SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14A-6(E)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HEALTHSOUTH CORPORATION
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(Name of Registrant as Specified In Its Charter)
HEALTHSOUTH CORPORATION
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)14) and 0-11.
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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PRELIMINARY COPY
HEALTHSOUTH CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April ____, 1999
The Annual Meeting of Stockholders of HEALTHSOUTH Corporation (the
"Company") will be held at One HealthSouth Parkway, Birmingham, Alabama, on
Thursday, May 20, 1999, at 2:00 p.m., C.D.T., for the following purposes:
1. To elect twelve Directors to serve until the next Annual Meeting
of Stockholders and until their successors are duly elected and
qualified.
2. To approve the 1999 Exchange Stock Option Plan of the Company.
3. To approve the 1999 Executive Equity Loan Plan of the Company.
4. To vote upon a stockholder proposal submitted by the Amalgamated
Bank of New York LongView Collective Investment Fund.
5. 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 April 1, 1999, 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
PRELIMINARY COPY
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 20, 1999
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 One HealthSouth
Parkway, 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 __, 1999. The Company has retained ChaseMellon
Shareholder Services, L.L.C. to solicit Proxies on its behalf and will pay
ChaseMellon Shareholder Services, L.L.C. a fee of $_____ for those services. The
Company will reimburse ChaseMellon Shareholder Services, L.L.C. 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 purposes of the Annual Meeting of Stockholders are to (a) elect a Board
of Directors to serve until the next Annual Meeting of Stockholders, (b) approve
the 1999 Exchange Stock Option Plan of the Company, (c) approve the 1999
Executive Equity Loan Plan of the Company and (d) vote upon a proposal submitted
by the Amalgamated Bank of New York LongView Collective Investment Fund relating
to the composition of the Board of Directors of the Company (the "LongView
Proposal"). 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 votes to be taken on the election of
Directors, the approval of the 1999 Exchange Stock Option Plan, the approval of
the 1999 Executive Equity Loan Plan or the LongView Proposal, which require 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 April 1, 1999. 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 April 1, 1999, the record date for the Annual Meeting, there were 414,904,331
shares of Common Stock outstanding, exclusive of shares held by the Company as
treasury stock.
DISSENTERS' RIGHTS OF APPRAISAL
There are no dissenters' rights of appraisal in connection with any vote of
stockholders to be taken at the 1999 Annual Meeting of Stockholders.
PROPOSALS BY STOCKHOLDERS
Any proposals by stockholders of the Company intended to be presented at
the 2000 Annual Meeting of Stockholders must be received by the Company for
inclusion in the Company's Proxy Statement and form of Proxy by December ____,
1999.
ELECTION OF DIRECTORS
NOMINEES FOR DIRECTOR
At the Annual Meeting, twelve 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
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH THE COMPANY SINCE
- - -------------------------- ----- ----------------------------------------- -----------
Richard M. Scrushy 46 Chairman of the Board 1984
and Chief Executive Officer and Director
James P. Bennett 41 President and Chief Operating Officer 1993
and Director
Phillip C. Watkins, M.D. 57 Physician, Birmingham, Alabama, 1984
and Director
George H. Strong 72 Private Investor, Locust, New Jersey, 1984
and Director
C. Sage Givens 42 General Partner, 1985
Acacia Venture Partners,
and Director
Charles W. Newhall III 54 Partner, New Enterprise 1985
Associates Limited Partnerships,
and Director
Anthony J. Tanner 50 Executive Vice President -- 1993
Administration and Secretary
and Director
P. Daryl Brown 44 President -- HEALTHSOUTH Outpatient 1995
Centers and Director
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PRINCIPAL OCCUPATION
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH THE COMPANY SINCE
- - ------------------------ ----- ----------------------------------------- -----------
John S. Chamberlin 70 Private Investor, 1993
Princeton, New Jersey,
and Director
Joel C. Gordon 69 Chairman, Cardiology Partners 1996
of America, Inc.,
Consultant to the Company
and Director
Michael D. Martin 38 Executive Vice President 1998
and Chief Financial Officer
and Director
Larry D. Striplin, Jr. 69 Chairman and Chief Executive Officer, 1999
Nelson-Brantley Glass Contractors, Inc.,
and Director
Richard M. Scrushy, one of the Company's management founders, has served as
Chairman of the Board and Chief Executive Officer of the Company since 1984, and
also served as President of the Company from 1984 until March 1995. From 1979 to
1984, Mr. Scrushy was with Lifemark Corporation, a publicly owned healthcare
corporation, serving in various operational and management positions. Mr.
Scrushy is also a director of MedPartners, Inc., a publicly traded physician
practice management company, for which he also served as Acting Chief Executive
Officer from January 16 through March 18, 1998 and as Chairman of the Board from
January 16 through December 1, 1998.
Phillip C. Watkins, M.D., FACC, is and has been for more than five years in
the private practice of medicine in Birmingham, Alabama. A graduate of The
Medical College of Alabama, Dr. Watkins is a Diplomate of the American Board of
Internal Medicine. He is also a Fellow of the American College of Cardiology and
the Subspecialty Board of Cardiovascular Disease.
George H. Strong retired as senior vice president and chief financial
officer of Universal Health Services, Inc. in December 1984, a position he held
for more than six years. Mr. Strong is a private investor and continued to act
as a director of Universal Health Services, Inc., a publicly traded hospital
management corporation, until 1993. Mr. Strong is also a director of Balanced
Care Corporation and Integrated Health Services, Inc., both publicly traded
healthcare corporations, 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 at $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, Inc. and Opta Food Ingredients,
Inc., all of which are publicly traded 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., 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.
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Anthony J. Tanner, Sc.D., a management founder, serves as Executive Vice
President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as director, clinical and
professional programs (1982-1984) and director, quality assurance and education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
P. Daryl Brown joined the Company in April 1986 and served until June 1992
as Group Vice President -- Outpatient Operations. He became President --
HEALTHSOUTH Outpatient Centers in June 1992, and was elected as a Director in
March 1995. From 1977 to 1986, Mr. Brown served with the American Red Cross,
Alabama Region, in several positions, including Chief Operating Officer,
Administrative Director for Financing and Administration and Controller.
John S. Chamberlin retired in 1988 as president and chief operating officer
of Avon Products, Inc., a position he had held since 1985. From 1976 until 1985,
he served as chairman and chief executive officer of Lenox, Incorporated, after
22 years in various assignments for General Electric. From 1990 to 1991, he
served as chairman and chief executive officer of New Jersey Publishing Co. Mr.
Chamberlin is chairman of the board of Sports Holding Company and WNS, Inc., and
is a director of Imagyn Medical Technologies, Inc. He is a member of the Board
of Trustees of the Medical Center at Princeton and is a trustee of the Woodrow
Wilson National Fellowship Foundation.
Joel C. Gordon served as Chairman of the Board of Directors of Surgical
Care Affiliates, Inc. ("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 is Chairman of
Cardiology Partners of America, Inc. and serves on the boards of directors of
Genesco, Inc., an apparel manufacturer, and SunTrust Bank of Nashville, N.A.
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 and Executive Vice President -- Finance and Treasurer in May 1996.
In October 1997, he was additionally named Chief Financial Officer of the
Company, and in March 1998, he was named a Director of the Company. In March
1999, he ceased serving as Treasurer of the Company. 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. Mr. Martin is a director of MedPartners, Inc.
Larry D. Striplin, Jr. has been the Chairman and Chief Executive Officer of
Nelson-Brantley Glass Contractors, Inc. and Chairman and Chief Executive Officer
of Clearview Properties, Inc. since December 1995. Until December 1995, Mr.
Striplin had been Chairman of the Board and Chief Executive Officer of Circle
"S" Industries, Inc., a privately owned bonding wire manufacturer. Mr. Striplin
is a member of the boards of directors of Kulicke & Suffa Industries, Inc., a
publicly traded manufacturer of electronic equipment, The Banc Corporation and
MedPartners, 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 of such persons was elected as a
Director or an executive officer, except the Employment Agreements between the
Company and Richard M. Scrushy, James P. Bennett, Michael D. Martin, Anthony J.
Tanner and P. Daryl Brown (see "Executive Compensation and Other Information --
Audit and Compensation Committee Report on Executive Compensation -- Chief
Executive Officer Compensation; Developments in 1998" and " -- Other Executive
Employment Agreements and Related Developments"), and except that the Company
initially agreed to appoint Mr. Gordon to the Board of Directors in connection
with the SCA merger. There are no family relationships between any Directors,
nominees for Director or executive officers of the Company. The Board of
Directors of the Corporation held a total of 11 meetings during 1998.
4
The Company is a party to Employment Agreements with the executive officers
named in the Summary Compensation Table under "Executive Compensation and Other
Information -- Executive Compensation -- General". Except for such Employment
Agreements 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" and the Executive Deferred Compensation Plan of the Company
described under "Executive Compensation and Other Information -- Deferred
Compensation Plan", there are no compensatory plans or arrangements with respect
to any such executive officer which result or will result from the resignation
or retirement of such executive officer or any other termination of such
executive officer's employment with 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 May 21, 1998, C. Sage Givens, George H. Strong
and Phillip C. Watkins, M.D., 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 twice by unanimous written consent during 1998.
On August 14, 1997, the Board of Directors established a Corporate
Compliance Committee of the Board of Directors, which is responsible for
establishing and reviewing the Company's Corporate Compliance Program and
otherwise ensuring that the Corporation operates in compliance with federal,
state and local laws and regulations. At that time, 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, and Anthony J. Tanner,
Executive Vice President -- Administration and Secretary of the Company, and
John S. Chamberlin, Joel C. Gordon, and Charles W. Newhall III, all of whom are
outside Directors, were appointed to serve on this committee, with Mr. Tanner
appointed as Chairman and Compliance Officer. Members of the committee serve for
a period of one year or until their successors are appointed. The above members
were reappointed on May 21, 1998 and continue to serve. This committee conducted
its business during regular Board of Directors meetings in 1998 and did not meet
separately from the Board of Directors.
The Company has no other standing audit, nominating or compensation
committees of the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
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, 1998 through December 31, 1998, all
of its officers, Directors and greater-than-10% beneficial owners complied with
Section 16(a) filing requirements applicable to them.
5
1999 EXCHANGE STOCK OPTION PLAN
GENERAL
The Company's Board of Directors has adopted the 1999 Exchange Stock Option
Plan (the "Exchange Plan") for certain key employees of the Company and its
subsidiaries who hold existing stock options under other stock option plans of
the Company which are significantly out-of-the-money (i.e., where the exercise
price of such options is substantially higher than current market prices for the
Company's Common Stock). The Exchange Plan is intended to advance the Company's
interests by providing such persons the opportunity to exchange Eligible
Exchanging Options (as defined below) for options covering a smaller number of
shares of Common Stock at a lower exercise price.
Management believes that the Exchange Plan will benefit the Company by
restoring incentive to holders of Eligible Exchanging Options to work to enhance
stockholder value. The implicit value of Eligible Exchanging Options to such
holders has significantly diminished due to a substantial decline in the
Company's stock price, which management believes largely reflects industry and
general market factors and not factors within the control of such holders.
Accordingly, management believes that it is important to provide such holders
with the opportunity to regain meaningful incentive. Further, the exchange of
Eligible Exchanging Options for options under the Exchange Plan will reduce the
total number of shares of Common Stock subject to outstanding options, thus
eliminating a portion of market "overhang" associated with the Company's
existing stock options.
For purposes of the Exchange Plan, "Eligible Exchanging Option" shall mean
any stock option held by any employee of the Company (other than Directors and
executive officers) (i) which is issued under any other stock option plan of the
Company, excluding those stock option plans which were assumed by the Company in
connection with the acquisition of other entities, (ii) which is currently
outstanding, whether or not vested or exercisable, and (iii) which has an
exercise price equal to or greater than $16.00 per share. Options covering
approximately 3,333,600 shares of Common Stock will be eligible for exchange
under the Exchange Plan. Directors and executive officers of the Company will
not be eligible to participate in the Exchange Plan, and options held by such
persons shall not be deemed to be Eligible Exchanging Options.
It should be noted that each employee of the Company who holds Eligible
Exchanging Options has, by reason of being eligible to receive options under the
Exchange Plan, an interest in seeing that the Exchange Plan is adopted by the
stockholders.
Set forth below is a summary of the major features of the Exchange Plan.
This summary does not purport to be a complete statement of all the provisions
of the Exchange Plan, and is qualified in its entirety by the text of the
Exchange Plan attached to this Proxy Statement as Appendix A. See "Executive
Compensation and Other Information -- Stock Option Plans" in this Proxy
Statement for information with respect to stock options granted to certain
Directors and executives of the Company under the other stock option plans of
the Company described herein.
NATURE OF OPTIONS TO BE GRANTED PURSUANT TO THE EXCHANGE PLAN
The Exchange Plan provides for the grant of non-qualified stock options.
The Plan does not provide for the grant of "incentive stock options", as such
term is used under Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code").
COMMON STOCK SUBJECT TO THE EXCHANGE PLAN
The aggregate number of shares of Common Stock covered by the Exchange Plan
is 2,750,000 shares. Shares issued upon exercise of options under the Exchange
Plan may be either authorized but unissued shares or shares re-acquired by the
Company. If, on or prior to the termination of the Exchange Plan, an option
granted thereunder expires or is terminated for any reason without having been
exercised in full, the unpurchased shares covered thereby shall cease to be
reserved for issuance under the Exchange Plan and shall revert to the status of
authorized but unissued shares. The maximum number of shares of
6
Common Stock for which any individual may be granted options under the Exchange
Plan during any calendar year shall be equal to the largest number of shares
eligible for issuance to any one optionholder based upon the exchange ratios
described in the Exchange Plan.
The purchase price for the shares of Common Stock covered by each option
granted under the Exchange Plan will be at least 100% of the fair market value,
but in no event less than the par value, per share of the Common Stock at May
20, 1999, the date of the 1999 Annual Meeting of Stockholders. For purposes of
the Exchange Plan, such fair market value shall be conclusively deemed to be the
closing price per share of the Common Stock on the New York Stock Exchange
Composite Transactions Tape on such date. Options issued under the Exchange Plan
shall be deemed to have been granted on May 20, 1999.
