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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, 2001; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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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. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 22, 2002;
Common Stock, par value $.01 per share -- $5,286,816,483
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 22, 2001
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COMMON STOCK, PAR VALUE
$.01 PER SHARE 392,778,890 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, medical centers and
other healthcare facilities. We believe that we provide patients, physicians and
payors with high-quality healthcare services at significantly lower costs than
traditional inpatient hospitals. Additionally, our national network, reputation
for quality and focus on outcomes have enabled us to secure contracts with
national and regional managed care payors. At December 31, 2001, HEALTHSOUTH
operated approximately 1,900 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 and
outpatient diagnostic 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.
We are also the largest operator of freestanding 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.
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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, as 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 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.
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 believe our ISM strategy capitalizes on the complementary
nature of our primary services. Almost all rehabilitation and surgery
patients require 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.
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
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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 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
approximately 1,900 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
2001, approximately 31.1% of our revenues were derived from Medicare,
approximately 2.6% from Medicaid and approximately 66.3% 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 our
business.
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 having begun January 1, 2002. 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, future changes in reimbursement rates or any 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.
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
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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. In 2001, we settled
certain litigation involving alleged violations of Medicare regulations, and we
remain subject to other such litigation. See this Item, "Business -- Regulation"
and Item 3, "Legal Proceedings".
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 us. 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 one of the largest providers of healthcare
services in the United States, 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 business, financial condition or 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, of other companies
believed to be similar to us, 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
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reflect information provided by us. Adverse movement in our 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.
INDUSTRY OVERVIEW
The United States Centers for Medicare and Medicaid Services (formerly the
Health Care Financing Administration) ("CMS") 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 for 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%.
CMS 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
97% 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 2000.
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 freestanding 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 17 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, rehabilitative and sports medicine services and that provide
independent platforms for growth. Our acquisitions and internal growth have
enabled HEALTHSOUTH to become one of the largest providers
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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 Segment
Our outpatient services segment includes our outpatient rehabilitation
facilities, 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, 2001, we provided
outpatient rehabilitative healthcare services through approximately 1,415
locations in all 50 states, Puerto Rico 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.
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.
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OUTPATIENT SURGERY SERVICES. As of December 31, 2001, we provided
outpatient surgery services through 213 freestanding surgery centers in 38
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 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 freestanding outpatient
diagnostic centers in the United States. Over 85% of our diagnostic centers are
located in markets served by our rehabilitation facilities. At December 31,
2001, we operated 135 diagnostic centers in 29 states and the District of
Columbia. 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
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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 the president of our Ambulatory Services Division. 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.
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, 2001, our
inpatient rehabilitation facilities achieved an overall utilization, based on
patient days and available beds, of 79.9%. 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, 2001, we operated 118
inpatient rehabilitation facilities with 7,611 licensed beds in the continental
United States, representing the largest group of affiliated proprietary
inpatient rehabilitation facilities in the nation, as well as a 70-bed
rehabilitation hospital in Australia and a 30-bed rehabilitation facility in
Puerto Rico. Effective December 31, 2001, we sold four non-strategic inpatient
rehabilitation facilities with 222 licensed beds. Our inpatient rehabilitation
facilities provide high-quality comprehensive services to patients who require
intensive institutional rehabilitation care.
8
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 under the new PPS system, which is in effect for cost reporting
years beginning on or after January 1, 2002. 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 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, 2001, we operated four medical centers
with 925 licensed beds in three 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.
9
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".
In March 2001, we announced plans to replace our existing Birmingham,
Alabama medical center facility with a new "digital hospital" which will be
located on the campus of our corporate headquarters in Birmingham and is
intended to integrate many significant technological advances in healthcare
that, due to incompatible computer systems, lack of integration among equipment
manufacturers and other obstacles, have limited impact to date in the hospital
industry. We believe that this new model for acute-care delivery will enhance
efficiency, safety and quality of care from the perspective of both physicians
and patients.
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 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, involving 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.
10
We maintain a Web site at www.healthsouth.com, which provides information
on our 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, we and our employees are
able to support charitable organizations and activities within the communities
served by our facilities.
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, 2000 DECEMBER 31, 2001
------------------------------ ----------------- -----------------
Medicare ..................... 29.0% 31.1%
Commercial (1) ............... 43.1 42.6
Workers' Compensation ........ 12.0 11.9
All Other Payors (2) ......... 15.9 14.4
----- -----
100.0% 100.0%
===== =====
- ----------------
(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, representing approximately 3.0% of
2000 revenues and 2.6% of 2001 revenues.
