0000890613-95-000119.txt : 19950914 0000890613-95-000119.hdr.sgml : 19950914 ACCESSION NUMBER: 0000890613-95-000119 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19950908 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHSOUTH CORP CENTRAL INDEX KEY: 0000785161 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 630860407 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-62475 FILM NUMBER: 95572304 BUSINESS ADDRESS: STREET 1: TWO PERIMETER PARK S STREET 2: STE 224W CITY: BIRMINGHAM STATE: AL ZIP: 35243 BUSINESS PHONE: 2059677116 MAIL ADDRESS: STREET 1: TWO PERIMETER PARK SOUTH CITY: BIRMINGHAM STATE: AL ZIP: 35243 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHSOUTH REHABILITATION CORP DATE OF NAME CHANGE: 19920703 S-3 1 As filed with the Securities and Exchange Commission on September 8, 1995 Registration No. 33-_____________ =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM S-3 Registration Statement Under The Securities Act of 1933 ------------------- HEALTHSOUTH Corporation (Exact Name of Registrant as Specified in its Charter) ------------------- Delaware 63-0860407 (State or Other Jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) Number) Two Perimeter Park South, Birmingham, Alabama 35243 (205) 967-7116 (Address, including Zip Code, and Telephone Number, including Area Code, of Registrant's Principal Executive Offices) RICHARD M. SCRUSHY Chairman of the Board and Chief Executive Officer HEALTHSOUTH Corporation Two Perimeter Park South Birmingham, Alabama 35243 (205) 967-7116 (Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service) Copies to: -------------------
J. BROOKE JOHNSTON, JR., ESQ WILLIAM W. HORTON, ESQ. NATHANIEL M. CARTMELL III, ESQ. BEALL D. GARY, JR., ESQ. Group Vice President--Legal Services KAREN A. DEMPSEY, ESQ. Haskell Slaughter Young & Johnston, HEALTHSOUTH Corporation J. KEITH BIANCAMANO, ESQ. Professional Association Two Perimeter Park South Pillsbury Madison & Sutro 1200 AmSouth/Harbert Plaza Birmingham, Alabama 35243 Post Office Box 7880 1901 Sixth Avenue North San Francisco, California 94120 Birmingham, Alabama 35203
------------------- Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered pursuant to dividend or interest reinvestment plans, check the following box.[] If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE -----------------------------------------------------------------------------
================================================================================================================= Proposed Maximum Proposed Maximum Amount of Title of Each Class of Security to be Amount to be Offering Price Aggregate Offering Registration Registered............................. registered (1) Per Share (2) Price (2) Fee ----------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share 12,650,000 shares $22.875 $289,368,750 $99,783 =================================================================================================================
(1) Includes 1,650,000 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(c) based on the average of the high and low prices of the Registrant's Common Stock as reported on the New York Stock Exchange on September 7, 1995. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further Amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. =============================================================================== SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1995 P R O S P E C T U S 11,000,000 Shares HEALTHSOUTH Corporation Common Stock ------------ All of the shares of Common Stock (the "Common Stock") offered hereby are being sold by HEALTHSOUTH Corporation (the "Company"). The Common Stock is listed on the New York Stock Exchange under the symbol HRC. On September 6, 1995, the last sale price for the Common Stock, as reported on the New York Stock Exchange, was $23.125 per share. See "Risk Factors" for a discussion of certain factors that should be considered by prospective purchasers of the shares of Common Stock offered hereby. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ============================================================================== Underwriting Price to Discounts and Proceeds to Public Commissions (1) Company (2) ------------------------------------------------------------------------------ Per Share .. $ $ $ ------------------------------------------------------------------------------ Total (3) .. $ $ $ ============================================================================== (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting". (2) Before deducting expenses of the offering payable by the Company, estimated at $500,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 1,650,000 additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting". If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $____, $____ and $____ , respectively. ---------- The shares of Common Stock are offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Common Stock will be available for delivery on or about ________, 1995, at the office of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013. ---------- Smith Barney Inc. Merrill Lynch & Co. Morgan Stanley & Co. Incorporated ___________ , 1995 HEALTHSOUTH Corporation [MAP LOGO APPEARS HERE] (MAP REPRESENTS LOCATIONS OF HEALTHSOUTH FACILITIES THROUGHOUT THE UNITED STATES) AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). The Registration Statement, as well as such reports, proxy statements and other information, may be inspected at the Public Reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C., and should be available for inspection and copying at the Regional Offices of the SEC located at 7 World Trade Center, 13th Floor, New York, New York, 560 Wilshire Boulevard, 11th Floor, Los Angeles, California, and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois. Copies of such material can be obtained at prescribed rates by writing to the SEC, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common Stock is listed and traded on the New York Stock Exchange (Symbol: HRC). Such reports, proxy statements and other information can also be inspected at the office of such Exchange, 20 Broad Street, New York, New York. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus and in the documents incorporated by reference herein. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' option to purchase up to 1,650,000 additional shares of Common Stock to cover over-allotments, if any. All financial information has been adjusted to reflect a three-for-two stock split effected in the form of a 50% stock dividend paid on December 31, 1991 and a two-for-one stock split effected in the form of a 100% stock dividend paid on April 17, 1995. The Company HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company") is the nation's largest provider of outpatient and rehabilitative healthcare services. The Company provides these services through its national network of outpatient and inpatient rehabilitation facilities, outpatient surgery centers, medical centers and other healthcare facilities. The Company believes that it provides patients, physicians and payors with high-quality healthcare services at significantly lower costs than traditional inpatient hospitals. Additionally, HEALTHSOUTH's national network, reputation for quality and focus on outcomes has enabled the Company to secure contracts with national and regional managed care payors. HEALTHSOUTH has over 500 patient care locations in 38 states, the District of Columbia and Ontario, Canada. In its outpatient and inpatient rehabilitation facilities, HEALTHSOUTH provides interdisciplinary programs for the rehabilitation of patients experiencing disability due to a wide variety of physical conditions, such as stroke, head injury, orthopaedic problems, neuromuscular disease and sports-related injuries. The Company's rehabilitation services include physical therapy, sports medicine, work hardening, neurorehabilitation, occupational therapy, respiratory therapy, speech-language pathology and rehabilitation nursing. Independent studies have shown that rehabilitation services like those provided by the Company can save money for payors and employers. HEALTHSOUTH operates the third largest network of free-standing outpatient surgery centers in the United States. The Company's outpatient surgery centers provide the facilities and medical support staff necessary for physicians to perform non-emergency surgical procedures. While outpatient surgery is widely recognized as generally less expensive than surgery performed in a hospital, the Company believes that outpatient surgery performed at a free-standing outpatient surgery center is generally less expensive than hospital-based outpatient surgery. Approximately 95% of the Company's surgery center facilities are located in markets served by its rehabilitative service facilities, enabling the Company to pursue opportunities for cross-referrals. Over the last two years, the Company has completed several significant acquisitions in the rehabilitation business and has expanded into the surgery center business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company believes that these acquisitions complement its historical operations and enhance its market position. The Company believes that its expansion into the outpatient surgery business provides the Company with a platform for future growth. In addition, since the facilities acquired had very limited contractual relationships with payors, managed care providers, employers and others, the Company plans to expand its existing payor relationships to include these facilities. HEALTHSOUTH's principal objective is to be the provider of choice for patients, physicians and payors for outpatient and rehabilitative healthcare services. HEALTHSOUTH's strategy is based upon four primary elements: (i) the implementation of the Company's integrated service model in appropriate markets; (ii) successful marketing of the Company's services to managed care organizations and other payors; (iii) the provision of cost-effective healthcare services; and (iv) the expansion of the Company's national network. 3 The Offering Common Stock Offered........... 11,000,000 shares Common Stock to be Outstanding after the Offering.......... 91,516,441 shares (1) Use of Proceeds............... The Company intends to repay indebtedness outstanding under its existing bank credit facility. NYSE Symbol................... HRC Summary Consolidated Financial Information (In thousands, except for per share and operating data)
Six Months Ended Year Ended December 31, June 30, ---------------------------------------------------------- -------------------- 1990 1991 1992 1993 1994 1994 1995 -------- -------- -------- -------- ---------- -------- -------- Income Statement Data: Revenues .................... $207,390 $277,655 $501,046 $656,329 $1,236,190 $584,183 $716,949 Net income................... 14,425 25,671 34,929 17,197 49,961 29,226 17,777 Net income per common and common equivalent share--assuming full dilution (2) ................ $ 0.32 $ 0.43 $ 0.47 $ 0.22 $ 0.59 $ 0.35 $ 0.20 Other Data: EBITDA (3)................... $ 46,953 $ 66,147 $100,495 $ 99,290 $ 242,632 $115,263 $132,531 Data before non-recurring expenses: (4) EBITDA....................... 46,953 66,147 104,160 147,965 264,152 118,660 172,917 Income ...................... 14,425 25,671 37,308 45,935 62,720 31,281 42,817 Income per common share--assuming full dilution(2).................. $ 0.32 $ 0.43 $ 0.50 $ 0.59 $ 0.73 $ 0.37 $ 0.48 Operating Data at Period End: (5) .................... Outpatient rehabilitation locations.................... 126 171 238 199 318 Inpatient facilities......... 26 43 71 66 82 Surgery centers.............. 20 28 36 32 43
June 30, 1995 --------------------- Actual As Adjusted(6) --------- ---------- Balance Sheet Data: Cash and marketable securities $ 75,915 $ 75,915 Working capital ............... 285,146 285,146 Total assets .................. 2,063,049 2,063,049 Long-term debt (7) ............ 1,357,299 1,112,323 Stockholders' equity .......... 518,132 763,108
(1) Outstanding shares do not include (a) a total of 14,589,830 shares of Common Stock reserved for issuance pursuant to the exercise of options outstanding under the Company's stock option plans, (b) 6,112,956 shares reserved for issuance upon conversion of the Company's 5% Convertible Subordinated Debentures due 2001, and (c) 1,777,778 shares to be issued in connection with the pending acquisition of Sutter Surgery Centers, Inc. (2) Fully diluted earnings per share in 1990 and 1991 reflect shares reserved for issuance upon exercise of dilutive stock options and shares reserved for issuance upon conversion of HEALTHSOUTH's 7 3/4 % Convertible Subordinated Debentures due 2014, all of which were converted into Common Stock prior to June 3, 1991. Fully diluted earnings per share in 1994 reflect shares reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures due 2001. (3) EBITDA represents earnings before interest expense, income taxes, minority interests, depreciation and amortization. (4) Non-recurring expenses include merger expenses, losses on impairment of assets, loss on abandonment of computer project, acquisition-related expenses, terminated merger expense and the gain on sale of partnership interest. See Notes 2, 10, 14 and 16 of "Notes to Consolidated Financial Statements" for the years ended December 31, 1992, 1993 and 1994, Notes 4 and 8 of "Notes to Consolidated Financial Statements" for the six month periods ended June 30, 1994 and 1995, and "Management's Discussion and Analysis of Financial Condition and Results of Operations". (5) Comparable data is not available for periods prior to 1992 as a result of the Company's recent pooling-of-interests acquisitions. (6) Adjusted to reflect the sale of 11,000,000 shares by the Company and the application of the estimated net proceeds therefrom. See "Use of Proceeds". (7) Includes current portion of long-term debt. 4 THE COMPANY The Company was organized in 1984 as a Delaware corporation. Its principal executive offices are located at Two Perimeter Park South, Birmingham, Alabama 35243. Its telephone number at that address is (205) 967-7116. As used in this Prospectus, except as otherwise specified or when the context otherwise requires, references to "HEALTHSOUTH" and the "Company" include HEALTHSOUTH Corporation and its consolidated subsidiaries and affiliates. RECENT DEVELOPMENTS On August 23, 1995, the Company signed a definitive agreement to acquire Sutter Surgery Centers, Inc. ("SSCI"). Under the agreement, SSCI stockholders will receive an aggregate of 1,777,778 shares of HEALTHSOUTH Common Stock, subject to adjustment in certain circumstances, which equated to a transaction value of approximately $38,000,000 at the time the agreement was signed. The transaction is subject to certain regulatory and governmental approvals, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The transaction, which is expected to be accounted for as a pooling of interests, is expected to close during the fourth quarter of 1995. SSCI is a privately-held operator of 12 ambulatory surgery centers located in California, Arizona and Utah. RISK FACTORS In addition to the other information in this Prospectus, the following should be considered carefully before making an investment in the Common Stock offered hereby. Regulation. As a result of the continued escalation of healthcare costs and the inability of many individuals to obtain health insurance, numerous proposals have been or may be introduced in the United States Congress and state legislatures relating to healthcare reform. There can be no assurance as to the ultimate content, timing or effect of any healthcare reform legislation, nor is it possible at this time to estimate the impact of potential legislation, which may be material, on the Company. The Company is also subject to various other types of regulation at the federal and state levels, including, but not limited to, licensure and certification laws, Certificate of Need laws and laws relating to financial relationships among providers of healthcare services, Medicare fraud and abuse and physician self-referral. See "Business -- Regulation". USE OF PROCEEDS The net proceeds from the sale of shares of Common Stock offered hereby are estimated to be $244,976,000 ($281,797,400 if the Underwriters' over-allotment option is exercised in full) at an assumed public offering price of $23.125 per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company intends to use all of such net proceeds to reduce the indebtedness outstanding under the Company's $1,000,000,000 revolving bank credit facility. As a result of the application of net proceeds as set forth above, the Company's LIBOR-based interest rate will decrease by at least 25 basis points. See Note 7 of "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operation-- Liquidity and Capital Resources" for a description of the interest rate and other terms of the Company's $1,000,000,000 revolving bank credit facility. Until utilized for the above purpose, the net proceeds of this Offering will be invested in short-term investment grade interest-bearing securities. 5 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1995, and as adjusted to give effect to the sale by the Company of the 11,000,000 shares of Common Stock offered hereby at an assumed price of $23.125 per share, and the application of the estimated net proceeds therefrom (after deducting the estimated underwriting discount and expenses of the offering). See "Use of Proceeds".
June 30, 1995 ----------------------- Actual As Adjusted ---------- ---------- (In thousands) Current portion of long-term debt (1) .............................. $ 16,750 $ 16,750 ========== ========== Long-term debt (net of current portion) (1): Notes payable ...................................................... $ 895,000 $ 650,024 Other .............................................................. 80,549 80,549 9.5% Senior Subordinated Notes due 2001 ............................ 250,000 250,000 5.0% Convertible Subordinated Debentures due 2001 .................. 115,000 115,000 ---------- ---------- Total long-term debt ............................................... 1,340,549 1,095,573 Stockholders' equity: Preferred stock, $.10 par value, 1,500,000 shares authorized; issued and outstanding--none........................................ -- -- Common stock, $.01 par value, 150,000,000 shares authorized; issued-- 80,128,000 shares, 91,128,000 shares issued as adjusted (2) 801 911 Additional paid-in capital ......................................... 381,743 626,609 Retained earnings .................................................. 151,797 151,797 Treasury stock ..................................................... (323) (323) Receivable from Employee Stock Ownership Plan ...................... (15,886) (15,886) ---------- ---------- Total stockholders' equity ......................................... 518,132 763,108 ---------- ---------- Total capitalization ............................................... $1,858,681 $1,858,681 ========== ==========
(1) See Note 7 of "Notes to Consolidated Financial Statements". (2) Outstanding shares do not include (a) a total of 14,589,830 shares of Common Stock reserved for issuance pursuant to the exercise of options outstanding under the Company's stock option plans, (b) 6,112,956 shares reserved for issuance upon conversion of the Company's 5% Convertible Subordinated Debentures due 2001, and (c) 1,777,778 shares to be issued in connection with the acquisition of SSCI. See Note 8 of "Notes to Consolidated Financial Statements". 6 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated income statement data set forth below for the years ended December 31, 1990, 1991, 1992, 1993 and 1994 and the consolidated balance sheet data at December 31, 1990, 1991, 1992, 1993 and 1994 are derived from consolidated financial statements audited by the Company's independent auditors. The data for the six months ended June 30, 1994 and 1995 and at June 30, 1995 are derived from the unaudited consolidated financial statements of the Company. In the opinion of the Company, the consolidated income statement data for the six months ended June 30, 1994 and 1995, and the consolidated balance sheet data at June 30, 1995, reflect all adjustments (which consist of only normal recurring adjustments) necessary for a fair presentation of results of interim periods. Operating results for the six months ended June 30, 1995, are not necessarily indicative of results for the full fiscal year or for any future interim period. The consolidated income statement data set forth below for the years ended December 31, 1992, 1993 and 1994 and the consolidated balance sheet data at December 31, 1992, 1993 and 1994 are qualified by reference to the audited consolidated financial statements included elsewhere herein. The consolidated income statement data set forth below for the six months ended June 30, 1994 and 1995 and the consolidated balance sheet data at June 30, 1995 are qualified by reference to the unaudited consolidated financial statements included elsewhere herein. The financial information for all periods set forth below has been restated to reflect the acquisition of ReLife, Inc. ("ReLife") in December 1994 and the acquisition of Surgical Health Corporation ("SHC") in June 1995, each of which has been accounted for as a pooling of interests.
Six Months Ended Year Ended December 31, June 30, ---------------------------------------------------------- -------------------- 1990 1991 1992 1993 1994 1994 1995 -------- -------- -------- -------- ---------- ----------- -------- (In thousands, except per share data) (unaudited) Income Data Statement: Revenues .................................. $207,390 $277,655 $501,046 $656,329 $1,236,190 $ 584,183 $716,949 Operating expenses: Operating units ........................... 151,970 200,350 372,169 471,778 906,712 437,643 513,038 Corporate general and administrative ..... 7,025 10,901 16,878 24,329 45,895 19,191 19,645 Provision for doubtful accounts............ 5,608 6,092 13,254 16,181 23,739 10,287 14,119 Depreciation and amortization ............. 11,388 15,115 29,834 46,224 86,678 36,962 55,663 Interest expense........................... 12,058 10,507 12,623 18,495 65,286 26,980 44,292 Interest income............................ (4,166) (5,835) (5,415) (3,924) (4,308) (1,598) (2,770) Merger expense (1) ........................ -- -- -- 333 6,520 3,397 29,194 Loss on impairment of assets (2) .......... -- -- -- -- 10,500 -- 11,192 Loss on abandonment of computer project (2) -- -- -- -- 4,500 -- -- NME Selected Hospitals Acquisition related expense (2) ............................... -- -- -- 49,742 -- -- -- Terminated merger expense (2) ............. -- -- 3,665 -- -- -- -- Gain on sale of partnership interest ..... -- -- -- (1,400) -- -- -- -------- -------- -------- -------- ---------- ----------- -------- 183,883 237,130 443,008 621,758 1,145,522 532,862 684,373 -------- -------- -------- -------- ---------- ----------- -------- Income before income taxes and minority interests.................................. 23,507 40,525 58,038 34,571 90,668 51,321 32,576 Provision for income taxes ................ 8,153 13,582 18,864 11,930 34,305 19,104 10,895 -------- -------- -------- -------- ---------- ----------- -------- Income before minority interests........... 15,354 26,943 39,174 22,641 56,363 32,217 21,681 Minority interests......................... 929 1,272 4,245 5,444 6,402 2,991 3,904 -------- -------- -------- -------- ---------- ----------- -------- Net income ................................ $ 14,425 $ 25,671 $ 34,929 $ 17,197 $ 49,961 $ 29,226 $ 17,777 ======== ======== ======== ======== ========== =========== ======== Weighted average common and common equivalent shares outstanding.............. 41,337 57,390 74,214 77,709 84,687 83,974 87,246 ======== ======== ======== ======== ========== =========== ======== Net income per common and common equivalent share (3) ...................... $ 0.35 $ 0.45 $ 0.47 $ 0.22 $ 0.59 $ 0.35 $ 0.20 ======== ======== ======== ======== ========== =========== ======== Net income per common share--assuming full dilution (3)(4) ........................... $ 0.32 $ 0.43 $ 0.47 $ 0.22 $ 0.59 $ 0.35 $ 0.20 ======== ======== ======== ======== ========== =========== ========
December 31, June 30, ------------------------------------------------------ 1990 1991 1992 1993 1994 1995 --------- -------- -------- ---------- ---------- ---------- Balance Sheet Data: Cash and marketable securities ................... $ 74,774 $126,508 $111,524 $ 89,999 $ 85,363 $ 75,915 Working capital............... 114,761 184,729 204,065 211,063 231,327 285,146 Total assets.................. 321,383 503,797 795,367 1,444,418 1,736,336 2,063,049 Long-term debt (5)............ 157,585 171,275 338,000 888,181 1,034,394 1,357,299 Stockholders' equity.......... 132,009 299,097 386,244 418,298 489,920 518,132
(1) Expenses related to SHC's Ballas merger in 1993, the ReLife and Heritage Acquisitions in 1994 and the SHC Acquisition and NovaCare Rehabilitation Hospitals Acquisition in 1995. (2) See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements". (3) Adjusted to reflect a three-for-two stock split effected in the form of a 50% stock dividend paid on December 31, 1991 and a two-for-one stock split effected in the form of a 100% stock dividend paid on April 17, 1995. (4) Fully-diluted earnings per share in 1990 and 1991 reflect shares reserved for issuance upon exercise of dilutive stock options and shares reserved for issuance upon conversion of HEALTHSOUTH's 7-3/4 % Convertible Subordinated Debentures due 2014, all of which were converted into Common Stock prior to June 3, 1991. Fully diluted earnings per share in 1994 reflect shares reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures due 2001. (5) Includes current portion of long-term debt. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion is intended to facilitate the understanding and assessment of significant changes and trends related to the results of operations and financial condition of the Company, including certain factors related to recent acquisitions by the Company, the timing and nature of which have significantly affected the Company's results of operations. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this Prospectus. The Company completed the following acquisitions over the last two years: o On December 31, 1993, HEALTHSOUTH acquired substantially all of the assets of the rehabilitation services division of National Medical Enterprises, Inc. (the "NME Selected Hospitals Acquisition"). The purchase price was approximately $315,000,000, plus net working capital. The Company acquired 28 inpatient rehabilitation facilities, with an aggregate of 2,296 licensed beds, and 45 outpatient rehabilitation centers. o On December 29, 1994, HEALTHSOUTH acquired ReLife, Inc. (the "ReLife Acquisition"). A total of 11,025,290 shares of HEALTHSOUTH Common Stock were issued in the transaction, representing a value of $180,000,000 at the time of the acquisition. At that time, ReLife operated 31 inpatient facilities with an aggregate of 1,102 licensed beds, including nine free-standing rehabilitation hospitals, nine acute rehabilitation units, five sub-acute rehabilitation units, seven transitional living units and one residential facility, and also provided outpatient rehabilitation services at 12 centers. o On May 19, 1995, HEALTHSOUTH purchased the operations of the rehabilitation hospital division of NovaCare, Inc. (the "NovaCare Rehabilitation Hospitals Acquisition"). The purchase price was approximately $235,000,000. The NovaCare Rehabilitation Hospitals consisted of 11 rehabilitation hospitals in seven states, 12 other facilities and two Certificates of Need. o On June 13, 1995, HEALTHSOUTH acquired Surgical Health Corporation (the "SHC Acquisition"). A total of 8,531,480 shares of HEALTHSOUTH Common Stock were issued in the transaction, representing a value of $155,000,000 at the time of the acquisition. The Company also purchased SHC's $75,000,000 aggregate principal amount of 11.5% Senior Subordinated Notes due 2004 for an aggregate consideration of approximately $86,000,000. At that time, SHC operated a network of 36 free-standing surgery centers in 11 states, and five mobile lithotripsy units. The NME Selected Hospitals Acquisition and the NovaCare Rehabilitation Hospitals Acquisition each were accounted for under the purchase method of accounting and, accordingly, such operations are included in the Company's consolidated financial information from their respective dates of acquisition. The ReLife Acquisition and the SHC Acquisition were each accounted for as a pooling of interests and, unless otherwise indicated, all amounts shown in the following discussion have been restated to reflect such acquisitions. The results of operations of SHC in turn reflect SHC's acquisition of Heritage Surgical Corporation (the "Heritage Acquisition"), which also was accounted for as a pooling of interests. The Company determines the amortization period of the cost in excess of net asset value of purchased facilities based on an evaluation of the facts and circumstances of each individual purchase transaction. The evaluation includes an analysis of historic and projected financial performance, an evaluation of the estimated useful life of the buildings and fixed assets acquired, the indefinite useful life of certificates of need and licenses acquired, the competition within local markets, lease terms where applicable, and the legal terms of partnerships where applicable. The Company utilizes independent appraisers and relies on its own management expertise in evaluating each of the factors noted above. With respect to the carrying value of the excess of cost over net asset value of purchased facilities and other intangible assets, the Company determines on a quarterly basis whether an impairment event has occurred by considering factors such as the market value of the asset, a significant adverse change in 8 legal factors or in the business climate, adverse action by regulators, history of operating losses or cash flow losses, or a projection of continuing losses associated with an operating entity. The carrying value of excess cost over net asset value of purchased facilities and other intangible assets will be evaluated if the facts and circumstances suggest that it has been impaired. If this evaluation indicates that the value of the asset will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the asset will be reduced by the estimated shortfall of cash flows. Governmental, commercial and private payors have increasingly recognized the need to contain their costs for healthcare services. These payors, accordingly, are turning to closer monitoring of services, prior authorization requirements, utilization review and increased utilization of outpatient services. During the periods discussed below, the Company has experienced an increased effort by these payors to contain costs through negotiated discount pricing. The Company views these efforts as an opportunity to demonstrate the effectiveness of its clinical programs and its ability to provide its rehabilitative healthcare services efficiently. The Company has entered into a number of contracts with payors to provide services and has realized an increased volume of patients as a result. The Company's revenues include net patient service revenues and other operating revenues. Net patient service revenues are reported at estimated net realizable amounts from patients, insurance companies, third-party payors (primarily Medicare and Medicaid) and others for services rendered. Revenues from third-party payors also include estimated retroactive adjustments under reimbursement agreements which are subject to final review and settlement by appropriate authorities. Management determines allowances for doubtful accounts and contractual adjustments based on historical experience and the terms of payor contracts. Net accounts receivable include only those amounts estimated by management to be collectible. The Company, in many cases, operates more than one site in a market. In such markets, there