SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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HEALTHSOUTH CORPORATION
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(Name of Registrant as Specified In Its Charter)
HEALTHSOUTH CORPORATION
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HEALTHSOUTH CORPORATION
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Our 2002 annual meeting of stockholders will be held at One HealthSouth
Parkway, Birmingham, Alabama on Thursday, May 16, 2002, beginning at 2:00 p.m.,
Central Daylight Time. The meeting is being held for the following purposes:
(1) To elect nine Directors to serve until our next annual meeting of
stockholders and until their successors shall have been duly elected
and qualified; and
(2) To act on any other matter that may properly come before the annual
meeting or any adjournment(s) or postponement(s) of the annual
meeting.
All stockholders of record who own shares of HEALTHSOUTH common stock at
the close of business on March 28, 2002 are entitled to receive notice of and to
vote at the annual meeting.
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WHETHER OR NOT YOU INTEND TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING FORM OF PROXY, USING THE
ENCLOSED PREPAID ENVELOPE. IF YOU ATTEND THE ANNUAL MEETING IN PERSON, YOU MAY
REVOKE YOUR PROXY AND VOTE IN PERSON. ATTENDANCE AT THE MEETING DOES NOT OF
ITSELF REVOKE YOUR PROXY.
--------------------------------------------------------------------------------
BRANDON O. HALE
Secretary
April 12, 2002
HEALTHSOUTH CORPORATION
PROXY STATEMENT
INTRODUCTION
This proxy statement and the accompanying form of proxy are being sent to
our stockholders in connection with our solicitation of proxies for use at the
2002 annual meeting of our stockholders or at any adjournment(s) or
postponement(s) of the annual meeting. The annual meeting will be held on May
16, 2002, beginning at 2:00 p.m., Central Daylight Time, at our principal
executive offices, located at One HealthSouth Parkway, Birmingham, Alabama. We
encourage all of our stockholders to vote at the annual meeting, and we hope
that the information contained in this document will help you decide how you
wish to vote at the annual meeting. These proxy solicitation materials are being
sent to our stockholders on or about April 12, 2002.
THE ANNUAL MEETING
Purpose of the Annual Meeting
The purpose of the annual meeting is to elect a Board of Directors to serve
until our 2003 annual meeting of stockholders and until their successors are
duly elected and qualified to act.
Voting at the Annual Meeting; Proxies
To vote at the annual meeting, you may attend the annual meeting and vote
your shares of HEALTHSOUTH common stock in person, or you may appoint a person
to act as your proxy who will vote your shares at the annual meeting in
accordance with your instructions. If you wish to appoint a proxy who will vote
your shares of HEALTHSOUTH common stock on your behalf at the annual meeting,
you should complete, date, sign and return the form of proxy accompanying this
document by using the enclosed prepaid envelope. If you properly complete, date
and sign your proxy and it is received by Mellon Investor Services, L.L.C.
before, or by us at, the annual meeting, your shares of HEALTHSOUTH common stock
will be voted in accordance with the voting instructions you completed on the
proxy, unless you have validly revoked the proxy. If you properly date and sign
and return a proxy, but you fail to complete the voting instructions, your
shares of HEALTHSOUTH common stock will be voted FOR the election of each
nominee named under the section of this document captioned "Election of
Directors".
We do not currently anticipate that any other matters will be presented for
action at the annual meeting. If any other matters are properly presented for
action, the person(s) named on your proxy will vote your shares of HEALTHSOUTH
common stock on these other matters in their discretion and best judgment, under
the discretionary authority you have granted to them in your proxy.
You may revoke your proxy at any time prior to its exercise at the annual
meeting by:
o writing to us notifying us that you wish to revoke your proxy;
o properly completing, dating, signing and returning to us another proxy
which is granted and dated after any other proxy previously granted by
you; or
o attending the annual meeting and voting in person.
Notices of revocation should be addressed to us as follows:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Brandon O. Hale, Secretary
Notices of revocation of your proxy must be received by us at the address
above as originals sent by U.S. mail or overnight courier. You may not revoke
your proxy by any other means.
If you grant a proxy, you are not prevented from attending the annual
meeting and voting in person. However, your attendance at the annual meeting
will not by itself revoke a proxy that you have previously granted; you must
vote in person at the annual meeting to revoke your proxy. If you have
instructed your broker, nominee, custodian or other fiduciary to vote your
shares of HEALTHSOUTH common stock, you must contact that fiduciary and follow
its directions on how to change your vote.
Quorum; Voting Rights
Our Board of Directors has determined that those stockholders who are
recorded in our record books as owning shares of HEALTHSOUTH common stock as of
the close of business on March 28, 2002, are entitled to receive notice of and
to vote at the annual meeting. As of the record date, there were 392,793,890
shares of HEALTHSOUTH common stock issued and outstanding.
Before any business may be transacted at the annual meeting, a quorum must
be present. A quorum will be present if a majority of the shares of HEALTHSOUTH
common stock which are entitled to vote at the annual meeting are present in
person or represented by proxy at the annual meeting.
Each share of common stock is entitled to one vote on any matter to
properly come before the annual meeting.
There are no dissenters' rights of appraisal in connection with any
stockholder vote to be taken at the annual meeting.
Proxy Solicitation
This proxy solicitation is being made by our Board of Directors. To assist
us in soliciting proxies, we have retained Mellon Investor Services, L.L.C., a
proxy soliciting firm, and we have agreed to pay Mellon Investor Services,
L.L.C. a fee of $12,000, and all reasonable out-of-pocket expenses incurred by
it in connection with the provision of its services. In addition, our Directors,
officers and other employees, not specifically employed for this purpose, may
also solicit proxies by personal interview, mail, telephone or facsimile. They
will not receive additional compensation for their efforts. We will bear the
entire cost of this proxy solicitation. We will request banks, brokers,
nominees, custodians and other fiduciaries, who hold shares of HEALTHSOUTH
common stock in street name, to forward these proxy solicitation materials to
the beneficial owners of those shares and we will reimburse them the reasonable
out-of-pocket expenses they incur in doing so.
Effect of "Abstentions" and "Broker Non-Votes"
We intend to count "abstentions" and "broker non-votes" only for the
purpose of determining if a quorum is present at the annual meeting; they will
not be counted as votes cast on any other proposal which requires the vote of
our stockholders. An "abstention" will occur at the annual meeting if your
shares of HEALTHSOUTH common stock are deemed to be present at the annual
meeting, either because you attend the annual meeting or because you have
properly completed and returned a proxy, but you do not vote on any proposal or
other matter which is required to be voted on by our stockholders at the annual
meeting. A "broker non-vote" will occur if your shares of HEALTHSOUTH common
stock are held by a broker or nominee and your shares are deemed to be present
at the annual meeting but you have not instructed your broker or nominee how to
vote your shares. Brokerage firms which hold shares in street name may not vote
a client's shares with respect to any "non-discretionary" item if the client has
not furnished voting instructions to the brokerage firm. You should consult your
broker if you have any questions about this.
Abstentions and broker non-votes will have no effect in connection with the
election of Directors because the Directors are elected by a majority of the
shares of HEALTHSOUTH common stock present or represented and entitled to be
voted at the annual meeting. No other matters are expected to be voted on at the
annual meeting.
2
ELECTION OF DIRECTORS
GENERAL
Our bylaws permit our Board of Directors to determine the number of our
Directors. Our Board of Directors proposes that each of the nine nominees listed
below be elected at the annual meeting as members of our Board of Directors, to
serve until the annual meeting of our stockholders in 2003 or until such
nominee's successor is duly elected and qualified. The affirmative vote of a
majority of the shares of HEALTHSOUTH common stock present or represented and
entitled to vote at the annual meeting is required for the election of each
nominee. Unless otherwise instructed on the proxy, the persons designated as
proxies will vote the shares represented by them FOR the election of the
nominees listed below. If a nominee becomes unable or unwilling to accept the
nomination or election, the persons designated as proxies will be entitled to
vote for any other person designated as a substitute nominee by our Board of
Directors.
Our bylaws require that any stockholder wishing to nominate a candidate for
Director (in addition to the nominees proposed by our Board of Directors) must
submit such nomination in writing to our corporate secretary so that such
nomination is received not later than the 30th day preceding the date set for
any meeting of stockholders at which Directors are to be elected. Any such
nomination must be accompanied by a written statement from the nominee
indicating that he or she is qualified and willing to serve as a Director if so
elected. As of the record date for the annual meeting, we had received no such
nominations.
NOMINEES FOR DIRECTOR
Information relating to each of the nominees proposed by our Board of
Directors for election as one of our Directors is set out below. We have no
reason to believe that any of the following nominees will be unable to serve.
PRINCIPAL OCCUPATION
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH HEALTHSOUTH SINCE
-------------------------- ----- ----------------------------------------- -----------
Richard M. Scrushy 49 Chairman of the Board 1984
and Chief Executive Officer
and Director
Phillip C. Watkins, M.D. 60 Physician, 1984
Birmingham, Alabama,
and Director
George H. Strong 75 Private Investor, 1984
Locust, New Jersey,
and Director
C. Sage Givens 45 General Partner, 1985
Acacia Venture Partners
and Directors
Charles W. Newhall III 57 Partner, New Enterprise 1985
Associates Limited Partnerships,
and Director
John S. Chamberlin 73 Private Investor, 1993
Princeton, New Jersey,
and Director
Joel C. Gordon 72 Private Investor, 1996
Consultant to the Company
and Director
Larry D. Striplin, Jr. 72 Chairman and Chief Executive Officer, 1999
Nelson-Brantley Glass Contractors, Inc.,
and Director
William T. Owens 43 President 2001
and Chief Operating Officer
and Director
3
Richard M. Scrushy, one of our 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.
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 chairman 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 we
acquired SCA. 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, Inc. 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 in June 1992, 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. In August 2001, he was named President and Chief Operating
Officer of HEALTHSOUTH. 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.
MANAGEMENT MATTERS
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
officer, except the Employment Agreement between us and
4
Richard M. Scrushy described elsewhere in this Proxy Statement (see "Executive
Compensation and Other Information -- Compensation Committee Report on Executive
Compensation -- Chief Executive Officer Compensation"; and except that we
initially agreed to appoint Mr. Gordon to the Board of Directors in connection
with the SCA merger. There are no family relationships between any Directors or
executive officers of HEALTHSOUTH. None of our Directors or executive officers
is a party to any material proceedings adverse to us or any of our subsidiaries
or has a material interest adverse to us or any of our subsidiaries. The Board
of Directors held a total of seven meetings during 2001.
We have Employment Agreements with some of our executive officers in
addition to Mr. Scrushy. See "Executive Compensation and Other Information --
Compensation Committee Report on Executive Compensation -- Other Executive
Employment Agreements". Except for such Employment Agreements and except for the
broad-based retirement plans described under "Executive Compensation and Other
Information -- Retirement Investment Plan" and "Executive Compensation and Other
Information -- Employee Stock Benefit Plan" and the Executive Deferred
Compensation Plan described under "Executive Compensation and Other Information
-- Deferred Compensation Plan", there are no compensatory plans or arrangements
with respect to any such executive officer which result or will result from the
resignation or retirement of such executive officer or any other termination of
such executive officer's employment with HEALTHSOUTH and its subsidiaries or
from a change in control of or from a change in such executive officer's
responsibilities following a change in control of HEALTHSOUTH.
The Board of Directors currently has four standing committees: the Audit
Committee, which is responsible for reviewing all reports made by our auditors
and monitoring internal controls; the Compensation Committee, which is
responsible for reviewing our compensation programs and administering our stock
option plans; the Corporate Compliance Committee, which is responsible for
establishing and reviewing our Corporate Compliance Program and otherwise
ensuring that we conduct our operations in compliance with federal, state and
local laws and regulations; and the Nominating Committee, which is responsible
for proposing and recommending to the Board of Directors potential candidates
for the Board. During 2001, the Audit Committee consisted of C. Sage Givens,
Larry D. Striplin, Jr. and George H. Strong, Chairman; the Compensation
Committee consisted of John S. Chamberlin, Phillip C. Watkins, M.D. and Larry D.
Striplin, Jr., Chairman; the Corporate Compliance Committee consisted of Charles
W. Newhall IIII, Phillip C. Watkins, M.D., Brandon O. Hale and Joel C. Gordon,
Chairman; and the Nominating Committee consisted of C. Sage Givens, Charles W.
Newhall III and George H. Strong. All members of such committees are outside
directors, except for Mr. Hale, who is our Senior Vice President -
Administration and Secretary and Corporate Compliance Officer. All members of
these committees continue to serve in such capacities.
The Audit Committee met separately from the Board once in 2001 and, through
its Chairman, reviewed and approved our financial statements each quarter before
the filing of our Quarterly Reports on Form 10-Q. The Compensation Committee met
once and acted by unanimous written consent three times in 2001. The Corporate
Compliance Committee met three times in 2001. The Nominating Committee did not
meet in 2001.
There are no other standing audit, nominating or compensation committees of
the Board of Directors.
BOARD COMPENSATION
Directors who are not also employed by us 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 "Executive Compensation and Other Information
-- Stock Option Plans".
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
5
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, 2001, through December
31, 2001, all of our executive officers, Directors and greater-than-10%
beneficial owners complied with all Section 16(a) filing requirements applicable
to them.
6
EXECUTIVE COMPENSATION AND OTHER INFORMATION
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 a former executive officer for whom disclosure would have
been required had he been serving as an executive officer at December 31, 2001,
for all services rendered to HEALTHSOUTH and its subsidiaries in 1999, 2000 and
2001.
