-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AIi21kTNHZoH/oMaeW94HJzwevdxik0szdv70hyu7plET6IzP8jeG/7TSs3bEiDA riFL6FuEOFJn0AIq3Pu73A== 0001005150-01-000286.txt : 20010402 0001005150-01-000286.hdr.sgml : 20010402 ACCESSION NUMBER: 0001005150-01-000286 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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: 10-K SEC ACT: SEC FILE NUMBER: 000-14940 FILM NUMBER: 1584949 BUSINESS ADDRESS: STREET 1: ONE HEALTHSOUTH PKWY STREET 2: STE 224W CITY: BIRMINGHAM STATE: AL ZIP: 35243 BUSINESS PHONE: 2059677116 MAIL ADDRESS: STREET 1: ONE HEALTHSOUTH PARKWAY CITY: BIRMINGHAM STATE: AL ZIP: 35243 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHSOUTH REHABILITATION CORP DATE OF NAME CHANGE: 19920703 10-K 1 0001.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000; OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________ Commission File Number 1-10315 HEALTHSOUTH CORPORATION ------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 63-0860407 - ------------------------------------------ ------------------------------------ (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) ONE HEALTHSOUTH PARKWAY BIRMINGHAM, ALABAMA 35243 - ------------------------------------------ ------------------------------------ (Address of Principal Executive (Zip Code) Offices) Registrant's Telephone Number, Including Area Code: (205) 967-7116 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered - ------------------------------------------ ------------------------------------ COMMON STOCK, PAR VALUE NEW YORK STOCK EXCHANGE $.01 PER SHARE Securities Registered Pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such Reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 26, 2001: Common Stock, par value $.01 per share -- $5,221,026,283 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 26, 2001 --------------------------------- ------------------------------ COMMON STOCK, PAR VALUE $.01 PER SHARE 389,463,041 SHARES DOCUMENTS INCORPORATED BY REFERENCE No documents are incorporated by reference into this Annual Report on Form 10-K. ================================================================================ PART I ITEM 1. BUSINESS. GENERAL HEALTHSOUTH Corporation is the nation's largest provider of outpatient surgery, outpatient diagnostic and rehabilitative healthcare services. We provide these services through our national network of inpatient and outpatient healthcare facilities, including inpatient and outpatient rehabilitation facilities, outpatient surgery centers, diagnostic centers, occupational medicine centers, medical centers and other healthcare facilities. We believe that we provide patients, physicians and payors with high-quality healthcare services at significantly lower costs than traditional inpatient hospitals. Additionally, our national network, reputation for quality and focus on outcomes have enabled us to secure contracts with national and regional managed care payors. At December 31, 2000, HEALTHSOUTH operated over 2,000 locations in all 50 states, Puerto Rico, the United Kingdom, Canada and Australia. Our healthcare services are provided through inpatient healthcare facilities and facilities providing other clinical services (including inpatient rehabilitation facilities and specialty medical centers, as well as associated physician practices and other services) and outpatient healthcare facilities (including outpatient rehabilitation centers, outpatient surgery centers, outpatient diagnostic centers and occupational medicine centers). In our outpatient and inpatient rehabilitation facilities, we provide 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. Our 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 we provide can save money for payors and employers. A patient referred to a HEALTHSOUTH rehabilitation facility 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. We have 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 our patients, regardless of the severity and complexity of their disabilities, can receive the level and intensity of services necessary to restore them to as productive, active and independent a lifestyle as possible. In addition to our rehabilitation facilities, we operate the largest network of freestanding outpatient surgery centers in the United States. Our outpatient surgery centers provide the facilities and medical support staff necessary for physicians to perform non-emergency surgical procedures. Outpatient surgery is widely recognized as generally less expensive than surgery performed in a hospital, and we believe that outpatient surgery performed at a freestanding outpatient surgery center is generally less expensive than hospital-based outpatient surgery. Over 80% of our surgery center facilities are located in markets served by our rehabilitation facilities, enabling us to pursue opportunities for cross-referrals. HEALTHSOUTH is also the largest operator of outpatient diagnostic centers in the United States. Most of our diagnostic centers operate in markets where we also provide rehabilitative healthcare and outpatient surgery services. We believe that our ability to offer a comprehensive range of healthcare services in a particular geographic market makes HEALTHSOUTH more attractive to both patients and payors in such market. We focus on marketing our services in an integrated system to patients and payors in such geographic markets. We are continually evaluating potential acquisitions that complement our existing operations, as well as divestitures of non-strategic assets and businesses. HEALTHSOUTH was organized as a Delaware corporation in February 1984. Our principal executive offices are located at One HealthSouth Parkway, Birmingham, Alabama 35243, and our telephone number is (205) 967-7116. 1 COMPANY STRATEGY Our objective is to continue to grow profitably and enhance our position as the preferred provider in our lines of business and geographic markets. In the 1994-1998 period, we pursued a strategy of rapid growth through acquisitions. During this period, we consummated a series of major acquisitions that strengthened our position in our primary lines of business. Today, we believe that we have a strong franchise in our core product lines that encompasses a geographic scope that is unlikely to be duplicated by competitors in the foreseeable future. Going forward, our business strategy will be focused on enhancing profit margins through operating efficiencies and organic growth, as well as selective acquisition and development activity. The following are key elements of our strategy: o Leverage Our Existing National Network. As one of the largest providers of healthcare services in the United States, and as the largest provider in our primary lines of business, we believe we are well-positioned to leverage our existing network of facilities in order to realize economies of scale and compete successfully for national and regional contracts while retaining the flexibility to respond to particular needs of local markets. Our national network offers large national and regional employers and payors the convenience of dealing with a single provider, a well as offering us the ability 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. We believe that our operations management structure allows us to realize these benefits without sacrificing local market responsiveness. Our objective is to provide those outpatient and rehabilitative healthcare services needed within each local market by tailoring our services and facilities to that market's needs, thus bringing the benefits of nationally recognized expertise and quality into the local setting. o Deliver Cost-Effective Services. We strive to provide high-quality healthcare services in cost-effective settings. To that end, we use standardized clinical protocols based on "best practices" techniques for the treatment of our patients. We use these standardized clinical protocols at all of our facilities, promoting the delivery of high-quality care in a highly efficient, consistent and cost-effective manner. We believe that our facilities are among the most cost-effective in the industry, making us an attractive healthcare provider for payors and self-insured employers. In addition, we believe that our low-cost profile favorably positions us to respond to reimbursement pricing pressure. o Market to Managed Care Organizations and Other Payors. Since the late 1980s, we have 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. Our documented clinical outcomes and our daily experience with thousands of patients in delivering quality healthcare services at reasonable prices has enhanced our attractiveness to such entities and has given us a competitive advantage over smaller and regional competitors. These relationships have increased patient volume in our facilities and contributed to our same-store growth. These relationships also enable us to work with major payors to ensure competitive pricing and provide for more efficient billing, claims processing and payment procedures. o Expand Our Integrated Service Model. Our Integrated Service Model ("ISM") strategy coordinates the delivery of our outpatient services in a given market through the integrated management and marketing of our outpatient operations. We plan to expand our ISM into the 300 largest markets in the United States. We believe our ISM strategy capitalizes on the complementary nature of our primary services. Almost all rehabilitation and surgery patients have diagnostic procedures, and many inpatient rehabilitation patients require some form of outpatient rehabilitation. Furthermore, a significant number of both inpatient and outpatient rehabilitation patients require surgery. Through the ISM, our healthcare services are delivered in a coordinated manner intended to enhance referrals across our business lines. The ISM also allows us to offer patients and payors attractive pricing on bundled services in a given market, as well as the convenience of dealing with a single source for patient care needs. 2 o Manage for Cash Flow. We have implemented disciplined financial policies that have resulted in strong cash flows as compared to other publicly traded healthcare companies. We intend to continue focusing on managing our business for cash flow and improving financial performance. We will also seek to leverage new technologies into tangible operating efficiencies, improved accounts receivable collection and cost-effective operations. In particular, we are aggressively working to reduce our accounts receivable days and enhance our operating margins by utilizing new electronic claims processing and payment technology, improving our charge capture systems and continuing our proactive efforts to work with payors to streamline payment processes and reduce reimbursement delays. We intend to use free cash flow to reduce outstanding debt and further strengthen our balance sheet. o Implement Technology Initiatives. We intend to capitalize on our strong brand identity through strategic alliances and, where appropriate, equity participation with technology-oriented companies offering services that we believe will benefit us, both by creating greater efficiencies and cost savings for our operations and by expanding the range of services we offer and public awareness of our company. We believe that our network of over 2,000 facilities, our volume of daily interactions with patients across the country and our relationships with leading physicians and institutions offer these companies immediate operational scale and exposure of a type not available through other healthcare providers. We will seek to leverage those assets through business affiliations that we believe will both benefit our operations and increase stockholder value through strategic investment activities. RISK FACTORS Our business, operations and financial condition are subject to various risks. Some of these risks are described below, and readers of this Annual Report on Form 10-K should take such risks into account in evaluating HEALTHSOUTH or any investment decision involving HEALTHSOUTH. This section does not describe all risks applicable to our company, our industry or our business, and it is intended only as a summary of certain material factors. More detailed information concerning the factors described below is contained in other sections of this Annual Report on Form 10-K. We Depend Upon Reimbursement by Third-Party Payors. Substantially all of our revenues are derived from private and governmental third-party payors. In 2000, approximately 29% of our revenues were derived from Medicare, approximately 3% from Medicaid and approximately 68% from commercial insurers, managed care plans, workers' compensation payors and other private pay revenue sources. There are increasing pressures from many payors to control healthcare costs and to reduce or limit increases in reimbursement rates for medical services. There can be no assurances that payments from government or private payors will remain at levels comparable to present levels. In attempts to limit federal spending, there have been, and we expect that there will continue to be, a number of proposals to limit Medicare reimbursement for various services. We cannot now predict whether any of these pending proposals will be adopted or what effect the adoption of such proposals would have on HEALTHSOUTH. Further, Medicare reimbursement for inpatient rehabilitation services is changing from a cost-based reimbursement system to a prospective payment system ("PPS"), with the phase-in of the PPS currently expected to begin sometime in 2001. While we believe we are well-positioned and well-prepared for the transition, we cannot be certain what effect the implementation of inpatient rehabilitation PPS will have on us. In addition, a delay in the implementation of inpatient rehabilitation PPS, lower than expected reimbursement rates or our failure to successfully execute our planned response to this change could have a material adverse effect on our financial condition or results of operations. See this Item, "Business -- Regulation". Our Operations Are Subject To Extensive Regulation. Our operations are subject to various other types of regulation by federal and state governments, including 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. 3 The operation of our facilities and the provision of healthcare services are subject to federal, state and local licensure and certification laws. These facilities and services are subject to periodic inspection by governmental and other authorities to assure compliance with the various standards established for continued licensure under state law, certification under the Medicare and Medicaid programs and participation in other government programs. Additionally, in many states, Certificates of Need or other similar approvals are required for expansion of our operations. We could be adversely affected if we cannot obtain such approvals, by changes in the standards applicable to approvals and by possible delays and expenses associated with obtaining approvals. Our failure to obtain, retain or renew any required regulatory approvals, licenses or certificates could prevent us from being reimbursed for our services or from offering some of our services, or could adversely affect our results of operations. Our business is subject to extensive federal and state regulation with respect to financial relationships among healthcare providers, physician self-referral arrangements and other fraud and abuse issues. Penalties for violation of federal and state laws and regulations include exclusion from participation in the Medicare and Medicaid programs, asset forfeiture, civil penalties and criminal penalties, any of which could have a material adverse effect on our business, results of operations or financial condition. The Office of Inspector General of the Department of Health and Human Services, the Department of Justice and other federal agencies interpret healthcare fraud and abuse provisions liberally and enforce them aggressively. See this Item, "Business -- Regulation". Healthcare Reform Legislation May Affect Our Business. In recent years, many legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. Among the proposals which are currently being, or which recently have been, considered are cost controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurance coverage to their employees and the creation of a single government health insurance plan that would cover all citizens. The costs of certain proposals would be funded in significant part by reductions in payment by governmental programs, including Medicare and Medicaid, to healthcare providers. There continue to be federal and state proposals that would, and actions that do, impose more limitations on government and private payments to healthcare providers such as HEALTHSOUTH and proposals to increase copayments and deductibles from patients. At the federal level, Congress has continued to propose or consider healthcare budgets that substantially reduce payments under the Medicare and Medicaid programs. In addition, many states are considering the enactment of initiatives designed to reduce their Medicaid expenditures, to provide universal coverage or additional levels of care and/or to impose additional taxes on healthcare providers to help finance or expand the states' Medicaid systems. 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 on HEALTHSOUTH. That impact may be material to our business, financial condition or results of operations. We Face National, Regional and Local Competition. We operate in a highly competitive industry. Although we are the largest provider of our range of inpatient and outpatient healthcare services on a nationwide basis, in any particular market we may encounter competition from local or national entities with longer operating histories or other superior competitive advantages. There can be no assurance that such competition, or other competition which we may encounter in the future, will not adversely affect our results of operations. See this Item, "Business -- Competition". We are Subject To Material Litigation. We are, and may in the future be, subject to litigation which, if determined adversely to us, could have a material adverse affect on our business, financial condition or results of operations. In addition, some of the companies and businesses we have acquired have been subject to such litigation. While we attempt to conduct our operations in such a way as to reduce the risk that adverse results in litigation could have a material adverse affect on us, there can be no assurance that pending or future litigation, whether or not described in this Annual Report on Form 10-K, will not have such a material adverse affect. See Item 3, "Legal Proceedings". Our Stock Price May Be Volatile. Healthcare stocks in general, including HEALTHSOUTH's common stock, are subject to frequent changes in stock price and trading volume, some of which may be large. These changes may be influenced by the market's perceptions of the healthcare sector in general, 4 of other companies believed to be similar to HEALTHSOUTH, or of our results of operations and future prospects. In addition, these perceptions may be greatly affected not only by information we provide but also by opinions and reports created by investment analysts and other third parties which do not necessarily reflect information provided by us. Adverse movement in HEALTHSOUTH's stock price, particularly as a result of factors over which we have no control, may adversely affect our access to capital and the ability to consummate acquisitions using our stock. RECENT DEVELOPMENTS From time to time, we determine to divest assets or businesses that we have acquired which are no longer consistent with our current business strategy. In that connection, in the first quarter of 2001, we announced that we had entered into a letter of intent with HCA - The Hospital Company to sell our Richmond, Virginia facility and a related outpatient surgery center to an affiliate of HCA. In addition, we also announced that we had entered into a letter of intent to sell substantially all of our occupational medicine center operations to U.S. HealthWorks, Inc. In both cases, we determined that the facilities being divested were not consistent with our current strategy and that management resources devoted to those operations could be better utilized in connection with our strategic businesses. Both divestiture transactions are subject to the completion of definitive documentation and the satisfaction of various conditions. We currently expect that both transactions will close at or shortly after the end of the first quarter of 2001. We expect to use the proceeds from the transactions to pay down existing indebtedness. INDUSTRY OVERVIEW The United States Health Care Financing Administration ("HCFA") estimates that national health expenditures were approximately $1.2 trillion in 1999 and are projected to total $2.2 trillion, or 16.2% of the Gross Domestic Product, by 2008. Within the United States, hospital and physician expenditures traditionally account of the majority of personal healthcare spending. Accelerating private spending growth rates in 1998 caused the share of health spending paid by the private sector to increase for the first time since 1988, rising from 53.8% in 1997 to 54.5% in 1998. At the same time, growth in public sector spending for 1998 increased by 4.1%. HCFA projects that the combination of demographic forces associated with the aging of the baby-boomers and continued economic strength is expected to continue to generate industry growth. The private sector in particular is expected to continue to benefit from demographic trends, technology improvements, and the ongoing focus on cost containment. Outpatient and Inpatient Rehabilitation Markets According to available information, there are approximately 35,000 inpatient rehabilitation beds and 8,000 to 9,000 outpatient rehabilitation centers in the United States. The need for rehabilitation is expected to continue to grow over the next few years driven by the increased percentage of persons over 65 years of age within the general United States population, who generally have the highest rehabilitation needs. Outpatient Surgery Market Based on industry estimates, the freestanding outpatient surgery center market is approximately $6 billion in size. There was a 75% increase in the number of treatments in ambulatory settings (hospital outpatient, freestanding ambulatory surgery centers and physicians' offices) from 1986 to 1996, and it is estimated that approximately 80% of surgeries performed today can be done on an outpatient basis. Additionally, the number of outpatient surgery cases increased 196% from 1993 through 1999, from 2.9 million to 5.7 million cases, due mostly to continued medical advances, which facilitated a shift of many procedures to ambulatory settings. Growth in the market is expected to continue during the next decade, after seeing the number of outpatient surgery centers increase from 2,300 in 1996 to more than 2,700 centers in 1999. 5 Diagnostic Market The diagnostic market is highly fragmented, with radiologists, hospitals and independent organizations offering diagnostic services. It is estimated that there are currently approximately 2,700 diagnostic centers within the United States, an increase from approximately 1,300 centers in 1988. We expect the diagnostics market to continue to grow over the next few years due to increased sub-specializations, expanding geographic reach and the non-invasive and cost-effective nature of diagnostics in general. 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 16 years, we have consistently sought and implemented opportunities to expand our services through acquisitions and start-up development activities that complement our historic focus on orthopaedic, sports medicine and occupational health services and that provide independent platforms for growth. Our acquisitions and internal growth have enabled HEALTHSOUTH to become one of the largest providers of healthcare services in the United States. The following sections discuss the range of services we offer in our inpatient and other clinical services and outpatient services business segments. See Note 14 of "Notes to Consolidated Financial Statements" for financial information concerning these segments. Outpatient Services Segments Our outpatient services segments, comprising our Ambulatory Services-East and Ambulatory Services-West divisions, include our outpatient rehabilitation facilities and occupational medicine centers, our outpatient surgery centers and our outpatient diagnostic centers. We are the largest operator of outpatient rehabilitation facilities, outpatient surgery centers and outpatient diagnostic centers in the United States. OUTPATIENT REHABILITATION SERVICES. As of December 31, 2000, we provided outpatient rehabilitative healthcare services through approximately 1,407 locations in all 50 states and the United Kingdom, including freestanding outpatient centers, outpatient satellites of inpatient facilities and outpatient facilities managed under contract. This constitutes the largest network of outpatient rehabilitation facilities in the United States. Our 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, sports-related, work-related, hand and spine injuries and various neurological/neuromuscular conditions. Continuing emphasis on containing increases in healthcare costs, as evidenced by Medicare's prospective payment system, the growth in managed care and the various alternative healthcare reform proposals, has resulted in earlier 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. Our 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-effective setting. We believe that the key factors influencing the outpatient rehabilitation business include cost, quality of services and outcomes achieved, convenience for patients and referral sources, and relationships with payors and self-insured employers. We believe that we are well-positioned to compete on all of these factors. Our national network allows us to benefit from economies of scale and to introduce standardized clinical protocols for the treatment of our patients, resulting in "best practices" techniques being utilized at all of our facilities. This has allowed us to consistently achieve demonstrable, cost-effective clinical outcomes. In addition, we believe that our facilities offer an attractive environment for patients and are located in convenient proximity to referring physicians and to our target patient populations. We believe that our national scale and our reputation for high-quality, cost-effective services enables us to obtain national, regional and local contracts with payors and with self-insured employers. 6 We endeavor to locate our outpatient rehabilitation centers in specific areas where we believe there is a demand for our services. In general, we initially establish an outpatient center in a given market, either by acquiring an existing private therapy practice or through start-up development, and institute our clinical protocols and programs in response to the community's general need for services. We 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. Our outpatient centers are staffed by physical therapists, occupational therapists and other clinicians and appropriate support personnel, depending on the services provided at a particular location, and are open at hours designed to accommodate the needs of the patient population being served and the local demand for services. Outpatient rehabilitation patients are referred to our outpatient centers by physicians. In our markets, we strive to develop and maintain relationships with orthopaedic surgeons, neurologists and neurosurgeons, physiatrists and other physicians who serve patients likely to need the rehabilitation services we provide and to keep those physicians informed with respect to the scope and quality of those services. In addition, we attempt to locate our outpatient rehabilitation facilities in proximity to those types of physicians, in order to provide for convenient access to them. We also market our services to managed care payors and case management companies, as well as to self-insured employers and professional and amateur athletic organizations which are likely to have a large number of work-related or sports-related orthopaedic injuries. We believe that we offer high-quality services in a cost-effective setting that is attractive to patients, physicians and payors. In addition, at December 31, 2000, we operated approximately 113 occupational medicine centers in 29 states, which provide cost-effective, outpatient primary medical care and related services for work-related injuries and illnesses, work- related physical examinations, physical therapy services and workers' compensation medical services. Our occupational medicine centers market their services to large and small employers, workers' compensation and health insurers and managed care organizations. As described above, in the first quarter of 2001 we entered into a letter of intent to sell substantially all of our occupational medicine center operations. See this Item, "Business - Recent Developments". OUTPATIENT SURGERY SERVICES. As of December 31, 2000, we provided outpatient surgery services through 222 freestanding surgery centers in 40 states. This constitutes the largest network of outpatient surgery centers in the United States. Over 80% of our outpatient surgery centers are located in markets served by our rehabilitation facilities, enabling us to pursue opportunities for cross-referrals between surgery and rehabilitation facilities, as well as to centralize administrative functions. We believe that the key factors influencing the outpatient surgery business are physician utilization, cost and quality of services and case mix. Physicians typically choose to perform outpatient surgical procedures in a freestanding outpatient surgery center rather than an acute-care hospital because of the convenience of the surgery center for themselves and for their patients, in terms of access, scheduling and operating room turnaround time. Like most other outpatient surgery centers, the majority of our centers are owned in partnership with surgeons and other physicians who perform procedures at the centers. It is critical to the success of an outpatient surgery center that its physician partners utilize the center for a significant portion of their procedures, and we believe that our surgery centers offer our physician partners convenient, modern and well-equipped settings for outpatient surgery. We also believe that our reputation in the field of orthopaedic healthcare and the physician relationships we have developed in that area enhance our ability to attract orthopaedic surgical procedures, which are reimbursed more favorably than some other types of outpatient surgery. Our surgery centers provide the facilities and medical support staff necessary for physicians to perform non-emergency surgical procedures. Our typical surgery center is a freestanding facility with two to six fully equipped operating and procedure rooms and ancillary areas for reception, preparation, recovery and administration. Each of our 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 7 centers are adding extended recovery care capabilities where permitted. Most of our surgery centers currently provide for extended recovery stays. Our ability to develop such recovery care facilities is dependent upon state regulatory environments in the particular states where our centers are located. Our outpatient surgery centers implement quality control procedures to evaluate the level of care provided at the centers. Each center has a medical advisory committee of three to ten physicians which reviews the professional credentials of physicians applying for medical staff privileges at the center. In order to increase volumes and margins in our outpatient surgery centers, we focus on educating physicians as to the advantages in terms of convenience, technology, quality of care and cost-effectiveness that we believe our surgery centers provide and on syndicating our surgery centers to physicians who we believe will provide us with a high volume of cases and a favorable case mix in terms of reimbursement. To that end, we are increasing our efforts to syndicate additional partnership interests in our surgery centers to appropriate physicians and to buy out physician partners who have retired, moved away from a center's service area or otherwise do not utilize the center as a significant extension of their practice. In addition, we believe that the geographic scope of our surgery centers and the cost-effective nature of services performed in a freestanding outpatient surgery center are attractive to payors, and we market our outpatient surgery centers to those payors. DIAGNOSTIC SERVICES. We are the largest operator of outpatient diagnostic centers in the United States. At December 31, 2000, we operated 142 diagnostic centers in 31 states and the United Kingdom. Our diagnostic centers provide outpatient diagnostic imaging services, including MRI services, CT services, X-ray services, ultrasound services, mammography services, nuclear medicine services and fluoroscopy. Not all services are provided at all sites; however, most of our diagnostic centers are multi-modality centers offering multiple types of service. We believe that the key factors influencing the diagnostic center business are quality of service, turnaround time, relationships with referring physicians and patient convenience. In our diagnostic centers, we attempt to obtain the services of the best available radiologists to provide high-quality interpretations and to provide modern, well-maintained equipment and well-trained technicians. We attempt to locate our diagnostic centers in areas which are convenient for physicians and patients and to focus on prompt performance of diagnostic procedures and turnaround of interpretation reports. In addition, we believe that the reputation and relationships we have established with physicians through our outpatient rehabilitation and outpatient surgery services help us market our diagnostic services to those physicians and others. Our diagnostic centers provide outpatient diagnostic procedures performed by experienced radiological technicians. After the diagnostic procedure is completed, the images are reviewed by radiologists who have contracted with us. Those radiologists prepare a report of the test and their findings, which are then delivered to the referring physician. Our diagnostic centers are open at hours designed to accommodate the needs of the patient population being served and the local demand for services. Because many patients at our rehabilitative healthcare and outpatient surgery facilities require diagnostic procedures of the type performed at our diagnostic centers, we believe that our diagnostic operations are a natural complement to our other services and enhance our ability to market those services to patients and payors. OUTPATIENT SERVICES MANAGEMENT. Our outpatient services are managed by local market managers, who are responsible for all outpatient services in particular local markets, and regional market leaders, who are responsible for overseeing the market managers in particular regions. The market leaders report to division presidents responsible for our Ambulatory Services--East and Ambulatory Services--West divisions. This management approach, introduced in September 1999, replaced an earlier system which had separate, corporate-office-based management teams for each line of business. The new structure puts significant authority for operations, development and managed care contracting decisions in the hands of experienced managers who are positioned to respond to particular local and regional demands, trends and opportunities, with a full range of centralized corporate support resources backing them up. We believe that this approach allows us to better leverage our comparative regional advantage in terms of market share, relationships with payors, physicians and referral sources, and local market knowledge and experience. 8 INTEGRATED SERVICE MODEL STRATEGY. Our ISM strategy is an integral part of our outpatient operations. In major markets, we seek to provide an integrated system of healthcare services, including, as appropriate, outpatient rehabilitation services, outpatient surgery services and outpatient diagnostic services, offering payors the convenience of dealing with a single provider for multiple services and enhancing cross-referral opportunities among our facilities. The ISM also includes inpatient rehabilitation services in appropriate markets. We have implemented our ISM in over 180 of our markets, and intend as our long-term goal to expand the model into the 300 largest markets in the United States. Inpatient and Other Clinical Services Segment Our inpatient and other clinical services segment includes the operations of our inpatient rehabilitation facilities and medical centers, as well as the operations of certain other clinical services which are managerially aligned with our inpatient services. During the year ended December 31, 2000, our inpatient rehabilitation facilities achieved an overall utilization, based on patient days and available beds, of 79.6%. In measuring patient utilization of our inpatient facilities, various factors must be considered. Due to market demand, demographics, start-up status, renovation, patient mix and other factors, we 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. We are generally in a position to increase the number of available beds at such facilities as market conditions dictate. INPATIENT REHABILITATION FACILITIES. At December 31, 2000, we operated 120 inpatient rehabilitation facilities with 7,696 licensed beds in the continental United States, representing the largest group of affiliated proprietary inpatient rehabilitation facilities in the nation, as well as a 71-bed rehabilitation hospital in Australia and a 17-bed rehabilitation facility in Puerto Rico. Our inpatient rehabilitation facilities provide high-quality comprehensive services to patients who require intensive institutional rehabilitation care. We believe that the key factors influencing the inpatient rehabilitation services business are cost and quality of care, clinical outcomes, relationships with payors, case managers, discharge planners and referral sources, and reimbursement rates. We believe that our reputation for quality of care and cost-effectiveness positions us well with payors and others to compete for patients. In addition, we believe that the economies of scale that we enjoy and the standardized clinical protocols that we utilize enable us to operate our inpatient rehabilitation facilities in a cost-effective manner that we expect will benefit us when the current cost-based Medicare reimbursement system for inpatient rehabilitation services is replaced by the new PPS system, which is expected to phase in sometime in 2001. See this Item, "Business -- Regulation". Further, we believe that our strategy of joint venturing our rehabilitation hospitals with nearby tertiary-care hospitals, where appropriate opportunities exist, enables us to enhance our clinical and research activities, to obtain various support and ancillary services from the acute-care hospitals without duplication of resources, and to provide a more coordinated continuum of care for the constituencies served by those acute-care hospitals. 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. Our 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 our 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. In certain markets, our 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 9 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 our freestanding outpatient centers are utilized by these facilities. A number of our rehabilitation hospitals were developed in conjunction with local tertiary-care facilities, including major teaching hospitals such as those at Vanderbilt University, the University of Missouri and the University of Virginia. In addition to those facilities so developed by us, we have entered into or are pursuing similar affiliations with a number of our rehabilitation hospitals which were obtained through our major acquisitions. Inpatient rehabilitation patients have typically been discharged from an acute-care setting. Accordingly, we focus on marketing our services to acute-care hospital discharge planners and to case managers utilized by payors and case management companies, who are typically influential in determining appropriate post-acute treatment settings for their patients. In addition, we market our services to physiatrists, neurologists, neurosurgeons, orthopaedic surgeons and other physicians involved in the care and referral of patients suited for inpatient rehabilitation. MEDICAL CENTERS. At December 31, 2000, we operated five medical centers with 1,125 licensed beds in four geographic markets, including one facility managed under contract. These facilities provide general and specialty medical and surgical healthcare services, emphasizing orthopaedics, sports medicine and rehabilitation. We acquired our medical centers as outgrowths of our 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 we have acquired a medical center, we had well-established relationships with the medical communities serving each facility. Following the acquisition of each of our medical centers, we have provided the resources to improve upon the physical plant and expand services through the introduction of new technology. We have 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 of our medical centers have improved their operating efficiencies and enhanced census. Each of our medical center facilities is licensed as an acute-care hospital, is accredited by the JCAHO and participates in the Medicare acute-care prospective payment system. See this Item, "Business -- Regulation". As described above, in the first quarter of 2001 we entered into a letter of intent to sell our Richmond, Virginia medical center and a related surgery center. See this Item, "Business - Recent Developments". Other Patient Care Services In some markets, we provide other patient care services, including physician services and contract management of hospital- based rehabilitative healthcare services. We evaluate 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 we provide or stand-alone businesses. These services are included within our business segment with which they are most closely aligned in the particular local market. MARKETING We market our services to patients, payors, physicians, case managers and other referral sources through a combination of national, regional and local strategies. We believe that these strategies have allowed us to develop a strong corporate brand identity, and have enabled us to focus our marketing efforts on particular demographic factors and competitive strengths in local and regional markets. We develop a local 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 10 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. Our larger-scale marketing activities are focused more broadly on efforts to generate patient referrals to multiple facilities and the creation of new business opportunities. These activities include the development and maintenance of contractual relationships or national pricing agreements with large third-party payors, such as CIGNA, United Healthcare or other national insurance companies, with national HMO/PPO companies, such as First Health and Multiplan, with national case management companies, such as INTRACORP and Crawford & Co., and with national employers, such as Delta Airlines, Georgia-Pacific Corporation, Federated Department Stores, Goodyear Tire & Rubber and Winn-Dixie. We also carry out broader programs designed to further enhance our name recognition and association with amateur and professional athletics. Among these is the HEALTHSOUTH Sports Medicine Council, headed by Bo Jackson and involving other well-known professional and amateur athletes and sports medicine specialists, which is dedicated to developing educational programs focused on athletics for use in high schools. We have ongoing relationships with the Professional Golfers Association, the Senior Professional Golfers Association, the Ladies Professional Golf Association, the Southwestern Athletic Conference, and other professional and amateur sports organizations, as well as numerous universities, colleges and high schools to provide sports medicine coverage of events and rehabilitative healthcare services for injured athletes. In addition, we have established relationships with or provided treatment services for athletes from some 40-50 professional sports teams, as well as providing sports medicine services for Olympic and amateur athletes. In 1996, HEALTHSOUTH and the United States Olympic Committee established the Richard M. Scrushy/HEALTHSOUTH Sports Medicine and Sport Science Center at the USOC's Colorado Springs campus. We maintain a Web site at www.healthsouth.com, which provides information on the company, health information, targeted information and services for physicians and patients, links to our Securities and Exchange Commission filings and press releases, a facility locator and links to other relevant information, as well as other specialized Web sites. We believe that our Web sites enhance consumer and physician awareness of our services and locations and access to those services, as well as providing a valuable resource for health information related to the services that we provide. We are a national sponsor of the United Cerebral Palsy Association and the National Arthritis Foundation and support many other charitable organizations on national and local levels. Through these endeavors, HEALTHSOUTH and its employees are able to support charitable organizations and activities within their communities. SOURCES OF REVENUES Most of our revenues come from non-governmental revenue sources. The following table sets forth the percentages of our revenues from various sources for the periods indicated:
YEAR ENDED YEAR ENDED SOURCE DECEMBER 31, 1999 DECEMBER 31, 2000 ------ ------------------- ------------------ Medicare ...................... 33.0% 29.0% Commercial (1) ................ 40.3 43.1 Workers' Compensation ......... 11.5 12.0 All Other Payors (2) .......... 15.2 15.9 ----- ----- 100.0% 100.0% ===== =====
- ------------------ (1) Includes commercial insurance, HMOs, PPOs and other managed care plans. (2) Medicaid is included in this category, representing approximately 2% of 1999 revenues and 3% of 2000 revenues. See this Item, "Business -- Regulation -- Medicare Participation and Reimbursement" for a description of certain of the reimbursement regulations applicable to our facilities. 11 COMPETITION Our rehabilitation facilities compete on a local, 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 particular area. The primary competitive factors in the rehabilitation components of our inpatient and outpatient business segments 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 we do. We believe that we compete successfully within the marketplace based upon our reputation for quality, competitive prices, positive rehabilitation outcomes, innovative programs, clean and bright facilities and responsiveness to needs. Our surgery centers compete primarily with hospitals and other operators of freestanding surgery centers in attracting physicians and patients and in developing new centers and 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, we believe that our national market system and our historical presence in many of the markets where our surgery centers are located enhance our ability to operate these facilities successfully. Our diagnostic centers compete with local hospitals, other multi-center imaging companies, local independent diagnostic centers and imaging centers owned by local physician groups. We believe that the principal competitive factors in the diagnostic services business are price, quality of service, ability to establish and maintain relationships with managed care payors and referring physicians, reputation of interpreting physicians, facility location and convenience of scheduling. We believe that our diagnostic facilities compete successfully within their respective markets, taking into account these factors. Our 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. Our facilities compete directly with these local hospitals as well as various nationally recognized centers of excellence in orthopaedics, sports medicine and other specialties. Because our facilities enjoy a national and international reputation for orthopaedic surgery and sports medicine, we believe that our medical centers' level of service and continuum of care enable them to compete successfully, both locally and nationally. We potentially face competition any time we initiate a Certificate of Need project or seek to acquire an existing facility or Certificate of Need. See this Item, "Business -- Regulation". This competition may arise either from competing national or regional companies or from local hospitals or other providers which file competing applications or oppose the proposed Certificate of Need 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. We have generally been successful in obtaining Certificates of Need or similar approvals when required, although there can be no assurance that we 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 our business activities by controlling our growth, requiring licensure or certification of our facilities, regulating the use of our properties and controlling the reimbursement we receive 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 Certificate of Need programs place limits on the 12 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 or outpatient surgery centers. Most states do not require such approvals for outpatient rehabilitation, occupational health and diagnostic facilities and services. State Certificate of Need 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 must determine that a need exists for those beds, facilities or services. The Certificate of Need 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 agency 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 Certificate of Need is granted is based upon a finding of need by the agency in accordance with criteria set forth in Certificate of Need 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 agency will issue a Certificate of Need containing a maximum amount of expenditure and a specific time period for the holder of the Certificate of Need to implement the approved project. Licensure and certification are separate, but related, regulatory activities. Licensure is usually a state or local requirement, and certification 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 our inpatient rehabilitation facilities and medical centers and substantially all of our surgery centers are currently required to be licensed, but only the outpatient rehabilitation facilities located in Alabama, Arizona, Kentucky, Maryland, Massachusetts, New Hampshire, New Mexico and Rhode Island currently must satisfy such a licensing requirement. Most states do not require diagnostic and occupational medicine facilities to be licensed. 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 our inpatient facilities, except for our St. Louis head injury center, participate in the Medicare program. Approximately 1,178 of our outpatient rehabilitation facilities currently participate in, or are awaiting the assignment of a provider number to participate in, the Medicare program. All of our surgery centers are certified (or awaiting certification) under the Medicare program. Diagnostic and occupational health facilities are not certified by the Medicare program. Our 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. We have developed our operational systems to attempt to assure compliance with the various standards and requirements of the Medicare program and have established ongoing quality assurance activities to monitor compliance. As a result of the Social Security Act Amendments of 1983, Congress adopted a PPS to cover the routine and ancillary operating costs of most Medicare inpatient acute-care 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, reimbursement received by an acute-care hospital 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 acute-care 13 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. Our medical center facilities are generally subject to acute-care PPS with respect to Medicare inpatient services. The acute-care 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. Freestanding inpatient rehabilitation facilities have been exempt from PPS, and inpatient rehabilitation units within acute-care hospitals have been eligible to obtain an exemption from PPS upon satisfaction of certain federal criteria. As discussed below, freestanding inpatient rehabilitation facilities and hospital-based inpatient rehabilitation units are to be placed under a PPS currently expected to be phased in beginning later in 2001. Currently, 17 of our outpatient centers are Medicare-certified Comprehensive Outpatient Rehabilitation Facilities ("CORFs") and 983 are Medicare-certified rehabilitation agencies or satellites. Additionally, we have certification applications pending for two CORF sites and 176 rehabilitation agency sites (including satellites.) Through December 31, 1998, CORFs were reimbursed reasonable costs (subject to certain limits) for services provided to Medicare beneficiaries, and outpatient rehabilitation facilities certified by Medicare as rehabilitation agencies were 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. From January 1, 1999, CORFs and rehabilitation agencies are reimbursed on a fee screen basis as well. Our outpatient rehabilitation facilities submit monthly bills to their fiscal intermediaries for services provided to Medicare beneficiaries, and we file annual cost reports with the intermediaries for each such facility. Our inpatient facilities (other than the medical center facilities) either are not currently covered by PPS or are currently exempt from PPS, and are currently 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. Annual cost reports are filed with our fiscal intermediary and payment adjustments are made, if necessary. As part of the Balanced Budget Act of 1997, Congress directed the United States Department of Health and Human Services to develop regulations that would subject inpatient rehabilitation hospitals to a PPS, which was expected to be phased in beginning April 2001, and to be fully implemented by April 2003. The Act required that the rates must equal 98% of the amount of payments that would have been if the PPS had not been adopted. More recently, the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 amended the requirements of the Balanced Budget Act to require that rates for federal fiscal year 2002 must equal 100% of the amount of payments that would have been made if the PPS had not been adopted and to allow inpatient rehabilitation facilities to elect to transition immediately to full PPS reimbursement in their first cost reporting year beginning after the effective date of PPS implementation, instead of having PPS phased in over three cost reporting years, as originally required. Final regulations implementing inpatient rehabilitation PPS have not yet been released, and the United States Department of Health and Human Services has announced that it intends to delay the scheduled April 1, 2001 implementation date to a later date that has not yet been determined. In addition, the Act requires the establishment of a PPS for hospital outpatient department services, effective for services furnished beginning in 1999. Regulations implementing that requirement became effective August 1, 2000. We do not expect those regulations to have a material effect on us. In June 1998, the Health Care Financing Administration issued proposed rules setting forth new payment classifications which would significantly change Medicare reimbursement for outpatient surgery centers. However, these proposed rules have not been promulgated in final form, and we cannot currently predict when final rules, if any, will be adopted or the content or effect on our operations of those rules. 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 14 the United States government. Because HEALTHSOUTH 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 or cost reporting error could result in significant civil or criminal penalties. 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 (a) 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 (b) 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 issued regulations describing compensation arrangements which are not viewed as illegal remuneration under the Fraud and Abuse Law (the "1991 Safe Harbor Rules"). The 1991 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 that 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. In 1992, regulations were published in the Federal Register implementing the OIG sanction and civil money penalty provisions established in the Fraud and Abuse Law. The regulations provide that the OIG may exclude a Medicare provider from participation in the Medicare Program for a five-year period upon a finding that the Fraud and Abuse Law has been violated. The regulations expressly incorporate a test adopted by three federal circuit courts providing that if one purpose of remuneration that is offered, paid, solicited or received is to induce referrals, then the statute is violated. The regulations also provide that after the OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove that it has not violated the Fraud and Abuse Law. The OIG closely scrutinizes healthcare joint ventures involving physicians and other referral sources. In 1989, the OIG published a Fraud Alert that outlined questionable features of "suspect" joint ventures, and has continued to rely on such Fraud Alert in later pronouncements. We currently operate 23 of our rehabilitation hospitals and many of our outpatient rehabilitation facilities as limited partnerships or limited liability companies (collectively, "partnerships") with third-party investors. Six of the rehabilitation hospital partnerships involve physician investors and 17 of the rehabilitation hospital partnerships involve other institutional healthcare providers. Eight 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 we have established with physicians and other healthcare providers do not fit within any of the Safe Harbors. The 1991 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 indicated that failure to fall within a Safe Harbor may subject an arrangement to increased scrutiny. Most of our surgery centers are owned by partnerships, which include as partners physicians who perform surgical or other procedures at such centers. On November 19, 1999, the Department of Health and Human Services promulgated rules setting forth additional Safe Harbors under the Fraud and Abuse Law (the "1999 Safe Harbors"). Included in the 1999 Safe Harbors is a Safe Harbor which would protect payments to investors in ambulatory surgery centers who are surgeons who refer patients directly to the center and perform surgery themselves on referred patients as an extension of their practices (the "ASC Safe Harbor"). Under the ASC Safe Harbor, ownership in a freestanding ambulatory surgery center will be protected if a number of conditions are satisfied. Included in those conditions is a requirement that each investor be either (a) a surgeon who derived at least one-third of his medical practice income for 15 the previous fiscal year or twelve-month period from performing procedures on the list of Medicare-covered procedures for ambulatory surgery centers or (b) not in a position to make or influence referrals to the center, nor provide items or services to the center, nor an employee of the center or of any investor. In addition, if all physician investors are not members of a single specialty, at least one-third of the Medicare-eligible ambulatory surgery procedures performed by each physician investor for the previous fiscal year or previous twelve-month period must be performed at the center in which the investment is made. Since a subsidiary of HEALTHSOUTH is an investor in each partnership which owns a surgery center and provides management and other services to the surgery center, our arrangements with physician investors do not fit within the specific terms of the ASC Safe Harbor. In addition, because we do not control the medical practices of our physician investors or control where they perform surgical procedures, it is possible that the quantitative tests described above will not be met, or that other conditions of the ASC Safe Harbor will not be met. Accordingly, while the ASC Safe Harbor is helpful in establishing the principle that a physician investor's interest in a surgery center partnership should be considered as an extension of the physician's practice and not as a prohibited financial relationship, there can be no assurance that such ownership interests will not be challenged under the Fraud and Abuse Law. We believe, however, that our arrangements with physicians with respect to surgery center facilities should not fall within the activities prohibited by the Fraud and Abuse Law. Some of our diagnostic centers are owned or operated by partnerships which include radiologists as partners. While such ownership interests are not directly covered by the Safe Harbor Rules, we do not believe that such arrangements violate the Fraud and Abuse Law because radiologists are typically not in a position to make or induce referrals to diagnostic centers. In addition, our mobile lithotripsy operations are conducted by partnerships in which urologists are limited partners. Because such urologists are in a position to, and do, perform lithotripsy procedures utilizing our lithotripsy equipment, we believe that the same analysis underlying the ASC Safe Harbor should apply to ownership interests in lithotripsy equipment held by urologists. In addition, we believe that the nature of lithotripsy services (i.e., lithotripsy is only prescribed and utilized when a condition for which lithotripsy is the treatment of choice has been diagnosed) makes the risk of overutilization unlikely. There can be no assurance, however, that the Fraud and Abuse Law will not be interpreted in a manner contrary to our beliefs with respect to diagnostic and lithotripsy services. 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 our partnerships. We believe that our operations are 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 we have established with physicians or other healthcare providers or result in the imposition of penalties on HEALTHSOUTH or particular HEALTHSOUTH facilities. Even the assertion of a violation could have a material adverse effect upon our business, results of operations or financial condition. 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, occupational therapy, radiology services or radiation 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 our partnerships with physician partners. On January 9, 1998, the Department of Health and Human Services published proposed regulations (the "Proposed Stark Regulations") under the Stark II statute and solicited comments thereon. On January 4, 2001, the Department of Health and Human Services published final regulations relating to part of the Stark II statute (the "Phase I Final Stark Regulations") and announced its intention to publish a second, "Phase II" set of regulations covering the remainder of the statute and responding to comments received on the Phase I Final Stark Regulations at some unspecified future date. The Phase I Final Stark Regulations, which differ substantially in many respects from the Proposed Stark Regulations, have a specified effective date of January 4, 2002; however, recent actions by the new Administration have suspended the effective date of all regulations that had not yet gone into effect pending its review. We cannot currently predict whether this suspension will have the effect of delaying 16 the January 4, 2002 date. 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, we have restructured most of our partnerships which involve physician investors to the extent required by applicable law, in order to eliminate physician ownership interests not permitted by applicable law. We intend 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. We believe that this restructuring has not adversely affected and will not adversely affect the operations of our facilities. Ambulatory surgery is not identified as a "designated health service" under Stark II, and we do not believe the statute is intended to cover ambulatory surgery services. The Phase I Final Stark Regulations expressly clarify that the provision of designated health services in an ambulatory surgery center is excepted from the referral prohibition of Stark II if payment for such designated health services is included in the ambulatory surgery center payment rate. Our lithotripsy units frequently operate on hospital campuses, and it is possible to conclude that such services are "inpatient and outpatient hospital services" -- a category of designated health services under Stark II. The legislative history of the Stark II statute indicates that the statute was not intended to cover the provision of lithotripsy services by physician-owned lithotripsy providers under contract with a hospital. However, the Phase I Final Stark Regulations indicate that lithotripsy services provided at a hospital would constitute "inpatient and outpatient hospital services" and thus would be subject to Stark II. Based upon the Phase I Final Stark Regulations and the associated commentary by the Health Care Financing Administration, we believe that the operations of our lithotripsy partnerships, to the extent that they involve designated health services, either fall within exceptions contained in the Phase I Final Stark Regulations or, depending on the particular situation, might be restructured to comply with them before the effective date of the Phase I Final Stark Regulations. To the extent practicable, we intend to take such steps as may be required to cause such partnerships to be in compliance. If we are required to terminate any of these relationships, we believe such action will not adversely affect our operations. In addition, physicians frequently perform endoscopic procedures in the procedure rooms of our surgery centers, and it is possible to construe such services to be "designated health services". While we do not believe that Stark II was intended to apply to such services, if that were determined to be the case, we intend to take steps necessary to cause the operations of our facilities to comply with the law. The Health Insurance Portability and Accountability Act of 1996 In an effort to combat healthcare fraud, Congress included several anti-fraud measures in the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA, among other things, amends existing crimes and criminal penalties for Medicare fraud and enacts new federal healthcare fraud crimes. HIPAA also expands the Fraud and Abuse Law to apply to all federal healthcare programs, defined to include any plan or program that provides health benefits through insurance that is funded by the federal government. Under HIPAA, the Secretary of the Department of Health and Human Services (the "Secretary") may exclude from the Medicare program any individual who has a direct or indirect ownership or control interest in a healthcare entity that has been convicted of a healthcare fraud crime or that has been excluded from the Medicare program. HIPAA directs the Secretary to establish a program to collect information on healthcare fraud and abuse to encourage individuals to report information concerning fraud and abuse against the Medicare program and provides for payment of a portion of amounts collected to such individuals. HIPAA mandates the establishment of a Fraud and Abuse Program, among other programs, to control fraud and abuse with respect to health plans and to conduct investigations, audits, evaluations, and inspections relating to the delivery of and payment for healthcare in the United States. HIPAA prohibits any person or entity from knowingly and willfully committing a federal healthcare offense relating to a "health care benefit program". Under HIPAA, a "health care benefit program" broadly includes any private plan or contract affecting interstate commerce under which any medical benefit, item, or service is provided to any individual. Among the "federal health care offenses" prohibited by HIPAA are healthcare fraud and making false statements relative to healthcare matters. 17 Any person or entity that knowingly and willfully defrauds or attempts to defraud a healthcare benefit program or obtains by means of false or fraudulent pretenses, representations or promises, any of the money or property of any healthcare benefit program in connection with the delivery of healthcare services is subject to a fine and/or imprisonment. In addition, HIPAA provides that any person or entity that knowingly and willfully falsifies, conceals or covers up a material fact or makes any materially false or fraudulent statements in connection with the delivery of or payment of healthcare services by a healthcare benefit plan is subject to a fine and/or imprisonment. HIPAA further expands the list of acts which are subject to civil monetary penalties under federal law and increases the amount of civil penalties which may be imposed. HIPAA provides for civil fines for individuals who retain an ownership or control interest in a Medicare or Medicaid participating entity after such individuals have been excluded from participating in the Medicare or Medicaid program. HIPAA further provides for civil fines for individuals who offer inducements to Medicare or Medicaid eligible patients if the individuals know or should know that their offers will influence the patients to order or receive items or services from a particular provider, practitioner or supplier. In addition, HIPAA mandates, for all healthcare providers, standardization in the use, storage, and transfer of electronically transmitted healthcare data and also requires that healthcare providers, payors and clearinghouses adopt detailed new procedures for ensuring the privacy and security of individually identifiable health information. In August 2000, the Department of Health and Human Services published final regulations adopting standards for electronic transactions and for code sets to be used in those transactions. Those regulations have a specified effective date of October 16, 2002 for most providers, including us. In December 2000, the Department released final regulations establishing standards for the privacy of individually identifiable health information. The final privacy regulations, which differ substantially from previously proposed regulations, impose significant limitations on the use and disclosure of individually identifiable health information by providers, including us, as well as payors and clearinghouses. The final regulations are currently scheduled to take effect in April 2003. The final privacy regulations have been significantly criticized by many parts of the healthcare industry, and further changes in such regulations or delays in their implementation are possible. Compliance with the HIPAA privacy and electronic standards regulations will require significant changes in current information and claims processing practices utilized by healthcare providers, including us. It is not possible at this time to estimate the cost of such compliance. However, we have taken steps intended to ensure that we will comply with the applicable regulations by their respective effective dates, and we believe that we will be able to do so without a material adverse effect on our business, financial condition or results of operations. We cannot predict whether other regulatory or statutory provisions will be enacted by federal or state authorities which would prohibit or otherwise regulate relationships which we have 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. We believe, however, that we will be able to adjust our operations so as to be in compliance with any regulatory or statutory provision that may be applicable. See this Item, "Business -- Patient Care Services" and "Business -- Sources of Revenues". INSURANCE Beginning December 1, 1993, we became self-insured for professional liability and comprehensive general liability. We purchased coverage for all claims incurred prior to December 1, 1993. In addition, we purchased underlying insurance which would cover all claims once established limits have been exceeded. It is the opinion of management that as of December 31, 2000, we had adequate reserves to cover losses on asserted and unasserted claims. In the fourth quarter of 2000, we formed an offshore captive insurance subsidiary to which we expect to transition the administration of our self-insurance programs. In connection with our October 1997 acquisition of Horizon/CMS Healthcare Corporation, HEALTHSOUTH assumed responsibility for handling Horizon/CMS's open professional and general liability claims. We have entered into an agreement with an insurance carrier to assume responsibility for the majority of open claims. Under this agreement, a "risk transfer" converted Horizon/CMS's self-insured claims to insured liabilities consistent with the terms of the underlying insurance policy. 18 EMPLOYEES As of December 31, 2000, we employed approximately 53,216 persons, of whom 34,427 were full-time employees and 18,789 were part-time or per diem employees. Of the above employees, 863 (including 39 part-time or per diem employees) were employed at our headquarters in Birmingham, Alabama. Except for approximately 93 employees at one rehabilitation hospital (about 16% of that facility's workforce), none of our employees are represented by a labor union. We are not aware of any current activities to organize our employees at other facilities. Management considers the relationship between HEALTHSOUTH and its employees to be good. ITEM 2. PROPERTIES. HEALTHSOUTH's executive offices occupy a headquarters building of approximately 200,000 square feet in Birmingham, Alabama. The headquarters building was constructed on a 73-acre parcel of land owned by HEALTHSOUTH pursuant to a tax retention operating lease structured through NationsBanc Leasing Corporation. Substantially all of our outpatient rehabilitation and occupational medicine operations are carried out in leased facilities. We own 45 of our inpatient rehabilitation facilities and lease or operate under management contracts the remainder of our inpatient rehabilitation facilities. We also own 80 of our surgery centers and 41 of our diagnostic centers and lease or operate under management arrangements the remainder. We constructed our rehabilitation hospitals in Florence and Columbia, South Carolina, Kingsport and Nashville, Tennessee, Concord, New Hampshire, Dothan, Alabama, Columbia, Missouri, and Charlottesville, Virginia on property leased under long-term ground leases. The property on which our Memphis, Tennessee rehabilitation hospital is located is owned in partnership by HEALTHSOUTH and Methodist Healthcare-Memphis Hospitals. We own four of our medical center facilities and manage one under contract. We currently own, and from time to time may acquire, certain other improved and unimproved real properties in connection with our business. See Notes 5 and 7 of "Notes to Consolidated Financial Statements" for information with respect to the properties we own and certain related indebtedness. In management's opinion, our physical properties are adequate for our needs for the foreseeable future, and are consistent with our expansion plans described elsewhere in this Annual Report on Form 10-K. 19 The following table sets forth a listing of our primary domestic patient care services locations (including both facilities owned or leased by HEALTHSOUTH and facilities under management agreements or similar arrangements) at December 31, 2000:
INPATIENT REHABILITATION OCCUPATIONAL OUTPATIENT FACILITIES MEDICAL MEDICINE REHABILITATION SURGERY DIAGNOSTIC STATE (BEDS)(1) CENTERS (BEDS)(1) CENTERS CENTERS(2) CENTERS CENTERS - ----- ---------------- ------------------- -------------- ---------------- --------- ----------- Alabama ...................... 7 (374) 2 (538) 3 36 7 5 Alaska ....................... 3 7 1 1 Arizona ...................... 4 (243) 7 32 4 2 Arkansas ..................... 5 (283) 1 23 2 California ................... 3 (197) 27 58 50 3 Colorado ..................... 1 (64) 1 34 4 6 Connecticut .................. 1 34 5 Delaware ..................... 6 1 District of Columbia ......... 1 1 Florida ...................... 10 (661) 1(281) 8 130 19 8 Georgia ...................... 1 (50) 4 42 4 11 Hawaii ....................... 11 2 Idaho ........................ 2 1 Illinois ..................... 1 (39) 1 50 8 6 Indiana ...................... 4 (208) 3 10 4 1 Iowa ......................... 1 5 2 1 Kansas ....................... 4 (244) 30 1 Kentucky ..................... 2 (80) 2 7 6 Louisiana .................... 4 (267) 3 8 2 3 Maine ........................ 2 (125) 2 8 Maryland ..................... 2 (117) 30 5 13 Massachusetts ................ 10 (764) 1 63 1 2 Michigan ..................... 1 (30) 1 15 Minnesota .................... 15 2 Mississippi .................. 13 3 1 Missouri ..................... 2 (160) 2 58 8 6 Montana ...................... 4 1 Nebraska ..................... 1 6 Nevada ....................... 2 (130) 21 3 1 New Hampshire ................ 2 (74) 8 New Jersey ................... 1 (142) 63 3 2 New Mexico ................... 1 (61) 6 1 1 New York ..................... 1 45 2 North Carolina ............... 41 10 1 North Dakota ................. 2 Ohio ......................... 3 39 8 2 Oklahoma ..................... 3 (153) 1 23 5 3 Oregon ....................... 30 2 Pennsylvania ................. 15 (1,147) 4 81 6 12 Rhode Island ................. 2 2 South Carolina ............... 4 (256) 18 2 3 South Dakota ................. 2 1 Tennessee .................... 6 (350) 42 6 4 Texas ........................ 16 (1,084) 1 (106) 4 123 19 26 Utah ......................... 1 (89) 2 9 3 2 Vermont ...................... 1 2 Virginia ..................... 2 (90) 1 (200) 6 41 1 5 Washington ................... 17 56 4 1 West Virginia ................ 4 (214) 4 1 Wisconsin .................... 9 4 Wyoming ...................... 2
- ------------------ (1) "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. (2) Includes freestanding outpatient centers and their satellites, outpatient satellites of inpatient rehabilitation facilities and outpatient facilities managed under contract. 20 In addition, at December 31, 2000, we operated six diagnostic centers and one outpatient rehabilitation center in the United Kingdom, one 71-bed rehabilitation hospital in Australia and one 17-bed inpatient rehabilitation facility in Puerto Rico, as well as numerous locations in various states providing other services. We also provided occupational medicine services at four industrial plants in Canada. See this Item, "Business -- Recent Developments", for a description of pending divestiture transactions. ITEM 3. LEGAL PROCEEDINGS. In the ordinary course of its business, HEALTHSOUTH may be subject, from time to time, to claims and legal actions by patients and others. We do not believe that any such pending actions, if adversely decided, would have a material adverse effect on our financial condition. See Item 1, "Business -- Insurance" for a description of our insurance coverage arrangements. From time to time, we appeal decisions of various rate-making authorities with respect to Medicare rates established for HEALTHSOUTH 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 HEALTHSOUTH's operations. SECURITIES LITIGATION HEALTHSOUTH was served with various lawsuits filed beginning September 30, 1998 purporting to be class actions under the federal and Alabama securities laws. Such lawsuits were filed following a decline in our stock price at the end of the third quarter of 1998. Seven such suits were filed in the United States District Court for the Northern District of Alabama. In January 1999, those suits were ordered to be consolidated under the case style In re HEALTHSOUTH Corporation Securities Litigation, Master File No. CV98-O-2634-S. On April 12, 1999, the plaintiffs filed a consolidated amended complaint against HEALTHSOUTH and certain of our current and former officers and directors alleging that, during the period April 24, 1997 through September 30, 1998, the defendants misrepresented or failed to disclose certain material facts concerning our business and financial condition and the impact of the Balanced Budget Act of 1997 on our operations in order to artificially inflate the price of our common stock and issued or sold shares of such stock during the purported class period, all allegedly in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Certain of the named plaintiffs in the consolidated amended complaint also claim to represent separate subclasses consisting of former stockholders of Horizon/CMS Healthcare Corporation and National Surgery Centers, Inc. ("NSC") who received shares of HEALTHSOUTH common stock in connection with our acquisition of those entities and assert additional claims under Section 11 of the Securities Act of 1933 with respect to the registration of securities issued in those acquisitions. Another suit, Peter J. Petrunya v. HEALTHSOUTH Corporation, et al., Civil Action No. 98-05931, was filed in the Circuit Court for Jefferson County, Alabama, alleging that during the period July 16, 1996 through September 30, 1998 the defendants misrepresented or failed to disclose certain material facts concerning our business and financial condition, allegedly in violation of Sections 8-6-17 and 8-6-19 of the Alabama Securities Act. The Petrunya complaint was voluntarily dismissed by the plaintiff without prejudice in January 1999. Additionally, a suit styled Dennis Family Trust v. Richard M. Scrushy, et al., Civil Action No. 98-06592, has been filed in the Circuit Court for Jefferson County, Alabama, purportedly as a derivative action on behalf of HEALTHSOUTH. That suit largely replicates the allegations originally set forth in the individual complaints filed in the federal actions described in the preceding paragraph and alleges that the current directors of HEALTHSOUTH, certain former directors and certain officers of HEALTHSOUTH breached their fiduciary duties to HEALTHSOUTH and engaged in other allegedly tortious conduct. The plaintiff in that case has forborne pursuing its claim thus far pending further developments in the federal action, and the defendants have not yet been required to file a responsive pleading in the case. We filed a motion to dismiss the consolidated amended complaint in the federal action in late June 1999. On September 13, 2000, the magistrate judge issued his report and recommendation, recommending that the court dismiss the amended complaint in its entirety, with leave to amend. The plaintiffs objected 21 to that report, and we responded to that objection. On December 20, 2000, without oral argument, the court issued an order rejecting the magistrate judge's report and recommendation and denying our motion to dismiss. We believed that the December 20, 2000 order failed to follow the standards required under the Private Securities Litigation Reform Act of 1995 and Rule 9(b) of the Federal Rules of Civil Procedure, and we filed a motion asking the court to reconsider that order or to certify it for an interlocutory appeal to the United States Eleventh Circuit Court of Appeals. Oral argument on that motion was held on March 2, 2001, and the court denied that motion on March 12, 2001. Accordingly, we filed our answer to the consolidated amended complaint on March 26, 2001. We believe that all claims asserted in the above suits are without merit, and expect to vigorously defend against such claims. Because such suits remain at an early stage, we cannot currently predict the outcome of any such suits or the magnitude of any potential loss if our defense is unsuccessful. CERTAIN HORIZON/CMS LITIGATION On October 29, 1997, we acquired Horizon/CMS through the merger of a wholly owned subsidiary of HEALTHSOUTH into Horizon/CMS. Horizon/CMS is currently a party, or is subject, to certain material litigation matters and disputes, which are described below, as well as various other litigation matters and disputes arising in the ordinary course of its business. Michigan Attorney General Litigation Regarding Long-Term Care Facility In Michigan Horizon/CMS learned in September 1996 that the Attorney General of the State of Michigan was investigating one of its skilled nursing facilities. The facility, in Howell, Michigan, was owned and operated by Horizon/CMS from February 1994 until December 31, 1997. As widely reported in the press, the Attorney General seized a number of patient, financial and accounting records that were located at this facility. By order of a circuit judge in the county in which the facility is located, the Attorney General was ordered to return patient records to the facility for copying. Horizon/CMS advised the Michigan Attorney General that it was willing to cooperate fully in the investigation. The facility in question was sold by Horizon/CMS to Integrated Health Services, Inc. on December 31, 1997. On February 19, 1998, the State of Michigan filed a criminal complaint against Horizon/CMS, four former employees of the facility and one former Horizon/CMS regional manager, alleging various violations in 1995 and 1996 of certain statutes relating to patient care, patient medical records and the making of false statements with respect to the condition or operations of the facility (State of Michigan v. Horizon/CMS Healthcare Corp., et al., Case No. 98-630-FY, State of Michigan District Court 54B). The maximum fines chargeable against Horizon/CMS under the counts alleged in the complaint (exclusive of charges against the individual defendants, some of which charges may result in indemnification obligations for Horizon/CMS) aggregate $69,000. Horizon/CMS denies the allegations made in the complaint and expects to vigorously defend against the charges. The litigation continued at the pretrial hearing phase for over a year, including numerous adjournments, and Horizon/CMS is still awaiting a decision by the court as to which, if any, charges may be brought to trial. Because of the preliminary status of this litigation, it is not possible to predict at this time the outcome or effect of this litigation or the length of time it will take to resolve this litigation. Lawsuit by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc. On May 28, 1997, Continental Medical Systems, Inc. ("CMS"), a Horizon/CMS subsidiary acquired in 1995, was served with a lawsuit styled Kenneth Hubbard and Lynn Hubbard v. Rocco Ortenzio, Robert A. Ortenzio and Continental Medical Systems, Inc., No. 3:97 CV294MCK, filed in the United States District Court for the Western District of North Carolina, Charlotte Division, by the former shareholders of Communi-Care, Inc. and Pro Rehab, Inc. seeking damages arising out of certain "earnout" provisions of the definitive purchase agreements under which CMS purchased the outstanding stock of Communi-Care, Inc. and Pro Rehab, Inc. from such shareholders. The plaintiffs allege that the manner in which CMS and the other defendants operated the companies after their acquisition breached its fiduciary duties to the plaintiffs, constituted fraud, gross negligence and bad faith and a breach of their employment agreements with the companies. As a result of such alleged conduct, the plaintiffs assert that 22 they are entitled to damages in an amount in excess of $27,000,000 from CMS and the other defendants. Some of the plaintiffs' claims were dismissed by order of the court in September 1999. Horizon/CMS believes, based upon its evaluation of the legal and factual matters relating to the plaintiffs' assertions, that it has valid defenses to the plaintiffs' remaining claims and, as a result, intends to vigorously contest such claims. Horizon/CMS has also filed various counterclaims against the plaintiffs. Because this litigation remains at a procedurally early stage, HEALTHSOUTH cannot now predict the outcome or effect of such litigation or the length of time it will take to resolve such litigation. EEOC Litigation In March 1997, the Equal Employment Opportunity Commission filed a complaint against Horizon/CMS alleging that Horizon/CMS had engaged in unlawful employment practices in respect of Horizon/CMS's employment policies related to pregnancies. Specifically, the EEOC asserted that Horizon/CMS's alleged refusal to provide pregnant employees with light-duty assignments to accommodate their temporary disabilities caused by pregnancy violated Sections 701(k) and 703(a) of Title VII, 42 U.S.C. (section)(section) 2000e-(k) and 2000e-2(a). In this lawsuit, the EEOC sought, among other things, to permanently enjoin Horizon/CMS's employment practices in this regard. The trial court granted summary judgment in favor of Horizon/CMS on one count and dismissed the other count after a jury trial. The EEOC appealed the summary judgment ruling to the United States Court of Appeals for the Tenth Circuit, but did not appeal the dismissal of the other count. On July 31, 2000, a three-judge panel of the Court of Appeals reversed the summary judgment and remanded the case for trial on the sole remaining count. The matter has not yet gone to trial. Texas Nursing Facility Litigation In July 1996, Horizon/CMS was sued in a lawsuit styled Lexa A. Auld, Administratrix of Martha Hary, Deceased v. Horizon/CMS Healthcare Corporation and Charles T. Maxvill, D.O., No. 48- 165121, 48th Judicial District Court, Tarrant County, Texas. The case involved injuries allegedly suffered by a resident of the Heritage Western Hills nursing facility in Fort Worth, Texas. Horizon/CMS tendered the claim to its insurance carrier, which accepted coverage with a reservation of rights and provided a defense through the carrier's selected counsel in Dallas, Texas. The case went to trial on October 29, 1997, and on November 7, 1997, the jury rendered a verdict in favor of the plaintiff in the amount of $2,370,000 in compensatory damages and $90,000,000 in punitive damages. On February 20, 1998, the court reduced the jury's verdict and entered a judgment in the amount of approximately $11,237,000. On August 24, 2000, the Texas Supreme Court upheld the trial court's damage award, as reduced, and remanded the case for a final recalculation of interest. All damages in this case less Horizon/CMS's self-insured retention of $250,000 were covered by insurance. In addition, Horizon/CMS is the defendant in a case styled Cecil Fuqua, as Executor of the Estate of Wyvonne Fuqua, Deceased, v. Horizon/CMS Healthcare Corporation, Civil Action No. 4-98-CV- 1087-Y, United States District Court for the Northern District of Texas, Fort Worth Division. This case likewise involved injuries allegedly suffered by a resident at the Heritage Western Hills nursing facility. Horizon/CMS tendered the claim to its insurance carrier, which accepted coverage and provided a defense through the carrier's selected counsel. In October 2000, the court issued a sanctions order effectively preventing Horizon/CMS from raising any defense as to liability in the matter, and in February 2001, the jury returned a verdict against Horizon/CMS for actual damages totaling approximately $2,765,000 (plus 10% per annum prejudgment interest) and $310,000,000 in punitive damages. Horizon/CMS has filed various post-judgment motions for a new trial and for a reduction in the amount of the judgment, and has also filed a notice of its intent to appeal the judgment and various orders and rulings leading to the judgment once the court has ruled on the post-judgment motions. Horizon/CMS believes that it has strong arguments in support of its post-judgment motions and strong arguments to be made on appeal, if necessary. Horizon/CMS currently believes that the amount of the judgment will be reduced and the amount of any ultimate judgment or settlement will be covered by insurance. However, there can be no assurance that Horizon/CMS will be successful in having the judgment reduced or reversed, and Horizon/CMS and HEALTHSOUTH would potentially be liable for any portion of the judgment not covered by insurance. 23 Horizon/CMS was also a defendant in a case styled Lillian Ernst as Independent Executrix of the Estate of Robert Ernst, Deceased, v. Horizon/CMS Healthcare Corporation, et al., No. 99-CI-08116, 285th Judicial District Court, Bexar County, Texas. This case involved injuries allegedly suffered by a resident at the Blanco Vista nursing and rehabilitation facility in San Antonio, Texas. Horizon/CMS tendered the claim to its insurance carrier, which accepted coverage and provided a defense through the carrier's selected counsel. In February 2001, the jury returned a verdict against Horizon/CMS for actual damages of $7,000,000 and punitive damages of $75,000,000. The plaintiff and the insurance carrier agreed during trial that Horizon/CMS's liability would be capped at $20,000,000 and the carrier settled the claim for that amount after trial. The entire liability was paid by the insurance carrier, with no contribution from Horizon/CMS. See Item 1, "Business -- Insurance". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. HEALTHSOUTH common stock is listed for trading on the New York Stock Exchange under the symbol "HRC". The following table sets forth for the fiscal periods indicated the high and low reported sale prices for HEALTHSOUTH common stock as reported on the NYSE Composite Transactions Tape.
REPORTED SALE PRICE ------------------------- HIGH LOW ----------- ----------- 1999 -------- First Quarter .................... $ 17.75 $ 10.38 Second Quarter ................... 16.00 8.94 Third Quarter .................... 15.38 4.56 Fourth Quarter ................... 6.38 4.69 2000 -------- First Quarter .................... $ 7.31 $ 4.75 Second Quarter ................... 8.56 5.38 Third Quarter .................... 8.12 5.19 Fourth Quarter ................... 17.50 8.12
The closing price per share for HEALTHSOUTH common stock on the New York Stock Exchange on March 26, 2001 was $13.70. There were approximately 6,884 holders of record of HEALTHSOUTH common stock as of March 26, 2001. We have never paid cash dividends on our common stock (although certain of the companies we have acquired in pooling-of-interests transactions had paid dividends prior to such acquisitions), and we do not anticipate paying cash dividends in the foreseeable future. We currently anticipate that any future earnings will be retained to finance our operations. RECENT SALES OF UNREGISTERED SECURITIES There were no unregistered sales of equity securities by HEALTHSOUTH in 2000. 25 ITEM 6. SELECTED FINANCIAL DATA. Set forth below is a summary of selected consolidated financial data for HEALTHSOUTH for the years indicated. All amounts have been restated to reflect the effects of the 1996 acquisitions of Surgical Care Affiliates, Inc. ("SCA") and Advantage Health Corporation, the 1997 acquisition of Health Images, Inc. and the 1998 acquisition of NSC, each of which was accounted for as a pooling of interests.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1996 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues ............................................ $2,648,188 $3,123,176 $4,006,074 $4,072,107 $4,195,115 Operating unit expenses ............................. 1,718,108 1,952,189 2,491,914 2,688,849 2,816,363 Corporate general and administrative expenses .......................................... 82,953 87,512 112,800 149,285 148,023 Provision for doubtful accounts ..................... 61,311 74,743 112,202 342,708 98,037 Depreciation and amortization ....................... 212,967 257,136 344,591 374,248 360,847 Merger and acquisition related expenses (1) ......... 41,515 15,875 25,630 -- -- Impairment and restructuring charges (2) ............ 37,390 -- 483,455 121,037 -- Loss on sale of assets (2) .......................... -- -- 31,232 -- -- Interest expense .................................... 101,367 112,529 148,163 176,652 221,595 Interest income ..................................... (6,749) (6,004) (11,286) (10,587) (9,104) ---------- ---------- ---------- ---------- ---------- 2,248,862 2,493,980 3,738,701 3,842,192 3,635,761 ---------- ---------- ---------- ---------- ---------- Income before income taxes and minority interests ......................................... 399,326 629,196 267,373 229,915 559,354 Provision for income taxes .......................... 148,545 213,668 143,347 66,929 181,808 ---------- ---------- ---------- ---------- ---------- 250,781 415,528 124,026 162,986 377,546 Minority interests .................................. 54,003 72,469 77,468 86,469 99,081 ---------- ---------- ---------- ---------- ---------- Net income .......................................... $ 196,778 $ 343,059 $ 46,558 $ 76,517 $ 278,465 ========== ========== ========== ========== ========== Weighted average common shares outstanding (3) ................................... 336,603 366,768 421,462 408,195 385,666 ========== ========== ========== ========== ========== Net income per common share (3) ..................... $ 0.58 $ 0.94 $ 0.11 $ 0.19 $ 0.72 ========== ========== ========== ========== ========== Weighted average common shares outstanding -- assuming dilution (3)(4) ........... 365,715 386,211 432,275 414,570 391,016 ========== ========== ========== ========== ========== Net income per common share -- assuming dilution (3)(4) ................................... $ 0.55 $ 0.89 $ 0.11 $ 0.18 $ 0.71 ========== ========== ========== ========== ========== DECEMBER 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash and marketable securities ...................... $ 205,166 $ 185,018 $ 142,513 $ 132,882 $ 180,407 Working capital ..................................... 624,497 612,917 945,927 852,711 1,048,204 Total assets ........................................ 3,671,958 5,566,324 6,788,209 6,890,484 7,380,440 Long-term debt (5) .................................. 1,570,597 1,614,961 2,830,926 3,114,648 3,211,829 Stockholders' equity ................................ 1,686,770 3,290,623 3,423,004 3,206,362 3,526,454
- ---------- (1) Expenses related to the SCA, Advantage Health, Professional Sports Care Management, Inc. and ReadiCare, Inc. acquisitions in 1996, the Health Images acquisition in 1997 and the NSC acquisition in 1998. (2) See "Notes to Consolidated Financial Statements". (3) Adjusted to reflect a two-for-one stock split effected in the form of a 100% stock dividend paid on March 17, 1997. (4) Diluted earnings per share in 1996 and 1997 reflect shares reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures due 2001. Substantially all of those Debentures were converted into shares of HEALTHSOUTH common stock in 1997. (5) Includes current portion of long-term debt. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion is intended to facilitate the understanding and assessment of significant changes and trends related to the consolidated results of operations and financial condition of HEALTHSOUTH, including various factors related to acquisitions we have made during the periods indicated, the timing and nature of which have significantly affected our consolidated results of operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. We completed the following major acquisitions over the last three years: o On July 1, 1998, we acquired Columbia/HCA Healthcare Corporation's interest in (or entered into interim management arrangements with respect to) 34 outpatient surgery centers located in 13 states (the "Columbia/HCA Acquisition"). The cash purchase price was approximately $550,402,000. o On July 22, 1998, we acquired National Surgery Centers, Inc. (the "NSC Acquisition"). A total of 20,426,261 shares of HEALTHSOUTH common stock were issued in connection with the transaction, representing a value of approximately $574,489,000. At that time, NSC operated 40 outpatient surgery centers in 14 states. o On June 29, 1999, we acquired from Mariner Post-Acute Network, Inc. ("Mariner") substantially all of the assets of Mariner's American Rehability Services division (the "Rehability Acquisition"), which operated approximately 160 outpatient rehabilitation centers in 18 states. The net cash purchase price was approximately $54,521,000. Each of the Columbia/HCA Acquisition and the Rehability Acquisition was accounted for under the purchase method of accounting and, accordingly, the acquired operations are included in our consolidated financial statements from their respective dates of acquisition. The NSC Acquisition was accounted for as a pooling of interests and, with the exception of data set forth relating to revenues derived from Medicare and Medicaid, all amounts shown in the following discussion have been restated to reflect such acquisitions. NSC did not separately track such revenues (see Note 2 of "Notes to Consolidated Financial Statements" for further discussion). We determine the amortization period of the cost in excess of net asset value of purchased facilities based on an evaluation of the facts and circumstances of each individual purchase transaction. The evaluation includes an analysis of historic and projected financial performance, an evaluation of the estimated useful life of the buildings and fixed assets acquired, the indefinite useful life of certificates of need and licenses acquired, the competition within local markets, lease terms where applicable, and the legal terms of partnerships where applicable. We utilize independent appraisers and rely on our own management expertise in evaluating each of the factors noted above. With respect to the carrying value of the excess of cost over net asset value of individual purchased facilities and other intangible assets, we determine on a quarterly basis whether an impairment event has occurred by considering factors such as the market value of the asset, a significant adverse change in legal factors or in the business climate, adverse action by regulators, a history of operating losses or cash flow losses, or a projection of continuing losses associated with an operating entity. The carrying value of excess cost over net asset value of purchased facilities and other intangible assets will be evaluated if the facts and circumstances suggest that it has been impaired. If this evaluation indicates that the value of the asset will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, our carrying value of the asset will be reduced by the estimated shortfall of cash flows to the estimated fair market value. Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires an enterprise to report operating segments based upon the way its operations are managed. This approach defines operating segments along the lines used by 27 management to assess performance and make operating and resource allocation decisions. Based on our management and reporting structure, segment information has been presented for inpatient and other clinical services, outpatient services -- East and outpatient services -- West. The inpatient and other clinical services segment primarily includes the operations of our inpatient rehabilitation facilities and medical centers, as well as the operations of certain physician practices and other clinical services which are managerially aligned with our inpatient services. The outpatient services segments primarily include the operations of our outpatient rehabilitation facilities, outpatient surgery centers and outpatient diagnostic centers and follow the geographic management reporting structure we use for our outpatient services operations. See Note 14 of "Notes to Consolidated Financial Statements" for financial data for each of our operating segments. Our revenues include net patient service revenues and other operating revenues. Net patient service revenues are reported at estimated net realizable amounts from patients, insurance companies, third-party payors (primarily Medicare and Medicaid) and others for services rendered. Revenues from third-party payors also include estimated retroactive adjustments under reimbursement agreements which are subject to final review and settlement by appropriate authorities. We determine allowances for doubtful accounts based on the specific agings and payor classifications at each facility, and contractual adjustments based on historical experience and the terms of payor contracts. Net accounts receivable include only those amounts we estimate to be collectible. Substantially all of our revenues are derived from private and governmental third-party payors. Our reimbursement from governmental third-party payors is based upon cost reports and other reimbursement mechanisms which require the application and interpretation of complex regulations and policies, and such reimbursement is subject to various levels of review and adjustment by fiscal intermediaries and others, which may affect the final determination of reimbursement. In addition, there are increasing pressures from many payor sources to control healthcare costs and to reduce or limit increases in reimbursement rates for medical services. There can be no assurance that payments under governmental and third-party payor programs will remain at levels comparable to present levels. In addition, there have been, and we expect that there will continue to be, a number of proposals to limit Medicare reimbursement for certain services. We cannot now predict whether any of these proposals will be adopted or, if adopted and implemented, what effect such proposals would have on us. Changes in reimbursement policies or rates by private or governmental payors could have an adverse effect on our future results of operations. In many cases, we operate more than one site within a market. In such markets, there is customarily an outpatient center or inpatient facility with associated satellite outpatient locations. For purposes of the following discussion and analysis, same store operations are measured on locations within markets in which similar operations existed at the end of the period and include the operations of additional locations opened within the same market. New store operations are measured on locations within new markets. We may, from time to time, close or consolidate similar locations in multi-site markets to obtain efficiencies and respond to changes in demand. RESULTS OF OPERATIONS Twelve-Month Periods Ended December 31, 1998 and 1999 Our operations generated revenues of $4,072,107,000 in 1999, an increase of $66,033,000, or 1.6%, as compared to 1998 revenues. Same store revenues for the twelve months ended December 31, 1999 were $4,023,696,000, an increase of $97,792,000, or 2.4%, as compared to the same period in 1998, excluding discontinued home health operations. New store revenues for 1999 were $48,411,000. The increase in revenues is primarily attributable to the addition of new operations and increases in patient volume. Revenues generated from patients under the Medicare and Medicaid programs respectively accounted for 33.0% and 2.2% of total revenues for 1999, compared to 35.9% and 2.7% of total revenues for 1998. Revenues from any other single third-party payor were not significant in relation to our total revenues. 28 During 1999, same store inpatient days, outpatient visits, surgical cases and diagnostic cases increased 6.9%, 10.1%, 13.0% and 10.8%, respectively. Revenue per inpatient day, outpatient visit, surgical case and diagnostic case for same store operations decreased by (7.0)%, (1.3)%, (5.1)% and (7.2)%, respectively. Operating expenses (expenses excluding corporate general and administrative expenses, provision for doubtful accounts, depreciation and amortization and interest expense) were $2,688,849,000, or 66.0% of revenues, for 1999, compared to 62.2% of revenues for 1998. Included in operating expenses for the year ended December 31, 1999, is a non-recurring expense item of approximately $40,183,000 which related primarily to our plan to write off obsolete equipment. During the fourth quarter of 1999, we reviewed equipment that had originally been acquired through various company mergers and acquisitions. During the acquisitions it was our intention to either continue using the equipment or transfer it to other locations where it could be utilized. During the fourth quarter of 1999, an obsolescence charge was taken based on our determination that certain equipment was obsolete due to changes in available technologies. Excluding the non-recurring expense, operating expenses were $2,648,666,000, or 65.0% of revenues, for the year ended December 31, 1999. The increase in operating expenses as a percentage of revenues is primarily attributable to the decline in same store revenues per inpatient day, outpatient visit, surgical case and diagnostic case. Same store operating expenses for 1999, excluding the non-recurring expense item noted above, were $2,614,953,000, or 65.0% of related revenues. New store operating expenses were $33,713,000, or 69.6% of related revenues. Corporate general and administrative expenses increased from $112,800,000 in 1998 to $149,285,000 in 1999. Included in corporate general and administrative expenses for the year ended December 31, 1999, is a non-recurring expense item of approximately $29,798,000. This expense item included write-offs of investments and notes of $14,603,000, expenses related to year 2000 remediation of $13,429,000 and expenses related to the proposed spin-off of our inpatient operations of $1,766,000. As part of our evaluation of the proposed spin-off in 1999, we determined that certain notes and investments totaling $14,603,000 should be written off. The year 2000 remediation expenditures were incurred during 1999 while testing for year 2000 compliance. Excluding the non-recurring expense, as a percentage of revenues, corporate general and administrative expenses increased from 2.8% in 1998 to 2.9% in 1999. Total operating expenses were $2,838,134,000, or 69.7% of revenues, for 1999, compared to $2,604,714,000, or 65.0% of revenues, for 1998. The provision for doubtful accounts was $342,708,000, or 8.4% of revenues, for 1999, compared to $112,202,000, or 2.8% of revenues, for 1998. Included in the provision for doubtful accounts is $117,752,000 in expense recognized in the third quarter of 1999 and $139,835,000 in expense recognized in the fourth quarter of 1999. The third quarter provision includes the charge-off of accounts receivable of facilities included in the impairment and restructuring charges recognized in 1998. These accounts receivable were determined to be uncollectible by local and regional operations management personnel who assumed collection responsibilities in the third quarter of 1999 in connection with the restructuring of our outpatient regional business offices, which had previously been responsible for collection activities. The fourth quarter charge reflected management's decision to adopt a more conservative approach in estimating the allowance for doubtful accounts. The revision in estimating the allowance for doubtful accounts was due to management's assessment of the healthcare payor environment. This approach focused more heavily upon the specific agings and payor classifications at each facility, as opposed to determining an estimate based primarily on historical write-off rates. Due to a deterioration of the payor environment, our days sales outstanding at the end of the second quarter of 1999 had grown to 94.5 days. Our subsequent reviews uncovered tremendous volumes of denied or pended claims. Further commitment to collecting these older receivables would have diluted our effectiveness in collecting current, ongoing accounts. Depreciation and amortization expense was $374,248,000 for 1999, compared to $344,591,000 for 1998. The increase resulted from our investment in additional assets. Interest expense increased to $176,652,000 in 1999, compared to $148,163,000 for 1998, primarily because of the increased amount outstanding under our credit facilities (see "Liquidity and Capital Resources"). For 1999, interest income was $10,587,000, compared to $11,286,000 for 1998. During the fourth quarter of 1999, we completed our budgets for the 2000 fiscal year. The existence of locations budgeting operating losses before interest, taxes, depreciation and amortization initiated our 29 need for a detail oriented impairment review. During the fourth quarter of 1999, we recorded a non-recurring expense item of $121,037,000 related to the impairment of long-term assets. The charge was based on a facility-by-facility review of each facility's financial performance which determined if there were trends that would indicate that the facility's ability to recover its investment in long-lived assets had been impaired. The evaluation indicated that the value of the asset would not be recoverable, as determined based on the undiscounted cash flows of the entity over the remaining amortization period, and the impairment loss was calculated based on the excess of the carrying amount of the asset over the asset's fair value. For further discussion, see Note 13 of "Notes to Consolidated Financial Statements". Total unusual and non-recurring charges and expenses included in the results of operations for the year ended December 31, 1999 were approximately $448,605,000. Income before minority interests and income taxes for 1999 was $229,915,000, compared to $267,373,000 for 1998. Minority interests reduced income before income taxes by $86,469,000 in 1999, compared to $77,468,000 for 1998. The provision for income taxes for 1999 was $66,929,000, compared to $143,347,000 for 1998. Excluding the tax effects of the impairment and restructuring charges in both periods and the merger costs and the loss on sale of assets in 1998, the effective tax rate for 1999 was 39.5%, compared to 39.0% for 1998 (see Note 10 of "Notes to Consolidated Financial Statements" for further discussion). Net income for 1999 was $76,517,000. Twelve-Month Periods Ended December 31, 1999 and 2000 Our operations generated revenues of $4,195,115,000 in 2000, an increase of $123,008,000, or 3.0%, as compared to 1999 revenues. Same store revenues for the twelve months ended December 31, 2000 were $4,121,055,000, an increase of $48,948,000, or 1.2%, as compared to the same period in 1999. New store revenues for 2000 were $74,060,000. The increase in revenues is primarily attributable to increases in patient volume. Revenues generated from patients under the Medicare and Medicaid programs respectively accounted for 29.0% and 2.6% of total revenues for 2000, compared to 33.0% and 2.2% of total revenues for 1999. Revenues from any other single third-party payor were not significant in relation to our total revenues. During 2000, same store inpatient days, outpatient visits, surgical cases and diagnostic cases increased 4.6%, 3.5%, 1.8% and 6.2%, respectively. Revenue per inpatient day, outpatient visit, surgical case and diagnostic case for same store operations (decreased) increased by (2.3)%, 0.4%, 1.8% and (10.2)%, respectively. Operating unit expenses (expenses excluding corporate general and administrative expenses, provision for doubtful accounts, depreciation and amortization and interest expense) were $2,816,363,000, or 67.1% of revenues, for 2000, compared to 66.0% of revenues for 1999. Same store operating expenses for 2000 were $2,762,795,000, or 67.0% of related revenues. New store operating expenses were $53,568,000, or 72.3% of related revenues. Corporate general and administrative expenses decreased from $149,285,000 in 1999 to $148,023,000 in 2000. As described above, included in corporate general and administrative expenses for the year ended December 31, 1999, is a non-recurring expense item of approximately $29,798,000. Excluding the non-recurring expense, as a percentage of revenues, corporate general and administrative expenses increased from 2.9% in 1999 to 3.5% in 2000. Total operating expenses were $2,964,386,000, or 70.7% of revenues, for 2000, compared to $2,838,134,000, or 69.7% of revenues, for 1999. The provision for doubtful accounts was $98,037,000, or 2.3% of revenues, for 2000, compared to $342,708,000, or 8.4% of revenues, for 1999. Included in the 1999 provision for doubtful accounts is $117,752,000 in expense recognized in the third quarter of 1999 and $139,835,000 in expense recognized in the fourth quarter of 1999. Depreciation and amortization expense was $360,847,000 for 2000, compared to $374,248,000 for 1999. The decrease was primarily attributable to the full amortization of certain intangible assets. Interest expense increased to $221,595,000 in 2000, compared to $176,652,000 for 1999, primarily attributable to increases in effective interest rates (see "Liquidity and Capital Resources"). For 2000, interest income was $9,104,000, compared to $10,587,000 for 1999. Income before minority interests and income taxes for 2000 was $559,354,000, compared to $229,915,000 for 1999. Minority interests reduced income before income taxes by $99,081,000 in 2000, compared to $86,469,000 for 1999. The provision for income taxes for 2000 was $181,808,000, compared 30 to $66,929,000 for 1999. Excluding the tax effects of the impairment and restructuring charges in 1999, the effective tax rate for 1999 and 2000 was 39.5% (see Note 10 of "Notes to Consolidated Financial Statements" for further discussion). Net income for 2000 was $278,465,000. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, we had working capital of $1,048,204,000, including cash and marketable securities of $180,407,000. Working capital at December 31, 1999 was $852,711,000, including cash and marketable securities of $132,882,000. For 2000, cash provided by operations was $796,764,000, compared to $704,511,000 for 1999. For 2000, investing activities used $757,304,000, compared to using $614,859,000 for 1999. The change is primarily due to increased purchases of property, plant and equipment. Additions to property, plant and equipment and acquisitions accounted for $583,639,000 and $74,137,000, respectively, during 2000. Those same investing activities accounted for $474,115,000 and $104,304,000, respectively, in 1999. Financing activities provided $11,457,000 and used $99,079,000 during 2000 and 1999, respectively. The change is primarily due to significantly higher purchases of treasury stock in 1999. Net borrowing proceeds for 2000 and 1999 were $89,007,000 and $285,379,000, respectively. Net accounts receivable were $946,965,000 at December 31, 2000, compared to $891,829,000 at December 31, 1999. The number of days of average quarterly revenues in ending receivables was 80.9 at December 31, 2000, compared to 82.0 at December 31, 1999. See Note 1 of "Notes to Consolidated Financial Statements" for the concentration of net accounts receivable from patients, third-party payors, insurance companies and others at December 31, 2000 and 1999. We have a $1,750,000,000 revolving credit facility with Bank of America, N.A. ("Bank of America") and other participating banks (the "1998 Credit Agreement"). Interest on the 1998 Credit Agreement is paid based on LIBOR plus a predetermined margin, a base rate, or competitively bid rates from the participating banks. We are required to pay a fee based on the unused portion of the revolving credit facility ranging from 0.09% to 0.25%, depending on certain defined credit ratings. The principal amount is payable in full on June 22, 2003. We have provided a negative pledge on all assets under the 1998 Credit Agreement. The effective interest rate on the average outstanding balance under the 1998 Credit Agreement was 6.92% for the twelve months ended December 31, 2000, compared to the average prime rate of 9.21% during the same period. At December 31, 2000, we had drawn $1,655,000,000 under the 1998 Credit Agreement. For further discussion, see Note 7 of "Notes to Consolidated Financial Statements". We also had a Short Term Credit Agreement with Bank of America (as amended, the "Short Term Credit Agreement"), providing for a $250,000,000 short term revolving credit facility. The terms of the Short Term Credit Agreement were substantially consistent with those of the 1998 Credit Agreement. Interest on the Short Term Credit Agreement was paid based on LIBOR plus a predetermined margin or a base rate. We were required to pay a fee on the unused portion of the credit facility ranging from 0.30% to 0.50%, depending on certain defined ratios. On October 31, 2000, we terminated the Short Term Credit Agreement and replaced it with a new $400,000,000 Credit Agreement (the "2000 Credit Agreement") with UBS AG and other participating banks. Interest on the 2000 Credit Agreement is paid based on LIBOR plus a predetermined margin or base rate. We are required to pay a fee on the unused portion of the credit facility ranging from 0.25% to 0.50%, depending on certain defined ratios. The principal amount is payable in full in eight quarterly installments ending on June 22, 2003. At December 31, 2000, we had no drawings outstanding under the 2000 Credit Agreement. On March 24, 1994, we issued $250,000,000 principal amount of 9.5% Senior Subordinated Notes due 2001 (the "9.5% Notes"). We redeemed the 9.5% Notes at par on October 30, 2000. On March 20, 1998, we issued $500,000,000 in 3.25% Convertible Subordinated Debentures due 2003. An additional $67,750,000 principal amount of the 3.25% Convertible Debentures was issued on March 31, 1998 to cover underwriters' overallotments. Interest is payable on April 1 and October 1. The 3.25% Convertible Debentures are convertible into HEALTHSOUTH common stock at the option of the holder at a conversion price of $36.625 per share. The conversion price is subject to adjustment upon the occurrence of (a) a subdivision, combination or reclassification of outstanding shares of our common 31 stock, (b) the payment of a stock dividend or stock distribution on any shares of our capital stock, (c) the issuance of rights or warrants to all holders of our common stock entitling them to purchase shares of our common stock at less than the current market price, or (d) the payment of certain other distributions with respect to our common stock. In addition, we may, from time to time, lower the conversion price for periods of not less than 20 days, in our discretion. We used net proceeds from the issuance of the 3.25% Convertible Debentures to pay down indebtedness outstanding under our then-existing credit facilities. On June 22, 1998, we issued $250,000,000 in 6.875% Senior Notes due 2005 and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the "Senior Notes"). Interest is payable on June 15 and December 15. The Senior Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. We used the net proceeds from the issuance of the Senior Notes to pay down indebtedness outstanding under our then-existing credit facilities. On September 25, 2000, we issued $350,000,000 in 10-3/4% Senior Subordinated Notes due 2008 (the "10-3/4% Notes"). Interest is payable on April 1 and October 1. The 10-3/4% Notes are senior subordinated obligations of HEALTHSOUTH and, as such, are subordinated to all our existing and future senior indebtedness, and also are effectively subordinated to all existing and future liabilities of our subsidiaries and partnerships. The net proceeds from the issuance of the 10-3/4% Notes were used to redeem the 9.5% Notes and to pay down indebtedness outstanding under our then-existing credit facilities. The 10-3/4% Notes mature on October 1, 2008. On February 1, 2001, we issued $375,000,000 in 8-1/2% Senior Notes due 2008 (the "8-1/2% Notes"). Interest is payable on February 1 and August 1. The 8-1/2% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net proceeds from the issuance of the 8-1/2% Notes were used to pay down indebtedness outstanding under our credit facilities. The 8-1/2% Notes mature on February 1, 2008. We intend to pursue the acquisition or development of additional healthcare operations, including outpatient rehabilitation facilities, inpatient rehabilitation facilities, ambulatory surgery centers, outpatient diagnostic centers and companies engaged in the provision of other complementary services, and to expand certain of our existing facilities. While it is not possible to estimate precisely the amounts which will actually be expended in the foregoing areas, we anticipate that over the next twelve months, we will spend approximately $100,000,000 to $150,000,000 on maintenance and expansion of our existing facilities and approximately $200,000,000 to $250,000,000 on development activities and on continued development of the Integrated Service Model. See Item 1, "Business -- Company Strategy". Although we are continually considering and evaluating acquisitions and opportunities for future growth, we have not entered into any agreements with respect to material future acquisitions. We believe that existing cash, cash flow from operations and borrowings under existing credit facilities will be sufficient to satisfy our estimated cash requirements for the next twelve months, and for the reasonably foreseeable future. Inflation in recent years has not had a significant effect on our business, and is not expected to adversely affect us in the future unless it increases significantly. EXPOSURES TO MARKET RISK We are exposed to market risk related to changes in interest rates. The impact on earnings and value of market risk-sensitive financial instruments (principally marketable security investments and long-term debt, as well as the interest rate swaps described below) is subject to change as a result of movements in market rates and prices. We use sensitivity analysis models to evaluate these impacts. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage features. Our investment in marketable securities was $90,000 at December 31, 2000, compared to $3,482,000 at December 31, 1999. The investment represents less than 1% of total assets at December 31, 2000 and 1999. These securities are generally short-term, highly-liquid instruments and, accordingly, their fair value approximates cost. Earnings on investments in marketable securities are not significant to our results of operations, and therefore any changes in interest rates would have a minimal impact on future pre-tax earnings. 32 As described below, a significant portion of our long-term indebtedness is subject to variable rates of interest, generally equal to LIBOR plus a predetermined percentage. In October 2000, we entered into three short-term interest rate swap arrangements intended to hedge our exposure to rising interest rates in the capital markets. Two of these arrangements have a notional amount of $240,000,000 and one has a notional amount of $175,000,000. These mature six months and twelve months, respectively, from the date of the original transaction. The notional amounts are used to measure interest to be paid or received and do not represent an amount of exposure to credit loss. In each of these arrangements, we pay the counterparty a fixed rate of interest on the notional amount, and the counterparty pays us a variable rate of interest equal to the 90-day LIBOR rate. The variable rate paid to us by the counterparty on the six-month maturities and the twelve-month maturity are reset once and three times, respectively, during the term of the swaps. Thus, these interest rate swaps have the effect of fixing the interest rates on an aggregate of $655,000,000 of our variable-rate debt through their maturity dates. The arrangements mature at various dates in April 2001 and November 2001. We would be exposed to credit losses if the counterparties did not perform their obligations under the swap arrangements; however, the counterparties are major commercial banks whom we believe to be creditworthy, and we expect them to fully satisfy their obligations. At December 31, 2000, the weighted average interest rate we were obligated to pay under these interest rate swaps was 6.70%, and the weighted average interest rate we received was 6.76%. With respect to our interest-bearing liabilities, approximately $1,655,000,000 in long-term debt at December 31, 2000 is subject to variable rates of interest before giving effect to the interest rate swaps above, while the remaining balance in long-term debt of $1,556,829,000 is subject to fixed rates of interest. This compares to $1,625,000,000 in long-term debt subject to variable rates of interest and $1,489,648,000 in long-term debt subject to fixed rates of interest at December 31, 1999 (see Note 7 of "Notes to Consolidated Financial Statements" for further description). The fair value of our total long-term debt, based on discounted cash flow analyses, approximates its carrying value at December 31, 2000 except for the 3.25% Convertible Debentures, 6.875% Senior Notes, 7.0% Senior Notes and 10-3/4% Senior Notes. The fair value of the 3.25% Convertible Debentures at December 31, 2000 was approximately $503,765,000. The fair value of the 6.875% Senior Notes due 2005 was approximately $252,025,000 at December 31, 2000. The fair value of the 7% Senior Notes due 2008 was approximately $225,125,000 at December 31, 2000. The fair value of the 10-3/4% Senior Notes due 2008 was approximately $366,625,000 at December 31, 2000. Based on a hypothetical 1% increase in interest rates, the potential losses in future pre-tax earnings would be approximately $16,550,000. The impact of such a change on the carrying value of long-term debt would not be significant. These amounts are determined considering the impact of the hypothetical interest rates on our borrowing cost and long-term debt balances. These analyses do not consider the effects, if any, of the potential changes in the overall level of economic activity that could exist in such an environment. Further, in the event of a change of significant magnitude, management would expect to take actions intended to further mitigate its exposure to such change. Foreign operations, and the related market risks associated with foreign currency, are currently insignificant to our results of operations and financial position. FORWARD-LOOKING STATEMENTS Statements contained in this Annual Report on Form 10-K which are not historical facts are forward-looking statements. Without limiting the generality of the preceding statement, all statements in this Annual Report on Form 10-K concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, HEALTHSOUTH, through its senior management, from time to time makes forward-looking public statements concerning our expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting our best judgment based upon current information, involve a number of risks and uncertainties and are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. There can be no assurance that other factors will not affect the accuracy of such forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from 33 those estimated by us include, but are not limited to, changes in the regulation of the healthcare industry at either or both of the federal and state levels, changes or delays in reimbursement for our services by governmental or private payors, competitive pressures in the healthcare industry and our response thereto, our ability to obtain and retain favorable arrangements with third-party payors, unanticipated delays in the implementation of our Integrated Service Model, general conditions in the economy and capital markets, and other factors which may be identified from time to time in our Securities and Exchange Commission filings and other public announcements. 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated financial statements of HEALTHSOUTH meeting the requirements of Regulation S-X are filed on the following pages of this Item 8 of this Annual Report on Form 10-K, as listed below:
PAGE ----- Report of Independent Auditors ..................................... 36 Consolidated Balance Sheets as of December 31, 1999 and 2000 ....... 37 Consolidated Statements of Income for the Years Ended December 31, 1998, 1999 and 2000 .................................. 38 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000 ...................... 39 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000 .................................. 40 Notes to Consolidated Financial Statements ......................... 42
The financial statement schedules required under Regulation S-X are listed in Item 14(a)2, and filed under Item 14(d), of this Annual Report on Form 10-K. QUARTERLY RESULTS (UNAUDITED) Set forth below is summary information with respect to HEALTHSOUTH's operations for the last eight fiscal quarters.