is customarily an outpatient center or inpatient facility with associated satellite outpatient locations. For purposes of the following discussion and analysis, same store operations are measured on locations within markets in which similar operations existed at the end of the period and include the operations of additional locations opened within the same market. New store operations are measured on locations within new markets. Results of Operations of the Company Six-Month Periods Ended June 30, 1995 and 1994 The Company operated 318 outpatient rehabilitation locations (excluding outpatient satellites of inpatient facilities) at June 30, 1995, compared to 199 outpatient rehabilitation locations at June 30, 1994. In addition, the Company operated 77 inpatient rehabilitation facilities, five medical centers and 43 surgery centers at June 30, 1995, compared with 61 inpatient facilities, five medical centers and 32 surgery centers at June 30, 1994. The Company's operations generated revenues of $716,949,000 for the six months ended June 30, 1995, an increase of $132,766,000, or 22.7%, as compared to the same period in 1994. The increase in revenues is primarily attributable to increases in patient volume and the completion of the NovaCare Rehabilitation Hospitals Acquisition, which was effective April 1, 1995, and the addition of new outpatient centers. Same store revenues for the the period ended June 30, 1995 were $639,443,000, an increase of $55,260,000, or 9.5%, as compared to the same period in 1994. New store revenues were $77,506,000. Revenues generated from patients under Medicare and Medicaid plans respectively accounted for 41.1% and 2.3% of revenue for the first six months of 1995, compared to 41.3% and 3.4% for the same period in 1994. Revenues from any other single third-party payor were not significant in relation to the Company's revenues. During the first six months of 1995, same store outpatient visits, inpatient days and surgical cases increased 24.1%, 6.4% and 14.1%, respectively. Revenue per outpatient visit for the same store operations decreased by 1.5%, while revenue per inpatient day and revenue per surgical case for the same store operations increased by 0.3% and 0.7%, respectively. Operating expenses, at the operating unit level, were $513,038,000, or 71.6% of revenues, for the six months ended June 30, 1995, as compared to $437,643,000, or 74.9% of revenues, for the first six months of 1994. Same store operating expenses were $456,608,000, or 71.4% of comparable revenue. New store 9 operating expenses were $56,430,000, or 72.8% of comparable revenue. Corporate general and administrative expenses increased from $19,191,000 during the first six months of 1994 to $19,645,000 during the first six months of 1995. As a percentage of revenues, corporate general and administrative expenses decreased from 3.3% in the 1994 period to 2.7% in the 1995 period. The provision for doubtful accounts was $14,119,000, or 2.0% of revenues, for the first six months of 1995, compared to $10,287,000, or 1.8% of revenues, for the same period in 1994. Management believes that this provision is adequate to cover any uncollectible revenues. Depreciation and amortization expense was $55,663,000 for the six-month period ended June 30, 1995, compared to $36,962,000 for the same period in 1994. The increase represents the investment in additional assets by the Company. Interest expense was $44,292,000 for the six-month period ended June 30, 1995, compared to $26,980,000 for the six-month period ended June 30, 1994. The increase in interest expense corresponds to the increase in long-term debt by the Company. For the first six months of 1995, interest income was $2,770,000, compared to $1,598,000 for the first six months of 1994. As a result of the NovaCare Rehabilitation Hospitals Aquisition and the SHC Acquisition, the Company recognized $29,194,000 in merger costs during the second quarter of 1995. Fees related to legal, accounting and financial advisory services accounted for $3,400,000 of the expense. Costs and expenses related to the SHC Bond Tender Offer (see "Liquidity and Capital Resources") totaled $14,606,000. Accruals for employee separations were approximately $1,188,000. In addition, the Company has provided approximately $10,000,000 for the write-down of certain assets to net realizable value as the result of a planned facility consolidation. The consolidation is applicable in a market where the Company's existing services overlap with those of an acquired facility. During the second quarter of 1995, the Company recognized an $11,192,000 loss on impairment of assets. The impaired assets relate to six SHC facilities in which the projected undiscounted cash flows did not support the book value of the long-lived assets of such facilities. Income before minority interests and income taxes and non-recurring expenses for the first six months of 1995 was $72,962,000, compared to $54,718,000 for the same period in 1994. Income before minority interests and income taxes for the first six months of 1995 was $32,576,000. Minority interests decreased income before income taxes by $3,904,000 for the six month period ended June 30, 1995, compared to decreasing income before income taxes by $2,991,000 for the same period of 1994. The provision for income taxes (excluding non-recurring expenses) for the first six months of 1995 was $26,242,000, compared to $20,446,000 for the same period in 1994, resulting in effective tax rates of 38.0% and 39.5%, respectively. The provision for income taxes (including non-recurring expenses) for the first six months of 1995 was $10,895,000, resulting in an effective tax rate of 38.0%. Income (excluding non-recurring expenses and related income tax benefits) for the first six months of 1995 was $42,817,000, compared to $31,281,000 for the same period in 1994. Net income for the six months ended June 30, 1995 (including non-recurring expenses) was $17,777,000, compared to $29,226,000 for the same period in 1994. Twelve-Month Periods Ended December 31, 1994 and 1993 The Company operated 238 outpatient rehabilitation locations (excluding outpatient satellites of inpatient facilities) at December 31, 1994, compared to 171 outpatient rehabilitation locations at December 31, 1993. In addition, the Company operated 66 inpatient facilities, 36 surgery centers and five medical centers at December 31, 1994, compared to 39 inpatient facilities, 28 surgery centers and four medical centers at December 31, 1993. The Company's operations generated revenues of $1,236,190,000 in 1994, an increase of $579,861,000, or 88.3%, as compared to 1993 revenues. Same store revenues for the twelve months ended December 31, 1994 were $746,709,000, an increase of $90,380,000, or 13.8%, as compared to the same period in 1993. New store revenues for 1994 were $489,481,000. New store revenues primarily reflect the 28 inpatient rehabilitation facilities and 45 associated outpatient rehabilitation locations associated with the NME Selected Hospitals Acquisition. The increase in revenues is primarily attributable to the addition of these operations and increases in patient volume. Revenues generated from patients under Medicare 10 and Medicaid plans respectively accounted for 41.0% and 3.2% of total revenues for 1994, compared to 30.6% and 1.0% of total revenues for 1993. Revenues from any other single third-party payor were not significant in relation to the Company's total revenues. The increase in Medicare revenues is primarily attributable to the NME Selected Hospitals Acquisition, since the acquired facilities had a greater proportion of Medicare patients than the Company's historical experience in its existing facilities. During 1994, same store outpatient visits, inpatient days and surgery center cases increased 21.8%, 23.0% and 5.0%, respectively. Revenue per outpatient visit and revenue per inpatient day for the same store operations decreased by 7.8% and 8.4%, respectively, while revenue per surgery case increased by 0.9%. These decreases were offset by increased volume from managed care and national accounts and by control of expenses. Operating expenses, at the operating unit level, were $906,712,000, or 73.3% of revenues, for 1994, compared to 71.9% of revenues for 1993. This change was due to the decrease in revenue per visit and revenue per inpatient day described above. Same store operating expenses for 1994 were $563,915,000, or 75.5% of related revenues. New store operating expenses were $342,797,000, or 70.0% of related revenues. Corporate general and administrative expenses increased from $24,329,000 in 1993 to $45,895,000 in 1994. As a percentage of revenues, corporate general and administrative expenses remained at 3.7% in 1993 and 1994. Total operating expenses were $952,607,000, or 77.1% of revenues, for 1994, compared to $496,107,000, or 75.6% of revenues, for 1993. The provision for doubtful accounts was $23,739,000, or 1.9% of revenues, for 1994, compared to $16,181,000, or 2.5% of revenues, for 1993. Depreciation and amortization expense was $86,678,000 for 1994, compared to $46,224,000 for 1993. The increase represents the investment in additional assets by the Company. Interest expense increased to $65,286,000 in 1994, compared to $18,495,000 for 1993, primarily because of the increased borrowings during the year under the Company's revolving line of credit, the issuance of $250,000,000 principal amount of 9.5% Senior Subordinated Notes due 2001 and the issuance of $115,000,000 principal amount of 5% Convertible Subordinated Debentures due 2001. For 1994, interest income was $4,308,000, compared to $3,924,000 for 1993. The increase in interest income is primarily attributable to the increase in interest rates. During 1994, the Company began implementation of the plan of consolidation related to the NME Selected Hospitals Acquisition. The $3,338,000 accrual for costs related to employee separations and relocations was reduced by approximately $758,000. A total of 208 employees were affected during 1994. In addition, assets with a net book value $17,911,000 were written off against the $39,000,000 provided for the plan of consolidation. Finally, the Company wrote off all of the $7,700,000 in capitalized development projects. The Company will complete the plan of consolidation during 1995. It is management's opinion that the remaining accrual of $23,669,000 is adequate to complete the plan. Merger costs in 1994 of $6,520,000 represent costs incurred or accrued in connection with completing the ReLife Acquisition ($2,949,000) and the Heritage Acquisition ($3,571,000). During 1994, the Company recognized a $10,500,000 loss on impairment of assets. This amount relates to the termination of a ReLife management contract and a permanently damaged ReLife facility. The Company determined not to attempt to reopen such damaged facility because, under its existing licensure, the facility was not consistent with the Company's plans. Also during 1994, the Company recognized a $4,500,000 loss on abandonment of a ReLife computer project. Income before minority interests and income taxes for 1994 was $90,668,000, compared to $34,571,000 for 1993. Minority interests reduced income before income taxes by $6,402,000, compared to $5,444,000 for 1993. The provision for income taxes for 1994 was $34,305,000, compared to $11,930,000 for 1993, resulting in effective tax rate of 40.7% for 1994 and 41.0% for 1993. Net income for 1994 was $49,961,000. Twelve-Month Periods Ended December 31, 1993 and 1992 The Company operated 171 outpatient rehabilitation locations (excluding outpatient satellites of inpatient facilities) at December 31, 1993, compared to 126 outpatient rehabilitation locations at December 31, 1992. In addition, the Company operated 39 inpatient facilities, 28 surgery centers and four 11 medical centers at December 31, 1993, compared to 22 inpatient facilities, 20 surgery centers and four medical centers at December 31, 1992. In 1993, the Company opened the Vanderbilt Stallworth Rehabilitation Hospital in Nashville, Tennessee, and acquired 13 inpatient facilities from Rebound, Inc. The foregoing information does not give effect to the facilities acquired effective December 31, 1993 in the NME Selected Hospitals Acquisition. The Company's operations generated revenues of $656,329,000 in 1993, an increase of $155,283,000, or 31.0%, as compared to 1992 revenues. Same store revenues for the twelve months ended December 31, 1993 were $583,251,000, an increase of $82,205,000, or 16.4%, as compared to the same period in 1992. New store revenues for 1993 were $73,078,000. The increase in revenues is primarily attributable to increases in patient volume and the addition of 45 outpatient rehabilitation locations and 13 inpatient locations. Revenues generated from patients under Medicare and Medicaid plans respectively accounted for 30.6% and 1.0% of revenues for 1993, compared to 29.3% and 1.3% of revenues for 1992. Revenues from any other single third-party payor were not significant in relation to the Company's revenues. During 1993, same store outpatient visits, inpatient days and surgical cases increased 19.9%, 8.2% and 13.0%, respectively. Revenue per outpatient visit, revenue per inpatient day and revenue per surgical case for same store operations increased by 0.6%, 6.3% and 6.1%, respectively. Operating expenses, at the operating unit level, were $471,778,000, or 71.9% of revenues, for 1993, compared to 74.3% of revenues for 1992. Same store operating expenses for 1993 were $420,093,000, or 72.0% of related revenues. New store operating expenses were $51,685,000, or 70.7% of related revenues. The decrease in operating expenses as a percentage of revenues is primarily attributable to increased patient volume and controlled expenses. Corporate general and administrative expenses increased from $16,878,000 in 1992 to $24,329,000 in 1993. As a percentage of revenues, corporate general and administrative expense increased from 3.4% in 1992 to 3.7% in 1993. Total operating expenses were $496,107,000, or 75.6% of revenues, for 1993, compared to $389,047,000, or 77.6% of revenues, for 1992. The provision for doubtful accounts was $16,181,000, or 2.5% of revenues, for 1993, compared to $13,254,000, or 2.6% of revenues, for 1992. Depreciation and amortization expense was $46,224,000 for 1993, compared to $29,834,000 for 1992. The increase represents the investment in additional assets by the Company. Interest expense increased to $18,495,000 in 1993 compared to $12,623,000 for 1992 primarily because of the increased borrowings during the year under the Company's revolving line of credit. For 1993, interest income was $3,924,000, compared to $5,415,000 for 1992. The reduction in interest income was primarily attributable to the reduction in rates received on invested funds and a decrease in the cash balance. As a result of the NME Selected Hospitals Acquisition, the Company recognized an expense of approximately $49,742,000 during the year ended December 31, 1993. By recognizing this expense, the Company accrued approximately $3,338,000 for costs related to certain employee separations and relocations. The Company expects the plan of consolidation to take up to 24 months. The $3,338,000 accrual, which is the only cash expense included in the acquisition-related expense, will be paid over the same period. In addition, the Company has provided approximately $39,000,000 for the write-down of certain assets to net realizable value as the result of planned facility consolidations, and approximately $7,700,000 for the write-off of certain capitalized development projects. The consolidations are applicable in selected markets where the Company's services overlap with those of the acquired facilities. The costs of development projects in certain target markets that were previously capitalized were written off due to the acquisition of NME facilities in or near those markets. Income before minority interests and income taxes for 1993 was $34,571,000, compared to $58,038,000 for 1992. The provision for income taxes for 1993 was $11,930,000, compared to $18,864,000 for 1992, resulting in effective tax rates of 41.0% for 1993 and 35.1% for 1992. Net income for 1993 was $17,197,000. Liquidity and Capital Resources As of June 30, 1995, the Company had working capital of $285,146,000, including cash and marketable securities of $75,915,000. Working capital at December 31, 1994 was $231,327,000, including cash and marketable securities of $85,363,000. For the first six months of 1995, cash provided by operations 12 was $87,776,000, compared to $60,561,000 for the same period in 1994. Additions to property, plant, and equipment and acquisitions accounted for $70,235,000 and $284,090,000, respectively, during the first six months of 1995. Those same investing activities accounted for $68,320,000 and $34,645,000, respectively, in the same period in 1994. Financing activities provided $273,558,000 and $74,959,000 during the first six months of 1995 and 1994, respectively. Net borrowing proceeds (borrowing less principal reductions) for the first six months of 1995 and 1994 were $277,393,000 and $68,330,000, respectively. Accounts receivable were $281,283,000 at June 30, 1995, compared to $242,659,000 at December 31, 1994. The number of days of average revenues in ending receivables was 64.5 at June 30, 1995 (excluding accounts receivable and revenue from the facilities acquired from NovaCare during the second quarter of 1995), compared to 71.6 at December 31, 1994. The concentration of net accounts receivable from patients, third-party payors, insurance companies and others at June 30, 1995 is consistent with the related concentration of revenues for the period then ended. At June 30, 1995, the Company had a $1,000,000,000 revolving line of credit with NationsBank of North Carolina and 28 other banks. Interest is paid based on LIBOR plus a predetermined margin, prime or competitively bid rates from the participating banks. This credit facility has an initial maturity date of June 1, 1998, with two one-year renewals. The Company provided a negative pledge on all assets and granted the banks a first priority security interest in all shares of stock of its subsidiaries and rights and interests in its controlled partnerships. The effective interest rate on the average outstanding balance under the revolving line of credit was 7.27% for the six months ended June 30, 1995, compared to the average prime rate of 8.91% during the same period. At June 30, 1995, the Company had drawn $895,000,000 under its revolving line of credit. On June 20, 1995, the Company purchased $67,500,000 of the $75,000,000 outstanding principal amount of 11.5% Senior Subordinated Notes due 2004 of SHC (the "SHC Bond Tender Offer") for 115% of the face value of the Notes. Subsequent to June 30, 1995, the remaining $7,500,000 balance was purchased on the open market. The Company intends to pursue the acquisition or development of additional healthcare operations, including outpatient rehabilitation facilities, inpatient rehabilitation facilities ambulatory surgery centers, and companies engaged in the provision of rehabilitation-related services, and to expand certain of its existing facilities. While it is not possible to estimate precisely the amounts which will actually be expended in the foregoing areas, the Company anticipates that over the next twelve months, it will spend approximately $80,000,000 for the acquisition and/or development of new outpatient facilities and approximately $70,000,000 for inpatient facility projects and the construction and equipping of additions to inpatient facilities. Although the Company is continually considering and evaluating acquisitions and opportunities for future growth, the Company has not entered into any agreements with respect to material future acquisitions other than the pending acquisition of SSCI. The Company believes that existing cash, cash flow from operations, and borrowings under the revolving line of credit will be sufficient to satisfy the Company's estimated cash requirements for the next twelve months and thereafter. Inflation in recent years has not had a significant effect on the Company's business, and is not expected to adversely affect the Company in the future unless it increases significantly. 13 BUSINESS General HEALTHSOUTH is the nation's largest provider of outpatient and rehabilitative healthcare services. The Company provides these services through its national network of outpatient and inpatient rehabilitation facilities, outpatient surgery centers, medical centers and other healthcare facilities. The Company believes that it provides patients, physicians and payors with high-quality healthcare services at significantly lower costs than traditional inpatient hospitals. Additionally, HEALTHSOUTH's national network, reputation for quality and focus on outcomes has enabled the Company to secure contracts with national and regional managed care payors. HEALTHSOUTH has over 500 patient care locations in 38 states, the District of Columbia and Ontario, Canada. In its outpatient and inpatient rehabilitation facilities, HEALTHSOUTH provides interdisciplinary programs for the rehabilitation of patients experiencing disability due to a wide variety of physical conditions, such as stroke, head injury, orthopaedic problems, neuromuscular disease and sports-related injuries. The Company's rehabilitation services include physical therapy, sports medicine, work hardening, neurorehabilitation, occupational therapy, respiratory therapy, speech-language pathology and rehabilitation nursing. Independent studies have shown that rehabilitation services like those provided by the Company can save money for payors and employers. HEALTHSOUTH operates the third largest network of free-standing outpatient surgery centers in the United States. The Company's outpatient surgery centers provide the facilities and medical support staff necessary for physicians to perform non-emergency surgical procedures. While outpatient surgery is widely recognized as generally less expensive than surgery performed in a hospital, the Company believes that outpatient surgery performed at a free-standing outpatient surgery center is generally less expensive than hospital-based outpatient surgery. Approximately 95% of the Company's surgery center facilities are located in markets served by its rehabilitative service facilities, enabling the Company to pursue opportunities for cross-referrals. Over the last two years, the Company has completed several significant acquisitions in the rehabilitation business and has expanded into the surgery center business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company believes that these acquisitions complement its historical operations and enhance its market position. The Company further believes that its expansion into the outpatient surgery business provides the Company with a platform for future growth. Company Strategy The Company's principal objective is to be the provider of choice for patients, physicians and payors alike for outpatient and rehabilitative healthcare services throughout the United States. The Company's growth strategy is based upon four primary elements: (i) the implementation of the Company's integrated service model in appropriate markets, (ii) successful marketing to managed care organizations and other payors, (iii) the provision of high-quality, cost-effective healthcare services, and (iv) the expansion of the Company's national network. o Integrated Service Model. The Company seeks, where appropriate, to provide an integrated system of healthcare services, including outpatient rehabilitation services, inpatient rehabilitation services, ambulatory surgery services and outpatient diagnostic services. The Company believes that its integrated system offers payors the convenience of dealing with a single provider for multiple services. Additionally, the Company believes that its facilities can provide extensive referral opportunities. For example, the Company estimates that approximately one-third of its outpatient rehabilitation patients have had outpatient surgery, virtually all inpatient rehabilitation patients will require some form of outpatient rehabilitation, and virtually all inpatient rehabilitation patients have had some type of diagnostic procedure. The Company has implemented its integrated service model in certain of its markets, and intends to expand the model into other appropriate markets. 14 o Marketing to Managed Care Organizations and Other Payors. Since the late 1980s, the Company has focused on the development of contractual relationships with managed care organizations, major insurance companies, large regional and national employer groups and provider alliances and networks. The Company's documented outcomes and experience with several hundred thousand patients in delivering quality healthcare services at reasonable prices has enhanced the Company's attractiveness to such entities and has given the Company a competitive advantage over smaller and regional competitors. These relationships have increased patient flow to the Company's facilities and contributed to the Company's same-store growth. o Cost-Effective Services. HEALTHSOUTH's goal is to provide high-quality healthcare services in cost-effective settings. To that end, the Company has developed standardized clinical protocols for the treatment of its patients. This results in "best practices" techniques being utilized at all of the Company's facilities, allowing the consistent achievement of demonstrable, cost-effective clinical outcomes. HEALTHSOUTH's reputation for its clinical programs is enhanced through its relationships with major universities throughout the nation, and its support of clinical research in its facilities. Further, independent studies estimate that, for every dollar spent on rehabilitation, $11 to $35 is saved. Finally, surgical procedures typically are less expensive in outpatient surgery centers than in hospital settings. The Company believes that outpatient and rehabilitative healthcare services will assume increasing importance in the healthcare environment as payors continue to seek to reduce overall costs by shifting patients to more cost-effective treatment settings. o Expansion of National Network. As the largest provider of outpatient and rehabilitative healthcare services in the United States, HEALTHSOUTH is able to realize economies of scale and compete successfully for national contracts with large payors and employers while retaining the flexibility to respond to particular needs of local markets. The national network affords HEALTHSOUTH the opportunity to offer large national and regional employers and payors the convenience of dealing with a single provider, to utilize greater buying power through centralized purchasing, to achieve more efficient costs of capital and labor and to more effectively recruit and retain clinicians. HEALTHSOUTH believes that its recent and pending acquisitions in the outpatient surgery and diagnostic imaging fields will further enhance its national presence by broadening the scope of its existing services and providing new opportunities for growth. These national benefits are realized without sacrificing local market responsiveness. HEALTHSOUTH's objective is to provide those outpatient and rehabilitative healthcare services needed within each local market by tailoring its services and facilities to that market's needs, thus bringing the benefits of nationally recognized expertise and quality into the local setting. Patient Care Services HEALTHSOUTH began its operations in 1984 with a focus on providing comprehensive orthopaedic and musculoskeletal rehabilitation services on an outpatient basis. Over the succeeding 11 years, HEALTHSOUTH has consistently sought and implemented opportunities to expand its services through acquisitions and de novo development activities that complement its historic focus on orthopaedic, sports medicine and occupational medicine services and that provide independent platforms for growth. The Company's acquisitions and internal growth have enabled it to become the largest provider of rehabilitative healthcare services, both inpatient and outpatient, in the United States. In addition, the Company has added outpatient surgery services, diagnostic imaging services and other outpatient services which provide natural enhancements to its rehabilitative healthcare locations and facilitate the implementation of its integrated service model. The Company believes that these additional businesses also provide opportunities for growth in other areas not directly related to the rehabilitative business, and the Company intends to pursue further expansion in those businesses. 