See this Item, "Business -- Regulation -- Medicare Participation and
Reimbursement" for a description of some of the reimbursement regulations
applicable to our facilities.
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.
11
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 three 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 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.
12
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 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 participate in the Medicare
program. Approximately 1,057 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 and 121 of our
diagnostic centers are certified (or awaiting certification) under 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 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 above, freestanding
inpatient rehabilitation facilities and hospital-based inpatient rehabilitation
units are being placed under a PPS to be phased in beginning January 1, 2002.
As of December 31, 2001, 17 of our outpatient centers were
Medicare-certified Comprehensive Outpatient Rehabilitation Facilities ("CORFs")
and 951 were Medicare-certified rehabilitation agencies or satellites.
Additionally, we had certification applications pending for 89 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,
13
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.
Through December 31, 2001, inpatient facilities (other than the medical
center facilities) either were not covered by PPS or were exempt from PPS, and
were 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 originally
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. Under the final regulations governing
inpatient rehabilitation PPS, the new system is in effect for cost reporting
years beginning on or after January 1, 2002. 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. Those regulations have not had a
material effect on us to date, and we do not expect them to do so in the future.
In June 1998, CMS 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 the United States government, and
provides for penalties equal to three times the actual amount of any
overpayments plus $5,500 to $11,000 per claim. In addition, the False Claims Act
allows private persons, known as "relators", to file complaints under seal and
provides a period of time for the government to investigate such complaints and
determine whether or not to intervene in them and take over the handling of all
or part of such complaints. Because of the sealing provisions of the False
Claims Act, it is possible for healthcare providers to be subject to False
Claims Act suits for extended periods of time without notice of such suits or an
opportunity to respond to them. Because we perform thousands of similar
procedures a year for which we are reimbursed by Medicare and other federal
payors and there is a relatively long statute of limitations, a billing error or
cost reporting error could result in significant civil or criminal penalties
under the False Claims Act or other laws. We are currently a named defendant in
certain unsealed suits under the False Claims Act. See Item 3, "Legal
Proceedings".
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.
14
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 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
15
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, currently predicted to
be sometime in 2002. The Phase I Final Stark Regulations, which differ
substantially in many respects from the Proposed Stark Regulations, had a
specified effective date of January 4, 2002. 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
16
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 CMS, 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. 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
17
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, 2001, 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 have begun to transition the administration of our
self-insurance programs. The captive is an independent insurance company
primarily designed to insure our first layer of coverage. We purchase commercial
insurance for excess layers. Currently, the captive provides primary coverage
for our professional and general liability risk, workers' compensation risk and
the construction risk associated with the building of our replacement medical
center facility in Birmingham, Alabama. We expect to evaluate other lines of
insurance suitable for placement with the captive on an ongoing basis.
In connection with our October 1997 acquisition of Horizon/CMS Healthcare
Corporation, we 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.
EMPLOYEES
As of December 31, 2001, we employed approximately 51,537 persons, of whom
33,783 were full-time employees and 17,754 were part-time, pool or per diem
employees. Of the above employees, 1,365 (including 446 part-time, pool or per
diem employees) were employed at our headquarters in Birmingham, Alabama. Except
for approximately 84 employees at one rehabilitation hospital (about 20% 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.
18
ITEM 2. PROPERTIES.
Our 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 an
operating lease structured through a group of financial institutions.