1999 --------------------------------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER --------------- --------------- ----------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $ 1,030,547 $ 1,047,632 $993,341 $1,000,587 Net income (loss) 109,905 114,005 (4,330) (143,063) Net income (loss) per common share 0.26 0.28 (0.01) (0.37) Net income (loss) per common share -- assuming dilution 0.26 0.27 (0.01) (0.37) 2000 --------------------------------------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER --------------- --------------- --------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $ 1,021,335 $ 1,036,322 $ 1,060,457 $ 1,077,001 Net income 65,326 65,213 71,037 76,889 Net income per common share 0.17 0.17 0.18 0.20 Net income per common share -- assuming dilution 0.17 0.17 0.18 0.19
35 REPORT OF INDEPENDENT AUDITORS The Board of Directors HEALTHSOUTH Corporation We have audited the accompanying consolidated balance sheets of HEALTHSOUTH Corporation and Subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HEALTHSOUTH Corporation and Subsidiaries at December 31, 1999 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Birmingham, Alabama March 6, 2001 36 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- 1999 2000 ------------- ------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents (Note 3) ......................................... $ 129,400 $ 180,317 Other marketable securities (Note 3) ....................................... 3,482 90 Accounts receivable, net of allowances for doubtful accounts of $303,614,000 in 1999 and $230,430,000 in 2000............................. 891,829 946,965 Inventories ................................................................ 85,551 92,943 Prepaid expenses and other current assets .................................. 170,836 210,803 Income tax refund receivable ............................................... 39,438 -- ---------- ---------- Total current assets ........................................................ 1,320,536 1,431,118 Other assets: Loans to officers .......................................................... 3,842 6,242 Assets held for sale (Note 13) ............................................. 29,473 26,759 Deferred income taxes (Note 10) ............................................ 47,550 -- Other (Note 4) ............................................................. 157,609 197,897 ---------- ---------- 238,474 230,898 Property, plant and equipment, net (Note 5) ................................. 2,502,967 2,871,763 Intangible assets, net (Note 6) ............................................. 2,828,507 2,846,661 ---------- ---------- Total assets ................................................................ $6,890,484 $7,380,440 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................... $ 76,549 $ 78,762 Salaries and wages payable ................................................. 93,046 87,730 Accrued interest payable and other liabilities ............................. 152,244 168,970 Deferred income taxes (Note 10) ............................................ 108,168 4,227 Current portion of long-term debt (Note 7) ................................. 37,818 43,225 ---------- ---------- Total current liabilities ................................................... 467,825 382,914 Long-term debt (Note 7) ..................................................... 3,076,830 3,168,604 Deferred income taxes (Note 10) ............................................. - 160,365 Deferred revenue and other long-term liabilities ............................ 4,573 4,126 Minority interests-limited partnerships (Note 1) ............................ 134,894 137,977 Commitments and contingencies (Note 11) Stockholders' equity (Notes 8 and 12): Preferred stock, $.10 par value -- 1,500,000 shares authorized; issued and outstanding -- none ...................................................... -- -- Common stock, $.01 par value -- 600,000,000 shares authorized; issued -- 423,982,000 in 1999 and 426,031,000 in 2000 .............................. 4,240 4,260 Additional paid-in capital ................................................. 2,584,572 2,610,442 Accumulated other comprehensive (loss) income .............................. (1,443) 7,074 Retained earnings .......................................................... 949,828 1,224,950 Treasury stock, at cost (38,342,000 shares in 1999 and 38,742,000 shares in 2000) ................................................................. (278,504) (280,524) Receivable from Employee Stock Ownership Plan .............................. (7,898) (5,415) Notes receivable from stockholders, officers and management employees ................................................................ (44,433) (34,333) ---------- ---------- Total stockholders' equity .................................................. 3,206,362 3,526,454 ---------- ---------- Total liabilities and stockholders' equity .................................. $6,890,484 $7,380,440 ========== ==========
See accompanying notes. 37 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1999 2000 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenues .................................................. $4,006,074 $4,072,107 $4,195,115 Operating unit expenses ................................... 2,491,914 2,688,849 2,816,363 Corporate general and administrative expenses ............. 112,800 149,285 148,023 Provision for doubtful accounts ........................... 112,202 342,708 98,037 Depreciation and amortization ............................. 344,591 374,248 360,847 Merger and acquisition related expenses (Notes 2 and 9) ................................................... 25,630 -- -- Loss on sale of assets (Note 9) ........................... 31,232 -- -- Impairment and restructuring charges (Note 13) ............ 483,455 121,037 -- Interest expense .......................................... 148,163 176,652 221,595 Interest income ........................................... (11,286) (10,587) (9,104) ---------- ---------- ---------- 3,738,701 3,842,192 3,635,761 ---------- ---------- ---------- Income before income taxes and minority interests ......... 267,373 229,915 559,354 Provision for income taxes (Note 10) ...................... 143,347 66,929 181,808 ---------- ---------- ---------- 124,026 162,986 377,546 Minority interests ........................................ 77,468 86,469 99,081 ---------- ---------- ---------- Net income ................................................ $ 46,558 $ 76,517 $ 278,465 ========== ========== ========== Weighted average common shares outstanding ................ 421,462 408,195 385,666 ========== ========== ========== Net income per common share ............................... $ 0.11 $ 0.19 $ 0.72 ========== ========== ========== Weighted average common shares outstanding - assuming dilution ........................................ 432,275 414,570 391,016 ========== ========== ========== Net income per common share - assuming dilution ........... $ 0.11 $ 0.18 $ 0.71 ========== ========== ==========
See accompanying notes. 38 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
COMMON STOCK ADDITIONAL -------------------- PAID-IN SHARES AMOUNT CAPITAL --------- ---------- -------------- (IN THOUSANDS) Balance at December 31, 1997 ........................................ 415,537 $ 4,155 $ 2,474,726 Comprehensive income: Net income ......................................................... -- -- -- Translation adjustment ............................................. -- -- -- Comprehensive income Proceeds from exercise of options (Note 8) .......................... 6,885 69 60,135 Common shares issued in connection with acquisitions (Note 9)........ 699 7 19,390 Common shares issued in connection with lease buyout ................ 57 1 1,592 Income tax benefits related to incentive stock options (Note 8)...... -- -- 21,804 Reduction in receivable from ESOP ................................... -- -- -- Payments received on stockholders' notes receivable ................. -- -- -- Repurchase limited partnership units ................................ -- -- -- Purchase of treasury stock .......................................... -- -- -- ------- ------- ----------- Balance at December 31, 1998 ........................................ 423,178 4,232 2,577,647 Comprehensive income: Net income ......................................................... -- -- -- Translation adjustment ............................................. -- -- -- Comprehensive income ................................................ Proceeds from exercise of options (Note 8) .......................... 804 8 4,363 Restricted stock grants issued ...................................... -- -- 2,562 Reduction in receivable from ESOP ................................... -- -- -- Loans made to stockholders .......................................... -- -- -- Payments received on stockholders' notes receivable ................. -- -- -- Repurchase limited partnership units ................................ -- -- -- Purchase of treasury stock .......................................... -- -- -- ------- ------- ----------- Balance at December 31, 1999 ........................................ 423,982 4,240 2,584,572 Comprehensive income: Net income ......................................................... -- -- -- Translation adjustment ............................................. -- -- -- Unrealized gain on available for sale securities (net $7,526 tax expense) ........................................................... -- -- -- Comprehensive income ................................................ Proceeds from exercise of options (Note 8) .......................... 2,049 20 14,768 Income tax benefits related to incentive stock options (Note 8)...... -- -- 4,155 Restricted stock grants issued ...................................... -- -- 2,002 Reduction in receivable from ESOP ................................... -- -- -- Payments received on stockholders' notes receivable ................. -- -- -- Repurchase limited partnership units ................................ -- -- -- Variable stock option appreciation .................................. -- -- 4,945 Purchase of treasury stock .......................................... -- -- -- ------- ------- ----------- Balance at December 31, 2000 ........................................ 426,031 $ 4,260 $ 2,610,442 ======= ======= =========== ACCUMULATED OTHER TREASURY STOCK COMPREHENSIVE RETAINED ------------------------ INCOME (LOSS) EARNINGS SHARES AMOUNT --------------- --------------- -------- --------------- (IN THOUSANDS) Balance at December 31, 1997 ........................................ $ (1,057) $ 834,385 552 $ (3,923) Comprehensive income: Net income ......................................................... -- 46,558 -- -- Translation adjustment ............................................. (24) -- -- -- Comprehensive income Proceeds from exercise of options (Note 8) .......................... -- -- -- -- Common shares issued in connection with acquisitions (Note 9)........ -- -- -- -- Common shares issued in connection with lease buyout ................ -- -- -- -- Income tax benefits related to incentive stock options (Note 8)...... -- -- -- -- Reduction in receivable from ESOP ................................... -- -- -- -- Payments received on stockholders' notes receivable ................. -- -- -- -- Repurchase limited partnership units ................................ -- (1,634) -- -- Purchase of treasury stock .......................................... -- -- 1,490 (17,890) --------- ----------- ----- ----------- Balance at December 31, 1998 ........................................ (1,081) 879,309 2,042 (21,813) Comprehensive income: Net income ......................................................... -- 76,517 -- -- Translation adjustment ............................................. (362) -- -- -- Comprehensive income ................................................ Proceeds from exercise of options (Note 8) .......................... -- -- -- -- Restricted stock grants issued ...................................... -- -- -- -- Reduction in receivable from ESOP ................................... -- -- -- -- Loans made to stockholders .......................................... -- -- -- -- Payments received on stockholders' notes receivable ................. -- -- -- -- Repurchase limited partnership units ................................ -- (5,998) -- -- Purchase of treasury stock .......................................... -- -- 36,300 (256,691) --------- ----------- ------ ----------- Balance at December 31, 1999 ........................................ (1,443) 949,828 38,342 (278,504) Comprehensive income: Net income ......................................................... -- 278,465 -- -- Translation adjustment ............................................. (3,560) -- -- -- Unrealized gain on available for sale securities (net $7,526 tax expense) ........................................................... 12,077 -- -- -- Comprehensive income ................................................ Proceeds from exercise of options (Note 8) .......................... -- -- -- -- Income tax benefits related to incentive stock options (Note 8)...... -- -- -- -- Restricted stock grants issued ...................................... -- -- -- -- Reduction in receivable from ESOP ................................... -- -- -- -- Payments received on stockholders' notes receivable ................. -- -- -- -- Repurchase limited partnership units ................................ -- (3,343) -- -- Variable stock option appreciation .................................. -- -- -- -- Purchase of treasury stock .......................................... -- -- 400 (2,020) --------- ----------- ------ ----------- Balance at December 31, 2000 ........................................ $ 7,074 $ 1,224,950 38,742 $ (280,524) ========= =========== ====== =========== TOTAL RECEIVABLE NOTES STOCKHOLDERS' FROM ESOP RECEIVABLE EQUITY -------------- -------------- -------------- (IN THOUSANDS) Balance at December 31, 1997 ........................................ $ (12,247) $ (5,416) $ 3,290,623 Comprehensive income: Net income ......................................................... -- -- 46,558 Translation adjustment ............................................. -- -- (24) ----------- Comprehensive income 46,534 Proceeds from exercise of options (Note 8) .......................... -- -- 60,204 Common shares issued in connection with acquisitions (Note 9)........ -- -- 19,397 Common shares issued in connection with lease buyout ................ -- -- 1,593 Income tax benefits related to incentive stock options (Note 8)...... -- -- 21,804 Reduction in receivable from ESOP ................................... 2,078 -- 2,078 Payments received on stockholders' notes receivable ................. -- 295 295 Repurchase limited partnership units ................................ -- -- (1,634) Purchase of treasury stock .......................................... -- -- (17,890) ---------- ---------- ----------- Balance at December 31, 1998 ........................................ (10,169) (5,121) 3,423,004 Comprehensive income: Net income ......................................................... -- -- 76,517 Translation adjustment ............................................. -- -- (362) ----------- Comprehensive income ................................................ 76,155 Proceeds from exercise of options (Note 8) .......................... -- -- 4,371 Restricted stock grants issued ...................................... -- -- 2,562 Reduction in receivable from ESOP ................................... 2,271 -- 2,271 Loans made to stockholders .......................................... -- (39,334) (39,334) Payments received on stockholders' notes receivable ................. -- 22 22 Repurchase limited partnership units ................................ -- -- (5,998) Purchase of treasury stock .......................................... -- -- (256,691) ---------- ---------- ----------- Balance at December 31, 1999 ........................................ (7,898) (44,433) 3,206,362 Comprehensive income: Net income ......................................................... -- -- 278,465 Translation adjustment ............................................. -- -- (3,560) Unrealized gain on available for sale securities (net $7,526 tax expense) ........................................................... -- -- 12,077 ----------- Comprehensive income ................................................ 286,982 Proceeds from exercise of options (Note 8) .......................... -- -- 14,788 Income tax benefits related to incentive stock options (Note 8)...... -- -- 4,155 Restricted stock grants issued ...................................... -- -- 2,002 Reduction in receivable from ESOP ................................... 2,483 -- 2,483 Payments received on stockholders' notes receivable ................. -- 10,100 10,100 Repurchase limited partnership units ................................ -- -- (3,343) Variable stock option appreciation .................................. -- -- 4,945 Purchase of treasury stock .......................................... -- -- (2,020) ---------- ---------- ----------- Balance at December 31, 2000 ........................................ $ (5,415) $ (34,333) $ 3,526,454 ========== ========== ===========
See accompanying notes. 39 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1999 2000 --------------- ------------- --------------- (IN THOUSANDS) OPERATING ACTIVITIES Net income ........................................................ $ 46,558 $ 76,517 $ 278,465 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................................... 344,591 374,248 360,847 Provision for doubtful accounts .................................. 112,202 342,708 98,037 Issuance of restricted stock grants .............................. -- 2,562 2,002 Variable stock option appreciation ............................... -- -- 4,945 Impairment and restructuring charges ............................. 483,455 121,037 -- Merger and acquisition related expenses .......................... 25,630 -- -- Loss on sale of assets ........................................... 31,232 -- -- Income applicable to minority interests of limited partnerships .................................................... 77,468 86,469 99,081 (Benefit) provision for deferred income taxes .................... (43,410) (5,850) 96,448 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable ............................................. (250,468) (332,977) (150,283) Inventories, prepaid expenses and other current assets .......... (132,280) 67,428 (7,877) Accounts payable and accrued expenses ........................... (58,846) (27,631) 15,099 ------------ ---------- ------------ Net cash provided by operating activities ......................... 636,132 704,511 796,764 INVESTING ACTIVITIES Purchases of property, plant and equipment ........................ (714,212) (474,115) (583,639) Proceeds from sale of non-strategic assets ........................ 34,100 5,693 2,713 Additions to intangible assets, net of effects of acquisitions..... (48,415) (33,140) (83,291) Assets obtained through acquisitions, net of liabilities assumed .......................................................... (729,440) (104,304) (74,137) Payments on purchase accounting accruals .......................... (292,949) (22,063) -- Changes in other assets ........................................... (48,883) 12,866 (22,342) Proceeds received on sale of other marketable securities .......... 18,340 1,300 3,392 Investments in other marketable securities ........................ -- (1,096) -- ------------ ---------- ------------ Net cash used in investing activities ............................. (1,781,459) (614,859) (757,304) FINANCING ACTIVITIES Proceeds from borrowings .......................................... $ 3,486,474 $ 756,000 $ 1,585,000 Principal payments on long-term debt .............................. (2,309,163) (470,621) (1,495,993) Proceeds from exercise of options ................................. 60,204 4,371 14,788 Purchase of treasury stock ........................................ (17,890) (256,691) (2,020) Reduction in receivable from ESOP ................................. 2,078 2,271 2,483 Decrease (increase) in loans from stockholders .................... 295 (39,312) 10,100 Proceeds from investment by minority interests .................... 4,471 11,582 12,901 Purchase of limited partnership units ............................. (1,634) (5,998) (21,116) Payment of cash distributions to limited partners ................. (103,649) (100,319) (91,126) Foreign currency translation adjustment ........................... (24) (362) (3,560) ------------ ---------- ------------ Net cash provided by (used in) financing activities ............... 1,121,162 (99,079) 11,457 ------------ ---------- ------------ (Decrease) increase in cash and cash equivalents .................. (24,165) (9,427) 50,917 Cash and cash equivalents at beginning of year .................... 162,992 138,827 129,400 ------------ ---------- ------------ Cash and cash equivalents at end of year .......................... $ 138,827 $ 129,400 $ 180,317 ============ ========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest ......................................................... $ 143,606 $ 159,496 $ 232,776 Income taxes ..................................................... 315,028 88,575 9,153
40 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) Non-cash investing activities: The Company assumed liabilities of $107,091,000, $9,529,000 and $9,178,000 during the years ended December 31, 1998, 1999 and 2000, respectively, in connection with its acquisitions. During the year ended December 31, 1998, the Company issued 699,000 common shares with a market value of $19,397,000 as consideration for acquisitions accounted for as purchases. See accompanying notes. 41 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed by HEALTHSOUTH Corporation and its subsidiaries ("the Company") are presented as an integral part of the consolidated financial statements. NATURE OF OPERATIONS HEALTHSOUTH is engaged in the business of providing healthcare services through three operating divisions: Inpatient and other clinical services and Outpatient services -- East and Outpatient services -- West. Inpatient and other clinical services consist primarily of services provided through inpatient rehabilitation facilities, specialty medical centers and certain physician practices and other clinical services. Outpatient services consist primarily of services provided through outpatient rehabilitation facilities, outpatient surgery centers and outpatient diagnostic centers. Management operates the outpatient services in two geographic segments, East and West. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of HEALTHSOUTH Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its majority ownership or controlling interest in limited partnerships and limited liability companies. All significant intercompany accounts and transactions have been eliminated in consolidation. HEALTHSOUTH operates a number of its facilities as general and limited partnerships ("partnerships") or limited liability companies ("LLCs") in which HEALTHSOUTH or a subsidiary serves as the general partner or managing member, as applicable. HEALTHSOUTH's policy is to consolidate the financial position and results of operations of these partnerships and LLCs in cases where HEALTHSOUTH owns the majority interest or in which it otherwise has a controlling interest (see also "Minority Interests" below in Note 1). Investments in partnerships, LLCs and other entities that represent less than a majority interest or otherwise represent a non-controlling interest are accounted for under the equity method or cost method, as appropriate (see also "Minority Interests" below in Note 1 and Note 4). OPERATING SEGMENTS Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires the utilization of a "management approach" to define and report the financial results of operating segments. The management approach defines operating segments along the lines used by management to assess performance and make operating and resource allocation decisions. The Company operates in three segments: Inpatient and other clinical services, Outpatient services -- East and Outpatient services -- West. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. MARKETABLE SECURITIES Marketable securities and debt securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, if material, reported as a separate component of stockholders' equity, net of tax. The cost of the specific security sold method is used to 42 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) compute gain or loss on the sale of securities. Interest and dividends on securities classified as available-for-sale are included in interest income. Marketable securities and debt securities held by the Company have maturities of less than one year. ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENT ACTIVITIES Receivables from patients, insurance companies and third-party contractual insured accounts (primarily Medicare and Medicaid) are based on payment agreements which generally result in the Company's collecting an amount different from the established rates. Net third-party settlement receivables included in accounts receivable were $42,606,000 and $69,480,000 at December 31, 1999 and 2000, respectively. Final determination of the settlement is subject to review by appropriate authorities. It is at least reasonably possible that the recorded estimates will change by material amounts in the near term. The differences between original estimates made by the Company and subsequent revisions (including final settlement) were not material to the Company's operating results. Adequate allowances are provided for doubtful accounts and contractual adjustments. Uncollectible accounts are written off against the allowance for doubtful accounts after adequate collection efforts are made. Net accounts receivable includes only those amounts estimated by management to be collectible. The concentration of net accounts receivable from third-party contractual payors and others, as a percentage of total net accounts receivable, was as follows:
DECEMBER 31, ------------------- 1999 2000 -------- -------- Medicare ................. 26% 27% Medicaid ................. 5 5 Other .................... 69 68 -- -- 100% 100% === ===
INVENTORIES Inventories are stated at the lower of cost or market using the specific identification method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Upon sale or retirement of property, plant or equipment, the cost and related accumulated depreciation are eliminated from the respective account and the resulting gain or loss is included in the results of operations. Interest cost incurred during the construction of a facility is capitalized. The Company incurred interest costs of $148,793,000, $178,836,000 and $223,321,000 of which $630,000, $2,184,000 and $1,726,000 was capitalized during 1998, 1999 and 2000, respectively. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the term of the lease, as appropriate. The estimated useful life of buildings is 30-40 years and the general range of useful lives for leasehold improvements, furniture, fixtures and equipment is 3-15 years. INTANGIBLE ASSETS Costs in excess of the net asset value of purchased facilities are amortized over 20 to 40 years using the straight-line method, with the majority of such costs being amortized over 40 years. Organization and Partnership formation costs are deferred and amortized on a straight-line basis over a period of 36 months. Debt issue costs are amortized over the term of the debt. Noncompete agreements are amortized using the straight-line method over the term of the agreements. 43 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) Effective July 1, 1997, the Company began expensing amounts reflecting the costs of implementing its clinical and administrative programs and protocols at acquired facilities in the period in which such costs are incurred. Previously, the Company had capitalized such costs and amortized them over 36 months. Such costs at June 30, 1997 aggregated $64,643,000, net of accumulated amortization. These capitalized costs were amortized in accordance with the Company's policy in effect through June 30, 1997 and were fully amortized by June 2000. Through June 30, 1997, the Company had assigned value to and capitalized organization and partnership formation costs which had been incurred by the Company or obtained by the Company in acquisitions accounted for as purchases. Effective July 1, 1997, the Company no longer assigned value to organization and partnership formation costs obtained in acquisitions accounted for as purchases except to the extent that objective evidence exists that such costs will provide future economic benefits to the Company after the acquisition. Such organization and partnership formation costs at June 30, 1997, which were obtained by the Company in purchase transactions, aggregated $8,380,000, net of accumulated amortization. Such costs at June 30, 1997 were amortized in accordance with the Company's policy in effect through June 30, 1997 and were fully amortized by June 2000. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that the costs of start-up activities be expensed as incurred. The SOP broadly defines start-up activities as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, initiating a new process in an existing facility, or beginning some new operation. SOP 98-5 is effective for years beginning after December 15, 1998. In 1997, the Company began expensing as incurred all costs related to start-up activities. Therefore, the adoption of SOP 98-5 did not have a material effect on the Company's financial statements. MINORITY INTERESTS The equity of minority investors in partnerships and LLCs of the Company is reported on the consolidated balance sheets as minority interests. Minority interests reported in the consolidated income statements reflect the respective interests in the income or loss of the limited partnerships or limited liability companies attributable to the minority investors (ranging from 1% to 50% at December 31, 2000), the effect of which is removed from the results of operations of the Company. REVENUES Revenues include net patient service revenues and other operating revenues. Other operating revenues include cafeteria revenue, gift shop revenue, rental income, trainer/contract revenue, management and administrative fee revenue (related to non-consolidated subsidiaries and affiliates) and transcriptionist fees which are insignificant to total revenues. Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. 44 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1999 2000 ------------- ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Numerator: Net income ................................................. $ 46,558 $ 76,517 $ 278,465 --------- --------- --------- Numerator for basic earnings per share-income available to common stockholders ...................................... $ 46,558 $ 76,517 $ 278,465 ========= ========= ========= Denominator: Denominator for basic earnings per share -- weighted-average shares ................................................... 421,462 408,195 385,666 Effect of dilutive securities: Net effect of dilutive stock options ..................... 10,813 5,525 4,600 Restricted shares issued ................................. -- 850 750 --------- --------- --------- Dilutive potential common shares ........................... 10,813 6,375 5,350 --------- --------- --------- Denominator of diluted earnings per share - adjusted weighted-average shares and assumed conversions .......... 432,275 414,570 391,016 ========= ========= ========= Basic earnings per share .................................... $ 0.11 $ 0.19 $ 0.72 ========= ========= ========= Diluted earnings per share .................................. $ 0.11 $ 0.18 $ 0.71 ========= ========= =========
IMPAIRMENT OF ASSETS The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In such cases, the impaired assets are written down to fair value. Fair value is determined based on the individual facts and circumstances of the impairment event, and the available information related to it. Such information might include quoted market prices, prices for comparable assets, estimated future cash flows discounted at a rate commensurate with the risks involved and independent appraisals. For purposes of analyzing impairment, assets are generally grouped at the individual operational facility level, which is the lowest level for which there are identifiable cash flows. If the group of assets being tested was acquired by the Company as part of a purchase business combination, any goodwill that arose as part of the transaction is included as part of the asset grouping. With respect to the carrying value of goodwill and other intangible assets, the Company determines on a quarterly basis whether an impairment event has occurred by considering factors such as the market value of the asset, a significant adverse change in legal factors or in the business climate, adverse action by regulators, a history of operating losses or cash flow losses, or a projection of continuing losses associated with an operating entity. The carrying value of goodwill and other intangible assets will be evaluated if the facts and circumstances suggest that it has been impaired. If this evaluation indicates that the value of the asset will not be recoverable, as determined based on the undiscounted cash flows of the entity over the remaining amortization period, an impairment loss is calculated based on the excess of the carrying amount of the asset over the asset's fair value (see Note 13). 45 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) SELF-INSURANCE The Company is self-insured for professional liability and comprehensive general liability. Liabilities for asserted and unasserted claims are accrued based upon specific claims and incidents and the claims history of the Company. The reserves for estimated liabilities for asserted and unasserted claims, which are not material in relation to the Company's consolidated financial position at December 31, 1999 and 2000, are included with accrued interest payable and other liabilities in the accompanying consolidated balance sheets. RECLASSIFICATIONS Certain amounts in 1998 and 1999 financial statements have been reclassified to conform with the 2000 presentation. Such reclassifications had no effect on previously reported consolidated financial position and consolidated net income. FOREIGN CURRENCY TRANSLATION The Company translates the assets and liabilities of its foreign subsidiaries stated in local functional currencies to U.S. dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates of exchange in effect during the period. Gains and losses from currency translation are included in stockholders' equity. Currency transaction gains or losses are recognized in current operations as operating unit expenses and have not been significant to the Company's operating results in any period. 2. MERGERS Effective July 22, 1998, a wholly-owned subsidiary of the Company merged with National Surgery Centers, Inc. ("NSC"), and in connection therewith the Company issued 20,426,261 shares of its common stock in exchange for all of NSC's outstanding common stock. Prior to the merger, NSC operated 40 outpatient surgery centers in 14 states. Costs and expenses of approximately $25,630,000, primarily legal, accounting and financial advisory fees, incurred by the Company in connection with the NSC merger have been recorded in operations during 1998 and reported as merger expenses in the accompanying consolidated statements of income. The merger of the Company with NSC was accounted for as a pooling of interests. There were no material transactions between the Company and NSC prior to the merger. The effects of conforming the accounting policies of the combined companies are not material. 46 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES Cash, cash equivalents and other marketable securities consisted of the following:
DECEMBER 31, ------------------------- 1999 2000 ----------- ----------- (IN THOUSANDS) Cash ........................................ $117,912 $179,989 Cash equivalents ............................ 11,488 328 -------- -------- Total cash and cash equivalents ............ 129,400 180,317 Certificates of deposit ..................... 2,352 80 Municipal put bonds ......................... 130 10 Collateralized mortgage obligations ......... 1,000 -- -------- -------- Total other marketable securities .......... 3,482 90 -------- -------- Total cash, cash equivalents and other marketable securities (approximates market value) .............................. $132,882 $180,407 ======== ========
For purposes of the consolidated balance sheets and statements of cash flows, marketable securities with a maturity of ninety days or less when purchased are considered cash equivalents. 4. OTHER ASSETS Other assets consisted of the following:
DECEMBER 31, ------------------------- 1999 2000 ----------- ----------- (IN THOUSANDS) Notes receivable .................. $ 48,717 $ 52,907 Prepaid long-term lease ........... 7,084 6,555 Investments accounted for on equity method ........................... 15,523 26,328 Other investments ................. 50,400 71,021 Real estate investments ........... 2,820 2,686 Trusteed funds .................... 8,255 11,185 Deferred loss on leases ........... 21,263 19,686 Other ............................. 3,547 7,529 --------- --------- $ 157,609 $ 197,897 ========= =========
The Company has various investments, with ownership percentages ranging from 24% to 49%, which are accounted for using the equity method of accounting. The Company's equity in earnings of these investments was not material to the Company's consolidated results of operations for the years ended 1998, 1999 and 2000. At December 31, 2000, the investment balance on the Company's books was not materially different than the underlying equity in net assets of the unconsolidated entities. Other investments consist of investments in companies involved in operations similar to those of the Company. For those investments with a quoted market price, the Company's investment balance is based on the quoted market price. For all other investments in this category, it was not practicable to estimate the fair value because of the lack of a quoted market price and the inability to estimate the fair value without incurring excessive costs. The carrying amount at December 31, 2000 represents the original cost of the investments, which management believes is not impaired. 47 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. OTHER ASSETS - (CONTINUED) During 1998, the Company sold four inpatient rehabilitation hospital facilities. Because the Company is leasing back all of the properties, the resulting loss on sale of approximately $19,500,000 has been recorded on the accompanying consolidated balance sheet in other assets as deferred loss on leases and will be amortized into expense over the initial lease term of 15 years in accordance with SFAS 28. Aggregate annual lease payments for these properties total $6,000,000. During 1995, the Company sold another inpatient rehabilitation hospital property under terms similar to those described above. Aggregate annual lease payments for this property total $1,700,000. The resulting loss of approximately $4,000,000 is being amortized to expense over the initial lease term of 15 years. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
DECEMBER 31, ----------------------------- 1999 2000 ------------- ------------- (IN THOUSANDS) Land ...................................... $ 126,074 $ 138,277 Buildings ................................. 1,233,809 1,312,375 Leasehold improvements .................... 380,852 479,404 Furniture, fixtures and equipment ......... 1,553,159 1,821,403 Construction-in-progress .................. 28,931 83,406 ---------- ---------- 3,322,825 3,834,865 Less accumulated depreciation and amortization ............................. 819,858 963,102 ---------- ---------- $2,502,967 $2,871,763 ========== ==========
6. INTANGIBLE ASSETS Intangible assets consisted of the following:
DECEMBER 31, ------------------------------- 1999 2000 -------------- -------------- (IN THOUSANDS) Organizational, partnership formation and start-up costs (see Note 1) ......... $ 117,622 $ 17,393 Debt issue costs ......................... 51,284 66,179 Noncompete agreements .................... 122,545 124,932 Cost in excess of net asset value of purchased facilities .................... 2,920,980 3,038,560 ----------- ----------- 3,212,431 3,247,064 Less accumulated amortization ............ 383,924 400,403 ----------- ----------- $ 2,828,507 $ 2,846,661 =========== ===========
48 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT Long-term debt consisted of the following:
DECEMBER 31, ----------------------------- 1999 2000 ------------- ------------- (IN THOUSANDS) Notes and bonds payable: Advances under a $1,750,000,000 credit agreement with banks ........... $1,625,000 $1,655,000 9.5% Senior Subordinated Notes .......... 250,000 -- 3.25% Convertible Subordinated Debentures due 2003 ................... 567,750 567,750 6.875% Senior Notes due 2005 ............ 250,000 250,000 7.0% Senior Notes due 2008 .............. 250,000 250,000 10-3/4% Senior Subordinated Notes due 2008 .............................. -- 350,000 Notes payable to banks and various other notes payable, at interest rates from 5.5% to 14.9% .................... 117,421 104,031 Hospital revenue bonds payable .......... 15,130 11,674 Noncompete agreements payable with payments due at intervals ranging through December 2005 ................. 39,347 23,374 ---------- ---------- 3,114,648 3,211,829 Less amounts due within one year ......... 37,818 43,225 ---------- ---------- $3,076,830 $3,168,604 ========== ==========
The fair value of the total long-term debt approximates book value at December 31, 2000 except for the 3.25% Convertible Subordinated Debentures due 2003, the 6.875% Senior Notes due 2005, the 7.0% Senior Notes due 2008 and the 10-3/4% Senior Subordinated Notes due 2008. The fair value of the 3.25% Convertible Subordinated Debentures due 2003 was approximately $503,765,000 at December 31, 2000. The fair value of the 6.875% Senior Notes due 2005 was approximately $252,025,000 at December 31, 2000. The fair value of the 7% Senior Notes due 2008 was approximately $225,125,000 at December 31, 2000. The fair value of the 10-3/4% Senior Subordinated Notes due 2008 was approximately $366,625,000 at December 31, 2000. The fair values of the Company's long-term debt are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The Company has a $1,750,000,000 revolving credit facility with Bank of America, N.A. ("Bank of America") and other participating banks (the "1998 Credit Agreement"). The 1998 Credit Agreement replaced a previous $1,250,000,000 revolving credit agreement, also with Bank of America. Interest on the 1998 Credit Agreement is paid based on LIBOR plus a predetermined margin, a base rate, or competitively bid rates from the participating banks. The Company is required to pay a fee on the unused portion of the revolving credit facility ranging from 0.09% to 0.25%, depending on certain defined credit ratings. The principal amount is payable in full on June 22, 2003. The Company has provided a negative pledge on all assets under the 1998 Credit Agreement. At December 31, 2000, the effective interest rate associated with the 1998 Credit Agreement was approximately 7.18%. The Company also had a Short Term Credit Agreement with Bank of America and other participating banks (as amended, the "Short Term Credit Agreement"), providing for a $250,000,000 short term revolving credit facility. The terms of the Short Term Credit Agreement were substantially 49 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT - (CONTINUED) consistent with those of the 1998 Credit Agreement. Interest on the Short Term Credit Agreement was paid based on LIBOR plus a predetermined margin or a base rate. The Company was required to pay a fee on the unused portion of the credit facility ranging from 0.30% to 0.50%, depending on certain defined credit ratings. On October 31, 2000, the Company terminated the Short Term Credit Agreement and replaced it with a new $400,000,000 Credit Agreement (the "2000 Credit Agreement") with UBS AG and other participating banks. Interest on the 2000 Credit Agreement is paid based on LIBOR plus a predetermined margin or base rate. The Company is required to pay a fee on the unused portion of the credit facility ranging from 0.25% to 0.50%, depending on certain defined ratios. The principal amount is payable in full in eight quarterly installments ending on June 22, 2003. At December 31, 2000, the Company had no drawings outstanding under the 2000 Credit Agreement. On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5% Senior Subordinated Notes due 2001 (the "9.5% Notes"). The Company redeemed the 9.5% Notes at par on October 30, 2000. On March 20, 1998, the Company issued $500,000,000 in 3.25% Convertible Subordinated Debentures due 2003 (the "3.25% Convertible Debentures") in a private placement. An additional $67,750,000 principal amount of the 3.25% Convertible Debentures was issued on March 31, 1998 to cover underwriters' overallotments. Interest is payable on April 1 and October 1. The 3.25% Convertible Debentures are convertible into common stock of the Company at the option of the holder at a conversion price of $36.625 per share. The conversion price is subject to adjustment upon the occurrence of (a) a subdivision, combination or reclassification of outstanding shares of common stock, (b) the payment of a stock dividend or stock distribution on any shares of the Company's capital stock, (c) the issuance of rights or warrants to all holders of common stock entitling them to purchase shares of common stock at less than the current market price, or (d) the payment of certain other distributions with respect to the Company's common stock. In addition, the Company may, from time to time, lower the conversion price for periods of not less than 20 days, in its discretion. The net proceeds from the issuance of the 3.25% Convertible Debentures were used by the Company to pay down indebtedness outstanding under its then-existing credit facilities. On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior Notes due 2005 and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the "Senior Notes"). Interest is payable on June 15 and December 15. The Senior Notes are unsecured, unsubordinated obligations of the Company. The net proceeds from the issuance of the Senior Notes were used by the Company to pay down indebtedness outstanding under its then-existing credit facilities. On September 25, 2000, the Company issued $350,000,000 in 10-3/4% Senior Subordinated Notes due 2008 (the "10-3/4% Notes"). Interest is payable on April 1 and October 1. The 10-3/4% Notes are senior subordinated obligations of the Company and, as such, are subordinated to all existing and future senior indebtedness of the Company, and also are effectively subordinated to all existing and future liabilities of the Company's subsidiaries and partnerships. The net proceeds from the issuance of the 10-3/4% Notes were used by the Company to redeem the 9.5% Notes and to pay down indebtedness outstanding under its then-existing credit facilities. The 10-3/4% Notes mature on October 1, 2008. In October 2000, the Company entered into two six-month and one twelve-month interest rate swap arrangements with notional amounts of $240,000,000, $240,000,000 and $175,000,000 each. The swaps expire on various dates in April 2001 and November 2001. These arrangements have the effect of converting a portion of the Company's variable rate debt to a fixed rate. The arrangements did not have a material effect on the Company's operations. 50 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT - (CONTINUED) Principal maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS) ------------------------------ --------------- 2001 ....................... $ 43,225 2002 ....................... 19,569 2003 ....................... 2,236,623 2004 ....................... 11,721 2005 ....................... 260,641 After 2006 ................. 640,050 ---------- $3,211,829 ==========
8. STOCK OPTIONS The Company has various stockholder-approved stock option plans which provide for the grant of options to directors, officers and other key employees to purchase common stock at 100% of the fair market value as of the date of grant. The Compensation Committee of the Board of Directors administers the stock option plans. Options may be granted as incentive stock options or as non-qualified stock options. Incentive stock options vest 25% annually, commencing upon completion of one year of employment subsequent to the date of grant. Certain of the non-qualified stock options are not subject to any vesting provisions, while others vest on the same schedule as the incentive stock options. The options expire ten years from the date of grant. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning after December 15, 1995 and allows for the option of continuing to account for stock-based compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations, or selecting the fair value method of expense recognition as described in SFAS 123. The Company has elected to follow APB 25 in accounting for its employee stock options. The Company follows SFAS 123 in accounting for its non-employee stock options. The total compensation expense associated with non-employee stock options granted in 1998, 1999 and 2000 was not material. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1999 and 2000, respectively: risk-free interest rates of 6.10%, 6.21% and 5.11%; dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of .76, .77 and .71; and a weighted-average expected life of the options of 5.5 years, 5.0 years and 5.2 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 51 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. STOCK OPTIONS - (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1999 2000 ------------ ------------ -------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Pro forma net income ......... $ 31,009 $ 47,149 $ 266,684 Pro forma earnings per share: Basic ...................... 0.07 0.12 0.69 Diluted .................... 0.07 0.12 0.69
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1998 1999 2000 ------------------------ ------------------------ ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE (000) PRICE (000) PRICE (000) PRICE ----------- ---------- ----------- ---------- ----------- --------- Options outstanding January 1 .............. 34,771 $ 12 34,437 $ 12 36,028 $ 11 Granted ................................... 6,020 12 6,589 11 3,615 5 Exercised ................................. (5,035) 12 (772) 5 (1,957) 8 Canceled .................................. (1,319) 21 (4,226) 20 (1,704) 15 ------ ---- ------ ---- ------ ---- Options outstanding at December 31 ......... 34,437 $ 12 36,028 $ 11 35,982 $ 10 Options exercisable at December 31 ......... 29,156 $ 11 31,689 $ 11 31,429 $ 10 Weighted average fair value of options granted during the year ................... $ 7.50 $ 7.14 $ 3.07
The following table summarizes information about stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ----------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE 2000 LIFE PRICE 2000 PRICE ---------------- ----------- ---------- --------------- ----------- (IN THOUSANDS) (YEARS) (IN THOUSANDS) Under $10.00............. 22,926 4.73 $ 6.14 19,807 $ 6.10 $10.00 - $23.63.......... 12,871 6.47 16.79 11,448 17.40 $23.63 and above......... 185 7.00 27.28 174 27.24
9. ACQUISITIONS The Company evaluates each of its acquisitions independently to determine the appropriate amortization period for the cost in excess of net asset value of purchased facilities. Each evaluation includes an analysis of historic and projected financial performance, evaluation of the estimated useful lives of buildings and fixed assets acquired, the indefinite lives of certificates of need and licenses acquired, the competition within local markets, lease terms where applicable, and the legal term of partnerships where applicable. 1998 ACQUISITIONS Effective July 1, 1998, the Company acquired Columbia/HCA Healthcare Corporation's interests in 33 ambulatory surgery centers (subject to certain outstanding consents and approvals with respect to three of the centers, as to which the parties entered into management agreements) in a transaction 52 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. ACQUISITIONS - (CONTINUED) accounted for as a purchase. Effective July 31, 1998, the Company entered into certain other arrangements to acquire substantially all of the economic benefit of Columbia/HCA's interests in one additional ambulatory surgery center, which interests the Company later acquired outright. The purchase price was approximately $550,402,000 in cash. At various dates and in separate transactions throughout 1998, the Company acquired 112 outpatient rehabilitation facilities, four outpatient surgery centers, one inpatient rehabilitation hospital and 27 diagnostic imaging centers. The acquired operations are located throughout the United States. The total purchase price of the acquired operations was approximately $216,305,000. The form of consideration constituting the total purchase price was approximately $179,038,000 in cash, $17,870,000 in notes payable and the issuance of approximately 699,000 shares of the Company's common stock valued at $19,397,000. In connection with these transactions, the Company entered into noncompete agreements with former owners totaling $25,926,000. In general, these noncompete agreements are payable in monthly or quarterly installments over periods ranging from five to ten years. The fair value of the total net assets relating to the 1998 acquisitions described above was approximately $15,570,000. The total cost of the 1998 acquisitions exceeded the fair value of the net assets acquired by approximately $751,137,000. Based on the evaluation of each acquisition utilizing the criteria described above, the Company determined that the costs in excess of net asset value of purchased facilities relating to the 1998 acquisitions should be amortized over periods ranging from 25 to 40 years on a straight-line basis. No other identifiable intangible assets were recorded in the acquisitions described above. The Company sold its physical therapy staffing business, which had been acquired by the Company as part of a larger strategic acquisition in 1994. The loss on the sale of the physical therapy staffing business was $31,232,000 and was recorded by the Company in the fourth quarter of 1998. 1999 ACQUISITIONS Effective June 29, 1999, the Company acquired from Mariner Post-Acute Network, Inc. ("Mariner") substantially all of the assets of Mariner's American Rehability Services division in a transaction accounted for as a purchase. At the time of the acquisition, Mariner operated approximately 160 outpatient rehabilitation centers in 18 states. The purchase price was approximately $54,521,000 in cash. At various dates and in separate transactions throughout 1999, the Company acquired ten outpatient rehabilitation facilities, eight outpatient surgery centers, two inpatient rehabilitation hospitals and four diagnostic imaging centers. The acquired operations are located throughout the United States. The total purchase price of the acquired operations was approximately $49,844,000. The form of consideration constituting the total purchase price was approximately $49,684,000 in cash and $160,000 in notes payable. In connection with these transactions, the Company entered into noncompete agreements with former owners totaling $2,996,000. In general, these noncompete agreements are payable in monthly or quarterly installments over periods ranging from five to ten years. The fair value of the total net assets relating to the 1999 acquisitions described above was approximately $23,245,000. The total cost of the 1999 acquisitions exceeded the fair value of the net assets acquired by approximately $81,120,000. Based on the evaluation of each acquisition utilizing the criteria described above, the Company determined that the cost in excess of net asset value of purchased facilities relating to the 1999 acquisitions should be amortized over periods ranging from 20 to 40 years on a straight-line basis. No other identifiable intangible assets were recorded in the acquisitions described above. 53 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. ACQUISITIONS - (CONTINUED) 2000 ACQUISITIONS At various dates and in separate transactions throughout 2000, the Company acquired thirteen outpatient rehabilitation facilities, three outpatient surgery centers, three inpatient rehabilitation hospitals and thirteen diagnostic imaging centers. The acquired operations are located throughout the United States. The total purchase price of the acquired operations was approximately $75,365,000. The form of consideration constituting the total purchase price was approximately $74,137,000 in cash and $1,228,000 in notes payable. In connection with these transactions, the Company entered into noncompete agreements with former owners totaling $5,520,000. In general, these noncompete agreements are payable in monthly or quarterly installments over periods ranging from five to ten years. The fair value of the total net assets relating to the 2000 acquisitions described above was approximately $8,174,000. The total cost of the 2000 acquisitions exceeded the fair value of the net assets acquired by approximately $67,191,000. Based on the evaluation of each acquisition utilizing the criteria described above, the Company determined that the cost in excess of net asset value of purchased facilities relating to the 2000 acquisitions should be amortized over periods ranging from 20 to 40 years on a straight-line basis. No other identifiable intangible assets were recorded in the acquisitions described above. At December 31, 2000, the purchase price allocation associated with the 2000 acquisitions is preliminary in nature. During 2001 the Company will make adjustments, if necessary, to the purchase price allocation based on revisions to the fair value of the assets acquired. All of the acquisitions described above were accounted for as purchases and, accordingly, the results of operations of the acquired businesses (not material individually or in the aggregate) are included in the accompanying consolidated financial statements from their respective dates of acquisition. 10. INCOME TAXES HEALTHSOUTH and its subsidiaries file a consolidated federal income tax return. The partnerships and LLCs file separate income tax returns. HEALTHSOUTH's allocable portion of each partnership's income or loss is included in the taxable income of the Company. The remaining income or loss of each partnership and LLC is allocated to the other partners. 54 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES - (CONTINUED) The Company utilizes the liability method of accounting for income taxes, as required by Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes". Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1999 are as follows:
CURRENT NONCURRENT TOTAL -------------- ------------ ------------ (IN THOUSANDS) Deferred tax assets: Net operating loss ....................... $ -- $ 2,811 $ 2,811 Impairment and restructuring charges...... -- 126,008 126,008 ---------- --------- ---------- Total deferred tax assets ................. -- 128,819 128,819 Deferred tax liabilities: ................. Depreciation and amortization ............ -- (46,017) (46,017) Bad debts ................................ (91,830) -- (91,830) Capitalized costs ........................ -- (35,252) (35,252) Accruals ................................. (7,584) -- (7,584) Other .................................... (8,754) -- (8,754) ---------- --------- ---------- Total deferred tax liabilities ............ (108,168) (81,269) (189,437) ---------- --------- ---------- Net deferred tax (liabilities) assets ..... $ (108,168) $ 47,550 $ (60,618) ========== ========= ==========
Significant components of the Company's deferred tax assets and liabilities as of December 31, 2000 are as follows:
CURRENT NONCURRENT TOTAL ------------ --------------- --------------- (IN THOUSANDS) Deferred tax assets: Net operating loss ...................... $ -- $ 5,864 $ 5,864 Accruals ................................ 9,063 -- 9,063 Impairment and restructuring charges..... -- 41,932 41,932 Other ................................... -- 5,045 5,045 --------- ----------- ----------- Total deferred tax assets ................ 9,063 52,841 61,904 Deferred tax liabilities: Depreciation and amortization ........... -- (123,901) (123,901) Bad debts ............................... (13,290) -- (13,290) Capitalized costs ....................... -- (81,779) (81,779) Unrealized gain on available for sale securities ............................ -- (7,526) (7,526) --------- ----------- ----------- Total deferred tax liabilities ........... (13,290) (213,206) (226,496) --------- ----------- ----------- Net deferred tax liabilities ............. $ (4,227) $ (160,365) $ (164,592) ========= =========== ===========
At December 31, 2000, the Company has net operating loss carryforwards of approximately $15,275,000 for income tax purposes expiring through the year 2020. Those carryforwards resulted from the Company's acquisitions of Rebound, Inc., Horizon/CMS Healthcare Corporation, ASC Network Corporation, The Company Doctor and National Imaging Affiliates. 55 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES - (CONTINUED) The provision for income taxes was as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 ------------ ---------- ----------- (IN THOUSANDS) Currently payable: Federal ................................. $ 162,433 $ 61,156 $ 74,243 State ................................... 24,324 11,623 11,117 --------- -------- --------- 186,757 72,779 85,360 Deferred expense: Federal ................................. (37,756) (4,916) 83,886 State ................................... (5,654) (934) 12,562 --------- -------- --------- (43,410) (5,850) 96,448 --------- -------- --------- $ 143,347 $ 66,929 $ 181,808 ========= ======== =========
The difference between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before taxes was as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1999 2000 ------------- ------------ ------------ (IN THOUSANDS) Federal taxes at statutory rates ......... $ 93,581 $ 80,470 $ 195,774 Add (deduct): State income taxes, net of federal tax benefit ............................... 12,136 6,948 15,391 Minority interests ...................... (27,114) (30,264) (34,678) Nondeductible goodwill .................. 7,630 9,304 2,452 Disposal/impairment charges ............. 57,873 6,128 -- Other ................................... (759) (5,657) 2,869 --------- --------- --------- $ 143,347 $ 66,929 $ 181,808 ========= ========= =========
11. COMMITMENTS AND CONTINGENCIES The Company is a party to legal proceedings incidental to its business. In the opinion of management, any ultimate liability with respect to these actions will not materially affect the consolidated financial position or results of operations of the Company. Beginning December 1, 1993, the Company became self-insured for professional liability and comprehensive general liability. The Company purchased coverage for all claims incurred prior to December 1, 1993. In addition, the Company purchased underlying insurance which would cover all claims once established limits have been exceeded. It is the opinion of management that at December 31, 2000 the Company has adequate reserves to cover losses on asserted and unasserted claims. In the fourth quarter of 2000, the Company formed an offshore captive insurance subsidiary to which it expects to transition the administration of its self-insurance programs. In connection with the Horizon/CMS acquisition in 1997, the Company assumed Horizon/CMS's open professional and general liability claims. The Company has entered into an agreement with an insurance carrier to assume responsibility for the majority of open claims. Under this agreement, a "risk transfer" was conducted which converted Horizon/CMS's self-insured claims to insured liabilities consistent with the terms of the underlying insurance policy. 56 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES - (CONTINUED) Horizon/CMS is currently a party, or is subject, to certain litigation matters and disputes. The Company itself is, in general, not a party to such litigation. These matters include actions or investigations initiated by the Securities and Exchange Commission, New York Stock Exchange, various federal and state regulatory agencies, stockholders of Horizon/CMS and other parties. Both Horizon/CMS and the Company are working to resolve these matters and cooperating fully with the various regulatory agencies involved. As of December 31, 2000, it was not possible for the Company to predict the ultimate outcome or effect of these matters. In management's opinion, the ultimate resolution of these matters will not have a material effect on the Company's consolidated financial position or results of operations. The Company was served with certain lawsuits filed beginning September 30, 1998, purporting to be class actions under the federal and Alabama securities laws. These lawsuits were filed following a decline in the Company's stock price at the end of the third quarter of 1998. Seven such suits were filed in the United States District Court for the Northern District of Alabama. In January 1999, those suits were ordered consolidated under the case style In re HEALTHSOUTH Corporation Securities Litigation, Master File No. CV98-O-2634-S. On April 12, 1999, the plaintiffs filed a consolidated amended complaint against the Company and certain of its officers and directors alleging that, during the period April 24, 1997 through September 30, 1998, the defendants misrepresented or failed to disclose certain material facts concerning the Company's business and financial condition and the impact of the Balanced Budget Act of 1997 on our operations in order to artificially inflate the price of the Company's common stock and issued or sold shares of such stock during the purported class period, all allegedly in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Certain of the named plaintiffs in the consolidated amended complaint also purport to represent separate subclasses consisting of former stockholders of Horizon/CMS Healthcare Corporation and National Surgery Centers, Inc. who received shares of the Company's Common Stock in connection with such acquisitions and who assert additional claims under Section 11 of the Securities Act of 1933 with respect to the registration of securities issued in those acquisitions. Additionally, another suit has been filed in the Circuit Court of Jefferson County, Alabama, purportedly as a derivative action on behalf of the Company. This suit largely replicates the allegations of the federal actions described in the preceding paragraph and alleges that the current directors of the Company, certain former directors and certain officers of the Company breached their fiduciary duties to the Company and engaged in other allegedly tortious conduct. The plaintiff in that case has forborne pursuing its claim thus far pending further progress in the federal actions, and the Company has not yet been required to file a responsive pleading in the case. Another non-derivative state court action was voluntarily dismissed by the plaintiff, without prejudice. The Company filed its motion to dismiss the consolidated amended complaint in the federal action in late June 1999. The court denied that motion to dismiss in December 2000. The Company believes that all claims asserted in the above suits are without merit, and expects to vigorously defend against such claims. Because such suits remain at an early stage, the Company cannot predict the outcome of any such suits or the magnitude of any potential loss if the Company's defense is unsuccessful. At December 31, 2000, committed capital expenditures for the next twelve months are $41,281,000. Operating leases generally consist of short-term lease agreements for buildings where facilities are located. These leases generally have 5-year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Total rental expense for all operating leases was $238,937,000, $233,895,000 and $248,782,000 for the years ended December 31, 1998, 1999 and 2000, respectively. The Company has entered into two tax retention operating leases for certain of its facilities. The Company is required to renegotiate the leases or purchase, or obtain a purchaser, for the facilities at its termination in 2003. The minimum sales price guarantee is approximately $119,190,000. 57 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES - (CONTINUED) The following is a schedule of future minimum lease payments under all operating leases having initial or remaining non-cancelable lease terms in excess of one year:
YEAR ENDING DECEMBER 31, (IN THOUSANDS) ------------------------ --------------- 2001 ........................................... $ 236,811 2002 ........................................... 200,890 2003 ........................................... 158,221 2004 ........................................... 123,035 2005 ........................................... 90,372 After 2006 ..................................... 409,091 ----------- Total minimum payments required ................ $ 1,218,420 ===========
12. EMPLOYEE BENEFIT PLANS The Company has a 401(k) savings plan which matches 15% of the first 4% of earnings that an employee contributes. All contributions are in the form of cash. All employees who have completed one year of service with a minimum of 1,000 hours worked are eligible to participate in the plan. Company contributions are gradually vested over a seven-year service period. Contributions to the plan by the Company were approximately $4,121,000, $4,608,000 and $4,712,000 in 1998, 1999 and 2000, respectively. In 1991, the Company established an Employee Stock Ownership Plan ("ESOP") for the purpose of providing substantially all employees of the Company the opportunity to save for their retirement and acquire a proprietary interest in the Company. The ESOP currently owns approximately 3,320,000 shares of the Company's common stock, which were purchased with funds borrowed from the Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the "1992 ESOP Loan"). At December 31, 2000, the combined ESOP Loans had a balance of $5,415,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is payable in annual installments covering interest and principal over a ten-year period beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of 8.5%, is payable in annual installments covering interest and principal over a ten-year period beginning in 1993. Company contributions to the ESOP began in 1992 and shall at least equal the amount required to make all ESOP loan amortization payments for each plan year. The Company recognizes compensation expense based on the shares allocated method. Compensation expense related to the ESOP recognized by the Company was $3,195,000, $3,197,000 and $3,176,000 in 1998, 1999 and 2000, respectively. Interest incurred on the ESOP Loans was approximately $927,000, $715,000 and $483,000 in 1998, 1999 and 2000, respectively. Approximately 2,451,000 shares owned by the ESOP have been allocated to participants at December 31, 2000. During 1993, the American Institute of Certified Public Accountants issued Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). Among other provisions, SOP 93-6 requires that compensation expense relating to employee stock ownership plans be measured based on the fair market value of the shares when allocated to the employees. The provisions of SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares newly acquired by an existing leveraged ESOP after December 31, 1992. Because all shares owned by the Company's ESOP were acquired prior to December 31, 1992, the Company's accounting policies for the shares currently owned by the ESOP are not affected by SOP 93-6. 13. IMPAIRMENT AND RESTRUCTURING CHARGES During the third quarter of 1998, the Company recorded impairment and restructuring charges of approximately $72,000,000 related to the Company's decision to dispose of or otherwise discontinue substantially all of its home health operations. The decision was prompted in large part by the negative 58 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED) impact of the 1997 Balanced Budget Act, which placed reimbursement limits on home health businesses. The limits were announced in March 1998, and the Company began to see the adverse affect on home health margins. Based on this unfavorable trend, management prepared a plan to exit the home health operations described above. The plan was approved by the Board of Directors on September 16, 1998. Revenues and losses before income taxes and minority interests for the home health operations were $71,163,000 and $(4,261,000), respectively. The home health operations have been included in the inpatient and other clinical services segment. The home health operations covered by the plan included approximately 35 locations, all of which were closed by December 31, 1998. The $72,000,000 third quarter charge consists of the following components: (i) A $62,748,000 impairment charge was recorded to reduce the carrying amount of selected long-lived assets to estimated fair value. All of the assets written down, including fixed assets of $8,363,000 and intangible assets of $54,385,000, were associated with the discontinued home health operations and are detailed further in the table below. (ii) A $4,908,000 charge was recorded to write down other assets, primarily inventories and prepaid expenses, which were negatively impacted by the Company's decision to discontinue the home health operations. (iii) The remaining components of the charge included $2,618,000 in lease abandonment costs and $1,435,000 in other incremental costs, representing primarily legal and asset disposal costs. The Company has developed a strategic plan to provide integrated services in major markets throughout the United States. In the fourth quarter of 1998, the Company recorded a restructuring charge of approximately $404,000,000 as a result of its decision to close certain facilities that did not fit with the Company's strategic vision, underperforming facilities and facilities not located in target markets. The Company's Board of Directors approved the restructuring plan on December 10, 1998. A total of 167 facilities were included in the plan, including 110 outpatient rehabilitation facilities, 7 inpatient rehabilitation hospitals, 29 outpatient surgery centers, and 21 diagnostic centers. Some of these facilities had multiple business units associated with the operation. The identified facilities contributed $140,087,000 to the Company's revenue and $(9,907,000) to the Company's income before income taxes and minority interests during 1998. At March 21, 2001, approximately 97% of the locations identified in the fourth quarter restructuring plan had been closed. The $404,000,000 fourth quarter charge consists of the following components: (i) A $304,624,000 impairment charge was recorded to reduce the carrying amount of selected long-lived assets to estimated fair value. All of the assets written down, including fixed assets of $137,880,000 and intangible assets of $166,744,000, were associated with the facilities identified in the fourth quarter restructuring plan. These assets are detailed further in the table below. (ii) A $19,857,000 charge was recorded to write down other assets, primarily inventories and prepaid expenses, which were negatively impacted by the Company's decision to close the affected facilities. (iii) Approximately $6,027,000 of the charge related to involuntary severance packages paid or payable to approximately 7,900 employees. These employees worked primarily in the Company's discontinued home health operations described above. The terminations were communicated to the affected employees during the fourth quarter. Approximately 7,880 of the affected employees had left the Company as of December 31, 1998. The remaining employees left the Company during the first half of 1999. 59 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED) (iv) Approximately $49,476,000 of the charge related to lease abandonment costs primarily for office and clinical space that was or was to be vacated as a result of the restructuring plan. (v) The Company recognized $24,089,000 in estimated other incremental costs, generally representing costs that are a direct result of the restructuring plan and have no future economic benefit. These costs include primarily (a) $7,818,000 in legal costs associated with closing the facilities, (b) $7,275,000 in disposal costs, including costs associated with de-installation of signage and equipment, moving costs, refurbishing costs and exit cleaning costs, (c) $2,777,000 in ongoing security costs at abandoned or closed facilities, (d) $4,591,000 storage rental costs and (e) $1,628,000 in utility costs incurred at abandoned or closed facilities. The restructuring activities (shown below in tabular form) primarily relate to asset write-downs, lease abandonments and the elimination of job responsibilities resulting in costs incurred to sever employees. Details of the impairment and restructuring charges, separated by the amounts recorded in the third and fourth quarter of 1998, respectively, are as follows:
ACTIVITY ----------------------- NON-CASH BALANCE RESTRUCTURING CASH IMPAIR- AT DESCRIPTION CHARGE PAYMENTS MENTS 12/31/98 - ----------------------------- --------------- ---------- ------------ ---------- (IN THOUSANDS) Third Quarter 1998 Charge: Property, plant and equipment: Leasehold improvements..... $ 820 $ -- $ 820 $ -- Furniture, fixtures and equipment ................ 7,543 -- 7,543 -- --------- -------- --------- -------- 8,363 -- 8,363 -- Intangible assets: Goodwill .................. 53,485 -- 53,485 -- Noncompete agreements...... 678 -- 678 -- Other intangible assets ... 222 -- 222 -- --------- -------- --------- -------- 54,385 -- 54,385 -- Lease abandonment costs .... 2,618 2,618 -- -- Other assets ............... 4,908 -- 4,908 -- Other incremental costs .... 1,435 1,020 -- 415 --------- -------- --------- -------- Total Third Quarter 1998 Charge ..................... $ 71,709 $ 3,638 $ 67,656 $ 415 ========= ======== ========= ======== Fourth Quarter 1998 Charge: Property, plant and equipment: Land and buildings ........ $ 38,741 $ -- $ 38,741 $ -- Leasehold improvements..... 27,187 -- 27,187 -- Furniture, fixtures and equipment ................ 71,952 -- 71,952 -- --------- -------- --------- -------- 137,880 -- 137,880 -- Intangible assets: Goodwill .................. 154,840 -- 154,840 -- Noncompete agreements...... 10,632 -- 10,632 -- Other intangible assets ... 1,272 -- 1,272 -- --------- -------- --------- -------- 166,744 -- 166,744 -- Lease abandonment costs .... 49,476 -- -- 49,476 Other assets ............... 19,857 -- 19,857 -- Severance packages ......... 6,027 4,753 -- 1,274 Other incremental costs .... 24,089 8,100 -- 15,989 --------- -------- --------- -------- Total Fourth Quarter 1998 Charge ..................... $ 404,073 $ 12,853 $ 324,481 $ 66,739 ========= ======== ========= ======== ACTIVITY ACTIVITY --------------------- ---------- NON-CASH BALANCE NON-CASH BALANCE CASH IMPAIR- AT CASH IMPAIR- AT DESCRIPTION PAYMENTS MENTS 12/31/99 PAYMENTS MENTS 12/31/00 - ----------------------------- ---------- ---------- ---------- ---------- ---------- ----------- (IN THOUSANDS) Third Quarter 1998 Charge: Property, plant and equipment: Leasehold improvements..... $ -- $ -- $ -- $ -- $ -- $ -- Furniture, fixtures and equipment ................ -- -- -- -- -- -- -------- ---- -------- -------- ---- -------- -- -- -- -- -- -- Intangible assets: Goodwill .................. -- -- -- -- -- -- Noncompete agreements...... -- -- -- -- -- -- Other intangible assets ... -- -- -- -- -- -- -------- ---- -------- -------- ---- -------- -- -- -- -- -- -- Lease abandonment costs .... -- -- -- -- -- -- Other assets ............... -- -- -- -- -- -- Other incremental costs .... 415 -- -- -- -- -- -------- ---- -------- -------- ---- -------- Total Third Quarter 1998 Charge ..................... $ 415 $ -- $ -- $ -- $ -- $ -- ======== ==== ======== ======== ==== ======== Fourth Quarter 1998 Charge: Property, plant and equipment: Land and buildings ........ $ -- $ -- $ -- $ -- $ -- $ -- Leasehold improvements..... -- -- -- -- -- -- Furniture, fixtures and equipment ................ -- -- -- -- -- -- -------- ---- -------- -------- ---- -------- -- -- -- -- -- -- Intangible assets: Goodwill .................. -- -- -- -- -- -- Noncompete agreements...... -- -- -- -- -- -- Other intangible assets ... -- -- -- -- -- -- -------- ---- -------- -------- ---- -------- -- -- -- -- -- -- Lease abandonment costs .... 17,110 -- 32,366 11,253 -- 21,113 Other assets ............... -- -- -- -- -- -- Severance packages ......... 1,274 -- -- -- -- -- Other incremental costs .... 8,978 -- 7,011 7,011 -- -- -------- ---- -------- -------- ---- -------- Total Fourth Quarter 1998 Charge ..................... $ 27,362 $ -- $ 39,377 $ 18,264 $ -- $ 21,113 ======== ==== ======== ======== ==== ========
The remaining balances at December 31, 1999 and 2000, are included in accrued interest payable and other liabilities in the accompanying consolidated balance sheets. 60 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED) In addition to the third and fourth quarter charges described above, the Company recorded an impairment charge of approximately $8,000,000 in the fourth quarter of 1998 related to a rehabilitation hospital it had closed. The write-down was based on a recently obtained independent appraisal, which reflected a decline in valuation since the original closure. The hospital was closed in 1995 as a result of duplicative services in a single market. At that time, the hospital was written down to its then-estimated fair value and classified as assets held for sale. The Company abandoned certain equipment and sold certain properties and equipment during 2000, associated with the 1998 closed facilities. The fair value of assets remaining to be sold is approximately $24,559,000 compared to $27,273,000 as of December 31, 1999. The Company expects to have all properties sold by the end of 2001. The effect of suspending depreciation is immaterial. For assets that will not be abandoned, the fair values were based on independent appraisals or estimates of recoverability for similar closings. Goodwill and other related intangible assets included in the third and fourth quarter 1998 charges were allocated to the impaired assets based on the relative fair values of those assets at their respective acquisition dates. Lease abandonment costs were based on the lease terms remaining, which range from one to fifteen years, net of any anticipated sublease income, where applicable. During the fourth quarter of 1999, in accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company recorded an asset impairment charge of $121,037,000. Management evaluated the financial performance of each of its facilities to determine if there are trends which would indicate that a facility's ability to recover its investment in its long-lived assets had been impaired. Based on this evaluation, the Company determined that property, plant and equipment with a carrying value of $38,050,000 and intangibles with a carrying value of $95,091,000 were impaired and wrote them down by $25,807,000 and $95,091,000 respectively, to their fair market value. In addition, the Company plans to sell certain property, plant and equipment with a carrying amount of $2,339,000 in 2001 and has estimated the sales value, net of related costs to sell, at $2,200,000. Accordingly, the Company recorded an impairment loss of $139,000 on these assets, which is included in the 1999 impairment and restructuring charge. See Note 14 for the impact of impairment losses on operating segments. 14. OPERATING SEGMENTS The accounting policies of the segments are the same as those for the Company described in Note 1, Significant Accounting Policies. Intrasegment revenues are not significant. The Company's Chief Operating Decision Maker evaluates the performance of its segments and allocates resources to them based on income before minority interests and income taxes and earnings before interest, income taxes, depreciation and amortization ("EBITDA"). In addition, certain revenue producing functions are managed directly from the Corporate office and are not included in operating results for management reporting. Unallocated assets represent those assets under the direct management of Corporate office personnel. 61 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. OPERATING SEGMENTS - (CONTINUED) Operating results and other financial data are presented for the principal operating segments as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1999 2000 ------------- ------------- ------------- (IN THOUSANDS) Revenues: Inpatient and other clinical services .................... $2,178,060 $2,021,546 $1,988,506 Outpatient services - East ............................... 870,994 989,451 1,062,842 Outpatient services - West ............................... 940,468 1,039,072 1,125,885 ---------- ---------- ---------- 3,989,522 4,050,069 4,177,233 Unallocated corporate office ............................. 16,552 22,038 17,882 ---------- ---------- ---------- Consolidated revenues ..................................... $4,006,074 $4,072,107 $4,195,115 ========== ========== ========== Income before income taxes and minority interests (excluding consolidated merger and acquisition related expenses, loss on sale of assets and impairment and restructuring charge): Inpatient and other clinical services .................... $ 540,726 $ 516,233 $ 422,808 Outpatient services - East ............................... 273,268 243,531 261,251 Outpatient services - West ............................... 230,875 193,612 232,811 ---------- ---------- ---------- 1,044,869 953,376 916,870 Unallocated corporate office ............................. (208,456) (322,447) (357,516) ---------- ---------- ---------- Consolidated income before income taxes and minority interests ................................................ $ 836,413 $ 630,929 $ 559,354 Consolidated merger and acquisition related expenses, loss on sale of assets and impairment and restructuring charge. (569,040) (401,014) -- ---------- ---------- ---------- Consolidated income before income taxes and minority interests ................................................ $ 267,373 $ 229,915 $ 559,354 ========== ========== ========== Depreciation and amortization: Inpatient and other clinical services .................... $ 124,712 $ 143,340 $ 114,926 Outpatient services - East ............................... 67,225 78,028 99,031 Outpatient services - West ............................... 73,313 78,607 86,398 ---------- ---------- ---------- 265,250 299,975 300,355 Unallocated corporate office ............................. 79,341 74,273 60,492 ---------- ---------- ---------- Consolidated depreciation and amortization ................ $ 344,591 $ 374,248 $ 360,847 ========== ========== ========== Interest expense: Inpatient and other clinical services .................... $ 64,427 $ 49,800 $ 63,719 Outpatient services - East ............................... 2,245 1,214 310 Outpatient services - West ............................... 5,458 3,714 4,433 ---------- ---------- ---------- 72,130 54,728 68,462 Unallocated corporate office ............................. 76,033 121,924 153,133 ---------- ---------- ---------- Consolidated interest expense ............................. $ 148,163 $ 176,652 $ 221,595 ========== ========== ==========
62 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. OPERATING SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998 1999 2000 --------------- --------------- --------------- (IN THOUSANDS) Interest income: Inpatient and other clinical services .................. $ 2,612 $ 2,340 $ 1,888 Outpatient services - East ............................. 525 301 459 Outpatient services - West ............................. 420 746 711 ----------- ----------- ----------- 3,557 3,387 3,058 Unallocated corporate office ........................... 7,729 7,200 6,046 ----------- ----------- ----------- Consolidated interest income ............................ $ 11,286 $ 10,587 $ 9,104 =========== =========== =========== EBITDA (excluding consolidated merger and acquisition related expenses, loss on sale of assets and impairment and restructuring charge): Inpatient and other clinical services .................. $ 727,253 $ 707,033 $ 599,565 Outpatient services - East ............................. 342,213 322,472 360,133 Outpatient services - West ............................. 309,226 275,187 322,931 ----------- ----------- ----------- 1,378,692 1,304,692 1,282,629 Unallocated corporate office ........................... (60,811) (133,450) (149,937) ----------- ----------- ----------- Consolidated EBITDA (excluding consolidated merger and acquisition related expenses, loss on sale of assets and impairment and restructuring charge): .............. $ 1,317,881 $ 1,171,242 $ 1,132,692 Consolidated merger and acquisition related expenses, loss on sale of assets and impairment and restructuring charge ................................................. (569,040) (401,014) -- ----------- ----------- ----------- Consolidated EBITDA ..................................... $ 748,841 $ 770,228 $ 1,132,692 =========== =========== =========== Assets: Inpatient and other clinical services .................. $ 2,621,115 $ 2,774,893 Outpatient services - East ............................. 1,551,413 1,704,838 Outpatient services - West ............................. 1,790,904 1,945,070 ----------- ----------- 5,963,432 6,424,801 Unallocated corporate office ........................... 927,052 955,639 ----------- ----------- Total assets ............................................ $ 6,890,484 $ 7,380,440 =========== ===========
63 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. RELATED PARTY In December 1999, the Company acquired 6,390,583 shares of Series A Convertible Preferred Stock of MedCenterDirect.com, inc., a development-stage healthcare e-procurement company, in a private placement for a purchase price of $0.3458 per share. Various persons affiliated or associated with the Company, including various of the Company's Directors and executive officers, also purchased shares in the private placement. Under a Stockholders Agreement, the Company and the other holders of the Series A Convertible Preferred Stock, substantially all of whom may be deemed to be Company affiliates or associates, have the right to elect 50% of the directors of MedCenterDirect.com. During 2001, the Company expects to enter into a definitive long-term exclusive agreement under which MedCenterDirect.com will be the Company's exclusive e-procurement vendor of medical products and supplies. The Company expects that the terms of such agreement will be no less favorable than those the Company could obtain from an unrelated vendor. 16. SUBSEQUENT EVENT On February 1, 2001, the Company issued $375,000,000 in 8-1/2% Senior Notes due 2008 (the "8-1/2% Notes"). The 8-1/2% Notes are unsecured, unsubordinated obligations of the Company. The net proceeds from the issuance of the 8-1/2% Notes were used to pay down indebtedness outstanding under the Company's credit facilities. 64 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. HEALTHSOUTH has not changed independent accountants within the 24 months prior to December 31, 2000. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. DIRECTORS The following table provides information with respect to our Directors.
A PRINCIPAL OCCUPATION AND ALL POSITIONS DIRECTOR NAME AGE WITH HEALTHSOUTH SINCE - ---------------------------------- ----- ------------------------------------------------------- --------- Richard M. Scrushy ............... 48 Chairman of the Board and Chief Executive Officer 1984 and Director Phillip C. Watkins, M.D. ......... 59 Physician, Birmingham, Alabama,and Director 1984 George H. Strong ................. 74 Private Investor, Locust, New Jersey, and Director 1984 C. Sage Givens ................... 44 General Partner, Acacia Venture Partners and 1985 Director Charles W. Newhall III ........... 56 Partner, New Enterprise Associates Limited 1985 Partnerships, and Director John S. Chamberlin ............... 72 Private Investor, Princeton, New Jersey, and Director 1993 Joel C. Gordon ................... 71 Private Investor, Nashville, Tennessee, Consultant to 1996 HEALTHSOUTH and Director Larry D. Striplin, Jr. ........... 71 Chairman and Chief Executive Officer, 1999 Nelson-Brantley Glass Contractors, Inc., and Director William T. Owens ................. 42 Executive Vice President and Chief Financial Officer 2000 and Director
Richard M. Scrushy, one of HEALTHSOUTH's management founders, has served as Chairman of the Board and Chief Executive Officer of HEALTHSOUTH since 1984, and also served as President of HEALTHSOUTH from 1984 until March 1995. From 1979 to 1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned healthcare corporation, serving in various operational and management positions. Mr. Scrushy was until February 2001 a director of CaremarkRx, Inc., a publicly-traded pharmacy benefits management company, for which he also served as Acting Chief Executive Officer from January 16 through March 18, 1998 and as Chairman of the Board from January 16 through December 1, 1998. Phillip C. Watkins, M.D., FACC, is and has been for more than five years in the private practice of medicine in Birmingham, Alabama. A graduate of The Medical College of Alabama, Dr. Watkins is a Diplomate of the American Board of Internal Medicine. He is also a Fellow of the American College of Cardiology and the Subspecialty Board of Cardiovascular Disease. George H. Strong retired as senior vice president and chief financial officer of Universal Health Services, Inc. in December 1984, a position he held for more than six years. Mr. Strong is a private investor and continued to act as a director of Universal Health Services, Inc., a publicly-traded hospital management corporation, until 1993. Mr. Strong is also a director of AmeriSource, Inc., a large drug wholesaler. 65 C. Sage Givens is a founder and managing general partner of Acacia Venture Partners, a private venture capital fund. From 1983 to June 30, 1995, Ms. Givens was a general partner of First Century Partners, also a private venture capital fund. Ms. Givens managed the fund's healthcare investments. Ms. Givens also serves on the boards of directors of several privately-held healthcare companies. Charles W. Newhall III is a general partner and founder of New Enterprise Associates Limited Partnerships, Baltimore, Maryland, where he has been engaged in the venture capital business since 1978. Mr. Newhall is also a director of CaremarkRx, Inc. John S. Chamberlin retired in 1988 as president and chief operating officer of Avon Products, Inc., a position he had held since 1985. From 1976 until 1985, he served as chairman and chief executive officer of Lenox, Incorporated, after 22 years in various assignments for General Electric. From 1990 to 1991, he served as chairman and chief executive officer of New Jersey Publishing Co. Mr. Chamberlin is chairman of the board of WNS, Inc. He is a member of the Board of Trustees of the Medical Center at Princeton and is a trustee of the Woodrow Wilson National Fellowship Foundation. Joel C. Gordon served as Chairman of the Board of Directors of Surgical Care Affiliates, Inc. from its founding in 1982 until January 17, 1996, when SCA was acquired by HEALTHSOUTH. Mr. Gordon also served as Chief Executive Officer of SCA from 1987 until January 17, 1996. Mr. Gordon is a private investor and serves on the boards of directors of Genesco, Inc., an apparel manufacturer, and SunTrust Bank of Nashville, N.A. Larry D. Striplin, Jr. has been the Chairman and Chief Executive Officer of Nelson-Brantley Glass Contractors, Inc. and Chairman and Chief Executive Officer of Circle "S" Industries for more than five years. Mr. Striplin is a member of the boards of directors of Kulicke & Suffa Industries, Inc., a publicly traded manufacturer of electronic equipment and The Banc Corporation. William T. Owens, C.P.A., joined HEALTHSOUTH in March 1986 as Controller and was appointed Vice President and Controller in December 1986. He was appointed Group Vice President -- Finance and Controller, June 1992 and Senior Vice President -- Finance and Controller in February 1994 and Group Senior Vice President -- Finance and Controller in March 1998. In February 2000, he was named Executive Vice President and Chief Financial Officer, and in March 2001 he was named a Director. Prior to joining HEALTHSOUTH, Mr. Owens served as a certified public accountant on the audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from 1981 to 1986. EXECUTIVE OFFICERS The following table provides information with respect to our executive officers.
AN ALL POSITIONS OFFICER NAME AGE WITH HEALTHSOUTH SINCE - ---------------------------- ----- ------------------------------------------------------- -------- Richard M. Scrushy ......... 48 Chairman of the Board and Chief Executive Officer 1984 and Director Thomas W. Carman ........... 49 Executive Vice President -- Corporate Development 1985 William T. Owens ........... 42 Executive Vice President and Chief Financial Officer 1986 and Director William W. Horton .......... 41 Executive Vice President and Corporate Counsel and 1994 Assistant Secretary Robert E. Thomson .......... 53 President -- Inpatient Operations 1987 Patrick A. Foster .......... 54 President -- Ambulatory Services -- West 1994 Larry D. Taylor ............ 42 President -- Ambulatory Services -- East 1994 Brandon O. Hale ............ 51 Senior Vice President -- Administration and Secretary 1987 Weston L. Smith ............ 40 Senior Vice President -- Finance and Controller 1987 Malcolm E. McVay ........... 39 Senior Vice President -- Finance and Treasurer 1999
Biographical information for Mr. Scrushy and Mr. Owens is set forth above under this Item, "Directors and Executive Officers -- Directors". 66 Thomas W. Carman joined HEALTHSOUTH in 1985 as Regional Director -- Corporate Development, and now serves as Executive Vice President -- Corporate Development. From 1983 to 1985, Mr. Carman was director of development for Medical Care International. From 1981 to 1983, Mr. Carman was assistant administrator at the Children's Hospital of Birmingham, Alabama. William W. Horton joined HEALTHSOUTH in July 1994 as Group Vice President - -- Legal Services and was named Senior Vice President and Corporate Counsel in May 1996 and Executive Vice President and Corporate Counsel in March 2001. From August 1986 through June 1994, Mr. Horton practiced corporate, securities and healthcare law with the Birmingham, Alabama-based firm now known as Haskell Slaughter & Young, L.L.C., where he served as Chairman of the Healthcare Practice Group. Robert E. Thomson joined HEALTHSOUTH in August 1985 as administrator of its Florence, South Carolina inpatient rehabilitation facility, and subsequently served as Regional Vice President -- Inpatient Operations, Vice President -- Inpatient Operations, Group Vice President -- Inpatient Operations, and Senior Vice President -- Inpatient Operations. Mr. Thomson was named President -- Inpatient Operations in February 1996. Patrick A. Foster joined HEALTHSOUTH in February 1994 as Director of Operations and subsequently served as Group Vice President -- Inpatient Operations and Senior Vice President -- Inpatient Operations. He was named President -- HEALTHSOUTH Surgery Centers in October 1997 and President -- Ambulatory Services --West in September 1999. From August 1992 until February 1994, he served as Senior Vice President of the Rehabilitation/Medical Division of The Mediplex Group. Larry D. Taylor joined HEALTHSOUTH in May 1987 as an outpatient rehabilitation facility administrator. He was subsequently named Area Manager in July 1989, Regional Vice President -- Outpatient Operations in October 1991, Group Vice President -- Outpatient Operations in July 1992, Senior Vice President -- Outpatient Operations in February 1994, and Senior Vice President - -- Ambulatory Services -- East in September 1999. In July 2000, he became President -- Ambulatory Services -- East. Brandon O. Hale joined HEALTHSOUTH in July 1986 as Director of Human Resources and subsequently served as Vice President - Human Resources and Group Vice President - Human Resources. In December 1999, Mr. Hale was named Senior Vice President - Administration and Secretary of HEALTHSOUTH, and he also serves as HEALTHSOUTH's Corporate Compliance Officer. Weston L. Smith, C.P.A., joined HEALTHSOUTH in February 1987 as Director of Reimbursement and subsequently served as Assistant Vice President - Finance - - Reimbursement, Vice President - Finance - Reimbursement, Group Vice President - - Finance - Reimbursement and Senior Vice President - Finance - Reimbursement. In March 2000, he was named Senior Vice President - Finance and Controller. Prior to joining HEALTHSOUTH, Mr. Smith served as a certified public accountant on the audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from 1982 to 1987. Malcolm E. McVay joined HEALTHSOUTH in September 1999 as Vice President - Finance, and was named Senior Vice President - Finance and Treasurer in February 2000. From October 1998 until September 1999, he served as Senior Vice President of Investor Relations at CaremarkRx, Inc., and from 1996 until October 1998, he served as Chief Financial Officer, Secretary and Treasurer of Capstone Capital Corporation, a healthcare real estate investment trust. Prior to 1996, he worked for ten years in commercial banking, most recently as a Senior Vice President of SouthTrust Bank. GENERAL Directors of HEALTHSOUTH hold office until the next Annual Meeting of Stockholders of HEALTHSOUTH and until their successors are elected and qualified. Executive officers are elected annually by, and serve at the discretion of the Board of Directors. There are no arrangements or understandings known to us between any of our Directors, nominees for Director or executive officers and any other person pursuant to which any of those persons was elected as a Director or an executive 67 officer, except the Employment Agreement between HEALTHSOUTH and Richard M. Scrushy (see Item 11, "Executive Compensation -- Chief Executive Officer Employment Agreement"), and except that we initially agreed to appoint Mr. Gordon to the Board of Directors in connection with the Surgical Care Affiliates merger. There are no family relationships between any Directors or executive officers of HEALTHSOUTH. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and Directors, and persons who beneficially own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Executive officers, Directors and beneficial owners of more than 10% of HEALTHSOUTH's common stock are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms that they file. Based solely on review of the copies of such forms furnished to us, or written representations that no reports on Form 5 were required, we believe that for the period from January 1, 2000, through December 31, 2000, all of our executive officers, Directors and greater-than-10% beneficial owners complied with all Section 16(a) filing requirements applicable to them, except that Larry D. Striplin, Jr., an outside Director, failed to timely report the purchase of 5,000 shares of our common stock at $5.1875 per share on February 28, 2000. Mr. Striplin reported such purchase on Form 5 in February 2001. 68 ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION -- GENERAL The following table sets forth compensation paid or awarded to our Chief Executive Officer, as well as each of our other four most highly compensated executive officers and two former executive officers for whom disclosure would have been required had they been serving as executive officers at December 31, 2000, for all services rendered to HEALTHSOUTH and its subsidiaries in 1998, 1999 and 2000. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ----------------------------------- --------------------------------- BONUS/ANNUAL STOCK RESTRICTED ALL INCENTIVE OPTION STOCK OTHER COM- NAME AND CURRENT POSITION YEAR SALARY AWARD AWARDS AWARDS PENSATION(1) - ----------------------------------- ------ ------------- -------------- ----------- --------------------- ------------------ Richard M. Scrushy 1998 $2,777,829 -- 1,500,000 -- $ 72,352 Chairman of the Board 1999 1,634,031 -- 1,050,000 $ 1,293,750 (3) 54,145 and Chief Executive Officer(2) 2000 3,654,849 -- 800,000 -- 55,475 James P. Bennett 1998 $ 670,000 -- 300,000 -- $ 10,092 Formerly President and Chief 1999 589,058 -- 275,000 $ 1,293,750 (3) 4,350 Operating Officer 2000 627,716 -- 120,000 -- 3,137 William T. Owens 1998 $ 311,539 -- 62,500 -- $ 7,378 Executive Vice President - 1999 272,944 -- 55,000 $ 970,313 (3) 2,643 and Chief Financial Officer 2000 386,510 -- 75,000 -- 1,908 P. Daryl Brown 1998 $ 386,212 -- 75,000 -- $ 10,981 Formerly President - Ambulatory 1999 336,920 -- 125,000 $ 970,313 (3) 205,001 (4) Services - East 2000 372,730 -- 60,000 -- 3,845 Robert E. Thomson 1998 $ 327,928 -- 150,000 -- $ 11,341 President - Inpatient Operations 1999 402,987 -- 125,000 $ 970,313 (3) 4,994 2000 396,162 -- 60,000 -- 2,849 Thomas W. Carman 1998 $ 337,500 -- 65,000 -- $ 8,924 Executive Vice President - 1999 295,167 -- 65,000 $ 970,313 (3) 3,012 Corporate Development 2000 326,300 $50,000 20,000 -- 2,270 Patrick A. Foster 1998 $ 248,770 -- 120,000 -- $ 10,679 President - Ambulatory Services - 1999 275,977 -- 125,000 $ 970,313 (3) 3,298 West 2000 356,043 -- 60,000 -- 2,434
- ---------- (1) For the year ending December 31, 2000, this category includes (a) matching contributions under the HEALTHSOUTH Retirement Investment Plan of $1,020 for Mr. Scrushy, $1,575 for Mr. Bennett, $0 for Mr. Owens, $1,276 for Mr. Brown, $738 for Mr. Thomson, $1,050 for Mr. Carman and $1,260 for Mr. Foster; (b) awards under our Employee Stock Benefit Plan of $416 for Mr. Scrushy, $416 for Mr. Bennett, $416 for Mr. Owens, $416 for Mr. Brown, $416 for Mr. Thomson, $416 for Mr. Carman and $416 for Mr. Foster; and (c) split-dollar life insurance premiums paid of $54,039 with respect to Mr. Scrushy, $1,146 with respect to Mr. Bennett, $1,492 with respect to Mr. Owens, $2,153 with respect to Mr. Brown, $1,695 with respect to Mr. Thomson, $804 with respect to Mr. Carman, and $758 with respect to Mr. Foster. See this Item, "Executive Compensation -- Retirement Investment Plan" and "Executive Compensation -- Employee Stock Benefit Plan". (2) Salary amounts for Mr. Scrushy include monthly incentive compensation amounts payable upon achievement of certain budget targets. Effective November 1, 1998, Mr. Scrushy voluntarily suspended receipt of his base salary and monthly incentive compensation through March 31, 1999, and voluntarily took reduced compensation through January 2, 2000. See this Item,"Executive Compensation -- Chief Executive Officer Employment Agreement". (3) The value of restricted stock awards in 1999 reflects the closing price of HEALTHSOUTH common stock at the date of the award. The value of these awards measured at December 31, 2000 was $1,631,250 for the awards to each of Messrs. Scrushy and Bennett (100,000 shares each) and $1,223,438 for the awards to each of Messrs. Owens, Brown, Thomson, Carman and Foster (75,000 shares each). The awards vest five years from the date of grant, except as otherwise provided in our 1998 Restricted Stock Plan. See this Item, "Executive Compensation - 1998 Restricted Stock Plan" 69 (4) Includes $200,000 withdrawn by Mr. Brown in 1999 from his deferred compensation account. See this Item, "Executive Compensation - Deferred Compensation Plan". STOCK OPTION GRANTS IN 2000
INDIVIDUAL GRANTS ----------------------------------------------------------------------------- % OF TOTAL OPTIONS NUMBER OF GRANTED TO EXERCISE OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE NAME GRANTED FISCAL YEAR PER SHARE DATE PRESENT VALUE(1) - ---------------------------- ----------- -------------- ----------- ------------ ----------------- Richard M. Scrushy ......... 800,000 23.8% $ 4.875 2/28/10 $2,328,000 James P. Bennett ........... 120,000 3.6% 4.875 7/17/05 349,200 William T. Owens ........... 75,000 2.2% 4.875 2/28/10 218,250 P. Daryl Brown ............. 60,000 1.8% 4.875 2/28/10 174,600 Robert E. Thomson .......... 60,000 1.8% 4.875 2/28/10 174,600 Thomas W. Carman ........... 20,000 0.6% 4.875 2/28/10 58,200 Patrick A. Foster .......... 60,000 1.8% 4.875 2/28/10 174,600
- ---------- (1) Based on the Black-Scholes option pricing model adapted for use in valuing executive stock options. The actual value, if any, an executive may realize will depend upon the excess of the stock price over the exercise price on the date the option is exercised, so that there is no assurance that the value realized by an executive will be at or near the value estimated by the Black-Scholes model. The estimated values under that model are based on arbitrary assumptions as to certain variables, including the following: (i) stock price volatility is assumed to be 71%; (ii) the risk-free rate of return is assumed to be 5.11%; (iii) dividend yield is assumed to be 0; and (iv) the time of exercise is assumed to be 4.5 years from the date of grant. STOCK OPTION EXERCISES IN 2000 AND OPTION VALUES AT DECEMBER 31, 2000
NUMBER VALUE OF UNEXERCISED OF SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT DECEMBER 31, 2000(1) AT DECEMBER 31, 2000(2) ON VALUE ----------------------------- ------------------------------ NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------- ----------- ------------- ------------- --------------- --------------- -------------- Richard M. Scrushy ......... -- -- 14,522,524 -- $121,200,649 -- James P. Bennett ........... 515,000 $4,254,550 1,490,000 -- 4,531,562 -- William T. Owens ........... -- -- 512,500 -- 2,128,125 -- P. Daryl Brown ............. -- -- 1,100,000 -- 7,505,200 -- Robert E. Thomson .......... -- -- 755,000 -- 3,135,937 -- Thomas W. Carman ........... -- -- 850,000 -- 6,174,962 -- Patrick A. Foster .......... -- -- 513,800 -- 2,930,787 --
- ---------- (1) Does not reflect any options granted and/or exercised after December 31, 2000. The net effect of any such grants and exercises is reflected in the table appearing under Item 12, "Security Ownership of Certain Beneficial Owners and Management". (2) Represents the difference between market price of HEALTHSOUTH common stock and the respective exercise prices of the options at December 31, 2000. Such amounts may not necessarily be realized. Actual values which may be realized, if any, upon any exercise of such options will be based on the market price of the common stock at the time of any such exercise and thus are dependent upon future performance of the common stock. STOCK OPTION PLANS Set forth below is information concerning our various stock option plans at December 31, 2000. All share numbers and exercise prices have been adjusted as necessary to reflect previous stock splits. 70 1984 Incentive Stock Option Plan In 1984 we adopted the 1984 Incentive Stock Option Plan. Under this plan, our Board of Directors, which administered the plan, had discretion to grant to key employees of HEALTHSOUTH options to purchase shares of HEALTHSOUTH common stock at the fair market value attributed to shares of HEALTHSOUTH common stock on the date the option was granted or, in the case of a key employee who was also a beneficial holder of at least 10% of the total number of shares of HEALTHSOUTH common stock that were issued and outstanding at the time of the option grant, at 110% of such fair market value. The total number of shares of HEALTHSOUTH common stock covered by this plan was 4,800,000. The plan expired on February 28, 1994, in accordance with its terms. As of December 31, 2000, options granted under this plan to purchase 15,000 shares of HEALTHSOUTH common stock remained outstanding at an exercise price of $3.7825 per share. All of these outstanding options remain valid and in full force and must be held and exercised in accordance with the terms of the plan. All of the options granted must be exercised within ten years after they were granted and options granted under the plan terminate automatically within three months after termination of employment, unless such termination is by reason of death. In addition, the options may not be transferred, except pursuant to the terms of a valid will or applicable laws of descent and distribution, and in the event additional shares of HEALTHSOUTH common stock are issued they are protected from dilution. 1988 Non-Qualified Stock Option Plan In 1988 we adopted the 1998 Non-Qualified Stock Option Plan. Under this plan, the Audit and Compensation Committee of our Board of Directors, which administered the plan, had discretion to grant to the Directors, officers and other key employees of HEALTHSOUTH options to purchase shares of HEALTHSOUTH common stock at the fair market value attributed to shares of HEALTHSOUTH common stock on the date the option was granted. The total number of shares of HEALTHSOUTH common stock covered by this plan was 4,800,000. The plan expired on February 28, 1998, in accordance with its terms. As of December 31, 2000, options granted under this plan to purchase 7,300 shares of HEALTHSOUTH common stock remained outstanding at an exercise price of $16.25 per share. All of these outstanding options remain valid and in full force and must be held and exercised in accordance with the terms of the plan. All of the options must be exercised within ten years after they were granted. All of the options granted under this plan terminate automatically within three months after termination of association as a Director or of employment, unless such termination is by reason of death. In addition, the options may not be transferred, except pursuant to the terms of a valid will or applicable laws of descent and distribution, and in the event additional shares of HEALTHSOUTH common stock are issued they are protected from dilution. 1989, 1990, 1991, 1992, 1993, 1995 and 1997 Stock Option Plans In each of 1989, 1990, 1991, 1992, 1993, 1995 and 1997 we adopted stock option plans to provide incentives to our Directors, officers and other key employees. Under each of these plans, the Compensation Committee of our Board of Directors, which administers each of the plans, has the discretion to grant to our Directors, officers and other key employees incentive or non-qualified options to purchase shares of HEALTHSOUTH common stock at the fair market value attributed to shares of HEALTHSOUTH common stock on the date the option is granted. The table below sets forth information regarding each plan, including the total number of shares of HEALTHSOUTH common stock which may be purchased under each of the plans, the total number of additional shares of HEALTHSOUTH common stock which have been reserved for future use under each plan, the total number of shares of HEALTHSOUTH common stock which may be purchased under options which have been granted under each plan and which were outstanding on December 31, 2000 and the price or range of prices at which shares may be purchased if the options are exercised. 71
MAXIMUM NUMBER NUMBER OF OF SHARES OF ADDITIONAL SHARES OF HEALTHSOUTH HEALTHSOUTH COMMON STOCK COMMON STOCK NAME OF SUBJECT TO PURCHASE RESERVED FOR USE PLAN UNDER THE PLAN UNDER THE PLAN - -------------- ----------------------- ---------------------- 1989 Stock Option Plan 2,400,000 None 1990 Stock Option Plan 3,600,000 None 1991 Stock Option Plan 11,200,000 None 1992 Stock Option Plan 5,600,000 None 1993 Stock Option Plan 5,600,000 2,500 1995 Stock Option Plan 24,720,467 (1) 4,051,532 1997 Stock Option Plan 5,000,000 99,396 DATE THE PLAN TERMINATED OR WILL TERMINATE UNLESS NUMBER OF SHARES OF OTHERWISE DETERMINED HEALTHSOUTH BY OUR BOARD OF COMMON STOCK PRICE OR RANGE OF PRICES DIRECTORS OR IF ALL OF THE SUBJECT TO PURCHASE IF AT WHICH SHARES SHARES OF HEALTHSOUTH ALL OPTIONS MAY BE PURCHASED COMMON STOCK RESERVED FOR OUTSTANDING ON SUBJECT TO OPTIONS ISSUANCE UNDER THE PLAN HAVE NAME OF DECEMBER 31, 2000 OUTSTANDING BEEN PURCHASED DUE TO PLAN ARE EXERCISED ON DECEMBER 31, 2000 OPTIONS BEING EXERCISED - -------------- ------------------------ -------------------------- ----------------------------- 1989 Stock Option Plan 51,572 $2.52 -- $8.375 October 25, 1999 1990 Stock Option Plan 280,004 $3.7825 -- $8.375 October 15, 2000 1991 Stock Option Plan 3,452,502 $3.7825 -- $16.25 June 19, 2001 1992 Stock Option Plan 3,938,400 $3.7825 -- $23.625 June 16, 2002 1993 Stock Option Plan 3,094,025 $3.375 -- $23.625 April 19, 2003 1995 Stock Option Plan 17,782,745 $4.875 -- $28.0625 June 5, 2005 1997 Stock Option Plan 3,658,554 $4.875 -- $28.0625 April 30, 2007
- ---------- (1) At December 31, 2000; to be increased by 0.9% of the outstanding shares of HEALTHSOUTH common stock as of January 1 of each calendar year thereafter until the plan terminates. Until options granted under each of these plans expire or terminate, they remain valid and in full force and must be held and exercised in accordance with the terms of the plan under which they were issued. Each option granted under each of these plans, whether incentive or non-qualified, must be exercised within ten years after the date it was granted and each option granted under these plans, whether incentive or non-qualified, will terminate automatically within three months after a Director no longer is associated with us or an officer or key employee is no longer employed with us, except if the termination of association or employment is by reason of death. In addition, the options may not be transferred, except pursuant to the terms of a valid will or applicable laws of descent and distribution (except for various permitted transfers to family members or charities). In the event additional shares of HEALTHSOUTH common stock are issued, each option granted under these plans is protected from dilution. 1993 Consultants' Stock Option Plan In 1993 we adopted the 1993 Consultants' Stock Option Plan to provide incentives to non-employee consultants who provide significant services to us. Under this plan, our Board of Directors, which administers the plan, has the discretion to grant to these non-employee consultants options to purchase shares of HEALTHSOUTH common stock at prices to be determined by our Board of Directors or a committee of our Board of Directors to whom this discretion has been delegated. The plan will expire on February 25, 2003 unless terminated earlier at the discretion of our Board of Directors or as a result of all of the shares of HEALTHSOUTH common stock reserved under this plan having been purchased by the exercise of options granted under this plan. The total number of shares of HEALTHSOUTH common stock covered by this plan is 3,500,000. As of December 31, 2000, options granted under this plan to purchase 1,528,633 shares of HEALTHSOUTH common stock remained outstanding at exercise prices ranging from $3.375 to $28.00 per share, and 76,000 shares remain available for the grant of options under this plan. All of these options remain valid and in full force and must be held and exercised in accordance with the terms of the plan. All of these options must be exercised within ten years after they were granted, although they may be exercised at any time during this ten-year period. All of these options terminate automatically within three months after termination of association with us, unless such termination is by reason of death. In addition, the options may not be transferred, except pursuant to the terms of a valid will or applicable laws of descent and distribution, and in the event additional shares of HEALTHSOUTH common stock are issued the options are protected from dilution. 72 1999 Exchange Stock Option Plan In 1999, we adopted our 1999 Exchange Stock Option Plan (the "Exchange Plan") under which NQSOs could be granted, covering a maximum of 2,750,000 shares of common stock. The Exchange Plan was approved by our stockholders on May 20, 1999. The Exchange Plan was adopted after a protracted period of depression in the price of HEALTHSOUTH common stock and provided that HEALTHSOUTH employees (other than Directors and executive officers, who were eligible to participate) who held outstanding stock options with an exercise price equal to or greater than $16.00 could exchange such options for NQSOs issued under the Exchange Plan. Options granted under the Exchange Plan would have an exercise price equal to the closing price per share of our common stock on the New York Stock Exchange Composite Transactions Tape on May 20, 1999, would be deemed to have been granted on May 20, 1999, and would have durations and vesting restrictions identical to those affecting the options surrendered. Eligible options with an exercise price between $16.00 and $22.00 per share could be surrendered in exchange for an option under the Exchange Plan covering two shares of common stock for each three shares of common stock covered by the surrendered options, and eligible options having an exercise price of $22.00 per share or greater could be surrendered in exchange for an option under the Exchange Plan covering three shares of common stock for each four shares of common stock covered by the surrendered option. Each optionholder surrendering options was required to retain eligible options covering 10% of the aggregate number of shares covered by the options eligible for surrender. The Exchange Plan expired on September 30, 1999, at which time options covering 1,716,707 shares of common stock had been issued under the Exchange Plan at an exercise price of $13.3125 per share. Options covering 1,461,378 shares remained outstanding at December 31, 2000. Options granted under the Exchange Plan are nontransferable except by will or pursuant to the laws of descent and distribution (except for certain permitted transfers to family members or charities), are protected against dilution and expire within three months of termination of employment, unless such termination is by reason of death. Other Stock Option Plans In connection with some of our major acquisitions, we assumed existing stock option plans of the acquired companies, and outstanding options to purchase stock of the acquired companies under such plans were converted into options to acquire common stock in accordance with the exchange ratios applicable to such mergers. At December 31, 2000, there were outstanding under these assumed plans options to purchase 711,321 shares of HEALTHSOUTH common stock at exercise prices ranging from $5.28 to $36.9718 per share. No additional options are being granted under any such assumed plans. 1998 RESTRICTED STOCK PLAN In 1998, we adopted the 1998 Restricted Stock Plan (the "Restricted Stock Plan"), covering a maximum of 3,000,000 shares of HEALTHSOUTH common stock. The Restricted Stock Plan, which is administered by the Compensation Committee of our Board of Directors, provides that executives and other key employees of HEALTHSOUTH and its subsidiaries may be granted restricted stock awards vesting over a period of not less than one year and no more than ten years, as determined by the Committee. The Restricted Stock Plan terminates on the earliest of (a) May 28, 2008, (b) the date on which awards covering all shares of common stock reserved for issuance thereunder have been granted and are fully vested thereunder, or (c) such earlier time as the Board of Directors may determine. Awards under the Restricted Stock Plan are nontransferable except by will or pursuant to the laws of descent and distribution (except for certain permitted transfers to family members), are protected against dilution and are forfeitable upon termination of a participant's employment to the extent not vested. On May 17, 1999, the Audit and Compensation Committee of the Board of Directors granted restricted stock awards covering 850,000 shares of HEALTHSOUTH common stock to various executive officers of HEALTHSOUTH. These shares vest in full upon the earliest to occur of (a) five years from the date of the award, (b) a Change in Control (as defined) of HEALTHSOUTH, or (c) unless the Compensation Committee otherwise determines, upon the recipient's termination of employment by reason of death, disability or retirement. Awards covering 200,000 of such shares lapsed without vesting in 2000, and an award covering 100,000 shares vested upon the retirement of the recipient. 73 RETIREMENT INVESTMENT PLAN Effective January 1, 1990, we adopted the HEALTHSOUTH Retirement Investment Plan (the "401(k) Plan"), a retirement plan intended to qualify under Section 401(k) of the Code. The 401(k) Plan is open to all full-time and part-time employees of HEALTHSOUTH who are over the age of 21, have one full year of service with HEALTHSOUTH and have at least 1,000 hours of service in the year in which they enter the 401(k) Plan. Eligible employees may elect to participate in the Plan on January 1 and July 1 in each year. Under the 401(k) Plan, participants may elect to defer up to 15% of their annual compensation (subject to nondiscrimination rules under the Code). The deferred amounts may be invested among four options, at the participant's direction: a money market fund, a bond fund, a guaranteed insurance contract or an equity fund. HEALTHSOUTH will match a minimum of 15% of the amount deferred by each participant, up to 4% of such participant's total compensation, with the matched amount also directed by the participant. See Note 12 of "Notes to Consolidated Financial Statements". William T. Owens, Executive Vice President and Chief Financial Officer, and Brandon O. Hale, Senior Vice President -- Administration and Secretary, serve as Trustees of the 401(k) Plan, which is administered by HEALTHSOUTH. EMPLOYEE STOCK BENEFIT PLAN Effective January 1, 1991, we adopted the HEALTHSOUTH Rehabilitation Corporation and Subsidiaries Employee Stock Benefit Plan (the "ESOP"), a retirement plan intended to qualify under sections 401(a) and 4975(e)(7) of the Code. The ESOP is open to all full-time and part-time employees of HEALTHSOUTH who are over the age of 21, have one full year of service with HEALTHSOUTH and have at least 1,000 hours of service in the year in which they begin participation in the ESOP on the next January 1 or July 1 after the date on which such employee satisfies the conditions mentioned above. The ESOP was established with a $10,000,000 loan from HEALTHSOUTH, the proceeds of which were used to purchase 1,655,172 shares of HEALTHSOUTH common stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was used to purchase an additional 1,666,664 shares of common stock. Under the ESOP, a company stock account is established and maintained for each eligible employee who participates in the ESOP. In each plan year, this account is credited with such employee's allocable share of the common stock held by the ESOP and allocated with respect to that plan year. Each employee's allocable share for any given plan year is determined according to the ratio which such employee's compensation for such plan year bears to the compensation of all eligible participating employees for the same plan year. Eligible employees who participate in the ESOP and who have attained age 55 and have completed 10 years of participation in the ESOP may elect to diversify the assets in their company stock account by directing the plan administrator to transfer to the 401(k) Plan a portion of their company stock account to be invested, as the eligible employee directs, in one or more of the investment options available under the 401(k) Plan. See Note 12 of "Notes to Consolidated Financial Statements". Richard M. Scrushy, Chairman of the Board and Chief Executive Officer, William T. Owens, Executive Vice President and Chief Financial Officer, and Brandon O. Hale, Senior Vice President -- Administration and Secretary of the Company, serve as Trustees of the ESOP, which is administered by HEALTHSOUTH. STOCK PURCHASE PLAN In order to further encourage employees to obtain equity ownership in HEALTHSOUTH, the Board of Directors adopted an Employee Stock Purchase Plan effective January 1, 1994. Under the Stock Purchase Plan, participating employees may contribute $10 to $200 per pay period toward the purchase of HEALTHSOUTH common stock in open-market transactions. The Stock Purchase Plan is open to regular full-time or part-time employees who have been employed for six months and are at least 21 years old. After six months of participation in the Stock Purchase Plan, we currently provide a 20% matching 74 contribution to be applied to purchases under the Stock Purchase Plan. We also pay all fees and brokerage commissions associated with the purchase of the stock. The Stock Purchase Plan is administered by a broker-dealer firm not affiliated with HEALTHSOUTH. DEFERRED COMPENSATION PLAN In 1997, the Board of Directors adopted an Executive Deferred Compensation Plan, which allows senior management personnel to elect, on an annual basis, to defer receipt of up to 50% of their base salary and up to 100% of their annual bonus, if any (but not less than an aggregate of $2,400 per year) for a minimum of five years from the date such compensation would otherwise have been received. Amounts deferred are held by HEALTHSOUTH pursuant to a "rabbi trust" arrangement, and amounts deferred are credited with earnings at an annual rate equal to the Moody's Average Corporate Bond Yield Index (the "Moody's Rate"), as adjusted from time to time, or the Moody's Rate plus 2% if a participant's employment is terminated by reason of retirement, disability or death or within 24 months of a change in control of HEALTHSOUTH. Amounts deferred may be withdrawn upon retirement, termination of employment or death, upon a showing of financial hardship, or voluntarily with certain penalties. The Deferred Compensation Plan is administered by an Administrative Committee, currently consisting of William T. Owens, Executive Vice President and Chief Financial Officer, and Brandon O. Hale, Senior Vice President -- Administration and Secretary. 1999 EXECUTIVE EQUITY LOAN PLAN In order to provide its executive officers and other key employees with additional incentive for future endeavor and to align the interests of our management and our stockholders by providing a mechanism to enhance ownership of HEALTHSOUTH common stock by executives and key employees, we adopted the 1999 Executive Equity Loan Plan (the "Loan Plan"), which was approved by our stockholders on May 20, 1999. Under the Loan Plan, the Compensation Committee of the Board of Directors may approve loans to executive and key employees of HEALTHSOUTH to be used for purchases of HEALTHSOUTH common stock. The maximum aggregate principal amount of loans outstanding under the Loan Plan may not exceed $50,000,000. Loans under the Loan Plan have a maturity date of seven years from the date of the loan, subject to acceleration and termination as provided in the Loan Plan. The maturity date may be extended for up to one additional year by the Audit and Compensation Committee, acting in its discretion. The unpaid principal balance of each loan bears interest at a rate equal to the effective interest rate on the average outstanding balance under HEALTHSOUTH's principal credit agreement for each calendar quarter, adjustable as of the end of each calendar quarter. Interest compounds annually. Each loan is secured by a pledge of all the shares of HEALTHSOUTH common stock purchased with the proceeds of the loan. The pledged shares may not be sold for one year after the date on which they were acquired. Thereafter, one-third of the aggregate number of shares may be sold during each of the second, third and fourth years after the date of acquisitions, with any unsold portion carrying forward from year to year. The proceeds from any such sale must be used to repay a corresponding percentage of the principal amount of the loan. In addition, HEALTHSOUTH may, but is not required to, repurchase the shares of a participant at such participant's original acquisition cost if the participant's employment is terminated, voluntarily or involuntarily or by reason of death or disability, within the first three years after the acquisition date, all as more fully described in the Loan Plan. Loans under the Loan Plan are made with full recourse, and each participant is required to repay all principal and accrued but unpaid interest upon the maturity of the loan, or its earlier acceleration or termination, irrespective of whether the participant has sold the underlying shares or whether the proceeds of such sale were sufficient to repay all principal and interest with respect to the loan. The Loan Plan terminates on the earlier of May 19, 2009 or such earlier time as the Board of Directors may determine. 75 On September 10, 1999, loans aggregating $39,334,104 were made under the Loan Plan. Included in this amount were loans in the following amounts to then-serving executive officers:
NAME PRINCIPAL AMOUNT ----------------------------------------- ------------------- Richard M. Scrushy .................... $ 25,218,114.87 James P. Bennett ...................... 5,043,622.97 Michael D. Martin ..................... 1,513,086.89 P. Daryl Brown ........................ 1,008,506.87 Robert E. Thomson ..................... 1,008,506.87 Patrick A. Foster ..................... 1,008,506.87 Malcolm E. McVay ...................... 100,850.69 William W. Horton ..................... 88,914.00
The loans made to Messrs. Bennett and Martin were repaid in full in 2000. The loan made to Mr. McVay and one-third of the loan made to Mr. Foster were repaid in the first quarter of 2001. BOARD COMPENSATION Directors who are not also employed by HEALTHSOUTH are paid Directors' fees of $10,000 per year, plus $3,000 for each meeting of the Board of Directors and $1,000 for each Committee meeting attended. In addition, Directors are reimbursed for all out-of-pocket expenses incurred in connection with their duties as Directors. Our Directors, including employee Directors, have been granted non-qualified stock options to purchase shares of HEALTHSOUTH common stock. Under our existing stock option plans, each non-employee Director is granted an option covering 25,000 shares of common stock on the first business day in January of each year. See this Item, "Executive Compensation -- Stock Option Plans" above. CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT We have an Amended and Restated Employment Agreement, dated April 1, 1998, with Richard M. Scrushy, under which Mr. Scrushy, a management founder, is employed as Chairman of the Board and Chief Executive Officer for a five-year term originally scheduled to expire on April 1, 2003. This term is automatically extended for an additional year on each April 1 unless the Agreement is terminated as provided therein. In addition, we have agreed to use our best efforts to cause Mr. Scrushy to be elected as a Director during the term of the Agreement. The Agreement provides for Mr. Scrushy to receive an annual base salary of at least $1,200,000, as well as an "Annual Target Bonus" equal to at least $2,400,000, based upon our success in meeting certain monthly and annual performance standards determined by the Compensation Committee of the Board of Directors. Mr. Scrushy's base salary for 2001 has been set at $1,500,000. The Annual Target Bonus is earned at the rate of $200,000 per month if the monthly performance standards are met, provided that if any monthly performance standards are not met but the annual performance standards are met, Mr. Scrushy will be entitled to any payments which were withheld as a result of failure to meet the monthly performance standards. The Agreement further provides that Mr. Scrushy is eligible for participation in all other management bonus or incentive plans and stock option, stock purchase or equity-based incentive compensation plans in which other senior executives of HEALTHSOUTH are eligible to participate. Under the Agreement, Mr. Scrushy is entitled to receive long-term disability insurance coverage, a non-qualified retirement plan providing for annual retirement benefits equal to 60% of his base compensation, use of a company-owned automobile, certain personal security services, and various other retirement, insurance and fringe benefits, as well as to generally participate in all employee benefit programs we maintain. The Agreement may be terminated by Mr. Scrushy for "Good Reason" (as defined), by the Company for "Cause" (as defined), upon Mr. Scrushy's "Disability" (as defined) or death, or by either party at any time subject to the consequences of such termination as described in the Agreement. If the Agreement is terminated by Mr. Scrushy for Good Reason, we are required to pay him a lump-sum severance payment equal to the discounted value of the sum of his then-current base salary and Annual Target Bonus over the remaining term of the Agreement and to continue certain employee and fringe 76 benefits for the remaining term of the Agreement. If the Agreement is terminated by Mr. Scrushy otherwise than for Good Reason, we are required to pay him a lump-sum severance amount equal to the discounted value of two times the sum of his then-current base salary and Annual Target Bonus. If the Agreement is terminated by HEALTHSOUTH for Cause, Mr. Scrushy is not entitled to any severance or continuation of benefits. If the Agreement is terminated by reason of Mr. Scrushy's Disability, we are required to continue the payment of his then-current base salary and Annual Target Bonus for three years as if all relevant performance standards had been met, and if the Agreement is terminated by Mr. Scrushy's death, we are required to pay his representatives or estate a lump-sum payment equal to his then-current base salary and Annual Target Bonus. In the event of a voluntary termination by Mr. Scrushy following a Change in Control (as defined) of HEALTHSOUTH, other than for Cause, we are required to pay Mr. Scrushy an additional lump-sum severance payment equal to his then-current base salary and Annual Target Bonus. The Agreement provides for us to indemnify Mr. Scrushy against certain "parachute payment" excise taxes which may be imposed upon payments under the Agreement. The Agreement restricts Mr. Scrushy from engaging in certain activities competitive with our business during, and for 24 months after termination of, his employment with HEALTHSOUTH, unless such termination occurs after a Change in Control. OTHER EXECUTIVE EMPLOYMENT AGREEMENTS We also have Employment Agreements, dated April 1, 1998, with Thomas W. Carman, Executive Vice President -- Corporate Development, Robert E. Thomson, President -- Inpatient Operations, and Patrick A. Foster, President -- Ambulatory Services -- West, under which each of these persons is employed in these capacities for a three-year term originally scheduled to expire on April 1, 2001. Such terms are automatically extended for an additional year on each April 1 unless the Agreements are terminated in accordance with their terms. The Agreements currently provide for the payment of an annual base salary of $360,000 to Mr. Carman, $450,000 to Mr. Thomson, and $450,000 to Mr. Foster. The Agreements further provide that each of these officers is eligible for participation in all management bonus or incentive plans and stock option, stock purchase or equity-based incentive compensation plans in which other senior executives of HEALTHSOUTH are eligible to participate, and provide for various specified fringe benefits. If the Agreements are terminated by HEALTHSOUTH other than for Cause (as defined), Disability (as defined) or death, we are required to continue the officers' base salary in effect for a period of one year after termination, as severance compensation. In addition, in the event of a voluntary termination of employment by the officer within six months after a Change in Control (as defined), we are also required to continue the officer's salary for the same period. The Agreements restrict the officers from engaging in activities competitive with our business during their employment with HEALTHSOUTH and for any period during which the officer is receiving severance compensation, unless such termination occurs after a Change in Control. 77 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of HEALTHSOUTH common stock as of March 26, 2001, (a) by each person who is known by us to own beneficially more than 5% of our common stock, (b) by each of our Directors, (c) by our five most highly compensated executive officers, (d) by two former executive officers who would have been among our five most highly compensated executive officers had they held such positions at December 31, 2000 and (e) by all executive officers and Directors as a group.
