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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-0860407
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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COMMON STOCK, PAR VALUE NEW YORK STOCK EXCHANGE
$.01 PER SHARE
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 26, 2001:
Common Stock, par value $.01 per share -- $5,221,026,283
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 26, 2001
--------------------------------- ------------------------------
COMMON STOCK, PAR VALUE
$.01 PER SHARE 389,463,041 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
GENERAL
HEALTHSOUTH Corporation is the nation's largest provider of outpatient
surgery, outpatient diagnostic and rehabilitative healthcare services. We
provide these services through our national network of inpatient and outpatient
healthcare facilities, including inpatient and outpatient rehabilitation
facilities, outpatient surgery centers, diagnostic centers, occupational
medicine centers, medical centers and other healthcare facilities. We believe
that we provide patients, physicians and payors with high-quality healthcare
services at significantly lower costs than traditional inpatient hospitals.
Additionally, our national network, reputation for quality and focus on
outcomes have enabled us to secure contracts with national and regional managed
care payors. At December 31, 2000, HEALTHSOUTH operated over 2,000 locations in
all 50 states, Puerto Rico, the United Kingdom, Canada and Australia.
Our healthcare services are provided through inpatient healthcare
facilities and facilities providing other clinical services (including
inpatient rehabilitation facilities and specialty medical centers, as well as
associated physician practices and other services) and outpatient healthcare
facilities (including outpatient rehabilitation centers, outpatient surgery
centers, outpatient diagnostic centers and occupational medicine centers). In
our outpatient and inpatient rehabilitation facilities, we provide
interdisciplinary programs for the rehabilitation of patients experiencing
disability due to a wide variety of physical conditions, such as stroke, head
injury, orthopaedic problems, neuromuscular disease and sports-related
injuries. Our rehabilitation services include physical therapy, sports
medicine, work hardening, neurorehabilitation, occupational therapy,
respiratory therapy, speech-language pathology and rehabilitation nursing.
Independent studies have shown that rehabilitation services like those we
provide can save money for payors and employers.
A patient referred to a HEALTHSOUTH rehabilitation facility undergoes an
initial evaluation and assessment process that results in the development of a
rehabilitation care plan designed specifically for that patient. Depending upon
the patient's disability, this evaluation process may involve the services of a
single discipline, such as physical therapy for a knee injury, or of multiple
disciplines, as in the case of a complicated stroke patient. We have developed
numerous rehabilitation programs, which include stroke, head injury, spinal
cord injury, neuromuscular and work injury, that combine certain services to
address the needs of patients with similar disabilities. In this way, all of
our patients, regardless of the severity and complexity of their disabilities,
can receive the level and intensity of services necessary to restore them to as
productive, active and independent a lifestyle as possible.
In addition to our rehabilitation facilities, we operate the largest
network of freestanding outpatient surgery centers in the United States. Our
outpatient surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures.
Outpatient surgery is widely recognized as generally less expensive than
surgery performed in a hospital, and we believe that outpatient surgery
performed at a freestanding outpatient surgery center is generally less
expensive than hospital-based outpatient surgery. Over 80% of our surgery
center facilities are located in markets served by our rehabilitation
facilities, enabling us to pursue opportunities for cross-referrals.
HEALTHSOUTH is also the largest operator of outpatient diagnostic centers
in the United States. Most of our diagnostic centers operate in markets where
we also provide rehabilitative healthcare and outpatient surgery services. We
believe that our ability to offer a comprehensive range of healthcare services
in a particular geographic market makes HEALTHSOUTH more attractive to both
patients and payors in such market. We focus on marketing our services in an
integrated system to patients and payors in such geographic markets. We are
continually evaluating potential acquisitions that complement our existing
operations, as well as divestitures of non-strategic assets and businesses.
HEALTHSOUTH was organized as a Delaware corporation in February 1984. Our
principal executive offices are located at One HealthSouth Parkway, Birmingham,
Alabama 35243, and our telephone number is (205) 967-7116.
1
COMPANY STRATEGY
Our objective is to continue to grow profitably and enhance our position
as the preferred provider in our lines of business and geographic markets. In
the 1994-1998 period, we pursued a strategy of rapid growth through
acquisitions. During this period, we consummated a series of major acquisitions
that strengthened our position in our primary lines of business. Today, we
believe that we have a strong franchise in our core product lines that
encompasses a geographic scope that is unlikely to be duplicated by competitors
in the foreseeable future. Going forward, our business strategy will be focused
on enhancing profit margins through operating efficiencies and organic growth,
as well as selective acquisition and development activity. The following are
key elements of our strategy:
o Leverage Our Existing National Network. As one of the largest
providers of healthcare services in the United States, and as the
largest provider in our primary lines of business, we believe we are
well-positioned to leverage our existing network of facilities in
order to realize economies of scale and compete successfully for
national and regional contracts while retaining the flexibility to
respond to particular needs of local markets. Our national network
offers large national and regional employers and payors the
convenience of dealing with a single provider, a well as offering us
the ability to utilize greater buying power through centralized
purchasing, to achieve more efficient costs of capital and labor and
to more effectively recruit and retain clinicians. We believe that our
operations management structure allows us to realize these benefits
without sacrificing local market responsiveness. Our objective is to
provide those outpatient and rehabilitative healthcare services needed
within each local market by tailoring our services and facilities to
that market's needs, thus bringing the benefits of nationally
recognized expertise and quality into the local setting.
o Deliver Cost-Effective Services. We strive to provide high-quality
healthcare services in cost-effective settings. To that end, we use
standardized clinical protocols based on "best practices" techniques
for the treatment of our patients. We use these standardized clinical
protocols at all of our facilities, promoting the delivery of
high-quality care in a highly efficient, consistent and cost-effective
manner. We believe that our facilities are among the most
cost-effective in the industry, making us an attractive healthcare
provider for payors and self-insured employers. In addition, we
believe that our low-cost profile favorably positions us to respond to
reimbursement pricing pressure.
o Market to Managed Care Organizations and Other Payors. Since the late
1980s, we have focused on the development of contractual relationships
with managed care organizations, major insurance companies, large
regional and national employer groups and provider alliances and
networks. Our documented clinical outcomes and our daily experience
with thousands of patients in delivering quality healthcare services
at reasonable prices has enhanced our attractiveness to such entities
and has given us a competitive advantage over smaller and regional
competitors. These relationships have increased patient volume in our
facilities and contributed to our same-store growth. These
relationships also enable us to work with major payors to ensure
competitive pricing and provide for more efficient billing, claims
processing and payment procedures.
o Expand Our Integrated Service Model. Our Integrated Service Model
("ISM") strategy coordinates the delivery of our outpatient services
in a given market through the integrated management and marketing of
our outpatient operations. We plan to expand our ISM into the 300
largest markets in the United States. We believe our ISM strategy
capitalizes on the complementary nature of our primary services.
Almost all rehabilitation and surgery patients have diagnostic
procedures, and many inpatient rehabilitation patients require some
form of outpatient rehabilitation. Furthermore, a significant number
of both inpatient and outpatient rehabilitation patients require
surgery. Through the ISM, our healthcare services are delivered in a
coordinated manner intended to enhance referrals across our business
lines. The ISM also allows us to offer patients and payors attractive
pricing on bundled services in a given market, as well as the
convenience of dealing with a single source for patient care needs.
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o Manage for Cash Flow. We have implemented disciplined financial
policies that have resulted in strong cash flows as compared to other
publicly traded healthcare companies. We intend to continue focusing
on managing our business for cash flow and improving financial
performance. We will also seek to leverage new technologies into
tangible operating efficiencies, improved accounts receivable
collection and cost-effective operations. In particular, we are
aggressively working to reduce our accounts receivable days and
enhance our operating margins by utilizing new electronic claims
processing and payment technology, improving our charge capture
systems and continuing our proactive efforts to work with payors to
streamline payment processes and reduce reimbursement delays. We
intend to use free cash flow to reduce outstanding debt and further
strengthen our balance sheet.
o Implement Technology Initiatives. We intend to capitalize on our
strong brand identity through strategic alliances and, where
appropriate, equity participation with technology-oriented companies
offering services that we believe will benefit us, both by creating
greater efficiencies and cost savings for our operations and by
expanding the range of services we offer and public awareness of our
company. We believe that our network of over 2,000 facilities, our
volume of daily interactions with patients across the country and our
relationships with leading physicians and institutions offer these
companies immediate operational scale and exposure of a type not
available through other healthcare providers. We will seek to leverage
those assets through business affiliations that we believe will both
benefit our operations and increase stockholder value through
strategic investment activities.
RISK FACTORS
Our business, operations and financial condition are subject to various
risks. Some of these risks are described below, and readers of this Annual
Report on Form 10-K should take such risks into account in evaluating
HEALTHSOUTH or any investment decision involving HEALTHSOUTH. This section does
not describe all risks applicable to our company, our industry or our business,
and it is intended only as a summary of certain material factors. More detailed
information concerning the factors described below is contained in other
sections of this Annual Report on Form 10-K.
We Depend Upon Reimbursement by Third-Party Payors. Substantially all of
our revenues are derived from private and governmental third-party payors. In
2000, approximately 29% of our revenues were derived from Medicare,
approximately 3% from Medicaid and approximately 68% from commercial insurers,
managed care plans, workers' compensation payors and other private pay revenue
sources. There are increasing pressures from many payors to control healthcare
costs and to reduce or limit increases in reimbursement rates for medical
services. There can be no assurances that payments from government or private
payors will remain at levels comparable to present levels. In attempts to limit
federal spending, there have been, and we expect that there will continue to
be, a number of proposals to limit Medicare reimbursement for various services.
We cannot now predict whether any of these pending proposals will be adopted or
what effect the adoption of such proposals would have on HEALTHSOUTH.
Further, Medicare reimbursement for inpatient rehabilitation services is
changing from a cost-based reimbursement system to a prospective payment system
("PPS"), with the phase-in of the PPS currently expected to begin sometime in
2001. While we believe we are well-positioned and well-prepared for the
transition, we cannot be certain what effect the implementation of inpatient
rehabilitation PPS will have on us. In addition, a delay in the implementation
of inpatient rehabilitation PPS, lower than expected reimbursement rates or our
failure to successfully execute our planned response to this change could have
a material adverse effect on our financial condition or results of operations.
See this Item, "Business -- Regulation".
Our Operations Are Subject To Extensive Regulation. Our operations are
subject to various other types of regulation by federal and state governments,
including licensure and certification laws, Certificate of Need laws and laws
relating to financial relationships among providers of healthcare services,
Medicare fraud and abuse and physician self-referral.
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The operation of our facilities and the provision of healthcare services
are subject to federal, state and local licensure and certification laws. These
facilities and services are subject to periodic inspection by governmental and
other authorities to assure compliance with the various standards established
for continued licensure under state law, certification under the Medicare and
Medicaid programs and participation in other government programs. Additionally,
in many states, Certificates of Need or other similar approvals are required
for expansion of our operations. We could be adversely affected if we cannot
obtain such approvals, by changes in the standards applicable to approvals and
by possible delays and expenses associated with obtaining approvals. Our
failure to obtain, retain or renew any required regulatory approvals, licenses
or certificates could prevent us from being reimbursed for our services or from
offering some of our services, or could adversely affect our results of
operations.
Our business is subject to extensive federal and state regulation with
respect to financial relationships among healthcare providers, physician
self-referral arrangements and other fraud and abuse issues. Penalties for
violation of federal and state laws and regulations include exclusion from
participation in the Medicare and Medicaid programs, asset forfeiture, civil
penalties and criminal penalties, any of which could have a material adverse
effect on our business, results of operations or financial condition. The
Office of Inspector General of the Department of Health and Human Services, the
Department of Justice and other federal agencies interpret healthcare fraud and
abuse provisions liberally and enforce them aggressively. See this Item,
"Business -- Regulation".
Healthcare Reform Legislation May Affect Our Business. In recent years,
many legislative proposals have been introduced or proposed in Congress and in
some state legislatures that would effect major changes in the healthcare
system, either nationally or at the state level. Among the proposals which are
currently being, or which recently have been, considered are cost controls on
hospitals, insurance market reforms to increase the availability of group
health insurance to small businesses, requirements that all businesses offer
health insurance coverage to their employees and the creation of a single
government health insurance plan that would cover all citizens. The costs of
certain proposals would be funded in significant part by reductions in payment
by governmental programs, including Medicare and Medicaid, to healthcare
providers. There continue to be federal and state proposals that would, and
actions that do, impose more limitations on government and private payments to
healthcare providers such as HEALTHSOUTH and proposals to increase copayments
and deductibles from patients. At the federal level, Congress has continued to
propose or consider healthcare budgets that substantially reduce payments under
the Medicare and Medicaid programs. In addition, many states are considering
the enactment of initiatives designed to reduce their Medicaid expenditures, to
provide universal coverage or additional levels of care and/or to impose
additional taxes on healthcare providers to help finance or expand the states'
Medicaid systems. There can be no assurance as to the ultimate content, timing
or effect of any healthcare reform legislation, nor is it possible at this time
to estimate the impact of potential legislation on HEALTHSOUTH. That impact may
be material to our business, financial condition or results of operations.
We Face National, Regional and Local Competition. We operate in a highly
competitive industry. Although we are the largest provider of our range of
inpatient and outpatient healthcare services on a nationwide basis, in any
particular market we may encounter competition from local or national entities
with longer operating histories or other superior competitive advantages. There
can be no assurance that such competition, or other competition which we may
encounter in the future, will not adversely affect our results of operations.
See this Item, "Business -- Competition".
We are Subject To Material Litigation. We are, and may in the future be,
subject to litigation which, if determined adversely to us, could have a
material adverse affect on our business, financial condition or results of
operations. In addition, some of the companies and businesses we have acquired
have been subject to such litigation. While we attempt to conduct our
operations in such a way as to reduce the risk that adverse results in
litigation could have a material adverse affect on us, there can be no
assurance that pending or future litigation, whether or not described in this
Annual Report on Form 10-K, will not have such a material adverse affect. See
Item 3, "Legal Proceedings".
Our Stock Price May Be Volatile. Healthcare stocks in general, including
HEALTHSOUTH's common stock, are subject to frequent changes in stock price and
trading volume, some of which may be large. These changes may be influenced by
the market's perceptions of the healthcare sector in general,
4
of other companies believed to be similar to HEALTHSOUTH, or of our results of
operations and future prospects. In addition, these perceptions may be greatly
affected not only by information we provide but also by opinions and reports
created by investment analysts and other third parties which do not necessarily
reflect information provided by us. Adverse movement in HEALTHSOUTH's stock
price, particularly as a result of factors over which we have no control, may
adversely affect our access to capital and the ability to consummate
acquisitions using our stock.
RECENT DEVELOPMENTS
From time to time, we determine to divest assets or businesses that we
have acquired which are no longer consistent with our current business
strategy. In that connection, in the first quarter of 2001, we announced that
we had entered into a letter of intent with HCA - The Hospital Company to sell
our Richmond, Virginia facility and a related outpatient surgery center to an
affiliate of HCA. In addition, we also announced that we had entered into a
letter of intent to sell substantially all of our occupational medicine center
operations to U.S. HealthWorks, Inc. In both cases, we determined that the
facilities being divested were not consistent with our current strategy and
that management resources devoted to those operations could be better utilized
in connection with our strategic businesses.
Both divestiture transactions are subject to the completion of definitive
documentation and the satisfaction of various conditions. We currently expect
that both transactions will close at or shortly after the end of the first
quarter of 2001. We expect to use the proceeds from the transactions to pay
down existing indebtedness.
INDUSTRY OVERVIEW
The United States Health Care Financing Administration ("HCFA") estimates
that national health expenditures were approximately $1.2 trillion in 1999 and
are projected to total $2.2 trillion, or 16.2% of the Gross Domestic Product,
by 2008. Within the United States, hospital and physician expenditures
traditionally account of the majority of personal healthcare spending.
Accelerating private spending growth rates in 1998 caused the share of health
spending paid by the private sector to increase for the first time since 1988,
rising from 53.8% in 1997 to 54.5% in 1998. At the same time, growth in public
sector spending for 1998 increased by 4.1%.
HCFA projects that the combination of demographic forces associated with
the aging of the baby-boomers and continued economic strength is expected to
continue to generate industry growth. The private sector in particular is
expected to continue to benefit from demographic trends, technology
improvements, and the ongoing focus on cost containment.
Outpatient and Inpatient Rehabilitation Markets
According to available information, there are approximately 35,000
inpatient rehabilitation beds and 8,000 to 9,000 outpatient rehabilitation
centers in the United States. The need for rehabilitation is expected to
continue to grow over the next few years driven by the increased percentage of
persons over 65 years of age within the general United States population, who
generally have the highest rehabilitation needs.
Outpatient Surgery Market
Based on industry estimates, the freestanding outpatient surgery center
market is approximately $6 billion in size. There was a 75% increase in the
number of treatments in ambulatory settings (hospital outpatient, freestanding
ambulatory surgery centers and physicians' offices) from 1986 to 1996, and it
is estimated that approximately 80% of surgeries performed today can be done on
an outpatient basis. Additionally, the number of outpatient surgery cases
increased 196% from 1993 through 1999, from 2.9 million to 5.7 million cases,
due mostly to continued medical advances, which facilitated a shift of many
procedures to ambulatory settings. Growth in the market is expected to continue
during the next decade, after seeing the number of outpatient surgery centers
increase from 2,300 in 1996 to more than 2,700 centers in 1999.
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Diagnostic Market
The diagnostic market is highly fragmented, with radiologists, hospitals
and independent organizations offering diagnostic services. It is estimated
that there are currently approximately 2,700 diagnostic centers within the
United States, an increase from approximately 1,300 centers in 1988. We expect
the diagnostics market to continue to grow over the next few years due to
increased sub-specializations, expanding geographic reach and the non-invasive
and cost-effective nature of diagnostics in general.
PATIENT CARE SERVICES
HEALTHSOUTH began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 16 years, we have consistently sought and
implemented opportunities to expand our services through acquisitions and
start-up development activities that complement our historic focus on
orthopaedic, sports medicine and occupational health services and that provide
independent platforms for growth. Our acquisitions and internal growth have
enabled HEALTHSOUTH to become one of the largest providers of healthcare
services in the United States. The following sections discuss the range of
services we offer in our inpatient and other clinical services and outpatient
services business segments. See Note 14 of "Notes to Consolidated Financial
Statements" for financial information concerning these segments.
Outpatient Services Segments
Our outpatient services segments, comprising our Ambulatory Services-East
and Ambulatory Services-West divisions, include our outpatient rehabilitation
facilities and occupational medicine centers, our outpatient surgery centers
and our outpatient diagnostic centers. We are the largest operator of
outpatient rehabilitation facilities, outpatient surgery centers and outpatient
diagnostic centers in the United States.
OUTPATIENT REHABILITATION SERVICES. As of December 31, 2000, we provided
outpatient rehabilitative healthcare services through approximately 1,407
locations in all 50 states and the United Kingdom, including freestanding
outpatient centers, outpatient satellites of inpatient facilities and
outpatient facilities managed under contract. This constitutes the largest
network of outpatient rehabilitation facilities in the United States. Our
outpatient rehabilitation centers offer a comprehensive range of rehabilitative
healthcare services, including physical therapy and occupational therapy, that
are tailored to the individual patient's needs, focusing predominantly on
orthopaedic, sports-related, work-related, hand and spine injuries and various
neurological/neuromuscular conditions. Continuing emphasis on containing
increases in healthcare costs, as evidenced by Medicare's prospective payment
system, the growth in managed care and the various alternative healthcare
reform proposals, has resulted in earlier discharge of patients from acute-care
facilities. As a result, many hospital patients do not receive the intensity of
services that may be necessary for them to achieve a full recovery from their
diseases, disorders or traumatic conditions. Our outpatient rehabilitation
services play a significant role in the continuum of care because they provide
hospital-level services, in terms of intensity, quality and frequency, in a
more cost-effective setting.
We believe that the key factors influencing the outpatient rehabilitation
business include cost, quality of services and outcomes achieved, convenience
for patients and referral sources, and relationships with payors and
self-insured employers. We believe that we are well-positioned to compete on
all of these factors. Our national network allows us to benefit from economies
of scale and to introduce standardized clinical protocols for the treatment of
our patients, resulting in "best practices" techniques being utilized at all of
our facilities. This has allowed us to consistently achieve demonstrable,
cost-effective clinical outcomes. In addition, we believe that our facilities
offer an attractive environment for patients and are located in convenient
proximity to referring physicians and to our target patient populations. We
believe that our national scale and our reputation for high-quality,
cost-effective services enables us to obtain national, regional and local
contracts with payors and with self-insured employers.
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We endeavor to locate our outpatient rehabilitation centers in specific
areas where we believe there is a demand for our services. In general, we
initially establish an outpatient center in a given market, either by acquiring
an existing private therapy practice or through start-up development, and
institute our clinical protocols and programs in response to the community's
general need for services. We will then establish satellite clinics that are
dependent upon the main facility for management and administrative services.
These satellite clinics generally provide a specific evaluative or specialty
service/program, such as hand therapy or foot and ankle therapy, in response to
specific market demands. Our outpatient centers are staffed by physical
therapists, occupational therapists and other clinicians and appropriate
support personnel, depending on the services provided at a particular location,
and are open at hours designed to accommodate the needs of the patient
population being served and the local demand for services.
Outpatient rehabilitation patients are referred to our outpatient centers
by physicians. In our markets, we strive to develop and maintain relationships
with orthopaedic surgeons, neurologists and neurosurgeons, physiatrists and
other physicians who serve patients likely to need the rehabilitation services
we provide and to keep those physicians informed with respect to the scope and
quality of those services. In addition, we attempt to locate our outpatient
rehabilitation facilities in proximity to those types of physicians, in order
to provide for convenient access to them. We also market our services to
managed care payors and case management companies, as well as to self-insured
employers and professional and amateur athletic organizations which are likely
to have a large number of work-related or sports-related orthopaedic injuries.
We believe that we offer high-quality services in a cost-effective setting that
is attractive to patients, physicians and payors. In addition, at December 31,
2000, we operated approximately 113 occupational medicine centers in 29 states,
which provide cost-effective, outpatient primary medical care and related
services for work-related injuries and illnesses, work- related physical
examinations, physical therapy services and workers' compensation medical
services. Our occupational medicine centers market their services to large and
small employers, workers' compensation and health insurers and managed care
organizations. As described above, in the first quarter of 2001 we entered into
a letter of intent to sell substantially all of our occupational medicine
center operations. See this Item, "Business - Recent Developments".
OUTPATIENT SURGERY SERVICES. As of December 31, 2000, we provided
outpatient surgery services through 222 freestanding surgery centers in 40
states. This constitutes the largest network of outpatient surgery centers in
the United States. Over 80% of our outpatient surgery centers are located in
markets served by our rehabilitation facilities, enabling us to pursue
opportunities for cross-referrals between surgery and rehabilitation
facilities, as well as to centralize administrative functions.
We believe that the key factors influencing the outpatient surgery
business are physician utilization, cost and quality of services and case mix.
Physicians typically choose to perform outpatient surgical procedures in a
freestanding outpatient surgery center rather than an acute-care hospital
because of the convenience of the surgery center for themselves and for their
patients, in terms of access, scheduling and operating room turnaround time.
Like most other outpatient surgery centers, the majority of our centers are
owned in partnership with surgeons and other physicians who perform procedures
at the centers. It is critical to the success of an outpatient surgery center
that its physician partners utilize the center for a significant portion of
their procedures, and we believe that our surgery centers offer our physician
partners convenient, modern and well-equipped settings for outpatient surgery.
We also believe that our reputation in the field of orthopaedic healthcare and
the physician relationships we have developed in that area enhance our ability
to attract orthopaedic surgical procedures, which are reimbursed more favorably
than some other types of outpatient surgery.
Our surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures. Our
typical surgery center is a freestanding facility with two to six fully
equipped operating and procedure rooms and ancillary areas for reception,
preparation, recovery and administration. Each of our surgery centers is
available for use only by licensed physicians, oral surgeons and podiatrists,
and the centers do not perform surgery on an emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically
provided overnight accommodations, food services or other ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery
7
centers are adding extended recovery care capabilities where permitted. Most of
our surgery centers currently provide for extended recovery stays. Our ability
to develop such recovery care facilities is dependent upon state regulatory
environments in the particular states where our centers are located.
Our outpatient surgery centers implement quality control procedures to
evaluate the level of care provided at the centers. Each center has a medical
advisory committee of three to ten physicians which reviews the professional
credentials of physicians applying for medical staff privileges at the center.
In order to increase volumes and margins in our outpatient surgery centers, we
focus on educating physicians as to the advantages in terms of convenience,
technology, quality of care and cost-effectiveness that we believe our surgery
centers provide and on syndicating our surgery centers to physicians who we
believe will provide us with a high volume of cases and a favorable case mix in
terms of reimbursement.
To that end, we are increasing our efforts to syndicate additional
partnership interests in our surgery centers to appropriate physicians and to
buy out physician partners who have retired, moved away from a center's service
area or otherwise do not utilize the center as a significant extension of their
practice. In addition, we believe that the geographic scope of our surgery
centers and the cost-effective nature of services performed in a freestanding
outpatient surgery center are attractive to payors, and we market our
outpatient surgery centers to those payors.
DIAGNOSTIC SERVICES. We are the largest operator of outpatient diagnostic
centers in the United States. At December 31, 2000, we operated 142 diagnostic
centers in 31 states and the United Kingdom. Our diagnostic centers provide
outpatient diagnostic imaging services, including MRI services, CT services,
X-ray services, ultrasound services, mammography services, nuclear medicine
services and fluoroscopy. Not all services are provided at all sites; however,
most of our diagnostic centers are multi-modality centers offering multiple
types of service.
We believe that the key factors influencing the diagnostic center business
are quality of service, turnaround time, relationships with referring
physicians and patient convenience. In our diagnostic centers, we attempt to
obtain the services of the best available radiologists to provide high-quality
interpretations and to provide modern, well-maintained equipment and
well-trained technicians. We attempt to locate our diagnostic centers in areas
which are convenient for physicians and patients and to focus on prompt
performance of diagnostic procedures and turnaround of interpretation reports.
In addition, we believe that the reputation and relationships we have
established with physicians through our outpatient rehabilitation and
outpatient surgery services help us market our diagnostic services to those
physicians and others.
Our diagnostic centers provide outpatient diagnostic procedures performed
by experienced radiological technicians. After the diagnostic procedure is
completed, the images are reviewed by radiologists who have contracted with us.
Those radiologists prepare a report of the test and their findings, which are
then delivered to the referring physician. Our diagnostic centers are open at
hours designed to accommodate the needs of the patient population being served
and the local demand for services.
Because many patients at our rehabilitative healthcare and outpatient
surgery facilities require diagnostic procedures of the type performed at our
diagnostic centers, we believe that our diagnostic operations are a natural
complement to our other services and enhance our ability to market those
services to patients and payors.
OUTPATIENT SERVICES MANAGEMENT. Our outpatient services are managed by
local market managers, who are responsible for all outpatient services in
particular local markets, and regional market leaders, who are responsible for
overseeing the market managers in particular regions. The market leaders report
to division presidents responsible for our Ambulatory Services--East and
Ambulatory Services--West divisions. This management approach, introduced in
September 1999, replaced an earlier system which had separate,
corporate-office-based management teams for each line of business. The new
structure puts significant authority for operations, development and managed
care contracting decisions in the hands of experienced managers who are
positioned to respond to particular local and regional demands, trends and
opportunities, with a full range of centralized corporate support resources
backing them up. We believe that this approach allows us to better leverage our
comparative regional advantage in terms of market share, relationships with
payors, physicians and referral sources, and local market knowledge and
experience.
8
INTEGRATED SERVICE MODEL STRATEGY. Our ISM strategy is an integral part of
our outpatient operations. In major markets, we seek to provide an integrated
system of healthcare services, including, as appropriate, outpatient
rehabilitation services, outpatient surgery services and outpatient diagnostic
services, offering payors the convenience of dealing with a single provider for
multiple services and enhancing cross-referral opportunities among our
facilities. The ISM also includes inpatient rehabilitation services in
appropriate markets. We have implemented our ISM in over 180 of our markets,
and intend as our long-term goal to expand the model into the 300 largest
markets in the United States.
Inpatient and Other Clinical Services Segment
Our inpatient and other clinical services segment includes the operations
of our inpatient rehabilitation facilities and medical centers, as well as the
operations of certain other clinical services which are managerially aligned
with our inpatient services. During the year ended December 31, 2000, our
inpatient rehabilitation facilities achieved an overall utilization, based on
patient days and available beds, of 79.6%. In measuring patient utilization of
our inpatient facilities, various factors must be considered. Due to market
demand, demographics, start-up status, renovation, patient mix and other
factors, we may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time. We are
generally in a position to increase the number of available beds at such
facilities as market conditions dictate.
INPATIENT REHABILITATION FACILITIES. At December 31, 2000, we operated 120
inpatient rehabilitation facilities with 7,696 licensed beds in the continental
United States, representing the largest group of affiliated proprietary
inpatient rehabilitation facilities in the nation, as well as a 71-bed
rehabilitation hospital in Australia and a 17-bed rehabilitation facility in
Puerto Rico. Our inpatient rehabilitation facilities provide high-quality
comprehensive services to patients who require intensive institutional
rehabilitation care.
We believe that the key factors influencing the inpatient rehabilitation
services business are cost and quality of care, clinical outcomes,
relationships with payors, case managers, discharge planners and referral
sources, and reimbursement rates. We believe that our reputation for quality of
care and cost-effectiveness positions us well with payors and others to compete
for patients. In addition, we believe that the economies of scale that we enjoy
and the standardized clinical protocols that we utilize enable us to operate
our inpatient rehabilitation facilities in a cost-effective manner that we
expect will benefit us when the current cost-based Medicare reimbursement
system for inpatient rehabilitation services is replaced by the new PPS system,
which is expected to phase in sometime in 2001. See this Item, "Business --
Regulation". Further, we believe that our strategy of joint venturing our
rehabilitation hospitals with nearby tertiary-care hospitals, where appropriate
opportunities exist, enables us to enhance our clinical and research
activities, to obtain various support and ancillary services from the
acute-care hospitals without duplication of resources, and to provide a more
coordinated continuum of care for the constituencies served by those acute-care
hospitals.
Inpatient rehabilitation patients are typically those who are experiencing
significant physical disabilities due to various conditions, such as head
injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. Our inpatient rehabilitation facilities provide the
medical, nursing, therapy and ancillary services required to comply with local,
state and federal regulations, as well as accreditation standards of the Joint
Commission on Accreditation of Healthcare Organizations (the "JCAHO") and the
Commission on Accreditation of Rehabilitation Facilities. All of our inpatient
rehabilitation facilities utilize an interdisciplinary team approach to the
rehabilitation process and involve the patient and family, as well as the
payor, in the determination of the goals for the patient. Internal case
managers monitor each patient's progress and provide documentation of patient
status, achievement of goals, functional outcomes and efficiency.
In certain markets, our rehabilitation hospitals may provide outpatient
rehabilitation services as a complement to their inpatient services. Typically,
this opportunity arises when patients complete their inpatient course of
treatment but remain in need of additional therapy that can be accomplished on
an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the
9
rehabilitation hospital may establish the services either within its building
or in a satellite location. In either case, the clinical protocols and programs
developed for use in our freestanding outpatient centers are utilized by these
facilities.