The Exchange Plan prohibits any reduction of the exercise price of
outstanding options granted under the plan except by reason of an adjustment
pursuant to a stock split, merger, business combination, recapitalization or
similar change in the capitalization of the Company. The Exchange Plan likewise
prohibits the cancellation of outstanding options accompanied by the reissuance
of substitute options at a lower exercise price.
ADMINISTRATION OF THE EXCHANGE PLAN
The Exchange Plan is administered by the Audit and Compensation Committee
of the Board of Directors (the "Committee"), each member of which is an outside
Director. The Committee has full and exclusive authority to determine the grant
of options under the Exchange Plan.
GRANT OF OPTIONS UNDER THE EXCHANGE PLAN
Options may be granted under the Exchange Plan only in exchange for the
surrender and cancellation of Eligible Exchanging Options. Such exchange shall
be based upon the following ratios: (i) if the exercise price of an Eligible
Exchanging Option is at least $16.00 but less than $22.00 per share, such
Eligible Exchanging Option may be surrendered in exchange for an option under
the Exchange Plan covering two shares of Common Stock for each three shares of
Common Stock covered by the surrendered Eligible Exchanging Option; and (ii) if
the exercise price of an Eligible Exchanging Option is $22.00 per share or
greater, such Eligible Exchanging Option may be surrendered in exchange for an
option under the Exchange Plan covering three shares of Common Stock for each
four shares of Common Stock covered by the surrendered Eligible Exchanging
Option.
Each optionholder surrendering Eligible Exchanging Options shall be
required to retain Eligible Exchanging Options covering 10% of the aggregate
number of shares covered by the total number of Eligible Exchanging Options held
by such optionholder (the "10% Holdback"). The 10% Holdback shall consist of
those Eligible Exchange Options having the lowest exercise price. Optionholders
desiring to participate in the Exchange Plan must surrender not less than all of
their Eligible Exchanging Options, less only the 10% Holdback. The shares
represented by surrendered Eligible Exchanging Options shall not be restored to
the stock option plan under which they were issued, but instead shall revert to
the status of authorized but unissued shares of Common Stock.
Each option granted under the Exchange Plan shall be granted pursuant to
and subject to the terms and conditions of a stock option agreement (a "Stock
Option Agreement") to be entered into between the Company and the optionholder
at the time of such grant. Any such Stock Option Agreement shall incorporate by
reference all of the terms and provisions of the Exchange Plan as in effect at
the time of grant and may contain such other terms and provisions as shall be
approved and adopted by the Committee.
The expiration date of an option granted under the Exchange Plan shall be
identical to the expiration date of the Eligible Exchanging Option surrendered
in exchange therefor, provided that each such option shall expire not more than
ten years after the date such option is granted. Each option shall become
exercisable in whole, in part or in installments at such time or times as the
Committee may prescribe and specify in the Stock Option Agreement at the time
the option is granted. Unless otherwise expressly provided in the Stock Option
Agreement, each option granted under the Exchange Plan shall be deemed
7
to be vested and exercisable in the same proportion to the total number of
shares covered thereby as the relevant Eligible Exchanging Option was so vested
and exercisable at the time of surrender, and any unvested portion of such
option shall vest and become exercisable at the same time and in the same
proportions to the total number of shares covered thereby as previously provided
with respect to the relevant Eligible Exchanging Option.
In the event of a "Change in Control" (as defined), of the Company, options
granted under the Exchange Plan which are, by their terms, exercisable in
installments, will become immediately exercisable in full. A "Change in Control"
is defined to include the acquisition of more than 25% of the outstanding voting
securities of the Company by a single person or group, the election to the Board
of Directors of persons constituting a majority of the Board of Directors who
are not "Incumbent Directors" (as defined), or the approval by the stockholders
of the Company of (i) a merger, reorganization or similar transaction which
results in the then-current stockholders of the Company owning less than 75% of
the combined voting power of the reorganized or merged entity, (ii) the
liquidation or dissolution of the Company, or (iii) the sale of all or
substantially all of the assets of the Company. These provisions of the Exchange
Plan may have some deterrent effect on certain mergers, tender offers or other
takeover attempts, thereby having some potential adverse effect on the market
price of the Company's Common Stock.
The exercise price for options granted under the Exchange Plan may be paid
in any of the following ways, which may be combined for any given exercise: (a)
the exercise price may be paid in cash; (b) the exercise price may be paid by
tendering outstanding shares of Common Stock having a fair market value equal to
the aggregate exercise price for the options being exercised; or (c) subject to
applicable requirements of the Exchange Act, the optionholder may deliver with
his exercise notice irrevocable instructions to a broker to promptly deliver to
the Company an amount of sale or loan proceeds sufficient to pay the exercise
price.
Options granted under the Exchange Plan shall be assignable or transferable
only by will or pursuant to the laws of descent and distribution, and shall be
exercisable during the optionholder's lifetime only by the optionholder, except
for certain permitted transfers to family members, trusts or partnerships for
the benefit of family members, or tax-exempt charities. No holder of any option
shall have any rights to dividends or other rights of a stockholder with respect
to shares subject to an option prior to the purchase of such shares upon
exercise of the option.
TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF OPTIONHOLDER
With respect to an option which, by its terms, is not exercisable for one
year from the date on which it is granted, if an optionholder's employment by,
or other relationship with, the Company or any of its subsidiaries terminates
for any reason other than death within one year after the date an unexercised
option is granted under the Exchange Plan, the option shall terminate on the
date of termination of such employment or other relationship. With respect to
all options granted under the Exchange Plan, if an optionholder's employment by,
or other relationship with, the Company is terminated by reason of his death,
the option shall terminate one year after the date of death, unless the option
otherwise expires. If an optionholder's employment by, or other relationship
with, the Company terminates for any other reason, or at any other time, other
than as set forth above, the option shall terminate three months after the date
of termination of such employment or other relationship, unless the option
earlier expires, provided that: (a) if the optionholder dies within such
three-month period, the option shall terminate one year after the date of his
death, unless the option earlier expires; (b) the Board of Directors may, at any
time prior to any termination of such employment or other relationship under the
circumstances covered herein, determine in its discretion that the option shall
terminate on the date of termination of such employment or other relationship;
and (c) the exercise of any option after termination of such employment or other
relationship shall be subject to satisfaction of the conditions precedent that
the optionholder refrain from engaging, directly or indirectly, in any activity
which is competitive with any activity of the Company or any subsidiary and from
otherwise acting, either prior to or after termination of such employment or
other relationship, in any manner inimical or in any way contrary to the best
8
interests of the Company and that the optionholder furnish to the Company such
information with respect to the satisfaction of the foregoing conditions
precedent as the Board of Directors shall reasonably request.
EXPIRATION, TERMINATION AND AMENDMENT OF THE EXCHANGE PLAN
The Exchange Plan will terminate on the earliest of (a) September 30, 1999,
(b) the date on which all shares of Common Stock reserved for issuance under the
Exchange Plan shall have been acquired through exercise of options granted
thereunder, or (c) such earlier time as the Board of Directors may determine.
Any option outstanding under the Exchange Plan at the time of its termination
shall remain in effect in accordance with its terms and conditions and those of
the Exchange Plan.
The Exchange Plan may, at any time or from time to time, be terminated,
modified or amended by the stockholders of the Company by the affirmative vote
of the holders of a majority of the outstanding shares of Common Stock entitled
to vote. The Board of Directors may, insofar as permitted by law, from time to
time with respect to any shares of Common Stock at the time not subject to
options, suspend or discontinue the Exchange Plan or revise or amend it in any
respect whatsoever, except that, without approval of the stockholders of the
Company, no such revision or amendment shall increase the number of shares
subject to the Exchange Plan, permit exercise of options unless full payment is
made at the time of exercise (except as provided in the Exchange Plan), decrease
the price at which options may be granted, extend the period during which
options may be exercised, or change the provisions relating to adjustment to be
made upon changes in capitalization. Subject to the provisions described above,
the Board of Directors has the power to amend the Exchange Plan and any
outstanding options granted thereunder in such respects as the Board of
Directors shall, in its sole discretion, deem advisable in order to incorporate
in the Exchange Plan or any such option any new provision or change designed to
comply with or take advantage of requirements or provisions of the Code or other
statute, or rules or regulations of the Internal Revenue Service or other
federal or state governmental agency enacted or promulgated after the adoption
of the Exchange Plan.
FEDERAL TAX CONSEQUENCES
Pursuant to the Code, upon the exercise of an option under the Exchange
Plan, the Company is generally entitled to a tax deduction in an amount equal to
the difference between the option price and the fair market value of the Common
Stock on the date the option is exercised. For federal tax purposes, the person
exercising the option must pay personal income taxes on an amount equal to the
difference between the option price and the fair market value of the Common
Stock on the date the option is exercised. The basis of the Common Stock
obtained by exercising the option will be the option price paid plus the amount
equal to the difference between the option price and the fair market value of
the Common Stock on the date the option is exercised, which amount was subject
to federal income tax. A subsequent sale of the Common Stock by the person
exercising the option will result in a long- or short-term capital gain or loss
depending on the total period of time that the shares of Common Stock are held.
Generally, no taxable event occurs under the Code upon the grant of an option
under the Exchange Plan.
NEW PLAN BENEFITS
No options have been granted under the Exchange Plan. The number of shares
covered by particular options to be granted under the Exchange Plan is not
determinable at this time.
VOTE REQUIRED; RECOMMENDATION OF THE BOARD OF DIRECTORS
Management recommends a vote FOR the adoption of the 1999 Exchange Stock
Option Plan. The affirmative vote of the holders of a majority of the
outstanding shares of the Common Stock present or represented and entitled to
vote at the Annual Meeting will be necessary for stockholder approval of the
1999 Exchange Stock Option Plan.
9
1999 EXECUTIVE EQUITY LOAN PLAN
GENERAL
The Company's Board of Directors has adopted the 1999 Executive Equity Loan
Plan (the "Loan Plan") for the Company's executives and other key employees of
the Company and its subsidiaries. The Loan Plan is intended to advance the
Company's interests by providing such persons with additional incentive for
future endeavor and to align the interests of the Corporation's management and
its stockholders by providing a mechanism to enhance ownership of the Common
Stock by such executives and key employees, through the making of loans
("Loans") to such executives and key employees to purchase shares of the Common
Stock. Loans made under the Plan may only be used for the purpose of purchasing
Common Stock of the Company.
It should be noted that each officer and employee of the Company has, by
reason of being eligible to receive Loans under the Loan Plan, an interest in
seeing that the Loan Plan is adopted by the stockholders.
Set forth below is a summary of the major features of the Loan Plan. This
summary does not purport to be a complete statement of all the provisions of the
Loan Plan, and is qualified in its entirety by the text of the Loan Plan
attached to this Proxy Statement as Appendix B.
MAXIMUM PRINCIPAL AMOUNT OF LOANS UNDER THE LOAN PLAN
Loans may be made under the Loan Plan in such amounts as are approved by
the Committee (as defined below), provided that the maximum aggregate principal
amount of Loans outstanding under the Plan at any time shall not exceed
$50,000,000. If, on or prior to the termination of the Loan Plan, the principal
amount of any Loan under the Loan Plan shall have been repaid in whole or in
part, the principal amount so repaid shall again become available for the making
of Loans under the Plan, subject to the foregoing limitation on the maximum
aggregate principal amount outstanding at any time.
ADMINISTRATION OF THE LOAN PLAN
The Loan Plan is administered by the Audit and Compensation Committee of
the Board of Directors (the "Committee"), each member of which is an outside
Director. The Committee has full and exclusive authority to make Loans under the
Loan Plan; provided, however, that the Committee may delegate responsibility for
all or part of the administration of the Loan Plan to appropriate officers of
the Company, but no such officers shall have the power to make Loans under the
Loan Plan, amend, waive or modify any provision of the Loan Plan or forgive any
Loans, in whole or in part, without the express approval of the Committee in
each case.
LOANS UNDER THE LOAN PLAN
Each Loan made under the Loan Plan shall be granted pursuant to and subject
to the terms and conditions of a loan agreement (a "Loan Agreement") to be
entered into between the Company and the optionholder at the time of such award.
Any such Loan Agreement shall incorporate by reference all of the terms and
provisions of the Loan Plan as in effect at the time of grant and may contain
such other terms and provisions as shall be approved and adopted by the
Committee.
Loans made under the Loan Plan shall be subject to the following terms and
conditions:
(a) The proceeds of Loans may be used only for purchases of the Common
Stock in open-market transactions, block trades or negotiated transactions.
Such purchases must be effected through a broker approved by the Company.
(b) Loans shall have a maturity date of seven years from the date of
the Loan, subject to acceleration and termination as provided in the Loan
Plan. Such maturity date may be extended for up to one additional year by
the Committee, acting in its discretion. The unpaid principal balance of
each Loan shall bear interest at a rate equal to the effective interest
rate on the average outstanding
10
balance under the Company's principal credit agreement for each calendar
quarter, adjustable as of the end of each calendar quarter, which effective
interest rate shall be determined by the Controller of the Company.
Interest shall be compounded annually. Subject to the terms and conditions
set forth in the Loan Plan, repayment of principal and interest may be
deferred until final maturity of the Loan.
(c) Each Loan shall be secured by a pledge of all of the shares of
Common Stock purchased with the proceeds thereof ("Loan Shares"), pursuant
to which the participant shall grant the Company a first priority lien on
and security interest in the Loan Shares. The Loan Shares may not be sold
for one year after the date on which they were acquired (the "Acquisition
Date"). Thereafter, one-third of the aggregate number of Loan Shares may be
sold during each of the second, third and fourth years after the
Acquisition Date, with any unsold portion carrying forward from year to
year. The proceeds from any such sale must be used to repay a percentage of
the principal amount of the Loan equal to the percentage of Loan Shares
sold, less any amounts withheld for taxes (the "Mandatory Prepayment
Amount"). Any proceeds in excess of the Mandatory Prepayment Amount shall
be retained by the participant.
(d) Notwithstanding any contrary provision in the Loan Plan or any
Loan Agreement, a Loan shall immediately mature, and all principal and
accrued but unpaid interest thereon shall be due and payable, within 30
days after the effective date of any termination of the participant's
employment by the Company, whether voluntary or involuntary, or upon the
death or disability of the participant. Without limiting the generality of
the foregoing, the Company may, but shall not be required to, repurchase
the Loan Shares of a participant at such participant's original acquisition
cost if the participant's employment is terminated, voluntarily or
involuntarily or by reason of death or disability, within the first three
years after the Acquisition Date, according to the following schedule:
PERCENTAGE OF LOAN SHARES
YEAR BEGINNING ON SUBJECT TO REPURCHASE
------------------------ --------------------------
Acquisition Date 100 %
First Anniversary of
the Acquisition Date 66 2/3%
Second Anniversary of
the Acquisition Date 33 1/3%
The terms of such repurchase shall be as set forth in the Loan Agreement.