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 1999 $1,634,031 -- 1,050,000 $ 1,293,750(3) $54,145
Chairman of the Board 2000 3,654,849 -- 800,000 -- 55,475
and Chief Executive Officer(2) 2001 3,961,169 $6,500,000 1,200,000 -- 58,322
William T. Owens 1999 $ 272,944 -- 55,000 $ 970,313(3) $ 2,643
President 2000 386,510 -- 75,000 -- 1,908
and Chief Operating Officer 2001 502,115 $1,500,000 400,000 -- 4,755
Larry D. Taylor 1999 $ 183,298 -- 113,166 -- $ 4,449
President - Ambulatory Services 2000 278,796 $ 75,000 30,000 -- 3,380
2001 452,076 500,000 150,000 -- 6,148
Patrick A. Foster 1999 $ 275,977 -- 125,000 $ 970,313(3) $ 3,298
President -- Inpatient 2000 356,043 -- 60,000 -- 2,434
Operations 2001 337,922 $ 500,000 150,000 -- 6,155
Robert E. Thomson 1999 $ 402,987 -- 125,000 $ 970,313(3) $ 4,994
Formerly President -- Inpatient 2000 396,162 -- 60,000 -- 2,849
Operations 2001 85,556 $ 500,000 100,000 -- 5,474
Thomas W. Carman 1999 $ 295,167 -- 65,000 $ 970,313(3) $ 3,012
Executive Vice President -- 2000 326,300 $ 50,000 20,000 -- 2,270
Corporate Development 2001 361,651 75,000 80,000 -- 5,814
----------
(1) For the year ending December 31, 2001, this category includes (a) matching
contributions under the HEALTHSOUTH Retirement Investment Plan of $1,020 for
Mr. Scrushy, $0 for Mr. Owens, $1,393 for Mr. Taylor, $1,400 for Mr. Foster,
$719 for Mr. Thomson and $1,059 for Mr. Carman; (b) awards under our
Employee Stock Benefit Plan of $3,263 for Mr. Scrushy, $3,263 for Mr. Owens,
$3,263 for Mr. Taylor, $3,263 for Mr. Foster, $3,263 for Mr. Thomson and
$3,263 for Mr. Carman; and (c) split-dollar life insurance premiums paid of
$54,039 with respect to Mr. Scrushy, $1,492 with respect to Mr. Owens,
$1,492 with respect to Mr. Taylor, $1,492 with respect to Mr. Foster, $1,492
with respect to Mr. Thomson and $1,492 with respect to Mr. Carman. See
"Executive Compensation and Other Information -- Retirement Investment Plan"
and "Executive Compensation and Other Information -- 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
"Executive Compensation and Other Information -- Compensation Committee
Report on Executive Compensation -- Chief Executive Officer Compensation".
(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, 2001 was $1,482,000 for the award to Mr. Scrushy
(100,000 shares) and $1,111,500 for the awards to each of Messrs. Owens,
Carman and Foster (75,000 shares each). The award to Mr. Thomson lapsed in
2001. The awards vest five years from the date of grant, except as otherwise
provided in our 1998 Restricted Stock Plan. See "Executive Compensation and
Other Information - 1998 Restricted Stock Plan".
7
STOCK OPTION GRANTS IN 2001
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
-------------------- ----------- -------------- ----------- ------------ --------------
Richard M. Scrushy 1,000,000 21.2% $ 13.875 1/3/11 $7,130,000
200,000 4.2% 11.99 11/13/11 1,232,000
William T. Owens 300,000 6.4% 13.875 1/3/11 2,139,000
100,000 2.1% 11.99 11/13/11 616,000
Larry D. Taylor 100,000 2.1% 13.875 1/3/11 713,000
50,000 1.1% 11.99 11/13/11 308,000
Patrick A. Foster 100,000 2.1% 13.875 1/3/11 713,000
50,000 1.1% 11.99 11/13/11 308,000
Robert E. Thomson 100,000 2.1% 13.875 11/29/03 713,000
Thomas W. Carman 50,000 1.1% 13.875 1/3/11 356,500
30,000 0.6% 11.99 11/13/11 184,800
----------
(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 49%; (ii) the risk-free rate of
return is assumed to be 5.1%; (iii) dividend yield is assumed to be 0; and
(iv) the time of exercise is assumed to be 5.5 years from the date of grant.
STOCK OPTION EXERCISES IN 2001 AND OPTION VALUES AT DECEMBER 31, 2001
VALUE OF UNEXERCISED
NUMBER NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
OF SHARES AT DECEMBER 31, 2001(1) AT DECEMBER 31, 2001(2)
ACQUIRED ------------------------------- --------------------------------
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------- ----------- ------------ ------------- --------------- --------------- --------------
Richard M. Scrushy ......... -- -- 15,722,524 -- $129,199,197 --
William T. Owens ........... -- -- 912,500 -- 2,325,838 --
Larry D. Taylor ............ 22,500 $ 252,018 485,166 55,000 2,435,079 $359,944
Patrick A. Foster .......... 200,000 1,329,481 463,800 -- 1,084,266 --
Robert E. Thomson .......... -- -- 855,000 -- 2,619,725 --
Thomas W. Carman ........... 100,000 1,385,060 830,000 -- 3,376,038 --
----------
(1) Does not reflect any options granted and/or exercised after December 31,
2001. The net effect of any such grants and exercises is reflected in the
table appearing under "Principal Stockholders".
(2) Represents the difference between market price of HEALTHSOUTH common stock
and the respective exercise prices of the options at December 31, 2001. Such
amounts may not necessarily be realized. Actual values which may be
realized, if any, upon any exercise of such options will be based on the
market price of the common stock at the time of any such exercise and thus
are dependent upon future performance of the common stock.
STOCKHOLDER RETURN COMPARISON
Set forth below is a line graph comparing the total returns of HEALTHSOUTH
common stock, the Standard & Poor's 500 (S&P 500) Index and the Morgan Stanley
Health Care Provider Index (RXH), an equal-dollar weighted index of 15 companies
involved in the business of hospital management and medical/nursing services,
including HEALTHSOUTH. The graph assumes $100 invested on December 31, 1996, in
HEALTHSOUTH common stock and each of the indices. We assume reinvestment of
dividends for purposes of the graph.
8
December 31 HEALTHSOUTH S&P 500 RXH
----------- ----------- ------- ---
1996 $100 $100 $100
1997 143.69 131.01 125.07
1998 79.94 165.95 87.93
1999 27.83 198.35 54.99
2000 84.47 178.24 103.43
2001 76.74 154.99 101.45
[Graph omitted.]
STOCK OPTION PLANS
Set forth below is information concerning our various stock option plans at
December 31, 2001. All share numbers and exercise prices have been adjusted as
necessary to reflect previous stock splits.
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 our Directors, officers and
other key employees 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
9
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, 2001 and the price or range of prices at which
shares may be purchased if the options are exercised.
MAXIMUM NUMBER
OF SHARES OF NUMBER OF
HEALTHSOUTH ADDITIONAL SHARES OF
COMMON STOCK HEALTHSOUTH
SUBJECT TO COMMON STOCK
PURCHASE UNDER THE RESERVED FOR USE
NAME OF PLAN 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 None
1995 Stock Option Plan 22,359,992(1) 15,422
1997 Stock Option Plan 5,000,000 30,027
NUMBER OF SHARES OF
HEALTHSOUTH PRICE OR RANGE OF DATE THE PLAN TERMINATED OR WILL
COMMON STOCK PRICES AT WHICH TERMINATE UNLESS OTHERWISE DETERMINED
SUBJECT TO PURCHASE IF SHARES MAY BE BY OUR BOARD OF DIRECTORS OR IF ALL OF
ALL OPTIONS PURCHASED SUBJECT THE SHARES OF HEALTHSOUTH
OUTSTANDING ON TO OPTIONS COMMON STOCK RESERVED FOR ISSUANCE
DECEMBER 31, 2001 OUTSTANDING ON UNDER THE PLAN HAVE BEEN PURCHASED DUE
NAME OF PLAN ARE EXERCISED DECEMBER 31, 2001 TO OPTIONS BEING EXERCISED
------------------------ ------------------------ --------------------- ---------------------------------------
1989 Stock Option Plan 51,752 $ 8.375 October 25, 1999
1990 Stock Option Plan 100,504 $ 8.375 October 15, 2000
1991 Stock Option Plan 3,102,362 $3.7825 -- $16.25 June 19, 2001
1992 Stock Option Plan 3,707,000 $3.7825 -- $23.625 June 16, 2002
1993 Stock Option Plan 2,463,025 $ 3.375 -- $23.625 April 19, 2003
1995 Stock Option Plan 19,656,943 $ 4.875 -- $28.0625 June 5, 2005
1997 Stock Option Plan 3,546,328 $ 4.875 -- $28.0625 April 30, 2007
----------
(1) At December 31, 2001; 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,
2001, options granted under this plan to purchase 1,243,833 shares of
HEALTHSOUTH common stock remained outstanding at exercise prices ranging from
$3.375 to $28.00 per share, and 26,000 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.
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
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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 1,169,915 shares remained
outstanding at December 31, 2001. 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, 2001, there were outstanding under
these assumed plans options to purchase 538,888 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 Compensation Committee of the Board of Directors
granted restricted stock awards covering 850,000 shares of HEALTHSOUTH common
stock to various of our executive officers. 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 and
75,000 of such shares lapsed without vesting in 2000 and 2001, respectively, and
an award covering 100,000 shares vested upon the retirement of the recipient.
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
11
all of our full-time and part-time employees 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. We 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" in Appendix A.
William T. Owens, President and Chief Operating 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 of our full-time and part-time employees 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" in Appendix A.
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer,
William T. Owens, President and Chief Operating 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 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.
12
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, President and Chief Operating 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 our executive and key employees 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 our 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, we may, but are 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.
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
13
The loans made to Mr. Bennett and Mr. Martin were repaid in full in 2000.
The loans made to Mr. McVay, Mr. Foster, Mr. Horton and Mr. Thomson were repaid
in 2001. In addition, loans made to six persons who were not executive officers
had been repaid in full by December 31, 2001.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
The establishment and review of HEALTHSOUTH's compensation plans have been
delegated to the Compensation Committee of HEALTHSOUTH's Board of Directors, all
of whom are outside Directors. John S. Chamberlin, Phillip C. Watkins, M.D. and
Larry D. Striplin, Jr., who serves as Chairman, are the current members of the
Committee. The Committee is charged by the Board of Directors with establishing
a compensation plan which will enable HEALTHSOUTH to compete effectively for the
services of qualified officers and key employees, to give those employees
appropriate incentive to pursue the maximization of long-term stockholder value,
and to recognize those employees' success in achieving both qualitative and
quantitative goals for the benefit of HEALTHSOUTH. The Committee makes
recommendations to the full Board of Directors as to appropriate levels of
compensation for specific individuals, as well as compensation and benefit
programs for the company as a whole.
The following sections discuss the Committee's general philosophy and
policies concerning compensation for executive officers of HEALTHSOUTH, as well
as providing information concerning the specific implementation of such
policies.
Compensation Philosophy and Policies for Executive Officers
As its first principle, the Committee believes that HEALTHSOUTH executives
should be rewarded based upon their success in meeting the company's operational
goals, improving its earnings, maintaining its leadership role in the healthcare
services field, and generating value for its stockholders, and the Committee
strives to establish levels of compensation that take such factors into account
and provide appropriate recognition for past achievement and incentive for
future success. The Committee recognizes that the demand for executives with
expertise and experience in the healthcare services field is intense. In order
to attract and retain qualified persons, the Committee believes that HEALTHSOUTH
must offer current compensation at levels consistent with those of other
publicly traded healthcare companies. In addition, the Committee believes that
it is in the best interests of HEALTHSOUTH's stockholders to offer its
executives meaningful equity participation in HEALTHSOUTH, in order that those
executives' interests will be aligned with those of the company's stockholders.
The Committee feels that the historic mix of cash compensation and equity
participation has proven to be effective in stimulating HEALTHSOUTH's executives
to meet both long-term and short-term goals and has been a major factor in
limiting turnover among senior executives.
HEALTHSOUTH's compensation program has three distinct elements: base
salary; incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below.
Base Salary: While the demand for experienced managers in the healthcare
industry continues to grow, HEALTHSOUTH has been very successful in attracting
and retaining key executives, many of whom have been with the company since its
early days. HEALTHSOUTH believes that its compensation package has been
instrumental in such success. The Committee endeavors to establish base salary
levels for those key executives which are consistent with those provided for
similarly situated executives of other publicly traded healthcare companies,
taking into account each executive's areas and level of responsibility and
historical performance. In establishing such levels, the Committee considers
compensation for executives of other publicly traded providers of healthcare
services, as well as other publicly traded companies of similar size and with
similar characteristics. Compensation decisions are not targeted to specific
levels in the range of compensation paid by those other companies. However, the
Committee and the Board of Directors take such levels of compensation into
account in determining appropriate levels of compensation for HEALTHSOUTH's
executives.
14
Incentive Compensation: In addition to base salary, the Committee
recommends to the Board of Directors cash incentive compensation for
HEALTHSOUTH's executives, based upon each executive's success in meeting
qualitative and quantitative performance goals on an annual basis. The total
incentive bonus pool available for the company's executives and management
personnel is capped at the lesser of (a) the amount by which the company's
annual net income exceeds the budgeted annual net income established by the
Board of Directors and (b) 10% of the company's annual net income. No bonuses
are payable unless annual net income exceeds budgeted net income. Individual
incentive bonuses within such bonus pool are not determined in a formulary
manner, but are determined on a basis that takes into account each executive's
success in achieving standards of performance, which may or may not be
quantitative, established by the Board of Directors and an executive's
superiors. Bonus determinations are made on a case-by-case basis, taking into
account appropriate quantitative and qualitative factors, and there is no fixed
relationship between any particular performance factor and the amount of a given
executive's bonus. Historically, incentive compensation has been a major
component of HEALTHSOUTH's executive compensation, and the Committee believes
that placing executives at risk for such a component has been effective in
motivating such executives to achieve such goals.
In addition to cash incentive compensation, as a growth-oriented company,
HEALTHSOUTH has always utilized equity-based compensation, in the form of stock
options, as a tool to encourage its executives to work to meet its operational
goals and maximize long-term stockholder value. Because the value of stock
options granted to an executive is directly related to HEALTHSOUTH's success in
enhancing its market value over time, the Committee feels that its stock option
programs have been very effective in aligning the interests of management and
stockholders.
The Committee determines stock option grants under HEALTHSOUTH's various
stock option plans, all of which are described above under "Executive
Compensation and Other Information -- Stock Option Plans". Specific grants are
determined taking into account an executive's current responsibilities and
historical performance, as well as the executive's perceived contribution to
HEALTHSOUTH's results of operations. Options are also used to give incentive to
newly-promoted officers at the time that they are asked to assume greater
responsibilities, and, in some cases, to executives who have joined the company
laterally or through acquisitions and have assumed significant leadership roles
within the company. In evaluating option grants, the Committee considers prior
grants and shares currently held, as well as the recipient's success in meeting
operational goals and the recipient's level of responsibility. However, no fixed
formula is utilized to determine particular grants. The Committee believes that
the opportunity to acquire a significant equity interest in HEALTHSOUTH has been
a strong motivation for the company's executives to pursue the long-term
interests of HEALTHSOUTH and its stockholders, and has promoted longevity and
retention of key executives. Information relating to stock options granted to
HEALTHSOUTH's five most highly-compensated executive officers is set forth
elsewhere in this Proxy Statement.