A number of our rehabilitation hospitals were developed in conjunction
with local tertiary-care facilities, including major teaching hospitals such as
those at Vanderbilt University, the University of Missouri and the University
of Virginia. In addition to those facilities so developed by us, we have
entered into or are pursuing similar affiliations with a number of our
rehabilitation hospitals which were obtained through our major acquisitions.
Inpatient rehabilitation patients have typically been discharged from an
acute-care setting. Accordingly, we focus on marketing our services to
acute-care hospital discharge planners and to case managers utilized by payors
and case management companies, who are typically influential in determining
appropriate post-acute treatment settings for their patients. In addition, we
market our services to physiatrists, neurologists, neurosurgeons, orthopaedic
surgeons and other physicians involved in the care and referral of patients
suited for inpatient rehabilitation.
MEDICAL CENTERS. At December 31, 2000, we operated five medical centers
with 1,125 licensed beds in four geographic markets, including one facility
managed under contract. These facilities provide general and specialty medical
and surgical healthcare services, emphasizing orthopaedics, sports medicine and
rehabilitation. We acquired our medical centers as outgrowths of our
rehabilitative healthcare services. Often, patients require medical and
surgical interventions prior to the initiation of their rehabilitative care. In
each of the markets in which we have acquired a medical center, we had
well-established relationships with the medical communities serving each
facility. Following the acquisition of each of our medical centers, we have
provided the resources to improve upon the physical plant and expand services
through the introduction of new technology. We have also developed additional
relationships between these facilities and certain university facilities,
including the University of Miami, Auburn University and the University of
Alabama at Birmingham. Through these relationships, the influx of celebrity
athletes and personalities and the acquisition of new technology, all of our
medical centers have improved their operating efficiencies and enhanced census.
Each of our medical center facilities is licensed as an acute-care
hospital, is accredited by the JCAHO and participates in the Medicare
acute-care prospective payment system. See this Item, "Business -- Regulation".
As described above, in the first quarter of 2001 we entered into a letter
of intent to sell our Richmond, Virginia medical center and a related surgery
center. See this Item, "Business - Recent Developments".
Other Patient Care Services
In some markets, we provide other patient care services, including
physician services and contract management of hospital- based rehabilitative
healthcare services. We evaluate market opportunities on a case-by-case basis
in determining whether to provide additional services of these types, which may
be complementary to facility-based services we provide or stand-alone
businesses. These services are included within our business segment with which
they are most closely aligned in the particular local market.
MARKETING
We market our services to patients, payors, physicians, case managers and
other referral sources through a combination of national, regional and local
strategies. We believe that these strategies have allowed us to develop a
strong corporate brand identity, and have enabled us to focus our marketing
efforts on particular demographic factors and competitive strengths in local
and regional markets.
We develop a local marketing plan for each facility based on a variety of
factors, including population characteristics, physician characteristics and
incidence of disability statistics, in order to identify specific service
opportunities. Facility-oriented marketing programs are focused on increasing
the
10
volume of patient referrals to the specific facility and involve the
development of ongoing relationships with area schools, businesses and
industries, as well as physicians, health maintenance organizations and
preferred provider organizations.
Our larger-scale marketing activities are focused more broadly on efforts
to generate patient referrals to multiple facilities and the creation of new
business opportunities. These activities include the development and
maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, United Healthcare or other national
insurance companies, with national HMO/PPO companies, such as First Health and
Multiplan, with national case management companies, such as INTRACORP and
Crawford & Co., and with national employers, such as Delta Airlines,
Georgia-Pacific Corporation, Federated Department Stores, Goodyear Tire &
Rubber and Winn-Dixie.
We also carry out broader programs designed to further enhance our name
recognition and association with amateur and professional athletics. Among
these is the HEALTHSOUTH Sports Medicine Council, headed by Bo Jackson and
involving other well-known professional and amateur athletes and sports
medicine specialists, which is dedicated to developing educational programs
focused on athletics for use in high schools. We have ongoing relationships
with the Professional Golfers Association, the Senior Professional Golfers
Association, the Ladies Professional Golf Association, the Southwestern
Athletic Conference, and other professional and amateur sports organizations,
as well as numerous universities, colleges and high schools to provide sports
medicine coverage of events and rehabilitative healthcare services for injured
athletes. In addition, we have established relationships with or provided
treatment services for athletes from some 40-50 professional sports teams, as
well as providing sports medicine services for Olympic and amateur athletes. In
1996, HEALTHSOUTH and the United States Olympic Committee established the
Richard M. Scrushy/HEALTHSOUTH Sports Medicine and Sport Science Center at the
USOC's Colorado Springs campus.
We maintain a Web site at www.healthsouth.com, which provides information
on the company, health information, targeted information and services for
physicians and patients, links to our Securities and Exchange Commission
filings and press releases, a facility locator and links to other relevant
information, as well as other specialized Web sites. We believe that our Web
sites enhance consumer and physician awareness of our services and locations
and access to those services, as well as providing a valuable resource for
health information related to the services that we provide.
We are a national sponsor of the United Cerebral Palsy Association and the
National Arthritis Foundation and support many other charitable organizations
on national and local levels. Through these endeavors, HEALTHSOUTH and its
employees are able to support charitable organizations and activities within
their communities.
SOURCES OF REVENUES
Most of our revenues come from non-governmental revenue sources. The
following table sets forth the percentages of our revenues from various sources
for the periods indicated:
YEAR ENDED YEAR ENDED
SOURCE DECEMBER 31, 1999 DECEMBER 31, 2000
------ ------------------- ------------------
Medicare ...................... 33.0% 29.0%
Commercial (1) ................ 40.3 43.1
Workers' Compensation ......... 11.5 12.0
All Other Payors (2) .......... 15.2 15.9
----- -----
100.0% 100.0%
===== =====
------------------
(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, representing approximately 2% of
1999 revenues and 3% of 2000 revenues.
See this Item, "Business -- Regulation -- Medicare Participation and
Reimbursement" for a description of certain of the reimbursement regulations
applicable to our facilities.
11
COMPETITION
Our rehabilitation facilities compete on a local, regional and national
basis with other providers of specialized services such as sports medicine and
work hardening, and specific concentrations such as head injury rehabilitation
and orthopaedic surgery. The competition faced in each of these markets is
similar, with variations arising from the number of healthcare providers in the
particular area. The primary competitive factors in the rehabilitation
components of our inpatient and outpatient business segments are quality of
services, projected patient outcomes, charges for services, responsiveness to
the needs of the patients, community and physicians, and ability to tailor
programs and services to meet specific needs of the patients. Competitors and
potential competitors include hospitals, private practice therapists,
rehabilitation agencies and others. Some of these competitors may have greater
patient referral support and financial and personnel resources in particular
markets than we do. We believe that we compete successfully within the
marketplace based upon our reputation for quality, competitive prices, positive
rehabilitation outcomes, innovative programs, clean and bright facilities and
responsiveness to needs.
Our surgery centers compete primarily with hospitals and other operators
of freestanding surgery centers in attracting physicians and patients and in
developing new centers and acquiring existing centers. The primary competitive
factors in the outpatient surgery business are convenience, cost, quality of
service, physician loyalty and reputation. Hospitals have many competitive
advantages in attracting physicians and patients, including established
standing in a community, historical physician loyalty and convenience for
physicians making rounds or performing inpatient surgery in the hospital.
However, we believe that our national market system and our historical presence
in many of the markets where our surgery centers are located enhance our
ability to operate these facilities successfully.
Our diagnostic centers compete with local hospitals, other multi-center
imaging companies, local independent diagnostic centers and imaging centers
owned by local physician groups. We believe that the principal competitive
factors in the diagnostic services business are price, quality of service,
ability to establish and maintain relationships with managed care payors and
referring physicians, reputation of interpreting physicians, facility location
and convenience of scheduling. We believe that our diagnostic facilities
compete successfully within their respective markets, taking into account these
factors.
Our medical centers are located in four urban areas of the country, all
with well established healthcare services provided by a number of proprietary,
not-for-profit, and municipal hospital facilities. Our facilities compete
directly with these local hospitals as well as various nationally recognized
centers of excellence in orthopaedics, sports medicine and other specialties.
Because our facilities enjoy a national and international reputation for
orthopaedic surgery and sports medicine, we believe that our medical centers'
level of service and continuum of care enable them to compete successfully,
both locally and nationally.
We potentially face competition any time we initiate a Certificate of Need
project or seek to acquire an existing facility or Certificate of Need. See
this Item, "Business -- Regulation". This competition may arise either from
competing national or regional companies or from local hospitals or other
providers which file competing applications or oppose the proposed Certificate
of Need project. The necessity for these approvals serves as a barrier to entry
and has the potential to limit competition by creating a franchise to provide
services to a given area. We have generally been successful in obtaining
Certificates of Need or similar approvals when required, although there can be
no assurance that we will achieve similar success in the future.
REGULATION
The healthcare industry is subject to regulation by federal, state and
local governments. The various levels of regulatory activity affect our
business activities by controlling our growth, requiring licensure or
certification of our facilities, regulating the use of our properties and
controlling the reimbursement we receive for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the addition
of beds or the acquisition of existing facilities may be reviewable by state
regulators under a statutory scheme which is sometimes referred to as a
Certificate of Need program. States with Certificate of Need programs place
limits on the
12
construction and acquisition of healthcare facilities and the expansion of
existing facilities and services. In such states, approvals are required for
capital expenditures exceeding certain amounts which involve inpatient
rehabilitation facilities or services or outpatient surgery centers. Most
states do not require such approvals for outpatient rehabilitation,
occupational health and diagnostic facilities and services.
State Certificate of Need statutes generally provide that, prior to the
addition of new beds, the construction of new facilities or the introduction of
new services, a state health planning designated agency must determine that a
need exists for those beds, facilities or services. The Certificate of Need
process is intended to promote comprehensive healthcare planning, assist in
providing high quality healthcare at the lowest possible cost and avoid
unnecessary duplication by ensuring that only those healthcare facilities that
are needed will be built.
Typically, the provider of services submits an application to the
appropriate agency with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether
the Certificate of Need is granted is based upon a finding of need by the
agency in accordance with criteria set forth in Certificate of Need statutes
and state and regional health facilities plans. If the proposed facility or
service is found to be necessary and the applicant to be the appropriate
provider, the agency will issue a Certificate of Need containing a maximum
amount of expenditure and a specific time period for the holder of the
Certificate of Need to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. Licensure is usually a state or local requirement, and
certification is a federal requirement. In almost all instances, licensure and
certification will follow specific standards and requirements that are set
forth in readily available public documents. Compliance with the requirements
is monitored by annual on-site inspections by representatives of various
government agencies. All of our inpatient rehabilitation facilities and medical
centers and substantially all of our surgery centers are currently required to
be licensed, but only the outpatient rehabilitation facilities located in
Alabama, Arizona, Kentucky, Maryland, Massachusetts, New Hampshire, New Mexico
and Rhode Island currently must satisfy such a licensing requirement. Most
states do not require diagnostic and occupational medicine facilities to be
licensed.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of our inpatient facilities, except for our St. Louis head
injury center, participate in the Medicare program. Approximately 1,178 of our
outpatient rehabilitation facilities currently participate in, or are awaiting
the assignment of a provider number to participate in, the Medicare program.
All of our surgery centers are certified (or awaiting certification) under the
Medicare program. Diagnostic and occupational health facilities are not
certified by the Medicare program. Our Medicare-certified facilities, inpatient
and outpatient, undergo annual on-site Medicare certification surveys in order
to maintain their certification status. Failure to comply with the program's
conditions of participation may result in loss of program reimbursement or
other governmental sanctions. We have developed our operational systems to
attempt to assure compliance with the various standards and requirements of the
Medicare program and have established ongoing quality assurance activities to
monitor compliance.
As a result of the Social Security Act Amendments of 1983, Congress
adopted a PPS to cover the routine and ancillary operating costs of most
Medicare inpatient acute-care hospital services. Under this system, the
Secretary of Health and Human Services has established fixed payment amounts
per discharge based on diagnosis-related groups ("DRGs"). With limited
exceptions, reimbursement received by an acute-care hospital for Medicare
inpatients is limited to the DRG rate, regardless of the number of services
provided to the patient or the length of the patient's hospital stay. Under
acute-care
13
PPS, a hospital may retain the difference, if any, between its DRG rate and its
operating costs incurred in furnishing inpatient services, and is at risk for
any operating costs that exceed its DRG rate. Our medical center facilities are
generally subject to acute-care PPS with respect to Medicare inpatient
services.
The acute-care PPS program has been beneficial for the rehabilitation
segment of the healthcare industry because of the economic pressure on
acute-care hospitals to discharge patients as soon as possible. The result has
been increased demand for rehabilitation services for those patients discharged
early from acute-care hospitals. Freestanding inpatient rehabilitation
facilities have been exempt from PPS, and inpatient rehabilitation units within
acute-care hospitals have been eligible to obtain an exemption from PPS upon
satisfaction of certain federal criteria. As discussed below, freestanding
inpatient rehabilitation facilities and hospital-based inpatient rehabilitation
units are to be placed under a PPS currently expected to be phased in beginning
later in 2001.
Currently, 17 of our outpatient centers are Medicare-certified
Comprehensive Outpatient Rehabilitation Facilities ("CORFs") and 983 are
Medicare-certified rehabilitation agencies or satellites. Additionally, we have
certification applications pending for two CORF sites and 176 rehabilitation
agency sites (including satellites.) Through December 31, 1998, CORFs were
reimbursed reasonable costs (subject to certain limits) for services provided
to Medicare beneficiaries, and outpatient rehabilitation facilities certified
by Medicare as rehabilitation agencies were reimbursed on the basis of the
lower of reasonable costs for services provided to Medicare beneficiaries or
charges for such services. Outpatient rehabilitation facilities which are
physician-directed clinics, as well as outpatient surgery centers, are
reimbursed by Medicare on a fee screen basis; that is, they receive a fixed
fee, which is determined by the geographical area in which the facility is
located, for each procedure performed. From January 1, 1999, CORFs and
rehabilitation agencies are reimbursed on a fee screen basis as well. Our
outpatient rehabilitation facilities submit monthly bills to their fiscal
intermediaries for services provided to Medicare beneficiaries, and we file
annual cost reports with the intermediaries for each such facility.
Our inpatient facilities (other than the medical center facilities) either
are not currently covered by PPS or are currently exempt from PPS, and are
currently cost-reimbursed, receiving the lower of reasonable costs or charges.
Typically, the fiscal intermediary pays a set rate based on the prior year's
costs for each facility. Annual cost reports are filed with our fiscal
intermediary and payment adjustments are made, if necessary.
As part of the Balanced Budget Act of 1997, Congress directed the United
States Department of Health and Human Services to develop regulations that
would subject inpatient rehabilitation hospitals to a PPS, which was expected
to be phased in beginning April 2001, and to be fully implemented by April
2003. The Act required that the rates must equal 98% of the amount of payments
that would have been if the PPS had not been adopted. More recently, the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
amended the requirements of the Balanced Budget Act to require that rates for
federal fiscal year 2002 must equal 100% of the amount of payments that would
have been made if the PPS had not been adopted and to allow inpatient
rehabilitation facilities to elect to transition immediately to full PPS
reimbursement in their first cost reporting year beginning after the effective
date of PPS implementation, instead of having PPS phased in over three cost
reporting years, as originally required. Final regulations implementing
inpatient rehabilitation PPS have not yet been released, and the United States
Department of Health and Human Services has announced that it intends to delay
the scheduled April 1, 2001 implementation date to a later date that has not
yet been determined. In addition, the Act requires the establishment of a PPS
for hospital outpatient department services, effective for services furnished
beginning in 1999. Regulations implementing that requirement became effective
August 1, 2000. We do not expect those regulations to have a material effect on
us.
In June 1998, the Health Care Financing Administration issued proposed
rules setting forth new payment classifications which would significantly
change Medicare reimbursement for outpatient surgery centers. However, these
proposed rules have not been promulgated in final form, and we cannot currently
predict when final rules, if any, will be adopted or the content or effect on
our operations of those rules.
Over the past several years an increasing number of healthcare providers
have been accused of violating the federal False Claims Act. That Act prohibits
the knowing presentation of a false claim to
14
the United States government. Because HEALTHSOUTH performs thousands of similar
procedures a year for which it is reimbursed by Medicare and there is a
relatively long statute of limitations, a billing error or cost reporting error
could result in significant civil or criminal penalties.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers of
healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting
(a) the offer, payment, solicitation or receipt of remuneration by individuals
or entities to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (b) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law
may be subject to significant civil sanctions, including fines and/or exclusion
from the Medicare and/or Medicaid programs.
In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services issued regulations describing
compensation arrangements which are not viewed as illegal remuneration under
the Fraud and Abuse Law (the "1991 Safe Harbor Rules"). The 1991 Safe Harbor
Rules create certain standards ("Safe Harbors") for identified types of
compensation arrangements which, if fully complied with, assure participants in
the particular arrangement that the OIG will not treat that participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions.
In 1992, regulations were published in the Federal Register implementing
the OIG sanction and civil money penalty provisions established in the Fraud
and Abuse Law. The regulations provide that the OIG may exclude a Medicare
provider from participation in the Medicare Program for a five-year period upon
a finding that the Fraud and Abuse Law has been violated. The regulations
expressly incorporate a test adopted by three federal circuit courts providing
that if one purpose of remuneration that is offered, paid, solicited or
received is to induce referrals, then the statute is violated. The regulations
also provide that after the OIG establishes a factual basis for excluding a
provider from the program, the burden of proof shifts to the provider to prove
that it has not violated the Fraud and Abuse Law.
The OIG closely scrutinizes healthcare joint ventures involving physicians
and other referral sources. In 1989, the OIG published a Fraud Alert that
outlined questionable features of "suspect" joint ventures, and has continued
to rely on such Fraud Alert in later pronouncements. We currently operate 23 of
our rehabilitation hospitals and many of our outpatient rehabilitation
facilities as limited partnerships or limited liability companies
(collectively, "partnerships") with third-party investors. Six of the
rehabilitation hospital partnerships involve physician investors and 17 of the
rehabilitation hospital partnerships involve other institutional healthcare
providers. Eight of the outpatient partnerships currently have a total of 21
physician limited partners, some of whom refer patients to the partnerships.
Those partnerships which are providers of services under the Medicare program,
and their limited partners, are subject to the Fraud and Abuse Law. A number of
the relationships we have established with physicians and other healthcare
providers do not fit within any of the Safe Harbors. The 1991 Safe Harbor Rules
do not expand the scope of activities that the Fraud and Abuse Law prohibits,
nor do they provide that failure to fall within a Safe Harbor constitutes a
violation of the Fraud and Abuse Law; however, the OIG has indicated that
failure to fall within a Safe Harbor may subject an arrangement to increased
scrutiny.
Most of our surgery centers are owned by partnerships, which include as
partners physicians who perform surgical or other procedures at such centers.
On November 19, 1999, the Department of Health and Human Services promulgated
rules setting forth additional Safe Harbors under the Fraud and Abuse Law (the
"1999 Safe Harbors"). Included in the 1999 Safe Harbors is a Safe Harbor which
would protect payments to investors in ambulatory surgery centers who are
surgeons who refer patients directly to the center and perform surgery
themselves on referred patients as an extension of their practices (the "ASC
Safe Harbor"). Under the ASC Safe Harbor, ownership in a freestanding
ambulatory surgery center will be protected if a number of conditions are
satisfied. Included in those conditions is a requirement that each investor be
either (a) a surgeon who derived at least one-third of his medical practice
income for
15
the previous fiscal year or twelve-month period from performing procedures on
the list of Medicare-covered procedures for ambulatory surgery centers or (b)
not in a position to make or influence referrals to the center, nor provide
items or services to the center, nor an employee of the center or of any
investor. In addition, if all physician investors are not members of a single
specialty, at least one-third of the Medicare-eligible ambulatory surgery
procedures performed by each physician investor for the previous fiscal year or
previous twelve-month period must be performed at the center in which the
investment is made. Since a subsidiary of HEALTHSOUTH is an investor in each
partnership which owns a surgery center and provides management and other
services to the surgery center, our arrangements with physician investors do
not fit within the specific terms of the ASC Safe Harbor. In addition, because
we do not control the medical practices of our physician investors or control
where they perform surgical procedures, it is possible that the quantitative
tests described above will not be met, or that other conditions of the ASC Safe
Harbor will not be met. Accordingly, while the ASC Safe Harbor is helpful in
establishing the principle that a physician investor's interest in a surgery
center partnership should be considered as an extension of the physician's
practice and not as a prohibited financial relationship, there can be no
assurance that such ownership interests will not be challenged under the Fraud
and Abuse Law. We believe, however, that our arrangements with physicians with
respect to surgery center facilities should not fall within the activities
prohibited by the Fraud and Abuse Law.
Some of our diagnostic centers are owned or operated by partnerships which
include radiologists as partners. While such ownership interests are not
directly covered by the Safe Harbor Rules, we do not believe that such
arrangements violate the Fraud and Abuse Law because radiologists are typically
not in a position to make or induce referrals to diagnostic centers. In
addition, our mobile lithotripsy operations are conducted by partnerships in
which urologists are limited partners. Because such urologists are in a
position to, and do, perform lithotripsy procedures utilizing our lithotripsy
equipment, we believe that the same analysis underlying the ASC Safe Harbor
should apply to ownership interests in lithotripsy equipment held by
urologists. In addition, we believe that the nature of lithotripsy services
(i.e., lithotripsy is only prescribed and utilized when a condition for which
lithotripsy is the treatment of choice has been diagnosed) makes the risk of
overutilization unlikely. There can be no assurance, however, that the Fraud
and Abuse Law will not be interpreted in a manner contrary to our beliefs with
respect to diagnostic and lithotripsy services.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to our partnerships. We believe that our
operations are in compliance with the current requirements of applicable
federal and state law, but no assurances can be given that a federal or state
agency charged with enforcement of the Fraud and Abuse Law and similar laws
might not assert a contrary position or that new federal or state laws, or new
interpretations of existing laws, might not adversely affect relationships we
have established with physicians or other healthcare providers or result in the
imposition of penalties on HEALTHSOUTH or particular HEALTHSOUTH facilities.
Even the assertion of a violation could have a material adverse effect upon our
business, results of operations or financial condition.
The so-called "Stark II" provisions of the Omnibus Budget Reconciliation
Act of 1993 amend the federal Medicare statute to prohibit the making by a
physician of referrals for "designated health services" including physical
therapy, occupational therapy, radiology services or radiation therapy, to an
entity in which the physician has an investment interest or other financial
relationship, subject to certain exceptions. Such prohibition took effect on
January 1, 1995 and applies to all of our partnerships with physician partners.
On January 9, 1998, the Department of Health and Human Services published
proposed regulations (the "Proposed Stark Regulations") under the Stark II
statute and solicited comments thereon. On January 4, 2001, the Department of
Health and Human Services published final regulations relating to part of the
Stark II statute (the "Phase I Final Stark Regulations") and announced its
intention to publish a second, "Phase II" set of regulations covering the
remainder of the statute and responding to comments received on the Phase I
Final Stark Regulations at some unspecified future date. The Phase I Final
Stark Regulations, which differ substantially in many respects from the
Proposed Stark Regulations, have a specified effective date of January 4, 2002;
however, recent actions by the new Administration have suspended the effective
date of all regulations that had not yet gone into effect pending its review.
We cannot currently predict whether this suspension will have the effect of
delaying
16
the January 4, 2002 date. In addition, a number of states have passed or are
considering statutes which prohibit or limit physician referrals of patients to
facilities in which they have an investment interest. In response to these
regulatory activities, we have restructured most of our partnerships which
involve physician investors to the extent required by applicable law, in order
to eliminate physician ownership interests not permitted by applicable law. We
intend to take such actions as may be required to cause the remaining
partnerships to be in compliance with applicable laws and regulations,
including, if necessary, the prohibition of physician partners from referring
patients. We believe that this restructuring has not adversely affected and
will not adversely affect the operations of our facilities.
Ambulatory surgery is not identified as a "designated health service"
under Stark II, and we do not believe the statute is intended to cover
ambulatory surgery services. The Phase I Final Stark Regulations expressly
clarify that the provision of designated health services in an ambulatory
surgery center is excepted from the referral prohibition of Stark II if payment
for such designated health services is included in the ambulatory surgery
center payment rate.
Our lithotripsy units frequently operate on hospital campuses, and it is
possible to conclude that such services are "inpatient and outpatient hospital
services" -- a category of designated health services under Stark II. The
legislative history of the Stark II statute indicates that the statute was not
intended to cover the provision of lithotripsy services by physician-owned
lithotripsy providers under contract with a hospital. However, the Phase I
Final Stark Regulations indicate that lithotripsy services provided at a
hospital would constitute "inpatient and outpatient hospital services" and thus
would be subject to Stark II. Based upon the Phase I Final Stark Regulations
and the associated commentary by the Health Care Financing Administration, we
believe that the operations of our lithotripsy partnerships, to the extent that
they involve designated health services, either fall within exceptions
contained in the Phase I Final Stark Regulations or, depending on the
particular situation, might be restructured to comply with them before the
effective date of the Phase I Final Stark Regulations. To the extent
practicable, we intend to take such steps as may be required to cause such
partnerships to be in compliance. If we are required to terminate any of these
relationships, we believe such action will not adversely affect our operations.
In addition, physicians frequently perform endoscopic procedures in the
procedure rooms of our surgery centers, and it is possible to construe such
services to be "designated health services". While we do not believe that Stark
II was intended to apply to such services, if that were determined to be the
case, we intend to take steps necessary to cause the operations of our
facilities to comply with the law.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat healthcare fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"). HIPAA, among other things, amends existing crimes and
criminal penalties for Medicare fraud and enacts new federal healthcare fraud
crimes. HIPAA also expands the Fraud and Abuse Law to apply to all federal
healthcare programs, defined to include any plan or program that provides
health benefits through insurance that is funded by the federal government.
Under HIPAA, the Secretary of the Department of Health and Human Services (the
"Secretary") may exclude from the Medicare program any individual who has a
direct or indirect ownership or control interest in a healthcare entity that
has been convicted of a healthcare fraud crime or that has been excluded from
the Medicare program. HIPAA directs the Secretary to establish a program to
collect information on healthcare fraud and abuse to encourage individuals to
report information concerning fraud and abuse against the Medicare program and
provides for payment of a portion of amounts collected to such individuals.
HIPAA mandates the establishment of a Fraud and Abuse Program, among other
programs, to control fraud and abuse with respect to health plans and to
conduct investigations, audits, evaluations, and inspections relating to the
delivery of and payment for healthcare in the United States.
HIPAA prohibits any person or entity from knowingly and willfully
committing a federal healthcare offense relating to a "health care benefit
program". Under HIPAA, a "health care benefit program" broadly includes any
private plan or contract affecting interstate commerce under which any medical
benefit, item, or service is provided to any individual. Among the "federal
health care offenses" prohibited by HIPAA are healthcare fraud and making false
statements relative to healthcare matters.
17
Any person or entity that knowingly and willfully defrauds or attempts to
defraud a healthcare benefit program or obtains by means of false or fraudulent
pretenses, representations or promises, any of the money or property of any
healthcare benefit program in connection with the delivery of healthcare
services is subject to a fine and/or imprisonment. In addition, HIPAA provides
that any person or entity that knowingly and willfully falsifies, conceals or
covers up a material fact or makes any materially false or fraudulent
statements in connection with the delivery of or payment of healthcare services
by a healthcare benefit plan is subject to a fine and/or imprisonment.
HIPAA further expands the list of acts which are subject to civil monetary
penalties under federal law and increases the amount of civil penalties which
may be imposed. HIPAA provides for civil fines for individuals who retain an
ownership or control interest in a Medicare or Medicaid participating entity
after such individuals have been excluded from participating in the Medicare or
Medicaid program. HIPAA further provides for civil fines for individuals who
offer inducements to Medicare or Medicaid eligible patients if the individuals
know or should know that their offers will influence the patients to order or
receive items or services from a particular provider, practitioner or supplier.
In addition, HIPAA mandates, for all healthcare providers, standardization
in the use, storage, and transfer of electronically transmitted healthcare data
and also requires that healthcare providers, payors and clearinghouses adopt
detailed new procedures for ensuring the privacy and security of individually
identifiable health information. In August 2000, the Department of Health and
Human Services published final regulations adopting standards for electronic
transactions and for code sets to be used in those transactions. Those
regulations have a specified effective date of October 16, 2002 for most
providers, including us. In December 2000, the Department released final
regulations establishing standards for the privacy of individually identifiable
health information. The final privacy regulations, which differ substantially
from previously proposed regulations, impose significant limitations on the use
and disclosure of individually identifiable health information by providers,
including us, as well as payors and clearinghouses. The final regulations are
currently scheduled to take effect in April 2003. The final privacy regulations
have been significantly criticized by many parts of the healthcare industry,
and further changes in such regulations or delays in their implementation are
possible.
Compliance with the HIPAA privacy and electronic standards regulations
will require significant changes in current information and claims processing
practices utilized by healthcare providers, including us. It is not possible at
this time to estimate the cost of such compliance. However, we have taken steps
intended to ensure that we will comply with the applicable regulations by their
respective effective dates, and we believe that we will be able to do so
without a material adverse effect on our business, financial condition or
results of operations.
We cannot predict whether other regulatory or statutory provisions will be
enacted by federal or state authorities which would prohibit or otherwise
regulate relationships which we have established or may establish with other
healthcare providers or the possibility of materially adverse effects on its
business or revenues arising from such future actions. We believe, however,
that we will be able to adjust our operations so as to be in compliance with
any regulatory or statutory provision that may be applicable. See this Item,
"Business -- Patient Care Services" and "Business -- Sources of Revenues".
INSURANCE
Beginning December 1, 1993, we became self-insured for professional
liability and comprehensive general liability. We purchased coverage for all
claims incurred prior to December 1, 1993. In addition, we purchased underlying
insurance which would cover all claims once established limits have been
exceeded. It is the opinion of management that as of December 31, 2000, we had
adequate reserves to cover losses on asserted and unasserted claims. In the
fourth quarter of 2000, we formed an offshore captive insurance subsidiary to
which we expect to transition the administration of our self-insurance
programs.
In connection with our October 1997 acquisition of Horizon/CMS Healthcare
Corporation, HEALTHSOUTH assumed responsibility for handling Horizon/CMS's open
professional and general liability claims. We have entered into an agreement
with an insurance carrier to assume responsibility for the majority of open
claims. Under this agreement, a "risk transfer" converted Horizon/CMS's
self-insured claims to insured liabilities consistent with the terms of the
underlying insurance policy.
18
EMPLOYEES
As of December 31, 2000, we employed approximately 53,216 persons, of whom
34,427 were full-time employees and 18,789 were part-time or per diem
employees. Of the above employees, 863 (including 39 part-time or per diem
employees) were employed at our headquarters in Birmingham, Alabama. Except for
approximately 93 employees at one rehabilitation hospital (about 16% of that
facility's workforce), none of our employees are represented by a labor union.
We are not aware of any current activities to organize our employees at other
facilities. Management considers the relationship between HEALTHSOUTH and its
employees to be good.
ITEM 2. PROPERTIES.
HEALTHSOUTH's executive offices occupy a headquarters building of
approximately 200,000 square feet in Birmingham, Alabama. The headquarters
building was constructed on a 73-acre parcel of land owned by HEALTHSOUTH
pursuant to a tax retention operating lease structured through NationsBanc
Leasing Corporation. Substantially all of our outpatient rehabilitation and
occupational medicine operations are carried out in leased facilities. We own
45 of our inpatient rehabilitation facilities and lease or operate under
management contracts the remainder of our inpatient rehabilitation facilities.