In the event of any such repurchase, the purchase price of the shares so
repurchased shall be credited against the outstanding principal balance and
accrued but unpaid interest on the Loan, and the participant shall be
responsible for the payment of any deficiency.
(e) Certificates evidencing Loan shares shall bear an appropriate
restrictive legend. The Company may require such certificates to be held in
a custodial account with a bank or other financial institution, or may hold
such certificates itself.
(f) Loans shall be made with full recourse, and each participant shall
be required to repay all principal and accrued but unpaid interest upon the
maturity of the Loan (or its earlier acceleration or termination),
irrespective of whether the participant has sold Loan Shares or whether the
proceeds of any such sale were sufficient to repay all principal and
interest with respect to the Loan. If, at any time, the Committee
determines in its reasonable discretion that the value of the Loan Shares
pledged as security for the Loan is less than the indebtedness evidenced by
the Loan, the Committee shall require the participant to post additional
security (which may be shares of Common Stock or other collateral
acceptable to the Committee, in its reasonable discretion) in an amount
sufficient to fully secure the indebtedness of the Loan.
In the event of a "Change in Control" (as defined) of the Company, any
restrictions on sale of Loan Shares shall terminate, but the Loan Shares shall
remain subject to the pledge in favor of the Company. A "Change in Control" is
defined to include the acquisition of more than 25% of the outstanding voting
securities of the Company by a single person or group, the election to the Board
of Directors of persons
11
constituting a majority of the Board of Directors who are not "Incumbent
Directors" (as defined), or the approval by the stockholders of the Company of
(i) a merger, reorganization or similar transaction which results in the
then-current stockholders of the Company owning less than 75% of the combined
voting power of the reorganized or merged entity, (ii) the liquidation or
dissolution of the Company, or (iii) the sale of all or substantially all of the
assets of the Company. These provisions of the Loan Plan may have some deterrent
effect on certain mergers, tender offers or other takeover attempts, thereby
having some potential adverse effect on the market price of the Company's Common
Stock.
EXPIRATION, TERMINATION AND AMENDMENT OF THE LOAN PLAN
The Loan Plan will terminate on the earlier of (a) May 19, 2009 or (b) such
earlier time as the Board of Directors may determine. Any Loan outstanding under
the Loan Plan at the time of its termination shall remain in effect in
accordance with its terms and conditions and those of the Loan Plan.
The Loan Plan may, at any time or from time to time, be terminated,
modified or amended by the stockholders of the Company by the affirmative vote
of the holders of a majority of the outstanding shares of Common Stock entitled
to vote. The Board of Directors may, insofar as permitted by law, from time to
time suspend or discontinue the Loan Plan or revise or amend it in any respect
whatsoever, except that, without approval of the stockholders of the Company, no
such revision or amendment shall increase the maximum aggregate principal amount
of Loans made under the Loan Plan.
FEDERAL TAX CONSEQUENCES
In general, the making or receipt of Loans and the repayment of principal
will not be a taxable event or have other tax effects with respect to either the
Company or the participant. The payment of interest on Loans will ordinarily be
taxable income to the Company, but will not be deductible by the participant.
The sale of Loan Shares will ordinarily constitute a long- or short-term capital
gain or loss, depending on the period of time for which the Loan Shares were
held and the price at which they were purchased.
NEW PLAN BENEFITS
No awards have been made under the Loan Plan. The principal amount of Loans
to be made under the Loan Plan is not determinable at this time.
VOTE REQUIRED; RECOMMENDATION OF THE BOARD OF DIRECTORS
Management recommends a vote FOR the adoption of the Loan Plan. The
affirmative vote of the holders of a majority of the outstanding shares of the
Common Stock present or represented and entitled to vote at the Annual Meeting
will be necessary for stockholder approval of the Loan Plan.
STOCKHOLDER PROPOSAL
THE LONGVIEW PROPOSAL
Amalgamated Bank of New York LongView Collective Investment Fund, 11-15
Union Square, New York, New York 10003, claiming beneficial ownership of 55,100
shares of the Company's Common Stock, has submitted the proposal set forth below
(the "LongView Proposal", as defined above):
"SHAREHOLDER RESOLUTION
"RESOLVED that the shareholders request the Board of Directors to amend the
articles of incorporation and/or bylaws to the extent necessary to provide that
at least three-quarters of all Board members are `independent'. For purposes of
this resolution, an independent director shall be considered as one who:
o has not been employed by HEALTHSOUTH or an affiliate in an executive
capacity;
12
o has not been a member of a corporation or firm that is one of
HEALTHSOUTH's paid advisers or consultants;
o has not been employed by a significant customer of or supplier to
HEALTHSOUTH;
o has not had personal services contracts with HEALTHSOUTH or one of its
affiliates;
o has not been employed by a foundation or university that receives
significant grants or endowments from HEALTHSOUTH;
o is not a relative of an executive of HEALTHSOUTH or one of its
affiliates;
o has not been part of an interlocking directorate in which the CEO or
other executive officer of HEALTHSOUTH serves on the board of another
corporation that employs that director; and
o does not have any personal, financial and/or professional
relationships with the CEO or other executive officer that could
interfere with the exercise of independent judgment by such director.
"SUPPORTING STATEMENT
"This proposal seeks to establish a level of independence that we believe
will permit clear and objective decision-making in the best long-term interest
of all shareholders.
"Five of HEALTHSOUTH's 12 Directors are company insiders. A sixth is the
CEO of MedPartners, and HEALTHSOUTH's CEO, Richard M. Scrushy, is former
Chairman and current director of MedPartners' Board of Directors. As a result,
HEALTHSOUTH falls short of the level of independence proposed in this
resolution.
"In our view, Board dominance by insiders and people having other
significant ties to management can raise questions about whether a Board is
giving priority to management's interest at the expense of the shareholders. As
a committee of the Business Roundtable put it:
`Boards of Directors at large publicly-held corporations should be composed
predominately of independent directors who do not hold management
responsibilities within the corporation. . . . In order to underscore their
independence, non-management directors should not be dependent on the
companies on whose boards they serve.'
"We believe that greater board independence is particularly important at
this time. After years of growth, HEALTHSOUTH's stock price has plummeted since
late 1997. The company's performance for the past five years now lags behind
that of the S&P 500 index.
"We also believe that greater independence is needed in light of
HEALTHSOUTH's record on executive compensation. Our CEO was recently named as
one of ten `executive pay anti-heroes' by Graef Crystal, an expert on executive
pay, in a report prepared for the Council of Institutional Investors. Crystal's
conclusion was based in part on Mr. Scrushy's drawing a base salary 350% above
the market; a salary and bonus 592% above the market; and a total direct
compensation that is 225% above the market.
"We urge you to vote FOR this resolution."
RESPONSE OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote AGAINST the LongView Proposal, for
the reasons set forth below.
The Company's Board of Directors agrees that the management of the Company
should be vested in a Board of Directors consisting of a majority of independent
directors. For that reason, the Company has always maintained just such a
majority on its Board. The Board of Directors currently consists of seven
outside Directors and five inside Directors. The outside directors comprise two
of the nation's leading healthcare venture capitalists, the former chief
financial officer of a large hospital chain, a veteran of senior executive
positions with large retail and manufacturing enterprises, one of Alabama's most
13
successful entrepreneurs, a leading physician and a healthcare executive
identified by HealthcareBusiness magazine as having been involved in the
start-up of over 15 healthcare companies. The Company's current inside Directors
comprise two founders of the Company, as well as its Chief Operating Officer,
its Chief Financial Officer and the Chief Operating Officer of its largest
division. Only one member of the Company's Board of Directors is paid for
consulting services, and that member, Joel C. Gordon, founded Surgical Care
Affiliates, a pioneering company in the outpatient surgery business that was
acquired by the Company in 1996. The Board of Directors believes that its
current composition affords it a combination of independence, experience and
knowledge of the healthcare industry and the Company's business that has served
the Company and its stockholders well.
Each outside director meets the definition of independence adopted by the
New York Stock Exchange, which excludes any director who has "any relationship
that, in the opinion of the Board of Directors, would interfere with the
exercise of independent judgment". Further, each outside director other than Mr.
Gordon meets the more stringent test of being an "outside director" under the
regulations promulgated under Section 162(m) of the Internal Revenue Code of
1986, as amended (which regulations provide, among other things, that an outside
director cannot be a current employee, a former employee receiving compensation
for prior services (subject to certain exceptions), a current or former officer
of the corporation, or a person who receives (or is entitled to receive)
remuneration from the corporation in any capacity other than as a director).
The Board of Directors believes that the requirements proposed under the
LongView Proposal are arbitrary, unnecessary and inappropriate in that, unlike
the standards imposed by the New York Stock Exchange and the Internal Revenue
Code, such requirements would, for example, presume that a director was not
independent because that director was an employee of a company that engaged in
arm's-length commercial transactions with the Company in the ordinary course of
business, or of a foundation or university that received grants or endowments
from the Company. The Company operates in all 50 states, the United Kingdom and
Australia, and as a consequence has customer or supplier relationships with a
wide range of other companies around the world which may or may not meet the
undefined and subjective standard of being "significant". Likewise, as part of
its policy of corporate stewardship, the Company provides support to a number of
charitable foundations and educational institutions around the country. The
arbitrary requirements contained in the LongView Proposal would, without further
inquiry into the substantive independence of the directors, automatically bar
any employees of such companies, foundations and institutions from being
considered as independent directors, potentially depriving the Committee of
knowledgeable and experienced insight into the matters facing it. Thus, for
example, current or former executives of such companies as General Electric,
Delta Airlines and Wal-Mart, and current and former administrators of such
institutions as Vanderbilt University, the University of Virginia or the
Arthritis Foundation, would not be regarded as "independent" directors under the
LongView proposal.
In support of its proposal, LongView attributes an industry-wide decline in
stock prices to the performance of the Company's board notwithstanding the
Company's continuing record of earnings growth, and makes a gratuitous attack
upon the Company's Chairman of the Board and Chief Executive Officer, who has
voluntarily forgone his own salary during the decline in the Company's stock
price. In addition, the LongView supporting statement indicates that
MedPartners' Chief Executive Officer serves on the Company's Board, which is no
longer correct. LongView offers these dubious rationales in the face of the
performance that the Company has seen under its existing Board structure, under
which the Company:
* has become the only healthcare services provider to operate facilities
in all 50 states
* has met or exceeded analysts' expectations for 50 consecutive
quarters;
* has become part of the S&P 500 only 13 years after inception; and
* has become one of the few publicly traded healthcare services
companies to maintain investment grade ratings with Standard & Poor's
and Moody's;
all while becoming the nation's largest provider of outpatient surgery and
rehabilitative healthcare services. The Board believes that its existing
policies with respect to membership have served the Company and its stockholders
well, and that the LongView Proposal is unnecessary and inadvisable.
14
VOTE REQUIRED; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote AGAINST the LongView Proposal. The
affirmative vote of the holders of a majority of the outstanding shares of the
Common Stock present or represented and entitled to vote at the Annual Meeting
will be necessary for stockholder approval of the LongView Proposal.
15
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 1996, 1997 and 1998.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- -------------------------
BONUS/ANNUAL STOCK LONG-TERM ALL
INCENTIVE OPTION INCENTIVE OTHER COM-
NAME AND PRINCIPAL POSITION YEAR SALARY AWARD AWARDS PAYOUTS PENSATION(1)
- - -------------------------------- ------ ------------- -------------- ----------- ----------- ----------------
Richard M. Scrushy 1996 $3,391,775 $ 8,000,000 1,500,000 -- $ 34,286(2)
Chairman of the Board 1997 3,398,999 10,000,000 1,300,000 -- 21,430
and Chief Executive Officer(3) 1998 2,777,829 -- 1,500,000 -- 72,352
James P. Bennett 1996 496,590 800,000 200,000 -- 32,106(2)
President and Chief 1997 639,161 1,500,000 700,000 -- 10,158
Operating Officer 1998 670,000 -- 300,000 -- 10,092
Michael D. Martin 1996 281,644 750,000 120,000 -- 31,586(2)
Executive Vice President 1997 359,672 2,000,000 450,000 -- 9,700
and Chief Financial Officer 1998 415,826 -- 260,000 -- 9,665
P. Daryl Brown 1996 335,825 400,000 100,000 -- 11,181
President -- HEALTHSOUTH 1997 370,673 450,000 250,000 -- 10,737
Outpatient Centers 1998 386,212 -- 75,000 -- 10,981
Anthony J. Tanner 1996 298,078 350,000 100,000 -- 7,763
Executive Vice President -- 1997 371,114 450,000 450,000 -- 9,817
Administration and Secretary 1998 388,422 -- 250,000 -- 11,197
- - ----------
(1) Includes car allowances of $500 per month for Mr. Scrushy and $350 per
month for the other Named Executive Officers in 1996 and 1997, use of a
Company-owned automobile by Mr. Scrushy in 1998, and car allowances of $500
per month for Mr. Scrushy and $450 per month for the other Named Executive
Officers through September 1998. Also includes (a) matching contributions
under the Company's Retirement Investment Plan for 1996, 1997 and 1998,
respectively, of: $708, $791 and $1,450 to Mr. Scrushy; $1,425, $1,425 and
$1,499 to Mr. Bennett; $1,371, $1,324 and $1,395 to Mr. Martin; $1,897
$1,319 and $1,415 to Mr. Brown; and $1,290, $1,215 and $1,308 to Mr.
Tanner; (b) awards under the Company's Employee Stock Benefit Plan for
1996, 1997 and 1998, respectively, of $3,389, $2,889 and $2,882 to Mr.
Scrushy; $3,387, $2,889 and $2,882 to Mr. Bennett; $3,386, $2,889 and
$2,882 to Mr. Martin; $3,389, $2,889 and $2,882 to Mr. Brown; and $1,276,
$2,889 and $2,882 to Mr. Tanner; and (c) split-dollar life insurance
premiums paid in 1996, 1997 and 1998 of $2,312, $11,750 and $45,187 with
respect to Mr. Scrushy; $1,217, $1,644 and $1,661 with respect to Mr.