Retirement Compensation: As described under "Executive Compensation and
Other Information -- Retirement Investment Plan", in 1991 HEALTHSOUTH adopted a
401(k) retirement plan in order to give all full-time employees an opportunity
to provide for their retirement on a tax-advantaged basis. The 401(k) plan
offers a diversified range of investment options and does not provide for
investment in HEALTHSOUTH common stock. In order to further tie employees'
interests to the long-term market value of the company, HEALTHSOUTH adopted an
Employee Stock Benefit Plan (the "ESOP") in 1991, which gives all full-time
employees an opportunity to invest a portion of their retirement funds in
HEALTHSOUTH common stock on a tax-advantaged basis. The Committee believes that
the ESOP provides additional incentive to executives to maximize stockholder
value over the long term. See "Executive Compensation and Other Information --
Employee Stock Benefit Plan". Additionally, in 1997, HEALTHSOUTH adopted a
Deferred Compensation Plan, which gives senior management employees the
opportunity to elect to defer receipt of a portion of their salary and bonus in
exchange for a variable rate of interest on the amounts so deferred. See
"Executive Compensation and Other Information -- Deferred Compensation Plan".
15
Chief Executive Officer Compensation
HEALTHSOUTH has 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, HEALTHSOUTH has agreed to use its
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 was set at $1,500,000, and his
base salary for 2002 remains at that level. 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 HEALTHSOUTH 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, HEALTHSOUTH is required
to pay him a lump-sum severance payment equal to the discounted value of the sum
of his then-current base salary and Annual Target Bonus over the remaining term
of the Agreement and to continue certain employee and fringe benefits for the
remaining term of the Agreement. If the Agreement is terminated by Mr. Scrushy
otherwise than for Good Reason, HEALTHSOUTH is required to pay him a lump-sum
severance amount equal to the discounted value of two times the sum of his
then-current base salary and Annual Target Bonus. If HEALTHSOUTH terminates the
Agreement 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, HEALTHSOUTH is
required to pay Mr. Scrushy an additional lump-sum severance payment equal to
his then-current base salary and Annual Target Bonus. The Agreement provides for
HEALTHSOUTH 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.
The Committee reports to the Board of Directors on compensation
arrangements with Mr. Scrushy, and recommends to the Board of Directors the
level of incentive compensation, both cash and equity-based, which is
appropriate for Mr. Scrushy with respect to each fiscal year of the Company. In
making such recommendation, the Committee takes into account HEALTHSOUTH's
performance in the marketplace, its success in meeting strategic goals and its
success in meeting monthly and annual budgets established by the Board of
Directors. Again, ultimate compensation decisions are not made in a formulary
manner, but in a manner which takes into account HEALTHSOUTH's competitive
position, its position in its industry and the financial markets, and the
significant contributions made by Mr.
16
Scrushy to the success of the company. In making its decisions with respect to
Mr. Scrushy's compensation, the Committee believes that it is appropriate to
recognize that, as a management founder of the company, Mr. Scrushy has played
an instrumental role in establishing HEALTHSOUTH as the industry leader in
outpatient and rehabilitative healthcare services and that, under his
leadership, HEALTHSOUTH has continued to show strong performance in asset growth
and quality, net revenues and income.
In the period since December 31, 1993, HEALTHSOUTH, under Mr. Scrushy's
leadership, has grown from the fourth-largest provider of rehabilitative
healthcare services to the largest provider, and since 1995 has established
itself as the nation's largest provider of outpatient surgery services and
outpatient diagnostic services. During that same period, the company has
expanded its operations to 50 states, the United Kingdom, Australia, Canada and
Puerto Rico and has been named to the S&P 500. The Committee believes that Mr.
Scrushy's leadership has been essential to HEALTHSOUTH's success and growth. In
view of these accomplishments, the Committee believes that it is important to
ensure that, if Mr. Scrushy is successful in leading HEALTHSOUTH to achieve the
goals set by the Board of Directors, his compensation will be at a level
commensurate with that of chief executive officers of similarly-performing
public companies and that he will continue to have the opportunity to obtain a
significant equity interest in the company.
In evaluating Mr. Scrushy's performance in 2001 and recommending Mr.
Scrushy's compensation for 2002, the Committee took note of a number of factors,
including HEALTHSOUTH's successful execution of several capital markets
transactions and divestitures of non-strategic assets, continued improvement in
HEALTHSOUTH's revenues and operating performance, and Mr. Scrushy's role in
developing and advancing a number of new strategic initiatives for the company,
including the initiation of the company's innovative "digital hospital" project
and the expansion of the company's media initiatives and brand extension
strategy. The Committee also noted the additional responsibilities taken on by
Mr. Scrushy during the period between the departure of HEALTHSOUTH's previous
President and Chief Operating Officer in mid-2000 and the appointment of William
T. Owens to those positions in August 2001. In light of all these factors and
Mr. Scrushy's continued leadership, the Committee believes that Mr. Scrushy's
compensation for 2001 and his base compensation for 2002 is appropriate.
Other Executive Employment Agreements
HEALTHSOUTH also has Employment Agreements, dated April 1, 1998, with
Thomas W. Carman, Executive Vice President -- Corporate Development and Patrick
A. Foster, President -- Inpatient Services, 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 $390,000 to Mr. Carman and $490,000 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 HEALTHSOUTH terminates these Agreements other than for Cause (as
defined), Disability (as defined) or death, HEALTHSOUTH is 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), HEALTHSOUTH is also required to continue the officer's salary for the
same period. The Agreements restrict the officers from engaging in activities
competitive with HEALTHSOUTH's business during their employment with HEALTHSOUTH
and for any period during which the officer is receiving severance compensation,
unless such severance compensation results from a termination after a Change in
Control.
Section 162(m) of the Internal Revenue Code
The Omnibus Budget Reconciliation Act of 1993 contains a provision under
which a publicly traded corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
17
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
HEALTHSOUTH believes that its employee stock option plans meet the
requirements of Section 162(m) as performance-based plans. The Committee and the
Board of Directors have made a decision not to amend HEALTHSOUTH's cash
compensation programs to meet all requirements of Section 162(m) because such a
decision would not be in the best interests of the company's stockholders. The
Committee believes that, in establishing bonus and incentive awards, certain
subjective factors must be taken into account in particular cases, based upon
the experienced judgment of the Committee members as well as on factors which
may be objectively quantified. The preservation of tax deductibility of all
compensation is an important consideration. However, the Committee believes that
it is important that HEALTHSOUTH retain the flexibility to reward superior
effort and accomplishment even where all cash compensation may not be fully
deductible. The Committee will continue to review the requirements for
deductibility under Section 162(m) and will take such requirements into account
in the future as it deems appropriate and in the best interests of HEALTHSOUTH's
stockholders. Approximately $9,461,169 of Mr. Scrushy's compensation and
$1,002,115 of Mr. Owen's compensation paid with respect to 2001 will not be
deductible; however, HEALTHSOUTH believes that all other compensation paid to
executive officers will be fully deductible.
Conclusion
The Committee believes that the levels and mix of compensation provided to
HEALTHSOUTH's executives during 2001 were appropriate and were instrumental in
the achievement of the company's goals for 2001. It is the intent of the
Committee to ensure that the Company's compensation programs continue to
motivate its executives and reward them for being responsive to the long-term
interests of HEALTHSOUTH and its stockholders.
The foregoing report is submitted by the following Directors of
HEALTHSOUTH, constituting all of the members of the Compensation Committee of
the Board of Directors for the year ending December 31, 2001 who continue to
serve on the Board of Directors at the date of this Proxy Statement:
John S. Chamberlin
Phillip C. Watkins, M.D.
Larry D. Striplin, Jr., Chairman
AUDIT INFORMATION
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Our Board of Directors has engaged Ernst & Young LLP to audit our
consolidated financial statements for the year ended December 31, 2001. We
expect that Ernst & Young LLP will serve in that capacity for the 2002 fiscal
year as well. We expect that representatives of Ernst & Young LLP will be
present at the annual meeting to make a statement if they desire to do so and to
respond to appropriate questions.
AUDIT FEES
The aggregate fees billed to us for the fiscal year ended December 31, 2001
by Ernst & Young LLP for the fiscal year ended December 31, 2001 or related to
its audit for such fiscal year were as follows:
Audit Fees ......................... $1,164,750
All Other Fees
Audit-Related Fees ............... $2,387,676
Non-Audit-Related Fees ........... $ 121,580
18
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, consisting of C. Sage
Givens, Larry D. Striplin, Jr. and George H. Strong, Chairman, is responsible
for overseeing HEALTHSOUTH's financial reporting process on behalf of the Board
of Directors. HEALTHSOUTH's management has the primary responsibility for the
financial statements and the reporting process, including the systems of
internal control. In fulfilling its oversight responsibilities, the Committee
reviewed the audited financial statements contained in HEALTHSOUTH's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 2001 with management,
including a discussion of the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
All members of the Audit Committee are "independent" under the standards
established by the New York Stock Exchange. A copy of the Audit Committee
charter is included as Appendix B to this Proxy Statement.
The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with accounting principles generally accepted in the United States,
their judgments as to the quality, not just the acceptability, of HEALTHSOUTH's
accounting principles and such other matters as are required to be discussed
with the Committee under generally accepted auditing standards. In addition, the
Committee has discussed with the independent auditors the auditors' independence
from management and HEALTHSOUTH, including the matters in the written
disclosures required by the Independence Standards Board, and considered the
compatibility of non-audit services with the auditors' independence. The
Committee believes that the non-audit services are compatible with such
independence.
The Committee discussed with HEALTHSOUTH's internal and independent
auditors the overall scope and plans of their respective audits. The Committee
meets with the internal and independent auditors, with and without management
present, to discuss the results of their examinations, their evaluations of
HEALTHSOUTH's internal controls, and the overall quality of HEALTHSOUTH's
financial reporting.
In reliance upon the reviews and discussions referred to above, the
Committee has recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in HEALTHSOUTH's Annual Report
on Form 10-K for the Fiscal Year Ended December 31, 2001 for filing with the
Securities and Exchange Commission. Those audited financial statements are also
included in Appendix A to this Proxy Statement.
The forgoing report is submitted by the following Directors of HEALTHSOUTH,
constituting all the members of the Audit Committee of the Board of Directors
for the year ended December 31, 2001:
C. Sage Givens
Larry D. Striplin, Jr.
George H. Strong, Chairman
19
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of HEALTHSOUTH common stock as of March 28, 2002 (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 a former executive officer who would have been among our five
most highly compensated executive officers had he held such position at December
31, 2001 and (e) by all executive officers and Directors as a group.
NAME AND NUMBER OF SHARES PERCENTAGE OF
ADDRESS OF OWNER BENEFICIALLY OWNED (1) COMMON STOCK
---------------------------------------------------------------------- ------------------------ --------------
Richard M. Scrushy ................................................... 20,904,955(2) 5.1%
John S. Chamberlin ................................................... 407,000(3) *
C. Sage Givens ....................................................... 310,100(4) *
Charles W. Newhall III ............................................... 50,000(5) *
George H. Strong ..................................................... 473,350(6) *
Phillip C. Watkins, M.D. ............................................. 681,654(7) *
William T. Owens ..................................................... 987,500(8) *
Joel C. Gordon ....................................................... 1,961,968(9) *
Robert E. Thomson .................................................... 1,041,637(10) *
Larry D. Striplin, Jr. ............................................... 150,000(11) *
Thomas W. Carman ..................................................... 905,000(12) *
Patrick A. Foster .................................................... 539,412(13) *
Larry D. Taylor ...................................................... 583,866(14) *
FMR Corp.
82 Devonshire Street
Boston, Massachusetts 02109 ......................................... 50,673,509(15) 12.9%
All Executive Officers and Directors as a Group (17 persons) ......... 29,235,535(16) 7.06%
----------
(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 15,722,524 shares subject to currently exercisable stock
options.
(3) Includes 275,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 275,000 shares
subject to currently exercisable stock options.
(5) Includes 50,000 shares subject to currently exercisable stock options.
(6) Includes 220,665 shares owned by trusts of which Mr. Strong is a trustee
and claims shared voting and investment power and 200,000 shares subject to
currently exercisable stock options.
(7) Includes 128,364 shares owned by a partnership affiliated with Dr. Watkins
and 535,000 shares subject to currently exercisable stock options owned by
such partnership.
(8) Includes 912,500 shares subject to currently exercisable stock options.
(9) Includes 127,396 shares owned by Mr. Gordon's spouse and 509,520 shares
subject to currently exercisable stock options.
(10) Includes 855,000 shares subject to currently exercisable stock options.
(11) Includes 85,000 shares subject to currently exercisable stock options.
(12) Includes 830,000 shares subject to currently exercisable stock options.
(13) Includes 463,800 shares subject to currently exercisable stock options.
(14) Includes 540,166 shares subject to currently exercisable stock options.
(15) Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power to
vote 5,327,643 shares and sole power to dispose of all of the shares.
Information regarding FMR Corp. is based on its Schedule 13G/A filed
February 14, 2002.
(16) Includes 21,232,226 shares subject to currently exercisable stock options
held by executive officers and Directors.
----------
* Less than 1%
20
CERTAIN 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 2001, we paid $100,044,296 for the purchase of
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. In addition, we guaranteed up to $15,000,000 of
MedCenterDirect.com's indebtedness to an outside lender.
In April 2001, we established Source Medical Solutions, Inc. and acquired
3,932,500 shares of common stock in Source Medical in a private placement for a
purchase price of $0.10 per share. Various persons associated with us, including
various of our executive officers, also purchased shares in the private
placement. We established Source Medical for the purpose of allowing commercial
exploitation of our wireless clinical documentation system, which was originally
known as the HEALTHSOUTH Clinical Automation Program and is now marketed by
Source Medical under the name "TherapySource". As of July 1, 2001, we sold the
assets, including the intellectual property assets, associated with
TherapySource to Source Medical for $25,000,000 and entered into an agreement to
license TherapySource back from Source Medical. During 2001, we paid Source
Medical approximately $2,513,813 for services under such license. We believe
that those payments were on terms no less favorable than those we could have
obtained from an unrelated vendor. In addition, at December 31, 2001, we had a
receivable of approximately $82,000,000 from Source Medical relating to costs we
have advanced during its start-up period and guaranteed up to $6,000,000 of its
indebtedness to an outside lender.