15 Rehabilitative Services: General When a patient is referred to one of the Company's rehabilitation facilities, he undergoes an initial evaluation and assessment process that results in the development of a rehabilitation care plan designed specifically for that patient. Depending upon the patient's disability, this evaluation process may involve the services of a single discipline, such as physical therapy for a knee injury, or of multiple disciplines, as in the case of a complicated stroke patient. The Company has developed numerous rehabilitation programs, which include stroke, head injury, spinal cord injury, neuromuscular and work injury, that combine certain services to address the needs of patients with similar disabilities. In this way, all of the facilities' patients, regardless of the severity and complexity of their disabilities, can receive the level and intensity of those services necessary for them to be restored to as productive, active and independent a lifestyle as possible. Outpatient Rehabilitation Services HEALTHSOUTH operates the largest group of affiliated proprietary outpatient rehabilitation facilities in the United States. The Company's outpatient rehabilitation centers offer a comprehensive range of rehabilitative healthcare services, including physical therapy and occupational therapy, that are tailored to the individual patient's needs, focusing predominantly on orthopaedic injuries, sports injuries, work injuries, hand and upper extremity injuries, back injuries, and various neurological/ neuromuscular conditions. As of August 31, 1995, the Company provided outpatient rehabilitative healthcare services through 341 outpatient locations, including freestanding outpatient centers and their satellites and outpatient satellites of inpatient facilities. The continuing emphasis on containing the increases in healthcare costs, as evidenced by Medicare's prospective payment system, the growth in managed care and the various alternative healthcare reform proposals, results in the early discharge of patients from acute-care facilities. As a result, many hospital patients do not receive the intensity of services that may be necessary for them to achieve a full recovery from their diseases, disorders or traumatic conditions. The Company's outpatient rehabilitation services play a significant role in the continuum of care because they provide hospital-level services, in terms of intensity, quality and frequency, in a more cost-efficient setting. Patients treated at the Company's outpatient centers will undergo varying courses of therapy depending upon their needs. Some patients may only require a few hours of therapy per week for a few weeks, while others may spend up to five hours per day in therapy for six months or more, depending on the nature, severity and complexity of their injuries. In general, the Company initially establishes an outpatient center in a given market, either by acquiring an existing private therapy practice or through de novo development, and institutes its clinical protocols and programs in response to the community's general need for services. The Company will then establish satellite clinics that are dependent upon the main facility for management and administrative services. These satellite clinics generally provide a specific evaluative or specialty service/program, such as hand therapy or foot and ankle therapy, in response to specific market demands. The Company's outpatient rehabilitation facilities range in size from 1,200 square feet for specialty clinics to 20,000 square feet for large, full-service facilities. Currently, the typical outpatient facility configuration ranges in size from 2,000 to 5,000 square feet and costs less than $500,000 to build and equip. Patient utilization of the Company's outpatient rehabilitation facilities cannot be measured in the conventional manner applied to acute-care hospitals, nursing homes and other healthcare providers which have a fixed number of licensed beds and serve patients on a 24-hour basis. Utilization patterns in outpatient rehabilitation facilities will be affected by the market to be served, the types of injuries treated, the patient mix and the number of available therapists, among other factors. Moreover, because of variations in size, location, hours of operation, referring physician base and services provided and other differences among each of the Company's outpatient facilities, it is not possible to accurately assess patient utilization against a norm. 16 Inpatient Services Inpatient Rehabilitation Facilities. At August 31, 1995, HEALTHSOUTH operated 77 inpatient rehabilitation facilities with 4,618 beds, representing the largest group of affiliated proprietary inpatient rehabilitation facilities in the United States. The Company's inpatient rehabilitation facilities provide high-quality comprehensive services to patients who require intensive institutional rehabilitation care. Inpatient rehabilitation patients are typically those who are experiencing significant physical disabilities due to various conditions, such as head injury, spinal cord injury, stroke, certain orthopaedic problems and neuromuscular disease. The Company's inpatient rehabilitation facilities provide the medical, nursing, therapy and ancillary services required to comply with local, state and federal regulations as well as accreditation standards of the Joint Commission on Accreditation of Healthcare Organizations (the "JCAHO") and the Commission on Accreditation of Rehabilitation Facilities. All of the Company's inpatient rehabilitation facilities utilize an interdisciplinary team approach to the rehabilitation process and involve the patient and family, as well as the payor, in the determination of the goals for the patient. Internal case managers monitor each patient's progress and provide documentation of patient status, achievement of goals, functional outcomes and efficiency. The Company acquires or develops inpatient rehabilitation facilities in those communities where it believes there is a demonstrated need for comprehensive inpatient rehabilitation services. Depending upon the specific market opportunity, these facilities may be licensed as rehabilitation hospitals or skilled nursing facilities. The Company believes that it can provide high-quality rehabilitation services in either type of facility, but prefers to utilize the rehabilitation hospital form. In certain markets where the Company does not provide free-standing outpatient facilities, the Company's rehabilitation hospitals may provide outpatient rehabilitation services as a complement to their inpatient services. Typically, this opportunity arises when patients complete their inpatient course of treatment but remain in need of additional therapy that can be accomplished on an outpatient basis. Depending upon the demand for outpatient services and physical space constraints, the rehabilitation hospital may establish the services either within its building or in a satellite location. In either case, the clinical protocols and programs developed for use in the free-standing outpatient centers will be utilized by these facilities. The Company's Nashville, Tennessee (Vanderbilt University), Memphis, Tennessee (Methodist Hospitals), Dothan, Alabama (Southeast Alabama Medical Center) and Charleston, South Carolina (North Trident Regional Medical Center) hospital facilities have been developed in conjunction with local tertiary-care facilities. This strategy of developing effective referral and service networks prior to opening results in improved operating efficiencies for the new facilities. The Company is utilizing this same concept in rehabilitation hospitals under development with the University of Missouri and the University of Virginia. Medical Centers. The Company operates five medical centers with 912 licensed beds in four distinct markets. These facilities provide general and specialty medical and surgical healthcare services, emphasizing orthopaedics, sports medicine and rehabilitation. The Company acquired its five medical centers as outgrowths of its rehabilitative healthcare services. Often, patients require medical and surgical interventions prior to the initiation of their rehabilitative care. In each of the markets in which the Company has acquired a medical center, the Company had well-established relationships with the medical communities serving each facility. In addition, each of the facilities enjoyed well-established reputations in orthopaedics and/or sports medicine prior to their acquisition by the Company. Following the acquisition of each of the Company's medical centers, the Company has provided the resources to improve upon the physical plant and expand services through the introduction of new technology. The Company has also developed additional relationships between these facilities and certain university facilities, including the University of Miami, Auburn University and the University of Alabama at Birmingham. Through these relationships, the influx of celebrity athletes and personalities and the acquisition of new technology, all five medical centers have improved their operating efficiencies and enhanced census. 17 Each of the five medical center facilities is licensed as an acute-care hospital, is accredited by the JCAHO and participates in the Medicare prospective payment system. See "Business -- Regulation". Inpatient Facility Utilization. In measuring patient utilization of the Company's inpatient facilities, various factors must be considered. Due to market demand, demographics, start-up status, renovation, patient mix and other factors, the Company may not treat all licensed beds in a particular facility as available beds, which sometimes results in a material variance between licensed beds and beds actually available for utilization at any specific time. The Company is in a position to increase the number of available beds at such facilities as market conditions dictate. During the year ended December 31, 1994, the Company's inpatient facilities achieved an overall utilization, based on patient days and available beds, of 61.0%. Surgery Centers As a result of the SHC acquisition, HEALTHSOUTH became the third largest operator of outpatient surgery centers in the United States. The Company currently operates 43 free-standing surgery centers, including five mobile lithotripsy units, in 12 states, and has an additional five free-standing surgery centers under development. Approximately 95% of these facilities are located in markets served by HEALTHSOUTH outpatient and rehabilitative service facilities, enabling the Company to pursue opportunities for cross-referrals between surgery and rehabilitative facilities as well as to centralize administrative functions. In addition, the Company has entered into an agreement to acquire the 12 free-standing surgery centers owned or managed by Sutter Surgery Centers, Inc. See "Recent Developments". The Company's surgery centers provide the facilities and medical support staff necessary for physicians to perform non-emergency surgical procedures that do not generally require overnight hospitalization. The Company's typical surgery center is a free-standing facility with two to six fully equipped operating and procedure rooms and ancillary areas for reception, preparation, recovery and administration. Each of the Company's surgery centers is available for use only by licensed physicians, oral surgeons and podiatrists, and the centers do not perform surgery on an emergency basis. Outpatient surgery centers, unlike hospitals, have not historically provided overnight accommodations, food services or other ancillary services. Over the past several years, states have increasingly permitted the use of extended-stay recovery facilities by outpatient surgery centers. As a result, many outpatient surgery centers are adding extended recovery care capabilities where permitted. Seventeen of the Company's surgery centers currently provide for extended recovery stays. The Company's ability to develop such recovery care facilities is dependent upon state regulatory environments in the particular states where its centers are located. The Company's outpatient surgery centers implement quality control procedures to evaluate the level of care provided the centers. Each center has a medical advisory committee of three to ten physicians which reviews the professional credentials of physicians applying for medial staff privileges at the center. Other Patient Care Services In certain of its markets, the Company provides other patient care services, including home healthcare, diagnostic services, physician services and contract management of hospital-based rehabilitative healthcare services. The Company evaluates market opportunities on a case-by-case basis in determining whether to provide additional services of these types, which may be complementary to facility-based services provided by the Company or stand-alone businesses. Marketing of Facilities and Services The Company markets its facilities, and their services and programs, on local, regional and national levels. Local and regional marketing activities are typically coordinated by facility-based marketing personnel, whereas large-scale regional and national efforts are coordinated by corporate-based personnel. 18 In general, the Company develops a marketing plan for each facility based on a variety of factors, including population characteristics, physician characteristics and incidence of disability statistics, in order to identify specific service opportunities. Facility-oriented marketing programs are focused on increasing the volume of patient referrals to the specific facility and involve the development of ongoing relationships with area schools, businesses and industries as well as physicians, health maintenance organizations and preferred provider organizations. The Company's larger-scale marketing activities are focused more broadly on efforts to generate patient referrals to multiple facilities and the creation of new business opportunities. Such activities include the development and maintenance of contractual relationships or national pricing agreements with large third-party payors, such as CIGNA, Metrahealth (MetLife/Travelers) or other national insurance companies, with national HMO/PPO companies, such as Healthcare-COMPARE/AFFORDABLE, Hospital Network of America and Multiplan, with national case management companies, such as INTRACORP and Crawford & Co., and with national employers, such as Wal-Mart, Georgia-Pacific Corporation, Dillard Department Stores, Goodyear Tire & Rubber and Winn-Dixie. In addition, since the facilities acquired by the Company during the past two years had very limited contractual relationships with payors, managed care providers, employers and others, the Company is expanding its existing payor relationships to include these facilities. The Company carries out broader programs designed to further enhance its public image. Among these is the HEALTHSOUTH Sports Medicine Council, headed by Bo Jackson, which is dedicated to developing educational programs focused on athletics for use in high schools. The Company has ongoing relationships with the Ladies Professional Golf Association, the Southeastern Conference and more than 400 universities, colleges and high schools to provide sports medicine coverage of events and rehabilitative healthcare services for injured athletes. In addition, the Company has established relationships with or provided treatment services for athletes from some 35 to 40 major professional sports teams, as well as providing sports medicine services for Olympic and amateur athletes. HEALTHSOUTH is a national sponsor of the United Cerebral Palsy Association and the National Arthritis Foundation and supports many other charitable organizations on national and local levels. Through these endeavors, the Company provides its employees with opportunities to support their communities. 19 Sources of Revenues Private pay revenue sources represent the majority of the Company's revenues. The following table sets forth the percentages of the Company's revenues from various sources for the periods indicated: Year Ended Year Ended Source December 31, 1993 December 31, 1994 ------ ----------------- ----------------- Medicare............. 30.6% 41.0% Commercial (1)....... 36.3 34.1 Workers' Compensation......... 16.4 10.9 All Other Payors (2). 16.7 14.0 ------- ------- 100.0% 100.0% (1) Includes commercial insurance, HMOs, PPOs and other managed care plans. (2) Medicaid is included in this category, but is insignificant in amount. The above table does not reflect the ReLife facilities or the SHC facilities for either period. The NME Selected Hospitals are included in the 1994 figures only. Comparable information for the ReLife and SHC facilities is not available and is not reflected in either year in the table. The percentage of revenues derived from Medicare increased in 1994 as a result of the NME Selected Hospitals Acquisition. The Company has expanded its existing payor relationships to include the former NME and ReLife facilities. See "Business -- Regulation -- Medicare Participation and Reimbursement" for a description of the reimbursement regulations applicable to the Company's facilities. Competition The Company competes in the geographic markets in which its facilities are located. In addition, the Company's rehabilitation facilities compete on a regional and national basis with other providers of specialized services such as sports medicine and work hardening, and specific concentrations such as head injury rehabilitation and orthopaedic surgery. The competition faced in each of these markets is similar, with variations arising from the number of healthcare providers in the given metropolitan area. The primary competitive factors in the rehabilitation services business are quality of services, projected patient outcomes, charges for services, responsiveness to the needs of the patients, community and physicians, and ability to tailor programs and services to meet specific needs of the patients. Competitors and potential competitors include hospitals, private practice therapists, rehabilitation agencies and others. Some of these competitors may have greater patient referral support and financial and personnel resources in particular markets than the Company. Management believes that the Company competes successfully within the marketplace based upon its reputation for quality, competitive prices, positive rehabilitation outcomes, innovative programs, clean and bright facilities and responsiveness to needs. HEALTHSOUTH's medical centers are located in four urban areas of the country, all with well-established healthcare services provided by a number of proprietary, not-for-profit, and municipal hospital facilities. The Company's facilities compete directly with these local hospitals as well as various nationally recognized centers of excellence in orthopaedics, sports medicine and other specialties. Because HEALTHSOUTH's facilities enjoy a national and international reputation for orthopaedic surgery and sports medicine, the Company believes that its medical centers' level of service and continuum of care enable them to compete successfully, both locally and nationally. The Company's surgery centers compete primarily with hospitals and other operators of freestanding surgery centers in attracting physicians and patients, and developing new centers and in acquiring existing centers. The primary competitive factors in the outpatient surgery business are convenience, cost, quality of service, physician loyalty and reputation. Hospitals have many competitive advantages in attracting physicians and patients, including established standing in a community, historical physician loyalty and convenience for physicians making rounds or performing inpatient surgery in the hospital. However, the Company believes that its national market system and its historical presence in many of the markets where the SHC facilities are located will enhance the Company's ability to operate these facilities successfully. 20 The Company potentially faces competition any time it initiates a Certificate of Need ("CON") project or seeks to acquire an existing facility or CON. See "Business -- Regulation". This competition may arise either from competing companies, national or regional, or from local hospitals which file competing applications or oppose the proposed CON project. The necessity for these approvals serves as a barrier to entry and has the potential to limit competition by creating a franchise to provide services to a given area. To date the Company has been successful in obtaining each of the CONs or similar approvals which it has sought, although there can be no assurance that it will achieve similar success in the future. Regulation The healthcare industry is subject to regulation by federal, state and local governments. The various levels of regulatory activity affect the Company's business activities by controlling its growth, requiring licensure or certification of its facilities, regulating the use of its properties and controlling the reimbursement to the Company for services provided. Licensure, Certification and Certificate of Need Regulations Capital expenditures for the construction of new facilities, the addition of beds or the acquisition of existing facilities may be reviewable by state regulators under a statutory scheme which is sometimes referred to as a Certificate of Need program. States with CON programs place limits on the construction and acquisition of healthcare facilities and the expansion of existing facilities and services. In such states, approvals are required for capital expenditures exceeding certain amounts which involve inpatient rehabilitation facilities or services. Outpatient rehabilitation facilities and services do not require such approvals in a majority of states. State CON statutes generally provide that, prior to the addition of new beds, the construction of new facilities or the introduction of new services, a state health planning designated agency (a "SHPDA") must determine that a need exists for those beds, facilities or services. The CON process is intended to promote comprehensive healthcare planning, assist in providing high quality healthcare at the lowest possible cost and avoid unnecessary duplication by ensuring that only those healthcare facilities that are needed will be built. Typically, the provider of services submits an application to the appropriate SHPDA with information concerning the area and population to be served, the anticipated demand for the facility or service to be provided, the amount of capital expenditure, the estimated annual operating costs, the relationship of the proposed facility or service to the overall state health plan and the cost per patient day for the type of care contemplated. Whether the CON is granted is based upon a finding of need by the SHPDA in accordance with criteria set forth in CON statutes and state and regional health facilities plans. If the proposed facility or service is found to be necessary and the applicant to be the appropriate provider, the SHPDA will issue a CON containing a maximum amount of expenditure and a specific time period for the holder of the CON to implement the approved project. Licensure and certification are separate, but related, regulatory activities. The former is usually a state or local requirement and the latter is a federal requirement. In almost all instances, licensure and certification will follow specific standards and requirements that are set forth in readily available public documents. Compliance with the requirements is monitored by annual on-site inspections by representatives of various government agencies. All of the Company's inpatient rehabilitation facilities and medical centers and substantially all of the Company's surgery centers are currently required to be licensed, but only the outpatient rehabilitation facilities located in Alabama, Arizona, Connecticut, Maryland, Massachusetts and New Hampshire currently must satisfy such a licensing requirement. 21 Medicare Participation and Reimbursement In order to participate in the Medicare program and receive Medicare reimbursement, each facility must comply with the applicable regulations of the United States Department of Health and Human Services relating to, among other things, the type of facility, its equipment, its personnel and its standards of medical care, as well as compliance with all state and local laws and regulations. All of the Company's inpatient facilities, except for the St. Louis head injury center, participate in the Medicare program. Ninety-two of the Company's outpatient rehabilitation facilities currently participate in, or are awaiting the assignment of a provider number to participate in, the Medicare program. All of the Company's surgery centers are certified (or awaiting certification) under the Medicare program. The Company's Medicare-certified facilities, inpatient and outpatient, undergo annual on-site Medicare certification surveys in order to maintain their certification status. Failure to comply with the program's conditions of participation may result in loss of program reimbursement or other governmental sanctions. All such facilities have been deemed to be in satisfactory compliance on all applicable surveys. The Company has developed its operational systems to assure compliance with the various standards and requirements of the Medicare program and has established ongoing quality assurance activities to monitor compliance. The Company believes that all of such facilities currently meet all applicable Medicare requirements. As a result of the Social Security Act Amendments of 1983, Congress adopted a prospective payment system ("PPS") to cover the routine and ancillary operating costs of most Medicare inpatient hospital services. Under this system, the Secretary of Health and Human Services has established fixed payment amounts per discharge based on diagnosis-related groups ("DRGs"). With limited exceptions, a hospital's payment for Medicare inpatients is limited to the DRG rate, regardless of the number of services provided to the patient or the length of the patient's hospital stay. Under PPS, a hospital may retain the difference, if any, between its DRG rate and its operating costs incurred in furnishing inpatient services, and is at risk for any operating costs that exceed its DRG rate. HEALTHSOUTH's medical center facilities are generally subject to PPS with respect to Medicare inpatient services. The PPS program has been beneficial for the rehabilitation segment of the healthcare industry because of the economic pressure on acute-care hospitals to discharge patients as soon as possible. The result has been increased demand for rehabilitation services for those patients discharged early from acute-care hospitals. Outpatient rehabilitation services and free-standing inpatient rehabilitation facilities are currently exempt from PPS, and inpatient rehabilitation units within acute-care hospitals are eligible to obtain an exemption from PPS upon satisfaction of certain federal criteria. Currently, four of the Company's outpatient centers are Medicare-certified CORFs and 88 are Medicare-certified rehabilitation agencies. CORFs have been designated cost-reimbursed Medicare providers since 1982. Under the regulations, CORFs are reimbursed reasonable costs (subject to certain limits) for services provided to Medicare beneficiaries. Outpatient rehabilitation facilities certified by Medicare as rehabilitation agencies are reimbursed on the basis of the lower of reasonable costs for services provided to Medicare beneficiaries or charges for such services. Outpatient rehabilitation facilities which are physician-directed clinics, as well as outpatient surgery centers, are reimbursed by Medicare on a fee screen basis; that is, they receive a fixed fee, which is determined by the geographical area in which the facility is located, for each procedure performed. The Company's outpatient rehabilitation facilities submit monthly bills to their fiscal intermediaries for services provided to Medicare beneficiaries, and the Company files annual cost reports with the intermediaries for each such facility. Adjustments are then made if costs have exceeded payments from the fiscal intermediary or vice versa. The Company's inpatient facilities (other than the medical center facilities) either are not currently covered by PPS or are exempt from PPS, and are also cost-reimbursed, receiving the lower of reasonable costs or charges. Typically, the fiscal intermediary pays a set rate based on the prior year's costs for each facility. As with outpatient facilities subject to cost-based reimbursement, annual cost reports are filed with the Company's fiscal intermediary and payment adjustments are made, if necessary. Congress has directed the United States Department of Health and Human Services to develop regulations, which could subject inpatient rehabilitation hospitals to PPS in place of the current "reasonable cost within limits" system of reimbursement. In addition, informal proposals have been made for a prospective payment system for Medicare outpatient care. Other proposals for a prospective payment system for rehabilitation hospitals are also being considered by the federal government. Therefore, the Company cannot predict at this time the effect that any such changes may have on its operations. Regulations relating to prospective payment or other aspects of reimbursement may be developed in the future which could adversely affect reimbursement for services provided by the Company. 22 Over the past several years an increasing number of healthcare providers have been accused of violating the federal False Claims Act. That Act prohibits the knowing presentation of a false claim to the United States government. Because the Company performs thousands of similar procedures a year for which it is reimbursed by Medicare and there is a relatively long statute of limitations, a billing error could result in significant civil penalties. The Company does not believe that it is or has been in violation of the False Claims Act. Relationships with Physicians and Other Providers Various state and federal laws regulate relationships among providers of healthcare services, including employment or service contracts and investment relationships. These restrictions include a federal criminal law prohibiting (i) the offer, payment, solicitation or receipt of remuneration by individuals or entities, to induce referrals of patients for services reimbursed under the Medicare or Medicaid programs or (ii) the leasing, purchasing, ordering, arranging for or recommending the lease, purchase or order of any item, good, facility or service covered by such programs (the "Fraud and Abuse Law"). In addition to federal criminal sanctions, violators of the Fraud and Abuse Law may be subject to significant civil sanctions, including fines and/or exclusion from the Medicare and/or Medicaid programs. In 1991, the Office of the Inspector General ("OIG") of the United States Department of Health and Human Services promulgated regulations describing compensation arrangements which are not viewed as illegal remuneration under the Fraud and Abuse Law (the "Safe Harbor Rules"). The Safe Harbor Rules create certain standards ("Safe Harbors") for identified types of compensation arrangements which, if fully complied with, assure participants in the particular arrangement that the OIG will not treat such participation as a criminal offense under the Fraud and Abuse Law or as the basis for an exclusion from the Medicare and Medicaid programs or an imposition of civil sanctions. The Company operates five of its rehabilitation hospitals and almost all of its outpatient rehabilitation facilities as limited partnerships. Three of the rehabilitation hospital partnerships involve physician investors, and two of the rehabilitation hospital partnerships involve other institutional healthcare providers. Seven of the outpatient partnerships currently have a total of 21 physician limited partners, some of whom refer patients to the partnerships. Those partnerships which are providers of services under the Medicare program, and their limited partners, are subject to the Fraud and Abuse Law. A number of the relationships established by the Company with physicians and other healthcare providers do not fit within any of the Safe Harbors. The Safe Harbor Rules do not expand the scope of activities that the Fraud and Abuse Law prohibits, nor do they provide that failure to fall within a Safe Harbor constitutes a violation of the Fraud and Abuse Law; however, the OIG has informally indicated that failure to fall within a Safe Harbor may subject an arrangement to increased scrutiny. Most of the Company's surgery centers are owned by limited partnerships, which include as limited partners physicians who perform surgical procedures at such centers. Subsequent to the promulgation of the Safe Harbor Rules in 1991, the Department of Health and Human Services issued for public comment additional proposed Safe Harbors, one of which specifically addresses surgeon ownership interests in ambulatory surgery centers. As proposed, the ambulatory surgery Safe Harbor would protect payments to be made to surgeons as a return on investment interest in a surgery center if, among other conditions, all the investors are surgeons who are in a position to refer patients directly to the center and perform surgery on such referred patients. Since a subsidiary of the Company is an investor in each limited partnership which owns a surgery center, the Company's arrangements with physician investors do not fit within the Safe Harbor for ambulatory surgery centers as currently proposed. The Company is unable at this time to predict whether the proposed ambulatory surgery center Safe Harbor will become final, and if so, whether the language and requirements will remain as currently proposed, or whether changes will be made prior to becoming final. There can be no assurance that the Company will ever meet the criteria under this new Safe Harbor as proposed or as it may be adopted in final form. The Company believes, however, that its arrangements with physicians with respect to its surgery center facilities should not fall within the activities prohibited by the Fraud and Abuse Law. 23 While several federal court decisions have aggressively applied the restrictions of the Fraud and Abuse Law, they provide little guidance as to the application of the Fraud and Abuse Law to the Company's limited partnerships. The Company believes that it is in compliance with the current requirements of applicable federal and state law, but no assurances can be given that a federal or state agency charged with enforcement of the Fraud and Abuse Law and similar laws might not assert a contrary position or that new federal or state laws, or new interpretations of existing laws, might not adversely affect relationships established by the Company with physicians or other healthcare providers or result in the imposition of penalties on the Company or certain of its facilities. Even the assertion of a violation could have a material adverse effect upon the Company. The so-called "Stark II" provisions of the Omnibus Budget Reconciliation Act of 1993 amend the federal Medicare statute to prohibit the making by a physician of referrals for "designated health services" (including physical therapy and occupational therapy) to an entity in which the physician has an investment interest or other financial relationship, subject to certain exceptions. Such prohibition took effect on January 1, 1995 and applies to all of the Company's outpatient rehabilitation facility partnerships with physician limited partners. In addition, a number of states have passed or are considering statutes which prohibit or limit physician referrals of patients to facilities in which they have an investment interest. In response to these regulatory activities, the Company has restructured most of its rehabilitation facility partnerships which involve physician investors, in order to eliminate physician ownership interests not permitted by applicable law. The Company intends to take such actions as may be required to cause the remaining partnerships to be in compliance with applicable laws and regulations, including, if necessary, the prohibition of physician partners from referring patients. The Company believes that this restructuring has not adversely affected and will not adversely affect the operations of its facilities. Ambulatory surgery is not identified as a "designated health service", and the Company does not believe that ambulatory surgery is subject to the restrictions set forth in Stark II. However, lithotripsy facilities operated by the Company frequently operate on hospital campuses, and it is possible to conclude that such services are "inpatient and outpatient hospital services" -- a category of proscribed services within the meaning of Stark II. Similarly, physicians frequently perform endoscopic procedures in the procedure rooms of the Company's surgery centers, and it is also possible to construe these services to be "designated health services". While the Company does not believe that Stark II was intended to apply to such services, if that were determined to be the case, the Company intends to take steps necessary to cause the operation of its facilities to comply with the law. The Company cannot predict whether other regulatory or statutory provisions will be enacted by federal or state authorities which would prohibit or otherwise regulate relationships which the Company has established or may establish with other healthcare providers or the possibility of materially adverse effects on its business or revenues arising from such future actions. Management of the Company believes, however, that the Company will be able to adjust its operations so as to be in compliance with any regulatory or statutory provision as may be applicable. See "Business -- Sources of Revenues" and "Business -- Patient Care Services". Insurance Beginning December 1, 1993, the Company became self-insured for professional liability and comprehensive general liability. The Company purchased coverage for all claims incurred prior to December 1, 1993. In addition, the Company purchased underlying insurance which would cover all claims once established limits have been exceeded. It is the opinion of management that at August 31, 1995, the Company has adequate reserves to cover losses on asserted and unasserted claims. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". 24 Employees As of August 31, 1995, the Company employed 22,531 persons, of whom 14,803 were full-time employees and 7,728 were part-time employees. Of the above employees, 412 are employed at the Company's headquarters in Birmingham, Alabama. Except for approximately 100 employees at one rehabilitation hospital (about 20% of that facility's workforce), none of the Company's employees is represented by a labor union, and the Company is not aware of any current activities to organize its employees at other facilities. Management of the Company considers the relationship between the Company and its employees to be good. Legal Proceedings In the ordinary course of its business, the Company may be subject, from time to time, to claims and legal actions by patients and others. The Company does not believe that any such pending actions, if adversely decided, would have a material adverse effect on its financial condition. See "Business -- Insurance" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of the Company's insurance coverage arrangements. From time to time, the Company appeals decisions of various rate-making authorities with respect to Medicare rates established for the Company's facilities. These appeals are initiated in the ordinary course of business. Management believes that adequate reserves have been established for possible adverse decisions on any pending appeals and that the outcomes of currently pending appeals, either individually or in the aggregate, will have no material adverse effect on the Company's operations. Properties The Company's executive offices currently occupy approximately 120,000 square feet of leased space in Birmingham, Alabama. In August 1995, the Company announced plans to construct new executive offices on property acquired by the Company earlier in the year. The expanded executive offices are expected to be fully available by December 1996. All of the Company's outpatient operations are carried out in leased facilities, except for its outpatient rehabilitation facilities located in Birmingham and Montgomery, Alabama, Orlando, Florida and one of its facilities in Baltimore, Maryland. The Company owns 33 of its inpatient rehabilitation facilities and leases or operates under management contracts 44 of its inpatient rehabilitation facilities. The Company constructed its rehabilitation hospitals in Florence and Columbia, South Carolina, Kingsport and Nashville, Tennessee, Concord, New Hampshire, and Dothan, Alabama on property leased under long-term ground leases. The property on which the Company's Memphis, Tennessee rehabilitation hospital is located is owned in partnership by the Company and Methodist Hospitals of Memphis. The Company owns its four medical center facilities in Birmingham, Alabama, Richmond, Virginia and Miami, Florida and leases its medical center facility in Dallas, Texas. The Company currently owns, and from time to time may acquire, certain other improved and unimproved real properties in connection with its business. See Notes 4 and 6 of "Notes to Consolidated Financial Statements" for information with respect to the properties owned by the Company and certain indebtedness related thereto. In Management's opinion, the Company's physical properties are adequate for the Company's needs for the foreseeable future, and are consistent with the Company's expansion plans described elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". 25 The following table sets forth a listing of the Company's patient care services locations at August 31, 1995:
Inpatient Outpatient Rehabilitation Rehabilitation Facilities Medical Surgery Diagnostic Other State Market Centers(1) (Beds) (2) Centers (Beds)(2) Centers Centers Services ----- ------ ---------- ---------- -------- -------- ---------- -------- Alabama Birmingham 6 6(225) 1(219) Dothan 1(34) Auburn 1 Valley 1 Opelika 1 Florence 2 Gadsden 2 Huntsville 3 1(50) Mobile 2 Montgomery 1 1(80) Muscle Shoals 1 Tuscaloosa 1 1 1 Arizona Tucson 2 1(80) Phoenix 4 1(60) 1 Scottsdale 3 1(43) Arkansas Fort Smith 1(80) Little Rock 1 California Bakersfield 1(60) Fresno 2 Huntington 2 1 Marina Del Rey 1 2 Newport Beach 1 Redding 1 San Carlos 1 San Diego 2 3 San Francisco 1 1 Santa Rosa 2 Van Nuys 2 Woodland Hills 1 Colorado Colorado Springs 6 Englewood 3 Longmont 1 Wheat Ridge 4 Denver 3 2 Fort Collins 2 Connecticut Fairfield 1 District of Columbia Washington 1 1 Florida Boca Raton 2 2 26 Fort Lauderdale 1 1(108) 1 Jacksonville 2 Lake Worth 1 Largo 1(40) Melbourne 3 1(80) 1 Merritt Island 3 Panama City 3 Coral Gables 2 Miami 2 2(165) 2(397) 1 1 1 Naples 1 Ocala 2 Ocoee 2 1 Orlando 6 2 Palm Bay 2 Port St. Lucie 3 1 Sarasota 2 1(60) 1 Tallahassee 2 1(70) Tampa 4 Tarpon Springs 1 Vero Beach 1 1(70) 1 West Palm Beach 2 1 Georgia Atlanta 6 1(14) 3 1 Columbus 1 Macon 2 2(75) Idaho Boise 1 (3) Illinois Caronbdale 1 Palos Heights 2 Wilmette 2 1 Arlington Heights 4 1 Elgin 3 DuPage 2 Columbia 2 Indiana Evansville 1(80) Muncie 8 Iowa Des Moines 3 Kansas Leawood 1 1 Kansas City 2 Great Bend 1 Kentucky Edgewood 1(40) Louisville 2 Louisiana Baton Rouge 1 1(43) Metairie 1 Shreveport 1 Maine Bangor 2 Maryland Baltimore 10 1 Barlow 1 Chevy Chase 1 Rockville 1 1 Salisbury 1(44) Wheaton 1 Massachusetts Abington 1 Michigan Monroe 1 Mississippi Jackson 1 Pascagoula 1 Meridian 1 Missouri Cape Girardeau 3 Columbia 3 Blue Springs 1 Kansas City 2(21) 27 Lake Ozark 1 Springfield 3 St. Louis 15 1(26) 4 2 Nebraska Omaha 2 Nevada Las Vegas 2 New Hampshire Bedford 3 Dover 2 Manchester 1 Concord 1 1(100) New Jersey Atlantic City 1 Bridgewater 1 1 Brunswick 1 1(15) Edison 2 Emerson 2 Haddonfield 1 Linden 2 Madison 1 Manahawkin 1 North Bergen 1 Newton 1 Paramus 2 Tinton Falls 1 Toms River 1 1(155) Upper Saddle River 2 Washington 1 New Mexico Albuquerque 3 1(60) New York Syracuse 1 Liverpool 1 Monsey 1 Pulaski 1 Huntington 1 North Carolina Asheville 1 Charlotte 1 Kingston 1(17) Concord 1 Statesville 1 Ohio Ashtabula 1 Cincinnati 1 Dayton 1 Toledo 1 Lorain 5 Oklahoma Oklahoma City 4 1(111) 2 1 Ada 2 Tulsa 2 1 Weatherford 1 Ontario, Canada Etabicoke 1 Pennsylvania Altoona 2 1(66) Erie 1 2(207) Harrisburg 3 Mechanicsburg 2 2(201) Pittsburgh 6 1(89) Pleasant Gap 4 1(88) York 3 1(88) South Carolina Charleston 1(36) Columbia 2 1(89) Florence 1 1(88) Lancaster 2(54) Tennessee Chattanooga 3 1(80) 1 Clarksville 1 28 Kingsport 1(50) Knoxville 2 Dyersburg 1 Collierville 1 Union City 1 Martin 1(40) Memphis 4 1(80) Nashville 2 1(80) Texas Amarillo 1 Arlington 2 1(60) Austin 5 1(80) 1 Beaumont 1 Dallas 3 3(175) 1(96) 1 1 El Paso 1 Fort Worth 2 1(60) 1 Houston 11 2(186) 5 1 1 Midland 1(60) San Antonio 10 3(127) 1 5 Texarkana 1 1(60) Waco 2 Victoria 1 Utah Sandy 1 1(86) Virginia Alexandria 1 Arlington 1 Richmond 2 3(84) 1(200) 1 1 Roanoke 1 Tyson 1 Virginia Beach 3 Warrenton 1 West Virginia Huntington 1(40) Morgantown 1(80) Parkersburg 1(40) Princeton 1(40) Wisconsin Green Bay 1 (1) Includes freestanding outpatient centers and their satellites and outpatient satellites of inpatient rehabilitation facilities. (2) "Beds" refers to the number of beds for which a license or certificate of need has been granted, which may vary materially from beds available for use. (3) Under construction.
29 MANAGEMENT Directors and Executive Officers The following table sets forth certain information with respect to the Company's Directors and executive officers.
A Director or Name Age All Positions With the Company Officer Since ------------------------ ----- --------------------------------------------- ----------------- Richard M. Scrushy...... 43 Chairman of the Board, Chief Executive Officer and Director 1984 James P. Bennett........ 37 President and Chief Operating Officer 1991 Executive Vice President and Chief Financial Aaron Beam, Jr.......... 51 Officer and Director 1984 Anthony J. Tanner....... 46 Executive Vice President -- Administration Thomas W. Carman........ 44 and Secretary and Director 1984 Executive Vice President -- Corporate Development 1985 P. Daryl Brown.......... 40 President -- HEALTHSOUTH Outpatient Centers 1986 Russell H. Maddox....... 54 President -- HEALTHSOUTH Surgery & Imaging Centers 1995 William T. Owens........ 36 Senior Vice President -- Finance and Controller 1986 Michael D. Martin....... 35 Senior Vice President -- Finance and Treasurer 1989 William W. Horton....... 35 Group Vice President -- Legal Services and Assistant Secretary 1994 Phillip C. Watkins, M.D. 53 Director 1984 George H. Strong........ 69 Director 1984 C. Sage Givens.......... 38 Director 1985 Charles W. Newhall III . 50 Director 1985 Larry R. House.......... 52 Director 1985 John S. Chamberlin...... 67 Director 1993 Richard F. Celeste...... 57 Director 1991
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-traded healthcare corporation, serving in various operational and management positions. Mr. Scrushy is also a director of Integrated Health Services, Inc. and MedPartners, Inc., both publicly-traded healthcare corporations, and Chairman of the Board of Capstone Capital, Inc., a publicly-traded real estate investment trust. He also serves on the boards of directors of several privately-held healthcare corporations. James P. Bennett joined the Company in May 1991 as Director of Inpatient Operations, was promoted to Group Vice President -- Inpatient Rehabilitation Operations in September 1991, 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 30 August 1987 to May 1991, Mr. Bennett was employed by Russ Pharmaceuticals, Inc., Birmingham, Alabama, as vice president -- operations, chief financial officer, secretary and director. Mr. Bennett served as a certified public accountant on the audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from October 1980 to August 1987. Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice President and Chief Financial Officer of the Company and was elected a Director in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark Corporation in several financial and operational management positions for the Shared Services Division, including division controller. Mr. Beam is a director of Ramsey Healthcare, Inc., a publicly-traded healthcare corporation. 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. 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. P. Daryl Brown, President -- HEALTHSOUTH Outpatient Centers, joined the Company in April 1986 and served until June 1992 at Group Vice President -- Outpatient Operations. He was elected as a Director in March 1995. From 1997 to 1986, Mr. Brown served with the American Red Cross, Alabama Region, in several positions, including chief operating officer, administrative director for finance and administration and controller. Russell H. Maddox became President -- HEALTHSOUTH Surgery & Imaging Centers in June 1995. From January 1992 until May 1995, Mr. Maddox served as Chairman of the Board, President and Chief Executive Officer of Diagnostic Health Corporation, an outpatient diagnostic imaging company. Mr. Maddox was founder and president of Russ Pharmaceuticals, Inc., located in Birmingham, Alabama. In March 1989, the company was acquired by Ethyl Corporation of Richmond, Virginia. William T. Owens, C.P.A., joined the Company in March 1986 as Controller and was appointed Vice President and Controller in December 1986. He was appointed Group Vice President -- Finance and Controller in June 1992 and became Senior Vice President -- Finance and Controller in February 1994. Prior to joining the Company, Mr. Owens served as a certified public accountant on the audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from 1981 to 1986. Michael D. Martin joined the Company in October 1989 as Vice President and Treasurer, and was named Senior Vice President -- Finance and Treasurer in February 1994. From 1983 through September 1989, Mr. Martin specialized in healthcare lending with AmSouth Bank N.A., Birmingham, Alabama, where he was a vice president immediately prior to joining the Company. Mr. Martin is a director of Capstone Capital, Inc., a publicly-traded real estate investment trust. William W. Horton joined the Company in July 1994 as Group Vice President -- Legal Services. From August 1986 through June 1994, Mr. Horton practiced corporate, securities and healthcare law with the Birmingham, Alabama-based firm of Haskell Slaughter Young & Johnston, Professional Association, where he served as chairman of the healthcare practice group. Phillip C. Watkins, M.D., FACC, is and has been in private practice for more than five years with Cardiovascular Associates, P.C. in Birmingham, Alabama. A graduate of The Medical College of Alabama, Dr. Watkins is a Diplomate of the American Board of Internal Medicine. He is also a Fellow of the American College of Cardiology. 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 31 management corporation, until 1993. Mr. Strong is also a director of Core Funds, a public mutual fund group, Integrated Health Services, Inc., a publicly-traded healthcare corporation, and AmeriSource, Inc., a large drug wholesaler. C. Sage Givens is a general partner of Acacia Venture Partners, a private venture capital fund capitalized at $66,000,000. From 1983 to June 30, 1995, Ms. Givens was a general partner of First Century Partners, a private venture capital fund capitalized 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 private 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. Larry R. House is Chairman of the Board, President and Chief Executive Officer of MedPartners, Inc., a publicly-traded physician practice management firm, a position he assumed as his principal occupation in August 1993. Mr. House was elected a Director of the Company in February 1993. At the same time he became President -- HEALTHSOUTH International, Inc., and New Business Ventures, a position which he held until August 31, 1994, when he terminated his employment with the Company to concentrate on his duties at MedPartners. Mr. House joined the Company in September 1985 as Director of Marketing, subsequently served as Senior Vice President and Chief Operating Officer of the Company, and in June 1992 became President and Chief Operating Officer -- HEALTHSOUTH Medical Centers. Prior to joining the Company, Mr. House was president and chief executive officer of a provider of clinical contract management services for more than ten years. 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 from General Electric. From 1990 to 1991, he served as chairman and chief executive officer of New Jersey Publishing Incorporated. Mr. Chamberlin is chairman of the board of Life Fitness Company and WNS, Inc., and is a director of Seasons, Inc., the Scotts Company, The Robbins Company and Sports Holdings Corp. He is a member of the Board of Trustees of the Medical Center at Princeton and the Board of Overseers of Parsons School of Design and is a trustee of the Woodrow Wilson National Fellowship Foundation. Richard F. Celeste originally joined the Board of Directors in 1991, took a leave of absence from the Board of Directors in August 1993 to head the Democratic National Committee's healthcare reform campaign, and rejoined the Company in May 1994. He is a principal of Celeste and Sabaty, Ltd., a business advisory firm located in Columbus, Ohio, which assists United States companies in building strategic business alliances in Europe, Africa, South Asia and the Pacific Rim. He served as Governor of Ohio from 1983 to 1991, during which time he chaired the National Governors' Association Committee on Science and Technology, and directed the United States Peace Corps from 1979 to 1981. He is a member of the Advisory Council of the Carnegie Commission on Science, Technology and Government, and chairs Carnegie's Task Force on Science, Technology and the States. He is a director of Navistar International, Inc. and Republic Engineered Steels, Inc., both of which are publicly-traded companies. 32 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 150,000,000 shares of Common Stock, par value $.01 per share, and 1,500,000 shares of Preferred Stock, par value $.10 per share. See "Capitalization". Common Stock The holders of Common Stock are entitled to participate equally in dividends when and as declared by the Board of Directors out of funds legally available therefor and, in the event of liquidation or distribution of assets of the Company, are entitled to share ratably in such assets remaining after payment of liabilities. Stockholders are entitled to one vote per share. The holders of Common Stock have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions with respect to such stock. The outstanding shares of Common Stock are, and when issued and paid for, the shares offered by the Company in this Offering will be, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock that the Company may designate and issue in the future. Preferred Stock The Board of Directors has the authority to issue Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions, including the dividend rights, dividend rate, conversion rights, voting rights, terms of redemption, redemption price or prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without any further vote or action by the stockholders. Issuance of shares of Preferred Stock, while providing flexibility in connection with possible acquisition and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. Any such issuance could also adversely affect the voting power of the holders of the Common Stock. The Board of Directors has no present intention of issuing any shares of Preferred Stock. Fair Price Provision The Company's Restated Certificate of Incorporation contains certain provisions requiring supermajority stockholder approval to effect specified extraordinary corporate transactions unless certain conditions are met. The Restated Certificate of Incorporation requires the affirmative vote of 66 2/3 % of all shares entitled to vote in the election of Directors to approve a "business combination" with any "other entity" that is the beneficial owner, directly or indirectly, of more than 20% of the outstanding shares of the Company entitled to vote in the election of Directors. For purposes of this restriction, a "business combination" includes: (a) the sale, exchange, lease, transfer or other disposition by the Company of all, or substantially all, of its assets or businesses; (b) any merger or consolidation of the Company; and (c) certain sales of Common Stock in exchange of cash, assets, securities or any combination thereof. An "other entity" is defined to include, generally, any corporation, person or entity, and any affiliate or associate of such corporation, person or entity. The foregoing supermajority vote shall not be required where, in the business combination, (i) stockholders of the Company receive consideration per share not less than the highest per share price paid by the other entity in acquiring any of its holdings of Common Stock (subject to certain adjustments upward) and (ii) certain other requirements, designed to prevent the other entity from receiving disproportionate gains in connection with the business combination, are satisfied. The provisions of the Company's Restated Certificate of Incorporation described in the preceding paragraphs, and its Bylaws, may be amended or repealed only the affirmative vote of 66-2/3% of the shares entitled to vote thereon. The effect of the foregoing provisions is to make it more difficult for a person, entity or group to effect a change in control of the Company through the acquisition of a large block of voting stock, or to effect a merger or other acquisition that is not approved by a majority of the Company's Directors 33 serving in office prior to the acquisition by the other entity of 5% or more of the Company's stock. In addition, holders of the Company's 5% Convertible Subordinated Debentures due 2001 (the "Debentures") have the right to require the Company to redeem the Debentures at 100% of the principal amount thereof, plus accrued interest, upon the occurrence of certain events involving a sale or merger of the Company, unless holders of Common Stock shall receive an amount per share at least equal to the conversion price of the Debentures in effect on the date such sale or merger is consummated. Such holders' redemption option may impede certain forms of takeovers if the potential acquiror is unable to finance the redemption of the Debentures. Section 203 of the DGCL The Company is subject to the provisions of Section 203 of the General Corporation Law of Delaware (the "DGCL"). That section provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or affiliate or associate of such person who is an "interested stockholder" for a period of three years from the date that such person became an interested stockholder unless: (i) the transaction resulting in a person's becoming an interested stockholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested stockholder, (ii) the interested stockholder acquires 85% or more of the outstanding voting stock of the corporation in the same transaction that makes it an interested stockholder (excluding shares held by directors, officers and certain employee stock ownership plans); or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least 66-2/3% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. An "interested stockholder" is defined to include any person, and the affiliates and associates of such person that (i) is the owner of 15% or more of the outstanding voting stock of the corporation or (ii) is an affiliate or associate of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. It is anticipated that the provisions of Section 203 of the DGCL may encourage companies or others interested in acquiring the Company to negotiate in advance with the Company's Board of Directors, since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which results in the acquiror's becoming an interested stockholder. Transfer Agent The transfer agent and registrar for the Common Stock is Chemical Bank, New York, New York. 34 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, each of the Underwriters named below has severally agreed to purchase from the Company, and the Company has agreed to sell to such Underwriter, the respective number of shares of Common Stock set forth opposite the name of such Underwriter. Number of Underwriter Shares -------------- ------------ Smith Barney Inc..................... Merrill Lynch, Pierce, Fenner & Smith Incorporated................... Morgan Stanley & Co. Incorporated .. ------------ Total................................ 11,000,000 ============ The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are purchased. The Underwriters, for whom Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated are acting as the representatives (the "Representatives"), propose to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at the price that represents a concession not in excess of $______ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ ______ per share to certain other dealers. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 1,650,000 shares of Common Stock at the price to public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the Offering of the shares offered hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite each Underwriter's name in the preceding table bears to the total number of shares listed in such table. The Company has agreed that it will not offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to purchase Common Stock, except pursuant to the grant or exercise of options under the Company's stock option plans, shares of Common Stock issuable upon conversion of the Company's outstanding Debentures, and 1,777,778 shares issuable in connection with the acquisition of SSCI for a period of 90 days from the date of this Prospectus without the prior written consent of the Underwriters. The Company has agreed to indemnify the Underwriters and certain related persons against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments that the Underwriters may be required to make in respect thereof. Smith Barney Inc., one of the Underwriters, has in the past performed, and is currently performing, investment banking services for the Company for which it is receiving customary fees. 35 LEGAL MATTERS Haskell Slaughter Young & Johnston, Professional Association, Birmingham, Alabama, counsel to the Company, has passed on certain legal matters in connection with the shares of Common Stock offered hereby. Pillsbury Madison & Sutro, San Francisco, California, is acting as counsel to the Underwriters in connection with certain legal matters relating to the shares of Common Stock offered hereby. At June 30, 1995, attorneys with the firm of Haskell Slaughter Young & Johnston, Professional Association, owned beneficially an aggregate of 9,930 shares of the Company's Common Stock and held options issued under the 1993 Consultants Stock Option Plan to purchase an additional 15,000 shares of Common Stock. EXPERTS The consolidated financial statements and schedule of the Company and its subsidiaries and the consolidated financial statements of Rehab Systems Company appearing or incorporated by reference in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, to the extent indicated in their reports thereon also appearing elsewhere herein and in the Registration Statement or incorporated by reference. Such consolidated financial statements have been included herein or incorporated by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE There are hereby incorporated by reference in this Prospectus the following documents, all of which were previously filed by the Company with the Commission (File No. 1-10315). 1. The Company's Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 1994. 2. The Company's Quarterly Reports on Form 10-Q, as amended, for the quarters ended March 31 and June 30, 1995. 3. The Company's Current Report on Form 8-K, as amended, filed January 13, 1995 (relating to the ReLife Acquisition). 4. The Company's Current Report on Form 8-K, as amended, filed February 1, 1995 (relating to the SHC Acquisition). 5. The Company's Current Report on Form 8-K, as amended, filed February 21, 1995 (relating to the NovaCare Hospitals Acquisition). 6. The Company's Current Report on Form 8-K, as amended, filed August 15, 1995 (relating to the SHC Acquisition). 7. The Company's Current Report on Form 8-K filed on September 7, 1995 (relating to the acquisition of Sutter Surgery Centers, Inc.). Additionally, all documents subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering made hereby shall be deemed to be incorporated by reference into this Prospectus. Any statement contained in a previously filed document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or replaces such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or replaced, to constitute a part of this Prospectus. The Company undertakes to provide without charge to any person to whom a copy of this Prospectus has been delivered, upon the written or oral request of any such person, a copy of any or all of the documents which have been or may be incorporated by reference into this Prospectus, other than exhibits to such documents. Written or oral requests for such copies should be directed to Anthony J. Tanner, Executive Vice President and Secretary, at the executive offices of the Company, which are located at Two Perimeter Park South, Birmingham, Alabama 35243 (telephone (205) 967-7116). The Company has filed with the Commission a registration statement on Form S-3 under the Securities Act of 1933 with respect to the shares of Common Stock offered hereby (the "Registration Statement"). This Prospectus does not contain all of the information set forth in the Registration Statement. For further information pertaining to the shares of Common Stock offered hereby and the Company, reference is made to the Registration Statement, including the exhibits and financial statement schedules filed therewith. The statements contained in this Prospectus concerning any contract or other document are not necessarily complete. Where such contract or other document is an exhibit to the Registration Statement, each such statement is qualified in all respects by the provisions of such exhibit. 36 INDEX TO FINANCIAL STATEMENTS HEALTHSOUTH Corporation and Subsidiaries Consolidated Financial Statements Page --------------------------------- ----- Years ended December 31, 1992, 1993 and 1994 Report of Independent Auditors ......................................... F-2 Consolidated Balance Sheets ............................................ F-3 Consolidated Statements of Income ...................................... F-4 Consolidated Statements of Stockholders' Equity ........................ F-5 Consolidated Statements of Cash Flows .................................. F-6 Notes to Consolidated Financial Statements ............................. F-8 Six months ended June 30, 1994 and 1995 Consolidated Balance Sheet (unaudited) ................................. F-24 Consolidated Statements of Income (unaudited) .......................... F-25 Consolidated Statements of Cash Flows (unaudited) ...................... F-26 Notes to Consolidated Financial Statements (unaudited) ................. F-27 Pro Forma Financial Information......................................... F-30 Pro Forma Condensed Combined Income Statement........................... F-31 Notes to Pro Forma Condensed Financial Information...................... F-32 F-1 Report of Ernst & Young LLP, Independent Auditors The Board of Directors HEALTHSOUTH Corporation We have audited the accompanying consolidated balance sheets of HEALTHSOUTH Corporation and Subsidiaries as of December 31, 1993 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HEALTHSOUTH Corporation and Subsidiaries at December 31, 1993 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Birmingham, Alabama March 1, 1995, except for Notes 2 and 17, as to which the date is June 13, 1995 F-2 HEALTHSOUTH Corporation and Subsidiaries Consolidated Balance Sheets