We also own 80 of our surgery centers and 41 of our diagnostic centers and
lease or operate under management arrangements the remainder. We constructed
our rehabilitation hospitals in Florence and Columbia, South Carolina,
Kingsport and Nashville, Tennessee, Concord, New Hampshire, Dothan, Alabama,
Columbia, Missouri, and Charlottesville, Virginia on property leased under
long-term ground leases. The property on which our Memphis, Tennessee
rehabilitation hospital is located is owned in partnership by HEALTHSOUTH and
Methodist Healthcare-Memphis Hospitals. We own four of our medical center
facilities and manage one under contract. We currently own, and from time to
time may acquire, certain other improved and unimproved real properties in
connection with our business. See Notes 5 and 7 of "Notes to Consolidated
Financial Statements" for information with respect to the properties we own and
certain related indebtedness.
In management's opinion, our physical properties are adequate for our
needs for the foreseeable future, and are consistent with our expansion plans
described elsewhere in this Annual Report on Form 10-K.
19
The following table sets forth a listing of our primary domestic patient
care services locations (including both facilities owned or leased by
HEALTHSOUTH and facilities under management agreements or similar arrangements)
at December 31, 2000:
INPATIENT
REHABILITATION OCCUPATIONAL OUTPATIENT
FACILITIES MEDICAL MEDICINE REHABILITATION SURGERY DIAGNOSTIC
STATE (BEDS)(1) CENTERS (BEDS)(1) CENTERS CENTERS(2) CENTERS CENTERS
----- ---------------- ------------------- -------------- ---------------- --------- -----------
Alabama ...................... 7 (374) 2 (538) 3 36 7 5
Alaska ....................... 3 7 1 1
Arizona ...................... 4 (243) 7 32 4 2
Arkansas ..................... 5 (283) 1 23 2
California ................... 3 (197) 27 58 50 3
Colorado ..................... 1 (64) 1 34 4 6
Connecticut .................. 1 34 5
Delaware ..................... 6 1
District of Columbia ......... 1 1
Florida ...................... 10 (661) 1(281) 8 130 19 8
Georgia ...................... 1 (50) 4 42 4 11
Hawaii ....................... 11 2
Idaho ........................ 2 1
Illinois ..................... 1 (39) 1 50 8 6
Indiana ...................... 4 (208) 3 10 4 1
Iowa ......................... 1 5 2 1
Kansas ....................... 4 (244) 30 1
Kentucky ..................... 2 (80) 2 7 6
Louisiana .................... 4 (267) 3 8 2 3
Maine ........................ 2 (125) 2 8
Maryland ..................... 2 (117) 30 5 13
Massachusetts ................ 10 (764) 1 63 1 2
Michigan ..................... 1 (30) 1 15
Minnesota .................... 15 2
Mississippi .................. 13 3 1
Missouri ..................... 2 (160) 2 58 8 6
Montana ...................... 4 1
Nebraska ..................... 1 6
Nevada ....................... 2 (130) 21 3 1
New Hampshire ................ 2 (74) 8
New Jersey ................... 1 (142) 63 3 2
New Mexico ................... 1 (61) 6 1 1
New York ..................... 1 45 2
North Carolina ............... 41 10 1
North Dakota ................. 2
Ohio ......................... 3 39 8 2
Oklahoma ..................... 3 (153) 1 23 5 3
Oregon ....................... 30 2
Pennsylvania ................. 15 (1,147) 4 81 6 12
Rhode Island ................. 2 2
South Carolina ............... 4 (256) 18 2 3
South Dakota ................. 2 1
Tennessee .................... 6 (350) 42 6 4
Texas ........................ 16 (1,084) 1 (106) 4 123 19 26
Utah ......................... 1 (89) 2 9 3 2
Vermont ...................... 1 2
Virginia ..................... 2 (90) 1 (200) 6 41 1 5
Washington ................... 17 56 4 1
West Virginia ................ 4 (214) 4 1
Wisconsin .................... 9 4
Wyoming ...................... 2
------------------
(1) "Beds" refers to the number of beds for which a license or certificate of
need has been granted, which may vary materially from beds available for
use.
(2) Includes freestanding outpatient centers and their satellites, outpatient
satellites of inpatient rehabilitation facilities and outpatient
facilities managed under contract.
20
In addition, at December 31, 2000, we operated six diagnostic centers and
one outpatient rehabilitation center in the United Kingdom, one 71-bed
rehabilitation hospital in Australia and one 17-bed inpatient rehabilitation
facility in Puerto Rico, as well as numerous locations in various states
providing other services. We also provided occupational medicine services at
four industrial plants in Canada. See this Item, "Business -- Recent
Developments", for a description of pending divestiture transactions.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, HEALTHSOUTH may be subject, from
time to time, to claims and legal actions by patients and others. We do not
believe that any such pending actions, if adversely decided, would have a
material adverse effect on our financial condition. See Item 1, "Business --
Insurance" for a description of our insurance coverage arrangements.
From time to time, we appeal decisions of various rate-making authorities
with respect to Medicare rates established for HEALTHSOUTH facilities. These
appeals are initiated in the ordinary course of business. Management believes
that adequate reserves have been established for possible adverse decisions on
any pending appeals and that the outcomes of currently pending appeals, either
individually or in the aggregate, will have no material adverse effect on
HEALTHSOUTH's operations.
SECURITIES LITIGATION
HEALTHSOUTH was served with various lawsuits filed beginning September 30,
1998 purporting to be class actions under the federal and Alabama securities
laws. Such lawsuits were filed following a decline in our stock price at the
end of the third quarter of 1998. Seven such suits were filed in the United
States District Court for the Northern District of Alabama. In January 1999,
those suits were ordered to be consolidated under the case style In re
HEALTHSOUTH Corporation Securities Litigation, Master File No. CV98-O-2634-S.
On April 12, 1999, the plaintiffs filed a consolidated amended complaint
against HEALTHSOUTH and certain of our current and former officers and
directors alleging that, during the period April 24, 1997 through September 30,
1998, the defendants misrepresented or failed to disclose certain material
facts concerning our business and financial condition and the impact of the
Balanced Budget Act of 1997 on our operations in order to artificially inflate
the price of our common stock and issued or sold shares of such stock during
the purported class period, all allegedly in violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Certain of the named
plaintiffs in the consolidated amended complaint also claim to represent
separate subclasses consisting of former stockholders of Horizon/CMS Healthcare
Corporation and National Surgery Centers, Inc. ("NSC") who received shares of
HEALTHSOUTH common stock in connection with our acquisition of those entities
and assert additional claims under Section 11 of the Securities Act of 1933
with respect to the registration of securities issued in those acquisitions.
Another suit, Peter J. Petrunya v. HEALTHSOUTH Corporation, et al., Civil
Action No. 98-05931, was filed in the Circuit Court for Jefferson County,
Alabama, alleging that during the period July 16, 1996 through September 30,
1998 the defendants misrepresented or failed to disclose certain material facts
concerning our business and financial condition, allegedly in violation of
Sections 8-6-17 and 8-6-19 of the Alabama Securities Act. The Petrunya
complaint was voluntarily dismissed by the plaintiff without prejudice in
January 1999. Additionally, a suit styled Dennis Family Trust v. Richard M.
Scrushy, et al., Civil Action No. 98-06592, has been filed in the Circuit Court
for Jefferson County, Alabama, purportedly as a derivative action on behalf of
HEALTHSOUTH. That suit largely replicates the allegations originally set forth
in the individual complaints filed in the federal actions described in the
preceding paragraph and alleges that the current directors of HEALTHSOUTH,
certain former directors and certain officers of HEALTHSOUTH breached their
fiduciary duties to HEALTHSOUTH and engaged in other allegedly tortious
conduct. The plaintiff in that case has forborne pursuing its claim thus far
pending further developments in the federal action, and the defendants have not
yet been required to file a responsive pleading in the case.
We filed a motion to dismiss the consolidated amended complaint in the
federal action in late June 1999. On September 13, 2000, the magistrate judge
issued his report and recommendation, recommending that the court dismiss the
amended complaint in its entirety, with leave to amend. The plaintiffs objected
21
to that report, and we responded to that objection. On December 20, 2000,
without oral argument, the court issued an order rejecting the magistrate
judge's report and recommendation and denying our motion to dismiss. We
believed that the December 20, 2000 order failed to follow the standards
required under the Private Securities Litigation Reform Act of 1995 and Rule
9(b) of the Federal Rules of Civil Procedure, and we filed a motion asking the
court to reconsider that order or to certify it for an interlocutory appeal to
the United States Eleventh Circuit Court of Appeals. Oral argument on that
motion was held on March 2, 2001, and the court denied that motion on March 12,
2001. Accordingly, we filed our answer to the consolidated amended complaint on
March 26, 2001. We believe that all claims asserted in the above suits are
without merit, and expect to vigorously defend against such claims. Because
such suits remain at an early stage, we cannot currently predict the outcome of
any such suits or the magnitude of any potential loss if our defense is
unsuccessful.
CERTAIN HORIZON/CMS LITIGATION
On October 29, 1997, we acquired Horizon/CMS through the merger of a
wholly owned subsidiary of HEALTHSOUTH into Horizon/CMS. Horizon/CMS is
currently a party, or is subject, to certain material litigation matters and
disputes, which are described below, as well as various other litigation
matters and disputes arising in the ordinary course of its business.
Michigan Attorney General Litigation Regarding Long-Term Care Facility In
Michigan
Horizon/CMS learned in September 1996 that the Attorney General of the
State of Michigan was investigating one of its skilled nursing facilities. The
facility, in Howell, Michigan, was owned and operated by Horizon/CMS from
February 1994 until December 31, 1997. As widely reported in the press, the
Attorney General seized a number of patient, financial and accounting records
that were located at this facility. By order of a circuit judge in the county
in which the facility is located, the Attorney General was ordered to return
patient records to the facility for copying. Horizon/CMS advised the Michigan
Attorney General that it was willing to cooperate fully in the investigation.
The facility in question was sold by Horizon/CMS to Integrated Health Services,
Inc. on December 31, 1997.
On February 19, 1998, the State of Michigan filed a criminal complaint
against Horizon/CMS, four former employees of the facility and one former
Horizon/CMS regional manager, alleging various violations in 1995 and 1996 of
certain statutes relating to patient care, patient medical records and the
making of false statements with respect to the condition or operations of the
facility (State of Michigan v. Horizon/CMS Healthcare Corp., et al., Case No.
98-630-FY, State of Michigan District Court 54B). The maximum fines chargeable
against Horizon/CMS under the counts alleged in the complaint (exclusive of
charges against the individual defendants, some of which charges may result in
indemnification obligations for Horizon/CMS) aggregate $69,000. Horizon/CMS
denies the allegations made in the complaint and expects to vigorously defend
against the charges. The litigation continued at the pretrial hearing phase for
over a year, including numerous adjournments, and Horizon/CMS is still awaiting
a decision by the court as to which, if any, charges may be brought to trial.
Because of the preliminary status of this litigation, it is not possible to
predict at this time the outcome or effect of this litigation or the length of
time it will take to resolve this litigation.
Lawsuit by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc.
On May 28, 1997, Continental Medical Systems, Inc. ("CMS"), a Horizon/CMS
subsidiary acquired in 1995, was served with a lawsuit styled Kenneth Hubbard
and Lynn Hubbard v. Rocco Ortenzio, Robert A. Ortenzio and Continental Medical
Systems, Inc., No. 3:97 CV294MCK, filed in the United States District Court for
the Western District of North Carolina, Charlotte Division, by the former
shareholders of Communi-Care, Inc. and Pro Rehab, Inc. seeking damages arising
out of certain "earnout" provisions of the definitive purchase agreements under
which CMS purchased the outstanding stock of Communi-Care, Inc. and Pro Rehab,
Inc. from such shareholders. The plaintiffs allege that the manner in which CMS
and the other defendants operated the companies after their acquisition
breached its fiduciary duties to the plaintiffs, constituted fraud, gross
negligence and bad faith and a breach of their employment agreements with the
companies. As a result of such alleged conduct, the plaintiffs assert that
22
they are entitled to damages in an amount in excess of $27,000,000 from CMS and
the other defendants. Some of the plaintiffs' claims were dismissed by order of
the court in September 1999. Horizon/CMS believes, based upon its evaluation of
the legal and factual matters relating to the plaintiffs' assertions, that it
has valid defenses to the plaintiffs' remaining claims and, as a result,
intends to vigorously contest such claims. Horizon/CMS has also filed various
counterclaims against the plaintiffs. Because this litigation remains at a
procedurally early stage, HEALTHSOUTH cannot now predict the outcome or effect
of such litigation or the length of time it will take to resolve such
litigation.
EEOC Litigation
In March 1997, the Equal Employment Opportunity Commission filed a
complaint against Horizon/CMS alleging that Horizon/CMS had engaged in unlawful
employment practices in respect of Horizon/CMS's employment policies related to
pregnancies. Specifically, the EEOC asserted that Horizon/CMS's alleged refusal
to provide pregnant employees with light-duty assignments to accommodate their
temporary disabilities caused by pregnancy violated Sections 701(k) and 703(a)
of Title VII, 42 U.S.C. (section)(section) 2000e-(k) and 2000e-2(a). In this
lawsuit, the EEOC sought, among other things, to permanently enjoin
Horizon/CMS's employment practices in this regard. The trial court granted
summary judgment in favor of Horizon/CMS on one count and dismissed the other
count after a jury trial. The EEOC appealed the summary judgment ruling to the
United States Court of Appeals for the Tenth Circuit, but did not appeal the
dismissal of the other count. On July 31, 2000, a three-judge panel of the
Court of Appeals reversed the summary judgment and remanded the case for trial
on the sole remaining count. The matter has not yet gone to trial.
Texas Nursing Facility Litigation
In July 1996, Horizon/CMS was sued in a lawsuit styled Lexa A. Auld,
Administratrix of Martha Hary, Deceased v. Horizon/CMS Healthcare Corporation
and Charles T. Maxvill, D.O., No. 48- 165121, 48th Judicial District Court,
Tarrant County, Texas. The case involved injuries allegedly suffered by a
resident of the Heritage Western Hills nursing facility in Fort Worth, Texas.
Horizon/CMS tendered the claim to its insurance carrier, which accepted
coverage with a reservation of rights and provided a defense through the
carrier's selected counsel in Dallas, Texas. The case went to trial on October
29, 1997, and on November 7, 1997, the jury rendered a verdict in favor of the
plaintiff in the amount of $2,370,000 in compensatory damages and $90,000,000
in punitive damages. On February 20, 1998, the court reduced the jury's verdict
and entered a judgment in the amount of approximately $11,237,000. On August
24, 2000, the Texas Supreme Court upheld the trial court's damage award, as
reduced, and remanded the case for a final recalculation of interest. All
damages in this case less Horizon/CMS's self-insured retention of $250,000 were
covered by insurance.
In addition, Horizon/CMS is the defendant in a case styled Cecil Fuqua, as
Executor of the Estate of Wyvonne Fuqua, Deceased, v. Horizon/CMS Healthcare
Corporation, Civil Action No. 4-98-CV- 1087-Y, United States District Court for
the Northern District of Texas, Fort Worth Division. This case likewise
involved injuries allegedly suffered by a resident at the Heritage Western
Hills nursing facility. Horizon/CMS tendered the claim to its insurance
carrier, which accepted coverage and provided a defense through the carrier's
selected counsel. In October 2000, the court issued a sanctions order
effectively preventing Horizon/CMS from raising any defense as to liability in
the matter, and in February 2001, the jury returned a verdict against
Horizon/CMS for actual damages totaling approximately $2,765,000 (plus 10% per
annum prejudgment interest) and $310,000,000 in punitive damages. Horizon/CMS
has filed various post-judgment motions for a new trial and for a reduction in
the amount of the judgment, and has also filed a notice of its intent to appeal
the judgment and various orders and rulings leading to the judgment once the
court has ruled on the post-judgment motions. Horizon/CMS believes that it has
strong arguments in support of its post-judgment motions and strong arguments
to be made on appeal, if necessary. Horizon/CMS currently believes that the
amount of the judgment will be reduced and the amount of any ultimate judgment
or settlement will be covered by insurance. However, there can be no assurance
that Horizon/CMS will be successful in having the judgment reduced or reversed,
and Horizon/CMS and HEALTHSOUTH would potentially be liable for any portion of
the judgment not covered by insurance.
23
Horizon/CMS was also a defendant in a case styled Lillian Ernst as
Independent Executrix of the Estate of Robert Ernst, Deceased, v. Horizon/CMS
Healthcare Corporation, et al., No. 99-CI-08116, 285th Judicial District Court,
Bexar County, Texas. This case involved injuries allegedly suffered by a
resident at the Blanco Vista nursing and rehabilitation facility in San
Antonio, Texas. Horizon/CMS tendered the claim to its insurance carrier, which
accepted coverage and provided a defense through the carrier's selected
counsel. In February 2001, the jury returned a verdict against Horizon/CMS for
actual damages of $7,000,000 and punitive damages of $75,000,000. The plaintiff
and the insurance carrier agreed during trial that Horizon/CMS's liability
would be capped at $20,000,000 and the carrier settled the claim for that
amount after trial. The entire liability was paid by the insurance carrier,
with no contribution from Horizon/CMS.
See Item 1, "Business -- Insurance".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
HEALTHSOUTH common stock is listed for trading on the New York Stock
Exchange under the symbol "HRC". The following table sets forth for the fiscal
periods indicated the high and low reported sale prices for HEALTHSOUTH common
stock as reported on the NYSE Composite Transactions Tape.
REPORTED
SALE PRICE
-------------------------
HIGH LOW
----------- -----------
1999
--------
First Quarter .................... $ 17.75 $ 10.38
Second Quarter ................... 16.00 8.94
Third Quarter .................... 15.38 4.56
Fourth Quarter ................... 6.38 4.69
2000
--------
First Quarter .................... $ 7.31 $ 4.75
Second Quarter ................... 8.56 5.38
Third Quarter .................... 8.12 5.19
Fourth Quarter ................... 17.50 8.12
The closing price per share for HEALTHSOUTH common stock on the New York
Stock Exchange on March 26, 2001 was $13.70.
There were approximately 6,884 holders of record of HEALTHSOUTH common
stock as of March 26, 2001.
We have never paid cash dividends on our common stock (although certain of
the companies we have acquired in pooling-of-interests transactions had paid
dividends prior to such acquisitions), and we do not anticipate paying cash
dividends in the foreseeable future. We currently anticipate that any future
earnings will be retained to finance our operations.
RECENT SALES OF UNREGISTERED SECURITIES
There were no unregistered sales of equity securities by HEALTHSOUTH in
2000.
25
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is a summary of selected consolidated financial data for
HEALTHSOUTH for the years indicated. All amounts have been restated to reflect
the effects of the 1996 acquisitions of Surgical Care Affiliates, Inc. ("SCA")
and Advantage Health Corporation, the 1997 acquisition of Health Images, Inc.
and the 1998 acquisition of NSC, each of which was accounted for as a pooling
of interests.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues ............................................ $2,648,188 $3,123,176 $4,006,074 $4,072,107 $4,195,115
Operating unit expenses ............................. 1,718,108 1,952,189 2,491,914 2,688,849 2,816,363
Corporate general and administrative
expenses .......................................... 82,953 87,512 112,800 149,285 148,023
Provision for doubtful accounts ..................... 61,311 74,743 112,202 342,708 98,037
Depreciation and amortization ....................... 212,967 257,136 344,591 374,248 360,847
Merger and acquisition related expenses (1) ......... 41,515 15,875 25,630 -- --
Impairment and restructuring charges (2) ............ 37,390 -- 483,455 121,037 --
Loss on sale of assets (2) .......................... -- -- 31,232 -- --
Interest expense .................................... 101,367 112,529 148,163 176,652 221,595
Interest income ..................................... (6,749) (6,004) (11,286) (10,587) (9,104)
---------- ---------- ---------- ---------- ----------
2,248,862 2,493,980 3,738,701 3,842,192 3,635,761
---------- ---------- ---------- ---------- ----------
Income before income taxes and minority
interests ......................................... 399,326 629,196 267,373 229,915 559,354
Provision for income taxes .......................... 148,545 213,668 143,347 66,929 181,808
---------- ---------- ---------- ---------- ----------
250,781 415,528 124,026 162,986 377,546
Minority interests .................................. 54,003 72,469 77,468 86,469 99,081
---------- ---------- ---------- ---------- ----------
Net income .......................................... $ 196,778 $ 343,059 $ 46,558 $ 76,517 $ 278,465
========== ========== ========== ========== ==========
Weighted average common shares
outstanding (3) ................................... 336,603 366,768 421,462 408,195 385,666
========== ========== ========== ========== ==========
Net income per common share (3) ..................... $ 0.58 $ 0.94 $ 0.11 $ 0.19 $ 0.72
========== ========== ========== ========== ==========
Weighted average common shares
outstanding -- assuming dilution (3)(4) ........... 365,715 386,211 432,275 414,570 391,016
========== ========== ========== ========== ==========
Net income per common share -- assuming
dilution (3)(4) ................................... $ 0.55 $ 0.89 $ 0.11 $ 0.18 $ 0.71
========== ========== ========== ========== ==========
DECEMBER 31,
------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and marketable securities ...................... $ 205,166 $ 185,018 $ 142,513 $ 132,882 $ 180,407
Working capital ..................................... 624,497 612,917 945,927 852,711 1,048,204
Total assets ........................................ 3,671,958 5,566,324 6,788,209 6,890,484 7,380,440
Long-term debt (5) .................................. 1,570,597 1,614,961 2,830,926 3,114,648 3,211,829
Stockholders' equity ................................ 1,686,770 3,290,623 3,423,004 3,206,362 3,526,454
----------
(1) Expenses related to the SCA, Advantage Health, Professional Sports Care
Management, Inc. and ReadiCare, Inc. acquisitions in 1996, the Health
Images acquisition in 1997 and the NSC acquisition in 1998.
(2) See "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect a two-for-one stock split effected in the form of a
100% stock dividend paid on March 17, 1997.
(4) Diluted earnings per share in 1996 and 1997 reflect shares reserved for
issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated
Debentures due 2001. Substantially all of those Debentures were converted
into shares of HEALTHSOUTH common stock in 1997.
(5) Includes current portion of long-term debt.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion is intended to facilitate the understanding and
assessment of significant changes and trends related to the consolidated
results of operations and financial condition of HEALTHSOUTH, including various
factors related to acquisitions we have made during the periods indicated, the
timing and nature of which have significantly affected our consolidated results
of operations. This discussion and analysis should be read in conjunction with
our consolidated financial statements and notes thereto included elsewhere in
this Annual Report on Form 10-K.
We completed the following major acquisitions over the last three years:
o On July 1, 1998, we acquired Columbia/HCA Healthcare Corporation's interest
in (or entered into interim management arrangements with respect to) 34
outpatient surgery centers located in 13 states (the "Columbia/HCA
Acquisition"). The cash purchase price was approximately $550,402,000.
o On July 22, 1998, we acquired National Surgery Centers, Inc. (the "NSC
Acquisition"). A total of 20,426,261 shares of HEALTHSOUTH common stock
were issued in connection with the transaction, representing a value of
approximately $574,489,000. At that time, NSC operated 40 outpatient
surgery centers in 14 states.
o On June 29, 1999, we acquired from Mariner Post-Acute Network, Inc.
("Mariner") substantially all of the assets of Mariner's American
Rehability Services division (the "Rehability Acquisition"), which operated
approximately 160 outpatient rehabilitation centers in 18 states. The net
cash purchase price was approximately $54,521,000.
Each of the Columbia/HCA Acquisition and the Rehability Acquisition was
accounted for under the purchase method of accounting and, accordingly, the
acquired operations are included in our consolidated financial statements from
their respective dates of acquisition. The NSC Acquisition was accounted for as
a pooling of interests and, with the exception of data set forth relating to
revenues derived from Medicare and Medicaid, all amounts shown in the following
discussion have been restated to reflect such acquisitions. NSC did not
separately track such revenues (see Note 2 of "Notes to Consolidated Financial
Statements" for further discussion).
We determine the amortization period of the cost in excess of net asset
value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of certificates of need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. We utilize independent appraisers and
rely on our own management expertise in evaluating each of the factors noted
above. With respect to the carrying value of the excess of cost over net asset
value of individual purchased facilities and other intangible assets, we
determine on a quarterly basis whether an impairment event has occurred by
considering factors such as the market value of the asset, a significant
adverse change in legal factors or in the business climate, adverse action by
regulators, a history of operating losses or cash flow losses, or a projection
of continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has
been impaired. If this evaluation indicates that the value of the asset will
not be recoverable, as determined based on the undiscounted cash flows of the
entity acquired over the remaining amortization period, our carrying value of
the asset will be reduced by the estimated shortfall of cash flows to the
estimated fair market value.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information" requires an enterprise
to report operating segments based upon the way its operations are managed.
This approach defines operating segments along the lines used by
27
management to assess performance and make operating and resource allocation
decisions. Based on our management and reporting structure, segment information
has been presented for inpatient and other clinical services, outpatient
services -- East and outpatient services -- West.
The inpatient and other clinical services segment primarily includes the
operations of our inpatient rehabilitation facilities and medical centers, as
well as the operations of certain physician practices and other clinical
services which are managerially aligned with our inpatient services. The
outpatient services segments primarily include the operations of our outpatient
rehabilitation facilities, outpatient surgery centers and outpatient diagnostic
centers and follow the geographic management reporting structure we use for our
outpatient services operations.
See Note 14 of "Notes to Consolidated Financial Statements" for financial
data for each of our operating segments.
Our revenues include net patient service revenues and other operating
revenues. Net patient service revenues are reported at estimated net realizable
amounts from patients, insurance companies, third-party payors (primarily
Medicare and Medicaid) and others for services rendered. Revenues from
third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. We determine allowances for doubtful accounts based on
the specific agings and payor classifications at each facility, and contractual
adjustments based on historical experience and the terms of payor contracts.
Net accounts receivable include only those amounts we estimate to be
collectible.
Substantially all of our revenues are derived from private and
governmental third-party payors. Our reimbursement from governmental
third-party payors is based upon cost reports and other reimbursement
mechanisms which require the application and interpretation of complex
regulations and policies, and such reimbursement is subject to various levels
of review and adjustment by fiscal intermediaries and others, which may affect
the final determination of reimbursement. In addition, there are increasing
pressures from many payor sources to control healthcare costs and to reduce or
limit increases in reimbursement rates for medical services. There can be no
assurance that payments under governmental and third-party payor programs will
remain at levels comparable to present levels. In addition, there have been,
and we expect that there will continue to be, a number of proposals to limit
Medicare reimbursement for certain services. We cannot now predict whether any
of these proposals will be adopted or, if adopted and implemented, what effect
such proposals would have on us. Changes in reimbursement policies or rates by
private or governmental payors could have an adverse effect on our future
results of operations.
In many cases, we operate more than one site within a market. In such
markets, there is customarily an outpatient center or inpatient facility with
associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store operations are measured on locations within
markets in which similar operations existed at the end of the period and
include the operations of additional locations opened within the same market.
New store operations are measured on locations within new markets. We may, from
time to time, close or consolidate similar locations in multi-site markets to
obtain efficiencies and respond to changes in demand.
RESULTS OF OPERATIONS
Twelve-Month Periods Ended December 31, 1998 and 1999
Our operations generated revenues of $4,072,107,000 in 1999, an increase
of $66,033,000, or 1.6%, as compared to 1998 revenues. Same store revenues for
the twelve months ended December 31, 1999 were $4,023,696,000, an increase of
$97,792,000, or 2.4%, as compared to the same period in 1998, excluding
discontinued home health operations. New store revenues for 1999 were
$48,411,000. The increase in revenues is primarily attributable to the addition
of new operations and increases in patient volume. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
33.0% and 2.2% of total revenues for 1999, compared to 35.9% and 2.7% of total
revenues for 1998. Revenues from any other single third-party payor were not
significant in relation to our total revenues.
28
During 1999, same store inpatient days, outpatient visits, surgical cases and
diagnostic cases increased 6.9%, 10.1%, 13.0% and 10.8%, respectively. Revenue
per inpatient day, outpatient visit, surgical case and diagnostic case for same
store operations decreased by (7.0)%, (1.3)%, (5.1)% and (7.2)%, respectively.
Operating expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $2,688,849,000, or 66.0% of revenues,
for 1999, compared to 62.2% of revenues for 1998. Included in operating
expenses for the year ended December 31, 1999, is a non-recurring expense item
of approximately $40,183,000 which related primarily to our plan to write off
obsolete equipment. During the fourth quarter of 1999, we reviewed equipment
that had originally been acquired through various company mergers and
acquisitions. During the acquisitions it was our intention to either continue
using the equipment or transfer it to other locations where it could be
utilized. During the fourth quarter of 1999, an obsolescence charge was taken
based on our determination that certain equipment was obsolete due to changes
in available technologies. Excluding the non-recurring expense, operating
expenses were $2,648,666,000, or 65.0% of revenues, for the year ended December
31, 1999. The increase in operating expenses as a percentage of revenues is
primarily attributable to the decline in same store revenues per inpatient day,
outpatient visit, surgical case and diagnostic case. Same store operating
expenses for 1999, excluding the non-recurring expense item noted above, were
$2,614,953,000, or 65.0% of related revenues. New store operating expenses were
$33,713,000, or 69.6% of related revenues. Corporate general and administrative
expenses increased from $112,800,000 in 1998 to $149,285,000 in 1999. Included
in corporate general and administrative expenses for the year ended December
31, 1999, is a non-recurring expense item of approximately $29,798,000. This
expense item included write-offs of investments and notes of $14,603,000,
expenses related to year 2000 remediation of $13,429,000 and expenses related
to the proposed spin-off of our inpatient operations of $1,766,000. As part of
our evaluation of the proposed spin-off in 1999, we determined that certain
notes and investments totaling $14,603,000 should be written off. The year 2000
remediation expenditures were incurred during 1999 while testing for year 2000
compliance. Excluding the non-recurring expense, as a percentage of revenues,
corporate general and administrative expenses increased from 2.8% in 1998 to
2.9% in 1999. Total operating expenses were $2,838,134,000, or 69.7% of
revenues, for 1999, compared to $2,604,714,000, or 65.0% of revenues, for 1998.
The provision for doubtful accounts was $342,708,000, or 8.4% of revenues, for
1999, compared to $112,202,000, or 2.8% of revenues, for 1998. Included in the
provision for doubtful accounts is $117,752,000 in expense recognized in the
third quarter of 1999 and $139,835,000 in expense recognized in the fourth
quarter of 1999. The third quarter provision includes the charge-off of
accounts receivable of facilities included in the impairment and restructuring
charges recognized in 1998. These accounts receivable were determined to be
uncollectible by local and regional operations management personnel who assumed
collection responsibilities in the third quarter of 1999 in connection with the
restructuring of our outpatient regional business offices, which had previously
been responsible for collection activities. The fourth quarter charge reflected
management's decision to adopt a more conservative approach in estimating the
allowance for doubtful accounts. The revision in estimating the allowance for
doubtful accounts was due to management's assessment of the healthcare payor
environment. This approach focused more heavily upon the specific agings and
payor classifications at each facility, as opposed to determining an estimate
based primarily on historical write-off rates. Due to a deterioration of the
payor environment, our days sales outstanding at the end of the second quarter
of 1999 had grown to 94.5 days. Our subsequent reviews uncovered tremendous
volumes of denied or pended claims. Further commitment to collecting these
older receivables would have diluted our effectiveness in collecting current,
ongoing accounts.