At times, we have made loans to executive officers to assist them in
meeting various financial obligations or for other purposes. At December 31,
2001, loans in the aggregate principal amount of $678,514 were outstanding to
William T. Owens, President and Chief Operating Officer and a Director of the
Corporation. These loans bear interest at the rate of 1 1/4% per annum below the
prime rate of AmSouth Bank of Alabama, Birmingham, Alabama, and are payable on
demand. See "Executive Compensation and Other Information -- 1999 Executive
Equity Loan Plan", for information concerning loans to executive officers to
purchase HEALTHSOUTH common stock.
GENERAL INFORMATION
STOCKHOLDER PROPOSALS FOR 2003 ANNUAL MEETING
Any proposals that our stockholders wish to have included in our proxy
statement and form of proxy for the 2003 annual meeting of stockholders must be
received by us no later than the close of business on December 13, 2002. You may
also submit a proposal without having it included in our proxy statement and
form of proxy, but we need not submit such a proposal for consideration at the
annual meeting if it is considered untimely. Under the applicable rules of the
Securities and Exchange Commission, a proposal will be considered untimely
unless you have given us notice of your intent to submit it for consideration no
later than the close of business on February 28, 2003. Any proposals should be
sent to:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Brandon O. Hale, Secretary
FINANCIAL STATEMENTS
Our audited consolidated financial statements for the year ended December
31, 2001, and other selected information, including our management's discussion
and analysis of our financial condition and results of operations, are included
in Appendix A to this proxy statement.
21
ANNUAL REPORT ON FORM 10-K
A copy of our annual report on Form 10-K for the year ended December 31,
2001 may be obtained without charge by writing to our Secretary at the address
below:
--------------------------------------------------------------------------------
HEALTHSOUTH CORPORATION
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
ATTENTION: BRANDON O. HALE, SECRETARY
--------------------------------------------------------------------------------
All requests submitted by beneficial owners of HEALTHSOUTH common stock
must include a good faith representation by the requesting stockholder
confirming that, as of March 28, 2002 he or she is a beneficial owner of shares
of HEALTHSOUTH common stock.
Please complete, sign and return the enclosed proxy promptly.
By Order of the Board of Directors:
BRANDON O. HALE
Secretary
April 12, 2002
22
APPENDIX A
NOTE: This Appendix A, together with the foregoing Proxy Statement,
contains the information required to be provided in our annual report to
security holders pursuant to the Rules and Regulations of the Securities and
Exchange Commission. Our 2001 Annual Report to Stockholders, which provides
additional information concerning HEALTHSOUTH and its performance in 2001, is
also included in this mailing.
TABLE OF CONTENTS
PAGE
NUMBER
-------
Business ............................................................................. A-2
Selected Financial Data .............................................................. A-2
Quarterly Results .................................................................... A-3
Directors and Executive Officers ..................................................... A-4
Management's Discussion and Analysis of Financial Condition and Results of Operations A-6
Audited Consolidated Financial Statements of HEALTHSOUTH Corporation and
Subsidiaries
Report of Independent Auditors ...................................................... A-16
Consolidated Balance Sheets ......................................................... A-17
Consolidated Statements of Income ................................................... A-18
Consolidated Statements of Stockholders' Equity ..................................... A-19
Consolidated Statements of Cash Flows ............................................... A-20
Notes to Consolidated Financial Statements .......................................... A-22
Market for HEALTHSOUTH's Common Equity and Related Stockholder Matters ............... A-44
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . A-44
A-1
BUSINESS
HEALTHSOUTH Corporation is the nation's largest provider of outpatient
surgery and rehabilitative healthcare services. We provide these services
through our national network of outpatient and inpatient rehabilitation
facilities, outpatient surgery centers, diagnostic 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, 2001, the Company had
approximately 1,900 patient care locations in 50 states, Puerto Rico, the United
Kingdom, Canada and Australia.
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 1997 acquisition of Health Images, Inc. and the 1998
acquisition of National Surgery Centers, Inc. ("NSC"), each of which was
accounted for as a pooling of interests.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues ............................... $3,123,176 $4,006,074 $4,072,107 $4,195,115 $4,380,477
Operating unit expenses ................ 1,952,189 2,491,914 2,688,849 2,816,363 2,905,043
Corporate general and
administrative expenses .............. 87,512 112,800 149,285 148,023 167,206
Provision for doubtful accounts ........ 74,743 112,202 342,708 98,037 107,871
Depreciation and amortization .......... 257,136 344,591 374,248 360,847 375,270
Merger and acquisition related
expenses (1) ......................... 15,875 25,630 -- -- --
Loss on sale of assets ................. -- 31,232 -- -- 174,127 (2)
Impairment and restructuring
charges (2) .......................... -- 483,455 121,037 -- --
Loss on termination of credit
facility (2) ......................... -- -- -- -- 6,475
Interest expense ....................... 112,529 148,163 176,652 221,595 218,100
Interest income ........................ (6,004) (11,286) (10,587) (9,104) (7,349)
---------- ---------- ---------- ---------- -----------
2,493,980 3,738,701 3,842,192 3,635,761 3,946,743
---------- ---------- ---------- ---------- -----------
Income before income taxes and
minority interests ................... 629,196 267,373 229,915 559,354 433,734
Provision for income taxes ............. 213,668 143,347 66,929 181,808 139,467
---------- ---------- ---------- ---------- -----------
415,528 124,026 162,986 377,546 294,267
Minority interests ..................... 72,469 77,468 86,469 99,081 91,880
---------- ---------- ---------- ---------- -----------
Net income ............................. $ 343,059 $ 46,558 $ 76,517 $ 278,465 $ 202,387
========== ========== ========== ========== ===========
Weighted average common shares
outstanding .......................... 366,768 421,462 408,195 385,666 389,717
========== ========== ========== ========== ===========
Net income per common share ............ $ 0.94 $ 0.11 $ 0.19 $ 0.72 $ 0.52
========== ========== ========== ========== ===========
Weighted average common shares
outstanding -- assuming dilution ..... 386,211 432,275 414,570 391,016 399,227
========== ========== ========== ========== ===========
Net income per common share --
assuming dilution .................... $ 0.89 $ 0.11 $ 0.18 $ 0.71 $ 0.51
========== ========== ========== ========== ===========
A-2
DECEMBER 31,
------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and marketable securities ......... $ 185,018 $ 142,513 $ 132,882 $ 180,407 $ 278,456
Working capital ........................ 612,917 945,927 852,711 1,048,204 1,377,459
Total assets ........................... 5,566,324 6,778,209 6,890,484 7,380,440 7,579,237
Long-term debt (3) ..................... 1,614,961 2,830,926 3,114,648 3,211,829 3,026,947
Stockholders' equity ................... 3,290,623 3,423,004 3,206,362 3,526,454 3,796,924
----------
(1) Expenses related to the Health Images acquisition in 1997 and the NSC
acquisition in 1998.
(2) See "Notes to Consolidated Financial Statements".
(3) Includes current portion of long-term debt.
QUARTERLY RESULTS (UNAUDITED)
Set forth below is summary information with respect to HEALTHSOUTH's
operations for the last eight fiscal quarters. This information includes the
effects of unusual items in the second and fourth quarters of 2001. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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
2001
---------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- ---------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ............................. $1,090,462 $1,098,989 $1,075,874 $1,115,152
Net income (loss) .................... 75,311 (19,947) 79,126 67,897
Net income (loss) per common share ... 0.19 (0.05) 0.20 0.17
Net income (loss) per common share --
assuming dilution ................... 0.19 (0.05) 0.20 0.17
A-3
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information with respect to our executive
officers:
ALL POSITIONS AN OFFICER
NAME AGE WITH HEALTHSOUTH SINCE
---------------------------- ----- ------------------------------------------------------- -----------
Richard M. Scrushy ......... 49 Chairman of the Board and Chief Executive Officer and 1984
Director
William T. Owens ........... 43 President and Chief Operating Officer and Director 1986
Patrick A. Foster .......... 55 President -- Inpatient Services 1994
Larry D. Taylor ............ 43 President -- Ambulatory Services 1991
Thomas W. Carman ........... 50 Executive Vice President -- Corporate Development 1985
William W. Horton .......... 42 Executive Vice President and Corporate Counsel and 1994
Assistant Secretary
Malcolm E. McVay ........... 40 Executive Vice President and Treasurer 1999
Weston L. Smith ............ 41 Executive Vice President and Chief Financial Officer 1987
Brandon O. Hale ............ 52 Senior Vice President -- Administration and Secretary 1987
Susan M. Jones ............. 37 Senior Vice President -- Reimbursement 1992
Biographical information for Mr. Scrushy and Mr. Owens is set forth under
the caption "Election of Directors" in the Proxy Statement to which this
Appendix A is attached.
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. In August 2001, he was named
President -- Inpatient Services. 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, and he was named President --
Ambulatory Services in August 2001.
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 & Rediker, L.L.C., where he served as Chairman of the Healthcare
Practice Group.
Malcolm E. McVay joined HEALTHSOUTH in September 1999 as Vice President -
Finance, and was named Senior Vice President - Finance and Treasurer in February
2000 and Executive Vice President and Treasurer in August 2001. 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.
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
A-4
- Finance - Reimbursement. In March 2000, he was named Senior Vice President -
Finance and Controller and in August 2001, he was named Executive Vice President
and Chief Financial Officer. 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.
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.
Susan M. Jones, C.P.A., joined HEALTHSOUTH in November 1989 and was named
Assistant Vice President -- Finance -- Reimbursement in February 1992, Vice
President -- Finance -- Reimbursement in February 1995 and Senior Vice President
-- Reimbursement in March 2000. She previously served as a certified public
accountant with the Birmingham, Alabama office of Ernst & Whinney (now Ernst &
Young LLP).
See "Election of Directors" in the Proxy Statement to which this Appendix A
is attached for identification of the Directors of the Company.
A-5
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to facilitate the understanding and
assessment of significant changes and trends related to our consolidated results
of operations and financial condition, including various factors related to
acquisitions and divestitures 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 Appendix A.
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, which operated approximately 160 outpatient rehabilitation
centers in 18 states (the "Rehability Acquisition"). The net cash purchase price
was approximately $54,521,000. 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 the
respective date of acquisition (see Note 9 of "Notes to Consolidated Financial
Statements" for further discussion). The Rehability Acquisition was our only
material acquisition in the three years ended December 31, 2001.
During the second quarter of 2001, we sold substantially all of our
occupational medicine operations to US Healthworks, Inc. and our Richmond,
Virginia medical center to HCA -- The Healthcare Company. These transactions
yielded net cash proceeds of approximately $98,882,000 and a net loss on the
sale of assets of $139,883,000.
During the fourth quarter of 2001, we sold our diagnostic operations in the
United Kingdom to Lodestone Patient Care, Limited and four non-strategic
rehabilitation hospitals to Meadowbrook Healthcare Corporation. These
transactions yielded net cash proceeds of approximately $31,919,000 and a net
loss on sale of assets of $18,847,000. We also completed a sale-leaseback
transaction for thirteen of our facilities which yielded net cash proceeds of
$79,735,000 and a net loss on the sale of assets of $15,397,000.
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 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 and non-patient care
services.
The inpatient and other clinical services segment 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
segment includes the operations of our outpatient rehabilitation facilities,
outpatient surgery centers and outpatient diagnostic centers. The non-patient
care services segment includes the operations of our corporate office, general
and administrative costs, non-clinical subsidiaries and other operations that
are independent of our inpatient and outpatient services segments. See Note 14
of "Notes to Consolidated Financial Statements" for financial data for each of
our operating segments.
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 a
material effect on our future results of operations.
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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 having begun January 1, 2002. We believe we are
well-positioned and well-prepared for the transition and that our emphasis on
cost-effective services means that the inpatient rehabilitation PPS will have a
positive effect on our results of operations. Our early experience with payments
under PPS has been consistent with our internal estimates. However, because
implementation of PPS has only recently begun, we cannot be certain that the
ultimate impact of the PPS transition will be consistent with our current
expectations. In addition, the climate for both governmental and
non-governmental reimbursement frequently changes, and future changes in
reimbursement rates could have a material effect on our financial condition or
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 outpatient rehabilitation operations are
measured on locations within markets in which similar operations existed at the
end of the period and include the operations of additional outpatient
rehabilitation locations opened within the same market. New store outpatient
rehabilitation operations are measured on locations within new markets. Same
store operations in our other business lines are measured based on specific
locations. We may, from time to time, close or consolidate similar locations in
multi-site markets to obtain efficiencies and respond to changes in demand.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. In preparing these financial statements, we are required to make
estimates and judgments that affect the reported amounts of our assets,
liabilities, revenues and expenses. Those reported amounts could differ, in some
cases materially, if we made different estimates and judgments with respect to
particular items in our financial statements. We make such estimates and
judgments based on our historical experience and on assumptions that we believe
are reasonable under the circumstances in an effort to ensure that our financial
statements fairly reflect our financial condition and results of operations. We
describe some of the most important policies that we follow in making such
estimates and judgments below.
Revenues and Contractual Reserves
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 that are subject to final review and settlement by
appropriate authorities. We estimate contractual adjustments from
non-governmental third-party payors based on historical experience and the terms
of payor contracts. Our reimbursement from governmental third-party payors is
based upon cost reports, Medicare and Medicaid payment regulations 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. We estimate net realizable
amounts from governmental payors based on historical experience and
interpretations of such regulations and policies. In the event that final
reimbursement differs from our estimates, our actual revenues and net income,
and our accounts receivable, could vary from the amounts reported.
Allowance for Doubtful Accounts
As with any healthcare provider, some of our accounts receivable will
ultimately prove uncollectible for various reasons, including the inability of
patients or third-party payors to satisfy their financial obligations to us. We
estimate allowances for doubtful accounts based on the specific agings and payor
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classifications at each facility. Net accounts receivable includes only those
amounts we estimate to be collectible based on this evaluation. Unforeseen
factors, such as the insolvency of third-party payors, could cause our estimate
to be inaccurate and could cause our actual results and the amount of our
accounts receivable to vary from amounts reported in our financial statements.
Impairment of Goodwill
Many of our facilities came to us through acquisitions. 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 to the
estimated fair market 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
we acquired the group of assets being tested as part of a purchase business
combination, any goodwill that arose as part of the transaction is included as
part of the asset grouping.
In July 2001, the Financial Accounting Standards Board issued FASB
Statement No. 142, "Goodwill and Other Intangibles". SFAS No. 142 requires the
periodic testing of goodwill for impairment rather than a monthly amortization
of the balance. This testing takes place in two steps: (1) the determination of
the fair value of a reporting unit, and (2) the determination of the implied
fair value of the goodwill. We adopted SFAS No. 142 on January 1, 2002. We are
currently evaluating the financial impact of adopting the new policy. Because we
have recorded (and expect in the future to record) significant goodwill in
connection with acquisitions, the impact of this new policy on our future
reported results could be material.