PERCENTAGE NAME AND NUMBER OF SHARES OF ADDRESS OF OWNER BENEFICIALLY OWNED(1) COMMON STOCK - ---------------------------------------------------------------------- ----------------------- ------------- Richard M. Scrushy ................................................... 20,704,955 (2) 5.11% John S. Chamberlin ................................................... 382,000 (3) * C. Sage Givens ....................................................... 445,100 (4) * Charles W. Newhall III ............................................... 805,846 (5) * George H. Strong ..................................................... 540,665 (6) * Phillip C. Watkins, M.D. ............................................. 694,154 (7) * William T. Owens ..................................................... 887,500 (8) * Joel C. Gordon ....................................................... 1,961,868 (9) * Robert E. Thomson .................................................... 1,176,637 (10) * Larry D. Striplin, Jr. ............................................... 125,000 (11) * Thomas W. Carman ..................................................... 1,075,000 (12) * Patrick A. Foster .................................................... 802,837 (13) * James P. Bennett ..................................................... 1,570,500 (14) * P. Daryl Brown ....................................................... 1,574,873 (15) * FMR Corp. ............................................................ 37,727,785 (16) 9.69% 82 Devonshire Street Boston, Massachusetts 02109 All Executive Officers and Directors as a Group (17 persons) ......... 31,486,089 (17) 7.63%
- ---------- (1) The persons named in the table have sole voting and investment power with respect to all shares of HEALTHSOUTH common stock shown as beneficially owned by them, except as otherwise indicated. (2) Includes 9,000 shares held by trusts for Mr. Scrushy's children, 31,000 shares held by a charitable foundation of which Mr. Scrushy is an officer and director and 15,522,524 shares subject to currently exercisable stock options. (3) Includes 250,000 shares subject to currently exercisable stock options. (4) Includes 2,100 shares owned by Ms. Givens's spouse and 410,000 shares subject to currently exercisable stock options. (5) Includes 460 shares owned by members of Mr. Newhall's immediate family, and 685,000 shares subject to currently exercisable stock options. Mr. Newhall disclaims beneficial ownership of the shares owned by his family members, except to the extent of his pecuniary interest therein. (6) Includes 220,665 shares owned by trusts of which Mr. Strong is a trustee and claims shared voting and investment power and 300,000 shares subject to currently exercisable stock options. (7) Includes 547,500 shares subject to currently exercisable stock options. (8) Includes 812,500 shares subject to currently exercisable stock options. (9) Includes 127,396 shares owned by Mr. Gordon's spouse and 484,520 shares subject to currently exercisable stock options. (10) Includes 855,000 shares subject to currently exercisable stock options. (11) Includes 60,000 shares subject to currently exercisable stock options. (12) Includes 900,000 shares subject to currently exercisable stock options. (13) Includes 613,800 shares subject to currently exercisable stock options. (14) Includes 1,490,000 shares subject to currently exercisable stock options. (15) Includes 1,100,000 shares subject to currently exercisable stock options. (16) Shares held by various investment funds for which affiliates of FMR Corp. act as investment advisor. FMR Corp. or its affiliates claim sole power to vote 936,510 shares and sole power to dispose of all of the shares. (17) Includes 23,119,857 shares subject to currently exercisable stock options held by executive officers and Directors. * Less than 1% 78 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In December 1999, we acquired 6,390,583 shares of Series A Convertible Preferred Stock of MedCenterDirect.com, inc., a development-stage healthcare e-procurement company, in a private placement for a purchase price of $0.3458 per share. Various persons affiliated or associated with us, including various of our Directors and executive officers, also purchased shares in the private placement. Under a Stockholders Agreement, we and the other holders of Series A Convertible Preferred Stock, substantially all of whom may be deemed to be our affiliates or associates, have the right to elect 50% of the directors of MedCenterDirect.com. During 2000, we purchased $74,587,873 in goods, supplies and related services through MedCenterDirect.com on terms we believe to be no less favorable than those we could have obtained from an unrelated vendor. During 2001, we expect to enter into a definitive long-term exclusive agreement under which MedCenterDirect.com will be our exclusive e-procurement vendor of medical products and supplies. We expect that the terms of such agreement will be no less favorable than those we could obtain from an unrelated vendor. At times, we have made loans to executive officers to assist them in meeting various financial obligations or for other purposes. At December 31, 2000, a loan in the principal amount of $476,000 was outstanding to William T. Owens, Executive Vice President and Chief Financial Officer and a Director of the Corporation. This loan bears interest at the rate of 1 1/4% per annum below the prime rate of AmSouth Bank of Alabama, Birmingham, Alabama, and is payable on demand. See Item 11, "Executive Compensation -- 1999 Executive Equity Loan Plan", for information concerning loans to executive officers to purchase HEALTHSOUTH common stock. 79 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits. 1. Financial Statements. The consolidated financial statements of HEALTHSOUTH and its subsidiaries filed as a part of this Annual Report on Form 10-K are listed in Item 8 of this Annual Report on Form 10-K, which listing is hereby incorporated herein by reference. 2. Financial Statement Schedules. The financial statement schedules required by Regulation S-X are filed under Item 14(d) of this Annual Report on Form 10-K, as listed below: Schedules Supporting the Financial Statements Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions or are inapplicable, or because the information has been provided in the Consolidated Financial Statements or the Notes thereto. 3. Exhibits. The Exhibits filed as a part of this Annual Report are listed in Item 14(c) of this Annual Report on Form 10-K, which listing is hereby incorporated herein by reference. (b) Reports on Form 8-K. HEALTHSOUTH filed no Current Reports on Form 8-K during the three months ended December 31, 2000. (c) Exhibits. The Exhibits required by Regulation S-K are set forth in the following list and are filed either by incorporation by reference from previous filings with the Securities and Exchange Commission or by attachment to this Annual Report on Form 10-K as so indicated in such list. (2)-1 Plan and Agreement of Merger, dated December 2, 1996, among HEALTHSOUTH Corporation, Hammer Acquisition Corporation and Health Images, Inc., filed as Exhibit (2)-1 to HEALTHSOUTH's Registration Statement on Form S-4 (Registration No. 333-19439), is hereby incorporated by reference. (2)-2 Plan and Agreement of Merger, dated February 17, 1997, among HEALTHSOUTH Corporation, Reid Acquisition Corporation and Horizon/CMS Healthcare Corporation, as amended, filed as Exhibit 2 to HEALTHSOUTH's Registration Statement on Form S-4 (Registration No. 333-36419), is hereby incorporated by reference. (2)-3 Purchase and Sale Agreement, dated November 3, 1997, among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and Integrated Health Services, Inc., filed as Exhibit 2.1 to HEALTHSOUTH's Current Report on Form 8-K, dated December 31, 1997, is hereby incorporated by reference. (2)-4 Amendment to Purchase and Sale Agreement, dated December 31, 1997, among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and Integrated Health Services, Inc., filed as Exhibit 2.2 to HEALTHSOUTH's Current Report on Form 8-K, dated December 31, 1997, is hereby incorporated by reference.
80 (2)-5 Second Amendment to Purchase and Sale Agreement, dated March 4, 1998, among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and Integrated Health Services, Inc., filed as Exhibit (2-14) to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997, is hereby incorporated by reference. (2)-6 Plan and Agreement of Merger, dated May 5, 1998, among HEALTHSOUTH Corporation, Field Acquisition Corporation and National Surgery Centers, Inc., filed as Exhibit (2) to HEALTHSOUTH's Registration Statement on Form S-4 (Registration No. 333-57087), is hereby incorporated by reference. (3)-1 Restated Certificate of Incorporation of HEALTHSOUTH Corporation, as filed in the Office of the Secretary of State of the State of Delaware on May 21, 1998, filed as Exhibit (3)-1 to HEALTHSOUTH's Current Report on Form 8-K dated May 28, 1998, is hereby incorporated by reference. (3)-2 By-laws of HEALTHSOUTH Corporation, filed as Exhibit (3)-2 to HEALTHSOUTH's Current Report on Form 8-K dated May 28, 1998, are hereby incorporated by reference. (4)-1 Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH Corporation and The Bank of Nova Scotia Trust Company of New York, as Trustee, filed as Exhibit (4)-2 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997, is hereby incorporated by reference. (4)-2 Officer's Certificate pursuant to Sections 2.3 and 11.5 of the Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH Corporation and The Bank of Nova Scotia Trust Company of New York, as Trustee, relating to HEALTHSOUTH's 3.25% Convertible Subordinated Debentures due 2003, filed as Exhibit (4)-3 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997, is hereby incorporated by reference. (4)-3 Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and PNC Bank, National Association, as Trustee, filed as Exhibit 4.1 to HEALTHSOUTH's Quarterly Report on Form 10-Q for the Three Months Ended June 30, 1998, is hereby incorporated by reference. (4)-4 Form of Officer's Certificate pursuant to Sections 2.3 and 11.5 of the Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and PNC Bank, National Association, as Trustee, relating to HEALTHSOUTH's 6.875% Senior Notes due 2005 and 7.0% Senior Notes due 2008, filed as Exhibit (4)-6 to HEALTHSOUTH's Registration Statement on Form S-4 (Registration No. 333-61485), is hereby incorporated by reference. (4)-5 Indenture, dated September 25, 2000, between HEALTHSOUTH Corporation and The Bank of New York, as Trustee, filed as Exhibit (4)-1 to HEALTHSOUTH's Registration Statement on Form S-4 (Registration No. 333-49636), is hereby incorporated by reference. (4)-6 Indenture, dated February 1, 2001, between HEALTHSOUTH Corporation and The Bank of New York, as Trustee. (4)-7 Registration Rights Agreement, dated February 1, 2001, among HEALTHSOUTH Corporation and UBS Warburg LLC, Deutsche Banc Alex. Brown Inc, Chase Securities Inc., First Union Securities, Inc., and Scotia Capital (USA) Inc., relating to HEALTHSOUTH's 8 1/2% Senior Notes due 2008. (10)-1 1984 Incentive Stock Option Plan, as amended, filed as Exhibit (10)-1 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1987, is hereby incorporated by reference. (10)-2 1988 Non-Qualified Stock Option Plan, filed as Exhibit 4(a) to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No. 33-23642), is hereby incorporated by reference.
81 (10)-3 1989 Stock Option Plan, filed as Exhibit (10)-6 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1989, is hereby incorporated by reference. (10)-4 1990 Stock Option Plan, filed as Exhibit (10)-13 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1990, is hereby incorporated by reference. (10)-5 1991 Stock Option Plan, as amended, filed as Exhibit (10)-15 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1991, is hereby incorporated by reference. (10)-6 1992 Stock Option Plan, filed as Exhibit (10)-8 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1992, is hereby incorporated by reference. (10)-7 1993 Stock Option Plan, filed as Exhibit (10)-10 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1993, is hereby incorporated by reference. (10)-8 Amended and Restated 1993 Consultants Stock Option Plan, filed as Exhibit 4 to HEALTHSOUTH's Registration Statement on Form S-8 (Commission File No. 333-42305), is hereby incorporated by reference. (10)-9 1995 Stock Option Plan, filed as Exhibit (10)-14 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, is hereby incorporated by reference. (10)-10 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and Richard M. Scrushy, filed as Exhibit (10)-10 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999, is hereby incorporated by reference. (10)-11 Credit Agreement, dated as of June 23, 1998, by and among HEALTHSOUTH Corporation, NationsBank, National Association, J.P. Morgan Securities, Inc., Deutsche Bank AG, ScotiaBanc, Inc. and the Lenders party thereto from time to time, filed as Exhibit 10 to HEALTHSOUTH's Quarterly Report on Form for the Three Months Ended June 30, 1998, is hereby incorporated by reference. (10)-12 Form of Indemnity Agreement entered into between HEALTHSOUTH Rehabilitation Corporation and each of its Directors, filed as Exhibit (10)-13 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1991, is hereby incorporated by reference. (10)-13 Surgical Health Corporation 1992 Stock Option Plan, filed as Exhibit 10(aa) to Surgical Health Corporation's Registration Statement on Form S-4 (Commission File No. 33-70582), is hereby incorporated by reference. (10)-14 Surgical Health Corporation 1993 Stock Option Plan, filed as Exhibit 10(bb) to Surgical Health Corporation's Registration Statement on Form S-4 (Commission File No. 33-70582), is hereby incorporated by reference. (10)-15 Surgical Health Corporation 1994 Stock Option Plan, filed as Exhibit 10(pp) to Surgical Health Corporation's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1994, is hereby incorporated by reference. (10)-16 Heritage Surgical Corporation 1992 Stock Option Plan, filed as Exhibit 4(d) to HEALTHSOUTH's Registration Statement on Form S-8 (Commission File No. 33-60231), is hereby incorporated by reference. (10)-17 Heritage Surgical Corporation 1993 Stock Option Plan, filed as Exhibit 4(e) to HEALTHSOUTH's Registration Statement on Form S-8 (Commission File No. 33-60231), is hereby incorporated by reference.
82 (10)-18 Sutter Surgery Centers, Inc. 1993 Stock Option Plan, Non-Qualified Stock Option Plan and Agreement (Saibeni), Non-Qualified Stock Option Plan and Agreement (Shah), Non-Qualified Stock Option Plan and Agreement (Akella), Non-Qualified Stock Option Plan and Agreement (Kelly) and Non-Qualified Stock Option Plan and Agreement (May), filed as Exhibits 4(a) -- 4(f) to HEALTHSOUTH's Registration Statement on Form S-8 (Commission File No. 33-64615), are hereby incorporated by reference. (10)-19 Surgical Care Affiliates Incentive Stock Plan of 1986, filed as Exhibit 10(g) to Surgical Care Affiliates, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1993, is hereby incorporated by reference. (10)-20 Surgical Care Affiliates 1990 Non-Qualified Stock Option Plan for Non-Employee Directors, filed as Exhibit 10(i) to Surgical Care Affiliates, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1990, is hereby incorporated by reference. (10)-21 Professional Sports Care Management, Inc. 1992 Stock Option Plan, as amended, filed as Exhibits 10.1 -- 10.3 to Professional Sports Care Management, Inc.'s Registration Statement on Form S-1 (Commission File No. 33-81654), is hereby incorporated by reference. (10)-22 Professional Sports Care Management, Inc. 1994 Stock Incentive Plan, filed as Exhibit 10.4 to Professional Sports Care Management, Inc.'s Registration Statement on Form S-1 (Commission File No. 33-81654), is hereby incorporated by reference. (10)-23 Professional Sports Care Management, Inc. 1994 Directors' Stock Option Plan, filed as Exhibit 10.5 to Professional Sports Care Management, Inc.'s Registration Statement on Form S-1 (Commission File No. 33-81654), is hereby incorporated by reference. (10)-24 ReadiCare, Inc. 1991 Stock Option Plan, filed as an exhibit to ReadiCare, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended February 29, 1992, is hereby incorporated by reference. (10)-25 ReadiCare, Inc. Stock Option Plan for Non-Employee Directors, as amended, filed as an exhibit to ReadiCare, Inc's Annual Report on Form 10-K for the Fiscal Year Ended February 29, 1992 and as an exhibit to ReadiCare, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended February 28, 1994, is hereby incorporated by reference. (10)-26 1997 Stock Option Plan, filed as Exhibit 4 to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No. 333-42307) is hereby incorporated by reference. (10)-27 1998 Restricted Stock Plan filed as Exhibit (10)-27 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference. (10)-28 Health Images, Inc. Non-Qualified Stock Option Plan, filed as Exhibit 10(d)(i) to Health Images, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, is hereby incorporated by reference. (10)-29 Amended and Restated Employee Incentive Stock Option Plan, as amended, of Health Images, Inc., filed as Exhibits 10(c)(i), 10(c)(ii), 10(c)(iii) and 10(c)(iv) to Health Images, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, is hereby incorporated by reference. (10)-30 Form of Health Images, Inc. 1995 Formula Stock Option Plan, filed as Exhibit 10(d)(iv) to Health Images, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, is hereby incorporated by reference. (10)-31 1996 Employee Incentive Stock Option Plan of Health Images, Inc., filed as Exhibit 4(v) to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No. 333-24429), is hereby incorporated by reference.
83 (10)-32 Employee Stock Option Plan of Horizon/CMS Healthcare Corporation, filed as Exhibit 10.5 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May 31, 1994, is hereby incorporated by reference. (10)-33 First Amendment to Employee Stock Option Plan of Horizon/CMS Healthcare Corporation, filed as Exhibit 10.6 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May 31, 1994, is hereby incorporated by reference. (10)-34 Corrected Second Amendment to Employee Stock Option Plan of Horizon/CMS Healthcare Corporation, filed as Exhibit 10.7 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May 31, 1994, is hereby incorporated by reference. (10)-35 Amendment No. 3 to Employee Stock Option Plan of Horizon/CMS Healthcare Corporation, filed as Exhibit 10.12 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May 31, 1995, is hereby incorporated by reference. (10)-36 Horizon Healthcare Corporation Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.6 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May 31, 1994, is hereby incorporated by reference. (10)-37 Amendment No. 1 to Horizon Healthcare Corporation Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.14 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May 31, 1996, is hereby incorporated by reference. (10)-38 Horizon/CMS Healthcare Corporation 1995 Incentive Plan, filed as Exhibit 4.1 to Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration No. 33-63199), is hereby incorporated by reference. (10)-39 Horizon/CMS Healthcare Corporation 1995 Non-Employee Directors' Stock Option Plan, filed as Exhibit 4.2 to Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration No. 33-63199), is hereby incorporated by reference. (10)-40 First Amendment to Horizon Healthcare Corporation Employee Stock Purchase Plan, filed as Exhibit 10.18 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May 31, 1996, is hereby incorporated by reference. (10)-41 Continental Medical Systems, Inc. 1994 Stock Option Plan (as amended and restated effective December 1, 1991), Amendment No. 1 to Continental Medical Systems, Inc. 1986 Stock Option Plan and Amendment No. 2 to Continental Medical Systems, Inc. 1986 Stock Option Plan, filed as Exhibit 4.1 to Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration No. 33-61697), is hereby incorporated by reference. (10)-42 Continental Medical Systems, Inc. 1989 Non-Employee Directors' Stock Option Plan (as amended and restated effective December 1, 1991), filed as Exhibit 4.2 to Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration No. 33-61697), is hereby incorporated by reference. (10)-43 Continental Medical Systems, Inc. 1992 CEO Stock Option Plan and Amendment No. 1 to Continental Medical Systems, Inc. 1992 CEO Stock Option Plan, filed as Exhibit 4.3 to Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration No. 33-61697), is hereby incorporated by reference. (10)-44 Continental Medical Systems, Inc. 1993 Nonqualified Stock Option Plan, Amendment No. 1 to Continental Medical Systems, Inc. 1993 Nonqualified Stock Option Plan and Amendment No. 2 to Continental Medical Systems, Inc. 1993 Nonqualified Stock Option Plan, filed as Exhibit 4.4 to Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration No. 33-61697), is hereby incorporated by reference.
84 (10)-45 Continental Medical Systems, Inc. 1994 Stock Option Plan, filed as Exhibit 4.5 to Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration No. 33-61697), is hereby incorporated by reference. (10)-46 The Company Doctor Amended and Restated Omnibus Stock Plan of 1995, filed as Exhibit 4.1 to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No. 333-59895), is hereby incorporated by reference. (10)-47 National Surgery Centers, Inc. Amended and Restated 1992 Stock Option Plan, filed as Exhibit 4.1 to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No. 333-59887), is hereby incorporated by reference. (10)-48 National Surgery Centers, Inc. 1997 Non-Employee Directors Stock Option Plan, filed as Exhibit 4.2 to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No. 333-59887), is hereby incorporated by reference. (10)-49 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and James P. Bennett, filed as Exhibit (10)-49 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference. (10)-50 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and P. Daryl Brown, filed as Exhibit (10)-50 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference. (10)-51 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and Thomas W. Carman, filed as Exhibit (10)-51 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference. (10)-52 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and Michael D. Martin, filed as Exhibit (10)-52 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference. (10)-53 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and Anthony J. Tanner, filed as Exhibit (10)-53 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999, is hereby incorporated by reference. (10)-54 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and Patrick A. Foster, filed as Exhibit (10)-54 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference. (10)-55 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and Robert E. Thomson, filed as Exhibit (10)-55 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference. (10)-56 Lease Agreement, dated October 31, 2000, between First Security Bank, National Association, as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, as Lessor, and HEALTHSOUTH Corporation, as Lessee. (10)-57 Participation Agreement, October 31, 2000, among HEALTHSOUTH Corporation as Lessee, First Security Bank, National Association, as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, the Holders and the Lenders Party Thereto From Time to Time, The Chase Manhattan Bank, UBS Warburg LLC, Deutsche Bank Securities Inc., Deutsche Bank AG, New York Branch and UBS AG, Stamford Branch.
85 (10)-58 Credit Agreement among HEALTHSOUTH Corporation, UBS AG, Stamford Branch, Deutsche Bank AG, the Lenders Party Thereto and the Industrial Bank of Japan, Limited, dated October 31, 2000. (10)-59 1999 Exchange Stock Option Plan, filed as Exhibit 3 to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No. 333-80073), is hereby incorporated by reference. (10)-60 1999 Executive Equity Loan Plan, filed as Exhibit (10)-60 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999, is hereby incorporated by reference. (21) Subsidiaries of HEALTHSOUTH Corporation. (23) Consent of Ernst & Young LLP.
(d) Financial Statement Schedules. Schedule II: Valuation and Qualifying Accounts 86 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------ -------------- --------------------------------------- ----------------- -------------- BALANCE AT ADDITIONS CHARGED ADDITIONS CHARGED BEGINNING OF TO COSTS AND TO OTHER ACCOUNTS DEDUCTIONS BALANCE AT DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD - ------------------------------------------ -------------- ------------------- ------------------- ----------------- -------------- (IN THOUSANDS) Year ended December 31, 1998: Allowance for doubtful accounts ......... $127,572 $112,202 $ 18,524(1) $ 114,609(2) $143,689 ======== ======== =========== ============ ======== Year ended December 31, 1999: Allowance for doubtful accounts ......... $143,689 $342,708 $ 16,314(1) $ 199,097(2) $303,614 ======== ======== =========== ============ ======== Year ended December 31, 2000: Allowance for doubtful accounts ......... $303,614 $ 98,037 $ 6,961(1) $ 178,182(2) $230,430 ======== ======== =========== ============ ========
- ---------- (1) Allowances of acquisitions in years 1998, 1999 and 2000, respectively. (2) Write-offs of uncollectible patient accounts receivable. 87 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. HEALTHSOUTH CORPORATION By: RICHARD M. SCRUSHY ------------------------------------ Richard M. Scrushy, Chairman of the Board and Chief Executive Officer Date: March 29, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - --------------------------- ----------------------------------------- --------------- RICHARD M. SCRUSHY Chairman of the Board March 29, 2001 - ----------------------- and Chief Executive Officer Richard M. Scrushy and Director WILLIAM T. OWENS Executive Vice President March 29, 2001 - ----------------------- and Chief Financial Officer and Director William T. Owens WESTON L. SMITH Senior Vice President-Finance March 29, 2001 - ----------------------- and Controller (Principal Accounting Weston L. Smith Officer) C. SAGE GIVENS Director March 29, 2001 - ----------------------- C. Sage Givens CHARLES W. NEWHALL III Director March 29, 2001 - ----------------------- Charles W. Newhall III GEORGE H. STRONG Director March 29, 2001 - ----------------------- George H. Strong PHILLIP C. WATKINS Director March 29, 2001 - ----------------------- Phillip C. Watkins JOHN S. CHAMBERLIN Director March 29, 2001 - ----------------------- John S. Chamberlin JOEL C. GORDON Director March 29, 2001 - ----------------------- Joel C. Gordon LARRY D. STRIPLIN, JR. Director March 29, 2001 - ----------------------- Larry D. Striplin, Jr.
EX-4.6 2 0002.txt EXHIBIT (4)-6 EXHIBIT (4)-6 ================================================================================ HEALTHSOUTH CORPORATION, as Issuer, and THE BANK OF NEW YORK, as Trustee ----------------------- INDENTURE Dated as of February 1, 2001 ----------------------- 8 1/2% Senior Notes due 2008, Series A 8 1/2% Senior Notes due 2008, Series B ================================================================================ CROSS-REFERENCE TABLE
TIA Indenture Section Section - ------- -------- 310(a)(1)....................................................................... 7.10 (a)(2)....................................................................... 7.10 (a)(3)....................................................................... N.A. (a)(4)....................................................................... N.A (a)(5)....................................................................... 7.10 (b).......................................................................... 7.08; 7.10; 11.02 (c).......................................................................... N.A. 311(a).......................................................................... 7.11 (b).......................................................................... 7.11 (c).......................................................................... N.A. 312(a).......................................................................... 2.05 (b).......................................................................... 11.03 (c).......................................................................... 11.03 313(a).......................................................................... 7.06 (b)(1)....................................................................... 7.06 (b)(2)....................................................................... 7.06 (c).......................................................................... 7.06; 11.02 (d).......................................................................... 7.06 314(a).......................................................................... 4.02; 4.08; 11.02 (b).......................................................................... N.A. (c)(1)....................................................................... 11.04; 11.05 (c)(2)....................................................................... 11.04; 11.05 (c)(3)....................................................................... N.A. (d).......................................................................... N.A. (e).......................................................................... 11.05 (f).......................................................................... N.A. 315(a).......................................................................... 7.01; 7.02 (b).......................................................................... 7.05; 11.02 (c).......................................................................... 7.01 (d).......................................................................... 6.05; 7.01; 7.02 (e).......................................................................... 6.11 316(a) (last sentence).......................................................... 2.09 (a)(1)(A).................................................................... 6.05 (a)(1)(B).................................................................... 6.04 (a)(2)....................................................................... 8.02 (b).......................................................................... 6.07 (c).......................................................................... 8.04 317(a)(1)....................................................................... 6.08 (a)(2)....................................................................... 6.09 (b).......................................................................... 2.04 318(a).......................................................................... 11.01
N.A. means Not Applicable - -------------------- NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of this Indenture. TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS Section 1.01. Definitions....................................................................1 Section 1.02. Other Definitions.............................................................15 Section 1.03. Incorporation by Reference of Trust Indenture Act.............................16 Section 1.04. Rules of Construction.........................................................16 ARTICLE 2 THE NOTES Section 2.01. Dating; Incorporation of Form in Indenture; Form of Notes.....................16 Section 2.02. Execution and Authentication; Appointment of Authenticating Agent.............17 Section 2.03. Registrar and Paying Agent....................................................18 Section 2.04. Paying Agent To Hold Money in Trust...........................................18 Section 2.05. Holder Lists..................................................................19 Section 2.06. [Intentionally Omitted].......................................................19 Section 2.07. Replacement Notes.............................................................19 Section 2.08. Outstanding Notes.............................................................19 Section 2.09. Treasury Notes................................................................20 Section 2.10. Temporary Notes...............................................................20 Section 2.11. Cancellation..................................................................20 Section 2.12. Defaulted Interest............................................................20 Section 2.13. Deposit of Moneys; Payments...................................................21 Section 2.14. "CUSIP" Number................................................................21 Section 2.15. Depositary....................................................................21 Section 2.16. Registration of Transfers and Exchanges.......................................22 Section 2.17. Restrictive Legends...........................................................29 ARTICLE 3 REDEMPTION Section 3.01. Notices to Trustee............................................................30 Section 3.02. Selection of Notes To Be Redeemed.............................................30 Section 3.03. Notice of Redemption..........................................................31 Section 3.04. Effect of Notice of Redemption................................................32 Section 3.05. Deposit of Redemption Price...................................................32 Section 3.06. Notes Redeemed in Part........................................................33
i ARTICLE 4 COVENANTS
Page ---- Section 4.01. Payment of Notes..............................................................33 Section 4.02. Reports.......................................................................33 Section 4.03. Waiver of Stay, Extension or Usury Laws.......................................33 Section 4.04. Compliance Certificate; Notice of Default; Tax Information....................34 Section 4.05. Payment of Taxes and Other Claims.............................................34 Section 4.06. Corporate Existence...........................................................35 Section 4.07. Maintenance of Office or Agency...............................................35 Section 4.08. Compliance with Laws..........................................................35 Section 4.09. Maintenance of Properties and Insurance.......................................36 Section 4.10. Limitation on Restricted Payments.............................................36 Section 4.11. Limitation on Additional Indebtedness and Subsidiary Preferred Stock..........37 Section 4.12. Limitation on Asset Sales.....................................................38 Section 4.13. Limitation on Transactions with Affiliates....................................41 Section 4.14. Limitation on Liens...........................................................41 Section 4.15. Purchase of Notes upon a Change of Control....................................42 Section 4.16. Limitation on Restrictions on Distributions from Subsidiaries.................43 Section 4.17. Limitations on Layering Indebtedness..........................................44 ARTICLE 5 SURVIVING ENTITY Section 5.01. Limitations on Mergers and Consolidations.....................................44 Section 5.02. Successor Substituted.........................................................44 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default.............................................................45 Section 6.02. Acceleration..................................................................46 Section 6.03. Other Remedies................................................................47 Section 6.04. Waiver of Existing Defaults and Events of Default.............................47 Section 6.05. Control by Majority...........................................................48 Section 6.06. Limitation on Suits...........................................................48 Section 6.07. Rights of Holders To Receive Payment..........................................49 Section 6.08. Collection Suit by Trustee....................................................49 Section 6.09. Trustee May File Proofs of Claim..............................................49 Section 6.10. Priorities....................................................................49 Section 6.11. Undertaking for Costs.........................................................50
ii
Page ---- ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee.............................................................50 Section 7.02. Rights of Trustee.............................................................51 Section 7.03. Individual Rights of Trustee..................................................52 Section 7.04. Trustee's Disclaimer..........................................................53 Section 7.05. Notice of Defaults............................................................53 Section 7.06. Reports by Trustee to Holders.................................................53 Section 7.07. Compensation and Indemnity....................................................53 Section 7.08. Replacement of Trustee........................................................54 Section 7.09. Successor Trustee by Consolidation, Merger or Conversion......................55 Section 7.10. Eligibility; Disqualification.................................................55 Section 7.11. Preferential Collection of Claims Against Company.............................56 ARTICLE 8 MODIFICATIONS, AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 8.01. Without Consent of Holders....................................................56 Section 8.02. With Consent of Holders.......................................................57 Section 8.03. Compliance with TIA...........................................................58 Section 8.04. Revocation and Effect of Consents.............................................58 Section 8.05. Notation on or Exchange of Notes..............................................58 Section 8.06. Trustee To Sign Amendments, etc...............................................59 ARTICLE 9 DISCHARGE OF INDENTURE; DEFEASANCE Section 9.01. Satisfaction and Discharge of Indenture.......................................59 Section 9.02. Legal Defeasance..............................................................60 Section 9.03. Covenant Defeasance...........................................................60 Section 9.04. Conditions to Legal Defeasance or Covenant Defeasance.........................61 Section 9.05. Application of Trust Money....................................................62 Section 9.06. Repayment to the Company......................................................62 Section 9.07. Reinstatement.................................................................63
iii
Page ---- ARTICLE 10 [INTENTIONALLY OMITTED] ARTICLE 11 MISCELLANEOUS Section 11.01. TIA Controls..................................................................63 Section 11.02. Notices.......................................................................63 Section 11.03. Communications by Holders with Other Holders..................................64 Section 11.04. Certificate and Opinion as to Conditions Precedent............................64 Section 11.05. Statements Required in Certificate and Opinion................................65 Section 11.06. Rules by Trustee and Agents...................................................65 Section 11.07. Business Days; Legal Holidays.................................................65 Section 11.08. Governing Law.................................................................65 Section 11.09. Waiver of Trial by Jury.......................................................65 Section 11.10. Submission to Jurisdiction....................................................66 Section 11.11. No Adverse Interpretation of Other Agreements.................................66 Section 11.12. No Recourse Against Others....................................................66 Section 11.13. Successors....................................................................66 Section 11.14. Multiple Counterparts.........................................................66 Section 11.15. Table of Contents, Headings, etc..............................................66 Section 11.16. Separability..................................................................66 Section 11.17. Translation...................................................................67 SIGNATURES.....................................................................................S-1 EXHIBITS Exhibit A Form of Initial Notes Exhibit B Form of Exchange Notes Exhibit C Form of Rule 144A Transfer Certificate Exhibit D Form of Regulation S Transfer Certificate Exhibit E Form of Rule 144 Transfer Certificate Exhibit F Form of Accredited Investor Transfer Certificate iv
INDENTURE, dated as of February 1, 2001, between HEALTHSOUTH CORPORATION, a corporation incorporated in Delaware (the "Company"), as Issuer, and The Bank of New York, a New York banking corporation, as Trustee (the "Trustee"). The Company has duly authorized the creation of an issue of Series A 8 1/2% Senior Notes due 2008 and Series B 8 1/2% Senior Notes due 2008 and, to provide therefor, the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Notes, when duly issued and executed by the Company, and authenticated and delivered hereunder, the valid obligations of the Company, and to make this Indenture a valid and binding agreement of the Company, have been done. Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders: ARTICLE 1 DEFINITIONS Section 1.01. Definitions. ----------- "2000 Credit Agreement" means the Credit Agreement dated as of October 31, 2000 by and among the Company, as borrower, UBS AG, Stamford Branch, as Administrative Agent, Deutsche Bank AG New York Branch, as Syndication Agent, the lenders party thereto from time to time, UBS Warburg LLC and Deutsche Bank Securities Inc., as Joint Lead Arrangers, and The Industrial Bank of Japan, Limited, as Documentation Agent, together with the related documents thereto, including, without limitation, any security documents, if any, and all exhibits and schedules thereto and any agreement or agreements relating to any extension, refunding, refinancing, successor or replacement facility, whether or not with the same lender, and whether or not the principal amount or amount of letters of credit outstanding thereunder or the interest rate payable in respect thereof shall be thereby increased, in each case as amended and in effect from time to time. "Acquired Indebtedness" means (i) with respect to any Person that becomes a Subsidiary of the Company after the Issue Date, Indebtedness of such Person and its Subsidiaries existing at the time such Person becomes a Subsidiary of the Company and (ii) with respect to the Company or any of its Subsidiaries, any Indebtedness assumed by the Company or any of its Subsidiaries in connection with the acquisition of an asset from another Person. "Additional Interest" has the meaning provided to such term in the Registration Rights Agreement. "Affiliate" of any specified Person means any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Registrar, Paying Agent, co-Registrar, authenticating agent or agent for service of notices and demands. "Asset Sale" for any Person means the sale, lease, conveyance or other disposition (including, without limitation, by merger or consolidation, and whether by operation of law or otherwise) of any of that Person's assets (including, without limitation, the sale or other disposition of Capital Stock of any Subsidiary of such Person, whether by such Person or by such Subsidiary), whether owned on the Issue Date or subsequently acquired, in one transaction or a series of related transactions, in which such Person and/or its Subsidiaries sell, lease, convey or otherwise dispose of: (i) all or substantially all of the Capital Stock of any of such Person's Subsidiaries; (ii) assets which constitute all or substantially all of any division or line of business of such Person or any of its Subsidiaries; or (iii) any other assets of such Person or any of its Subsidiaries, other than in the ordinary course of business, provided, that the Fair Market Value thereof shall be at least 1% of Consolidated Tangible Assets; provided, however, that the following shall not constitute Asset Sales: (a) transactions between the Company and any of its Wholly Owned Subsidiaries or among such Wholly Owned Subsidiaries; (b) any transaction not prohibited by Section 4.10 hereof or that constitutes a Permitted Investment; (c) any transfer of assets (including Capital Stock) that is governed by and in accordance with Article 5 hereof or the creation of any Lien not prohibited by Section 4.14 hereof; or (d) sales of damaged, worn-out or obsolete equipment or assets that, in the Company's reasonable judgment, are no longer either used or useful in the business of the Company or its Subsidiaries. "Attributable Indebtedness" when used with respect to any Sale and Leaseback Transaction means, as at the time of determination, the present value (discounted at a rate equivalent to the interest rate implicit in the lease, compounded on a semiannual basis) of the total obligations of the lessee for rental payments, after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, utilities and other similar expenses payable by the lessee pursuant to the terms of the lease, during the remaining term of the lease included in any such Sale and Leaseback Transaction or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of a penalty (in which case the rental payments shall include such penalty); provided, that the Attributable Indebtedness with respect to a Sale and Leaseback Transaction shall be no less than the fair market value of the property subject to such Sale and Leaseback Transaction. "Bank Debt" means all obligations of the Company and its Subsidiaries, now or hereafter existing under (i) the Credit Agreements, whether for principal, interest, reimbursement of amounts drawn under letters of credit issued pursuant thereto, guarantees in respect thereof, fees, expenses, premiums, indemnities or otherwise, and (ii) any Indebtedness incurred by the Company to extend, refund or refinance, in whole or in part, the Bank Debt, including any interest and premium on any such Indebtedness. "Board of Directors" means, with respect to any Person, the board of directors or similar governing body of such Person or any duly authorized committee thereof. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification and delivered to the Trustee. 2 "Capital Stock" of any Person means any and all shares, rights to purchase, warrants or options (whether or not currently exercisable), participation or other equivalents of or interest in (however designated) the equity (including without limitation common stock, preferred stock and partnership, joint venture and limited liability company interests) of such Person (excluding any debt securities that are convertible into, or exchangeable for, such equity). "Capitalized Lease Obligations" of any Person means the obligation of such Person to pay rent or other amounts under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such obligation shall be the capitalized amount thereof determined in accordance with GAAP. "Certificated Note" means a Note issued in certificated form to a Person other than the Depositary. "Change of Control" means the occurrence of any of the following: (i) all or substantially all of the Company's assets are sold as an entirety to any Person or related group of Persons; (ii) there shall be consummated any consolidation or merger of the Company (A) in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a Wholly Owned Subsidiary of the Company in which all shares of the Company's Common Equity outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (B) pursuant to which the Company's Common Equity would be converted into cash, securities or other property, in each case other than a consolidation or merger of the Company in which the holders of the Company's Common Equity immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the total voting power of all classes of Capital Stock entitled to vote generally in the election of directors of the continuing or surviving corporation immediately after such consolidation or merger in substantially the same proportion as their ownership of the Company's Common Equity immediately before such transaction; (iii) any Person, or any Persons acting together which would constitute a "group" for purposes of Section 13(d) of the Exchange Act, together with any affiliates thereof, shall beneficially own (as defined in Rule 13d-3 under the Exchange Act) at least 50% of the total voting power of all classes of Capital Stock of the Company entitled to vote generally in the election of directors of the Company; (iv) at any time during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of 66-2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (v) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, the body performing such duties at the time. "Common Equity" of any Person means all Capital Stock of such Person that is generally entitled to (i) vote in the election of directors of such Person or (ii) if such Person is not a corporation, vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management and policies of such Person. 3 "Company" means the party named as such in the first paragraph of this Indenture until a successor replaces such party pursuant to Article 5 hereof and thereafter means such successor. "Consolidated Amortization Expense" of any Person for any period means the amortization expense of such Person and its Subsidiaries for such period (to the extent included in the computation of Consolidated Net Income of such Person), determined on a consolidated basis in accordance with GAAP. "Consolidated Depreciation Expense" of any Person means the depreciation expense of such Person and its Subsidiaries for such period (to the extent included in the computation of Consolidated Net Income of such Person), determined on a consolidated basis in accordance with GAAP. "Consolidated EBITDA" of any Person means, with respect to any determination date, Consolidated Net Income, plus (i) Consolidated Income Tax Expense, plus (ii) Consolidated Depreciation Expense, plus (iii) Consolidated Amortization Expense, plus (iv) Consolidated Interest Expense, plus (v) all other unusual non-cash items or non-recurring non-cash items reducing Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, and less all non-cash items increasing Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, in each case, for such Person's prior four full fiscal quarters for which financial results have been reported immediately preceding the determination date. "Consolidated Income Tax Expense" means, for any Person for any period, the provision for taxes based on income and profits of such Person and its Subsidiaries to the extent such provision for income taxes was deducted in computing Consolidated Net Income of such Person for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" of any Person for any period means, without duplication, (i) the Interest Expense of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, plus (ii) (to the extent not otherwise included within the definition of Interest Expense as imputed interest) one-third of the rental expense on Attributable Indebtedness of such Person for such period determined on a consolidated basis, plus (iii) the dividend requirements of such Person and its Subsidiaries with respect to Disqualified Stock and with respect to all other Preferred Stock of Subsidiaries of such Person (in each case whether in cash or otherwise (except dividends payable solely in shares of Capital Stock (other than Disqualified Stock) of such Person or such Subsidiary)) paid, accrued or accumulated during such period times a fraction the numerator of which is one and the denominator of which is one minus the then effective consolidated Federal, state and local tax rate of such Person, expressed as a decimal. "Consolidated Net Income" of any Person for any period means the net income (or loss) of such Person and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded from such net income (to the extent otherwise included therein), without duplication: (i) the net income (or loss) of any Person (other than a Subsidiary of the referent Person) in which any Person other than the referent Person has an ownership interest, except to the extent that any such income has actually been received by the referent Person or any of 4 its Wholly Owned Subsidiaries in the form of dividends or similar distributions during such period; (ii) except to the extent includable in the consolidated net income of the referent Person pursuant to the foregoing clause (i), the net income (or loss) of any Person that accrued prior to the date that (a) such Person becomes a Subsidiary of the referent Person or is merged into or consolidated with the referent Person or any of its Subsidiaries or (b) the assets of such Person are acquired by the referent Person or any of its Subsidiaries; (iii) the net income of any Subsidiary of the referent Person (other than a Wholly Owned Subsidiary) to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of that income is not permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary during such period; (iv) any gain (or loss), together with any related provisions for taxes on any such gain, realized during such period by the referent Person or any of its Subsidiaries upon (a) the acquisition of any securities, or the extinguishment of any Indebtedness, of the referent Person or any of its Subsidiaries or (b) any Asset Sale by the referent Person or any of its Subsidiaries; (v) any extraordinary gain or extraordinary loss, together with any related provision for taxes or tax benefit resulting from any such extraordinary gain or extraordinary loss, realized by the referent Person or any of its Subsidiaries during such period; and (vi) in the case of a successor to such Person by consolidation, merger or transfer of its assets, any earnings of the successor prior to such merger, consolidation or transfer of assets. "Consolidated Net Worth" of any Person as of any date means the stockholders' equity (including any preferred stock that is classified as equity under GAAP, other than Disqualified Stock) of such Person and its Subsidiaries (excluding any equity adjustment for foreign currency translation for any period subsequent to the Issue Date) on a consolidated basis at such date, as determined in accordance with GAAP, less all write-ups subsequent to the Issue Date in the book value of any asset owned by such Person or any of its Subsidiaries. "Consolidated Tangible Assets" of any Person as of any date means the total assets of such Person and its Subsidiaries (excluding any assets that would be classified as "intangible assets" under GAAP) on a consolidated basis at such date, as determined in accordance with GAAP, less all write-ups subsequent to the Issue Date in the book value of any asset owned by such Person or any of its Subsidiaries. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 101 Barclay Street, Floor 21 West, New York, New York 10286, Attention: Corporate Trust Administration, or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or the principal corporate trust office of any successor Trustee (or such other address as a successor Trustee may designate from time to time by notice to the Holders and the Company). 5 "Credit Agreements" means (i) the Credit Agreement dated as of June 23, 1998 by and among the Company, as borrower, Nationsbank, National Association, as Administrative Agent and Arranger, J.P. Morgan Securities Inc., Deutsche Bank AG and Scotiabanc, Inc., as Syndication Agents and Co-Arrangers, and the other lenders party thereto from time to time, together with the related documents thereto, including, without limitation, any security documents, if any, and all exhibits and schedules thereto and any agreement or agreements relating to any extension, refunding, refinancing, successor or replacement facility, whether or not with the same lender, and whether or not the principal amount or amount of letters of credit outstanding thereunder or the interest rate payable in respect thereof shall be thereby increased, in each case as amended and in effect from time to time and (ii) the 2000 Credit Agreement. "Default" means any event, act or condition that is, or after notice or the passage of time or both would be, an Event of Default. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the Stated Maturity date of the Notes. "DTC" means The Depository Trust Company, a New York corporation. "DTC Letter of Representations" shall mean the Letter of Representations, dated the Issue Date, among the Company, DTC and the Trustee. "EBITDA Coverage Ratio" with respect to any period means the ratio of (i) Consolidated EBITDA of the Company to (ii) the aggregate amount of Consolidated Interest Expense of the Company for such period; provided, however, that if any calculation of the Company's EBITDA Coverage Ratio requires the use of any quarter prior to the Issue Date, such calculation shall be made on a pro forma basis, giving effect to the issuance of the Notes and the use of the net proceeds therefrom as if the same had occurred at the beginning of the four-quarter period used to make such calculation; and provided further that if any such calculation requires the use of any quarter prior to the date that any Asset Sale was consummated, or that any Indebtedness was incurred, or that any acquisition of a hospital or other healthcare facility or any assets purchased outside the ordinary course of business was effected, by the Company or any of its Subsidiaries, such calculation shall be made on a pro forma basis, giving effect to each such Asset Sale, incurrence of Indebtedness or acquisition, as the case may be, and the use of any proceeds therefrom, as if the same had occurred at the beginning of the four-quarter period used to make such calculation. "Eligible Investments" of any Person means Investments of such Person in: (i) direct obligations of, or obligations the payment of which is guaranteed by, the United States of America or an interest in any trust or fund that invests solely in such obligations or repurchase agreements, properly secured, with respect to such obligations; (ii) direct obligations of agencies or instrumentalities of the United States of America having a rating of A or higher by Standard & Poor's Corporation or A2 or higher by Moody's Investors Service, Inc.; 6 (iii) a certificate of deposit issued by, or other interest-bearing deposits with, a bank having its principal place of business in the United States of America and having equity capital of not less than $250,000,000; (iv) a certificate of deposit by, or other interest-bearing deposits with, any other bank organized under the laws of the United States of America or any state thereof, provided that such deposit is either (a) insured by the Federal Deposit Insurance Corporation or (b) properly secured by such bank by pledging direct obligations of the United States of America having a market value of not less than the face amount of such deposits; (v) prime commercial paper maturing within 270 days of the acquisition thereof and, at the time of acquisition, having a rating of A-1 or higher by Standard & Poor's Corporation, or P-1 or higher by Moody's Investors Service, Inc.; or (vi) eligible banker's acceptances, repurchase agreements and tax-exempt municipal bonds having a maturity of less than one year, in each case having a rating, or that is the full recourse obligation of a person whose senior debt is rated A or higher by Standard & Poor's Corporation or A2 or higher by Moody's Investors Service, Inc. "Equity Offering" means a primary offering of Capital Stock of the Company (other than Disqualified Stock or Preferred Stock) pursuant to a registration statement filed with the Commission in accordance with the Securities Act and declared effective by the staff of the Commission. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means the 8 1/2% Senior Notes due 2008, Series B (the terms of which are identical to the Initial Notes except that, unless any Exchange Notes shall be issued as Private Exchange Notes (as defined in the Registration Rights Agreement), the Exchange Notes shall be registered under the Securities Act, and shall not contain the restrictive legend on the face of the form of the Initial Notes), to be issued in exchange for the Initial Notes pursuant to the registered Exchange Offer and a Private Exchange (as defined in the Registration Rights Agreement). "Exchange Offer" means the registration by the Company under the Securities Act pursuant to a registration statement of the offer by the Company to each Holder of the Initial Notes to exchange all the Initial Notes held by such Holder for the Exchange Notes in an aggregate principal amount equal to the aggregate principal amount of the Initial Notes held by such Holder, all in accordance with the terms and conditions of the Registration Rights Agreement. "Exempted Debt" means the sum of the following as of any date of determination: (i) Indebtedness of the Company and its Subsidiaries incurred after the Issue Date and secured by Liens not otherwise permitted by the "Limitations on Liens" covenant and (ii) Attributable Indebtedness of the Company and its Subsidiaries in respect of every Sale and Leaseback Transaction entered into after the Issue Date. "Existing Indebtedness" means all of the Indebtedness of the Company and its Subsidiaries that is outstanding on the Issue Date. 7 "Fair Market Value" of any asset or items means the fair market value of such asset or items as determined in good faith by the Board of Directors and evidenced by a resolution of the Board of Directors. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, as from time to time in effect. "guarantee" means, as applied to any obligation, (a) a guarantee (other than by endorsement or negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part of all of such obligation and (b) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down under letters of credit. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any interest rate swap agreement, foreign currency exchange agreement, interest rate collar agreement, option or futures contract or other similar agreement or arrangement relating to interest rates or foreign exchange rates. "Holder" means a Person in whose name a Note is registered on the Registrar's books or records. "Indebtedness" of any Person at any date means, without duplication: (i) all indebtedness of such Person for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof); (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (iii) all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto); (iv) all obligations of such Person with respect to Hedging Obligations (other than those that fix the interest rate on variable rate indebtedness otherwise permitted by this Indenture or that protect the Company and/or its Subsidiaries against changes in foreign exchange rates); (v) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, except trade payables and accrued expenses incurred in the ordinary course of business; (vi) all Capitalized Lease Obligations of such Person; (vii) all Indebtedness of others secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; (viii) all Indebtedness of others guaranteed by such Person to the extent of such guarantee; (ix) all Attributable Indebtedness; and (x) all Disqualified Stock of such Person and its Subsidiaries and all other Preferred Stock of Subsidiaries of such Person valued at the greater of (a) the voluntary or involuntary liquidation preference of such Disqualified Stock or such Preferred Stock, as the case may be, and (b) the aggregate amount payable upon purchase, redemption, defeasance or payment of such Disqualified Stock or such Preferred Stock, as the case may be. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations plus past due interest as described above, the maximum liability of such Person for any such contingent obligations at such date and, in the case of clause (vii), the amount of the Indebtedness secured. 8 "Indenture" means this Indenture as amended, restated or supplemented from time to time. "Initial Notes" means the 8 1/2% Senior Notes due 2008, Series A of the Company issued on the Issue Date and authenticated and delivered under this Indenture pursuant to Section 2.02 of this Indenture and any other notes (other than Exchange Notes) issued after the Issue Date in accordance with clause (iii) of the fourth paragraph of Section 2.02. "Initial Purchasers" refers to UBS Warburg LLC, Deutsche Banc Alex. Brown Inc., Chase Securities Inc., First Union Securities, Inc. and Scotia Capital (USA) Inc. "Interest Expense" of any Person for any period means the aggregate amount of interest which, in accordance with GAAP, would be set opposite the caption "interest expense" or any like caption on an income statement for such Person (including, without limitation or duplication, imputed interest included in Capitalized Lease Obligations, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, the net costs associated with Hedging Obligations, amortization of financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount and all other non-cash interest expense other than interest amortized to cost of sales) plus the aggregate amount, if any, by which such interest expense was reduced as a result of the amortization of deferred debt restructuring credits for such period. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes as specified in the forms of Note attached hereto as Exhibits A and B. "Investments" of any Person means: (i) all investments by such Person in any other Person in the form of loans, advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business); (ii) all guarantees of Indebtedness or other obligations of any other Person by such Person; (iii) all purchases (or other acquisitions for consideration) by such Person of Indebtedness, Capital Stock or other securities of any other Person; and (iv) all other items that would be classified as investments (including, without limitation, purchases of assets outside the ordinary course of business) on a balance sheet of such Person prepared in accordance with GAAP. "Issue Date" means February 1, 2001, the date the Initial Notes are initially issued. "Joint Venture" means any Person at least a majority of whose revenues result from healthcare related business of facilities. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or other similar encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including, without limitation, any conditional sale or other title retention agreement, and any financing lease in the nature thereof, any agreement to sell, and any filing of, or agreement to give, any financing statement (other than notice filings not perfecting a security interest) under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). 9 "Net Proceeds" with respect to any Asset Sale means (i) cash (in U.S. dollars or freely convertible into U.S. dollars) received by the Company or any of its Subsidiaries from such Asset Sale (including, without limitation, cash received as consideration for the assumption or incurrence of liabilities incurred in connection with or in anticipation of such Asset Sale), after (a) provision for all income or other taxes measured by or resulting from such Asset Sale or the transfer of the proceeds of such Asset Sale to the Company or any of its Subsidiaries, (b) payment of all commissions and other fees and expenses related to such Asset Sale and (c) deduction of an appropriate amount to be provided by the Company or any of its Subsidiaries as a reserve, in accordance with GAAP, against any liabilities associated with the assets sold or otherwise disposed of in such Asset Sale and retained by the Company or any of its Subsidiaries after such Asset Sale (including, without limitation, pension and other post-employment benefit liabilities and liabilities related to environmental matters) or against any indemnification obligations associated with the sale or other disposition of the assets sold or otherwise disposed of in such Asset Sale and (ii) all non-cash consideration received by the Company or any of its Subsidiaries from such Asset Sales upon the liquidation or conversion of such consideration into cash. "Notes" means the Initial Notes, the Exchange Notes and any other notes issued after the Issue Date in accordance with clause (iii) of the fourth paragraph of Section 2.02 treated as a single class of securities, as amended or supplemented from time to time in accordance with the terms hereof, that are issued pursuant to this Indenture. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, Chief Accounting Officer, Treasurer, President, any Vice President, secretary, assistant secretary, director or other authorized signatory of such Person. "Officers' Certificate" means a certificate signed by the Chairman of the Board, any Vice Chairman of the Board, the Chief Executive Officer, the President or any Vice President and by the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company in their official (and not individual) capacities; provided, however, that every Officers' Certificate with respect to the compliance with a condition precedent to the taking of any action under this Indenture shall include (i) a statement that the officers making or giving such Officers' Certificate have read such condition and any definitions or other provisions contained in this Indenture relating thereto and (ii) a statement as to whether, in the opinion of such officers, such condition has been complied with. "Opinion of Counsel" means a written opinion from legal counsel (such counsel may be an employee of or counsel to the Company or the Trustee) that complies with the requirements of this Indenture. "Permitted Investments" means: (i) capital contributions, advances or loans to the Company by any Subsidiary or by the Company or any of its Subsidiaries to a Subsidiary of the Company; (ii) the acquisition and holding by the Company and each of its Subsidiaries of receivables owing to the Company and such Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (iii) the acquisition and holding by the Company and its Subsidiaries of cash and Eligible Investments; (iv) Investments in any Person as a result of which such other Person becomes a Subsidiary of the Company or is merged into or consolidated with or transfers all or substantially all of its assets to the Company or any of its Subsidiaries; and (v) the making of an Investment by the Company, directly or through a Wholly Owned Subsidiary, in a Wholly Owned Subsidiary formed solely for the purpose of insuring the 10 healthcare business and facilities owned or operated by the Company or a Subsidiary and any physician employed by or on the staff of any such business or facility (the "Insurance Subsidiary"), provided that the amount invested in such Insurance Subsidiary does not exceed $15,000,000. "Permitted Liens" means: (i) Liens for taxes, assessments or governmental charges or claims that either (a) are not yet delinquent or (b) are being contested in good faith by appropriate proceedings; (ii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and with respect to amounts that either (a) are not yet delinquent or (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves or other provisions have been made in accordance with GAAP; (iii) Liens (other than any Lien imposed by the Employee Retirement Income Security Act of 1974, as amended) incurred or deposits due in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, progress payments, government contracts and other obligations of like nature (exclusive of obligations for the payment of borrowed money), in each case, incurred in the ordinary course of business; (v) attachment or judgment Liens not giving rise to a Default or an Event of Default; (vi) easements, rights-of-way, restrictions and other similar charges or encumbrances not interfering with the ordinary conduct of the business of the Company or any of its Subsidiaries; (vii) leases or subleases granted to others not interfering with the ordinary conduct of the business of the Company or any of its Subsidiaries; (viii) Liens with respect to any Acquired Indebtedness, provided that such Liens only extend to assets that were subject to such Liens prior to the acquisition of such assets by the Company or its Subsidiaries and, with respect to Indebtedness other than Indebtedness ranking pari passu with the Notes, not incurred in anticipation or contemplation of such acquisition; (ix) Liens securing Bank Debt or Refinancing Indebtedness, provided, in the case of Refinancing Indebtedness, that such Liens only extend to the assets securing the Indebtedness being refinanced and such refinanced Indebtedness was previously secured by such assets; (x) purchase money mortgages (including Capitalized Lease Obligations); (xi) Liens existing on the Issue Date; (xii) Liens on assets of any Subsidiary of the Company securing Indebtedness of such Subsidiary, provided that such Indebtedness is permitted to be incurred by the terms of this Indenture; (xiii) bankers' liens with respect to the right of set-off arising in the ordinary course of business against amounts maintained in bank accounts or certificates of deposit in the name of the Company or any Subsidiary; (xiv) the interest of any issuer of a letter of credit in any cash or Eligible Investment deposited with or for the benefit of such issuer as collateral for such letter of credit, provided that the Indebtedness so collateralized is permitted to be incurred by the terms of this Indenture; (xv) any Lien consisting of a right of first refusal or option to purchase the Company's ownership interest in any Subsidiary or to purchase assets of the Company or any Subsidiary of the Company, which right of first refusal or option is entered into in the ordinary course of business; and (xvi) the Lien granted to the Trustee pursuant to the trust created pursuant to Article 9 hereof and any substantially equivalent Lien granted to the respective trustees under the indentures for other debt securities of the Company. "Person" means any individual, corporation, partnership, joint venture, incorporated or unincorporated association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind. "Preferred Stock" means with respect to any Person all Capital Stock of such Person which has a preference in liquidation or a preference with respect to the payment of dividends or distributions of operating profit or cash. 11 "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A. "Record Date" for interest payable on any Interest Payment Date (except a date for payment of default interest) means the January 15 or July 15 (whether or not a Business Day), as the case may be, immediately preceding such Interest Payment Date. "Redemption Date" when used with respect to any Note to be redeemed means the date fixed for such redemption pursuant to this Indenture. "Redemption Price" when used with respect to any Note to be redeemed means the price fixed for such redemption pursuant to this Indenture. "Refinancing Indebtedness" means Indebtedness that is applied to refund, refinance or extend any Existing Indebtedness (other than Indebtedness under the 2000 Credit Agreement), provided that: (i) the Refinancing Indebtedness is the obligation of the same Person (or if the Indebtedness being refinanced is an obligation of one or more Subsidiaries of the Company, such Refinancing Indebtedness may be incurred by the Company or one or more Subsidiaries of the Company) and is subordinated to the Notes, if at all, to the same extent as the Indebtedness being refunded, refinanced or extended; (ii) the Refinancing Indebtedness is scheduled to mature no earlier than the Indebtedness being refunded, refinanced or extended; (iii) the Refinancing Indebtedness has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Indebtedness being refunded, refinanced or extended; (iv) the Refinancing Indebtedness is secured only to the extent, if at all, and by the assets that the Indebtedness being refunded, refinanced or extended is secured; and (v) such Refinancing Indebtedness is in an aggregate principal amount that is equal to or less than the aggregate principal amount then outstanding under the Indebtedness being refunded, refinanced or extended (except for issuance costs and increases in Attributable Indebtedness due solely to increases in the present value calculations resulting from renewals or extensions of the terms of the underlying leases in effect on the Issue Date). "Registration Rights Agreement" means the Registration Rights Agreement dated as of February 1, 2001 among the Company and the Initial Purchasers. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Restricted Period" means, with respect to any Note, the period of forty (40) consecutive days beginning on and including the first day after the later of (i) the day on which such Note is first offered to Persons other than distributors (as defined in Regulation S) in reliance on Regulation S and (ii) the closing date of the offering of such Note. "Restricted Payment" means with respect to any Person: (i) the declaration of any dividend or the making of any other payment or distribution of cash, securities or other property or assets in respect of such Person's Capital Stock (except that a dividend payable solely in Capital Stock (other than Disqualified Stock) of such Person shall not constitute a Restricted Payment); (ii) any payment on account of the purchase, redemption, retirement or other acquisition for value of such Person's or such Person's Subsidiaries' Capital Stock or any other payment or distribution made in respect thereof, either directly or indirectly; (iii) any payment on account of the purchase, redemption, 12 retirement, defeasance or other acquisition for value, prior to any scheduled principal payment, sinking fund payment or Stated Maturity, of Subordinated Indebtedness of the Company or its Subsidiaries; (iv) the incurrence, creation or assumption of any guarantee of Indebtedness of any Affiliate (other than a Subsidiary of the Company); or (v) the making of any Investment in any Person (other than Permitted Investments); provided, however, that with respect to the Company and its Subsidiaries, Restricted Payments shall not include any payment described in clause (i), (ii) or (iii) above made (1) to the Company or any of its Wholly Owned Subsidiaries by any of the Company's Subsidiaries or (2) by the Company to any of its Wholly Owned Subsidiaries or (3) by any Subsidiary provided that the Company or another Subsidiary receives its proportionate share thereof. "Restricted Security" means any Note (or beneficial interest therein) other than an Exchange Note (or beneficial interest therein), until such time as: (i) such Note (or beneficial interest therein) has been transferred pursuant to an effective registration statement under the Securities Act; (ii) such Note is a 144A Global Note and two years have passed since the Issue Date; (iii) such Note is a Regulation S Global Note and the Regulation S Restricted Period has expired; or (iv) the Private Placement legend therefor has otherwise been removed pursuant to Section 2.16(e) hereof or, in the case of a beneficial interest in a Global Note, such beneficial interest has been exchanged for an interest in a Global Note not bearing a Private Placement Legend. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Sale and Leaseback Transaction" means, with respect to any Person, an arrangement with any bank, insurance company or other lender or investor or to which such lender or investor is a party, providing for the leasing by such Person or any of its Subsidiaries of any property or asset of such Person or any of its Subsidiaries which has been or is being sold or transferred by such Person or such Subsidiary to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. "Secretary's Certificate" means a certificate signed by the Secretary or any Assistant Secretary of the Company in his or her official (and not individual) capacity. "Securities Act" means the Securities Act of 1933, as amended. "Significant Subsidiary" means a Subsidiary of the Company which at the time of determination either (i) had tangible assets which, as of the Company's most recent quarterly consolidated balance sheet, constituted at least 5% of Consolidated Tangible Assets as of such date, or (ii) had revenues for the 12-month period ending on the date of the Company's most recent quarterly consolidated statement of income which constituted at least 5% of the Company's total consolidated revenues for such period. "Stated Maturity" when used with respect to any security or any installment of interest thereon, means that date specified in such security as the fixed date on which the principal of such security or such installment of interest is due and payable. "Subordinated Indebtedness" of any Person means any Indebtedness of such Person that is subordinated in right of payment to the Notes. 13 "Subsidiary" of any Person means (i) any corporation of which Common Equity having ordinary voting power to elect a majority of the directors of such corporation is owned by such Person directly or through one or more other Subsidiaries of such Person and (ii) any entity other than a corporation in which such Person, directly or indirectly, owns at least 50% of the Common Equity of such entity and has the authority to manage such entity on a day-to-day basis. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) as in effect on the date of this Indenture (except as provided in Section 8.03 hereof). "Trust Officer" shall mean, when used with respect to the Trustee, any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such Person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "Trustee" means the party named as such in this Indenture until a successor replaces it pursuant to this Indenture and thereafter means the successor. "U.S. Government Obligations" means (a) securities that are direct obligations of the United States of America for the payment of which its full faith and credit are pledged or (b) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or a specific payment of principal or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt. "Weighted Average Life to Maturity" means, when applied to any Indebtedness or portion thereof at any date, the number of years obtained by dividing (i) the then outstanding principal amount of such Indebtedness or portion thereof (if applicable) into (ii) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment. "Wholly Owned Subsidiary" of any Person means (i) a Subsidiary of which 100% of the Common Equity (except for director's qualifying shares or certain minority interests owned by other Persons solely due to local law requirements that there be more than one stockholder, but which interest is not in excess of what is required for such purpose) is owned directly by such Person or 14 through one or more other Wholly Owned Subsidiaries of such Person and (ii) any entity other than a corporation in which such Person, directly or indirectly, owns all of the Common Equity of such entity. Section 1.02. Other Definitions. The definitions of the following terms may be found in the sections indicated as follows: Term Defined in Section "Accredited Investors".................................... 2.01 "Affiliate Transaction"................................... 4.13 "Agent Members"........................................... 2.15 "Applicable Procedures"................................... 2.16 "Asset Sale Offer"........................................ 4.12 "Asset Sale Payment Amount"............................... 4.12 "Asset Sale Purchase Price"............................... 4.12 "Bankruptcy Law".......................................... 6.01 "Business Day"............................................ 11.07 "Change of Control Offer"................................. 4.15 "Change of Control Payment Date".......................... 4.15 "Change of Control Purchase Price"........................ 4.15 "Clearstream"............................................. 2.01 "Covenant Defeasance"..................................... 9.03 "Custodian"....... ....................................... 6.01 "Depositary".............................................. 2.15 "Euroclear"............................................... 2.01 "Event of Default"........................................ 6.01 "Excess Proceeds"......................................... 4.12 "Excess Proceeds Payment Date"............................ 4.12 "Global Notes"............................................ 2.01 "Legal Defeasance"........................................ 9.02 "Legal Holiday"........................................... 11.07 "make whole amount"....................................... Exhibit A/Exhibit B "Net Proceeds Deficiency"................................. 4.12 "Non-payment Default"..................................... 10.03 "Other Debt".............................................. 4.12 "Paying Agent"............................................ 2.03 "Payment Blockage Notice"................................. 10.03 "Payment Blockage Period"................................. 10.03 "Payment Default"......................................... 10.03 "Private Placement Legend"................................ 2.17 "Registrar"............................................... 2.03 "Regulation S Global Note"................................ 2.01 "Restricted Global Note".................................. 2.01 "Successor"............................................... 5.01 15 Section 1.03. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the portion of such provision required to be incorporated herein in order for this Indenture to be qualified under the TIA is incorporated by reference in and made a part of this Indenture. Unless otherwise specified, terms used in this Indenture that are defined by the TIA, defined in the TIA by reference to another statute or defined by Commission rule have the meanings therein assigned to them. Section 1.04. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it herein, whether defined expressly or by reference; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) words used herein implying any gender shall apply to every gender. ARTICLE 2 THE NOTES Section 2.01. Dating; Incorporation of Form in Indenture; Form of Notes. (a) Generally. The Initial Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, and the Exchange Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit B, each of which is incorporated in and made part of this Indenture with such appropriate insertions, substitutions and other variations as are required or permitted by this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage all in a form approved by the Company. Each Note shall be dated the date of its authentication. (b) Notes Sold Pursuant to Rule 144A. The Notes offered and sold in their initial distribution in reliance on Rule 144A to Qualified Institutional Buyers shall be issued in the form of a permanent global note (the "Restricted Global Note") (which may be represented by more than one certificate, if so required by the Depositary's rules regarding the maximum principal amount to be represented by a single certificate), duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Restricted Global Note shall be registered in the name of the Depositary or its nominee and deposited with the Trustee, at its Corporate Trust Office, as custodian for the Depositary on behalf of the purchasers of the Notes represented thereby. 16 (c) Notes Sold Pursuant to Regulation S. The Notes offered and sold in their initial distribution in reliance on Regulation S shall be issued in the form of a permanent global note (the "Regulation S Global Note" and, together with the Restricted Global Note, the "Global Notes") (which may be represented by more than one certificate, if so required by the Depositary's rules regarding the maximum principal amount to be represented by a single certificate), duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Regulation S Global Note shall be registered in the name of the Depositary or its nominee and deposited with the Trustee, at its Corporate Trust Office, as custodian for the Depositary for credit to the respective accounts of The Euroclear System ("Euroclear") and Clearsteam Banking, societe anonyme ("Clearstream"). Prior to the termination of the Regulation S Restricted Period, beneficial interests in the Regulation S Global Note may be held only through Euroclear and Clearstream. (d) Notes Sold to Institutional Accredited Investors. The Notes offered and sold in their initial distribution in reliance on an exemption from registration under the Securities Act (other than Rule 144A or Regulation S) to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act ("Accredited Investors")) shall be issued in certificated, fully registered form without coupons and only in denominations of $250,000 and integral multiples of $1,000 in excess thereof, duly executed by the Company and authenticated by the Trustee as hereinafter provided. Section 2.02. Execution and Authentication; Appointment of Authenticating Agent. The Notes shall be executed on behalf of the Company by one or more Officers of the Company. Such signature may be either manual or facsimile. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee authenticates the Note, the Note shall be valid nevertheless. A Note shall not be valid until the Trustee manually signs the certificate of authentication on the Note. Such signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall authenticate (i) Initial Notes for original issue on the Issue Date in the aggregate principal amount not to exceed $375,000,000, (ii) pursuant to the Exchange Offer, Exchange Notes from time to time for issue only in exchange for a like principal amount of Initial Notes and (iii) subject to compliance with Section 4.11 hereof, one or more series of Notes for original issue after the Issue Date (such Notes to be substantially in the form of Exhibit A or B hereto, as the case may be) in an unlimited amount (and if in the form of Exhibit A hereto the same principal amount of Exchange Notes in exchange therefor upon consummation of a registered exchange offer), in each case upon written orders of the Company in the form of an Officers' Certificate, which Officers' Certificate shall, in the case of any issuance pursuant to clause (iii) above, certify that such issuance is in compliance with Section 4.11 hereof. In addition, each such Officers' Certificate shall specify the amount of Notes to be authenticated, the date on which the Notes are to be authenticated, whether the Notes are to be Initial Notes, Exchange Notes or Notes issued under clause (iii) of the preceding sentence and the aggregate principal amount of Notes outstanding on the date of authentication. 17 Except as provided in section 2.01(d), the Notes shall be issuable only in definitive, fully registered form without coupons and only in minimum denominations of $1,000 and integral multiples thereof. The Trustee, with the approval of the Company, may appoint an authenticating agent to authenticate Notes. Any such appointment shall be evidenced by an instrument signed by an authorized officer of the Trustee, a copy of which shall be furnished to the Company. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent, and shall comply with this Indenture. An authenticating agent has the same right as an Agent to deal with the Company or an Affiliate. Section 2.03. Registrar and Paying Agent. The Company shall maintain an office or agency in the Borough of Manhattan, The City of New York where (a) Notes may be presented or surrendered for registration of transfer or for exchange ("Registrar"), (b) Notes may be presented or surrendered for payment ("Paying Agent") and (c) notices and demands in respect of Notes and this Indenture may be served. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Registrar shall provide the Company a current copy of such register from time to time upon request of the Company. The Company may have one or more co-Registrars and one or more additional Paying Agents. The Company may change any Paying Agent, Registrar or co-Registrar without notice to any Holder. The Company may not act as Paying Agent, but may act as Registrar or co-Registrar. The Company shall enter into an appropriate agency agreement with any Registrar or Paying Agent not a party to this Indenture, which shall incorporate the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee in writing of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or agent for service of notices and demands, or fails to give the foregoing notice, the Company shall notify the Trustee and the Trustee shall to the extent that it is capable act as such for so long as such failure continues. The Company initially appoints the Trustee as Registrar and Paying Agent in the Borough of Manhattan, The City of New York. Section 2.04. Paying Agent To Hold Money in Trust. Before 10:00 A.M. New York City time on each payment date of the principal of and/or interest on any Notes, the Company shall deposit with the Paying Agent a sum sufficient to pay such principal and interest so becoming due. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee together with a complete accounting of such sums, and the Trustee may at any time during the continuance of any Event of Default under Section 6.01(a) or (b) hereof, upon written request to a Paying Agent, require such Paying Agent to forthwith pay to the Trustee all sums so held in trust by such Paying Agent together with a complete accounting of such sums. Upon doing so, the Paying Agent shall have no further liability for the money. Funds deposited with the Paying Agent may be invested as agreed from time to time by the Company and the Paying Agent. All payments made hereunder shall be in U.S. legal tender. 18 Section 2.05. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least five Business Days before each Interest Payment Date and the Stated Maturity Date and at such other times as the Trustee may reasonably request in writing, a list in such form and as of such date as the Trustee may require of the names and addresses of Holders. Section 2.06. [Intentionally Omitted]. Section 2.07. Replacement Notes. If a mutilated Note is surrendered to the Trustee or if the Holder of a Note claims that a Note has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Note if the Trustee's requirements for replacement are met. An indemnity bond may be required by the Company or the Trustee that is sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee or any Agent from any loss which any of them may suffer if a Note is replaced and evidence to their satisfaction of apparent loss, destruction or theft of such Note may be required by the Company, the Trustee or any Agent. The Company and the Trustee may charge for their reasonable out-of-pocket expenses (including reasonable attorneys' fees and expenses and any applicable taxes) in replacing a Note pursuant to this Section 2.07. In the event any such mutilated, lost, destroyed or wrongfully taken Note has become due and payable, the Company in its discretion may pay such Note instead of issuing a new Note in replacement thereof. If after the delivery of such new Note, a bona fide purchaser of the original Note in lieu of which such new Note was issued presents for payment such original Note, the Company and the Trustee shall be entitled to recover such new Note from the person to whom it was delivered or any transferee thereof, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the Company or the Trustee in connection therewith. Every replacement Note is an additional obligation of the Company. Section 2.08. Outstanding Notes. Notes outstanding at any time are all Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. A Note replaced pursuant to Section 2.07 hereof (other than a mutilated Note surrendered for replacement) ceases to be outstanding unless and until the Trustee receives proof satisfactory to it that such replaced Note is held by a protected purchaser. If a Paying Agent holds on a Redemption Date or at Stated Maturity U.S. legal tender sufficient to pay the principal of, make-whole amount, if any, and accrued interest on Notes (or portions thereof) payable on that date, then on and after that date, such Notes (or portions thereof) cease to be outstanding and interest on them ceases to accrue. 19 Section 2.09. Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver, consent or notice, Notes owned by the Company or any of its Affiliates shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which a Trust Officer of the Trustee actually knows are so owned shall be so considered. The Company shall notify the Trustee, in writing, when it or any of its Affiliates repurchases or otherwise acquires Notes and of the aggregate principal amount of such Notes so repurchased or otherwise acquired. Section 2.10. Temporary Notes. Until definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form, and shall carry all rights and restrictions, of definitive Notes but may have variations that the Company considers appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes upon surrender of such temporary Notes at the office or agency maintained pursuant to Section 2.03 hereof. Section 2.11. Cancellation. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for transfer, exchange, payment or cancellation and, unless the Company instructs the Trustee in writing to deliver the Notes to the Company, shall dispose of such Notes in accordance with its normal practice. Subject to Section 2.07 hereof, the Company may not issue new Notes to replace Notes in respect of which it has previously paid all principal, make-whole amount, if any, and interest accrued thereon, or delivered to the Trustee for cancellation. The Trustee shall provide the Company with a list of all Notes that have been canceled from time to time as requested in writing by the Company. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.07. Section 2.12. Defaulted Interest. If the Company defaults in a payment of principal or interest on the Notes, it shall pay interest on overdue principal and on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the rate per annum borne by the Notes, to the extent lawful. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special Record Date, which date shall be the fifteenth day next preceding the date fixed by the Company for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. At least 15 days before the subsequent special Record Date, the Company shall mail to each Holder, as of a recent date selected by the 20 Company, with a copy to the Trustee, a notice that states the subsequent special Record Date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. Notwithstanding the foregoing, any interest which is paid prior to the expiration of the 30-day period set forth in Section 6.01(a) hereof shall be paid to Holders as of the Record Date for the Interest Payment Date for which interest has not been paid. Section 2.13. Deposit of Moneys; Payments. Prior to 10:00 A.M., New York City time, on the relevant Interest Payment Date, Stated Maturity date, Redemption Date, Change of Control Purchase Date and Excess Proceeds Payment Date, the Company shall have deposited with the Paying Agent in immediately available funds money sufficient to make all cash payments due on such Interest Payment Date, Stated Maturity date, Redemption Date, Change of Control Purchase Date and Excess Proceeds Payment Date, as the case may be (or if any such date is not a Business Day, the first preceding Business Day). The principal and interest on Global Notes shall be payable to the Depositary or its nominee, as the case may be, as the sole registered owner and the sole holder of the Global Notes represented thereby. The principal and interest on Certificated Notes, if any, shall be payable at the office of the Paying Agents. The Paying Agents shall pay the Company any excess cash remaining on deposit after all payments have been made with respect to a given Interest Payment Date, Stated Maturity date, Redemption Date, Change of Control Purchase Date or Excess Proceeds Payment Date, as the case may be. All payments made hereunder shall be in U.S. legal tender. Section 2.14. "CUSIP" Number. The Company in issuing the Notes may use "CUSIP" number(s) and the Trustee shall use the "CUSIP" numbers(s) in notices of redemption or exchange as a convenience to Holders; provided that neither the Company nor the Trustee shall have any responsibility for any defect in the "CUSIP" number that appears on any Note, check, advice or payment or redemption notice, and any such notice may state that no representation is made as to the correctness or accuracy of the "CUSIP" number(s) printed in the notice or on the Notes, and that reliance may be placed only on the other identification numbers printed on the Notes and any such redemption or exchange shall not be affected by any defect in or omission of such number(s). The Company shall promptly notify the Trustee of any changes in "CUSIP" numbers. Section 2.15. Depositary. (a) The Company hereby appoints DTC to act as depositary (in such capacity, together with its successors in such capacity, the "Depositary") with respect to the Global Notes. The Trustee shall act as custodian of the Global Notes for the Depositary. So long as the Depositary or its nominee, Cede & Co., is the registered owner of the Global Notes, it shall be considered the Holder of the Notes represented thereby for all purposes hereunder and under the Global Notes, and neither any members of, or participants in, the Depositary ("Agent Members") nor any other Persons on whose behalf Agent Members may act shall have any rights hereunder with respect to the Global Notes or under the Global Notes. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or its nominee, as the case may be, or impair, as between the 21 Depositary, its Agent Members and any other Person on whose behalf an Agent Member may act, the operation of customary practices of such Persons governing the exercise of the rights of a Holder of any Note. (b) The Company may remove or replace DTC or any successor as Depositary for any reason upon thirty (30) days' notice to DTC or such successor. The Holders shall have no right to a depositary for the Notes. (c) Notwithstanding any other provision of this Indenture or the Notes, so long as DTC or its nominee is the registered owner of the Notes: (i) the provisions of the DTC Letter of Representations shall control over the provisions of this Indenture with respect to the matters covered thereby; (ii) presentation of Notes to the Trustee at redemption or at maturity shall be deemed made to the Trustee when the right to exercise ownership rights in the Notes through DTC or Agent Members is transferred by DTC on its books; and (iii) DTC may present notices, approvals, waivers or other communications required or permitted to be made by Holders under this Indenture on a fractionalized basis on behalf of some or all of those Persons entitled to exercise ownership rights in the Notes through DTC or Agent Members. Section 2.16. Registration of Transfers and Exchanges. (a) Transfer and Exchange Generally. (i) The Notes are transferable only upon the surrender thereof for registration of transfer. When a Note is presented to the Registrar with a duly executed instrument of assignment and transfer substantially in the form of assignment attached to Exhibit A or B, as applicable, the Registrar shall register the transfer as requested if such transfer complies with the provisions hereof. Prior to the due presentation for registration of transfer of any Note, the Person in whose name such Note is registered shall be treated as the absolute owner of such Note for the purpose of receiving payment of principal of, make-whole amount (if any) and interest on such Note (whether or not such payment is overdue) and for all other purposes whatsoever, notwithstanding any notice to the contrary. Registration of transfer of any Note by the Registrar shall be deemed to be an acknowledgment of such transfer by the Company. (ii) When Notes are presented to the Registrar with a written request to exchange such Notes for Notes of any authorized denominations and of a like aggregate principal amount, the Registrar shall make the exchange as requested if such exchange complies with the provisions of this Section 2.16(a). (iii) Following any request for transfer or exchange of one or more Notes made in compliance with clauses (i) or (ii), as the case may be, of this Section 2.16(a), the Company shall execute, and the Trustee shall authenticate and deliver, one or more new Notes of a like principal amount and in such authorized denominations as may be requested. Any exchange or transfer shall be without charge, except that the Company may require payment by the Holder of a sum sufficient to cover any tax or other governmental charge that may be 22 imposed in relation to a transfer or exchange other than any exchange pursuant to Sections 2.10, 3.06, 4.12, 4.15 or 8.05 hereof. (iv) Transfers or exchanges of the Global Notes and beneficial interests therein shall be subject to the provisions of Section 2.16(b) and the rules of the Depositary. Transfers or exchanges of Certificated Notes shall be subject to the provisions of Section 2.16(c). (v) Except as otherwise provided herein, the Global Notes and each Certificated Note shall bear the Private Placement Legend as set forth in Section 2.17. By its acceptance of any Note bearing the Private Placement Legend, whether upon original issuance or subsequent transfer, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. Upon the specific written request of a Holder to remove the Private Placement Legend, the Registrar shall authenticate and deliver a Note with an equivalent principal amount not bearing the Private Placement Legend if there is provided to the Company evidence reasonably satisfactory to the Company (which may, at the Company's request, include an Opinion of Counsel) that neither the Private Placement Legend nor the restrictions on transfer set forth therein are required to ensure compliance with the Securities Act. Upon a written request for the registration of transfer or exchange of a Note bearing the Private Placement Legend pursuant to an effective registration statement under the Securities Act and in accordance with any applicable securities laws of any state of the United States, the Registrar shall authenticate and deliver a Note with an equivalent principal amount not bearing the Private Placement Legend. If the Private Placement Legend has been removed from a Note as provided in this clause (v), the transfer of such Note shall not be subject to the restrictions on transfer set forth in the Private Placement Legend, and no other Note issued in exchange for all or any part of such Note shall bear the Private Placement Legend unless the Company has reasonable cause to believe that such other Note is a Restricted Security and instructs the Registrar in writing to cause the Private Placement Legend to appear thereon. (vi) None of the Company or the Trustee or the Registrar shall be liable for any delay by the Depositary in identifying the beneficial owners of the Notes, and each such Person may conclusively rely on, and shall be protected in relying on, instructions from the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of any Notes to be issued). (vii) Prior to the due presentation for registration of transfer of any Note, the Company, the Trustee, the Paying Agent, the Registrar or any co-Registrar may deem and treat the Person in whose name a Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of, make-whole amount, if any, and interest, if any, on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar or any co-Registrar shall be affected by notice to the contrary. So long as the Depositary or its nominee is the Holder of a Global Note, the Depositary or such nominee, as the case may be, will be considered the sole owner or Holder of the Notes represented by such Global Note for all purposes hereunder and under the Notes. Any Holder of a Global Note, and each Person with an interest in such Global Note, shall, by acceptance of such Global Note or such interest, agree that transfers of the beneficial interests in such Global Note may be effected only through a book-entry system 23 maintained by the Holder of such Global Note (or its agent) and that ownership of a beneficial interest in such Global Note shall be required to be reflected in a book entry. (viii) Any Note issued upon any transfer or exchange pursuant to this Section 2.16 will evidence the same debt and will be entitled to the same benefits and, unless otherwise provided for in this Indenture, subject to the same restrictions under this Indenture as the Note or Notes surrendered upon such transfer or exchange. (ix) The Registrar shall not be required to register the transfer of or exchange any Note (A) selected for redemption in whole or in part pursuant to Article 3, except the unredeemed portion of any Note being redeemed in part, (B) for a period beginning fifteen (15) days before the mailing of a notice of redemption of Notes and ending on the date of such mailing or (C) between a Record Date and the next succeeding Interest Payment Date. (b) Transfers and Exchanges of the Global Notes and Beneficial Interests Therein. (i) Subject to clauses (ii) through (viii) of this Section 2.16(b), transfers of the Global Notes shall be limited to transfers in whole, but not in part, to the Depositary, its successors or their respective nominees. So long as the Global Notes remain outstanding and are held by or on behalf of the Depositary, transfers and exchanges of beneficial interests in the Global Notes shall be made in accordance with the provisions of this Section 2.16(b) and in accordance with the rules and procedures of the Depositary to the extent applicable (the "Applicable Procedures"). (ii) No restrictions shall apply with respect to the transfer or registration of transfer of (x) a beneficial interest in the Restricted Global Note to a transferee that takes delivery in the form of a beneficial interest in the Restricted Global Note or (y) a beneficial interest in the Regulation S Global Note to a transferee that takes delivery in the form of a beneficial interest in the Regulation S Global Note; provided that any transfer described in this clause (ii) shall be made in accordance with the Applicable Procedures. (iii) Any transfer of a beneficial interest in the Restricted Global Note to a transferee that will take delivery in the form of a beneficial interest in the Regulation S Global Note prior to the termination of the Regulation S Restricted Period shall be registered, subject to the Applicable Procedures, only in accordance with this clause (iii). At any time prior to the termination of the Regulation S Restricted Period, upon (x) receipt by the Registrar of (A) instructions given in accordance with the Applicable Procedures from the Depositary or its nominee on behalf of an owner of a beneficial interest in the Restricted Global Note to transfer such beneficial interest to a Person that will take delivery in the form of a beneficial interest in the Regulation S Global Note, (B) a written order of the Depositary or its nominee given in accordance with the Applicable Procedures containing account and other information with respect to such transfer and (C) a certificate of the transferor of the beneficial interest in the Restricted Global Note substantially in the form of Exhibit D and (y) satisfaction of all other applicable conditions imposed by this Indenture and the Applicable Procedures, the Registrar shall (1) reflect in the register for the Notes a decrease in the principal amount of the Restricted Global Note and an increase in the principal amount of the Regulation S Global Note, each such adjustment to be equal to the beneficial interest transferred pursuant to this clause (iii) and (2) instruct the Depositary to make the corresponding adjustment to its records 24 and debit the account of the appropriate Agent Members in accordance with the Applicable Procedures. (iv) Any transfer of a beneficial interest in the Restricted Global Note to a transferee that will take delivery in the form of a beneficial interest in the Regulation S Global Note subsequent to the termination of the Regulation S Restricted Period shall be registered, subject to the Applicable Procedures, only in accordance with this clause (iv). At any time subsequent to the termination of the Regulation S Restricted Period, upon (x) receipt by the Registrar of (A) instructions given in accordance with the Applicable Procedures from the Depositary or its nominee on behalf of an owner of a beneficial interest in the Restricted Global Note to transfer such beneficial interest to a Person that will take delivery in the form of a beneficial interest in the Regulation S Global Note, (B) a written order of the Depositary or its nominee given in accordance with the Applicable Procedures containing account and other information with respect to such transfer and (C) a certificate of the transferor of the beneficial interest in the Restricted Global Note substantially in the form of Exhibit D (if transfer is made in reliance on Regulation S) or Exhibit E (if transfer is made in reliance on Rule 144) and (y) satisfaction of all other conditions imposed by the Applicable Procedures, the Registrar shall (1) reflect in the register for the Notes a decrease in the principal amount of the Restricted Global Note and an increase in the principal amount of the Regulation S Global Note, each such adjustment to equal the principal amount of the beneficial interest transferred pursuant to this clause (iv), and (2) instruct the Depositary to make the corresponding adjustment to its records and debit and credit the accounts of the appropriate Agent Members in accordance with the Applicable Procedures. (v) Any transfer of a beneficial interest in the Regulation S Global Note to a transferee that will take delivery in the form of a beneficial interest in the Restricted Global Note, either prior or subsequent to the termination of the Regulation S Restricted Period, shall be registered, subject to the Applicable Procedures, only in accordance with this clause (v). At any time upon (x) receipt by the Registrar of (A) instructions given in accordance with the Applicable Procedures from the Depositary or its nominee on behalf of an owner of a beneficial interest in the Regulation S Global Note to transfer such beneficial interest to a Person that will take delivery in the form of a beneficial interest in the Restricted Global Note, (B) a written order of the Depositary or its nominee given in accordance with the Applicable Procedures containing account and other information with respect to such transfer and (C) a certificate of the transferor of the beneficial interest in the Regulation S Global Note substantially in the form of Exhibit C and (y) satisfaction of all other conditions imposed by and the Applicable Procedures, the Registrar shall (1) reflect in the register for the Notes a decrease in the principal amount of the Regulation S Global Note and an increase in the principal amount of the Restricted Global Note, each such adjustment to equal the principal amount of the beneficial interest transferred pursuant to this clause (v), and (2) instruct the Depositary to make the corresponding adjustment to its records and debit and credit the accounts of the appropriate Agent Members in accordance with the Applicable Procedures. (vi) Any transfer of a beneficial interest in the Restricted Global Note to a transferee that will take delivery in the form of one or more Certificated Notes shall be registered, subject to the Applicable Procedures, only in accordance with this clause (vi). At any time upon (x) receipt by the Registrar of (A) instructions given in accordance with the Applicable Procedures from the Depositary or its nominee on behalf of an owner of a 25 beneficial interest in the Restricted Global Note to transfer such beneficial interest to a Person that will take delivery in the form of one or more Certificated Notes, (B) a written order of the Depositary or its nominee given in accordance with the Applicable Procedures containing account and other information with respect to such transfer, (C) a certificate of such Person substantially in the form of Exhibit F and (D) unless the Restricted Global Note does not bear a Private Placement Legend, an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act, and (y) satisfaction of all other applicable conditions imposed by this Indenture and the Applicable Procedures, (1) the Registrar shall (A) reflect in the register for the Notes a decrease in the principal amount of the Restricted Global Note in an amount equal to the beneficial interest transferred pursuant to this clause (vi) and (B) instruct the Depositary to make the corresponding adjustment to its records and debit the account of the appropriate Agent Member in accordance with the Applicable Procedures, and (2) the Company shall execute and the Trustee shall authenticate and deliver to or on behalf of such Person one or more Certificated Notes of like tenor and amount and, unless the Restricted Global Note does not bear a Private Placement Legend, bearing the Private Placement Legend. (vii) Any transfer of a beneficial interest in the Regulation S Global Note to a transferee that will take delivery in the form of one or more Certificated Notes prior to the termination of the Regulation S Restricted Period shall be registered, subject to the Applicable Procedures, only in accordance with this clause (vii). At any time prior to the termination of the Regulation S Restricted Period, upon (x) receipt by the Registrar of (A) instructions given in accordance with the Applicable Procedures from the Depositary or its nominee on behalf of an owner of a beneficial interest in the Regulation S Global Note to transfer such beneficial interest to a Person that will take delivery in the form of one or more Certificated Notes, (B) a written order of the Depositary or its nominee given in accordance with the Applicable Procedures containing account and other information with respect to such transfer, (C) a certificate of such Person substantially in the form of Exhibit F and (D) an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act and (y) satisfaction of all other conditions imposed by the Applicable Procedures, (1) the Registrar shall (A) reflect in the register for the Notes a decrease in the principal amount of the Regulation S Global Note in an amount equal to the beneficial interest transferred pursuant to this clause (vii) and (B) instruct the Depositary to make the corresponding adjustment to its records and debit the account of the appropriate Agent Member in accordance with the Applicable Procedures, and (2) the Company shall execute and the Trustee shall authenticate and deliver to or on behalf of such Person one or more Certificated Notes of like tenor and amount bearing the Private Placement Legend. (viii) Notwithstanding any contrary provision contained herein, Certificated Notes shall be issued in exchange for the beneficial interests in a Global Note if at any time: (x) the Company advises the Trustee in writing that the Depositary is unwilling or unable to continue as depositary for such Global Note or is no longer eligible to act as such and in each case a successor depositary is not appointed by the Company within ninety (90) days of receipt by the Company of notice of such inability; (y) the Company, at its option, elects to terminate the book-entry system through the Depositary with respect to such Global Note; or (z) after the occurrence of an Event of Default, beneficial owners holding interests representing a majority of the aggregate principal amount of Notes represented by such Global Note advise the Trustee in writing through the Depositary that the continuation of a book-entry system through the Depositary is no longer in such beneficial owners' best interests. Upon the occurrence of any 26 of the events set forth in clauses (x), (y) and (z) immediately above, the Trustee, upon receipt of written notice thereof and a list of all Persons that hold a beneficial interest in such Global Note, shall notify, through the appropriate Agent Members at the expense of the Company, all Persons that hold a beneficial interest in such Global Note of the issuance of Certificated Notes. Upon surrender by the Trustee, as custodian for the Depositary, of such Global Note and receipt from the Depositary of instructions for re-registration, the Company shall execute and the Trustee, upon the written instructions of the Company, shall authenticate and deliver Certificated Notes of like tenor and amount and, unless such Global Note does not bear a Private Placement Legend, bearing the Private Placement Legend. Certificated Notes issued in exchange for beneficial interests in such Global Note pursuant to this clause (viii) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from Agent Members or otherwise, shall instruct the Trustee. (c) Transfers and Exchanges of Certificated Notes. (i) Any transfer of a Certificated Note bearing the Private Placement Legend to a transferee that takes delivery in the form of one or more Certificated Notes shall be registered only in accordance with this clause (i). Upon (x) surrender of any Certificated Note bearing the Private Placement Legend at the office of the Registrar, together with (A) an executed instrument of assignment of such Certificated Note substantially in the form of assignment attached to such Certificated Note, (B) a certificate of the transferee of such Certificated Note substantially in the form of Exhibit F and (C) an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act and (y) satisfaction of all other applicable conditions imposed by this Indenture, (1) the Trustee shall register such transfer and (2) the Company shall execute and the Trustee shall authenticate and deliver in the name of the transferee one or more Certificated Notes of any authorized denomination in the same aggregate principal amount and of the same maturity as the transferred Certificated Note, each such new Certificated Note bearing the Private Placement Legend; provided, however, that Certificated Notes so delivered shall not be required to bear the Private Placement Legend if there is provided to the Company evidence reasonably satisfactory to the Company (which may, at the Company's request, include an Opinion of Counsel) that neither the Private Placement Legend nor the restrictions on transfer set forth therein are required to ensure compliance with the Securities Act. (ii) Any transfer of a Certificated Note not bearing the Private Placement Legend to a transferee that takes delivery in the form of one or more Certificated Notes shall be registered only in accordance with this clause (ii). Upon (x) surrender of any Certificated Note not bearing the Private Placement Legend at the office of the Registrar, together with an executed instrument of assignment of such Certificated Note substantially in the form of assignment attached to such Certificated Note, and (y) satisfaction of all other applicable conditions imposed by this Indenture, (A) the Trustee shall register such transfer and (B) the Company shall execute and the Trustee shall authenticate and deliver in the name of the transferee one or more Certificated Notes of any authorized denomination in the same aggregate principal amount and of the same maturity as the transferred Certificated Note. Each such new Certificated Note may at the request of the transferee, but shall not be required to, bear the Private Placement Legend. (iii) Any transfer of a Certificated Note bearing the Private Placement Legend to a transferee that takes delivery in the form of a beneficial interest in a Global Note shall be registered only in accordance with this clause (iii). Upon (x) surrender of any 27 Certificated Note bearing the Private Placement Legend at the office of the Registrar, together with (A) an executed instrument of assignment of such Certificated Note substantially in the form of assignment attached to such Certificated Note, (B) written instructions from the transferor that such Certificated Note shall be registered in the name of the Depositary or its nominee and (C) a certificate of the transferor of such Certificated Note substantially in the form of Exhibit D (if the transferee will take delivery in the form of a beneficial interest in the Regulation S Global Note) or Exhibit C (if the transferee will take delivery in the form of a beneficial interest in the Restricted Global Note), and (y) satisfaction of all other applicable conditions imposed by this Indenture and the Applicable Procedures, the Registrar shall (1) register such transfer and cancel such Certificated Note, (2) reflect in the register for the Notes an increase in the appropriate Global Note in an amount equal to the Certificated Note transferred pursuant to this clause (iii) and (3) instruct the Depositary to make the corresponding adjustment to its records and credit the account of the appropriate Agent Member in accordance with the Applicable Procedures. (iv) Any transfer of a Certificated Note not bearing the Private Placement Legend to a transferee that takes delivery in the form of a beneficial interest in a Global Note shall be registered only in accordance with this clause (iv). Upon (x) surrender of a Certificated Note not bearing the Private Placement Legend at the office of the Registrar, together with (A) an executed instrument of assignment of such Certificated Note substantially in the form of assignment attached to such Certificated Note and (B) written instructions from the transferor that such Certificated Note shall be registered in the name of the Depositary or its nominee, and (y) satisfaction of all other applicable conditions imposed by this Indenture and the Applicable Procedures, the Registrar shall (1) register such transfer and cancel such Certificated Note, (2) reflect in the register for the Notes an increase in the Global Note in an amount equal to the Certificated Note transferred pursuant to this clause (iv) and (3) instruct the Depositary to make the corresponding adjustment to it's records and credit the account of the appropriate Agent Member in accordance with the Applicable Procedures. (v) Any exchange of a Certificated Note for one or more Certificated Notes in different authorized denominations shall be registered only in accordance with this clause (v). Upon (x) surrender of a Certificated Note at the office of the Registrar, together with a written request to exchange such Certificated Note for one or more Certificated Notes in different authorized denominations, and (y) satisfaction of all other applicable conditions imposed by this Indenture, (A) the Registrar shall register such exchange and (B) the Company shall execute and the Trustee shall authenticate and deliver in the name of the registered owner one or more Certificated Notes in any authorized denomination with the same aggregate principal amount and maturity date. (vi) Any exchange of a Certificated Note for a beneficial interest in a Global Note shall be registered only in accordance with this clause (vi). Upon (x) surrender of a Certificated Note at the office of the Registrar, together with (A) a written request to exchange such Certificated Note for a beneficial interest in a Global Note, (B) written instructions from the registered owner that such Certificated Note shall be registered in the name of the Depositary or its nominee and (C) a certificate of the registered owner of such Certificated Note substantially in the form of Exhibit D (if the Certificated Note is being exchanged for a beneficial interest in the Regulation S Global Note) or Exhibit C (if the Certificated Note is being exchanged for a beneficial interest in the Restricted Global Note) 28 and (y) satisfaction of all other applicable conditions imposed by this Indenture and the Applicable Procedures, the Registrar shall (1) register such exchange and cancel such Certificated Note, (2) reflect in the register for the Notes an increase in the Restricted Global Note in an amount equal to the Certificated Note exchanged pursuant to this clause (vi) and (3) instruct the Depositary to make the corresponding adjustment to its records and credit the account of the appropriate Agent Member in accordance with the Applicable Procedures. Section 2.17. Restrictive Legends. Each Note that constitutes a Restricted Security shall bear the following legend (the "Private Placement Legend") on the face thereof until February 1, 2003, unless otherwise agreed to by the Company and the Holder thereof: THE NOTE (OR ITS PREDECESSORS) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE NOTE EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM OR IN A TRANSACTION NOT SUBJECT THERETO. EACH PURCHASER OF THE NOTE EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER OR ANOTHER EXEMPTION UNDER THE SECURITIES ACT. THE HOLDER OF THE NOTE EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH NOTE MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i)(a) TO A PERSON THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR TRANSFER IS BEING MADE IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A UNDER THE SECURITIES ACT, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 OF REGULATION S UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, PROVIDED THAT IN THE CASE OF A TRANSFER, PLEDGE OR SALE PURSUANT TO THIS CLAUSE (d) SUCH TRANSFER IS SUBJECT TO THE RECEIPT BY THE REGISTRAR (AND THE COMPANY, IF IT SO REQUESTS) OF A CERTIFICATION OF THE TRANSFEROR AND AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (ii) TO THE COMPANY OR ITS AFFILIATES OR (iii) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT 29 AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND THE INDENTURE GOVERNING THE NOTES AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE NOTE EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. Each Global Note shall also bear the following legend: THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, AND TRANSFERS OF INTERESTS IN THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.16 OF THE INDENTURE. ARTICLE 3 REDEMPTION Section 3.01. Notices to Trustee. If the Company elects to redeem Notes pursuant to paragraph 6 of the Notes, at least 60 days prior to the Redemption Date or during such other period as the Trustee may agree to, the Company shall notify the Trustee in writing of the Redemption Date, the principal amount of Notes to be redeemed and the Redemption Price, and deliver to the Trustee an Officers' Certificate stating that such redemption will comply with the conditions contained herein and in the Notes, as appropriate. Section 3.02. Selection of Notes To Be Redeemed. (a) In the event that less than all of the Notes are to be redeemed at any time, selection of the Notes to be redeemed shall be made by the Trustee on a pro rata basis, by lot or by such method as the Trustee shall deem fair and equitable; provided, however, that no Notes of a principal amount of $1,000 or less shall be redeemed in part; provided, further, that if a partial redemption is made with the proceeds of any Equity Offering, selection of the Notes or portions thereof 30 for redemption shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to the procedures of the Depositary), unless such method is otherwise prohibited. The Trustee shall make the selection from the outstanding Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount of the Notes to be redeemed. In the event of a partial redemption by lot, the Trustee shall select the particular Notes to be redeemed not less than 30 nor more than 60 days prior to the relevant Redemption Date from the Outstanding Notes not previously called for redemption. The Company may redeem Notes in denominations of $1,000 only in whole. The Trustee may select for redemption portions (equal to $1,000 or any integral multiple of $1,000) of the principal of Notes that have denominations larger than $1,000. A new Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon delivery of the original Note to the Paying Agent and cancellation of the original Note. On and after the Redemption Date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has made a deposit with the Paying Agent in U.S. legal tender in satisfaction of the applicable Redemption Price pursuant to this Indenture. (b) For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of that Note which has been or is to be redeemed. Section 3.03. Notice of Redemption. Notice of redemption shall be mailed by first class mail at least 30 but not more than 60 calendar days before the Redemption Date to each Holder of Notes to be redeemed at the registered address of such Holder. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. If the Company elects to have the Trustee give notice of redemption, the Trustee shall give notice in the name of the Company and at the Company's expense; provided, however, that the Company shall furnish the Trustee all information required to be contained in the notice. The notice shall identify the Notes to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price and the amount of accrued interest, if any, to be paid; (3) whether or not the Company is redeeming all outstanding Notes and if any Note is being redeemed in part, the portion of the principal amount (equal to $1,000 in principal amount or any integral multiple thereof) of such Note to be redeemed and that, on and after the Redemption Date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be issued; (4) the name, address and telephone number of the Paying Agent; (5) that Notes called for redemption must be surrendered to the Paying Agent at the address specified in such notice to collect the Redemption Price plus accrued interest, if any; 31 (6) that, unless the Company defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date and the only remaining right of the Holders is to receive payment of the Redemption Price plus accrued interest to the Redemption Date upon surrender of the Notes to the Paying Agent; (7) the subparagraph of the Notes pursuant to which the Notes called for redemption are being redeemed; (8) if fewer than all the Notes are to be redeemed, the identification of the particular Notes (or portion thereof) to be redeemed, as well as the aggregate principal amount of Notes to be redeemed and the aggregate principal amount of Notes to be outstanding after such partial redemption; and (9) the CUSIP or ISIN number, if any, listed in the notice or printed on the Notes, and that no representation is made as to the accuracy or correctness of such CUSIP or ISIN number. Section 3.04. Effect of Notice of Redemption. Once the notice of redemption described in Section 3.03 hereof is mailed, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price, including any make-whole amount, plus accrued interest to the Redemption Date, if any. Upon surrender to the Paying Agent, such Notes shall be paid at the Redemption Price, including any make-whole amount, plus accrued interest to the Redemption Date, if any; provided that if the Redemption Date is after a Record Date and on or prior to the Interest Payment Date, the accrued interest shall be payable to the Holder of the redeemed Notes registered on the relevant Record Date. Section 3.05. Deposit of Redemption Price. On or prior to 10:00 a.m., New York City time, on the relevant Redemption Date, the Company shall have deposited with the Paying Agent in immediately available funds U.S. legal tender sufficient to pay the Redemption Price of and accrued interest, if any, on all Notes to be redeemed on that date. The Paying Agent shall return to the Company any money deposited with the Paying Agent by the Company in excess of the amount necessary to pay the Redemption Price of and accrued interest, if any, on all Notes to be redeemed. On and after any Redemption Date, if U.S. legal tender sufficient to pay the Redemption Price of and accrued interest, if any, on Notes called for redemption shall have been made available in accordance with the preceding paragraph, the Notes called for redemption will cease to accrue interest and the only right of the Holders of such Notes will be to receive payment of the Redemption Price of and, subject to the proviso in Section 3.04 hereof, accrued and unpaid interest on such Notes to the Redemption Date, if any. If any Note called for redemption shall not be so paid, interest will continue to accrue and be paid, from the Redemption Date until such redemption payment is made, on the unpaid principal of the Note and any interest not paid on such unpaid principal, in each case, at the rate and in the manner provided for in Section 2.12 hereof. 32 Section 3.06. Notes Redeemed in Part. Upon surrender of a Note that is redeemed in part, the Company shall execute and the Trustee shall authenticate, at the expense of the Company, for a Holder a new Note equal in principal amount to the unredeemed portion of the Note surrendered; provided that each new Note will be in a principal amount of $1,000 or an integral multiple of $1,000. ARTICLE 4 COVENANTS Section 4.01. Payment of Notes. The Company shall pay the principal of and interest (including all Additional Interest as provided in the Registration Rights Agreement) on the Notes on the dates and in the manner provided in the Notes and this Indenture. An installment of principal or interest shall be considered paid on the date it is due if the Trustee or Paying Agent holds, for the benefit of the Holders, on that date money designated for and sufficient to pay such installment in full and is not prohibited from paying such money to the Holders pursuant to the terms of this Indenture. The Company shall pay interest on overdue principal and interest on overdue interest, to the extent lawful as provided for in Section 2.12 hereof. Section 4.02. Reports. Whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company shall file with the Commission, to the extent such filings are accepted by the Commission, and shall furnish (within 15 days after such filing) to the Trustee and to the Holders all quarterly and annual reports and other information, documents and reports that would be required to be filed with the Commission pursuant to Section 13 of the Exchange Act if the Company were required to file under such section. In addition, the Company shall make such information available to prospective purchasers of the Notes, securities analysts and broker-dealers who request it in writing. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). Section 4.03. Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead (as a defense or otherwise) or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of, make-whole amount, if any, and/or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and the Company 33 hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 4.04. Compliance Certificate; Notice of Default; Tax Information. (a) The Company shall deliver to the Trustee, within 90 days after the end of the Company's fiscal year commencing with the fiscal year ending December 31, 2000, an Officers' Certificate (one of the signers of which shall be the principal executive officer, principal financial officer or principal accounting officer of the Company) stating that to the best of his or her knowledge no Default or Event of Default has occurred, listing all Restricted Payments for such year, and if a Default or Event of Default shall have occurred, describing all of such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto. The Officers' Certificate shall also notify the Trustee should the Company elect to change the manner in which it fixes its fiscal year end. (b) The annual financial statements delivered pursuant to Section 4.02 shall be accompanied by a written report addressed to the Trustee of the Company's independent accountants (who shall be a firm of established national reputation) that in conducting their audit of such financial statements nothing has come to their attention that would lead them to believe that a Default or Event of Default has occurred under this Indenture insofar as they relate to accounting matters or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) If (i) any Default or Event of Default has occurred and is continuing or (ii) any Holder seeks to exercise any remedy hereunder with respect to a claimed default under this Indenture or the Notes, the Company shall deliver to the Trustee, at its address set forth in Section 11.02 hereof, by registered or certified mail or by telegram or facsimile transmission followed by hard copy by registered or certified mail an Officers' Certificate specifying such Default or Event of Default, notice or other action, the status thereof and what action the Company is taking or proposes to take, which Officers' Certificate shall be so delivered within five (5) Business Days of its becoming aware of such occurrence. Section 4.05. Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon it or any of its Subsidiaries or properties of it or any of its Subsidiaries and (ii) all lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of it or any of its Subsidiaries; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted for which adequate reserves, to the extent required under GAAP, have been taken. 34 Section 4.06. Corporate Existence. Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or limited liability company or other existence of each Subsidiary, in accordance with the respective organizational documents (as the same may be amended from time to time) of each Subsidiary and the material rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries except where the failure to preserve and keep in full force and effect any such rights, licenses and franchises shall not have a material adverse effect on the financial condition, business, operations or prospects of the Company and its Subsidiaries taken as a whole; and provided that the Company shall not be required to preserve any such right, license or franchise, or the corporate, limited liability company, partnership or other existence of any of the Subsidiaries, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole. Section 4.07. Maintenance of Office or Agency. The Company shall maintain an office or agency in the Borough of Manhattan, The City of New York, where Notes may be surrendered for registration of transfer or exchange or for presentation for payment and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee as set forth in Section 11.02 hereof. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company shall give prompt written notice to the Trustee of such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Corporate Trust Office of the Trustee set forth in Section 11.02 hereof as such office of the Company in the Borough of Manhattan, The City of New York. Section 4.08. Compliance with Laws. The Company shall comply, and shall cause each of its Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States of America and all other sovereign nations, all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except for such noncompliances as would not in the aggregate have a material adverse effect on the financial condition or results of operations of the Company and its Subsidiaries taken as a whole. 35 Section 4.09. Maintenance of Properties and Insurance. (a) The Company shall cause all material properties owned by or leased by it or any of its Subsidiaries used or useful to the conduct of the Company's business or the business of any of its Subsidiaries to be maintained and kept in normal condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in its judgment may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 4.09 shall prevent the Company or any of its Subsidiaries from discontinuing the use, operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Board of Directors of the Company or of the Board of Directors of the Subsidiary of the Company concerned, desirable in the conduct of the business of the Company or any Subsidiary of the Company. (b) The Company shall maintain, and shall cause the Subsidiaries to maintain, insurance with responsible carriers against such risks and in such amounts, and with such deductibles, retentions, self-insured amounts and co-insurance provisions, as, in the reasonable judgment of the Company, may be necessary. Section 4.10. Limitation on Restricted Payments. The Company shall not, and shall not permit any of its Subsidiaries, directly or indirectly, to make any Restricted Payment if at the time of such Restricted Payment: (i) a Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof; (ii) after giving effect to the proposed Restricted Payment, the amount of such Restricted Payment, when added to the aggregate amount of all Restricted Payments made after September 25, 2000, exceeds the sum of: (a) 50% of the Company's Consolidated Net Income accrued during the period (taken as a single period) commencing on July 1, 1997 to and including the fiscal quarter ended immediately prior to the date of such Restricted Payment (or, if such aggregate Consolidated Net Income shall be a deficit, minus 100% of such aggregate deficit); (b) the net cash proceeds from the issuance and sale of the Company's Capital Stock (other than to a Subsidiary of the Company) that is not Disqualified Stock during the period (taken as a single period) commencing with the Issue Date; and (c) $50,000,000; or (iii) the Company would not be able to incur an additional $1.00 of Indebtedness pursuant to Section 4.11 hereof. Notwithstanding the foregoing, the Company may: (w) pay any dividend within 60 days after the date of declaration thereof if the payment thereof would have complied with the limitations of this Section 4.10 on the date of declaration; (x) retire shares of the Company's Capital Stock or the Company's or a Subsidiary of the Company's Indebtedness out of the proceeds of a substantially concurrent sale (other than to a Subsidiary of the Company) of shares of the Company's Capital Stock (other than Disqualified Stock); (y) make Investments in Joint Ventures, when added to the aggregate amount of all such other Investments made pursuant to this clause (y) (or such other Investments as would have been made pursuant to this clause (y) had such clause been in effect) after September 25, 2000, not exceeding at any time 5% of Consolidated Tangible Assets (with each such Investment being valued as of the date made and without regard to subsequent changes in value); and (z) make Investments, when added to the aggregate amount of all such other Investments made pursuant to this clause (z) (or such other Investments as would have been made pursuant to this clause (z) had such clause been in effect) after September 25, 2000, not exceeding at any time 2.5% of 36 Consolidated Tangible Assets (with each such Investment being valued as of the date made and without regard to subsequent changes in value); provided, however, that each Restricted Payment described in clauses (w) and (x) above shall be taken into account for purposes of computing the aggregate amount of all Restricted Payments pursuant to clause (ii) of the immediately preceding paragraph. Section 4.11. Limitation on Additional Indebtedness and Subsidiary Preferred Stock. (a) After the Issue Date, (i) the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee, extend the Stated Maturity of, or otherwise become liable with respect to (collectively, "incur"), any Indebtedness (including, without limitation, Acquired Indebtedness) and (ii) the Company shall not permit any of its Subsidiaries to issue (except to the Company or any of its Wholly Owned Subsidiaries) or create any Preferred Stock or permit any Person (other than the Company or a Wholly Owned Subsidiary) to own or hold any interest in any Preferred Stock of any such Subsidiary; provided, however, that the Company may incur Indebtedness and the Company may permit its Subsidiaries to issue or create Preferred Stock if, after giving effect thereto, the Company's EBITDA Coverage Ratio on the date thereof would be at least 2.5 to 1, determined on a pro forma basis as if the incurrence of such additional Indebtedness or the issuance of such Preferred Stock (declared to have an aggregate principal amount equal to the aggregate liquidation value of such Preferred Stock), as the case may be, and the application of the net proceeds therefrom, had occurred at the beginning of the four-quarter period used to calculate the Company's EBITDA Coverage Ratio. (b) Notwithstanding the foregoing, and irrespective of the EBITDA Coverage Ratio, in addition to Existing Indebtedness: (i) the Company may incur Indebtedness pursuant to the Notes issued on the Issue Date and the Exchange Notes issued in exchange for such Notes; (ii) the Company may incur Indebtedness under the 2000 Credit Agreement in an aggregate principal amount at any time not to exceed $400,000,000; (iii) the Company and its Subsidiaries may incur Refinancing Indebtedness; (iv) the Company may incur any Indebtedness to any Subsidiary or any Subsidiary may incur any Indebtedness to the Company or to any Subsidiary; (v) the Company and its Subsidiaries may incur any Indebtedness evidenced by letters of credit which are used in the ordinary course of business of the Company and its Subsidiaries to secure workers' compensation and other insurance coverages; (vi) the Company and its Subsidiaries may incur Capitalized Lease Obligations and Attributable Indebtedness, in each case excluding Existing Indebtedness, in an aggregate principal amount at any one time outstanding not to exceed 10% of Consolidated Tangible Assets; and (vii) the Subsidiaries of the Company may incur Indebtedness, excluding Existing Indebtedness, in an aggregate principal amount at any time outstanding not to exceed $250,000,000, in addition to Indebtedness permitted to be incurred by Subsidiaries pursuant to the foregoing clauses (iii) - (vi). (c Notwithstanding the foregoing, the Company may permit any Subsidiary which is a partnership formed to operate a single healthcare facility to issue or create Preferred Stock, provided that the aggregate amount of all such Preferred Stock outstanding after giving effect to such issuance or creation shall not exceed 1% of Consolidated Tangible Assets as of the date of such issuance or creation. 37 Section 4.12. Limitation on Asset Sales. (a) The Company shall not, and shall not permit any of its Subsidiaries to, consummate any Asset Sale unless (i) the Company or such Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets included in such Asset Sale, (ii) immediately before and immediately after giving effect to such Asset Sale, no Default or Event of Default shall have occurred and be continuing and (iii) at least 75% of the consideration received by the Company or such Subsidiary therefor is in the form of cash paid at the closing thereof, provided, however, that this clause (iii) shall not apply if, after giving effect to such Asset Sale, the aggregate principal amount of all notes or similar debt obligations and Fair Market Value of all equity securities received by the Company from all Asset Sales since September 25, 2000 (other than such notes or similar debt obligations and such equity securities converted into or otherwise disposed of for cash and applied in accordance with the second succeeding sentence) would not exceed 2.5% of Consolidated Tangible Assets. The amount (without duplication) of any (x) Indebtedness (other than Subordinated Indebtedness) of the Company or such Subsidiary that is expressly assumed by the transferee in such Asset Sale and with respect to which the Company or such Subsidiary, as the case may be, is unconditionally released by the holder of such Indebtedness and (y) any notes, securities or similar obligations or items of property received from such transferee that are immediately converted, sold or exchanged by the Company or such Subsidiary for cash (to the extent of the cash actually so received), shall be deemed to be cash for purposes of this Section 4.12. If at any time any non-cash consideration received by the Company or such Subsidiary, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then the date of such conversion or disposition shall be deemed to constitute the date of an Asset Sale hereunder and the Net Proceeds thereof shall be applied in accordance with this Section 4.12. A transfer of assets by the Company to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary will not be deemed to be an Asset Sale, and a transfer of assets that constitutes a Restricted Payment and that is permitted under Section 4.10 hereof will not be deemed to be an Asset Sale. (b) If the Company or any Subsidiary engages in an Asset Sale, the Company or such Subsidiary shall, no later than 360 days after such Asset Sale, (i) apply all or any of the Net Proceeds therefrom to repay Indebtedness that ranks pari passu with the Notes and is secured by the assets disposed of in the Asset Sale or to repay Bank Debt in accordance with the applicable provisions thereof, (ii) invest all or any part of the Net Proceeds therefrom in the lines of business of the Company or any of its Subsidiaries immediately prior to such investment or (iii) any combination of clauses (i) and (ii) above. The amount of such Net Proceeds not applied or invested as provided in this paragraph (b) will constitute "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds equals or exceeds $5,000,000, the Company shall be required to make an offer to purchase (an "Asset Sale Offer") from all Holders, an aggregate principal amount of Notes equal to the amount of such Excess Proceeds as follows: (i) The Company shall make an Asset Sale Offer to all Holders in accordance with the procedures set forth in this Section 4.12 to purchase the maximum principal amount (expressed as a multiple of $1,000) of Notes that may be purchased out of the amount (the "Asset Sale Payment Amount") of such Excess Proceeds. 38 (ii) The offer price for the Notes shall be payable in cash in an amount equal to 100% of the principal amount of the Notes tendered pursuant to such Asset Sale Offer, plus accrued and unpaid interest and Additional Interest, if any, to the date such Asset Sale Offer is consummated (the "Asset Sale Purchase Price"), in accordance with the procedures set forth in this Section 4.12. To the extent that the aggregate Asset Sale Purchase Price of Notes tendered pursuant to an Asset Sale Offer is less than the Asset Sale Payment Amount relating thereto (such shortfall constituting a "Net Proceeds Deficiency"), the Company may use such Net Proceeds Deficiency, or a portion thereof, for general corporate purposes. (iii) If the aggregate Asset Sale Purchase Price of Notes validly tendered and not withdrawn by holders thereof exceeds the Asset Sale Payment Amount, Notes to be purchased shall be selected on a pro rata basis. (iv) Upon completion of such Asset Sale Offer in accordance with the foregoing provisions, the amount of Excess Proceeds with respect to which such Asset Sale Offer was made shall be deemed to be zero. In the event that any other Indebtedness of the Company which ranks pari passu with the Notes ("Other Debt") requires an offer to purchase to be made to repurchase such Other Debt upon the consummation of an Asset Sale, the Company may apply the Excess Proceeds to both purchase such Other Debt and to make an Asset Sale Offer, provided, that the purchase price of such Other Debt does not exceed 100% of the aggregate principal amount or accreted value thereof plus interest thereon. With respect to any Excess Proceeds, the Company shall make the Asset Sale Offer in respect thereof at the same time as the analogous offer to purchase is made pursuant to any Other Debt and the purchase date in respect thereof shall be the same as the purchase date in respect thereof pursuant to any Other Debt. With respect to any Asset Sale Offer effected pursuant to this Section 4.12, to the extent the aggregate principal amount of Notes and Other Debt, if any, tendered pursuant to such Asset Sale Offer and the concurrent offer to purchase with respect to such Other Debt exceeds the Excess Proceeds, such Notes and Other Debt, if any, shall be purchased pro rata based on the aggregate principal amount of such Notes and such Other Debt tendered by each holder thereof. (d) If the Company is required to make an Asset Sale Offer, the Company shall, within 30 days following the date specified in clause (c) above, notify the Trustee thereof and give written notice of such Asset Sale Offer to each Holder by first-class mail, postage prepaid, at the address of such Holder appearing in the register maintained by the Registrar, stating: (1) that an Asset Sale Offer is being made pursuant to this Section 4.12; (2) that such Holders have the right to require the Company to apply the Excess Proceeds to repurchase the Notes at a purchase price in cash equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the purchase date which shall be no earlier than 30 days and not later than 60 days from the date such notice is mailed (the "Excess Proceeds Payment Date"); (3) that any Note not tendered or accepted for payment will continue to accrue interest; 39 (4) that any Notes accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Excess Proceeds Payment Date; (5) that Holders accepting the offer to have their Notes purchased pursuant to the Asset Sale Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day preceding the Excess Proceeds Payment Date; (6) that Holders will be entitled to withdraw their acceptance of the Asset Sale Offer if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Excess Proceeds Payment Date, a telegram, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes delivered for purchase and a statement that such Holder is withdrawing his or her election to have such Notes purchased; (7) that if the aggregate principal amount of Notes surrendered by Holders exceeds the amount of Excess Proceeds, Company shall select the Notes to be purchased on a pro rata basis so that the aggregate amount of Notes so purchased equals the amount of Excess Proceeds (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000 or integral multiples thereof shall be purchased); (8) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each such new Note issued shall be in an original principal amount in denominations of $1,000 or integral multiples thereof; (9) the calculations used in determining the amount of Excess Proceeds to be applied to the purchase of such Notes; (10) any other procedures that a Holder must follow to accept an Asset Sale Offer or effect withdrawal of such acceptance; and (11) the name and address of the Paying Agent. On the Excess Proceeds Payment Date, the Company shall, to the extent lawful, (1) accept for payment, on a pro rata basis to the extent necessary, Notes or portions thereof tendered pursuant to the Asset Sale Offer, (2) deposit with the Paying Agent US legal tender sufficient to pay the purchase price plus accrued and unpaid interest, if any, on the Notes to be purchased or portions thereof, (3) deliver or cause to be delivered to the Trustee Notes so accepted together with an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 4.12. The Paying Agent shall promptly mail to each Holder so accepted payment in an amount equal to the purchase price for such Notes, and the Company shall execute and issue, and the Trustee shall promptly authenticate and make available for delivery to such Holder, a new Note equal in principal amount to any unpurchased portion of the Notes surrendered; provided that each Note purchased and each such new Note issued shall be in an original principal amount in denominations of $1,000 or integral multiples thereof. 40 (e) The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with this Section 4.12, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.12 by virtue thereof. Section 4.13. Limitation on Transactions with Affiliates. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, in one transaction or a series of transactions, make any loan, advance, guarantee or capital contribution to, or for the benefit of, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or for the benefit of, or purchase or lease any property or assets from, or enter into or amend any contract, agreement or understanding with, or for the benefit of, any Affiliate of the Company or any of its Subsidiaries or any Person (or any Affiliate of such Person) holding 10% or more of the Common Equity of the Company or any of its Subsidiaries, other than transactions in the ordinary course between the Company and its Subsidiaries or among Subsidiaries of the Company (an "Affiliate Transaction"), unless: (i) the terms of such Affiliate Transactions are fair and reasonable to the Company or such Subsidiary, as the case may be, and are at least as favorable as the terms which could be obtained by the Company or such Subsidiary, as the case may be, in a comparable transaction made on an arm's-length basis between unaffiliated parties; (ii) with respect to any such Affiliate Transaction involving aggregate payments in excess of $5,000,000, the Company delivers an Officers' Certificate to the Trustee certifying that such Affiliate Transaction complies with clause (i) above and a Secretary's Certificate which sets forth and authenticates a resolution that has been adopted by a vote of a majority of the disinterested members of the Board of Directors approving such Affiliate Transaction; and (iii) with respect to any such Affiliate Transaction involving aggregate payments in excess of $25,000,000, the Company delivers to the Trustee the certificates specified in clause (ii) above and an opinion of an independent investment banking firm of national standing in the United States, stating that such Affiliate Transaction is fair from a financial point of view to the Company or such Subsidiary, as the case may be; provided, however, that the foregoing clauses (ii) and (iii) shall not apply to transactions between the Company or any of its Subsidiaries and MedCenterDirect.com, Inc. or any entity to which the Company transfers all or substantially all of the rights to its HEALTHSOUTH Clinical Automation Program. Section 4.14. Limitation on Liens. The Company will not create or suffer to exist any Lien (other than Permitted Liens) on any of its assets, unless contemporaneously therewith: (i) in the case of any Lien securing an obligation that ranks pari passu with the Notes, effective provision is made to secure the Notes at least equally and ratably with or prior to such obligation with a Lien on the same collateral; and (ii) in the case of any Lien securing an obligation that is subordinated in right of payment to the Notes, effective provision is made to secure the Notes with a Lien on the same collateral that is prior to the Lien securing such subordinated obligation. 41 Notwithstanding the above, the Company may, without securing the Notes, create or assume any Indebtedness which is secured by a Lien which would otherwise be subject to the foregoing restrictions, provided that after giving effect thereto, the Exempted Debt then outstanding does not exceed 10% of the total Consolidated Tangible Assets of the Company and its Subsidiaries at such time. Section 4.15. Purchase of Notes upon a Change of Control. (a) Upon the occurrence of a Change of Control, the Company shall be obligated to make an offer to purchase (the "Change of Control Offer") the outstanding Notes of each Holder in whole or in part in integral multiples of $1,000, at a purchase price (the "Change of Control Purchase Price") in cash in an amount equal to 101% of the principal amount thereof, plus accrued interest, if any, to the date of purchase (the "Change of Control Purchase Date"), pursuant to the procedures set forth below. (b) Within 30 days following any Change of Control, the Company shall notify the Trustee thereof and give written notice of such Change of Control to each Holder by first-class mail, postage prepaid, at the address of such Holder appearing in the register maintained by the Registrar, stating, among other things: (1) that the Change of Control Offer is being made pursuant to this Section 4.15; (2) that such Holders have the right to require the Company to repurchase such Notes at the Change of Control Purchase Price on the Change of Control Purchase Date which shall be no earlier than 30 days and not later than 60 days from the date such notice is mailed; (3) that any Note not tendered or accepted for payment will continue to accrue interest; (4) that, unless the Company defaults in its payment of the Change of Control Purchase Price, any Note accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date; (5) that Holders accepting the offer to have their Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day preceding the Change of Control Purchase Date; (6) that Holders will be entitled to withdraw their acceptance of the Change of Control Offer if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Change of Control Purchase Date, a telegram, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes delivered for purchase and a statement that such Holder is withdrawing his or her election to have such Notes purchased; (7) any other procedures that a Holder must follow to accept an Change of Control Offer or effect withdrawal of such acceptance; and 42 (8) the name and address of the Paying Agent. On the Change of Control Payment Date, the Company shall, to the extent lawful, (1) accept for payment Notes or portions thereof tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent U.S. legal tender sufficient to pay the purchase price of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee Notes so accepted together with an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company pursuant to this Section 4.15. The Paying Agent shall promptly mail to each Holder so accepted payment in an amount equal to the purchase price for such Notes, and the Company shall execute and issue, and the Trustee shall promptly authenticate and mail to such Holder, a new Note equal in principal amount to any unpurchased portion of the Notes surrendered; provided that each such new Note shall be issued in an original amount in denominations of $1,000 and integral multiples thereof. (c) The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with this Section 4.15, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.15 by virtue thereof. Section 4.16. Limitation on Restrictions on Distributions from Subsidiaries. The Company shall not, and shall not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction (other than encumbrances or restrictions imposed by law or by judicial or regulatory action or by provisions in leases or other agreements that restrict the assignability thereof) on the ability of any Subsidiary of the Company to (i) pay dividends or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits, owned by the Company or any of its other Subsidiaries, or pay interest on or principal of any Indebtedness owed to the Company or any of its other Subsidiaries, (ii) make loans or advances to the Company or any of its other Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its other Subsidiaries, in each case except for encumbrances or restrictions existing under or by reason of (a) applicable law, (b) the Credit Agreements, (c) Existing Indebtedness, (d) any restrictions under any agreement evidencing any Acquired Indebtedness that was permitted to be incurred pursuant to this Indenture and which was not incurred in anticipation or contemplation of the related acquisition, provided that such restrictions and encumbrances only apply to assets that were subject to such restrictions and encumbrances prior to the acquisition of such assets by the Company or its Subsidiaries, (e) restrictions or encumbrances replacing those permitted by clause (b), (c) or (d) above which, taken as a whole, are not materially more restrictive, (f) this Indenture, (g) any restrictions and encumbrances arising in connection with Refinancing Indebtedness; provided, however, that any restrictions or encumbrances of the type described in this clause (g) that arise under such Refinancing Indebtedness are not, taken as a whole, materially more restrictive than those under the agreement creating or evidencing the Indebtedness being refunded or refinanced, (h) any restrictions with respect to a Subsidiary of the Company imposed pursuant to an agreement that has been entered into for the sale or other disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (i) any agreement restricting the sale or other disposition of property securing Indebtedness if such agreement does not expressly restrict the 43 ability of a Subsidiary of the Company to pay dividends or make loans or advances and (j) customary restrictions in purchase money debt or leases relating to the property covered thereby. Section 4.17. Limitations on Layering Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, incur any Indebtedness that purports to be by its terms subordinated to any other Indebtedness of the Company or such Subsidiary, as the case may be, unless such Indebtedness is also expressly subordinated to the Notes to the same extent and in the same manner as such Indebtedness is subordinated to such other Indebtedness. ARTICLE 5 SURVIVING ENTITY Section 5.01. Limitations on Mergers and Consolidations. The Company shall not consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets, or assign any of its obligations under the Notes or this Indenture, to any Person unless: (i) the Person formed by or surviving such consolidation or merger (if other than the Company), or to which such sale, lease, conveyance or other disposition or assignment shall be made (collectively, the "Successor"), is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia, and the Successor assumes by supplemental indenture in a form satisfactory to the Trustee all of the obligations of the Company under the Notes and this Indenture; (ii) immediately after giving effect to such consolidation, merger, sale, lease, conveyance or other disposition or assignment and the use of any net proceeds therefrom on a pro forma basis, no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such consolidation, merger, sale, lease, conveyance or other disposition or assignment and the use of any net proceeds therefrom on a pro forma basis, the Consolidated Net Worth of the Company or the Successor, as the case may be, would be at least equal to the Consolidated Net Worth of the Company immediately prior to such transaction; (iv) immediately after giving effect to such consolidation, merger, sale, lease, conveyance or other disposition or assignment and the use of any net proceeds therefrom on a pro forma basis, the EBITDA Coverage Ratio of the Company or the Successor, as the case may be, would be such that the Company or the Successor, as the case may be, would be entitled to incur at least $1.00 of additional Indebtedness under the EBITDA Coverage Ratio test in Section 4.11 hereof; and (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, lease, conveyance or other disposition or assignment complies with the provisions of this Indenture. Section 5.02. Successor Substituted. Upon any consolidation, merger, conveyance or any transfer of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the surviving entity formed by such consolidation or into which the Company or any such Subsidiary is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the 44 Company or such Subsidiary, as the case may be, under this Indenture with the same effect as if such surviving entity had been named as the Company or such Subsidiary, as the case may be herein, and thereafter the predecessor entity shall be relieved of all obligations and covenants under this Indenture and the Notes. ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default. An "Event of Default" means each one of the following events which shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any installment of interest upon any of the Notes as and when the same shall become due and payable, and continuance of such default for a period of 30 days; (b) default in the payment of all or any part of the principal, or make-whole amount, if any, on any of the Notes as and when the same shall become due and payable either at its Stated Maturity, upon any redemption, by declaration or otherwise; (c) failure by the Company to comply with its obligations or covenants described under Section 4.12, Section 4.15 or Article 5 hereof; (d) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company in the Notes or this Indenture (other than the covenants referred to in clauses (a), (b) and (c) above) for a period of 60 days after the date on which written notice specifying such failure, stating that such notice is a "Notice of Default" under this Indenture and demanding that the Company remedy the same, shall have been given by registered or certified mail, return receipt requested, to the Company by the Trustee, or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes; (e) default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company or any Subsidiary of the Company or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any Subsidiary of the Company, whether such indebtedness now exists or shall hereafter be created, if (i) such default results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, (ii) the principal amount of such indebtedness, together with the principal amount of any other such indebtedness which has been so accelerated, aggregates $25,000,000 or more at any one time outstanding and (iii) such indebtedness is not discharged, or such acceleration is not rescinded or annulled, within a 45 period of 10 days after there shall have been given to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes a written notice specifying such default and requiring the Company to cause such Indebtedness to be discharged or cause such acceleration to be rescinded or annulled; (f) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary for any substantial part of its or their property or ordering the winding up or liquidation of its or their affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (g) the Company or any Significant Subsidiary shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or any Significant Subsidiary or for any substantial part of it or their property, or make any general assignment for the benefit of creditors. Section 6.02. Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.01(f) or 6.01(g) hereof relating to the Company) shall have occurred and be continuing under this Indenture, the Trustee, by written notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding by written notice to the Company and the Trustee, may declare all amounts owing under the Notes to be due and payable. Upon effectiveness of such acceleration, the aggregate principal of, make-whole amount, if any, and interest on the outstanding Notes shall immediately become due and payable. At any time after such acceleration but before a judgment or decree based on such acceleration is obtained by the Trustee, or any Holder, the Holders of a majority in aggregate principal amount of outstanding Notes, by written notice to the Company and the Trustee, may rescind and annul such acceleration if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay: (1) all overdue interest on the Notes; (2) all unpaid principal of and make-whole amount, if any, on any of the outstanding Notes that has become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes; (3) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the Notes; (4) all sums paid or advanced by the Trustee under this Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; 46 (b) all Events of Default, other than the non-payment of amounts of principal of, make-whole amount, if any, or interest on the Notes that has become due solely by such declaration of acceleration, have been cured or waived; and (c) in the event of the cure or waiver of an Event of Default with respect to the Company of the type described in Section 6.01(f) or 6.01(g) hereof, the Trustee shall have received an Officers' Certificate and an Opinion of Counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. In case an Event of Default with respect to the Company of the type described in Section 6.01(f) or 6.01(g) hereof shall occur, the aggregate principal of, make-whole amount, if any, and interest on the outstanding Notes shall immediately become due and payable without any declaration or other act on the part of the Trustee or the Holders. Section 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, or make-whole amount, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture and may take any necessary action requested of it as Trustee to settle, compromise, adjust or otherwise conclude any proceedings to which it is a party. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. Section 6.04. Waiver of Existing Defaults and Events of Default. Subject to Sections 2.09, 6.02, 6.07 and 8.02 hereof, the Holders of a majority in principal amount of the Notes then outstanding have the right to waive existing Defaults under or in compliance with any provision of this Indenture or the Notes except a continuing Default in the payment of the principal of, or interest or make-whole amount, if any, on any Note as specified in clauses (a) and (b) of Section 6.01 hereof or in respect of a covenant or a provision which cannot be modified or amended without the consent of all Holders as provided for in Section 8.02 hereof. The Company shall deliver to the Trustee an Officers' Certificate stating that the requisite percentage of Holders have consented to such waiver and attach copies of such consents. In case of any such waiver, the Company, the Trustee and the Holders shall be restored to their former positions and rights hereunder and under the Notes, respectively. This paragraph of this Section 6.04 shall be in lieu of ss. 316(a)(1)(B) of the TIA and such ss. 316(a)(1)(B) of the TIA is hereby expressly excluded from this Indenture and the Notes, as permitted by the TIA. Upon any such waiver, such Default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have 47 been cured and not to have occurred for every purpose of this Indenture, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. Section 6.05. Control by Majority. Subject to Section 2.09 hereof, the Holders of a majority in principal amount of the then outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on the Trustee by this Indenture. The Trustee, however, may refuse to follow any direction that conflicts with law or this Indenture or that the Trustee determines in its reasonable judgment may be unduly prejudicial to the rights of another Holder not taking part in such direction, and the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, determines that the action so directed may not lawfully be taken or if the Trustee in good faith shall, by a Trust Officer, determine that the proceedings so directed may involve it in personal liability; provided that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. In the event the Trustee takes any action or follows any direction pursuant to this Indenture, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against any loss or expense caused by taking such action or following such direction. This Section 6.05 shall be in lieu of Section 316(a)(1)(A) of the TIA, and such Section 316(a)(1)(A) of the TIA is hereby expressly excluded from this Indenture and the Notes, as permitted by the TIA. Section 6.06. Limitation on Suits. Subject to Section 6.07 hereof, no Holder has any right to institute any proceeding with respect to this Indenture or any remedy hereunder unless: (1) the Holder gives the Trustee written notice of a continuing Event of Default; (2) the Holders of at least 25% in aggregate principal amount of the outstanding Notes make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity reasonably satisfactory to the Trustee against any loss, liability or expense which may be incurred in compliance with such request; (4) the Trustee fails to institute such proceeding within 60 calendar days after receipt of such notice and the offer of indemnity; and (5) the Trustee has not received directions inconsistent with such written request during such 60-day period by the Holders of a majority in aggregate principal amount of then outstanding Notes. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. 48 Section 6.07. Rights of Holders To Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of, or make-whole amount, if any, or accrued interest on any Note held by such Holder on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates, is absolute and unconditional (subject to the terms of this Indenture) and shall not be impaired or affected without the consent of such Holder. Section 6.08. Collection Suit by Trustee. If an Event of Default occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of unpaid principal, make-whole amount, if any, and accrued interest remaining unpaid, together with, to the extent that payment of such interest is lawful, interest on overdue principal and interest on overdue installments of interest, in each case at the rate set forth in Section 4.01 hereof, and such further amounts as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same after deduction of its charges and expenses to the extent that any such charges and expenses are not paid out of the estate in any such proceedings and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan or reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceedings. Section 6.10. Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: FIRST: to the Trustee for amounts due under Section 7.07 hereof; SECOND: if the Holders are forced to proceed against the Company directly without the Trustee, to Holders for their collection costs; and 49 THIRD: to Holders for amounts due and unpaid on the Notes for principal, make-whole amount, if any, and interest as to each, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes. The Trustee, upon prior written notice to the Company, may fix a Record Date and payment date for any payment to Holders pursuant to this Section 6.10. Section 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 hereof or a suit by Holders of more than 10% in principal amount of the Notes then outstanding. ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee. (a) If an Event of Default actually known to a Trust Officer of the Trustee has occurred and is continuing, the Trustee shall exercise such rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise under the circumstances in the conduct of such Person's own affairs. (b) Except during the continuance of a Default or an Event of Default: (1) The Trustee need perform only those duties and obligations that are specifically set forth in this Indenture. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (c) Notwithstanding anything to the contrary herein contained, the Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: 50 (A) This paragraph does not limit the effect of paragraph (b) of this Section 7.01. (B) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer of the Trustee, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (C) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Sections 6.02, 6.04 and 6.05 hereof. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or to take or omit to take any action under this Indenture or take any action at the request or direction of Holders if it shall have reasonable grounds for believing that repayment of such funds is not assured to it or it does not receive from such Holders an indemnity reasonably satisfactory to it against such risk, liability, loss, fee or expense which might be incurred by it in compliance with such request or direction. (e) Whether or not expressly so provided, the provisions of the TIA and paragraphs (a), (b), (c) and (d) of this Section 7.01 shall govern every provision of this Indenture that in any way relates to the Trustee. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by the law or as otherwise agreed to in writing by the Trustee and the Company. (g) Unless otherwise specifically provided in this Indenture, any demand, request direction or notice from the Company shall be sufficient if signed by an Officer of the Company. Section 7.02. Rights of Trustee. Subject to Section 7.01 hereof: (1) The Trustee may conclusively rely on any document believed by it in good faith to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (2) Before the Trustee acts or refrains from acting with respect to any matters contemplated by this Indenture or the Notes it may require an Officers' Certificate or an Opinion of Counsel, or both, which shall conform to the provisions of Section 11.05 hereof. The Trustee shall be fully protected and shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (3) The Trustee may act through agents, attorneys, custodians or nominees and shall not be responsible for the misconduct or negligence of any agent, attorney, custodian or nominee appointed with due care by it hereunder. 51 (4) The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers under this Indenture. (5) Before the Trustee acts or refrains from acting with respect to any matters contemplated by this Indenture or the Notes, the Trustee may consult with counsel of its selection, and the advice or opinion of such counsel, accountant, appraiser or other expert adviser whether retained or employed by the Company or the Trustee shall be full and complete authorization and protection from liability in respect of any action taken, omitted or suffered by it hereunder in good faith and in reliance thereon. (6) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and if the Trustee shall determine in good faith to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation. (7) In no event shall the Trustee be liable for the selection of investments or for investment losses incurred thereon. The Trustee shall have no liability in respect of losses incurred as a result of the liquidation of any such investment prior to its Stated Maturity or the failure of the party directing such investment to provide timely written investment direction. The Trustee shall have no obligation to invest or reinvest any amounts held hereunder in the absence of specific written investment direction. (8) The rights, privileges, immunities and protections afforded to the Trustee pursuant to this Indenture (including, without limitation, the right to be indemnified) shall also be afforded to the Trustee in each of its capacities hereunder and each Paying Agent, Registrar, Co-Registrar, Custodian, transfer agent or tender agent and each agent or other Person employed to act hereunder. (9) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Trust Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Notes and this Indenture. (10) The Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any person authorized to sign an Officers' Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded. Section 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may make loans to, accept deposits from, perform services for or otherwise deal with the Company, or any Affiliates thereof, with the same rights it would have if it were not Trustee. Any 52 Agent may do the same with like rights. The Trustee, however, shall be subject to Sections 7.10 and 7.11 hereof. Section 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes or any recitals therein, it shall not be accountable for the Company's use of the proceeds from the sale of Notes or any money paid to the Company pursuant to the terms of this Indenture and it shall not be responsible for any statement in the Notes other than its certificate of authentication. Section 7.05. Notice of Defaults. If a Default or an Event of Default occurs and is continuing and is known to a Trust Officer of the Trustee, the Trustee shall mail to each Holder notice of the uncured Default or Event of Default within 5 days after obtaining knowledge thereof. Except in the case of a Default or an Event of Default in payment of principal of, make-whole amount, if any, or interest on, any Note, including an accelerated payment and the failure to make payment on the Change of Control Payment Date pursuant to a Change of Control Offer or on the Excess Proceeds Payment Date pursuant to an Asset Sale Offer, and except in the case of a failure to comply with Article 5 hereof the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the best interest of the Holders. This Section 7.05 shall be in lieu of the proviso to Section 315(b) of the TIA, and such proviso of Section 315(b) of the TIA is hereby expressly excluded from this Indenture and the Notes, as permitted by the TIA. Section 7.06. Reports by Trustee to Holders. If required by TIA Section 313(a), within 60 days after May 15 of any year, commencing on May 15, 2001, the Trustee shall transmit by mail to each Holder a brief report dated as of such May 15 that complies with TIA Section 313(a). The Trustee also shall comply with the reporting requirements of TIA Sections 313(b), (c) and (d). A copy of each such report at the time of such mailing to Holders shall be mailed to the Company and, if the Notes are listed on a stock exchange, filed with the Commission and each stock exchange on which the Notes are listed as provided by TIA Section 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange and any delisting thereof. Section 7.07. Compensation and Indemnity. The Company shall pay to the Trustee from time to time such compensation as may from time to time be agreed in writing between the Company and the Trustee for its services hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust). Except as otherwise provided herein, the Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it in connection with its duties under this Indenture, including the reasonable compensation, disbursements and expenses of the Trustee's agents, counsel, custodians and nominees, except for any such disbursement or expense as may be attributable to the Trustee's negligence, bad faith or willful misconduct. 53 The Company shall indemnify each of the Trustee and its officers, directors, employees and agents and any predecessor Trustee and its officers, directors, employees and agents for, and hold it or them harmless against, any and all loss, damage, claim, liability or reasonable expense, including taxes (other than franchise taxes and taxes based on the income of the Trustee) incurred by it or them in connection with the acceptance or performance of its duties under this Indenture and any other documents and transactions in connection therewith including the reasonable costs and expenses of defending itself against any claim (whether asserted by the Company, or any Holder or any other Person) or liability in connection with the exercise or performance of any of its or their powers or duties hereunder (including, without limitation, settlement costs, provided any settlement with respect to which indemnification is sought shall have been consented to by the Company). The Trustee shall notify the Company in writing promptly of any claim asserted against the Trustee for which it may seek indemnity. However, the failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder except to the extent the Company is prejudiced thereby. This Section 7.07 shall survive the termination of this Indenture and the earlier resignation or removal of the Trustee. Notwithstanding the foregoing, the Company need not reimburse the Trustee for any expense or indemnify it against any loss, damage, claim or liability incurred by the Trustee through its negligence, bad faith or willful misconduct. To secure the payment obligations of the Company in this Section 7.07, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee except such money or property held in trust to pay principal of and interest on particular Notes. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(f) or 6.01(g) hereof occurs, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any Federal or state bankruptcy, insolvency or similar law. The obligation of the Company under this Section 7.07 shall survive the resignation or removal of the Trustee and the satisfaction and discharge of this Indenture. Section 7.08. Replacement of Trustee. The Trustee may resign by so notifying the Company in writing. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by notifying the removed Trustee and the Company in writing and may appoint a successor Trustee with the Company's written consent. The Company may remove the Trustee at its election if: (1) the Trustee fails to comply with Section 7.10 hereof; (2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a receiver or other public officer takes charge or control of the Trustee or its property or affairs; or (4) the Trustee otherwise becomes incapable of acting. 54 If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. No resignation or removal of the Trustee shall become effective until the acceptance of appointment by the successor Trustee. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the outstanding Notes may petition any court of competent jurisdiction at the expense of the Company for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10 hereof, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee if the Trustee fails after written request thereof by such Holder to comply with such Section 7.10. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately following such delivery, the resignation or removal of the retiring Trustee shall become effective and the retiring Trustee shall, subject to its rights under Section 7.07 hereof, transfer all property held by it as Trustee to the successor Trustee, and the successor Trustee, after any and all amounts then due and owing the Trustee hereunder have been paid in full, shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. Section 7.09. Successor Trustee by Consolidation, Merger or Conversion. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust assets to, another corporation, subject to Section 7.10 hereof, the successor corporation without any further act shall be the successor Trustee. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any such successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have. Section 7.10. Eligibility; Disqualification. This Indenture shall always have a Trustee which shall be eligible to act as Trustee under TIA Sections 310(a)(1) and 310(a)(2). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. If the Trustee has or shall acquire any "conflicting interest" within the meaning of TIA Section 310(b), the Trustee and the Company shall comply with the provisions of TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. If at any 55 time the Trustee shall cease to be eligible in accordance with the provisions of this Section 7.10, the Trustee shall resign immediately in the manner and with the effect hereinbefore specified in this Article 7. Section 7.11. Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 MODIFICATIONS, AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 8.01. Without Consent of Holders. The Company, when authorized by a Board Resolution of the Company, and the Trustee may modify, amend or supplement this Indenture or the Notes without notice to or consent of any Holder: (1) to cure any ambiguity, or to correct or supplement any provision in this Indenture or the Notes or make any other provisions with respect to matters or questions arising under this Indenture or the Notes; provided that, in each case, such provisions shall not adversely affect the interest of the Holders; (2) to provide for uncertificated Notes in addition to or in place of certificated Notes; (3) to provide for the assumption by a successor corporation of the Company's obligations under this Indenture; (4) to add guarantees with respect to the Notes; (5) to secure the Notes; (6) to add to the covenants of the Company or the Events of Default for the benefit of Holders; (7) to surrender any right or power conferred on the Company; or (8) to make any other change that does not adversely affect the rights of any Holder or to comply with any requirement of the Commission in connection with the qualification of this Indenture under the Trust Indenture Act. 56 Section 8.02. With Consent of Holders. Subject to Section 6.07 hereof, the Company and the Trustee may modify, amend or supplement this Indenture or the Notes with the written consent of the Holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes). Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in principal amount of the then outstanding Notes may waive compliance by the Company with any provision of this Indenture or the Notes. However, without the consent of each Holder affected (including consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes), a modification, amendment, supplement or waiver, including a waiver pursuant to Section 6.04 hereof, may not: (1) change the Stated Maturity of the principal of, or any installment of interest on, such Note or alter the optional redemption provisions thereof; (2) reduce the principal amount of, or make-whole amount, if any, or interest on, such Note or extend the time of payments under the Notes; (3) modify the ranking of the Notes in a manner adverse to the Holder; (4) change the place or currency of payment of principal of, or make-whole amount, if any, or interest on, such Note; (5) alter the provisions with respect to the obligation of the Company to make a Change of Control Offer in accordance with Section 4.15 hereof or to make an Asset Sale Offer in accordance with Section 4.12 hereof; (6) impair the right to institute suit for the enforcement of any payment on or with respect to such Note; or (7) reduce the percentage in principal amount of outstanding Notes, the consent of whose Holders is required for modification or amendment of this Indenture or for waiver of compliance with certain provisions of this Indenture or for waiver of certain Defaults or Events of Default. After an amendment, supplement or waiver under this Section 8.02 becomes effective, the Company shall mail to the Holders a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. Upon the request of the Company, accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the receipt by the Trustee of evidence reasonably satisfactory to the Trustee of the consent of the Holders as aforesaid and upon receipt by the Trustee of the documents described in Section 8.06 hereof, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture, in which case the Trustee may in its own discretion, but shall not be obligated to, enter into such supplemental indenture. 57 It shall not be necessary for the consent of the Holders under this Section 8.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. Section 8.03. Compliance with TIA. Every amendment to or supplement of this Indenture or the Notes shall comply with the TIA as then in effect. Section 8.04. Revocation and Effect of Consents. Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. Subject to the following paragraph, any such Holder or subsequent Holder may revoke the consent as to such Holder's Note or portion of such Note by notice to the Trustee or the Company received before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Notes have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. The Company may, but shall not be obligated to, fix a Record Date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a Record Date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those Persons who were Holders at such Record Date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons shall continue to be Holders after such Record Date. No such consent shall be valid or effective for more than 90 days after such Record Date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (1) through (7) of Section 8.02 hereof, in which case, the amendment, supplement or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Note, on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. Section 8.05. Notation on or Exchange of Notes. If an amendment, supplement, or waiver changes the terms of a Note, the Trustee may request the Holder to deliver it to the Trustee. In such case, the Trustee shall place an appropriate notation on the Note about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determine, in exchange for the Note the Company shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. 58 Section 8.06. Trustee To Sign Amendments, etc. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article 8 is authorized or permitted by this Indenture and that such amendment, supplement or waiver constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms (subject to customary exceptions). The Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. ARTICLE 9 DISCHARGE OF INDENTURE; DEFEASANCE Section 9.01. Satisfaction and Discharge of Indenture. This Indenture shall be discharged and shall cease to be of further effect (except those obligations referred to in the penultimate paragraph of this Section 9.01) and the Trustee, on written demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when either: (a) all Notes theretofore authenticated and delivered (other than (i) Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.07 hereof and (ii) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation; or (b) (i) either (A) pursuant to Article 3 hereof, the Company shall have given notice to the Trustee and mailed a notice of redemption to each Holder of the redemption of all of the Notes under arrangements satisfactory to the Trustee for the giving of such notice or (B) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable; (ii) the Company has irrevocably deposited or caused to be deposited with the Trustee in trust for the purpose an amount in U.S. legal tender sufficient to pay and discharge the entire Indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for the principal of, make-whole amount, if any, and interest to the date of such deposit; (iii) no Default or Event of Default with respect to this Indenture or the Notes shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other material instrument to which the Company is a party or by which it is bound (other than a Default or Event of Default resulting from the incurrence of Indebtedness, all or a portion of which will be used to defease the Notes concurrently with such incurrence); (iv) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (v) the Company has delivered to the Trustee (A) irrevocable instructions to apply the deposited money toward payment of the Notes at the Stated Maturity thereof, and (B) an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied 59 with and that such satisfaction and discharge does not result in a default under any material agreement or instrument then known to such counsel which binds or affects the Company. Notwithstanding the foregoing paragraph, the Company's obligations in Article 2 and Sections 4.01, 4.07, 7.07 and 8.06 hereof shall survive until the Notes are no longer outstanding pursuant to the last paragraph of Section 2.08 hereof. After the Notes are no longer outstanding pursuant to Section 2.08 hereof, the Company's obligations under Section 7.07 and 8.06 shall survive. After such delivery or irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Notes and this Indenture except for those surviving obligations specified above. Section 9.02. Legal Defeasance. (a) The Company may, at its option by a Board Resolution of the Board of Directors of the Company, at any time, elect to have this Section 9.02 be applied to all outstanding Notes upon compliance with the conditions set forth in Section 9.04 hereof. (b) Upon the Company's exercise under paragraph (a) hereof of the option applicable to this paragraph (b), the Company shall, subject to the satisfaction of the conditions set forth in Section 9.04 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Notes on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 9.05 hereof and the other Sections of this Indenture referred to in clauses (i) and (ii) below, and to have satisfied all its other obligations under such Notes and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions, which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of outstanding Notes to receive, solely from the trust fund described in Section 9.05 hereof and as more fully set forth in such Section, payments in respect of the principal of, make-whole amount, if any, and interest on such Notes when such payments are due on the Stated Maturity thereof (or, upon redemption, if applicable), (ii) the Company's obligations with respect to such Notes under Article 2 and Section 4.07 hereof, (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (iv) this Article 9. Subject to compliance with this Article 9, the Company may exercise its option under this Section 9.02 notwithstanding the prior exercise of its option under Section 9.03 below with respect to the Notes. Section 9.03. Covenant Defeasance. (a) The Company may, at its option by a Board Resolution of the Board of Directors of the Company, at any time, elect to have this Section 9.03 be applied to all outstanding Notes upon compliance with the conditions set forth in Section 9.04 hereof. (b) Upon the Company's exercise under paragraph (a) hereof of the option applicable to this paragraph (b), the Company shall, subject to the satisfaction of the conditions set forth in Section 9.04 hereof, be released from its obligations under the covenants contained in Sections 4.05, 4.08 and 4.09 through 4.17, inclusive, and Article 5 hereof with respect to the outstanding Notes 60 on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder. For this purpose, such Covenant Defeasance means that, with respect to the outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event or Default under Section 6.01(c) or 6.01(d) hereof, but, except as specified above, the remainder of this Indenture, and such Notes shall be unaffected thereby. In addition, upon the Company's exercise under paragraph (a) hereof of the option applicable to this paragraph (b), subject to the satisfaction of the conditions set forth in Section 9.04 hereof, Sections 6.01(c), 6.01(d) and 6.01(e) shall not constitute Events of Default. Section 9.04. Conditions to Legal Defeasance or Covenant Defeasance. The following shall be the conditions to the application of either Section 9.02 or 9.03 hereof to the outstanding Notes: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit or cause to be deposited with the Trustee, as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders, cash in U.S. dollars, or U.S. Government Obligations, or in the case of Covenant Defeasance, corporate obligations rated at least "A" by Standard & Poor's Ratings Group or at least "A" by Moody's Investors Service, Inc. or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the principal of, make-whole amount, if any, and interest on the outstanding Notes on the Stated Maturity thereof (or upon redemption, if applicable) of such principal, make-whole amount, if any, or installment of interest; (b) no Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit or, insofar as an event of bankruptcy under clauses (f) or (g) of Section 6.01 hereof is concerned, at any time during the period ending on the 91st day after the date of such deposit; (c) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any material agreement or instrument to which the Company is a party or by which it is bound; (d) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel stating that the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or since the Issue Date, there has been a change in applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the outstanding Notes of such series will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; and 61 (e) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of outstanding Notes of such series will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; and (f) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with. Section 9.05. Application of Trust Money. All money and U.S. Government Obligations deposited with the Trustee pursuant to Section 9.01 or 9.04 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent as the Trustee may determine, to the Holders of such Notes, of all sums due and to become due thereon in respect of principal, make-whole amount, if any, and accrued interest, but such money need not be segregated from other funds except to the extent required by law. Anything in this Article 9 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon a written request of the Company in the form of an Officers' Certificate any money or U.S. Government Obligations held by it as provided in Section 9.01 or 9.04 hereof which, in the opinion of a nationally-recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. Section 9.06. Repayment to the Company. Subject to Sections 9.01, 9.,02, 9.03, 9.04, 9.05 and 9.07, the Trustee and the Paying Agent shall promptly pay to the Company upon request any excess U.S. legal tender or U.S. Government Obligations held by them at any time and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal, make-whole amount, if any, or interest that remains unclaimed for two years; provided that the Trustee or such Paying Agent, before being required to make any payment, may at the expense of the Company cause to be published once in a newspaper of general circulation in the City of New York or mail to each Holder entitled to such money notice that such money remains unclaimed, and that after a date specified therein which shall be at least 30 days from the date of such publication or mailing, any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Holders entitled to such money must look to the Company for payment as general creditors unless an applicable law designates another Person. 62 Section 9.07. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 9.01, 9.02 or 9.03 hereof by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article 9 until such time as the Trustee or Paying Agent is permitted to apply all such money and U.S. Government Obligations in accordance with Section 9.01 hereof; provided, however, that if the Company has made any payment of principal of, make-whole amount, if any, or accrued interest on any Notes because of the reinstatement of their obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money and U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 10 [INTENTIONALLY OMITTED] ARTICLE 11 MISCELLANEOUS Section 11.01. TIA Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. Section 11.02. Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Company: HEALTHSOUTH Corporation One HealthSouth Parkway Birmingham, Alabama 35243 Telephone No.: (205) 969-4977 Facsimile No.: (205) 969-4730 Attention: William W. Horton 63 If to the Trustee: The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Telephone No.: (212) 815-5287 Facsimile No.: (212) 815-5915 Attention: Corporate Trust Trustee Administration The Company or the Trustee by written notice to the others may designate additional or different addresses for subsequent notices or communications. Any notice or communication to the Company or the Trustee, shall be deemed to have been given or made when actually received. Any notice or communication mailed to a Holder shall be mailed by first-class mail, postage prepaid, at the address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication to a Holder is mailed in the manner provided above, it shall be deemed duly given, whether or not the addressee receives it. In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice as required by this Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice. Section 11.03. Communications by Holders with Other Holders. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). Section 11.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with. 64 Section 11.05. Statements Required in Certificate and Opinion. Each certificate and opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition and the definitions relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, it or he has made such examination or investigation as is reasonably necessary to enable such person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such covenant or condition has been complied with; provided, however, that with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. Section 11.06. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at meetings of Holders. The Registrar and Paying Agent may make reasonable rules for their functions. Section 11.07. Business Days; Legal Holidays. A "Business Day" is a day that is not a Legal Holiday. A "Legal Holiday" is a Saturday, a Sunday, a federally-recognized holiday or a day on which banking institutions are not required to be open in the State of New York. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 11.08. Governing Law. THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE OR THE NOTES. Section 11.09. Waiver of Trial by Jury. The Company hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Indenture. 65 Section 11.10. Submission to Jurisdiction. The Company hereby consents to the non-exclusive jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder or under the Notes. The Company hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum. Section 11.11. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan, security or debt agreement of the Company or any Subsidiary thereof. No such indenture, loan, security or debt agreement may be used to interpret this Indenture. Section 11.12. No Recourse Against Others. No incorporator, director, officer, employee, stockholder or controlling person, as such, of the Company shall have any liability for any obligations of the Company under the Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Notes. Section 11.13. Successors. All agreements of each of the Company in this Indenture and the Notes shall bind their respective successors. All agreements of the Trustee, any additional trustee and any Paying Agents in this Indenture shall bind its successor. Section 11.14. Multiple Counterparts. The parties may sign multiple counterparts of this Indenture. Each signed counterpart shall be deemed an original, but all of them together represent one and the same agreement. Section 11.15. Table of Contents, Headings, etc. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 11.16. Separability. Each provision of this Indenture shall be considered separable and if for any reason any provision shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby to the extent allowed by law. 66 Section 11.17. Translation. The original and controlling version of this Indenture and any related agreements shall be the English language version. All translations of this Indenture or any agreements related hereto into other languages shall be for the convenience of the parties only, and shall not control the meaning or application of this Indenture. All notices and other communications required or permitted by this Indenture or any other transactional agreement must be in English or accompanied by an English translation, and the interpretation and application of such notices and other communications shall be based solely upon the English language version thereof. 67 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed all as of the date and year first written above. Company: HEALTHSOUTH CORPORATION By: /s/ William T. Owens --------------------------------- Name: William T. Owens Title: Executive Vice President and Chief Financial Officer Trustee: THE BANK OF NEW YORK, as Trustee By: /s/ Robert A. Massimillo ------------------------------------- Name: Robert A. Massimillo Title: Assistant Vice President EXHIBIT A [FORM OF SERIES A NOTE] CUSIP No.: HEALTHSOUTH CORPORATION 8 1/2% SENIOR NOTE DUE 2008 No. $ HEALTHSOUTH CORPORATION, a corporation incorporated in Delaware (the "Company," which term includes any successor entity), for value received promises to pay to or registered assigns, the principal sum of $ on February 1, 2008. Interest Payment Dates: February 1 and August 1, commencing August 1, 2001. Record Dates: January 15 and July 15. Reference is made to the further provisions of this Note contained herein and the Indenture (as defined), which will for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized directors, officers or other authorized signatories. HEALTHSOUTH CORPORATION By: --------------------------------------- Name: Title: By: --------------------------------------- Name: Title: CERTIFICATE OF AUTHENTICATION Date: February 1, 2001 This is one of the 8 1/2% Senior Notes due 2008 referred to in the within-mentioned Indenture. THE BANK OF NEW YORK, as Trustee By: --------------------------------------- Authorized Signatory A-2 (REVERSE OF SECURITY) 8 1/2% SENIOR NOTE DUE 2008 1. Interest. HEALTHSOUTH CORPORATION, a corporation incorporated in Delaware (the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. Interest on the Notes will accrue from the most recent date on which interest has been paid or duly provided for, or if no interest has been paid, from the date of the original issuance of the Notes. The Company will pay interest semi-annually in arrears on each Interest Payment Date, commencing August 1, 2001. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Company shall pay interest on overdue principal and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful from time to time on demand at the rate borne by the Notes. 2. Method of Payment. The Company shall pay interest on the Notes (except defaulted interest) to the Persons who are the registered Holders at the close of business on January 15 or July 15 immediately preceding the Interest Payment Date (whether or not such day is a Business Day) even if the Notes are canceled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Notes to a Paying Agent to collect principal payments. Payments of principal and make-whole amount, if any, will be made (on presentation of such Notes if in certificated form) in U.S. legal tender; provided, however, that the Company may pay principal, make-whole amount, if any, and interest by check payable in U.S. legal tender. The Company may deliver any such interest payment by check mailed to the address of the Person entitled thereto as such address will appear on the security register. 3. Paying Agents and Registrar. Initially, The Bank of New York, a banking organization organized under the laws of New York (the "Trustee"), will act as Paying Agent and the Trustee will act as Registrar. The Company may change any Paying Agents, Registrar or co-Registrar without notice to the Holders. Neither the Company nor any of its Subsidiaries or Affiliates may act as Paying Agent but may act as Registrar or co-Registrar. 4. Indenture. The Company issued this Note under an Indenture, dated as of February 1, 2001 (the "Indenture"), by and among the Company and the Trustee. This Note is one of a duly authorized issue of Initial Notes of the Company designated as its 8 1/2% Senior Notes due 2008 (the "Notes"). The Notes include the Initial Notes and the Exchange Notes issued pursuant to the Indenture. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the TIA for a statement of them. The Notes are general unsecured obligations of the Company. A-3 5. [Intentionally Omitted.] 6. Redemption. The Notes will be redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes, plus accrued interest thereon to the date of redemption and (ii) as determined by a Quotation Agent (as defined below), the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus accrued interest on the Notes to the date of redemption. If a redemption date does not fall on an interest payment date, then, with respect to the interest payment immediately succeeding the redemption date, only the unaccrued portion of such interest payment as of the redemption date shall be included in any calculation pursuant to clause (ii) above. Any amount payable in excess of 100% of the principal amount of the Notes (other than accrued interest thereon) shall be referred to herein as the "make-whole amount." "Adjusted Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of the principal amount) equal to the Comparable Treasury Price for such redemption date, plus 0.50%. "Comparable Treasury Issue" means the United States Treasury security selected by a Quotation Agent as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes. "Comparable Treasury Price" means, with respect to any redemption date, (i) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (ii) if the Trustee obtains three or fewer such Reference Treasury Dealer Quotations, the average of all such quotations. "Quotation Agent" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company. "Reference Treasury Dealer" means (i) each of UBS Warburg LLC, Deutsche Banc Alex. Brown Inc. and Chase Securities Inc. and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York, New York (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer; and (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer Quotation" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. A-4 If less than all of the Notes are to be redeemed at any time, selection of the Notes to be redeemed will be made by the Trustee from among the outstanding Notes on a pro rata basis, by lot or by any other method permitted in the Indenture. On and after the redemption date, interest will cease to accrue on the Notes or portions thereof called for redemption. The Notes will not be entitled to any sinking fund. 7. Notice of Redemption. Notice of redemption under paragraph 6 of this Note will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at such Holder's registered address. Except as set forth in the Indenture, if monies for the redemption of the Notes called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date, then the Notes called for redemption will cease to bear interest from and after such Redemption Date and the only right of the Holders of such Notes will be to receive payment of the Redemption Price plus interest accrued through the Redemption Date, if any. 8. Offers to Purchase. The Indenture provides that, after certain Asset Sales (as defined in the Indenture) and upon the occurrence of a Change of Control (as defined in the Indenture), and subject to further limitations contained therein, the Company will make an offer to purchase certain amounts of the Notes in accordance with the procedures set forth in the Indenture. 9. Registration Rights. Pursuant to the Registration Rights Agreement by and between the Company and the Initial Purchasers, the Company will be obligated to consummate an exchange offer pursuant to which the Holder of this Note shall have the right to exchange this Note for the Company's Series B 8 1/2% Senior Notes due 2008 (the "Exchange Notes"), at such time as the Exchange Notes shall have been registered under the Securities Act, in like principal amount and having terms identical in all material respects to the Initial Notes. The Holders of the Initial Notes shall be entitled to receive certain Additional Interest payments in the event such exchange offer is not consummated and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement. 10. Denominations; Transfer; Exchange. The Notes are in definitive, fully registered form, without coupons, in minimum denominations of [$1,000] [$250,000] and in integral multiples [of $1,000 in excess] thereof. A Holder shall register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Notes or portions thereof selected for redemption. 11. Persons Deemed Owners. The registered Holder of a Note shall be treated as the owner of such Note for all purposes. 12. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company. After that, Holders entitled to money must look to the Company for payment as general creditors unless an "abandoned property" law designates another person. A-5 13. Legal Defeasance and Covenant Defeasance. If the Company at any time deposits with the Trustee U.S. legal tender or other obligations of the types set forth in the Indenture sufficient to pay the principal of and interest on the Notes to Stated Maturity or redemption, if applicable, and complies with the other provisions of the Indenture relating to Legal Defeasance or Covenant Defeasance, the Company will be discharged from certain provisions of the Indenture and the Notes (including certain covenants, but excluding its obligation to pay the principal of and interest on the Notes). 14. Amendments, Supplements, and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate outstanding principal amounts of the Notes, and any existing Default or Event of Default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency or make any other change that does not adversely affect in any material respect the rights of any Holder of a Note. 15. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Company and its Subsidiaries to, among other things, make payments in respect of its Capital Stock, incur additional Indebtedness, make certain investments, sell assets, enter into transactions with Affiliates, create Liens, merge or consolidate with or into any other Person or sell, lease, convey or otherwise dispose of all or substantially all of its assets or create dividend or other payment restrictions affecting Subsidiaries of the Company. Such limitations are subject to a number of important qualifications and exceptions. The Company must report on an annual basis to the Trustee on compliance with such limitations. 16. Successor. When a Successor assumes, in accordance with the Indenture, all the obligations of its predecessor under the Notes and the Indenture, and immediately before and thereafter no Default exists and certain other conditions are satisfied, the predecessor entity will be released from those obligations. 17. Defaults and Remedies. Events of Default are set forth in the Indenture. If an Event of Default (other than an Event of Default with respect to the Company pursuant to Section 6.01(f) or 6.01(g) of the Indenture) shall have occurred and be continuing, then the Trustee by written notice to the Company or the Holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare to be immediately due and payable the entire principal amount of all the Notes then outstanding plus accrued interest to the date of acceleration; provided, however, that after such acceleration but before a judgment or decree based on such acceleration is obtained by the Trustee, the Holders of a majority in aggregate principal amount of the outstanding Notes by written notice to the Company and the Trustee may rescind and annul such acceleration and its consequences if all existing Events of Default, other than the nonpayment of principal, make-whole amount, if any, or interest that has become due solely because of the acceleration, have been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. In case an Event of Default with respect to the Company specified in Section 6.01(f) or 6.01(g) of the Indenture occurs, such principal amount, together with make-whole amount, if any, and interest with respect to all of the Notes, shall be due and payable immediately without any declaration or other act on the part of the Trustee or the Holders of the Notes. A-6 18. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 19. No Recourse Against Others. No incorporator, director, officer, employee, stockholder or controlling person, as such, of the Company shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Notes. 20. Authentication. This Note shall not be valid until the Trustee or Authenticating Agent manually signs the certificate of authentication on this Note. 21. Multiple Counterparts. The parties may sign multiple counterparts of this Note. Each signed counterpart shall be deemed an original but all of them together represent one and the same Note. 22. Governing Law. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES TO THE INDENTURE HAS AGREED TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE. 23. Abbreviations and Defined Terms. Customary abbreviations may be used in the name of a Holder of a Note or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 24. CUSIP Numbers. The Company has caused CUSIP numbers to be printed on the Notes as a convenience to the Holders. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identification numbers printed hereon. 25. Indenture. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Indenture, as the same may be amended from time to time. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture which has the text of this Note in larger type. Requests may be made to: HEALTHSOUTH Corporation, One HealthSouth Parkway, Birmingham, Alabama 35243, Telephone No. (205) 969-4977, Facsimile No. (205) 969-4730, Attention: William W. Horton. A-7 ASSIGNMENT FORM If you the Holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint _______________________________________________________, agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: Signed: ----------------------------- ----------------------------- (Sign exactly as your name appears on the other side of this Note) Medallion Guarantee: ----------------------------- A-8 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Note purchased by the Company pursuant to Section 4.12 or Section 4.15 of the Indenture, check the appropriate box: Section 4.12 |_| Section 4.15 |_| If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.12 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $ ------------------------ Date: - ----------------------------- -------------------------------------- NOTICE: The signature on this assignment must correspond with the name as it appears upon the face of the within Note in every particular without alteration or enlargement or any change whatsoever and be guaranteed by the endorser's bank or broker. Medallion Guarantee: ----------------------------- A-9 EXHIBIT B [FORM OF SERIES B NOTE] CUSIP No.: HEALTHSOUTH CORPORATION 8 1/2% SENIOR NOTE DUE 2008 No. $ HEALTHSOUTH CORPORATION, a corporation incorporated in Delaware (the "Company," which term includes any successor entity), for value received promises to pay to or registered assigns, the principal sum of $ on February 1, 2008. Interest Payment Dates: February 1 and August 1, commencing August 1, 2001. Record Dates: January 15 and July 15. Reference is made to the further provisions of this Note contained herein and the Indenture (as defined), which will for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized directors, officers or other authorized signatories. HEALTHSOUTH CORPORATION By: ---------------------------- Name: Title: By: ---------------------------- Name: Title: CERTIFICATE OF AUTHENTICATION Date: This is one of the 8 1/2% Senior Notes due 2008 referred to in the within-mentioned Indenture. THE BANK OF NEW YORK, as Trustee By: ---------------------- Authorized Signatory B-2 (REVERSE OF SECURITY) 8 1/2% SENIOR NOTE DUE 2008 1 Interest. HEALTHSOUTH CORPORATION, a corporation incorporated in Delaware (the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. Interest on the Notes will accrue from the most recent date on which interest has been paid or duly provided for, or if no interest has been paid, from the date of the original issuance of the Notes. The Company will pay interest semi-annually in arrears on each Interest Payment Date, commencing August 1, 2001. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Company shall pay interest on overdue principal and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful from time to time on demand at the rate borne by the Notes. 2. Method of Payment. The Company shall pay interest on the Notes (except defaulted interest) to the Persons who are the registered Holders at the close of business on January 15 or July 15 immediately preceding the Interest Payment Date (whether or not such day is a Business Day) even if the Notes are canceled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Notes to a Paying Agent to collect principal payments. Payments of principal and make-whole amount, if any, will be made (on presentation of such Notes if in certificated form) in U.S. legal tender; provided, however, that the Company may pay principal, make-whole amount, if any, and interest by check payable in U.S. legal tender. The Company may deliver any such interest payment by check mailed to the address of the Person entitled thereto as such address will appear on the security register. 3. Paying Agents and Registrar. Initially, The Bank of New York, a banking organization organized under the laws of New York (the "Trustee"), will act as Paying Agent and the Trustee will act as Registrar. The Company may change any Paying Agents, Registrar or co-Registrar without notice to the Holders. Neither the Company nor any of its Subsidiaries or Affiliates may act as Paying Agent but may act as Registrar or co-Registrar. 4. Indenture. The Company issued this Note under an Indenture, dated as of February 1, 2001 (the "Indenture"), by and among the Company and the Trustee. This Note is one of a duly authorized issue of Exchange Notes of the Company designated as its 8 1/2% Senior Notes due 2008 (the "Notes"). The Notes include the Initial Notes and the Exchange Notes issued pursuant to the Indenture. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the TIA for a statement of them. The Notes are general unsecured obligations of the Company. 5. [Intentionally Omitted.] B-3 6. Redemption. The Notes will be redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes, plus accrued interest thereon to the date of redemption and (ii) as determined by a Quotation Agent (as defined below), the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus accrued interest on the Notes to the date of redemption. If a redemption date does not fall on an interest payment date, then, with respect to the interest payment immediately succeeding the redemption date, only the unaccrued portion of such interest payment as of the redemption date shall be included in any calculation pursuant to clause (ii) above. Any amount payable in excess of 100% of the principal amount of the Notes (other than accrued interest thereon) shall be referred to herein as the "make-whole amount." "Adjusted Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of the principal amount) equal to the Comparable Treasury Price for such redemption date, plus 0.50%. "Comparable Treasury Issue" means the United States Treasury security selected by a Quotation Agent as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes. "Comparable Treasury Price" means, with respect to any redemption date, (i) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (ii) if the Trustee obtains three or fewer such Reference Treasury Dealer Quotations, the average of all such quotations. "Quotation Agent" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company. "Reference Treasury Dealer" means (i) each of UBS Warburg LLC, Deutsche Banc Alex. Brown Inc. and Chase Securities Inc. and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York, New York (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer; and (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer Quotation" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. If less than all of the Notes are to be redeemed at any time, selection of the Notes to be redeemed will be made by the Trustee from among the outstanding Notes on a pro rata basis, by lot or B-4 by any other method permitted in the Indenture. On and after the redemption date, interest will cease to accrue on the Notes or portions thereof called for redemption. The Notes will not be entitled to any sinking fund. 7. Notice of Redemption. Notice of redemption under paragraph 6 of this Note will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at such Holder's registered address. Except as set forth in the Indenture, if monies for the redemption of the Notes called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date, then the Notes called for redemption will cease to bear interest from and after such Redemption Date and the only right of the Holders of such Notes will be to receive payment of the Redemption Price plus interest accrued through the Redemption Date, if any. 8. Offers to Purchase. The Indenture provides that, after certain Asset Sales (as defined in the Indenture) and upon the occurrence of a Change of Control (as defined in the Indenture), and subject to further limitations contained therein, the Company will make an offer to purchase certain amounts of the Notes in accordance with the procedures set forth in the Indenture. 9. Denominations; Transfer; Exchange. The Notes are in definitive, fully registered form, without coupons, in minimum denominations of [$1,000] [$250,000] and in integral multiples [of $1,000 in excess] thereof. A Holder shall register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Notes or portions thereof selected for redemption. 10. Persons Deemed Owners. The registered Holder of a Note shall be treated as the owner of such Note for all purposes. 11. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company. After that, Holders entitled to money must look to the Company for payment as general creditors unless an "abandoned property" law designates another person. 12. Legal Defeasance and Covenant Defeasance. If the Company at any time deposits with the Trustee U.S. legal tender or other obligations of the types set forth in the Indenture sufficient to pay the principal of and interest on the Notes to Stated Maturity or redemption, if applicable, and complies with the other provisions of the Indenture relating to Legal Defeasance or Covenant Defeasance, the Company will be discharged from certain provisions of the Indenture and the Notes (including certain covenants, but excluding its obligation to pay the principal of and interest on the Notes). 13. Amendments, Supplements, and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the written consent of the B-5 Holders of at least a majority in aggregate outstanding principal amounts of the Notes, and any existing Default or Event of Default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency or make any other change that does not adversely affect in any material respect the rights of any Holder of a Note. 14. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Company and its Subsidiaries to, among other things, make payments in respect of its Capital Stock, incur additional Indebtedness, make certain investments, sell assets, enter into transactions with Affiliates, create Liens, merge or consolidate with or into any other Person or sell, lease, convey or otherwise dispose of all or substantially all of its assets or create dividend or other payment restrictions affecting Subsidiaries of the Company. Such limitations are subject to a number of important qualifications and exceptions. The Company must report on an annual basis to the Trustee on compliance with such limitations. 15. Successor. When a Successor assumes, in accordance with the Indenture, all the obligations of its predecessor under the Notes and the Indenture, and immediately before and thereafter no Default exists and certain other conditions are satisfied, the predecessor entity will be released from those obligations. 16. Defaults and Remedies. Events of Default are set forth in the Indenture. If an Event of Default (other than an Event of Default with respect to the Company pursuant to Section 6.01(f) or 6.01(g) of the Indenture) shall have occurred and be continuing, then the Trustee by written notice to the Company or the Holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare to be immediately due and payable the entire principal amount of all the Notes then outstanding plus accrued interest to the date of acceleration; provided, however, that after such acceleration but before a judgment or decree based on such acceleration is obtained by the Trustee, the Holders of a majority in aggregate principal amount of the outstanding Notes by written notice to the Company and the Trustee may by written notice to the Company and the Trustee rescind and annul such acceleration and its consequences if all existing Events of Default, other than the nonpayment of principal, make-whole amount, if any, or interest that has become due solely because of the acceleration, have been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. In case an Event of Default with respect to the Company specified in Section 6.01(f) or 6.01(g) of the Indenture occurs, such principal amount, together with make-whole amount, if any, and interest with respect to all of the Notes, shall be due and payable immediately without any declaration or other act on the part of the Trustee or the Holders of the Notes. 17. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 18. No Recourse Against Others. No incorporator, director, officer, employee, stockholder or controlling person, as such, of the Company shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Notes. B-6 19. Authentication. This Note shall not be valid until the Trustee or Authenticating Agent manually signs the certificate of authentication on this Note. 20. Multiple Counterparts. The parties may sign multiple counterparts of this Note. Each signed counterpart shall be deemed an original but all of them together represent one and the same Note. 21. Governing Law. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES TO THE INDENTURE HAS AGREED TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE. 22. Abbreviations and Defined Terms. Customary abbreviations may be used in the name of a Holder of a Note or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 23. CUSIP Numbers. The Company has caused CUSIP numbers to be printed on the Notes as a convenience to the Holders. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identification numbers printed hereon. 24. Indenture. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Indenture, as the same may be amended from time to time. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture which has the text of this Note in larger type. Requests may be made to: HEALTHSOUTH Corporation, One HealthSouth Parkway, Birmingham, Alabama 35243, Telephone No. (205) 969-4977, Facsimile No. (205) 969-4730, Attention: William W. Horton. B-7 ASSIGNMENT FORM If you the Holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint________________________________________________________, agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: Signed: ----------------------------- ---------------------------- (Sign exactly as your name appears on the other side of this Note) Medallion Guarantee: ---------------------------- B-8 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Note purchased by the Company pursuant to Section 4.12 or Section 4.15 of the Indenture, check the appropriate box: Section 4.12 |_| Section 4.15 |_| If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.12 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $ ---------------------- Date: ------------------------- --------------------------- NOTICE: The signature on this assignment must correspond with the name as it appears upon the face of the within Note in every particular without alteration or enlargement or any change whatsoever and be guaranteed by the endorser's bank or broker. Medallion Guarantee: ------------------------ B-9 EXHIBIT C [FORM OF RULE 144A TRANSFER CERTIFICATE] [Date] [Name of Registrar] [Address of Registrar] Ladies and Gentlemen: Reference is hereby made to the Indenture, dated as of February 1, 2001, between HEALTHSOUTH Corporation, as Issuer (the "Company"), and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the respective meanings given to such terms in the Indenture or Rule 144A, as the case may be. [Insert the following paragraph for any transfer made pursuant to Section 2.16(b)(vi): This certificate relates to US$___________ principal amount of Notes which are held in the form of a beneficial interest in the Restricted Global Note (CUSIP No. ______________ ) with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest for one or more Certificated Notes to be registered in the name of [insert name of transferee] (the "Transferee").] [Insert the following paragraph for any transfer made pursuant to Section 2.16(b)(v): This certificate relates to US$___________ principal amount of Notes which are held in the form of a beneficial interest in the Regulation S Global Note (CUSIP No. ______________ ) with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest for a beneficial interest in the Restricted Global Note to be registered in the name of [insert name of transferee] (the "Transferee").] [Insert the following paragraph for any transfer made pursuant to Section 2.16(c)(iii): This certificate relates to US$__________ principal amount of Notes which are held in the form of one or more Certificated Notes registered in the name of [insert name of transferor (the "Transferor"). The Transferor has requested a transfer of such Certificated Notes for a beneficial interest in the Restricted Global Note (CUSIP No. _____________ ) to be held [with the Depositary in the name of [insert name of Transferee] (the "Transferee").] In connection with such request for transfer and in respect of such Notes, the Transferor does hereby certify that such transfer is being effected in accordance with the transfer restrictions set forth in the Indenture and the Notes and pursuant to and in accordance with Rule 144A, and accordingly the Transferor does hereby certify: (1) the Transferee is a person that the Transferor and any person acting on behalf of the Transferor reasonably believe is purchasing such Notes for its own account, or for one or more accounts with respect to which the Transferee exercises sole investment C-1 discretion, and the Transferee and each such account is a "qualified institutional buyer" within the meaning of Rule 144A; (2) the Transferor and any person acting on its behalf has taken reasonable steps to ensure that the Transferee is aware that the Transferor may be relying on Rule 144A in connection with the transaction; and (3) the transaction satisfies all other requirements of Rule 144A and of any applicable Notes laws of any state of the United States or any other jurisdiction. You and the Company are entitled to rely upon this certificate and are irrevocably authorized to produce this certificate or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. [Name of Transferor] By: ------------------------ Name: Title: C-2 EXHIBIT D [FORM OF REGULATION S TRANSFER CERTIFICATE] [date] [Name of Registrar] [Address of Registrar] Ladies and Gentlemen: Reference is hereby made to the Indenture, dated as of February 1, 2001, between HEALTHSOUTH Corporation, as Issuer (the "Company"), and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the respective meanings given to such terms in the Indenture or Regulation S, as the case may be. [Insert the following paragraph for any transfer made pursuant to Section 2.16(b)(iii) or 2.16(b)(iv): This certificate relates to US$__________ principal amount of Notes which are held in the form of a beneficial interest in the Restricted Global Note (CUSIP No.__________) with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest for a beneficial interest in the Regulation S Global Note (CUSIP No.__________) to be held [[include the following for any transfer made pursuant to Section 2.16(b)(iii): with [Euroclear] [Clearstream] (Common Code No.__________)] through the Depositary in the name of [insert name of transferee] (the "Transferee").] [Insert the following paragraph for any transfer made pursuant to Section 2.16(c)(iii): This certificate relates to US$__________ principal amount of Notes which are held in the form of one or more Certificated Notes registered in the name of [insert name of transferor) (the "Transferor"). The Transferor has requested a transfer of such Certificated Notes for a beneficial interest in the Regulation S Global Note (CUSIP No.__________) to be held [with [Euroclear] [Clearstream]] through the Depositary in the name of [insert name of transferee] (the "Transferee").] In connection with such request for transfer and in respect of such Notes, the Transferor does hereby certify that such transfer is being effected in accordance with the transfer restrictions set forth in the Indenture and the Notes and pursuant to and in accordance with Regulation S, and accordingly the Transferor does hereby certify: (1) the offer of such Notes was not made to a person in the United States; (2) either (A) at the time the buy order for such Notes was originated, the Transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed that the Transferee was outside the United States or (B) the transaction was executed in, or through the facilities of, a designated offshore securities market and neither the Transferor nor any person acting on its behalf knew that the transaction was pre-arranged with a buyer in the United States, (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or 904(b) of the Securities Act, as applicable, and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. [Add the following for transfers made during the Regulation S Restricted Period: In addition, (A) if the provisions of Rule 903(c)(3) or Rule 904(c)(1) of the Securities Act are applicable to the transaction, the Transferor hereby certifies that the transfer is being made in accordance with the requirements of Rule 903(c)(3) or Rule 904(c)(1), as the case may be, and (B) upon completion of the transaction, the Transferee will hold the transferred beneficial interest through Euroclear or Clearstream.] You and the Company are entitled to rely upon this certificate and are irrevocably authorized to produce this certificate or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. [Name of Transferor] By: ------------------------------------- Name: Title: D-2 EXHIBIT E [FORM OF RULE 144 TRANSFER CERTIFICATE] [date] [Name of Registrar] [Address of Registrar] Ladies and Gentlemen: Reference is hereby made to the Indenture, dated as of February 1, 2001, between HEALTHSOUTH Corporation, as Issuer (the "Company"), and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the respective meanings given to such terms in the Indenture or Rule 144, as the case may be. [Insert the following paragraph for any transfer made pursuant to Section 2.16(b)(iii): This certificate relates to US$__________ principal amount of Notes which are held in the form of a beneficial interest in the Restricted Global Note (CUSIP No.__________) with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest for a beneficial interest in the Regulation S Global Note (CUSIP No.__________) to be held with the Depositary in the name of [insert name of transferee] (the "Transferee").] [Insert the following paragraph for any transfer made pursuant to Section 2.16(b)(vi): This certificate relates to US$__________ principal amount of Notes which are held in the form of a beneficial interest in the Restricted Global Note (CUSIP No.__________) with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest for one or more Certificated Notes to be registered in the name of [insert name of transferee] (the "Transferee").] [Insert the following paragraph for any transfer made pursuant to Section 2.16(b)(vii): This certificate relates to US$__________ principal amount of Notes which are held in the form of a beneficial interest in the Regulation S Global Note (CUSIP No.__________) with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest for one or more Certificated Notes to be registered in the name of [insert name of transferee] (the "Transferee").] In connection with such request for transfer and in respect of such Notes, the Transferor does hereby certify that such transfer has been effected in accordance with the transfer restrictions set forth in the Indenture and the Notes, and that the Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act. You and the Company are entitled to rely upon this certificate and are irrevocably authorized to produce this certificate or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby, [Name of Transferor] By: --------------------------------- Name: Title: E-2 EXHIBIT F [FORM OF ACCREDITED INVESTOR TRANSFER CERTIFICATE] [date] [Name of Registrar] [Address of Registrar] Ladies and Gentlemen: Reference is hereby made to the Indenture, dated as of February 1, 2001, between HEALTHSOUTH Corporation, as Issuer (the "Company"), and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the respective meanings given to such terms in the Indenture or Regulation D, as the case may be. [Insert the following paragraph for any transfer made pursuant to Section 2.16(b)(vi): This certificate relates to US$__________ principal amount of Notes which are held in the form of a beneficial interest in the Restricted Global Note (CUSIP No.__________) with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest for a beneficial interest in one or more Certificated Notes (CUSIP No.__________) to be held with the Depositary in the name of [insert name of transferee] (the "Transferee"]. [Insert the following paragraph for any transfer made pursuant to Section 2.16(b)(vii) of the Indenture: This certificate relates to US$__________ principal amount of Notes which are held in the form of a beneficial interest in the Regulation S Global Note (CUSIP No.__________) with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest for one or more Certificated Notes to be registered in the name of [insert name of transferee] (the "Transferee").] [Insert the following paragraph for any transfer made pursuant to Section 2.16(c)(i) of the Indenture: This certificate relates to US$__________ principal amount of Notes which are held in the form of one or more Certificated Notes registered in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such Certificated Notes for one or more Certificated Notes to be registered in the name of [insert name of transferee] (the "Transferee").] The undersigned represents and warrants to you that: (1) We are an institutional "accredited investor" (as defined in Rule 501(a)(1). (2), (3) or (7) of Regulation D under the Securities Act of 1933, as amended (the "Securities Act")) purchasing for our own account or for the account of such an institutional "accredited investor", and we are acquiring the Notes not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or other applicable securities law and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes and invest in or purchase securities similar to the Notes in the normal course of our business. We and any accounts for which we are acting are each able to bear the economic risk of our investment. (2) We understand and acknowledge that the Notes have not been registered under the Securities Act or any other applicable securities law and unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Notes to offer, sell or otherwise transfer such Notes prior to the date which is two (2) years after the later of the date of original issue and the last date on which the Company or any Affiliate of the Company was the owner of such Notes (or any predecessor thereto) (such later date, the "Resale Restriction Termination Date") only (a) to a Person we reasonably believe is a qualified institutional buyer (as defined in Rule 144A under the Securities Act) that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the resale, pledge or transfer is being made in a transaction meeting the requirements of Rule 144A under the securities act, (b) in a transaction meeting the requirements of Rule 144 under the Securities Act, (c) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 of Regulation S under the Securities Act or (d) in accordance with another exemption from the registration requirements of the Securities Act, provided that in the case of a transfer, pledge or sale pursuant to this clause (d) such transfer is subject to the receipt by the Registrar (and the Company, if it so requests) of a certification of the transferor and an Opinion of Counsel t the effect that such transfer is in compliance with the Securities Act, (e) to the Company or its Affiliates or (f) pursuant to an effective registration statement under the Securities Act and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction and the Indenture governing the notes. Any transfer of Notes pursuant to clause (d) above to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2) (3) or (7) of Regulation D under the Securities Act that is purchasing the Notes for its own account or for the account of such an institutional "accredited investor," shall involve a minimum purchase price of US$250,000 for such Notes, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Notes is proposed to an institutional "accredited investor" prior to the Resale Restriction Termination Date, the transferor shall deliver to the Company and the Trustee a letter from the transferee substantially in the form of this letter, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of Rule 501 (a)(l), (2), (3) or (7) of Regulation D under the Securities Act and that it is acquiring such Notes for investment purposes and not for distribution in violation of the Securities Act. We acknowledge that the Company and the Trustee reserve the right prior to any offer, sale or other transfer of the Notes pursuant to clause (c) or (d) above prior to the Resale Restriction Termination Date to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to the Company and the Trustee. (3) We are acquiring the Notes purchased by us for our own account or for one or more accounts as to each of which we exercise sole investment discretion. F-2 You and the Company are entitled to rely upon this certificate and are irrevocably authorized to produce this certificate or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. [Name of Transferee] By: ----------------------------------- Name: Title: F-3 EX-4.7 3 0003.txt EXHIBIT (4)-7 EXHIBIT (4)-7 ================================================================================ REGISTRATION RIGHTS AGREEMENT Dated as of February 1, 2001 By and Among HEALTHSOUTH CORPORATION, as Issuer, and UBS WARBURG LLC, DEUTSCHE BANC ALEX. BROWN INC., CHASE SECURITIES INC., FIRST UNION SECURITIES, INC., and SCOTIA CAPITAL (USA) INC. as Initial Purchasers 8 1/2% Senior Notes due 2008 ================================================================================ TABLE OF CONTENTS Page ---- 1. Definitions...........................................................1 2. Exchange Offer........................................................4 3. Shelf Registration....................................................7 4. Additional Interest...................................................8 5. Registration Procedures..............................................10 6. Registration Expenses................................................18 7. Indemnification......................................................18 8. Rules 144 and 144A...................................................21 9. Underwritten Registrations...........................................22 10. Miscellaneous........................................................22 (a) No Inconsistent Agreements..................................22 (b) Adjustments Affecting Registrable Notes.....................22 (c) Amendments and Waivers......................................22 (d) Notices.....................................................23 (e) Successors and Assigns......................................23 (f) Counterparts................................................24 (g) Headings................................................... 