Depreciation and amortization expense was $374,248,000 for 1999, compared
to $344,591,000 for 1998. The increase resulted from our investment in
additional assets. Interest expense increased to $176,652,000 in 1999, compared
to $148,163,000 for 1998, primarily because of the increased amount outstanding
under our credit facilities (see "Liquidity and Capital Resources"). For 1999,
interest income was $10,587,000, compared to $11,286,000 for 1998.
During the fourth quarter of 1999, we completed our budgets for the 2000
fiscal year. The existence of locations budgeting operating losses before
interest, taxes, depreciation and amortization initiated our
29
need for a detail oriented impairment review. During the fourth quarter of
1999, we recorded a non-recurring expense item of $121,037,000 related to the
impairment of long-term assets. The charge was based on a facility-by-facility
review of each facility's financial performance which determined if there were
trends that would indicate that the facility's ability to recover its
investment in long-lived assets had been impaired. The evaluation indicated
that the value of the asset would not be recoverable, as determined based on
the undiscounted cash flows of the entity over the remaining amortization
period, and the impairment loss was calculated based on the excess of the
carrying amount of the asset over the asset's fair value. For further
discussion, see Note 13 of "Notes to Consolidated Financial Statements".
Total unusual and non-recurring charges and expenses included in the
results of operations for the year ended December 31, 1999 were approximately
$448,605,000.
Income before minority interests and income taxes for 1999 was
$229,915,000, compared to $267,373,000 for 1998. Minority interests reduced
income before income taxes by $86,469,000 in 1999, compared to $77,468,000 for
1998. The provision for income taxes for 1999 was $66,929,000, compared to
$143,347,000 for 1998. Excluding the tax effects of the impairment and
restructuring charges in both periods and the merger costs and the loss on sale
of assets in 1998, the effective tax rate for 1999 was 39.5%, compared to 39.0%
for 1998 (see Note 10 of "Notes to Consolidated Financial Statements" for
further discussion). Net income for 1999 was $76,517,000.
Twelve-Month Periods Ended December 31, 1999 and 2000
Our operations generated revenues of $4,195,115,000 in 2000, an increase
of $123,008,000, or 3.0%, as compared to 1999 revenues. Same store revenues for
the twelve months ended December 31, 2000 were $4,121,055,000, an increase of
$48,948,000, or 1.2%, as compared to the same period in 1999. New store
revenues for 2000 were $74,060,000. The increase in revenues is primarily
attributable to increases in patient volume. Revenues generated from patients
under the Medicare and Medicaid programs respectively accounted for 29.0% and
2.6% of total revenues for 2000, compared to 33.0% and 2.2% of total revenues
for 1999. Revenues from any other single third-party payor were not significant
in relation to our total revenues. During 2000, same store inpatient days,
outpatient visits, surgical cases and diagnostic cases increased 4.6%, 3.5%,
1.8% and 6.2%, respectively. Revenue per inpatient day, outpatient visit,
surgical case and diagnostic case for same store operations (decreased)
increased by (2.3)%, 0.4%, 1.8% and (10.2)%, respectively.
Operating unit expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $2,816,363,000, or 67.1% of revenues,
for 2000, compared to 66.0% of revenues for 1999. Same store operating expenses
for 2000 were $2,762,795,000, or 67.0% of related revenues. New store operating
expenses were $53,568,000, or 72.3% of related revenues. Corporate general and
administrative expenses decreased from $149,285,000 in 1999 to $148,023,000 in
2000. As described above, included in corporate general and administrative
expenses for the year ended December 31, 1999, is a non-recurring expense item
of approximately $29,798,000. Excluding the non-recurring expense, as a
percentage of revenues, corporate general and administrative expenses increased
from 2.9% in 1999 to 3.5% in 2000. Total operating expenses were
$2,964,386,000, or 70.7% of revenues, for 2000, compared to $2,838,134,000, or
69.7% of revenues, for 1999. The provision for doubtful accounts was
$98,037,000, or 2.3% of revenues, for 2000, compared to $342,708,000, or 8.4%
of revenues, for 1999. Included in the 1999 provision for doubtful accounts is
$117,752,000 in expense recognized in the third quarter of 1999 and
$139,835,000 in expense recognized in the fourth quarter of 1999.
Depreciation and amortization expense was $360,847,000 for 2000, compared
to $374,248,000 for 1999. The decrease was primarily attributable to the full
amortization of certain intangible assets. Interest expense increased to
$221,595,000 in 2000, compared to $176,652,000 for 1999, primarily attributable
to increases in effective interest rates (see "Liquidity and Capital
Resources"). For 2000, interest income was $9,104,000, compared to $10,587,000
for 1999.
Income before minority interests and income taxes for 2000 was
$559,354,000, compared to $229,915,000 for 1999. Minority interests reduced
income before income taxes by $99,081,000 in 2000, compared to $86,469,000 for
1999. The provision for income taxes for 2000 was $181,808,000, compared
30
to $66,929,000 for 1999. Excluding the tax effects of the impairment and
restructuring charges in 1999, the effective tax rate for 1999 and 2000 was
39.5% (see Note 10 of "Notes to Consolidated Financial Statements" for further
discussion). Net income for 2000 was $278,465,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had working capital of $1,048,204,000, including
cash and marketable securities of $180,407,000. Working capital at December 31,
1999 was $852,711,000, including cash and marketable securities of
$132,882,000. For 2000, cash provided by operations was $796,764,000, compared
to $704,511,000 for 1999. For 2000, investing activities used $757,304,000,
compared to using $614,859,000 for 1999. The change is primarily due to
increased purchases of property, plant and equipment. Additions to property,
plant and equipment and acquisitions accounted for $583,639,000 and
$74,137,000, respectively, during 2000. Those same investing activities
accounted for $474,115,000 and $104,304,000, respectively, in 1999. Financing
activities provided $11,457,000 and used $99,079,000 during 2000 and 1999,
respectively. The change is primarily due to significantly higher purchases of
treasury stock in 1999. Net borrowing proceeds for 2000 and 1999 were
$89,007,000 and $285,379,000, respectively.
Net accounts receivable were $946,965,000 at December 31, 2000, compared
to $891,829,000 at December 31, 1999. The number of days of average quarterly
revenues in ending receivables was 80.9 at December 31, 2000, compared to 82.0
at December 31, 1999. See Note 1 of "Notes to Consolidated Financial
Statements" for the concentration of net accounts receivable from patients,
third-party payors, insurance companies and others at December 31, 2000 and
1999.
We have a $1,750,000,000 revolving credit facility with Bank of America,
N.A. ("Bank of America") and other participating banks (the "1998 Credit
Agreement"). Interest on the 1998 Credit Agreement is paid based on LIBOR plus
a predetermined margin, a base rate, or competitively bid rates from the
participating banks. We are required to pay a fee based on the unused portion
of the revolving credit facility ranging from 0.09% to 0.25%, depending on
certain defined credit ratings. The principal amount is payable in full on June
22, 2003. We have provided a negative pledge on all assets under the 1998
Credit Agreement. The effective interest rate on the average outstanding
balance under the 1998 Credit Agreement was 6.92% for the twelve months ended
December 31, 2000, compared to the average prime rate of 9.21% during the same
period. At December 31, 2000, we had drawn $1,655,000,000 under the 1998 Credit
Agreement. For further discussion, see Note 7 of "Notes to Consolidated
Financial Statements".
We also had a Short Term Credit Agreement with Bank of America (as
amended, the "Short Term Credit Agreement"), providing for a $250,000,000 short
term revolving credit facility. The terms of the Short Term Credit Agreement
were substantially consistent with those of the 1998 Credit Agreement. Interest
on the Short Term Credit Agreement was paid based on LIBOR plus a predetermined
margin or a base rate. We were required to pay a fee on the unused portion of
the credit facility ranging from 0.30% to 0.50%, depending on certain defined
ratios. On October 31, 2000, we terminated the Short Term Credit Agreement and
replaced it with a new $400,000,000 Credit Agreement (the "2000 Credit
Agreement") with UBS AG and other participating banks. Interest on the 2000
Credit Agreement is paid based on LIBOR plus a predetermined margin or base
rate. We are required to pay a fee on the unused portion of the credit facility
ranging from 0.25% to 0.50%, depending on certain defined ratios. The principal
amount is payable in full in eight quarterly installments ending on June 22,
2003. At December 31, 2000, we had no drawings outstanding under the 2000
Credit Agreement.
On March 24, 1994, we issued $250,000,000 principal amount of 9.5% Senior
Subordinated Notes due 2001 (the "9.5% Notes"). We redeemed the 9.5% Notes at
par on October 30, 2000.
On March 20, 1998, we issued $500,000,000 in 3.25% Convertible
Subordinated Debentures due 2003. An additional $67,750,000 principal amount of
the 3.25% Convertible Debentures was issued on March 31, 1998 to cover
underwriters' overallotments. Interest is payable on April 1 and October 1. The
3.25% Convertible Debentures are convertible into HEALTHSOUTH common stock at
the option of the holder at a conversion price of $36.625 per share. The
conversion price is subject to adjustment upon the occurrence of (a) a
subdivision, combination or reclassification of outstanding shares of our
common
31
stock, (b) the payment of a stock dividend or stock distribution on any shares
of our capital stock, (c) the issuance of rights or warrants to all holders of
our common stock entitling them to purchase shares of our common stock at less
than the current market price, or (d) the payment of certain other
distributions with respect to our common stock. In addition, we may, from time
to time, lower the conversion price for periods of not less than 20 days, in
our discretion. We used net proceeds from the issuance of the 3.25% Convertible
Debentures to pay down indebtedness outstanding under our then-existing credit
facilities.
On June 22, 1998, we issued $250,000,000 in 6.875% Senior Notes due 2005
and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the "Senior
Notes"). Interest is payable on June 15 and December 15. The Senior Notes are
unsecured, unsubordinated obligations of HEALTHSOUTH. We used the net proceeds
from the issuance of the Senior Notes to pay down indebtedness outstanding
under our then-existing credit facilities.
On September 25, 2000, we issued $350,000,000 in 10-3/4% Senior
Subordinated Notes due 2008 (the "10-3/4% Notes"). Interest is payable on April
1 and October 1. The 10-3/4% Notes are senior subordinated obligations of
HEALTHSOUTH and, as such, are subordinated to all our existing and future
senior indebtedness, and also are effectively subordinated to all existing and
future liabilities of our subsidiaries and partnerships. The net proceeds from
the issuance of the 10-3/4% Notes were used to redeem the 9.5% Notes and to pay
down indebtedness outstanding under our then-existing credit facilities. The
10-3/4% Notes mature on October 1, 2008.
On February 1, 2001, we issued $375,000,000 in 8-1/2% Senior Notes due
2008 (the "8-1/2% Notes"). Interest is payable on February 1 and August 1. The
8-1/2% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net
proceeds from the issuance of the 8-1/2% Notes were used to pay down
indebtedness outstanding under our credit facilities. The 8-1/2% Notes mature
on February 1, 2008.
We intend to pursue the acquisition or development of additional
healthcare operations, including outpatient rehabilitation facilities,
inpatient rehabilitation facilities, ambulatory surgery centers, outpatient
diagnostic centers and companies engaged in the provision of other
complementary services, and to expand certain of our existing facilities. While
it is not possible to estimate precisely the amounts which will actually be
expended in the foregoing areas, we anticipate that over the next twelve
months, we will spend approximately $100,000,000 to $150,000,000 on maintenance
and expansion of our existing facilities and approximately $200,000,000 to
$250,000,000 on development activities and on continued development of the
Integrated Service Model. See Item 1, "Business -- Company Strategy".
Although we are continually considering and evaluating acquisitions and
opportunities for future growth, we have not entered into any agreements with
respect to material future acquisitions. We believe that existing cash, cash
flow from operations and borrowings under existing credit facilities will be
sufficient to satisfy our estimated cash requirements for the next twelve
months, and for the reasonably foreseeable future.
Inflation in recent years has not had a significant effect on our
business, and is not expected to adversely affect us in the future unless it
increases significantly.
EXPOSURES TO MARKET RISK
We are exposed to market risk related to changes in interest rates. The
impact on earnings and value of market risk-sensitive financial instruments
(principally marketable security investments and long-term debt, as well as the
interest rate swaps described below) is subject to change as a result of
movements in market rates and prices. We use sensitivity analysis models to
evaluate these impacts. We do not hold or issue derivative instruments for
trading purposes and are not a party to any instruments with leverage features.
Our investment in marketable securities was $90,000 at December 31, 2000,
compared to $3,482,000 at December 31, 1999. The investment represents less
than 1% of total assets at December 31, 2000 and 1999. These securities are
generally short-term, highly-liquid instruments and, accordingly, their fair
value approximates cost. Earnings on investments in marketable securities are
not significant to our results of operations, and therefore any changes in
interest rates would have a minimal impact on future pre-tax earnings.
32
As described below, a significant portion of our long-term indebtedness is
subject to variable rates of interest, generally equal to LIBOR plus a
predetermined percentage. In October 2000, we entered into three short-term
interest rate swap arrangements intended to hedge our exposure to rising
interest rates in the capital markets. Two of these arrangements have a
notional amount of $240,000,000 and one has a notional amount of $175,000,000.
These mature six months and twelve months, respectively, from the date of the
original transaction. The notional amounts are used to measure interest to be
paid or received and do not represent an amount of exposure to credit loss. In
each of these arrangements, we pay the counterparty a fixed rate of interest on
the notional amount, and the counterparty pays us a variable rate of interest
equal to the 90-day LIBOR rate. The variable rate paid to us by the
counterparty on the six-month maturities and the twelve-month maturity are
reset once and three times, respectively, during the term of the swaps. Thus,
these interest rate swaps have the effect of fixing the interest rates on an
aggregate of $655,000,000 of our variable-rate debt through their maturity
dates. The arrangements mature at various dates in April 2001 and November
2001. We would be exposed to credit losses if the counterparties did not
perform their obligations under the swap arrangements; however, the
counterparties are major commercial banks whom we believe to be creditworthy,
and we expect them to fully satisfy their obligations. At December 31, 2000,
the weighted average interest rate we were obligated to pay under these
interest rate swaps was 6.70%, and the weighted average interest rate we
received was 6.76%.
With respect to our interest-bearing liabilities, approximately
$1,655,000,000 in long-term debt at December 31, 2000 is subject to variable
rates of interest before giving effect to the interest rate swaps above, while
the remaining balance in long-term debt of $1,556,829,000 is subject to fixed
rates of interest. This compares to $1,625,000,000 in long-term debt subject to
variable rates of interest and $1,489,648,000 in long-term debt subject to
fixed rates of interest at December 31, 1999 (see Note 7 of "Notes to
Consolidated Financial Statements" for further description). The fair value of
our total long-term debt, based on discounted cash flow analyses, approximates
its carrying value at December 31, 2000 except for the 3.25% Convertible
Debentures, 6.875% Senior Notes, 7.0% Senior Notes and 10-3/4% Senior Notes.
The fair value of the 3.25% Convertible Debentures at December 31, 2000 was
approximately $503,765,000. The fair value of the 6.875% Senior Notes due 2005
was approximately $252,025,000 at December 31, 2000. The fair value of the 7%
Senior Notes due 2008 was approximately $225,125,000 at December 31, 2000. The
fair value of the 10-3/4% Senior Notes due 2008 was approximately $366,625,000
at December 31, 2000. Based on a hypothetical 1% increase in interest rates,
the potential losses in future pre-tax earnings would be approximately
$16,550,000. The impact of such a change on the carrying value of long-term
debt would not be significant. These amounts are determined considering the
impact of the hypothetical interest rates on our borrowing cost and long-term
debt balances. These analyses do not consider the effects, if any, of the
potential changes in the overall level of economic activity that could exist in
such an environment. Further, in the event of a change of significant
magnitude, management would expect to take actions intended to further mitigate
its exposure to such change.
Foreign operations, and the related market risks associated with foreign
currency, are currently insignificant to our results of operations and
financial position.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. Without limiting the
generality of the preceding statement, all statements in this Annual Report on
Form 10-K concerning or relating to estimated and projected earnings, margins,
costs, expenditures, cash flows, growth rates and financial results are
forward-looking statements. In addition, HEALTHSOUTH, through its senior
management, from time to time makes forward-looking public statements
concerning our expected future operations and performance and other
developments. Such forward-looking statements are necessarily estimates
reflecting our best judgment based upon current information, involve a number
of risks and uncertainties and are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. There can
be no assurance that other factors will not affect the accuracy of such
forward-looking statements or that our actual results will not differ
materially from the results anticipated in such forward-looking statements.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from
33
those estimated by us include, but are not limited to, changes in the
regulation of the healthcare industry at either or both of the federal and
state levels, changes or delays in reimbursement for our services by
governmental or private payors, competitive pressures in the healthcare
industry and our response thereto, our ability to obtain and retain favorable
arrangements with third-party payors, unanticipated delays in the
implementation of our Integrated Service Model, general conditions in the
economy and capital markets, and other factors which may be identified from
time to time in our Securities and Exchange Commission filings and other public
announcements.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of HEALTHSOUTH meeting the requirements
of Regulation S-X are filed on the following pages of this Item 8 of this
Annual Report on Form 10-K, as listed below:
PAGE
-----
Report of Independent Auditors ..................................... 36
Consolidated Balance Sheets as of December 31, 1999 and 2000 ....... 37
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1999 and 2000 .................................. 38
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000 ...................... 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000 .................................. 40
Notes to Consolidated Financial Statements ......................... 42
The financial statement schedules required under Regulation S-X are listed
in Item 14(a)2, and filed under Item 14(d), of this Annual Report on Form 10-K.
QUARTERLY RESULTS (UNAUDITED)
Set forth below is summary information with respect to HEALTHSOUTH's
operations for the last eight fiscal quarters.
1999
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 1,030,547 $ 1,047,632 $993,341 $1,000,587
Net income (loss) 109,905 114,005 (4,330) (143,063)
Net income (loss) per common share 0.26 0.28 (0.01) (0.37)
Net income (loss) per common share --
assuming dilution 0.26 0.27 (0.01) (0.37)
2000
---------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 1,021,335 $ 1,036,322 $ 1,060,457 $ 1,077,001
Net income 65,326 65,213 71,037 76,889
Net income per common share 0.17 0.17 0.18 0.20
Net income per common share --
assuming dilution 0.17 0.17 0.18 0.19
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of
HEALTHSOUTH Corporation and Subsidiaries as of December 31, 1999 and 2000, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HEALTHSOUTH
Corporation and Subsidiaries at December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Birmingham, Alabama
March 6, 2001
36
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 2000
------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents (Note 3) ......................................... $ 129,400 $ 180,317
Other marketable securities (Note 3) ....................................... 3,482 90
Accounts receivable, net of allowances for doubtful accounts of
$303,614,000 in 1999 and $230,430,000 in 2000............................. 891,829 946,965
Inventories ................................................................ 85,551 92,943
Prepaid expenses and other current assets .................................. 170,836 210,803
Income tax refund receivable ............................................... 39,438 --
---------- ----------
Total current assets ........................................................ 1,320,536 1,431,118
Other assets:
Loans to officers .......................................................... 3,842 6,242
Assets held for sale (Note 13) ............................................. 29,473 26,759
Deferred income taxes (Note 10) ............................................ 47,550 --
Other (Note 4) ............................................................. 157,609 197,897
---------- ----------
238,474 230,898
Property, plant and equipment, net (Note 5) ................................. 2,502,967 2,871,763
Intangible assets, net (Note 6) ............................................. 2,828,507 2,846,661
---------- ----------
Total assets ................................................................ $6,890,484 $7,380,440
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 76,549 $ 78,762
Salaries and wages payable ................................................. 93,046 87,730
Accrued interest payable and other liabilities ............................. 152,244 168,970
Deferred income taxes (Note 10) ............................................ 108,168 4,227
Current portion of long-term debt (Note 7) ................................. 37,818 43,225
---------- ----------
Total current liabilities ................................................... 467,825 382,914
Long-term debt (Note 7) ..................................................... 3,076,830 3,168,604
Deferred income taxes (Note 10) ............................................. - 160,365
Deferred revenue and other long-term liabilities ............................ 4,573 4,126
Minority interests-limited partnerships (Note 1) ............................ 134,894 137,977
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 8 and 12):
Preferred stock, $.10 par value -- 1,500,000 shares authorized; issued and
outstanding -- none ...................................................... -- --
Common stock, $.01 par value -- 600,000,000 shares authorized; issued --
423,982,000 in 1999 and 426,031,000 in 2000 .............................. 4,240 4,260
Additional paid-in capital ................................................. 2,584,572 2,610,442
Accumulated other comprehensive (loss) income .............................. (1,443) 7,074
Retained earnings .......................................................... 949,828 1,224,950
Treasury stock, at cost (38,342,000 shares in 1999 and 38,742,000 shares
in 2000) ................................................................. (278,504) (280,524)
Receivable from Employee Stock Ownership Plan .............................. (7,898) (5,415)
Notes receivable from stockholders, officers and management
employees ................................................................ (44,433) (34,333)
---------- ----------
Total stockholders' equity .................................................. 3,206,362 3,526,454
---------- ----------
Total liabilities and stockholders' equity .................................. $6,890,484 $7,380,440
========== ==========
See accompanying notes.
37
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Revenues .................................................. $4,006,074 $4,072,107 $4,195,115
Operating unit expenses ................................... 2,491,914 2,688,849 2,816,363
Corporate general and administrative expenses ............. 112,800 149,285 148,023
Provision for doubtful accounts ........................... 112,202 342,708 98,037
Depreciation and amortization ............................. 344,591 374,248 360,847
Merger and acquisition related expenses (Notes 2
and 9) ................................................... 25,630 -- --
Loss on sale of assets (Note 9) ........................... 31,232 -- --
Impairment and restructuring charges (Note 13) ............ 483,455 121,037 --
Interest expense .......................................... 148,163 176,652 221,595
Interest income ........................................... (11,286) (10,587) (9,104)
---------- ---------- ----------
3,738,701 3,842,192 3,635,761
---------- ---------- ----------
Income before income taxes and minority interests ......... 267,373 229,915 559,354
Provision for income taxes (Note 10) ...................... 143,347 66,929 181,808
---------- ---------- ----------
124,026 162,986 377,546
Minority interests ........................................ 77,468 86,469 99,081
---------- ---------- ----------
Net income ................................................ $ 46,558 $ 76,517 $ 278,465
========== ========== ==========
Weighted average common shares outstanding ................ 421,462 408,195 385,666
========== ========== ==========
Net income per common share ............................... $ 0.11 $ 0.19 $ 0.72
========== ========== ==========
Weighted average common shares outstanding -
assuming dilution ........................................ 432,275 414,570 391,016
========== ========== ==========
Net income per common share - assuming dilution ........... $ 0.11 $ 0.18 $ 0.71
========== ========== ==========
See accompanying notes.
38
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
COMMON STOCK ADDITIONAL
-------------------- PAID-IN
SHARES AMOUNT CAPITAL
--------- ---------- --------------
(IN THOUSANDS)
Balance at December 31, 1997 ........................................ 415,537 $ 4,155 $ 2,474,726
Comprehensive income:
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Comprehensive income
Proceeds from exercise of options (Note 8) .......................... 6,885 69 60,135
Common shares issued in connection with acquisitions (Note 9)........ 699 7 19,390
Common shares issued in connection with lease buyout ................ 57 1 1,592
Income tax benefits related to incentive stock options (Note 8)...... -- -- 21,804
Reduction in receivable from ESOP ................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Repurchase limited partnership units ................................ -- -- --
Purchase of treasury stock .......................................... -- -- --
------- ------- -----------
Balance at December 31, 1998 ........................................ 423,178 4,232 2,577,647
Comprehensive income:
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Comprehensive income ................................................
Proceeds from exercise of options (Note 8) .......................... 804 8 4,363
Restricted stock grants issued ...................................... -- -- 2,562
Reduction in receivable from ESOP ................................... -- -- --
Loans made to stockholders .......................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Repurchase limited partnership units ................................ -- -- --
Purchase of treasury stock .......................................... -- -- --
------- ------- -----------
Balance at December 31, 1999 ........................................ 423,982 4,240 2,584,572
Comprehensive income:
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... -- -- --
Comprehensive income ................................................
Proceeds from exercise of options (Note 8) .......................... 2,049 20 14,768
Income tax benefits related to incentive stock options (Note 8)...... -- -- 4,155
Restricted stock grants issued ...................................... -- -- 2,002
Reduction in receivable from ESOP ................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Repurchase limited partnership units ................................ -- -- --
Variable stock option appreciation .................................. -- -- 4,945
Purchase of treasury stock .......................................... -- -- --
------- ------- -----------
Balance at December 31, 2000 ........................................ 426,031 $ 4,260 $ 2,610,442
======= ======= ===========
ACCUMULATED
OTHER TREASURY STOCK
COMPREHENSIVE RETAINED ------------------------
INCOME (LOSS) EARNINGS SHARES AMOUNT
--------------- --------------- -------- ---------------
(IN THOUSANDS)
Balance at December 31, 1997 ........................................ $ (1,057) $ 834,385 552 $ (3,923)
Comprehensive income:
Net income ......................................................... -- 46,558 -- --
Translation adjustment ............................................. (24) -- -- --
Comprehensive income
Proceeds from exercise of options (Note 8) .......................... -- -- -- --
Common shares issued in connection with acquisitions (Note 9)........ -- -- -- --
Common shares issued in connection with lease buyout ................ -- -- -- --
Income tax benefits related to incentive stock options (Note 8)...... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Repurchase limited partnership units ................................ -- (1,634) -- --
Purchase of treasury stock .......................................... -- -- 1,490 (17,890)
--------- ----------- ----- -----------
Balance at December 31, 1998 ........................................ (1,081) 879,309 2,042 (21,813)
Comprehensive income:
Net income ......................................................... -- 76,517 -- --
Translation adjustment ............................................. (362) -- -- --
Comprehensive income ................................................
Proceeds from exercise of options (Note 8) .......................... -- -- -- --
Restricted stock grants issued ...................................... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Loans made to stockholders .......................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Repurchase limited partnership units ................................ -- (5,998) -- --
Purchase of treasury stock .......................................... -- -- 36,300 (256,691)
--------- ----------- ------ -----------
Balance at December 31, 1999 ........................................ (1,443) 949,828 38,342 (278,504)
Comprehensive income:
Net income ......................................................... -- 278,465 -- --
Translation adjustment ............................................. (3,560) -- -- --
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... 12,077 -- -- --
Comprehensive income ................................................
Proceeds from exercise of options (Note 8) .......................... -- -- -- --
Income tax benefits related to incentive stock options (Note 8)...... -- -- -- --
Restricted stock grants issued ...................................... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Repurchase limited partnership units ................................ -- (3,343) -- --
Variable stock option appreciation .................................. -- -- -- --
Purchase of treasury stock .......................................... -- -- 400 (2,020)
--------- ----------- ------ -----------
Balance at December 31, 2000 ........................................ $ 7,074 $ 1,224,950 38,742 $ (280,524)
========= =========== ====== ===========
TOTAL
RECEIVABLE NOTES STOCKHOLDERS'
FROM ESOP RECEIVABLE EQUITY
-------------- -------------- --------------
(IN THOUSANDS)
Balance at December 31, 1997 ........................................ $ (12,247) $ (5,416) $ 3,290,623
Comprehensive income:
Net income ......................................................... -- -- 46,558
Translation adjustment ............................................. -- -- (24)
-----------
Comprehensive income 46,534
Proceeds from exercise of options (Note 8) .......................... -- -- 60,204
Common shares issued in connection with acquisitions (Note 9)........ -- -- 19,397
Common shares issued in connection with lease buyout ................ -- -- 1,593
Income tax benefits related to incentive stock options (Note 8)...... -- -- 21,804
Reduction in receivable from ESOP ................................... 2,078 -- 2,078
Payments received on stockholders' notes receivable ................. -- 295 295
Repurchase limited partnership units ................................ -- -- (1,634)
Purchase of treasury stock .......................................... -- -- (17,890)
---------- ---------- -----------
Balance at December 31, 1998 ........................................ (10,169) (5,121) 3,423,004
Comprehensive income:
Net income ......................................................... -- -- 76,517
Translation adjustment ............................................. -- -- (362)
-----------
Comprehensive income ................................................ 76,155
Proceeds from exercise of options (Note 8) .......................... -- -- 4,371
Restricted stock grants issued ...................................... -- -- 2,562
Reduction in receivable from ESOP ................................... 2,271 -- 2,271
Loans made to stockholders .......................................... -- (39,334) (39,334)
Payments received on stockholders' notes receivable ................. -- 22 22
Repurchase limited partnership units ................................ -- -- (5,998)
Purchase of treasury stock .......................................... -- -- (256,691)
---------- ---------- -----------
Balance at December 31, 1999 ........................................ (7,898) (44,433) 3,206,362
Comprehensive income:
Net income ......................................................... -- -- 278,465
Translation adjustment ............................................. -- -- (3,560)
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... -- -- 12,077
-----------
Comprehensive income ................................................ 286,982
Proceeds from exercise of options (Note 8) .......................... -- -- 14,788
Income tax benefits related to incentive stock options (Note 8)...... -- -- 4,155
Restricted stock grants issued ...................................... -- -- 2,002
Reduction in receivable from ESOP ................................... 2,483 -- 2,483
Payments received on stockholders' notes receivable ................. -- 10,100 10,100
Repurchase limited partnership units ................................ -- -- (3,343)
Variable stock option appreciation .................................. -- -- 4,945
Purchase of treasury stock .......................................... -- -- (2,020)
---------- ---------- -----------
Balance at December 31, 2000 ........................................ $ (5,415) $ (34,333) $ 3,526,454
========== ========== ===========
See accompanying notes.
39
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000
--------------- ------------- ---------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income ........................................................ $ 46,558 $ 76,517 $ 278,465
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................... 344,591 374,248 360,847
Provision for doubtful accounts .................................. 112,202 342,708 98,037
Issuance of restricted stock grants .............................. -- 2,562 2,002
Variable stock option appreciation ............................... -- -- 4,945
Impairment and restructuring charges ............................. 483,455 121,037 --
Merger and acquisition related expenses .......................... 25,630 -- --
Loss on sale of assets ........................................... 31,232 -- --
Income applicable to minority interests of limited
partnerships .................................................... 77,468 86,469 99,081
(Benefit) provision for deferred income taxes .................... (43,410) (5,850) 96,448
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable ............................................. (250,468) (332,977) (150,283)
Inventories, prepaid expenses and other current assets .......... (132,280) 67,428 (7,877)
Accounts payable and accrued expenses ........................... (58,846) (27,631) 15,099
------------ ---------- ------------
Net cash provided by operating activities ......................... 636,132 704,511 796,764
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........................ (714,212) (474,115) (583,639)
Proceeds from sale of non-strategic assets ........................ 34,100 5,693 2,713
Additions to intangible assets, net of effects of acquisitions..... (48,415) (33,140) (83,291)
Assets obtained through acquisitions, net of liabilities
assumed .......................................................... (729,440) (104,304) (74,137)
Payments on purchase accounting accruals .......................... (292,949) (22,063) --
Changes in other assets ........................................... (48,883) 12,866 (22,342)
Proceeds received on sale of other marketable securities .......... 18,340 1,300 3,392
Investments in other marketable securities ........................ -- (1,096) --
------------ ---------- ------------
Net cash used in investing activities ............................. (1,781,459) (614,859) (757,304)
FINANCING ACTIVITIES
Proceeds from borrowings .......................................... $ 3,486,474 $ 756,000 $ 1,585,000
Principal payments on long-term debt .............................. (2,309,163) (470,621) (1,495,993)
Proceeds from exercise of options ................................. 60,204 4,371 14,788
Purchase of treasury stock ........................................ (17,890) (256,691) (2,020)
Reduction in receivable from ESOP ................................. 2,078 2,271 2,483
Decrease (increase) in loans from stockholders .................... 295 (39,312) 10,100
Proceeds from investment by minority interests .................... 4,471 11,582 12,901
Purchase of limited partnership units ............................. (1,634) (5,998) (21,116)
Payment of cash distributions to limited partners ................. (103,649) (100,319) (91,126)
Foreign currency translation adjustment ........................... (24) (362) (3,560)
------------ ---------- ------------
Net cash provided by (used in) financing activities ............... 1,121,162 (99,079) 11,457
------------ ---------- ------------
(Decrease) increase in cash and cash equivalents .................. (24,165) (9,427) 50,917
Cash and cash equivalents at beginning of year .................... 162,992 138,827 129,400
------------ ---------- ------------
Cash and cash equivalents at end of year .......................... $ 138,827 $ 129,400 $ 180,317
============ ========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ......................................................... $ 143,606 $ 159,496 $ 232,776
Income taxes ..................................................... 315,028 88,575 9,153
40
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
Non-cash investing activities:
The Company assumed liabilities of $107,091,000, $9,529,000 and $9,178,000
during the years ended December 31, 1998, 1999 and 2000, respectively, in
connection with its acquisitions.