RESULTS OF OPERATIONS
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 was 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.
A-8
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. 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 2.9% 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 non-recurring expense recognized in the third quarter of 1999
and $139,835,000 in non-recurring 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 we 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. Because local and regional
operations personnel were more directly involved in interactions with the
account obligors (primarily insurance companies and other third-party payors),
management determined that their assessment of the collectibility of accounts in
view of the specific payor environments in particular markets more accurately
reflected the likelihood of collectibility than information derived from the
centralized regional business offices. The fourth quarter charge reflected
management's decision to adopt a more conservative approach in estimating the
allowance for doubtful accounts in view of the information obtained by local and
regional operations personnel. 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, including recent payor insolvencies and
an increasing tendency of payors to dispute claims, pay claims beyond the time
limits contractually allowed or take discounts in excess of those contractually
allowed, our days' sales outstanding at the end of the second quarter of 1999
had grown to 94.5 days. Our subsequent reviews uncovered significant volumes of
denied or pended claims. Further commitment to collecting these older
receivables would have diluted our effectiveness in collecting current, ongoing
accounts. Accordingly, we revised our previous estimates of collectibility to
reflect the new policy. Excluding the non-recurring charge, the 1999 provision
for doubtful accounts was $85,121,000 or 2.1% of revenues.
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 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.
A-9
Twelve-Month Periods Ended December 31, 2000 and 2001
Our operations generated revenues of $4,380,477,000 in 2001, an increase of
$185,362,000, or 4.4%, as compared to 2000 revenues. Same store revenues for the
twelve months ended December 31, 2001 were $4,234,507,000, an increase of
$289,920,000, or 7.3%, as compared to the same period in 2000, excluding
facilities in operation in 2000 but no longer in operation in 2001. New store
revenues for 2001 were $85,238,000. The increase in revenues was primarily
attributable to increases in patient volume. Revenues generated from patients
under the Medicare and Medicaid programs respectively accounted for 31.1% and
2.6% of total revenues for 2001, compared to 29.0% and 2.6% of total revenues
for 2000. Revenues from any other single third-party payor were not significant
in relation to our total revenues. During 2001, same store inpatient days,
outpatient visits, surgical cases and diagnostic cases increased 1.5%, 3.9%,
5.3% and 9.8%, respectively. Revenue per inpatient day, outpatient visit,
surgical case and diagnostic case for same store operations increased by 2.6%,
0.7%, 0.8% and 4.2%, respectively.
Operating unit expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $2,905,043,000, or 66.3% of revenues,
for 2001, compared to 67.1% of revenues for 2000. Same store operating expenses
for 2001 were $2,790,349,000, or 65.9% of related revenues. New store operating
expenses were $58,662,000, or 68.8% of related revenues. Corporate general and
administrative expenses increased from $148,023,000 in 2000 to $167,206,000 in
2001. Included in corporate general and administrative expenses for the year
ended December 31, 2001, is a non-recurring expense item of approximately
$8,248,000 related to the settlement of litigation with the United States
Department of Justice. Excluding the non-recurring expense, as a percentage of
revenues, corporate general and administrative expenses increased from 3.5% in
2000 to 3.6% in 2001. Total operating expenses were $3,072,249,000, or 70.1% of
revenues, for 2001, compared to $2,964,386,000, or 70.7% of revenues, for 2000.
The provision for doubtful accounts was $107,871,000, or 2.5% of revenues, for
2001, compared to $98,037,000, or 2.3% of revenues, for 2000. Included in the
2001 provision for doubtful accounts is approximately $10,300,000 due to the
charge-off of a portion of the accounts receivable of our Richmond, Virginia
medical center, which we sold in the second quarter of 2001. While we retained
the facility's accounts receivable, we were dependent on the purchaser to
collect the retained accounts receivable for us because it controlled the
underlying information and collection systems related to such accounts, and the
charge-off reflects our estimate of the shortfall resulting from our inability
to control the collection activity. Excluding the non-recurring charge, the 2001
provision for doubtful accounts was $97,571,000, or 2.2% of revenues.
Depreciation and amortization expense was $375,270,000 for 2001, compared
to $360,847,000 for 2000. The increase was primarily attributable to our
investment in additional assets. Interest expense decreased to $218,100,000 in
2001, compared to $221,595,000 for 2000 (see "Liquidity and Capital Resources").
For 2001, interest income was $7,349,000, compared to $9,104,000 for 2000. The
changes in interest income and interest expense for 2001 were primarily
attributable to decreases in effective interest rates.
In the second quarter of 2001, we recorded a loss of $6,475,000 related to
the write-off of unamortized balances of loan fees on a secondary credit
facility we had established in 2000 and which we elected to terminate before its
stated maturity in 2003. These fees were being amortized over the original term
of the facility prior to our decision to terminate the facility early.
As described above, we recorded a net non-recurring expense item in the
second quarter of 2001 of approximately $139,883,000, reflecting the loss on the
sale of our Richmond, Virginia medical center and our occupational medicine
operations in that quarter. We recorded a net non-recurring expense item in the
fourth quarter of 2001 of approximately $18,847,000, related to the loss on the
sale of our United Kingdom diagnostic facilities and the sale of four of our
inpatient facilities in that quarter. We recorded a net non-recurring expense
item in the fourth quarter of 2001 of approximately $15,397,000, related to the
loss on a sale-leaseback transaction involving thirteen of our facilities. The
thirteen facilities included five rehabilitation hospitals, two surgery centers
and six diagnostic centers.
Income before minority interests and income taxes for 2001 was
$433,734,000, compared to $559,354,000 for 2000. Minority interests reduced
income before income taxes by $91,880,000 in 2001,
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compared to $99,081,000 for 2000. The decrease in minority interest expense is
due primarily to our repurchase of partnership interests in some of our surgery
centers in order to resyndicate those interests to new partners that we believe
will enhance the operations of those surgery centers. The provision for income
taxes for 2001 was $139,467,000, compared to $181,808,000 for 2000. Excluding
the tax effects of the impairment and restructuring charges in 2001, the
effective tax rate for 2000 and 2001 was 39.5% (see Note 10 of "Notes to
Consolidated Financial Statements" for further discussion). Net income for 2001
was $202,387,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had working capital of $1,377,459,000, including
cash and marketable securities of $278,456,000. Working capital at December 31,
2000 was $1,048,204,000, including cash and marketable securities of
$180,407,000. For 2001, cash provided by operations was $670,394,000, compared
to $796,764,000 for 2000. The change was primarily due to a decrease in net
income and growth in inventories, prepaid expenses and other current assets. For
2001, investing activities used $399,340,000, compared to using $778,420,000 for
2000. The change was primarily due to decreased purchases of property, plant and
equipment and also reflects net proceeds of $215,370,000 received from the sale
of certain facilities. Additions to property, plant and equipment and
acquisitions accounted for $440,032,000 and $5,032,000, respectively, during
2001. Those same investing activities accounted for $583,639,000 and
$74,137,000, respectively, in 2000. Financing activities used $174,788,000 and
provided $32,573,000 during 2001 and 2000, respectively. The change is primarily
due to the use of funds to pay down our bank debt in 2001. Net principal
payments on long-term debt for 2001 were $187,546,000, compared to net borrowing
proceeds for 2000 of $89,007,000.
Net accounts receivable were $940,414,000 at December 31, 2001, compared to
$946,965,000 at December 31, 2000. The number of days of average quarterly
revenues in ending receivables was 77.6 at December 31, 2001, compared to 80.9
at December 31, 2000. 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, 2001 and 2000.
We have a $1,750,000,000 revolving credit facility with Bank of America,
N.A. 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 5.25% for the twelve months ended December 31, 2001, compared to
the average prime rate of 6.94% during the same period. At December 31, 2001, we
had drawn $540,000,000 under the 1998 Credit Agreement. For further discussion,
see Note 7 of "Notes to Consolidated Financial Statements".
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 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. The
3.25% Convertible Debentures mature on April 1, 2003.
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
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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. The Senior
Notes mature on June 15, 2005 and June 15, 2008.
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.
On September 28, 2001, we issued $400,000,000 in 8 3/8% Senior Notes due
2011 (the "8 3/8% Notes"). Interest is payable on April 1 and October 1. The 8
3/8% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net
proceeds from the issuance of the 8 3/8% Notes were used to pay down
indebtedness under our credit facilities. The 8 3/8% Notes mature on October 1,
2011.
On September 28, 2001, we issued $200,000,000 in 7 3/8% Senior Notes due
2006 (the "7 3/8% Notes"). Interest is payable on April 1 and October 1. The 7
3/8% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net
proceeds from the issuance of the 7 3/8% Notes were used to pay down
indebtedness under our credit facilities. The 7 3/8% Notes mature on October 1,
2006.
During 1995 and 1998, we entered into two tax retention operating lease
agreements structured through financial institutions for our corporate
headquarters building and for nine of our rehabilitation hospitals. These
agreements have a total value of $187,000,000 and terminate on June 22, 2003. At
termination, unless we renegotiate and extend the leases, we must purchase the
facilities or obtain a purchaser for them. We provide a residual value guaranty
of approximately $163,690,000 related to these lease agreements.
In December 2001, we entered into a seven-and-one-half year operating lease
agreement to provide for the financing of our replacement medical center in
Birmingham, Alabama. During the construction period, we provide a residual value
guaranty for up to 89% of the value of the improvements. At December 31, 2001,
the value of the improvements totaled approximately $8,700,000. At maturity, our
residual value guaranty will total 85% of the value of the improvements.
The table below sets forth certain information concerning amounts due with
respect to our long-term debt and various other commitments as of December 31,
2001:
DUE DUE DUE DUE 2007
TOTAL 2002 2003-2004 2005-2006 AND BEYOND
------------------ ---------------- ------------------ ---------------- ------------------
Long-Term Debt $2,982,714,000 $ 6,921,000 $1,119,007,000 $259,212,000 $1,597,574,000
Capital Lease Obligations 24,387,000 1,786,000 7,977,000 5,016,000 9,608,000
Noncompete Obligations 19,846,000 13,205,000 6,374,000 267,000 --
Operating Leases 1,369,441,000 223,638,000 355,219,000 237,633,000 552,951,000
-------------- ------------ -------------- ------------ --------------
Total Obligations $4,396,388,000 $245,550,000 $1,488,577,000 $502,128,000 $2,160,133,000
While the rates of interest payable under our principal credit facility and
payments under some of our operating leases vary depending in part on investment
ratings of our debt, we have no credit or lease agreements which provide for the
acceleration of maturities or the termination of such agreements based upon any
change in our investment rating.
We intend to pursue the acquisition or development of additional healthcare
operations and related businesses, including outpatient rehabilitation
facilities, inpatient rehabilitation facilities, ambulatory surgery centers,
outpatient diagnostic centers and companies engaged in the provision of other
A-12
complementary services, and to expand certain of our existing facilities. While
it is not possible to estimate precisely the amounts that 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 $250,000,000 to
$350,000,000 on development activities, and on continued development of our
Integrated Service Model.
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, together with the proceeds from potential capital markets
transactions as market conditions indicate, 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 $1,873,000 at December 31,
2001, compared to $90,000 at December 31, 2000. The investment represents less
than 1% of total assets at December 31, 2001 and 2000. 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.
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 had a notional
amount of $240,000,000 and one has a notional amount of $175,000,000. These
matured six months and twelve months, respectively, from the date of the
original transaction. The notional amounts were used to measure interest to be
paid or received and did not represent an amount of exposure to credit loss. In
each of these arrangements, we paid the counterparty a fixed rate of interest on
the notional amount, and the counterparty paid us a variable rate of interest
equal to the 90-day LIBOR rate. The variable rates paid to us by the
counterparty on the six-month maturities and the twelve-month maturity were
reset once and three times, respectively, during the term of the swaps. Thus,
these interest rate swaps had 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 matured at various dates in April 2001 and November
2001. In 2001, the weighted average interest rate we were obligated to pay under
the swaps was 6.70%, and the weighted average interest rate we received was
5.25%. At December 31, 2001, we had no interest rate swaps outstanding.
With respect to our interest-bearing liabilities, approximately
$540,000,000 in long-term debt at December 31, 2001 is subject to variable rates
of interest, while the remaining balance in long-term debt of $2,486,947,000 is
subject to fixed rates of interest. This compares to $1,655,000,000 in long-term
debt subject to variable rates of interest and $1,556,829,000 in long-term debt
subject to fixed rates of interest at December 31, 2000 (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, 2001 except for the 3.25% Convertible
Debentures, 6.875% Senior Notes, 7.0% Senior Notes, 10 3/4% Senior Notes, 8 1/2%
Senior Notes, 8 3/8% Senior Notes and 7 3/8% Senior Notes. The fair value of the
3.25% Convertible Debentures at December 31, 2001 was
A-13
approximately $541,974,000. The fair value of the 6.875% Senior Notes due 2005
was approximately $250,191,000 at December 31, 2001. The fair value of the 7%
Senior Notes due 2008 was approximately $243,713,000 at December 31, 2001. The
fair value of the 10 3/4% Senior Notes due 2008 was approximately $386,365,000
at December 31, 2001. The fair value of the 8 1/2% Senior Notes due 2008 was
approximately $392,231,000 at December 31, 2001. The fair value of the 8 3/8%
Senior Notes due 2011 was approximately $414,940,000 at December 31, 2001. The
fair value of the 7 3/8% Senior Notes due 2006 was approximately $201,350,000 at
December 31, 2001. Based on a hypothetical 1% increase in interest rates, the
potential losses in future pre-tax earnings would be approximately $5,400,000.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, "Business Combinations", and FASB Statement No. 142,
"Goodwill and Other Intangibles". SFAS No. 141 eliminates the use of the pooling
method for business combinations and requires that all acquisitions be accounted
for under the purchase method. This statement is effective for acquisitions
completed after June 30, 2001. SFAS No. 142 requires the periodic testing of
goodwill for impairment rather than a monthly amortization of the balance. This
testing takes place in two steps: (1) the determination of the fair value of a
reporting unit, and (2) the determination of the implied fair value of the
goodwill. We adopted this statement on January 1, 2002. See "Critical Accounting
Policies", above.
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143
requires that the fair value of a liability for an asset retirement be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be determined. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. We have not determined the effect of the adoption
of this statement.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. We adopted this statement on
January 1, 2002. We are currently evaluating the effect of adopting this
statement.