24 (H) GOVERNING LAW...............................................24 (i) Severability................................................24 (j) Securities Held by the Issuer or Its Affiliates.............24 (k) Third Party Beneficiaries...................................24 (l) Attorneys' Fees.............................................24 (m) Entire Agreement............................................24 -i- REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is dated as of February 1, 2001, by and among HEALTHSOUTH Corporation, a Delaware corporation (the "Issuer"), on the one hand, and UBS WARBURG LLC, DEUTSCHE BANC ALEX. BROWN INC., CHASE SECURITIES INC., FIRST UNION SECURITIES, INC. and SCOTIA CAPITAL (USA) INC. (collectively, the "Initial Purchasers"), on the other hand. This Agreement is entered into in connection with the Purchase Agreement, dated as of January 25, 2001, among the Issuer and the Initial Purchasers (the "Purchase Agreement"), relating to the $375,000,000 aggregate principal amount of the Issuer's 8 1/2% Senior Notes due 2008 (the "Notes"). The execution and delivery of this Agreement is a condition to the Initial Purchasers' obligation to purchase the Notes under the Purchase Agreement. The parties hereby agree as follows: Section 1. Definitions As used in this Agreement, the following terms shall have the following meanings: "Additional Interest" shall have the meaning set forth in Section 4(a) hereof. "Advice" shall have the meaning set forth in the final paragraph of Section 5 hereof. "Agreement" shall have the meaning set forth in the introductory paragraph hereto. "Applicable Period" shall have the meaning set forth in Section 2(b) hereof. "Business Day" shall mean a day that is not a Legal Holiday. "Commission" shall mean the Securities and Exchange Commission. "day" means a calendar day. "Effectiveness Period" shall have the meaning set forth in the second paragraph of Section 3(a) hereof. "Event Date" shall have the meaning set forth in Section 4(b) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Notes" shall have the meaning set forth in Section 2(a) hereof. "Exchange Offer" shall have the meaning set forth in Section 2(a) hereof. "Exchange Offer Registration Statement" shall have the meaning set forth in Section 2(a) hereof. "Holder" shall mean any holder of a Registrable Note or Registrable Notes. "Indemnified Person" shall have the meaning set forth in Section 7(c) hereof. "Indemnifying Person" shall have the meaning set forth in Section 7(c) hereof. "Indenture" shall mean the Indenture, dated as of February 1, 2001, by and among the Issuer and The Bank of New York, as trustee, pursuant to which the Notes are being issued, as amended or supplemented from time to time in accordance with the terms thereof. "Initial Purchasers" shall have the meaning set forth in the preamble hereof. "Initial Shelf Registration" shall have the meaning set forth in Section 3(a) hereof. "Inspectors" shall have the meaning set forth in Section 5(n) hereof. "Issue Date" shall mean February 1, 2001, the date of original issuance of the Notes. "Issuer" shall have the meaning set forth in the introductory paragraph hereto and shall also include the Issuer's permitted successors and assigns. "Legal Holiday" shall mean a Saturday, a Sunday, a federally recognized holiday or a day on which banking institutions are not required to be open in the State of New York. "NASD" shall have the meaning set forth in Section 5(s) hereof. "Notes" shall have the meaning set forth in the second introductory paragraph hereto. "Participant" shall have the meaning set forth in Section 7(a) hereof. "Participating Broker-Dealer" shall have the meaning set forth in Section 2(b) hereof. "Person" shall mean an individual, trustee, corporation, partnership, joint stock company, trust, unincorporated association, union, business association, firm, government or agency or political subdivision thereof or other legal entity. "Private Exchange" shall have the meaning set forth in Section 2(b) hereof. "Private Exchange Notes" shall have the meaning set forth in Section 2(b) hereof. "Prospectus" shall mean the prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in -2- reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Purchase Agreement" shall have the meaning set forth in the introductory paragraphs hereof. "Records" shall have the meaning set forth in Section 5(n) hereof. "Registrable Notes" shall mean each Note upon its original issuance and at all times subsequent thereto, each Exchange Note as to which Section 2(c)(iv) hereof is applicable upon original issuance and at all times subsequent thereto and each Private Exchange Note upon original issuance thereof and at all times subsequent thereto, until (i) a Registration Statement (other than, with respect to any Exchange Note as to which Section 2(c)(iv) hereof is applicable, the Exchange Offer Registration Statement) covering such Note, Exchange Note or Private Exchange Note has been declared effective by the Commission and such Note, Exchange Note or such Private Exchange Note, as the case may be, has been disposed of in accordance with such effective Registration Statement, (ii) such Note has been exchanged pursuant to the Exchange Offer for one or more Exchange Notes that may be resold without restriction under state and federal securities laws, (iii) such Note, Exchange Note or Private Exchange Note, as the case may be, ceases to be outstanding for purposes of the Indenture or (iv) the date on which any such Note, Exchange Note or Private Exchange Note is distributed to the public pursuant to Rule 144 or is saleable pursuant to Rule 144(k) under the Securities Act. "Registration Default" shall have the meaning set forth in Section 4(a) hereof. "Registration Statement" shall mean any appropriate registration statement of the Issuer covering any of the Registrable Notes pursuant to the provisions of this Agreement, including, but not limited to, the Exchange Offer Registration Statement, filed with the Commission under the Securities Act, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Requesting Participating Broker-Dealer" shall have the meaning set forth in Section 2(b) hereof. "Rule 144" shall mean Rule 144 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the Commission providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. -3- "Rule 144A" shall mean Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the Commission. "Rule 415" shall mean Rule 415 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Shelf Filing Event" shall have the meaning set forth in Section 2(c) hereof. "Shelf Registration" shall have the meaning set forth in Section 3(b) hereof. "Subsequent Shelf Registration" shall have the meaning set forth in Section 3(b) hereof. "TIA" shall mean the Trust Indenture Act of 1939, as amended. "Trustee" shall mean the trustee under the Indenture and the trustee (if any) under any indenture governing the Exchange Notes and Private Exchange Notes. "Underwritten registration or underwritten offering" shall mean a registration in which securities of the Issuer are sold to an underwriter for reoffering to the public. Section 2. Exchange Offer (a) The Issuer shall, at the Issuer's cost (as set forth in Section 6 hereof), (i) file (or confidentially submit) a Registration Statement (the "Exchange Offer Registration Statement") within 60 days after the Issue Date with the Commission on an appropriate registration form with respect to a registered offer (the "Exchange Offer") to exchange any and all of the Registrable Notes for a like aggregate principal amount of notes (the "Exchange Notes") that are identical in all material respects to the Notes (except that the Exchange Notes shall not contain terms with respect to transfer restrictions or Additional Interest upon a Registration Default) and (ii) use its reasonable best efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act on or prior to 120 days after the Issue Date and (iii) use its reasonable best efforts to consummate the Exchange Offer on or prior to 150 days after the Issue Date. Upon the Exchange Offer Registration Statement being declared effective by the Commission, the Issuer will offer the Exchange Notes in exchange for surrender of the Notes. The Issuer shall keep the Exchange Offer open for not less than 20 Business Days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to Holders. Each Holder that participates in the Exchange Offer will be required to represent to the Issuer in writing that (i) such Holder is not an affiliate of the Issuer within the meaning of the Securities Act, (ii) any Exchange Notes to be received by it will be acquired in the ordinary course of -4- its business, (iii) at the time of the commencement of the Exchange Offer such Holder will have no arrangement or understanding with any Person to participate in the distribution (as such term is used in the Securities Act) of the Exchange Notes in violation of the provisions of the Securities Act, (iv) if such Holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes and (v) if such Holder is a broker-dealer that will receive Exchange Notes for its own account in exchange for Notes that were acquired as a result of market-making or other trading activities, it will deliver a Prospectus in connection with any resale of such Exchange Notes. Upon consummation of the Exchange Offer in accordance with this Section 2, the provisions of this Agreement shall continue to apply, mutatis mutandis, solely with respect to Registrable Notes that are Private Exchange Notes, Exchange Notes as to which Section 2(c)(iv) is applicable and Exchange Notes held by Participating Broker-Dealers (as defined), and the Issuer shall have no further obligation to register Registrable Notes (other than Private Exchange Notes and other than in respect of any Exchange Notes as to which clause 2(c)(iv) hereof applies) pursuant to Section 3 hereof. No securities other than the Exchange Notes shall be included in the Exchange Offer Registration Statement. (b) The Issuer and the Initial Purchasers acknowledge that the staff of the Commission has taken the position that any broker-dealer that elects to exchange Notes that were acquired by such broker-dealer for its own account as a result of market-making or other trading activities for Exchange Notes in the Exchange Offer (a "Participating Broker-Dealer") may be deemed to be an "underwriter" within the meaning of the Securities Act and must deliver a Prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes (other than a resale of an unsold allotment resulting from the original offering of the Notes). The Issuer and the Initial Purchasers also acknowledge that it is the staff of the Commission's position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Notes, without naming the Participating Broker-Dealers or specifying the amount of Exchange Notes owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligations under the Securities Act in connection with resales of Exchange Notes for their own accounts, so long as the Prospectus otherwise meets the requirements of the Securities Act. In light of the foregoing, if requested by a Participating Broker-Dealer (a "Requesting Participating Broker-Dealer"), the Issuer agrees to use its reasonable best efforts to keep the Exchange Offer Registration Statement continuously effective for a period of up to 180 days after the date on which the Exchange Offer Registration Statement is declared effective, or such longer period if extended pursuant to the last paragraph of Section 5 hereof (such period, the "Applicable Period"), or such earlier date as all Requesting Participating Broker-Dealers shall have notified the Issuer in writing that such Requesting Participating Broker-Dealers have resold all Exchange Notes acquired in the Exchange Offer. The Issuer shall include a plan of distribution in such Exchange Offer Registration Statement that meets the requirements set forth in the preceding paragraph. -5- If, prior to consummation of the Exchange Offer, any Holder holds any Notes acquired by it that have, or that are reasonably likely to be determined to have, the status of an unsold allotment in an initial distribution, or if any Holder is not entitled to participate in the Exchange Offer, the Issuer upon the request of any such Holder shall, simultaneously with the delivery of the Exchange Notes in the Exchange Offer, issue and deliver to any such Holder, in exchange (the "Private Exchange") for such Notes held by any such Holder, a like principal amount of notes (the "Private Exchange Notes") of the Issuer that are identical in all material respects to the Exchange Notes. The Private Exchange Notes shall be issued pursuant to the same indenture as the Exchange Notes and bear the same CUSIP number as the Exchange Notes. In connection with the Exchange Offer, the Issuer shall: (1) mail to each Holder entitled to participate in the Exchange Offer a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (2) utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York; (3) permit Holders to withdraw tendered Notes at any time prior to the close of business, New York time, on the last Business Day on which the Exchange Offer shall remain open; and (4) otherwise comply in all material respects with all applicable laws, rules and regulations. As soon as practicable after the close of the Exchange Offer and the Private Exchange, if any, the Issuer shall: (1) accept for exchange all Notes validly tendered and not validly withdrawn pursuant to the Exchange Offer and the Private Exchange; (2) deliver to the Trustee for cancellation all Notes so accepted for exchange; and (3) cause the Trustee to authenticate and deliver promptly to each Holder of Notes Exchange Notes or Private Exchange Notes, as the case may be, equal in principal amount to the Notes of such Holder so accepted for exchange. The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than that (i) the Exchange Offer or Private Exchange, as the case may be, does not violate applicable law or any applicable interpretation of the staff of the Commission, (ii) no action or proceeding shall have been instituted or threatened in any court or by any governmental agency which might materially impair the ability of the Issuer to proceed with the Exchange Offer or the Private Exchange, and no material adverse development shall have occurred in any existing action or proceeding with respect to the Issuer and (iii) all governmental approvals shall have been obtained, -6- which approvals the Issuer deems necessary for the consummation of the Exchange Offer or Private Exchange. The Exchange Notes and the Private Exchange Notes shall be issued under (i) the Indenture or (ii) an indenture identical in all material respects to the Indenture (in either case, with such changes as are necessary to comply with any requirements of the Commission to effect or maintain the qualification thereof under the TIA) and which, in either case, has been qualified under the TIA and shall provide that the Exchange Notes shall not be subject to the transfer restrictions set forth in the Indenture or Additional Interest upon a Registration Default. The Indenture or such indenture shall provide that the Exchange Notes, the Private Exchange Notes and the Notes shall vote and consent together on all matters as one class and that none of the Exchange Notes, the Private Exchange Notes or the Notes will have the right to vote or consent as a separate class on any matter. (c) In the event that (i) any changes in law or the applicable interpretations of the staff of the Commission do not permit the Issuer to effect the Exchange Offer, (ii) if for any reason the Exchange Offer is not consummated within 150 days of the Issue Date, (iii) any Holder of Private Exchange Notes so requests; or (iv) in the case of any Holder that participates in the Exchange Offer, such Holder does not receive Exchange Notes on the date of the exchange that may be sold without restriction under federal securities laws (other than due solely to the status of such Holder as an affiliate of the Issuer within the meaning of the Securities Act) (each such event referred to in clauses (i) through (iv) of this sentence, a "Shelf Filing Event"), then the Issuer shall file a Shelf Registration pursuant to Section 3 hereof. Section 3. Shelf Registration If at any time a Shelf Filing Event shall occur, then: (a) Shelf Registration. The Issuer shall file with the Commission a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Registrable Notes not exchanged in the Exchange Offer, Private Exchange Notes and Exchange Notes as to which Section 2(c)(iv) is applicable (the "Initial Shelf Registration"). The Issuer shall use its reasonable best efforts to file with the Commission the Initial Shelf Registration as promptly as practicable, but in no event later than 45 days after the Issuer has notice of the Shelf Filing Event. The Initial Shelf Registration shall be on Form S-3 or another appropriate form permitting registration of such Registrable Notes for resale by Holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Issuer shall not permit any securities other than the Registrable Notes to be included in the Initial Shelf Registration or any Subsequent Shelf Registration (as defined below). The Issuer shall use its reasonable best efforts (x) to cause the Initial Shelf Registration to be declared effective under the Securities Act on or prior to the later of the 60th day after the Shelf Filing Event or the 150th day after the Issue Date and (y) to keep the Initial Shelf Registration continuously effective under the Securities Act for the period ending on the date which is two years from the Issue Date, subject to extension pursuant to the last paragraph of Section 5 hereof (the "Effectiveness Period"), or such shorter period ending when (i) all Registrable Notes covered by -7- the Initial Shelf Registration have been sold in the manner set forth and as contemplated in the Initial Shelf Registration or (ii) a Subsequent Shelf Registration covering all of the Registrable Notes covered by and not sold under the Initial Shelf Registration or an earlier Subsequent Shelf Registration has been declared effective under the Securities Act; provided, however, that the Effectiveness Period in respect of the Initial Shelf Registration shall be extended to the extent required to permit dealers to comply with the applicable prospectus delivery requirements of Rule 174 under the Securities Act and as otherwise provided herein; provided, further, that the Issuer may suspend the effectiveness of a Shelf Registration Statement by written notice to the Holders for a period not to exceed 30 days in any calendar year if (i) an event occurs and is continuing as a result of which the Shelf Registration Statement would, in the Issuer's good faith judgment, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading and (ii) (a) the Issuer determines in good faith that the disclosure of such event at such time would have a material adverse effect on the business, operations or prospects of the Issuer and its subsidiaries, taken as a whole, or (b) the disclosure otherwise relates to a previously undisclosed pending material business transaction, the disclosure of which would impede the Issuer's ability to consummate such transaction. (b) Subsequent Shelf Registrations. If the Initial Shelf Registration or any Subsequent Shelf Registration ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Issuer shall use its reasonable best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof, and in any event shall as soon as practicable after such cessation amend the Initial Shelf Registration or such Subsequent Shelf Registration, as the case may be, in a manner to obtain the withdrawal of the order suspending the effectiveness thereof, or file an additional "shelf" Registration Statement pursuant to Rule 415 covering all of the Registrable Notes covered by and not sold under the Initial Shelf Registration or such earlier Subsequent Shelf Registration (each, a "Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed, the Issuer shall use its reasonable best efforts to cause the Subsequent Shelf Registration to be declared effective under the Securities Act as soon as practicable after such filing and to keep such Registration Statement continuously effective for a period equal to the number of days in the Effectiveness Period less the aggregate number of days during which the Initial Shelf Registration and any Subsequent Shelf Registration was previously continuously effective. As used herein, the term "Shelf Registration" means the Initial Shelf Registration and any Subsequent Shelf Registration. (c) Supplements and Amendments. The Issuer shall promptly supplement and amend the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if reasonably requested by the Holders of a majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement or by any underwriter of such Registrable Notes. Section 4. Additional Interest (a) The Issuer and the Initial Purchasers agree that the Holders will suffer damages if the Issuer fails to fulfill its obligations under Section 2 or Section 3 hereof and that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, in the event that: -8- (i) the Issuer does not file (or confidentially submit) with the Commission on or prior to the 60th day following the Issue Date, or cause to become effective on or prior to the 120th day following the Issue Date, the Exchange Offer Registration Statement, (ii) the Issuer is obligated to file the Shelf Registration Statement and such Shelf Registration Statement is not filed with the Commission on or prior to the 45th day following the date on which the Issuer has notice of the Shelf Filing Event or such Shelf Registration Statement is not declared effective on or prior to the later of the 60th day following the Shelf Filing Event or the 150th day following the Issue Date, (iii) the Issuer fails to consummate the Exchange Offer on or prior to the 150th day following the Issue Date or (iv) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be declared effective or usable in connection with resales of Registrable Notes during the periods specified herein, except if the Shelf Registration or the Exchange Offer Registration Statement ceases to be effective or usable as specifically permitted herein or solely as a result of (x) the filing of a post-effective amendment to such Shelf Registration Statement to incorporate annual audited financial information with respect to the Issuer where such post-effective amendment is not yet effective and needs to be declared effective to permit holders to use the related Prospectus or (y) other material events, with respect to the Issuer, that would need to be described in such Shelf Registration Statement or the related Prospectus and, in the case of this clause (y), the Issuer is proceeding promptly and in good faith to amend or supplement the Shelf Registration Statement or the Exchange Offer Registration Statement and related Prospectus to describe such events (each such event referred to in clauses (i) through (iv) above, a "Registration Default"), then the Issuer shall pay, as liquidated damages, additional interest ("Additional Interest") on the Registrable Notes in cash on each Interest Payment Date (as defined in the Indenture) in an amount equal to one-quarter of one percent (0.25%) per annum of the aggregate principal amount of the Registrable Notes, with respect to the first 90-day period following such Registration Default. The amount of such Additional Interest will increase by an additional one-quarter of one percent (0.25%) to a maximum of one percent (1.0%) per annum of the aggregate principal amount of the Registrable Notes for each subsequent 90-day period until such Registration Default has been cured. Upon (1) the filing (or confidential submission) of the Exchange Offer Registration Statement after the 60-day period described in clause (i) above, (2) the effectiveness of the Exchange Offer Registration Statement after the 120-day period described in clause (i) above, (3) the filing (or confidential submission) of the Shelf Registration Statement after the 45-day period described in clause (ii) above, (4) the effectiveness of the Shelf Registration Statement after the 60-day period or the 150-day period, as the case may be, described in clause (ii) above, (5) the consummation of the Exchange Offer after the 150-day period described in clause (iii) above, or (6) the cure of any Registration Default described in clause (iv) above, the interest rate borne by the Notes from the date of such filing, effectiveness or consummation, as the case may be, will be reduced to the original interest rate if the Issuer is otherwise in compliance with this paragraph; provided, however, that if, after any such reduction in interest rate, a different -9- event specified above occurs, the interest rate may again be increased pursuant to the foregoing provisions. (b) The Issuer shall notify the Trustee within one Business Day after each and every date on which an event occurs in respect of which Additional Interest is required to be paid (an "Event Date"). Any amounts of Additional Interest due pursuant to Section 4(a) hereof will be payable in cash semi-annually on the Interest Payment Dates specified in the Indenture (to the holders of record as specified in the Indenture), commencing with the first such Interest Payment Date occurring after any such Additional Interest commences to accrue. The amount of Additional Interest will be determined by multiplying the applicable Additional Interest rate by the principal amount of the Registrable Notes, multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed), and the denominator of which is 360. Section 5. Registration Procedures In connection with the filing of any Registration Statement pursuant to Section 2 or 3 hereof, the Issuer shall effect such registrations to permit the sale of the securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto and in connection with any Registration Statement filed by the Issuer hereunder the Issuer shall: (a) Prepare and file (or confidentially submit) with the Commission, a Registration Statement or Registration Statements as prescribed by Section 2 or 3 hereof, and use its reasonable best efforts to cause each such Registration Statement to become effective and remain effective as provided herein; provided, however, that, if (1) such filing is pursuant to Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Issuer shall furnish to and afford the Holders of the Registrable Notes covered by such Registration Statement or each such Participating Broker-Dealer, as the case may be, their counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (in each case at least five Business Days prior to such filing). The Issuer shall not file any Registration Statement or Prospectus or any amendments or supplements thereto if the Holders of a majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement, or any such Participating Broker-Dealer, as the case may be, their counsel, or the managing underwriters, if any, shall reasonably object. (b) Prepare and file with the Commission such amendments and post-effective amendments to each Shelf Registration Statement or Exchange Offer Registration Statement, as the case may be, as may be necessary to keep such Registration Statement continuously effective for the Effectiveness Period or the Applicable Period, as the case may be; cause the -10- related Prospectus to be supplemented by any Prospectus supplement required by applicable law, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act and the Exchange Act applicable to each of them with respect to the disposition of all securities covered by such Registration Statement as so amended or in such Prospectus as so supplemented and with respect to the subsequent resale of any securities being sold by a Participating Broker-Dealer covered by any such Prospectus, in each case, in accordance with the intended methods of distribution set forth in such Registration Statement or Prospectus, as so amended. The Issuer shall be deemed not to have used its reasonable best efforts to keep a Registration Statement effective during the Effectiveness Period or the Applicable Period, as the case may be, relating thereto if the Issuer voluntarily takes any action that would result in selling Holders of the Registrable Notes covered thereby or Participating Broker-Dealers seeking to sell Exchange Notes not being able to sell such Registrable Notes or such Exchange Notes during that period unless such action is required by applicable law; provided, however, that the Issuer may suspend the effectiveness of a Registration Statement by written notice to the Holders or the Participating Broker-Dealers for a period not to exceed 30 days in any calendar year if (i) an event occurs and is continuing as a result of which the Registration Statement would, in the Issuer's good faith judgment, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading and (ii) (a) the Issuer determines in good faith that the disclosure of such event at such time would have a material adverse effect on the business, operations or prospects of the Issuer and its subsidiaries, taken as a whole, or (b) the disclosure otherwise relates to a previously undisclosed pending material business transaction, the disclosure of which would impede the Issuer's ability to consummate such transaction. (c) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto, notify the selling Holders of Registrable Notes, or each such Participating Broker-Dealer, as the case may be, their counsel and the managing underwriters, if any, as promptly as possible, and, if requested by any such Person, confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective under the Securities Act (including in such notice a written statement that any Holder may, upon request, obtain, at the sole expense of the Issuer, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules, documents incorporated or deemed to be incorporated by reference and exhibits), (ii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation of any proceedings for that purpose, (iii) if at any time when a Prospectus is required by the Securities Act to be delivered in connection with sales of the Registrable Notes or resales of Exchange Notes by Participating Broker-Dealers the representations and warranties of the Issuer contained in any agreement (including any underwriting agreement) contemplated by Section 5(m) hereof cease to be true and correct in -11- all material respects, (iv) of the receipt by the Issuer of any notification with respect to the suspension of the qualification or exemption from qualification of a Registration Statement or any of the Registrable Notes or the Exchange Notes to be sold by any Participating Broker-Dealer for offer or sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, (v) of the happening of any event, the existence of any condition or any information becoming known to the Issuer that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in or amendments or supplements to such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (vi) of the Issuer's determination that a post-effective amendment to a Registration Statement would be appropriate. (d) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto, use its reasonable best efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Registrable Notes or the Exchange Notes to be sold by any Participating Broker-Dealer, for sale in any jurisdiction, and, if any such order is issued, to use its reasonable best efforts to obtain the withdrawal of any such order at the earliest practicable moment. (e) If (1) a Shelf Registration is filed pursuant to Section 3 hereof and if requested by the managing underwriter or underwriters (if any), the Holders of a majority in aggregate principal amount of the Registrable Notes being sold in connection with an underwritten offering, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto and if requested by any Participating Broker-Dealer, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriter or underwriters (if any), such Holders or any Participating Broker-Dealer (based upon advice of counsel) determine is reasonably necessary to be included therein, (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Issuer has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, however, that the Issuer shall not be required to take any action hereunder that would, in the written opinion of counsel to the Issuer, violate applicable laws, and (iii) supplement or make amendments to such Registration Statement (based upon advice of counsel). -12- (f) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto, furnish to each selling Holder of Registrable Notes and to each such Participating Broker-Dealer who so requests and to counsel and each managing underwriter, if any, at the sole expense of the Issuer, one conformed copy of the Registration Statement or Registration Statements and each post-effective amendment thereto, including financial statements and schedules, and, if requested, all documents incorporated or deemed to be incorporated therein by reference and all exhibits. (g) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto, deliver to each selling Holder of Registrable Notes, or each such Participating Broker-Dealer, as the case may be, their respective counsel, and the underwriter or underwriters, if any, at the sole expense of the Issuer, as many copies of the Prospectus or Prospectuses (including each form of preliminary prospectus) and each amendment or supplement thereto and any documents incorporated by reference therein as such Persons may reasonably request; and, subject to the last paragraph of this Section 5, the Issuer hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders of Registrable Notes or each such Participating Broker-Dealer, as the case may be, and the underwriters or agents, if any, and dealers (if any), in connection with the offering and sale of the Registrable Notes covered by, or the sale by Participating Broker-Dealers of the Exchange Notes pursuant to, such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Notes or any delivery of a Prospectus contained in the Exchange Offer Registration Statement by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, use its reasonable best efforts to register or qualify, and to cooperate with the selling Holders of Registrable Notes or each such Participating Broker-Dealer, as the case may be, the managing underwriter or underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of, such Registrable Notes for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any selling Holder, Participating Broker-Dealer, or the managing underwriter or underwriters reasonably request; provided, however, that where Exchange Notes held by Participating Broker-Dealers or Registrable Notes are offered other than through an underwritten offering, the Issuer agrees to cause the Issuer's counsel to perform Blue Sky investigations and file registrations and qualifications required to be filed pursuant to this Section 5(h); and keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of the Exchange Notes held by Participating Broker-Dealers or the Registrable Notes covered by the applicable Registration Statement; provided, however, that -13- the Issuer shall not be required to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction where it is not then so subject. (i) If a Shelf Registration is filed pursuant to Section 3 hereof, cooperate with the selling Holders of Registrable Notes and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Notes to be sold, which certificates shall not bear any restrictive legends and shall be in a form eligible for deposit with The Depository Trust Company; and enable such Registrable Notes to be in such denominations and registered in such names as the managing underwriter or underwriters, if any, or Holders may request at least two Business Days prior to any sale of such Registrable Notes. (j) Use its reasonable best efforts to cause the Registrable Notes covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be reasonably necessary to enable the seller or sellers thereof or the underwriter or underwriters, if any, to consummate the disposition of such Registrable Notes, except as may be required solely as a consequence of the nature of such selling Holder's business, in which case the Issuer will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals. (k) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto, upon the occurrence of any event contemplated by paragraph 5(c)(v) or 5(c)(vi) hereof, as promptly as practicable prepare and (subject to Section 5(a) hereof) file with the Commission, at the sole expense of the Issuer, a supplement or post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Notes being sold thereunder or to the purchasers of the Exchange Notes to whom such Prospectus will be delivered by a Participating Broker-Dealer, any such Prospectus will not 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, in the light of the circumstances under which they were made, not misleading. (l) Prior to the effective date of the first Registration Statement relating to the Registrable Notes, (i) provide the Trustee with certificates for the Registrable Notes in a form eligible for deposit with The Depository Trust Company and (ii) provide a CUSIP number for the Registrable Notes. (m) In connection with any underwritten offering of Registrable Notes pursuant to a Shelf Registration, enter into an underwriting agreement as is customary in underwritten offerings of debt securities similar to the Notes and take all such other actions as are -14- reasonably requested by the managing underwriter or underwriters in order to expedite or facilitate the registration or the disposition of such Registrable Notes and, in such connection, (i) make such representations and warranties to, and covenants with, the underwriters with respect to the business of the Issuer and its subsidiaries (including any acquired business, properties or entity, if applicable) and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings of debt securities similar to the Notes (but in no event materially more extensive than those in the Purchase Agreement), and confirm the same in writing if and when requested; (ii) use its reasonable best efforts to obtain the written opinions of counsel to the Issuer and written updates thereof in form, scope and substance reasonably satisfactory to the managing underwriter or underwriters, addressed to the underwriters covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by the managing underwriter or underwriters (but in no event materially more extensive than those required by the Purchase Agreement); (iii) use its reasonable best efforts to obtain "cold comfort" letters and updates thereof in form, scope and substance reasonably satisfactory to the managing underwriter or underwriters from the independent certified public accountants of the Issuer (and, if necessary, any other independent certified public accountants of any subsidiary of the Issuer or of any business acquired by the Issuer for which financial statements and financial data are, or are required to be, included or incorporated by reference in the Registration Statement), addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings (but in no event materially more extensive than those required by the Purchase Agreement); and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 7 hereof (or such other provisions and procedures acceptable to Holders of a majority in aggregate principal amount of Registrable Notes covered by such Registration Statement and the managing underwriter or underwriters or agents) with respect to all parties to be indemnified pursuant to said Section. The above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder. (n) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto, make available for inspection by any selling Holder of such Registrable Notes being sold, or each such Participating Broker-Dealer, as the case may be, any underwriter participating in any such disposition of Registrable Notes, if any, and any attorney, accountant or other agent retained by any such selling Holder or each such Participating Broker-Dealer, as the case may be, or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and instruments of the Issuer and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors, employees and agents of the Issuer and its subsidiaries to supply all information reasonably requested by any such Inspector in connection with such -15- Registration Statement and Prospectus. Each Inspector shall agree in writing that it will not disclose any records that the Issuer determines, in good faith, to be confidential and that it notifies the Inspectors in writing are confidential unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such Registration Statement or Prospectus, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, (iii) disclosure of such information is necessary or advisable in connection with any action, claim, suit or proceeding, directly or indirectly, involving or potentially involving such Inspector and arising out of, based upon, relating to, or involving this Agreement or the Purchase Agreement, or any transactions contemplated hereby or thereby or arising hereunder or thereunder, or (iv) the information in such Records has been made generally available to the public other than by an act or a failure to act by a Holder or an Inspector; provided, however, that such Inspector shall take such actions as are reasonably necessary to protect the confidentiality of such information (if practicable) to the extent such action is otherwise not inconsistent with, an impairment of or in derogation of the rights and interests of the Holder or any Inspector. (o) Provide an indenture trustee for the Registrable Notes or the Exchange Notes, as the case may be, and cause the Indenture or any other indenture provided for in Section 2(a) hereof, as the case may be, to be qualified under the TIA not later than the effective date of the first Registration Statement relating to the Registrable Notes; in connection therewith, cooperate with the trustee under any such indenture and the Holders of the Registrable Notes, to effect such changes to such indenture as may be required for such indenture to be so qualified in accordance with the terms of the TIA; and execute, and use its reasonable best efforts to cause such trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the Commission to enable such indenture to be so qualified in a timely manner. (p) Comply with all applicable rules and regulations of the Commission and make generally available to the Issuer's securityholders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) (i) commencing at the end of any fiscal quarter in which Registrable Notes are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Issuer after the effective date of a Registration Statement. (q) Upon consummation of the Exchange Offer or a Private Exchange, use its reasonable best efforts to obtain an opinion of counsel to the Issuer, in a form customary for underwritten transactions, addressed to the Trustee for the benefit of all Holders of Registrable Notes participating in the Exchange Offer or the Private Exchange, as the case may be, that the Exchange Notes or Private Exchange Notes, as the case may be, and the related indenture constitute legal, valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with its respective terms, subject to customary exceptions and qualifications. (r) If the Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Registrable Notes by Holders to the Issuer (or to such other Person as directed -16- by the Issuer) in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be, mark, or cause to be marked, on such Registrable Notes that such Registrable Notes are being cancelled in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be; in no event shall such Registrable Notes be marked as paid or otherwise satisfied. (s) Cooperate with each seller of Registrable Notes covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Notes and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"). (t) Use its reasonable best efforts to take all other steps necessary or advisable to effect the registration of the Registrable Notes covered by a Registration Statement contemplated hereby. The Issuer may require each seller of Registrable Notes as to which any registration is being effected to furnish to the Issuer such information regarding such seller and the distribution of such Registrable Notes as the Issuer may, from time to time, reasonably request. The Issuer may exclude from such registration the Registrable Notes of any seller so long as such seller fails to furnish such information within a reasonable time after receiving such request. Each seller as to which any Shelf Registration is being effected agrees to furnish promptly to the Issuer all information required to be disclosed in order to make the information previously furnished to the Issuer by such seller not materially misleading. If any such Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Issuer, then such Holder shall have the right to require (i) the insertion therein of language, in form and substance reasonably satisfactory to such Holder, to the effect that the holding by such Holder of such securities is not to be construed as a recommendation by such Holder of the investment quality of the securities covered thereby and that such holding does not imply that such Holder will assist in meeting any future financial requirements of the Issuer, or (ii) in the event that such reference to such Holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force, the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. Each Holder of Registrable Notes and each Participating Broker-Dealer agrees by acquisition of such Registrable Notes or Exchange Notes to be sold by such Participating Broker-Dealer, as the case may be, that, upon actual receipt of any notice from the Issuer of the happening of any event of the kind described in Section 5(c)(ii), 5(c)(iv), 5(c)(v) or 5(c)(vi) hereof, such Holder will forthwith discontinue disposition of such Registrable Notes covered by such Registration Statement or Prospectus or Exchange Notes to be sold by such Holder or Participating Broker-Dealer, as the case may be, until such Holder's or Participating Broker-Dealer's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 5(k) hereof, or until it is advised in writing (the "Advice") by the Issuer that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto. In the event that the Issuer shall give any such notice, each of the Effectiveness Period and the Applicable Period shall be extended by the number of -17- days during such periods from and including the date of the giving of such notice to and including the date when each seller of Registrable Notes covered by such Registration Statement or Exchange Notes to be sold by such Participating Broker-Dealer, as the case may be, shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 5(k) hereof or (y) the Advice. Section 6. Registration Expenses All fees and expenses incident to the performance of or compliance with this Agreement by the Issuer shall be borne by the Issuer, whether or not the Exchange Offer Registration Statement or any Shelf Registration is filed or becomes effective or the Exchange Offer is consummated, including, without limitation, (i) all registration and filing fees (including, without limitation, (A) fees with respect to filings required to be made with the NASD in connection with an underwritten offering and (B) fees and expenses of compliance with state securities or Blue Sky laws (including, without limitation, reasonable fees and disbursements of counsel in connection with Blue Sky qualifications of the Registrable Notes or Exchange Notes and determination of the eligibility of the Registrable Notes or Exchange Notes for investment under the laws of such jurisdictions (x) where the holders of Registrable Notes are located, in the case of the Exchange Notes, or (y) as provided in Section 5(h) hereof, in the case of Registrable Notes or Exchange Notes to be sold by a Participating Broker-Dealer during the Applicable Period)), (ii) printing expenses, including, without limitation, expenses of printing certificates for Registrable Notes or Exchange Notes in a form eligible for deposit with The Depository Trust Company and of printing Prospectuses if the printing of Prospectuses is requested by the managing underwriter or underwriters, if any, by the Holders of a majority in aggregate principal amount of the Registrable Notes included in any Registration Statement or in respect of Registrable Notes or Exchange Notes to be sold by any Participating Broker-Dealer during the Applicable Period, as the case may be, (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Issuer and reasonable fees and disbursements of one special counsel for all of the sellers of Registrable Notes (exclusive of any counsel retained pursuant to Section 7 hereof), (v) fees and disbursements of all independent certified public accountants referred to in Section 5(m)(iii) hereof (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance), (vi) Securities Act liability insurance, if the Issuer desires such insurance, (vii) fees and expenses of all other Persons retained by the Issuer, (viii) internal expenses of the Issuer (including, without limitation, all salaries and expenses of officers and employees of the Issuer performing legal or accounting duties), (ix) the expense of any annual audit, (x) the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange, and the obtaining of a rating of the securities, in each case if applicable, and (xi) the expenses relating to printing, word processing and distributing all Registration Statements, underwriting agreements, indentures and any other documents necessary in order to comply with this Agreement. Notwithstanding the foregoing or anything to the contrary, each Holder shall pay all underwriting discounts and commissions of any underwriters with respect to any Registrable Notes sold by or on behalf of it. Section 7. Indemnification (a) The Issuer agrees to indemnify and hold harmless each Holder of Registrable Notes and each Participating Broker-Dealer selling Exchange Notes during the Applicable Period -18- relating thereto, the officers, directors, employees and agents of each such Person, and each Person, if any, who controls any such Person within the bmeaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (each, a "Participant"), from and against any and all losses, claims, damages and liabilities (including, without limitation, the reasonable legal fees and other expenses actually incurred in connection with any suit, action or proceeding or any claim asserted) caused by, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) or Prospectus (as amended or supplemented if the Issuer shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by, 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, in the case of the Prospectus in the light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Participant furnished to the Issuer in writing by or on behalf of such Participant expressly for use therein. (b) Each Participant agrees, severally and not jointly, to indemnify and hold harmless the Issuer, its directors, officers, employees and agents and each Person who controls the Issuer within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent (but on a several, and not joint, basis) as the foregoing indemnity from the Issuer to each Participant, in each case to the extent, but only to the extent, that any loss, claim, damage or liability is caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Participant furnished to the Issuer in writing by or on behalf of such Participant expressly for use in any Registration Statement (or any amendment thereto) or Prospectus (as amended or supplemented if the Issuer shall have furnished any amendments or supplements thereto) or any preliminary prospectus. (c) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such Person (the "Indemnified Person") shall promptly notify the Persons against whom such indemnity may be sought (the "Indemnifying Persons") in writing, and the Indemnifying Persons, upon request of the Indemnified Person, shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Persons may reasonably designate in such proceeding and shall pay the fees and expenses actually incurred by such counsel related to such proceeding; provided, however, that the failure to so notify the Indemnifying Persons shall not relieve any of them of any obligation or liability which any of the Indemnifying Persons may have hereunder or otherwise, except to the extent such failure materially prejudices the Indemnifying Persons. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Persons and the Indemnified Person shall have mutually agreed to the contrary, (ii) the Indemnifying Persons shall have failed within a reasonable period of time to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include both any Indemnifying Person and the Indemnified Person or any affiliate thereof and representation of both parties by the same counsel would be inappropriate due to actual or -19- potential differing interests between them. It is understood that, unless there exists a conflict among Indemnified Persons, the Indemnifying Persons shall not, in connection with any one such proceeding or separate but substantially similar related proceeding in the same jurisdiction arising out of the same general allegations, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed promptly as they are incurred. Any such separate firm for the Participants and such control Persons of Participants shall be designated in writing by Participants who sold a majority in interest of Registrable Notes and Exchange Notes sold by all such Participants and shall be reasonably acceptable to the Issuer and any such separate firm for the Issuer, their respective directors, their respective officers and such control Persons of the Issuer shall be designated in writing by the Issuer and shall be reasonably acceptable to the Holders. The Indemnifying Persons shall not be liable for any settlement of any proceeding effected without their prior written consent (which consent shall not be unreasonably withheld or delayed), but if settled with such consent or if there be a final judgment for the plaintiff for which the Indemnified Person is entitled to indemnification pursuant to this Agreement, each of the Indemnifying Persons agrees to indemnify and hold harmless each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. No Indemnifying Person shall, without the prior written consent of the Indemnified Persons (which consent shall not be unreasonably withheld or delayed), effect any settlement or compromise of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement (A) includes an unconditional written release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (B) does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of such Indemnified Person. (d) If the indemnification provided for in the first and second paragraphs of this Section 7 is for any reason unavailable to, or insufficient to hold harmless, an Indemnified Person in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. The relative fault of the parties 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 Issuer on the one hand or such Participant or such other Indemnified Person, as the case may be, on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. (e) The parties agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Participants were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable -20- considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses actually incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, in no event shall a Participant be required to contribute any amount in excess of the amount by which proceeds received by such Participant from sales of Registrable Notes or Exchange Notes, as the case may be, exceeds the amount of any damages that such Participant has otherwise been required to pay or has paid 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 Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (f) Any losses, claims, damages, liabilities or expenses for which an Indemnified Person is entitled to indemnification or contribution under this Section 7 shall be paid by the Indemnifying Person to the Indemnified Person as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Issuer 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 Holder or any person who controls a Holder, the Issuer, their respective directors, officers, employees or agents or any person controlling the Issuer, and (ii) any termination of this Agreement. (g) The indemnity and contribution agreements contained in this Section 7 will be in addition to any liability which the Indemnifying Persons may otherwise have to the Indemnified Persons referred to above. Section 8. Rules 144 and 144A The Issuer covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, if at any time the Issuer is not required to file such reports, it will, upon the request of any Holder or beneficial owner of Registrable Notes, make available such information necessary to permit sales pursuant to Rule 144A under the Securities Act. The Issuer further covenants that it will take such further action as any Holder of Registrable Notes may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Notes without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Notwithstanding the foregoing, nothing in this Section 8 shall be deemed to require the Issuer to register any of its securities pursuant to the Exchange Act. -21- Section 9. Underwritten Registrations If any of the Registrable Notes covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Holders of a majority in aggregate principal amount of such Registrable Notes included in such offering and shall be reasonably acceptable to the Issuer. No Holder of Registrable Notes may participate in any underwritten registration hereunder unless such Holder (i) agrees to sell such Holder's Registrable Notes on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. Section 10. Miscellaneous (a) No Inconsistent Agreements. The Issuer has not, as of the date hereof, and the Issuer shall not, after the date of this Agreement, enter into any agreement with respect to any of its securities that is inconsistent with the rights granted to the Holders of Registrable Notes in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not conflict with and are not inconsistent with, in any material respect, the rights granted to the holders of the Issuer's other issued and outstanding securities under any such agreements. The Issuer has not entered and will not enter into any agreement with respect to any of its securities which will grant to any Person piggy-back registration rights with respect to any Registration Statement. (b) Adjustments Affecting Registrable Notes. The Issuer shall not, directly or indirectly, take any action with respect to the Registrable Notes as a class that would adversely affect the ability of the Holders of Registrable Notes to include such Registrable Notes in a registration undertaken pursuant to this Agreement. (c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given except pursuant to a written agreement duly signed and delivered by (i) the Issuer and (ii)(1) the Holders of not less than a majority in aggregate principal amount of the then outstanding Registrable Notes and (2) in circumstances that would adversely affect the Participating Broker-Dealers, the Participating Broker-Dealers holding not less than a majority in aggregate principal amount of the Exchange Notes held by all Participating Broker-Dealers; provided, however, that Section 7 and this Section 10(c) may not be amended, modified or supplemented except pursuant to a written agreement duly signed and delivered by each Holder and each Participating Broker-Dealer (including any person who was a Holder or Participating Broker-Dealer of Registrable Notes or Exchange Notes, as the case may be, disposed of pursuant to any Registration Statement) affected by any such amendment, modification or supplement. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Registrable Notes whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of -22- Registrable Notes may be given by Holders of at least a majority in aggregate principal amount of the Registrable Notes being sold pursuant to such Registration Statement. (d) Notices. All notices and other communications (including, without limitation, any notices or other communications to the Trustee) provided for or permitted hereunder shall be made in writing by hand-delivery, registered or certified first-class mail, next-day air courier or telecopier: (i) if to a Holder of the Registrable Notes or any Participating Broker-Dealer, at the most current address of such Holder or Participating Broker-Dealer, as the case may be, set forth on the records of the registrar under the Indenture. (ii) if to the Issuer, at the address as follows: HEALTHSOUTH Corporation One HealthSouth Parkway Birmingham, Alabama 35243 Telephone: (205) 969-4977 Fax number: (205) 969-4730 Attention: William W. Horton (iii) if to the Initial Purchasers, at the address as follows: UBS Warburg LLC 299 Park Avenue New York, New York 10171 Telephone: (203) 719-7166 Fax number: (203) 719-8620 Attention: Syndicate Department All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by the recipient's telecopier machine, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address and in the manner specified in the Indenture. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto, the Holders and the Participating Broker-Dealers; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign holds Registrable Notes. -23- (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (H) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. (i) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (j) Securities Held by the Issuer or Its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registrable Notes is required hereunder, Registrable Notes held by the Issuer or any of its affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. (k) Third Party Beneficiaries. Holders, beneficial owners of Registrable Notes, Participating Broker-Dealers and the controlling persons and agents referred to in Section 7 are intended third party beneficiaries of this Agreement, and this Agreement may be enforced by such Persons. No other Person is intended to be, or shall be construed as, a third-party beneficiary of this Agreement. (l) Attorneys' Fees. As between the parties to this Agreement, in any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees actually incurred in addition to its costs and expenses and any other available remedy. (m) Entire Agreement. This Agreement, together with the Purchase Agreement and the Indenture, is intended by the parties as a final and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein and any and all prior oral or written agreements, representations, or warranties, contracts, understandings, correspondence, conversations and memoranda between the Holders on the one hand and the Issuer on the other, or between or among any agents, representatives, parents, subsidiaries, affiliates, predecessors in interest or successors in interest with respect to the subject matter hereof and thereof are merged herein and replaced hereby. -24- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. HEALTHSOUTH CORPORATION By: /s/ William T. Owens ----------------------------------- Name: William T. Owens Title: Executive Vice President and Chief Financial Officer -25- UBS WARBURG LLC DEUTSCHE BANC ALEX. BROWN INC. CHASE SECURITIES INC. FIRST UNION SECURITIES, INC. SCOTIA CAPITAL (USA) INC. By: UBS WARBURG LLC By: /s/ Michael Y. Leder ----------------------------------- Name: Michael Y. Leder Title: Managing Director Leveraged Finance By: /s/ David W. Barth ----------------------------------- Name: David W. Barth Title: Director Leveraged Finance EX-10.56 4 0004.txt EXHIBIT (10)-56 EXHIBIT (10)-56 LEASE AGREEMENT Dated as of October 31, 2000 between FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, as Lessor and HEALTHSOUTH Corporation, as Lessee - -------------------------------------------------------------------------------- This Lease Agreement (the "Lease Agreement") is subject to a security interest in favor of UBS AG, Stamford Branch, as Administrative Agent (the "Agent") under the Security Agreement dated as of the date hereof among First Security Bank, National Association, not individually except as expressly stated therein, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, the Lenders and the Agent, as amended, modified, supplemented, restated or replaced from time to time. This Lease Agreement has been executed in several counterparts. To the extent, if any, that this Lease Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease Agreement may be created through the transfer or possession of any counterpart other than the original counterpart containing the receipt therefor executed by the Agent on the signature page hereof. TABLE OF CONTENTS
PAGE ARTICLE I.........................................................................................................1 1.1. Definitions.....................................................................................1 ARTICLE II........................................................................................................1 2.1. Properties......................................................................................1 2.2. Lease Term......................................................................................2 2.3. Title...........................................................................................2 ARTICLE III.......................................................................................................2 3.1. Rent............................................................................................2 3.2. Payment of Basic Rent...........................................................................2 3.3. Supplemental Rent...............................................................................2 3.4. Performance on a Non-Business Day...............................................................3 3.5. Rent Payment Provisions.........................................................................3 ARTICLE IV........................................................................................................3 4.1. Utility Charges; Taxes..........................................................................3 ARTICLE V.........................................................................................................4 5.1. Quiet Enjoyment.................................................................................4 ARTICLE VI........................................................................................................4 6.1. Net Lease.......................................................................................4 6.2. No Termination or Abatement.....................................................................5 ARTICLE VII.......................................................................................................5 7.1. Ownership of the Properties.....................................................................5 ARTICLE VIII......................................................................................................6 8.1. Condition of the Properties.....................................................................6 8.2. Possession and Use of the Properties............................................................7 ARTICLE IX........................................................................................................7 9.1. Compliance with Legal Requirements and Insurance Requirements...................................7 i ARTICLE X.........................................................................................................8 10.1. Maintenance and Repair; Return..................................................................8 10.2. Environmental Inspection........................................................................9 ARTICLE XI........................................................................................................9 11.1. Modifications...................................................................................9 ARTICLE XII......................................................................................................10 12.1. Warranty of Title..............................................................................10 ARTICLE XIII.....................................................................................................11 13.1. Permitted Contests Other Than in Respect of Indemnities........................................11 ARTICLE XIV......................................................................................................11 14.1. Public Liability and Workers' Compensation Insurance...........................................11 14.2. Hazard and Other Insurance.....................................................................12 14.3. Coverage.......................................................................................12 ARTICLE XV.......................................................................................................13 15.1. Casualty and Condemnation......................................................................13 15.2. Environmental Matters..........................................................................15 15.3. Notice of Environmental Matters................................................................15 ARTICLE XVI......................................................................................................16 16.1. Termination Upon Certain Events................................................................16 16.2. Procedures.....................................................................................16 ARTICLE XVII.....................................................................................................16 17.1. Lease Events of Default........................................................................16 17.2. Surrender of Possession........................................................................19 17.3. Reletting......................................................................................19 17.4. Damages........................................................................................19 17.5. Final Liquidated Damages.......................................................................20 17.6. Waiver of Certain Rights.......................................................................21 17.7. Assignment of Rights Under Contract............................................................21 17.8. Environmental Costs............................................................................21 17.9. Remedies Cumulative............................................................................22 17.10. Notice of Default or Event of Default..........................................................22 ii ARTICLE XVIII....................................................................................................22 18.1. Lessor's Right to Cure Lessee's Lease Defaults.................................................22 ARTICLE XIX......................................................................................................22 19.1. Provisions Relating to Lessee's Exercise of its Purchase Option................................22 19.2. No Termination With Respect to Less than all of the Properties.................................22 ARTICLE XX.......................................................................................................23 20.1. Early Purchase Option..........................................................................23 20.2. Purchase or Sale Option........................................................................23 ARTICLE XXI......................................................................................................24 21.1. Intentionally Deleted..........................................................................24 ARTICLE XXII.....................................................................................................24 22.1. Sale Procedure.................................................................................24 22.2. Application of Proceeds of Sale................................................................26 22.3. Indemnity for Excessive Wear...................................................................26 22.4. Appraisal Procedure............................................................................26 22.5. Certain Obligations Continue...................................................................27 ARTICLE XXIII....................................................................................................27 23.1. Holding Over...................................................................................27 ARTICLE XXIV.....................................................................................................28 24.1. Risk of Loss...................................................................................28 ARTICLE XXV......................................................................................................28 25.1. Assignment.....................................................................................28 25.2. Subleases......................................................................................28 ARTICLE XXVI.....................................................................................................29 26.1. No Waiver......................................................................................29 ARTICLE XXVII....................................................................................................29 27.1. Acceptance of Surrender........................................................................29 27.2. No Merger of Title.............................................................................29 iii ARTICLE XXVIII...................................................................................................30 28.1. Incorporation of Covenants.....................................................................30 28.2. Additional Reporting Requirements..............................................................31 ARTICLE XXIX.....................................................................................................31 29.1. Notices........................................................................................31 ARTICLE XXX......................................................................................................32 30.1. Miscellaneous..................................................................................32 30.2. Amendments and Modifications...................................................................32 30.3. Successors and Assigns.........................................................................33 30.4. Headings and Table of Contents.................................................................33 30.5. Counterparts...................................................................................33 30.6. GOVERNING LAW..................................................................................33 30.7. Calculation of Rent............................................................................33 30.8. Memorandum of Lease............................................................................33 30.9. Allocations between the Lenders and the Holders................................................33 30.10. Limitations on Recourse........................................................................34 30.11. WAIVERS OF JURY TRIAL..........................................................................34 30.12. Existing Agreements............................................................................34 30.13. Power of Sale..................................................................................34 30.14. Exercise of Lessor Right.......................................................................34
iv LEASE AGREEMENT THIS LEASE AGREEMENT (as amended, supplemented or modified from time to time, this "Lease"), dated as of October 31, 2000, is between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, having its principal office at 79 South Main Street, Salt Lake City, Utah 84111, not individually, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, as Lessor (the "Lessor"), and HEALTHSOUTH Corporation, a Delaware corporation, having its principal place of business at One HealthSouth Parkway, Birmingham, Alabama 35243, as Lessee (the "Lessee"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, subject to the terms and conditions of the Participation Agreement (defined below), Lessor owns or leases under ground leases certain parcels of real property, the Improvements on such real property and certain Equipment; and WHEREAS, the Basic Term shall commence with respect to the Properties as of the date hereof; and WHEREAS, the Lessor desires to lease to the Lessee, and the Lessee desires to lease from the Lessor, the Properties; NOW, THEREFORE, in consideration of the mutual agreements herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I 1.1. Definitions. Capitalized terms used but not otherwise defined in this Lease have the respective meanings specified in Appendix A to the Participation Agreement of even date herewith (as such may be amended, modified, supplemented, restated and/or replaced from time to time in accordance with the terms thereof, the "Participation Agreement") among the Lessee, First Security Bank, National Association, not individually, except as expressly stated therein, but as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, the Holders party thereto, the Lenders party thereto and the Agent. ARTICLE II 2.1. Properties. Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, each Property described in Exhibit A and Schedule I-A, Schedule I-B and Schedule I-C attached thereto. 2.2. Lease Term. The term of this Lease with respect to each Property (the "Basic Term") shall continue from the date hereof (the "Basic Term Commencement Date" or the "Term Commencement Date") and shall end on June 22, 2003 (the "Basic Term Expiration Date"), unless the Term is earlier terminated in accordance with the provisions of this Lease. 2.3. Title. Each Property is leased to Lessee without any representation or warranty, express or implied, by Lessor and subject to the rights of parties in possession (if any), the existing state of title (including, without limitation, the Permitted Exceptions) and all applicable Legal Requirements. Lessee shall in no event have any recourse against Lessor for any defect in title to any Property other than for Lessor Liens. ARTICLE III 3.1. Rent. (a) Lessee shall pay Basic Rent on each Payment Date, and on any date on which this Lease shall terminate. (b) Basic Rent shall be due and payable in lawful money of the United States and shall be paid in immediately available funds on the due date therefor (or within the applicable grace period) to such account or accounts at such bank or banks as Lessor shall from time to time direct. (c) Lessee's inability or failure to take possession of all or any portion of any Property on the Closing Date, whether or not attributable to any act or omission of the Lessor, the Lessee, or any other Person, or for any other reason whatsoever, shall not delay or otherwise affect Lessee's obligation to pay Rent for such Property in accordance with the terms of this Lease. 3.2. Payment of Basic Rent. Basic Rent shall be paid absolutely net to Lessor or its designee, so that this Lease shall yield to Lessor the full amount of Basic Rent, without setoff, deduction or reduction. 3.3. Supplemental Rent. Lessee shall pay to Lessor or its designee or to the Person entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. Without limiting the generality of the definition of "Supplemental Rent," Lessee shall pay to Lessor as Supplemental Rent, among other things, on demand, to the extent permitted by applicable Legal Requirements, (a) any and all unpaid fees, charges, payments and other obligations (except the obligations of Lessor to pay the principal amount of the Loans and the Holder Amount) due and 2 owing by Lessor under the Credit Agreement, the Trust Agreement or any other Operative Agreement (including specifically without limitation any amounts owing to the Lenders under Section 2.11 or Section 2.12 of the Credit Agreement and any amounts owing to the Holders under Section 3.9 or Section 3.10 of the Trust Agreement) and (b) interest at the applicable Base Rate on any installment of Basic Rent not paid when due (subject to the applicable grace period) for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by the appropriate Person for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease, in the event of any failure on the part of Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added (a) by any party to an Operative Agreement pursuant to the terms of such agreement or (b) by any Person that is not a party to an Operative Agreement, in each case for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. 3.4. Performance on a Non-Business Day. If any Basic Rent is required hereunder on a day that is not a Business Day, then such Basic Rent shall be due on the corresponding Scheduled Interest Payment Date. If any Supplemental Rent is required hereunder on a day that is not a Business Day, then such Supplemental Rent shall be due on the next succeeding Business Day. 3.5. Rent Payment Provisions. Lessee shall make payment of all Basic Rent and Supplemental Rent when due regardless of whether any of the Operative Agreements pursuant to which same is calculated and is owing shall have been rejected, avoided or disavowed in any bankruptcy or insolvency proceeding involving any of the parties to any of the Operative Agreements. Such provisions of such Operative Agreements and their related definitions are incorporated herein by reference and shall survive any termination, amendment or rejection of any such Operative Agreements. ARTICLE IV 4.1. Utility Charges; Taxes. Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on any Property and related real property during the Term. Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by Lessee. Unless a Lease Default or Lease Event of Default shall have occurred and be continuing, the amount of any credit or refund received by Lessor on account of any utility charges paid by Lessee, net of the costs and expenses incurred by Lessor in obtaining such credit or refund, shall be promptly paid over to Lessee. In addition, Lessee shall pay or cause to be paid all taxes or tax assessments against any Property. All charges for utilities and all taxes or tax assessments imposed with respect to any Property for a billing period (or in the cases of tax assessments, a tax period) during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between Lessor and Lessee, and each party shall pay or reimburse the other for such party's pro rata share thereof. 3 ARTICLE V 5.1. Quiet Enjoyment. Subject to the rights of Lessor contained in Sections 17.2 and 17.3 and the other terms of this Lease and the other Operative Agreements and so long as no Lease Event of Default shall have occurred and be continuing, Lessee shall peaceably and quietly have, hold and enjoy each Property for the applicable Term, free of any claim or other action by Lessor or anyone rightfully claiming by, through or under Lessor (other than Lessee) with respect to any matters arising from and after the Basic Term Commencement Date. ARTICLE VI 6.1. Net Lease. This Lease shall constitute a net lease. Any present or future law to the contrary notwithstanding, this Lease shall not terminate, nor shall Lessee be entitled to any abatement, suspension, deferment, reduction, setoff, counterclaim, or defense with respect to the Rent, nor shall the obligations of Lessee hereunder be affected (except as expressly herein permitted and by performance of the obligations in connection therewith) by reason of (a) any damage to or destruction of any Property or any part thereof; (b) any taking of any Property or any part thereof or interest therein by Condemnation or otherwise; (c) any prohibition, limitation, restriction or prevention of Lessee's use, occupancy or enjoyment of any Property or any part thereof, or any interference with such use, occupancy or enjoyment by any Person or for any other reason; (d) any title defect, Lien or any matter affecting title to any Property; (e) any eviction by paramount title or otherwise; (f) any default by Lessor hereunder; (g) any action for bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding relating to or affecting the Agent, any Lender, Lessor, Lessee, any Holder or any Governmental Authority; (h) the impossibility or illegality of performance by Lessor, Lessee or both, (i) any action of any Governmental Authority or any other Person; (j) Lessee's acquisition of ownership of all or part of any Property; (k) breach of any warranty or representation with respect to any Property or of any Operative Agreement; (1) any defect in the condition, quality or fitness for use of any Property or any part thereof; or (m) any other cause or circumstance whether similar or dissimilar to the foregoing and whether or not Lessee shall have notice or knowledge of any of the foregoing. The foregoing clause (j) shall not prevent the termination of the Lease in accordance with the terms hereof if the Lessee purchases all of the Properties pursuant to Section 20.1 or 20.2. The parties intend that the obligations of Lessee hereunder shall be covenants, agreements and obligations that are separate and independent from any obligations of Lessor hereunder and shall continue unaffected unless such covenants, agreements and obligations shall have been modified or terminated in accordance with an express provision of this Lease. Lessor and Lessee acknowledge and agree that the provisions of this Section 6.1 have been specifically reviewed and agreed to, and that this Lease has been negotiated by the parties. 4 6.2. No Termination or Abatement. Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting Lessor or any Governmental Authority, or any action with respect to this Lease or any Operative Agreement which may be taken by any trustee, receiver or liquidator of Lessor or any Governmental Authority or by any court with respect to Lessor, Lessee, any Holder, or any Governmental Authority. Lessee hereby waives all right (a) to terminate or surrender this Lease (except as permitted under the terms of the Operative Agreements) or (b) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. Lessee shall remain obligated under this Lease in accordance with its terms and Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound by all of the terms and conditions contained in this Lease. ARTICLE VII 7.1. Ownership of the Properties. (a) Lessor and Lessee intend that (i) for financial accounting purposes with respect to Lessee (A) this Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended, (B) Lessor will be treated as the owner and lessor of the Properties and (C) Lessee will be treated as the lessee of the Properties, but (ii) for federal and all state and local income tax purposes, for bankruptcy purposes and all other purposes (A) this Lease will be treated as a financing arrangement and (B) Lessee will be treated as the owner of the Properties and will be entitled to all tax benefits ordinarily available to owners of property similar to the Properties for such tax purposes, and (C) all payments of Basic Rent shall be deemed to be interest payments. Consistent with the foregoing, Lessee intends to claim depreciation and cost recovery deductions associated with the Properties, and Lessor agrees not to take any inconsistent position on its income tax returns. Neither Lessor, the Agent, any Lender, any Holder, UBS Warburg LLC, Deutsche Bank Securities, Inc., The Chase Manhattan Bank nor Deutsche Bank AG, New York Branch makes any representation or warranty with respect to the foregoing matters described in this Section 7.1 and will assume no liability for the Lessee's accounting treatment of this transaction. (b) For all purposes other than as set forth in Section 7.1(a)(i), Lessor and Lessee intend this Lease to constitute a finance lease and not a true lease. Lessor and Lessee further intend and agree that, for the purpose of securing Lessee's obligations hereunder (i) this Lease shall be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code respecting each of the Properties to the extent such is personal property and an irrevocable grant and conveyance of each Property to the Lessor as security for the Lessee's obligations hereunder to the extent such is real 5 property; (ii) the acquisition of title (or to the extent applicable, a leasehold interest) in the Properties referenced in Article II shall be deemed to be (A) a grant by Lessee to Lessor of a lien on and security interest in all of Lessee's right, title and interest in and to each Property and all proceeds (including without limitation insurance proceeds) of each Property, whether in the form of cash, investments, securities or other property, and (B) an assignment by Lessee to Lessor of all rents, profits and income produced by each Property; and (iii) notifications to Persons holding such Property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. Lessor and Lessee shall promptly take such actions as may be necessary or advisable in either party's opinion (including without limitation the filing of Uniform Commercial Code Financing Statements or Uniform Commercial Code Fixture Filings) to ensure that the lien and security interest in the Properties will be deemed to be a perfected lien and security interest of first priority under applicable law and will be maintained as such throughout the Term. ARTICLE VIII 8.1. Condition of the Properties. LESSEE ACKNOWLEDGES AND AGREES THAT IT IS LEASING THE PROPERTIES "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY LESSOR AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF (IF ANY), (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, (D) ALL APPLICABLE LEGAL REQUIREMENTS AND (E) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF. NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF ANY PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY PROPERTY (OR ANY PART THEREOF), AND NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREON OR THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT. THE LESSEE HAS BEEN AFFORDED FULL OPPORTUNITY TO INSPECT EACH PROPERTY AND THE IMPROVEMENTS THEREON (IF ANY), IS (INSOFAR AS THE LESSOR, THE AGENT, EACH LENDER AND EACH HOLDER ARE CONCERNED) SATISFIED WITH THE RESULTS OF ITS INSPECTIONS AND IS ENTERING INTO THIS LEASE SOLELY ON THE BASIS OF THE RESULTS OF ITS OWN INSPECTIONS, AND ALL RISKS INCIDENT TO THE MATTERS DESCRIBED IN THE PRECEDING SENTENCE, AS BETWEEN THE LESSOR, THE AGENT, THE LENDERS AND THE HOLDERS, ON THE ONE HAND, AND THE LESSEE, ON THE OTHER HAND, ARE TO BE BORNE BY LESSEE. 6 8.2. Possession and Use of the Properties. (a) At all times during the Term, the Properties shall be used by Lessee or any sublessee permitted under Section 25.2 for the provision of rehabilitation and other healthcare services and related activities in the ordinary course of its business. Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Properties as contemplated by this Lease. Lessee shall not commit or permit any waste of the Properties or any part thereof. (b) Lessee represents and warrants that the address stated in Section 29.1 of this Lease is the chief place of business and chief executive office of Lessee (as such terms are used in Section 9-103 (or other corresponding section) of the Uniform Commercial Code of any applicable jurisdiction), and Lessee will provide Lessor with prior written notice of any change of location of its chief place of business or chief executive office. Regarding the Properties, Lessee represents and warrants that Schedules I-A and I-B hereto correctly identify the initial location of the related Equipment and Improvements, and Schedule I-C hereto contains an accurate legal description for the Land. Lessee has no other places of business where the Equipment or Improvements will be located other than as identified on Schedule I-C. (c) Lessee will not attach or incorporate any item of Equipment to or in any other item of equipment or personal property or to or in any real property (except the Land identified in Schedule I-C) in a manner that could give rise to the assertion of any Lien on such item of Equipment by reason of such attachment or the assertion of a claim that such item of Equipment has become a fixture and is subject to a Lien in favor of a third party that is prior to the Liens thereon created by the Operative Agreements. (d) At all times during the Term, Lessee will comply with all obligations under, and (to the extent no Event of Default has occurred and is continuing and provided that such exercise will not impair the value of any Property) shall be permitted to exercise all rights and remedies under, all operation and easement agreements and related or similar agreements applicable to each Property. ARTICLE IX 9.1. Compliance with Legal Requirements and Insurance Requirements. Subject to the terms of Article XIII relating to permitted contests, Lessee, at its sole cost and expense, shall (i) comply with all material Legal Requirements (including without limitation all Environmental Laws), and all Insurance Requirements relating to the Properties, including the use, development, construction, operation, maintenance, repair, refurbishment and restoration thereof, whether or not compliance therewith shall require structural or extraordinary changes in the Improvements or interfere with the use and enjoyment of any Property, and (ii) 7 procure, maintain and comply with all material licenses, permits, orders, approvals, consents and other authorizations required for the construction, use, maintenance and operation of any Property and for the use, development, construction, operation, maintenance, repair and restoration of the Improvements. ARTICLE X 10.1. Maintenance and Repair; Return. (a) Lessee, at its sole cost and expense, shall maintain each Property in good condition, repair and working order (ordinary wear and tear excepted) and make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural, or foreseen or unforeseen, in each case as required by all Legal Requirements, Insurance Requirements, and manufacturer's specifications and standards and on a basis consistent with the operation and maintenance of properties or equipment comparable in type and function to such Property and in compliance with standard industry practice, subject, however, to the provisions of Article XV with respect to Condemnation and Casualty. (b) Lessee shall not move, use or relocate any component of any Property beyond the boundaries of the Land without Lessor's prior written consent, which consent shall not be unreasonably withheld or delayed. (c) If any material component of any Property becomes worn out, lost, destroyed, damaged beyond repair or otherwise permanently rendered unfit for use, Lessee, at its own expense, will within a reasonable time replace such component with a replacement component which is free and clear of all Liens (other than Permitted Liens) and has a value, utility and useful life at least equal to the component replaced. All components which are added to any Property shall immediately become the property of, and title thereto shall vest in, Lessor, and shall be deemed incorporated in such Property and subject to the terms of this Lease as if originally leased hereunder. (d) Upon reasonable advance notice, Lessor and its agents shall have the right to inspect each Property and the maintenance records with respect thereto at any reasonable time during normal business hours but shall not materially disrupt the business of Lessee. (e) In addition to any Appraisal required by Section 5.3 of the Participation Agreement, Lessee shall cause to be delivered to Lessor (at Lessee's sole expense) any additional Appraisals (or reappraisals) as Lessor or the Agent may deem appropriate (i) if an Event of Default has occurred and is continuing, or (ii) if any one of Lessor, the Agent, any Lender or any Holder is required pursuant to any applicable Legal Requirement to obtain such an Appraisal (or reappraisal). (f) Lessor shall under no circumstances be required to build any improvements on any Property, make any repairs, replacements, alterations or renewals of any 8 nature or description to such Property, make any expenditure whatsoever in connection with this Lease or maintain any Property in any way. Lessor shall not be required to maintain, repair or rebuild all or any part of any Property, and Lessee waives the right to (i) require Lessor to maintain, repair, or rebuild all or any part of any Property (unless such repairs are needed to cure damage to a Property caused by the gross negligence or willful misconduct of the Lessor), or (ii) make repairs at the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement, contract, agreement, covenants, condition or restriction at any time in effect. (g) Lessee shall, upon the expiration or earlier termination of this Lease with respect to the Properties, if Lessee shall not have exercised its Purchase Option with respect to the Properties, surrender the Properties to Lessor, or the third party purchaser, as the case may be, subject to Lessee's obligations under this Lease (including without limitation Sections 9.1, 10.1(a)-(f), 10.2. 11.1 12.1, 22.1 and 23.1) and the other Operative Agreements. 10.2. Environmental Inspection. If (a) Lessee has not given notice of the exercise of its Purchase Option on the Expiration Date pursuant to Section 20.2, or (b) Lessee has given notice, pursuant to Section 20.2 of its election to remarket the Properties pursuant to Section 22.1 then, in either case, not more than 120 days nor less than 60 days prior to the Expiration Date, Lessee shall, at its sole cost and expense, provide to Lessor and the Agent a report by a reputable environmental consultant selected by Lessee, which report shall be in form and substance reasonably satisfactory to Lessor and the Agent and shall include without limitation a "Phase I" environmental report (or update of a prior "Phase I" report that was previously delivered to the Lessor and the Agent) on each of the Properties. If the report delivered pursuant to the preceding sentence recommends that a "Phase II" report or other supplemental report be obtained, the Lessee shall, at its own cost and expense, not less than thirty (30) days prior to such Expiration Date or Payment Date, provide to Lessor and the Agent such "Phase II" or other report, in form and substance reasonably satisfactory to Lessor and the Agent. If Lessee fails to provide such Phase I, Phase II or other supplemental reports with respect to any Property within the time periods required by this Section 10.2, or if such report or reports are not satisfactory in scope or content to the Agent or the Lessor (in their sole discretion), then notwithstanding any other provision of this Lease, Lessor may require Lessee to purchase all of the Properties on such Expiration Date or Payment Date for the Termination Value thereof, plus all Rent due and payable, and all other amounts due and owing under any Operative Agreement. ARTICLE XI 11.1. Modifications. Lessee at its sole cost and expense, at any time and from time to time without the consent of Lessor may make alterations, renovations, improvements and additions to any Property or any part thereof and substitutions and replacements therefor (collectively, "Modifications") and shall make any Modifications required by all applicable Legal 9 Requirements; provided, that: (i) except for any Modification required to be made pursuant to a Legal Requirement, no Modification shall materially impair the value, utility or useful life of any Property from that which existed immediately prior to such Modification; (ii) the Modification shall be done expeditiously and in a good and workmanlike manner; (iii) Lessee shall comply with all material Legal Requirements (including all Environmental Laws) and Insurance Requirements applicable to the Modification, including without limitation the obtaining of all permits and certificates of occupancy, and the structural integrity of any Property shall not be adversely affected; (iv) to the extent required by Section 14.2(a), Lessee shall maintain builders' risk insurance at all times when a Modification is in progress; (v) subject to the terms of Article XIII relating to permitted contests, Lessee shall pay all costs and expenses and discharge any Liens arising with respect to the Modification; (vi) such Modification shall comply with the requirements of this Lease (including without limitation Sections 8.2 and 10.1); and (vii) no Improvements shall be demolished. Modifications that (y) are not required for any Property or any part thereof pursuant to any Legal Requirement or otherwise and (z) are severable from the applicable Property without damage or other loss of value to such Property (other than the value added by such Modification) shall become property of the Lessee, and title to such Modifications shall rest with the Lessee. Except as set forth in the immediately preceding sentence, all Modifications shall become property of the Lessor and shall be subject to this Lease, and title to any component of any Property comprising any such Modifications shall immediately vest in Lessor. ARTICLE XII 12.1. Warranty of Title. (a) Lessee agrees that, except as otherwise provided herein and subject to the terms of Article XIII relating to permitted contests, Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, (i) any Lien, defect, attachment, levy, title retention agreement or claim upon any Property or any Modifications or (ii) any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by the Agent pursuant to the Credit Agreement, in each case other than Permitted Liens and Lessor Liens. Lessee shall promptly notify Lessor in the event it receives actual knowledge that a Lien other than a Permitted Lien or Lessor Lien has occurred with respect to any Property, and Lessee represents and warrants to, and covenants with, Lessor that the Liens in favor of the Lessor created by the Operative Agreements are first priority perfected Liens subject only to Permitted Liens. (b) Nothing contained in this Lease shall be construed as constituting the consent or request of Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to any Property or any part thereof NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING A PROPERTY OR 10 ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO SUCH PROPERTY. ARTICLE XIII 13.1. Permitted Contests Other Than in Respect of Indemnities. Except to the extent otherwise provided for in Section 13 of the Participation Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Legal Requirement, or utility charges payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or encroachment, and Lessor agrees not to pay, settle or otherwise compromise any such item, provided that (a) the commencement and continuation of such proceedings shall suspend the collection of any such contested amount from, and suspend the enforcement thereof against, the subject Property, Lessor, each Holder, the Agent and each Lender; (b) there shall not be imposed a Lien (other than Permitted Liens) on any Property and no part of any Property nor any Rent shall be in any danger of being sold, forfeited, lost or deferred; (c) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or material civil liability on Lessor, any Holder, the Agent or any Lender for failure to comply therewith; and (d) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the end of the Term, then Lessee shall deliver to Lessor an Officer's Certificate certifying as to the matters set forth in clauses (a), (b) and (c) of this Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by Lessee, shall join as a party therein at Lessee's sole cost and expense. ARTICLE XIV 14.1. Public Liability and Workers' Compensation Insurance. During the Term, Lessee shall procure and carry, at Lessee's sole cost and expense, commercial general liability insurance for claims for injuries or death sustained by persons or damage to property while on a Property or the premises where the Equipment is located and such other public liability coverages as are then customarily carried by similarly situated companies conducting business similar to that conducted by Lessee. Such insurance shall be on terms and in amounts that are no less favorable than insurance maintained by Lessee with respect to similar properties and equipment that it owns and are then carried by similarly situated companies conducting business similar to that conducted by Lessee. The policies shall be endorsed to name Lessor, the Holders, the Agent and the Lenders as additional insureds and, to the extent of their interest, loss payees. The policies shall also specifically provide that such policies shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which Lessor, any Holder, the Agent or any Lender may have in force. Lessee shall, in the operation of each Property, comply with the applicable workers' compensation laws and protect Lessor, each Holder, the Agent and each Lender against any liability under such laws. 11 14.2. Hazard and Other Insurance. (a) During the Term, Lessee shall keep, or cause to be kept, each Property insured against loss or damage by fire and other risks and shall maintain builders' risk insurance during construction of any Improvements or Modifications in amounts not less than the replacement value from time to time of such Property and on terms that (a) are no less favorable than insurance covering other similar properties owned by Lessee and (b) are then carried by similarly situated companies conducting business similar to that conducted by Lessee. The policies shall be endorsed to name Lessor, the Holders, the Agent and the Lenders, to the extent of their respective interests, as additional loss payees; provided, that so long as no Lease Event of Default has occurred and is continuing, any loss payable under the insurance policies required by this Section will be paid to Lessee. (b) If, during the Term, the area in which a Property is located is designated a "flood-prone" area pursuant to the Flood Disaster Protection Act of 1973, or any amendments or supplements thereto, then Lessee shall comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973. In addition, Lessee will fully comply with the requirements of the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as each may be amended from time to time, and with any other Legal Requirement concerning flood insurance to the extent that it may apply to any such Property. 14.3. Coverage. (a) As of the date of this Lease and annually thereafter so long as this Lease remains in effect, Lessee shall furnish Lessor and the Agent with certificates prepared by the insurers or insurance broker of Lessee showing the insurance required under Sections 14.1 and 14.2 to be in effect, naming (except with respect to workers' compensation insurance) Lessor, the Holders, the Agent and the Lenders as additional insureds and loss payees and evidencing the other requirements of this Article XIV. All such insurance shall be at the cost and expense of Lessee and provided by nationally recognized, financially sound insurance companies. Such certificates shall include a provision for thirty (30) days' advance written notice by the insurer to Lessor and the Agent in the event of cancellation or material alteration of such insurance. If a Lease Event of Default has occurred and is continuing and Lessor so requests, Lessee shall deliver to Lessor copies of all insurance policies required by Sections 14.1 and 14.2. (b) Lessee agrees that any insurance policy required by Sections 14.1, 14.2(a) and 14.2(b) shall include an appropriate provision that such policy will not be invalidated should Lessee waive, at any time, any or all rights of recovery against any party for losses covered by such policy or due to any breach of warranty, 12 fraud, action, inaction or misrepresentation by Lessee or any Person acting on behalf of Lessee. Lessee hereby waives any and all such rights against the Lessor, the Holders, the Agent and the Lenders to the extent of payments made to any such Person under any such policy. (c) Neither Lessor nor Lessee shall carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Article XIV, except that Lessor may carry separate liability insurance at Lessor's sole cost so long as (i) Lessee's insurance is designated as primary and in no event excess or contributory to any insurance Lessor may have in force which would apply to a loss covered under Lessee's policy and (ii) each such insurance policy will not cause Lessee's insurance required under this Article XIV to be subject to a coinsurance exception of any kind. (d) Lessee shall pay as they become due all premiums for the insurance required by Section 14.1 and Section 14.2, shall renew or replace each policy prior to the expiration date thereto and shall otherwise maintain the coverage required by such Sections without any lapse in coverage. (e) Notwithstanding anything to the contrary contained in this Section, Lessee's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried or maintained by Lessee; provided, however, that the coverage afforded Lessor will not be reduced or diminished or otherwise be different from that which would exist under separate policies meeting all other requirements of this Lease, and that the requirements of this Article XIV are otherwise satisfied. ARTICLE XV 15.1. Casualty and Condemnation. (a) Subject to the provisions of this Article XV and Article XVI (in the event Lessee delivers, or is obligated to deliver, a Termination Notice), and prior to the occurrence and continuation of a Lease Default or Lease Event of Default, Lessee shall be entitled to receive (and Lessor hereby irrevocably assigns to Lessee all of Lessor's right, title and interest in) any award, compensation or insurance proceeds under Sections 14.2(a) or (b) hereof to which Lessee or Lessor may become entitled by reason of their respective interests in each Property (i) if all or a portion of such Property is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, occupancy, easement rights or title to such Property or any part thereof is the subject of a Condemnation; provided, however, that if a Lease Default or Lease Event of Default shall have occurred and be continuing, such award, compensation or insurance proceeds shall be paid directly to Lessor or, if received by Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor and held in accordance with the terms of this paragraph (a). All amounts held by Lessor hereunder on account of any award, compensation or insurance proceeds either paid directly to Lessor or turned over to Lessor shall be held as security for the performance of Lessee's obligations hereunder. 13 (b) Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof. At Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor and the Agent shall participate in any such proceeding, action, negotiation, prosecution or adjustment. Lessor and Lessee agree that this Lease shall control the rights of Lessor and Lessee in and to any such award, compensation or insurance payment. (c) If Lessee shall receive notice of a Casualty or a possible Condemnation of a Property or any interest therein where damage to such Property is estimated to equal or exceed ten percent (10%) of the Property Cost of such Property, Lessee shall give notice thereof to the Lessor and to the Agent promptly after the receipt of such notice. (d) In the event of a Casualty or a Condemnation (regardless of whether notice thereof must be given pursuant to paragraph (c)), this Lease shall terminate with respect to such Property in accordance with Section 16.1 if Lessee, within thirty (30) days after such occurrence, delivers to Lessor and the Agent a Termination Notice to such effect. (e) If, pursuant to this Section 15.1, this Lease shall continue in full force and effect following a Casualty or Condemnation with respect to a Property, Lessee shall, at its sole cost and expense and using, if available, the proceeds of any award, compensation or insurance with respect to such Casualty or Condemnation (including, without limitation, any such award, compensation or insurance which has been received by the Agent and which should be turned over to Lessee pursuant to the terms of the Operative Agreements, and if not available or sufficient, using its own funds), promptly and diligently repair any damage to such Property caused by such Casualty or Condemnation in conformity with the requirements of Sections 10.1 and 11.1, using the as-built plans and specifications or manufacturer's specifications for the applicable Improvements or Equipment (as modified to give effect to any subsequent Modifications, any Condemnation affecting the Property and all applicable Legal Requirements), so as to restore such Property to substantially the same condition, operation, function and value as existed immediately prior to such Casualty or Condemnation. In such event, title to such Property shall remain with Lessor. (f) In no event shall a Casualty or Condemnation with respect to which this Lease remains in full force and effect under this Section 15.1 affect Lessee's obligations to pay Rent pursuant to Section 3.1. (g) Notwithstanding anything to the contrary set forth in Section 15.1(a) or Section 15.1 (e), if during the Term, a Casualty occurs with respect to any Property or Lessee receives notice of a Condemnation with respect to any Property, and 14 following such Casualty or Condemnation, (i) such Property cannot reasonably be restored, repaired or replaced on or before the 180th day prior to the Expiration Date (if such Casualty or Condemnation occurs during the Term) to substantially the same condition as existed immediately prior to such Casualty or Condemnation, or (ii) on or before such day such Property is not in fact so restored, repaired or replaced, then Lessee shall be required to purchase such Property on the next Payment Date and pay Lessor the Termination Value for such Property, plus any and all Rent then due and owing, plus all other amounts then due and owing (including without limitation amounts described in clause FIRST of Section 22.2). 15.2. Environmental Matters. Promptly upon Lessee's actual knowledge of the presence of Hazardous Substances in any portion of a Property in concentrations and conditions that constitute an Environmental Violation and as to which, in the reasonable opinion of Lessee, the cost to undertake any legally required response, clean up, remedial or other action might result in a cost to Lessee of more than $100,000, Lessee shall notify Lessor in writing of such condition. In the event of any Environmental Violation (regardless of whether notice thereof must be given), Lessee shall, not later than thirty (30) days after Lessee has actual knowledge of such Environmental Violation, either deliver to Lessor a Termination Notice pursuant to Section 16.1 if applicable, or, at Lessee's sole cost and expense, promptly and diligently undertake and complete any response, clean up, remedial or other action necessary to remove, cleanup or remediate the Environmental Violation in accordance with all Environmental Laws. If Lessee does not deliver a Termination Notice pursuant to Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause to be prepared by a reputable environmental consultant acceptable to Lessor a report describing the Environmental Violation and the actions taken by Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied in full compliance with applicable Environmental Law. 15.3. Notice of Environmental Matters. Promptly, but in any event within thirty (30) days from the date Lessee has actual knowledge thereof, Lessee shall provide to Lessor written notice of any pending or threatened Environmental Claim involving any Environmental Law or any Release on or in connection with any Property. All such notices shall describe in reasonable detail the nature of the claim, action or proceeding and Lessee's proposed response thereto. In addition, Lessee shall provide to Lessor, within five (5) Business Days of receipt, copies of all material written communications with any Governmental Authority relating to any Environmental Law in connection with the Property. Lessee shall also promptly provide such detailed reports of any such material Environmental Claims as may reasonably be requested by Lessor. 15 ARTICLE XVI 16.1. Termination Upon Certain Events. If any of the following occur: (i) if the requirements of Section 15.1(c) are satisfied, or (ii) if the requirements of Section 15.1(d) are satisfied and Lessee has determined pursuant to such section that following the applicable Casualty or Condemnation this Lease shall terminate with respect to the affected Property, or (iii) Lessee has determined pursuant to the second sentence of Section 15.2 that, due to the occurrence of an Environmental Violation, this Lease shall terminate with respect to the affected Property, then Lessee shall be obligated to deliver, within thirty (30) days of its receipt of notice of the applicable Condemnation or the occurrence of the applicable Casualty or Environmental Violation, a written notice to the Lessor in the form described in Section 16.2(a) (a "Termination Notice") of the termination of this Lease with respect to the affected Property. 16.2. Procedures. (a) A Termination Notice shall contain: (i) notice of termination of this Lease with respect to the affected Property on a Payment Date not more than sixty (60) days after Lessor's receipt of such Termination Notice (the "Termination Date"); and (ii) a binding and irrevocable agreement of Lessee to pay the Termination Value for the applicable Property, any and all Rent then due and owing and all other amounts then due and owing from Lessee under any of the Operative Agreements (including without limitation amounts described in clause FIRST of Section 22.2) and purchase such Property on such Termination Date. (b) On the Termination Date, Lessee shall pay to Lessor the Termination Value for the applicable Property, any and all Rent then due and owing and all other amounts then due and owing from Lessee under any of the Operative Agreements (including without limitation amounts described in clause FIRST of Section 22.2), and Lessor shall convey such Property, or the remaining portion thereof, if any, to Lessee (or Lessee's designee), all in accordance with Section 19.1. ARTICLE XVII 17.1. Lease Events of Default. If any one or more of the following events (each a "Lease Event of Default") shall occur: (a) Lessee shall fail to make payment of (i) any Basic Rent (except as set forth in clause (ii)) within five (5) Business Days after the same has become due and payable or (ii) any Termination Value, on the date any such payment is due, or any payment of Basic Rent or Supplemental Rent due on the due date of any such payment of Termination Value, or any amount due on the Expiration Date; 16 (b) Lessee shall fail to make payment of any Supplemental Rent (other than Supplemental Rent referred to in Section 17.1(a)(ii)) due and payable within three (3) Business Days after receipt of notice that such payment is due; (c) Lessee shall fail to maintain insurance as required by Article XIV of this Lease; (d) Lessee or any Consolidated Entity, as the case may be, shall fail to observe or perform any term, covenant or provision (including without limitation any term, covenant or provision applying to Lessee and such Consolidated Entity under the Incorporated Covenants) of Lessee or any Consolidated Entity, as the case may be, under this Lease or any other Operative Agreement to which Lessee is a party other than those set forth in Sections 17.1(a), (b) or (c) hereof, and such failure shall remain uncured for a period of thirty (30) days after the earlier of receipt of written notice from Lessor thereof or a Responsible Officer of Lessee becomes aware of such failure; (e) Lessee shall default in the performance or observance of any other provision of this Lease or any other Operative Agreement to which Lessee is a party other than those set forth in Sections 17.1(a), (b), (c) or (d) hereof, and shall not cure such default within thirty days after the first to occur of (i) the date the Agent, Lenders or Lessor gives written or telephonic notice of the default to Lessee, or (ii) the date the Lessee otherwise has notice thereof; (f) A default shall be made (i) in the payment of any Indebtedness (other than obligations under the Operative Agreements) of the Lessee or any Consolidated Entity when due or (ii) in the performance, observance or fulfillment of any term or covenant contained in any agreement or instrument under or pursuant to which any such Indebtedness may have been issued, created, assumed, guaranteed or secured by the Lessee or any Consolidated Entity, if the effect of such default is to accelerate the maturity of such Indebtedness or to permit the holder thereof to cause such Indebtedness to become due prior to its stated maturity, and such default shall not be cured within 10 days after the occurrence of such default, and the amount of the Indebtedness involved exceeds $5,000,000; (g) The liquidation or dissolution of Lessee, or the suspension of the business of Lessee, or the filing by Lessee of a voluntary petition or an answer seeking reorganization, arrangement, readjustment of its debts or for any other relief under the United States Bankruptcy Code, as amended, or under any other insolvency act or law, state or federal, now or hereafter existing, or any other action of Lessee indicating its consent to, approval of or acquiescence in, any such petition or proceeding; the application by Lessee for, or the appointment by consent or acquiescence of Lessee of a receiver, a trustee or a custodian of Lessee for all or a substantial part of its property; the making by Lessee of any assignment for the benefit of creditors; the inability of Lessee or the admission by Lessee in writing of its inability to pay its debts as they mature; or Lessee taking any corporate action to authorize any of the foregoing; 17 (h) The filing of an involuntary petition against Lessee in bankruptcy or seeking reorganization, arrangement readjustment of its debts or for any other relief under the United States Bankruptcy Code, as amended, or under any other insolvency act or law, state or federal, now or hereafter existing; or the involuntary appointment of a receiver, a trustee or a custodian of Lessee for all or a substantial part of its property; or the issuance of a warrant of attachment, execution or similar process against any substantial part of the property of Lessee, and the continuance of any of such events for ninety (90) days undismissed or undischarged; (i) The adjudication of Lessee as bankrupt or insolvent; (j) The entering of any order in any proceedings against Lessee decreeing the dissolution, divestiture or split-up of Lessee, and such order remains in effect for more than sixty (60) days; (k) Any material report, certificate, financial statement or other instrument delivered to Lessor by or on behalf of Lessee pursuant to the terms of this Lease or any other Operative Agreement shall be false or misleading in any material respect when made or delivered; (l) A final judgment (after all avenues of appeal and all applicable appeal periods have expired), which with other outstanding final judgments against Lessee exceeds an aggregate of $500,000 shall be rendered against Lessee, and if within thirty (30) days after entry thereof such judgment shall not have been discharged, paid or bonded or execution thereon stayed pending appeal, or if within thirty (30) days after the expiration of any such stay such judgment shall not have been discharged; (m) Any "Event of Default" (as defined in the Existing HEALTHSOUTH Credit Agreement, as such agreement may be amended, supplemented or restated from time to time, to the extent the Majority Lenders and the Agent agree to any such amendments, otherwise the form of HEALTHSOUTH Credit Agreement existing before such amendment will continue to control with respect to the Operative Agreements) (hereinafter referred to as "Existing HEALTHSOUTH Corporation Credit Agreement Event of Default") shall have occurred and be continuing (or, in the event the Existing HEALTHSOUTH Credit Agreement has been terminated, would have occurred and be continuing had the HEALTHSOUTH Credit Agreement continued to exist) beyond any applicable notice, grace or cure period (if any) included within the definition of such Existing HEALTHSOUTH Corporation Credit Agreement Event of Default; (n) Any material Environmental Violation with respect to which notice to the Lessor is required to be given in accordance with Section 15.2 shall have occurred and be continuing, unless (i) the Lessee shall completely remediate such Environmental Violation to the reasonable satisfaction of the Agent and the Lessor within 90 days following the date the Lessee has actual knowledge of such Environmental 18 Violation or (ii) the Lessee shall consummate the purchase of the affected Property in accordance with and at the price required by Section 16.2 by the earlier of (A) 60 days after the Lessor's receipt of the respective Termination Notice under Section 16.2(a) or (B) 90 days after the Lessee has actual knowledge of such Environmental Violation; (o) Any Operative Agreement shall cease to be in full force and effect, other than due to its expiration or termination in accordance with its terms; or (p) If the Guarantor shall default in the performance of any obligations under the Guarantee. then, in any such event, (i) Lessor may, in addition to the other rights and remedies provided for in this Article XVII and in Section 18.1, terminate this Lease by giving Lessee fifteen (15) days notice of such termination, and this Lease shall terminate, and all rights of Lessee under this Lease shall cease. Lessee shall, to the fullest extent permitted by law, pay as Supplemental Rent all costs and expenses incurred by or on behalf of Lessor, including without limitation reasonable fees and expenses of counsel, as a result of any Lease Event of Default hereunder. 17.2. Surrender of Possession. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written notice, surrender to Lessor possession of the Properties. Lessor may enter upon and repossess the Properties by such means as are available at law or in equity, and may remove Lessee and all other Persons and any and all personal property and Lessee's equipment and personalty and severable Modifications from the Properties. Lessor shall have no liability by reason of any such entry, repossession or removal performed in accordance with applicable law. Upon the written demand of Lessor, Lessee shall return the Properties promptly to Lessor, in the manner and condition required by, and otherwise in accordance with the provisions of, Section 22.1(c) hereof 17.3. Reletting. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessor may, but shall be under no obligation to, relet any Property, for the account of Lessee or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) and for such purposes as Lessor may determine, and Lessor may collect, receive and retain the rents resulting from such reletting. Lessor shall not be liable to Lessee for any failure to relet a Property or for any failure to collect any rent due upon such reletting. 17.4. Damages. Neither (a) the termination of this Lease pursuant to Section 17.1; (b) the repossession of any Property; nor (c) the failure of Lessor to relet any Property, the reletting of all or any portion thereof, nor the failure of Lessor to collect or receive any rentals due upon any 19 such reletting, shall relieve Lessee of its liabilities and obligations hereunder, all of which shall survive any such termination, repossession or reletting. If any Lease Event of Default shall have occurred and be continuing and notwithstanding any termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay to Lessor all Rent and other sums due and payable hereunder to and including the date of such termination. Thereafter, on the days on which the Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or would have been payable under this Lease if the same had not been terminated pursuant to Section 17.1 and until the end of the Term hereof or what would have been the Term in the absence of such termination, Lessee shall pay Lessor, as current liquidated damages (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the Basic Rent and Supplemental Rent that are payable under this Lease or would have been payable by Lessee hereunder if this Lease had not been terminated pursuant to Section 17.1, less the net proceeds, if any, which are actually received by Lessor with respect to the period in question of any reletting of any Property or any portion thereof, provided that Lessee's obligation to make payments of Basic Rent and Supplemental Rent under this Section 17.4 shall continue only so long as Lessor shall not have received the amounts specified in Section 17.5. In calculating the amount of such net proceeds from reletting, there shall be deducted all of Lessor's, any Holder's, the Agent's and any Lender's reasonable expenses in connection therewith, including repossession costs, reasonable brokerage or sales commissions, reasonable fees and expenses for counsel and any necessary repair or alteration costs and expenses incurred in preparation for such reletting. To the extent Lessor receives any damages pursuant to this Section 17.4, such amounts shall be regarded as amounts paid on account of Rent. Lessee specifically acknowledges and agrees that its obligations under this Section 17.4 shall be absolute and unconditional under any and all circumstances and shall be paid or performed, as the case may be, without notice or demand and without any abatement, reduction, diminution, setoff, defense, counterclaim or recoupment whatsoever. 17.5. Final Liquidated Damages. If a Lease Event of Default shall have occurred and be continuing, whether or not this Lease shall have been terminated pursuant to Section 17.1 and whether or not Lessor shall have collected any current liquidated damages pursuant to Section 17.4, Lessor shall have the right to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, as and for final liquidated damages, but exclusive of the indemnities payable under Section 13 of the Participation Agreement, and in lieu of all current liquidated damages beyond the date of such demand (it being agreed that it would be impossible accurately to determine actual damages) the sum of (a) the Termination Value of all Properties plus (b) all other amounts owing in respect of Rent and Supplemental Rent heretofore accruing under this Lease and all other amounts then due and owing by the Lessee under any Operative Agreement. Upon payment of the amount specified pursuant to the first sentence of this Section 17.5, Lessee shall be entitled to receive from Lessor, either at Lessee's request or upon Lessor's election, in either case at Lessee's cost, an assignment of Lessor's entire right, title and interest in and to the Properties, the Improvements, Fixtures, Modifications and Equipment, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of this Lease (including the release of any memorandum of Lease recorded in connection therewith) and any Lessor Liens. The Properties shall be conveyed to Lessee "AS IS" `WHERE IS" and in their then present physical condition. If any statute or rule of law shall limit the amount of such final 20 liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law; provided, however, Lessee shall not be entitled to receive an assignment of Lessor's interest in the Property, the Improvements, Fixtures, Modifications or Equipment or documents unless Lessee shall have paid in full the Termination Value and all other amounts due and owing hereunder and under the other Operative Agreements. Lessee specifically acknowledges and agrees that its obligations under this Section 17.5 shall be absolute and unconditional under any and all circumstances and shall be paid or performed, as the case may be, without notice or demand (except as otherwise specifically provided herein) and without any abatement, reduction, diminution, setoff, defense, counterclaim or recoupment whatsoever. 17.6. Waiver of Certain Rights. If this Lease shall be terminated pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law, (a) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; provided, however, that the Lessor or the Agent shall make a good faith effort to provide notice to the Lessee of any such action, but the failure to provide such notice for any reason shall not result in the invalidity of any action so taken and shall not give rise to any rights on the part of the Lessee; (b) any right of redemption, re-entry or possession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt, and (d) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Article XVII. 17.7. Assignment of Rights Under Contract. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's demand immediately assign, transfer and set over to Lessor all of Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the purchase, construction, development, use or operation of all Properties (including, without limitation, a right, title and interest of Lessee with respect to all warranty, performance, service and indemnity provisions), as and to the extent that the same relate to the purchase, construction, use and operation of any Property. 17.8. Environmental Costs. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall pay directly to any third party (or at Lessor's election, reimburse Lessor) for the cost of any environmental testing or remediation work undertaken respecting any Property as such testing or work is deemed appropriate in the reasonable judgment of Lessor, Lessee shall pay all amounts referenced in the immediately preceding sentence within ten (10) days of any request by Lessor for such payment. 21 17.9. Remedies Cumulative. The remedies herein provided shall be cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise, including, without limitation, any mortgage foreclosure remedies. 17.10. Notice of Default or Event of Default. Lessee shall promptly notify the Lessor and the Agent if any Responsible Officer of Lessee has received notice, or has actual knowledge, of any Default or Event of Default. ARTICLE XVIII 18.1. Lessor's Right to Cure Lessee's Lease Defaults. Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to) remedy any Lease Event of Default for the account and at the sole cost and expense of Lessee, including the failure by Lessee to maintain the insurance required by Article XIV, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon any Property, or real property owned or leased by Lessee and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of any lessee. All reasonable out-of-pocket costs and expenses so incurred (including without limitation reasonable fees and expenses of counsel), together with interest thereon at the Base Rate from the date on which such sums or expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand. ARTICLE XIX 19.1. Provisions Relating to Lessee's Exercise of its Purchase Option. Subject to Section 19.2, in connection with any termination of this Lease pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option or its option to purchase all the Properties pursuant to Section 20.1, upon the date on which this Lease is to terminate, and upon tender by Lessee of the amounts set forth in Sections 16.2(b), 20.1 or 20.2, as applicable, Lessor shall execute and deliver to Lessee (or to Lessee's designee), at Lessee's cost and expense a deed and an assignment of Lessor's entire interest in the Properties, in recordable form and otherwise in conformity with local custom and free and clear of the Lien of this Lease and any Lessor Liens attributable to Lessor but without any other warranties (of title or otherwise) from the Lessor. All Property shall be conveyed to Lessee "AS IS" "WHERE IS" and in then present physical condition. 19.2. No Termination With Respect to Less than all of the Properties. Lessee shall not be entitled to exercise its Purchase Option separately with respect to less than all of the Properties or that portion of any Property consisting of Land, Equipment and Improvements but shall be required to exercise its Purchase Option with respect to all Properties. 22 ARTICLE XX 20.1. Early Purchase Option. Provided that no Lease Default of the types specified in Sections 17.1 (a), (b), (h), (i) or (j) or any Lease Event of Default shall have occurred and be continuing and provided that the Election Notice referred to in Section 20.2 has not been delivered, Lessee shall have the option, exercisable by giving the Agent and Lessor no more than one hundred twenty (120) days and no less than sixty (60) days irrevocable written notice of Lessee's election to exercise such option, to purchase all (but not less than all) of the Properties on a Scheduled Interest Payment Date as identified in such written notice, at a price equal to the Termination Value for the Properties (which the parties do not intend to be a "bargain" purchase price), and Lessee at such time shall also pay any and all Rent then due and owing and all other amounts then due and owing by Lessee under this Lease and under any other Operative Agreement (including without limitation amounts, if any, described in clause FIRST of Section 22.2). If Lessee exercises its option to purchase the Properties free and clear of the Lien of this Lease and any Lessor Liens with respect to the Property pursuant to this Section 20.1, Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to each Property as of the Scheduled Interest Payment Date on which such purchase occurs. 20.2. Purchase or Sale Option. Not less than 120 days and no more than 180 days prior to the Expiration Date, Lessee may give Lessor and Agent irrevocable written notice (the "Election Notice") that Lessee is electing to exercise either (a) the option to purchase all, but not less than all, of the Properties on the Expiration Date (the "Purchase Option") or (b) the option to remarket all of the Properties and cause a sale of all of the Properties pursuant to the terms of Section 22.1 (the "Sale Option"), such sale to occur on the Expiration Date. If Lessee does not give an Election Notice indicating the Sale Option at least 120 days and not more than 180 days prior to the then current Expiration Date, then Lessee shall be deemed to have elected the Purchase Option for the Expiration Date. Lessor shall have no obligation to sell any Property unless all of the Properties are sold on the Expiration Date. If Lessee shall (i) elect (or be deemed to elect) to exercise the Purchase Option, or (ii) elect to remarket all of the Properties pursuant to Section 22.1 and fail to deliver the environmental report required by Section 10.2 at the time specified in such Section, or (iii) elect to remarket all of the Properties pursuant to Section 22.1 and fail to cause all of the Properties to be sold in accordance with the terms of Section 22.1 on the Expiration Date on which such a sale of all of the Properties is required in connection with such election, then in each case, Lessee shall pay to Lessor on the Expiration Date an amount equal to the Termination Value for all the Properties (which the parties do not intend to be a "bargain" purchase) plus all Rent and other amounts then due and payable under this Lease or under any other Operative Agreement (including without limitation the amounts described in clause FIRST of Section 22.2), and, upon receipt of such amount, Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to the Properties in accordance with Section 19.1. If the Lessee elects the Purchase Option or the Sale Option and fails to perform its obligations under this Lease with respect to such option, a Lease Event of Default shall be deemed to occur. 