Substantially all of our outpatient rehabilitation operations are carried out in
leased facilities. We own 33 of our inpatient rehabilitation facilities and
lease or operate under management contracts the remainder of our inpatient
rehabilitation facilities. Nine of such facilities are leased under an operating
lease structured through a group of financial institutions. We also own 60 of
our surgery centers and 20 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 with Methodist Healthcare -- Memphis Hospitals. We own
three of our medical center facilities and manage one under contract. We are
constructing our new replacement medical center facility in Birmingham, Alabama
pursuant to an operating lease structured through a group of financial
institutions. 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, 2001:
INPATIENT
REHABILITATION OUTPATIENT
FACILITIES MEDICAL REHABILITATION SURGERY DIAGNOSTIC
STATE (BEDS)(1) CENTERS (BEDS)(1) CENTERS(2) CENTERS CENTERS
- -------------------------- -------------- ----------------- -------------- ------- ----------
Alabama .................. 8 (382) 2 (538) 39 7 6
Alaska ................... 7 1 1
Arizona .................. 4 (246) 33 4 2
Arkansas ................. 5 (284) 21 2
California ............... 3 (152) 53 51 4
Colorado ................. 1 (50) 36 5 5
Connecticut .............. 33 4
Delaware ................. 6 1
District of Columbia ..... 1 1
Florida .................. 11 (727) 1 (281) 142 16 7
Georgia .................. 1 (55) 45 4 11
Hawaii ................... 11 2
Idaho .................... 2 1
Illinois ................. 1 (37) 58 7 7
Indiana .................. 4 (210) 10 2 1
Iowa ..................... 4 2 1
Kansas ................... 4 (244) 17 1
Kentucky ................. 2 (80) 8 6
Louisiana ................ 4 (267) 10 2 3
Maine .................... 2 (125) 8
Maryland ................. 1 (49) 35 10 13
Massachusetts ............ 7 (707) 58 3
Michigan ................. 1 (30) 15
Minnesota ................ 16 2
Mississippi .............. 9 3 1
Missouri ................. 3 (163) 60 7 4
Montana .................. 4 1
Nebraska ................. 5
Nevada ................... 4 (272) 23 3 1
New Hampshire ............ 2 (74) 9
New Jersey ............... 1 (125) 69 3 2
New Mexico ............... 1 (61) 7 1
New York ................. 48 2
North Carolina ........... 45 9 2
North Dakota ............. 2
Ohio ..................... 37 8 2
Oklahoma ................. 2 (141) 23 5 3
Oregon ................... 25 2
Pennsylvania ............. 14 (1,077) 75 6 9
Rhode Island ............. 2 2
South Carolina ........... 4 (259) 22 2 3
South Dakota ............. 1
Tennessee ................ 5 (319) 42 5 4
Texas .................... 16 (1,079) 1 (106) 125 17 27
Utah ..................... 1 (84) 10 3 2
Vermont .................. 1
Virginia ................. 2 (90) 31 5
Washington ............... 58 4 2
West Virginia ............ 4 (222) 3 1
Wisconsin ................ 7 2
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, 2001, we operated one outpatient
rehabilitation center in the United Kingdom, one 70-bed rehabilitation hospital
in Australia and one 30-bed inpatient rehabilitation facility and one outpatient
rehabilitation center 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. Effective December 31, 2001, we sold four
non-strategic inpatient rehabilitation facilities included in the above table.
These facilities had a total of 222 licensed beds.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of our business, we 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 our 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 our operations.
SECURITIES LITIGATION
We were 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 us 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. 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 our then-current directors, certain former directors
and certain officers 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
21
plaintiffs objected 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. The court has scheduled a hearing on the plaintiff's motion for class
certification for April 23, 2002. 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 MEDICARE LITIGATION
On May 22, 2001, we announced a settlement with the United States
Department of Justice in connection with a lawsuit styled United States ex rel.
Greg Madrid v. HEALTHSOUTH Corporation, et al., No. CV-97-C-3206-S, filed in the
United States District Court for the Northern District of Alabama. The lawsuit
alleged that we had improperly included various costs on Medicare cost reports
submitted for various periods in 1992 through 1997 in a manner inconsistent with
Medicare regulations relating to cost limits on reimbursement for
sale-and-leaseback transactions, transactions with related parties and
abandonment of tangible assets, resulting in alleged overpayments to us. We did
not admit liability with respect to any of the allegations. Under the settlement
agreement, the lawsuit was dismissed and we paid the United States approximately
$8,248,000, including interest, and entered into a corporate integrity agreement
with the Office of Inspector General of the United States Department of Health
and Human Services. The corporate integrity agreement builds upon our existing
corporate compliance program and provides for additional employee education
activities and safeguards against erroneous billing and cost reporting.