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, through our senior management, we from time to time
make 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 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
A-14
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.
A-15
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, 2000 and 2001, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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, 2000 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Birmingham, Alabama
March 12, 2002
A-16
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
2000 2001
------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 180,317 $ 276,583
Other marketable securities ............................................ 90 1,873
Accounts receivable, net of allowances for doubtful accounts of $230,430
in 2000 and $264,050 in 2001 ......................................... 946,965 940,414
Inventories ............................................................ 92,943 112,354
Prepaid expenses and other current assets .............................. 210,803 325,941
Income tax refund receivable ........................................... -- 79,290
---------- ----------
Total current assets .................................................... 1,431,118 1,736,455
Other assets:
Loans to officers ...................................................... 6,242 2,252
Assets held for sale (Note 13) ......................................... 26,759 21,925
Other .................................................................. 197,897 318,766
---------- ----------
230,898 342,943
Property, plant and equipment, net (Note 5) ............................. 2,871,763 2,774,736
Intangible assets, net (Note 6) ......................................... 2,846,661 2,725,103
---------- ----------
Total assets ............................................................ $7,380,440 $7,579,237
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 78,762 $ 37,085
Salaries and wages payable ............................................. 87,730 65,364
Accrued interest payable and other liabilities ......................... 168,970 134,762
Deferred income taxes (Note 10) ........................................ 4,227 99,873
Current portion of long-term debt (Note 7) ............................. 43,225 21,912
---------- ----------
Total current liabilities ............................................... 382,914 358,996
Long-term debt (Note 7) ................................................. 3,168,604 3,005,035
Deferred income taxes (Note 10) ......................................... 160,365 259,535
Deferred revenue and other long-term liabilities ........................ 4,126 4,206
Minority interests in limited partnerships (Note 1) ..................... 137,977 154,541
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
-- 426,031,000 in 2000 and 430,422,000 in 2001 ....................... 4,260 4,304
Additional paid-in capital ............................................. 2,610,442 2,657,804
Accumulated other comprehensive income ................................. 7,074 16,607
Retained earnings ...................................................... 1,224,950 1,430,846
Treasury stock, at cost (38,742,000 shares) ............................ (280,524) (280,524)
Receivable from Employee Stock Ownership Plan .......................... (5,415) (2,699)
Notes receivable from stockholders, officers and management
employees ............................................................ (34,333) (29,414)
---------- ----------
Total stockholders' equity .............................................. 3,526,454 3,796,924
---------- ----------
Total liabilities and stockholders' equity .............................. $7,380,440 $7,579,237
========== ==========
See accompanying notes.
A-17
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Revenues .................................................. $4,072,107 $4,195,115 $4,380,477
Operating unit expenses ................................... 2,688,849 2,816,363 2,905,043
Corporate general and administrative expenses ............. 149,285 148,023 167,206
Provision for doubtful accounts ........................... 342,708 98,037 107,871
Depreciation and amortization ............................. 374,248 360,847 375,270
Loss on termination of credit facility (Note 1) ........... -- -- 6,475
Loss on sale of assets (Note 16) .......................... -- -- 174,127
Impairment and restructuring charges (Note 13) ............ 121,037 -- --
Interest expense .......................................... 176,652 221,595 218,100
Interest income ........................................... (10,587) (9,104) (7,349)
---------- ---------- ----------
3,842,192 3,635,761 3,946,743
---------- ---------- ----------
Income before income taxes and minority interests ......... 229,915 559,354 433,734
Provision for income taxes (Note 10) ...................... 66,929 181,808 139,467
---------- ---------- ----------
162,986 377,546 294,267
Minority interests ........................................ 86,469 99,081 91,880
---------- ---------- ----------
Net income ................................................ $ 76,517 $ 278,465 $ 202,387
========== ========== ==========
Weighted average common shares outstanding ................ 408,195 385,666 389,717
========== ========== ==========
Net income per common share ............................... $ 0.19 $ 0.72 $ 0.52
========== ========== ==========
Weighted average common shares outstanding -
assuming dilution ........................................ 414,570 391,016 399,227
========== ========== ==========
Net income per common share - assuming dilution ........... $ 0.18 $ 0.71 $ 0.51
========== ========== ==========
See accompanying notes.
A-18
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
COMMON STOCK
-------------------- ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL
--------- ---------- --------------
(IN THOUSANDS)
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 ................................... 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 ................................... 2,049 20 14,768
Income tax benefits related to incentive stock options .............. -- -- 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
Comprehensive income: ...............................................
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Unrealized gain on available for sale securities (net $2,590 tax
expense) ........................................................... -- -- --
Comprehensive income ................................................
Proceeds from exercise of options ................................... 4,391 44 31,765
Income tax benefits related to incentive stock options .............. -- -- 12,806
Restricted stock grants issued ...................................... -- -- 1,997
Reduction in receivable from ESOP ................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Sale of limited partnership units ................................... -- -- --
Variable stock option appreciation .................................. -- -- 794
------- ------- -----------
Balance at December 31, 2001 ........................................ 430,422 $ 4,304 $ 2,657,804
======= ======= ===========
ACCUMULATED
OTHER TREASURY STOCK
COMPREHENSIVE RETAINED -----------------------
INCOME (LOSS) EARNINGS SHARES AMOUNT
--------------- --------------- -------- --------------
(IN THOUSANDS)
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 ................................... -- -- -- --
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 ................................... -- -- -- --
Income tax benefits related to incentive stock options .............. -- -- -- --
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)
Comprehensive income: ...............................................
Net income ......................................................... -- 202,387 -- --
Translation adjustment ............................................. 5,566 -- -- --
Unrealized gain on available for sale securities (net $2,590 tax
expense) ........................................................... 3,967 -- -- --
Comprehensive income ................................................
Proceeds from exercise of options ................................... -- -- -- --
Income tax benefits related to incentive stock options .............. -- -- -- --
Restricted stock grants issued ...................................... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Sale of limited partnership units ................................... -- 3,509 -- --
Variable stock option appreciation .................................. -- -- -- --
--------- ----------- ------ -----------
Balance at December 31, 2001 ........................................ $ 16,607 $ 1,430,846 38,742 $ (280,524)
========= =========== ====== ===========
RECEIVABLE NOTES TOTAL
FROM ESOP RECEIVABLE STOCKHOLDERS' EQUITY
-------------- -------------- ---------------------
(IN THOUSANDS)
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 ................................... -- -- 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 ................................... -- -- 14,788
Income tax benefits related to incentive stock options .............. -- -- 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
Comprehensive income: ...............................................
Net income ......................................................... -- -- 202,387
Translation adjustment ............................................. -- -- 5,566
Unrealized gain on available for sale securities (net $2,590 tax
expense) ........................................................... -- -- 3,967
-----------
Comprehensive income ................................................ 211,920
Proceeds from exercise of options ................................... -- -- 31,809
Income tax benefits related to incentive stock options .............. -- -- 12,806
Restricted stock grants issued ...................................... -- -- 1,997
Reduction in receivable from ESOP ................................... 2,716 -- 2,716
Payments received on stockholders' notes receivable ................. -- 4,919 4,919
Sale of limited partnership units ................................... -- -- 3,509
Variable stock option appreciation .................................. -- -- 794
---------- ---------- -----------
Balance at December 31, 2001 ........................................ $ (2,699) $ (29,414) $ 3,796,924
========== ========== ===========
See accompanying notes.
A-19
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
------------- ------------- -------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income ..................................................... $ 76,517 $ 278,465 $ 202,387
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 374,248 360,847 375,270
Provision for doubtful accounts ............................. 342,708 98,037 107,871
Equity-based compensation ................................... 2,562 6,947 2,791
Impairment and restructuring charges ........................ 121,037 -- --
Loss on sale of assets ...................................... -- -- 174,127
Income applicable to minority interests of limited
partnerships ............................................... 86,469 99,081 91,880
Loss on termination of credit facility ...................... -- -- 6,475
(Benefit) provision for deferred income taxes ............... (5,850) 96,448 192,226
Changes in operating assets and liabilities, net of effects
of acquisitions: ...........................................
Accounts receivable ...................................... (332,977) (150,283) (126,861)
Inventories, prepaid expenses and other current
assets .................................................. 67,428 (7,877) (234,807)
Accounts payable and accrued expenses .................... (27,631) 15,099 (120,965)
---------- ---------- ----------
Net cash provided by operating activities ...................... 704,511 796,764 670,394
INVESTING ACTIVITIES
Purchases of property, plant and equipment ..................... (474,115) (583,639) (440,032)
Proceeds from sale of non-strategic assets ..................... 5,693 2,713 215,370
Additions to intangible assets, net of effects of acquisitions . (33,140) (83,291) (40,474)
Assets obtained through acquisitions, net of liabilities
assumed ....................................................... (104,304) (74,137) (5,032)
Payments on purchase accounting accruals ....................... (22,063) -- --
Purchase of limited partnership units .......................... (5,998) (21,116) (47,947)
Changes in other assets ........................................ 12,866 (22,342) (79,442)
Net change in other marketable securities ...................... 204 3,392 (1,783)
---------- ---------- ----------
Net cash used in investing activities .......................... (620,857) (778,420) (399,340)
A-20
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 2000 2001
------------- --------------- ---------------
(IN THOUSANDS)
FINANCING ACTIVITIES
Proceeds from borrowings .................................... $ 756,000 $ 1,585,000 $ 1,850,201
Principal payments on long-term debt ........................ (470,621) (1,495,993) (2,037,747)
Proceeds from exercise of options ........................... 4,371 14,788 31,809
Purchase of treasury stock .................................. (256,691) (2,020) --
Reduction in receivable from ESOP ........................... 2,271 2,483 2,716
(Increase) decrease in loans from stockholders .............. (39,312) 10,100 4,919
Proceeds from investment by minority interests .............. 11,582 12,901 33,685
Payment of cash distributions to limited partners ........... (100,319) (91,126) (62,942)
Foreign currency translation adjustment ..................... (362) (3,560) 2,571
---------- ------------ ------------
Net cash (used in) provided by financing activities ......... (93,081) 32,573 (174,788)
---------- ------------ ------------
(Decrease) increase in cash and cash equivalents ............ (9,427) 50,917 96,266
Cash and cash equivalents at beginning of year .............. 138,827 129,400 180,317
---------- ------------ ------------
Cash and cash equivalents at end of year .................... $ 129,400 $ 180,317 $ 276,583
========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ................................................... $ 159,496 $ 232,776 $ 214,632
Income taxes ............................................... 88,575 9,153 36,169
Non-cash investing activities:
The Company assumed liabilities of $9,529,000, $9,178,000 and $843,000 during
the years ended December 31, 1999, 2000 and 2001, respectively, in connection
with its acquisitions.
See accompanying notes.
A-21
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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 segments: Inpatient and other clinical services,
Outpatient services and Non-patient care services. 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. The Non-patient care services segment includes
the operations of the Company's corporate office, general and administrative
costs, non-clinical subsidiaries and other operations that are independent of
the Company's inpatient and outpatient services segments.
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).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
consolidated financial statements and notes. Actual results could differ
materially 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 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
A-22
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
receivables included in accounts receivable were $69,480,000 and $135,954,000 at
December 31, 2000 and 2001, respectively. Final determination of the settlements
is subject to review by appropriate authorities. Such review may result in
changes in recorded estimates, possibly by material amounts, in the future. The
differences between original estimates made by the Company and subsequent
revisions (including final settlement) were not material to the Company's
operating results. Allowances believed by management to be adequate 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,
-------------------
2000 2001
-------- --------
Medicare ................. 27% 32%
Medicaid ................. 5 5
Other .................... 68 63
-- --
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 $178,836,000, $223,321,000
and $218,102,000, of which $2,184,000, $1,726,000 and $2,000 was capitalized
during 1999, 2000 and 2001, 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. 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.
START-UP COSTS
As required by SOP 98-5, Reporting on the Costs of Start-Up Activities, the
costs of start-up activities are expensed as incurred.
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, 2001), the effect of which is removed from the results of
operations of the Company.
A-23
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 and 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.
INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 2000 2001
------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Net income available to common stockholders ............... $ 76,517 $ 278,465 $ 202,387
========= ========== ==========
Denominator:
Denominator for basic earnings per share --
weighted-average shares ................................. 408,195 385,666 389,717
Effect of dilutive securities:
Net effect of dilutive stock options .................... 5,525 4,600 8,852
Restricted shares issued ................................ 850 750 658
--------- ---------- ----------
Dilutive potential common shares .......................... 6,375 5,350 9,510
--------- ---------- ----------
Denominator of diluted earnings per share -- adjusted
weighted-average shares and assumed conversions ......... 414,570 391,016 399,227
========= ========== ==========
Basic earnings per share ................................... $ 0.19 $ 0.72 $ 0.52
========= ========== ==========
Diluted earnings per share ................................. $ 0.18 $ 0.71 $ 0.51
========= ========== ==========
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
A-24
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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).
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, 2000 and 2001, are included with accrued interest payable and other
liabilities in the accompanying consolidated balance sheets.
In the fourth quarter of 2000, the Company formed an offshore captive
insurance subsidiary to which it transitioned the administration of its
self-insurance programs. The captive is an independent insurance company
primarily designed to insure the Company's first layer of coverage. The Company
purchases commercial insurance for excess layers. Currently, the captive
provides primary coverage for the Company's professional and general liability
risk, workers' compensation risk and the construction risk associated with the
building of the Company's replacement medical center facility in Birmingham,
Alabama. The Company expects to evaluate other lines of insurance suitable for
placement with the captive on an ongoing basis.
RECLASSIFICATIONS
Certain amounts in 1999 and 2000 financial statements have been
reclassified to conform to the 2001 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, Business Combinations ("SFAS No. 141"), and FASB Statement
No. 142, Goodwill and Other Intangibles ("SFAS No. 142"). SFAS No. 141
eliminates the use of the pooling method for business combinations and requires
that all acquisitions be accounted for under the purchase method. This statement
is effective for acquisitions completed after June 30, 2001. SFAS No. 142
requires the periodic testing of goodwill for impairment rather than a monthly
amortization of the balance. This testing takes place in two steps: (1) the
determination of the fair value of a reporting unit, and (2) the determination
of the implied fair value of the goodwill. The Company will adopt this statement
on January 1, 2002 and is currently evaluating the financial impact of adopting
the new policy.
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143").
SFAS No. 143 requires that the fair value of a liability for an asset retirement
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be determined. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The effect of the adoption of this statement has
not been determined by the Company.
A-25
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS No. 144"). SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company will
adopt this statement on January 1, 2002.