23 ARTICLE XXI 21.1. Intentionally Deleted. ARTICLE XXII 22.1. Sale Procedure. (a) During the Marketing Period, Lessee, on behalf of the Lessor, shall obtain bids for the cash purchase of all of the Properties in connection with a sale to one or more purchasers to be consummated on the Expiration Date for the highest price available, shall notify Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for the Properties and shall provide Lessor with such additional information about the bids and the bid solicitation procedure as Lessor may reasonably request from time to time. Lessor may reject any and all bids and may assume sole responsibility for obtaining bids by giving Lessee written notice to that effect; provided, however, that notwithstanding the foregoing, Lessor may not reject the highest bid for the Properties submitted by the Lessee if such bid is greater than or equal to the sum of the Limited Recourse Amount for the Properties, plus all reasonable costs and expenses referred to in clause FIRST of Section 22.2 and represent bona fide offers from one or more third party purchasers and provided further, that Lessor may not reject a bid from the Houston Purchaser (defined below) with respect to all Property located in Houston, Texas, or a bid from the Topeka Purchaser (defined below) with respect to all Property located in Topeka, Kansas in each case if and only if each of the following conditions in clauses (y) and (z) are met: (y) such bid is at least equal to the Termination Value of such Property (whether or not it is the highest bid for such Property), plus all reasonable costs and expenses referred to in clause FIRST of Section 22.2 related to such Property. If the price which a prospective purchaser or purchasers shall have offered to pay for the Property is less than the sum of the Limited Recourse Amount plus all reasonable costs and expenses referred to in clause FIRST of Section 22.2 and represents a bona fide offer from such purchaser and (z) with respect to all Properties other than such Property (the "Other Properties"), the Lessee has received (and the Lessor has accepted) bids from one or more prospective purchasers, such bids are greater than or equal to the sum of the Limited Recourse Amounts for the Other Properties, plus all reasonable costs and expenses referred to in clause FIRST of Section 22.2, Lessor may elect to retain the Properties by giving Lessee prior written notice of Lessor's election to retain the Properties, and upon receipt of such notice, Lessee shall surrender the Properties to Lessor pursuant to Section 10.1. Unless Lessor shall have elected to retain the Properties pursuant to the preceding sentence, Lessee shall arrange for Lessor to sell the Properties free and clear of the Lien of this Lease and any Lessor Liens attributable to it, without recourse or warranty (of title or otherwise), for cash on the last day of the Marketing Period (such date being hereafter referred to as the "Sale Date") to the purchaser or purchasers identified by Lessee or Lessor, as the case may be; provided, however, solely as 24 to Lessor or the Trust Company, in its individual capacity, any Lessor Lien shall not constitute a Lessor Lien so long as Lessor or the Trust Company, in its individual capacity, is diligently contesting such Lessor Lien by appropriate proceedings in good faith and Lessor indemnifies such purchaser with respect to such Lessor Lien. Lessee shall surrender the Properties so sold or subject to such documents to the purchaser in the condition specified in Section 10.1. Lessee shall not take or fail to take any action which would have the effect of unreasonably discouraging bona fide third party bids for the Property. Lessor shall have no obligation to sell any Property on the Sale Date unless all of the Properties are sold on the Sale Date. If the Properties are not either (i) sold on the Sale Date in accordance with the terms of this Section 22.1, or (ii) retained by the Lessor pursuant to an affirmative election made by the Lessor pursuant to the third sentence of this Section 22.1(a), then the Lessee shall be obligated to pay the Lessor on the Sale Date an amount equal to the Termination Value for the Properties (plus all Rent and other amounts then due and payable under this Lease and any other Operative Agreements) in accordance with the terms of Section 20.2. For the purposes of this paragraph, "Houston Purchaser" shall mean Houston Rehabilitation Associates, a Delaware general partnership; and "Topeka Purchaser" shall mean Kansas Rehabilitation Hospital, Inc., a Delaware corporation. (b) If the Properties are sold on the Sale Date to a third party purchaser or purchasers in accordance with the terms of Section 22.1(a) and the aggregate purchase price paid for the Properties minus the sum of all costs and expenses referred to in clause FIRST of Section 22.2 is less than the sum of the Termination Value for the Properties plus all Rent and other amounts then due and payable under this Lease and under any other Operative Agreements (hereinafter such difference shall be referred to as the "Deficiency Balance"), then the Lessee hereby unconditionally promises to pay to the Lessor on the Sale Date the lesser of (i) the Deficiency Balance, or (ii) the Maximum Residual Guarantee Amount for the Properties. If the Properties are retained by the Lessor pursuant to an affirmative election made by the Lessor pursuant to the third sentence of Section 22.1(a), then the Lessee hereby unconditionally promises to pay to the Lessor on the Sale Date an amount equal to the Maximum Residual Guarantee Amount for the Properties. (c) In the event that the Properties are either sold to a third party purchaser or purchasers on the Sale Date or retained by the Lessor in connection with an affirmative election made by the Lessor pursuant to the third sentence of Section 22.1(a), then in either case on the Sale Date the Lessee shall provide Lessor or such third party purchaser or purchasers with (i) all permits, certificates of occupancy, governmental licenses and authorizations necessary to use and operate the Properties for their intended purposes, (ii) such easements, licenses, rights-of-way and other rights and privileges in the nature of an easement as are reasonably necessary or desirable in connection with the use, repair, access to or maintenance of the Properties for its intended purpose or otherwise as the Lessor shall reasonably request, (iii) a services agreement covering such services as Lessor or such third party purchaser may reasonably request and having a reasonable 25 duration, in order to use and operate the Properties for their intended purposes at such rates (not in excess of arm's-length fair market rates) as shall be acceptable to Lessee and Lessor or such third party purchaser or purchasers, and (iv) an assignment to the Lessor or such third party purchaser or purchasers (as the case may be) of any existing service agreements relating to the Properties, to the extent such agreements are assignable. All assignments, licenses, easements, agreements and other deliveries required by clauses (i) and (ii) of this paragraph (c) shall be in form reasonably satisfactory to the Lessor or such third party purchaser or purchasers, as applicable, and shall be fully assignable (including both primary assignments and assignments given in the nature of security) without payment of any fee, cost or other charge. 22.2. Application of Proceeds of Sale. The Lessor shall apply the proceeds of sale of the Properties in the following order of priority: (a) FIRST, to pay or to reimburse Lessor for the payment of all reasonable costs and expenses incurred by Lessor in connection with the sale; (b) SECOND, so long as the Participation Agreement, the Credit Agreement or the Trust Agreement is in effect and any Loan, Holder Advance or any amount is owing to the Lenders, the Holders or any other Person under any Operative Agreement, to the Agent to be applied pursuant to the terms in the Operative Agreements; and (c) THIRD, to the Lessee. 22.3. Indemnity for Excessive Wear. If the proceeds of the sale described in Section 22.1 with respect to the Properties, less all expenses incurred by Lessor in connection with such sale, shall be less than the Limited Recourse Amount with respect to the Properties, and at the time of such sale it shall have been reasonably determined (pursuant to the Appraisal Procedure) that the Fair Market Sales Value of the Properties, shall have been impaired by greater than expected wear and tear during the term of the Lease, Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's written statement (i) the amount of such excess wear and tear determined by the Appraisal Procedure or (ii) the amount of the Net Sale Proceeds Shortfall, whichever amount is less. 22.4. Appraisal Procedure. For determining the Fair Market Sales Value of the Properties or any other amount which may, pursuant to any provision of any Operative Agreement, be determined by an appraisal procedure, Lessor and Lessee shall use the following procedure (the "Appraisal Procedure"). Lessor and Lessee shall endeavor to reach a mutual agreement as to such amount for a period of ten (10) days from commencement of the Appraisal Procedure under the applicable section of the Lease, and if they cannot agree within ten (10) days, then two qualified appraisers, one chosen by Lessee and one chosen by Lessor, shall mutually agree thereupon, but 26 if either party shall fail to choose an appraiser within twenty (20) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If the two appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser shall be selected by the two appraisers or, failing agreement as to such third appraiser within (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the appraiser most different from the average of the other two shall be discarded and such average shall be binding on Lessor and Lessee; provided that if the highest appraisal and the lowest appraisal are equidistant from the third appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees and expenses of each appraiser shall be paid by Lessee. 22.5. Certain Obligations Continue. During the Marketing Period, the obligation of Lessee to pay Rent with respect to the Properties (including the installment of Basic Rent due on the Expiration Date) shall continue undiminished until payment in full to Lessor of the sale proceeds, if any, the Maximum Residual Guarantee Amount, the amount due under Section 22.3, if any, and all other amounts due to Lessor with respect to the Properties. Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article XXII. ARTICLE XXIII 23.1. Holding Over. If Lessee shall for any reason remain in possession of the Properties after the expiration or earlier termination of this Lease (unless Properties are conveyed to Lessee), such possession shall be as a tenancy at sufferance during which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to the Properties and Lessee shall continue to pay Basic Rent at 110% of the Basic Rent that would otherwise be due and payable at such time. Such Basic Rent shall be payable from time to time upon demand by Lessor and such additional 10% amount shall be applied by the Lessor to the payment of the Loans pursuant to the Credit Agreement and the Holder Advances pursuant to the Trust Agreement pro rata between the Loans and the Holder Advances. During any period of tenancy at sufferance, Lessee shall, subject to the first sentence of this paragraph, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue their occupancy and use of the Properties. Nothing contained in this Article XXIII shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to the Properties (unless the Properties are conveyed to Lessee) and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of the Properties or exercising any other remedy available to Lessor at law or in equity. 27 ARTICLE XXIV 24.1. Risk of Loss. During the Term, unless Lessee shall not be in actual possession of the Properties solely by reason of Lessor's exercise of its remedies of dispossession under Article XVII, the risk of loss or decrease in the enjoyment and beneficial use of the Properties as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by Lessee, and Lessor shall in no event be answerable or accountable therefor. ARTICLE XXV 25.1. Assignment. (a) Lessee may not assign, mortgage, pledge or encumber this Lease or any of its rights or obligations hereunder in whole or in part to any Person without the prior written consent of the Agent, the Lessor, each Lender and each Holder, with such consent to be given or withheld in the sole discretion of each such party. (b) No such assignment or other relinquishment of possession to the Properties shall in any way discharge or diminish any of the obligations of Lessee to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease. 25.2. Subleases. (a) Except as set forth in this Section 25.2, Lessee may not sublet any Property or portion thereof without first obtaining the prior written consent of the Lessor and the Agent, which consent may be given or withheld in the sole discretion of each such party. (b) Lessee may, without the consent of Lessor or the Agent, sublet a Property to a Subsidiary of Lessee, or sublet professional space constituting a portion of a Property to healthcare providers, in each case if and only if: (i) Lessee remains fully liable for all obligations (including without limitation all Rent and other obligations with respect to such subleased Properties and any other Properties) under this Lease and the other Operative Agreements; (ii) Such sublease is in writing and is expressly subject and subordinate to the rights of the Lessor, the Agent, the Lenders and the Holders under this Lease, the Security Agreement, each Mortgage Instrument and all other Operative Agreements; and (iii) Such sublease is on commercially reasonable terms and at market rates, and has a term that does not extend past the Expiration Date, and such Property is at all times used for the purposes set forth in this paragraph and in the definition of "Property". 28 (c) No sublease or other relinquishment of possession to any Property shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to the portion of the Property so sublet. (d) Each insurance policy carried by Lessee pursuant to Article XIV hereof shall be endorsed to name each sublessee, under any such sublease as an additional insured. Prior to the effectiveness of any such sublease, Lessee shall deliver a copy thereof to the Lessor and the Agent. (e) Promptly but in any event at least thirty (30) days prior to the execution and delivery of any sublease permitted by this Article XXV, Lessee shall notify Lessor and the Agent of the execution of such sublease. ARTICLE XXVI 26.1. No Waiver. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. ARTICLE XXVII 27.1. Acceptance of Surrender. No surrender to Lessor of this Lease or of all or any portion of the Properties or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and the Agent and, prior to the payment or performance of all obligations under the Credit Documents, the Agent, and no act by Lessor or the Agent or any representative or agent of Lessor or the Agent, other than a written acceptance, shall constitute an acceptance of any such surrender. 27.2. No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, (b) any right, title or interest in any Property, (c) any Notes, or (d) a beneficial interest in Lessor. 29 ARTICLE XXVIII 28.1. Incorporation of Covenants. (a) Reference is made to that certain Credit Agreement dated as of October 31, 2000 (the "Existing HEALTHSOUTH Corporation Credit Agreement") among HEALTHSOUTH Corporation, UBS AG, Stamford Branch, as agent, and the other financial institutions party thereto. Further reference is made to the covenants contained in Articles VII and VIII of the Existing HEALTHSOUTH Corporation Credit Agreement (hereinafter referred to as the "Incorporated Covenants"). The Lessee agrees with the Lessor that, effective as of the date hereof (whether or not the Basic Term has commenced), the Incorporated Covenants (and all other relevant provisions of the Existing HEALTHSOUTH Corporation Credit Agreement related thereto) are hereby incorporated by reference into this Lease to the same extent and with the same effect as if set forth fully herein and shall inure to the benefit of the Lessor, without giving effect to any waiver, amendment, modification or replacement of the Existing HEALTHSOUTH Corporation Credit Agreement or any term or provision of the Incorporated Covenants occurring subsequent to the date of this Lease, except to the extent otherwise specifically provided in the following provisions of this paragraph. In the event a waiver is granted under the Existing HEALTHSOUTH Corporation Credit Agreement or an amendment or modification is executed with respect to the Existing HEALTHSOUTH Corporation Credit Agreement, and such waiver, amendment or modification affects the Incorporated Covenants, then such waiver, amendment or modification shall be effective with respect to the Incorporated Covenants as incorporated by reference into this Lease only if consented to in writing by the Majority Lenders. In the event of any replacement of the Existing HEALTHSOUTH Corporation Credit Agreement with a similar credit facility (the "New Facility") the covenants contained in the New Facility which correspond to the covenants contained in Articles VII and VIII of the Existing HEALTHSOUTH Corporation Credit Agreement shall become the Incorporated Covenants hereunder only if consented to in writing by the Majority Lenders and, if such consent is not granted, then the covenants contained in Articles VII and VIII of the Existing HEALTHSOUTH Corporation Credit Agreement (together with any modifications or amendments approved in accordance with this paragraph) shall continue to be the Incorporated Covenants hereunder. If the Existing HEALTHSOUTH Corporation Credit Agreement (or any such New Facility, as the case may be) is terminated and not replaced, then the covenants contained in Articles VII and VIII of the Existing HEALTHSOUTH Corporation Credit Agreement (together with any modifications or amendments thereto, or to covenants of the New Facility, in each case approved in accordance with this paragraph) shall continue to be the Incorporated Covenants hereunder. (b) Financial Statements, Reports, etc. Without limiting the generality of the foregoing, from and after the date hereof (whether or not the Basic Term has commenced with respect to any Property), to the extent that the Incorporated 30 Covenants require the Lessee or any of its Subsidiaries to deliver any financial statement, certificate, notice, report, or other document or information to the Existing Credit Agent (or any other agent or lender under the applicable credit facility), the Lessee shall, and shall cause its Subsidiaries to, simultaneously deliver a copy of such financial statement, certificate, notice, report, document or information to the Agent, each Lender, each Holder and (upon Lessor's request) the Lessor. 28.2. Additional Reporting Requirements. Without limiting the generality of the foregoing, from and after the date hereof, the Lessee will deliver, or will cause to be delivered, to the Agent, each Lender, each Holder and (upon the Lessor's request) the Lessor: (i) Such other information regarding the financial condition or operations of the Lessee or its Subsidiaries as the Agent shall reasonably request from time to time or at any time; (ii) Promptly after the same shall have become known to any officer of the Lessee, a notice describing any action, suit or proceeding at law or in equity or by or before any Governmental Authority that, if adversely determined, might impair the ability of the Lessee to perform its obligations under this Agreement or any other Operating Agreement or which might have a Material Adverse Effect; (iii) Prompt notice in writing of the occurrence of any Lease Default or Lease Event of Default. ARTICLE XXIX 29.1. Notices. All notices, demands, requests, consents, approvals and other communications hereunder shall be in writing and delivered personally or by a nationally recognized overnight courier service or mailed (by registered or certified mail, return receipt requested, postage prepaid) or telecopied with a confirming notice, addressed to the respective parties, as follows: If to Lessee: HEALTHSOUTH Corporation One HealthSouth Parkway Birmingham, Alabama 35243 Attention: Malcolm E. McVay Telephone No.: (205) 969-6140 Telecopy No.: (205) 969-4620 Email: tadd.mcvay@healthsouth.com 31 With a copy to: HEALTHSOUTH Corporation One HealthSouth Parkway Birmingham, Alabama 35243 Attention: William W. Horton Telephone No.: (205) 969-4977 Telecopy No.: (205) 969-4730 Email: bill.horton@healthsouth.com If to Lessor: First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attention: Val T. Orton Telephone No.: (801) 246-5630 Telecopy No.: (801) 246-5053 Email: with a copy to the Agent: UBS AG, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901 Attention: Jennifer Poccia Telephone No.: (203) 719-3834 Telecopy No.: (203) 719-3888 Email: jennifer.poccia@ubsw.com or such additional parties or other address as such party may hereafter designate, and shall be effective upon receipt or refusal thereof. ARTICLE XXX 30.1. Miscellaneous. Anything contained in this Lease to the contrary notwithstanding, all claims against and liabilities of Lessee or Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any provision of this Lease shall be held to be unenforceable in any jurisdiction, such unenforceability shall not affect the enforceability of any other provision of this Lease in such jurisdiction or of such provision or of any other provision hereof in any other jurisdiction. 30.2. Amendments and Modifications. Neither this Lease nor any provision hereof may be amended, waived, discharged or terminated except by an instrument in writing in recordable form signed by Lessor and Lessee. 32 30.3. Successors and Assigns. All the terms and provisions of this Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 30.4. Headings and Table of Contents. The headings and table of contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 30.5. Counterparts. This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. 30.6. GOVERNING LAW. AS TO MATTERS RELATING TO THE CREATION, PERFECTION, AND FORECLOSURE OF LIENS, AND ENFORCEMENT OF RIGHTS AND REMEDIES AGAINST ANY LEASED PROPERTY, THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE IN WHICH THE APPLICABLE LEASED PROPERTY IS LOCATED. THIS LEASE SHALL IN ALL OTHER RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 30.7. Calculation of Rent. All calculation of Rent payable hereunder shall be computed based on the actual number of days elapsed over a year of 360 days. 30.8. Memorandum of Lease. This Lease shall not be recorded, provided Lessor and Lessee shall promptly record a Memorandum of this Lease (in substantially the form of Exhibit B attached hereto) in the local filing office at Lessee's cost and expense, and as required under applicable law to sufficiently evidence this Lease in the applicable real estate filing records. 30.9. Allocations between the Lenders and the Holders. Notwithstanding any other term or provision of this Lease to the contrary, the allocations of the proceeds of the Properties and any and all other Rent and other amounts received hereunder shall be subject to the inter-creditor provisions between the Lenders and the Holders contained in the Operative Agreements (or as otherwise agreed among the Lenders and the Holders from time to time). 33 30.10. Limitations on Recourse. Notwithstanding anything contained in this Lease to the contrary, Lessee agrees to look solely to Lessor's estate and interest in the Properties for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor or any shareholder, owner or partner (direct or indirect) in or of Lessor, or any director, officer, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of Lessee under or with respect to this Lease, the relationship of Lessor and Lessee hereunder or Lessee's use of the Properties or any other liability of Lessor to Lessee. Nothing in this Section shall be interpreted so as to limit the terms of Sections 6.1 or 6.2. 30.11. WAIVERS OF JURY TRIAL. THE LESSOR AND THE LESSEE IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LEASE OR ANY COUNTERCLAIM THEREIN. 30.12. Existing Agreements. The single executed original of this Lease marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the original executed counterpart of this Lease (the "Original Executed Counterpart"). To the extent that this Lease constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. 30.13. Power of Sale. Without limiting any other remedies set forth in this Lease, in the event that a court of competent jurisdiction rules that this Lease constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties, then the Lessor and the Lessee agree that the Lessee hereby grants, bargains, sells, conveys, mortgages, and grants a security interest in the Properties (and any additional property described in Exhibit A) WITH POWER OF SALE, and that, upon the occurrence of any Event of Default, the Lessor shall have the power and authority, to the extent provided by law or the Operative Agreements, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of any Property, to appoint or obtain the appointment of a receiver for all or any part of the Property, and to exercise any other right or remedy that may be available under applicable law to the holder of a mortgage, deed of trust, security deed or other secured financing. 30.14. Exercise of Lessor Right. The Lessee hereby acknowledges and agrees that the rights and powers of the Lessor under this Lease have been collaterally assigned to the Agent pursuant to the terms of the Security Agreement and the other Operative Agreements, and that the Lessor has encumbered 34 the Properties by various Mortgage Instruments made by the Lessor in favor of the Agent, all as security for certain indebtedness and obligations described therein of the Lessor to the Agent, the Lenders and the Holders under the Operative Agreements. Lessee hereby consents to said assignment and said Mortgage Instruments in favor of the Agent and further acknowledges and agrees as follows: (a) In the event that a court of competent jurisdiction rules that this Lease constitutes a mortgage, deed of trust, security deed or other secured financing as is the intent of the parties, then the Lessor and the Lessee agree that the Lessor's collateral assignment of this Lease to the Agent shall be deemed to be a collateral assignment of such mortgage, deed of trust, security deed or other secured financing, and the Agent as such collateral assignee shall be entitled to exercise any and all rights and remedies of the Lessor set forth herein during the existence of any Event of Default, including without limitation the Lessor's rights to obtain a receiver, to obtain possession of the Properties and the rents and revenues thereof, to foreclose this Lease, to sell the Lessee's interest in the Properties, and to exercise any other rights or remedies that may then be available to the Lessor under applicable law on account of such Event of Default. (b) Lessee's interest in the Properties is junior and subordinate to the lien of any Mortgage Instruments made by the Lessor in favor of the Agent against the respective Properties from time to time in connection with the Operative Agreements; provided, however, that for so long as no Event of Default shall have occurred and be continuing, (i) the Agent shall not disturb Lessee's possession of the Properties through any foreclosure or other remedial action against the Properties under any Mortgage Instrument, and (ii) if Lessor's interest in any Property shall be transferred to any Person other than the Lessee as the result of the Agent's foreclosure or other remedial action under any Mortgage Instrument, the Lessee shall (upon request of the Agent) attorn to such transferee and recognize the transferee as the Lessee's landlord under this Lease. (c) During the existence of an Event of Default, the Agent as holder of the Mortgage Instruments and as collateral assignee of this Lease may exercise any and all rights and remedies that may then be available under applicable law to the Agent in either or both capacities, whether exercised singly, successively or concurrently. Without limiting the generality of the foregoing, the Agent as collateral assignee may enforce the Lessee's payment obligations under this Lease (regardless of whether this Lease shall be deemed a mortgage, deed of trust, security deed or other secured financing) even if Lessee's interest and estate in any Property under this Lease shall have been extinguished or forfeited under applicable law through the foreclosure or other enforcement of any Mortgage Instrument. [Remainder of page intentionally left blank] 35 IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and delivered as of the date first above written. HEALTHSOUTH Corporation, as Lessee By: /s/ Malcolm E. McVay -------------------------------------------- Name: Malcolm E. McVay Title: Senior Vice President FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, as Lessor By: /s/ Arge Pavlos ------------------------------------------- Name: Arge Pavlos Title: Trust Officer 36 Receipt of this original counterpart of the foregoing Lease is hereby acknowledged on this 31st day of October, 2000. UBS AG, Stamford Branch as Agent By: /s/ Daniel W. Ladd III --------------------------------------- Name: Daniel W. Ladd III Title: Executive Director By: /s/ Wilfred V. Saint -------------------------------------- Name: Wilfred V. Saint Title: Associate Director 37 EXHIBIT A TO THE LEASE Description of Properties The Properties subject to this Lease includes the Land described on Schedule I-C attached hereto, and all Equipment on and Improvements to such Land, including without limitation the Equipment described on Schedule I-B attached hereto and the Improvements described on Schedule I-C attached hereto. In addition, to the extent that a court of competent jurisdiction rules that this Lease constitute a mortgage, deed of trust or other secured financing, the Lessee hereby grants, bargains, sells, conveys, mortgage and grants a security interest WITH POWER OF SALE in each of the following: 1. All buildings, structures, fixtures, and other improvements of every kind existing at any time and from time to time on or under the real property described on Schedule I-C (such real property, together with any and all appurtenances to such buildings, structures or improvements, including sidewalks, utility pipes, conduits and lines, parking areas and roadways, and including all Lease Modifications and other additions to or changes in the Lease Improvements at any time (all of the foregoing in this paragraph 1 being referred to as the "Lease Improvements"); 2. All easements, rights-of-way, gores of land, streets, ways, alleys, passages, sewer rights, waters, water courses, water rights and passages, sewer rights, waters, water courses, water rights and powers, and all estate, rights, title, interests, privileges, liberties, tenements, hereditaments and appurtenances whatsoever, in any way belonging, relating or appertaining to any of the Properties hereinabove described, or which hereafter shall in any way belong, relate or be appurtenant thereto, whether now owned or hereafter acquired by Lessee, and the reversion and reversions, remainder and remainders, rents, issues and profits thereof, and all the estate, right, title, interest, property, possession, claim and demand whatsoever, at law as well as in equity, of Lessee in and to the same, including but not limited to all judgments, awards of damages and settlements hereafter made resulting from condemnation proceedings involving Lessee taking the Properties described in Paragraphs 1 and 2 hereof, or any part thereof, under the power of eminent domain, or for any damage (whether caused by such taking or otherwise) to the Properties hereinabove described or any part thereof or to any rights appurtenant thereto, and all proceeds of any sales or other dispositions of the Properties or any part thereof (all of the foregoing in this paragraph 2 being referred to as the "Lease Easements"); 3. All right, title and interest of the Lessee in and to all of the fixtures, chattels, business machines, machinery, apparatus, equipment, furnishings, fittings and articles of personal property of every kind and nature whatsoever, and all appurtenances and additions thereto and substitutions or replacements thereof (together with, in each case, attachments, components, parts and accessories) currently owned or subsequently acquired by the Lessee and now or subsequently attached to, or contained in, comprising a portion of or used or usable in any way in connection with the Properties, including but without limiting the generality of the foregoing, all equipment referred to in the Appraisals and the Equipment Schedules pursuant to the Lease or the Participation Agreement, all computer hardware, and all heating, electrical, and mechanical equipment, fighting, switchboards, plumbing, ventilation, air conditioning and air-cooling apparatus, refrigerating, and incinerating equipment, escalators, elevators, loading and unloading equipment and systems, cleaning systems (including without limitation window cleaning apparatus), telephones, communication systems (including without limitation satellite dishes and antennae), televisions, computers, sprinkler systems and other fire prevention and extinguishing apparatus and materials, security systems, motors, engines, machinery, pipes, pumps, tanks, conduits, appliances, fittings and fixtures of every kind and description, but excluding Tangible Personal Property (all of the foregoing in this Paragraph 3 being referred to as the "Lease Equipment"); 4. All alterations, renovations, improvements and additions to the Land, any Lease Improvements or any Lease Equipment or any part thereof and substitutions and replacements therefor (all of the foregoing in this Paragraph 4 being referred to as the "Lease Modifications"); 5. All right, title and interest of the Lessee in and to all of the fixtures, furnishings and fittings of every kind and nature whatsoever, and all appurtenances and additions thereto and substitutions or replacements thereof (together with, in each case, attachments, components, parts and accessories) currently owned or subsequently acquired by the Lessee and now or subsequently attached to, or contained in or used or usable in any way in connection with any of the Properties; together with (i) all property affixed to or located on the Properties which to the fullest extent permitted by law, shall be deemed fixtures and a part of the real property, (ii) all materials delivered to the Properties for use in any construction being conducted thereon, and owned by Lessee, (iii) all contract rights, general intangibles, actions and rights in action including all rights to insurance proceeds, arising out of or related to any of the foregoing property described in subparagraphs (i) and (ii) of this Paragraph 5 and Paragraphs 1, 2 and 11, and (iv) all products, replacements, additions, substitutions, renewals and accessions of any of the foregoing (all of the foregoing in this paragraph being referred to as the "Lease Fixtures"; all Land, Lease Fixtures, Lease Equipment, the Lease Improvements, Lease Easements and the Lease Modifications are being collectively referred to herein as the "Property"); 6. All estate, right, title, claim or demand whatsoever of the Lessee, in possession or expectancy, in and to the Properties or any part thereof; 7. All right, title and interest of the Lessee in and to all substitutes, modifications and replacements of, and all additions, accessions and improvements to the Properties, subsequently acquired by the Lessee or constructed, assembled or placed by the Lessee on the Land, immediately upon such acquisition, release, construction, assembling or placement, and in each such case, without any further conveyance, assignment or other act by the Lessee; 8. All right, title and interest of the Lessee in and to all unearned premiums under insurance policies now or subsequently obtained by the Lessee relating to the Properties and the Lessee's interest in and to all proceeds of any such insurance policies, including without limitation the right to collect and receive such proceeds; and all awards and other compensation, including without limitation the interest payable thereon and the right to collect and receive the same, made to the present or any subsequent owner of the Properties for the taking by eminent domain, condemnation or otherwise, of all or any part of the Properties or any easement or other right therein; 2 9. All right, title and interest of the Lessee in and to (i) all consents, licenses, certificates and other governmental approvals relating to construction, use or operation of the Properties or any part thereof and (ii) all Plans and Specifications relating to the Properties; 10. All rents, royalties, issues, profits, revenue, income and other benefits from the Properties; together with a right, title and interest of Lessee in and to any and all leases now or hereafter on or affecting the Properties, together with all security therefor and monies payable thereunder; and 11. All proceeds, both cash and noncash, of any of the foregoing. 3 SCHEDULE I-A (Equipment) None. SCHEDULE I-B (Improvements) All Improvements now or hereafter located on the Land described in Schedule I-C. SCHEDULE I-C (Land) EXHIBIT B TO THE LEASE FORM OF MEMORANDUM OF LEASE EX-10.57 5 0005.txt EXHIBIT (10)-57 EXHIBIT (10)-57 - -------------------------------------------------------------------------------- PARTICIPATION AGREEMENT Dated as of October 31, 2000 among HEALTHSOUTH Corporation as Lessee, FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, THE VARIOUS BANKS AND OTHER LENDING INSTITUTIONS WHICH ARE PARTIES HERETO FROM TIME TO TIME, as the Holders, THE VARIOUS BANKS AND OTHER LENDING INSTITUTIONS WHICH ARE PARTIES HERETO FROM TIME TO TIME, as the Lenders, THE CHASE MANHATTAN BANK, as Documentation Agent, UBS WARBURG LLC, and DEUTSCHE BANK SECURITIES, INC., as Joint Lead Arrangers, DEUTSCHE BANK AG NEW YORK BRANCH, as Syndication Agent, and UBS AG, STAMFORD BRANCH, as Administrative Agent for the Lenders - -------------------------------------------------------------------------------- PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT, dated as of October 31, 2000 (as further amended or supplemented from time to time, this "Agreement"), is by and among HEALTHSOUTH Corporation., as Lessee (the "Lessee"), FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually (in its individual capacity, the "Trust Company"), except as expressly stated herein, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1 (the "Owner Trustee" or the "Lessor"), THE CHASE MANHATTAN BANK, as Documentation Agent; UBS WARBURG LLC and DEUTSCHE BANK SECURITIES, INC., as Joint Lead Arrangers; DEUTSCHE BANK AG NEW YORK BRANCH, as Syndication Agent; UBS AG, Stamford Branch, as Administrative Agent (in such capacity, the "Agent") for the Lenders and the Holders; UBS AG, Stamford Branch, and the various other banks and lending institutions which are parties hereto from time to time as Holders, and UBS AG, Stamford Branch and the various other banks and lending institutions which are parties hereto from time to time as Lenders. Capitalized terms used but not otherwise defined in this Agreement shall have the meanings set forth in Appendix A hereto. In consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. THE LOANS. The Lenders have agreed to make Loans in an aggregate principal amount of up to the aggregate amount of the Commitments of the Lenders in order for the Lessor to acquire the Properties and certain Improvements, and in consideration of the receipt of such Loan proceeds, the Lessor, upon the request of the relevant Lenders, will issue the Notes (together with any note or notes issued in exchange or substitution therefor in accordance with the Credit Agreement, the "Notes"). The Loans shall be made and the Notes shall be issued pursuant to the Credit Agreement. Pursuant to Section 5 of this Agreement and Section 2 of the Credit Agreement, the Loans will be made to the Lessor on the Closing Date and in accordance with this Agreement and the other Operative Agreements. The Loans and the obligations of the Lessor under the Credit Agreement are secured by the Collateral. SECTION 2. HOLDER ADVANCES. Subject to the terms and conditions of this Agreement and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto on each date Advances are made in accordance with Section 5 hereof, each Holder shall make a Holder Advance on a pro rata basis to the Owner Trustee with respect to the HEALTHSOUTH Corporation Trust 2000-1 based on its Holder Commitment in an amount in immediately available funds such that the aggregate of all Holder Advances shall be three percent (3%) of the amount of the Advances being funded on such date; provided, no Holder shall be obligated for any Holder Advance in excess of its pro rata share of the Available Holder Commitment. The aggregate amount of Holder Advances shall be up to the aggregate amount of the Holder Commitments. No prepayment or any other payment with respect to any Advance shall be permitted such that the Holder Advance with respect to such Advance is less than 3% of 1 the outstanding amount of such Advance, except in connection with termination or expiration of the Term or in connection with the exercise of remedies relating to the occurrence of a Lease Event of Default. The representations, warranties, covenants and agreements of the Holders herein and in the other Operative Agreements are several, and not joint and several. SECTION 3. SUMMARY OF TRANSACTIONS. 3.1 Operative Agreements. On the date hereof (the "Closing Date"), each of the respective parties hereto and thereto shall execute and deliver this Agreement, the Lease, the Credit Agreement, the Notes (if applicable), the Certificates, the Trust Agreement, the Security Agreement and such other documents, instruments, certificates and opinions of counsel as agreed to by the parties hereto. 3.2 Closing Date. On the Closing Date and subject to the terms and conditions of this Agreement (a) each Holder will make available to UBS AG, Stamford Branch, the amount set forth for such Holder on Schedule 1 to the Holder Addendum, executed and delivered by such Holder pursuant to Section 14.18 hereof, constituting the principal amount of the Holder Advance to be made by such Holder hereunder, and (b) each Lender will make available to UBS AG, Stamford Branch, the amount set forth for such Lender on such Lender's Lender Addendum executed and delivered by such Lender pursuant to Section 14.18 hereof, as the principal amount of the Loan to be made by such Lender thereunder. The Lessor will purchase pursuant to a Deed or lease pursuant to a Ground Lease each Property, as the case may be, as of the Closing Date, and a Lien on each Property for the benefit of the Agent shall be in full force and effect before and after the execution of the required Security Documents. After giving effect to the Advances on the Closing Date, there shall no longer be any Commitments outstanding. SECTION 4. THE CLOSING. 4.1 Closing Date. All documents and instruments required to be delivered on the Closing Date shall be delivered at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, or at such other location as may be determined by the Lessor, the Agent and the Lessee. SECTION 5. MAKING OF ADVANCES. 5.1 General. The Lessor has used and will use the proceeds of the Advances made on the date hereof to acquire the Properties, repay the existing loans and advances. 5.2 Intentionally Deleted. 5.3 Conditions to the Holders' and the Lenders' Obligations to Make Advances on the Closing Date. Subject to Section 6, the obligations of each Holder to make Holder Advances, and each Lender to make Loans on the Closing Date are subject to the prior or contemporaneous satisfaction or waiver of the following conditions precedent: 2 (a) the correctness in all material respects on such date of the representations and warranties of the Owner Trustee, the Lessee and the Holders contained herein and in each of the other Operative Agreements; (b) the performance in all material respects by the Lessee of its agreements contained herein and in the other Operative Agreements which covenants are to be performed by it on or prior to such date; (c) the satisfaction of all conditions to any such making of Holder Advance or Loan set forth in any Operative Agreement; (d) no Default or Event of Default under any of the Operative Agreements shall have occurred after giving effect to the making of Holder Advances and Loans; (e) title to each Property shall conform to the representations and warranties set forth in Section 7.2(l) and 7.3(l) hereof; (f) the Lessor shall have good and marketable title to each Property in fee simple, subject only to the Permitted Exceptions. The Lessor shall have the right to grant the Mortgage Instruments on the Properties; (g) the Lessee shall have delivered to the Agent and the Owner Trustee, a title insurance policy in favor of the Agent and Owner Trustee with respect to each Property, such policy being in form and substance reasonably acceptable to the Owner Trustee and the Agent, with such title exceptions thereto as are reasonably acceptable to the Owner Trustee and the Agent; (h) the Lessee shall have delivered to the Agent and the Owner Trustee (A) a "Phase I" environmental site assessment with respect to each Property, prepared by an independent recognized professional reasonably acceptable to the Agent and the Owner Trustee and in a form and substance that is reasonably acceptable to the Agent and the Owner Trustee, and (B) the Agent shall have received letters from such environmental professional stating, among other things, that the Agent, the Lenders, the Owner Trustee and the Holders may rely on the Environmental Report with respect to each Property which were prepared by such firm as if they were originally addressed to them in all respects; (i) the Lessee shall have delivered to the Agent, the Owner Trustee and the Title Company an as-built survey of each Property certified to the Agent, the Holders, the Owner Trustee and the Title Company, prepared by an independent recognized professional meeting the then current minimum standard detail requirements for American Land Title Association and the American Congress of Surveying and Mapping (ALTA/ACSM) Land Title Surveys certified to the Agent and otherwise reasonably acceptable to the Agent; (j) the Lessee shall have caused to be delivered to the Agent and the Owner Trustee a legal opinion (in the form attached hereto as Exhibit A) from counsel located in the state where each Property is located; 3 (k) the Owner Trustee and the Agent shall be satisfied, in their discretion, that the execution of the Mortgage Instruments and the other Security Documents will not adversely affect in any material respect the rights of the Owner Trustee, the Holders, the Agent or the Lenders under or with respect to the other Operative Agreements in effect as of the Closing Date (it being understood and acknowledged that the Agent and the Owner Trustee may require that the Lessee deliver an acceptable legal opinion in connection with this condition); (l) the Lessee shall have delivered to the Agent and the Owner Trustee, respecting each Property, Invoices for the various Transaction Expenses and other fees, expenses and disbursements referenced in Section 9.1 of this Agreement (to the extent paid from Loan proceeds) and an Officer's Certificate in the form attached hereto as Exhibit B specifying the Property Cost for each Property; (m) the Lessee shall have delivered to the Agent and the Owner Trustee, respecting each Property, certificates of insurance meeting the requirements of Section 14.3 of the Lease; (n) the Lessor shall have delivered to the Agent a Mortgage Instrument and Lender Financing Statements with respect to each Property in a form reasonably acceptable to the Agent and Lessee and all necessary recording fees, documentary stamp taxes or similar amounts will be paid in connection with the related Mortgage Instrument in an amount sufficient to cover such maximum total Property Cost, or (in the case of the recording tax with respect to the Mortgage Instrument) in an amount required to be paid at the time of recording of such instrument (provided that the Lessee shall promptly pay or reimburse any Indemnified Person for payment of, any additional recording tax that may be due at any time with respect to such instrument); (o) the Lessee shall have delivered to the Lessor with respect to each Property, a Memorandum of Lease (such memorandum to be substantially in the form attached to the Lease as Exhibit B and in form suitable for recording); (p) the Lessee shall have delivered to the Lessor, with respect to each Property, Lessor Financing Statements executed by the Lessee and the Lessor; (q) all necessary (or in the reasonable opinion of the Owner Trustee, the Agent, or their respective counsel, advisable) Governmental Actions, in each case required by any law or regulation enacted, imposed or adopted on or prior to each such date or by any change in facts or circumstances on or prior to each such date, shall have been obtained or made and be in full force and effect; (r) if any such Property is subject to a Ground Lease, the Lessee shall have caused a lease memorandum (in form and substance satisfactory to the Agent) to be delivered to the Agent for such Ground lease; (s) the Lessee shall cause (i) Uniform Commercial Code lien searches, tax lien searches and judgment lien searches regarding each of the Lessee and the Lessor to be conducted (and copies thereof to be delivered to the Agent and the Owner Trustee) in the 4 state and county (or other Jurisdiction) in which each Property is located, by a nationally recognized search company acceptable to the Owner Trustee and the Agent, and (ii) the liens referenced in such lien searches which are objectionable to the Owner Trustee or the Agent to be either removed or otherwise handled in a manner reasonably satisfactory to the Owner Trustee and the Agent; (t) the Agent shall have received an Appraisal for each Property showing that each Property has an enterprise value, when taken together with the enterprise value of all other Properties, equal to at least fifty percent (50%) of the Total Property Cost of all Properties and all Improvements constructed thereon; (u) The Agent shall have received a certificate of the chief financial officer of the Lessee (i) attaching copies of all consents, authorizations and filings required to consummate the transactions contemplated by this Agreement, and (ii) stating that such consents, licenses and filings are in full force and effect, and each such consent, authorization and filing shall be in form and substance reasonably satisfactory to the Agent; and (v) all conditions set forth in Section 5.1 of the Existing HEALTHSOUTH Corporation Credit Agreement shall have been satisfied. 5.4 Inspection of Documents; Hold Harmless; Removal of Property. Any document or item (including without limitation any environmental report) delivered to the Agent shall be available for inspection at any time during ordinary business hours upon reasonable notice by any Lender or Holder. The Agent shall not incur any liability to any Lender, any Holder, the Owner Trustee or any other Person (and each Lender, each Holder, the Owner Trustee and the Lessee hereby holds the Agent harmless from any such liability) as a result of any such document or item, any information contained therein, the failure to receive any such document, or the Agent's approval of any Property. In the event the Majority Lenders determine that any environmental site assessment reveals an Environmental Violation and they or the Agent so notify the Lessee, then the Lessee shall remedy or purchase such Property in accordance with Sections 15.2. 16.1 and 16.2 of the Lease. SECTION 6. CONDITIONS OF THE CLOSING. 6.1 Conditions to the Lessor's and the Holders' Obligations. The obligations of the Lessor and the Holders to consummate the transactions contemplated by this Agreement on the Closing Date, including the obligation to execute and deliver the applicable Operative Agreements to which each is a party on the Closing Date, are subject to (i) the accuracy and correctness on the Closing Date of the representations and warranties of the other parties hereto contained herein, (ii) the accuracy and correctness on the Closing Date of the representations and warranties of the other parties hereto contained in any other Operative Agreement or certificate delivered pursuant hereto or thereto, (iii) the performance by the other parties hereto of their respective agreements contained herein and in the other Operative Agreements and to be performed by them on or prior to the Closing Date and 5 (iv) the satisfaction, or waiver by the Lessor and the Holders, of all of the following conditions on or prior to the Closing Date: (a) Each of the Operative Agreements shall have been duly authorized, executed and delivered by the parties thereto, other than the Lessor, and shall be in full force and effect, and no Default or Event of Default shall exist thereunder (both before and after giving effect to the transactions contemplated by the Operative Agreements), and the Lessor shall have received a fully executed copy of each of the Operative Agreements (other than the Notes of which it shall have received specimens). The Operative Agreements (or memoranda thereof), any supplements thereto and any financing statements and fixture filings in connection therewith required under the Uniform Commercial Code shall have been filed or shall be promptly filed, if necessary, in such manner as to enable the Lessee's counsel to render its opinion referred to in Section 6.1(g) hereof; (b) All taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Agreements shall have been paid or provision for such payment shall have been made to the reasonable satisfaction of the Lessor and the Agent; (c) No action or proceeding shall have been instituted, nor shall any action or proceeding be threatened, before any Governmental Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority (i) to set aside, restrain, enjoin or prevent the full performance of this Agreement, any other Operative Agreement or any transaction contemplated hereby or thereby or (ii) which is reasonably likely to have a Material Adverse Effect; (d) In the reasonable opinion of the Lessor and the Holders and their counsel, the transactions contemplated by the Operative Agreements do not and will not violate any material Legal Requirements and do not and will not subject the Lessor or the Holders to any materially adverse regulatory prohibitions or constraints, in each case enacted, imposed, adopted or proposed since the date hereof; (e) The Lessor and the Agent shall each have received an Officer's Certificate of the Lessee, dated as of the Closing Date, in the form attached hereto as Exhibit C or in such other form as is reasonably acceptable to such parties stating that (a) each and every representation and warranty of the Lessee contained in the Operative Agreements to which it is a party is true and correct in all material respects on and as of the Closing Date; (ii) no Default or Event of Default has occurred and is continuing under any Operative Agreement; (iii) each Operative Agreement to which Lessee is a party is in full force and effect with respect to it; and (iv) the Lessee has performed and complied with all covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by it on or prior to the Closing Date; (f) The Lessor and the Agent shall each have received (i) a certificate of the Secretary or an Assistant Secretary of the Lessee in the form attached hereto as Exhibit D or in such other form as is reasonably acceptable to such parties attaching and certifying 6 as to (A) the resolutions of the Board of Directors of Lessee duly authorizing the execution, delivery and performance by Lessee of each of the Operative Agreements to which it is or will be a party and a statement that the resolutions have not been amended, modified, revoked or rescinded, (B) its certificate of incorporation and by-laws, in each case certified as of a recent date by the Secretary of State of the State of its incorporation, as correct and complete copies and (C) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Agreements to which it is a party and (ii) a good standing certificate from the appropriate officer of each state in which any Property is located as to its good standing in such state; (g) Haskell Slaughter & Young, L.L.C., counsel for the Lessee, shall have issued to the Lessor, the Agent, the Lenders and the Holders an opinion in the form attached hereto as Exhibit A; (h) As of the Closing Date, there shall not have occurred any event, condition, situation or status since December 31, 1999 that has had or could reasonably be expected to result in a Material Adverse Effect; and (i) The Agent and the Joint Lead Arrangers shall have received the fees to be paid on the Closing Date pursuant to the Fee Letter, or any other Lender or Holder entitled to fees to be paid on the Closing Date by Lessee have received fees; which fees shall not be paid using the proceeds, if any, of the Loans or Holder Advances. 6.2 Conditions to the Lessee's Obligations. The obligation of the Lessee to consummate the transactions contemplated by this Agreement on the Closing Date, including the obligation to execute and deliver the Operative Agreements to which it is a party on the Closing Date, is subject to (i) the accuracy and correctness on the Closing Date of the representations and warranties of the other parties hereto contained herein, (ii) the accuracy and correctness on the Closing Date of the representations and warranties of the other parties hereto contained in any other Operative Agreement or certificate delivered pursuant hereto or thereto, (iii) the performance by the other parties hereto of their respective agreements contained herein and in the other Operative Agreements, in each case to be performed by them on or prior to the Closing Date, and (iv) the satisfaction or waiver by the Lessee of all of the following conditions on or prior to the Closing Date: (a) Each of the Operative Agreements to be entered into on the Closing Date shall have been duly authorized, executed and delivered by the parties thereto, other than the Lessee, and shall be in full force and effect, and no Default, other than Defaults of the Lessee, shall exist thereunder, and the Lessee shall have received a fully executed copy of each of the Operative Agreements (other than Notes of which it shall have received a specimen); (b) In the reasonable opinion of the Lessee and its counsel, the transactions contemplated by the Operative Agreements do not violate any material Legal Requirements and will not subject Lessee to any materially adverse regulatory prohibitions or constraints; 7 (c) No action or proceeding shall have been instituted, nor shall any action or proceeding be threatened, before any Governmental Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority (i) to set aside, restrain, enjoin or prevent the full performance of this Agreement, any other Operative Agreement or any transaction contemplated hereby or thereby or (ii) which is reasonably likely to have a Material Adverse Effect; (d) The Lessee and the Agent shall each have received an Officer's Certificate of the Lessor dated as of such Closing Date in the form attached hereto as Exhibit E or in such other form as is reasonably acceptable to Lessee and the Agent, stating that (i) each and every representation and warranty of the Lessor contained in the Operative Agreements to which it is a party is true and correct on and as of the Closing Date; (ii) each Operative Agreement to which the Lessor is a party is in full force and effect with respect to it, and (iii) the Lessor has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by it on or prior to the Closing Date; (e) The Lessee and the Agent shall each have received (i) a certificate of the Secretary, an Assistant Secretary, Trust Officer or Vice President of the Trust Company in the form attached hereto as Exhibit F or in such other form as is reasonably acceptable to Lessee and the Agent, attaching and certifying as to (A) the signing resolutions, (B) its articles of incorporation or other equivalent charter documents, as the case may be, certified as of a recent date by an appropriate officer of the Trust Company, (C) its bylaws and (D) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Agreements to which it is a party and (ii) a good standing certificate from the state of incorporation of the Trust Company; and (f) Ray, Quinney & Nebeker, counsel for the Lessor, shall have issued to the Lessee, the Holders, the Lenders and the Agent an opinion in the form attached hereto as Exhibit G. 6.3 Conditions to the Agent's and Lenders' Obligations. The obligation of each of the Agent and the Lenders to consummate the transactions contemplated by this Agreement on the Closing Date, including the obligation to execute and deliver each of the Operative Agreements to which it is a party on the Closing Date, is subject to (i) the accuracy and correctness on the Closing Date of the representations and warranties of the other parties hereto contained herein, (ii) the accuracy and correctness on the Closing Date of the representations and warranties of the other parties hereto contained in any other Operative Agreement or certificate delivered pursuant hereto or thereto, (iii) the performance by the other parties hereto of their respective agreements contained herein and in the other Operative Agreements, in each case to be performed by them on or prior to the Closing Date, and (iv) the satisfaction, or waiver by the Agent, of all of the following conditions on or prior to the Closing Date: (a) Each of the Operative Agreements to be entered into on the Closing Date shall have been duly authorized, executed and delivered by the parties thereto, other than the 8 Agent, and shall be in full force and effect, and no Default or Event of Default shall exist thereunder (both before and after giving effect to the transactions contemplated by the Operative Agreements), and the Agent shall have received a fully executed copy of each of the Operative Agreements (including the Notes). The Operative Agreements (or memoranda thereof), any supplements thereto and any financing statements and fixture filings in connection therewith required under the Uniform Commercial Code shall have been filed or shall be promptly filed, if necessary, in such manner as to enable the Lessor's counsel to render its opinion referred to in Section 6.2(f) hereof; (b) The satisfaction of each of the conditions set forth in Sections 6. 1(b), (c), (e), (f), (g), (h) and (i) and Sections 6.2(d), (e) and (f) hereof, and (c) In the reasonable opinion of the Agent and its counsel, the transactions contemplated by the Operative Agreements do not and will not violate any material Legal Requirements and do not and will not subject the Agent or the Lenders to any materially adverse regulatory prohibitions or constraints. SECTION 7. REPRESENTATIONS AND WARRANTIES ON THE CLOSING DATE. 7.1 Representations and Warranties of the Holders. Effective as of the Closing Date, each of the Holders represents and warrants to each of the other parties hereto that: (a) It is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, and has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under each Operative Agreement to which it is or will be a party and each other agreement, instrument and document to be executed and delivered by it on or before each Closing Date in connection with or as contemplated by each such Operative Agreement to which it is or will be a party; (b) The execution, delivery and performance of each Operative Agreement to which it is or will be a party have been duly authorized by all necessary corporate, limited liability company or partnership action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) requires or will require any approval of the stockholders of, or approval or consent of any trustee or holder of any indebtedness or obligations of, such Holder which has not been obtained or is not in full force and effect, (ii) violates or will violate any Legal Requirement applicable to or binding on it (except no representation or warranty is made as to any Legal Requirement to which it may be subject solely as a result of the activities of the Lessee) as of the date hereof, (iii) violates or will violate or result in any breach of or constitute any default under, or result in the creation of any Lien upon any Property or any of the Improvements (other than Liens created by the Operative Agreements) under its certificate of incorporation or other equivalent charter documents, or any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or 9 instrument to which it is a party or by which it or its properties is bound or affected or (iv) requires or will require any Governmental Action by any Governmental Authority (other than arising solely by reason of the business, condition or activities of the Lessee or any Affiliate thereof or the construction or use of the Properties or the Improvements); (c) This Agreement and each other Operative Agreement to which it is or will be a party has been, or will be, duly executed and delivered by it and constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against it in accordance with the terms thereof, subject to the effect of any applicable bankruptcy, moratorium, insolvency, reorganization or other similar laws affecting the enforceability of creditors' rights generally and to the effect of general principles of equity (whether considered in a proceeding at law or in equity); (d) There is no action or proceeding pending or, to its knowledge, threatened against it before any Governmental Authority that questions the validity or enforceability of any Operative Agreement to which it is or will become a party or that, if adversely determined, would materially and adversely affect its ability to perform its obligations under the Operative Agreements to which it is a party; (e) It has not assigned or transferred any of its right, title or interest in or under the Lease except in accordance with the Operative Agreements; (f) No Default or Event of Default under the Operative Agreements attributable to it has occurred and is continuing; (g) Except as otherwise contemplated by the Operative Agreements, it has not, it shall not, and it did not, nor shall it direct the Owner Trustee to, use the proceeds of any Loan or Holder Advance for any purpose other than the payment of Transaction Expenses and the fees, expenses and other disbursements referenced in Section 9.1of this Agreement; and (h) It is acquiring its interest in the Trust Estate for its own account for investment and not with a view to any distribution (as such term is used in Section 2(11) of the Securities Act) thereof, and no part of such amount constitutes the assets of any Employee Benefit Plan and if in the future it should decide to dispose of its interest in the Trust Estate, it understands that it may do so only in compliance with the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder and any applicable state securities laws. Neither it nor anyone authorized to act on its behalf has taken or will take any action which would subject, as a direct result of such action alone, the issuance or sale of any interest in any Property, the Trust Estate or the Lease to the registration requirements of Section 5 of the Securities Act. No representation or warranty contained in this Section 7.1(g) shall include or cover any action or inaction of the Lessee or any Affiliate thereof whether or not purportedly on behalf of the Holders, the Owner Trustee or any of their Affiliates. 10 7.2 Representations and Warranties of the Owner Trustee. Effective as of the Closing Date, the Trust Company in its individual capacity and as the Owner Trustee, as indicated, represents and warrants to each of the other parties hereto as follows, provided, that the representations in paragraphs (h), (i), (j) and (k) below are made solely in its capacity as the Owner Trustee: (a) It is a national banking association duly organized, validly existing and in good standing under the laws of the United States of America and has the power and authority to enter into and perform its obligations under the Trust Agreement and (assuming due authorization, execution and delivery of the Trust Agreement by the Holders) has the corporate and trust power and authority to act as the Owner Trustee and to enter into and perform the obligations under each of the other Operative Agreements to which Trust Company or the Owner Trustee, as the case may be, is or will be a party and each other agreement, instrument and document to be executed and delivered by it on or before each Closing Date in connection with or as contemplated by each such Operative Agreement to which Trust Company or the Owner Trustee, as the case may be, is or will be a party; (b) The execution, delivery and performance of each Operative Agreement to which it is or will be a party, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Holders) as the Owner Trustee, as the case may be, has been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) requires or will require any approval of its stockholders, or any approval or consent of any trustee or holders of any of its indebtedness or obligations, (ii) violates or will violate any current law, governmental rule or regulation relating to its banking or trust powers, (iii) violates or will violate or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, (A) its charter or by-laws, or (B) any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected, which violation, breach, default or Lien under clause (B) would materially and adversely affect its ability, in its individual capacity or as Owner Trustee, to perform its obligations under the Operative Agreements to which it is a party or (iv) requires or will require any Governmental Action by any Governmental Authority regulating its banking or trust powers; (c) The Trust Agreement and, assuming the Trust Agreement is the legal, valid and binding obligation of the Holders, each other Operative Agreement to which the Trust Company or the Owner Trustee, as the case may be, is or will be a party have been, or will be, duly executed and delivered by Trust Company or the Owner Trustee, as the case may be, and the Trust Agreement and each such other Operative Agreement to which Trust Company or the Owner Trustee, as the case may be, is a party constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against Trust Company or the Owner Trustee, as the case may be, in accordance with the terms thereof; 11 (d) There is no action or proceeding pending or, to its knowledge, threatened to which it is or will be a party, either in its individual capacity or as the Owner Trustee, before any Governmental Authority that, if adversely determined, would materially and adversely affect its ability, in its individual capacity or as Owner Trustee, to perform its obligations under the Operative Agreements to which it is a party or would question the validity or enforceability of any of the Operative Agreements to which it is or will become a party; (e) It has not assigned or transferred any of its right, title or interest in or under the Lease, any other Operative Agreement or any Property, except in accordance with the Operative Agreements; (f) The Lessor is not in default under or with respect to any of its Contractual Obligations in any respect which could have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Lessor. No Default or Event of Default under the Operative Agreements attributable to the Owner Trustee has occurred and is continuing; (g) Except as otherwise contemplated in the Operative Agreements, the Owner Trustee shall not use the proceeds of the Loans and Holder Advances for any purpose other than solely in accordance with the provisions of the Operative Agreements; (h) Neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf has offered or sold any interest in the Trust Estate or the Notes, or in any similar security relating to any Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than, in the case of the Notes, the Lenders, and neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf will take any action which would subject, as a direct result of such action alone, the issuance or sale of any interest in the Trust Estate or the Notes to the provisions of Section 5 of the Securities Act, or require the qualification of any Operative Agreement under the Trust Indenture Act of 1939, as amended; (i) The Owner Trustee's chief place of business, chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at 79 South Main Street, Salt Lake City, Utah 84111; (j) The Owner Trustee is not engaged principally in, and does not have as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System of the United States), and no part of the proceeds of the Loans or the Holder Advances will be used by it to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulations T, U, or X of the Federal Reserve Board; 12 (k) The Owner Trustee is not a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended, or a "public utility" within the meaning of the Federal Power Act, as amended. The Owner Trustee is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act or an "investment adviser" within the meaning of the Investment Advisers Act of 1940, as amended; and (l) The Properties are free and clear of all Lessor Liens. 7.3 Representations and Warranties of the Lessee. Effective as of the Closing Date, the Lessee represents and warrants to each of the other parties hereto that: (a) It and each of its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is duly qualified to do business in each other jurisdiction where the nature of its business makes such qualification necessary, except where such failure to so qualify would not have a Material Adverse Effect. The Lessee and each of its Subsidiaries has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under each Operative Agreement to which it is or will be a party and each other agreement, instrument and document to be executed and delivered by it on or before the Closing Date in connection with or as contemplated by each such Operative Agreement to which it is or will be a party; (b) The execution, delivery and performance by the Lessee and each of its relevant Subsidiaries of this Agreement and the other Operative Agreements to which each is or will be a party (i) have been duly authorized by all necessary corporate action on the part of the Lessee and each such Subsidiary (including any necessary shareholder action), (ii) have received all necessary governmental approval, and (iii) do not and will not (A) violate any Legal Requirement, decree, judgment or award or order of any Governmental Authority, (B) violate or conflict with, or result in a breach of, any provision of the Certificate of Incorporation, By-Laws or other organizational documents of the Lessee or any of its Subsidiaries, or any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan, credit agreement or other agreement, instrument or document to which the Lessee or any of its Subsidiaries is a party or which is binding on the Lessee or any of its Subsidiaries or any of their respective properties, or (C) result in, or require, the creation or imposition of any Lien (other than pursuant to the. terms of the Operative Agreements) on any asset of the Lessee or any of its Subsidiaries; (c) Each of this Agreement and each other Operative Agreement to which the Lessee or any of its Subsidiaries is or will be a party has been, or will be, duly executed and delivered by it and constitutes, or upon execution and delivery will constitute, the legal, valid and binding obligation of the Lessee or such Subsidiary, as the case may be, enforceable against it in accordance with the terms thereof. The Lessee and each of its 13 relevant Subsidiaries have each executed the various Operative Agreements required to be executed as of the Closing Date; (d) Except as disclosed in the Lessee's annual report on Form 10-K for the year ended December 31, 1999, there are no actions, suits or proceedings (including, without limitation, any derivative action) pending or, to the knowledge of the Lessee, threatened with respect to the Lessee or any of its Subsidiaries which, if adversely decided, are reasonably likely to result, either individually or collectively, in a Material Adverse Effect. None of the Lessee or any of its Subsidiaries has any material contingent liabilities not provided for or disclosed in the financial statements referred to in Section 7.3(f), which are required in accordance with GAAP to be reported in such financial statements; (e) No Governmental Action by any Governmental Authority or authorization, registration, consent, approval, waiver, notice or other action by, to or of any other Person is required to authorize or is required in connection with (i) the leasing of the Properties, (ii) the execution, delivery or performance of any Operative Agreement, or (iii) the legality, validity, binding effect or enforceability of any Operative Agreement, in each case except those which have been obtained and are in full force and effect; (f) (i) The audited consolidated financial statements of the Consolidated Entities as of December 31, 1999, copies of which have been furnished to the Agent and the Owner Trustee, were prepared in accordance with GAAP applied on a consistent basis and fairly present the financial condition of the Lessee and the other Consolidated Entities on a consolidated basis as of such date and their consolidated results of operations for the fiscal year then ended and (ii) the unaudited consolidated financial statements as at June 30, 2000, copies of which have been furnished to the Agent and the Owner Trustee, were prepared in accordance with GAAP applied on a consistent basis (subject to normal year-end adjustments) and fairly present in all material respects the financial condition of the Lessee and its Consolidated Entities on a consolidated basis as of such date and its consolidated results of operations for the fiscal period then ended and such two-quarter period, respectively; (g) Since the date of the audited financial statements described in Section 7.3(f) there has been no event or occurrence which has had or is reasonably likely to have a Material Adverse Effect; (h) The Lessee knows of no proposed material tax assessments against it or any of its Subsidiaries. No extension of time for assessment or payment of any material federal, state or local tax by the Lessee or any of its Subsidiaries is in effect; (i) Each of the Lessee and its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the regulations and published interpretations thereunder. The execution and delivery of the Operative Agreements will not involve any prohibited transaction within the meaning of ERISA, the Lessee and each ERISA Affiliate has fulfilled its obligations under the minimum funding standards imposed by ERISA and each is in compliance in all material respects with the applicable 14 provisions of ERISA, and no "Reportable Event," as defined in Section 4043(b) of Title IV of ERISA, has occurred with respect to any plan maintained by the Lessee or any of its ERISA Affiliates. No Reportable Event has occurred as to which the Lessee or any ERISA Affiliate was required to file a report with the PBGC, and the present value of all benefit liabilities under each Plan (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed by more than $1,000,000 the value of the assets of such Plan. Neither the Lessee nor any ERISA Affiliate has incurred any Withdrawal Liability which remains unpaid and that could result in a Material Adverse Effect. Neither the Lessee nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization or has been terminated within the meaning of Title IV of ERISA, and to the best knowledge of the Lessee no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated,where such reorganization or termination has resulted or could reasonably be expected to result, through increases in the contributions required to be made to such Plan or otherwise, in a Material Adverse Effect; (j) Upon the execution and delivery of the Lease, (i) the Lessee will have unconditionally accepted the Properties and will have a valid and subsisting leasehold interest in the Properties, subject only to the Permitted Exceptions, and (ii) no offset will exist with respect to any Rent or other sums payable under the Lease; (k) Neither the Lessee nor any of its Subsidiaries has filed a voluntary petition in bankruptcy or been adjudicated a bankrupt or insolvent, or filed any petition or answer seeking any reorganization, liquidation, receivership, dissolution or similar relief under any bankruptcy, receivership, insolvency, or other law relating to relief for debtors, or sought or consented to or acquiesced in the appointment of any trustee, receiver, conservator or liquidator of all or any part of its properties or its interest in any Property. No court of competent jurisdiction has entered an order, judgment, or decree approving a petition filed against the Lessee or any of its Subsidiaries seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any federal or state bankruptcy, receivership, insolvency or other law relating to relief for debtors, and no other liquidator has been appointed for the Lessee or any of its Subsidiaries or all or any part of its properties or its interest in any Property, and no such action is pending. Neither the Lessee nor any of its Subsidiaries has given notice to any Governmental Authority or any Person of insolvency or pending insolvency, or suspension or pending suspension of operations; (l) The Lessee has a subsisting leasehold interest in all of the Properties free and clear of all Liens, except Permitted Liens. The Lessee has complied with all obligations under all leases relating to the Properties to which it is a party and all such leases are in full force and effect. Each of the Lessee and its Subsidiaries enjoys peaceful and undisturbed possession under all such leases; (m) Neither the Lessee nor any of its Subsidiaries is (a) an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act or an "investment adviser" within the meaning of the Investment Advisers Act of 1940, as amended, or (b) a "holding company", or a 15 "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", or a "public utility", within the meaning of the Public Utility Holding Company Act of 1935, as amended, or a "public utility" within the meaning of the Federal Power Act, as amended; (n) Neither the Lessee nor any of its Subsidiaries is engaged principally in, or has as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Federal Reserve Board), and no part of the proceeds of the Loans or the Holder Advances will be used for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock or maintaining or extending credit to others for such purpose, or for any purpose that violates, or is inconsistent with Regulations T, U, or X of the Federal Reserve Board; (o) The Lessee and each of its Subsidiaries has filed all material tax returns and reports required by Law to have been filed by it and has paid all Taxes and governmental charges thereby shown to be owing, except any such Taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves shall in accordance with GAAP have been set aside on its books; (p) To the best of the knowledge of the Lessee, after reasonable inquiry, the Lessee and each Subsidiary is in material compliance with all Environmental Laws and Occupational Safety and Health Laws where failure to comply could have a Material Adverse Effect. Neither the Lessee nor any of its Subsidiaries has received notice of any claims that any of them is not in compliance in all material respects with any Environmental Law where failure to comply could have a Material Adverse Effect; (q) The Lessee and each of its Subsidiaries is in compliance with all statutes, judicial and administrative orders, permits and governmental rules and regulations which are material to its business except for such non-compliance as would not have a Material Adverse Effect; (r) No financial statement, document, certificate or other written communication furnished to the Agent, the Owner Trustee, any Lender or any Holder by or on behalf of the Lessee or any Consolidated Entity, or to the extent not a Consolidated Entity any Subsidiary, in connection with any Operative Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. There is no fact known to the Lessee that materially adversely affects the business or condition of the Lessee or any Material Group that has not been disclosed herein or in such financial statements; (s) Each of the Arizona Ground Lease Documents has been duly executed and delivered by each of the parties thereto and constitute the legal, valid and binding obligation enforceable against each such party in accordance with the terms thereof; (t) The Properties consist of (i) Land and existing Improvements thereon which Improvements are suitable for occupancy and (ii) Equipment; 16 (u) Each of the Deeds, the Memoranda of Lease and the Mortgages has been recorded with, or delivered for recording to, the appropriate Governmental Authorities; (v) Upon recording, each of the Mortgage Instruments and the Memorandum of Lease will constitute a valid and perfected first lien on the Property described thereto in an amount not less than the Loans, subject only to the Permitted Exceptions; (w) Upon filing of each of the UCC Financing Statements (with respect to each Property) in the filing offices designated by the Lessee, such UCC Financing Statements will have been filed with the appropriate Governmental Authorities in order to perfect a security interest in the Property described therein (to the extent perfection can be obtained by filing under the UCC); (x) Upon filing in the filing offices designated by the Lessee, the Lender Financing Statements, together with an assignment to the Agent of the filed Lessor Financing Statements, will perfect a valid first priority security interest (in favor of the Agent, for the benefit of itself, the Lenders and the Holders) in the Properties and other collateral described therein in which a security interest or mortgage can be perfected by filing under the UCC, and upon filing, the Lessor Financing Statements will protect Lessor's interest under the Lease to the extent the Lease is a security agreement and mortgage; (y) No portion of any Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any Property is located in an area identified as a special flood hazard area by any such agency, then flood insurance has been obtained for the Property in accordance with Section 14.2(b) of the Lease and in accordance with the National Flood Insurance Act of 1968, as amended; (z) None of the Properties consists of Tangible Personal Property; (aa) The Lessee has obtained insurance coverage for each Property which meets the requirements of Article XIV of the Lease and all of such coverage is in full force and effect; (bb) The Properties comply with all Legal Requirements (including, without limitation, all zoning and land use laws and Environmental Laws), except to the extent that failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect; (cc) All consents, licenses, permits, authorizations, assignments and building permits required, as of the Closing Date, by a Legal Requirement or pursuant to the terms of any contract, indenture, instrument or agreement for construction, completion, occupancy, operation, leasing or subleasing of the Properties have been obtained and are in full force and effect, except to the extent that the failure to so obtain would not, individually or in the aggregate, have a Material Adverse Effect; (dd) All Improvements comply with all applicable Legal Requirements and Insurance Requirements (including, without limitation, all zoning and land use laws and 17 Environmental Laws), except to the extent the failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect. Such Improvements do not encroach in any manner onto any adjoining land (except as permitted by express written easements) and such Improvements and the use thereof by the Lessee and its agents, assignees, employees, invitees, lessees, licensees and tenants comply in all respects with all applicable Legal Requirements (including, without limitation, all applicable Environmental Laws and building, planning, zoning and fire codes), except to the extent the failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect. There are no material defects to such Improvements including, without limitation, the plumbing, heating, air conditioning and electrical systems thereof and all water, sewer, electric, gas, telephone and drainage facilities and all other utilities required to adequately service such Improvements for their intended use are available pursuant to adequate permits (including any that may be required under applicable Environmental Laws), except to the extent that failure to obtain any such permit would not, individually or in the aggregate, have a Material Adverse Effect. There is no action, suit or proceeding (including any proceeding in condemnation or eminent domain or under any Environmental Law) pending or, to the best knowledge of the Lessee, threatened which adversely affects the title to, or the use, operation or value of, the Properties. No fire or other casualty with respect to the Properties has occurred which has had a Material Adverse Effect. All utilities serving the Properties are located in and vehicular access to such Improvements is provided by (or will be provided by), either public rights-of-way abutting each related Property or Appurtenant Rights. All licenses, approvals, authorizations, consents, permits (including, without limitation, building, demolition and environmental permits, licenses, approvals, authorizations and consents), easements and rights-of-way, including proof of dedication, required for (i) the use, treatment, storage, transport, disposal or disposition of any Hazardous Substance on, at, under or from the real property underlying such Improvements during the use and operation of such Improvements, and (ii) the use and operation of such Improvements with the applicable Equipment which such Improvements support for the purposes for which they were intended have been obtained from the appropriate Governmental Authorities or from private parties, as the case may be; (ee) Construction of Improvements has been performed in a good and workmanlike manner in compliance with all Insurance Requirements and Legal Requirements, except to the extent noncompliance with any Legal Requirements would not, individually or in the aggregate, have a Material Adverse Effect; (ff) The Improvements are wholly within any building restriction lines (unless consented to by applicable Government Authorities), however established; (gg) The Advance is secured by the Lien of the Security Documents, and the Lessee has not received any notice of, or taken any action to incur, any Lien against the applicable Improvements other than Permitted Liens; (hh) All conditions precedent contained in this Agreement and in the other Operative Agreements relating to the Closing Date have been substantially satisfied; and 18 (ii) All utility services and facilities necessary for the use of the Improvements (including gas, electrical, water and sewage services and facilities) are available to the Properties. 7.4 Representations and Warranties of the Agent. Effective as of the Closing Date, the Agent represents and warrants to each of the other parties hereto that: (a) It has the full power and authority to enter into and perform its obligations under this Agreement and each other Operative Agreement to which it is or will be a party; (b) The execution, delivery and performance by the Agent of this Agreement and each other Operative Agreement to which it is or will be a party are not, and will not be, inconsistent with the charter documents of the Agent, do not and will not contravene any applicable Law of the State of Connecticut or of the United States of America governing its activities and will not contravene any provision of, or constitute a default under any indenture, mortgage, contract or other instrument to which it is a party or by which it or its properties are bound, or require any consent or approval of any Governmental Authority under any applicable law, rule or regulation of the State of Connecticut or any federal law, rule or regulation of the United States of America governing its activities; (c) Each of this Agreement and each other Operative Agreement to which it is a party has been, or when executed and delivered will be, duly authorized by all necessary corporate action on the part of the Agent and has been, or on such Closing Date will be, duly executed and delivered by the Agent and, assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, will constitute a legal, valid and binding obligation enforceable against the Agent in accordance with the terms thereof; and (d) Except as otherwise contemplated by the Operative Agreements, the Agent shall not, nor shall it direct the Owner Trustee to, use the proceeds of any Loan for any purpose other than the payment of Transaction Expenses and the fees, expenses and other disbursements referenced in Section 9.1 of this Agreement. SECTION 8. INTENTIONALLY DELETED. SECTION 9. PAYMENT OF CERTAIN EXPENSES. 9.1 Transaction Expenses. Lessee agrees on the Closing Date, to pay, or cause to be paid, all reasonable fees, expenses and disbursements of the various legal counsels for the Lessor and the Agent in connection with the transactions contemplated by the Operative Agreements and incurred in connection with the Closing Date, including all Transaction Expenses, all fees, expenses and disbursements incurred with respect to the various items referenced in Sections 5.3 (including without limitation the cost of any Appraisals or environmental site assessments, any developer's fees, any premiums for title insurance policies and charges for any updates to such policies) and 19 all other reasonable fees, expenses and disbursements in connection with the Closing Date, and including, without limitation, all expenses relating to and all fees (including brokers' fees), taxes (including any and all stamp, transfer or similar taxes) and expenses for the recording, registration and filing of documents. 9.2 Certain Fees and Expenses. The Lessee agrees to pay or cause to be paid (i) the initial and annual Owner Trustee's fee and all reasonable expenses of the Owner Trustee and any necessary co-trustees (including without limitation reasonable counsel fees and expenses) or any successor owner trustee, for acting as owner trustee under the Trust Agreement, (ii) all reasonable costs and expenses incurred by the Lessee, the Agent, the Lenders, the Holders or the Lessor (including without limitation reasonable counsel fees and expenses) in entering into any actual or proposed future amendments or supplements requested by the Lessee with respect to any of the Operative Agreements, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto which have been requested by the Lessee, and (iii) all reasonable costs and expenses incurred by the Lessor, the Lessee, the Holders, the Lenders or the Agent in connection with the enforcement of any Operative Agreement or any exercise of remedies under any Operative Agreement or any purchase of the Property by the Lessee pursuant to Article XX of the Lease. SECTION 10. OTHER COVENANTS AND AGREEMENTS. 10.1 Cooperation with the Lessee. The Holders, the Owner Trustee (at the direction of the Holders) and the Agent shall, to the extent reasonably requested by the Lessee (but without assuming additional liabilities on account thereof), at the Lessee's expense, cooperate with the Lessee in connection with its covenants contained herein including, without limitation, at any time and from time to time, upon the request of the Lessee, promptly and duly executing and delivering any and all such further instruments, documents and financing statements (and continuation statements related thereto) as the Lessee may reasonably request in order to perform such covenants. 10.2 Covenants of the Owner Trustee and the Holders. Each of the Owner Trustee and each of the Holders, each individually and not jointly, hereby agree that so long as this Agreement is in effect: (a) None of the Holders and the Owner Trustee (both in its trust capacity and in its individual capacity) will create or permit to exist at any time, and each of the Holders and the Owner Trustee will, at its own cost and expense, promptly take such action (and notify Lessee of such action) as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens attributable to it on the Properties; provided, however, that the Holders and the Owner Trustee shall not be required to discharge any such Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as (a) such proceedings shall not involve any material danger of impairment of the Liens of the Security Documents or of the sale, forfeiture or loss of, the Properties or title thereto or any interest therein or the payment of Rent, and 20 (b) such proceedings shall not materially interfere with the disposition of any Property or title thereto or interest therein or the payment of Rent or the possession and use of the Properties by the Lessee; (b) Without prejudice to any right of the Owner Trustee under the Trust Agreement to resign (subject to the requirement set forth in the Trust Agreement that such resignation shall not be effective until a successor shall have agreed to accept such appointment), or the Holders' rights under the Trust Agreement to remove the institution acting as Owner Trustee (after consent to such removal by the Agent as provided in the Trust Agreement), each of the Holders and the Owner Trustee hereby agrees with the Lessee and the Agent (i) not to terminate or revoke the trust created by the Trust Agreement except as permitted by Article VIII of the Trust Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise modify any provision of the Trust Agreement in such a manner as to adversely affect the rights of the Lessee or the Agent without the prior written consent of such party and (iii) to comply with all of the terms of the Trust Agreement, the nonperformance of which would adversely affect any such party; (c) The Owner Trustee or any successor may resign or be removed by the Holders as Owner Trustee, a successor Owner Trustee may be appointed and a corporation may become the Owner Trustee under the Trust Agreement, only in accordance with the provisions of Article IX of the Trust Agreement and, with respect to such appointment, with the consent of the Lessee, which consent shall not be unreasonably withheld, conditioned or delayed; (d) The Owner Trustee, in its capacity as Owner Trustee under the Trust Agreement, and not in its individual capacity, shall not contract for, create, incur or assume any indebtedness, or enter into any business or other activity, other than pursuant to or under the Operative Agreements; (e) The Holders will not instruct the Owner Trustee to take any action in violation of the terms of any Operative Agreement; (f) Neither any Holder nor the Owner Trustee shall (i) commence any case, proceeding or other action with respect to the Owner Trustee under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seek appointment of a receiver, trustee, custodian or other similar official with respect to the Owner Trustee or for all or any substantial benefit of the creditors of the Owner Trustee; and neither any Holder nor the Owner Trustee shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph; (g) The Owner Trustee shall give prompt notice to the Lessee and the Agent if the Owner Trustee's chief place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to any Property are kept, shall cease to be located at 79 South Main Street, Salt Lake City, Utah 84111, or if it shall change its name; 21 (h) Provided that no Lease Default or Lease Event of Default has occurred and is continuing, neither the Owner Trustee nor any Holder shall, without the prior written consent of the Lessee, consent to or permit any amendment, supplement or other modification of the terms and provisions of the Credit Agreement or the Notes; (i) Neither the Owner Trustee nor any Holder shall consent to or permit any amendment, supplement or other modification of the terms and provisions of any Operative Agreement, in each case without the prior written consent of the Agent except as described in Section 10.5 of this Agreement; and (j) The Owner Trustee (i) shall take such actions and shall refrain from taking such actions with respect to the Operative Agreements or the Properties and shall grant such approvals and otherwise act or refrain from acting with respect to the Operative Agreements or the Properties in each case as directed in writing by the Agent or, to the extent required by Section 10.5 hereof, the Lessee, notwithstanding any contrary instruction or absence of instruction by any Holder or Holders; and (ii) shall not take any action, grant any approvals or otherwise act under or with respect to the Operative Agreements or any matters relating to the Properties without first obtaining the prior written consent of the Agent (and without regard to any contrary instruction or absence of instruction by any Holder); provided, however, that notwithstanding the foregoing provisions of this subparagraph (j) the Owner Trustee, the Agent and the Holders each acknowledge, covenant and agree that, with respect to all matters under the Operative Agreements that require the consent or concurrence of all of the Lenders pursuant to the terms of Section 9.1 of the Credit Agreement (the "Unanimous Vote Matters"), neither the Owner Trustee nor the Agent shall act or refrain from acting with respect to any Unanimous Vote Matter until such party has received the approval of each Lender and each Holder with respect thereto. 10.3 Lessee Covenants, Consents, Acknowledgments and Representation. (a) Lessee acknowledges and agrees that the Owner Trustee, pursuant to the terms and conditions of the Security Agreement and the Mortgage Instruments, shall create Liens respecting the various personal property, fixtures and real property described therein in favor of the Agent. Lessee hereby irrevocably consents to the creation, perfection and maintenance of such Liens; (b) Lessor hereby instructs Lessee, and Lessee hereby acknowledges and agrees, that until such time as the Loans are paid in full and the Liens evidenced by the Security Agreement and the Mortgage Instruments have been released, (i) any and all Rent and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to the Lessor or the Owner Trustee shall instead be paid directly to the Agent or as the Agent may direct from time to time and (ii) Lessee shall cause all notices, certificates, financial statements, communications and other information which is delivered, or is required to be delivered, to the Lessor, the Owner Trustee or any Holder also to be delivered at the same time to the Agent; 22 (c) Lessee shall not consent to or permit any amendment, supplement or other modification of the terms or provisions of any Operative Agreement without, in each case, obtaining the prior written consent of the Agent and, to the extent required by the proviso at the end of Section 10.2(j) hereof, each of the Holders; (d) Except as otherwise contemplated by the Operative Agreements, neither the Owner Trustee nor the Lessee has used or shall use the proceeds of any Holder Advance for any purpose other than the payment of (i) the Property Cost and (ii) Transaction Expenses and the fees, expenses and other disbursements referenced in Section 9.1 of this Agreement; (e) The Lessee shall not permit any of the Property to consist of Tangible Personal Property; and, without limiting the generality of the first clause of this paragraph (e), the Lessee shall not permit the aggregate Property Cost of any "Personal Property" (as defined in the Arizona Ground Lease) located at, or included in, the Arizona Property to exceed $3,000,000; (f) The Lessee covenants and agrees that aggregate appraised enterprise value of all Properties as shown in the most recent Appraisals of each Property received by the Agent pursuant to Section 5.3 or otherwise shall at all times be greater than or equal to 50% of the aggregate Property Cost of all Properties; and any Appraisal obtained to comply with this provision shall be at the Lessee's sole cost and expense; and to confirm compliance with this provision, the Lessee expressly agrees to provide an Appraisal to the Agent from time to time at the request of the Agent within sixty (60) days of such request, at the expense of Lessee, but not more often than once per calendar year; (g) The Lessee agrees to perform each of the Incorporated Covenants and any other covenants set forth in (or incorporated by reference into) Article XXVIII of the Lease, in accordance with their respective terms; (h) The Lessee shall not create or permit to exist at any time (and the Lessee shall, at its own expense, take such action as may be necessary to duly discharge, or cause to be discharged) any Lien against any Property other than Permitted Liens and Lessor Liens; (i) The Lessee has performed or has caused to be performed all actions recommended or required by the Environmental Reports, or has undertaken to perform such actions, such performance to be reasonably satisfactory to the Agent; (j) The Lessee shall pay (when and as due) any fees pursuant to the Fee Letter; and (k) The Lessee agrees that the provisions of the Fee Letter or any other letter entitling any Lender to fees to be paid by Lessee shall remain in full force and effect after the Closing Date. 10.4 Sharing of Certain Payments. The parties hereto acknowledge and agree that all payments due and owing by the Lessee to the Lessor under the Lease or any of the other Operative Agreements shall be made by 23 the Lessee directly to the Agent as more particularly provided in Section 10.3 hereof. The Holders and the Agent, on behalf of the Lenders, acknowledge the terms of Section 8 of the Credit Agreement regarding the allocation of payments and other amounts made or received from time to time under the Operative Agreements and agree all such payments and amounts are to be allocated as provided in Section 8 of the Credit Agreement. In connection therewith the Holders hereby (a) appoint the Agent to act as collateral agent for the Holders in connection with the Lien granted by the Mortgage Instruments and other Security Documents to secure the Holder Amount and (b) acknowledge and agree and direct that the rights and remedies of the beneficiaries of the Lien of the Mortgage Instruments and other Security Documents shall be exercised by the Agent on behalf of the Lenders and the Holders as directed from time to time by the Lenders without notice to or consent from the Holders. 10.5 Grant of Easements, etc. The Agent and the Holders hereby agree that, so long as no Event of Default shall have occurred and be continuing, and until such time as the Agent gives instructions to the contrary to the Owner Trustee, the Owner Trustee shall, from time to time at the request of the Lessee, in connection with the transactions contemplated by the Lease or the other Operative Agreements, (i) grant easements and other rights in the nature of easements with respect to any Property, (ii) release existing easements or other rights in the nature of easements which are for the benefit of any Property, (iii) execute and deliver to any Person any instrument appropriate to confirm or effect such grants or releases, and (iv) execute and deliver to any Person such other documents or materials in connection with the operation of any Property, including, without limitation, reciprocal easement agreements, operating agreements, development agreements, plats, replats or subdivision documents; provided, that each of the agreements and documents referred to in this Section 10.5 shall be of the type normally executed by the Lessee in the ordinary course of the Lessee's business, or consistent with local practice or as required by local Governmental Authorities, and shall be on commercially reasonable terms so as not to diminish the value of any Property in any material respect. SECTION 11. CREDIT AGREEMENT AND TRUST AGREEMENT. 11.1 Lessee's Credit Agreement Rights. Notwithstanding anything to the contrary contained in the Credit Agreement, the Agent, the Lessee and the Owner Trustee hereby agree that, prior to the occurrence and continuation of any Lease Default or Lease Event of Default the Lessee (as designated below) shall have the following rights: (a) The Lessee shall have the right to give the notice referred to in Section 2.3 of the Credit Agreement, to designate the account to which a borrowing under the Credit Agreement is to be credited pursuant to Section 2.3 of the Credit Agreement; (b) the Lessee shall have the right to exercise the conversion and continuation options pursuant to Section 2.7 of the Credit Agreement; (c) the Lessee shall have the right to approve any successor agent pursuant to Section 7.8 of the Credit Agreement; 24 (d) the Lessee shall have the right to consent to any assignment by a Lender to which the Lessor has the right to consent pursuant to Section 9.8 of the Credit Agreement; and (e) without limiting the foregoing clauses (a) through (d), and in addition thereto, provided that no Event of Default then exists, the Lessee shall have the right to exercise any other right of the Owner Trustee under the Credit Agreement upon not less than five (5) Business Days' prior written notice from the Lessee to the Owner Trustee and the Agent. 11.2 Lessee's Trust Agreement Rights. Notwithstanding anything to the contrary contained in the Trust Agreement, the Lessee, the Owner Trustee and the Holders hereby agree that, prior to the occurrence and continuation of any Lease Default or Lease Event of Default the Lessee (as designated below) shall have the following rights: (a) the Lessee shall have the right to exercise the conversion and continuation options pursuant to Section 3.8 of the Trust Agreement; (b) no removal of the Owner Trustee and appointment of a successor Owner Trustee pursuant to Section 9.1 of the Trust Agreement shall be made without the prior written consent (not to be unreasonably withheld or delayed) of the Lessee; and (c) the Holders and the Owner Trustee shall not amend, supplement or otherwise modify any provision of the Trust Agreement in such a manner as to adversely affect the rights of the Lessee without the prior written consent (not to be unreasonably withheld or delayed) of the Lessee. SECTION 12. TRANSFER OF INTEREST. 12.1 Restrictions on Transfer. The Holders may, directly or indirectly, assign, convey or otherwise transfer any of their right, title or interest in or to the Trust Estate or the Trust Agreement with the prior written consent of the Agent, and (provided no Default or Event of Default has occurred and is continuing) the Lessee (which consent in each case shall not be unreasonably withheld or delayed); provided that such consents shall not be required for an assignment to a Lender or an affiliate of a Lender. The Owner Trustee may, subject to the Lien of the applicable Security Documents, but only with the prior written consent of the Agent, the Holders (which consent may be withheld by the Agent or the Holders in their sole discretion) and (provided no Default or Event of Default has occurred and is continuing) the Lessee, directly or indirectly, assign, convey, appoint an agent with respect to enforcement of, or otherwise transfer any of the Owner Trustee's right, title or interest in or to any Property, the Lease, the Trust Agreement, this Agreement (including, without limitation, any right to indemnification thereunder), or any other document relating to a Property or any interest in a Property as provided in the Trust Agreement and the Lease. The provisions of the immediately preceding sentence shall not apply to the obligations of the Owner Trustee to transfer the Properties to the Lessee or a third party 25 purchaser pursuant to Article XXII of the Lease upon payment for such Properties in accordance with each of the terms and conditions of the Lease. 12.2 Effect of Transfer. From and after any transfer effected in accordance with this Section 12, the transferor shall be released, to the extent of such transfer, from its liability hereunder and under the other documents to which it is a party in respect of obligations to be performed on or after the date of such transfer; provided, however, that any transferor Holder shall remain liable under Article XI of the Trust Agreement to the extent that the transferee Holder shall not have assumed the obligations of the transferor Holder thereunder. Upon any transfer by the Owner Trustee or a Holder as above provided, any such transferee shall assume the obligations of the Owner Trustee and Lessor or the obligations of a Holder, as the case may be, and shall be deemed an "Owner Trustee", "Lessor" or "Holder", as the case may be, for all purposes of such documents and each reference herein to the transferor shall thereafter be deemed a reference to such transferee for all purposes, except as provided in the preceding sentence. Notwithstanding any transfer of all or a portion of the transferor's interest as provided in this Section 12, the transferor shall be entitled to all benefits accrued and all rights vested prior to such transfer including, without limitation, rights to indemnification under any such document. SECTION 13. INDEMNIFICATION. 13.1 General Indemnity. (a) Whether or not any of the transactions contemplated hereby shall be consummated, the Indemnity Provider hereby assumes liability for and agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims which may be imposed on, incurred by or asserted against an Indemnified Person by any other Person in any way relating to or arising or alleged to arise out of the execution, delivery, performance or enforcement of this Agreement, the Lease or any other Operative Agreement or on or with respect to any Property or any part thereof, including, without limitation, Claims in any way relating to or arising or alleged to arise out of (i) the financing, refinancing, purchase, acceptance, rejection, ownership, design, construction, refurbishment, development, delivery, acceptance, nondelivery, leasing, subleasing, possession, use, operation, maintenance, repair, modification, transportation, condition, sale, return, repossession (whether by summary proceedings or otherwise), or any other disposition of any Property, or any part thereof, including the acquisition, holding or disposition of any interest in any Property, lease or agreement comprising a portion of any thereof; (ii) any latent or other defect in any Property whether or not discoverable by an Indemnified Person or the Indemnity Provider; (iii) any Environmental Claim, any violation of Environmental Laws, or any other loss of or damage to any Property or the environment relating to any Property, the Lease or the Indemnity Provider; (iv) the Operative Agreements, or any transaction contemplated thereby; (v) any breach by the Lessee of any of its representations or warranties under the Operative Agreements to which it is a party or failure by the Lessee to perform or observe any covenant or agreement to be performed by it under any of the Operative Agreements; (vi) the transactions contemplated hereby or by any other Operative 26 Agreement, in respect of the application of Parts 4 and 5 of Subtitle B of Title I of ERISA; (vii) any personal injury, death or property damage, including without limitation Claims based on strict or absolute liability in tort; (viii) any easement, right, agreement or document referred to in Section 10.5 of this Agreement; or (ix) any Lien on any Property (other than Liens created by the Operative Agreements). The foregoing indemnity shall not apply to a Claim imposed on, incurred by or asserted against an Indemnified Person to the extent such Claim arises from the gross negligence or willful misconduct of such Indemnified Person as determined by a final judgment of a court of competent jurisdiction; (b) If a written Claim is made against any Indemnified Person or if any proceeding shall be commenced against such Indemnified Person (including a written notice of such proceeding) for any Claim, such Indemnified Person shall promptly notify the Indemnity Provider in writing and shall not take action with respect to such Claim without the consent of the Indemnity Provider for thirty (30) days after the receipt of such notice by the Indemnity Provider; provided, however, that, in the case of any such Claim, if action shall be required by law or regulation to be taken prior to the end of such 30-day period, such Indemnified Person shall endeavor, in such notice to the Indemnity Provider, to inform the Indemnity Provider of such shorter period, and no action shall be taken with respect to such Claim without the consent of the Indemnity Provider before seven (7) days before the end of such shorter period; provided, further, that the failure of such Indemnified Person to give the notices referred to in this sentence shall not diminish the Indemnity Provider's obligation hereunder except to the extent such failure materially precludes the Indemnity Provider from contesting such Claim; (c) If, within thirty (30) days of receipt of such notice from the Indemnified Person (or such shorter period as the Indemnified Person has notified the Indemnity Provider is required by law or regulation for the Indemnified Person to respond to such Claim), the Indemnity Provider shall request in writing that such Indemnified Person respond to such Claim, the Indemnified Person shall, at the expense of the Indemnity Provider, in good faith conduct and control such action (including, without limitation by pursuit of appeals) provided, however, that (A) if such Claim can be pursued by the Indemnity Provider on behalf of or in the name of such Indemnified Person, the Indemnified Person, at the Indemnity Provider's request, shall allow the Indemnity Provider to conduct and control the response to such Claim and (B) in the case of any Claim, the Indemnified Person may request the Indemnity Provider to conduct and control the response to such Claim (with counsel to be selected by the Indemnity Provider and consented to by such Indemnified Person, such consent not to be unreasonably withheld, conditioned or delayed; provided however, that any Indemnified Person may retain separate counsel at the expense of the Indemnity Provider in the event of a conflict)) by, in the sole discretion of the Person conducting and controlling the response to such Claim, (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by the Indemnity Provider from time to time; 27 (d) The party controlling the response to any Claim shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of the response to such Claim; provided, that all decisions ultimately shall be made in the discretion of the controlling party, except that the Indemnity Provider may not agree to any dismissal or settlement of, or other agreement in connection with, any claim without the prior written consent of such Indemnified Person, if such dismissal, settlement or agreement would require any admission or acknowledgment of any culpability or wrongdoing by such Indemnified Person or provide for any nonmonetary relief to be performed by such Indemnified Person. The parties agree that an Indemnified Person may at any time decline to take further action with respect to the response to such Claim and may settle such Claim if such Indemnified Person shall waive its rights to any indemnity from the Indemnity Provider that otherwise would be payable in respect of such Claim (and any future Claim, the pursuit of which is precluded by reason of such resolution of such Claim) and shall pay to the Indemnity Provider any amount previously paid or advanced by the Indemnity Provider pursuant to this Section 13.1 by way of indemnification or advance for the payment of any amount regarding such Claim other than expenses of the action relating to such Claim; and (e) Notwithstanding the foregoing provisions of this Section 13.1, an Indemnified Person shall not be required to take any action and no Indemnity Provider shall be permitted to respond to any Claim in its own name or that of the Indemnified Person unless (i) the Indemnity Provider shall have agreed to pay and shall pay to such Indemnified Person on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Indemnified Person actually incurs in connection with such Claim, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (ii) the Indemnified Person shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (iii) if such Claim shall involve the payment of any amount prior to the resolution of such Claim, the Indemnity Provider shall provide to the Indemnified Person an interest-free advance in an amount equal to the amount that the Indemnified Person is required to pay (with no additional net after-tax cost to such Indemnified Person), (iv) in the case of a Claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the Indemnity Provider shall have provided to such Indemnified Person an opinion of independent counsel selected by the Indemnified Person and reasonably satisfactory to the Indemnity Provider stating that a reasonable basis exists to contest such Claim and (v) such claim is covered by insurance and no Default or Event of Default shall have occurred and be continuing. In addition, an Indemnified Person shall not be required to contest any Claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 13.1, unless there shall have been a change in law (or interpretation thereof) and the Indemnified Person shall have received, at the Indemnity Provider's expense, an opinion of independent counsel selected by the Indemnified Person and reasonably acceptable to the Indemnity Provider stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Indemnified Person will prevail in such contest. 28 13.2 General Tax Indemnity. (a) The Indemnity Provider shall pay and assume liability for, and does hereby agree to indemnify, protect and defend each Property and all Indemnified Persons, and hold them harmless against, all Impositions on an After Tax Basis; (b) (i) Subject to the terms of Section 13.2(f), the Indemnity Provider shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Indemnified Person, as appropriate, and the Indemnity Provider shall at its own expense, upon such Indemnified Person's reasonable request, furnish to such Indemnified Person copies of official receipts or other satisfactory proof evidencing such payment; (ii) In the case of Impositions for which no contest is conducted pursuant to Section 13.2(f) and which the Indemnity Provider pays directly to the taxing authorities, the Indemnity Provider shall pay such Impositions prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Indemnity Provider reimburses an Indemnified Person, the Indemnity Provider shall do so within thirty (30) days after receipt by the Indemnity Provider of demand by such Indemnified Person describing in reasonable detail the nature of the Imposition and the basis for the demand (including the computation of the amount payable). In the case of Impositions for which a contest is conducted pursuant to Section 13.2(f), the Indemnity Provider shall pay such Impositions or reimburse such Indemnified Person for such Impositions, to the extent not previously paid or reimbursed pursuant to subsection (a), prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 13.2(f). (iii) Impositions imposed with respect to a Property for a billing period during which the Lease expires or terminates with respect to such Property (unless the Lessee has exercised the Purchase Option with respect to such Property or the Lessee has otherwise purchased such Property) shall be adjusted and prorated on a daily basis between the Indemnity Provider and the Lessor, whether or not such Imposition is imposed before or after such expiration or termination and each such party shall pay its pro rata share thereof; and (iv) At the Indemnity Provider's request, the amount of any indemnification payment by the Indemnity Provider pursuant to subsection (a) shall be verified and certified by an independent public accounting firm mutually acceptable to the Indemnity Provider and the Indemnified Person. The fees and expenses of such independent public accounting firm shall be paid by the Indemnity Provider unless such verification shall result in an adjustment in the Indemnity Provider's favor of 15% or more of the payment as computed by the Indemnified Person, in which case such fee shall be paid by the Indemnified Person; (c) The Indemnity Provider shall be responsible for preparing and filing any real and personal property or ad valorem tax returns with respect to each Property. In case any other report or tax return shall be required to be made with respect to any obligations of 29 the Indemnity Provider under or arising out of subsection (a) and of which the Indemnity Provider has knowledge or should have knowledge, the Indemnity Provider, at its sole cost and expense, shall notify the relevant Indemnified Person of such requirement and (except if such Indemnified Person notifies the Indemnity Provider that such Indemnified Person intends to file such report or return) (A) to the extent required or permitted by and consistent with Legal Requirements, make and file in Indemnity Provider's name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Indemnified Person, advise such Indemnified Person of such fact and prepare such return, statement or report for filing by such Indemnified Person or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Indemnity Provider under or arising out of subsection (a), provide such Indemnified Person at the Indemnity Provider's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Indemnity Provider under or arising out of subsection (a). Such Indemnified Person shall, upon the Indemnity Provider's request and at the Indemnity Provider's expense, provide any data maintained by such Indemnified Person (and not otherwise available to or within the control of the Indemnity Provider) with respect to each Property which the Indemnity Provider may reasonably require to prepare any required tax returns or reports; (d) If as a result of the payment or reimbursement by the Indemnity Provider of any Imposition or other reasonable expenses of the Lessor or the payment of any Transaction Expenses incurred in connection with the transactions contemplated by the Operative Agreements, the Lessor, the Holders, partners of any Holder, or shareholders of such partners of a partnership which is a partner of such Holder, shall suffer a net increase in any federal, state or local income tax liability, the Indemnity Provider shall indemnify such Persons (without duplication of any indemnification required by subsection (a)) on an After Tax Basis for the amount of such increase. The calculation of any such net increase shall take into account any current or future tax savings (including any net operating loss carry-forward) realized or reasonably expected to be realized by such Person in respect thereof, as well as any interest, penalties and additions to tax payable by such Lessor, or such Holder, or such Affiliate, in respect thereof; (e) As between the Indemnity Provider on one hand, and the Lessor or the Agent, any Lender or any Holder on the other hand, the Indemnity Provider shall be responsible for, and the Indemnity Provider shall indemnify and hold harmless the Lessor, the Agent, the Lenders and each Holder (without duplication of any indemnification required by subsection (a)) on an After Tax Basis against, any obligation for United States or foreign withholding taxes imposed in respect of payments on the Notes or Certificates or with respect to Rent payments under the Lease (and, if the Lessor, the Agent, any Lender or any Holder receives a demand for such payment from any taxing authority, the Indemnity Provider shall discharge such demand on behalf of the Lessor, the Agent, such Lender or such Holder); provided, however, that the right of any Lender to make a claim for indemnification under this Section 13.2(e) is subject to the compliance by such Lender with the requirements of Section 2.13 of the Credit Agreement, but only to the extent that such claim is attributable to noncompliance by such Lender under such Section 2.13; and 30 (f) (i) If a written Claim is made against any Indemnified Person, or if any proceeding shall be commenced against such Indemnified Person (including a written notice of such proceeding), for any Impositions, such Indemnified Person shall promptly notify the Indemnity Provider in writing and shall not take action with respect to such Claim or proceeding without the consent of the Indemnity Provider for thirty (30) days after the receipt of such notice by the Indemnity Provider; provided, however, that, in the case of any such Claim or proceeding, if action shall be required by law or regulation to be taken prior to the end of such 30-day period, such Indemnified Person shall, in such notice to the Indemnity Provider, inform the Indemnity Provider of such shorter period, and no action shall be taken with respect to such Claim or proceeding without the consent of the Indemnity Provider before seven (7) days before the end of such shorter period; provided, further, that the failure of such Indemnified Person to give the notices referred to this sentence shall not diminish the Indemnity Provider's obligation hereunder except to the extent such failure materially precludes the Indemnity Provider from contesting such Claim; (ii) If, within thirty (30) days of receipt of such notice from the Indemnified Person (or such shorter period as the Indemnified Person has notified the Indemnity Provider is required by law or regulation for the Indemnified Person to commence such contest), the Indemnity Provider shall request in writing that such Indemnified Person contest such Imposition, the Indemnified Person shall, at the expense of the Indemnity Provider, in good faith conduct and control such contest (including, without limitation, by pursuit of appeals) relating to the validity, applicability or amount of such Imposition (provided, however, that (A) if such contest can be pursued independently from any other proceeding involving a tax liability of such Indemnified Person, the Indemnified Person, at the Indemnity Provider's request, shall allow the Indemnity Provider to conduct and control such contest and (B) in the case of any contest, the Indemnified Person may request the Indemnity Provider to conduct and control such contest (with counsel to be selected by the Indemnity Provider and consented to by such Indemnified Person, such consent not to be unreasonably withheld, conditioned or delayed; provided, however, that any Indemnified Person may retain separate counsel at the expense of the Indemnity Provider in the event of a conflict)) by, in the sole discretion of the Person conducting and controlling such contest, (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by the Indemnity Provider from time to time; (iii) The party controlling any contest shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of such contest; provided, that all decisions ultimately shall be made in the sole discretion of the controlling party. The parties agree that an Indemnified Person may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Indemnified Person shall waive its rights to any indemnity from the Indemnity Provider that otherwise would be payable in respect of such Imposition (and any future Claim by any taxing authority, the contest of which is precluded by reason of such resolution of such contest) and shall pay to the Indemnity 31 Provider any amount previously paid or advanced by the Indemnity Provider pursuant to this Section 13.2 by way of indemnification or advance for the payment of any amount regarding such Imposition other than expenses of such contest; and (iv) Notwithstanding the foregoing provisions of this Section 13.2, an Indemnified Person shall not be required to take any action and no Indemnity Provider shall be permitted to contest any Imposition in its own name or that of the Indemnified Person unless (A) the Indemnity Provider shall have agreed to pay and shall pay to such Indemnified Person on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Indemnified Person actually incurs in connection with contesting such Imposition, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) the Indemnified Person shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (C) if such contest shall involve the payment of the Imposition prior to or during the contest, the Indemnity Provider shall provide to the Indemnified Person an interest-free advance in an amount equal to the Imposition that the Indemnified Person is required to pay (with no additional net after-tax cost to such Indemnified Person), (D) in the case of a Claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the Indemnity Provider shall have provided to such Indemnified Person an opinion of independent tax counsel selected by the Indemnified Person and reasonably satisfactory to the Indemnity Provider stating that a reasonable basis exists to contest such Claim and (E) no Default or Event of Default shall have occurred and be continuing. In addition, an Indemnified Person shall not be required to contest any claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 13.2, unless there shall have been a change in law (or interpretation thereof) and the Indemnified Person shall have received, at the Indemnity Provider's expense, an opinion of independent tax counsel selected by the Indemnified Person and reasonably acceptable to the Indemnity Provider stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Indemnified Person will prevail in such contest. 13.3 Environmental Indemnity. Without limiting the generality of the foregoing, whether or not the transactions contemplated hereby shall be consummated, the Indemnity Provider hereby assumes liability for and agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims which may be imposed on, incurred by or asserted against an Indemnified Person by any other Person (but not to the extent such Claims arise from the gross negligence or willful misconduct of such Indemnified Person as determined by a final judgment of a court of competent jurisdiction) in any way relating to or arising, or alleged (by any Person asserting such a Claim against an Indemnified Person) to arise, out of any Environmental Claim, any violation of Environmental Laws, or any other loss of or damage to any Property or the environment (including without limitation the presence on any Property of wetlands, tidelands or swamp or overflow lands, or any condition arising from 32 or affecting any Property or arising from or affecting any lands nearby or adjacent to any Property that has or threatens to have any adverse effect upon human health or the environment at any Property or upon the use or value of such Property), in each case relating to any Property, the Lease or the Indemnity Provider. SECTION 14. MISCELLANEOUS. 14.1 Survival of Agreements. The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Agreements, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Agreement, the transfer of any Property to the Owner Trustee, the acquisition of any additional Equipment, the construction of any additional Improvements, any disposition of any interest of the Owner Trustee in any Property or any interest of the Holders in the Owner Trust, the payment of the Notes and any disposition thereof, and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Agreements. Except as otherwise expressly set forth herein or in other Operative Agreements, the indemnities of the parties provided for in the Operative Agreements shall survive the expiration or termination of any thereof. 14.2 No Broker, etc. Each of the parties hereto represents to the others that it has not retained or employed any broker, finder or financial adviser to act on its behalf in connection with this Agreement, nor has it authorized any broker, finder or financial adviser retained or employed by any other Person so to act. Any party who is in breach of this representation shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation. 14.3 Notices. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by United States certified or registered mail (postage prepaid), by nationally recognized courier service, by hand or by telecopy with confirming notice and any such notice shall become effective upon receipt and shall be directed to the address of such Person as indicated: If to the Lessee, to it at the following address: HEALTHSOUTH Corporation One HealthSouth Parkway Birmingham, Alabama 35243 Attention: Malcolm E. McVay Telephone No.: (205) 969-6140 Telecopy No.: (205) 969-4620 Email: tadd.mcvay@healthsouth.com 33 With a copy to: HEALTHSOUTH Corporation One HealthSouth Parkway Birmingham, Alabama 35243 Attention: William W. Horton Telephone No.: (205) 969-4977 Telecopy No.: (205) 969-4730 Email: bill.horton@healthsouth.com If to the Owner Trustee, to it at the following address: First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attention: Val T. Orton Telephone No.: (801) 246-5208 Telecopy No.: (801) 246-5053 If to UBS AG, Stamford Branch, as a Holder or a Lender, to it at the following address: UBS AG, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901 Attn: Jennifer Poccia Telephone No.: (203) 719-3834 Telecopy No.: (203)719-3888 Email: jennifer.poccia@ubsw.com if to any other Holder, to it at the address set forth for such Holder on each Holder's Holder Addendum hereto or in the applicable Assignment and Assumption; If to any other Lender, to it at the address for notice set forth on such Lender's Lender Addendum hereto or in the applicable Assignment and Assumption, the form of which is attached as a schedule to the Credit Agreement; If to the Agent, to it at the following address: UBS AG, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901 Attn: Jennifer Poccia Telephone No.: (203) 719-3834 Telecopy No.: (203)719-3888 Email: jennifer.poccia@ubsw.com with all notices of borrowing, conversion, continuation or prepayment of any Loan to be delivered to the address set forth in Section 9.2 of the Credit Agreement. 34 From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. 14.4 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. 14.5 Amendments and Termination. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified except by an instrument in writing signed by the Lessor, the Lessee and (subject to Section 9.1 of the Credit Agreement) the Agent. This Agreement may be terminated by an agreement signed in writing by the Owner Trustee, the Holders, the Lenders, the Lessee and the Agent. 14.6 Headings, etc. The Table of Contents and headings of the various Articles and Sections of this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. 14.7 Parties in Interest. Except as expressly provided herein, none of the provisions of this Agreement are intended for the benefit of any Person except the parties hereto; provide, that the Lenders are intended to be third-party beneficiaries of this Agreement. 14.8 GOVERNING LAW; WAIVERS OF JURY TRIAL. (i) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. (ii) TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM THERETO. 14.9 Submission to Jurisdictions Waivers. Each of the parties hereto irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Operative Agreements to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general 35 jurisdiction of the courts of the State of New York and the courts of the United States located in the Southern District of New York and appellate courts thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail) postage prepaid, to the respective party at its address set forth in Section 14.3 hereof or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 14.9 any special, exemplary, punitive or consequential damages. 14.10 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render such provision unenforceable in any other jurisdiction. 14.11 Liability Limited. (a) The Agent, the Lessee and the Holders each acknowledge and agree that the Owner Trustee is (except as otherwise expressly provided herein or therein) entering into this Agreement and the other Operative Agreements to which it is a party (other than the Trust Agreement and other than as set forth in Section 7.2 of this Agreement), solely in its capacity as trustee under the Trust Agreement and not in its individual capacity and that Trust Company shall not be liable or accountable under any circumstances whatsoever in its individual capacity for or on account of any statements, representations, warranties, covenants or obligations stated to be those of the Owner Trustee, except for its own gross negligence or willful misconduct and except as otherwise expressly provided herein or in the other Operative Agreements. (b) Anything to the contrary contained in this Agreement, the Credit Agreement, the Notes or in any other Operative Agreement notwithstanding, neither the Lessor nor any Holder (in its capacity as a Holder) nor any officer, director, shareholder, or partner thereof, nor any of the successors or assigns of the foregoing (all such Persons being hereinafter referred to collectively as the "Exculpated Persons"), shall be personally liable in any respect for any liability or obligation hereunder or under any other Operative 36 Agreement including the payment of the principal of, or interest on, the Notes, or for monetary damages for the breach of performance of any of the covenants contained in the Credit Agreement, the Notes, this Agreement, the Security Agreement or any of the other Operative Agreements. The Agent (for itself and on behalf of the Lenders) agrees that, in the event the Agent or any Lender pursues any remedies available to them under the Credit Agreement, the Notes, this Agreement, the Security Agreement, the Mortgage Instruments or under any other Operative Agreement, neither the Lenders nor the Agent shall have any recourse against any Exculpated Person, for any deficiency, loss or Claim for monetary damages or otherwise resulting therefrom, and recourse shall be had solely and exclusively against the Trust Estate and the Lessee (with respect to the Lessee's obligations under the Lease, the Participation Agreement and any other Operative Agreement); but nothing contained herein shall be taken to prevent recourse against or the enforcement of remedies against the Trust Estate in respect of any and all liabilities, obligations and undertakings contained herein, in the Credit Agreement, in the Notes, in the Security Agreement, the Mortgage Instruments or in any other Operative Agreement. Notwithstanding the provisions of this Section, nothing in this Agreement, the Credit Agreement, the Notes, the Security Agreement, the Mortgage Instruments or any other Operative Agreement shall: (i) constitute a waiver, release or discharge of any indebtedness or obligation evidenced by the Notes or arising under this Agreement, the Security Agreement, the Mortgage Instruments or the Credit Agreement or secured by the Security Agreement, the Mortgage Instruments or any other Operative Agreement, but the same shall continue until paid or discharged; (ii) relieve the Lessor or any Exculpated Person from liability and responsibility for (but only to the extent of the damages arising by reason of): (a) active waste knowingly committed by such Lessor or such Exculpated Person with respect to the Properties or (b) any fraud, gross negligence, willful misconduct or willful breach as determined by a final judgment of a court of competent jurisdiction, on the part of such Lessor or such Exculpated Person; (iii) relieve such Lessor or such Exculpated Person from liability and responsibility for (but only to the extent of the moneys misappropriated, misapplied or not turned over) (a) misappropriation or misapplication by such Lessor (i.e., application in a manner contrary to any Operative Agreement) of any insurance proceeds or condemnation award paid or delivered to such Lessor by any Person other than the Agent or (b) any rents or other income received by such Lessor from the Lessee that are not turned over to the Agent; or (iv) affect or in any way limit the Agent's rights and remedies under any Operative Agreement with respect to the Rents and its rights thereunder or its right to obtain a judgment against the Lessor's interest in the Properties. 14.12 Rights of Lessee. Notwithstanding any provision of the Operative Agreements, if at any time all obligations (i) of the Owner Trustee under the Credit Agreement, the Security Documents, the Trust Agreement and the other Operative Agreements and (ii) of the Lessee under the Operative Agreements have in each case been satisfied or discharged in full, then the Lessee shall be entitled to (a) terminate the Lease and (b) receive all amounts then held under the Operative Agreements and all proceeds with respect to any of the Properties. Upon the termination of the Lease pursuant to the foregoing clause (a), the Lessor shall transfer to the Lessee all of its right, title and interest free and clear of the Lien of the Lease and all Lessor Liens in and to the 37 Properties and any amounts or proceeds referred to in the foregoing clause (b) shall be paid over to the Lessee. 14.13 Further Assurances. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of the Lessee, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Participation Agreement, the other Operative Agreements and the transactions contemplated hereby and thereby (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Lessee, at its own expense and without need of any prior request from any other party, shall take such action as may be necessary (including any action specified in the preceding sentence), or (if Owner Trustee shall so request) as so requested, in order to maintain and protect all security interests provided for hereunder or under any other Operative Agreement. 14.14 Calculations under Operative Agreements. The parties hereto agree that all calculations and numerical determinations to be made under the Operative Agreements by the Owner Trustee shall be made by the Agent and that such calculations and determinations shall be conclusive and binding on the parties hereto in the absence of manifest error. 14.15 Confidentiality. Each of the Owner Trustee, the Holders, the Agent and the Lenders severally agrees to use reasonable efforts to keep confidential all non-public information pertaining to the Lessee or its Subsidiaries which is provided to it by the Lessee or its Subsidiaries, provided that nothing herein shall prohibit the disclosure by any such Person of such information: (a) to the extent such information is public when received by such Person or becomes public thereafter due to the act or omission of any party other than such Person; (b) to the extent such information is independently obtained from a source other than the Lessee or any of its Subsidiaries and such information from such source is not, to such Person's knowledge, subject to an obligation of confidentiality or, if such information is subject to an obligation of confidentiality, that disclosure of such information is permitted; (c) to counsel, auditors or accountants retained by any such Person or any Affiliates of any such Person provided they agree to keep such information. confidential as if such Person or Affiliate were party to this Agreement and to financial institution regulators, including examiners of any Lender, the Agent or the Owner Trustee, any Holder or any Affiliate in the course of examinations of such Persons; 38 (d) in connection with any litigation or the enforcement or preservation of the rights of the Agent, the Owner Trustee, the Lessor, any Lender or any Holder under the Operative Agreements; (e) to the extent required by any applicable statute, rule or regulation or court order (including, without limitation, by way of subpoena) or pursuant to the request of any regulatory or Governmental Authority having jurisdiction over such Person; provided, however, that such Person shall endeavor (if not otherwise prohibited by Law) to notify the Lessee prior to any disclosure made pursuant to this clause (e), except that no such Person shall be subject to any liability whatsoever for any failure to so notify the Lessee; (f) the Agent may disclose such information to the Owner Trustee, any Lender or any Holder; or (g) to the extent disclosure to any other financial institution or other Person is appropriate in connection with any proposed or actual (i) assignment or grant of a participation by any of the Lenders of interests in the Credit Agreement or (ii) assignment by any Holder of interests in the Trust Agreement to another Person. 14.16 Calculation of Rent, Interest, Holder Yield and Fees. Except as otherwise expressly set forth in the Operative Agreements, all calculation of Rent, interest, Holder Yield, Overdue Rate, Holder Overdue Rate, Commitment Fees, or Holder Commitment Fees payable hereunder shall be computed based on the actual number of days elapsed over a year of 360 days. 14.17 Responsibilities and Liabilities. The Joint Lead Arrangers, the Documentation Agent and the Syndication Agent, in such respective capacities, shall have no responsibilities, and shall incur no liabilities under this Agreement or any of the Operative Agreements. 14.18 Holder and Lender Addenda. Each Holder shall become a party to this Agreement by delivering to the Administrative Agent a Holder Addendum, substantially in the form of Exhibit H, duly executed by such Holder, the Owner Trustee and the Administrative Agent. Each Lender shall become a party to this Agreement by delivering to the Administrative Agent a Lender Addendum, substantially in the form of Exhibit I, duly executed by such Lender, the Borrower and the Administrative Agent. 39 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HEALTHSOUTH Corporation., as Lessee By: /s/ Malcolm E. McVay ------------------------------------ Name: Malcolm E. McVay Title: Senior Vice President FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1 By: /s/ Arge Pavlos ------------------------------------- Name: Arge Pavlos Title: Trust Officer UBS AG, STAMFORD BRANCH, as Agent By: /s/ Daniel W. Ladd III ------------------------------------- Name: Daniel W. Ladd III Title: Executive Director By: /s/ Wilfred V. Saint ------------------------------------- Name: Wilfred V. Saint 40 EX-10.58 6 0006.txt EXHIBIT (10)-58 EXHIBIT (10)-58 EXECUTION COPY - -------------------------------------------------------------------------------- CREDIT AGREEMENT by and among, HEALTHSOUTH CORPORATION, as Borrower, UBS AG, STAMFORD BRANCH, as Administrative Agent DEUTSCHE BANK AG NEW YORK BRANCH as Syndication Agent THE LENDERS PARTY HERETO FROM TIME TO TIME UBS WARBURG LLC and DEUTSCHE BANK SECURITIES INC. as Joint Lead Arrangers and THE INDUSTRIAL BANK OF JAPAN, LIMITED, as Documentation Agent October 31, 2000 - --------------------------------------------------------------------------------