December 31 ----------------------- 1993 1994 ---------- ---------- (In thousands) Assets Current assets: Cash and cash equivalents (Note 3)................................. $ 81,031 $ 68,735 Other marketable securities (Note 3)............................... 8,968 16,628 Accounts receivable, net of allowances for doubtful accounts and contractual adjustments of $120,810,000 in 1993 and $144,427,000 in 1994............................................................ 179,761 242,659 Inventories........................................................ 24,078 26,151 ---------- ---------- Prepaid expenses and other current assets.......................... 44,674 71,029 ---------- ---------- Total current assets............................................... 338,512 425,202 Other assets: ..................................................... Loans to officers.................................................. 1,488 1,240 Other (Note 4)..................................................... 23,983 41,834 ---------- ---------- 25,471 43,074 Property, plant and equipment, net (Note 5)........................ 791,097 857,372 Intangible assets, net (Note 6) ................................... 289,338 410,688 ---------- ---------- Total assets....................................................... $1,444,418 $1,736,336 ========== ========== Liabilities and stockholders' equity Current liabilities: Accounts payable................................................... $ 50,432 $ 87,153 Salaries and wages payable......................................... 28,229 34,102 Accrued interest payable and other liabilities..................... 33,614 55,922 Current portion of long-term debt and leases (Note 7) ............. 15,174 16,698 ---------- ---------- Total current liabilities.......................................... 127,449 193,875 Long-term debt (Note 7)............................................ 873,007 1,017,696 Deferred income taxes (Note 11).................................... 10,853 8,595 Deferred revenue (Note 15)......................................... -- 7,526 Other long-term liabilities (Note 16).............................. 3,285 8,398 Minority interests-limited partnerships (Note 9)................... 11,526 10,326 Commitments and contingent liabilities (Notes 12 and 17) Stockholders' equity: Preferred Stock, $.10 par value-1,500,000 shares authorized; issued and outstanding-none........................................ -- -- Common Stock, $.01 par value-100,000,000 shares authorized; issued-74,896,000 in 1993 and 76,991,000 in 1994................... 749 770 Additional paid-in capital......................................... 347,163 369,186 Retained earnings.................................................. 89,641 137,764 Treasury stock, at cost (91,000 shares)............................ (323) (323) Receivable from Employee Stock Ownership Plan (Note 13) ........... (18,932) (17,477) ---------- ---------- Total stockholders' equity......................................... 418,298 489,920 ---------- ---------- Total liabilities and stockholders' equity......................... $1,444,418 $1,736,336 ========== ==========
See accompanying notes. F-3 HEALTHSOUTH Corporation and Subsidiaries Consolidated Statements of Income
Year ended December 31 -------------------------------- 1992 1993 1994 -------- -------- --------- (In thousands, except for per share amounts) Revenues........................................... $501,046 $656,329 $1,236,190 Operating expenses: ............................... Operating units.................................... 372,169 471,778 906,712 Corporate general and administrative............... 16,878 24,329 45,895 Provision for doubtful accounts.................... 13,254 16,181 23,739 Depreciation and amortization...................... 29,834 46,224 86,678 Interest expense................................... 12,623 18,495 65,286 Interest income.................................... (5,415) (3,924) (4,308) Merger expenses (Note 2)........................... -- 333 6,520 Loss on impairment of assets (Note 16)............. -- -- 10,500 Loss on abandonment of computer project (Note 16) . -- -- 4,500 NME Selected Hospitals Acquisition related expense (Note 10).......................................... -- 49,742 -- Terminated merger expense (Note 14)................ 3,665 -- -- Gain on sale of partnership interest............... -- (1,400) -- -------- -------- --------- 443,008 621,758 1,145,522 -------- -------- --------- Income before income taxes and minority interests . 58,038 34,571 90,668 Provision for income taxes (Note 11)............... 18,864 11,930 34,305 -------- -------- --------- 39,174 22,641 56,363 Minority interests................................. 4,245 5,444 6,402 -------- -------- --------- Net income......................................... $ 34,929 $ 17,197 $ 49,961 ======== ======== ========= Weighted average common and common equivalent shares outstanding................................. 74,214 77,709 84,687 ======== ======== ========= Net income per common and common equivalent share . $ 0.47 $ .22 $ .59 ======== ======== ========= Net income per common share-assuming full dilution........................................... $ N/A $ N/A $ .59 ======== ======== =========
See accompanying notes. F-4 HEALTHSOUTH Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity
Additional Total Common Common Paid-In Retained Treasury Receivable Stockholders' Shares Stock Capital Earnings Stock from ESOP Equity ------ ------ --------- ---------- ----------- ------------ ------ (In thousands) Balance at December 31, 1991 .... 64,993 649.6 $ 257,660.8 $ 53,925.1 $ (60.0) $ (10,000.0) $ 302,175.5 Proceeds from issuance of common shares........................... 6,436 64.4 60,286.3 -- -- -- 60,350.7 Proceeds from exercise of options.......................... 1,917 19.2 6,871.9 -- -- -- 6,891.1 Income tax benefits related to Incentive Stock Options.......... -- -- 5,634.7 -- -- -- 5,634.7 Common shares exchanged in the exercise of options.............. (8) -- (95.6) -- -- -- (95.6) Loan to Employee Stock Ownership Plan............................. -- -- -- -- -- (10,000.0) (10,000.0) Reduction in Receivable from Employee Stock Ownership Plan............................. -- -- -- -- -- 358.0 358.0 Purchase of limited partnership units............................ 42 .4 499.6 (11,318.4) -- -- (10,818.4) Net income....................... -- -- -- 34,929.0 -- -- 34,929.0 ------ ------ --------- ---------- ----------- -------- ----------- Balance at December 31, 1992 .... 73,380 733.6 330,857.7 77,535.7 (60.0) (19,642.0) 389,425.0 Proceeds from exercise of options.......................... 462 4.6 1,732.9 -- -- -- 1,737.5 Proceeds from issuance of common shares........................... 1,074 10.7 13,987.9 -- -- -- 13,998.6 ------ ------ --------- ---------- ----------- -------- ----------- Income tax benefits related to Incentive Stock Options.......... -- -- 584.7 -- -- -- 584.7 Reduction in Receivable from Employee Stock Ownership Plan............................. -- -- -- -- -- 710.1 710.1 Purchase of limited partnership units............................ -- -- -- (5,091.7) -- -- (5,091.7) Purchase of treasury stock ...... (20) -- -- -- (263.0) -- (263.0) Net income....................... -- -- -- 17,197.0 -- -- 17,197.0 ------ ------ --------- ---------- ----------- -------- ----------- Balance at December 31, 1993 .... 74,896 748.9 347,163.2 89,641.0 (323.0) (18,931.9) 418,298.2 Proceeds from issuance of common shares at $27.17 per share ...... 38 .4 532.6 -- -- -- 533.0 Proceeds from exercise of options.......................... 2,079 20.8 15,341.8 -- -- -- 15,362.6 Income tax benefits related to Incentive Stock Options.......... -- -- 6,469.6 -- -- -- 6,469.6 Common shares exchanged in the exercise of options.............. (22) (.2) (321.2) -- -- -- (321.4) Reduction in receivable from Employee Stock Ownership Plan ... -- -- -- -- -- 1,455.0 1,455.0 Purchase of limited partnership units............................ -- -- -- (1,838.0) -- -- (1,838.0) Net income....................... -- -- -- 49,961.0 -- -- 49,961.0 ------ ------ --------- ---------- ----------- -------- ----------- Balance at December 31, 1994 .... $76,991 $ 769.9 $ 369,186.0 $ 137,764.0 $ (323.0)$ (17,476.9) $ 489,920.0 ====== ====== ========= ========== =========== ======== ===========
See accompanying notes. F-5 HEALTHSOUTH Corporation and Subsidiaries Consolidated Statements of Cash Flows
Year ended December 31 1992 1993 1994 --------- --------- --------- (In thousands) Operating activities Net income........................................................... $ 34,929 $ 17,197 $ 49,961 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................................ 29,834 46,224 86,678 Provision for doubtful accounts...................................... 13,254 16,181 23,739 Provision for losses on impairment of assets......................... -- -- 10,500 Provision for losses on abandonment of computer project ............. -- -- 4,500 NME Selected Hospitals Acquisition related expense................... -- 49,742 -- Income applicable to minority interests of limited partnerships ..... 4,245 5,444 6,402 Provision (benefit) for deferred income taxes........................ 4,596 (5,685) (1,541) Provision for deferred revenue....................................... (279) (49) (164) Gain on sale of property, plant and equipment........................ -- -- (627) Gain on sale of partnership interests................................ -- (1,400) -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable.................................................. (38,503) (28,965) (74,636) Inventories, prepaid expenses and other current assets............... (13,660) (18,054) (21,757) Accounts payable and accrued expenses................................ 9,236 (7,673) 62,766 --------- --------- --------- Net cash provided by operating activities............................ 43,652 72,962 145,821 Investing activities Purchases of property, plant and equipment........................... (98,343) (131,222) (160,785) Proceeds from sale of property, plant and equipment.................. -- -- 68,317 Additions to intangible assets, net of effects of acquisitions ...... (25,206) (39,156) (59,307) Assets obtained through acquisitions, net of liabilities assumed .... (75,487) (454,013) (89,266) Changes in other assets.............................................. 192 (9,582) (23,020) Proceeds received on sale of other marketable securities ............ 14,041 20,554 1,660 Investments in other marketable securities........................... (13,000) (6,000) (9,126) --------- --------- --------- Net cash used in investing activities................................ (197,803) (619,419) (271,527)
F-6 HEALTHSOUTH Corporation and Subsidiaries Consolidated Statements of Cash Flows--(Continued)
Year ended December 31 ---------------------------- 1992 1993 1994 ---- ---- ---- (In thousands) Financing activities Proceeds from borrowings......................... $181,076 $553,258 $1,045,263 Principal payments on long-term debt and leases . (65,221) (32,239) (937,872) Proceeds from exercise of options................ 6,788 1,736 13,895 Proceeds from issuance of common stock........... 46,519 13,999 342 Purchase of treasury stock....................... -- (263) -- Loans to Employee Stock Ownership Plan........... (10,000) -- -- Reduction in Receivable from Employee Stock Ownership Plan................................... 358 710 1,455 Proceeds from investment by minority interests .. 2,886 6,476 2,252 Purchase of limited partnership interests ....... (11,495) (3,784) (1,090) Payment of cash distributions to limited partners......................................... (5,873) (5,913) (10,835) Net cash provided by financing activities ....... 145,038 533,980 113,410 Decrease in cash and cash equivalents ........... (9,113) (12,477) (12,296) Cash and cash equivalents at beginning of year .. 102,621 93,508 81,031 -------- -------- ---------- Cash and cash equivalents at end of year ........ $ 93,508 $ 81,031 $ 68,735 ======== ======== ========== Supplemental disclosures of cash flow information Cash paid during the year for: Interest......................................... $ 14,174 $ 16,241 $ 51,778 Income taxes..................................... 10,466 22,144 29,129
Non-cash investing activities: The Company assumed liabilities of $57,091,000, $88,566,000 and $24,659,000 during the years ended December 31, 1992, 1993 and 1994, respectively, in conjunction with its acquisitions. During the years ended December 31, 1992, 1993 and 1994, the Company issued 1,182,000, 69,000 and 19,000 common shares, respectively, with a market value of $12,853,000, $954,000 and $533,000, respectively, as consideration for acquisitions. Non-cash financing activities: The Company received a tax benefit from the disqualifying disposition of incentive stock options of $5,635,000, $585,000 and $6,470,000 for the years ended December 31, 1992, 1993 and 1994, respectively. During the years ended December 31, 1992 and 1994, respectively, 4,000 and 11,000 common shares were exchanged in the exercise of options. The shares exchanged had market values on the date of exchange of $95,600 and $321,400, respectively. See accompanying notes. F-7 HEALTHSOUTH Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1994 1. Significant Accounting Policies The significant accounting policies followed by HEALTHSOUTH Corporation (formerly HEALTHSOUTH Rehabilitation Corporation) and its subsidiaries (the Company) are presented as an integral part of the consolidated financial statements. Principles of Consolidation The consolidated financial statements include the accounts of HEALTHSOUTH Corporation (HEALTHSOUTH) and its wholly-owned subsidiaries, as well as its limited partnerships (see Note 9). All significant intercompany accounts and transactions have been eliminated in consolidation. HEALTHSOUTH Corporation is engaged in the business of providing comprehensive rehabilitative and clinical healthcare services on an inpatient and outpatient basis. Marketable Securities Marketable equity securities and debt securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, if material, reported as a separate component of stockholders' equity, net of tax. The adjusted cost of the specific security sold method is used to compute gain or loss on the sale of securities. Interest and dividends on securities classified as available-for-sale are included in investment income. Marketable equity securities and debt securities of the Company have maturities of less than one year. Accounts Receivable and Third-Party Reimbursement Activities Receivables from patients, insurance companies and third-party contractual insured accounts (Medicare and Medicaid) are based on payment agreements which generally result in the Company collecting an amount different from the established rates. Final determination of the settlement is subject to review by appropriate authorities. Adequate allowances are provided for doubtful accounts and contractual adjustments. Uncollectible accounts are written off against the allowance for doubtful accounts after adequate collection efforts are made. Net accounts receivable include only those amounts estimated by management to be collectible. The concentration of net accounts receivable from third-party contractual payors and others, as a percentage of total net accounts receivable, was as follows: December 31 -------------- 1993 1994 ---- ---- Medicare ......................... 33% 36% Medicaid ......................... 4 6 Other............................. 63 58 ---- ---- 100% 100% ==== ==== Inventories Inventories are stated at the lower of cost or market using the specific identification method. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Upon sale or retirement of property, plant or equipment, the cost and related accumulated depreciation are eliminated from the respective account and the resulting gain or loss is included in the results of operations. F-8 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) Interest cost incurred during the construction of a facility is capitalized. The Company incurred interest of $14,644,000, $21,159,000 and $67,680,000 of which $2,021,000, $2,664,000 and $2,394,000 was capitalized during 1992, 1993 and 1994, respectively. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the term of the lease, as appropriate. The estimated useful life of buildings is 30-40 years and the general range of useful lives for leasehold improvements, furniture, fixtures and equipment is 10-15 years. Intangible Assets Cost in excess of net asset value of purchased facilities is amortized over 20 to 40 years using the straight-line method. Organization and start-up costs incurred prior to opening a new facility and partnership formation costs are deferred and amortized on a straight-line basis over a period of 36 months. Organization, partnership formation and start-up costs for a project that is subsequently abandoned are charged to operations in that period. Debt issue costs are amortized over the term of the debt. Noncompete agreements are amortized using the straight-line method over the term of the agreements. Minority Interests The equity of minority investors in limited partnerships of the Company is reported on the balance sheet as minority interests. Minority interests reported in the income statement reflect the respective shares of income or loss of the limited partnerships attributable to the minority investors, the effect of which is removed from the results of operations of the Company. Revenues Revenues include net patient service revenues and other operating revenues. Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Income Per Common and Common Equivalent Share Income per common and common equivalent share is computed based on the weighted average number of common shares and common equivalent shares outstanding during the periods, as adjusted for the two-for-one stock split declared subsequent to year end (see Note 17). Common equivalent shares include dilutive employees' stock options, less the number of treasury shares assumed to be purchased from the proceeds using the average market price of the Company's common stock. Fully diluted earnings per share (based on 89,409,000 shares in 1994) assumes conversion of the 5% Convertible Subordinated Debentures due 2001 (see Note 7). Impairment of Assets Long-lived assets, such as property, plant and equipment and identifiable intangible assets are reviewed for impairment losses when certain impairment indicators exist. If an impairment exists, the related asset is adjusted to the lower of book value or estimated future undiscounted cash flows from the use and eventual disposal of the asset. With respect to the carrying value of the excess of cost over net asset value of purchased facilities and other intangible assets, the Company determines on a quarterly basis whether an impairment event has occurred by considering factors such as: the market value of the asset; a significant adverse change in legal factors or in the business climate; adverse action by a regulator; a history of operating or cash flow F-9 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) losses or a projection of continuing losses associated with an operating entity. The carrying value of net asset value of purchased facilities and other intangible assets will be evaluated if the facts and circumstances suggest that it has been impaired. If this evaluation indicates that the value of the asset will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the asset will be reduced by the estimated shortfall of cash flows. 2. Mergers Effective December 29, 1994, the Company merged with ReLife, Inc. ("ReLife") and in connection therewith issued 11,025,290 shares of its Common Stock for all of ReLife's outstanding common stock. ReLife provides a system of rehabilitation services and operates 31 inpatient facilities with an aggregate of approximately 1,100 licensed beds, including nine free-standing rehabilitation hospitals, nine acute rehabilitation units, five sub-acute rehabilitation units, seven transitional living units and one residential facility and provides outpatient rehabilitation services at twelve outpatient centers. The merger was accounted for as a pooling of interests and, accordingly, the Company's financial statements have been restated to include the results of ReLife for all periods presented. Prior to the merger, ReLife reported on a fiscal year ending on September 30. The accompanying financial statements are based on a combination of the Company's results for its December 31 fiscal year and ReLife's results for its September 30 fiscal year for all periods presented. Costs and expenses of $2,949,000 incurred by HEALTHSOUTH in connection with the merger have been recorded in operations in 1994 and reported as merger expenses in the accompanying consolidated statements of income. Effective June 13, 1995, the Company merged with Surgical Health Corporation ("SHC") and in connection therewith issued 8,531,480 shares of its Common Stock for all of SHC's common and preferred stock. SHC operates a network of 41 freestanding surgery centers (including four mobile lithotripters) in eleven states, with an aggregate of 156 operating and procedure rooms. The merger of the Company and SHC was accounted for as a pooling of interests and, accordingly, the Company's financial statements have been restated to include the results of SHC for all periods presented. Costs and expenses of approximately $29,194,000 incurred by the Company in connection with the SHC merger have been recorded in operations during the quarter ended June 30, 1995. SHC merged with Ballas Outpatient Management, Inc. and Midwest Anesthesia, Inc. on February 11, 1993 in a transaction accounted for as a pooling of interests. SHC recorded merger costs of $333,000 in connection with this transaction in 1993. SHC merged with Heritage Surgical Corporation on January 18, 1994 in a transaction accounted for as a pooling of interests. SHC recorded merger costs of $3,571,000 in connection with this transaction in 1994. SHC's historical financial statements for the periods prior to the two mergers described above have been restated to include the results of the acquired companies for all periods presented. F-10 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) Combined and separate results of the Company, ReLife and SHC are as follows (in thousands):
HEALTHSOUTH ReLife SHC Combined ----------- ------ --- -------- Year ended December 31, 1992 Revenues................... $ 406,968 $ 57,320 $ 36,758 $ 501,046 Net income................. 29,738 4,856 335 34,929 Year ended December 31, 1993 Revenues................... 482,304 93,042 80,983 656,329 Net income................. 6,687 6,905 3,605 17,197 Year ended December 31, 1994 Revenues................... 1,008,567 118,874 108,749 1,236,190 Net income (loss).......... 54,047 (822) (3,264) 49,961
There were no transactions among the Company, ReLife and SHC prior to the respective mergers. The effects of conforming the accounting policies of the companies are not material. 3. Cash, Cash Equivalents and Other Marketable Securities Cash, cash equivalents and other marketable securities consisted of the following:
December 31 ---------------- 1993 1994 ---- ----- (In thousands) Cash........................................................... $ 52,616 $ 59,635 Municipal put bonds............................................ 9,800 2,100 Tax advantaged auction preferred stocks........................ 4,000 7,000 Municipal put bond mutual funds................................ 2,000 -- Money market funds............................................. 8,410 -- United States Treasury bills................................... 4,205 -- --------- --------- Total cash and cash equivalents................................ 81,031 68,735 United States Treasury notes................................... -- 1,004 Certificates of deposit........................................ 1,108 2,135 Municipal put bonds............................................ 1,860 3,975 Municipal put bond mutual funds................................ 5,000 8,514 Collateralized mortgage obligations............................ 1,000 1,000 --------- --------- Total other marketable securities.............................. 8,968 16,628 --------- --------- Total cash, cash equivalents and other marketable securities (approximates market value).................................... $ 89,999 $ 85,363 ========= =========
For purposes of the consolidated balance sheets and statements of cash flows, marketable securities purchased with an original maturity of ninety days or less are considered cash equivalents. F-11 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) 4. Other Assets Other assets consisted of the following:
December 31 -------------- 1993 1994 ----- ----- (In thousands) Notes and accounts receivable................... $ 3,280 $ 15,104 Investment in Caretenders Health Corp. ......... 7,382 7,370 Investments in other unconsolidated subsidiaries.................................... 4,460 6,007 Real estate investments......................... 3,023 10,022 Escrow funds.................................... 394 -- Other........................................... 5,444 3,331 --------- ------- $ 23,983 $ 41,834 ========= ========
The Company has a 24% ownership interest in Caretenders Health Corp. ("Caretenders"). Accordingly, the Company's investment is being accounted for using the equity method of accounting. The investment was initially valued at $7,250,000. The Company's equity in earnings of Caretenders for the years ended December 31, 1992, 1993 and 1994 was not material to the Company's results of operations. It was not practicable to estimate the fair value of the Company's various investments in other unconsolidated subsidiaries (involved in operations similar to those of the Company) because of the lack of a quoted market price and the inability to estimate fair value without incurring excessive costs. The carrying amount at December 31, 1994 represents the original cost of the investments, which management believes is not impaired. 5. Property, Plant and Equipment Property, plant and equipment consisted of the following:
December 31 -------------- 1993 1994 ----- ----- (In thousands) Land.......................................... $ 65,857 $ 55,511 Buildings..................................... 473,239 491,372 Leasehold improvements........................ 27,224 43,410 Furniture, fixtures and equipment............. 254,047 335,959 Construction in progress...................... 37,385 45,709 --------- ------- 857,752 971,961 Less accumulated depreciation and amortization.................................. 66,655 114,589 --------- ------- $ 791,097 $857,372 ========= ========
F-12 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) 6. Intangible Assets Intangible assets consisted of the following:
December 31 ------------------ 1993 1994 ------- -------- (In thousands) Organization, partnership formation and start-up costs............................................... $ 53,342 $ 93,499 Debt issue costs.................................... 1,653 18,848 Noncompete agreements............................... 24,862 35,253 Cost in excess of net asset value of purchased facilities.......................................... 243,303 323,608 --------- -------- 323,160 471,208 Less accumulated amortization....................... 33,822 60,520 --------- -------- $ 289,338 $410,688 ========= ========
7. Long-Term Debt Long-term debt consisted of the following:
December 31 -------------------- 1993 1994 -------- --------- (In thousands) Notes and bonds payable: ...................................... Advances under a $390,000,000 credit agreement with a bank .... $ 370,000 $ -- Advances under a $550,000,000 credit agreement with a bank .... -- 510,000 9.5% Senior Subordinated Notes due 2001........................ -- 250,000 5% Convertible Subordinated Debentures due 2001................ --- 115,000 11.5% Senior Subordinated Notes due 2004....................... -- 75,000 Due to National Medical Enterprises, Inc....................... 361,164 -- Notes payable to banks and various other notes payable, at interest rates from 5.5% to 9.0%............................... 99,988 34,680 Noncompete agreements payable with payments due at varying intervals through December 2004................................ 12,050 17,610 Hospital revenue bonds payable................................. 24,862 24,763 Other.......................................................... 20,117 7,341 --------- ---------- 888,181 1,034,394 Less amounts due within one year............................... 15,174 16,698 --------- ---------- $ 873,007 $1,017,696 ========= ==========
The fair value of total long-term debt approximates book value at December 31, 1994 and 1993. The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. During 1994, the Company entered into a Credit Agreement with NationsBank of North Carolina, N.A. and other participating banks (the 1994 Credit Agreement) which consists of a $550,000,000 revolving facility and term loan. The 1994 Credit Agreement replaced a previous $390,000,000 Credit Agreement with NationsBank. Interest is paid quarterly based on LIBOR rates plus a predetermined margin, a base rate, or competitively bid rates from the participating banks. The Company is required to pay a F-13 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) fee on the unused portion of the 1994 revolving credit facility ranging from 0.25% to 0.5%, depending on certain defined ratios. The principal amount is payable in 15 equal quarterly installments beginning on June 30, 1997. The Company has provided a negative pledge of all its assets and has granted a first priority security interest in and lien on all shares of stock of its subsidiaries and rights and interests in its partnerships. At December 31, 1994, the effective interest rate associated with the 1994 Credit Agreement was approximately 6.75%. The amount shown as Due to National Medical Enterprises, Inc. at December 31, 1993 was subsequently repaid from proceeds of other notes and bonds. On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5% Senior Subordinated Notes due 2001 (the Notes). Interest is payable on April 1 and October 1. The Notes are senior subordinated obligations of the Company and as such will be subordinated to all existing and future senior indebtedness of the Company, and also will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries and partnerships. The Notes rank senior to all subordinated indebtedness of the Company, including the 5% Convertible Subordinated Debentures due 2001 described below. The Notes mature on April 1, 2001. Also on March 24, 1994, the Company issued $100,000,000 principal amount of 5% Convertible Subordinated Debentures due 2001 (the Convertible Debentures). An additional $15,000,000 principal amount of Convertible Debentures was issued in April 1994 to cover underwriters' over allotments. Interest is payable on April 1 and October 1. The Convertible Debentures are convertible into Common Stock of the Company at the option of the holder at a conversion price of $18.8125 per share, subject to adjustment in the occurrence of certain events. The net proceeds from the issuance of the Notes and Convertible Debentures were used by the Company to pay down indebtedness outstanding under its other existing credit facilities. In June, 1994, Surgical Health Corporation (see Note 2) issued $75 million of 11.5% Senior Subordinated Notes due July 15, 2004 (the "SHC Notes"). The proceeds of the SHC Notes were used by SHC to pay down indebtedness outstanding under its other existing credit facilities. Subsequent to December 31, 1994, the Company purchased the entire $75,000,000 outstanding principal amount of the SHC Notes for 115% of their face value. Because the SHC Notes were purchased using proceeds from the Company's other long-term credit facilities, the entire balance of the SHC Notes is classified as non-current in the accompanying balance sheet. Principal maturities of long-term debt are as follows:
Year ending December 31 (In thousands) ------------------------ --------------- 1995................... $ 16,698 1996................... 14,262 1997................... 113,303 1998................... 143,816 1999................... 149,626 After 1999............. 596,689 ---------- $1,034,394 ==========
F-14 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) 8. Stock Options The Company has various stockholder-approved stock option plans which provide for the grant of options to Directors, officers and other key employees to purchase common stock at 100% of the fair market value as of the date of grant. The Board of Directors administers the stock option plans. Options may be granted as incentive stock options or as non-qualified stock options. Incentive stock options vest 25% annually, commencing upon completion of one year of employment subsequent to the date of grant. Non-qualified stock options generally are not subject to any vesting provisions. The options expire at dates ranging from five to ten years from the date of grant. The following table summarizes activity in the stock option plans:
1992 1993 1994 --------- ---------- ---------- Options outstanding January 1:.................... 6,737,142 11,357,490 14,807,500 Granted........................................... 6,207,272 3,944,252 944,246 Exercised......................................... 1,535,922 374,602 1,976,874 Cancelled......................................... 51,002 119,640 744,174 Options outstanding at December 31................ 11,357,490 14,807,500 13,030,698 Option price range for options granted during the period............................................ $1.50-$9.94 $6.75-$8.44 $ 13.94-$18.25 Option price range for options exercised during the period........................................ $1.50-$10.71 $1.50-$9.59 $ 1.50-$8.44 Options exercisable at December 31................ 8,311,634 10,665,880 10,882,308 Options available for grant at December 31 ....... 1,092,100 649,100 1,100,408
9. Limited Partnerships HEALTHSOUTH and its subsidiaries operate a number of rehabilitation and surgery centers as limited partnerships. HEALTHSOUTH serves as the general partner. These limited partnerships are included in the consolidated financial statements (as more fully described in Note 1 under "Minority Interests"). The limited partners share in the profit or loss of the partnerships based on their respective ownership percentage (ranging from 1% to 50% at December 31, 1994) during their ownership period. Beginning in 1992, due to federal and state regulatory requirements, the Company began the process of buying back selected partnership interests of its physician limited partners. The buyback prices for the interests were in general based on a predetermined multiple of projected cash flows of the partnerships. The excess of the buyback price over the book value of the limited partners' capital amounts was charged to the Company's retained earnings. F-15 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) 10. Acquisitions At various dates during 1994, the Company acquired 53 separate outpatient rehabilitation operations located throughout the United States. The combined purchase price of these acquired outpatient operations was approximately $53,947,000. The Company also acquired a specialty medical center in Dallas, Texas, a contract therapist provider and a diagnostic imaging company. The combined purchase price of these three operations was approximately $25,861,000. The form of consideration comprising the total purchase prices of $79,808,000 was approximately $68,359,000 in cash, $10,916,000 in notes payable and approximately 19,000 shares of Common Stock valued at $533,000. In connection with the acquisition of the contract therapist provider, there is additional contingent consideration payable of up to $9,000,000 if the acquired company achieves certain levels of future earnings. Such contingency payments will be paid to the former owners each fiscal year in which the acquired company's annual pretax income exceeds a certain threshold. The contingent payments will cease upon the earlier of the payment of the maximum amount of contingent payments allowed or ten years. The Company accrues, as an operating expense, for this contingency in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." As of December 31, 1994, the Company has accrued $99,000 in contingent consideration. In connection with these transactions, the Company entered into non-compete agreements with former owners totaling $10,814,000. In general these non-compete agreements are payable in monthly or quarterly installments over periods ranging from five to ten years. The fair value of the total net assets relating to the 1994 acquisitions described above was approximately $11,087,000. The total cost for 1994 acquisitions exceeded the fair value of the net assets acquired by approximately $68,721,000. The Company evaluated each acquisition, independently, to determine the appropriate amortization period for the cost in excess of net asset value of purchased facilities. Each evaluation included an analysis of historic and projected financial performance, evaluation of the estimated useful life of buildings and fixed assets acquired, the indefinite life of Certificates of Need and licenses acquired, the competition within local markets, lease terms where applicable, and the legal term of partnerships where applicable. Based on these evaluations, the Company determined that the cost in excess of net asset value of purchased facilities relating to the 1994 acquisitions should be amortized over periods ranging from twenty-five to forty years on a straight line basis. No other identifiable intangible assets were recorded in the acquisitions described above. All of the 1994 acquisitions described above were accounted for as purchases and, accordingly, the results of operations of the acquired businesses (not material individually or in the aggregate) are included in the accompanying consolidated financial statements from their respective dates of acquisition. Effective December 31, 1993, the Company completed an acquisition from National Medical Enterprises, Inc. (NME) of 28 inpatient rehabilitation facilities and 45 outpatient rehabilitation centers, which constituted substantially all of NME's rehabilitation services division (the NME Selected Hospitals Acquisition). The purchase price was approximately $296,661,000 cash, plus net working capital of $64,503,000, subject to certain adjustments, the assumption of approximately $16,313,000 of current liabilities and the assumption of approximately $17,111,000 in long-term debt. The Company's pro forma 1993 revenues, net income and net income per common and common equivalent share giving effect to the NME acquisiton were $1,111,598,000, $25,076,000 and $.32, respectively. As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH recognized an expense of approximately $49,742,000 during the year ended December 31, 1993. This expense represents management's estimate of the cost to consolidate operations of thirteen existing HEALTHSOUTH facilities (three inpatient facilities and ten outpatient facilities) into the operations of certain facilities acquired F-16 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) from NME. This plan was formulated by HEALTHSOUTH management in order to more efficiently provide services in markets where multiple locations now exist as a result of the acquisition. The plan of consolidation calls for the affected operations to be merged into the operations of the acquired facilities over a period of twelve to twenty-four months from the date of the NME Selected Hospitals Acquisition. Due to the single-use nature of these properties, the consolidation plan does not provide for the sale of these facilities. The total expense of $49,742,000 consists of several components. First, approximately $39,000,000 relates to the writedown of the assets of the affected HEALTHSOUTH facilities to their estimated net realizable value. Of this $39,000,000, approximately $31,500,000 relates to the assets of the three inpatient facilities and approximately $7,500,000 relates to the assets of the ten outpatient facilities. The $39,000,000 is broken down into the following asset categories (net of any related accumulated depreciation or amortization): Inpatient Outpatient Facilities Facilities Total ----------- ----------- ------- (In thousands) Land............. $ 2,898 $ -- $ 2,898 Buildings........ 16,168 -- 16,168 Equipment........ 4,326 2,920 7,246 Intangible assets........... 6,111 3,455 9,566 Other assets..... 1,997 1,125 3,122 ----------- ----------- ------- $ 31,500 $ 7,500 $39,000 =========== =========== ======= During the year ended December 31, 1994, management discontinued operations in two of the inpatient facilities and three of the outpatient facilities affected by the plan and merged them into the operations of the acquired facilities. Accordingly, assets with a net book value of approximately $17,911,000 were written off in 1994 against the reserves established at December 31, 1993. The two inpatient facilities and three outpatient facilities affected by the plan in 1994 had revenues of approximately $11,441,000, $8,640,000 and $9,125,000 for the years ended December 31, 1992, 1993 and 1994, respectively. These same facilities had net operating income (loss) before income taxes of $(489,000), $(844,000) and $67,000 for the years ended December 31, 1992, 1993 and 1994, respectively. Operations at the remaining inpatient facility and the remaining seven outpatient facilities identified in the plan will be discontinued during 1995. Second, $7,700,000 relates to the write-off of certain capitalized development projects. These projects relate to planned facilities that, if completed, would be in direct competition with certain of the acquired NME facilities. These development projects were written off in 1994 against the reserves established at December 31, 1993. Finally, approximately $3,000,000 was accrued for costs of employee separations, relocations and other direct costs related to the planned consolidation of the affected operations. During the second quarter of 1994, management revised its estimate of the cost of the employee separations and relocations. The revised estimate calls for approximately 150 employees to be affected by separations and approximately 400 to be affected by relocations. Separation benefits under the revised plan range from one month's to one year's compensation and total approximately $2,188,000. Relocation benefits are estimated to be $2,000 per employee and total $800,000. An additional $350,000 has been provided for additional direct administrative costs associated with the implementation of the plan, including outplacement services, travel and legal fees. Accordingly, the total revised estimated cost of employee separations and relocations is $3,338,000. The difference between the initial estimate and the revised estimate was treated as a change in accounting estimate and charged to operations in the second quarter of 1994. F-17 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) During the year ended 1994, a total of 208 employees were affected by terminations and relocations at a cost of approximately $758,000. This cost is the only cash expense included in the acquisition-related expense. It is management's opinion that remaining accrual at December 31, 1994 of $23,669,000, is adequate to complete the plan of consolidation of the affected operations. Also at various dates during 1993, the Company acquired 27 separate outpatient rehabilitation operations located throughout the United States. The total consideration paid for these acquired outpatient rehabilitation operations was approximately $23,943,000, consisting of $21,634,000 in cash and $2,309,000 in notes payable. The fair value of the net assets acquired was approximately $5,196,000. The total cost of the 1993 outpatient rehabilitation acquisitions exceeded the fair value of the net assets acquired by approximately $18,747,000. The Company also acquired nine outpatient surgery center operations during 1993. The total consideration paid for these acquired outpatient surgery center operations was approximately $33,494,000, consisting of $26,901,000 in cash, $5,639,000 in notes payable and common stock value at $954,000. The total cost of the 1993 outpatient surgery acquisitions exceeded the fair value of the net assets acquired by approximately $3,832,000. Based on the evaluation of each acquisition, utilizing the criteria described above, the Company determined that the cost in excess of net asset value of purchased facilities relating to the 1993 acquisitions should be amortized over a forty-year period on a straight line basis. No other identifiable intangible assets were recorded in the acquisitions described above. Also during 1993, the Company acquired 100% of the stock of Rebound, Inc. (Rebound) for net consideration of approximately $14,000,000 in cash. Rebound operates 293 beds in thirteen facilities. The purchase price exceeded the fair value of the net assets acquired by approximately $11,200,000, which was allocated to excess of cost over net asset value of purchased facilities. Effective February 1, 1992, the Company acquired substantially all of the assets and/or stock of Dr. John T. Macdonald Health Systems, Inc. and Subsidiaries (collectively, JTM Health Systems). JTM Health Systems includes two general acute-care hospitals and other healthcare-related entities located in the Miami, Florida metropolitan area. The total purchase price paid was approximately $16,893,000 in cash. Also in 1992 the Company acquired 100% of the stock of Renaissance America, Inc. (Renaissance) for net consideration of approximately $5,996,000 consisting of $649,000 cash and $5,347,000 in the Company's Common Stock (214,885 shares). Also at various dates during 1992, the Company acquired 28 separate outpatient rehabilitation operations located throughout the United States. The combined purchase price of these acquired outpatient rehabilitation operations was approximately $25,964,000. The Company also acquired 14 outpatient surgery centers during 1992. The combined purchase price of these acquired surgery center operations was approximately $50,014,000. The fair value of the net assets acquired in 1992 was approximately $38,330,000. The total cost of the 1992 acquisitions exceeded the fair value of the assets acquired by approximately $60,537,000, which is being amortized over a forty-year period on a straight line basis. All of the 1993 and 1992 acquisitions described above were accounted for as purchases and, accordingly, the results of operations of the acquired businesses are included in the accompanying consolidated financial statements from their respective dates of acquisition. 11. Income Taxes HEALTHSOUTH and its subsidiaries file a consolidated federal income tax return. The limited partnerships file separate income tax returns. HEALTHSOUTH's allocable portion of each partnership's income or loss is included in the taxable income of the Company. The remaining income or loss of each partnership is allocated to the limited partners. F-18 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) Effective January 1, 1993, the Company changed its method of accounting for income taxes to the liability method required by Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes". The cumulative effect of adopting Statement No. 109 was not material. Previously, the Company had used the liability method as prescribed by FASB Statement No. 96. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1993 are as follows:
Current Noncurrent Total ------- ---------- ------- (In thousands) Deferred tax liabilities: Depreciation and amortization.................... $ -- $ 32,787 $32,787 ------- ---------- ------- Other............................................ 340 255 595 ------- ---------- ------- Total deferred tax liabilities................... 340 33,042 33,382 Deferred tax assets: ............................ NME Selected Hospitals Acquisition related expense.......................................... -- 19,399 19,399 Other............................................ 3,549 2,790 6,339 ------- ---------- ------- Total deferred tax assets........................ 3,549 22,189 25,738 ------- ---------- ------- Net deferred tax (assets) liabilities............ $ (3,209) $ 10,853 $ 7,644 ======= ========== =======
Significant components of the Company's deferred tax liabilities and assets as of December 31, 1994 are as follows:
Current Noncurrent Total ------- ---------- ------- (In thousands) Deferred tax liabilities: Depreciation and amortization.................... $ -- $ 26,343 $26,343 Other............................................ -- 385 385 ------- ---------- ------- Total deferred tax liabilities................... -- 26,728 26,728 Deferred tax assets: NME Selected Hospitals Acquisition related expense.......................................... -- 15,241 15,241 Other............................................ 2,643 2,892 5,535 ------- ---------- ------- Total deferred tax assets........................ 2,643 18,133 20,776 ------- ---------- ------- Net deferred tax (assets) liabilities............ $ (2,643) $ 8,595 $ 5,952 ======= ========== =======
The current portion of the Company's deferred tax assets is included with prepaid expenses and other current assets on the accompanying balance sheet. F-19 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) The provision for income taxes was as follows:
Year ended December 31 1992 1993 1994 ------ ------- ------- (In thousands) Currently payable: Federal................... $12,556 $15,616 $31,363 State..................... 1,772 2,101 4,634 ------ ------- ------- 14,328 17,717 35,997 Deferred expense (benefit): Federal................... 4,041 (5,213) (1,414) State..................... 495 (574) (278) ------ ------- ------- 4,536 (5,787) (1,692) ------ ------- ------- Total provision........... $18,864 $11,930 $34,305 ====== ======= =======
The components of the provision for deferred income taxes for the year ended December 31, 1992 are as follows: (In thousands) ------------ Depreciation and amortization................. $ 5,599 Bad debts.................... (1,119) Other........................ 56 ---------- $ 4,536 ========== The difference between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before taxes was as follows: Year ended December 31 --------------------------- 1992 1993 1994 ------ ------- ------- (In thousands) Federal taxes at statutory rates............. $19,733 $12,100 $31,734 Add (deduct): ............................... State income taxes, net of federal tax benefit...................................... 1,665 792 2,734 Tax-exempt interest income................... (1,076) (454) (276) ------ ------- ------- Other........................................ (1,458) (508) 113 ------ ------- ------- $18,864 $11,930 $34,305 ====== ======= ======= 12. Commitments and Contingencies At December 31, 1994, anticipated capital expenditures for the next twelve months approximate $130,000,000. This amount includes expenditures for the construction and equipping of additions to existing facilities, the construction of two inpatient rehabilitation facilities for which regulatory approval is being obtained and the acquisition or development of comprehensive outpatient rehabilitation facilities. Beginning December 1, 1993, the Company became self-insured for professional liability and comprehensive general liability. The Company purchased coverage for all claims incurred prior to December 1, 1993. In addition, the Company purchased underlying insurance which would cover all claims once established limits have been exceeded. It is the opinion of management that at December 31, 1994 the Company has adequate reserves to cover losses on asserted and unasserted claims. F-20 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) Operating leases Operating leases generally consist of short-term lease agreements for buildings where facilities are located. These leases generally have 5-year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Total rental expense for all operating leases was $17,777,000, $29,373,000 and $66,056,000 for the years ended December 31, 1992, 1993 and 1994, respectively. The following is a schedule of future minimum lease payments under all operating leases having initial or remaining non-cancelable lease terms in excess of one year: Year ending December 31 (In thousands) ------------------------ --------------- 1995........................... $ 57,659 1996........................... 53,836 1997........................... 49,752 1998........................... 45,663 1999........................... 40,438 After 1999..................... 129,327 ---------- Total minimum payments required....................... $ 376,675 ========== 13. Employee Benefit Plans The Company has a 401(k) savings plan which matches 15% of the first 4% of earnings that an employee contributes. All contributions are in the form of cash. All employees who have completed one year of service with a minimum of 1,000 hours worked are eligible to participate in the plan. Company contributions are gradually vested over a seven-year service period. Contributions to the plan by the Company were approximately $521,000, $490,000 and $1,094,000 in 1992, 1993 and 1994, respectively. In 1991, the Company established an Employee Stock Ownership Plan (ESOP) for the purpose of providing substantially all employees of the Company the opportunity to save for their retirement and acquire a proprietary interest in the Company. The ESOP currently owns approximately 830,000 shares of the Company's Common Stock, which were purchased with funds borrowed from the Company, $10,000,000 in 1991 (the 1991 ESOP Loan) and $10,000,000 in 1992 (the 1992 ESOP Loan). At December 31, 1994, the combined ESOP Loans had a balance of $17,477,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is payable in annual installments covering interest and principal over a ten-year period beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of 8.5%, is payable in annual installments covering interest and principal over a ten-year period beginning in 1993. Company contributions to the ESOP began in 1992 and shall at least equal the amount required to make all ESOP Loan amortization payments for each plan year. The Company recognizes compensation expense based on the shares allocated method. The total compensation expense related to the ESOP recognized by the Company was $1,701,000, $3,198,000 and $3,673,000 in 1992, 1993 and 1994, respectively. Interest incurred on the ESOP Loans was approximately $964,000, $1,743,000 and $1,608,000 in 1992, 1993 and 1994, respectively. Approximately 213,000 shares owned by the ESOP have been allocated to participants at December 31, 1994. During 1993 the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 93-6, "Employers Accounting for Employee Stock Ownership Plans." Among other provisions, SOP 93-6 requires that compensation expense relating to employee stock ownership plans be measured based on the fair market value of the shares when allocated to the employees. The provisions of SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares newly acquired F-21 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) by an existing leveraged ESOP after December 31, 1992. Because all shares owned by the Company's ESOP were acquired prior to December 31, 1992, the Company's accounting policies for the shares currently owned by the ESOP are not affected by SOP 93-6. 14. Terminated Merger On January 2, 1992, the Company and Continental Medical Systems, Inc. ("CMS") jointly announced an agreement to combine their business operations as provided in an Agreement and Plan of Reorganization (the Plan). On May 6, 1992, the Company and CMS jointly announced the termination of the Plan. Accordingly, all costs and expenses incurred in connection with the Plan were charged to operations in 1992 and reported as terminated merger expense in the accompanying statements of income. 15. Sale of Assets and Partnership Interest During the second quarter of 1994, the Company consummated the sale of selected properties to Capstone Capital Corporation ("Capstone"), a real estate investment trust. These properties include six ancillary hospital facilities, three outpatient rehabilitation facilities, and one research facility. The net proceeds to the Company as a result of this transaction were approximately $49,025,000. The net book value of the properties was approximately $41,335,000. Because the Company is leasing back substantially all of the properties from Capstone, payments which aggregate $5.7 million annually, the resulting gain on sale of approximately $7,690,000 has been recorded on the accompanying consolidated balance sheet as deferred revenue and will be amortized into income over the initial lease terms of the properties. The Company is accounting for each of the new leases as an operating lease with an initial lease term of 15 years. The Company and certain Company officers own approximately 3.9% of the outstanding common stock of Capstone. In May 1993, the Company sold its 51% partnership interest in Coastal Lithotripsy Associates, L.P. and the Associated Management Services contract for net proceeds of approximately $3,163,000. The Company recognized a gain of $1,400,000 from this sale. 16. Impairment of Long-Term Assets During 1994, certain events have occurred impairing the value of specific long-term assets of ReLife (see Note 2). A hospital in Missouri with a distinct part unit which ReLife was managing was purchased in 1994 by an acute care provider which terminated the contract with ReLife. Remaining goodwill of $1,700,000 and costs allocated to the management contract of $1,300,000 were written off as there is no value remaining for the terminated contract. A ReLife facility in central Florida incurred tornado damage and has not been operating since September 1993. During 1994, management of ReLife has determined that it is probable that this facility will not reopen. Start-up costs of $1,600,000 were written off. This facility is leased under an operating lease as described in Note 12 through the year 2001. An impairment accrual has been established based on the projected undiscounted net cash flows related to this non-operating facility for the remainder of the lease term. The accrual totals $5,900,000 and consists of $4,700,000 in lease payments and $1,200,000 in fixed costs and operating expenses, including property taxes, maintenance, security and other related costs. The current portion of the accrual approximates $600,000 and is included with accrued interest payable and other liabilities in the accompanying December 31, 1994 balance sheet. The remaining long-term portion of the accrual is included with other long-term liabilities in the accompanying December 31, 1994 balance sheet. F-22 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements December 31, 1994--(Continued) During 1994, ReLife entered into a contract for a new information system. During the period ended September 30, 1994, ReLife's expenditures related to this contract totalled approximately $4,363,000. The system was not operational during this period, thus those expenditures are considered non-recurring. The Company will retain certain equipment with an approximate cost of $750,000, which was included in the expenditures noted above. The remainder of the expenditures, $3,613,000, is included in loss on abandonment of the computer project. The Company has also established a reserve of approximately $887,000 for settlement of the contract. The contract contains a provision for cancellation by ReLife, without cause, upon at least 180 days' prior written notice. The application of this termination provision could result in a settlement of up to $6,500,000. The Company is currently in negotiations to settle the contract and believes that it is probable that the settlement will be for an amount approximately equal to the reserve established. The above amounts are shown as operating expenses in the consolidated statement of income. 17. Subsequent Events Effective June 13, 1995, the Company merged with Surgical Health Corporation in a transaction accounted for as a pooling of interests (see Note 2). Effective April 1, 1995, the Company completed the acquisition of the rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of 11 rehabilitation hospitals, 12 other facilities and certificates of need to build two other facilities. The total purchase price for the NovaCare facilities was approximately $235,000,000. Effective April 17, 1995, the Company declared a two-for-one stock split paid in the form of a 100% stock dividend. Accordingly, all share and per share information have been restated to give effect to this transaction for all periods presented. Subsequent to December 31, 1994, the Company received a fully underwritten commitment to amend and restate the 1994 Credit Agreement (see Note 7) which will increase the size of the facility to $1 billion. F-23 HEALTHSOUTH Corporation and Subsidiaries Consolidated Balance Sheet (Unaudited) June 30, 1995 ---------- (In thousands) Assets Current Assets: Cash and cash equivalents ................................... $ 62,336 Other marketable securities ................................. 13,579 Accounts receivable ......................................... 281,283 Inventories, prepaid expenses, and other current assets .... 110,538 ---------- Total current assets ........................................ 467,736 Other assets................................................. 60,953 Property, plant and equipment--net .......................... 1,042,444 Intangible assets--net ...................................... 491,916 ---------- Total assets ................................................ $2,063,049 ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable ............................................ $ 93,094 Salaries and wages payable .................................. 44,496 Accrued interest payable and other liabilities .............. 28,250 Current portion of long-term debt ........................... 16,750 ----------- Total current liabilities ................................... 182,590 Long-term debt .............................................. 1,340,549 Deferred income taxes ....................................... 6,518 Other long-term liabilities ................................. 4,071 Deferred revenue............................................. 7,266 Minority interests--limited partnerships..................... 3,923 Stockholders' equity: ....................................... Preferred Stock, $.10 par value--1,500,000 shares authorized; issued and outstanding--none .................... -- Common Stock, $.01 par value--150,000,000 shares authorized; 80,128,000 shares issued .................................... 801 Additional paid-in capital .................................. 381,743 Retained earnings ........................................... 151,797 Treasury stock .............................................. (323) Receivable from Employee Stock Ownership Plan ............... (15,886) ---------- Total stockholders' equity .................................. 518,132 ---------- Total liabilities and stockholders' equity .................. $2,063,049 ========== See accompanying notes. F-24 HEALTHSOUTH Corporation and Subsidiaries Consolidated Statements of Income (Unaudited)