During the year ended December 31, 1998, the Company issued 699,000 common
shares with a market value of $19,397,000 as consideration for acquisitions
accounted for as purchases.
See accompanying notes.
41
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by HEALTHSOUTH Corporation
and its subsidiaries ("the Company") are presented as an integral part of the
consolidated financial statements.
NATURE OF OPERATIONS
HEALTHSOUTH is engaged in the business of providing healthcare services
through three operating divisions: Inpatient and other clinical services and
Outpatient services -- East and Outpatient services -- West. Inpatient and
other clinical services consist primarily of services provided through
inpatient rehabilitation facilities, specialty medical centers and certain
physician practices and other clinical services. Outpatient services consist
primarily of services provided through outpatient rehabilitation facilities,
outpatient surgery centers and outpatient diagnostic centers. Management
operates the outpatient services in two geographic segments, East and West.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its
majority ownership or controlling interest in limited partnerships and limited
liability companies. All significant intercompany accounts and transactions
have been eliminated in consolidation.
HEALTHSOUTH operates a number of its facilities as general and limited
partnerships ("partnerships") or limited liability companies ("LLCs") in which
HEALTHSOUTH or a subsidiary serves as the general partner or managing member,
as applicable. HEALTHSOUTH's policy is to consolidate the financial position
and results of operations of these partnerships and LLCs in cases where
HEALTHSOUTH owns the majority interest or in which it otherwise has a
controlling interest (see also "Minority Interests" below in Note 1).
Investments in partnerships, LLCs and other entities that represent less than a
majority interest or otherwise represent a non-controlling interest are
accounted for under the equity method or cost method, as appropriate (see also
"Minority Interests" below in Note 1 and Note 4).
OPERATING SEGMENTS
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information" requires the
utilization of a "management approach" to define and report the financial
results of operating segments. The management approach defines operating
segments along the lines used by management to assess performance and make
operating and resource allocation decisions. The Company operates in three
segments: Inpatient and other clinical services, Outpatient services -- East
and Outpatient services -- West.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated
financial statements and notes. Actual results could differ from those
estimates.
MARKETABLE SECURITIES
Marketable securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. The cost of the specific
security sold method is used to
42
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
compute gain or loss on the sale of securities. Interest and dividends on
securities classified as available-for-sale are included in interest income.
Marketable securities and debt securities held by the Company have maturities
of less than one year.
ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENT ACTIVITIES
Receivables from patients, insurance companies and third-party contractual
insured accounts (primarily Medicare and Medicaid) are based on payment
agreements which generally result in the Company's collecting an amount
different from the established rates. Net third-party settlement receivables
included in accounts receivable were $42,606,000 and $69,480,000 at December
31, 1999 and 2000, respectively. Final determination of the settlement is
subject to review by appropriate authorities. It is at least reasonably
possible that the recorded estimates will change by material amounts in the
near term. The differences between original estimates made by the Company and
subsequent revisions (including final settlement) were not material to the
Company's operating results. Adequate allowances are provided for doubtful
accounts and contractual adjustments. Uncollectible accounts are written off
against the allowance for doubtful accounts after adequate collection efforts
are made. Net accounts receivable includes only those amounts estimated by
management to be collectible.
The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Medicare ................. 26% 27%
Medicaid ................. 5 5
Other .................... 69 68
-- --
100% 100%
=== ===
INVENTORIES
Inventories are stated at the lower of cost or market using the specific
identification method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Upon sale or
retirement of property, plant or equipment, the cost and related accumulated
depreciation are eliminated from the respective account and the resulting gain
or loss is included in the results of operations.
Interest cost incurred during the construction of a facility is
capitalized. The Company incurred interest costs of $148,793,000, $178,836,000
and $223,321,000 of which $630,000, $2,184,000 and $1,726,000 was capitalized
during 1998, 1999 and 2000, respectively.
Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 3-15 years.
INTANGIBLE ASSETS
Costs in excess of the net asset value of purchased facilities are
amortized over 20 to 40 years using the straight-line method, with the majority
of such costs being amortized over 40 years. Organization and Partnership
formation costs are deferred and amortized on a straight-line basis over a
period of 36 months. Debt issue costs are amortized over the term of the debt.
Noncompete agreements are amortized using the straight-line method over the
term of the agreements.
43
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Effective July 1, 1997, the Company began expensing amounts reflecting the
costs of implementing its clinical and administrative programs and protocols at
acquired facilities in the period in which such costs are incurred. Previously,
the Company had capitalized such costs and amortized them over 36 months. Such
costs at June 30, 1997 aggregated $64,643,000, net of accumulated amortization.
These capitalized costs were amortized in accordance with the Company's policy
in effect through June 30, 1997 and were fully amortized by June 2000.
Through June 30, 1997, the Company had assigned value to and capitalized
organization and partnership formation costs which had been incurred by the
Company or obtained by the Company in acquisitions accounted for as purchases.
Effective July 1, 1997, the Company no longer assigned value to organization
and partnership formation costs obtained in acquisitions accounted for as
purchases except to the extent that objective evidence exists that such costs
will provide future economic benefits to the Company after the acquisition.
Such organization and partnership formation costs at June 30, 1997, which were
obtained by the Company in purchase transactions, aggregated $8,380,000, net of
accumulated amortization. Such costs at June 30, 1997 were amortized in
accordance with the Company's policy in effect through June 30, 1997 and were
fully amortized by June 2000.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that the costs of start-up activities
be expensed as incurred. The SOP broadly defines start-up activities as those
one-time activities related to opening a new facility, introducing a new
product or service, conducting business in a new territory, conducting business
with a new class of customer, initiating a new process in an existing facility,
or beginning some new operation. SOP 98-5 is effective for years beginning
after December 15, 1998. In 1997, the Company began expensing as incurred all
costs related to start-up activities. Therefore, the adoption of SOP 98-5 did
not have a material effect on the Company's financial statements.
MINORITY INTERESTS
The equity of minority investors in partnerships and LLCs of the Company
is reported on the consolidated balance sheets as minority interests. Minority
interests reported in the consolidated income statements reflect the respective
interests in the income or loss of the limited partnerships or limited
liability companies attributable to the minority investors (ranging from 1% to
50% at December 31, 2000), the effect of which is removed from the results of
operations of the Company.
REVENUES
Revenues include net patient service revenues and other operating
revenues. Other operating revenues include cafeteria revenue, gift shop
revenue, rental income, trainer/contract revenue, management and administrative
fee revenue (related to non-consolidated subsidiaries and affiliates) and
transcriptionist fees which are insignificant to total revenues. Net patient
service revenues are reported at the estimated net realizable amounts from
patients, third-party payors and others for services rendered, including
estimated retroactive adjustments under reimbursement agreements with
third-party payors.
44
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Net income ................................................. $ 46,558 $ 76,517 $ 278,465
--------- --------- ---------
Numerator for basic earnings per share-income available to
common stockholders ...................................... $ 46,558 $ 76,517 $ 278,465
========= ========= =========
Denominator:
Denominator for basic earnings per share -- weighted-average
shares ................................................... 421,462 408,195 385,666
Effect of dilutive securities:
Net effect of dilutive stock options ..................... 10,813 5,525 4,600
Restricted shares issued ................................. -- 850 750
--------- --------- ---------
Dilutive potential common shares ........................... 10,813 6,375 5,350
--------- --------- ---------
Denominator of diluted earnings per share - adjusted
weighted-average shares and assumed conversions .......... 432,275 414,570 391,016
========= ========= =========
Basic earnings per share .................................... $ 0.11 $ 0.19 $ 0.72
========= ========= =========
Diluted earnings per share .................................. $ 0.11 $ 0.18 $ 0.71
========= ========= =========
IMPAIRMENT OF ASSETS
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. In such cases, the
impaired assets are written down to fair value. Fair value is determined based
on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include quoted
market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If the group of assets being tested
was acquired by the Company as part of a purchase business combination, any
goodwill that arose as part of the transaction is included as part of the asset
grouping.
With respect to the carrying value of goodwill and other intangible
assets, the Company determines on a quarterly basis whether an impairment event
has occurred by considering factors such as the market value of the asset, a
significant adverse change in legal factors or in the business climate, adverse
action by regulators, a history of operating losses or cash flow losses, or a
projection of continuing losses associated with an operating entity. The
carrying value of goodwill and other intangible assets will be evaluated if the
facts and circumstances suggest that it has been impaired. If this evaluation
indicates that the value of the asset will not be recoverable, as determined
based on the undiscounted cash flows of the entity over the remaining
amortization period, an impairment loss is calculated based on the excess of
the carrying amount of the asset over the asset's fair value (see Note 13).
45
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
SELF-INSURANCE
The Company is self-insured for professional liability and comprehensive
general liability. Liabilities for asserted and unasserted claims are accrued
based upon specific claims and incidents and the claims history of the Company.
The reserves for estimated liabilities for asserted and unasserted claims,
which are not material in relation to the Company's consolidated financial
position at December 31, 1999 and 2000, are included with accrued interest
payable and other liabilities in the accompanying consolidated balance sheets.
RECLASSIFICATIONS
Certain amounts in 1998 and 1999 financial statements have been
reclassified to conform with the 2000 presentation. Such reclassifications had
no effect on previously reported consolidated financial position and
consolidated net income.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign
subsidiaries stated in local functional currencies to U.S. dollars at the rates
of exchange in effect at the end of the period. Revenues and expenses are
translated using rates of exchange in effect during the period. Gains and
losses from currency translation are included in stockholders' equity. Currency
transaction gains or losses are recognized in current operations as operating
unit expenses and have not been significant to the Company's operating results
in any period.
2. MERGERS
Effective July 22, 1998, a wholly-owned subsidiary of the Company merged
with National Surgery Centers, Inc. ("NSC"), and in connection therewith the
Company issued 20,426,261 shares of its common stock in exchange for all of
NSC's outstanding common stock. Prior to the merger, NSC operated 40 outpatient
surgery centers in 14 states. Costs and expenses of approximately $25,630,000,
primarily legal, accounting and financial advisory fees, incurred by the
Company in connection with the NSC merger have been recorded in operations
during 1998 and reported as merger expenses in the accompanying consolidated
statements of income.
The merger of the Company with NSC was accounted for as a pooling of
interests. There were no material transactions between the Company and NSC
prior to the merger. The effects of conforming the accounting policies of the
combined companies are not material.
46
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
Cash, cash equivalents and other marketable securities consisted of the
following:
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
(IN THOUSANDS)
Cash ........................................ $117,912 $179,989
Cash equivalents ............................ 11,488 328
-------- --------
Total cash and cash equivalents ............ 129,400 180,317
Certificates of deposit ..................... 2,352 80
Municipal put bonds ......................... 130 10
Collateralized mortgage obligations ......... 1,000 --
-------- --------
Total other marketable securities .......... 3,482 90
-------- --------
Total cash, cash equivalents and other
marketable securities (approximates
market value) .............................. $132,882 $180,407
======== ========
For purposes of the consolidated balance sheets and statements of cash
flows, marketable securities with a maturity of ninety days or less when
purchased are considered cash equivalents.
4. OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
(IN THOUSANDS)
Notes receivable .................. $ 48,717 $ 52,907
Prepaid long-term lease ........... 7,084 6,555
Investments accounted for on equity
method ........................... 15,523 26,328
Other investments ................. 50,400 71,021
Real estate investments ........... 2,820 2,686
Trusteed funds .................... 8,255 11,185
Deferred loss on leases ........... 21,263 19,686
Other ............................. 3,547 7,529
--------- ---------
$ 157,609 $ 197,897
========= =========
The Company has various investments, with ownership percentages ranging
from 24% to 49%, which are accounted for using the equity method of accounting.
The Company's equity in earnings of these investments was not material to the
Company's consolidated results of operations for the years ended 1998, 1999 and
2000. At December 31, 2000, the investment balance on the Company's books was
not materially different than the underlying equity in net assets of the
unconsolidated entities.
Other investments consist of investments in companies involved in
operations similar to those of the Company. For those investments with a quoted
market price, the Company's investment balance is based on the quoted market
price. For all other investments in this category, it was not practicable to
estimate the fair value because of the lack of a quoted market price and the
inability to estimate the fair value without incurring excessive costs. The
carrying amount at December 31, 2000 represents the original cost of the
investments, which management believes is not impaired.
47
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER ASSETS - (CONTINUED)
During 1998, the Company sold four inpatient rehabilitation hospital
facilities. Because the Company is leasing back all of the properties, the
resulting loss on sale of approximately $19,500,000 has been recorded on the
accompanying consolidated balance sheet in other assets as deferred loss on
leases and will be amortized into expense over the initial lease term of 15
years in accordance with SFAS 28. Aggregate annual lease payments for these
properties total $6,000,000. During 1995, the Company sold another inpatient
rehabilitation hospital property under terms similar to those described above.
Aggregate annual lease payments for this property total $1,700,000. The
resulting loss of approximately $4,000,000 is being amortized to expense over
the initial lease term of 15 years.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
-----------------------------
1999 2000
------------- -------------
(IN THOUSANDS)
Land ...................................... $ 126,074 $ 138,277
Buildings ................................. 1,233,809 1,312,375
Leasehold improvements .................... 380,852 479,404
Furniture, fixtures and equipment ......... 1,553,159 1,821,403
Construction-in-progress .................. 28,931 83,406
---------- ----------
3,322,825 3,834,865
Less accumulated depreciation and
amortization ............................. 819,858 963,102
---------- ----------
$2,502,967 $2,871,763
========== ==========
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31,
-------------------------------
1999 2000
-------------- --------------
(IN THOUSANDS)
Organizational, partnership formation
and start-up costs (see Note 1) ......... $ 117,622 $ 17,393
Debt issue costs ......................... 51,284 66,179
Noncompete agreements .................... 122,545 124,932
Cost in excess of net asset value of
purchased facilities .................... 2,920,980 3,038,560
----------- -----------
3,212,431 3,247,064
Less accumulated amortization ............ 383,924 400,403
----------- -----------
$ 2,828,507 $ 2,846,661
=========== ===========
48
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-----------------------------
1999 2000
------------- -------------
(IN THOUSANDS)
Notes and bonds payable:
Advances under a $1,750,000,000
credit agreement with banks ........... $1,625,000 $1,655,000
9.5% Senior Subordinated Notes .......... 250,000 --
3.25% Convertible Subordinated
Debentures due 2003 ................... 567,750 567,750
6.875% Senior Notes due 2005 ............ 250,000 250,000
7.0% Senior Notes due 2008 .............. 250,000 250,000
10-3/4% Senior Subordinated Notes
due 2008 .............................. -- 350,000
Notes payable to banks and various
other notes payable, at interest rates
from 5.5% to 14.9% .................... 117,421 104,031
Hospital revenue bonds payable .......... 15,130 11,674
Noncompete agreements payable with
payments due at intervals ranging
through December 2005 ................. 39,347 23,374
---------- ----------
3,114,648 3,211,829
Less amounts due within one year ......... 37,818 43,225
---------- ----------
$3,076,830 $3,168,604
========== ==========
The fair value of the total long-term debt approximates book value at
December 31, 2000 except for the 3.25% Convertible Subordinated Debentures due
2003, the 6.875% Senior Notes due 2005, the 7.0% Senior Notes due 2008 and the
10-3/4% Senior Subordinated Notes due 2008. The fair value of the 3.25%
Convertible Subordinated Debentures due 2003 was approximately $503,765,000 at
December 31, 2000. The fair value of the 6.875% Senior Notes due 2005 was
approximately $252,025,000 at December 31, 2000. The fair value of the 7%
Senior Notes due 2008 was approximately $225,125,000 at December 31, 2000. The
fair value of the 10-3/4% Senior Subordinated Notes due 2008 was approximately
$366,625,000 at December 31, 2000. The fair values of the Company's long-term
debt are estimated using discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
The Company has a $1,750,000,000 revolving credit facility with Bank of
America, N.A. ("Bank of America") and other participating banks (the "1998
Credit Agreement"). The 1998 Credit Agreement replaced a previous
$1,250,000,000 revolving credit agreement, also with Bank of America. Interest
on the 1998 Credit Agreement is paid based on LIBOR plus a predetermined
margin, a base rate, or competitively bid rates from the participating banks.
The Company is required to pay a fee on the unused portion of the revolving
credit facility ranging from 0.09% to 0.25%, depending on certain defined
credit ratings. The principal amount is payable in full on June 22, 2003. The
Company has provided a negative pledge on all assets under the 1998 Credit
Agreement. At December 31, 2000, the effective interest rate associated with
the 1998 Credit Agreement was approximately 7.18%.
The Company also had a Short Term Credit Agreement with Bank of America
and other participating banks (as amended, the "Short Term Credit Agreement"),
providing for a $250,000,000 short term revolving credit facility. The terms of
the Short Term Credit Agreement were substantially
49
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
consistent with those of the 1998 Credit Agreement. Interest on the Short Term
Credit Agreement was paid based on LIBOR plus a predetermined margin or a base
rate. The Company was required to pay a fee on the unused portion of the credit
facility ranging from 0.30% to 0.50%, depending on certain defined credit
ratings. On October 31, 2000, the Company terminated the Short Term Credit
Agreement and replaced it with a new $400,000,000 Credit Agreement (the "2000
Credit Agreement") with UBS AG and other participating banks. Interest on the
2000 Credit Agreement is paid based on LIBOR plus a predetermined margin or
base rate. The Company is required to pay a fee on the unused portion of the
credit facility ranging from 0.25% to 0.50%, depending on certain defined
ratios. The principal amount is payable in full in eight quarterly installments
ending on June 22, 2003. At December 31, 2000, the Company had no drawings
outstanding under the 2000 Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal amount of
9.5% Senior Subordinated Notes due 2001 (the "9.5% Notes"). The Company
redeemed the 9.5% Notes at par on October 30, 2000.
On March 20, 1998, the Company issued $500,000,000 in 3.25% Convertible
Subordinated Debentures due 2003 (the "3.25% Convertible Debentures") in a
private placement. An additional $67,750,000 principal amount of the 3.25%
Convertible Debentures was issued on March 31, 1998 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1. The 3.25%
Convertible Debentures are convertible into common stock of the Company at the
option of the holder at a conversion price of $36.625 per share. The conversion
price is subject to adjustment upon the occurrence of (a) a subdivision,
combination or reclassification of outstanding shares of common stock, (b) the
payment of a stock dividend or stock distribution on any shares of the
Company's capital stock, (c) the issuance of rights or warrants to all holders
of common stock entitling them to purchase shares of common stock at less than
the current market price, or (d) the payment of certain other distributions
with respect to the Company's common stock. In addition, the Company may, from
time to time, lower the conversion price for periods of not less than 20 days,
in its discretion. The net proceeds from the issuance of the 3.25% Convertible
Debentures were used by the Company to pay down indebtedness outstanding under
its then-existing credit facilities.
On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior Notes
due 2005 and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the
"Senior Notes"). Interest is payable on June 15 and December 15. The Senior
Notes are unsecured, unsubordinated obligations of the Company. The net
proceeds from the issuance of the Senior Notes were used by the Company to pay
down indebtedness outstanding under its then-existing credit facilities.
On September 25, 2000, the Company issued $350,000,000 in 10-3/4% Senior
Subordinated Notes due 2008 (the "10-3/4% Notes"). Interest is payable on April
1 and October 1. The 10-3/4% Notes are senior subordinated obligations of the
Company and, as such, are subordinated to all existing and future senior
indebtedness of the Company, and also are effectively subordinated to all
existing and future liabilities of the Company's subsidiaries and partnerships.
The net proceeds from the issuance of the 10-3/4% Notes were used by the
Company to redeem the 9.5% Notes and to pay down indebtedness outstanding under
its then-existing credit facilities. The 10-3/4% Notes mature on October 1,
2008.
In October 2000, the Company entered into two six-month and one
twelve-month interest rate swap arrangements with notional amounts of
$240,000,000, $240,000,000 and $175,000,000 each. The swaps expire on various
dates in April 2001 and November 2001. These arrangements have the effect of
converting a portion of the Company's variable rate debt to a fixed rate. The
arrangements did not have a material effect on the Company's operations.
50
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
Principal maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------------ ---------------
2001 ....................... $ 43,225
2002 ....................... 19,569
2003 ....................... 2,236,623
2004 ....................... 11,721
2005 ....................... 260,641
After 2006 ................. 640,050
----------
$3,211,829
==========
8. STOCK OPTIONS
The Company has various stockholder-approved stock option plans which
provide for the grant of options to directors, officers and other key employees
to purchase common stock at 100% of the fair market value as of the date of
grant. The Compensation Committee of the Board of Directors administers the
stock option plans. Options may be granted as incentive stock options or as
non-qualified stock options. Incentive stock options vest 25% annually,
commencing upon completion of one year of employment subsequent to the date of
grant. Certain of the non-qualified stock options are not subject to any
vesting provisions, while others vest on the same schedule as the incentive
stock options. The options expire ten years from the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning
after December 15, 1995 and allows for the option of continuing to account for
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations, or selecting the fair value method of expense recognition as
described in SFAS 123. The Company has elected to follow APB 25 in accounting
for its employee stock options. The Company follows SFAS 123 in accounting for
its non-employee stock options. The total compensation expense associated with
non-employee stock options granted in 1998, 1999 and 2000 was not material.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1999 and 2000, respectively: risk-free interest rates of
6.10%, 6.21% and 5.11%; dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of .76, .77 and .71; and a
weighted-average expected life of the options of 5.5 years, 5.0 years and 5.2
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
51
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS - (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
------------ ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro forma net income ......... $ 31,009 $ 47,149 $ 266,684
Pro forma earnings per share:
Basic ...................... 0.07 0.12 0.69
Diluted .................... 0.07 0.12 0.69
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
1998 1999 2000
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
----------- ---------- ----------- ---------- ----------- ---------
Options outstanding January 1 .............. 34,771 $ 12 34,437 $ 12 36,028 $ 11
Granted ................................... 6,020 12 6,589 11 3,615 5
Exercised ................................. (5,035) 12 (772) 5 (1,957) 8
Canceled .................................. (1,319) 21 (4,226) 20 (1,704) 15
------ ---- ------ ---- ------ ----
Options outstanding at December 31 ......... 34,437 $ 12 36,028 $ 11 35,982 $ 10
Options exercisable at December 31 ......... 29,156 $ 11 31,689 $ 11 31,429 $ 10
Weighted average fair value of options
granted during the year ................... $ 7.50 $ 7.14 $ 3.07
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
2000 LIFE PRICE 2000 PRICE
---------------- ----------- ---------- --------------- -----------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
Under $10.00............. 22,926 4.73 $ 6.14 19,807 $ 6.10
$10.00 - $23.63.......... 12,871 6.47 16.79 11,448 17.40
$23.63 and above......... 185 7.00 27.28 174 27.24
9. ACQUISITIONS
The Company evaluates each of its acquisitions independently to determine
the appropriate amortization period for the cost in excess of net asset value
of purchased facilities. Each evaluation includes an analysis of historic and
projected financial performance, evaluation of the estimated useful lives of
buildings and fixed assets acquired, the indefinite lives of certificates of
need and licenses acquired, the competition within local markets, lease terms
where applicable, and the legal term of partnerships where applicable.
1998 ACQUISITIONS
Effective July 1, 1998, the Company acquired Columbia/HCA Healthcare
Corporation's interests in 33 ambulatory surgery centers (subject to certain
outstanding consents and approvals with respect to three of the centers, as to
which the parties entered into management agreements) in a transaction
52
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
accounted for as a purchase. Effective July 31, 1998, the Company entered into
certain other arrangements to acquire substantially all of the economic benefit
of Columbia/HCA's interests in one additional ambulatory surgery center, which
interests the Company later acquired outright. The purchase price was
approximately $550,402,000 in cash.
At various dates and in separate transactions throughout 1998, the Company
acquired 112 outpatient rehabilitation facilities, four outpatient surgery
centers, one inpatient rehabilitation hospital and 27 diagnostic imaging
centers. The acquired operations are located throughout the United States. The
total purchase price of the acquired operations was approximately $216,305,000.
The form of consideration constituting the total purchase price was
approximately $179,038,000 in cash, $17,870,000 in notes payable and the
issuance of approximately 699,000 shares of the Company's common stock valued
at $19,397,000.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $25,926,000. In general, these
noncompete agreements are payable in monthly or quarterly installments over
periods ranging from five to ten years.
The fair value of the total net assets relating to the 1998 acquisitions
described above was approximately $15,570,000. The total cost of the 1998
acquisitions exceeded the fair value of the net assets acquired by
approximately $751,137,000. Based on the evaluation of each acquisition
utilizing the criteria described above, the Company determined that the costs
in excess of net asset value of purchased facilities relating to the 1998
acquisitions should be amortized over periods ranging from 25 to 40 years on a
straight-line basis. No other identifiable intangible assets were recorded in
the acquisitions described above.
The Company sold its physical therapy staffing business, which had been
acquired by the Company as part of a larger strategic acquisition in 1994. The
loss on the sale of the physical therapy staffing business was $31,232,000 and
was recorded by the Company in the fourth quarter of 1998.
1999 ACQUISITIONS
Effective June 29, 1999, the Company acquired from Mariner Post-Acute
Network, Inc. ("Mariner") substantially all of the assets of Mariner's American
Rehability Services division in a transaction accounted for as a purchase. At
the time of the acquisition, Mariner operated approximately 160 outpatient
rehabilitation centers in 18 states. The purchase price was approximately
$54,521,000 in cash.
At various dates and in separate transactions throughout 1999, the Company
acquired ten outpatient rehabilitation facilities, eight outpatient surgery
centers, two inpatient rehabilitation hospitals and four diagnostic imaging
centers. The acquired operations are located throughout the United States. The
total purchase price of the acquired operations was approximately $49,844,000.
The form of consideration constituting the total purchase price was
approximately $49,684,000 in cash and $160,000 in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $2,996,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods
ranging from five to ten years.
The fair value of the total net assets relating to the 1999 acquisitions
described above was approximately $23,245,000. The total cost of the 1999
acquisitions exceeded the fair value of the net assets acquired by
approximately $81,120,000. Based on the evaluation of each acquisition
utilizing the criteria described above, the Company determined that the cost in
excess of net asset value of purchased facilities relating to the 1999
acquisitions should be amortized over periods ranging from 20 to 40 years on a
straight-line basis. No other identifiable intangible assets were recorded in
the acquisitions described above.
53
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
2000 ACQUISITIONS
At various dates and in separate transactions throughout 2000, the Company
acquired thirteen outpatient rehabilitation facilities, three outpatient
surgery centers, three inpatient rehabilitation hospitals and thirteen
diagnostic imaging centers. The acquired operations are located throughout the
United States. The total purchase price of the acquired operations was
approximately $75,365,000. The form of consideration constituting the total
purchase price was approximately $74,137,000 in cash and $1,228,000 in notes
payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $5,520,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods
ranging from five to ten years.
The fair value of the total net assets relating to the 2000 acquisitions
described above was approximately $8,174,000. The total cost of the 2000
acquisitions exceeded the fair value of the net assets acquired by
approximately $67,191,000. Based on the evaluation of each acquisition
utilizing the criteria described above, the Company determined that the cost in
excess of net asset value of purchased facilities relating to the 2000
acquisitions should be amortized over periods ranging from 20 to 40 years on a
straight-line basis. No other identifiable intangible assets were recorded in
the acquisitions described above. At December 31, 2000, the purchase price
allocation associated with the 2000 acquisitions is preliminary in nature.
During 2001 the Company will make adjustments, if necessary, to the purchase
price allocation based on revisions to the fair value of the assets acquired.
All of the acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
10. INCOME TAXES
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The partnerships and LLCs file separate income tax returns.
HEALTHSOUTH's allocable portion of each partnership's income or loss is
included in the taxable income of the Company. The remaining income or loss of
each partnership and LLC is allocated to the other partners.
54
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES - (CONTINUED)
The Company utilizes the liability method of accounting for income taxes,
as required by Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes". Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1999 are as follows:
CURRENT NONCURRENT TOTAL
-------------- ------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss ....................... $ -- $ 2,811 $ 2,811
Impairment and restructuring charges...... -- 126,008 126,008
---------- --------- ----------
Total deferred tax assets ................. -- 128,819 128,819
Deferred tax liabilities: .................
Depreciation and amortization ............ -- (46,017) (46,017)
Bad debts ................................ (91,830) -- (91,830)
Capitalized costs ........................ -- (35,252) (35,252)
Accruals ................................. (7,584) -- (7,584)
Other .................................... (8,754) -- (8,754)
---------- --------- ----------
Total deferred tax liabilities ............ (108,168) (81,269) (189,437)
---------- --------- ----------
Net deferred tax (liabilities) assets ..... $ (108,168) $ 47,550 $ (60,618)
========== ========= ==========
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2000 are as follows:
CURRENT NONCURRENT TOTAL
------------ --------------- ---------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss ...................... $ -- $ 5,864 $ 5,864
Accruals ................................ 9,063 -- 9,063
Impairment and restructuring charges..... -- 41,932 41,932
Other ................................... -- 5,045 5,045
--------- ----------- -----------
Total deferred tax assets ................ 9,063 52,841 61,904
Deferred tax liabilities:
Depreciation and amortization ........... -- (123,901) (123,901)
Bad debts ............................... (13,290) -- (13,290)
Capitalized costs ....................... -- (81,779) (81,779)
Unrealized gain on available for sale
securities ............................ -- (7,526) (7,526)
--------- ----------- -----------
Total deferred tax liabilities ........... (13,290) (213,206) (226,496)
--------- ----------- -----------
Net deferred tax liabilities ............. $ (4,227) $ (160,365) $ (164,592)
========= =========== ===========
At December 31, 2000, the Company has net operating loss carryforwards of
approximately $15,275,000 for income tax purposes expiring through the year
2020. Those carryforwards resulted from the Company's acquisitions of Rebound,
Inc., Horizon/CMS Healthcare Corporation, ASC Network Corporation, The Company
Doctor and National Imaging Affiliates.