In late December 2001, the United States Department of Justice filed a
Notice of Election to Intervene in Part and to Decline to Intervene in Part in a
case styled United States ex rel. DeWayne Manning v. HEALTHSOUTH Corporation,
No. CV-99-BE-2150-S, filed in the United States District Court for the Northern
District of Alabama. The Department's Notice indicated that it was partially
intervening in a complaint under the federal False Claims Act filed by a former
employee of HEALTHSOUTH which alleged that certain physical therapy practices,
primarily involving the use of physical therapy aides and other assistive
personnel, violated Medicare regulations related to the provision of physical
therapy to Medicare beneficiaries in freestanding outpatient centers. The Notice
also indicated that the Department was declining to intervene in any other
claims asserted by the relator, but that the Department intended to assert other
claims relating to alleged violations of certain regulations relating to
technical documentation requirements for Medicare physical therapy claims, that
the Department may seek to consolidate other cases containing similar
allegations, and that the Department intended to file a complaint with respect
to such allegations within 120 days. On January 15, 2002, the Court entered an
Order unsealing the original relator's complaint, granting the Department 120
days from that date to file and serve its complaint, and prohibiting the relator
from serving his complaint until the Department served its new complaint. We are
aware of approximately four similar complaints that were filed under seal in
three other federal district courts, in at least two of which the Department has
filed a substantially identical notice of partial intervention and in at least
one of which the Department has declined to intervene. We have not been served
with any of the underlying complaints to date. Based upon the information
available to us, we believe that the Department's theory with respect to the
issues regarding the use of physical therapy aides and other assistive personnel
is without support in applicable law or regulation and is inconsistent with
traditionally accepted practices in the physical therapy industry. Accordingly,
we expect to vigorously defend against the claims asserted at such time as we
are served with the complaints. However, 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.
22
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). After a lengthy pretrial
hearing phase, in mid-2001 Horizon/CMS was bound over for trial on twelve counts
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
$67,000. Horizon/CMS denies the allegations made in the complaint and expects to
vigorously defend against the charges. 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 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. The case continues in the discovery phase and is currently set for
trial in July 2002. HEALTHSOUTH cannot now predict the outcome or effect of such
litigation or the length of time it will take to resolve such litigation.
Texas Nursing Facility Litigation
Horizon/CMS was 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 involved injuries
23
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. After trial, the case was settled for
$20,000,000, of which approximately $9,000,000 was directly paid by the primary
insurance carrier. Horizon/CMS has filed a claim for reimbursement for the
remaining amount with the excess carrier, and believes that such amount is due
to be reimbursed by the excess carrier under the applicable policy terms.
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
---- ---
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
2001
----
First Quarter .................... $ 16.50 $ 12.55
Second Quarter ................... 15.97 11.40
Third Quarter .................... 18.30 14.35
Fourth Quarter ................... 16.50 11.99
The closing price per share for HEALTHSOUTH common stock on the New York
Stock Exchange on March 22, 2002 was $13.74.
There were approximately 6,684 holders of record of HEALTHSOUTH common
stock as of March 22, 2002.
We have never paid cash dividends on our common stock, and we do not
anticipate paying cash dividends in the foreseeable future. We currently
anticipate that any future earnings will be retained to finance our operations.
RECENT SALES OF UNREGISTERED SECURITIES
We had no unregistered sales of equity securities in 2001.
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 1997 acquisition of Health Images, Inc. and the 1998
acquisition of National Surgery Centers, Inc. ("NSC"), each of which was
accounted for as a pooling of interests.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues ....................................... $3,123,176 $4,006,074 $4,072,107 $4,195,115 $4,380,477
Operating unit expenses ........................ 1,952,189 2,491,914 2,688,849 2,816,363 2,905,043
Corporate general and administrative
expenses ..................................... 87,512 112,800 149,285 148,023 167,206
Provision for doubtful accounts ................ 74,743 112,202 342,708 98,037 107,871
Depreciation and amortization .................. 257,136 344,591 374,248 360,847 375,270
Merger and acquisition related expenses (1)..... 15,875 25,630 -- -- --
Loss on sale of assets ......................... -- 31,232 -- -- 174,127 (2)
Impairment and restructuring charges (2) ....... -- 483,455 121,037 -- --
Loss on termination of credit facility (2) ..... -- -- -- -- 6,475
Interest expense ............................... 112,529 148,163 176,652 221,595 218,100
Interest income ................................ (6,004) (11,286) (10,587) (9,104) (7,349)
---------- ---------- ---------- ---------- -----------
2,493,980 3,738,701 3,842,192 3,635,761 3,946,743
---------- ---------- ---------- ---------- -----------
Income before income taxes and minority
interests .................................... 629,196 267,373 229,915 559,354 433,734
Provision for income taxes ..................... 213,668 143,347 66,929 181,808 139,467
---------- ---------- ---------- ---------- -----------
415,528 124,026 162,986 377,546 294,267
Minority interests ............................. 72,469 77,468 86,469 99,081 91,880
---------- ---------- ---------- ---------- -----------
Net income ..................................... $ 343,059 $ 46,558 $ 76,517 $ 278,465 $ 202,387
========== ========== ========== ========== ===========
Weighted average common shares
outstanding .................................. 366,768 421,462 408,195 385,666 389,717
========== ========== ========== ========== ===========
Net income per common share .................... $ 0.94 $ 0.11 $ 0.19 $ 0.72 $ 0.52
========== ========== ========== ========== ===========
Weighted average common shares
outstanding -- assuming dilution ............. 386,211 432,275 414,570 391,016 399,227
========== ========== ========== ========== ===========
Net income per common share -- assuming
dilution ..................................... $ 0.89 $ 0.11 $ 0.18 $ 0.71 $ 0.51
========== ========== ========== ========== ===========
DECEMBER 31,
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1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and marketable securities ......... $ 185,018 $ 142,513 $ 132,882 $ 180,407 $ 278,456
Working capital ........................ 612,917 945,927 852,711 1,048,204 1,377,459
Total assets ........................... 5,566,324 6,778,209 6,890,484 7,380,440 7,579,237
Long-term debt (3) ..................... 1,614,961 2,830,926 3,114,648 3,211,829 3,026,947
Stockholders' equity ................... 3,290,623 3,423,004 3,206,362 3,526,454 3,796,924
- ----------------
(1) Expenses related to the Health Images acquisition in 1997 and the NSC
acquisition in 1998.