Bennett; $752, $1,287 and $1,338 with respect to Mr. Martin; $1,695, $2,329
and $2,634 with respect to Mr. Brown; and $997, $1,513 and $2,957 with
respect to Mr. Tanner. See "Executive Compensation and Other Information --
Retirement Investment Plan" and "-- Employee Stock Benefit Plan".
(2) In addition to the amounts described in the preceding footnote, includes
the forgiveness of loans in the amount of $21,877 each owed by Messrs.
Scrushy, Bennett and Martin in 1996.
(3) Salary amounts for Mr. Scrushy include monthly incentive compensation
amounts payable upon achievement of certain budget targets. Effective
November 1, 1998, Mr. Scrushy voluntarily suspended receipt of his base
salary and monthly incentive compensation. See "Executive Compensation and
other Information -- Audit and Compensation Committee Report on Executive
Compensation -- Chief Executive Officer Compensation; Developments in
1998".
16
STOCK OPTION GRANTS IN 1998
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE PRESENT VALUE(1)
- - -------------------- ----------- -------------- ----------- ------------ -----------------
Richard M. Scrushy 1,500,000 29.9% $ 10.00 10/22/08 $11,355,000
James P. Bennett 300,000 6.0% 10.00 10/22/08 2,271,000
Michael D. Martin 260,000 5.2% 10.00 10/22/08 1,968,200
P. Daryl Brown 75,000 1.5% 10.00 10/22/08 567,750
Anthony J. Tanner 250,000 5.0% 10.00 10/22/08 1,892,500
- - ----------
(1) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend upon the excess of the stock price over the exercise price on
the date the option is exercised, so that there is no assurance that the
value realized by an executive will be at or near the value estimated by
the Black-Scholes model. The estimated values under that model are based on
arbitrary assumptions as to certain variables, including the following: (i)
stock price volatility is assumed to be 76%; (ii) the risk-free rate of
return is assumed to be 6.01%; (iii) dividend yield is assumed to be 0; and
(iv) the time of exercise is assumed to be 7.3 years from the date of
grant.
STOCK OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998
NUMBER VALUE OF UNEXERCISED
OF SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1998(1) AT DECEMBER 31, 1998(2)
ON VALUE ------------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---------------------------- ---------- ------------- ------------- --------------- ------------- --------------
Richard M. Scrushy ......... -- -- 12,672,524 -- $97,144,849 --
James P. Bennett ........... -- -- 1,610,000 -- 4,945,175 --
Michael D. Martin. ......... -- -- 860,000 30,000 1,643,750 $213,750
P. Daryl Brown ............. 198,000 $2,458,802 915,000 -- 5,386,450 --
Anthony J. Tanner .......... -- -- 1,190,000 -- 5,026,325 --
- - ----------
(1) Does not reflect any options granted and/or exercised after December 31,
1998. 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,
1998. Such amounts may not necessarily be realized. Actual values which may
be realized, if any, upon any exercise of such options will be based on the
market price of the Common Stock at the time of any such exercise and thus
are dependent upon future performance of the Common Stock.
STOCKHOLDER RETURN COMPARISON (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, 1993, 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.
[Graph]
17
DECEMBER 31, HEALTHSOUTH S&P 500 REHAB INDEX
- - ------------- ------------- --------- -------------
1993 100 100 100
1994 144 101 85
1995 231 140 128
1996 306 172 149
1997 440 230 222
1998 245 295 175
- - ----------
(1) In previous Proxy Statements of the Company, the Rehab Index included
Continental Medical Systems, Inc. ("CMS"). In May 1995, CMS was acquired by
Horizon Healthcare Corporation, which was the surviving corporation in the
merger. Because CMS was not publicly traded during all of 1995 or
thereafter, data relating to CMS has 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, 1998. All share numbers and exercise prices have
been adjusted to reflect the Company's March 1997 two-for-one stock split.
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 4,800,000 shares of Common
Stock. The ISO Plan expired on February 28, 1994, in accordance with its terms.
As of December 31, 1998, there were outstanding under the ISO Plan options to
purchase 15,202 shares of the Company's Common Stock at $3.7825 per share. All
such options remain in full force and effect in accordance with their terms and
the ISO Plan. Under the ISO Plan, which was administered by the Board of
Directors, key employees could be granted options to purchase shares of Common
Stock at 100% of fair market value on the date of grant (or 110% of fair market
value in the case of a 10% stockholder/ grantee). The outstanding options
granted under the ISO Plan must be exercised within ten years from the date of
grant, are cumulatively exercisable with respect to 25% of the shares covered
thereby after the expiration of each of the first through the fourth years
following the date of grant, are nontransferable except by will or pursuant to
the laws of descent and distribution, are protected against dilution and expire
within three months after termination of employment, unless such termination is
by reason of death.
1988 Non-Qualified Stock Option Plan
The Company also had a 1988 Non-Qualified Stock Option Plan (the "NQSO
Plan") covering a maximum of 4,800,000 shares of Common Stock. The NQSO Plan
expired on February 28, 1998, in accordance with its terms. As of December 31,
1998, there were outstanding under the NQSO Plan options to purchase 7,300
shares of the Company's Common Stock at $16.25 per share. Under the NQSO Plan,
which was administered by the Audit and Compensation Committee of the Board of
Directors, provides that Directors, executive officers and other key employees
could be granted options to purchase shares of Common Stock at 100% of fair
market value on the date of grant. The outstanding 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, 1995 and 1997 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"), a 1995 Stock Option Plan (the "1995 Plan") and a 1997 Stock Option Plan
(the "1997 Plan"), under each of which incentive stock options ("ISOs") and
non-qualified stock options
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("NQSOs") may be granted. The 1989, 1990, 1991, 1992, 1993 and 1995 Plans cover
a maximum of 2,400,000 shares, 3,600,000 shares, 11,200,000 shares, 5,600,000
shares, 5,600,000 shares, 18,929,658 (to be increased by 0.9% of the outstanding
Common Stock of the Company on each January 1, beginning January 1, 1996) shares
and 5,000,000 shares, respectively, of the Company's Common Stock. As of
December 31, 1998, there were outstanding options to purchase an aggregate of
29,938,700 shares of the Company's Common Stock under such Plans at exercise
prices ranging from $2.52 to $28.0625 per share. An additional 3,825,091 shares
were reserved for future grants under such Plans. Each of the 1989, 1990, 1991,
1992, 1993, 1995 and 1997 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, 1995 and 1997
Plans terminate on the earliest of (a) October 25, 1999, October 15, 2000, June
19, 2001, June 16, 2002, April 19, 2003, June 5, 2005 and April 30, 2007,
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 (except for
certain permitted transfers to family members or charities), 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
3,500,000 shares of Common Stock. As of December 31, 1998, there were
outstanding under the 1993 Consultants' Plan options to purchase 1,620,633
shares of Common Stock at prices ranging from $3.375 to $28.0625 per share. An
additional 120,000 shares were reserved for grants under such Plans. The 1993
Consultants' Plan, which is administered by the Board of Directors, provides
that certain non-employee consultants who provide significant services to the
Company may be granted options to purchase shares of Common Stock at such prices
as are determined by the Board of Directors or the appropriate committee. The
1993 Consultants' Plan terminates on the earliest of (a) February 25, 2003, (b)
such time as all shares of Common Stock reserved for issuance under the 1993
Consultants' Plan have been acquired through the exercise of options granted
thereunder, or (c) such earlier time as the Board of Directors of the Company
may determine. Options granted under the 1993 Consultants' Plan have a ten-year
term. Options granted under the 1993 Consultants' Plan are nontransferable
except by will or pursuant to the laws of descent and distribution, are
protected against dilution and expire within three months of termination of
association with the Company as a consultant, unless such termination is by
reason of death.
Other Stock Option Plans
In connection with certain of its major acquisitions, 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, 1998, there were
outstanding under these assumed plans options to purchase 2,838,710 shares of
the Company's Common Stock at exercise prices ranging from $1.6363 to $40.7042
per share. No additional options are being granted under any such assumed plans.
1998 RESTRICTED STOCK PLAN
The Company has a 1998 Restricted Stock Plan (the "Restricted Stock Plan"),
covering a maximum of 3,000,000 shares of the Company's Common Stock. The
Restricted Stock Plan, which is administered by the Audit and Compensation
Committee of the Board of Directors, provides that executives and other key
employees of the Company and its subsidiaries may be granted restricted stock
awards vesting over a period
19
of not less than one year and no more than ten years, as determined by such
Committee. The Restricted Stock Plan terminates on the earliest of (a) May 28,
2008, (b) the date on which awards covering all shares of Common Stock reserved
for issuance thereunder have been granted and are fully vested thereunder, or
(c) such earlier time as the Board of Directors of the Company may determine.
Awards under the Restricted Stock Plan are nontransferable except by will or
pursuant to the laws of dissent and distribution (except for certain permitted
transfers to family members) are protected against dilution and are forfeitable
upon termination of a participant's employment to the extent not vested. No
awards have been made under the Restricted Stock Plan.
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 Code. 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 401(k) Plan on January 1 and July 1 in each year.
Under the 401(k) Plan, participants may elect to defer up to 15% of their
annual compensation (subject to nondiscrimination rules under the Code). The
deferred amounts may be invested among four options, at the participant's
direction: a money market fund, a bond fund, a guaranteed insurance contract or
an equity fund. The Company will match a minimum of 15% of the amount deferred
by each participant, up to 4% of such participant's total compensation, with the
matched amount also directed by the participant.
Michael D. Martin, 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 Code. The ESOP is open to all full-time and part-time
employees of the Company who are over the age of 21, have one full year of
service with the Company and have at least 1,000 hours of service in the year in
which they begin participation in the ESOP on the next January 1 or July 1 after
the date on which such employee satisfies the aforementioned conditions.
The ESOP was established with a $10,000,000 loan from the Company, the
proceeds of which were used to purchase 1,655,172 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 1,666,664 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.
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.
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer of
the Company, Michael D. Martin, 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.
20
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.
DEFERRED COMPENSATION PLAN
In 1997, the Board of Directors adopted an Executive Deferred Compensation
Plan (the "Deferred Compensation Plan"), which allows senior management
personnel to elect, on an annual basis, to defer receipt of up to 50% of their
base salary and up to 100% of their annual bonus, if any (but not less than an
aggregate of $2,400 per year) for a minimum of five years from the date such
compensation would otherwise have been received. Amounts deferred are held by
the Company pursuant to a "rabbi trust" arrangement, and amounts deferred are
credited with earnings at an annual rate equal to the Moody's Average Corporate
Bond Yield Index (the "Moody's Rate"), as adjusted from time to time, or the
Moody's Rate plus 2% if a participant's employment is terminated by reason of
retirement, disability or death or within 24 months of a change in control of
the Company. Amounts deferred may be withdrawn upon retirement, termination of
employment or death, upon a showing of financial hardship, or voluntarily with
certain penalties. The Deferred Compensation Plan is administered by an
Administrative Committee, currently consisting of Michael D. Martin, Executive
Vice President and Chief Financial Officer of the Company, and Anthony J.
Tanner, Executive Vice President -- Administration and Secretary of 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. Under the Company's existing stock option plans, each non-employee
Director is granted an option covering 25,000 shares of such Common Stock on the
first business day in January of each year. 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.
The following sections discuss the Committee's general philosophy and
policies concerning compensation for executive officers of the Company, as well
as providing information concerning the specific implementation of such
policies. In addition, the Committee's report with respect to 1998 focuses on
the response of management to the impact of the Balanced Budget Act of 1997 and
increasing pressure from
21
managed care payors on pricing. In response to such pressures, and in order to
provide leadership for all of the Company's personnel, the Company's Chief
Executive Officer voluntarily chose to forgo receipt of his salary and target
bonus beginning in November 1998, and all other senior officers of the Company
voluntarily took salary reductions of 10% to 25% beginning in 1999. The
Committee believes that these actions provide an excellent example of the
stewardship of corporate resources by the Company's management team.
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 healthcare services field, and generating returns for its stockholders, and
the Committee strives to establish levels of compensation that take such factors
into account and provide appropriate recognition for past achievement and
incentive for future success. The Committee recognizes that the demand for
executives with expertise and experience in the healthcare services field is
intense. In order to attract and retain qualified persons, the Committee
believes that 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 has been
instrumental in such success. The Committee endeavors to establish base salary
levels for those key executives which are consistent with those provided for
similarly situated executives of other publicly traded healthcare companies,
taking into account each executive's areas and level of responsibility,
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, 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 and management personnel is capped
at the lesser of (a) the amount by which the Company's annual net income exceeds
the budgeted annual net income established by the Board of Directors and (b) 10%
of the Company's annual net income. No bonuses are payable unless annual net
income exceeds budgeted net income. Individual incentive bonuses within such
bonus pool are not determined in a formulary manner, but are determined on a
basis that takes into account each executive's success in achieving standards of
performance, which may or may not be quantitative, established by the Board of
Directors and 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.
22
In 1994, the Committee initially engaged William M. Mercer, Inc. ("Mercer")
as a consultant to perform a study of the Company's executive compensation
programs. The 1994 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. The
Company has continued to utilize Mercer's services in connection with analyzing
and structuring its compensation programs in recent years.
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 1994 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 1994 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. The Committee
believes that the ESOP provides additional incentive to executives to maximize
stockholder value over the long term. See "Executive Compensation and Other
Information -- Employee Stock Benefit Plan". Additionally, in 1997, the Company
adopted a Deferred Compensation Plan, which gives senior management employees
the opportunity to elect to defer receipt of a portion of their salary and bonus
in exchange for a variable rate of interest on the amounts so deferred. See
"Executive Compensation and Other Information -- Deferred Compensation Plan".