55
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES - (CONTINUED)
The provision for income taxes was as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
------------ ---------- -----------
(IN THOUSANDS)
Currently payable:
Federal ................................. $ 162,433 $ 61,156 $ 74,243
State ................................... 24,324 11,623 11,117
--------- -------- ---------
186,757 72,779 85,360
Deferred expense:
Federal ................................. (37,756) (4,916) 83,886
State ................................... (5,654) (934) 12,562
--------- -------- ---------
(43,410) (5,850) 96,448
--------- -------- ---------
$ 143,347 $ 66,929 $ 181,808
========= ======== =========
The difference between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes was as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1999 2000
------------- ------------ ------------
(IN THOUSANDS)
Federal taxes at statutory rates ......... $ 93,581 $ 80,470 $ 195,774
Add (deduct):
State income taxes, net of federal tax
benefit ............................... 12,136 6,948 15,391
Minority interests ...................... (27,114) (30,264) (34,678)
Nondeductible goodwill .................. 7,630 9,304 2,452
Disposal/impairment charges ............. 57,873 6,128 --
Other ................................... (759) (5,657) 2,869
--------- --------- ---------
$ 143,347 $ 66,929 $ 181,808
========= ========= =========
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. In
the opinion of management, any ultimate liability with respect to these actions
will not materially affect the consolidated financial position or results of
operations of the Company.
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that at December 31, 2000 the Company has adequate reserves to cover
losses on asserted and unasserted claims. In the fourth quarter of 2000, the
Company formed an offshore captive insurance subsidiary to which it expects to
transition the administration of its self-insurance programs.
In connection with the Horizon/CMS acquisition in 1997, the Company
assumed Horizon/CMS's open professional and general liability claims. The
Company has entered into an agreement with an insurance carrier to assume
responsibility for the majority of open claims. Under this agreement, a "risk
transfer" was conducted which converted Horizon/CMS's self-insured claims to
insured liabilities consistent with the terms of the underlying insurance
policy.
56
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Horizon/CMS is currently a party, or is subject, to certain litigation
matters and disputes. The Company itself is, in general, not a party to such
litigation. These matters include actions or investigations initiated by the
Securities and Exchange Commission, New York Stock Exchange, various federal
and state regulatory agencies, stockholders of Horizon/CMS and other parties.
Both Horizon/CMS and the Company are working to resolve these matters and
cooperating fully with the various regulatory agencies involved. As of December
31, 2000, it was not possible for the Company to predict the ultimate outcome
or effect of these matters. In management's opinion, the ultimate resolution of
these matters will not have a material effect on the Company's consolidated
financial position or results of operations.
The Company was served with certain lawsuits filed beginning September 30,
1998, purporting to be class actions under the federal and Alabama securities
laws. These lawsuits were filed following a decline in the Company's stock
price at the end of the third quarter of 1998. Seven such suits were filed in
the United States District Court for the Northern District of Alabama. In
January 1999, those suits were ordered consolidated under the case style In re
HEALTHSOUTH Corporation Securities Litigation, Master File No. CV98-O-2634-S.
On April 12, 1999, the plaintiffs filed a consolidated amended complaint
against the Company and certain of its officers and directors alleging that,
during the period April 24, 1997 through September 30, 1998, the defendants
misrepresented or failed to disclose certain material facts concerning the
Company's business and financial condition and the impact of the Balanced
Budget Act of 1997 on our operations in order to artificially inflate the price
of the Company's common stock and issued or sold shares of such stock during
the purported class period, all allegedly in violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Certain of the named
plaintiffs in the consolidated amended complaint also purport to represent
separate subclasses consisting of former stockholders of Horizon/CMS Healthcare
Corporation and National Surgery Centers, Inc. who received shares of the
Company's Common Stock in connection with such acquisitions and who assert
additional claims under Section 11 of the Securities Act of 1933 with respect
to the registration of securities issued in those acquisitions.
Additionally, another suit has been filed in the Circuit Court of
Jefferson County, Alabama, purportedly as a derivative action on behalf of the
Company. This suit largely replicates the allegations of the federal actions
described in the preceding paragraph and alleges that the current directors of
the Company, certain former directors and certain officers of the Company
breached their fiduciary duties to the Company and engaged in other allegedly
tortious conduct. The plaintiff in that case has forborne pursuing its claim
thus far pending further progress in the federal actions, and the Company has
not yet been required to file a responsive pleading in the case. Another
non-derivative state court action was voluntarily dismissed by the plaintiff,
without prejudice.
The Company filed its motion to dismiss the consolidated amended complaint
in the federal action in late June 1999. The court denied that motion to
dismiss in December 2000. The Company believes that all claims asserted in the
above suits are without merit, and expects to vigorously defend against such
claims. Because such suits remain at an early stage, the Company cannot predict
the outcome of any such suits or the magnitude of any potential loss if the
Company's defense is unsuccessful.
At December 31, 2000, committed capital expenditures for the next twelve
months are $41,281,000.
Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the
time of renewal. Total rental expense for all operating leases was
$238,937,000, $233,895,000 and $248,782,000 for the years ended December 31,
1998, 1999 and 2000, respectively.
The Company has entered into two tax retention operating leases for
certain of its facilities. The Company is required to renegotiate the leases or
purchase, or obtain a purchaser, for the facilities at its termination in 2003.
The minimum sales price guarantee is approximately $119,190,000.
57
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------ ---------------
2001 ........................................... $ 236,811
2002 ........................................... 200,890
2003 ........................................... 158,221
2004 ........................................... 123,035
2005 ........................................... 90,372
After 2006 ..................................... 409,091
-----------
Total minimum payments required ................ $ 1,218,420
===========
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which matches 15% of the first 4% of
earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $4,121,000,
$4,608,000 and $4,712,000 in 1998, 1999 and 2000, respectively.
In 1991, the Company established an Employee Stock Ownership Plan ("ESOP")
for the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 3,320,000 shares of the
Company's common stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992
(the "1992 ESOP Loan"). At December 31, 2000, the combined ESOP Loans had a
balance of $5,415,000. The 1991 ESOP Loan, which bears an interest rate of 10%,
is payable in annual installments covering interest and principal over a
ten-year period beginning in 1992. The 1992 ESOP Loan, which bears an interest
rate of 8.5%, is payable in annual installments covering interest and principal
over a ten-year period beginning in 1993. Company contributions to the ESOP
began in 1992 and shall at least equal the amount required to make all ESOP
loan amortization payments for each plan year. The Company recognizes
compensation expense based on the shares allocated method. Compensation expense
related to the ESOP recognized by the Company was $3,195,000, $3,197,000 and
$3,176,000 in 1998, 1999 and 2000, respectively. Interest incurred on the ESOP
Loans was approximately $927,000, $715,000 and $483,000 in 1998, 1999 and 2000,
respectively. Approximately 2,451,000 shares owned by the ESOP have been
allocated to participants at December 31, 2000.
During 1993, the American Institute of Certified Public Accountants issued
Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership
Plans" ("SOP 93-6"). Among other provisions, SOP 93-6 requires that
compensation expense relating to employee stock ownership plans be measured
based on the fair market value of the shares when allocated to the employees.
The provisions of SOP 93-6 apply only to leveraged ESOPs formed after December
31, 1992, or shares newly acquired by an existing leveraged ESOP after December
31, 1992. Because all shares owned by the Company's ESOP were acquired prior to
December 31, 1992, the Company's accounting policies for the shares currently
owned by the ESOP are not affected by SOP 93-6.
13. IMPAIRMENT AND RESTRUCTURING CHARGES
During the third quarter of 1998, the Company recorded impairment and
restructuring charges of approximately $72,000,000 related to the Company's
decision to dispose of or otherwise discontinue substantially all of its home
health operations. The decision was prompted in large part by the negative
58
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
impact of the 1997 Balanced Budget Act, which placed reimbursement limits on
home health businesses. The limits were announced in March 1998, and the
Company began to see the adverse affect on home health margins. Based on this
unfavorable trend, management prepared a plan to exit the home health
operations described above. The plan was approved by the Board of Directors on
September 16, 1998. Revenues and losses before income taxes and minority
interests for the home health operations were $71,163,000 and $(4,261,000),
respectively. The home health operations have been included in the inpatient
and other clinical services segment. The home health operations covered by the
plan included approximately 35 locations, all of which were closed by December
31, 1998.
The $72,000,000 third quarter charge consists of the following components:
(i) A $62,748,000 impairment charge was recorded to reduce the carrying amount
of selected long-lived assets to estimated fair value. All of the assets
written down, including fixed assets of $8,363,000 and intangible assets
of $54,385,000, were associated with the discontinued home health
operations and are detailed further in the table below.
(ii) A $4,908,000 charge was recorded to write down other assets, primarily
inventories and prepaid expenses, which were negatively impacted by the
Company's decision to discontinue the home health operations.
(iii) The remaining components of the charge included $2,618,000 in lease
abandonment costs and $1,435,000 in other incremental costs, representing
primarily legal and asset disposal costs.
The Company has developed a strategic plan to provide integrated services
in major markets throughout the United States. In the fourth quarter of 1998,
the Company recorded a restructuring charge of approximately $404,000,000 as a
result of its decision to close certain facilities that did not fit with the
Company's strategic vision, underperforming facilities and facilities not
located in target markets. The Company's Board of Directors approved the
restructuring plan on December 10, 1998. A total of 167 facilities were
included in the plan, including 110 outpatient rehabilitation facilities, 7
inpatient rehabilitation hospitals, 29 outpatient surgery centers, and 21
diagnostic centers. Some of these facilities had multiple business units
associated with the operation. The identified facilities contributed
$140,087,000 to the Company's revenue and $(9,907,000) to the Company's income
before income taxes and minority interests during 1998. At March 21, 2001,
approximately 97% of the locations identified in the fourth quarter
restructuring plan had been closed.
The $404,000,000 fourth quarter charge consists of the following
components:
(i) A $304,624,000 impairment charge was recorded to reduce the carrying
amount of selected long-lived assets to estimated fair value. All of the
assets written down, including fixed assets of $137,880,000 and intangible
assets of $166,744,000, were associated with the facilities identified in
the fourth quarter restructuring plan. These assets are detailed further
in the table below.
(ii) A $19,857,000 charge was recorded to write down other assets, primarily
inventories and prepaid expenses, which were negatively impacted by the
Company's decision to close the affected facilities.
(iii) Approximately $6,027,000 of the charge related to involuntary severance
packages paid or payable to approximately 7,900 employees. These
employees worked primarily in the Company's discontinued home health
operations described above. The terminations were communicated to the
affected employees during the fourth quarter. Approximately 7,880 of the
affected employees had left the Company as of December 31, 1998. The
remaining employees left the Company during the first half of 1999.
59
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
(iv) Approximately $49,476,000 of the charge related to lease abandonment costs
primarily for office and clinical space that was or was to be vacated as a
result of the restructuring plan.
(v) The Company recognized $24,089,000 in estimated other incremental costs,
generally representing costs that are a direct result of the restructuring
plan and have no future economic benefit. These costs include primarily
(a) $7,818,000 in legal costs associated with closing the facilities, (b)
$7,275,000 in disposal costs, including costs associated with
de-installation of signage and equipment, moving costs, refurbishing costs
and exit cleaning costs, (c) $2,777,000 in ongoing security costs at
abandoned or closed facilities, (d) $4,591,000 storage rental costs and
(e) $1,628,000 in utility costs incurred at abandoned or closed
facilities.
The restructuring activities (shown below in tabular form) primarily
relate to asset write-downs, lease abandonments and the elimination of job
responsibilities resulting in costs incurred to sever employees. Details of the
impairment and restructuring charges, separated by the amounts recorded in the
third and fourth quarter of 1998, respectively, are as follows:
ACTIVITY
-----------------------
NON-CASH BALANCE
RESTRUCTURING CASH IMPAIR- AT
DESCRIPTION CHARGE PAYMENTS MENTS 12/31/98
----------------------------- --------------- ---------- ------------ ----------
(IN THOUSANDS)
Third Quarter 1998 Charge:
Property, plant and
equipment:
Leasehold improvements..... $ 820 $ -- $ 820 $ --
Furniture, fixtures and
equipment ................ 7,543 -- 7,543 --
--------- -------- --------- --------
8,363 -- 8,363 --
Intangible assets:
Goodwill .................. 53,485 -- 53,485 --
Noncompete agreements...... 678 -- 678 --
Other intangible assets ... 222 -- 222 --
--------- -------- --------- --------
54,385 -- 54,385 --
Lease abandonment costs .... 2,618 2,618 -- --
Other assets ............... 4,908 -- 4,908 --
Other incremental costs .... 1,435 1,020 -- 415
--------- -------- --------- --------
Total Third Quarter 1998
Charge ..................... $ 71,709 $ 3,638 $ 67,656 $ 415
========= ======== ========= ========
Fourth Quarter 1998 Charge:
Property, plant and
equipment:
Land and buildings ........ $ 38,741 $ -- $ 38,741 $ --
Leasehold improvements..... 27,187 -- 27,187 --
Furniture, fixtures and
equipment ................ 71,952 -- 71,952 --
--------- -------- --------- --------
137,880 -- 137,880 --
Intangible assets:
Goodwill .................. 154,840 -- 154,840 --
Noncompete agreements...... 10,632 -- 10,632 --
Other intangible assets ... 1,272 -- 1,272 --
--------- -------- --------- --------
166,744 -- 166,744 --
Lease abandonment costs .... 49,476 -- -- 49,476
Other assets ............... 19,857 -- 19,857 --
Severance packages ......... 6,027 4,753 -- 1,274
Other incremental costs .... 24,089 8,100 -- 15,989
--------- -------- --------- --------
Total Fourth Quarter 1998
Charge ..................... $ 404,073 $ 12,853 $ 324,481 $ 66,739
========= ======== ========= ========
ACTIVITY ACTIVITY
--------------------- ----------
NON-CASH BALANCE NON-CASH BALANCE
CASH IMPAIR- AT CASH IMPAIR- AT
DESCRIPTION PAYMENTS MENTS 12/31/99 PAYMENTS MENTS 12/31/00
----------------------------- ---------- ---------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
Third Quarter 1998 Charge:
Property, plant and
equipment:
Leasehold improvements..... $ -- $ -- $ -- $ -- $ -- $ --
Furniture, fixtures and
equipment ................ -- -- -- -- -- --
-------- ---- -------- -------- ---- --------
-- -- -- -- -- --
Intangible assets:
Goodwill .................. -- -- -- -- -- --
Noncompete agreements...... -- -- -- -- -- --
Other intangible assets ... -- -- -- -- -- --
-------- ---- -------- -------- ---- --------
-- -- -- -- -- --
Lease abandonment costs .... -- -- -- -- -- --
Other assets ............... -- -- -- -- -- --
Other incremental costs .... 415 -- -- -- -- --
-------- ---- -------- -------- ---- --------
Total Third Quarter 1998
Charge ..................... $ 415 $ -- $ -- $ -- $ -- $ --
======== ==== ======== ======== ==== ========
Fourth Quarter 1998 Charge:
Property, plant and
equipment:
Land and buildings ........ $ -- $ -- $ -- $ -- $ -- $ --
Leasehold improvements..... -- -- -- -- -- --
Furniture, fixtures and
equipment ................ -- -- -- -- -- --
-------- ---- -------- -------- ---- --------
-- -- -- -- -- --
Intangible assets:
Goodwill .................. -- -- -- -- -- --
Noncompete agreements...... -- -- -- -- -- --
Other intangible assets ... -- -- -- -- -- --
-------- ---- -------- -------- ---- --------
-- -- -- -- -- --
Lease abandonment costs .... 17,110 -- 32,366 11,253 -- 21,113
Other assets ............... -- -- -- -- -- --
Severance packages ......... 1,274 -- -- -- -- --
Other incremental costs .... 8,978 -- 7,011 7,011 -- --
-------- ---- -------- -------- ---- --------
Total Fourth Quarter 1998
Charge ..................... $ 27,362 $ -- $ 39,377 $ 18,264 $ -- $ 21,113
======== ==== ======== ======== ==== ========
The remaining balances at December 31, 1999 and 2000, are included in
accrued interest payable and other liabilities in the accompanying consolidated
balance sheets.
60
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
In addition to the third and fourth quarter charges described above, the
Company recorded an impairment charge of approximately $8,000,000 in the fourth
quarter of 1998 related to a rehabilitation hospital it had closed. The
write-down was based on a recently obtained independent appraisal, which
reflected a decline in valuation since the original closure. The hospital was
closed in 1995 as a result of duplicative services in a single market. At that
time, the hospital was written down to its then-estimated fair value and
classified as assets held for sale.
The Company abandoned certain equipment and sold certain properties and
equipment during 2000, associated with the 1998 closed facilities. The fair
value of assets remaining to be sold is approximately $24,559,000 compared to
$27,273,000 as of December 31, 1999. The Company expects to have all properties
sold by the end of 2001. The effect of suspending depreciation is immaterial.
For assets that will not be abandoned, the fair values were based on
independent appraisals or estimates of recoverability for similar closings.
Goodwill and other related intangible assets included in the third and
fourth quarter 1998 charges were allocated to the impaired assets based on the
relative fair values of those assets at their respective acquisition dates.
Lease abandonment costs were based on the lease terms remaining, which
range from one to fifteen years, net of any anticipated sublease income, where
applicable.
During the fourth quarter of 1999, in accordance with FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the Company recorded an asset impairment charge of
$121,037,000. Management evaluated the financial performance of each of its
facilities to determine if there are trends which would indicate that a
facility's ability to recover its investment in its long-lived assets had been
impaired. Based on this evaluation, the Company determined that property, plant
and equipment with a carrying value of $38,050,000 and intangibles with a
carrying value of $95,091,000 were impaired and wrote them down by $25,807,000
and $95,091,000 respectively, to their fair market value. In addition, the
Company plans to sell certain property, plant and equipment with a carrying
amount of $2,339,000 in 2001 and has estimated the sales value, net of related
costs to sell, at $2,200,000. Accordingly, the Company recorded an impairment
loss of $139,000 on these assets, which is included in the 1999 impairment and
restructuring charge. See Note 14 for the impact of impairment losses on
operating segments.
14. OPERATING SEGMENTS
The accounting policies of the segments are the same as those for the
Company described in Note 1, Significant Accounting Policies. Intrasegment
revenues are not significant. The Company's Chief Operating Decision Maker
evaluates the performance of its segments and allocates resources to them based
on income before minority interests and income taxes and earnings before
interest, income taxes, depreciation and amortization ("EBITDA"). In addition,
certain revenue producing functions are managed directly from the Corporate
office and are not included in operating results for management reporting.
Unallocated assets represent those assets under the direct management of
Corporate office personnel.
61
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
Operating results and other financial data are presented for the principal
operating segments as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
------------- ------------- -------------
(IN THOUSANDS)
Revenues:
Inpatient and other clinical services .................... $2,178,060 $2,021,546 $1,988,506
Outpatient services - East ............................... 870,994 989,451 1,062,842
Outpatient services - West ............................... 940,468 1,039,072 1,125,885
---------- ---------- ----------
3,989,522 4,050,069 4,177,233
Unallocated corporate office ............................. 16,552 22,038 17,882
---------- ---------- ----------
Consolidated revenues ..................................... $4,006,074 $4,072,107 $4,195,115
========== ========== ==========
Income before income taxes and minority interests
(excluding consolidated merger and acquisition related
expenses, loss on sale of assets and impairment and
restructuring charge):
Inpatient and other clinical services .................... $ 540,726 $ 516,233 $ 422,808
Outpatient services - East ............................... 273,268 243,531 261,251
Outpatient services - West ............................... 230,875 193,612 232,811
---------- ---------- ----------
1,044,869 953,376 916,870
Unallocated corporate office ............................. (208,456) (322,447) (357,516)
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ................................................ $ 836,413 $ 630,929 $ 559,354
Consolidated merger and acquisition related expenses, loss
on sale of assets and impairment and restructuring charge. (569,040) (401,014) --
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ................................................ $ 267,373 $ 229,915 $ 559,354
========== ========== ==========
Depreciation and amortization:
Inpatient and other clinical services .................... $ 124,712 $ 143,340 $ 114,926
Outpatient services - East ............................... 67,225 78,028 99,031
Outpatient services - West ............................... 73,313 78,607 86,398
---------- ---------- ----------
265,250 299,975 300,355
Unallocated corporate office ............................. 79,341 74,273 60,492
---------- ---------- ----------
Consolidated depreciation and amortization ................ $ 344,591 $ 374,248 $ 360,847
========== ========== ==========
Interest expense:
Inpatient and other clinical services .................... $ 64,427 $ 49,800 $ 63,719
Outpatient services - East ............................... 2,245 1,214 310
Outpatient services - West ............................... 5,458 3,714 4,433
---------- ---------- ----------
72,130 54,728 68,462
Unallocated corporate office ............................. 76,033 121,924 153,133
---------- ---------- ----------
Consolidated interest expense ............................. $ 148,163 $ 176,652 $ 221,595
========== ========== ==========
62
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
(IN THOUSANDS)
Interest income:
Inpatient and other clinical services .................. $ 2,612 $ 2,340 $ 1,888
Outpatient services - East ............................. 525 301 459
Outpatient services - West ............................. 420 746 711
----------- ----------- -----------
3,557 3,387 3,058
Unallocated corporate office ........................... 7,729 7,200 6,046
----------- ----------- -----------
Consolidated interest income ............................ $ 11,286 $ 10,587 $ 9,104
=========== =========== ===========
EBITDA (excluding consolidated merger and acquisition
related expenses, loss on sale of assets and impairment
and restructuring charge):
Inpatient and other clinical services .................. $ 727,253 $ 707,033 $ 599,565
Outpatient services - East ............................. 342,213 322,472 360,133
Outpatient services - West ............................. 309,226 275,187 322,931
----------- ----------- -----------
1,378,692 1,304,692 1,282,629
Unallocated corporate office ........................... (60,811) (133,450) (149,937)
----------- ----------- -----------
Consolidated EBITDA (excluding consolidated merger
and acquisition related expenses, loss on sale of assets
and impairment and restructuring charge): .............. $ 1,317,881 $ 1,171,242 $ 1,132,692
Consolidated merger and acquisition related expenses,
loss on sale of assets and impairment and restructuring
charge ................................................. (569,040) (401,014) --
----------- ----------- -----------
Consolidated EBITDA ..................................... $ 748,841 $ 770,228 $ 1,132,692
=========== =========== ===========
Assets:
Inpatient and other clinical services .................. $ 2,621,115 $ 2,774,893
Outpatient services - East ............................. 1,551,413 1,704,838
Outpatient services - West ............................. 1,790,904 1,945,070
----------- -----------
5,963,432 6,424,801
Unallocated corporate office ........................... 927,052 955,639
----------- -----------
Total assets ............................................ $ 6,890,484 $ 7,380,440
=========== ===========
63
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. RELATED PARTY
In December 1999, the Company acquired 6,390,583 shares of Series A
Convertible Preferred Stock of MedCenterDirect.com, inc., a development-stage
healthcare e-procurement company, in a private placement for a purchase price
of $0.3458 per share. Various persons affiliated or associated with the
Company, including various of the Company's Directors and executive officers,
also purchased shares in the private placement. Under a Stockholders Agreement,
the Company and the other holders of the Series A Convertible Preferred Stock,
substantially all of whom may be deemed to be Company affiliates or associates,
have the right to elect 50% of the directors of MedCenterDirect.com. During
2001, the Company expects to enter into a definitive long-term exclusive
agreement under which MedCenterDirect.com will be the Company's exclusive
e-procurement vendor of medical products and supplies. The Company expects that
the terms of such agreement will be no less favorable than those the Company
could obtain from an unrelated vendor.
16. SUBSEQUENT EVENT
On February 1, 2001, the Company issued $375,000,000 in 8-1/2% Senior
Notes due 2008 (the "8-1/2% Notes"). The 8-1/2% Notes are unsecured,
unsubordinated obligations of the Company. The net proceeds from the issuance
of the 8-1/2% Notes were used to pay down indebtedness outstanding under the
Company's credit facilities.
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
HEALTHSOUTH has not changed independent accountants within the 24 months
prior to December 31, 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
The following table provides information with respect to our Directors.
A
PRINCIPAL OCCUPATION AND ALL POSITIONS DIRECTOR
NAME AGE WITH HEALTHSOUTH SINCE
---------------------------------- ----- ------------------------------------------------------- ---------
Richard M. Scrushy ............... 48 Chairman of the Board and Chief Executive Officer 1984
and Director
Phillip C. Watkins, M.D. ......... 59 Physician, Birmingham, Alabama,and Director 1984
George H. Strong ................. 74 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens ................... 44 General Partner, Acacia Venture Partners and 1985
Director
Charles W. Newhall III ........... 56 Partner, New Enterprise Associates Limited 1985
Partnerships, and Director
John S. Chamberlin ............... 72 Private Investor, Princeton, New Jersey, and Director 1993
Joel C. Gordon ................... 71 Private Investor, Nashville, Tennessee, Consultant to 1996
HEALTHSOUTH and Director
Larry D. Striplin, Jr. ........... 71 Chairman and Chief Executive Officer, 1999
Nelson-Brantley Glass Contractors, Inc., and Director
William T. Owens ................. 42 Executive Vice President and Chief Financial Officer 2000
and Director
Richard M. Scrushy, one of HEALTHSOUTH's management founders, has served
as Chairman of the Board and Chief Executive Officer of HEALTHSOUTH since 1984,
and also served as President of HEALTHSOUTH from 1984 until March 1995. From
1979 to 1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned
healthcare corporation, serving in various operational and management
positions. Mr. Scrushy was until February 2001 a director of CaremarkRx, Inc.,
a publicly-traded pharmacy benefits management company, for which he also
served as Acting Chief Executive Officer from January 16 through March 18, 1998
and as Chairman of the Board from January 16 through December 1, 1998.
Phillip C. Watkins, M.D., FACC, is and has been for more than five years
in the private practice of medicine in Birmingham, Alabama. A graduate of The
Medical College of Alabama, Dr. Watkins is a Diplomate of the American Board of
Internal Medicine. He is also a Fellow of the American College of Cardiology
and the Subspecialty Board of Cardiovascular Disease.
George H. Strong retired as senior vice president and chief financial
officer of Universal Health Services, Inc. in December 1984, a position he held
for more than six years. Mr. Strong is a private investor and continued to act
as a director of Universal Health Services, Inc., a publicly-traded hospital
management corporation, until 1993. Mr. Strong is also a director of
AmeriSource, Inc., a large drug wholesaler.
65
C. Sage Givens is a founder and managing general partner of Acacia Venture
Partners, a private venture capital fund. From 1983 to June 30, 1995, Ms.
Givens was a general partner of First Century Partners, also a private venture
capital fund. Ms. Givens managed the fund's healthcare investments. Ms. Givens
also serves on the boards of directors of several privately-held healthcare
companies.
Charles W. Newhall III is a general partner and founder of New Enterprise
Associates Limited Partnerships, Baltimore, Maryland, where he has been engaged
in the venture capital business since 1978. Mr. Newhall is also a director of
CaremarkRx, Inc.
John S. Chamberlin retired in 1988 as president and chief operating
officer of Avon Products, Inc., a position he had held since 1985. From 1976
until 1985, he served as chairman and chief executive officer of Lenox,
Incorporated, after 22 years in various assignments for General Electric. From
1990 to 1991, he served as chairman and chief executive officer of New Jersey
Publishing Co. Mr. Chamberlin is chairman of the board of WNS, Inc. He is a
member of the Board of Trustees of the Medical Center at Princeton and is a
trustee of the Woodrow Wilson National Fellowship Foundation.
Joel C. Gordon served as Chairman of the Board of Directors of Surgical
Care Affiliates, Inc. from its founding in 1982 until January 17, 1996, when
SCA was acquired by HEALTHSOUTH. Mr. Gordon also served as Chief Executive
Officer of SCA from 1987 until January 17, 1996. Mr. Gordon is a private
investor and serves on the boards of directors of Genesco, Inc., an apparel
manufacturer, and SunTrust Bank of Nashville, N.A.
Larry D. Striplin, Jr. has been the Chairman and Chief Executive Officer
of Nelson-Brantley Glass Contractors, Inc. and Chairman and Chief Executive
Officer of Circle "S" Industries for more than five years. Mr. Striplin is a
member of the boards of directors of Kulicke & Suffa Industries, Inc., a
publicly traded manufacturer of electronic equipment and The Banc Corporation.
William T. Owens, C.P.A., joined HEALTHSOUTH in March 1986 as Controller
and was appointed Vice President and Controller in December 1986. He was
appointed Group Vice President -- Finance and Controller, June 1992 and Senior
Vice President -- Finance and Controller in February 1994 and Group Senior Vice
President -- Finance and Controller in March 1998. In February 2000, he was
named Executive Vice President and Chief Financial Officer, and in March 2001
he was named a Director. Prior to joining HEALTHSOUTH, Mr. Owens served as a
certified public accountant on the audit staff of the Birmingham, Alabama
office of Ernst & Whinney (now Ernst & Young LLP) from 1981 to 1986.
EXECUTIVE OFFICERS
The following table provides information with respect to our executive
officers.
AN
ALL POSITIONS OFFICER
NAME AGE WITH HEALTHSOUTH SINCE
---------------------------- ----- ------------------------------------------------------- --------
Richard M. Scrushy ......... 48 Chairman of the Board and Chief Executive Officer 1984
and Director
Thomas W. Carman ........... 49 Executive Vice President -- Corporate Development 1985
William T. Owens ........... 42 Executive Vice President and Chief Financial Officer 1986
and Director
William W. Horton .......... 41 Executive Vice President and Corporate Counsel and 1994
Assistant Secretary
Robert E. Thomson .......... 53 President -- Inpatient Operations 1987
Patrick A. Foster .......... 54 President -- Ambulatory Services -- West 1994
Larry D. Taylor ............ 42 President -- Ambulatory Services -- East 1994
Brandon O. Hale ............ 51 Senior Vice President -- Administration and Secretary 1987
Weston L. Smith ............ 40 Senior Vice President -- Finance and Controller 1987
Malcolm E. McVay ........... 39 Senior Vice President -- Finance and Treasurer 1999
Biographical information for Mr. Scrushy and Mr. Owens is set forth above
under this Item, "Directors and Executive Officers -- Directors".
66
Thomas W. Carman joined HEALTHSOUTH in 1985 as Regional Director --
Corporate Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was assistant
administrator at the Children's Hospital of Birmingham, Alabama.
William W. Horton joined HEALTHSOUTH in July 1994 as Group Vice President
-- Legal Services and was named Senior Vice President and Corporate Counsel in
May 1996 and Executive Vice President and Corporate Counsel in March 2001. From
August 1986 through June 1994, Mr. Horton practiced corporate, securities and
healthcare law with the Birmingham, Alabama-based firm now known as Haskell
Slaughter & Young, L.L.C., where he served as Chairman of the Healthcare
Practice Group.
Robert E. Thomson joined HEALTHSOUTH in August 1985 as administrator of
its Florence, South Carolina inpatient rehabilitation facility, and
subsequently served as Regional Vice President -- Inpatient Operations, Vice
President -- Inpatient Operations, Group Vice President -- Inpatient
Operations, and Senior Vice President -- Inpatient Operations. Mr. Thomson was
named President -- Inpatient Operations in February 1996.
Patrick A. Foster joined HEALTHSOUTH in February 1994 as Director of
Operations and subsequently served as Group Vice President -- Inpatient
Operations and Senior Vice President -- Inpatient Operations. He was named
President -- HEALTHSOUTH Surgery Centers in October 1997 and President --
Ambulatory Services --West in September 1999. From August 1992 until February
1994, he served as Senior Vice President of the Rehabilitation/Medical Division
of The Mediplex Group.