(2) See "Notes to Consolidated Financial Statements".
(3) Includes current portion of long-term debt.
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 our consolidated results
of operations and financial condition, including various factors related to
acquisitions and divestitures we have made during the periods indicated, the
timing and nature of which have significantly affected our consolidated results
of operations. This discussion and analysis should be read in conjunction with
our consolidated financial statements and notes thereto included elsewhere in
this Annual Report on Form 10-K.
On June 29, 1999, we acquired from Mariner Post-Acute Network, Inc.
("Mariner") substantially all of the assets of Mariner's American Rehability
Services division, which operated approximately 160 outpatient rehabilitation
centers in 18 states (the "Rehability Acquisition"). The net cash purchase price
was approximately $54,521,000. The Rehability Acquisition was accounted for
under the purchase method of accounting and, accordingly, the acquired
operations are included in our consolidated financial statements from the
respective date of acquisition (see Note 9 of "Notes to Consolidated Financial
Statements" for further discussion). The Rehability Acquisition was our only
material acquisition in the three years ended December 31, 2001.
During the second quarter of 2001, we sold substantially all of our
occupational medicine operations to US Healthworks, Inc. and our Richmond,
Virginia medical center to HCA -- The Healthcare Company. These transactions
yielded net cash proceeds of approximately $98,882,000 and a net loss on the
sale of assets of $139,883,000.
During the fourth quarter of 2001, we sold our diagnostic operations in the
United Kingdom to Lodestone Patient Care, Limited and four non-strategic
rehabilitation hospitals to Meadowbrook Healthcare Corporation. These
transactions yielded net cash proceeds of approximately $31,919,000 and a net
loss on sale of assets of $18,847,000. We also completed a sale-leaseback
transaction for thirteen of our facilities which yielded net cash proceeds of
$79,735,000 and a net loss on the sale of assets of $15,397,000.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information", requires an enterprise
to report operating segments based upon the way its operations are managed. This
approach defines operating segments along the lines used by management to assess
performance and make operating and resource allocation decisions. Based on our
management and reporting structure, segment information has been presented for
inpatient and other clinical services, outpatient services and non-patient care
services.
The inpatient and other clinical services segment includes the operations
of our inpatient rehabilitation facilities and medical centers, as well as the
operations of certain physician practices and other clinical services which are
managerially aligned with our inpatient services. The outpatient services
segment includes the operations of our outpatient rehabilitation facilities,
outpatient surgery centers and outpatient diagnostic centers. The non-patient
care services segment includes the operations of our corporate office, general
and administrative costs, non-clinical subsidiaries and other operations that
are independent of our inpatient and outpatient services segments. See Note 14
of "Notes to Consolidated Financial Statements" for financial data for each of
our operating segments.
There are increasing pressures from many payor sources to control
healthcare costs and to reduce or limit increases in reimbursement rates for
medical services. There can be no assurance that payments under governmental and
third-party payor programs will remain at levels comparable to present levels.
In addition, there have been, and we expect that there will continue to be, a
number of proposals to limit Medicare reimbursement for certain services. We
cannot now predict whether any of these proposals will be adopted or, if adopted
and implemented, what effect such proposals would have on us. Changes in
reimbursement policies or rates by private or governmental payors could have a
material effect on our future results of operations.