TABLE OF CONTENTS Page ---- ARTICLE I Definitions and Terms...................................................................................1 1.1. Definitions...........................................................................................1 1.2. Rules of Interpretation..............................................................................25 1.3. Classes and Types of Loans...........................................................................26 ARTICLE II The Loans.............................................................................................27 2.1. Revolving Credit Loans...............................................................................27 2.2. Facility Extension Loans.............................................................................29 2.3. Payment of Interest..................................................................................30 2.4. Payment of Principal.................................................................................30 2.5. Non-Conforming Payments..............................................................................31 2.6. Notes................................................................................................31 2.7. Pro Rata Payments....................................................................................31 2.8. Reductions...........................................................................................32 2.9. Conversions and Elections of Subsequent Interest Periods.............................................32 2.10. Unused Fees.......................................................................................33 2.11. Deficiency Advances...............................................................................33 2.12. Use of Proceeds...................................................................................33 2.13. Increase and Decrease in Amounts..................................................................33 ARTICLE III Letters of Credit....................................................................................34 3.1. Letters of Credit....................................................................................34 3.2. Reimbursement........................................................................................34 3.3. Letter of Credit Facility Fees.......................................................................37 3.4. Administrative Fees..................................................................................38 3.5. Applications.........................................................................................38 ARTICLE IV Change in Circumstances...............................................................................38 4.1. Increased Cost and Reduced Return....................................................................38 4.2. Limitation on Types of Loans.........................................................................39 4.3. Illegality...........................................................................................40 4.4. Treatment of Affected Loans..........................................................................40 4.5. Compensation.........................................................................................41 4.6. Taxes................................................................................................41 ARTICLE V Conditions to Making Loans and Issuing Letters of Credit...............................................43 5.1. Conditions of Initial Advance........................................................................43 5.2. Conditions of Loans and Letters of Credit............................................................45 ARTICLE VI Representations and Warranties........................................................................46 6.1. Organization and Authority...........................................................................46 6.2. Loan Documents.......................................................................................47 6.3. Solvency.............................................................................................47
Page ---- 6.4. Subsidiaries and Subsidiaries' Guarantees............................................................47 6.5. Ownership Interests..................................................................................47 6.6. Financial Condition..................................................................................47 6.7. Title to Properties..................................................................................48 6.8. Taxes................................................................................................48 6.9. Other Agreements.....................................................................................48 6.10. Litigation........................................................................................49 6.11. Margin Stock......................................................................................49 6.12. Investment Company................................................................................50 6.13. Patents, Etc......................................................................................50 6.14. No Untrue Statement...............................................................................50 6.15. No Consents, Etc..................................................................................50 6.16. ERISA Requirement.................................................................................50 6.17. No Default........................................................................................51 6.18. Hazardous Materials...............................................................................51 6.19. Employment Matters................................................................................51 6.20. RICO..............................................................................................51 6.21. Reimbursement from Third Party Payors.............................................................51 6.22. Material Adverse Change...........................................................................52 ARTICLE VII Affirmative Covenants................................................................................52 7.1. Financial Statements, Reports, Etc...................................................................52 7.2. Maintain Properties..................................................................................53 7.3. Conduct of Business and Maintenance of Existence, Qualification, Etc.................................54 7.4. Regulations and Taxes................................................................................54 7.5. Insurance............................................................................................54 7.6. True Books...........................................................................................54 7.7. Right of Inspection..................................................................................54 7.8. Observe all Laws.....................................................................................54 7.9. Governmental Licenses................................................................................55 7.10. Covenants Extending to Other Persons..............................................................55 7.11. Officer's Knowledge of Default....................................................................55 7.12. Suits or Other Proceedings........................................................................55 7.13. Notice of Discharge of Hazardous Material or Environmental Complaint..............................55 7.14. Environmental Compliance..........................................................................56 7.15. Continuation of Current Business..................................................................56 7.16. Management Contracts..............................................................................56 7.17. Payment of Obligations............................................................................56 7.18. New Subsidiaries..................................................................................56 ARTICLE VIII Negative Covenants..................................................................................56 8.1. Financial Covenants..................................................................................57 8.2. Investments and Loans................................................................................57 8.3. Indebtedness.........................................................................................57 8.4. Disposition of Assets................................................................................57 8.5. Consolidation or Merger..............................................................................58 8.6. Liens................................................................................................58 ii
Page ---- 8.7. Dividends and Distributions..........................................................................58 8.8. Acquisitions and Capital Expenditures................................................................58 8.9. Restricted Payments; Other Payments..................................................................59 8.10. Compliance with ERISA.............................................................................59 8.11. Fiscal Year.......................................................................................60 8.12. Dissolution, etc..................................................................................60 8.13. Transactions with Affiliates......................................................................60 ARTICLE IX Events of Default and Acceleration....................................................................60 9.1. Events of Default....................................................................................60 9.2. Administrative Agent to Act..........................................................................63 9.3. Cumulative Rights....................................................................................63 9.4. No Waiver............................................................................................63 9.5. Allocation of Proceeds...............................................................................64 ARTICLE X The Administrative Agent...............................................................................64 10.1. Appointment, Powers, and Immunities...............................................................64 10.2. Reliance by Administrative Agent..................................................................65 10.3. Defaults..........................................................................................65 10.4. Rights as Lender..................................................................................65 10.5. Indemnification...................................................................................66 10.6. Non-Reliance on Administrative Agent and Other Lenders............................................66 10.7. Resignation of Administrative Agent...............................................................66 10.8. Fees..............................................................................................67 ARTICLE XI Miscellaneous.........................................................................................67 11.1. Assignments and Participations....................................................................67 11.2. Notices...........................................................................................69 11.3. No Waiver.........................................................................................70 11.4. Rights of Setoff; Adjustments.....................................................................70 11.5. Survival..........................................................................................71 11.6. Expenses..........................................................................................71 11.7. Amendments and Waivers............................................................................72 11.8. Counterparts......................................................................................72 11.9. Waivers by Borrower...............................................................................72 11.10. Termination.......................................................................................72 11.11. Governing Law.....................................................................................73 11.12. Indemnification...................................................................................73 11.13. Agreement Controls................................................................................74 11.14. Integration.......................................................................................74 11.15. Successors and Assigns............................................................................74 11.16. Severability......................................................................................75 11.17. Lender Addenda....................................................................................75 11.18. Designated Senior Indebtedness....................................................................75 EXHIBIT A Lender Addendum EXHIBIT B Form of Assignment and Acceptance EXHIBIT C Notice of Appointment (or Revocation) of Authorized Representative iii
Page ---- EXHIBIT D Form of Borrowing Notice EXHIBIT E Form of Interest Rate Selection Notice EXHIBIT F Form of Note EXHIBIT G Investments EXHIBIT H Form of Opinion of Borrower's Counsel EXHIBIT I Compliance Certificate EXHIBIT J Executive Officers EXHIBIT K Form of Guarantee Schedule 1.1(a) Preferred Cash Distribution Arrangement Schedule 6.4 Subsidiaries Schedule 6.19 Employment Matters Schedule 8.3 Existing Subsidiary Indebtedness iv
74 CREDIT AGREEMENT THIS CREDIT AGREEMENT dated as of October 31, 2000 (this "Agreement") is entered into by and among HEALTHSOUTH CORPORATION, a Delaware corporation (the "Borrower"), the Lenders signatories hereto (the "Lenders") and UBS AG, STAMFORD BRANCH, as administrative agent (in such capacity, the "Administrative Agent"). RECITAL: The Borrower has requested that the Lenders make available to the Borrower a revolving credit facility of up to $400,000,000, including a $20,000,000 sublimit for the issuance of standby letters of credit, the proceeds of which shall be used as set forth in Section 2.12, and the Lenders have agreed to make such revolving credit facility available to the Borrower on the following terms and conditions: ARTICLE I Definitions and Terms 1.1. Definitions. (a) For the purposes of this agreement, in addition to the definitions set forth above, the following terms shall have the respective meanings set forth below: "Acquisition" means the acquisition, whether with cash, property, stock or promise to pay, of all or a portion of a Person or a Facility or Facilities of a Person, permitted under Section 8.8; provided such Person, Facility or Facilities is in substantially the same line of business engaged in by Borrower or its Consolidated Entities. "Acquisition/CapEx Basket Amount" means, for any Fiscal Year, the sum of (a) the Acquisition/CapEx Initial Basket Amount plus (b) 50% of the amount, if any, of the Acquisition/CapEx Basket Amount applicable to the immediately preceding Fiscal Year pursuant to the foregoing clause (a) that was not expended during such immediately preceding Fiscal Year for Acquisitions pursuant to Section 8.8(a)(ii) or for Capital Expenditures pursuant to Section 8.8(b). For the purposes hereof, any amount spent in any Fiscal Year in respect of Acquisitions pursuant to Section 8.8(a)(ii) or Capital Expenditures pursuant to Section 8.8(b) shall be applied, first, toward amounts permitted to be spent during such Fiscal Year pursuant to the foregoing clause (a) of this definition and, second, to amounts permitted to be spent during such Fiscal Year pursuant to the foregoing clause (b) of this definition. "Acquisition/CapEx Initial Basket Amount" means an amount equal to $650,000,000. "Actual/360 Basis" means a method of computing interest or other charges hereunder on the basis of an assumed year of 360 days for actual number of days elapsed, meaning that interest or other charges accrued for each day will be computed by multiplying the rate per annum applicable on that day by the unpaid principal balance (or other relevant sum) on that day and dividing the result by 360. "Advance" means a borrowing under the Revolving Credit Facility consisting of the aggregate principal amount of a Revolving Credit Loan. "Affiliate" of any specified Person means any other Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person; or (ii) which beneficially owns or holds 5% or more of any class of the outstanding Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of such specified Person; or 5% or more of any class of the outstanding Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of Voting Stock, by contract or otherwise. "Applicable Commitment Percentage" means, with respect to each Lender, that portion of the Total Revolving Credit Commitment allocable to such Lender (a) with respect to Lenders as of the Closing Date, as set forth on Schedule 1 to the Lender Addendum executed and delivered by such Lender, and (b) with respect to any Person who becomes a Lender thereafter, as reflected in each Assignment and Acceptance to which such Lender is a party assignee; provided that the Applicable Commitment Percentage of each Lender shall be increased or decreased to reflect any assignments to or by such Lender effected in accordance with Section 11. 1. "Applicable Extension Percentage" means, with respect to each Lender, that portion of the aggregate amount of Facility Extension Loans outstanding and allocable to such Lender as in effect from time to time giving effect to each Assignment and Acceptance to which such Lender is a party. "Applicable Lending Office" means, for each Lender and for each Type of Loan, the "Lending Office" of such Lender (or an affiliate of such Lender) designated for such Type of Loan on the signature pages hereof or such other office of such Lender (or an affiliate of such Lender) as such Lender may from time to time specify to the Administrative Agent and the Borrower by written notice in accordance with the terms hereof as the office by which its Loans of such Type are to be made and maintained. "Applicable Margin" means that percent per annum set forth in the table below under the heading "Applicable Margin for Eurodollar Rate Loans" or "Applicable Margin for Base Rate Loans", as applicable, opposite the applicable Tier determined by the highest Rating as in effect at the time of determination (subject to the provisions of this definition following the table below): 2
------------------------------------------------------------------------------------------------------ RATING APPLICABLE MARGIN FOR APPLICABLE MARGIN TIER S&P OR MOODYS EURODOLLAR RATE LOANS FOR BASE RATE LOANS ------------------------------------------------------------------------------------------------------ I BBB+ Baa1 1.250% 0.250% or higher or higher ------------------------------------------------------------------------------------------------------ II BBB Baa2 1.500% 0.500% ---------------------------------------------------------------------------------------------------- III BBB- Baa3 1.750% 0.750% ------------------------------------------------------------------------------------------------------ IV BB+ Ba1 2.000% 1.000% ------------------------------------------------------------------------------------------------------ V Less than Less than 2.250% 1.250% BB+ Ba1 ------------------------------------------------------------------------------------------------------
The Applicable Margin shall be established from time to time based upon the Rating then in effect. Any change in the Applicable Margin due to a change in any Rating shall be effective on the date of such change in such Rating. In the event (i) of a split Rating where the Ratings are more than one Tier apart, then the Tier next above the Tier corresponding to the lower Rating shall apply and, (ii) either Rating is Tier IV or below (or unrated), then (A) the Applicable Margin shall be Tier IV if either Rating is Tier IV or higher and (B) Tier V otherwise. In the event that the Borrower shall not have a Rating by either S&P or Moody's, the Applicable Margin shall be mutually agreed to by the Borrower, the Administrative Agent and the Lenders and shall be Tier V until such mutual agreement is reached. "Applicable Unused Fee" means that percent per annum set forth in the table below under the heading "Applicable Unused Fee" opposite the applicable Tier determined by the highest Rating as in effect at the time of determination (subject to the provisions of this definition following the table below):
---------------------------------------------------------------------------------------------------------- RATING APPLICABLE UNUSED TIER S&P OR MOODY'S FEE ---------------------------------------------------------------------------------------------------------- I BBB+ Baa1 0.250% or higher or higher ---------------------------------------------------------------------------------------------------------- II BBB Baa2 0.375% ---------------------------------------------------------------------------------------------------------- III BBB- Baa3 0.375% ---------------------------------------------------------------------------------------------------------- IV BB+ Ba1 0.500% ---------------------------------------------------------------------------------------------------------- V Less than Less than 0.500% BB+ Ba1 ----------------------------------------------------------------------------------------------------------
The Applicable Unused Fee shall be established from time to time based upon the Ratings then in effect. Any change in the Applicable Unused Fee due to a change in any Rating shall be effective on the date of such change in such Rating. In the event (i) of split Ratings where the Ratings are more than one Tier apart, then the Tier next above the Tier corresponding to the lower Rating shall apply and, (ii) either Rating is Tier IV or below (or unrated), then (A) the Applicable Unused Fee shall be Tier IV if either Rating is Tier IV or higher and (B) Tier V otherwise. In the event that the Borrower shall not have a Rating by either S&P or Moody's, the Applicable Unused Fee shall be mutually agreed to by the Borrower, the Administrative Agent and the Lenders and shall be Tier IV until such mutual agreement is reached. 3 "Applications and Agreements for Letters of Credit" means, collectively, the Applications and Agreements for Letters of Credit, or similar documentation, executed by the Borrower from time to time and delivered to the Issuing Bank to support the issuance of Letters of Credit and which terms shall state that the requested Letter of Credit is to be issued under this Agreement. "Assignment and Acceptance" means an Assignment and Acceptance in the form of Exhibit B (with blanks appropriately filled in) (or in such other form as shall be approved by the Administrative Agent) delivered to the Administrative Agent in connection with an assignment of a Lender's interest under this Agreement pursuant to Section 11. 1. "Authorized Representative" means any of the Executive Officers of the Borrower or, with respect to financial matters, the Treasurer or the Chief Financial Officer of the Borrower, or any other Person expressly designated by the board of directors of the Borrower (or the appropriate committee thereof) as an Authorized Representative of the Borrower, as set forth from time to time in a certificate in the form of Exhibit C. "Base Rate" means, for any day, the rate per annum equal to the higher of (i) the Prime Rate for such day or (ii) the Federal Funds Rate for such day plus one-half of one percent (1/2%). Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or Federal Funds Rate. "Base Rate Loan" means a Loan for which the rate of interest is determined by reference to the Base Rate. "Base Rate Refunding Loan" means an Advance under the Revolving Credit Facility which bears interest at a Base Rate made to satisfy Reimbursement Obligations arising from a drawing under a Letter of Credit. "Board" means the Board of Governors of the Federal Reserve System (or any successor body). "Borrowing Notice" means the notice delivered by an Authorized Representative in connection with an Advance under the Revolving Credit Facility, in the form of Exhibit D. "Business Day" means, (i) except in the case of a Eurodollar Rate Loan, any day which is not a Saturday, Sunday or a day on which banks in the State of New York are authorized or obligated by law, executive order or governmental decree to be closed and, (ii) with respect to any Eurodollar Rate Loan, any day which is a Business Day, as described above, and on which the relevant international financial markets are open for the transaction of business contemplated by this Agreement in London, England, and New York, New York. 4 "Capital Expenditures" means, for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition or leasing (pursuant to a Capital Lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries, but for the avoidance of duplication, excluding any amounts included in Cost of Acquisition with respect to any Acquisition. "Capital Leases" means all leases which have been or should be capitalized in accordance with GAAP as in effect from time to time including Statement No. 13 of the Financial Accounting Standards Board or any successor thereof. "Capital Stock" of any Person means any and all shares, rights to purchase, warrants or options (whether or not currently exercisable), participation or other equivalents of or interest in (however designated) the equity (including without limitation common stock, preferred stock and partnership and joint venture interests) of such Person (excluding any debt securities that are convertible into, or exchangeable for, such equity). "Change of Control" means, at any time: (i) all or substantially all of the Borrower's assets are sold as an entirety to any Person or related group of Persons; (ii) there shall be consummated any consolidation or merger of the Borrower (A) in which the Borrower is not the continuing or surviving corporation (other than a consolidation or merger with a wholly owned Subsidiary of the Borrower in which all shares of the Borrower's Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (B) pursuant to which the Borrower's Common Stock would be converted into cash, securities or other property, in each case other than a consolidation or merger of the Borrower in which the holders of the Borrower's Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the total Voting Stock of the continuing or surviving corporation immediately after such consolidation or merger in substantially the same proportion as their ownership of the Borrower's Common Stock immediately before such transaction; (iii) any "person" or "group" (each as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), who are not as of the Closing Date owners of one percent (1%) or more of the Voting Stock of the Borrower, either (A) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of Voting Stock of the Borrower (or securities convertible into or exchangeable for such Voting Stock) representing 15% or more of the combined voting power of all Voting Stock of the Borrower (on a fully diluted basis) or (B) otherwise has the ability, directly or indirectly, to elect a majority of the board of directors of the Borrower; (iv) during any period of up to 24 consecutive months, commencing on the Closing Date, individuals who at the beginning of such period were directors of the 5 Borrower shall cease for any reason (other than the death, disability or retirement of an officer of the Borrower that is serving as a director at such time so long as another officer of the Borrower replaces such Person as a director) to constitute a majority of the board of directors of the Borrower; (v) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation thereof, will result in its or their acquisition, of the power to exercise, directly or indirectly, a controlling influence on the management or policies of the Borrower, or (vi) the Borrower is liquidated or dissolved or adopts a plan of liquidation or dissolution. "Closing Date" means the date as of which this Agreement is executed by the Borrower, the Lenders and the Administrative Agent and on which the conditions set forth in Section 5.1 have been satisfied. "Code" means the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. "Common Stock" means the common stock, par value $.01 per share, of the Borrower. "Consistent Basis" in reference to the application of GAAP means the accounting principles observed in the period referred to are comparable in all material respects to those applied in the preparation of the audited financial statements of the Borrower referred to in Section 6.6(a). "Consolidated Amortization Expense" of the Borrower for any period means the amortization expense of the Borrower and its Consolidated Entities for such period (to the extent included in the computation of Consolidated Net Income), determined on a consolidated basis in accordance with GAAP. "Consolidated Depreciation Expense" of the Borrower means the depreciation expense of the Borrower and its Consolidated Entities for such period (to the extent included in the computation of Consolidated Net Income of the Borrower), determined on a consolidated basis in accordance with GAAP. "Consolidated EBITDA" means, with respect to the Borrower and its Consolidated Entities for any Four-Quarter Period ending on the date of computation thereof, the sum of, without duplication, (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) Consolidated Income Tax Expense, (iv) Consolidated Amortization Expense, (v) Consolidated Depreciation Expense, (vi) the minority interest of any Person or Persons in the income of Consolidated Entities for such period, (vii) the non-recurring, non-cash expenses and cash transaction costs relating to professional fees arising in conjunction with an Acquisition provided such expenses do not exceed 10% of the Cost of Acquisition and (viii) as applicable, the non-recurring, non-cash expenses incurred by 6 the Borrower and its Consolidated Entities during the three month period ended September 30, 1999 and the three month period ended December 31, 1999; all determined on a consolidated basis in accordance with GAAP applied on a Consistent Basis. "Consolidated Entity" means any Person whose financial statements are appropriately consolidated with the Borrower's financial statements under GAAP. "Consolidated Indebtedness" means all Indebtedness of the Borrower and its Consolidated Entities, all determined on a consolidated basis. "Consolidated Interest Expense" means, with respect to any Four-Quarter Period ending on the date of computation thereof, the gross interest expense of the Borrower and its Consolidated Entities, including without limitation (i) the current amortized portion of debt discounts to the extent included in gross interest expense, (ii) the current amortized portion of all fees (including fees payable in respect of any Rate Hedging Obligation) payable in connection with the incurrence of Indebtedness to the extent included in gross interest expense, (iii) the portion of any payments made in connection with Capital Leases allocable to interest expense, and (iv) lease payments, other than the Headquarters Obligations and Hospitals Obligations, made pursuant to the Headquarters Lease and Hospitals Lease, respectively, all determined on a consolidated basis in accordance with GAAP applied on a Consistent Basis. "Consolidated Net Income" of the Borrower for any period means the net income (or loss) of the Borrower and its Consolidated Entities for such period determined on a consolidated basis in accordance with GAAP, without giving effect to dividends on any series of preferred stock of any Consolidated Entity, whether or not in cash, to the extent such consolidated net income was reduced thereby; provided that there shall be excluded from such net income (for all purposes, other than compliance with Section 8.1(a), to the extent otherwise included therein), without duplication, (i) the net income of any Person (other than a Consolidated Entity) to the extent that any such income has not actually been received by the Borrower or a Consolidated Entity in the form of dividends or similar distributions during such period, but including, in any event, net income of any Person who becomes a Consolidated Entity whose Acquisition is accounted for on a "pooling of interests" basis; (ii) except to the extent includable in the consolidated net income of the Borrower or a Consolidated Entity pursuant to the foregoing clause (i), the net income of any Person that accrued prior to the date that (a) such Person becomes a Consolidated Entity or is merged into or consolidated with a Consolidated Entity or (b) the assets of such Person are acquired by the Borrower or a Consolidated Entity; (iii)the net income of any Consolidated Entity to the extent that the declaration or payment of dividends or similar distributions by such Consolidated Entity of that income is not permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Consolidated Entity during such period; (iv) any gain (or loss), together with any related provisions for taxes on any such gain, realized during such period by the Borrower or its Consolidated Entities upon (a) the acquisition of any securities, or the extinguishment of any Indebtedness, of the Borrower or its Consolidated Entities or (b) any asset sale by the 7 referent Person or any of its Subsidiaries; (v) any extraordinary gain (or extraordinary loss), together with any related provision for taxes or tax benefit resulting from any such extraordinary gain or loss, realized by the Borrower or its Consolidated Entities during such period; and (vi) in the case of a successor to any Person by consolidation, merger or transfer of its assets, any earnings of the successor prior to such merger, consolidation or transfer of assets. "Consolidated Net Worth" of the Borrower as of any date means the Consolidated Stockholders' Equity (including any preferred stock that is classified as equity under GAAP, other than Disqualified Stock) of the Borrower and its Consolidated Entities (excluding any equity adjustment for foreign currency translation for any period subsequent to the Closing Date) on a consolidated basis at such date, as determined in accordance with GAAP, less all write-ups subsequent to the Closing Date in the book value of any asset owned by the Borrower or any of its Consolidated Entities. "Consolidated Stockholders' Equity" means at any time as at which the amount thereof is to be determined, the sum of the following amounts in respect of the Borrower and the Consolidated Entities: (i) the par or stated value of all Capital Stock of the Borrower, (ii) retained earnings, (iii) additional paid in capital, (iv) capital surplus and (v) earned surplus minus treasury stock. "Consolidated Tangible Net Assets" means, as of any date on which the amount thereof is determined, Consolidated Total Assets minus (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earnings) (i) all reserves (other than contingency reserves not allocated to any particular purpose), including without limitation reserves for depreciation, depletion, amortization, obsolescence, deferred income taxes, insurance and inventory valuation, and (ii) the net book value of all assets which would be treated as intangible assets, such as (without limitation) goodwill (whether representing the excess of cost over book value of assets acquired or otherwise), capitalized expenses, unamortized debt discount and expense, consignment inventory rights, patents, trademarks, trade names, copyrights, franchises and licenses, all as determined on a consolidated basis in accordance with GAAP applied on a Consistent Basis. "Consolidated Tangible Net Worth" means, as of any date on which the amount thereof is to be determined, Consolidated Stockholders' Equity minus (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earnings) (i) all reserves (other than contingency reserves not allocated to any particular purpose), including without limitation reserves for depreciation, depletion, amortization, obsolescence, deferred income taxes, insurance and inventory valuation, and (ii) the net book value of all assets which would be treated as intangible assets, such as (without limitation) goodwill (whether representing the excess of cost over book value of assets acquired or otherwise), capitalized expenses, unamortized debt discount and expense, consignment inventory rights, patents, trademarks, trade names, copyrights, franchises and licenses, all as determined on a consolidated basis in accordance with GAAP applied on a Consistent Basis. 8 "Consolidated Total Assets" means, as of any date on which the amount thereof is to be determined, the net book value of all assets of the Borrower and its Consolidated Entities as determined on a consolidated basis in accordance with GAAP applied on a Consistent Basis. "Consolidated Total Capital" means, as of any date on which the amount thereof is to be determined, the sum of Consolidated Indebtedness plus Consolidated Stockholders' Equity of the Borrower and its Consolidated Entities. "Continue", "Continuation", and "Continued" shall refer to the continuation pursuant to Section 2.9 hereof of a Eurodollar Rate Loan as a Eurodollar Rate Loan from one Interest Period to the next Interest Period. "Contract Provider" means any Person who provides professional health care services under or pursuant to any contract with the Borrower or any Subsidiary. "Controlled Investment Affiliate" of any specified Person, means any other Person that (i) directly or indirectly through one or more intermediaries is in control of, is controlled by, or is under common control with, such specified Person and (ii) is organized by such specified Person primarily for the purpose of making equity or debt investments in one or more companies. For purposes of this definition, "control" of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person, whether through ownership of Voting Stock, by contract or otherwise. "Controlled Partnership" means a general partnership of which the Borrower or a Subsidiary is a general partner, or a limited partnership whose general partners include the Borrower or a Subsidiary (but not including Vanderbilt), or a limited liability company whose members include the Borrower or a Subsidiary or another Controlled Partnership, which partnership, whether general or limited, or limited liability company has assets with a value in excess of $2,000.00, and with respect to which partnership or limited liability company the Borrower or a Subsidiary is entitled to receive not less than 50% of any distributions of cash made to the partners or members thereof, other than any preferred cash distribution arrangement in existence at the Closing Date as set forth on Schedule 1.1(a) hereto, or approved by the Required Lenders in writing, or which is otherwise a Consolidated Entity. "Convert", "Conversion" and "Converted" refers to a conversion pursuant to Section 2.9 or Article IV of one Type of Loan into another Type of Loan. "Convertible Subordinated Debentures" means the 3.25% Convertible Subordinated Debentures due 2003 issued by the Borrower, as the same may be amended, supplemented, waived or otherwise modified from time to time. "Cost of Acquisition" means in respect of any Acquisition, the sum of (i) the amount of cash paid by the Borrower and its Consolidated Entities in connection with such Acquisition, (ii) the Fair Market Value of all Capital Stock or other ownership 9 interests of the Borrower or any Consolidated Entity issued or given in connection with such Acquisition, (iii) the amount (determined by using the face amount or the amount payable at maturity, whichever is greater) of all Indebtedness incurred, assumed or acquired in connection with such Acquisition, (iv) all additional purchase price amounts in the form of earnouts and other contingent obligations that should be recorded on the financial statements of the Borrower and its Consolidated Entities in connection with Generally Accepted Accounting Principles, (v) all amounts paid in respect of covenants not to compete, consulting agreements and other affiliated contracts in connection with such Acquisition and (vi) the aggregate fair market value of all other consideration given by the Borrower and its Consolidated Entities in connection with such Acquisition. "Default" means any event or condition which, with the giving or receipt of notice or lapse of time or both, would constitute an Event of Default. "Default Rate" means (i) with respect to each Eurodollar Rate Loan, until the end of the Interest Period applicable thereto, a rate of two percent (2%) above the Eurodollar Rate applicable to such Loan plus the Applicable Margin applicable to Eurodollar Loans, and thereafter at a rate of interest per annum which shall be two percent (2%) above the Base Rate plus the Applicable Margin applicable to Base Rate Loans, (ii) with respect to Base Rate Loans, at a rate of interest per annum which shall be two percent (2%) above the Base Rate plus the Applicable Margin applicable to Base Rate Loans and (iii) in any case, the maximum rate permitted by applicable law, if lower. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the Revolving Credit Termination Date or the Facility Extension Loan Termination Date, if applicable. "Dollars" and the symbol "$" mean dollars constituting legal tender for the payment of public and private debts in the United States of America. "Eligible Assignee" means (i) a Lender, (ii) an affiliate of a Lender, (iii) any Controlled Investment Affiliate of a Lender, and (iv) any other Person approved by the Administrative Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 11.1, the Borrower, such approval not to be unreasonably withheld or delayed by the Borrower or the Administrative Agent and such approval to be deemed given by the Borrower if no objection is received by the assigning Lender and the Administrative Agent from the Borrower within two Business Days after written notice of such proposed assignment has been provided by the assigning Lender to the Borrower; provided, however, that neither the Borrower nor an affiliate of the Borrower shall qualify as an Eligible Assignee. "Employee Benefit Plan" means any employee benefit plan within the meaning of Section 3(3) of ERISA which (i) is maintained for employees of the Borrower or any of its ERISA Affiliates or is assumed by the Borrower or any of its ERISA Affiliates in 10 connection with any Acquisition or (ii) has at any time been maintained for the employees of the Borrower or any current or former ERISA Affiliate. "Environmental Laws" means any federal, state or local statute, law, ordinance, code, rule, regulation, order, decree, permit or license regulating, relating to, or imposing liability or standards of conduct concerning any environmental matters or conditions, environmental protection or conservation, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; the Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act, as amended; the Toxic Substances Control Act, as amended; the Clean Air Act, as amended; the Clean Water Act, as amended; together with all regulations promulgated thereunder, and any other "Superfund" or "Superlien" law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute and all rules and regulations promulgated thereunder. "ERISA Affiliate", as applied to the Borrower, means any Person or trade or business which is a member of a group which is under common control with the Borrower, who together with the Borrower, is treated as a single employer within the meaning of Section 414(b) and (c) of the Code. "Eurodollar Rate" means the interest rate per annum calculated according to the following formula: Eurodollar Rate = Interbank Offered Rate ---------------------- (1- Reserve Requirement) "Eurodollar Rate Loan" means a Loan for which the rate of interest is determined by reference to the Eurodollar Rate. "Event of Default" means any of the occurrences set forth as such in Section 9. 1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder. "Executive Officer" means any Person who from time to time holds the offices with Borrower listed on Exhibit J. "Facility" means an inpatient or outpatient rehabilitation facility, certified outpatient rehabilitation facility, skilled nursing facility, specialty medical center, specialty orthopedic hospital or acute care hospital, subacute inpatient facility, transitional living center, medical office building, outpatient surgery center or outpatient diagnostic center with all buildings and improvements associated therewith, that is owned or leased or acquired (as permitted under Section 8.8), in whole or part, by the Borrower or a Subsidiary or any Controlled Partnership. 11 "Facility Extension Loan Termination Date" means the Facility Extension Maturity Date or such earlier date of termination of Lenders' obligations hereunder as may be determined pursuant to Section 9.1 upon the occurrence of an Event of Default, or such date on which the Borrower may voluntarily and permanently terminate the Revolving Credit Facility by payment in full of all outstanding amounts under the Facility Extension Loans with all accrued and unpaid interest and fees thereon. "Fair Market Value" means, with respect to any capital stock or other ownership interests issued or given by the Borrower or any Consolidated Entity in connection with an Acquisition, (i) in the case of capital stock that is Common Stock and such Common Stock is then designated as a national market system security by the National Association of Securities Dealers, Inc. ("NASD") or is listed on a national securities exchange, the average of the last reported bid and ask quotations or prices reported thereon for Common Stock or such other value as may be ascribed to the Common Stock in a definitive merger or acquisition agreement provided such value is determined according to customary methods for like transactions and is approved (to the extent required by Borrower's charter or bylaws) by the Borrower's board of directors or (ii) in the case of capital stock that is not Common Stock or in the event that Common Stock is not so designated by NASD or listed on such national exchange, or in the case of any other ownership interests, the determination of the fair market value thereof in good faith by a majority of disinterested members of the board of directors of the Borrower or such Consolidated Entity, in each case effective as of the close of business on the Business Day immediately preceding the closing date of such Acquisition. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to the Administrative Agent (in its individual capacity) on such day on such transaction as shall be determined by the Administrative Agent. "Fiscal Year" means, with respect to the Borrower, the twelve month fiscal period of the Borrower commencing on January 1 of each calendar year and ending on December 31 of each calendar year. "Four-Quarter Period" means a period of four full consecutive fiscal quarters of the Borrower and its Subsidiaries, taken together as one accounting period. "GAAP" or "Generally Accepted Accounting Principles" means generally accepted accounting principles, being those principles of accounting set forth in pronouncements of the Financial Accounting Standards Board or the American Institute 12 of Certified Public Accountants or which have other substantial authoritative support and are applicable in the circumstances as of the date of a report. "Governmental Authority" means any Federal, state, municipal, national or other governmental department, commission, board, bureau, court, agency or instrumentality or political subdivision thereof or any entity or officer exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government or any court, in each case whether associated with a state of the United States, the United States, or a foreign entity or government. "Guarantee" means the guarantee, substantially in the form of Exhibit K, to which each Guarantor shall become a party. "Guaranteed Obligations" of any Person means all guaranties (including guaranties of guaranties and guaranties of dividends and other monetary obligations), endorsements, assumptions and other contingent obligations with respect to, or to purchase or to otherwise pay or acquire, Indebtedness of others; provided, however, that such term shall not include obligations under leases and other contracts initially incurred directly by another Person and subsequently directly assumed by the Person in question, but such term shall include obligations that, if the same had been initially incurred directly by the Person in question, would have constituted Guaranteed Obligations. "Guarantor" means any Subsidiary of the Borrower that directly or indirectly guarantees any Indebtedness of the Borrower and becomes a party to the Guarantee. "Hazardous Material" means and includes any pollutant, contaminant, or hazardous, toxic or dangerous waste, substance or material (including without limitation petroleum products, asbestos-containing materials, and lead), the generation, handling, storage, disposal, treatment or emission of which is subject to any Environmental Law. "HCFA" means the United States Health Care Financing Administration and any successor thereto. "Headquarters Lease" means the Amended and Restated Lease Agreement dated as of October 31, 2000, between First Security Bank, National Association, a national banking association, not individually, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 1995-1, as Lessor and HEALTHSOUTH Holdings, Inc., a Delaware corporation, as Lessee, as such Lease Agreement may be amended, modified, supplemented or restated in its entirety from time to time. "Headquarters Obligations" means all of the Holder Advances and Loans, as each such term is defined in the Headquarters Participation Agreement. "Headquarters Participation Agreement" means the Amended and Restated Participation Agreement dated as of October 31, 2000 by and among HEALTHSOUTH HOLDINGS, INC., as Lessee, FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, except as expressly stated herein, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 13 1995-1, THE CHASE MANHATTAN BANK, as Documentation Agent; UBS WARBURG LLC and DEUTSCHE BANK SECURITIES, INC., as Joint Lead Arrangers; DEUTSCHE BANK AG NEW YORK BRANCH, as Syndication Agent; UBS AG, Stamford Branch, as Administrative Agent for the Lenders and the Holders; UBS AG, Stamford Branch, and the various other banks and lending institutions which are parties thereto from time to time as Holders, and UBS AG, Stamford Branch and the various other banks and lending institutions which are parties thereto from time to time as Lenders, as such Headquarters Participation Agreement may be amended, modified, supplemented or restated in its entirety from time to time. "Hospitals Lease" means the Lease Agreement dated as of October 31, 2000, between First Security Bank, a national banking association, not individually, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, as Lessor, and HEALTHSOUTH Corporation, a Delaware corporation, as Lessee, as such Lease Agreement may be amended, modified, supplemented or restated in its entirety from time to time. "Hospitals Obligations" means all of the Holder Advances and Loans, as each such term is defined in the Hospitals Participation Agreement. "Hospitals Participation Agreement" means the Participation Agreement dated as of October 31, 2000 by and among HEALTHSOUTH Corporation., as Lessee, FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, except as expressly stated therein, but solely as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, THE CHASE MANHATTAN BANK, as Documentation Agent; UBS WARBURG LLC and DEUTSCHE BANK SECURITIES, INC., as Joint Lead Arrangers; DEUTSCHE BANK AG NEW YORK BRANCH, as Syndication Agent; UBS AG, Stamford Branch, as Administrative Agent for the Lenders and the Holders; UBS AG, Stamford Branch, and the various other banks and lending institutions which are parties thereto from time to time as Holders, and UBS AG, Stamford Branch and the various other banks and lending institutions which are parties thereto from time to time as Lenders, as such Hospitals Participation Agreement may be amended, modified, supplemented or restated in its entirety from time to time. "Indebtedness" of any Person at any date means, without duplication: (i) all indebtedness of such Person for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof); (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (iii) all obligations (contingent or otherwise) of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto); (iv) all obligations of such Person with respect to Rate Hedging Obligations (excluding, for all purposes of this Agreement other than Section 9.1(e), those that fix the interest rate on variable rate indebtedness otherwise permitted hereunder or that protect the Borrower and or its Consolidated Entities against changes in foreign exchange rates); (v) obligations of such Person to pay the deferred and unpaid purchase price of property or services, except trade payables and accrued expenses incurred in the ordinary course of business; (vi) all Capitalized Lease Obligations of such Person; (vii) all indebtedness of 14 others secured by a Lien on any assets of such Person, whether or not such indebtedness is assumed by such Person; (viii) all Guaranteed Obligations; (ix) the Headquarters Obligations and the Hospitals Obligations; and (x) all obligations of a like nature to those described in clauses (i) through (ix) above of a partnership of which such Person is a general partner or of a limited liability company of which such Person is a member. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above, the maximum liability of such Person for any such contingent obligations at such date and, in the case of clause (vii), the amount of the Indebtedness secured. "Interbank Offered Rate" means, for any Eurodollar Rate Loan for the Interest Period applicable thereto, the rate per annum (rounded upwards, if necessary, to the nearest one-one hundredth (1/100) of one percent) appearing on Dow Jones Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason, as determined by the Administrative Agent, such rate is not available, the term "Interbank Offered Rate" means, for any Eurodollar Rate Loan for the Interest Period applicable thereto, the rate per annum (rounded upwards, if necessary, to the nearest 1 /100 of 1 %) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%). "Interest Period" means, with respect to any Eurodollar Rate Loan, each period commencing on the date such Eurodollar Rate Loan is made or Converted from a Loan of another Type or the last day of the next preceding Interest Period for such Loan and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Borrower may select as provided in Section 2.3, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period for any Eurodollar Rate Loan would otherwise end after the Revolving Credit Termination Date (with respect to Revolving Credit Loans) or the Facility Extension Loan Termination Date (with respect to Facility Extension Loans), such Interest Period shall end on the Revolving Credit Termination Date or the Facility Extension Loan Termination Date, as applicable; (ii) each Interest Period that would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for a Eurodollar Rate Loan, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding clauses (i) and (ii) above, no Interest Period for any Loan shall have a duration of less than one month (in the case of a Eurodollar Rate Loan) and, if the Interest Period for any Eurodollar Rate Loan would otherwise be a shorter period, such Loan shall not be available hereunder for such period. 15 "Interest Rate Selection Notice" means the written notice delivered by an Authorized Representative in connection with the election of a subsequent Interest Period for any Eurodollar Rate Loan or the Conversion of any Eurodollar Rate Loan into a Base Rate Loan or the Conversion of any Base Rate Loan into a Eurodollar Rate Loan, substantially in the form of Exhibit E. "Issuing Bank" means UBS AG, Stamford Branch, as issuer of Letters of Credit under Article III. "LC Account Agreement" means the LC Account Agreement dated as of the date hereof among the Borrower, the Administrative Agent and the Lenders, as amended, modified or supplemented from time to time. "Lender Addendum" means, with respect to any initial Lender, a Lender Addendum, substantially in the form of Exhibit A, to be executed and delivered by such Lender on the Closing Date as provided in Section 11.17. "Letter of Credit" means a standby letter of credit issued by the Issuing Bank pursuant to Article III for the account of the Borrower in favor of a Person advancing credit or securing an obligation on behalf of the Borrower. "Letter of Credit Commitment" means, with respect to each Lender, the obligation of such Lender to acquire Participations in respect of Letters of Credit and Reimbursement Obligations up to an aggregate amount at any one time outstanding equal to such Lender's Applicable Commitment Percentage of the Total Letter of Credit Commitment as the same may be increased or decreased from time to time pursuant to this Agreement. "Letter of Credit Facility" means, the facility described in Article III providing for the issuance by the Issuing Bank for the account of the Borrower of Letters of Credit in an aggregate stated amount at any time outstanding not exceeding, together with all Reimbursement Obligations, the Total Letter of Credit Commitment. "Letter of Credit Outstandings" means, as of any date of determination, the aggregate amount remaining undrawn under all Letters of Credit plus Reimbursement Obligations then outstanding. "Lien" means any interest in property securing any obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. For the purposes of this Agreement, the Borrower and any Subsidiary shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement, financing lease, or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes. 16 "Loan" or "Loans" means any Revolving Credit Loans, Reimbursement Obligations and Letter of Credit Outstandings and all extensions and renewals thereof, including, if applicable and without limitation, any Facility Extension Loans. "Loan Documents" means this Agreement, the Notes, the LC Account Agreement, the Applications and Agreements for Letter of Credit and all other instruments and documents heretofore or hereafter executed or delivered to or in favor of any Lender or the Administrative Agent in connection with the Loans made, Letters of Credit issued and transactions contemplated under this Agreement, as the same may be amended, supplemented or replaced from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business, properties, operations, condition or prospects, financial or otherwise, of the Borrower and its Consolidated Entities, taken as a whole, (ii) the ability of the Borrower to pay or perform its obligations, liabilities and indebtedness under the Loan Documents as such payment or performance becomes due in accordance with the terms thereof, or (iii) the rights, powers and remedies of the Administrative Agent or any Lender under any Loan Document or the validity, legality or enforceability thereof (including for purposes of clauses (ii) and (iii) the imposition of burdensome conditions thereon). "Material Group" means, at any time, any group, whether one or more, or combination of Consolidated Entities (a) whose assets, in the aggregate, constitute 5% or more of the assets of the Borrower and the Consolidated Entities on a consolidated basis or (b) whose net revenues, in the aggregate, constitute 5% or more of the net revenues of the Borrower and the Consolidated Entities on a consolidated basis. "Medicaid Certification" means certification by HCFA or a state agency or entity under contract with HCFA that a health care operation is in compliance with all the conditions of participation set forth in the Medicaid Regulations. "Medicaid Provider Agreement" means an agreement entered into between a state agency or other entity administering the Medicaid program and a health care operation under which the health care operation agrees to provide services for Medicaid patients in accordance with the terms of the agreement and Medicaid Regulations. "Medicaid Regulations" means, collectively, (i) all federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting the medical assistance program established by Title XIX of the Social Security Act and any statutes succeeding thereto; (ii) all applicable provisions of all federal rules, regulations, manuals and orders of all Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (i) above and all federal administrative, reimbursement and other guidelines of all Governmental Authorities having the force of law promulgated pursuant to or in connection with the statutes described in clause (i) above; (iii) all state statutes and plans for medical assistance enacted in connection with the statutes and provisions described in clauses (i) and (ii) above; and (iv) all applicable provisions of all rules, regulations, manuals and orders of all Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (iii) above 17 and all state administrative, reimbursement and other guidelines of all Governmental Authorities having the force of law promulgated pursuant to or in connection with the statutes described in clause (ii) above, in each case as may be amended, supplemented or otherwise modified from time to time. "Medicare Certification" means certification by HCFA or a state agency or entity under contract with HCFA that a health care operation is in compliance with all the conditions of participation set forth in the Medicare Regulations. "Medicare Provider Agreement" means an agreement entered into between a state agency or other entity administering the Medicare program and a health care operation under which the health care operation agrees to provide services for Medicare patients in accordance with the terms of the agreement and Medicare Regulations. "Medicare Regulations" means, collectively, all federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act and any statutes succeeding thereto; together with all applicable provisions of all rules, regulations, manuals and orders and administrative, reimbursement and other guidelines having the force of law of all Governmental Authorities (including without limitation, Health and Human Services ("HHS"), HCFA, the Office of the Inspector General for HHS, or any Person succeeding to the functions of any of the foregoing) promulgated pursuant to or in connection with any of the foregoing having the force of law, as each may be amended, supplemented or otherwise modified from time to time. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making, or is accruing an obligation to make, contributions or has made, or been obligated to make, contributions within the preceding six (6) Fiscal Years. "1999 10-K" means the Borrower's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999 "Notes" means, the promissory notes of the Borrower evidencing the Loans executed and delivered to the Lenders as provided in Section 2.6, substantially in the form of Exhibit F, with appropriate insertions as to amounts, dates and names of Lenders. "Obligations" means the obligations, liabilities and Indebtedness of the Borrower with respect to (i) the principal and interest on the Loans, (ii) the Reimbursement Obligations and otherwise in respect of the Letters of Credit, (iii) all liabilities of the Borrower to any Lender which arise under a Swap Agreement, and (iv) the payment and performance of all other obligations, liabilities and Indebtedness of the Borrower to the Lenders or the Administrative Agent hereunder, under any one or more of the other Loan Documents or with respect to the Loans. 18 "Participation" means, with respect to any Lender (other than the Issuing Bank) and a Letter of Credit, the extension of credit represented by the participation of such Lender hereunder in the liability of the Issuing Bank in respect of a Letter of Credit issued by the Issuing Bank in accordance with the terms hereof. "PBGC" means the Pension Benefit Guaranty Corporation and any successor thereto. "Pension Plan" means any employee pension benefit plan within the meaning of Section 3(2) of ERISA, other than a Multiemployer Plan, which is subject to the provisions of Title IV of ERISA or Section 412 of the Code and which (i) is maintained for employees of the Borrower or any of its ERISA Affiliates or is assumed by the Borrower or any of its ERISA Affiliates in connection with any Acquisition or (ii) has at any time been maintained for the employees of the Borrower or any current or former ERISA Affiliate. "Permitted Encumbrances" means: (1) liens for taxes, assessments and other governmental charges that are not delinquent or that are being contested in good faith by appropriate proceedings duly pursued; (2) mechanic's, materialmen's, contractor's, landlord's or other similar liens arising in the ordinary course of business, securing obligations that are not delinquent or that are being contested in good faith by appropriate proceedings duly pursued; (3) restrictions, exceptions, reservations, easements, conditions, limitations and other matters of record that do not materially adversely affect the value or utility of the affected property; (4) Liens on assets securing Indebtedness the proceeds of which are used to acquire such assets; (5) Liens and other matters approved in writing by the Required Lenders; and (6) Liens in favor of landlords, the amount secured by which landlords' Liens, in the aggregate, would not materially adversely affect the Borrower or a Material Group. "Permitted Investments" means: (1) direct obligations of, or obligations the payment of which is guaranteed by, the United States of America or an interest in any trust or fund that invests solely in such obligations or repurchase agreements, properly secured, with respect to such obligations. (2) direct obligations of agencies or instrumentalities of the United States of America having a rating of A or higher by S&P or A2 or higher by Moody's; 19 (3) a certificate of deposit issued by, or other interest-bearing deposits with, a bank which is a Lender or an affiliate of a Lender, or a bank having its principal place of business in the United States of America and having equity capital of not less than $250,000,000; (4) a certificate of deposit issued by, or other interest-bearing deposits with, any other bank organized under the laws of the United States of America or any state thereof, provided that such deposit is either (i) insured by the Federal Deposit Insurance Corporation or (ii) properly secured by such bank by pledging direct obligations of the United States of America having a market value not less than the face amount of such deposits; (5) the capital stock of and partnership interests in, and loans made by the Borrower to, Controlled Partnerships and Subsidiaries; (6) prime commercial paper maturing within 270 days of the acquisition thereof and, at the time of acquisition, having a rating of A-1 or higher by S&P, or P-1 or higher by Moody's; (7) eligible banker's acceptances, repurchase agreements and tax-exempt municipal bonds having a maturity of less than one year, in each case having a rating, or that is the full recourse obligation of a person whose senior debt is rated, A or higher by S&P or A2 or higher by Moody's; (8) loans made by the Borrower or a Consolidated Entity in an aggregate amount of $2,000,000 or less to employees of the Borrower or of a Consolidated Entity; (9) loans made by the Borrower or a Controlled Partnership in an aggregate amount of $1,000,000 or less to limited partners (or potential limited partners) of Controlled Partnerships for the purpose of enabling such limited partners to acquire limited partnership interests in Controlled Partnerships, to operate their practices or to restructure partnership interests; (10) loans in an aggregate amount of up to $20,000,000 made by the Borrower to the HEALTHSOUTH Employee Stock Benefit Plan; (11) scholarship loans made by the Borrower in an aggregate amount not exceeding $1,000,000 to individuals who meet certain eligibility requirements as established by the Borrower from time to time; (12) up to 100% of the outstanding shares of stock of Caretenders Healthcorp (formerly known as Senior Services, Inc.) provided that aggregate costs incurred to purchase such shares shall not exceed $12,000,000; (13) other investments of less than $5,000,000 in the aggregate expressly approved in writing by the Administrative Agent and investments of $5,000,000 or greater expressly approved in writing by the Required Lenders; 20 (14) any other investment having a rating of A or higher or A-1 or higher by S&P or A2 or higher or P-1 or higher by Moody's; (15) loans to health care practitioners and other persons not to exceed in the aggregate $5,000,000; (16) investments in Acacia Venture Partners, HEALTHSMART, Caremark Rx, Inc. and Austin Medical Office Building which in the aggregate do not exceed $5,000,000; and (17) additional investments existing on the Closing Date and described in Exhibit G. "Person" means an individual, partnership, corporation, limited liability company, trust, unincorporated organization, association, joint venture or a government or agency or political subdivision thereof. "Prime Rate" means the per annum rate of interest established from time to time by the Administrative Agent as its prime rate, which rate may not be the lowest rate of interest charged by the Administrative Agent to its customers. "Principal Office" means the office of the Administrative Agent at 677 Washington Boulevard, Stamford, Connecticut 06901, Attention: Jennifer Poccia, or such other office and address as the Administrative Agent may from time to time designate. "Rate Hedging Obligations" means any and all obligations of the Borrower or any Consolidated Entity, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all agreements, devices or arrangements designed to protect the Borrower or such Consolidated Entity from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, Dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts, warrants and those commonly known as interest rate "swap" agreements; and (ii) any and all cancellations, buybacks, reversals, terminations or assignments of any of the foregoing. "Rating" means the rating of senior unsecured Indebtedness of the Borrower in effect at any time which rating is made by either of Moody's or S&P. "Regulation D" means Regulation D of the Board as the same may be amended or supplemented from time to time. "Reimbursement Obligation" means, at any time, the obligation of the Borrower with respect to any Letter of Credit to reimburse the Issuing Bank and the Lenders to the extent of their respective Participations (including by the receipt by the Issuing Bank of 21 proceeds of Loans pursuant to Section 3.2) for amounts theretofore paid by the Issuing Bank pursuant to a drawing under such Letter of Credit. "Required Lenders" means, as of any date, Lenders on such date having Credit Exposures (as defined below) aggregating at least 51% of the aggregate Credit Exposures of all the Lenders on such date. For purposes of the preceding sentence, the amount of the "Credit Exposure" of each Lender shall be equal to the aggregate principal amount of the Loans, so long as there exists no Event of Default, owing to such Lender plus the aggregate unutilized amounts of such Lender's Revolving Credit Commitment plus the amount of such Lender's Applicable Commitment Percentage of Letter of Credit Outstandings; provided that, if any Lender shall have failed to pay to the Issuing Bank its Applicable Commitment Percentage of any drawing under any Letter of Credit resulting in an outstanding Reimbursement Obligation, such Lender's Credit Exposure attributable to Letters of Credit and Reimbursement Obligations shall be deemed to be held by the Issuing Bank for purposes of this definition. "Reserve Requirement" means, at any time, the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board by member banks of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Rate Loans. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement. "Restricted Payment" means (a) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Borrower or any of its Consolidated Entities (other than those payable or distributable solely to the Borrower) now or hereafter outstanding, except a dividend payable solely in shares of a class of stock to the holders of that class; (b) any redemption, conversion, exchange, retirement or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of the Borrower or any of its Consolidated Entities (other than those payable or distributable solely to the Borrower) now or hereafter outstanding; (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of the Borrower or any of its Consolidated Entities now or hereafter outstanding; (d) any issuance and sale of capital stock of any Consolidated Entity of the Borrower (or any option, warrant or right to acquire such stock) other than to the Borrower; and (e) any optional or voluntary payment, prepayment, repurchase or redemption of, or otherwise voluntary or optional defeasance of any Subordinated Debt, including, without limitation, the New Senior Subordinated Notes and the Convertible Subordinated Debentures, or the segregation of funds for any such payment, prepayment, repurchase, redemption or defeasance. 22 "Revolving Credit Commitment" means, with respect to each Lender, the obligation of such Lender to make Revolving Credit Loans to the Borrower up to an aggregate principal amount at any one time outstanding equal to such Lender's Applicable Commitment Percentage of the Total Revolving Credit Commitment. "Revolving Credit Facility" means the facility described in Article II providing for Loans to the Borrower by the Lenders in the aggregate principal amount of the Total Revolving Credit Commitment. "Revolving Credit Loan" means any borrowing pursuant to an Advance provided for by Section 2.1, which may be Base Rate Loans or Eurodollar Rate Loans. "Revolving Credit Outstandings" means, as of any date of determination, the aggregate principal amount of all Revolving Credit Loans then outstanding. "Revolving Credit Termination Date" means (i) the Stated Termination Date or (ii) such earlier date of termination of Lenders' obligations hereunder as may be determined pursuant to Section 9.1 upon the occurrence of an Event of Default, or (iii) such date on which the Borrower may voluntarily and permanently terminate the Revolving Credit Facility by payment in full of all Revolving Credit Outstandings and all Letter of Credit Outstandings and cancellation of all Letters of Credit, together with all accrued and unpaid interest and fees thereon. "S&P" means Standard & Poor's Rating Group, a division of The McGraw Hill Companies. "Senior Debt" means (i) the Obligations and (ii) all obligations of the Borrower and its Subsidiaries, now or hereafter existing under the Credit Agreement dated as of June 23, 1998 by and among the Borrower, as borrower, Nationsbank National Association, as Administrative Agent and Arranger, J.P. Morgan Securities Inc., Deutsche Bank AG and Scotiabanc, Inc., as Syndication Agents and Co-Arrangers, and the other lenders party thereto from time to time, as amended and in effect from time to time. "Single Employer Plan" means any employee pension benefit plan covered by Title IV of ERISA in respect of which the Borrower or any Subsidiary is an "employer" as described in Section 4001(b) of ERISA and which is not a Multiemployer Plan. "Solvent" means, when used with respect to any Person, that at the time of determination: (i) the fair value of its assets (both at fair valuation and at present fair saleable value on an orderly basis) is in excess of the total amount of its liabilities, including contingent obligations; and (ii) it is then able and expects to be able to pay its debts as they mature; and 23 (iii) it has capital sufficient to carry on its business as conducted and as proposed to be conducted. "Stated Termination Date" means October 30, 2001. "Subordinated Debt" means any unsecured Indebtedness of the Borrower or any Consolidated Entity (other than inter-company Indebtedness) which is subordinated in right of payment in all respects to the Senior Debt in a manner reasonably acceptable to the Administrative Agent. "Subsidiary" means any corporation or other entity in which more than 50% of its outstanding Voting Stock or more than 50% of all equity interests is owned directly or indirectly by the Borrower and/or by one or more of the Borrower's Subsidiaries. "Swap Agreement" means one or more agreements between the Borrower and any Person with respect to any Indebtedness under the Loan Documents, on terms mutually acceptable to Borrower and such Person and approved by each of the Lenders, which agreements create Rate Hedging Obligations; provided, however, that no such approval of the Lenders shall be required to the extent such agreements are entered into between the Borrower and any Lender. "Termination Event" means: (i) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder (unless the notice requirement has been waived by applicable regulation); or (ii) the withdrawal of the Borrower or any ERISA Affiliate from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001 (a)(2) of ERISA or was deemed such under Section 4062(e) of ERISA; or (iii) the termination of a Pension Plan, the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA; or (iv) the institution of proceedings to terminate a Pension Plan by the PBGC; or (v) any other event or condition which would constitute grounds under Section 4042(a) of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; or (vi) the partial or complete withdrawal of the Borrower or any ERISA Affiliate from a Multiemployer Plan; or (vii) the imposition of a Lien pursuant to Section 412 of the Code or Section 302 of ERISA; or (viii) any event or condition which results in the reorganization or insolvency of a Multiemployer Plan under Section 4241 or Section 4245 of ERISA, respectively; or (ix) any event or condition which results in the termination of a Multiemployer Plan under Section 4041A of ERISA or the institution by the PBGC of proceedings to terminate a Multiemployer Plan under Section 4042 of ERISA. "Total Letter of Credit Commitment" means an amount not to exceed $20,000,000. "Total Revolving Credit Commitment" means a principal amount equal to $400,000,000, as reduced from time to time in accordance with Section 2.1(a) and Section 2.8. 24 "Unused Amount" means with respect to each Lender, (a) the Revolving Credit Commitment of such Lender less (b) such Lender's pro rata share of outstanding Revolving Credit Loans and Letter of Credit Outstandings; provided that in no event shall such amount be a negative number. "Vanderbilt" means Vanderbilt Stallworth Rehabilitation Hospital, L.P., the partners of which are the Borrower, Vanderbilt University and Vanderbilt Health Services. "Voting Stock" means shares of Capital Stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. (b) Other Defined Terms. The following terms shall have the meanings defined for such terms in the Sections set forth below: Term Section ----- ------- Administrative Agent Preamble Affected Loans 4.4 Affected Type 4.4 Compliance Certificate 7.1(c) Contractual Obligation 6.2(c) Eurodollar Margin 2.2(c)(ii)(C) Event of Default 9.1 Facility Extension Loan 2.2(b) Facility Extension Loan Maturity Date 2.2(b) Facility Extension Notice 2.2(a) Indemnified Parties 11.12 Indemnified Liabilities 11.12 New Senior Subordinated Notes 5.1(c) Notice of Default 10.3 Other Taxes 4.6(b) Pro Forma Financial Statements 6.6(d) Refinancing 5.1(c) Register 11.1(b) Related LC Documents 3.2(i) Requirement of Law 6.2(b) Taxes 4.6(a) 1.2. Rules of Interpretation. (a) All accounting terms not specifically defined herein shall have the meanings assigned to such terms and shall be interpreted in accordance with GAAP applied on a Consistent Basis. 25 (b) The headings, subheadings and table of contents used herein or in any other Loan Document are solely for convenience of reference and shall not constitute a part of any such document or affect the meaning, construction or effect of any provision thereof. (c) Except as otherwise expressly provided, references herein to articles, sections, paragraphs, clauses, annexes, appendices, exhibits and schedules are references to articles, sections, paragraphs, clauses, annexes, appendices, exhibits and schedules in or to this Agreement. (d) All definitions set forth herein or in any other Loan Document shall apply to the singular as well as the plural form of such defined term, and all references to the masculine gender shall include reference to the feminine or neuter gender, and vice versa, as the context may require. (e) When used herein or in any other Loan Document, words such as "hereunder", "hereto", "hereof" and "herein" and other words of like import shall, unless the context clearly indicates to the contrary, refer to the whole of the applicable document and not to any particular article, section, subsection, paragraph or clause thereof. (f) References to "including" means including without limiting the generality of any description preceding such term, and for purposes hereof the rule of ejusdem generis shall not be applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned. (g) All dates and times of day specified herein shall refer to such dates and times at New York, New York. (h) Each of the parties to the Loan Documents and their counsel have reviewed and revised, or requested (or had the opportunity to request) revisions to, the Loan Documents, and any rule of construction that ambiguities are to be resolved against the drafting party shall be inapplicable in the construing and interpretation of the Loan Documents and all exhibits, schedules and appendices thereto. (i) Any reference to an officer of the Borrower or any other Person by reference to the title of such officer shall be deemed to refer to each other officer of such Person, however titled, exercising the same or substantially similar functions. (j) All references to any agreement or document as amended, modified or supplemented, or words of similar effect, shall mean such document or agreement, as the case may be, as amended, modified or supplemented from time to time only as and to the extent permitted therein and in the Loan Documents. 1.3. Classes and Types of Loans. Loans hereunder are distinguished by Class and Type. The Class of a Loan refers to whether such Loan is a Revolving Credit Loan or a Facility Extension Loan. The "Type" of a Loan refers to whether such Loan is a Base Rate Loan or a Eurodollar Rate Loan, each of which constitutes a Type. Loans may be identified by both Class and Type. 26 ARTICLE II The Loans 2.1. Revolving Credit Loans. (a) Commitment. Subject to the terms and conditions of this Agreement, each Lender severally agrees to make Advances to the Borrower under the Revolving Credit Facility from time to time from the Closing Date until the Revolving Credit Termination Date (such Advance by each Lender being made on a pro rata basis as to the total borrowing requested by the Borrower on any day determined by such Lender's Applicable Commitment Percentage), in an aggregate principal amount for each Lender up to but not exceeding the Revolving Credit Commitment of such Lender, provided, however, that (i) the Lenders will not be required and shall have no obligation to make any such Advance if the applicable conditions precedent thereto set forth in Article V have not been satisfied and (ii) immediately after giving effect to each such Advance, the principal amount of Revolving Credit Outstandings plus Letter of Credit Outstandings shall not exceed the Total Revolving Credit Commitment. Within such limits, the Borrower may borrow, repay and reborrow under the Revolving Credit Facility on any Business Day from the Closing Date until, but (as to borrowings and reborrowings) not including, the Revolving Credit Termination Date; provided, however, that (y) no Revolving Credit Loan that is a Eurodollar Rate Loan shall be made which has an Interest Period that extends beyond the Revolving Credit Termination Date and (z) each Revolving Credit Loan that is a Eurodollar Rate Loan may, subject to the provisions of Section 2.4, be repaid only on the last day of the Interest Period with respect thereto unless such payment is accompanied by the additional payment, if any, required by Section 4.5. (b) Amounts. The aggregate unpaid principal amount of the Revolving Credit Outstandings plus Letter of Credit Outstandings shall not exceed the Total Revolving Credit Commitment and, in the event there shall be outstanding any such excess, the Borrower shall immediately make such payments and prepayments as shall be necessary to comply with this restriction. Each Revolving Credit Loan hereunder, other than Base Rate Refunding Loans, and each Conversion under Section 2.9, shall be in an amount of at least $2,000,000, and, if greater than $2,000,000, an integral multiple of $500,000 with respect to Eurodollar Rate Loans and $100,000 with respect to Base Rate Loans. (c) Advances. (i) An Authorized Representative shall give the Administrative Agent (1) at least three (3) Business Days' irrevocable written notice by telefacsimile transmission of a Borrowing Notice or Interest Rate Selection Notice (as applicable) with appropriate insertions, effective upon receipt, of each Revolving Credit Loan that is a Eurodollar Rate Loan (whether representing an additional borrowing hereunder or the Conversion of a borrowing hereunder from Base Rate Loans to Eurodollar Rate Loans) prior to 10:30 A.M. and (2) irrevocable written notice by telefacsimile transmission of a Borrowing Notice or Interest Rate Selection Notice (as applicable) with appropriate insertions, effective upon receipt, of each Revolving Credit Loan (other than Base Rate Refunding Loans to the extent the same are effected without notice pursuant to Section 2.1(c)(iv)) that is a Base Rate Loan (whether representing an additional borrowing hereunder or the Conversion of borrowing hereunder from Eurodollar Rate Loans to Base Rate Loans) prior to 10:30 A.M. on the day of such proposed Revolving Credit Loan. Each such notice shall specify the amount of the borrowing, the Type of Loan (Base Rate or Eurodollar Rate), the date of borrowing and if a 27 Eurodollar Rate Loan the Interest Period to be used in the computation of interest. Notice of receipt of such Borrowing Notice or Interest Rate Selection Notice, as the case may be, together with the amount of each Lender's portion of an Advance requested thereunder, shall be provided by the Administrative Agent to each Lender by telefacsimile transmission with reasonable promptness, but (provided the Administrative Agent shall have received such notice by 10:30 A.M.) not later than 1:00 P.M. on the same day as the Administrative Agent's receipt of such notice. (ii) Not later than 2:00 P.M. on the date specified for each borrowing under this Section 2.1, each Lender shall, pursuant to the terms and subject to the conditions of this Agreement, make the amount of the Loan or Loans to be made by it on such day available by wire transfer to the Administrative Agent in the amount of its pro rata share determined according to such Lender's Applicable Commitment Percentage of the Revolving Credit Loans to be made on such day. Such wire transfer shall be directed to the Administrative Agent at the Principal Office and shall be in the form of Dollars constituting immediately available funds. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Borrower by delivery of the proceeds thereof as shall be directed in the applicable Borrowing Notice by the Authorized Representative and reasonably acceptable to the Administrative Agent. (iii) The Borrower shall have the option to elect the duration of the initial and any subsequent Interest Periods and to Convert the Revolving Credit Loans in accordance with Section 2.9. Eurodollar Rate Loans and Base Rate Loans may be outstanding at the same time; provided, however, there shall not be outstanding at any one time Revolving Credit Loans having more than eight (8) different Interest Periods. If the Administrative Agent does not receive a Borrowing Notice or an Interest Rate Selection Notice giving notice of election of the duration of an Interest Period or of Conversion of any Loan to or Continuation of a Loan as a Eurodollar Rate Loan by the time prescribed by Section 2.1(c) or 2.9, the Borrower shall be deemed to have elected to Convert such Loan to (or Continue such Loan as) a Base Rate Loan until the Borrower notifies the Administrative Agent in accordance with Section 2.9. (iv) Notwithstanding the foregoing, if a drawing is made under any Letter of Credit, such drawing is honored by the Issuing Bank prior to the Revolving Credit Termination Date, and the Borrower shall not immediately fully reimburse the Issuing Bank in respect of such drawing, (A) provided that the conditions to making a Revolving Credit Loan as herein provided shall then be satisfied, the Reimbursement Obligation arising from such drawing shall be paid to the Issuing Bank by the Administrative Agent without the requirement of notice to or from the Borrower from immediately available funds which shall be advanced as a Base Rate Refunding Loan by each Lender under the Revolving Credit Facility in an amount equal to such Lender's Applicable Commitment Percentage of such Reimbursement Obligation, and (B) if the conditions to making a Loan as herein provided shall not then be satisfied, each of the Lenders shall fund by payment to the Administrative Agent (for the benefit of the Issuing Bank) in immediately available funds the purchase from the Issuing Bank of their respective Participations in the related Reimbursement Obligation based on their respective Applicable Commitment Percentages. If a drawing is presented under any Letter of Credit in accordance with the terms thereof and the Borrower shall not immediately reimburse the Issuing Bank in respect thereof, then notice of such drawing or payment shall be provided promptly by the Issuing Bank to the 28 Administrative Agent and the Administrative Agent shall provide notice to each Lender by telephone or telefacsimile transmission. If notice to the Lenders of a drawing under any Letter of Credit is given by the Administrative Agent at or before 12:00 noon on any Business Day, each Lender shall, pursuant to the conditions specified in this Section 2.1(c)(iv), either make a Base Rate Refunding Loan or fund the purchase of its Participation in the amount of such Lender's Applicable Commitment Percentage of such drawing or payment and shall pay such amount to the Administrative Agent for the account of the Issuing Bank at the Principal Office in Dollars and in immediately available funds before 2:30 P.M. on the same Business Day. If notice to the Lenders of a drawing under a Letter of Credit is given by the Administrative Agent after 12:00 noon on any Business Day, each Lender shall, pursuant to the conditions specified in this Section 2.1(c)(iv), either make a Base Rate Refunding Loan or fund the purchase of its Participation in the amount of such Lender's Applicable Commitment Percentage of such drawing or payment and shall pay such amount to the Administrative Agent for the account of the Issuing Bank at the Principal Office in Dollars and in immediately available funds before 12:00 noon on the next following Business Day. Any such Base Rate Refunding Loan shall be deemed to be advanced as a Base Rate Loan as of the date the relevant drawing is honored by the Issuing Bank, and shall Continue as a Base Rate Loan unless and until the Borrower Converts such Base Rate Loan in accordance with the terms of Section 2.9. 2.2. Facility Extension Loans. (a) The Borrower may, by written irrevocable notice to the Administrative Agent (such notice being a "Facility Extension Notice") given no later than sixty days prior to the Stated Termination Date, convert the Revolving Credit Outstandings on the Stated Termination Date into term loans on the terms and conditions set forth in this Section 2.2; provided, however, that the Lenders will not be required and shall have no obligation to convert any Revolving Credit Outstandings pursuant to the terms in this Section 2.2 if the applicable conditions precedent thereto set forth in Article V have not been satisfied. No Facility Extension Loan that is a Eurodollar Rate Loan shall be made which has an Interest Period that extends beyond the Facility Extension Loan Termination Date and each Facility Extension Loan that is a Eurodollar Rate Loan may, subject to the provisions of Section 2.4, be repaid only on the last day of the Interest Period with respect thereto unless such payment is accompanied by the additional payment, if any, required by Section 4.5. The Administrative Agent shall promptly transmit any Facility Extension Notice to each Lender. (b) If the Borrower delivers a Facility Extension Notice, each Lender severally agrees that the Revolving Credit Outstandings owing to such Lender on the Stated Termination Date shall be converted into a term loan (a "Facility Extension Loan") with a maturity date of June 22, 2003 (the "Facility Extension Loan Maturity Date"). The Facility Extension Loans may from time to time be Base Rate Loans or Eurodollar Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2(c) and 2.9. (c) In the event that a Facility Extension Notice has been delivered, an Authorized Representative shall give the Administrative Agent at least three (3) Business Days' prior to the Stated Termination Date an irrevocable written notice by telefacsimile transmission stating if all or any portion of the Facility Extension Loans are to be Eurodollar Rate Loans, and the length of the initial Interest Period applicable thereto. 29 (d) On the date on which the Borrower provides the Facility Extension Notice according to Section 2.2(a) above, the Borrower agrees to pay to the Administrative Agent, for the benefit of each Lender, an extension fee equal to .25% of the amount of the Facility Extension Loan to be made by such Lender. 2.3. Payment of Interest. (a) The Borrower shall pay interest to the Administrative Agent for the account of each Lender on the outstanding and unpaid principal amount of each Loan made by such Lender for the period commencing on the date of such Loan until such Loan shall be due at the then applicable Base Rate for Base Rate Loans or applicable Eurodollar Rate for Eurodollar Rate Loans as designated by the Authorized Representative pursuant to Section 2.1 or 2.2 plus, in each case, the Applicable Margin applicable to such Loans; provided, however, that if any amount payable under this Agreement shall not be paid when due (at maturity, by acceleration or otherwise, subject to the provisions of Section 9.1(a)), all amounts outstanding hereunder shall bear interest thereafter until such overdue amount shall be paid in full at the Default Rate. (b) Interest on each Loan shall be computed on an Actual/360 Basis. Interest on each Loan shall be paid (i) quarterly in arrears on the last Business Day of each March, June, September and December, commencing December 31, 2000, for each Base Rate Loan. (ii) on the last day of the applicable Interest Period for each Eurodollar Rate Loan and, if such Interest Period extends for more than three (3) months, at intervals of three (3) months after the first day of such Interest Period, and (iii) upon the Revolving Credit Termination Date and the Facility Extension Loan Termination Date. Interest payable at the Default Rate shall be payable on demand. 2.4. Payment of Principal (a) Unless converted to a Facility Extension Loan pursuant to Section 2.2, the principal amount of each Revolving Credit Loan shall be due and payable to the Administrative Agent for the benefit of each Lender in full on the Stated Termination Date, or earlier as specifically provided herein. The Facility Extension Loan of each Lender shall mature in 8 equal quarterly installments, the first 7 such installments payable on the last Business Day of the following months: September, 2001; December, 2001; March, 2002; June, 2002; September, 2002; December, 2002; March, 2003; and the last installment payable on the Facility Extension Loan Maturity Date (b) From time to time, the Borrower may prepay the Loans, in whole or in part, without premium or penalty, upon at least four (4) Business Days' irrevocable written notice to the Administrative Agent, specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, Base Rate Loans or a combination thereof, and if a combination thereof, the amount allocable to each. If any notice of prepayment is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to the payment date on the amount prepaid. Upon receipt of any notice of prepayment, the Administrative Agent shall promptly notify each Lender thereof. Notwithstanding anything to the contrary herein, the principal amount of any Eurodollar Rate Loan may be prepaid only at the end of the applicable Interest Period unless the Borrower shall pay to the Administrative Agent for the account of the Lenders the additional amount, if any, required under Section 4.5. All prepayments of Revolving Credit Loans and, where applicable, Facility Extension Loans made by the Borrower shall be in the amount of $5,000,000 or such 30 greater amount which is an integral multiple of $1,000,000, or the amount equal to all Revolving Credit Outstandings or, where applicable, outstanding amounts under the Facility Extension Loans, as the case may be, or such other amount as necessary to comply with Section 2.1(b) or Section 2.9. Partial prepayments of the Facility Extension Loans shall be applied to the installments of principal under the Facility Extension Loans in the inverse order of their scheduled maturities. Amounts prepaid on account of the Facility Extension Loans may not be reborrowed. 2.5. Non-Conforming Payments. (a) Each payment of principal (including any prepayment) and payment of interest and fees, and any other amount required to be paid to the Lenders with respect to the Loans, shall be made to the Administrative Agent at the Principal Office, for the account of each Lender, in Dollars and in immediately available funds, without setoff, deduction or counterclaim before 10:00 A.M. on the date such payment is due. The Administrative Agent may, but shall not be obligated to, debit the amount of any such payment which is not made by such time to any ordinary deposit account, if any, of the Borrower with the Administrative Agent. The Administrative Agent shall promptly notify the Borrower of any such debit; however, failure to give such notice shall not affect the validity of such debit. (b) The Administrative Agent shall deem any payment made by or on behalf of the Borrower hereunder that is not made both in Dollars and in immediately available funds and prior to 10:00 A.M. to be a non-conforming payment. Any such payment shall not be deemed to be received by the Administrative Agent until the later of (i) the time such funds become available funds and (ii) the next Business Day. Any non-conforming payment may constitute or become a Default or Event of Default. Interest shall continue to accrue on any principal as to which a non-conforming payment is made until the later of (x) the date such funds become available funds or (y) the next Business Day at the Default Rate from the date such amount was due and payable. (c) In the event that any payment hereunder becomes due and payable on a day other than a Business Day, then such due date shall be extended to the next succeeding Business Day unless provided otherwise under the definition of "Interest Period"; provided that interest shall continue to accrue during the period of any such extension and provided further, that in no event shall any such due date be extended beyond the Stated Termination Date or the Facility Extension Termination Date, as the case may be. 2.6. Notes(a) . The Loans of each Lender shall be evidenced by the Register (as defined in Section 11.1(b)) and by a loan account maintained by such Lender. The Borrower hereby agrees that, upon request to the Administrative Agent by any Lender, the Borrower will execute and deliver to the requesting Lender a promissory note of the Borrower evidencing the Loans of such Lender, substantially in the form of Exhibit F, with appropriate insertions. 2.7. Pro Rata Payments. Except as otherwise provided herein, (a) each payment on account of the principal of and interest on the Revolving Credit Loans, the Facility Extension Loans and the fees described in Section 2.2(d), Section 2.10 and the first sentence of Section 3.3(a) shall be made to the Administrative Agent for the account of the Lenders pro rata based on their Applicable Commitment Percentages with respect to the Revolving Credit Loans and the Applicable Extension Percentages, with respect to the Facility Extension Loans, (b) all 31 payments to be made by the Borrower for the account of each of the Lenders on account of principal, interest and fees, shall be made without diminution, setoff, recoupment or counterclaim, and (c) the Administrative Agent will promptly distribute to the Lenders in immediately available funds payments received in fully collected, immediately available funds from the Borrower. 2.8. Reductions. The Borrower shall, by irrevocable notice from an Authorized Representative, have the right from time to time but not more frequently than once each calendar month, upon not less than three (3) Business Days' written notice to the Administrative Agent, effective upon receipt, to permanently reduce the Total Revolving Credit Commitment. The Administrative Agent shall give each Lender, within one (1) Business Day of receipt of such notice, telefacsimile notice, or telephonic notice (confirmed in writing), of such reduction. Each such reduction shall be in the aggregate amount of $10,000,000 or such greater amount which is in an integral multiple of $1,000,000, or the entire remaining Total Revolving Credit Commitment, and shall permanently reduce the Total Revolving Credit Commitment. Each reduction of the Total Revolving Credit Commitment shall be accompanied by payment of Revolving Credit Loans to the extent that the principal amount of Revolving Credit Outstandings plus Letter of Credit Outstandings exceeds the Total Revolving Credit Commitment after giving effect to such reduction, together with accrued and unpaid interest on the amounts prepaid. If any such reduction shall result in the payment of any Eurodollar Rate Loan other than on the last day of the Interest Period of such Eurodollar Rate Loan such prepayment shall be accompanied by amounts due, if any, under Section 4.5. 2.9. Conversions and Elections of Subsequent Interest Periods. Subject to the limitations set forth below and in Article IV, the Borrower may: (a) upon delivery, effective upon receipt, of a properly completed Interest Rate Selection Notice to the Administrative Agent at or before 10:30 A.M. on any Business Day, Convert all or a part of Eurodollar Rate Loans to Base Rate Loans on the last day of the Interest Period for such Eurodollar Rate Loans; and (b) provided that no Default or Event of Default shall have occurred and be continuing, upon delivery, effective upon receipt, of a properly completed Interest Rate Selection Notice to the Administrative Agent at or before 10:30 A.M. three (3)) Business Days prior to the date of such election or Conversion: (i) subject to Section 2.2(c), elect a subsequent Interest Period for all or a portion of Eurodollar Rate Loans to begin on the last day of the then current Interest Period for such Eurodollar Rate Loans; and (ii) Convert Base Rate Loans to Eurodollar Rate Loans on any Business Day. Each election and Conversion pursuant to this Section 2.9 shall be subject to the limitations on Eurodollar Rate Loans set forth in the definition of "Interest Period" herein and in Sections 2.1, 2.2, 2.4 and Article IV. The Administrative Agent shall give written notice to each Lender of such notice of 32 election or Conversion prior to 3:00 P.M. on the day such notice of election or Conversion is received. All such Continuations or Conversions of Loans shall be effected pro rata based on the Applicable Commitment Percentages of the Lenders. 2.10. Unused Fees. (a) For the period beginning on the Closing Date and ending on the Revolving Credit Termination Date, the Borrower agrees to pay to the Administrative Agent, for the benefit of each Lender, an unused fee equal to the Applicable Unused Fee multiplied by the average daily Unused Amount of such Lender. Such fees shall be due in arrears on the last Business Day of each March, June, September and December commencing on the last business day of December, 2000 to and on the Revolving Credit Termination Date. (b) Notwithstanding the foregoing, so long as any Lender fails to make available any portion of its Revolving Credit Commitment when requested, such Lender shall not be entitled to receive payment of its pro rata share of such fees until such Lender shall make available such portion. All fees payable pursuant to this Section 2.10 shall be calculated on an Actual/360 Basis. 2.11. Deficiency Advances. No Lender shall be responsible for any default of any other Lender in respect of such other Lender's obligation to make any Loan or fund its purchase of any Participation hereunder nor shall the Revolving Credit Commitment of any Lender hereunder be increased as a result of such default of any other Lender. Without limiting the generality of the foregoing, in the event any Lender shall fail to advance funds to the Borrower under the Revolving Credit Facility as herein provided, the Administrative Agent may in its discretion, but shall not be obligated to, advance under the Revolving Credit Commitment of the Administrative Agent, as a Lender, all or any portion of such amount or amounts (each, a "deficiency advance") and shall thereafter be entitled to payments of principal of and interest on such deficiency advance in the same manner and at the same interest rate or rates to which such other Lender would have been entitled had it made such advance under its Revolving Credit Commitment; provided that, upon payment to the Administrative Agent from such other Lender of the entire outstanding amount of each such deficiency advance, together with accrued and unpaid interest thereon, from the most recent date or dates interest was paid to the Administrative Agent by the Borrower on each Loan comprising such deficiency advance at the Federal Funds Rate, then such payment shall be credited against the Revolving Credit Commitment of the Administrative Agent in full payment of such deficiency advance and the Borrower shall be deemed to have borrowed the amount of such deficiency advance from such other Lender as of the most recent date or dates, as the case may be, upon which any payments of interest were made by the Borrower thereon. 2.12. Use of Proceeds. The proceeds of the Loans made pursuant to this Agreement shall be used by the Borrower to repay existing indebtedness and for general corporate purposes, including working capital needs, capital expenditures and permitted Acquisitions. 2.13. Increase and Decrease in Amounts. The amount of the Total Revolving Credit Commitment which shall be available to the Borrower as Advances shall be reduced by the aggregate amount of Letter of Credit Outstandings. 33 ARTICLE III Letters of Credit 3.1. Letters of Credit. The Issuing Bank agrees, subject to the terms and conditions of this Agreement, upon request of the Borrower to issue from time to time for the account of the Borrower Letters of Credit, upon delivery to the Issuing Bank of an Application and Agreement for Letter of Credit relating thereto in form and content acceptable to the Issuing Bank; provided, that (i) the Letter of Credit Outstandings shall not exceed the Total Letter of Credit Commitment, (ii) no Letter of Credit shall be issued if the applicable conditions set forth in Article V shall not have been satisfied, and (iii) no Letter of Credit shall be issued if, after giving effect thereto, Letter of Credit Outstandings plus the aggregate principal amount of Revolving Credit Outstandings shall exceed the Total Revolving Credit Commitment. No Letter of Credit shall have an expiry date (including all rights of the Borrower or any beneficiary named in such Letter of Credit to require renewal) or payment date occurring later than the fifth Business Day prior to the Revolving Credit Termination Date. All Letters of Credit shall be denominated in Dollars. 3.2. Reimbursement. (a) The Borrower hereby unconditionally agrees to pay to the Issuing Bank immediately on demand at the Principal Office all amounts required to pay all drafts drawn or purporting to be drawn under the Letters of Credit and all reasonable expenses incurred by the Issuing Bank in connection with the Letters of Credit, and in any event and without demand to place in possession of the Issuing Bank (which shall include Advances under the Revolving Credit Facility if permitted by Section 2.1(c)) sufficient funds to pay all debts and liabilities arising in respect of any Letter of Credit. The Issuing Bank agrees to give the Borrower prompt notice of any request for a draw under a Letter of Credit. The Issuing Bank may charge any account the Borrower may have with it for any and all amounts the Issuing Bank pays under a Letter of Credit, plus charges and reasonable expenses as from time to time agreed to by the Issuing Bank and the Borrower; provided that to the extent permitted by Section 2.1(c)(iv), amounts shall be paid pursuant to Advances under the Revolving Credit Facility. The Borrower agrees to pay the Issuing Bank interest on any Reimbursement Obligations not paid when due hereunder at the Default Rate. (b) In accordance with the provisions of Section 2.1(c), the Issuing Bank shall notify the Administrative Agent of any drawing under any Letter of Credit promptly following the receipt by the Issuing Bank of such drawing. (c) (i) Each Lender (other than the Issuing Bank) shall automatically acquire on the date of issuance thereof a Participation in the liability of the Issuing Bank in respect of each Letter of Credit in an amount equal to such Lender's Applicable Commitment Percentage of such liability, and to the extent that the Borrower is obligated to pay the Issuing Bank under Section 3.2(a), each Lender (other than the Issuing Bank) thereby shall absolutely, unconditionally and irrevocably assume, and shall be unconditionally obligated to pay to the Issuing Bank as hereinafter described, its Applicable Commitment Percentage of the liability of the Issuing Bank under such Letter of Credit. 34 (ii) Each Lender (including the Issuing Bank in its capacity as a Lender) shall, subject to the terms and conditions of Article II, pay to the Administrative Agent for the account of the Issuing Bank at the Principal Office in Dollars and in immediately available funds, an amount equal to its Applicable Commitment Percentage of any drawing under a Letter of Credit, such funds to be provided in the manner described in Section 2.1(c)(iv) plus interest at the Federal Funds Rate for the period from and including the date the drawing under a Letter of Credit is made to the date of such payment. (iii) Simultaneously with the making of each payment by a Lender to the Issuing Bank pursuant to Section 2.1(c)(iv)(B), such Lender shall, automatically and without any further action on the part of the Issuing Bank or such Lender, acquire a Participation in an amount equal to such payment (excluding the portion thereof constituting interest accrued prior to the date such Lender made its payment) in the related Reimbursement Obligation of the Borrower. The Reimbursement Obligations of the Borrower shall be immediately due and payable whether by Advances made in accordance with Section 2.1(c)(iv) or otherwise. (iv) Each Lender's obligation to make payment to the Administrative Agent for the account of the Issuing Bank pursuant to Section 2.1(c)(iv) and this Section 3.2(c), and the right of the Issuing Bank to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and shall be made without any offset, abatement, withholding or reduction whatsoever. If any Lender is obligated to pay but does not pay amounts to the Administrative Agent for the account of the Issuing Bank in full upon such request as required by Section 2.1(c)(iv) or this Section 3.2(c), such Lender shall, on demand, pay to the Administrative Agent for the account of the Issuing Bank interest on the unpaid amount for each day during the period commencing on the date of notice given to such Lender pursuant to Section 2.1(c) until such Lender pays such amount to the Administrative Agent for the account of the Issuing Bank in full at the Federal Funds Rate. (v) In the event the Lenders have purchased Participations in any Reimbursement Obligation as set forth in clause (ii) above, then at any time payment (in fully collected, immediately available funds) of such Reimbursement Obligation, in whole or in part, is received by the Issuing Bank from the Borrower, the Issuing Bank shall promptly pay to each Lender an amount equal to its Applicable Commitment Percentage of such payment from the Borrower. (d) Promptly following the end of each calendar quarter, the Issuing Bank shall deliver to the Administrative Agent and the Administrative Agent shall deliver to each Lender a notice describing the aggregate undrawn amount of all Letters of Credit at the end of such quarter. The Administrative Agent shall promptly notify each Lender of the issuance of a Letter of Credit. (e) The issuance by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article V, be subject to the conditions that such Letter of Credit be in such form and contain such terms as shall be reasonably satisfactory to the Issuing Bank consistent with the then current practices and procedures of the Issuing Bank with respect to similar letters of credit, and the Borrower shall have executed and delivered such other instruments and agreements relating to such Letters of Credit as the Issuing Bank shall have 35 reasonably requested consistent with such practices and procedures and shall not be in conflict with any of the express terms herein contained. (f) The Borrower agrees that the Issuing Bank may, in its sole discretion, accept or pay, as complying with the terms of any Letter of Credit, any drafts or other documents otherwise in order which may be signed or issued by an administrator, executor, trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, liquidator, receiver, attorney in fact or other legal representative of a party who is authorized under such Letter of Credit to draw or issue any drafts or other documents. (g) Without limiting the generality of the provisions of Section 11.12, the Borrower hereby agrees to indemnify and hold harmless the Issuing Bank, each other Lender and the Administrative Agent from and against any and all claims and damages, losses, liabilities, reasonable costs and expenses which the Issuing Bank, such other Lender or the Administrative Agent may incur (or which may be claimed against the Issuing Bank, such other Lender or the Administrative Agent) by any Person by reason of or in connection with the issuance or transfer of or payment or failure to pay under any Letter of Credit; provided that the Borrower shall not be required to indemnify the Issuing Bank, any other Lender or the Administrative Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, (i) determined by a final judgment of a court of competent jurisdiction to have been incurred by reason of the gross negligence or willful misconduct of such Person to be indemnified or (ii) in the case of the Issuing Bank, caused by the failure of the Issuing Bank to pay under any Letter of Credit after the presentation to it of a request for payment strictly complying with the terms and conditions of such Letter of Credit, unless such payment is prohibited by any law, regulation, court order or decree. The indemnification and hold harmless provisions of this Section 3.2(g) shall survive repayment of the Obligations, occurrence of the Revolving Credit Termination Date or the Facility Extension Loan Termination Date, as the case may be, and expiration or termination of this Agreement. (h) Without limiting the Borrower's rights as set forth in Section 3.2(g), the obligation of the Borrower to immediately reimburse the Issuing Bank for drawings made under Letters of Credit and to repay Loans made under Section 2.1(c) and the Issuing Bank's and each Lender's right to receive such payment shall be absolute, unconditional and irrevocable, and such obligations of the Borrower shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit and the related Applications and Agreement for any Letter of Credit, under all circumstances whatsoever, including the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit, the obligation supported by any Letter of Credit or any other agreement or instrument relating thereto (collectively, the "Related LC Documents"); (ii) any amendment or waiver of or any consent to or departure from all or any of the Related LC Documents; (iii) the existence of any claim, setoff, defense (other than the defense of payment in accordance with the terms of this Agreement) or other rights which the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any 36 persons or entities for whom any such beneficiary or any such transferee may be acting), the Administrative Agent, the Lenders or any other Person, whether in connection with the Loan Documents, the Related LC Documents or any unrelated transaction; (iv) any breach of contract or other dispute between the Borrower and any beneficiary or any transferee of a Letter of Credit (or any persons or entities for whom such beneficiary or any such transferee may be acting), the Administrative Agent, the Lenders or any other Person; (v) any draft, statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (vi) any delay, extension of time, renewal, compromise or other indulgence or modification granted or agreed to by the Administrative Agent or the requisite number of Lenders, with or without notice to or approval by the Borrower in respect of any of Borrower's Obligations under this Agreement; or (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; provided, however, that nothing in this Section 3.2(h) shall give the Issuing Bank any right to reimbursement for drawings made under a Letter of Credit otherwise than pursuant to a request for payment strictly complying with the terms and conditions of such Letter of Credit unless the Borrower has specifically waived such strict compliance in writing. 