Chief Executive Officer Compensation; Developments in 1998
The Company is party to an Employment Agreement, dated April 1, 1998, with
Richard M. Scrushy, pursuant to which Mr. Scrushy, a management founder of the
Company, is employed as Chairman of the Board and Chief Executive Officer of the
Company for a five-year term expiring on April 1, 2003. Such term is
automatically extended for an additional year on each April 1 unless the
Agreement is terminated as provided therein. In addition, the Company has agreed
to use its best efforts to cause Mr. Scrushy to be
23
elected as a Director of the Company during the term of the Agreement. The
Agreement provides for Mr. Scrushy to receive an annual base salary of at least
$1,200,000, as well as an "Annual Target Bonus" equal to at least $2,400,000,
based upon the Company's success in meeting certain monthly and annual
performance standards determined by the Committee. The Annual Target Bonus is
earned at the rate of $200,000 per month if the monthly performance standards
are met, provided that if any monthly performance standards are not met but the
annual performance standards are met, Mr. Scrushy will be entitled to any
payments which were withheld as a result of failure to meet the monthly
performance standards. The Agreement further provides that Mr. Scrushy is
eligible for participation in all other management bonus or incentive plans and
stock option, stock purchase or equity-based incentive compensation plans in
which other senior executives of the Company are eligible to participate. Under
the Agreement, Mr. Scrushy is entitled to receive long-term disability insurance
coverage, a non-qualified retirement plan providing for annual retirement
benefits equal to 60% of his base compensation, use of a Company-owned
automobile, certain personal security services, and certain other retirement,
insurance and fringe benefits, as well as to generally participate in all
employee benefit programs maintained by the Company.
The Agreement may be terminated by Mr. Scrushy for "Good Reason" (as
defined), by the Company for "Cause" (as defined), upon Mr. Scrushy's
"Disability" (as defined) or death, or by either party at any time subject to
the consequences of such termination as described in the Agreement. If the
Agreement is terminated by Mr. Scrushy for Good Reason, the Company is required
to pay him a lump-sum severance payment equal to the discounted value of the sum
of his then-current base salary and Annual Target Bonus over the remaining term
of the Agreement and to continue certain employee and fringe benefits for the
remaining term of the Agreement. If the Agreement is terminated by Mr. Scrushy
otherwise than for Good Reason, the Company is required to pay him a lump-sum
severance amount equal to the discounted value of two times the sum of his
then-current base salary and Annual Target Bonus. If the Agreement is terminated
by the Company for Cause, Mr. Scrushy is not entitled to any severance or
continuation of benefits. If the Agreement is terminated by reason of Mr.
Scrushy's Disability, the Company is required to continue the payment of his
then-current base salary and Annual Target Bonus for three years as if all
relevant performance standards had been met, and if the Agreement is terminated
by Mr. Scrushy's death, the company is required to pay his representatives or
estate a lump-sum payment equal to his then-current base salary and Annual
Target Bonus. In the event of a voluntary termination by Mr. Scrushy following a
Change in Control (as defined) of the Company, other than for Cause, the Company
is required to pay Mr. Scrushy an additional lump-sum severance payment equal to
his then-current base salary and Annual Target Bonus. The Agreement provides for
the Company to indemnify Mr. Scrushy against certain "parachute payment" excise
taxes which may be imposed upon payments under the Agreement. The Agreement
restricts Mr. Scrushy from engaging in certain activities competitive with the
business of the Company during, and for 24 months after termination of, his
employment with the Company, unless such termination occurs after a Change in
Control.
The Committee reports to the Board of Directors on compensation
arrangements with Mr. Scrushy, and recommends to the Board of Directors the
level of incentive compensation, both cash and equity-based, which is
appropriate for Mr. Scrushy with respect to each fiscal year of the Company. In
making such recommendation, the Committee takes into account 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 continues to grow in assets, net
revenues and income.
In 1997, the Committee asked Mercer to review certain information in
connection with the Committee's evaluation of Mr. Scrushy's performance and the
Company's compensation arrangements with Mr. Scrushy. In that connection, Mercer
reviewed the Company's rankings on 14 performance measures for the fiscal year
1996 and the twelve-month period ending September 30, 1997 against three
24
comparison groups: (a) 1,160 companies with 1996 revenues between $1,000,000,000
and $10,000,000,000, (b) 33 publicly held healthcare companies with 1996
revenues over $1,000,000,000, and (c) 62 companies from The Wall Street Journal
350 Study of CEO Compensation with 1996 revenues between $2,000,000,000 and
$8,000,000,000 and 1996 market capitalizations between $4,000,000,000 and
$8,000,000,000. Mercer determined that the Company performed above the 90th
percentile on more than two-thirds of the performance measurements and had an
average rank in the 99th percentile on the combined measures of (i) sales and
net income growth and total shareholder return and (ii) sales and earnings per
share growth and total shareholder return.
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 since 1995 has
established itself as the nation's largest provider of outpatient surgery
services and one of the largest providers of outpatient diagnostic services and
occupational medicine services through a series of strategic acquisitions.
During that same period, the Company has expanded its operations to 50 states,
the United Kingdom and Australia and has been named to the S&P 500. 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-performing public companies and that he will continue to
have the opportunity to obtain a significant equity interest in the Company.
Despite the Company's historic success, however, the Company's stock price
fell substantially in the latter part of 1998, both as a result of general
conditions in the capital markets and market perceptions concerning the
healthcare industry and following the Company's public announcement about the
potential future impact of changes in reimbursement and managed care pricing
pressure. The Company has continued to grow in revenues and income, and the
Committee believes that the downward pressure on the Company's stock price was
largely a result of external factors beyond management's control. In connection
with those factors, including the impact of the Balanced Budget Act of 1997 and
managed care pricing pressure, the Company heightened its efforts to reduce
corporate overhead and manage expenses. In order to lead by example, Mr. Scrushy
voluntarily chose to forgo receipt of his base salary and Annual Target Bonus
after October 31, 1998. Through that date, all monthly performance standard
required to be met for payment of monthly installments of his Annual Target
Bonus had been met. At some point in the future, Mr. Scrushy may choose to
resume receipt of some portion of his compensation package. The Committee
believes that this voluntary decision by Mr. Scrushy reflects a continued
example of his leadership and his stewardship of the Company's resources.
Other Executive Employment Agreements and Related Developments
The Company is also party to Employment Agreements, dated April 1, 1998,
with James P. Bennett, President and Chief Operating Officer, Michael D. Martin,
Executive Vice President and Chief Financial Officer, Anthony J. Tanner,
Executive Vice President -- Administration and Secretary, Thomas W. Carman,
Executive Vice President -- Corporate Development, Robert E. Thomson, President
- - -- HEALTHSOUTH Inpatient Operations, P. Daryl Brown, President -- HEALTHSOUTH
Outpatient Centers, and Patrick A. Foster, President -- HEALTHSOUTH Surgery
Centers, pursuant to which each of such persons is employed in such capacities
for a three-year term expiring on April 1, 2001. Such terms are automatically
extended for an additional year on each April 1 unless the Agreements are
terminated as provided therein. In addition, the Company has agreed to use its
best efforts to cause Messrs. Bennett, Tanner, Martin and Brown to be elected as
Directors of the Company during the term of their respective Agreements. The
Agreements provide for the payment of an annual base salary of at least $650,000
to Mr. Bennett, $400,000 to Mr. Martin, $375,000 to Mr. Tanner, $325,000 to Mr.
Carman, $300,000 to Mr. Thomson, $370,000 to Mr. Brown, and $240,000 to Mr.
Foster. The Agreements further provide that each such officer is eligible for
participation in all management bonus or incentive plans and stock option, stock
purchase or equity-based incentive compensation plans in which other senior
executives of the Company are eligible to participate, and provide for certain
specified fringe benefits, including car allowances of $500 per month.
25
If the Agreements are terminated by the Company other than for Cause (as
defined), Disability (as defined) or death, the Company is required to continue
the officers' base salary in effect for a period of two years (in the case of
Messrs. Bennett, Martin, Tanner and Brown) or one year (in each other case)
after termination, as severance compensation. In addition, in the event of a
voluntary termination of employment by the officer within six months after a
Change in Control (as defined), the Company is also required to continue the
officer's salary for the same period. The Agreements restrict the officers from
engaging in certain activities competitive with the business of the Company
during their employment with the Company and for any period during which the
officer is receiving severance compensation, unless such termination occurs
after a Change in Control.
Notwithstanding the terms of those employment agreements, each of the
affected officers voluntarily agreed to a 25% reduction in base salary effective
January 1, 1999 until otherwise agreed between the Company and any such officer.
The Committee believes that this voluntary agreement by the officers represents
a significant example of leadership for the Company.
In addition to the foregoing, the Company took other steps to respond to
potential future effects of pricing pressure in the healthcare industry. The
Company discontinued the payment of car allowances to all officers in October
1998, and the Committee determined that no management bonuses above the field
operations level would be awarded with respect to 1998. Further, senior officers
not covered by the employment agreements described above have voluntarily agreed
to a 10% reduction in base salary beginning January 1, 1999. The Committee
believes that these steps reflect the continued commitment of the Company's
Board of Directors and management to fiscally responsible compensation policies.
Section 162(m) of the Internal Revenue Code
The Omnibus Budget Reconciliation Act of 1993 contains a provision under
which a publicly traded corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
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 $1,850,000 of Mr.
Scrushy's compensation paid with respect to 1998 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 1998 were appropriate and were instrumental in
the achievement of the Company's goals for 1998. 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.
26
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, M.D., Chairman
27
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 15, 1999, (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 14,187,658 (2) 3.31%
John S. Chamberlin 312,000 (3) *
C. Sage Givens 412,100 (4) *
Charles W. Newhall III 580,846 (5) *
George H. Strong 468,582 (6) *
Phillip C. Watkins, M.D. 644,254 (7) *
James P. Bennett 1,890,500 (8) *
Anthony J. Tanner 1,471,358 (9) *
P. Daryl Brown 1,219,736 (10) *
Joel C. Gordon 2,886,905 (11) *
Michael D. Martin 957,008 (12) *
Larry D. Striplin, Jr. 20,000 *
FMR Corp. 24,397,084 (13) 5.88%
82 Devonshire Street
Boston, Massachusetts 02109
All Executive Officers and Directors
as a Group (17 persons) 28,131,863 (14) 6.38%
- - ----------
(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 6,000 shares held by trusts for Mr. Scrushy's minor children,
10,000 shares held by a charitable foundation of which Mr. Scrushy is an
officer and director and 13,522,524 shares subject to currently exercisable
stock options.
(3) Includes 200,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 410,000 shares
subject to currently exercisable stock options.
(5) Includes 460 shares owned by members of Mr. Newhall's immediate family and
460,000 shares subject to currently exercisable stock options. Mr. Newhall
disclaims beneficial ownership of the shares owned by his family members
except to the extent of his pecuniary interest therein.
(6) Includes 121,693 shares owned by trusts of which Mr. Strong is a trustee
and claims shared voting and investment power and 300,000 shares subject to
currently exercisable stock options.
(7) Includes 490,000 shares subject to currently exercisable stock options.
(8) Includes 1,810,000 shares subject to currently exercisable stock options.
(9) Includes 60,000 shares held in trust by Mr. Tanner for his children and
1,340,000 shares subject to currently exercisable stock options.
(10) Includes 990,000 shares subject to currently exercisable stock options.
(11) Includes 364,340 shares owned by his spouse and 434,520 shares subject to
currently exercisable stock options.
(12) Includes 950,000 shares subject to currently exercisable stock options.
(13) Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power to
vote 1,012,734 of the shares and sole power to dispose of all of the
shares.
(14) Includes 25,380,844 shares subject to currently exercisable stock options
held by executive officers and Directors.
* Less than 1%
28
CERTAIN TRANSACTIONS
The Company purchases computer equipment and related technology from a
variety of vendors. During 1998, the Company paid $12,837,000 for the purchase
of new NCR computer equipment from GG Enterprises, a value-added reseller of
computer equipment which is owned by Gerald Scrushy, the father 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.
Horizon/CMS is party to an agreement with AMI Aviation II, L.L.C. ("AMI")
with respect to the use of an airplane owned by AMI. Neal M. Elliott, who was
Chairman, President and Chief Executive Officer of Horizon/CMS prior to its
acquisition by the Company in October 1997 and who served as a Director of the
Company from October 1997 until his death in February 1998, was Managing Member
of AMI, a position which is now held by a trust of which Mr. Elliott's widow is
a trustee. Mr. Elliott owned, and such trust now owns, a 99% interest in AMI.
Under the use agreement, Horizon/CMS is obligated to pay $43,000 per month
through December 1999 and $57,600 per month from January 2000 through December
2004 for up to 30 hours per month of utilization of the airplane, plus certain
operating expenses of the airplane. The Company has caused Horizon/CMS to
continue to honor such use agreement, and is currently exploring available
options with respect to continued use of the airplane.
In November 1997, the Company agreed to lend up to $10,000,000 to 21st
Century Health Ventures L.L.C. ("21st Century"), an entity formed to sponsor a
private equity investment fund investing in the healthcare industry. Richard M.
Scrushy, Chairman of the Board and Chief Executive Officer of the Company and
Michael D. Martin, Executive Vice President and Chief Financial Officer and a
Director of the Company, along with another individual not employed by the
Company, were the principals of 21st Century. The purpose of the loan was to
facilitate certain investments by 21st Century prior to the establishment of its
proposed private equity fund, in which it was anticipated that the Company and
third-party investors would invest. Investment by the Company in such private
equity fund was expected to allow the Company to benefit from the opportunity to
participate in investments in healthcare businesses that are not part of the
Company's core businesses, but which the Company believes provide opportunities
for growth. Amounts outstanding under the loan bore interest at 1% over the
prime rate announced from time to time by AmSouth Bank of Alabama and were
repayable upon demand by the Company. During 1997 and 1998, 21st Century drew an
aggregate of $2,841,310 under the $10,000,000 commitment, of which $1,500,000
was used to purchase 576,924 shares of Series B Preferred Convertible Preferred
Stock in Summerville Healthcare Group, Inc. ("Summerville"), a developer and
operator of assisted living facilities, and the remainder of which was used to
make an investment in Pathology Partners, Inc., a provider of management
services to pathology groups. The Company owns an aggregate of 3,361,539 shares
of Series B Convertible Preferred Stock of Summerville, which it acquired in two
transactions in July and November 1997. In connection with the July transaction,
Mr. Scrushy and Mr. Martin were appointed to the Board of Directors of
Summerville. 21st Century repaid the principal and the interest allocated to the
purchase of the Summerville stock during 1998. In the first quarter of 1999,
21st Century determined that, due to adverse changes in the markets for private
equity funds specializing in the healthcare industry, it was advisable to
dissolve 21st Century. In connection with the dissolution of the 21st Century,
21st Century transferred to HEALTHSOUTH 675,005 shares of Series A Cumulative
Preferred Stock and 1,440,010 shares of Series B Convertible Preferred Stock of
Pathology Partners, Inc, in satisfaction of the principal and interest allocable
to the loan relating to the Pathology Partners, Inc. investment. The Company
believes that the value of the stock so received is equal to or greater than the
indebtedness of 21st Century to the Company.