Six Months Ended June 30, ------------------- 1994 1995 ---- ---- (In thousands, except for per share data) Revenues .............................................. $584,183 $716,949 Operating expenses: ................................... Operating units ....................................... 437,645 513,038 Corporate general and administrative .................. 19,191 19,645 Provision for doubtful accounts ....................... 10,287 14,119 Depreciation and amortization ......................... 36,962 55,663 Interest expense ...................................... 26,980 44,292 Interest income ....................................... (1,598) (2,770) Merger expenses........................................ 3,397 29,194 Loss on impairment of assets .......................... 0 11,192 ------- ------- 532,862 684,373 Income before income taxes and minority interests .... 51,321 32,576 Provision for income taxes ............................ 19,104 10,895 ------- ------- 32,217 21,681 Minority interests .................................... 2,991 3,904 ------- ------- Net income ............................................ $ 29,226 $ 17,777 ======= ======= Weighted average common and common equivalent shares outstanding ........................................... 83,974 87,246 ======= ======= Net income per common and common equivalent share .... $ 0.35 $ 0.20 ======= =======
See accompanying notes. F-25 HEALTHSOUTH Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, ------------------------- 1994 1995 ---- ---- (In thousands) Operating Activities Net income ..................................................................... $ 29,226 $ 17,777 Adjustments to reconcile net income to net cash provided by operating activities: .................................................................... Depreciation and amortization .................................................. 36,962 55,663 Provision for doubtful accounts ................................................ 10,287 14,119 Income applicable to minority interests of limited partnerships ............... 2,991 3,904 Loss on impairment of assets ................................................... -- 11,192 Merger costs ................................................................... 3,397 29,194 Provision for deferred income taxes ............................................ 13,588 9,354 Provision for deferred revenue ................................................. -- (260) Changes in operating assets and liabilities, net of effects of acquisitions: .. Accounts receivable ............................................................ (40,149) (6,935) Inventories, prepaid expenses and other current assets ......................... (6,393) (3,316) Accounts payable and accrued expenses .......................................... 10,652 (42,916) --------- -------- Net cash provided by operating activities ...................................... 60,561 87,776 Investing Activities Purchases of property, plant and equipment ..................................... (68,320) (70,235) Proceeds from sale of property, plant and equipment ............................ 50,867 14,786 Additions to intangible assets, net of effects of acquisitions ................. (19,778) (26,464) Assets obtained through acquisitions, net of liabilities assumed .............. (34,645) (284,090) Changes in other assets ........................................................ (15,561) (6,895) Proceeds received on sale of other marketable securities ....................... 2,085 11,596 Investments in other marketable securities ..................................... (3,004) (10,926) --------- -------- Net cash used in investing activities........................................... (88,356) (372,228) Financing Activities Proceeds from borrowings ....................................................... 488,536 650,744 Principal payments on long-term debt and leases ................................ (420,206) (373,351) Proceeds from exercise of options............................................... 8,797 5,448 Reduction in receivable from Employee Stock Ownership Plan ..................... 1,455 1,590 Proceeds from investment by minority interests ................................. 1,319 -- Purchase of limited partnership interests ...................................... (266) -- Payment of cash distributions to limited partners .............................. (4,676) (10,873) --------- -------- Net cash provided from financing activities .................................... 74,959 273,558 --------- -------- (Decrease) increase in cash and cash equivalents ............................... 47,164 (10,894) Cash and cash equivalents at beginning of period ............................... 81,031 73,230 --------- -------- Cash and cash equivalents at end of period ..................................... $ 128,195 $ 62,336 ========= ======== Supplemental Disclosures of Cash Flow Information .............................. Cash paid during the year for: ................................................. Interest ....................................................................... $ 19,165 $ 42,298 Income taxes ................................................................... 13,127 32,176
Non-cash financing activities: During 1995, the Company declared a two-for-one stock split on its Common Stock, which was effected in the form of a 100% stock dividend. See accompanying notes. F-26 HEALTHSOUTH Corporation and Subsidiaries Notes to Consolidated Financial Statements Six Months Ended June 30, 1995 and 1994 (Unaudited) NOTE 1 -- The accompanying consolidated financial statements include the accounts of HEALTHSOUTH Corporation (the "Company") and its subsidiaries. This information should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as amended. It is management's opinion that the accompanying consolidated financial statements reflect all adjustments (which are normal recurring adjustments, except as otherwise indicated) necessary for a fair presentation of the results for the interim period and the comparable period presented. NOTE 2 -- During 1994, the Company entered into a $550,000,000 revolving line of credit with NationsBank of North Carolina, N.A. ("NationsBank") and other participating banks (the "1994 Credit Agreement"). On April 11, 1995, the Company amended and restated the 1994 Credit Agreement with NationsBank to increase the size of the credit facility to $1,000,000,000. At June 30, 1995, the Company had drawn $895,000,000 under the restated 1994 Credit Agreement. On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5% Senior Subordinated Notes due 2001 (the "Notes"). Interest is payable on April 1 and October 1. The Notes are senior subordinated obligations of the Company and, as such, are subordinated to all existing and future senior indebtedness of the Company. Also on March 24, 1994, the Company issued $100,000,000 principal amount of 5% Convertible Subordinated Debentures due 2001 (the "Convertible Debentures"). An additional $15,000,000 principal amount of Convertible Debentures was issued in April 1994 to cover underwriters' overallotments. Interest is payable on April 1 and October 1. The Convertible Debentures are convertible into Common Stock of the Company at the option of the holder at a conversion price of $18.81 per share, subject to adjustment in certain events. The net proceeds from the issuance of the Notes and Convertible Debentures were used by the Company to pay down indebtedness outstanding under its other existing credit facilities. At June 30, 1995, long-term debt consisted of the following:
June 30, 1995 --------------- (In thousands) Advances under the $1,000,000,000 1994 Credit Agreement.......................................... $ 895,000 9.5% Senior Subordinated Notes due 2001............ 250,000 5% Convertible Subordinated Debentures due 2001 ... 115,000 Other long-term debt............................... 97,299 ----------- 1,357,299 Less amounts due within one year................... 16,750 ----------- $1,340,549 ===========
NOTE 3 -- Effective December 29, 1994, the Company merged with ReLife, Inc. ("ReLife") in a transaction that was accounted for as a pooling of interests. Accordingly, the Company's historical financial statements for all periods prior to the effective date of the merger have been restated to include the results of ReLife. Prior to the merger, ReLife reported on a fiscal year ending on September 30. The restated financial statements for all periods prior to and including December 31, 1994 are based on a combination of the Company's results for its December 31 fiscal year and ReLife's results for its September 30 fiscal year. Beginning F-27 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements Six Months Ended June 30, 1995 and 1994--(Continued) (Unaudited) January 1, 1995, all facilities acquired in the ReLife merger adopted a December 31 fiscal year end; accordingly, all consolidated financial statements for periods after Decem ber 31, 1994 are based on a consolidation of all of the Company's subsidiaries on a December 31 year end. ReLife's historical results of operations for the three months ended December 31, 1994 are not included in the Company's consolidated statements of income or cash flows. An adjustment has been made to stockholders' equity as of January 1, 1995 to adjust for the effect of excluding ReLife's results of operations for the three months ended December 31, 1994. The following is a summary of ReLife's results of operations and cash flows for the three months ended December 31, 1994 (in thousands):
Statement of Income Data: Revenues......................................... $ 38,174 Operating expense: .............................. Operating Units.................................. 31,797 Corporate general and administrative............. 2,395 Provision for doubtful accounts.................. 541 Depreciation and amortization.................... 1,385 Interest expense................................. 858 Interest income.................................. (91) HEALTHSOUTH merger expense....................... 3,050 Loss on disposal of fixed assets................. 1,000 Loss on abandonment of computer project ......... 973 -------- 41,908 -------- Income before income taxes and minority interests........................................ (3,734) Provision for income taxes....................... -- -------- Net income....................................... $ (3,734) ======== Statement of Cash Flow Data: Net cash provided by operating activities ....... $ 38,077 Net cash used by investing activities............ (9,632) Net cash used in financing activities............ (23,950) -------- Net increase in cash ............................ $ 4,495 ========
NOTE 4 -- Effective June 13, 1995, the Company merged with Surgical Health Corporation ("SHC") and in connection therewith issued 8,531,480 shares of its Common Stock for all of SHC's outstanding common and preferred stock. SHC operates a network of 41 freestanding surgery centers (including four mobile lithotripters) in eleven states, with an aggregate of 156 operating and procedure rooms. The merger was accounted for as a pooling of interests and, accordingly, the Company's financial statements have been restated to include the results of SHC for all periods presented. Costs and expenses of $29,194,000 incurred by the Company in connection with the merger have been recorded in operations during the quarter ending June 30, 1995 and reported as Merger Costs in the accompanying consolidated statements of income (see Note 8). There were no material transactions between the Company and SHC prior to the merger. The effects of conforming the accounting policies of the two companies are not material. F-28 HEALTHSOUTH Corporation and Subsidiaries - Notes to Consolidated Financial Statements Six Months Ended June 30, 1995 and 1994--(Continued) (Unaudited) NOTE 5 -- Effective April 1, 1995, the Company completed the acquisition of the rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of 11 rehabilitation hospitals, 12 other facilities, and certificates of need to build two other facilities. The total purchase price for the NovaCare facilities was approximately $235,000,000. The cost in excess of net asset value was approximately $173,000,000. Of this excess, approximately $129,000,000 has been allocated to leasehold value and the remaining $44,000,000 to goodwill. During the first six months of 1995, the Company acquired or opened 28 outpatient rehabilitation facilities and one outpatient surgery center. The total purchase price of the acquired facilities was approximately $54,385,000. The Company also entered into non-compete agreements totaling approximately $5,020,000 in connection with these transactions. The cost in excess of the acquired facilities' net asset value was approximately $39,463,000. The results of operations (not material individually or in the aggregate) of these acquisitions are included in the consolidated financial statements from their respective acquisition dates. NOTE 6 - During the first six months of 1995, the Company granted incentive and nonqualified stock options to certain Directors, employees and others for 2,947,500 shares of Common Stock at an exercise price of $16.75 per share. NOTE 7 -- Effective April 17, 1995, the Company declared a two-for-one stock split paid in the form of a 100% stock dividend. Accordingly, all share and per share information have been restated to give effect to this transaction for all periods presented. NOTE 8 -- As a result of the NovaCare acquisition and SHC merger, the Company recognized $29,194,000 in merger costs during 1995. Fees related to legal, accounting and financial advisory services accounted for $3,400,000 of the expense. Costs and expenses related to the SHC Bond Tender Offer (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources") totaled $14,606,000. Accruals for employee separations were approximately $1,188,000. In addition, the Company has provided approximately $10,000,000 for the write-down of certain assets to net realizable value as the result of a planned facility consolidation. The consolidation is applicable in a market where the Company's existing services overlap with those of an acquired facility. Also during the quarter ended June 30, 1995, the Company recognized an $11,192,000 loss on impairment of assets. The impaired assets relate to six SHC facilities in which the projected undiscounted cash flows did not support the book value of the long-lived assets of such facilities. F-29 Pro Forma Condensed Financial Information The following pro forma condensed financial information reflects the impact of the NovaCare Rehabilitation Hospitals Acquisition on HEALTHSOUTH'S results of operations for the six-month period ended June 30, 1995. The HEALTHSOUTH historical amounts reflect the ReLife Acquisition and the SHC Acquisition as HEALTHSOUTH acquired ReLife and SHC in December 1994 and June 1995, respectively, in transactions which were each accounted for as a pooling of interests. The HEALTHSOUTH historical amounts also reflect the results of operations of the NovaCare Rehabilitation Hospitals from April 1, 1995 through the end of the period. Prior to the NovaCare Rehabilitation Hospitals Acquisition, which was effective as of April 1, 1995, these facilities were operated by Rehab Systems Company ("RSC") a wholly-owned subsidiary of NovaCare, Inc. The NovaCare historical amounts reflect its financial results from January 1, 1995 through March 31, 1995. The pro forma information should be read in conjunction with the historical financial statements of HEALTHSOUTH and RSC and the related notes thereto. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have resulted had the acquisition described above been consummated at the date indicated, nor is it necessarily indicative of the results of operations of future periods. F-30 HEALTHSOUTH Corporation and Subsidiaries Pro Forma Condensed Combined Income Statement (Unaudited) Six Months Ended June 30, 1995
Pro Forma Pro Forma HEALTHSOUTH NovaCare Adjustments Combined ------------ ------------ -------------- --------- (In thousands, except per share amounts) Revenues............................................ $ 716,949 $ 37,942 $ 1,860 (5) $ 756,751 Operating expenses: ................................ Operating units..................................... 513,038 33,065 (910)(2) 545,193 Corporate general and administrative................ 19,645 - - 19,645 Provision for doubtful accounts..................... 14,119 322 - 14,441 Depreciation and amortization....................... 55,663 1,996 (999)(1) 58,542 1,882 (3) Interest expense.................................... 44,292 2,595 2,684 (4) 49,571 Interest income..................................... (2,770) - - (2,770) Merger costs........................................ 29,194 29,194 Loss on impairment of assets........................ 11,192 11,192 ----------- ----------- ---------- --------- 684,373 37,978 2,657 725,008 Income before income taxes and minority interests .. 32,576 (36) (797) 31,743 Provision for income taxes.......................... 10,895 (101) (259) 10,535 ----------- ----------- ---------- --------- 21,681 65 (538) 21,208 Minority interests.................................. 3,904 89 - 3,993 ----------- ----------- ---------- --------- Net income.......................................... $ 17,777 $ (24) $ (538) $ 17,215 =========== =========== ========== ========= Weighted average common and common equivalent shares outstanding.................................. 87,246 N/A N/A 87,246 =========== =========== ========== ========= Net income per common and common equivalent share .. $ 0.20 $ N/A $ N/A $ 0.20 =========== =========== ========== =========
See accompanying notes. F-31 HEALTHSOUTH Corporation and Subsidiaries Notes to Pro Forma Condensed Financial Information A. The NovaCare Rehabilitation Hospitals Acquisition Effective April 1, 1995 HEALTHSOUTH completed the acquisition of the rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of 11 rehabilitation hospitals, 12 other facilities, and certificates of need to build two additional facilities (the "NovaCare Rehabilitation Hospitals Acquisition"). The purchase price was approximately $234,807,000. The transaction was accounted for as a purchase. HEALTHSOUTH financed the cost of the NovaCare Rehabilitation Hospitals Acquisition through additional borrowings under its existing credit facilities, as amended. The accompanying pro forma income statement for the six months ended June 30, 1995 assume that the transaction was consummated at the beginning of the period presented. Certain assets and liabilities of Rehab Systems Company (a wholly owned subsidiary of NovaCare, Inc.) were excluded from the NovaCare Rehabilitation Hospitals Acquisition and are not included in the accompanying March 31, 1995 NovaCare balance sheet. The excluded assets and liabilities are as follows (in thousands):
Cash and cash equivalents........................... $ 4,973 Accounts receivable................................. 259 Other current assets................................ 42 Equipment, net...................................... 4,719 Intangible assets, net.............................. 56,321 Other assets (primarily investments in subsidiaries)....................................... 40,637 Accounts payable.................................... (454) Other current liabilities........................... (275) Current portion of long term debt................... (146) Long term debt...................................... (38,620) Payable to affiliates............................... (92,377) -------- Net excluded (liability)............................ (24,921) ========
The following pro forma adjustments are necessary for the NovaCare Rehabilitation Hospitals Acquisition: 1. To exclude historical depreciation and amortization expense related to the excluded assets described above. The total expense excluded amounts to $999,000 for the three months ended March 31, 1995. 2. To eliminate intercompany management fees and royalty fees of $910,000 of the acquired NovaCare facilities. 3. To adjust depreciation and amortization expense to reflect the allocation of the excess purchase price over the net tangible asset value as follows (in thousands):
Purchase Price Allocation Useful Amount of Adjustment Life Amortization ---------------- ---------- --------------- Leasehold value.......... $ 128,333 20 years $ 1,605 Goodwill................. 44,365 40 years 277 ----- $ 1,882 =====
No additional adjustments to NovaCare's historical depreciation and amortization are necessary. The remaining net assets acquired approximate their fair value. F-32 HEALTHSOUTH Corporation and Subsidiaries Notes to Pro Forma Condensed Financial Information (Continued) Because NovaCare's results of operations before intercompany items (described in Note 2 above) are profitable, both on a historical and pro forma basis, the 40-year amortization period for goodwill is appropriate and consistent with HEALTHSOUTH policy. Leasehold value is being amortized over the weighted average remaining terms of the leases, which is 20 years. 4. To increase interest expense by $4,889,000 to reflect pro forma borrowings of $234,807,000, described above, at a 8.33% variable interest rate, which represents HEALTHSOUTH's weighted average cost of debt, as if they were outstanding for the entire year, and to decrease interest expense by $2,205,000, which represents interest on NovaCare debt not assumed by HEALTHSOUTH. A .125% variance in the assumed interest rate would change annual pro forma interest expense by approximately $73,000. The net increase to pro forma interest expense for the six-month period ended June 30, 1995 is $2,684,000. 5. To adjust estimated Medicare reimbursement for the changes in reimbursable expenses described in items 1, 2, 3 and 4 above. These changes are as follows (in thousands);
Six months ended June 30, 1995 ------------------ Depreciation and amortization (Note 1)............................ $ (999) Intercompany management fees (Note 2)............................. (910) Depreciation and amortization (Note 3)............................ 1,882 Interest expense (Note 4)......................................... 2,684 ------ 2,657 Assumed Medicare utilization...................................... 70% ------ Increased reimbursement........................................... $1,860 ======
The Medicare utilization rate of 70% assumes a change from NovaCare's historical Medicare percentage of 78% as a result of bringing these facilities into the HEALTHSOUTH network. F-33 ============================================================================= No dealer, salesperson or other person has been authorized to give any information or to make any representations other than as contained herein, and if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to purchase any securities other than those to which it relates or an offer to, or solicitation of, any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company or that information provided herein is correct at any time subsequent to its date. TABLE OF CONTENTS Page ----- Available Information ................. 2 Prospectus Summary .................... 3 The Company ........................... 5 Recent Developments ................... 5 Risk Factors........................... Use of Proceeds ....................... 5 Capitalization ........................ 6 Selected Consolidated Financial Data . 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 8 Business .............................. 15 Management ............................ 30 Description of Capital Stock .......... 33 Underwriting .......................... 35 Legal Matters ......................... 36 Experts ............................... 36 Incorporation of Certain Documents by Reference ............................. 36 Index to Financial Statements ......... F-1 11,000,000 Shares HEALTHSOUTH Corporation Common Stock P R O S P E C T U S , 1995 Smith Barney Inc. Merrill Lynch & Co. Morgan Stanley & Co. Incorporated PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the New York Stock Exchange additional listing fee. Amount ------- SEC registration fee................ $ 99,783 NASD filing fee .................... 29,437 NYSE additional listing fee......... 44,725 Blue Sky fees and expenses ......... 7,500 Accounting fees and expenses ...... 50,000 Legal fees and expenses ............ 75,000 Printing and engraving ............. 150,000 Registrar and transfer agent's fees 5,000 Miscellaneous fees and expenses .... 39,005 --------- Total.............................. $500,000 Item 15. Indemnification of Directors and Officers Section 102(b)(7) of the General Corporation Law of the State of Delaware grants corporations the right to limit or eliminate the personal liability of their Directors in certain circumstances in accordance with provisions therein set forth. Article NINTH of HEALTHSOUTH's Restated Certificate of Incorporation provides for the elimination of personal liability of a Director to the corporation or its stockholders for monetary damage for the breach of the Director's fiduciary duty to the full extent allowable under such Section 102(b)(7). Section 145 of the General Corporation Law of the State of Delaware grants corporations the right to indemnify their directors, officers, employees and agents in accordance with the provisions therein set forth. Article VI of HEALTHSOUTH's Bylaws provides for the indemnification of such persons to the full extent allowable under applicable law. HEALTHSOUTH has entered into agreements with all of its Directors and its executive officers pursuant to which the company has agreed to indemnify such Directors and executive officers against liability incurred by them by reason of their services as a Director to the fullest extent allowable under applicable law. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the registrant, its directors and officers, and by the Registrant of the Underwriters and certain related persons, for certain liabilities arising under the Act and affords certain rights of contribution with respect thereto. II-1 Item 16. Exhibits. Exhibit Number Description of Document ------------ ----------------------- (1) Form of Underwriting Agreement. (5) Opinion of Haskell Slaughter Young & Johnston, Professional Association (to be filed by amendment). (11) Statement re Computation of Per Share Earnings. (23)-1 Consent of Ernst & Young LLP. (23)-2 Consent of Haskell Slaughter Young & Johnston, Professional Association (included in opinion filed as Exhibit (5)). (24) Powers of Attorney. See Signature Pages. (27)-1 Financial Data Schedule, year-end. (27)-2 Financial Data Schedule, six-months Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Company hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Birmingham, State of Alabama, on September 8 , 1995. HEALTHSOUTH Corporation By: /s/ Richard M. Scrushy ------------------------ Richard M. Scrushy, Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard M. Scrushy and Aaron Beam, Jr., and each of them, his attorney-in-fact with powers of substitution for him in any and all capacities, to sign any amendments, supplements, subsequent registration statements relating to the offering to which this Registration Statement relates, or other instruments he deems necessary or appropriate, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date ----------- --------------------------- ------- /s/ Richard M. Scrushy ------------------------ Richard M. Scrushy Chairman of the Board September 8, 1995 and Chief Executive Officer and Director /s/ Aaron Beam, Jr. ------------------------ Aaron Beam, Jr. Executive Vice President and September 8, 1995 Chief Financial Officer /s/ William T. Owens ------------------------ William T. Owens Senior Vice President September 8, 1995 and Controller (Principal Accounting Officer) /s/ James P. Bennett ------------------------ James P. Bennett Director September 8, 1995 /s/ Anthony J. Tanner ------------------------ Anthony J. Tanner Director September 8, 1995 /s/ P. Daryl Brown ------------------------ P. Daryl Brown Director September 8, 1995 /s/ Phillip C. Watkins, M.D. ------------------------ Phillip C. Watkins, M.D. Director September 8, 1995 II-3 /s/ George H. Strong ------------------------- George H. Strong Director September 8, 1995 /s/ C. Sage Givens ------------------------- C. Sage Givens Director September 8, 1995 /s/ Charles W. Newhall III ------------------------- Charles W. Newhall III Director September 8, 1995 /s/ Larry R. House ------------------------- Larry R. House Director September 8, 1995 /s/ John S. Chamberlin ------------------------- John S. Chamberlin Director September 8, 1995 /s/ Richard F. Celeste ------------------------- Richard F. Celeste Director September 8, 1995
II-4 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E ------------------------------------ ----------- ------------------------------------ ----------- --------------- Balance at Additions Charged Additions Charged Beginning of to Costs and to Other Accounts Deductions Balance at End Description Period Expenses Describe Describe of Period ----------- ------------- ----------------- ------------------ ----------- ---------------- (In thousands) Year ended December 31, 1992: Allowance for doubtful accounts and $ 218,964(1) contractual adjustments ............ $ 27,037 $ 13,254 14,822(2) $ 224,216(3) $ 49,861 ---------- ---------- ---------- ------------ -------- Year ended December 31, 1993: Allowance for doubtful accounts and 289,077(1) contractual adjustments ............ 49,861 16,181 50,420(2) 284,729 120,810 ---------- ---------- ---------- ------------ -------- Year ended December 31, 1994: Allowance for doubtful accounts and $ 644,658(1) contractual adjustments............. $ 120,810 $ 23,739 6,547(2) $ 651,327(3) $144,427 ---------- ---------- ---------- ------------ --------