3.3. Letter of Credit Facility Fees. (a) The Borrower shall pay to the Administrative Agent, for the pro rata benefit of the Lenders based on their Applicable Commitment Percentages, a fee on the aggregate amount available to be drawn on each outstanding Letter of Credit at a rate equal to the Applicable Margin for Eurodollar Rate Loans as set forth in the definition of "Applicable Margin". In addition, the Borrower agrees to pay to the Administrative Agent for the benefit of the Issuing Bank an issuance fee equal to one-eighth of one percent (1/8%) per annum times the amount of outstanding Letters of Credit. Such fees shall be due with respect to each Letter of Credit quarterly in arrears on the last Business Day of each March, June, September and December, the first such payment to be made on the last business day of December, 2000. The fees described in this Section 3.3 shall be calculated on an Actual/360 Basis. (b) The Borrower acknowledges that the Issuing Bank as issuer of each Letter of Credit will be required by applicable rules and regulations of the Board to maintain reserves for its liability to honor draws made pursuant to a Letter of Credit notwithstanding the obligation of the Lenders for a Participation in such liability. The Borrower agrees to promptly reimburse the Issuing Bank for all additional costs which it may hereafter incur solely by reason of its acting as issuer of the Letters of Credit and its being required to reserve for such liability, it being understood by the Borrower that other interest and fees payable under this Agreement do not include compensation of the Issuing Bank for such reserves. The Issuing Bank shall furnish to the Borrower at the time of its demand for payment of such additional costs, the computation 37 of such additional cost which shall be conclusive absent manifest error, provided that such computations are made on a reasonable basis. 3.4. Administrative Fees. The Borrower shall pay to the Issuing Bank such administrative fee and other fees, if any, in connection with the Letters of Credit in such amounts and at such times as the Issuing Bank and the Borrower shall agree from time to time. 3.5. Applications. To the extent that any provision of any Application and Agreement for Letters of Credit is inconsistent with the provisions of this Article III, the provisions of this Article III shall apply. ARTICLE IV Change in Circumstances 4.1. Increased Cost and Reduced Return. (a) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency: (i) shall subject such Lender (or its Applicable Lending Office) to any tax, duty, or other charge with respect to any Eurodollar Rate Loans, or its obligation to make Eurodollar Rate Loans, or change the basis of taxation of any amounts payable to such Lender (or its Applicable Lending Office) under this Agreement in respect of any Eurodollar Rate Loans (other than taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than the Reserve Requirement utilized in the determination of the Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (or its Applicable Lending Office), including the Revolving Credit Commitment of such Lender hereunder; or (iii) shall impose on such Lender (or its Applicable Lending Office) or on the London interbank market any other condition affecting this Agreement or any extensions of credit or liabilities or commitments hereunder; and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making, Converting into, Continuing, or maintaining any Eurodollar Rate Loans or to reduce any sum received or receivable by such Lender (or its Applicable Lending Office) under this Agreement with respect to any Eurodollar Rate Loans, then the Borrower shall 38 pay to such Lender on demand such amount or amounts as will compensate such Lender for such increased cost or reduction; provided that no Lender will be entitled to any compensation for any such increased cost or reduction if demand for payment thereof is made by such Lender more than 180 days after the occurrence of the circumstances giving rise to such claim. If any Lender requests compensation by the Borrower under this Section 4.1(a), the Borrower may, by notice to such Lender (with a copy to the Administrative Agent), suspend the obligation of such Lender to make or Continue Loans of the Type with respect to which such compensation is requested, or to Convert Loans of any other Type into Loans of such Type, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 4.4 shall be applicable); provided that such suspension shall not affect the right of such Lender to receive the compensation so requested. If, after the date hereof, any Lender shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of such Lender's obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (b) Each Lender shall promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section shall furnish to the Borrower and the Administrative Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods that such Lender uses for its customers that are similarly situated to the Borrower. 4.2. Limitation on Types of Loans. If on or prior to the first day of any Interest Period for any Eurodollar Rate Loan: (a) the Administrative Agent reasonably determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or (b) the Required Lenders reasonably determine (which determination shall be conclusive) and notify the Administrative Agent that the Eurodollar Rate will not 39 adequately and fairly reflect the cost to the Lenders of funding Eurodollar Rate Loans for such Interest Period; then the Administrative Agent shall give the Borrower prompt notice thereof specifying the relevant Type of Loans and the relevant amounts or periods, and so long as such condition remains in effect, the Lenders shall be under no obligation to make additional Loans of such Type, Continue Loans of such Type, or to Convert Loans of any other Type into Loans of such Type and the Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Loans of the affected Type, either prepay such Loans or Convert such Loans into another Type of Loan in accordance with the terms of this Agreement. 4.3. Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to make, maintain, or fund Eurodollar Rate Loans hereunder, then such Lender shall promptly notify the Borrower thereof and such Lender's obligation to make or Continue Eurodollar Rate Loans and to Convert other Types of Loans into Eurodollar Rate Loans shall be suspended until such time as such Lender may again make, maintain, and fund Eurodollar Rate Loans (in which case the provisions of Section 4.4 shall be applicable). 4.4. Treatment of Affected Loans. If the obligation of any Lender to make a Eurodollar Rate Loan or to Continue, or to Convert Loans of any other Type into, Loans of a particular Type shall be suspended pursuant to Section 4.1 or 4.3 hereof (Loans of such Type being herein called "Affected Loans" and such Type being herein called the "Affected Type"), such Lender's Affected Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for Affected Loans (or, in the case of a Conversion required by Section 4.3 hereof, on such earlier date as such Lender may specify to the Borrower with a copy to the Administrative Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 4.1 or 4.3 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Lender's Affected Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's Affected Loans shall be applied instead to its Base Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Lender as Loans of the Affected Type shall be made or Continued instead as Base Rate Loans, and all Loans of such Lender that would otherwise be Converted into Loans of the Affected Type shall be Converted instead into (or shall remain as) Base Rate Loans. If such Lender gives notice to the Borrower (with a copy to the Administrative Agent) that the circumstances specified in Section 4.1 or 4.3 hereof that gave rise to the Conversion of such Lender's Affected Loans pursuant to this Section 4.4 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Loans of the Affected Type made by other Lenders are outstanding, such Lender's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Loans of the Affected Type, to the extent necessary so that, after giving effect thereto, all Loans held by the Lenders holding Loans of the Affected Type and by such Lender 40 are held pro rata (as to principal amounts, Types, and Interest Periods) in accordance with their respective Revolving Credit Commitments. 4.5. Compensation. Upon the request of any Lender, the Borrower shall pay to such Lender such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost, or expense (including loss of anticipated profits) incurred by it as a result of: (a) any payment, prepayment, or Conversion of a Eurodollar Rate Loan for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9.1) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Borrower for any reason (including, without limitation, the failure of any condition precedent specified in Article V to be satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Rate Loan on the date for such borrowing, Conversion, Continuation, or prepayment specified in the relevant notice of borrowing, prepayment, Continuation, or Conversion under this Agreement. 4.6. Taxes. (a) Any and all payments by the Borrower to or for the account of any Lender or the Administrative Agent hereunder or under any other Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender (or its Applicable Lending Office) or the Administrative Agent (as the case may be) is organized or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable under this Agreement or any other Loan Document to any Lender or the Administrative Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.6) such Lender or the Administrative Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 11.2, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Agreement or any other Loan Document or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify each Lender and the Administrative Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 4.6) 41 paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) Each Lender organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Lender listed on the signature pages hereof and on or prior to the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by the Borrower or the Administrative Agent (but only so long as such Lender remains lawfully able to do so), shall provide the Borrower and the Administrative Agent with two copies of (i) Internal Revenue Service Form W-8BEN or W-8-ECI, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States and (ii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying that such Lender is entitled to an exemption from or a reduced rate of tax on payments pursuant to this Agreement or any of the other Loan Documents. Contemporaneously with the delivery of the appropriate Internal Revenue Service form, each Lender which is not a "bank" within the meaning of Section 881(c)(5)(A) of the Code and intends to claim the "portfolio interest" exemption described above shall provide the Borrower and the Administrative Agent (but only so long as such Lender remains lawfully able to do so) a certificate representing that such Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code). (e) For any period with respect to which a Lender has failed to provide the Borrower and the Administrative Agent with the appropriate form pursuant to Section 4.6(d) (unless such failure is due to a change in treaty, law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 4.6(a), 4.6(b), or 4.6(c) with respect to Taxes imposed by the United States; provided, however, that should a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Lender pursuant to this Section 4.6, then such Lender will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender. (g) Within thirty (30) days after the date of any payment of Taxes, the Borrower shall furnish to the Administrative Agent the original or a certified copy of a receipt evidencing such payment. 42 (h) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 4.6 shall survive the termination of the Revolving Credit Termination Date, the Facility Extension Loan Termination Date, if applicable, and the repayment of the Loans. ARTICLE V Conditions to Making Loans and Issuing Letters of Credit 5.1. Conditions of Initial Advance. The occurrence of the Closing Date, and the obligation of the Lenders to make the initial Revolving Credit Loans on the Closing Date, shall be conditioned upon the satisfaction of the following conditions precedent in the sole judgment of the Administrative Agent: (a) the Administrative Agent shall have received on the Closing Date, in form and substance satisfactory to the Administrative Agent, the following: (i) executed originals of each of this Agreement, the LC Account Agreement and the other Loan Documents, together with all schedules and exhibits thereto; (ii) the favorable written opinion or opinions with respect to the Loan Documents and the transactions contemplated thereby of counsel to the Borrower dated the Closing Date, addressed to the Administrative Agent and the Lenders and satisfactory to Simpson Thacher & Bartlett, special counsel to the Administrative Agent, substantially in the form of Exhibit H; (iii) resolutions of the board of directors of the Borrower certified by its secretary or assistant secretary as of the Closing Date, approving and adopting the Loan Documents to be executed by the Borrower, and authorizing the execution and delivery and performance thereof; (iv) specimen signatures of officers of the Borrower executing the Loan Documents on behalf of the Borrower, certified by the secretary or assistant secretary of the Borrower; (v) the charter documents of the Borrower certified as of a recent date by the Secretary of State of its state of organization; (vi) the bylaws of the Borrower certified as of the Closing Date as true and correct by its secretary or assistant secretary; (vii) certificates issued as of a recent date by the Secretary of State of the jurisdiction of formation of the Borrower as to the valid existence and good standing of the Borrower; (viii) notice of appointment of the initial Authorized Representative(s); 43 (ix) evidence of all insurance required by the Loan Documents; (x) a certificate substantially in the form of Exhibit I completed as of June 30, 2000; (xi) evidence that all fees, costs and expenses payable by the Borrower on the Closing Date to the Administrative Agent and the Lenders have been paid in full; (xii) such other documents, instruments, certificates and opinions as the Administrative Agent or any Lender may reasonably request on or prior to the Closing Date in connection with the consummation of the transactions contemplated hereby. (b) In the good faith judgment of the Administrative Agent and the Lenders: (i) there shall not have occurred or become known to the Administrative Agent or the Lenders any event, condition, situation or status since December 31, 1999 that has had or could reasonably be expected to result in a Material Adverse Effect; (ii) no litigation, action, suit, investigation or other arbitral, administrative or judicial proceeding shall be pending or threatened which could reasonably be expected to result in a Material Adverse Effect; and (iii) the Borrower and its Consolidated Entities shall have received all approvals, consents and waivers, and shall have made or given all necessary filings and notices, as shall be required to consummate the transactions contemplated hereby without the occurrence of any default under, conflict with or violation of (A) any applicable law, rule, regulation, order or decree of any Governmental Authority or arbitral authority or (B) any agreement, document or instrument to which any of the Borrower or any Consolidated Entity is a party or by which any of them or their properties is bound, except for such approvals, consents, waivers, filings and notices the receipt, making or giving of which will not have a Material Adverse Effect. (c) The following refinancing (the "Refinancing") shall have occurred or shall occur simultaneously with the occurrence of the Closing Date: (i) The Borrower shall have issued and sold not less than $350,000,000 of senior subordinated notes having terms and conditions acceptable to the Administrative Agent (the "New Senior Subordinated Notes"); (ii) The Closing Date under (and as defined in) the Headquarters Participation Agreement shall have occurred, and the refinancing of the notes and equity issued by HEALTHSOUTH Corporation Trust 1995-1 shall have occurred; (iii) The Closing Date under (and as defined in) the Hospitals Participation Agreement shall have occurred, and the refinancing of the notes and equity issued by HEALTHSOUTH Corporation Trust 2000-1 shall have occurred; 44 (iv) All amounts outstanding under the Borrower's Short Term Credit Agreement, dated as of December 15, 1999 shall have been repaid in full, and all commitments to extend credit thereunder shall have been terminated. (d) The Borrower shall have made available to the Lenders the pro forma consolidated balance sheets of the Borrower as of December 31, 1999 and June 30, 2000. (e) No litigation by any entity (private or governmental) shall be pending or threatened with respect to any of the transactions contemplated hereby or any other documentation executed in connection herewith or therewith or the transactions contemplated hereby (including, without limitation, the Refinancing). 5.2. Conditions of Loans and Letters of Credit. The obligations of the Lenders to make any Loans including, without limitation, the conversion of any Revolving Credit Loans to Facility Extension Loans, and the Issuing Bank to issue Letters of Credit, hereunder on or subsequent to the Closing Date, are subject to the satisfaction of the following conditions: (a) the Administrative Agent shall have received a Borrowing Notice or Facility Extension Notice, as applicable, if required by Article II; (b) the representations and warranties of the Borrower and the Subsidiaries set forth in Article VI and in each of the other Loan Documents shall be true and correct in all material respects on and as of the date of such Advance, Letter of Credit issuance or renewal or Facility Extension Loan, with the same effect as though such representations and warranties had been made on and as of such date, except to the extent that such representations and warranties expressly relate to an earlier date and except that the financial statements referred to in Section 6.6(a) shall be deemed to be those financial statements most recently delivered to the Administrative Agent and the Lenders pursuant to Section 7.1 from the date financial statements are delivered to the Administrative Agent and the Lenders in accordance with such Section; (c) in the case of the issuance of a Letter of Credit, the Borrower shall have executed and delivered to the Issuing Bank an Application and Agreement for the Letter of Credit in form and content acceptable to the Issuing Bank together with such other instruments and documents as it shall request; (d) at the time of (and after giving effect to) each Advance, conversion to Facility Extension Loan or the issuance of a Letter of Credit, no Default or Event of Default shall have occurred and be continuing; and (e) immediately after giving effect to: (i) a Loan, the aggregate principal balance of all outstanding Loans for each Lender plus such Lender's Applicable Commitment Percentage of the aggregate amount of Letter of Credit Outstandings shall not exceed such Lender's Revolving Credit Commitment; 45 (ii) a Letter of Credit or renewal thereof, the aggregate principal balance of all outstanding Participations in Letters of Credit and Reimbursement Obligations (or in the case of the Issuing Bank, its remaining interest after deduction of all Participations in Letters of Credit and Reimbursement Obligations of other Lenders) for each Lender and in the aggregate shall not exceed, respectively, (X) such Lender's Letter of Credit Commitment or (Y) the Total Letter of Credit Commitment; and (iii) a Loan or a Letter of Credit or renewal thereof, the sum of Letter of Credit Outstandings plus the aggregate principal amount of Revolving Credit Outstandings shall not exceed the Total Revolving Credit Commitment. Each borrowing of a Revolving Credit Loan or conversion to a Facility Extension Loan hereunder and each issuance of a Letter of Credit hereunder shall constitute a representation and warranty by the Borrower to the effect that the conditions set forth in clauses (b) and (d) have been satisfied as of the date of such borrowing. ARTICLE VI Representations and Warranties The Borrower represents and warrants with respect to itself and (to the extent expressly set forth below) its Consolidated Entities (which representations and warranties shall survive the delivery of the documents mentioned herein and the making of Loans and the issuance of a Letter of Credit), that: 6.1. Organization and Authority. (a) The Borrower and each Consolidated Entity is a corporation, partnership or limited liability company duly organized and validly existing under the laws of the jurisdiction of its formation; (b) The Borrower and each Consolidated Entity (x) has the requisite power and authority to own its properties and assets and to carry on its business as now being conducted and as contemplated in the Loan Documents, and (y) is qualified to do business in every jurisdiction in which failure so to qualify would have a Material Adverse Effect; (c) The Borrower has the power and authority to execute, deliver and perform this Agreement, and to borrow and obtain other extensions of credit hereunder, and to execute, deliver and perform each of the other Loan Documents to which it is a party; and (d) When executed and delivered, each of the Loan Documents to which the Borrower is a party will be the legal, valid and binding obligation or agreement, as the case may be, of the Borrower, enforceable against the Borrower in accordance with its terms, subject to the effect of any applicable bankruptcy, moratorium, insolvency, reorganization or other similar law affecting the enforceability of creditors' rights generally and to the effect of general principles of equity (whether considered in a proceeding at law or in equity). 46 6.2. Loan Documents. The execution, delivery and performance by the Borrower of each of the Loan Documents and the credit extensions hereunder: (a) have been duly authorized by all requisite corporate actions (including any required shareholder approval) of the Borrower required for the lawful execution, delivery and performance thereof; (b) do not violate any provisions of (i) applicable law, rule or regulation, (ii) any judgment, writ, order, determination, decree or arbitral award of any Governmental Authority or arbitral authority binding on the Borrower or any Subsidiary or its or any Subsidiary's properties, or (iii) the charter documents or bylaws of the Borrower (each instance of (i), (ii) or (iii), a "Requirement of Law"); (c) do not and will not conflict with, result in a breach of or constitute an event of default, or an event which, with notice or lapse of time or both, would constitute an event of default, under any contract, indenture, agreement or other instrument or document to which Borrower or any Consolidated Entity is a party, or by which the properties or assets of the Borrower or any Consolidated Entity are bound (each, a "Contractual Obligation"); and (d) do not and will not result in the creation or imposition of any Lien upon any of the properties or assets of Borrower or any Subsidiary. 6.3. Solvency. The Borrower is Solvent and the Borrower and its Consolidated Entities taken as a whole are Solvent, in each case after giving effect to the transactions contemplated by the Loan Documents. 6.4. Subsidiaries and Subsidiaries' Guarantees. The Borrower has no Subsidiaries other than those Persons listed as Subsidiaries in Schedule 6.4 and additional Subsidiaries created or acquired after the Closing Date. As of the Closing Date, no Subsidiary has directly or indirectly guaranteed any Indebtedness of the Borrower. 6.5. Ownership Interests. The Borrower owns no interest in any Person other than the Persons listed in Schedule 6.4, equity investments in Persons not constituting Subsidiaries permitted under Section 8.2 and additional Subsidiaries created or acquired after the Closing Date. 6.6. Financial Condition. (a) The Borrower has heretofore furnished to the Administrative Agent and each Lender an audited consolidated balance sheet of the Borrower and its Consolidated Entities as at December 31, 1999 and the notes thereto and the related consolidated statements of income, stockholders' equity and cash flows for the Fiscal Year then ended as examined and certified by Ernst & Young LLP. Except as set forth therein, such financial statements (including the notes thereto) present fairly the financial condition of the Borrower and its Consolidated Entities as of the end of such Fiscal Year and results of their operations and the changes in its stockholders' equity for the Fiscal Year, all in conformity with GAAP applied on a Consistent Basis, subject however, in the case of unaudited interim statements to year end audit adjustments. 47 (b) Since December 31, 1999, there has been no material adverse change in the condition, financial or otherwise, of the Borrower or any of its Consolidated Entities, or in the businesses, properties, performance, prospects or operations of the Borrower or any of its Consolidated Entities nor have such businesses or properties been materially adversely affected as a result of any fire, explosion, earthquake, accident, strike, lockout, combination of workers, flood, embargo or act of God. (c) Neither the Borrower nor any Consolidated Entity has any material Indebtedness, Guaranteed Obligations or other obligations or liabilities, direct or contingent, in an aggregate amount in excess of $300,000 other than (i) the liabilities reflected in such balance sheet and the notes thereto, (ii) obligations arising under this Agreement, (iii) the New Senior Subordinated Notes and (iv) liabilities incurred in the ordinary course of business. (d) The unaudited pro forma balance sheets of Borrower and the Consolidated Entities as at December 31, 1999 and June 30, 2000, (including the notes thereto (the "Pro Forma Financial Statements"), copies of which have been furnished to the Administrative Agent, have been prepared giving effect to the financings and refinancings contemplated by this Agreement as if such transactions had occurred on the dates of such pro forma balance sheets. The Pro Forma Financial Statements have been prepared based on the best information available to the Borrower on the date of delivery thereof, and present fairly on a pro forma basis the estimated financial position and results of operations of the Borrower, based upon the assumptions described in the preceding sentence. 6.7. Title to Properties. The Borrower and each Consolidated Entity has good and marketable title to all its real and personal properties, subject to no transfer restrictions or Liens of any kind, except for the transfer restrictions and Liens permitted by this Agreement. 6.8. Taxes. The Borrower and each Consolidated Entity have filed or caused to be filed all federal, state and local tax returns which are required to be filed by it and, except for taxes and assessments being contested in good faith by appropriate proceedings diligently conducted and against which reserves reflected in the financial statements described in Section 6.6(a) and satisfactory to the Borrower's independent certified public accountants have been established, have paid or caused to be paid all taxes as shown on said returns or on any assessment received by it, to the extent that such taxes have become due. 6.9. Other Agreements. Except as disclosed in or incorporated by reference in the 1999 10-K: (a) neither the Borrower nor any Consolidated Entity is a party to or subject to any judgment, order, decree, agreement, lease or instrument, or subject to other restrictions, compliance with the terms of which individually or in the aggregate could reasonably be likely to have a Material Adverse Effect; (b) neither the Borrower nor any Consolidated Entity is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in (i) any Medicaid Provider Agreement, Medicare Provider Agreement or other agreement or instrument to which the Borrower or any Consolidated Entity 48 is a party, which default has resulted in, or if not remedied within any applicable grace period could result in, the revocation, termination, cancellation or suspension of Medicaid Certification or Medicare Certification of Borrower or any Consolidated Entity which could have a Material Adverse Effect or (ii) any other agreement or instrument to which the Borrower or any Consolidated Entity is a party, which default has, or if not remedied within any applicable grace period could reasonably be likely to have, a Material Adverse Effect; (c) to the knowledge of Borrower's Executive Officers, no Contract Provider is a party to any judgment, order, decree, agreement or instrument, or subject to restrictions, compliance with the terms of which could individually or in the aggregate reasonably be likely to have a Material Adverse Effect; and (d) to the knowledge of Borrower's Executive Officers, no Contract Provider is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Medicaid Provider Agreement, Medicare Provider Agreement or other agreement or instrument to which such Person is a party, which default has resulted in, or if not remedied within any applicable grace period could result in, the revocation, termination, cancellation or suspension of Medicaid Certification or Medicare Certification of such Person, which revocation; termination, cancellation or suspension could reasonably be likely to have a Material Adverse Effect. 6.10. Litigation. Except as disclosed in or incorporated by reference in the 1999 10-K, there is no action, suit, investigation or proceeding at law or in equity or by or before any governmental instrumentality or agency or arbitral body pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any Consolidated Entity or, to the knowledge of the Borrower, pending or threatened by or against any Contract Provider, or affecting the Borrower or any Consolidated Entity or, to the knowledge of the Borrower, any Contract Provider or any properties or rights of the Borrower or any Consolidated Entity or, to the knowledge of the Borrower, any Contract Provider, which could reasonably be likely (i) to result in the revocation, termination, cancellation or suspension of Medicaid Certification or Medicare Certification of such Person, which revocation, termination, cancellation or suspension could reasonably be likely to have a Material Adverse Effect, or (ii) to have a Material Adverse Effect. 6.11. Margin Stock. The proceeds of the borrowings and other extensions of credit made hereunder will be used by the Borrower only for the purposes expressly authorized herein. None of such proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin stock or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry margin stock or for any other purpose which might constitute any of the Loans or Letters of Credit under this Agreement a "purpose credit" within the meaning of Regulation U or Regulation X of the Board. Neither the Borrower nor any Administrative Agent acting in its behalf has taken or will take any action which might cause this Agreement or any of the documents or instruments delivered pursuant hereto to violate any regulation of the Board or to violate the Exchange Act or the Securities Act of 1933, as amended, or any state securities laws. 49 6.12. Investment Company. Neither the Borrower nor any Consolidated Entity is an "investment company," or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended (15 U.S.C. ss. 80a-1, et seq.). The application of the proceeds of the Loans and repayment thereof by the Borrower and the issuance of Letters of Credit and the performance by the Borrower and any Consolidated Entity of the transactions contemplated by the Loan Documents will not violate any provision of said Act, or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. 6.13. Patents, Etc. The Borrower and each Consolidated Entity owns or has the right to use, under valid license agreements or otherwise, all material patents, licenses, franchises, trademarks, trademark rights, trade names, trade name rights, trade secrets, service marks, service mark rights and copyrights necessary to or used in the conduct of its businesses as now conducted and as contemplated by the Loan Documents, without known conflict by, or with, any patent, license, franchise, trademark, trade secret, trade name, service mark, copyright or other proprietary right of, any other Person. 6.14. No Untrue Statement. Neither (a) this Agreement nor any other Loan Document or certificate or document executed and delivered by or on behalf of the Borrower or any Consolidated Entity in accordance with or pursuant to any Loan Document nor (b) any statement, representation, or warranty provided to the Administrative Agent or any Lender in connection with the negotiation or preparation of the Loan Documents contains any misrepresentation or untrue statement of material fact or omits to state a material fact necessary, in light of the circumstance under which it was made, in order to make any such warranty, representation or statement contained therein not misleading. 6.15. No Consents, Etc. Neither the respective businesses or properties of the Borrower or any Consolidated Entity, nor any relationship between the Borrower or any Consolidated Entity and any other Person, nor any circumstance in connection with the execution, delivery and performance of the Loan Documents and the transactions contemplated thereby, is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any Governmental Authority or any other Person on the part of the Borrower or any Consolidated Entity as a condition to the execution, delivery and performance of, or consummation of the transactions contemplated by, or the validity or enforceability of, the Loan Documents, which, if not obtained or effected, would be reasonably likely to have a Material Adverse Effect, or if so, such consent, approval, authorization, filing, registration or qualification has been duly obtained or effected, as the case may be. 6.16. ERISA Requirement. (i) The execution and delivery of the Loan Documents will not involve any prohibited transaction within the meaning of ERISA, (ii) the Borrower and each ERISA Affiliate has fulfilled its obligations under the minimum funding standards imposed by ERISA and each is in compliance in all material respects with the applicable provisions of ERISA, and (iii) no "Reportable Event," as defined in Section 4043(b) of ERISA, has occurred with respect to any plan maintained by the Borrower or any of its ERISA Affiliates. 50 6.17. No Default. As of the date hereof, there does not exist any Default or Event of Default. 6.18. Hazardous Materials. The Borrower and each Consolidated Entity is in compliance with all applicable Environmental Laws in all material respects. Neither the Borrower nor any Consolidated Entity has been notified of any action, suit, proceeding or investigation which, and neither the Borrower nor any Consolidated Entity is aware of any facts which, (i) calls into question, or could reasonably be expected to call into question, compliance in all material respects by the Borrower or any Consolidated Entity with any Environmental Laws, (ii) which seeks, or could reasonably be expected to form the basis of a meritorious proceeding, to suspend, revoke or terminate any material license, permit or approval necessary for the generation, handling, storage, treatment or disposal of any Hazardous Material, or (iii) seeks to cause, or could reasonably be expected to form the basis of a meritorious proceeding to cause, any property of the Borrower or any Consolidated Entity material to the operations of the Borrower or such Consolidated Entity to be subject to any material restrictions on ownership, use, occupancy or transferability under any Environmental Law. 6.19. Employment Matters. (a) Except as set forth on Schedule 6.19, none of the employees of the Borrower or any Consolidated Entity is subject to any collective bargaining agreement and there are no strikes, work stoppages, election or decertification petitions or proceedings, unfair labor charges, equal opportunity proceedings. or other material labor/employee related controversies or proceedings pending or, to the best knowledge of the Borrower, threatened against the Borrower or any Consolidated Entity or between the Borrower or any Consolidated Entity and any of its employees, other than employee grievances, controversies or proceedings arising in the ordinary course of business which could not reasonably be likely, individually or in the aggregate, to have a Material Adverse Effect; and (b) Except to the extent a failure to maintain compliance would not have a Material Adverse Effect, the Borrower and each Consolidated Entity is in compliance in all respects with all applicable laws, rules and regulations pertaining to labor or employment matters, including without limitation those pertaining to wages, hours, occupational safety and taxation and there is neither pending nor threatened any litigation, administrative proceeding or, to the knowledge of the Borrower, any investigation, in respect of such matters which, if decided adversely, could reasonably be likely, individually or in the aggregate, to have a Material Adverse Effect. 6.20. RICO. Neither the Borrower nor any Consolidated Entity is engaged in or has engaged in any course of conduct that could subject any of their respective properties to any Lien, seizure or other forfeiture under any criminal law, racketeer influenced and corrupt organizations law, civil or criminal, or other similar laws. 6.21. Reimbursement from Third Party Payors. The accounts receivable of the Borrower and each Consolidated Entity and each Contract Provider have been and will continue to be adjusted to reflect reimbursement policies of third party payors such as Medicare, Medicaid, Blue Cross/Blue Shield, private insurance companies, health maintenance organizations, preferred provider organizations, alternative delivery systems, managed care systems, government contracting agencies and other third party payors. In particular, accounts 51 receivable relating to such third party payors do not and shall not exceed amounts any obligee is entitled to receive under any capitation arrangement, fee schedule, discount formula, cost-based reimbursement or other adjustment or limitation to its usual charges. 6.22. Material Adverse Change. Since December 31, 1999, there has been no development or event, which has had or could reasonably be expected to have a Material Adverse Effect. ARTICLE VII Affirmative Covenants The Borrower hereby agrees that, so long as the Revolving Credit Commitments remain in effect, any Letter of Credit remains outstanding or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, unless the Required Lenders shall otherwise consent in writing, the Borrower will, and where applicable will cause each Consolidated Entity to: 7.1. Financial Statements, Reports, Etc. The Borrower shall deliver or cause to be delivered to the Administrative Agent and each Lender: (a) Not later than 50 days after the end of each of the first three quarters of each Fiscal Year, a balance sheet and a statement of income of the Borrower and its Consolidated Entities on a consolidated basis and a statement of cash flow of the Borrower and its Consolidated Entities on a consolidated basis for such calendar quarter and for the period beginning on the first day of such Fiscal Year and ending on the last day of such quarter (in sufficient detail to indicate the Borrower's and each Consolidated Entity's compliance with the financial covenants set forth in Section 8.1), together with statements in comparative form for the corresponding date or period in the preceding Fiscal Year as summarized in the Borrower's Form 10-Q for the corresponding period, and certified as to fairness, accuracy and completeness by the chief executive officer, chief financial officer or Treasurer of the Borrower. (b) Not later than 100 days after the end of each Fiscal Year, financial statements (including a balance sheet, a statement of income, a statement of changes in shareholders' equity and a statement of cash flow) of the Borrower and its Consolidated Entities on a consolidated basis for such Fiscal Year (in sufficient detail to indicate the Borrower's and each Consolidated Entity's compliance with the financial covenants set forth in Section 8.1), together with statements in comparative form as of the end of and for the preceding Fiscal Year as summarized in the Borrower's Form 10-K for the corresponding period, and accompanied by an opinion of certified public accountants acceptable to the Administrative Agent, which opinion shall state in effect that such financial statements (A) were audited using generally accepted auditing standards, (B) were prepared in accordance with generally accepted accounting principles applied on a 52 Consistent Basis, and (C) present fairly the financial condition and results of operations of the Borrower and its Consolidated Entities for the periods covered. (c) Together with the financial statements required by subsections (a) and (b) above a compliance certificate duly executed by the chief executive officer or chief financial officer or Treasurer of the Borrower in the form of Exhibit I ("Compliance Certificate"). (d) Contemporaneously with the distribution thereof to the Borrower's or any Consolidated Entity's stockholders or partners or the filing thereof with the Securities and Exchange Commission, as the case may be, copies of all statements, reports, notices and filings distributed by the Borrower or any Consolidated Entity to its stockholders or partners or filed with the Securities and Exchange Commission (including reports on SEC Forms 10-K, 10-Q and 8-K). (e) Promptly after the Borrower knows or has reason to know of the occurrence of any "reportable event" under Section 4043 of ERISA applicable to the Borrower or any ERISA Affiliate, a certificate of the president or chief financial officer of the Borrower setting forth the details as to such "reportable event" and the action that the Borrower or the ERISA Affiliate has taken or will take with respect thereto, and promptly after the filing or receiving thereof, copies of all reports and notices that the Borrower and each Consolidated Entity files under ERISA with the Internal Revenue Service or the PBGC or the United States Department of Labor. (f) Promptly after the Borrower or any of its Consolidated Entities becomes aware of the commencement thereof, notice of any investigation, action, suit or proceeding before any Governmental Authority involving the condemnation or taking under the power of eminent domain of any of its property or the revocation or suspension of any permit, license, certificate of need or other governmental requirement applicable to any Facility. (g) Within 10 days of the receipt by the Borrower or any of its Consolidated Entities, copies of all material deficiency notices, compliance orders or adverse reports issued by any Governmental Authority or accreditation commission having jurisdiction over licensing, accreditation or operation of a Facility or by any Governmental Authority or private insurance company pursuant to a provider agreement, which, if not promptly complied with or cured, could result in the suspension or forfeiture of any license, certification or accreditation necessary in order for such Facility to carry on its business as then conducted or the termination of any material insurance or reimbursement program available to such Facility. (h) Such other information regarding any Facility or the financial condition or operations of the Borrower or its Consolidated Entities as the Administrative Agent shall reasonably request from time to time or at any time. 7.2. Maintain Properties. Maintain all properties necessary to its operations in good working order and condition, make all needed repairs, replacements and renewals to such 53 properties, and maintain free from Liens all trademarks, trade names, service marks, patents, copyrights, trade secrets, know-how, and other intellectual property and proprietary information (or adequate licenses thereto), in each case as are reasonably necessary to conduct its business as currently conducted or as contemplated hereby, all in accordance with customary and prudent business practices. 7.3. Conduct of Business and Maintenance of Existence, Qualification, Etc. Except as otherwise expressly permitted under Section 8.4, do or cause to be done all things necessary to preserve and keep in full force and effect its existence and all material rights and franchises, maintain its license or qualification to do business as a foreign corporation and good standing in each jurisdiction in which its ownership or lease of property or the nature of its business makes such license or qualification necessary and comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith would not, in the aggregate, have a Material Adverse Effect. 7.4. Regulations and Taxes. Comply in all material respects with or contest in good faith all statutes and governmental regulations and pay all taxes, assessments, governmental charges, claims for labor, supplies, rent and any other obligation which, if unpaid, would become a Lien against any of its properties except liabilities being contested in good faith by appropriate proceedings diligently conducted and against which adequate reserves acceptable to the Borrower's independent certified public accountants have been established unless and until any Lien resulting therefrom attaches to any of its property and becomes enforceable by its creditors. 7.5. Insurance. At all times maintain in force, and pay all premiums and costs related to, insurance coverages in amounts deemed by the management of the Borrower to be sufficient in accordance with usual and customary business practices and any other coverages required under applicable governmental requirements. The Borrower shall deliver to the Administrative Agent annually on or before each anniversary date of this Agreement, and at such other time or times as the Administrative Agent may request (but not more often than monthly), a certificate of the president or chief financial officer of the Borrower setting out in such detail as the Administrative Agent may reasonably require a description of all insurance coverages maintained by the Borrower and each Consolidated Entity. The Administrative Agent shall have no obligation to give the Borrower or any Consolidated Entity notice of any notification received by the Administrative Agent with respect to any insurance policies or take any steps to protect the Borrower's or any Consolidated Entity's interests under such policies. 7.6. True Books. Keep true books of record and account in which full, true and correct entries will be made of all of its dealings and transactions, and set up on its books such reserves as may be required by GAAP with respect to doubtful accounts and all taxes, assessments, charges, levies and claims and with respect to its business in general, and include such reserves in interim as well as year-end financial statements. 7.7. Right of Inspection. Permit the representatives of any Lender to visit and inspect any of the properties, corporate books and financial reports of the Borrower or any Subsidiary and to discuss its affairs, finances and accounts with its principal officers and independent certified public accountants, all at reasonable times, at reasonable intervals and with reasonable prior notice. 54 7.8. Observe all Laws. Conform to and duly observe, and cause all Contract Providers to conform to and duly observe, in all material respects all laws, rules and regulations and all other valid requirements of any regulatory authority with respect to the conduct of its business, including without limitation Titles XVII and XIX of the Social Security Act, Medicare Regulations, Medicaid Regulations, and all laws, rules and regulations of Governmental Authorities pertaining to the licensing of professional and other health care providers, except where the failure to do so could not reasonably be likely to have a Material Adverse Effect. 7.9. Governmental Licenses. Obtain and maintain, and use reasonable effort to cause all Contract Providers to obtain and maintain, all licenses, permits, certifications and approvals of all applicable Governmental Authorities as are required for the conduct of its business as currently conducted and herein contemplated, including without limitation professional licenses, Medicaid Certifications and Medicare Certifications, except where the failure to do so could not reasonably be likely to have a Material Adverse Effect. 7.10. Covenants Extending to Other Persons. Cause each of its Consolidated Entities to do with respect to itself, its business and its assets, each of the things required of the Borrower in Sections 7.2 through 7.9, 7.15 and 7.16 inclusive. 7.11. Officer's Knowledge of Default. Upon any Executive Officer of the Borrower obtaining knowledge of any Default or Event of Default or any default or event of default under any other obligation of the Borrower or any Consolidated Entity to any Lender, or any event, development or occurrence which could reasonably be expected to have a Material Adverse Effect, cause such Executive Officer or an Authorized Representative to promptly notify the Administrative Agent of the nature thereof, the period of existence thereof, and what action the Borrower or such Consolidated Entity proposes to take with respect thereto. The Administrative Agent shall notify the Lenders of receipt of such notice. 7.12. Suits or Other Proceedings. Upon any Executive Officer of the Borrower obtaining knowledge of any litigation or other proceedings being instituted (i) against the Borrower or any Subsidiary, or any attachment, levy, execution or other process being instituted against any assets of the Borrower or any Subsidiary or Controlled Partnership, which if adversely determined could reasonably be likely to have a Material Adverse Effect or (ii) against the Borrower, any Subsidiary or any Contract Provider (but only with respect to services provided to the Borrower or any Consolidated Entity) to suspend, revoke or terminate any Medicaid Provider Agreement, Medicaid Certification, Medicare Provider Agreement or Medicare Certification, which suspension, revocation or termination could reasonably be likely to have a Material Adverse Effect, cause such Executive Officer or an Authorized Representative to promptly deliver to the Administrative Agent written notice thereof stating the nature and status of such litigation, dispute, proceeding, levy, execution or other process. 7.13. Notice of Discharge of Hazardous Material or Environmental Complaint. Promptly provide to the Administrative Agent true, accurate and complete copies of any and all notices, complaints, orders, directives, claims, or citations received by the Borrower or any Consolidated Entity relating to any of the following which is likely to have a Material Adverse Effect: (a) violation or alleged violation by the Borrower or any Consolidated Entity of any applicable Environmental Law; (b) release or threatened release by the Borrower or any 55 Consolidated Entity, or at any Facility or property owned or leased or operated by the Borrower or any Consolidated Entity, of any Hazardous Material, except where occurring legally; or (c) liability or alleged liability of the Borrower or any Consolidated Entity for the costs of cleaning up, removing, remediating or responding to a release of Hazardous Materials. 7.14. Environmental Compliance. If the Borrower or any Consolidated Entity shall receive any letter, notice, complaint, order, directive, claim or citation from any Governmental Authority alleging that the Borrower or any Consolidated Entity has violated any Environmental Law or is liable for the costs of cleaning up, removing, remediating or responding to a release of Hazardous Materials, within the time period permitted by the applicable Environmental Law or the Governmental Authority responsible for enforcing such Environmental Law, remove or remedy, or cause the applicable Consolidated Entity to remove or remedy, such violation or release or satisfy such liability unless and only during the period that the applicability of such Environmental Law, the fact of such violation or liability or what is required to remove or remedy such violation is being contested by the Borrower or the applicable Consolidated Entity by appropriate proceedings diligently conducted and all reserves with respect thereto as may be required under GAAP, if any, have been made, and no Lien in connection therewith shall have attached to any property of the Borrower or the applicable Consolidated Entity which shall have become enforceable against creditors of such Person. 7.15. Continuation of Current Business. Not engage in any business other than the business now being conducted by the Borrower (including its Consolidated Entities) and other businesses directly related to such services. 7.16. Management Contracts. Not enter into any agreement whereby the management, supervision or control of its business or any Facility shall be delegated to or placed in any persons other than its governing body and officers, the Borrower or a Consolidated Entity, except that management of the Facility owned by Vanderbilt Stallworth Rehabilitation Hospital, L.P. is vested in part in a Governance Committee and in part in a Subsidiary of the Borrower pursuant to the applicable limited partnership agreement and a management agreement. 7.17. Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 7.18. New Subsidiaries. Promptly cause any Subsidiary that shall, after the Closing Date, directly or indirectly guarantee any Indebtedness of the Borrower (x) to execute and deliver the Guarantee to the Administrative Agent or (y) to become a party to such Guarantee, should such Guarantee already be in existence. 56 ARTICLE VIII Negative Covenants The Borrower hereby agrees that, so long as the Revolving Credit Commitments remain in effect, any Letter of Credit remains outstanding or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, unless the Required Lenders shall otherwise consent in writing, the Borrower will not, nor will it permit any Consolidated Entity to: 8.1. Financial Covenants. (a) Minimum Net Worth. Permit Consolidated Net Worth to be less than $2,750,000,000 plus (A) 50% of Consolidated Net Income (if positive and including for purposes of this Section 8.1(a) only any extraordinary gain), on an ongoing basis for each fiscal quarter beginning with the fiscal quarter ended June 30, 1998, plus (B) the aggregate amount of all increases, if any, in its capital accounts resulting from the issuance of Capital Stock or conversion of debt into Capital Stock or other securities properly classified as equity in accordance with GAAP, or from the sale or other disposition of treasury shares, from the date of this Agreement through the date of determination plus (C) without duplication, any addition to Consolidated Stockholders' Equity resulting from an Acquisition after the Closing Date which shall be accounted for on a pooling-of-interests basis. (b) Consolidated EBITDA to Consolidated Interest Expense Ratio. Permit the ratio of Consolidated EBITDA for any Four-Quarter Period to Consolidated Interest Expense for such Four-Quarter Period to be less than or equal to 3.00 to 1.00. (c) Consolidated Indebtedness to Consolidated Total Capital. Permit the ratio of Consolidated Indebtedness to Consolidated Total Capital at any time to equal or exceed 0.60 to 1.00. (d) Consolidated Indebtedness to Consolidated EBITDA. Permit the ratio of Consolidated Indebtedness at any date of determination to Consolidated EBITDA for the Four-Quarter Period of the Borrower most recently ended on or prior to such date of determination to exceed 3.50 to 1.00. 8.2. Investments and Loans. Purchase or otherwise acquire any stock, security, obligation or evidence of indebtedness of, make any capital contribution to, own any equity interest in, or make any loan or advance to, any other Person; provided, however, that the Borrower and its Consolidated Entities may (A) continue to hold all stock of and own partnership interests in the Persons that constitute Consolidated Entities on the Closing Date and Persons that thereafter become Consolidated Entities as a result of Acquisitions permitted under Section 8.8; (B) make Permitted Investments; and (C) make other investments in an aggregate amount while this Agreement is outstanding not exceeding 15% of Consolidated Total Assets. 8.3. Indebtedness. Permit to exist Indebtedness, howsoever evidenced, of Subsidiaries and Controlled Partnerships (exclusive of Indebtedness to the Borrower) in an aggregate amount at any time exceeding the greater of $70,000,000 or 15% of Consolidated 57 Tangible Net Worth, excluding, however, Indebtedness of Subsidiaries and Controlled Partnerships existing as of the date hereof and described on Schedule 8.3. 8.4. Disposition of Assets. Sell, lease or otherwise dispose of assets in excess of 15% of Consolidated Total Assets as at the Closing Date plus an amount equal to 15% of assets acquired following the Closing Date. 8.5. Consolidation or Merger. Merge or consolidate with another Person unless (i) in the case of a merger or consolidation of the Borrower, the Borrower is the continuing or surviving entity, (ii) in the case of a merger or consolidation involving a Consolidated Entity, the continuing or surviving entity is majority-owned by the Borrower (with such majority ownership constituting a controlling interest), and (iii) before and after giving effect to the proposed merger or consolidation, no Default or Event of Default shall exist. 8.6. Liens. Incur, create, assume or permit to exist any Lien upon any of its accounts receivable, contract rights, chattel paper, inventory, equipment, instruments, general intangibles or other personal or real property of any character, whether now owned or hereafter acquired, other than (i) Liens that constitute Permitted Encumbrances, and (ii) Liens on assets which at no time have a book value of greater than 5% of Consolidated Total Assets. 8.7. Dividends and Distributions. Permit any Consolidated Entity to be or become subject to any restrictions on the ability of such Consolidated Entity to pay dividends or to make partnership distributions other than as required by this Agreement or restrictions imposed by applicable law. 8.8. Acquisitions and Capital Expenditures. In any Fiscal Year, (a) make an Acquisition or enter into any agreement to make an Acquisition unless (i) (A) the Person or Facility to be acquired is in substantially the same line of business presently engaged in by the Borrower or its Consolidated Entities, (B) if the Cost of Acquisition exceeds $150,000,000 the Borrower shall have furnished to the Administrative Agent (1) pro forma historical financial statements as of the end of the most recently completed Fiscal Year of the Borrower and most recent interim fiscal quarter, if applicable, giving effect to such Acquisition and (2) a Compliance Certificate prepared on an historical pro forma basis giving effect to such Acquisition, which certificate shall demonstrate that no Default or Event of Default would exist immediately after giving effect thereto and (C) the entire consideration paid for such Acquisition is common stock of the Borrower or (ii) (A) the Person or Facility to be acquired is in substantially the same line of business presently engaged in by the Borrower or its Consolidated Entities, (B) if the Cost of Acquisition exceeds $150,000,000 the Borrower shall have furnished to the Administrative Agent (1) pro forma historical financial statements as of the end of the most recently completed Fiscal Year of the Borrower and most recent interim fiscal quarter, if applicable, giving effect to such Acquisition and (2) a Compliance Certificate prepared on an historical pro forma basis giving effect to such Acquisition, which certificate shall demonstrate that no Default or Event of Default would exist immediately after giving effect thereto and (C) (1) the aggregate amount of consideration (other than consideration in the form of common stock of the Borrower) paid in such Acquisition and all other Acquisitions consummated in such Fiscal Year pursuant to this clause (ii), plus (2) the aggregate amount expended by the Borrower and its Subsidiaries for Capital Expenditures during such Fiscal Year, does not exceed the 58 Acquisition/CapEx Basket Amount for such Fiscal Year; or (b) make or commit to make any Capital Expenditure unless (i) the aggregate amount expended by the Borrower and its Subsidiaries for Capital Expenditures during such Fiscal Year, plus (ii) the aggregate amount of consideration (other than consideration in the form of Common Stock) paid by the Borrower and its Subsidiaries during such Fiscal Year pursuant to the foregoing clause (a)(ii) in respect of Acquisitions, does not exceed the Acquisition/CapEx Basket Amount for such Fiscal Year. 8.9. Restricted Payments; Other Payments. (a) Make any Restricted Payment or apply or set apart any of their assets therefor or agree to do any of the foregoing; provided, however, the Borrower may make Restricted Payments in an amount not exceeding $50,000,000 in any Fiscal Year (on a non-cumulative basis, with the effect that amounts not paid in any Fiscal Year may not be carried over for payment in a subsequent period) if immediately prior and immediately after giving effect thereto no Default or Event of Default shall exist or occur and be continuing. (b) (i) amend, modify or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any of the terms of any Subordinated Debt (other than any such amendment, modification, waiver or other change which (A) would extend the maturity or reduce the amount of any payment of principal thereof, reduce the rate or extend the date for payment of interest thereon or relax any covenant or other restriction applicable to the Borrower or any of its Subsidiaries and (B) does not involve the payment of a consent fee), or (ii) designate any Indebtedness (other than the Senior Debt) as "Designated Senior Indebtedness" for the purposes of any instrument governing any Subordinated Debt, including, without limitation, the Indentures governing the New Senior Subordinated Notes and the Convertible Subordinated Debentures. 8.10. Compliance with ERISA. With respect to any Pension Plan, Employee Benefit Plan or Multiemployer Plan: (a) permit the occurrence of any Termination Event which would result in a liability on the part of the Borrower or any ERISA Affiliate to the PBGC which liability would have a Material Adverse Effect; or (b) permit the present value of all benefit liabilities under all Pension Plans to exceed the current value of the assets of such Pension Plans allocable to such benefit liabilities; or (c) permit any accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code) with respect to any Pension Plan, whether or not waived; or (d) fail to make any contribution or payment to any Multiemployer Plan which the Borrower or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; or (e) engage, or permit any Subsidiary or any ERISA Affiliate to engage, in any prohibited transaction under Section 406 of ERISA or Section 4975 of the Code for 59 which a civil penalty pursuant to Section 502(I) of ERISA or a tax pursuant to Section 4975 of the Code may be imposed; or (f) permit the establishment of any Employee Benefit Plan providing post-retirement welfare benefits or establish or amend any Employee Benefit Plan which establishment or amendment could result in liability to the Borrower or any ERISA Affiliate or increase the obligation of the Borrower or any ERISA Affiliate to a Multiemployer Plan which liability or increase, individually or together with all similar liabilities and increases, is in excess of $5,000,000; or (g) fail, or permit any Subsidiary or any ERISA Affiliate to fail, to establish, maintain and operate each Employee Benefit Plan in compliance in all material respects with the provisions of ERISA, the Code and all other applicable laws and the regulations and interpretations thereof. 8.11. Fiscal Year. Change its Fiscal Year (other than a change to conform the fiscal year of a Consolidated Entity to that of the Borrower). 8.12. Dissolution, etc. Wind up, liquidate or dissolve (voluntarily or involuntarily) or commence or suffer any proceedings seeking any such winding up, liquidation or dissolution, except in connection with a merger or consolidation permitted pursuant to Section 8.5 or where the liquidation or dissolution of a Consolidated Entity occurs in the ordinary course of business and does not have a Material Adverse Effect. 8.13. Transactions with Affiliates. Other than transactions permitted under Sections 8.2 and 8.5, enter into any transaction after the Closing Date, including, without limitation, the purchase, sale, lease or exchange of property, real or personal, or the rendering of any service, with any Affiliate of the Borrower, except (a) that such Persons may render services to the Borrower for compensation at the same rates generally paid by Persons engaged in the same or similar businesses for the same or similar services, (b) that the Borrower may render services to such Persons for compensation at the same rates generally charged by the Borrower and (c) in either case in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's business consistent with past practice of the Borrower and upon fair and reasonable terms no less favorable to the Borrower than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. ARTICLE IX Events of Default and Acceleration 9.1. Events of Default. If any one or more of the following events (herein called "Events of Default") shall occur for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority), that is to say: 60 (a) the Borrower shall fail to pay (i) when due, any principal payable under the terms hereof or any Reimbursement Obligation or (ii) not later than five Business Days of the date when due, any interest or fees payable under the terms hereof or any other amount payable under this Agreement or any other of the other Obligations or any other amount owed to the Administrative Agent or any of the Lenders under or in connection with the Loan Documents; or (b) the Borrower or any Material Group shall default in the performance or observance of any other provision of this Agreement (other than the provisions of Article VII and Article VIII) , except as covered by clause (a) above, and shall not cure such default within thirty days after the first to occur of (i) the date the Administrative Agent or any Lender gives written or telephonic notice of such default to the Borrower or (ii) the date the Borrower otherwise has notice thereof; or (c) the Borrower or any Material Group shall default in the observance or performance of any provision in Article VII or Article VIII; or (d) the Administrative Agent shall reasonably determine that any statement, certification, representation or warranty contained herein, or in any of the other Loan Documents or in any report, financial statement, certificate or other instrument delivered to the Administrative Agent or any Lender by or on behalf of the Borrower or any Consolidated Entity, was misleading or untrue in any material respect at the time it was made or deemed made; or (e) default shall be made (i) in the payment of any Indebtedness exceeding $5,000,000 (other than the Obligations) of the Borrower or any Consolidated Entity when due or (ii) in the performance, observance or fulfillment of any term or covenant contained in any agreement or instrument under or pursuant to which any such Indebtedness may have been issued, created, assumed, guaranteed or secured by Borrower or any Consolidated Entity, if the effect of such default in the performance, observance or fulfillment is to accelerate the maturity of such Indebtedness or to permit the holder thereof to cause such Indebtedness to become due prior to its stated maturity, and the amount of the Indebtedness involved exceeds $5,000,000, and such default shall not be cured within 10 days after the occurrence of such default; or (f) the Borrower or any Material Group shall fail to pay or admit in writing its inability to pay its or their debts generally as they come due, or a receiver, trustee, liquidator or other custodian shall be appointed for the Borrower or any Material Group or for any of the property of the Borrower or any Material Group or a petition in bankruptcy, or under any insolvency law, shall be filed by or against the Borrower or any Material Group or the Borrower or any Material Group shall apply for the benefit of, or take advantage of, any law for relief of debtors, or enter into an arrangement or composition with, or make an assignment for the benefit of, creditors; or (g) final judgment for the payment of money in excess of an aggregate of $500,000 shall be rendered against the Borrower or any Material Group, and the same 61 shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed; or (h) an event of default, as therein defined, shall occur under any other Loan Document; or (i) this Agreement, the Loans, the LC Account Agreement, or any part thereof, shall be deemed unenforceable by a court of competent jurisdiction or shall no longer be effective; or (j) the Borrower or any Consolidated Entity shall, other than in the ordinary course of business (as determined by past practices), suspend all or any part of its operations material to the conduct of the business of the Borrower and its Consolidated Entities, taken as a whole, for a period of more than 60 days; (k) the Borrower or any Consolidated Entity shall breach any of the material terms or conditions of any agreement under which any Rate Hedging Obligations are created and such breach shall continue beyond any grace period, if any, relating thereto pursuant to the terms of such agreement, or the Borrower or any Consolidated Entity shall disaffirm or seek to disaffirm any such agreement or any of its obligations thereunder; (l) there shall occur (i) any cancellation, revocation, suspension or termination of any Medicare Certification, Medicare Provider Agreement, Medicaid Certification or Medicaid Provider Agreement affecting the Borrower, any Subsidiary or any Contract Provider, or (ii) the loss of any other permits, licenses, authorizations, certifications or approvals from any federal, state or local Governmental Authority or termination of any contract with any such authority, in either case which cancellation, revocation, suspension, termination or loss (X) in the case of any suspension or temporary loss only, continues for a period greater than 60 days and (Y) results in the suspension or termination of operations of the Borrower or any Subsidiary or in the failure of the Borrower or any Subsidiaries or any Contract Provider to be eligible to participate in Medicare or Medicaid programs or to accept assignments of rights to reimbursement under Medicaid Regulations or Medicare Regulations, if and only if such Person, in the ordinary course of business, participates in the Medicare or Medicare programs or accepts assignments of rights to reimbursement thereunder; provided that any such events described in this Section 9.1(1) shall constitute an Event of Default only if such event shall result either singly or in the aggregate in the termination, cancellation, suspension or material impairment of operations or rights to reimbursement which produce 5% or more of the Borrower's gross revenues (on an annualized basis); or (m) there shall occur a Change of Control; then, and in any such event and at any time thereafter, if such Event of Default or any other Event of Default shall then be continuing and shall have not been waived, 62 (A) either or both of the following actions may be taken: (i) the Administrative Agent, with the consent of the Required Lenders, may, and at the direction of the Required Lenders shall, declare any obligation of the Lenders and the Issuing Bank to make further Loans or to issue additional Letters of Credit terminated, whereupon the obligation of each Lender to make further Loans and of the Issuing Bank to issue additional Letters of Credit hereunder shall terminate immediately, and (ii) the Administrative Agent shall at the direction of the Required Lenders, at their option, declare by notice to the Borrower any or all of the Obligations to be immediately due and payable, and the same, including all interest accrued thereon and all other obligations of the Borrower to the Administrative Agent and the Lenders, shall forthwith become immediately due and payable without presentment, demand, protest, notice or other formality of any kind, all of which are hereby expressly waived, anything contained herein or in any instrument evidencing the Obligations to the contrary notwithstanding; provided, however, that notwithstanding the above, if there shall occur an Event of Default under clause (f) above with respect to the Borrower, then the obligation of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall automatically terminate and any and all of the Obligations shall be immediately due and payable without the necessity of any action by the Administrative Agent or the Required Lenders or notice to the Administrative Agent or the Lenders; and (B) the Borrower shall, upon demand of the Administrative Agent or the Required Lenders, deposit cash with the Administrative Agent in an amount equal to the aggregate amount remaining undrawn under all outstanding Letters of Credit, as collateral security for the repayment of any future drawings or payments under such Letters of Credit, and such amounts shall be held by the Administrative Agent pursuant to the terms of the LC Account Agreement; and (C) the Administrative Agent and each of the Lenders shall have all of the rights and remedies available under the Loan Documents or under any applicable law. 9.2. Administrative Agent to Act. In case any one or more Events of Default shall occur and be continuing and not have been waived, the Administrative Agent may, and at the direction of the Required Lenders shall, proceed to protect and enforce their rights or remedies either by suit in equity or by action at law, or both, whether for the specific performance of any covenant, agreement or other provision contained herein or in any other Loan Document, or to enforce the payment of the Obligations or any other legal or equitable right or remedy. 9.3. Cumulative Rights. No right or remedy herein conferred upon the Lenders or the Administrative Agent is intended to be exclusive of any other rights or remedies contained herein or in any other Loan Document, and every such right or remedy shall be cumulative and shall be in addition to every other such right or remedy contained herein and therein or now or hereafter existing at law or in equity or by statute, or otherwise. 63 9.4. No Waiver. No course of dealing between the Borrower and any Lender or the Administrative Agent or any failure or delay on the part of any Lender or the Administrative Agent in exercising any rights or remedies under any Loan Document or otherwise available to it shall operate as a waiver of any rights or remedies and no single or partial exercise of any rights or remedies shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder or of the same right or remedy on a future occasion. 9.5. Allocation of Proceeds. If an Event of Default has occurred and not been waived, and the maturity of the Loans has been accelerated pursuant to this Article IX, all payments received by the Administrative Agent hereunder, in respect of any principal of or interest on the Obligations or any other amounts payable by the Borrower hereunder, shall be applied by the Administrative Agent in the following order: (i) amounts due to the Lenders pursuant to Section 2.2(d), Section 2.10, Section 3.3 or Section 11.6; (ii) amounts due to the Administrative Agent and the Issuing Bank pursuant to Section 10.8, Section 3.3 and Section 3.4; (iii) payments of interest, to be applied pro rata based on the proportion which the principal amount of outstanding Loans and Reimbursement Obligations of each Lender bears to the total of all outstanding Loans and Reimbursement Obligations; (iv) payments of principal, to be applied pro rata based on the proportion which the principal amount of outstanding Loans and Reimbursement Obligations of each Lender bears to the total of all outstanding Loans and Reimbursement Obligations; (v) payment of cash amounts to the Administrative Agent pursuant to Section 9.1(B); (vi) payments of all other amounts due under this Agreement, if any, to be applied in accordance with each Lender's pro rata share of all such other amounts due to the Lenders; and (vii) any surplus remaining after application as provided for herein, to the Borrower or otherwise as may be required by applicable law. ARTICLE X The Administrative Agent 10.1. Appointment, Powers, and Immunities. Each Lender hereby irrevocably appoints and authorizes the Administrative Agent to act as its Administrative Agent under this Agreement and the other Loan Documents with such powers and discretion as are specifically delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. The 64 Administrative Agent (which term as used in this sentence and in Section 10.5 and the first sentence of Section 10.6 hereof shall include its affiliates and its own and its affiliates' officers, directors, employees, and agents): (a) shall not have any duties or responsibilities except those expressly set forth in this Agreement and shall not be a trustee or fiduciary for any Lender; (b) shall not be responsible to the Lenders for any recital, statement, representation, or warranty (whether written or oral) made in or in connection with any Loan Document or any certificate or other document referred to or provided for in, or received by any of them under, any Loan Document, or for the value, validity, effectiveness, genuineness, enforceability, or sufficiency of any Loan Document, or any other document referred to or provided for therein or for any failure by any Person to perform any of its obligations thereunder; (c) shall not be responsible for or have any duty to ascertain, inquire into, or verify the performance or observance of any covenants or agreements by any Person or the satisfaction of any condition or to inspect the property (including the books and records) of any Person; (d) shall not be required to initiate or conduct any litigation or collection proceedings under any Loan Document; and (e) shall not be responsible for any action taken or omitted to be taken by it under or in connection with any Loan Document, except for its own negligence or willful misconduct. The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Joint Lead Arrangers, the Documentation Agent and Syndication Agent, in such respective capacities, shall have no responsibilities, and shall incur no liabilities under this Agreement. 10.2. Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon any certification, notice, instrument, writing, or other communication (including, without limitation, any thereof by telephone or telefacsimile) believed by it to be genuine and correct and to have been signed, sent or made by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants, and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until the Administrative Agent receives and accepts an Assignment and Acceptance executed in accordance with Section 11.1 hereof. As to any matters not expressly provided for by this Agreement, the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding on all of the Lenders; provided, however, that the Administrative Agent shall not be required to take any action that exposes the Administrative Agent to personal liability or that is contrary to any Loan Document or applicable law or unless it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking any such action. 10.3. Defaults. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of a Default or Event of Default unless the Administrative Agent has received written notice from a Lender or the Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default or Event of Default, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall (subject to Section 10.2 hereof) take such action with respect to such Default or Event of Default as shall reasonably be directed by the Required Lenders, provided that, unless 65 and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Lenders. 10.4. Rights as Lender. With respect to its Revolving Credit Commitment and the Loans made by it, UBS AG, Stamford Branch (and any successor acting as Administrative Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. UBS AG, Stamford Branch (and any successor acting as Administrative Agent) and its affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, make investments in, provide services to, and generally engage in any kind of lending, trust, or other business with the Borrower or any of its Subsidiaries or affiliates as if it were not acting as Administrative Agent, and UBS AG, Stamford Branch (and any successor acting as Administrative Agent) and its affiliates may accept fees and other consideration from the Borrower or any of its Subsidiaries or affiliates for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. 10.5. Indemnification. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed under Section 11.12 hereof, but without limiting the obligations of the Borrower under such Section) ratably in accordance with their respective Revolving Credit Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, reasonable costs and expenses (including attorneys' fees and disbursements), or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Lender) in any way relating to or arising out of any Loan Document or the transactions contemplated thereby (including, without limitation, the Refinancing or any transactions connected therewith) or any action taken or omitted by the Administrative Agent under any Loan Document; provided that no Lender shall be liable for any of the foregoing to the extent they arise (as determined by a final judgment of a court of competent jurisdiction) from the gross negligence or willful misconduct of the Person to be indemnified. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any costs or expenses payable by the Borrower under Section 11.6, to the extent that the Administrative Agent is not promptly reimbursed for such costs and expenses by the Borrower. The agreements contained in this Section shall survive payment in full of the Loans and all other amounts payable under this Agreement. 10.6. Non-Reliance on Administrative Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Loan Documents. Except for notices, reports and other documents and information expressly 66 required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition, or business of the Borrower or any of its Subsidiaries or affiliates that may come into the possession of the Administrative Agent or any of its affiliates. 10.7. Resignation of Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent subject to the approval of the Borrower so long as no Default or Event of Default shall have occurred and be continuing, such approval not to be unreasonably withheld. If no successor Administrative Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent's giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a commercial bank organized under the laws of the United States of America having combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor, such successor shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges, and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article X shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. 10.8. Fees. The Borrower agrees to pay to the Administrative Agent, for its individual account, an annual Administrative Agent's fee as from time to time agreed to by the Borrower and Administrative Agent in writing. ARTICLE XI Miscellaneous 11.1. Assignments and Participations. (a) Each Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Loans and its Revolving Credit Commitment); provided, however, that (i) each such assignment shall be to an Eligible Assignee; (ii) except in the case of an assignment by a Lender to an affiliate of such Lender or a Controlled Investment Affiliate of such Lender, or to another Lender, or an assignment of all of a Lender's rights and obligations under this Agreement, any such partial assignment shall be in an amount at least equal to $4,000,000 or an integral multiple of $1,000,000 in excess thereof; 67 (iii) each such assignment by a Lender shall be of a constant, and not varying, percentage of all of its rights and obligations under this Agreement; and (iv) the parties to such assignment shall execute and deliver to the Administrative Agent for its acceptance an Assignment and Acceptance together with any Note subject to such assignment and a processing fee of $3,500. Upon execution, delivery, and acceptance of such Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of such assignment, have the obligations, rights, and benefits of a Lender hereunder and the assigning Lender shall, to the extent of such assignment, relinquish its rights and be released from its obligations under this Agreement. Upon the consummation of any assignment pursuant to this Section the assignor, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if requested, new Notes are issued to the assignor and the assignee. If the assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of Taxes in accordance with Section 4.6. (b) The Administrative Agent shall maintain at its address referred to in Section 11.2 (or such other address as the Administrative Agent may specify thereunder) a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Revolving Credit Commitment of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender (with respect to entries relating to such Lender) at any reasonable time and from time to time upon reasonable prior notice. (c) Upon its receipt of an Assignment and Acceptance executed by the parties thereto, together with any Note subject to such assignment and payment of the processing fee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit B hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the parties thereto. (d) Each Lender may sell participations to one or more Persons in all or a portion of its rights, obligations or rights and obligations under this Agreement (including all or a portion of its Revolving Credit Commitment or its Loans); provided, however, that (i) any such participation in a Revolving Credit Commitment, but not its Loans, shall be in an amount at least equal to $4,000,000 or an integral multiple of $1,000,000 in excess thereof, (ii) such Lender's obligations under this Agreement shall remain unchanged, (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the participant shall be entitled to the benefit of the yield protection provisions contained in Article IV and the right of set-off contained in Section 11.4, and (v) the Borrower shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the 68 obligations of the Borrower relating to its Loans and to approve any amendment, modification, or waiver of any provision of this Agreement (other than amendments, modifications, or waivers decreasing the amount of principal of or the rate at which interest is payable on such Loans, extending any scheduled principal payment date or date fixed for the payment of interest on such Loans, or extending its Revolving Credit Commitment). (e) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section 11.1 concerning assignments of Loans relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including any pledge or assignment by a Lender of any Loan to any Federal Reserve Bank in accordance with applicable law. (f) Any Lender may furnish any information concerning the Borrower or any of its Subsidiaries in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants); provided, however that such Lender shall (a) take reasonable and customary measures to safeguard the confidentiality of non-public information and (b) advise such assignees or participants of the confidentiality of such non-public information. 11.2. Notices. Any notice shall be conclusively deemed to have been received by any party hereto and be effective (i) on the day on which delivered (including hand delivery by commercial courier service) to such party (against receipt therefor), (ii) on the date of receipt at such address, telefacsimile number or telex number as may from time to time be specified by such party in written notice to the other parties hereto or otherwise received), in the case of notice by telegram, telefacsimile or telex, respectively (where the receipt of such message is verified by return), or (iii) on the fifth Business Day after the day on which mailed, if sent prepaid by certified or registered mail, return receipt requested, in each case delivered, transmitted or mailed, as the case may be, to the address, telex number or telefacsimile number, as appropriate, set forth below or such other address or number as such party shall specify by notice hereunder: (a) if to the Borrower: Malcolm E. McVay, Senior Vice President and Treasurer HEALTHSOUTH Corporation One HealthSouth Parkway Birmingham, Alabama 35243 Tel: 205-969-6140 Fax: 205-969-4620 Email: tadd.mcvay@healthsouth.com with a copy to: William W. Horton HEALTHSOUTH Corporation One HealthSouth Parkway 69 Birmingham, Alabama 35243 Tel: 205-969-4977 Fax: 205-969-4730 Email: bill.horton@healthsouth.com (b) if to the Administrative Agent: UBS AG STAMFORD BRANCH 677 Washington Boulevard Stamford, Connecticut 06901 Attention: Jennifer Poccia Tel: 203-719-3834 Fax: 203-719-3888 Email: jennifer.poccia@ubsw.com Reference: HealthSouth (c) if to the Lenders: At the addresses set forth on each Lender's Addendum and on the signature page of each Assignment and Acceptance. 11.3. No Waiver. No failure or delay on the part of the Administrative Agent, any Lender or the Borrower in the exercise of any right, power or privilege hereunder shall operate as a waiver of any such right, power or privilege nor shall any such failure or delay preclude any other or further exercise thereof. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. 11.4. Rights of Setoff; Adjustments. (a) The Borrower agrees that the Administrative Agent and each Lender shall have a Lien for all the Obligations of the Borrower upon all deposits or deposit accounts of any kind, or any interest in any deposits or deposit accounts thereof, now or hereafter pledged, mortgaged, transferred or assigned to the Administrative Agent or such Lender or otherwise in the possession or control of the Administrative Agent or such Lender (other than for safekeeping) for any purpose for the account or benefit of the Borrower and including any balance of any deposit account or of any credit of the Borrower with the Administrative Agent or such Lender, whether now existing or hereafter established and hereby authorizes the Administrative Agent and each Lender at any time or times from and after the occurrence of a Default or an Event of Default with or without prior notice to set off against and apply such balances or any part thereof to such of the Obligations of the Borrower to the Lenders then past due and in such amounts as they may elect, and whether or not the collateral or the responsibility of other Person primarily, secondarily or otherwise liable may be deemed adequate. (b) If any Lender (a "benefitted Lender") shall at any time receive any payment of all or part of the Loans owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, or otherwise), in a greater 70 proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans owing to it, or interest thereon, such benefited Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loans owing to it, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however that if all or any portion of such excess payment or benefits is thereafter recovered from such benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrower agrees that any Lender so purchasing a participation from a Lender pursuant to this Section 11.4 may, to the fullest extent permitted by law, exercise all of its rights of payment (including the right of set-off) with respect to such participation as fully as if such Person were the direct creditor of the Borrower in the amount of such participation. 11.5. Survival. All covenants, agreements, representations and warranties made herein shall survive the making by the Lenders of the Loans and the issuance of the Letters of Credit and the execution and delivery to the Lenders of this Agreement and shall continue in full force and effect so long as any of Obligations remain outstanding or any Lender has any commitment hereunder or the Borrower has continuing obligations hereunder unless otherwise provided herein. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and permitted assigns of such party and all covenants, provisions and agreements by or on behalf of the Borrower which are contained in the Loan Documents shall inure to the benefit of the successors and permitted assigns of the Lenders or any of them. 11.6. Expenses. The Borrower agrees (a) to pay or reimburse the Administrative Agent for all its reasonable and customary out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of, and any amendment, supplement or modification to, this Agreement or any of the other Loan Documents, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse the Administrative Agent and each Lender for all their reasonable costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, including without limitation, the reasonable fees and disbursements of their counsel, (c) to pay, indemnify and hold harmless the Administrative Agent and each Lender from any and all recording and filing fees and any and all liabilities with respect to, or resulting from any failure of Borrower to pay or delay of Borrower in paying, documentary, stamp, excise, withholding and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, and (d) from and after the occurrence of any Event of Default to pay, and indemnify and hold harmless the Administrative Agent and each Lender from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement or in any respect relating to the transactions contemplated hereby or thereby (all the foregoing, collectively, the "indemnified liabilities"); provided, however, that the Borrower shall have no obligation hereunder with respect to indemnified 71 liabilities arising from (i) the willful misconduct or gross negligence of the party seeking indemnification, as determined by a final judgment of a court of competent jurisdiction (ii) legal proceedings commenced against the Administrative Agent or any Lender by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such, (iii) any taxes imposed upon the Administrative Agent or any Lender other than the documentary, stamp, excise, withholding and similar taxes described in clause (c) above or any tax resulting from any change described in Section 4.1, which tax would be payable to Lenders by Borrower pursuant to Article IV, (iv) taxes imposed as a result of a transfer or assignment of any Loan or Revolving Credit Commitment, participation or assignment of a portion of rights therein, (v) any taxes imposed upon any assignee of any Loan or Revolving Credit Commitment, or (vi) by reason of the failure of the Administrative Agent or any Lender to perform its or their obligations under this Agreement. The agreements in this subsection shall survive the Revolving Credit Termination Date, the Facility Extension Loan Termination Date, if applicable, and the repayment of the Loans. 11.7. Amendments and Waivers. Any provision of this Agreement or any other Loan Document may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Lenders (and, if Article X or the rights or duties of the Administrative Agent are affected thereby, by the Administrative Agent); provided that no such amendment or waiver shall, unless signed by all the Lenders, (i) increase the Revolving Credit Commitments or the Letter of Credit Commitment of the Lenders, (ii) reduce the principal of or rate of interest on any Loan or any fees or other amounts payable hereunder, (iii) postpone any date fixed for the payment of any scheduled installment of principal of or interest on any Loan or any fees or other amounts payable hereunder or for termination of any Revolving Credit Commitment, (iv) change the percentage of the Revolving Credit Commitments or of the unpaid principal amount of the Loans, or the percentage of Lenders that constitute Required Lenders or (v) amend the definition of "Required Lenders" or amend Section 11.15. 11.8. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such fully-executed counterpart. 11.9. Waivers by Borrower. IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE LOANS, ANY OF THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT, OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER ARISING BETWEEN THE BORROWER AND THE LENDERS OR THE ADMINISTRATIVE AGENT, EACH PARTY TO THIS AGREEMENT HEREBY WAIVES, TO THE EXTENT PERMITTED BY LAW, TRIAL BY JURY IN CONNECTION WITH ANY SUCH LITIGATION. 11.10. Termination. The termination of this Agreement shall not affect any rights of the Borrower, the Lenders or the Administrative Agent or any obligation of the Borrower, the Lenders or the Administrative Agent, arising prior to the effective date of such termination, and the provisions hereof shall continue to be fully operative until all transactions entered into or rights created or obligations incurred prior to such termination have been fully disposed of, 72 concluded or liquidated and the Obligations arising prior to or after such termination have been irrevocably paid in full. The rights granted to the Administrative Agent for the benefit of the Lenders hereunder and under the other Loan Documents shall continue in full force and effect, notwithstanding the termination of this Agreement, until all of the Obligations have been paid in full after the termination hereof or the Borrower has furnished the Lenders and the Administrative Agent with an indemnification satisfactory to the Administrative Agent and each Lender with respect thereto. All representations, warranties, covenants, waivers and agreements contained herein shall survive termination hereof until payment in full of the Obligations unless otherwise provided herein. Notwithstanding the foregoing, if after receipt of any payment of all or any part of the Obligations, any Lender is for any reason compelled to surrender such payment to any Person because such payment is determined to be void or voidable as a preference, impermissible setoff, a diversion of trust funds or for any other reason, this Agreement shall continue in full force and the Borrower shall be liable to, and shall indemnify and hold such Lender harmless for, the amount of such payment surrendered until such Lender shall have been finally and irrevocably paid in full. The provisions of the foregoing sentence shall be and remain effective notwithstanding any contrary action which may have been taken by the Lenders in reliance upon such payment, and any such contrary action so taken shall be without prejudice to the Lenders' rights under this Agreement and shall be deemed to have been conditioned upon such payment having become final and irrevocable. 11.11. Governing Law. (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. (b) Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally: (i) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States for the Southern District of New York, and appellate courts from any thereof; (ii) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (iii) agrees that service of process in any such action or proceeding may be efected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 11.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; and (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. 73 11.12. Indemnification. In consideration of the execution and delivery of this Agreement by the Administrative Agent and each Lender and the extension of the Revolving Credit Commitments, the Borrower hereby indemnifies, exonerates and holds free and harmless the Administrative Agent and each Lender and each of their respective officers, directors, employees, affiliates and agents (collectively, the "Indemnified Parties") from and against any and all actions, causes of action, claims, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to, any of the following: (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan or supported by any Letter of Credit; (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties; (c) provided Lenders have no ownership interest in real property of Borrower, any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the release by the Borrower or any of its Subsidiaries or Controlled Partnerships of any hazardous waste material; or (d) provided Lenders have no ownership interest in real property of Borrower, the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from any real property owned or operated by the Borrower or any Subsidiary or Controlled Partnership of any hazardous waste material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any environmental laws), regardless of whether caused by, or within the control of, the Borrower or such Subsidiary or Controlled Partnerships, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The agreements in this Section 11.12 shall survive the Revolving Credit Termination Date, the Facility Extension Loan Termination Date, if applicable, and the repayment of the Loans. 11.13. Agreement Controls. In the event that any term of any of the Loan Documents other than this Agreement conflicts with any term of this Agreement, the terms and provisions of this Agreement shall control. 11.14. Integration. This Agreement and the other Loan Documents represent the final agreement between the parties as to the subject matter hereof or thereof and may not be 74 contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no oral agreements between the parties. 11.15. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of the Administrative Agent and all Lenders. The Administrative Agent and the Lenders may assign or transfer their interest hereunder but only as provided herein. 11.16. Severability. If any provision of this Agreement or the other Loan Documents shall be determined to be illegal or invalid as to one or more of the parties hereto, then such provision shall remain in effect with respect to all parties, if any, as to whom such provision is neither illegal nor invalid, and in any event all other provisions hereof shall remain effective and binding on the parties hereto. 11.17. Lender Addenda. Each initial Lender shall become a party to this Agreement by delivering to the Administrative Agent a Lender Addendum duly executed by such Lender, the Borrower and the Administrative Agent. 11.18. Designated Senior Indebtedness. For purposes of the Convertible Subordinated Debentures and the New Senior Subordinated Notes, the Obligations shall be designated "Designated Senior Indebtedness". 75 IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed and delivered in New York, New York by their proper and duly authorized officers as of the day and year first written above. HEALTHSOUTH CORPORATION By: /s/Malcolm E. McVay -------------------------------- Name: Malcolm E. McVay Title: Senior Vice President and Treasurer UBS AG, STAMFORD BRANCH, as Administrative Agent By: /s/Daniel W. Ladd III ----------------------------------- Name: Daniel W. Ladd III Title: Executive Director By: /s/Wilfred V. Saint --------------------------------- Name: Wilfred V. Saint Title: Associate Director EX-21 7 0007.txt EXHIBIT (21) EXHIBIT (21) Subsidiaries of HEALTHSOUTH Corporation (State of Organization) (States Where Qualified)
Advantage Health Corporation (DE) (CT)(FL)(MA)(ME)(PA)(VT) Advantage Health Development Corp. (MA) Advantage Health Harmarville Rehabilitation Corporation (PA) Advantage Health Nursing Care, Inc. (MA) Advantage Rehabilitation Clinics, Inc. (MA) (CT)(DE)(ME)(NJ)(NY) Advantage Beverly Corporation (MA) (51%) Advantage Health Eastern Rehabilitation Network, Inc. (CT) PTSMA, Inc. (CT) Rehabilitation Institute of Western Massachusetts, Inc. (MA) Baygan Development Corp. (FL) HRC Services, Inc. (PA) LH Real Estate Company, Inc. (MA) (99.5%) New England Home Health Care, Inc. (MA) (CT) (96.8%) Special Care Certified of Massachusetts, Inc. (MA) (NH) Special Care Home Health Services of Connecticut, Inc. (CT) Special Care Home Health Services of Maine, Inc. (ME) Special Care Nursing Services, Inc. (MA) (CT)(IL)(KS)(KY) (ME)(MO)(OH)(OK)(TX)(VT)(WI) New England Rehabilitation Center of Southern New Hampshire, Inc. (NH) (91.75%) New England Rehabilitation Hospital, Inc. (MA) New England Rehabilitation Hospital of Portland, Inc. (ME) New England Rehabilitation Management Co., Inc. (NH) (CT)(MA)(ME)(NY)(PA)(VT) New England Rehabilitation Services of Central Massachusetts, Inc. (MA) (33-1/3%) Winchester Gables, Inc. (MA) (51%) ASC Network Corporation (DE) (AL)(CA)(CT)(FL)(IL)(IN)(NJ)(NY)(PA)(TX) Castro Valley Surgery Center, Inc. (CA) Day SurgiCenters, Inc. (IL) Diversified Health Centers, Inc. (CA) Fort Wayne Care Center, Inc. (DE) (IN) HEALTHSOUTH S.C. at Pasteur Plaza, Inc. (DE) (TX) HEALTHSOUTH S.C. of Burlington, Inc. (DE) (VT) Loyola Ambulatory Surgery Center at Oakbrook, Inc. (IL) Palm Desert Care Center, Inc. (DE) (CA) Premier Ambulatory Surgery of Blackhawk, Inc. (CA) Premier Ambulatory Surgery of Duncanville, Inc. (DE) (TX) Premier Ambulatory Surgery of Forest Park, Inc. (TX) Premier Ambulatory Surgery of Garland, Inc. (DE) (TX) Premier Ambulatory Surgery of Mesquite, Inc. (TX) Premier Ambulatory Surgery of Tri-Valley, Inc. (CA) Premier Ambulatory Surgery of Walnut Creek, Inc. (CA) Premier MSO of Texas, Inc. (TX) San Diego Outpatient Surgical Center, Inc. (CA) SunSurgery Corporation (CT) Bridgeport Surgical Center, Inc. (CT) Danbury Surgical Center, Inc. (CT) Frost Street Outpatient Surgical Center, Inc. (CA) (52.44%) Hartford Surgical Center, Inc. (CT) (81%) Medical Surgical Centers of America, Inc. (CA) (95.4%) d/b/a Grossmont Surgery Center MMDC of New Jersey, Inc. (NJ) MMDC of Pennsylvania, Inc. (PA) Pomerado Outpatient Surgical Center, Inc. (CA) CMS Capital Ventures, Inc. (DE) (CA)(FL) (15% ownership) Diagnostic Health Corporation (DE) (AL)(AZ)(CA)(CO)(DC)(FL)(GA)(IA)(IL)(IN)(KY)(LA) (MA)(MD)(MO)(NC)(NJ)(NM)(NV)(OH)(OK)(PA)(SC)(TN)(TX)(UT)(VA)(WA) Health Images Aurora North, Inc. (GA) (Shell) Health Images Aurora South, Inc. (GA) (Shell) Health Images Baton Rouge North, Inc. (GA) (Shell) Health Images Baton Rouge South, Inc. (GA) (Shell) Health Images Beaumont, Inc. (GA) (Shell) Health Images Birmingham, Inc. (GA) (Shell) Health Images Colorado, Inc. (GA) (Shell) Health Images Columbia, Inc. (GA) (Shell) Health Images Dallas, Inc. (GA) (Shell) Health Images Denver, Inc. (GA) (Shell) Health Images Greenville, Inc. (GA) (Shell) Health Images Huntsville, Inc. (GA) (Shell) Health Images Knoxville, Inc. (GA) (Shell) Health Images Nashville, Inc. (GA) (Shell) Health Images Orange Park, Inc. (GA) (Shell) Health Images Port Arthur, Inc. (GA) (Shell) Health Images Stratford, Inc. (GA) (Shell) Health Images Tulsa, Inc. (GA) (Shell) Health Images (UK) plc (UK) HEALTHSOUTH ASC of Houston, Inc. (DE) (TX) HEALTHSOUTH Diagnostic Centers, Inc. (AK) (AL) Neuro Imaging Institute, Inc. (FL) Neuro Imaging Institute, II, Inc. (FL) Radiology Diagnostic Centers, Inc. (MD) The Optimal Open MRI, Inc. (FL) Disability and Impairment Evaluation Centers of America, Inc. (DE) (AL)(FL)(TX)(LA)(OK) DIECA, Inc. (DE) (LA) Doty-Moore Tower Services, Inc. (TX) (NV) Encinitas Physical Therapy and Sports Rehabilitation, Inc. (CA) Flatirons Physical Therapy, Inc. (CO) HEALTHSOUTH Argentina, Inc. (AL) HEALTHSOUTH Aviation, Inc. (AL) HEALTHSOUTH Community Re-Entry Center of Dallas, Inc. (DE) (TX) HEALTHSOUTH Doctors' Hospital, Inc. (DE) (FL) Hospital Health Systems, Inc. (FL) Doctors' Health Service Corporation (FL) Doctors' Scanning Associates, Inc. (FL) Doctors' Home Health, Inc. (FL) Doctors' Medical Equipment Corp. (FL) - 2 - HEALTHSOUTH Holdings, Inc. (DE) (AL)(AR)(CT)(DC)(GA)(IL)(IA)(IN)(KY)(LA) (MA)(MD)(ME)(MS)(MO)(NE)(NH)(NV)(NJ)(NC)(NY)(OK)(PA)(RI)(SC)(SD) (TN)(VA)(VT)(WA)(WI)(WV) Delaware Sportscare/Physical Therapy, Inc. (DE) Johnson Physical Therapy, Inc. (OH) Madison Rehabilitation Center, Inc. (CT) Penn-Mar Rehabilitative Services, Inc. (PA) Physical Therapy Professionals, Inc. (OK) Professional Therapy & Rehabilitation, Inc. (OK) HEALTHSOUTH Home Health Services of Connecticut, prn, Inc. (CT) HEALTHSOUTH International, Inc. (DE) (AL)(AU) HEALTHSOUTH IMC, Inc. (DE) (AK)(AR)(AZ)(CT)(FL)(IN)(IA)(KS)(LA)(MD)(MO)(NC) (NJ)(NM)(NY)(OH)(PA)(RI)(TN)(UT)(VA) HEALTHSOUTH Medical Center, Inc. (AL) HEALTHSOUTH Medical Clinic, Inc. (DE) (AK)(AL)(FL)(GA)(IA)(IL)(IN)(KY)(LA)(MA)(MD) (MO)(NE)(NV)(OK)(PA)(SD)(TN)(VA)(VT) HEALTHSOUTH Network Services, Inc. (DE) (AK)(AL)(AZ)(AR)(CA)(CO)(CT)(DC)(FL)(GA)(HI)(ID)(IL)(IN)(IA)(KS)(KY) (LA)(MA)(MD)(ME)(MI)(MN)(MO)(MS)(MT)(NC)(ND)(NE)(NH)(NJ)(NM)(NV) (OH)(OK)(OR)(PA)(RI)(SC)(SD)(TN)(TX)(UT)(VA)(VT)(WA)(WI)(WV)(WY) HEALTHSOUTH Network Services of New York IPA, Inc. (NY) HEALTHSOUTH Occupational Health & Injury Management of Colorado, Inc. (DE) (CO) HEALTHSOUTH Occupational Health & Rehabilitation Center, Inc. (DE) (FL) HEALTHSOUTH of Altoona, Inc. (DE) (MD)(PA)(WV) HEALTHSOUTH of Austin, Inc. (DE) (TX) HEALTHSOUTH of Birmingham, Inc. (DE) (AL) HEALTHSOUTH of Charleston, Inc. (DE) (SC) HEALTHSOUTH of Chesapeake, Inc. (DE) (MD) HEALTHSOUTH of Columbia, Inc. (DE) (MO) HEALTHSOUTH of Dallas, Inc. (DE) (TX) HEALTHSOUTH of Dothan, Inc. (AL) HEALTHSOUTH of East Tennessee, Inc. (DE) (TN) HEALTHSOUTH of Erie, Inc. (DE) (OH)(PA) HEALTHSOUTH of Fort Smith, Inc. (DE) (AR)(OK) HEALTHSOUTH of Gadsden, Inc. (DE) (AL) HEALTHSOUTH of Goshen, Inc. (DE)(NY) HEALTHSOUTH of Houston, Inc. (DE) (TX) HEALTHSOUTH of Louisiana, Inc. (DE) (LA) HEALTHSOUTH of Mechanicsburg, Inc. (DE) (PA) HEALTHSOUTH of Michigan, Inc. (DE) (MI) HEALTHSOUTH of Middle Tennessee, Inc. (DE) (TN) HEALTHSOUTH of Midland, Inc. (DE) (TX) HEALTHSOUTH of Missouri, Inc. (DE) (MO) HEALTHSOUTH of Montgomery, Inc. (AL) HEALTHSOUTH of Naples, Inc. (FL) HEALTHSOUTH of New Hampshire, Inc. (DE) (NH) HEALTHSOUTH of New Mexico, Inc. (NM) HEALTHSOUTH of Nittany Valley, Inc. (DE) (PA) HEALTHSOUTH of Oklahoma, Inc. (DE) (OK) HEALTHSOUTH of Ontario, Inc. (DE) (Canada) (BC) (Ont.) (Que.) (Alb.) HEALTHSOUTH of Pittsburgh, Inc. (DE) (PA) HEALTHSOUTH of Raritan Bay, Inc. (DE)(NJ) HEALTHSOUTH of Reading, Inc. (DE) (PA) - 3 - HEALTHSOUTH of Salem, Inc. (DE) (NH) HEALTHSOUTH of San Antonio, Inc. (DE) (TX) HEALTHSOUTH of Sewickley, Inc. (DE) (PA) HEALTHSOUTH of South Carolina, Inc. (DE) (SC) HEALTHSOUTH of Spring Hill, Inc. (DE) (FL) HEALTHSOUTH of St. Joseph, Inc. (DE) (MO) HEALTHSOUTH of Texarkana, Inc. (DE) (TX)(LA) HEALTHSOUTH of Texas, Inc. (TX) HEALTHSOUTH of Toms River, Inc. (DE) (NJ) HEALTHSOUTH of Treasure Coast, Inc. (DE) (FL) HEALTHSOUTH of Utah, Inc. (DE) (UT) HEALTHSOUTH of Virginia, Inc. (DE) (VA) HEALTHSOUTH of Witchita, Inc. (DE) (KS) HEALTHSOUTH of York, Inc. (DE) (PA) HEALTHSOUTH Orthopedic Services, Inc. (DE) (AL)(CA)(CO)(FL)(IL)(MD)(MO)(NJ) (NC)(OH)(OR)(PA)(SC)(TX)(WA)(WI) Northwestern Memorial/HEALTHSOUTH Sports Medicine & Rehabilitation Center, Inc. (IL) (50%) HEALTHSOUTH Properties Corporation (DE) (AL)(AZ)(CA)(FL)(IN)(KY)(NM)(OH) (TN)(TX)(WV) HEALTHSOUTH Real Property Holding Corporation (DE) (AL)(AZ)(FL)(NC)(TX) HEALTHSOUTH Rehabilitation Center, Inc. (SC) HEALTHSOUTH Specialty Hospital, Inc. (TX) HEALTHSOUTH Sub-Acute Center of Houston, Inc. (DE) (TX) HEALTHSOUTH Sub-Acute Center of Mechanicsburg, Inc. (DE) (PA) HEALTHSOUTH Surgery Centers-West, Inc. (DE) (AL)(AZ)(CA)(UT) HEALTHSOUTH Salt Lake Surgical Center, Inc. (DE) (UT) HEALTHSOUTH Surgical Center of Tuscaloosa, Inc. (AL) Horizon/CMS Healthcare Corporation (DE) (AL)(CA)(CO)(CT)(FL)(ID)(KS)(LA)(MD) (MA)(MI)(MT)(NE)(NV)(NM)(NC)(OH)(OK)(PA)(TX)(VA)(WI) Continental Medical Systems, Inc. (DE) (CA)(MD)(PA)(TX) Central Arizona Rehabilitation Hospital, Inc. (DE) (AZ) Central Arkansas Outpatient Centers, Inc. (DE) (AR) Chandler Rehabilitation Hospital, Inc. (DE) (AZ) Chico Rehabilitation Hospital, Inc. (DE) (CA) Clear Lake Rehabilitation Hospital, Inc. (TX) CMS Administrative Services, Inc. (DE) (CO) CMS Alexandria Rehabiliation, Inc. (DE) (LA) CMS Baton Rouge Rehabilitation, Inc. (DE) (LA) CMS Beaumont Rehabilitation, Inc. (TX) The Kelton Corporation (MA) (RI) Braintree Rehabilitation Ventures, Inc. (MA) KBT Corporation (MA) CMS Denver Rehabilitation, Inc. (DE) (CO) CMS Development and Management Company, Inc. (DE) (IN)(KS)(NV)(PA)(TX) CMS Elizabethtown, Inc. (DE) (KY) CMS Fayetteville Rehabilitation, Inc. (DE) (AR) CMS Fort Worth Rehabilitation, Inc. (TX) CMS Fresno Rehabilitation, Inc. (DE) (CA) CMS Houston Rehabilitation, Inc. (TX) CMS Jonesboro Rehabilitation, Inc. (DE) (AR) CMS Kansas City Rehabilitation, Inc. (DE) (KS) CMS Outpatient Centers of North Texas, Inc. (DE) (TX) CMS Outpatient Centers of South Texas, Inc. (DE) (TX) - 4 - CMS Outpatient Rehabilitation Services, Inc. (DE) (CO) CMS Pennsylvania, Inc. (DE) (PA) CMS Physician Services, Inc. (DE) CMS of Ohio, Inc. (DE) (OH) CMS Rehab Technologies Corp. (DE) (CA) CMS Rehabilitation Center of Hialeah, Inc. (DE) (FL) CMS Ruston Rehabilitation, Inc. (DE) (LA) CMS San Diego Rehab, Inc. (DE) (CA) CMS San Diego Surgical, Inc. (DE) (CA) CMS Sherwood Rehabilitation, Inc. (DE) (AR) CMS South Miami Rehab, Inc. (DE) (FL) CMS Sportsmed Clinic, Inc. (DE) (CA) CMS Topeka Rehabilitation, Inc. (DE) (KS) CMS Tri-Cities Rehabilitation Hospital, Inc. (DE) (TN) CMS Wichita Rehabilitation, Inc. (DE) (KS) CMS WorkAble, Inc. (DE) (AZ)(CA)(LA)(TX) CMS WorkAble of Paragould, Inc. (DE) (AR) CMS Worknet of Baton Rouge, Inc. (DE) (LA) CMSI Systems of Texas, Inc. (TX) Colorado Outpatient Centers, Inc. (DE) (CO) Continental Medical of Arizona, Inc. (DE) (AZ) Continental Medical of Colorado, Inc. (DE) (CO) Continental Medical Systems of Florida, Inc. (FL) Continental Medical of Kentucky, Inc. (DE) (KY) Continental Medical of Palm Beach, Inc. (DE) (FL) Continental Rehab of W.F., Inc. (TX) Continental Rehabilitation Hospital of Arizona, Inc. (DE) (AZ) Contra Costa Rehab Clinic, Inc. (DE) Fairland Nursing and Retirement Home, Inc. (DE) (MD) Great Plains Rehabilitation Hospital, Inc. (DE) (KS) HCA Wesley Rehabilitation Clinic of Liberal, Inc. (DE) (KS) HCA Wesley Rehabilitation Hospital, Inc. (DE) (KS) Hialeah Convalescent Centers, Inc. (FL) Indiana Outpatient Centers, Inc. (DE) (IN) Innovative Health Alliances, Inc. (DE) (FL)(IN)(KS)(KY)(MO)(TN)(TX) K.C. Rehabilitation Hospital, Inc. (DE) (KS)(MO) (50%) Kansas Outpatient Centers, Inc. (DE) (KS) Kansas Rehabilitation Hospital, Inc. (DE) (KS) (60%) Kentfield Hospital Corporation (CA) Kokomo Rehabilitation Hospital, Inc. (DE) (IN) Lafayette Rehabilitation Hospital, Inc. (DE) (LA) Louisiana Outpatient Centers, Inc. (DE) (LA) Maryland Rehabilitation Hospital, Inc. (DE) Medical Management Associates, Inc. (CA) Mancor Medical Management Company, Inc. (CA) Mid-America Outpatient Centers, Inc. (DE) (KS) National Physicians Equity Corporation (CA) Nevada Rehabilitation Hospital, Inc. (DE) (NV) North Louisiana Rehabilitation Center, Inc. (LA) Northeast Arkansas Rehabilitation Unit, Inc. (AR) Northeast Oklahoma Rehabilitation Hospital, Inc. (DE) (OK) Northern Virginia Rehabilitation Hospital, Inc. (DE) (VA) The Nursing Home at Chevy Chase, Inc. (DE) (MD) Palm Springs Rehabilitation Hospital, Inc. (DE) (CA) Park Manor Nursing Home, Inc. (DE) (NJ) - 5 - RCM Management Company, Inc. (DE) (MA) Rehab Concepts Corp. (DE) (CA)(FL)(IN)(LA)(NV)(OK)(TX) Rehab Resources, Inc. (DE) (CT)(NJ)(NY) Rehabilitation Hospital of Colorado Springs, Inc. (DE) (CO) Rehabilitation Hospital of Fort Wayne, Inc. (DE) (IN) Rehabilitation Hospital of Nevada - Las Vegas, Inc. (DE) (NV) Rehabilitation Hospital of Plano, Inc. (TX) Romano Rehabilitation Hospital, Inc. (TX) SD Acquisition Corporation (DE) (CA) SD Partners, Inc. (DE) SelectRehab, Inc. (DE) (AZ)(AR)(CA)(CT)(FL)(IN)(LA)(MD)(MI)(MS)(NM) (OH)(OK)(PA)(TN)(TX) Sherwood Rehabilitation Hospital, Inc. (DE) (AR) Sierra Pain and Occupational Rehabilitation Center, Inc. (DE) (NV) Southeast Texas Rehabilitation Hospital, Inc. (TX) Tarrant County Rehabilitation Hospital, Inc. (TX) Terre Haute Rehabilitation Hospital, Inc. (DE) (IL)(IN) Texas Hospital Partners, Inc. (DE) Tulsa Rehabilitation Hospital, Inc. (DE) (OK) Tyler Rehabilitation Hospital, Inc. (TX) Western Neuro Care, Inc. (DE) (CA) Western Neurologic Residential Centers (CA) Western Neuro Residential, Inc. (DE) (CA) Wichita Falls Rehabilitation Hospital, Inc. (TX) Wilson Lane Holdings, Inc. (DE) Desert Corporation (NV) Eagle Rehab Corporation (DE) (AZ)(AR)(CA)(CO)(FL)(IL)(IN)(KS)(LA)(MD)(MI) (MS)(NV)(OH)(OR)(PA)(TX)(VA)(WA) Fankhauser Physical Therapy Orthopedic & Sports Rehabilitation, Inc. (WA) Northwestern Sports Clinic, Inc. (WA) Physical Therapy & Athletic Rehabilitation Associates, Inc. (WA) Physical Therapy Specialties, Inc. (WA) Sampson & Delilah, Inc. (WA) Spokane Associated Physical Therapists, Inc. (WA) Spokane Sports & Orthopedic Therapy, Inc. (WA) Pacific Rehabilitation & Sports Medicine, Inc. (DE) (MS)(OR)(WA) Dade Physical Therapy Rehab, Inc. (FL) Leeward Back and Neck, Inc. (HI) Longview Physicians Physical Therapy Service, Inc. (WA) Pacific Rehab of Alabama, Inc. (AL) Pacific Rehab of Mississippi, Inc. (MS) PR Acquisition Corporation (CA) (NV) The Rehab Group, Inc. (TN) (AL)(AR)(GA)(KY)(MS)(VA) The Rehab Clinic Richmond, Inc. (VA) The Rehab Group - Brunswick, Inc. (TN) Eagle Rehab Corporation (WA) (WA) (ID) Great Eastern Nursing Corp. (TX) (NJ) Greenery Securities Corp. (DE) (MA) HHC Acquisition Corp. (DE) (NM)(TX) HHC Nursing Facilities, Inc. (DE) (ID)(NM)(OK)(TX) Home Care Management Corp. (NV) Home Health Associates, Inc. (NV) Horizon Assisted Living Services, Inc. (DE) (TX) Horizon Facilities Management, Inc. (DE) (MI)(OK)(TX) Horizon Holding, Inc. (DE) (KS)(NM) - 6 - Horizon Hospice Care, Inc. (DE) (LA)(MA)(MI)(NV)(NM)(NC)(OH)(OK)(PA)(TX) Horizon Management Holding, Inc. (DE) (NM) Horizon Medical Management, Inc. (DE) (FL) Orthopaedic Associates of Broward, Inc. (FL) Horizon Medical Specialties, Inc. (DE) (AR)(FL)(KY)(LA)(MA)(MI)(MT)(NV)(NM) (OH)(TN)(TX) Horizon MDS Corporation (DE) (NV)(NM) Horizon Sleep Diagnostics Corporation (DE) (NV)(NM)(TN)(TX) Horizon Therapy Holdings, Inc. (DE) CMS Therapies Provider, Inc. (NC) (AL)(AR)(CA)(FL)(GA)(IL)(IN)(IA)(KS) (KY)(LA)(MD)(MI)(MS)(MO)(NC)(OH)(PA)(SC)(TN)(TX)(VA)(WI) Baton Rouge Rehab, Inc. (DE) (LA)(MS) Hospital HomeCare Corporation (TX) Intra-City Enterprises, Inc. (OH) Medical Innovations, Inc. (DE) (AL)(AR)(FL)(IL)(LA)(OK)(TX) Medical Innovations (Texas), Inc. (TX) Medical Innovations of New Jersey, Inc. (DE) (NJ) Medical Innovations Hospice, Inc. (TX) Medical Innovations of Virginia, Inc. (TX) (VA) PRN Home Health Care, Inc. (NV) (CA) Midwest Regional Rehabilitation Center, Inc. (DE) (MI)(NM) Nevada Home Care Partners, Inc. (NV) Northwest Arkansas Physical Therapy, Inc. (TN) (AR) Nurses PRN of Virginia, Inc. (TX) (VA) Nursing Innovations, Inc. (TX) Orange Rehabilitation Hospital, Inc. (DE) (CA) Physicians Hospital for Extended Care (NV) Physician's Visiting Nurses Services, Inc. (TX) San Jacinto Management Company (TX) Southern Nevada Hospice, Inc. (NV) Vegas Valley Convalescent Center, Inc. (NV) The Hitchcock Groups, Inc. (IN) Lakeshore System Services of Florida, Inc. (FL) MCA Sports of Amarillo, Inc. (TX) National Imaging Affiliates, Inc. (DE) (TN) Heritage Medical Services of South Carolina, Inc. (SC) National Imaging Affiliates of Fayetteville, Inc. (TN) (NC) (NIA is 80% stockholder) National Imaging Affiliates of Indian River, Inc. (TN) (FL) Heritage Medical Services of Florida, Inc. (FL) San Angelo Imaging Affiliates, Inc. (TX) National Imaging Affiliates of Washington, Inc. (TN) (WA) NIA Cancer Treatment Center, Inc. (TN) (TX) Paces Imaging, Inc. (GA) National Surgery Centers, Inc. (DE) (IL) Bettom Medical Management, Inc. (CT) Connecticut Surgical Center, Inc. (CT) Endoscopy Center Affiliates, Inc. (DE) (CA)(IL)(TX) KPSC, Inc. (WA) National Surgery Centers - Bakersfield, Inc. (CA) National Surgery Centers - Santa Monica, Inc. (CA) Northern Rockies Surgicenter, Inc. (MT) Eye Microsurgery Center, Inc. (MT) NSC Atlanta, Inc. (DE) (GA) NSC Auburn, Inc. (CA) - 7 - NSC Brownsville, Inc. (TX) NSC Channel Islands, Inc. (CA) NSC Connecticut, Inc. (CT) NSC Dallas, Inc. (TX) NSC Edmond, Inc. (OK) NSC Elizabethtown, Inc. (KY) NSC Fayetteville, Inc. (NC) NSC Greensboro, Inc. (NC) NSC Greensboro West, Inc. (NC) NSC Houston, Inc. (TX) NSC Jacksonville, Inc. (FL) NSC Kent, Inc. (OH) NSC Lancaster, Inc. (CA) NSC Las Vegas, Inc. (NV) NSC Las Vegas East, Inc. (NV) NSC Manahawkin, Inc. (NJ) NSC Miami, Inc. (FL) NSC Midwest City, Inc. (OK) NSC Norman, Inc. (OK) NSC Oklahoma City, Inc. (OK) NSC Phoenix, Inc. (AZ) NSC Port St. Lucie, Inc. (FL) NSC Provo, Inc. (UT) NSC Sarasota, Inc. (DE) (FL) NSC Seattle, Inc. (WA) NSC St. Augustine, Inc. (FL) NSC Upland, Inc. (CA) Walk-In And Out Surgery Center, Inc. (KY) NovaCare SMC, Inc. (MD) Orthopaedic Surgeons, Inc. (DE) (VA) Physical Therapeutix, Inc. (MI) Physician Practice Management Corporation (DE) (AL)(FL)(VA) Professional Sports Care Management, Inc. (DE) (CT)(NJ)(NY) Ortho Network Services, Inc. (NY) Professional Therapy Systems, Inc. (TN) ReadiCare, Inc. (DE) (CA) CHEC Medical Centers, Inc. (WA) Rebound, Inc. (DE) (AL)(FL)(GA)(LA)(MO)(OH)(SC)(TN)(TX)(WV) Rehabilitation Hospital Corporation of America, Inc. (DE) (IN)(MD)(PA)((TX)VA)(WV) Source Medical Solutions, Inc. (DE) (AL)(CA) South Florida Orthopaedics, Inc. (FL) Surgery Center Holding Corporation (DE) (IL)(NC) Birmingham Outpatient Surgical Center, Inc. (AL) Chiron, Inc. (NV) HEALTHSOUTH S.C. of Charlotte, Inc. (DE) (NC) HEALTHSOUTH S.C. of Greensboro, Inc. (DE) (NC) HEALTHSOUTH S.C. of Hickory, Inc. (DE) (NC) HEALTHSOUTH S.C. of Southern Pines, Inc. (DE) (NC) Lakeland Physicians Medical Building, Inc. (MS) Northwest Surgicare, Inc. (DE) (IL) St. Cloud Surgical Center, Inc. (MN) Surgery Center of Des Moines, Inc. (IA) Surgicare of Belleville, Inc. (IL) Surgicare of Gulfport, Inc. (MS) Surgicare of Jackson, Inc. (MS) - 8 - Surgicare of Joliet, Inc. (IL) Surgicare of Laguna Hills, Inc. (CA) Surgicare of La Veta, Inc. (CA) Surgicare of Minneapolis, Inc. (MN) Surgicare of Mississippi, Inc. (MS) Surgicare of Mobile, Inc. (AL) Surgicare of Oceanside, Inc. (CA) Surgicare of Orange, Inc. (CA) Surgicare of Owensboro, Inc. (KY) Surgicare of Reno, Inc. (NV) Surgicare of Salem, Inc. (OR Surgicare Outpatient Center of Baton Rouge, Inc. (LA) SurgiCenters of Southern California, Inc. (CA) Surgical Center of Wichita Falls, Inc. (TX) Waco Outpatient Surgical Center, Inc. (TX) Woodward Park Surgicenter, Inc. (CA) Surgical Care Affiliates, Inc. (DE) (AL)(TN)(PA) Alaska Surgery Center, Inc. (AK) All-Care Surgery Center, Inc. (MD) Aurora-SC, Inc. (CO) Bakersfield-SC, Inc. (TN) (CA) Camp Hill-SCA Centers, Inc. (PA) The Center for Day Surgery, Inc. (AR) Charlotte-SC, Inc. (NC) Chattanooga-SC, Inc. (TN) Coral Springs-SC, Inc. (TN) (FL) El Paso-SC, Inc. (TX) Fort Worth-SC, Inc. (TX) Glenwood-SC, Inc. (TN) (CA) Golden-SCA, Inc. (CO) Greenpark Surgery Center, Inc. (TX) Greenville Surgery Center, Inc. (TX) HEALTHSOUTH-Montgomery, Inc. (TN) (OH) HEALTHSOUTH Oak Leaf Surgery Center, Inc. (DE) (WI) HEALTHSOUTH of Easton, Inc. (DE) (MD) HEALTHSOUTH of Whitehall, Inc. (TN) (OH) HEALTHSOUTH P.M.C. of Sacramento, Inc. (DE) (CA) HEALTHSOUTH S.C. of Aiken, Inc. (DE) (SC) HEALTHSOUTH S.C. of Alhambra, Inc. (DE) (CA) HEALTHSOUTH S.C. of Arrowhead Park, Inc. (DE) (OH) HEALTHSOUTH S.C. of Aventura, Inc. (DE) (FL) HEALTHSOUTH S.C. of Cape Girardeau, Inc. (DE) (MO) Missouri Surgery Center, Inc. (MO) HEALTHSOUTH S.C. of Cleveland, Inc. (DE) (OH) HEALTHSOUTH S.C. of Colorado Springs, Inc. (DE) (CO) HEALTHSOUTH S.C. of Columbus, Inc. (DE) (OH) HEALTHSOUTH S.C. of D.C., Inc. (DE) (DC) HEALTHSOUTH S.C. of East Rutherford, Inc. (DE)(NJ) HEALTHSOUTH S.C. of Eldersburg, Inc. (DE) (MD) HEALTHSOUTH S.C. of Ellicott City, Inc. (DE) (MD) HEALTHSOUTH S.C. of Henderson, Inc. (DE) (NV) HEALTHSOUTH S.C. of Huntington Beach, Inc. (DE) (CA) HEALTHSOUTH S.C. of Kendall, Inc. (DE) (FL) HEALTHSOUTH S.C. of Kirkwood, Inc. (DE) (MO) HEALTHSOUTH S.C. of Maui, L.P. (TN) (HI) - 9 - HEALTHSOUTH S.C. of Montgomery, Inc. (DE) (OH) HEALTHSOUTH S.C. of Muskogee (DE) (OK) HEALTHSOUTH S.C. of New Jersey, Inc. (DE) (NJ) HEALTHSOUTH S.C. of Norwalk, Inc. (DE) (CT) HEALTHSOUTH S.C. of Odessa, Inc. (DE) (TX) HEALTHSOUTH S.C. of Park City, Inc. (DE) (UT) HEALTHSOUTH S.C. of Pinole, Inc. (DE) (CA) HEALTHSOUTH S.C. of Riverside, Inc. (DE) (CA) HEALTHSOUTH S.C. of Riverton, Inc. (DE) (WY) HEALTHSOUTH S.C. of San Angelo, Inc. (DE) (TX) HEALTHSOUTH S.C. of San Marcos, Inc. (DE) (TX) HEALTHSOUTH S.C. of Santa Monica, Inc. (DE) (CA) HEALTHSOUTH S.C. of Scottsdale-Bell Road, Inc. (DE) (AZ) HEALTHSOUTH S.C. of Tampa, Inc. (DE) (FL) HEALTHSOUTH S.C. of Waco, Inc. (DE) (TX) HEALTHSOUTH S.C. of Wilkes-Barre, Inc. (DE) (PA) HEALTHSOUTH S.C. of Ygnacio Valley, Inc. (DE) (CA) HEALTHSOUTH Surgery Center of Alamo Heights, Inc. (DE) (TX) HEALTHSOUTH Surgery Center of Baltimore, Inc. (DE) (MD) HEALTHSOUTH Surgery Center of Baton Rouge, Inc. (DE) (LA) HEALTHSOUTH Surgery Center of Clearwater, Inc. (DE) (FL) HEALTHSOUTH Surgery Center of Columbus, Inc. (DE) (OH) HEALTHSOUTH Surgery Center of Crestview, Inc. (DE) (FL) HEALTHSOUTH Surgery Center of Dayton, Inc. (DE) (OH) HEALTHSOUTH Surgery Center of Fairfield, Inc. (DE) HEALTHSOUTH Surgery Center of Kenosha, Inc. (DE) (WI) HEALTHSOUTH Surgery Center of Louisville, Inc. (DE) (KY) HEALTHSOUTH Surgery Center of Loveland, Inc. (DE) (CO) HEALTHSOUTH Surgery Center of New Jersey, Inc. (DE) (NJ) HEALTHSOUTH Surgery Center of Pecan Valley, Inc. (DE) (TX) HEALTHSOUTH Surgery Center of Pinellas Park, Inc. (DE) (FL) HEALTHSOUTH Surgery Center of Reading, Inc. (DE) (PA) HEALTHSOUTH Surgery Center of San Buenaventura, Inc. (DE) (CA) HEALTHSOUTH Surgery Center of Scottsdale, Inc. (DE) (AZ) HEALTHSOUTH Surgery Center of Spokane, Inc. (DE) (WA) HEALTHSOUTH Surgery Center of Springfield, Inc. (DE) (OH) HEALTHSOUTH Surgery Center of Summerlin, Inc. (DE) (NV) HEALTHSOUTH Surgery Center of Toledo, Inc. (DE) (OH) HEALTHSOUTH Surgery Center of West Columbus, Inc. (DE) HEALTHSOUTH Surgery Center of Westerville, Inc. (DE) HEALTHSOUTH Surgery Center of Westlake, Inc. (DE) (OH) HEALTHSOUTH Surgery Center of Wilmington, Inc. (DE) Knoxville-SCA Surgery Center, Inc. (TN) Lancaster Medical Centre, Inc. (PA) Lancaster Surgical Center, Inc. (PA) Lexington-SC, Inc. d/b/a Lexington-SC Partners, Ltd. (KY) Lexington-SC Properties, Inc. (KY) Little Rock-SC, Inc. (AR) Louisville-SC Properties, Inc. (KY) Maryland-SCA Centers, Inc. (MD) Nashville-SCA Surgery Centers, Inc. (TN) Oshkosh-SCA Surgery Center, Inc. (WI) Pueblo-SCA Surgery Center, Inc. (CO) Redlands-SCA Surgery Centers, Inc. (CA) San Antonio Surgery Center, Inc. (TX) - 10 - San Luis Obispo-SC, Inc. (TN) SC-Wilson, Inc. (NC) SCA-Albuquerque, Inc. (NM) SCA-Albuquerque Surgery Properties, Inc. (NM) SCA-Arlington Surgery, Inc. (TX) SCA-Blue Ridge, Inc. (TN) (NC) SCA Cabell Development Corporation (WV) SCA Cabell, Inc. (WV) SCA-Charleston, Inc. (SC) SCA-Citrus, Inc. (TN) (FL) SCA-Colorado Springs, Inc. (CO) SCA-Conroe, Inc. (TN) (TX) SCA-Dalton, Inc. (TN) SCA-Development, Inc. (TN) (MO) SCA-Dothan, Inc. (TN) (AL) SCA-Dover, Inc. (DE) SCA-Eugene, Inc. (TN) (OR) SCA-Evansville, Inc. (IN) SCA-Florence, Inc. (TN) (AL) SCA-Fort Collins, Inc. (CO) SCA-Fort Walton, Inc. (TN) (FL) SCA-Ft. Myers, Inc. (FL) SCA-Gadsden, Inc. (AL) Gadsden Surgery Center, Inc. (AL) SCA-Gainesville, Inc. (TN) (GA) SCA-Green River, Inc. (TN) (WA) SCA-Hamilton Development Corp. (TN) SCA-HHI, Inc. (TN) Health Horizons of San Francisco, Inc. (TN) (CA) SCA-Greenville East, Inc. (TN) (SC) SCA-Honolulu, Inc. (TN) (HI) SCA-Indianapolis, Inc. (IN) SCA Investment Company (NV) SCA-JV, Inc. (IL) WI) SCA-Knoxville/St. Mary's, Inc. (TN) SCA-Lake Forest, Inc. (TN) (LA) SCA-Little Rock Development Corp. (AR) SCA-Mecklenberg Development Corp. (NC) SCA-Mobile, Inc. (AL) SCA-Mobile Properties, Inc. (AL) SCA-Mt. Pleasant, Inc. (TN) (PA) SCA-North Indianapolis, Inc. (IN) SCA-Ohio Valley, Inc. (TN) SCA-Paoli, Inc. (TN) (PA) SCA-Plano, Inc. (TX) SCA-Roseland, Inc. (NJ) SCA-San Jose, Inc. (CA) SCA-San Luis Obispo, Inc. (CA) SCA-Santa Rosa, Inc. (TN) (CA)(NV) SCA-Sarasota, Inc. (FL) SCA-Shelby Development Corp. (TN) SCA-South Jersey, Inc. (NJ) SCA-St. Joseph Missouri, Inc. (TN) (MO) SCA-St. Petersburg, Inc. (FL) SCA-Tampa, Inc. (FL) - 11 - SCA-Ukiah, Inc. (TN) (CA) SCA-Wausau, Inc. (TN) (WI) SCA-Winter Park, Inc. (TN) (FL) SCA-Yuma, Inc. (TN) (AZ) Scranton-SC, Inc. (PA) Shelby Surgery Properties, Inc. (TN) Springfield-SC, Inc. (MA) Surgery Center of Louisville, Inc. (KY) Surgical Services of Sarasota, Inc. (FL) Wauwatosa Outpatient Surgery Center, Inc. (WI) Surgical Health Corporation (DE) (AL)(ID) Healthcare Real Estate Holdings II, Inc. (GA) (MO) HEALTHSOUTH Salt Lake Surgical Center, Inc. (DE) (UT) Heritage Medical Services of Maryland, Inc. (TN) (MD) Heritage Medical Services of Texas, Inc. (TX) Heritage Surgical Associates of Chula Vista, Inc. (CA) HSC of Beaumont, Inc. (TN) (TX) HSC of Boca Raton, Inc. (FL) HSC of Bradenton, Inc. (TN) (FL) HSC of Chesapeake, Inc. (TN) HSC of Cincinnati, Inc. (TN) (OH) HSC of Clarksville, Inc. (TN) HSC of Ft. Pierce, Inc. (GA) (FL) HSC of Gulf Coast, Inc. (TN) HSC of Houston, Inc. (TN) (TX) HSC of Nashville, Inc. (TN) HSC of Southwest Houston, Inc. (TN) (TX) HSC of Vero Beach, Inc. (TN) (FL) HVPG of California, Inc. (CA) La Jolla Health Systems, Inc. (CA) Midwest Anesthesia, Inc. (MO) (IL) Newport Beach Health Systems, Inc. (CA) North County Outpatient Management, Inc. (GA) Outpatient Surgery Center, Inc. (MO) SHC Amarillo, Inc. (GA) SHC Atlanta, Inc. (GA) SHC Austin, Inc. (GA) SHC Boca Raton Laser, Inc. (GA) (FL) SHC Central Florida, Inc. (GA) (FL) SHC Chattanooga, Inc. (GA) (TN) SHC Gwinnett, Inc. (GA) SHC Hawthorn, Inc. (GA) (IL) SHC Management Corporation (GA) (AZ)(FL)(IL)(MO)(OK)(TX) SHC Melbourne, Inc. (GA) (FL) SHC Midwest City, Inc. (GA) (OK) SHC Naples, Inc. (FL) SHC North Dade, Inc. (GA) (FL) SHC North Shore, Inc. (GA) (IL) SHC Northlake, Inc. (GA) SHC Oakwater, Inc. (GA) (FL) SHC Oklahoma City, Inc. (GA) (OK) SHC Palms Wellington, Inc. (GA) (FL) SHC Phoenix, Inc. (GA) (AZ) SHC San Diego, Inc. (GA) (CA) SHC Tri-County, Inc. (GA)(MO) - 12 - SHC West County, Inc. (GA) South County Outpatient Management, Inc. (MO) Surgical Health of Orlando, Inc. (FL) Surgical Health of of San Antonio, Inc. (TX) Tesson Ferry Anesthesia, Inc. (MO) Tesson Ferry Recovery, Inc. (MO) Tesson Ferry Medical Management, Inc. (MO) The Woodlands Surgery Systems, Inc. (DE) (TX) Sigma Health Properties, Inc. (FL) The Company Doctor (DE) (AR)(TX) Emergency Occupational Physician's Services, Inc. (TX) Andicare, Inc. (LA) Tuckahoe Surgery Center, Inc. (VA) West Virginia Rehabilitation Hospital, Inc. (WV)
- 13 - EX-23 8 0008.txt EXHIBIT 23 EXHIBIT (23) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-13489) pertaining to the 1984 Incentive Stock Option Plan, in the Registration Statement (Form S-8 No. 33-23642) pertaining to the 1988 Non-Qualified Stock Option Plan, in the Registration Statement (Form S-8 No. 33-34908) pertaining to the 1989 Stock Option Plan, in the Registration Statement (Form S-8 No. 33-40798) pertaining to the 1990 Stock Option Plan, in the Registration Statement (Form S-8 No. 33-50440) pertaining to the 1991 Stock Option Plan, in the Registration Statement (Form S-8 No. 33-64308) pertaining to the 1992 Stock Option Plan, in the Registration Statement (Form S-8 No. 33-64316) pertaining to the 1993 Consultants' Stock Option Plan, in the Registration Statement (Form S-8 No. 33-55303) pertaining to the 1993 Stock Option Plan, in the Registration Statements (Form S-8 No. 333-02221, 333-42301, 333-49345 and 333-33686) pertaining to the 1995 Stock Option Plan, in the Registration Statement (Form S-8 No. 33-60231) pertaining to the Surgical Health Corporation and Heritage Surgical Corporation Stock Option Plans, in the Registration Statement (Form S-8 No. 33-64615) pertaining to the Sutter Surgery Centers, Inc. Stock Option Plans, in the Registration Statement (Form S-8 No. 333-00565) pertaining to the Surgical Care Affiliates Stock Option Plans, in the Registration Statement (Form S-8 No. 333-12111) pertaining to the Professional Sports Care Management, Inc. Stock Option Plans, in the Registration Statement (Form S-8 No. 333-18035) pertaining to the ReadiCare Stock Option Plans, in the Registration Statement (Form S-3 No. 333-25921) pertaining to the stock purchase warrant issued to Robert D. Carl, III, in the Registration Statement (Form S-8 No. 333-24429) pertaining to the Health Images, Inc. Stock Option Plans, in the Registration Statement (Form S-3 No. 333-39825) pertaining to the resale of shares of Common Stock issued to the stockholders of National Imaging Affiliates, Inc., in the Registration Statement (Form S-8 No. 333-42307) pertaining to the 1997 Stock Option Plan, in the Registration Statement (Form S-8 No. 333-42305) pertaining to the Amended and Restated 1993 Consultants' Stock Option Plan, in the Registration Statement (Form S-8 No. 333-42301) pertaining to the Horizon/CMS Healthcare Corporation Stock Option Plans, in the Registration Statement (Form S-8 No. 333-59887) pertaining to the National Surgery Centers, Inc. Stock Option Plans, in the Registration Statement (Form S-8 No. 333-59895) pertaining to The Company Doctor Amended and Restated Omnibus Stock Plan of 1995, in the Registration Statement (Form S-3 No. 333-52237) pertaining to the 3.25% Convertible Subordinated Debentures due 2003, in the Registration Statement (Form S-8 No. 333-80073) pertaining to the 1999 Exchange Stock Option Plan, and in the Registration Statement (Form S-4 No. 333-49636) pertaining to the 10-3/4% Senior Subordinated Notes due 2008 of our report dated March 6, 2001, with respect to the consolidated financial statements and financial statement schedule of HEALTHSOUTH Corporation and Subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 2000. ERNST & YOUNG LLP Birmingham, Alabama March 23, 2001 -----END PRIVACY-ENHANCED MESSAGE-----