On December 31, 1998, the Company completed the sale through a leveraged
recapitalization of a majority interest in one of its subsidiaries which acted
as a holding company for its temporary physician staffing and therapist
placement businesses ("CompHealth"). These non-strategic businesses were
acquired by the Company in connection with certain of its major strategic
acquisitions. The Company retained approximately 15% of the equity in such
holding company. Net proceeds to the Company were
29
approximately $34,100,000. The purchasers comprised a group of venture capital
funds, including funds affiliated with C. Sage Givens and Charles W. Newhall
III, both outside Directors of the Company, as well as venture capital funds
controlled by unaffiliated third parties. The Company solicited offers from
third parties to purchase the business over a period of several months, and the
Company believes that the purchase price and terms of the transaction effected
with the venture capital funds were more favorable to the Company than those
available from other purchasers. In connection with the transaction, the Company
entered into certain "preferred vendor" arrangements with CompHealth, and
Michael D. Martin, Executive Vice President and Chief Financial Officer of the
Company, was named to the Board of Directors of CompHealth.
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, 1998, loans in the following original principal amounts
were outstanding: $460,000 to Larry R. House, a former Director and a former
executive officer, $500,000 to Aaron Beam, Jr., formerly Executive Vice
President and Chief Financial Officer and a Director, and $140,000 and $350,000
to William T. Owens, Group Senior Vice President and Controller. Outstanding
principal balances at December 31, 1998 were $210,000 for Mr. House, $400,000
for Mr. Beam and an aggregate of $476,000 for Mr. Owens. During 1998, the
Company also made loans of $400,000 to P. Daryl Brown, President -- HEALTHSOUTH
Outpatient Centers and a Director, and $750,000 to Russell H. Maddox, then
President -- HEALTHSOUTH Diagnostic Centers, both of which remained outstanding
at December 31, 1998. In connection with Mr. Beam's retirement, the Company
agreed to forgive his loan over a period of five years in exchange for his
provision of consulting services to the Company over such period. 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 1998 and it is expected that such firm will
serve in that capacity for the 1999 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, 1998, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other selected information are included in
Appendix C to this Proxy Statement.
30
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, 1998, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE 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, ONE
HEALTHSOUTH PARKWAY, 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 APRIL 1, 1999, 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 __, 1999
31
APPENDIX A
HEALTHSOUTH CORPORATION
1999 EXCHANGE STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of the 1999 Exchange Stock Option Plan
(hereinafter called the "Plan") of HEALTHSOUTH Corporation, a Delaware
corporation (hereinafter called the "Corporation"), is to provide incentive for
future endeavor and to advance the interests of the Corporation and its
stockholders by encouraging ownership of the Common Stock, par value $.01 per
share (hereinafter called the "Common Stock"), of the Corporation by certain of
its key employees, upon whose judgment, interest and continuing special efforts
the Corporation is largely dependent for the successful conduct of its
operations, through the grant of non-qualified options (hereinafter called
"Options") to purchase shares of the Common Stock on a basis providing
meaningful incentive for such employees.
2. PARTICIPANTS; ELIGIBLE EXCHANGING OPTIONS. (a) Options may be granted
under the Plan to such key employees of the Corporation who currently hold
Eligible Exchanging Options (as defined below) and who surrender such Eligible
Exchanging Options as provided herein; provided, however, that (i) no Option may
be granted to any person if such grant would cause the Plan to cease to be an
"employee benefit plan" as defined in Rule 405 of Regulation C promulgated under
the Securities Act of 1933; and (ii) no Option may be granted to any Director or
executive officer of the Corporation.
(b) For purposes of the Plan, "Eligible Exchanging Option" shall mean any
stock option held by any employee of the Corporation who is eligible under the
terms of Section 2(a) above to be granted options hereunder (i) which is issued
under the terms of any other stock option plan of the Corporation, excluding
those stock option plans which were assumed by the Corporation in connection
with the acquisition of other entities, (ii) which is currently outstanding,
whether or not vested or exercisable, and (iii) which has an exercise price
equal to or greater than $16.00 per share.
3. TERM OF THE PLAN. The Plan shall become effective as of May 20, 1999,
subject to the approval by the holders of a majority of the shares of issued and
outstanding Common Stock of the Corporation present in person or by proxy at the
1999 Annual Meeting of Stockholders of the Corporation. The Plan shall terminate
on the earliest of (a) September 30, 1999, (b) such time as all shares of Common
Stock reserved for issuance under the Plan have been acquired through the
exercise of Options granted under the Plan, or (c) such earlier time as the
Board of Directors of the Corporation may determine. Any Option outstanding
under the Plan at the time of its termination shall remain in effect in
accordance with its terms and conditions and those of the Plan. No Option shall
be granted under the Plan after September 30, 1999.
4. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13, the
aggregate number of shares of Common Stock for which Options may be granted
under the Plan shall not exceed 2,750,000 shares, and the maximum number of
shares of Common Stock for which any individual may be granted Options under the
Plan during any calendar year is shall be equal to the largest number of shares
eligible for issuance to any one optionholder pursuant to Section 6(b). If, on
or prior to the termination of the Plan as provided in Section 3, an Option
granted under the Plan shall have expired or terminated for any reason without
having been exercised in full, the unpurchased shares covered thereby shall
cease to be reserved for issuance hereunder and shall revert to the status of
authorized but unissued shares.
The shares to be delivered upon exercise of Options under the Plan shall be
made available, at the discretion of the Board of Directors, either from
authorized but previously unissued shares as permitted by the Certificate of
Incorporation of the Corporation or from shares re-acquired by the Corporation,
including shares of Common Stock purchased in the open market, and shares held
in the treasury of the Corporation.
5. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Audit
and Compensation Committee of the Board of Directors of the Corporation
(hereinafter called the "Committee"). The acts of a majority of the Committee,
at any meeting thereof at which a quorum is present, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be the
valid acts of the Committee.
A-1
The interpretation and construction of any provision of the Plan or of any
Option granted under it by the Committee shall be final, conclusive and binding
upon all parties, including the Corporation, its stockholders and Directors, and
the executives and employees of the Corporation and its subsidiaries. No member
of the Board of Directors or the Committee shall be liable to the Corporation,
any stockholder, any optionholder or any employee of the Corporation or its
subsidiaries for any action or determination made in good faith with respect to
the Plan or any Option granted under it. No member of the Board of Directors may
vote on any Option to be granted to him.
The expenses of administering the Plan shall be borne by the Corporation.
6. GRANT OF OPTIONS. (a) Options may be granted under the Plan at any time
prior to the termination of the Plan. All such Options shall be deemed to have
been granted on May 20, 1998.
(b) Options may be granted under the Plan only in exchange for the
surrender and cancellation of Eligible Exchanging Options. Such exchange shall
be based upon the following ratios: (i) if the exercise price of an Eligible
Exchanging Option is at least $16.00 but less than $22.00 per share, such
Eligible Exchanging Option may be surrendered in exchange for an Option granted
under this Plan covering two shares of Common Stock for each three shares of
Common Stock covered by the surrendered Eligible Exchanging Option; and (ii) if
the exercise price of an Eligible Exchanging Option is $22.00 per share or
greater, such Eligible Exchanging Option may be surrendered in exchange for an
Option granted under this Plan covering three shares of Common Stock for each
four shares of Common Stock covered by the surrendered Eligible Exchanging
Option. Each participant surrendering Eligible Exchanging Options shall be
required to retain Eligible Exchanging Options covering 10% of the aggregate
number of shares covered by the total number of Eligible Exchanging Options held
by such participant (the "10% Holdback"). The 10% Holdback shall consist of
those Eligible Exchanging Options held by such participant which have the lowest
exercise price. Participants desiring to receive Options hereunder must
surrender not less than all of their Eligible Exchanging Options, less only the
10% Holdback. No Options covering fractional shares will be issued hereunder,
and any fractional shares resulting from the application of the foregoing
exchange ratios will be deemed to be surrendered and canceled. The shares
represented by surrendered Eligible Exchanging Options shall not be restored to
the stock option plan under which they were issued, but instead shall revert to
the status of authorized but unissued shares of Common Stock.
(c) Each Option granted under the Plan shall be granted pursuant to and
subject to the terms and conditions of a stock option agreement to be entered
into between the Corporation and the optionholder at the time of such grant.
Each such stock option agreement shall be in a form from time-to-time adopted
for use under the Plan by the Committee (such form being hereinafter called a
"Stock Option Agreement"). Any such Stock Option Agreement shall incorporate by
reference all of the terms and provisions of the Plan as in effect at the time
of grant and may contain such other terms and provisions as shall be approved
and adopted by the Committee.
7. OPTION PRICE. (a) The purchase price of the shares of Common Stock
covered by each Option granted under the Plan shall be at least 100% of the fair
market value (but in no event less than the par value) of such shares at May 20,
1999.
(b) For purposes of the Plan, the fair market value per share of the
Corporation's Common Stock at May 20, 1999 shall be conclusively deemed to be
the closing price per share of the Common Stock on the New York Stock Exchange
Composite Transactions Tape on such date.
(c) The exercise price of any outstanding Options shall not be reduced
during the term of such Options except by reason of an adjustment pursuant to
Section 13 hereof, nor shall the Committee or the Board of Directors cancel
outstanding Options and reissue new Options at a lower exercise price in
substitution for the canceled Options.
8. TERM OF OPTIONS. The expiration date of an Option granted under the Plan
shall be identical to the expiration date of the Eligible Exchanging Option
surrendered in exchange therefor, provided that each such Option shall expire
not more than ten years after the date such Option was granted.
A-2
9. EXERCISE OF OPTIONS; VESTING. (a) Each Option shall become exercisable
in whole or in part or in installments at such time or times as the Committee
may prescribe at the time the Option is granted and specify in the Stock Option
Agreement. Unless otherwise expressly provided in the Stock Option Agreement,
each Option shall be deemed to be vested and exercisable in the same proportion
to the total number of shares covered thereby as the relevant Eligible
Exchanging Option was so vested and exercisable at the time of surrender, and
any unvested portion of such Option shall vest and become exercisable at the
same time and in the same proportions to the total number of shares covered
thereby as previously provided with respect to the relevant Eligible Exchanging
Option.
(b) Notwithstanding any contrary provision contained herein, unless
otherwise expressly provided in the Stock Option Agreement, any Option granted
hereunder which is, by its terms, exercisable in installments shall become
immediately exercisable in full upon the occurrence of a Change in Control of
the Corporation. For purposes of this Section 9(b), "Change in Control" shall
mean
(i) the acquisition (other than from the Corporation) by any person,
entity or "group" (within the meaning of Sections 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, but excluding, for this purpose, the
Corporation or its subsidiaries, or any employee benefit plan of the
Corporation or its subsidiaries which acquires beneficial ownership of
voting securities of the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Securities Exchange Act of
1934) of 25% or more of either the then-outstanding shares of Common Stock
or the combined voting power of the Corporation's then-outstanding voting
securities entitled to vote generally in the election of Directors; or
(ii) individuals who, as of May 20, 1999, constitute the Board of
Directors of the Corporation (as of such date, the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board of Directors;
provided, however, that any person becoming a Director subsequent to such
date whose election, or nomination for election, was approved by a vote of
at least a majority of the Directors then constituting the Incumbent Board
(other than an election or nomination of an individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of Directors of the Corporation) shall be,
for purposes of this Section 9(b)(ii), considered as though such person
were a member of the Incumbent Board; or
(iii) approval by the stockholders of the Corporation of a
reorganization, merger, consolidation or share exchange, in each case with
respect to which persons who were the stockholders of the Corporation
immediately prior to such reorganization, merger, consolidation or share
exchange do not, immediately thereafter, own more than 75% of the combined
voting power entitled to vote generally in the election of directors of the
reorganized, merged, consolidated or other surviving entity's
then-outstanding voting securities, or a liquidation or dissolution of the
Corporation or the sale of all or substantially all of the assets of the
Corporation.
(c) options may be exercised by giving written notice to the Corporation of
intention to exercise, specifying the number of shares to be purchased pursuant
to such exercise in accordance with the procedures set forth in the Stock Option
Agreement. All shares purchased upon exercise of any Option shall be paid for in
full at the time of purchase in accordance with the procedures set forth in the
Stock Option Agreement. Except as provided in Section 9(d) hereof, such payment
shall be made in cash or through delivery of shares of Common Stock or a
combination of cash and Common Stock as provided in the Stock Option Agreement.
Any shares so delivered shall be valued at their fair market value determined as
of the date of exercise of the Option under a method determined by the
Committee.
(d) Payment for shares purchased upon exercise of any such Option may be
made by delivery to the Corporation of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Corporation an amount of sale or loan proceeds sufficient to pay the exercise
price. Additionally, the Corporation will accept, in payment for shares
purchased upon exercise of any such Option, proceeds of a margin loan obtained
by the exercising optionholder from a broker, provided that the exercising
optionholder has, at the same time as delivery to the Corporation of a properly
executed exercise notice, delivered to the Corporation irrevocable instructions
to the Corporation to deliver share certificates directly to such broker upon
payment for such shares.
A-3
10. NONTRANSFERABILITY OF OPTIONS. (a) Options granted under the Plan shall
be assignable or transferable only by will or pursuant to the laws of descent
and distribution and shall be exercisable during the optionholder's lifetime
only by him, except to the extent set forth in the following paragraphs.
(b) Upon written notice to the Secretary of the Corporation, an
optionholder may, except as otherwise prohibited by applicable law, transfer
options granted under the Plan to one or more members of such optionholder's
immediate family, to a partnership consisting only of members of such
optionholder's immediate family, or to a trust all of whose beneficiaries are
members of the optionholder's immediate family. For purposes of this section, an
optionholder's "immediate family" shall be deemed to include such optionholder's
spouse, children and grandchildren only.
(c) Upon written notice to the Secretary of the Corporation, an
optionholder may transfer options to a charitable, educational or religious
entity which has been determined by the United States Internal Revenue Service
to be exempt from federal income taxation under the provisions of Section 501(c)
of the Internal Revenue Code of 1986, as amended, or any successor statutory
provision.