2. MERGERS
The Company had no mergers for the three years ended December 31, 2001.
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
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
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 1999, 2000 and
2001. At December 31, 2001, 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 or complementary 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, 2001 represents the
original cost of the investments, which management believes is not impaired.
A-26
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
-----------------------------
2000 2001
------------- -------------
(IN THOUSANDS)
Land ...................................... $ 138,277 $ 114,880
Buildings ................................. 1,312,375 1,251,027
Leasehold improvements .................... 479,404 485,745
Furniture, fixtures and equipment ......... 1,821,403 1,923,439
Construction-in-progress .................. 83,406 70,175
---------- ----------
3,834,865 3,845,266
Less accumulated depreciation and
amortization ............................. 963,102 1,070,530
---------- ----------
$2,871,763 $2,774,736
========== ==========
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31,
-----------------------------
2000 2001
-------------- -------------
(IN THOUSANDS)
Debt issue costs ........................ $ 66,179 $ 77,813
Noncompete agreements ................... 124,932 106,271
Cost in excess of net asset value of
purchased facilities ................... 3,038,560 3,010,838
Other ................................... 8,616 6,960
----------- -----------
3,238,287 3,201,882
Less accumulated amortization ........... 391,626 476,779
----------- -----------
$2,846,661 $2,725,103
=========== ===========
A-27
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-----------------------------
2000 2001
------------- -------------
(IN THOUSANDS)
Notes and bonds payable:
Advances under $1,750,000,000
revolving credit facility .............. $1,655,000 $ 540,000
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 ................................... 350,000 350,000
8 1/2% Senior Notes due 2008 ............ -- 375,000
8 3/8% Senior Notes due 2011 ............ -- 400,000
7 3/8% Senior Notes due 2006 ............ -- 200,000
Notes payable to banks and various
other notes payable, at interest rates
from 5.5% to 14.9% ..................... 104,031 64,683
Hospital revenue bonds payable .......... 11,674 9,668
Noncompete agreements payable with
payments due at intervals ranging
through December 2005 .................. 23,374 19,846
---------- ----------
3,211,829 3,026,947
Less amounts due within one year ......... 43,225 21,912
---------- ----------
$3,168,604 $3,005,035
========== ==========
The fair value of the total long-term debt approximates book value at
December 31, 2001 except for the 3.25% Convertible Subordinated Debentures due
2003, the 6.875% Senior Notes due 2005, the 7.0% Senior Notes due 2008, the 10
3/4% Senior Subordinated Notes due 2008, the 8 1/2% Senior Notes due 2008, the 8
3/8% Senior Notes due 2011 and the 7 3/8% Senior Notes due 2006. The fair value
of the 3.25% Convertible Subordinated Debentures due 2003 was approximately
$541,974,000 at December 31, 2001. The fair value of the 6.875% Senior Notes due
2005 was approximately $250,191,000 at December 31, 2001. The fair value of the
7.0% Senior Notes due 2008 was approximately $243,713,000 at December 31, 2001.
The fair value of the 10 3/4% Senior Subordinated Notes due 2008 was
approximately $386,365,000 at December 31, 2001. The fair value of the 8 1/2%
Senior Notes due 2008 was approximately $392,231,000 at December 31, 2001. The
fair value of the 8 3/8% Senior Notes due 2011 was approximately $414,940,000 at
December 31, 2001. The fair value of the 7 3/8% Senior Notes due 2006 was
approximately $201,350,000 at December 31, 2001. 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
A-28
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
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, 2001, the effective interest rate associated with the 1998 Credit
Agreement was approximately 2.49%.
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 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. The 2000 Credit Agreement has been terminated
by the Company. During the second quarter of 2001, the Company recorded a loss
of $6,475,000 related to the write-off of unamortized loan fees associated with
the early termination of the 2000 Credit Agreement.
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. The 3.25% Convertible Debentures mature on
April 1, 2003.
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. The Senior
Notes mature on June 15, 2005 and June 15, 2008, respectively.
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.
On February 1, 2001, the Company 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 the Company. The
net proceeds from the issuance of the 8 1/2% Notes were used by the Company to
pay down indebtedness outstanding under its then-existing credit facilities. The
8 1/2% Notes mature on February 1, 2008.
A-29
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
On September 28, 2001, the Company issued $400,000,000 in 8 3/8% Senior
Notes due 2011 (the "8 3/8% Notes"). Interest is payable on April 1 and October
1. The 8 3/8% Notes are unsecured, unsubordinated obligations of the Company.
The net proceeds from the issuance of the 8 3/8% Notes were used by the Company
to pay down indebtedness outstanding under its then-existing credit facilities.
The 8 3/8% Notes mature on October 1, 2011.
On September 28, 2001, the Company issued $200,000,000 in 7 3/8% Senior
Notes due 2006 (the "7 3/8% Notes"). Interest is payable on April 1 and October
1. The 7 3/8% Notes are unsecured, unsubordinated obligations of the Company.
The net proceeds from the issuance of the 7 3/8% Notes were used by the Company
to pay down indebtedness outstanding under its then-existing credit facilities.
The 7 3/8% Notes mature on October 1, 2006.
Principal maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------------ ---------------
2002 ......................... $ 21,912
2003 ......................... 1,121,123
2004 ......................... 12,235
2005 ......................... 258,271
2006 ......................... 6,224
After 2007 ................... 1,607,182
----------
$3,026,947
==========
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 No. 123"). SFAS No. 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 No. 25"), and related
interpretations, or selecting the fair value method of expense recognition as
described in SFAS No. 123. The Company has elected to follow APB No. 25 in
accounting for its employee stock options. The Company follows SFAS No. 123 in
accounting for its non-employee stock options. The total compensation expense
associated with non-employee stock options granted in 1999, 2000 and 2001 was
not material.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
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 1999, 2000 and 2001, respectively: risk-free interest rates of
6.21%, 5.11% and 5.10%; dividend yield of 0%; volatility factors of the expected
market price of the Company's common stock of .77, .71 and .49; and a
weighted-average expected life of the options of 5.0 years, 5.2 years and 5.5
years.
A-30
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS - (CONTINUED)
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.
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,
------------------------------------------
1999 2000 2001
------------ -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro forma net income ......... $ 47,149 $ 266,684 $ 178,255
Pro forma earnings per share:
Basic ...................... 0.12 0.69 0.46
Diluted .................... 0.12 0.69 0.45
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
1999 2000 2001
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
----------- ---------- ----------- ---------- ----------- ---------
Options outstanding January 1 .............. 34,437 $12 36,028 $11 35,982 $10
Granted ................................... 6,589 11 3,615 5 4,969 14
Exercised ................................. (772) 5 (1,957) 8 (4,433) 7
Canceled .................................. (4,226) 20 (1,704) 15 (935) 18
------- --- ------- --- ------- ---
Options outstanding at December 31 ......... 36,028 $11 35,982 $10 35,583 $11
Options exercisable at December 31 ......... 31,689 $11 31,429 $10 30,721 $11
Weighted average fair value of options
granted during the year ................... $ 7.14 $ 3.07 $ 9.06
The following table summarizes information about stock options outstanding
at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
2001 LIFE PRICE 2001 PRICE
---------------- ----------- ---------- --------------- -----------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
Under $10.00 ............. 19,256 3.73 $ 6.14 17,344 $ 6.16
$10.00 -- $23.63 ......... 16,147 6.54 15.96 13,203 16.60
$23.63 and above ......... 180 6.04 27.12 174 27.10
A-31
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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.
A-32
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
2001 ACQUISITIONS
At various dates and in separate transactions throughout 2001, the Company
acquired two outpatient rehabilitation facilities, one outpatient surgery center
and one diagnostic imaging center. The acquired operations are located in
California, Maine and Texas. The total purchase price of the acquired operations
was approximately $5,032,000, which was paid in cash.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $750,000. 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 2001 acquisitions
described above was approximately $97,000. The total cost of the 2001
acquisitions exceeded the fair value of the net assets acquired by approximately
$4,935,000. 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 2001 acquisitions should be
amortized over 20 years on a straight-line basis. No other identifiable
intangible assets were recorded in the acquisitions described above. At December
31, 2001, the purchase price allocation associated with the 2001 acquisitions is
preliminary in nature. During 2002 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.
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, 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)
======== ========= =========
A-33
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES - (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 2001 are as follows:
CURRENT NONCURRENT TOTAL
------------ --------------- ---------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss ....................................... $ -- $ 4,676 $ 4,676
Impairment and restructuring charges ..................... -- 41,731 41,731
Other .................................................... 317 -- 317
--------- --------- ---------
Total deferred tax assets ................................. 317 46,407 46,724
Deferred tax liabilities:
Depreciation and amortization ............................ -- (194,881) (194,881)
Bad debts ................................................ (99,168) -- (99,168)
Capitalized costs ........................................ -- (100,945) (100,945)
Accruals ................................................. (1,022) -- (1,022)
Unrealized gain on available for sale securities ......... -- (10,116) (10,116)
--------- --------- ---------
Total deferred tax liabilities ............................ (100,190) (305,942) (406,132)
--------- --------- ---------
Net deferred tax liabilities .............................. $ (99,873) $(259,535) $(359,408)
========= ========= =========
At December 31, 2001, the Company has net operating loss carryforwards of
approximately $12,889,000 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.
The provision for income taxes was as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 2000 2001
---------- ----------- --------------
(IN THOUSANDS)
Current:
Federal ......... $61,156 $ 74,243 $ (46,534)
State ........... 11,623 11,117 (6,225)
------- -------- ---------
72,779 85,360 (52,759)
Deferred:
Federal ......... (4,916) 83,886 169,557
State ........... (934) 12,562 22,669
------- -------- ---------
(5,850) 96,448 192,226
------- -------- ---------
$66,929 $181,808 $ 139,467
======= ======== =========
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,
------------------------------------------
1999 2000 2001
------------ ------------ ------------
(IN THOUSANDS)
Federal taxes at statutory rates ........................ $ 80,470 $195,774 $151,807
Add (deduct):
State income taxes, net of federal tax benefit ......... 6,948 15,391 10,689
Minority interests ..................................... (30,264) (34,678) (32,158)
Nondeductible goodwill ................................. 9,304 2,452 6,869
Disposal/impairment charges ............................ 6,128 -- --
Other .................................................. (5,657) 2,869 2,260
-------- -------- --------
$ 66,929 $181,808 $139,467
======== ======== ========
A-34
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001 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 transitioned
the administration of its self-insurance programs (see Note 1).
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.
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 various
federal and state regulatory agencies 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, 2001, 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 the
Company's 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.
A-35
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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.
In late December 2001, the Department of Justice (DOJ) filed a Notice of
Election to Intervene in Part in a case styled United States ex rel. DeWayne
Manning v. HEALTHSOUTH Corporation. The Department's Notice indicated that it
was partially intervening in a complaint under the federal False Claims Act
filed by a former employee of the Company which alleged that certain physical
therapy practices, primarily involving the use of physical therapy aids and
other assistive personnel, violated Medicare regulations related to the
provision of physical therapy to Medicare beneficiaries in freestanding
outpatient centers. On January 15, 2002, the Court entered an Order granting the
Department 120 days from that date to file and serve its complaint. The Company
has not been served with any of the underlying complaints to date. Based upon
the information available, management believes that the DOJ's theory with
respect to the issues regarding the use of physical therapy aides and other
assistive personnel is without support in applicable law or regulation and is
inconsistent with traditionally accepted practices in the physical therapy
industry. Accordingly, the Company expects to vigorously defend against the
claims asserted at such time as it is served with the complaints.
At December 31, 2001, committed capital expenditures for the next twelve
months are $57,063,000.
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 $233,895,000,
$248,782,000 and $252,684,000 for the years ended December 31, 1999, 2000 and
2001, respectively.
The Company has entered into two tax retention operating lease agreements
for its Corporate headquarters and nine rehabilitation hospitals. These
agreements terminate on June 22, 2003 and at termination, unless the Company
renegotiates to extend the leases, it must purchase the facilities or obtain a
purchaser for them. The Company provides a residual value guaranty of
approximately $163,690,000 related to these lease agreements.
In December 2001, the Company entered into a seven-and-one-half year lease
to fund the construction and equipping of a new state-of-the-art digital
hospital. The lease will be classified as an operating lease for financial
reporting purposes. The digital hospital will be constructed in Birmingham,
Alabama, on land that is owned by the Company and is ground leased to the lessor
for the term of the lease. The terms of the lease provide for thirty months in
which to construct the project. The lessor will then lease the completed project
to the Company for a minimum of five years. At the end of the lease term, the
Company has the option to purchase the facility or obtain a purchaser for the
facility. The Company provides a residual value guaranty of 85% of the value of
the improvements. In connection with the lease, the lessor will incur debt up to
$200,000,000, which is not reflected in the accompanying financial statements of
the Company.
A-36
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)
------------------------------------------ ---------------
2002 ..................................... $ 223,638
2003 ..................................... 191,737
2004 ..................................... 163,482
2005 ..................................... 131,332
2006 ..................................... 106,301
After 2007 ............................... 552,951
----------
Total minimum payments required .......... $1,369,441
==========
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 $4,608,000,
$4,712,000 and $4,050,000 in 1999, 2000 and 2001, 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, 2001, the combined ESOP Loans had a balance
of $2,699,000. 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 $3,197,000, $3,176,000 and $1,519,000 in
1999, 2000 and 2001, respectively. Interest incurred on the ESOP Loans was
approximately $715,000, $483,000 and $229,000 in 1999, 2000 and 2001,
respectively. Approximately 2,770,000 shares owned by the ESOP have been
allocated to participants at December 31, 2001.
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.
A-37
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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, during
the year ended December 31, 1998. 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 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. Approximately 97.8% of the locations
identified in the fourth quarter restructuring plan have been closed.