(1) Provisions for contractual adjustments which are netted against gross revenues. (2) Allowances of acquisitions in years 1992, 1993 and 1994, respectively. (3) Write-offs of uncollectible patient accounts receivable and third party contractual adjustments, net of third party retroactive settlements. S-1 EX-1.1 2 EXHIBIT 1.1 Draft 09/07/95 11,000,000 Shares HEALTHSOUTH CORPORATION Common Stock UNDERWRITING AGREEMENT ---------------------- _______, 1995 SMITH BARNEY INC. MERRILL LYNCH & CO. MORGAN STANLEY & CO. INCORPORATED As Representatives of the Several Underwriters c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Sirs: HEALTHSOUTH Corporation, a Delaware corporation (the "Company"), proposes to issue and sell an aggregate of 11,000,000 shares (the "Firm Shares") of its common stock, $0.01 par value per share (the "Common Stock") , to the several Underwriters named in Schedule I hereto (the "Underwriters"). The Company also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional 1,650,000 shares (the "Additional Shares") of Common Stock. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares". The Company wishes to confirm as follows its agreement with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters. 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-3 under the Act (the "registration statement"), including a prospectus subject to completion relating to the Shares. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective, or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission, and as -1- such prospectus shall have been amended from time to time prior to the date of the Prospectus. Any reference in this Agreement to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the registration statement, the Registration Statement, such Prepricing Prospectus or the Prospectus, as the case may be, and any reference to any amendment or supplement to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after such date under the Securities Exchange Act of 1934, as amended (the "Exchange Act") which, upon filing, are incorporated by reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used herein, the term "Incorporated Documents" means the documents which at the time are incorporated by reference in the registration statement, the Registration Statement, any Prepricing Prospectus, the Prospectus, or any amendment or supplement thereto. 2. Agreements to Sell and Purchase. The Company hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $_____ per Share (the "purchase price per share"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof). The Company also agrees, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Company, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to an aggregate of 1,650,000 Additional Shares. Additional Shares may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be purchased by the Underwriters as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof) bears to the aggregate number of Firm Shares. 3. Terms of Public Offering. The Company has been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery of the Shares and Payment Therefor. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New York City time, on ___________, 1993 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement between you and the Company. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Smith Barney Inc. at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional - 2 - Shares and the Option Closing Date for such Shares may be varied by agreement between you and the Company. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor by certified or official bank check or checks payable in New York Clearing House (next day) funds to the order of the Company. 5. Agreements of the Company. The Company agrees with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post-effective amendment has become effective. (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge (i) four signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits to the registration statement, (ii) such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may request, (iii) such number of copies of the Incorporated Documents, without exhibits, as you may request, and (iv) four copies of the exhibits to the Incorporated Documents. (d) The Company will not file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus or, prior to the end of the period of time referred to in the first sentence in subsection (f) below, file any document which, upon filing becomes an Incorporated Document, of which you shall not previously have been advised or to which, after you shall have received a copy of the document proposed to be filed, you shall reasonably object. - 3 - (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus (or to file under the Exchange Act any document which, upon filing, becomes an Incorporated Document) in order to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto (or to such document), and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. In the event that the Company and you, as Representatives of the several Underwriters, agree that the Prospectus should be amended or supplemented, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act. (i) During the period of five years hereafter, the Company will furnish to you (i) as soon as available, a copy of each report of the Company mailed to stockholders or filed with the Commission, and (ii) from time to time such other information concerning the Company as you may request. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 10 hereof or by notice given by you terminating this Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply with the terms or fulfill any of the conditions of this Agreement, the Company agrees to reimburse the Representatives for all out-of-pocket expenses - 4 - (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Shares substantially in accordance with the description set forth in the Prospectus. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) Except as provided in this Agreement, the Company will not sell, contract to sell or otherwise dispose of any Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or grant any options or warrants to purchase Common Stock, for a period of 90 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc., except (i) pursuant to the grant or exercise of options under the Company's stock option plans and (ii) for Common Stock to be issued in connection with the pending acquisition of Sutter Surgery Centers, Inc., by the Company. [(n) The Company has furnished or will furnish to you "lock-up" letters, in form and substance satisfactory to you, signed by each of its current officers and directors]. (o) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (p) The Company will use its best efforts to have the shares of Common Stock which it agrees to sell under this Agreement listed, subject to notice of issuance, on the New York Stock Exchange on or before the Closing Date. 6. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The Company and the transactions contemplated by this Agreement meet the requirements for using Form S-3 under the Act. The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, complied or will comply in all material respects with the provisions of the Act and will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. (c) The Incorporated Documents heretofore filed, when they were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed), conformed in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, any further Incorporated Documents so filed will, when they are filed, conform in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder; no such document when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained an untrue statement of a - 5 - material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and no such further document, when it is filed, will contain an untrue statement of a material fact or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. (d) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; all the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights; the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights; and the capital stock of the Company conforms to the description thereof in the registration statement and the prospectus. (e) Each of the Company and those corporate subsidiaries listed on Schedule II(a) hereto (collectively, the "Subsidiaries") has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Registration Statement; each of the affiliated partnerships listed on Schedule II(b) hereto (collectively, the "Controlled Entities") is duly formed and validly existing under the laws of the jurisdiction pursuant to which it was organized with full power and authority (partnership and other) to own, lease and operate its properties and conduct its business as described in the Registration Statement; and each of the Company, the Subsidiaries and the Controlled Entities is duly qualified to do business as a foreign corporation or partnership in good standing in all other jurisdictions, if any, where the ownership or leasing of properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, operations or financial condition of the Company, the Subsidiaries and the Controlled entities taken as a whole; all of the issued shares of capital stock of each of the Subsidiaries, and the partnership interests representing ownership in each Controlled Entity held of record or beneficially by the Company, have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company free and clear of all liens, security interests, charges or other encumbrances, except the pledge thereof to NationsBank of North Carolina, National Association, as Agent and Lenders as Signatories Thereto under the $1,000,000,000 Revolving Credit Facility dated as of __________________, 1995, as amended; and all of the outstanding interests representing ownership in the Controlled Entities have been offered, sold and issued in compliance with applicable state and federal laws related to the issuance of securities. (f) Each of the Company, the Subsidiaries and the Controlled Entities holds and is operating in compliance (in all material respects) with all material franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders of any governmental or self-regulatory body required for the conduct of its business, and all of such are valid and in full force and effect, and each of the Company, the Subsidiaries and the Controlled Entities is in compliance in all material respects with all laws, regulations, orders and decrees applicable to it which have a material effect on its business, properties or assets. (g) There is no legal or governmental proceeding pending or to the Company's knowledge threatened to which the Company, any Subsidiary or any Controlled Entity is a party or of which the business or property of the Company, any Subsidiary or any Controlled Entity is the subject which is not disclosed in the Registration Statement and the Prospectus and which might result in a judgment or decree having a material adverse effect on the business of the Company, the Subsidiaries and the Controlled Entities taken as whole or which is otherwise of a character required to be described in the Registration Statement or the Prospectus, and there is no contract, license or other document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement or any Incorporated Document which is not described or filed as required by the Act or the Exchange Act. (h) The Company and its Subsidiaries are not in violation of their respective - 6 - charters or by-laws, the Controlled Entities are not in violation of their respective agreements of limited partnership, and neither the Company nor any Subsidiary or Controlled Entity is in default in any respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any agreement, indenture or other instrument to which it is a party or by which it is bound, which violation or default is material to the Company, its Subsidiaries and its Controlled Entities taken as a whole; the issuance and sale of the Shares, the execution and delivery hereof, the fulfillment of the terms herein set forth and the consummation of the transactions herein contemplated do not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except such as may be required under the Act or other securities or Blue Sky laws), and will not conflict with or constitute a breach of or default under, or violate, the charter or by-laws of the Company or any Subsidiary, or the agreement of limited partnership of any Controlled Entity, or any agreement, indenture or other instrument to which the Company or any Subsidiary or any Controlled Entity is a party or by which it is bound, or any law, regulations, order or decree applicable to the Company, any Subsidiary or any Controlled Entity. (i) The Company and each Subsidiary and Controlled Entity have good and marketable title to all real and personal property described in the Prospectus as being owned respectively by them, in each case free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Prospectus or such as are not materially significant or important in relation to the business of the Company, the Subsidiaries and the Controlled Entities taken as a whole; and the real and personal property held under lease by the Company, any Subsidiary or any Controlled Entity is held by such entity under valid, subsisting and enforceable leases with only such exceptions as in the aggregate are not material and do not interfere with the conduct of the business of the Company, the Subsidiaries and the Controlled Entities taken as a whole; provided, however, that no representation is made hereby as to the title of the lessors of such property. (j) The accountants, Ernst & Young LLP, who have certified or shall certify the financial statements of the Company and its Subsidiaries included or incorporated by reference in the Registration Statement and the Prospectus (or any amendment or supplement thereto) are independent public accountants as required by the Act. (k) The financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company, the Subsidiaries and the Controlled Entities on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company, the Subsidiaries and the Controlled Entities. (l) The execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws. (m) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), neither the Company nor any of the Subsidiaries or Controlled Entities has incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of - 7 - business, that is material to the Company, the Subsidiaries and the Controlled Entities taken as a whole, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt of the Company or any of the Subsidiaries or Controlled Entities, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, net worth or results of operations of the Company and the Subsidiaries taken as a whole. (n) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (o) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (p) To the best of the Company's knowledge after reasonable investigation, neither the Company, any Subsidiary or any Controlled Entity, nor any employee or agent thereof has made any payment of funds of the Company, any Subsidiary or any Controlled Entity or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (q) The Company, each Subsidiary and each Controlled Entity have filed all tax returns required to be filed by it, which returns are complete and correct, and are not in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto, except where the failure to file such returns and make such payments would not have a material effect upon the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company, the Subsidiaries and the Controlled Entities taken as a whole. (r) No holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement. (s) Each of the Company, the Subsidiaries and the Controlled Entities own all patents, trademarks, trademark registration, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company, the Subsidiaries and the Controlled Entities with respect to the foregoing. (t) The Company has complied with all provisions of Florida Statutes, ss. 517.075, relating to issuers doing business with Cuba. 7. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or - 8 - expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Company may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company, such Underwriter or such controlling person shall promptly notify the Company and the Company shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company has failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Company and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and the Company by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Company shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Company shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The Company shall not be liable for any settlement of any such action, suit or proceeding effected without its written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Company agrees to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein - 9 - and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, its directors, any such officer, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have. (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule I hereto (or such numbers of Firm Shares increased as set forth in Section 10 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 7 and the representations and - 10 - warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers, or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. 8. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post-effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the registration statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with to your satisfaction. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, properties, net worth, or results of operations of the Company, the Subsidiaries and the Controlled Entities, taken as a whole, not contemplated by the Prospectus, which in your opinion, as Representatives of the several Underwriters, would materially adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Company or any officer or director of the Company which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion, as Representatives of the several Underwriters, materially adversely affect the market for the Shares. (c) You shall have received on the Closing Date, an opinion of Haskell Slaughter Young & Johnston, Professional Association, counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) Each of the Company and the Subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, and each of the Controlled Entities has been duly organized and is validly existing as a limited partnership under the laws of the jurisdiction of its organization; (ii) Each of the Company and the Subsidiaries has full corporate power and authority, and each of the Controlled Entities has full partnership power and authority, to own, lease and operate its properties and conduct its business as described in the Prospectus; and each of the Company, the Subsidiaries and the Controlled Entities is duly qualified to do business as a foreign corporation or partnership, as appropriate, and is in good standing in all jurisdictions in the United States, if any, in which it is required to be so qualified and in which the failure so to qualify would have a materially adverse effect on the business, operations or financial condition of the Company, the Subsidiaries and Controlled Entities, taken as a whole; (iii) The authorized and outstanding capital stock of the Company is as set forth - 11 - under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock"; (iv) All of the issued and outstanding shares of capital stock of the Company outstanding prior to the issuance of the Shares have been duly authorized and validly issued, are fully paid and nonassessable, and have not been issued in violation of any preemptive right or, to the best of such counsel's knowledge, other similar right; all of the issued and outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company, free and clear of any adverse claim; and all of the issued and outstanding partnership interests representing ownership in the Controlled Entities have been duly authorized and, to the extent material to the business, operations or financial condition of the Company the Subsidiaries and the Controlled Entities taken as a whole, validly issued, the partnership interests held of record by the Company are owned free and clear of any adverse claim, except the pledge thereof to NationsBank of North Carolina, National Association, as Agent and Lenders as Signatories Thereto under the $1,000,000,000 Revolving Credit Facility dated as of _______________, 1995, as amended, and the offer and sale of the partnership interests constituted transactions exempt from registration under Section 5 of the Act; (v) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive, or to the best knowledge of such counsel after reasonable inquiry, similar rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Company; (vi) The form of certificates for the Shares conforms to the requirements of the Delaware General Corporation Law; (vii) The Company has corporate power and authority to enter into this Agreement and to issue, sell and deliver the Shares to you as provided herein; (viii) This Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by applicable law; (ix) The Registration Statement and all post-effective amendments, if any, have become effective under the Act and, to the best knowledge of such counsel after reasonable inquiry, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (x) Neither the Company, any Subsidiary or any Controlled Entity is in violation of its respective certificate or articles of incorporation or bylaws, or other organizational documents, or to the best knowledge of such counsel after reasonable inquiry, is in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness, except as may be disclosed in the Prospectus; (xi) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement, compliance by the Company with the provisions hereof and thereof, nor consummation by the Company of the transactions contemplated hereby and thereby, conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company, any Subsidiary or any Controlled Entity or any agreement, indenture, lease or other instrument to which the Company, any Subsidiary or any Controlled Entity is a party or by which any of them or any of - 12 - their respective properties is bound or is known to such counsel after reasonable inquiry, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company, any Subsidiary or any Controlled Entity, nor will any such action result in any violation of any existing law, regulation, ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Company, any Subsidiary or any Controlled Entity or any of their respective properties; (xii) No consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company (except as have been obtained under the Act and the Exchange Act, and such as may be required under state securities or Blue Sky laws) for the valid issuance and sale of the Shares to you as contemplated by this Agreement; (xiii) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the Act; and each of the Incorporated Documents (except for the financial statements and the notes thereto and the schedules and other financial data included therein, as to which counsel need not express any opinion) complies as to form in all material respects with the Exchange Act and the rules and regulations of the Commission thereunder; (xiv) The descriptions in the Registration Statement and Prospectus of statutes, governmental regulations, agreements, contracts, leases and other documents are accurate and fairly present the information required to be presented by the Act; and, to the best of such counsel's knowledge, there are no statutes, governmental regulations, agreements, contracts, leases or documents of a character required to be described or referred to in the Registration Statement or Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement which are not described or referred to therein and filed as required; (xv) To the best of such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company, any Subsidiary or any Controlled Entity, or to which the Company, any Subsidiary or any Controlled Entity, or any of their property, is subject, which are required to be disclosed in the Registration Statement or Prospectus (or any amendment or supplement thereto) by the Act, other than those disclosed therein; (xvi) Each of the Company, the Subsidiaries and the Controlled Entities holds all material permits, licenses, certificates of need and other approvals or authorizations of and from governmental regulatory officials and bodies necessary to entitle it to own its properties and conduct its business as described in the Prospectus, or to receive reimbursement under Medicare (if represented in the Prospectus as being Medicare-certified); (xvii) To the best knowledge of such counsel after reasonable inquiry, neither the Company, any Subsidiary or any Controlled Entity is in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company, any Subsidiary or any Controlled Entity or of any decree of any court or governmental agency or body having jurisdiction over the Company, any Subsidiary or any Controlled Entity. Such counsel may state that they have participated in conferences with officers and representatives of the Company and with its independent public accountants regarding the contents of the Registration Statement and the Prospectus, but have not independently verified the statements made in the Registration Statement and Prospectus; and such counsel will state that nothing has come to their attention which has caused them to believe that the Registration Statement (including the Incorporated Documents) at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, including, without limitation, all descriptions of statutes, governmental regulations, agreements, contracts, leases - 13 - and other documents contained in the Registration Statement (including the Incorporated Documents) or Prospectus (other than the financial statements and supporting schedules, upon which such counsel need express no opinion), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or the Option Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) You shall have received on the Closing Date an opinion of Pillsbury Madison & Sutro, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to such matters as you may reasonably request. (e) You shall have received letters addressed to you, as Representatives of the several Underwriters, and dated the date hereof and the Closing Date from Ernst & Young LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (f)(i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the short-term or long-term debt of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or Supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company, the Subsidiaries and the Controlled Entities, taken as a whole; (iv) the Company, the Subsidiaries and the Controlled Entities shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company, the Subsidiaries and the Controlled Entities, taken as a whole, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), to the effect set forth in this Section 8(g) and in Section 8(h) hereof. (g) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (h) Prior to the Closing Date the Shares shall have been listed, subject to notice of issuance, on the New York Stock Exchange. (i) There shall not have been any announcement by any "nationally recognized statistical rating organization", as defined for purposes of Rule 436(g) under the Act, that (i) it is downgrading its rating assigned to any class of securities of the Company, or (ii) it is reviewing its rating assigned to any class of securities of the Company with a view to possible downgrading, or with negative implications, or direction not determined. (j) The Company shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel. - 14 - Any certificate or document signed by any officer of the Company and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 8, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (g) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c), (d) and (e) shall be revised to reflect the sale of Additional Shares. 9. Expenses. The Company agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by it of its obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all amendments or supplements to any of them, as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (iv) the printing (or reproduction) and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Shares; (v) the listing of the Shares on the New York Stock Exchange; (vi) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (viii) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Shares; and (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company. 10. Effective Date of Agreement. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are - 15 - obligated to purchase on the Closing Date and arrangements satisfactory to you and the Company for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Company, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 10 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 11. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company by notice to the Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in the Common Stock of the Company shall be suspended or subject to any restriction or limitation not in effect on the date of this Agreement; (ii) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (iii) a general moratorium on commercial banking activities in New York or Alabama shall have been declared by either federal or state authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 12. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside front cover, and the statements in the first and third paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 6(b) and 7 hereof. 13. Miscellaneous. Except as otherwise provided in Sections 5, 10 and 11 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at Two Perimeter Park South, Birmingham, Alabama 35243, Attention: William H. Horton, Group Vice President; or (ii) if to you, as Representatives of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, its directors and officers, and the other controlling persons referred to in Section 7 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 14. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. - 16 - This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. - 17 - Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, HEALTHSOUTH CORPORATION By ______________________________ Title _____________________________ Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule I hereto. SMITH BARNEY INC. MERRILL LYNCH & CO. MORGAN STANLEY & CO. INCORPORATED As Representatives of the Several Underwriters By SMITH BARNEY INC. By __________________________ Title _________________________ - 18 - SCHEDULE I NAME OF COMPANY
Number of Number of Underwriter Firm Shares Underwriter Firm Shares ----------- ----------- ----------- ----------- Smith Barney Inc. .................... Merrill Lynch & Co. .................. Morgan Stanley & Co. Incorporated .... ------------ Total..... [11,000,000] ------------ - 19 -
EX-11 3 EXHIBIT 11 EXHIBIT 11 HEALTHSOUTH Rehabilitation Corporation and Subsidiaries Computation of Income Per Share (In thousands, except for per share data)
Six Months Year Ended December 31, Ended June 30, 1992 1993 1994 1994 1995 ------- ------ -------- ------- ------ (unaudited) Primary: Weighted average common shares outstanding................... 69,198 73,705 76,267 74,779 79,849 Net effect of dilutive stock options......................... 5,016 4,004 8,422 9,195 7,397 ------- ------- ------- ------- ------- Total Common and Common Equivalent Shares.................... 74,214 77,709 84,689 83,974 87,246 ======= ======= ======= ======= ======= Net income................................................... $34,929 $17,197 $49,961 $29,226 $17,777 ======= ======= ======= ======= ======= Net income per common and common equivalent share ........... $ 0.47 $ 0.22 $ 0.59 $ 0.35 $ 0.20 ======= ======= ======= ======= ======= Fully Diluted: Weighted average common shares outstanding................... 69,198 73,705 76,267 74,779 79,849 Net effect of dilutive stock options......................... 5,016 4,004 8,422 9,195 7,397 ------- ------- ------- ------- ------- 74,214 77,709 84,689 83,974 87,246 Assumed conversion of 5% Convertible Subordinated Debentures due 2001..................................................... (1) (1) 4,722 (1) (1) ------- ------- ------- ------- ------- Total Common and Common Equivalent Shares, Fully Diluted .... -- -- 89,411 -- -- ======= ======= ======= ======= ======= Net income................................................... $34,929 $17,197 $49,961 -- -- Elimination of interest and amortization on 5% Convertible Subordinated Debentures Due 2001, less the related effect on the provision for income taxes............. -- -- 2,927 -- -- ------- ------- ------- ------- ------- Net income, fully diluted.................................... -- -- $52,888 -- -- ======= ======= ======= ======= ======= Net income per common and common equivalent share ........... -- -- $ 0.59 -- -- ======= ======= ======= ======= =======
(1) There were no other potentially dilutive securities outstanding for this period. 1 EX-23.1 4 EXHIBIT 23.1 Exhibit (23)-1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3 No. 33- ) and related Prospectus of HEALTHSOUTH Corporation for the registration of 11,000,000 shares of its common stock and to the inclusion therein of our report dated March 1, 1995, except for Notes 2 and 17, as to which the date is June 13, 1995, with respect to the consolidated financial statements of HEALTHSOUTH Corporation for the periods indicated in the index to financial statements. Further, we consent to the incorpration by reference therein of our report dated July 10, 1995 with respect to the consolidated financial statements of Rehab Systems Company included in its Current Report on Form 8-K/A, as amended, dated September 8, 1995, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Birmingham, Alabama September 8, 1995 EX-27.1 5 EXHIBIT 27.1
5 12-MOS DEC-31-1994 DEC-31-1994 68,735 16,628 387,086 (144,427) 26,151 425,202 971,961 114,589 1,736,336 193,875 1,017,696 770 0 0 489,150 1,736,336 0 1,236,190 0 952,607 86,678 23,739 65,286 90,668 34,305 49,961 0 0 0 49,961 0.59 0.59
EX-27.2 6 EXHIBIT 27.2
5 6-MOS DEC-31-1995 JUN-30-1995 62,336 13,579 496,642 (215,359) 29,862 467,736 1,189,655 (147,211) 2,063,049 182,590 1,340,549 801 0 0 517,331 2,063,049 0 716,949 0 532,683 55,663 14,119 44,292 32,576 10,895 17,777 0 0 0 17,777 0.20 0