11. STOCKHOLDER RIGHTS OF OPTIONHOLDER. No holder of any Option shall have
any rights to dividends or other rights of a stockholder with respect to shares
subject to an Option prior to the purchase of such shares upon exercise of the
Option.
12. TERMINATION OF OPTION. With respect to any Option which, by its terms,
is not exercisable for one year from the date on which it is granted, if an
optionholder's employment by, or other relationship with, the Corporation or any
of its subsidiaries terminates within one year after the date an unexercised
Option containing such terms is granted under the Plan for any reason other than
death, the Option shall terminate on the date of termination of such employment
or other relationship. With respect to all Options granted under the Plan, if an
optionholder's employment by, or other relationship with, the Corporation is
terminated by reason of his death, the Option shall terminate one year after the
date of death, unless the Option otherwise expires. If an optionholder's
employment by, or other relationship with, the Corporation terminates for any
reason other than as set forth above in this Section 12, the Option shall
terminate three months after the date of termination of such employment or other
relationship unless the Option earlier expires, provided that (a) if the
optionholder dies within such three-month period, the Option shall terminate one
year after the date of his death unless the Option earlier expires; (b) the
Board of Directors may, at any time prior to any termination of such employment
or other relationship under the circumstances covered by this Section 12,
determine in its discretion that the Option shall terminate on the date of
termination of such employment or other relationship with the Corporation; and
(c) the exercise of any Option after termination of such employment or other
relationship with the Corporation shall be subject to satisfaction of the
conditions precedent that the optionholder refrain from engaging, directly or
indirectly, in any activity which is competitive with any activity of the
Corporation or any subsidiary thereof and from otherwise acting, either prior to
or after termination of such employment or other relationship, in any manner
inimical or in any way contrary to the best interests of the Corporation and
that the optionholder furnish to the Corporation such information with respect
to the satisfaction of the foregoing condition precedent as the Board of
Directors shall reasonably request. For purposes of this Section 12, a
"relationship with the Corporation" shall be limited to any relationship that
does not cause the Plan to cease to be an "employee benefit plan" as defined in
Rule 405 of Regulation C under the Securities Act of 1933. The mere ownership of
stock in the Corporation shall not be deemed to be a "relationship with the
Corporation".
Nothing in the Plan or in the Stock Option Agreement shall confer upon any
optionholder the right to continue in the employ of the Corporation or any of
its subsidiaries or in any other relationship thereto or interfere in any way
with the right of the Corporation to terminate such employment or other
relationship at any time.
A holder of an Option under the Plan may make written designation of a
beneficiary on forms prescribed by and filed with the Secretary of the
Corporation. Such beneficiary, or if no such designation of any beneficiary has
been made, the legal representative of such optionholder or such other person
entitled thereto as determined by a court of competent jurisdiction, may
exercise, in accordance with and subject to the provisions of this Section 12,
any unterminated and unexpired Option granted to such
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optionholder to the same extent that the optionholder himself could have
exercised such Option were he alive or able; provided, however, that no Option
granted under the Plan shall be exercisable for more shares than the
optionholder could have purchased thereunder on the date his employment by, or
other relationship with, the Corporation and its subsidiaries was terminated.
13. ADJUSTMENT OF AND CHANGES IN CAPITALIZATION. In the event that the
outstanding shares of Common Stock shall be changed in number or class by reason
of split-ups, combinations, mergers, consolidations or recapitalizations, or by
reason of stock dividends, the number or class of shares which thereafter may be
purchased through exercise of Options granted under the Plan, both in the
aggregate and as to any individual, and the number and class of shares then
subject to Options theretofore granted and the price per share payable upon
exercise of such Option shall be adjusted so as to reflect such change, all as
determined by the Board of Directors of the Corporation. In the event there
shall be any other change in the number or kind of the outstanding shares of
Common Stock, or of any stock or other securities into which such Common Stock
shall have been changed, or for which it shall have been exchanged, then if the
Board of Directors shall, in its sole discretion, determine that such change
equitably requires an adjustment in any Option theretofore granted or which may
be granted under the Plan, such adjustment shall be made in accordance with such
determination.
Notice of any adjustment shall be given by the Corporation to each holder
of an Option which shall have been so adjusted and such adjustment (whether or
not such notice is given) shall be effective and binding for all purposes of the
Plan.
Fractional shares resulting from any adjustment in Options pursuant to this
Section 13 may be settled in cash or otherwise as the Board of Directors may
determine.
14. SECURITIES ACTS REQUIREMENTS. No Option granted pursuant to the Plan
shall be exercisable in whole or in part, and the Corporation shall not be
obligated to sell any shares of Common Stock subject to any such Option, if such
exercise and sale would, in the opinion of counsel for the Corporation, violate
the Securities Act of 1933 or other Federal or state statutes having similar
requirements, as they may be in effect at that time. Each Option shall be
subject to the further requirement that, at any time that the Board of Directors
or the Committee, as the case may be, shall determine, in their respective
discretion, that the listing, registration or qualification of the shares of
Common Stock subject to such Option under any securities exchange requirements
or under any applicable law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Option or the issuance of shares thereunder, such
Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors or the
Committee, as the case may be.
As a condition to the issuance of any shares upon exercise of an Option
under the Plan, the Board of Directors or the Committee, as the case may be, may
require the optionholder to furnish a written representation that he is
acquiring the shares for investment and not with a view to distribution of the
shares to the public and a written agreement restricting the transferability of
the shares solely to the Corporation, and may affix a restrictive legend or
legends on the face of the certificate representing such shares. Such
representation, agreement and/or legend shall be required only in cases where in
the opinion of the Board of Directors or the Committee, as the case may be, and
counsel for the Corporation, it is necessary to enable the Corporation to comply
with the provisions of the Securities Act of 1933 or other Federal or state
statutes having similar requirements, and any stockholder who gives such
representation and agreement shall be released from it and the legend removed at
such time as the shares to which they applied are registered or qualified
pursuant to the Securities Act of 1933 or other Federal or state statutes having
similar requirements, or at such other time as, in the opinion of the Board of
Directors or the Committee, as the case may be, and counsel for the Corporation,
the representation and agreement and legend cease to be necessary to enable the
Corporation to comply with the provisions of the Securities Act of 1933 or other
Federal or state statutes having similar requirements.
15. AMENDMENT OF THE PLAN. The Plan may, at any time or from time to time,
be terminated, modified or amended by the stockholders of the Corporation by the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation's Common Stock entitled to vote. The Board of
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Directors of the Corporation may, insofar as permitted by law, from time to time
with respect to any shares of Common Stock at the time not subject to Options,
suspend or discontinue the Plan or revise or amend it in any respect whatsoever;
provided, however, that, without approval of the stockholders of the
Corporation, no such revision or amendment shall increase the number of shares
subject to the Plan, decrease the price at which the Options may be granted,
permit exercise of Options unless full payment is made at the time of exercise
(except as so provided in Section 9 hereof), extend the period during which
Options may be exercised, or change the provisions relating to adjustment to be
made upon changes in capitalization.
16. CHANGES IN LAW. Subject to the provisions of Section 15, the Board of
Directors shall have the power to amend the Plan and any outstanding Options
granted thereunder in such respects as the Board of Directors shall, in its sole
discretion, deem advisable in order to incorporate in the Plan or any such
Option any new provision or change designed to comply with or take advantage of
requirements or provisions of the Code or any other statute, or Rules or
Regulations of the Internal Revenue Service or any other Federal or state
governmental agency enacted or promulgated after the adoption of the Plan.
17. LEGAL MATTERS. Every right of action by or on behalf of the Corporation
or by any stockholder against any past, present or future member of the Board of
Directors, officer or employee of the Corporation arising out of or in
connection with this Plan shall, irrespective of the place where such action may
be brought and irrespective of the place of residence of any such Director,
officer or employee, cease and be barred by the expiration of three years from
whichever is the later of (a) the date of the act or omission in respect of
which such right of action arises, or (b) the first date upon which there has
been made generally available to stockholders an annual report of the
Corporation and a proxy statement for the Annual Meeting of Stockholders
following the issuance of such annual report, which annual report and proxy
statement alone or together set forth, for the related period, the aggregate
number of shares for which Options were granted; and any and all right of action
by any employee or executive of the Corporation (past, present or future)
against the Corporation arising out of or in connection with this Plan shall,
irrespective of the place where such action may be brought, cease and be barred
by the expiration of three years from the date of the act or omission in respect
of which such right of action arises.
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the law of Delaware, applied without giving effect to any
conflicts-of-law principles, and construed accordingly.
A-6
APPENDIX B
HEALTHSOUTH CORPORATION
1999 EXECUTIVE EQUITY LOAN PLAN
1. PURPOSE OF THE PLAN. The purpose of the 1999 Executive Equity Loan Plan
(the "Plan") of HEALTHSOUTH Corporation, a Delaware corporation (the
"Corporation"), is to provide incentive for future endeavor and to align the
interests of the Corporation's management and its stockholders by providing a
mechanism to enhance ownership of the Common Stock, par value $.01 per share
(the "Common Stock"), of the Corporation by its executives and other key
employees, upon whose judgment, interest and continuing special efforts the
Corporation is largely dependent for the successful conduct of its operations,
and to enable the Corporation to compete effectively with other enterprises for
the services of such new executives and employees as may be needed for the
continued improvement of the Corporation's business, through the making of loans
("Loans") to such executives and employees to purchase shares of the Common
Stock.
2. PARTICIPANTS. Loans may be made under the Plan to such executives and
key employees ("Participants") of the Corporation and its subsidiaries as shall
be determined by the Committee (as set forth in Section 5 of the Plan).
3. TERM OF THE PLAN. The Plan shall become effective as of May 20, 1999,
subject to the approval by the holders of a majority of the shares of issued and
outstanding Common Stock of the Corporation present in person or by proxy and
voting at the 1998 Annual Meeting of Stockholders of the Corporation. The Plan
shall terminate on the earlier of (a) May 19, 2009 or (b) such earlier time as
the Board of Directors of the Corporation may determine. Any Loan outstanding
under the Plan at the time of its termination shall remain in effect in
accordance with its terms and conditions and those of the Plan. No Loan shall be
made under the Plan after May 19, 2009.
4. LOANS UNDER THE PLAN. Loans may be made under the Plan in such amounts
are as approved by the Committee, provided that the maximum aggregate principal
amount of Loans outstanding under the Plan at any time shall not exceed
$50,000,000. If, on or prior to the termination of the Plan as provided in
Section 3, the principal amount of any Loan under the Plan shall have been
repaid in whole or in part, the principal amount so repaid shall again become
available for the making of Loans under the Plan, subject to the foregoing
limitation on the maximum aggregate principal amount outstanding at any time.
5. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Audit
and Compensation Committee of the Board of Directors of the Corporation (the
"Committee"). The acts of a majority of the Committee, at any meeting thereof at
which a quorum is present, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee. The Committee shall determine the executives and key employees of the
Corporation and its subsidiaries who shall receive Loans and the principal
amount of each such Loan.
The interpretation and construction of any provision of the Plan or of any
Loan made under it by the Committee shall be final, conclusive and binding upon
all parties, including the Corporation, its stockholders and Directors, and the
executives and employees of the Corporation and its subsidiaries. No member of
the Board of Directors or the Committee shall be liable to the Corporation, any
stockholder or any employee of the Corporation or its subsidiaries for any
action or determination made in good faith with respect to the Plan or any Loan
made under it.
The Committee may delegate responsibility for all or part of the
administration of the Plan to appropriate officers of the Corporation; provided,
however, that no such officers shall have the power or authority to make Loans
under the Plan, amend, waive or modify any provision of the Plan or forgive any
Loans, in whole or in part, without the express approval of the Committee in
each case.
The expenses of administering the Plan shall be borne by the Corporation.
6. LOANS. (a) Loans may be made under the Plan by the Committee in
accordance with the provisions of Section 5 at any time prior to the termination
of the Plan. In making any determination as to executives and key employees to
whom Loans shall be made and as to the principal amount of such
B-1
Loans, the Committee shall take into account the duties of the respective
executives and key employees, their present and potential contribution to the
success of the Corporation, and such other factors as the Committee shall deem
relevant in connection with the accomplishment of the purposes of the Plan.
(b) Each Loan made under the Plan shall be granted pursuant to and subject
to the terms and conditions of a loan agreement to be entered into between the
Corporation and the Participant at the time of such grant. Each such loan
agreement shall be in a form from time-to-time adopted for use under the Plan by
the Committee (such form being hereinafter called a "Loan Agreement"). Any such
Loan Agreement shall incorporate by reference all of the terms and provisions of
the Plan as in effect at the time of grant and may contain such other terms and
provisions as shall be approved and adopted by the Committee.
7. CERTAIN CONDITIONS OF LOANS. Loans made under this Plan shall be subject
to the following terms and conditions:
(a) The proceeds of Loans may be used only for purchases of the Common
Stock in open-market transactions, block trades or negotiated transactions.
Such purchases must be effected through a broker approved by the
Corporation.
(b) Loans shall have a maturity date of seven years from the date of
the Loan, subject to acceleration and termination as provided herein. Such
maturity date may be extended for up to one additional year by the
Committee, acting in its discretion. The unpaid principal balance of each
Loan shall bear interest at a rate equal to the effective interest rate on
the average outstanding balance under the Corporation's principal credit
agreement for each calendar quarter, adjustable as of the end of each
calendar quarter, which effective interest rate shall be determined by the
Controller of the Corporation. Interest shall be compounded annually.
Subject to the terms and conditions set forth below, repayment of principal
and interest may be deferred until final maturity of the Loan.
(c) Each Loan shall be secured by a pledge of all of the shares of
Common Stock purchased with the proceeds thereof ("Loan Shares"), pursuant
to which the Participant shall grant the Corporation a first priority lien
on and security interest in the Loan Shares. The Loan Shares may not be
sold for one year after the date on which they were acquired (the
"Acquisition Date"). Thereafter, one-third of the aggregate number of Loan
Shares may be sold during each of the second, third and fourth years after
the Acquisition Date, with any unsold portion carrying forward from year to
year. The proceeds from any such sale must be used to repay a percentage of
the principal amount of the Loan equal to the percentage of Loan Shares
sold, less any amounts withheld for taxes (the "Mandatory Prepayment
Amount"). Any proceeds in excess of the Mandatory Prepayment Amount shall
be retained by the Participant.