A-38
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ACTIVITY
------------------------ ------------------------
RESTRUCTURING CASH NON-CASH BALANCE AT CASH NON-CASH
DESCRIPTION CHARGE PAYMENTS IMPAIRMENTS 12/31/98 PAYMENTS IMPAIRMENTS
-------------------------------------- --------------- ---------- ------------- ------------ ---------- -------------
(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 -- 415 415 --
--------- -------- --------- -------- -------- ---
Total Third Quarter 1998 Charge ...... $ 71,709 $ 3,638 $ 67,656 $ 415 $ 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 17,110 --
Other assets ........................ 19,857 -- 19,857 -- -- --
Severance packages .................. 6,027 4,753 -- 1,274 1,274 --
Other incremental costs ............. 24,089 8,100 -- 15,989 8,978 --
--------- -------- --------- -------- -------- ---
Total Fourth Quarter 1998 Charge ..... $ 404,073 $ 12,853 $ 324,481 $ 66,739 $ 27,362 $--
========= ======== ========= ======== ======== ===
ACTIVITY ACTIVITY
------------------------ ------------------------
BALANCE AT CASH NON-CASH BALANCE AT CASH NON-CASH BALANCE AT
DESCRIPTION 12/31/99 PAYMENTS IMPAIRMENTS 12/31/00 PAYMENTS IMPAIRMENTS 12/31/01
-------------------------------------- ------------ ---------- ------------- ------------ ---------- ------------- -----------
(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 ............. -- -- -- -- -- -- --
-------- -------- --- -------- ------- --- ------
Total Third Quarter 1998 Charge ...... $ -- $ -- $-- $ -- $ -- $-- $ --
======== ======== === ======== ======= === ======
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 ............. 32,366 11,253 -- 21,113 $11,648 -- 9,465
Other assets ........................ -- -- -- -- -- -- --
Severance packages .................. -- -- -- -- -- -- --
Other incremental costs ............. 7,011 7,011 -- -- -- -- --
-------- -------- --- -------- ------- --- ------
Total Fourth Quarter 1998 Charge ..... $ 39,377 $ 18,264 $-- $ 21,113 $11,648 $-- $9,465
======== ======== === ======== ======= === ======
A-39
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
The remaining balances at December 31, 2000 and 2001, are included in
accrued interest payable and other liabilities in the accompanying consolidated
balance sheets.
In addition to the third and fourth quarter 1998 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 an 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, which were associated with the 1998 closed facilities.
The fair value of assets remaining to be sold is approximately $19,725,000
compared to $24,559,000 as of December 31, 2000. The Company expects to have all
properties sold by the end of 2003. 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.
During the fourth quarter of 1999, in accordance with FASB Statement No.
121 ("SFAS 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 2002 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 these
segments 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. Non-patient care assets represent those assets under the direct
management of Corporate office personnel.
Operating results and other financial data are presented for the principal
operating segments as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
------------- ------------- -------------
(IN THOUSANDS)
Revenues:
Inpatient and other clinical services ......... $1,963,551 $1,928,823 $2,008,108
Outpatient services ........................... 2,086,518 2,248,410 2,349,420
---------- ---------- ----------
4,050,069 4,177,233 4,357,528
Non-patient care services ..................... 22,038 17,882 22,949
---------- ---------- ----------
Consolidated revenues .......................... $4,072,107 $4,195,115 $4,380,477
========== ========== ==========
A-40
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
------------- ------------- -------------
(IN THOUSANDS)
Income before income taxes and minority interests (excluding
loss on sale of assets and impairment and restructuring
charge):
Inpatient and other clinical services ..................... $ 532,650 $ 380,254 $ 419,544
Outpatient services ....................................... 445,860 509,910 565,191
---------- ---------- ----------
978,510 890,164 984,735
Non-patient care services ................................. (347,581) (330,810) (351,851)
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ................................................... 630,929 559,354 632,884
Loss on sale of assets and impairment and restructuring charge (401,014) -- (199,150)
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ................................................... $ 229,915 $ 559,354 $ 433,734
========== ========== ==========
Depreciation and amortization:
Inpatient and other clinical services ....................... $ 136,739 $ 128,344 $ 130,422
Outpatient services ......................................... 163,236 172,011 189,950
---------- ---------- ----------
299,975 300,355 320,372
Non-patient care services ................................... 74,273 60,492 54,898
---------- ---------- ----------
Consolidated depreciation and amortization ................... $ 374,248 $ 360,847 $ 375,270
========== ========== ==========
Interest expense:
Inpatient and other clinical services ....................... $ 45,120 $ 58,134 $ 40,602
Outpatient services ......................................... 9,608 10,328 7,958
---------- ---------- ----------
54,728 68,462 48,560
Non-patient care services ................................... 121,924 153,133 169,540
---------- ---------- ----------
Consolidated interest expense ................................ $ 176,652 $ 221,595 $ 218,100
========== ========== ==========
Interest income:
Inpatient and other clinical services ....................... $ 1,869 $ 1,876 $ 611
Outpatient services ......................................... 1,518 1,182 975
---------- ---------- ----------
3,387 3,058 1,586
Non-patient care services ................................... 7,200 6,046 5,763
---------- ---------- ----------
Consolidated interest income ................................. $ 10,587 $ 9,104 $ 7,349
========== ========== ==========
A-41
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
------------- ------------- -------------
(IN THOUSANDS)
EBITDA (excluding loss on sale of assets and impairment and
restructuring charge):
Inpatient and other clinical services ....................... $ 710,202 $ 566,823 $ 589,958
Outpatient services ......................................... 620,822 691,591 762,123
---------- ---------- ----------
1,331,024 1,258,414 1,352,081
Non-patient care services ................................... (159,782) (125,722) (133,176)
---------- ---------- ----------
Consolidated EBITDA (excluding loss on sale of assets and
impairment and restructuring charge): 1,171,242 1,132,692 1,218,905
Loss on sale of assets and impairment and restructuring charge (401,014) -- (199,150)
---------- ---------- ----------
Consolidated EBITDA .......................................... $ 770,228 $1,132,692 $1,019,755
========== ========== ==========
Assets:
Inpatient and other clinical services ....................... $3,277,840 $3,168,489
Outpatient services ......................................... 3,778,884 3,826,972
---------- ----------
7,056,724 6,995,461
Non-patient care services ................................... 323,716 583,776
---------- ----------
Total assets ................................................. $7,380,440 $7,579,237
========== ==========
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 paid $100,044,296 for the purchase of goods, supplies and
related services. In addition, the Company provided a guaranty of $15,000,000 of
indebtedness from MedCenterDirect.com to an outside lender.
In April 2001, the Company acquired 3,932,500 shares of common stock in
Source Medical Solutions, Inc. (Source Medical) in a private placement for a
purchase price of $0.10 per share. Various persons affiliated or associated with
the Company, including some of the Company's executive officers, also purchased
shares in the private placement. Source Medical was established for the purpose
of allowing commercial exploitation of the Company's wireless clinical
documentation system, which was originally known as the HEALTHSOUTH Clinical
Automation Program and is now marketed by Source Medical under the name
"TherapySource". As of July 1, 2001, the Company sold the assets, including the
intellectual property assets, associated with TherapySource to Source Medical
for $25,000,000 and entered into an agreement to license TherapySource back from
Source Medical. During 2001, the Company paid Source Medical approximately
$2,513,813 for services under such agreement. At December 31, 2001, the Company
has a receivable from Source Medical of approximately $82,000,000 included in
Other Assets on the balance sheet. In addition, the Company provided a guaranty
of $6,000,000 of indebtedness from Source Medical to an outside lender.
A-42
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. LOSS ON SALE OF ASSETS
During the second quarter of 2001, the Company sold substantially all of
its occupational medicine operations to US Healthworks, Inc. and its Richmond,
Virginia medical center to HCA -- The Healthcare Company. These transactions
yielded net cash proceeds of approximately $98,882,000 and a net loss on the
sale of assets of $139,883,000.
During the fourth quarter of 2001, the Company sold its diagnostic
operations in the United Kingdom to Lodestone Patient Care, Limited and four
non-strategic rehabilitation hospitals to Meadowbrook Healthcare Corporation.
These transactions yielded net cash proceeds of approximately $31,919,000 and a
net loss on sale of assets of $18,847,000. The Company also completed a
sale-leaseback transaction for thirteen of its facilities which yielded net cash
proceeds of $79,735,000 and a net loss on the sale of assets of $15,397,000.
Aggregate annual lease payments for these properties total $8,558,000.
A-43
MARKET FOR HEALTHSOUTH'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
----------- -----------
2001
----
First Quarter ................ $16.50 $12.55
Second Quarter ............... 15.97 11.40
Third Quarter ................ 18.30 14.35
Fourth Quarter ............... 16.50 11.99
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 April 2, 2002, was $13.84.
There were approximately 6,680 holders of record of HEALTHSOUTH common
stock as of March 28, 2002.
We have never paid cash dividends on our common stock 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
We had no unregistered sales of equity securities in 2001.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
We have not changed independent accountants within the 24 months prior to
December 31, 2001.
A-44
APPENDIX B
HEALTHSOUTH AUDIT COMMITTEE CHARTER
ORGANIZATION
This charter governs the operations of the Audit Committee. The committee
shall review and reassess the charter at least annually and obtain the approval
of the Board of Directors for any revisions. The committee shall be appointed by
the Board of Directors and shall comprise at least three directors, each of whom
are independent of management and the Company. Members of the committee shall be
considered independent if they have no relationship that may interfere with the
exercise of their independence from management and the Company, as determined by
the Board of Directors in its business judgment. All committee members shall be
financially literate, and at least one member shall have accounting or related
financial management expertise.
STATEMENT OF POLICY
The Audit Committee shall provide assistance to the Board of Directors in
fulfilling its oversight responsibility to the Company's stockholders, the
investment community, and others relating to the Company`s financial statements
and the financial reporting process, the systems of internal accounting and
financial controls, the internal audit function, and the annual independent
audit of the Company's financial statements. In so doing, it is the
responsibility of the committee to maintain free and open communication between
the committee, independent auditors, the internal auditors and management of the
Company. In discharging its oversight role, the committee is empowered to
investigate any matter brought to its attention with full access to all books,
records, facilities, and personnel of the Company and the power to retain
outside counsel or other experts for this purpose.
RESPONSIBILITIES AND PROCESSES
The primary responsibility of the Audit Committee is to oversee the
Company's financial reporting process on behalf of the Board and report the
results of its activities to the Board. Management is responsible for preparing
the Company's financial statements, and the independent auditors are responsible
for auditing those financial statements. The committee in carrying out its
responsibilities believes its policies and procedures should remain flexible, in
order to best react to changing conditions and circumstances. The committee
should take the appropriate actions to set the overall corporate "tone" for
quality financial reporting, sound business risk practices, and ethical
behavior.
The following shall be the principal recurring processes of the Audit
Committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the committee may supplement them
as appropriate.
(1) The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately
accountable to the Board and the Audit Committee, as representatives of
the Company's stockholders. The committee shall have the ultimate
authority and responsibility to evaluate and, where appropriate,
recommend the replacement of the independent auditors. The committee
shall discuss with the auditors their independence from management and
the Company and the matters included in the written disclosures required
by the Independence Standards Board. Annually, the committee shall
review and recommend to the board the selection of the Company's
independent auditors.
(2) The committee shall discuss with the internal auditors and the
independent auditors the overall scope and plans for their respective
audits including the adequacy of staffing and compensation. Also, the
committee shall discuss with management, the internal auditors and the
independent auditors the adequacy and effectiveness of the accounting
and financial controls. Further, the committee shall meet separately
with the internal auditors and the independent auditors, with and
without management present, to discuss the results of their
examinations.
B-1
(3) The committee shall review the interim financial statements with
management and the independent auditors prior to the filing of the
Company's Quarterly Report on Form 10-Q. Also, the committee shall
discuss the results of the quarterly review and any other matters
required to be communicated to the committee by the independent auditors
under generally accepted auditing standards. The chair of the committee
may represent the entire committee for the purposes of this review.
(4) The committee shall review with management and the independent auditors
the financial statements to be included in the Company's Annual Report
on Form 10-K, including the independent auditors' judgment about the
quality, not just acceptability, of accounting principles, the
reasonableness of significant judgments, and the clarity of the
disclosures in the financial statements. Also, the committee shall
discuss the results of the annual audit and any other matters required
to be communicated to the committee by the independent auditors under
generally accepted auditing standards.
SCOPE OF RESPONSIBILITY
The Audit Committee is responsible for the duties set forth in this charter
but is not responsible for either the preparation of the financial statements or
the auditing of the financial statements. Management has the responsibility for
preparing the financial statements and implementing internal controls, and the
independent auditors have the responsibility for auditing the financial
statements and monitoring the effectiveness of the internal controls. The review
of the financial statements by the Audit Committee is not of the same quality as
the audit performed by the independent auditors.
B-2
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HEALTHSOUTH CORPORATION
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS -- MAY 16, 2002
THIS PROXY IS SOLICITED BY OUR BOARD OF DIRECTORS
The undersigned hereby revoke(s) any and all proxies previously given by
the undersigned to vote or act with respect to the common stock of HEALTHSOUTH
Corporation owned by the undersigned, and appoints RICHARD M. SCRUSHY and
WILLIAM T. OWENS or __________________, and each of them, with several powers of
substitution, as proxies to vote the shares of common stock, par value $.01 per
share, of HEALTHSOUTH Corporation that the undersigned would be entitled to vote
if personally present at the annual meeting of stockholders of HEALTHSOUTH
Corporation to be held at One HealthSouth Parkway, Birmingham, Alabama, on
Thursday, May 16, 2002, at 2:00 p.m., C.D.T., and at any adjournment(s) or
postponement(s) of the annual meeting.
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote
(Except as marked to the contrary below) for all nominees listed below
Richard M. Scrushy Joel C. Gordon Larry D. Striplin, Jr.
John S. Chamberlin Charles W. Newhall III George H. Strong
C. Sage Givens William T. Owens Phillip C. Watkins, M.D.
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK A
LINE THROUGH THAT NOMINEE'S NAME IN THE LIST PROVIDED ABOVE.
2. IN THE DISCRETION OF THE PROXIES, TO ACT UPON ANY OTHER MATTER
INCIDENTAL TO THE FOREGOING OR THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING
OR ANY ADJOURNMENT(S) OR POSTPONEMENT(S) OF THE ANNUAL MEETING.
(Continued and to be signed on reverse.)
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(Continued from other side.)
THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED ON THIS PROXY BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE
VOTED FOR ITEM 1. IF YOU WISH TO WITHHOLD THE DISCRETIONARY AUTHORITY DESCRIBED
IN ITEM 2 ABOVE, MARK A LINE THROUGH THE ENTIRE ITEM 2.
Please mark, date, sign and promptly mail this proxy using the enclosed
envelope. No postage is required.
DATED_______________________________, 2001
_____________________________________
Signature of Stockholder
_____________________________________
Signature of Stockholder
Please sign your name as it appears on
this form of proxy. If there is more
than one owner, each owner should
sign. If you are signing as an
attorney, administrator, executor,
guardian or trustee, please indicate
the capacity in which you are signing.
If executed by a corporation or
partnership, this form of proxy must
be signed by an authorized
representative.
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