Larry D. Taylor joined HEALTHSOUTH in May 1987 as an outpatient
rehabilitation facility administrator. He was subsequently named Area Manager
in July 1989, Regional Vice President -- Outpatient Operations in October 1991,
Group Vice President -- Outpatient Operations in July 1992, Senior Vice
President -- Outpatient Operations in February 1994, and Senior Vice President
-- Ambulatory Services -- East in September 1999. In July 2000, he became
President -- Ambulatory Services -- East.
Brandon O. Hale joined HEALTHSOUTH in July 1986 as Director of Human
Resources and subsequently served as Vice President - Human Resources and Group
Vice President - Human Resources. In December 1999, Mr. Hale was named Senior
Vice President - Administration and Secretary of HEALTHSOUTH, and he also
serves as HEALTHSOUTH's Corporate Compliance Officer.
Weston L. Smith, C.P.A., joined HEALTHSOUTH in February 1987 as Director
of Reimbursement and subsequently served as Assistant Vice President - Finance
- Reimbursement, Vice President - Finance - Reimbursement, Group Vice President
- Finance - Reimbursement and Senior Vice President - Finance - Reimbursement.
In March 2000, he was named Senior Vice President - Finance and Controller.
Prior to joining HEALTHSOUTH, Mr. Smith served as a certified public accountant
on the audit staff of the Birmingham, Alabama office of Ernst & Whinney (now
Ernst & Young LLP) from 1982 to 1987.
Malcolm E. McVay joined HEALTHSOUTH in September 1999 as Vice President -
Finance, and was named Senior Vice President - Finance and Treasurer in
February 2000. From October 1998 until September 1999, he served as Senior Vice
President of Investor Relations at CaremarkRx, Inc., and from 1996 until
October 1998, he served as Chief Financial Officer, Secretary and Treasurer of
Capstone Capital Corporation, a healthcare real estate investment trust. Prior
to 1996, he worked for ten years in commercial banking, most recently as a
Senior Vice President of SouthTrust Bank.
GENERAL
Directors of HEALTHSOUTH hold office until the next Annual Meeting of
Stockholders of HEALTHSOUTH and until their successors are elected and
qualified. Executive officers are elected annually by, and serve at the
discretion of the Board of Directors. There are no arrangements or
understandings known to us between any of our Directors, nominees for Director
or executive officers and any other person pursuant to which any of those
persons was elected as a Director or an executive
67
officer, except the Employment Agreement between HEALTHSOUTH and Richard M.
Scrushy (see Item 11, "Executive Compensation -- Chief Executive Officer
Employment Agreement"), and except that we initially agreed to appoint Mr.
Gordon to the Board of Directors in connection with the Surgical Care
Affiliates merger. There are no family relationships between any Directors or
executive officers of HEALTHSOUTH.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and Directors, and persons who beneficially own more than
10% of a registered class of our equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Executive officers, Directors and beneficial
owners of more than 10% of HEALTHSOUTH's common stock are required by
Securities and Exchange Commission regulations to furnish us with copies of all
Section 16(a) forms that they file. Based solely on review of the copies of
such forms furnished to us, or written representations that no reports on Form
5 were required, we believe that for the period from January 1, 2000, through
December 31, 2000, all of our executive officers, Directors and
greater-than-10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them, except that Larry D. Striplin, Jr., an outside
Director, failed to timely report the purchase of 5,000 shares of our common
stock at $5.1875 per share on February 28, 2000. Mr. Striplin reported such
purchase on Form 5 in February 2001.
68
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to our Chief
Executive Officer, as well as each of our other four most highly compensated
executive officers and two former executive officers for whom disclosure would
have been required had they been serving as executive officers at December 31,
2000, for all services rendered to HEALTHSOUTH and its subsidiaries in 1998,
1999 and 2000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- ---------------------------------
BONUS/ANNUAL STOCK RESTRICTED ALL
INCENTIVE OPTION STOCK OTHER COM-
NAME AND CURRENT POSITION YEAR SALARY AWARD AWARDS AWARDS PENSATION(1)
----------------------------------- ------ ------------- -------------- ----------- --------------------- ------------------
Richard M. Scrushy 1998 $2,777,829 -- 1,500,000 -- $ 72,352
Chairman of the Board 1999 1,634,031 -- 1,050,000 $ 1,293,750 (3) 54,145
and Chief Executive Officer(2) 2000 3,654,849 -- 800,000 -- 55,475
James P. Bennett 1998 $ 670,000 -- 300,000 -- $ 10,092
Formerly President and Chief 1999 589,058 -- 275,000 $ 1,293,750 (3) 4,350
Operating Officer 2000 627,716 -- 120,000 -- 3,137
William T. Owens 1998 $ 311,539 -- 62,500 -- $ 7,378
Executive Vice President - 1999 272,944 -- 55,000 $ 970,313 (3) 2,643
and Chief Financial Officer 2000 386,510 -- 75,000 -- 1,908
P. Daryl Brown 1998 $ 386,212 -- 75,000 -- $ 10,981
Formerly President - Ambulatory 1999 336,920 -- 125,000 $ 970,313 (3) 205,001 (4)
Services - East 2000 372,730 -- 60,000 -- 3,845
Robert E. Thomson 1998 $ 327,928 -- 150,000 -- $ 11,341
President - Inpatient Operations 1999 402,987 -- 125,000 $ 970,313 (3) 4,994
2000 396,162 -- 60,000 -- 2,849
Thomas W. Carman 1998 $ 337,500 -- 65,000 -- $ 8,924
Executive Vice President - 1999 295,167 -- 65,000 $ 970,313 (3) 3,012
Corporate Development 2000 326,300 $50,000 20,000 -- 2,270
Patrick A. Foster 1998 $ 248,770 -- 120,000 -- $ 10,679
President - Ambulatory Services - 1999 275,977 -- 125,000 $ 970,313 (3) 3,298
West 2000 356,043 -- 60,000 -- 2,434
----------
(1) For the year ending December 31, 2000, this category includes (a) matching
contributions under the HEALTHSOUTH Retirement Investment Plan of $1,020
for Mr. Scrushy, $1,575 for Mr. Bennett, $0 for Mr. Owens, $1,276 for Mr.
Brown, $738 for Mr. Thomson, $1,050 for Mr. Carman and $1,260 for Mr.
Foster; (b) awards under our Employee Stock Benefit Plan of $416 for Mr.
Scrushy, $416 for Mr. Bennett, $416 for Mr. Owens, $416 for Mr. Brown,
$416 for Mr. Thomson, $416 for Mr. Carman and $416 for Mr. Foster; and (c)
split-dollar life insurance premiums paid of $54,039 with respect to Mr.
Scrushy, $1,146 with respect to Mr. Bennett, $1,492 with respect to Mr.
Owens, $2,153 with respect to Mr. Brown, $1,695 with respect to Mr.
Thomson, $804 with respect to Mr. Carman, and $758 with respect to Mr.
Foster. See this Item, "Executive Compensation -- Retirement Investment
Plan" and "Executive Compensation -- Employee Stock Benefit Plan".
(2) Salary amounts for Mr. Scrushy include monthly incentive compensation
amounts payable upon achievement of certain budget targets. Effective
November 1, 1998, Mr. Scrushy voluntarily suspended receipt of his base
salary and monthly incentive compensation through March 31, 1999, and
voluntarily took reduced compensation through January 2, 2000. See this
Item,"Executive Compensation -- Chief Executive Officer Employment
Agreement".
(3) The value of restricted stock awards in 1999 reflects the closing price of
HEALTHSOUTH common stock at the date of the award. The value of these
awards measured at December 31, 2000 was $1,631,250 for the awards to each
of Messrs. Scrushy and Bennett (100,000 shares each) and $1,223,438 for
the awards to each of Messrs. Owens, Brown, Thomson, Carman and Foster
(75,000 shares each). The awards vest five years from the date of grant,
except as otherwise provided in our 1998 Restricted Stock Plan. See this
Item, "Executive Compensation - 1998 Restricted Stock Plan"
69
(4) Includes $200,000 withdrawn by Mr. Brown in 1999 from his deferred
compensation account. See this Item, "Executive Compensation - Deferred
Compensation Plan".
STOCK OPTION GRANTS IN 2000
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE PRESENT VALUE(1)
---------------------------- ----------- -------------- ----------- ------------ -----------------
Richard M. Scrushy ......... 800,000 23.8% $ 4.875 2/28/10 $2,328,000
James P. Bennett ........... 120,000 3.6% 4.875 7/17/05 349,200
William T. Owens ........... 75,000 2.2% 4.875 2/28/10 218,250
P. Daryl Brown ............. 60,000 1.8% 4.875 2/28/10 174,600
Robert E. Thomson .......... 60,000 1.8% 4.875 2/28/10 174,600
Thomas W. Carman ........... 20,000 0.6% 4.875 2/28/10 58,200
Patrick A. Foster .......... 60,000 1.8% 4.875 2/28/10 174,600
----------
(1) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may
realize will depend upon the excess of the stock price over the exercise
price on the date the option is exercised, so that there is no assurance
that the value realized by an executive will be at or near the value
estimated by the Black-Scholes model. The estimated values under that
model are based on arbitrary assumptions as to certain variables,
including the following: (i) stock price volatility is assumed to be 71%;
(ii) the risk-free rate of return is assumed to be 5.11%; (iii) dividend
yield is assumed to be 0; and (iv) the time of exercise is assumed to be
4.5 years from the date of grant.
STOCK OPTION EXERCISES IN 2000 AND OPTION VALUES AT DECEMBER 31, 2000
NUMBER VALUE OF UNEXERCISED
OF SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 2000(1) AT DECEMBER 31, 2000(2)
ON VALUE ----------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------- ----------- ------------- ------------- --------------- --------------- --------------
Richard M. Scrushy ......... -- -- 14,522,524 -- $121,200,649 --
James P. Bennett ........... 515,000 $4,254,550 1,490,000 -- 4,531,562 --
William T. Owens ........... -- -- 512,500 -- 2,128,125 --
P. Daryl Brown ............. -- -- 1,100,000 -- 7,505,200 --
Robert E. Thomson .......... -- -- 755,000 -- 3,135,937 --
Thomas W. Carman ........... -- -- 850,000 -- 6,174,962 --
Patrick A. Foster .......... -- -- 513,800 -- 2,930,787 --
----------
(1) Does not reflect any options granted and/or exercised after December 31,
2000. The net effect of any such grants and exercises is reflected in the
table appearing under Item 12, "Security Ownership of Certain Beneficial
Owners and Management".
(2) Represents the difference between market price of HEALTHSOUTH common stock
and the respective exercise prices of the options at December 31, 2000.
Such amounts may not necessarily be realized. Actual values which may be
realized, if any, upon any exercise of such options will be based on the
market price of the common stock at the time of any such exercise and thus
are dependent upon future performance of the common stock.
STOCK OPTION PLANS
Set forth below is information concerning our various stock option plans
at December 31, 2000. All share numbers and exercise prices have been adjusted
as necessary to reflect previous stock splits.
70
1984 Incentive Stock Option Plan
In 1984 we adopted the 1984 Incentive Stock Option Plan. Under this plan,
our Board of Directors, which administered the plan, had discretion to grant to
key employees of HEALTHSOUTH options to purchase shares of HEALTHSOUTH common
stock at the fair market value attributed to shares of HEALTHSOUTH common stock
on the date the option was granted or, in the case of a key employee who was
also a beneficial holder of at least 10% of the total number of shares of
HEALTHSOUTH common stock that were issued and outstanding at the time of the
option grant, at 110% of such fair market value. The total number of shares of
HEALTHSOUTH common stock covered by this plan was 4,800,000. The plan expired
on February 28, 1994, in accordance with its terms. As of December 31, 2000,
options granted under this plan to purchase 15,000 shares of HEALTHSOUTH common
stock remained outstanding at an exercise price of $3.7825 per share. All of
these outstanding options remain valid and in full force and must be held and
exercised in accordance with the terms of the plan. All of the options granted
must be exercised within ten years after they were granted and options granted
under the plan terminate automatically within three months after termination of
employment, unless such termination is by reason of death. In addition, the
options may not be transferred, except pursuant to the terms of a valid will or
applicable laws of descent and distribution, and in the event additional shares
of HEALTHSOUTH common stock are issued they are protected from dilution.
1988 Non-Qualified Stock Option Plan
In 1988 we adopted the 1998 Non-Qualified Stock Option Plan. Under this
plan, the Audit and Compensation Committee of our Board of Directors, which
administered the plan, had discretion to grant to the Directors, officers and
other key employees of HEALTHSOUTH options to purchase shares of HEALTHSOUTH
common stock at the fair market value attributed to shares of HEALTHSOUTH
common stock on the date the option was granted. The total number of shares of
HEALTHSOUTH common stock covered by this plan was 4,800,000. The plan expired
on February 28, 1998, in accordance with its terms. As of December 31, 2000,
options granted under this plan to purchase 7,300 shares of HEALTHSOUTH common
stock remained outstanding at an exercise price of $16.25 per share. All of
these outstanding options remain valid and in full force and must be held and
exercised in accordance with the terms of the plan. All of the options must be
exercised within ten years after they were granted. All of the options granted
under this plan terminate automatically within three months after termination
of association as a Director or of employment, unless such termination is by
reason of death. In addition, the options may not be transferred, except
pursuant to the terms of a valid will or applicable laws of descent and
distribution, and in the event additional shares of HEALTHSOUTH common stock
are issued they are protected from dilution.
1989, 1990, 1991, 1992, 1993, 1995 and 1997 Stock Option Plans
In each of 1989, 1990, 1991, 1992, 1993, 1995 and 1997 we adopted stock
option plans to provide incentives to our Directors, officers and other key
employees. Under each of these plans, the Compensation Committee of our Board of
Directors, which administers each of the plans, has the discretion to grant to
our Directors, officers and other key employees incentive or non-qualified
options to purchase shares of HEALTHSOUTH common stock at the fair market value
attributed to shares of HEALTHSOUTH common stock on the date the option is
granted. The table below sets forth information regarding each plan, including
the total number of shares of HEALTHSOUTH common stock which may be purchased
under each of the plans, the total number of additional shares of HEALTHSOUTH
common stock which have been reserved for future use under each plan, the total
number of shares of HEALTHSOUTH common stock which may be purchased under
options which have been granted under each plan and which were outstanding on
December 31, 2000 and the price or range of prices at which shares may be
purchased if the options are exercised.
71
MAXIMUM NUMBER NUMBER OF
OF SHARES OF ADDITIONAL SHARES OF
HEALTHSOUTH HEALTHSOUTH
COMMON STOCK COMMON STOCK
NAME OF SUBJECT TO PURCHASE RESERVED FOR USE
PLAN UNDER THE PLAN UNDER THE PLAN
-------------- ----------------------- ----------------------
1989 Stock
Option Plan 2,400,000 None
1990 Stock
Option Plan 3,600,000 None
1991 Stock
Option Plan 11,200,000 None
1992 Stock
Option Plan 5,600,000 None
1993 Stock
Option Plan 5,600,000 2,500
1995 Stock
Option Plan 24,720,467 (1) 4,051,532
1997 Stock
Option Plan 5,000,000 99,396
DATE THE PLAN
TERMINATED OR WILL
TERMINATE UNLESS
NUMBER OF SHARES OF OTHERWISE DETERMINED
HEALTHSOUTH BY OUR BOARD OF
COMMON STOCK PRICE OR RANGE OF PRICES DIRECTORS OR IF ALL OF THE
SUBJECT TO PURCHASE IF AT WHICH SHARES SHARES OF HEALTHSOUTH
ALL OPTIONS MAY BE PURCHASED COMMON STOCK RESERVED FOR
OUTSTANDING ON SUBJECT TO OPTIONS ISSUANCE UNDER THE PLAN HAVE
NAME OF DECEMBER 31, 2000 OUTSTANDING BEEN PURCHASED DUE TO
PLAN ARE EXERCISED ON DECEMBER 31, 2000 OPTIONS BEING EXERCISED
-------------- ------------------------ -------------------------- -----------------------------
1989 Stock
Option Plan 51,572 $2.52 -- $8.375 October 25, 1999
1990 Stock
Option Plan 280,004 $3.7825 -- $8.375 October 15, 2000
1991 Stock
Option Plan 3,452,502 $3.7825 -- $16.25 June 19, 2001
1992 Stock
Option Plan 3,938,400 $3.7825 -- $23.625 June 16, 2002
1993 Stock
Option Plan 3,094,025 $3.375 -- $23.625 April 19, 2003
1995 Stock
Option Plan 17,782,745 $4.875 -- $28.0625 June 5, 2005
1997 Stock
Option Plan 3,658,554 $4.875 -- $28.0625 April 30, 2007
----------
(1) At December 31, 2000; to be increased by 0.9% of the outstanding shares of
HEALTHSOUTH common stock as of January 1 of each calendar year thereafter
until the plan terminates.
Until options granted under each of these plans expire or terminate, they
remain valid and in full force and must be held and exercised in accordance
with the terms of the plan under which they were issued. Each option granted
under each of these plans, whether incentive or non-qualified, must be
exercised within ten years after the date it was granted and each option
granted under these plans, whether incentive or non-qualified, will terminate
automatically within three months after a Director no longer is associated with
us or an officer or key employee is no longer employed with us, except if the
termination of association or employment is by reason of death. In addition,
the options may not be transferred, except pursuant to the terms of a valid
will or applicable laws of descent and distribution (except for various
permitted transfers to family members or charities). In the event additional
shares of HEALTHSOUTH common stock are issued, each option granted under these
plans is protected from dilution.
1993 Consultants' Stock Option Plan
In 1993 we adopted the 1993 Consultants' Stock Option Plan to provide
incentives to non-employee consultants who provide significant services to us.
Under this plan, our Board of Directors, which administers the plan, has the
discretion to grant to these non-employee consultants options to purchase
shares of HEALTHSOUTH common stock at prices to be determined by our Board of
Directors or a committee of our Board of Directors to whom this discretion has
been delegated. The plan will expire on February 25, 2003 unless terminated
earlier at the discretion of our Board of Directors or as a result of all of
the shares of HEALTHSOUTH common stock reserved under this plan having been
purchased by the exercise of options granted under this plan. The total number
of shares of HEALTHSOUTH common stock covered by this plan is 3,500,000. As of
December 31, 2000, options granted under this plan to purchase 1,528,633 shares
of HEALTHSOUTH common stock remained outstanding at exercise prices ranging
from $3.375 to $28.00 per share, and 76,000 shares remain available for the
grant of options under this plan. All of these options remain valid and in full
force and must be held and exercised in accordance with the terms of the plan.
All of these options must be exercised within ten years after they were
granted, although they may be exercised at any time during this ten-year
period. All of these options terminate automatically within three months after
termination of association with us, unless such termination is by reason of
death. In addition, the options may not be transferred, except pursuant to the
terms of a valid will or applicable laws of descent and distribution, and in
the event additional shares of HEALTHSOUTH common stock are issued the options
are protected from dilution.
72
1999 Exchange Stock Option Plan
In 1999, we adopted our 1999 Exchange Stock Option Plan (the "Exchange
Plan") under which NQSOs could be granted, covering a maximum of 2,750,000
shares of common stock. The Exchange Plan was approved by our stockholders on
May 20, 1999. The Exchange Plan was adopted after a protracted period of
depression in the price of HEALTHSOUTH common stock and provided that
HEALTHSOUTH employees (other than Directors and executive officers, who were
eligible to participate) who held outstanding stock options with an exercise
price equal to or greater than $16.00 could exchange such options for NQSOs
issued under the Exchange Plan. Options granted under the Exchange Plan would
have an exercise price equal to the closing price per share of our common stock
on the New York Stock Exchange Composite Transactions Tape on May 20, 1999,
would be deemed to have been granted on May 20, 1999, and would have durations
and vesting restrictions identical to those affecting the options surrendered.
Eligible options with an exercise price between $16.00 and $22.00 per share
could be surrendered in exchange for an option under the Exchange Plan covering
two shares of common stock for each three shares of common stock covered by the
surrendered options, and eligible options having an exercise price of $22.00
per share or greater could be surrendered in exchange for an option under the
Exchange Plan covering three shares of common stock for each four shares of
common stock covered by the surrendered option. Each optionholder surrendering
options was required to retain eligible options covering 10% of the aggregate
number of shares covered by the options eligible for surrender. The Exchange
Plan expired on September 30, 1999, at which time options covering 1,716,707
shares of common stock had been issued under the Exchange Plan at an exercise
price of $13.3125 per share. Options covering 1,461,378 shares remained
outstanding at December 31, 2000. Options granted under the Exchange Plan are
nontransferable except by will or pursuant to the laws of descent and
distribution (except for certain permitted transfers to family members or
charities), are protected against dilution and expire within three months of
termination of employment, unless such termination is by reason of death.
Other Stock Option Plans
In connection with some of our major acquisitions, we assumed existing
stock option plans of the acquired companies, and outstanding options to
purchase stock of the acquired companies under such plans were converted into
options to acquire common stock in accordance with the exchange ratios
applicable to such mergers. At December 31, 2000, there were outstanding under
these assumed plans options to purchase 711,321 shares of HEALTHSOUTH common
stock at exercise prices ranging from $5.28 to $36.9718 per share. No
additional options are being granted under any such assumed plans.
1998 RESTRICTED STOCK PLAN
In 1998, we adopted the 1998 Restricted Stock Plan (the "Restricted Stock
Plan"), covering a maximum of 3,000,000 shares of HEALTHSOUTH common stock. The
Restricted Stock Plan, which is administered by the Compensation Committee of
our Board of Directors, provides that executives and other key employees of
HEALTHSOUTH and its subsidiaries may be granted restricted stock awards vesting
over a period of not less than one year and no more than ten years, as
determined by the Committee. The Restricted Stock Plan terminates on the
earliest of (a) May 28, 2008, (b) the date on which awards covering all shares
of common stock reserved for issuance thereunder have been granted and are fully
vested thereunder, or (c) such earlier time as the Board of Directors may
determine. Awards under the Restricted Stock Plan are nontransferable except by
will or pursuant to the laws of descent and distribution (except for certain
permitted transfers to family members), are protected against dilution and are
forfeitable upon termination of a participant's employment to the extent not
vested. On May 17, 1999, the Audit and Compensation Committee of the Board of
Directors granted restricted stock awards covering 850,000 shares of HEALTHSOUTH
common stock to various executive officers of HEALTHSOUTH. These shares vest in
full upon the earliest to occur of (a) five years from the date of the award,
(b) a Change in Control (as defined) of HEALTHSOUTH, or (c) unless the
Compensation Committee otherwise determines, upon the recipient's termination of
employment by reason of death, disability or retirement. Awards covering 200,000
of such shares lapsed without vesting in 2000, and an award covering 100,000
shares vested upon the retirement of the recipient.
73
RETIREMENT INVESTMENT PLAN
Effective January 1, 1990, we adopted the HEALTHSOUTH Retirement
Investment Plan (the "401(k) Plan"), a retirement plan intended to qualify
under Section 401(k) of the Code. The 401(k) Plan is open to all full-time and
part-time employees of HEALTHSOUTH who are over the age of 21, have one full
year of service with HEALTHSOUTH and have at least 1,000 hours of service in
the year in which they enter the 401(k) Plan. Eligible employees may elect to
participate in the Plan on January 1 and July 1 in each year.
Under the 401(k) Plan, participants may elect to defer up to 15% of their
annual compensation (subject to nondiscrimination rules under the Code). The
deferred amounts may be invested among four options, at the participant's
direction: a money market fund, a bond fund, a guaranteed insurance contract or
an equity fund. HEALTHSOUTH will match a minimum of 15% of the amount deferred
by each participant, up to 4% of such participant's total compensation, with
the matched amount also directed by the participant. See Note 12 of "Notes to
Consolidated Financial Statements".
William T. Owens, Executive Vice President and Chief Financial Officer,
and Brandon O. Hale, Senior Vice President -- Administration and Secretary,
serve as Trustees of the 401(k) Plan, which is administered by HEALTHSOUTH.
EMPLOYEE STOCK BENEFIT PLAN
Effective January 1, 1991, we adopted the HEALTHSOUTH Rehabilitation
Corporation and Subsidiaries Employee Stock Benefit Plan (the "ESOP"), a
retirement plan intended to qualify under sections 401(a) and 4975(e)(7) of the
Code. The ESOP is open to all full-time and part-time employees of HEALTHSOUTH
who are over the age of 21, have one full year of service with HEALTHSOUTH and
have at least 1,000 hours of service in the year in which they begin
participation in the ESOP on the next January 1 or July 1 after the date on
which such employee satisfies the conditions mentioned above.
The ESOP was established with a $10,000,000 loan from HEALTHSOUTH, the
proceeds of which were used to purchase 1,655,172 shares of HEALTHSOUTH common
stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 1,666,664 shares of common stock. Under the
ESOP, a company stock account is established and maintained for each eligible
employee who participates in the ESOP. In each plan year, this account is
credited with such employee's allocable share of the common stock held by the
ESOP and allocated with respect to that plan year. Each employee's allocable
share for any given plan year is determined according to the ratio which such
employee's compensation for such plan year bears to the compensation of all
eligible participating employees for the same plan year.
Eligible employees who participate in the ESOP and who have attained age
55 and have completed 10 years of participation in the ESOP may elect to
diversify the assets in their company stock account by directing the plan
administrator to transfer to the 401(k) Plan a portion of their company stock
account to be invested, as the eligible employee directs, in one or more of the
investment options available under the 401(k) Plan. See Note 12 of "Notes to
Consolidated Financial Statements".
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer,
William T. Owens, Executive Vice President and Chief Financial Officer, and
Brandon O. Hale, Senior Vice President -- Administration and Secretary of the
Company, serve as Trustees of the ESOP, which is administered by HEALTHSOUTH.
STOCK PURCHASE PLAN
In order to further encourage employees to obtain equity ownership in
HEALTHSOUTH, the Board of Directors adopted an Employee Stock Purchase Plan
effective January 1, 1994. Under the Stock Purchase Plan, participating
employees may contribute $10 to $200 per pay period toward the purchase of
HEALTHSOUTH common stock in open-market transactions. The Stock Purchase Plan
is open to regular full-time or part-time employees who have been employed for
six months and are at least 21 years old. After six months of participation in
the Stock Purchase Plan, we currently provide a 20% matching
74
contribution to be applied to purchases under the Stock Purchase Plan. We also
pay all fees and brokerage commissions associated with the purchase of the
stock. The Stock Purchase Plan is administered by a broker-dealer firm not
affiliated with HEALTHSOUTH.
DEFERRED COMPENSATION PLAN
In 1997, the Board of Directors adopted an Executive Deferred Compensation
Plan, which allows senior management personnel to elect, on an annual basis, to
defer receipt of up to 50% of their base salary and up to 100% of their annual
bonus, if any (but not less than an aggregate of $2,400 per year) for a minimum
of five years from the date such compensation would otherwise have been
received. Amounts deferred are held by HEALTHSOUTH pursuant to a "rabbi trust"
arrangement, and amounts deferred are credited with earnings at an annual rate
equal to the Moody's Average Corporate Bond Yield Index (the "Moody's Rate"),
as adjusted from time to time, or the Moody's Rate plus 2% if a participant's
employment is terminated by reason of retirement, disability or death or within
24 months of a change in control of HEALTHSOUTH. Amounts deferred may be
withdrawn upon retirement, termination of employment or death, upon a showing
of financial hardship, or voluntarily with certain penalties. The Deferred
Compensation Plan is administered by an Administrative Committee, currently
consisting of William T. Owens, Executive Vice President and Chief Financial
Officer, and Brandon O. Hale, Senior Vice President -- Administration and
Secretary.
1999 EXECUTIVE EQUITY LOAN PLAN
In order to provide its executive officers and other key employees with
additional incentive for future endeavor and to align the interests of our
management and our stockholders by providing a mechanism to enhance ownership of
HEALTHSOUTH common stock by executives and key employees, we adopted the 1999
Executive Equity Loan Plan (the "Loan Plan"), which was approved by our
stockholders on May 20, 1999. Under the Loan Plan, the Compensation Committee of
the Board of Directors may approve loans to executive and key employees of
HEALTHSOUTH to be used for purchases of HEALTHSOUTH common stock. The maximum
aggregate principal amount of loans outstanding under the Loan Plan may not
exceed $50,000,000. Loans under the Loan Plan have a maturity date of seven
years from the date of the loan, subject to acceleration and termination as
provided in the Loan Plan. The maturity date may be extended for up to one
additional year by the Audit and Compensation Committee, acting in its
discretion. The unpaid principal balance of each loan bears interest at a rate
equal to the effective interest rate on the average outstanding balance under
HEALTHSOUTH's principal credit agreement for each calendar quarter, adjustable
as of the end of each calendar quarter. Interest compounds annually. Each loan
is secured by a pledge of all the shares of HEALTHSOUTH common stock purchased
with the proceeds of the loan. The pledged shares may not be sold for one year
after the date on which they were acquired. Thereafter, one-third of the
aggregate number of shares may be sold during each of the second, third and
fourth years after the date of acquisitions, with any unsold portion carrying
forward from year to year. The proceeds from any such sale must be used to repay
a corresponding percentage of the principal amount of the loan. In addition,
HEALTHSOUTH may, but is not required to, repurchase the shares of a participant
at such participant's original acquisition cost if the participant's employment
is terminated, voluntarily or involuntarily or by reason of death or disability,
within the first three years after the acquisition date, all as more fully
described in the Loan Plan. Loans under the Loan Plan are made with full
recourse, and each participant is required to repay all principal and accrued
but unpaid interest upon the maturity of the loan, or its earlier acceleration
or termination, irrespective of whether the participant has sold the underlying
shares or whether the proceeds of such sale were sufficient to repay all
principal and interest with respect to the loan. The Loan Plan terminates on the
earlier of May 19, 2009 or such earlier time as the Board of Directors may
determine.
75
On September 10, 1999, loans aggregating $39,334,104 were made under the
Loan Plan. Included in this amount were loans in the following amounts to
then-serving executive officers:
NAME PRINCIPAL AMOUNT
----------------------------------------- -------------------
Richard M. Scrushy .................... $ 25,218,114.87
James P. Bennett ...................... 5,043,622.97
Michael D. Martin ..................... 1,513,086.89
P. Daryl Brown ........................ 1,008,506.87
Robert E. Thomson ..................... 1,008,506.87
Patrick A. Foster ..................... 1,008,506.87
Malcolm E. McVay ...................... 100,850.69
William W. Horton ..................... 88,914.00
The loans made to Messrs. Bennett and Martin were repaid in full in 2000.
The loan made to Mr. McVay and one-third of the loan made to Mr. Foster were
repaid in the first quarter of 2001.
BOARD COMPENSATION
Directors who are not also employed by HEALTHSOUTH are paid Directors'
fees of $10,000 per year, plus $3,000 for each meeting of the Board of
Directors and $1,000 for each Committee meeting attended. In addition,
Directors are reimbursed for all out-of-pocket expenses incurred in connection
with their duties as Directors. Our Directors, including employee Directors,
have been granted non-qualified stock options to purchase shares of HEALTHSOUTH
common stock. Under our existing stock option plans, each non-employee Director
is granted an option covering 25,000 shares of common stock on the first
business day in January of each year. See this Item, "Executive Compensation --
Stock Option Plans" above.
CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
We have an Amended and Restated Employment Agreement, dated April 1, 1998,
with Richard M. Scrushy, under which Mr. Scrushy, a management founder, is
employed as Chairman of the Board and Chief Executive Officer for a five-year
term originally scheduled to expire on April 1, 2003. This term is automatically
extended for an additional year on each April 1 unless the Agreement is
terminated as provided therein. In addition, we have agreed to use our best
efforts to cause Mr. Scrushy to be elected as a Director during the term of the
Agreement. The Agreement provides for Mr. Scrushy to receive an annual base
salary of at least $1,200,000, as well as an "Annual Target Bonus" equal to at
least $2,400,000, based upon our success in meeting certain monthly and annual
performance standards determined by the Compensation Committee of the Board of
Directors. Mr. Scrushy's base salary for 2001 has been set at $1,500,000. The
Annual Target Bonus is earned at the rate of $200,000 per month if the monthly
performance standards are met, provided that if any monthly performance
standards are not met but the annual performance standards are met, Mr. Scrushy
will be entitled to any payments which were withheld as a result of failure to
meet the monthly performance standards. The Agreement further provides that Mr.
Scrushy is eligible for participation in all other management bonus or incentive
plans and stock option, stock purchase or equity-based incentive compensation
plans in which other senior executives of HEALTHSOUTH are eligible to
participate. Under the Agreement, Mr. Scrushy is entitled to receive long-term
disability insurance coverage, a non-qualified retirement plan providing for
annual retirement benefits equal to 60% of his base compensation, use of a
company-owned automobile, certain personal security services, and various other
retirement, insurance and fringe benefits, as well as to generally participate
in all employee benefit programs we maintain.
The Agreement may be terminated by Mr. Scrushy for "Good Reason" (as
defined), by the Company for "Cause" (as defined), upon Mr. Scrushy's
"Disability" (as defined) or death, or by either party at any time subject to
the consequences of such termination as described in the Agreement. If the
Agreement is terminated by Mr. Scrushy for Good Reason, we are required to pay
him a lump-sum severance payment equal to the discounted value of the sum of
his then-current base salary and Annual Target Bonus over the remaining term of
the Agreement and to continue certain employee and fringe
76
benefits for the remaining term of the Agreement. If the Agreement is
terminated by Mr. Scrushy otherwise than for Good Reason, we are required to
pay him a lump-sum severance amount equal to the discounted value of two times
the sum of his then-current base salary and Annual Target Bonus. If the
Agreement is terminated by HEALTHSOUTH for Cause, Mr. Scrushy is not entitled
to any severance or continuation of benefits. If the Agreement is terminated by
reason of Mr. Scrushy's Disability, we are required to continue the payment of
his then-current base salary and Annual Target Bonus for three years as if all
relevant performance standards had been met, and if the Agreement is terminated
by Mr. Scrushy's death, we are required to pay his representatives or estate a
lump-sum payment equal to his then-current base salary and Annual Target Bonus.
In the event of a voluntary termination by Mr. Scrushy following a Change in
Control (as defined) of HEALTHSOUTH, other than for Cause, we are required to
pay Mr. Scrushy an additional lump-sum severance payment equal to his
then-current base salary and Annual Target Bonus. The Agreement provides for us
to indemnify Mr. Scrushy against certain "parachute payment" excise taxes which
may be imposed upon payments under the Agreement. The Agreement restricts Mr.
Scrushy from engaging in certain activities competitive with our business
during, and for 24 months after termination of, his employment with
HEALTHSOUTH, unless such termination occurs after a Change in Control.
OTHER EXECUTIVE EMPLOYMENT AGREEMENTS
We also have Employment Agreements, dated April 1, 1998, with Thomas W.
Carman, Executive Vice President -- Corporate Development, Robert E. Thomson,
President -- Inpatient Operations, and Patrick A. Foster, President --
Ambulatory Services -- West, under which each of these persons is employed in
these capacities for a three-year term originally scheduled to expire on April
1, 2001. Such terms are automatically extended for an additional year on each
April 1 unless the Agreements are terminated in accordance with their terms.
The Agreements currently provide for the payment of an annual base salary of
$360,000 to Mr. Carman, $450,000 to Mr. Thomson, and $450,000 to Mr. Foster.
The Agreements further provide that each of these officers is eligible for
participation in all management bonus or incentive plans and stock option,
stock purchase or equity-based incentive compensation plans in which other
senior executives of HEALTHSOUTH are eligible to participate, and provide for
various specified fringe benefits.
If the Agreements are terminated by HEALTHSOUTH other than for Cause (as
defined), Disability (as defined) or death, we are required to continue the
officers' base salary in effect for a period of one year after termination, as
severance compensation. In addition, in the event of a voluntary termination of
employment by the officer within six months after a Change in Control (as
defined), we are also required to continue the officer's salary for the same
period. The Agreements restrict the officers from engaging in activities
competitive with our business during their employment with HEALTHSOUTH and for
any period during which the officer is receiving severance compensation, unless
such termination occurs after a Change in Control.
77
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of HEALTHSOUTH common stock as of March 26, 2001, (a) by each person
who is known by us to own beneficially more than 5% of our common stock, (b) by
each of our Directors, (c) by our five most highly compensated executive
officers, (d) by two former executive officers who would have been among our
five most highly compensated executive officers had they held such positions at
December 31, 2000 and (e) by all executive officers and Directors as a group.
PERCENTAGE
NAME AND NUMBER OF SHARES OF
ADDRESS OF OWNER BENEFICIALLY OWNED(1) COMMON STOCK
---------------------------------------------------------------------- ----------------------- -------------
Richard M. Scrushy ................................................... 20,704,955 (2) 5.11%
John S. Chamberlin ................................................... 382,000 (3) *
C. Sage Givens ....................................................... 445,100 (4) *
Charles W. Newhall III ............................................... 805,846 (5) *
George H. Strong ..................................................... 540,665 (6) *
Phillip C. Watkins, M.D. ............................................. 694,154 (7) *
William T. Owens ..................................................... 887,500 (8) *
Joel C. Gordon ....................................................... 1,961,868 (9) *
Robert E. Thomson .................................................... 1,176,637 (10) *
Larry D. Striplin, Jr. ............................................... 125,000 (11) *
Thomas W. Carman ..................................................... 1,075,000 (12) *
Patrick A. Foster .................................................... 802,837 (13) *
James P. Bennett ..................................................... 1,570,500 (14) *
P. Daryl Brown ....................................................... 1,574,873 (15) *
FMR Corp. ............................................................ 37,727,785 (16) 9.69%
82 Devonshire Street
Boston, Massachusetts 02109
All Executive Officers and Directors as a Group (17 persons) ......... 31,486,089 (17) 7.63%
----------
(1) The persons named in the table have sole voting and investment power with
respect to all shares of HEALTHSOUTH common stock shown as beneficially
owned by them, except as otherwise indicated.
(2) Includes 9,000 shares held by trusts for Mr. Scrushy's children, 31,000
shares held by a charitable foundation of which Mr. Scrushy is an officer
and director and 15,522,524 shares subject to currently exercisable stock
options.
(3) Includes 250,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 410,000 shares
subject to currently exercisable stock options.
(5) Includes 460 shares owned by members of Mr. Newhall's immediate family, and
685,000 shares subject to currently exercisable stock options. Mr. Newhall
disclaims beneficial ownership of the shares owned by his family members,
except to the extent of his pecuniary interest therein.
(6) Includes 220,665 shares owned by trusts of which Mr. Strong is a trustee
and claims shared voting and investment power and 300,000 shares subject to
currently exercisable stock options.
(7) Includes 547,500 shares subject to currently exercisable stock options.
(8) Includes 812,500 shares subject to currently exercisable stock options.
(9) Includes 127,396 shares owned by Mr. Gordon's spouse and 484,520 shares
subject to currently exercisable stock options.
(10) Includes 855,000 shares subject to currently exercisable stock options.
(11) Includes 60,000 shares subject to currently exercisable stock options.
(12) Includes 900,000 shares subject to currently exercisable stock options.
(13) Includes 613,800 shares subject to currently exercisable stock options.
(14) Includes 1,490,000 shares subject to currently exercisable stock options.
(15) Includes 1,100,000 shares subject to currently exercisable stock options.
(16) Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power to
vote 936,510 shares and sole power to dispose of all of the shares.
(17) Includes 23,119,857 shares subject to currently exercisable stock options
held by executive officers and Directors.
* Less than 1%
78
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1999, we acquired 6,390,583 shares of Series A Convertible
Preferred Stock of MedCenterDirect.com, inc., a development-stage healthcare
e-procurement company, in a private placement for a purchase price of $0.3458
per share. Various persons affiliated or associated with us, including various
of our Directors and executive officers, also purchased shares in the private
placement. Under a Stockholders Agreement, we and the other holders of Series A
Convertible Preferred Stock, substantially all of whom may be deemed to be our
affiliates or associates, have the right to elect 50% of the directors of
MedCenterDirect.com. During 2000, we purchased $74,587,873 in goods, supplies
and related services through MedCenterDirect.com on terms we believe to be no
less favorable than those we could have obtained from an unrelated vendor.
During 2001, we expect to enter into a definitive long-term exclusive agreement
under which MedCenterDirect.com will be our exclusive e-procurement vendor of
medical products and supplies. We expect that the terms of such agreement will
be no less favorable than those we could obtain from an unrelated vendor.
At times, we have made loans to executive officers to assist them in
meeting various financial obligations or for other purposes. At December 31,
2000, a loan in the principal amount of $476,000 was outstanding to William T.
Owens, Executive Vice President and Chief Financial Officer and a Director of
the Corporation. This loan bears interest at the rate of 1 1/4% per annum below
the prime rate of AmSouth Bank of Alabama, Birmingham, Alabama, and is payable
on demand. See Item 11, "Executive Compensation -- 1999 Executive Equity Loan
Plan", for information concerning loans to executive officers to purchase
HEALTHSOUTH common stock.
79
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Financial Statements.
The consolidated financial statements of HEALTHSOUTH and its subsidiaries
filed as a part of this Annual Report on Form 10-K are listed in Item 8 of this
Annual Report on Form 10-K, which listing is hereby incorporated herein by
reference.
2. Financial Statement Schedules.
The financial statement schedules required by Regulation S-X are filed
under Item 14(d) of this Annual Report on Form 10-K, as listed below:
Schedules Supporting the Financial Statements
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions or are
inapplicable, or because the information has been provided in the Consolidated
Financial Statements or the Notes thereto.
3. Exhibits.
The Exhibits filed as a part of this Annual Report are listed in Item
14(c) of this Annual Report on Form 10-K, which listing is hereby incorporated
herein by reference.
(b) Reports on Form 8-K.
HEALTHSOUTH filed no Current Reports on Form 8-K during the three months
ended December 31, 2000.
(c) Exhibits.
The Exhibits required by Regulation S-K are set forth in the following
list and are filed either by incorporation by reference from previous filings
with the Securities and Exchange Commission or by attachment to this Annual
Report on Form 10-K as so indicated in such list.
(2)-1 Plan and Agreement of Merger, dated December 2, 1996, among HEALTHSOUTH Corporation,
Hammer Acquisition Corporation and Health Images, Inc., filed as Exhibit (2)-1 to
HEALTHSOUTH's Registration Statement on Form S-4 (Registration No. 333-19439), is
hereby incorporated by reference.
(2)-2 Plan and Agreement of Merger, dated February 17, 1997, among HEALTHSOUTH Corporation,
Reid Acquisition Corporation and Horizon/CMS Healthcare Corporation, as amended,
filed as Exhibit 2 to HEALTHSOUTH's Registration Statement on Form S-4 (Registration
No. 333-36419), is hereby incorporated by reference.
(2)-3 Purchase and Sale Agreement, dated November 3, 1997, among HEALTHSOUTH Corporation,
Horizon/CMS Healthcare Corporation and Integrated Health Services, Inc., filed as
Exhibit 2.1 to HEALTHSOUTH's Current Report on Form 8-K, dated December 31, 1997, is
hereby incorporated by reference.
(2)-4 Amendment to Purchase and Sale Agreement, dated December 31, 1997, among HEALTHSOUTH
Corporation, Horizon/CMS Healthcare Corporation and Integrated Health Services, Inc.,
filed as Exhibit 2.2 to HEALTHSOUTH's Current Report on Form 8-K, dated December 31,
1997, is hereby incorporated by reference.
80
(2)-5 Second Amendment to Purchase and Sale Agreement, dated March 4, 1998, among
HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and Integrated Health
Services, Inc., filed as Exhibit (2-14) to HEALTHSOUTH's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1997, is hereby incorporated by reference.
(2)-6 Plan and Agreement of Merger, dated May 5, 1998, among HEALTHSOUTH Corporation, Field
Acquisition Corporation and National Surgery Centers, Inc., filed as Exhibit (2) to
HEALTHSOUTH's Registration Statement on Form S-4 (Registration No. 333-57087), is
hereby incorporated by reference.
(3)-1 Restated Certificate of Incorporation of HEALTHSOUTH Corporation, as filed in the
Office of the Secretary of State of the State of Delaware on May 21, 1998, filed as
Exhibit (3)-1 to HEALTHSOUTH's Current Report on Form 8-K dated May 28, 1998, is
hereby incorporated by reference.
(3)-2 By-laws of HEALTHSOUTH Corporation, filed as Exhibit (3)-2 to HEALTHSOUTH's Current
Report on Form 8-K dated May 28, 1998, are hereby incorporated by reference.
(4)-1 Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH Corporation and The
Bank of Nova Scotia Trust Company of New York, as Trustee, filed as Exhibit (4)-2 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997,
is hereby incorporated by reference.
(4)-2 Officer's Certificate pursuant to Sections 2.3 and 11.5 of the Subordinated
Indenture, dated March 20, 1998, between HEALTHSOUTH Corporation and The Bank of Nova
Scotia Trust Company of New York, as Trustee, relating to HEALTHSOUTH's 3.25%
Convertible Subordinated Debentures due 2003, filed as Exhibit (4)-3 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997, is hereby
incorporated by reference.
(4)-3 Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and PNC Bank,
National Association, as Trustee, filed as Exhibit 4.1 to HEALTHSOUTH's Quarterly
Report on Form 10-Q for the Three Months Ended June 30, 1998, is hereby incorporated
by reference.
(4)-4 Form of Officer's Certificate pursuant to Sections 2.3 and 11.5 of the Indenture,
dated June 22, 1998, between HEALTHSOUTH Corporation and PNC Bank, National
Association, as Trustee, relating to HEALTHSOUTH's 6.875% Senior Notes due 2005 and
7.0% Senior Notes due 2008, filed as Exhibit (4)-6 to HEALTHSOUTH's Registration
Statement on Form S-4 (Registration No. 333-61485), is hereby incorporated by
reference.
(4)-5 Indenture, dated September 25, 2000, between HEALTHSOUTH Corporation and The Bank of
New York, as Trustee, filed as Exhibit (4)-1 to HEALTHSOUTH's Registration Statement
on Form S-4 (Registration No. 333-49636), is hereby incorporated by reference.
(4)-6 Indenture, dated February 1, 2001, between HEALTHSOUTH Corporation and The Bank of
New York, as Trustee.
(4)-7 Registration Rights Agreement, dated February 1, 2001, among HEALTHSOUTH Corporation
and UBS Warburg LLC, Deutsche Banc Alex. Brown Inc, Chase Securities Inc., First
Union Securities, Inc., and Scotia Capital (USA) Inc., relating to HEALTHSOUTH's 8
1/2% Senior Notes due 2008.
(10)-1 1984 Incentive Stock Option Plan, as amended, filed as Exhibit (10)-1 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1987,
is hereby incorporated by reference.
(10)-2 1988 Non-Qualified Stock Option Plan, filed as Exhibit 4(a) to HEALTHSOUTH's
Registration Statement on Form S-8 (Registration No. 33-23642), is hereby
incorporated by reference.
81
(10)-3 1989 Stock Option Plan, filed as Exhibit (10)-6 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1989, is hereby incorporated by
reference.
(10)-4 1990 Stock Option Plan, filed as Exhibit (10)-13 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year ended December 31, 1990, is hereby incorporated by
reference.
(10)-5 1991 Stock Option Plan, as amended, filed as Exhibit (10)-15 to HEALTHSOUTH's Annual
Report on Form 10-K for the Fiscal Year ended December 31, 1991, is hereby
incorporated by reference.
(10)-6 1992 Stock Option Plan, filed as Exhibit (10)-8 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1992, is hereby incorporated by
reference.
(10)-7 1993 Stock Option Plan, filed as Exhibit (10)-10 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1993, is hereby incorporated by
reference.
(10)-8 Amended and Restated 1993 Consultants Stock Option Plan, filed as Exhibit 4 to
HEALTHSOUTH's Registration Statement on Form S-8 (Commission File No. 333-42305), is
hereby incorporated by reference.
(10)-9 1995 Stock Option Plan, filed as Exhibit (10)-14 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1995, is hereby incorporated by
reference.
(10)-10 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and
Richard M. Scrushy, filed as Exhibit (10)-10 to HEALTHSOUTH's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1999, is hereby incorporated by
reference.
(10)-11 Credit Agreement, dated as of June 23, 1998, by and among HEALTHSOUTH Corporation,
NationsBank, National Association, J.P. Morgan Securities, Inc., Deutsche Bank AG,
ScotiaBanc, Inc. and the Lenders party thereto from time to time, filed as Exhibit 10
to HEALTHSOUTH's Quarterly Report on Form for the Three Months Ended June 30, 1998,
is hereby incorporated by reference.
(10)-12 Form of Indemnity Agreement entered into between HEALTHSOUTH Rehabilitation
Corporation and each of its Directors, filed as Exhibit (10)-13 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1991, is hereby
incorporated by reference.
(10)-13 Surgical Health Corporation 1992 Stock Option Plan, filed as Exhibit 10(aa) to
Surgical Health Corporation's Registration Statement on Form S-4 (Commission File No.
33-70582), is hereby incorporated by reference.
(10)-14 Surgical Health Corporation 1993 Stock Option Plan, filed as Exhibit 10(bb) to
Surgical Health Corporation's Registration Statement on Form S-4 (Commission File No.
33-70582), is hereby incorporated by reference.
(10)-15 Surgical Health Corporation 1994 Stock Option Plan, filed as Exhibit 10(pp) to
Surgical Health Corporation's Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1994, is hereby incorporated by reference.
(10)-16 Heritage Surgical Corporation 1992 Stock Option Plan, filed as Exhibit 4(d) to
HEALTHSOUTH's Registration Statement on Form S-8 (Commission File No. 33-60231), is
hereby incorporated by reference.
(10)-17 Heritage Surgical Corporation 1993 Stock Option Plan, filed as Exhibit 4(e) to
HEALTHSOUTH's Registration Statement on Form S-8 (Commission File No. 33-60231), is
hereby incorporated by reference.
82
(10)-18 Sutter Surgery Centers, Inc. 1993 Stock Option Plan, Non-Qualified Stock Option Plan
and Agreement (Saibeni), Non-Qualified Stock Option Plan and Agreement (Shah),
Non-Qualified Stock Option Plan and Agreement (Akella), Non-Qualified Stock Option
Plan and Agreement (Kelly) and Non-Qualified Stock Option Plan and Agreement (May),
filed as Exhibits 4(a) -- 4(f) to HEALTHSOUTH's Registration Statement on Form S-8
(Commission File No. 33-64615), are hereby incorporated by reference.
(10)-19 Surgical Care Affiliates Incentive Stock Plan of 1986, filed as Exhibit 10(g) to
Surgical Care Affiliates, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1993, is hereby incorporated by reference.
(10)-20 Surgical Care Affiliates 1990 Non-Qualified Stock Option Plan for Non-Employee
Directors, filed as Exhibit 10(i) to Surgical Care Affiliates, Inc.'s Annual Report
on Form 10-K for the Fiscal Year Ended December 31, 1990, is hereby incorporated by
reference.
(10)-21 Professional Sports Care Management, Inc. 1992 Stock Option Plan, as amended, filed
as Exhibits 10.1 -- 10.3 to Professional Sports Care Management, Inc.'s Registration
Statement on Form S-1 (Commission File No. 33-81654), is hereby incorporated by
reference.
(10)-22 Professional Sports Care Management, Inc. 1994 Stock Incentive Plan, filed as Exhibit
10.4 to Professional Sports Care Management, Inc.'s Registration Statement on Form
S-1 (Commission File No. 33-81654), is hereby incorporated by reference.
(10)-23 Professional Sports Care Management, Inc. 1994 Directors' Stock Option Plan, filed as
Exhibit 10.5 to Professional Sports Care Management, Inc.'s Registration Statement on
Form S-1 (Commission File No. 33-81654), is hereby incorporated by reference.
(10)-24 ReadiCare, Inc. 1991 Stock Option Plan, filed as an exhibit to ReadiCare, Inc.'s
Annual Report on Form 10-K for the Fiscal Year Ended February 29, 1992, is hereby
incorporated by reference.
(10)-25 ReadiCare, Inc. Stock Option Plan for Non-Employee Directors, as amended, filed as an
exhibit to ReadiCare, Inc's Annual Report on Form 10-K for the Fiscal Year Ended
February 29, 1992 and as an exhibit to ReadiCare, Inc.'s Annual Report on Form 10-K
for the Fiscal Year Ended February 28, 1994, is hereby incorporated by reference.
(10)-26 1997 Stock Option Plan, filed as Exhibit 4 to HEALTHSOUTH's Registration Statement on
Form S-8 (Registration No. 333-42307) is hereby incorporated by reference.
(10)-27 1998 Restricted Stock Plan filed as Exhibit (10)-27 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by
reference.
(10)-28 Health Images, Inc. Non-Qualified Stock Option Plan, filed as Exhibit 10(d)(i) to
Health Images, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended December
31, 1995, is hereby incorporated by reference.
(10)-29 Amended and Restated Employee Incentive Stock Option Plan, as amended, of Health
Images, Inc., filed as Exhibits 10(c)(i), 10(c)(ii), 10(c)(iii) and 10(c)(iv) to
Health Images, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended December
31, 1995, is hereby incorporated by reference.
(10)-30 Form of Health Images, Inc. 1995 Formula Stock Option Plan, filed as Exhibit
10(d)(iv) to Health Images, Inc.'s Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1995, is hereby incorporated by reference.
(10)-31 1996 Employee Incentive Stock Option Plan of Health Images, Inc., filed as Exhibit
4(v) to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No.
333-24429), is hereby incorporated by reference.
83
(10)-32 Employee Stock Option Plan of Horizon/CMS Healthcare Corporation, filed as Exhibit
10.5 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for the
Fiscal Year Ended May 31, 1994, is hereby incorporated by reference.
(10)-33 First Amendment to Employee Stock Option Plan of Horizon/CMS Healthcare Corporation,
filed as Exhibit 10.6 to Horizon/CMS Healthcare Corporation's Annual Report on Form
10-K for the Fiscal Year Ended May 31, 1994, is hereby incorporated by reference.
(10)-34 Corrected Second Amendment to Employee Stock Option Plan of Horizon/CMS Healthcare
Corporation, filed as Exhibit 10.7 to Horizon/CMS Healthcare Corporation's Annual
Report on Form 10-K for the Fiscal Year Ended May 31, 1994, is hereby incorporated by
reference.
(10)-35 Amendment No. 3 to Employee Stock Option Plan of Horizon/CMS Healthcare Corporation,
filed as Exhibit 10.12 to Horizon/CMS Healthcare Corporation's Annual Report on Form
10-K for the Fiscal Year Ended May 31, 1995, is hereby incorporated by reference.
(10)-36 Horizon Healthcare Corporation Stock Option Plan for Non-Employee Directors, filed as
Exhibit 10.6 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for
the Fiscal Year Ended May 31, 1994, is hereby incorporated by reference.
(10)-37 Amendment No. 1 to Horizon Healthcare Corporation Stock Option Plan for Non-Employee
Directors, filed as Exhibit 10.14 to Horizon/CMS Healthcare Corporation's Annual
Report on Form 10-K for the Fiscal Year Ended May 31, 1996, is hereby incorporated by
reference.
(10)-38 Horizon/CMS Healthcare Corporation 1995 Incentive Plan, filed as Exhibit 4.1 to
Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration
No. 33-63199), is hereby incorporated by reference.
(10)-39 Horizon/CMS Healthcare Corporation 1995 Non-Employee Directors' Stock Option Plan,
filed as Exhibit 4.2 to Horizon/CMS Healthcare Corporation's Registration Statement
on Form S-8 (Registration No. 33-63199), is hereby incorporated by reference.
(10)-40 First Amendment to Horizon Healthcare Corporation Employee Stock Purchase Plan, filed
as Exhibit 10.18 to Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K
for the Fiscal Year Ended May 31, 1996, is hereby incorporated by reference.
(10)-41 Continental Medical Systems, Inc. 1994 Stock Option Plan (as amended and restated
effective December 1, 1991), Amendment No. 1 to Continental Medical Systems, Inc.
1986 Stock Option Plan and Amendment No. 2 to Continental Medical Systems, Inc. 1986
Stock Option Plan, filed as Exhibit 4.1 to Horizon/CMS Healthcare Corporation's
Registration Statement on Form S-8 (Registration No. 33-61697), is hereby
incorporated by reference.
(10)-42 Continental Medical Systems, Inc. 1989 Non-Employee Directors' Stock Option Plan (as
amended and restated effective December 1, 1991), filed as Exhibit 4.2 to Horizon/CMS
Healthcare Corporation's Registration Statement on Form S-8 (Registration No.
33-61697), is hereby incorporated by reference.
(10)-43 Continental Medical Systems, Inc. 1992 CEO Stock Option Plan and Amendment No. 1 to
Continental Medical Systems, Inc. 1992 CEO Stock Option Plan, filed as Exhibit 4.3 to
Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration
No. 33-61697), is hereby incorporated by reference.
(10)-44 Continental Medical Systems, Inc. 1993 Nonqualified Stock Option Plan, Amendment No.
1 to Continental Medical Systems, Inc. 1993 Nonqualified Stock Option Plan and
Amendment No. 2 to Continental Medical Systems, Inc. 1993 Nonqualified Stock Option
Plan, filed as Exhibit 4.4 to Horizon/CMS Healthcare Corporation's Registration
Statement on Form S-8 (Registration No. 33-61697), is hereby incorporated by
reference.
84
(10)-45 Continental Medical Systems, Inc. 1994 Stock Option Plan, filed as Exhibit 4.5 to
Horizon/CMS Healthcare Corporation's Registration Statement on Form S-8 (Registration
No. 33-61697), is hereby incorporated by reference.
(10)-46 The Company Doctor Amended and Restated Omnibus Stock Plan of 1995, filed as Exhibit
4.1 to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No. 333-59895),
is hereby incorporated by reference.
(10)-47 National Surgery Centers, Inc. Amended and Restated 1992 Stock Option Plan, filed as
Exhibit 4.1 to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No.
333-59887), is hereby incorporated by reference.
(10)-48 National Surgery Centers, Inc. 1997 Non-Employee Directors Stock Option Plan, filed
as Exhibit 4.2 to HEALTHSOUTH's Registration Statement on Form S-8 (Registration No.
333-59887), is hereby incorporated by reference.
(10)-49 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and James
P. Bennett, filed as Exhibit (10)-49 to HEALTHSOUTH's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference.
(10)-50 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and P.
Daryl Brown, filed as Exhibit (10)-50 to HEALTHSOUTH's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference.
(10)-51 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and Thomas
W. Carman, filed as Exhibit (10)-51 to HEALTHSOUTH's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference.
(10)-52 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and
Michael D. Martin, filed as Exhibit (10)-52 to HEALTHSOUTH's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by
reference.
(10)-53 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and
Anthony J. Tanner, filed as Exhibit (10)-53 to HEALTHSOUTH's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1999, is hereby incorporated by
reference.
(10)-54 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and
Patrick A. Foster, filed as Exhibit (10)-54 to HEALTHSOUTH's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1998, is hereby incorporated by
reference.
(10)-55 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH Corporation and Robert
E. Thomson, filed as Exhibit (10)-55 to HEALTHSOUTH's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1998, is hereby incorporated by reference.
(10)-56 Lease Agreement, dated October 31, 2000, between First Security Bank, National
Association, as Owner Trustee under the HEALTHSOUTH Corporation Trust 2000-1, as
Lessor, and HEALTHSOUTH Corporation, as Lessee.
(10)-57 Participation Agreement, October 31, 2000, among HEALTHSOUTH Corporation as Lessee,
First Security Bank, National Association, as Owner Trustee under the HEALTHSOUTH
Corporation Trust 2000-1, the Holders and the Lenders Party Thereto From Time to
Time, The Chase Manhattan Bank, UBS Warburg LLC, Deutsche Bank Securities Inc.,
Deutsche Bank AG, New York Branch and UBS AG, Stamford Branch.
85
(10)-58 Credit Agreement among HEALTHSOUTH Corporation, UBS AG, Stamford Branch, Deutsche
Bank AG, the Lenders Party Thereto and the Industrial Bank of Japan, Limited, dated
October 31, 2000.
(10)-59 1999 Exchange Stock Option Plan, filed as Exhibit 3 to HEALTHSOUTH's Registration
Statement on Form S-8 (Registration No. 333-80073), is hereby incorporated by
reference.
(10)-60 1999 Executive Equity Loan Plan, filed as Exhibit (10)-60 to HEALTHSOUTH's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1999, is hereby
incorporated by reference.
(21) Subsidiaries of HEALTHSOUTH Corporation.
(23) Consent of Ernst & Young LLP.
(d) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
86
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------ -------------- --------------------------------------- ----------------- --------------
BALANCE AT ADDITIONS CHARGED ADDITIONS CHARGED
BEGINNING OF TO COSTS AND TO OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
------------------------------------------ -------------- ------------------- ------------------- ----------------- --------------
(IN THOUSANDS)
Year ended December 31, 1998:
Allowance for doubtful accounts ......... $127,572 $112,202 $ 18,524(1) $ 114,609(2) $143,689
======== ======== =========== ============ ========
Year ended December 31, 1999:
Allowance for doubtful accounts ......... $143,689 $342,708 $ 16,314(1) $ 199,097(2) $303,614
======== ======== =========== ============ ========
Year ended December 31, 2000:
Allowance for doubtful accounts ......... $303,614 $ 98,037 $ 6,961(1) $ 178,182(2) $230,430
======== ======== =========== ============ ========
----------
(1) Allowances of acquisitions in years 1998, 1999 and 2000, respectively.
(2) Write-offs of uncollectible patient accounts receivable.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEALTHSOUTH CORPORATION
By: RICHARD M. SCRUSHY
------------------------------------
Richard M. Scrushy,
Chairman of the Board
and Chief Executive Officer
Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------------------------- ----------------------------------------- ---------------
RICHARD M. SCRUSHY Chairman of the Board March 29, 2001
----------------------- and Chief Executive Officer
Richard M. Scrushy and Director
WILLIAM T. OWENS Executive Vice President March 29, 2001
----------------------- and Chief Financial Officer and Director
William T. Owens
WESTON L. SMITH Senior Vice President-Finance March 29, 2001
----------------------- and Controller (Principal Accounting
Weston L. Smith Officer)
C. SAGE GIVENS Director March 29, 2001
-----------------------
C. Sage Givens
CHARLES W. NEWHALL III Director March 29, 2001
-----------------------
Charles W. Newhall III
GEORGE H. STRONG Director March 29, 2001
-----------------------
George H. Strong
PHILLIP C. WATKINS Director March 29, 2001
-----------------------
Phillip C. Watkins
JOHN S. CHAMBERLIN Director March 29, 2001
-----------------------
John S. Chamberlin
JOEL C. GORDON Director March 29, 2001
-----------------------
Joel C. Gordon
LARRY D. STRIPLIN, JR. Director March 29, 2001
-----------------------
Larry D. Striplin, Jr.