(d) Notwithstanding any contrary provision in the Plan or any Loan
Agreement, a Loan shall immediately mature, and all principal and accrued
but unpaid interest thereon shall be due and payable, within 30 days after
the effective date of any termination of the Participant's employment by
the Corporation, whether voluntary or involuntary, or upon the death or
disability of the Participant. Without limiting the generality of the
foregoing, the Corporation may, but shall not be required to, repurchase
the Loan Shares of a Participant at such Participant's original acquisition
cost if the Participant's employment is terminated, voluntarily or
involuntarily or by reason of death or disability, within the first three
years after the Acquisition Date, according to the following schedule:
PERCENTAGE OF LOAN SHARES
YEAR BEGINNING ON SUBJECT TO REPURCHASE
------------------------ --------------------------
Acquisition Date 100%
First Anniversary of
the Acquisition Date 66 2/3%
Second Anniversary of
the Acquisition Date 33 1/3%
The terms of such repurchase shall be as set forth in the Loan
Agreement. In the event of any such repurchase, the purchase price of the
shares so repurchased shall be credited against the outstanding principal
balance and accrued but unpaid interest on the Loan, and the Participant
shall be responsible for the payment of any deficiency.
B-2
(e) Each certificate evidencing Loan Shares shall be registered in the
name of the Participant, and shall bear a legend in substantially the
following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions of the 1999
Executive Equity Loan Plan of HEALTHSOUTH Corporation and a Loan Agreement
entered into between the registered owner and HEALTHSOUTH Corporation.
Copies of such Plan and Loan Agreement are on file in the offices of the
Secretary of HEALTHSOUTH Corporation."
(f) The Committee may adopt rules which provide that the stock
certificates evidencing Loan Shares may be held in custody by a bank or
other institution, or that the Corporation may itself hold such shares in
custody until the restrictions thereon shall have lapsed, and may require
as a condition of any Loan that the participant shall have delivered a
stock power endorsed in blank relating to the Loan Shares.
(g) Loans shall be made with full recourse, and each Participant shall
be required to repay all principal and accrued but unpaid interest upon the
maturity of the Loan (or its earlier acceleration or termination),
irrespective of whether the Participant has sold Loan Shares or whether the
proceeds of any such sale were sufficient to repay all principal and
interest with respect to the Loan. If, at any time, the Committee
determines in its reasonable discretion that the value of the Loan Shares
pledged as security for the Loan is less than the indebtedness evidenced by
the Loan, the Committee shall require the Participant to post additional
security (which may be shares of Common Stock or other collateral
acceptable to the Committee, in its reasonable discretion) in an amount
sufficient to fully secure the indebtedness of the Loan.
8. CERTAIN RIGHTS OF PARTICIPANTS. Notwithstanding any contrary provision
of the Plan or any Loan Agreement, a participant holding Loan Shares shall be
entitled to the following rights:
(a) A participant shall have with respect to Loan Shares all of the
rights of a stockholder of the Corporation, including the right to vote
such shares and receive dividends and other distributions thereon.
(b) Unless otherwise expressly provided in the Loan Agreement, any
restrictions on a participant's ability to sell any of the Loan Shares
pursuant to Section 7(c) shall terminate upon the occurrence of a Change in
Control of the Corporation. For purposes of this Section 8(b), "Change in
Control" shall mean
(i) the acquisition (other than from the Corporation) by any
person, entity or "group" (within the meaning of Sections 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, but excluding, for
this purpose, the Corporation or its subsidiaries, or any employee
benefit plan of the Corporation or its subsidiaries which acquires
beneficial ownership of voting securities of the Corporation) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Securities Exchange Act of 1934) of 25% or more of either
the then-outstanding shares of Common Stock or the combined voting
power of the Corporation's then-outstanding voting securities entitled
to vote generally in the election of Directors; or
(ii) individuals who, as of May 20, 1999, constitute the Board of
Directors of the Corporation (as of such date, the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that any person becoming a Director
subsequent to such date whose election, or nomination for election,
was approved by a vote of at least a majority of the Directors then
constituting the Incumbent Board (other than an election or nomination
of an individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election
of Directors of the Corporation) shall be, for purposes of this
Section 8(b), considered as though such person were a member of the
Incumbent Board; or
(iii) approval by the stockholders of the Corporation of a
reorganization, merger, consolidation or share exchange, in each case
with respect to which persons who were the stockholders of the
Corporation immediately prior to such reorganization, merger,
B-3
consolidation or share exchange do not, immediately thereafter, own
more than 75% of the combined voting power entitled to vote generally
in the election of directors of the reorganized, merged, consolidated
or other surviving entity's then-outstanding voting securities, or a
liquidation or dissolution of the Corporation or the sale of all or
substantially all of the assets of the Corporation.
Notwithstanding the foregoing, however, the pledge of the Loan Shares
shall continue in full force and effect until such time as all principal
and accrued but unpaid interest under the Loan has been repaid.
9. NO RIGHT OF CONTINUED EMPLOYMENT. Nothing in the Plan or in the Loan
Agreement shall confer upon any participant the right to continue in the employ
of the Corporation or any of its subsidiaries or in any other relationship
thereto or interfere in any way with the right of the Corporation to terminate
such employment or other relationship at any time.
10. AMENDMENT OF THE PLAN. The Plan may, at any time or from time to time,
be terminated, modified or amended by the stockholders of the Corporation by the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation's Common Stock present in person or by proxy and entitled to vote at
a meeting of the Corporation's stockholders duly called and held (or, to the
extent permitted by law, by written consent of the holders of a majority of the
outstanding shares of the Corporation's Common Stock entitled to vote). The
Board of Directors of the Corporation may, insofar as permitted by law, from
time to time suspend or discontinue the Plan or revise or amend it in any
respect whatsoever; provided, however, that, without approval of the
stockholders of the Corporation, no such revision or amendment shall increase
the maximum aggregate principal amount of Loans made under the Plan.
11. CHANGES IN LAW. Subject to the provisions of Section 10, the Board of
Directors shall have the power to amend the Plan and any outstanding Loans
granted thereunder in such respects as the Board of Directors shall, in its sole
discretion, deem advisable in order to incorporate in the Plan or any such Award
any new provision or change designed to comply with or take advantage of
requirements or provisions of the Internal Revenue Code of 1986, as amended, or
any other statute, or Rules or Regulations of the Internal Revenue Service or
any other Federal or state governmental agency enacted or promulgated after the
adoption of the Plan.
12. LEGAL MATTERS. Every right of action by or on behalf of the Corporation
or by any stockholder against any past, present or future member of the Board of
Directors, officer or employee of the Corporation arising out of or in
connection with this Plan shall, irrespective of the place where such action may
be brought and irrespective of the place of residence of any such Director,
officer or employee, cease and be barred by the expiration of three years from
whichever is the later of (a) the date of the act or omission in respect of
which such right of action arises, or (b) the first date upon which there has
been made generally available to stockholders an annual report of the
Corporation and a proxy statement for the Annual Meeting of Stockholders
following the issuance of such annual report, which annual report and proxy
statement alone or together set forth, for the related period, the aggregate
number of shares for which Awards were granted; and any and all right of action
by any employee or executive of the Corporation (past, present or future)
against the Corporation arising out of or in connection with this Plan shall,
irrespective of the place where such action may be brought, cease and be barred
by the expiration of three years from the date of the act or omission in respect
of which such right of action arises.
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the law of Delaware, applied without giving effect to any
conflicts-of-law principles, and construed accordingly.
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APPENDIX C
NOTE: This Appendix C, 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 1998 Annual Report to Stockholders, which
provides additional information concerning the Company and its performance in
1998, is also included in this mailing.
TABLE OF CONTENTS
PAGE
NUMBER
-------
Business ............................................................................. C-
Selected Financial Data .............................................................. C-
Quarterly Results .................................................................... C-
Directors and Executive Officers ..................................................... C-
Management's Discussion and Analysis of Financial Condition and Results of Operations. C-
Audited Consolidated Financial Statements of HEALTHSOUTH Corporation and
Subsidiaries ........................................................................
Report of Independent Auditors ...................................................... C-
Consolidated Balance Sheets ......................................................... C-
Consolidated Statements of Income ................................................... C-
Consolidated Statements of Stockholders' Equity ..................................... C-
Consolidated Statements of Cash Flows ............................................... C-
Notes to Consolidated Financial Statements .......................................... C-
Market for the Company's Common Equity and Related Stockholder Matters ............... C-
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. C-
C-1
BUSINESS
HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company) is the nation's
largest provider of outpatient surgery and rehabilitative healthcare services.
The Company provides these services through its national network of outpatient
and inpatient rehabilitation facilities, outpatient surgery centers, diagnostic
centers, occupational medicine 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 December 31, 1998, the
Company had nearly 1,900 patient care locations in 50 states, the United Kingdom
and Australia, exclusive of locations being closed, consolidated or held for
sale. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
SELECTED FINANCIAL DATA
[To be completed]
QUARTERLY RESULTS (UNAUDITED)
[To be completed]
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 ......... 46 Chairman of the Board and Chief Executive 1984
Officer and Director
James P. Bennett ........... 41 President and Chief Operating Officer and 1991
Director
Anthony J. Tanner .......... 50 Executive Vice President -- Administration 1984
and Secretary and Director
Michael D. Martin .......... 38 Executive Vice President and Chief 1989
Financial Officer and Director
Thomas W. Carman ........... 47 Executive Vice President -- Corporate 1985
Development
P. Daryl Brown ............. 44 President -- HEALTHSOUTH Outpatient 1986
Centers and Director
Robert E. Thomson .......... 51 President -- HEALTHSOUTH Inpatient 1987
Operations
Patrick A. Foster .......... 52 President -- HEALTHSOUTH Surgery 1994
Centers
William T. Owens ........... 40 Group Senior Vice President -- Finance 1986
and Controller
William W. Horton .......... 39 Senior Vice President and Corporate 1994
Counsel and Assistant Secretary
Biographical information for Messrs. Scrushy, Bennett, Tanner, Brown and
Martin is set forth in the Proxy Statement to which this Appendix C is attached
under "Election of Directors".
Thomas W. Carman joined the Company in 1985 as Regional Director --
Corporate Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was assistant
administrator at the Children's Hospital of Birmingham, Alabama.
C-2
Robert E. Thomson joined the Company in August 1985 as administrator of its
Florence, South Carolina inpatient rehabilitation facility, and subsequently
served as Regional Vice President -- Inpatient Operations, Vice President --
Inpatient Operations, Group Vice President -- Inpatient Operations, and Senior
Vice President -- Inpatient Operations. Mr. Thomson was named President --
HEALTHSOUTH Inpatient Operations in February 1996.
Patrick A. Foster joined the Company in February 1994 as Director of
Operations and subsequently served as Group Vice President -- Inpatient
Operations and Senior Vice President -- Inpatient Operations. He was named
President -- HEALTHSOUTH Surgery Centers in October 1997. From August 1992 until
February 1994, he served as Senior Vice President of the Rehabilitation/Medical
Division of The Mediplex Group.
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 Senior
Vice President -- Finance and Controller in February 1994 and Group Senior Vice
President -- Finance and Controller in March 1998. 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.
William W. Horton joined the Company in July 1994 as Group Vice President
- - -- Legal Services and was named Senior Vice President and Corporate Counsel in
May 1996. From August 1986 through June 1994, Mr. Horton practiced corporate,
securities and healthcare law with the Birmingham, Alabama-based firm now known
as Haskell Slaughter & Young, L.L.C., where he served as Chairman of the
Healthcare Practice Group.
See "Election of Directors" in the Proxy Statement to which this Appendix C
is attached for identification of the Directors of the Company.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
[To be completed]
C-3
[AUDITED CONSOLIDATED FINANCIAL STATEMENTS TO BE INCLUDED IN
DEFINITIVE PROXY STATEMENT]
C-4
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 March 17, 1997.
REPORTED
SALE PRICE
-------------------------
HIGH LOW
----------- -----------
1997
First Quarter .................... $ 22.38 $ 17.94
Second Quarter ................... 27.12 17.75
Third Quarter .................... 28.94 23.12
Fourth Quarter ................... 28.31 22.00
1998
First Quarter .................... $ 30.44 $ 21.69
Second Quarter ................... 30.81 25.75
Third Quarter .................... 30.12 8.88
Fourth Quarter ................... 15.88 7.69
----------------
The closing price for the Company's common stock on the New York Stock
Exchange on April ___, 1999, was $_______.
There were approximately 6,903 holders of record of the Company's common
stock as of April 1, 1999, excluding those shares held by depository companies
for certain beneficial owners.
The Company has never paid cash dividends on its common stock (although
certain of the companies acquired by the Company in poolings-of-interests
transactions had paid dividends prior to such acquisitions) 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.
RECENT SALES OF UNREGISTERED SECURITIES
All unregistered sales of equity securities by the Company in 1998 have
been previously reported on Form 10-Q or Form 8-K, as applicable.
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, 1998.
C-5
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PRELIMINARY COPY
HEALTHSOUTH CORPORATION
PROXY ANNUAL MEETING OF STOCKHOLDERS -- MAY 20, 1999
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints RICHARD M. SCRUSHY and MICHAEL D. MARTIN 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 One HealthSouth Parkway, Birmingham, Alabama 35243, on Thursday, May 20,
1999, at 2:00 p.m., C.D.T., and any adjournment thereof:
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to vote
below marked to the contrary (except as for all nominees
below) 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 James P. Bennett George H. Strong
Charles W. Newhall III Michael D. Martin John S. Chamberlin
P. Daryl Brown Joel C. Gordon Larry D. Striplin, Jr.
2. APPROVAL OF THE 1999 EXCHANGE STOCK OPTION PLAN OF THE COMPANY
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on reverse.)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(Continued from other side.)
3. APPROVAL OF THE 1999 EXECUTIVE EQUITY LOAN PLAN OF THE COMPANY
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. APPROVAL OF A STOCKHOLDER PROPOSAL BY THE AMALGAMATED BANK OF NEW YORK
LONGVIEW COLLECTIVE INVESTMENT FUND
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. 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 ITEMS 1, 2 AND 3 AND AGAINST ITEM 4 ABOVE. Any stockholder who
wishes to withhold the discretionary authority referred to in Item 5 above
should mark a line through the entire Item.
DATED , 1999
----------------------
----------------------------------------
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.
- - --------------------------------------------------------------------------------