27
Medicare reimbursement for inpatient rehabilitation services is changing
from a cost-based reimbursement system to a prospective payment system ("PPS"),
with the phase-in of the PPS having begun January 1, 2002. We believe we are
well-positioned and well-prepared for the transition and that our emphasis on
cost-effective services means that the inpatient rehabilitation PPS will have a
positive effect on our results of operations. Our early experience with payments
under PPS has been consistent with our internal estimates. However, because
implementation of PPS has only recently begun, we cannot be certain that the
ultimate impact of the PPS transition will be consistent with our current
expectations. In addition, the climate for both governmental and
non-governmental reimbursement frequently changes, and future changes in
reimbursement rates could have a material effect on our financial condition or
results of operations.
In many cases, we operate more than one site within a market. In such
markets, there is customarily an outpatient center or inpatient facility with
associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store outpatient rehabilitation operations are
measured on locations within markets in which similar operations existed at the
end of the period and include the operations of additional outpatient
rehabilitation locations opened within the same market. New store outpatient
rehabilitation operations are measured on locations within new markets. Same
store operations in our other business lines are measured based on specific
locations. We may, from time to time, close or consolidate similar locations in
multi-site markets to obtain efficiencies and respond to changes in demand.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. In preparing these financial statements, we are required to make
estimates and judgments that affect the reported amounts of our assets,
liabilities, revenues and expenses. Those reported amounts could differ, in some
cases materially, if we made different estimates and judgments with respect to
particular items in our financial statements. We make such estimates and
judgments based on our historical experience and on assumptions that we believe
are reasonable under the circumstances in an effort to ensure that our financial
statements fairly reflect our financial condition and results of operations. We
describe some of the most important policies that we follow in making such
estimates and judgments below.
Revenues and Contractual Reserves
Our revenues include net patient service revenues and other operating
revenues. Net patient service revenues are reported at estimated net realizable
amounts from patients, insurance companies, third-party payors (primarily
Medicare and Medicaid) and others for services rendered. Revenues from
third-party payors also include estimated retroactive adjustments under
reimbursement agreements that are subject to final review and settlement by
appropriate authorities. We estimate contractual adjustments from
non-governmental third-party payors based on historical experience and the terms
of payor contracts. Our reimbursement from governmental third-party payors is
based upon cost reports, Medicare and Medicaid payment regulations and other
reimbursement mechanisms which require the application and interpretation of
complex regulations and policies, and such reimbursement is subject to various
levels of review and adjustment by fiscal intermediaries and others, which may
affect the final determination of reimbursement. We estimate net realizable
amounts from governmental payors based on historical experience and
interpretations of such regulations and policies. In the event that final
reimbursement differs from our estimates, our actual revenues and net income,
and our accounts receivable, could vary from the amounts reported.
Allowance for Doubtful Accounts
As with any healthcare provider, some of our accounts receivable will
ultimately prove uncollectible for various reasons, including the inability of
patients or third-party payors to satisfy their financial obligations to us. We
estimate allowances for doubtful accounts based on the specific agings and payor
28
classifications at each facility. Net accounts receivable includes only those
amounts we estimate to be collectible based on this evaluation. Unforeseen
factors, such as the insolvency of third-party payors, could cause our estimate
to be inaccurate and could cause our actual results and the amount of our
accounts receivable to vary from amounts reported in our financial statements.
Impairment of Goodwill
Many of our facilities came to us through acquisitions. We determine the
amortization period of the cost in excess of net asset value of purchased
facilities based on an evaluation of the facts and circumstances of each
individual purchase transaction. The evaluation includes an analysis of historic
and projected financial performance, an evaluation of the estimated useful life
of the buildings and fixed assets acquired, the indefinite useful life of
certificates of need and licenses acquired, the competition within local
markets, lease terms where applicable, and the legal terms of partnerships where
applicable. We utilize independent appraisers and rely on our own management
expertise in evaluating each of the factors noted above. With respect to the
carrying value of the excess of cost over net asset value of individual
purchased facilities and other intangible assets, we determine on a quarterly
basis whether an impairment event has occurred by considering factors such as
the market value of the asset, a significant adverse change in legal factors or
in the business climate, adverse action by regulators, a history of operating
losses or cash flow losses, or a projection of continuing losses associated with
an operating entity. The carrying value of excess cost over net asset value of
purchased facilities and other intangible assets will be evaluated if the facts
and circumstances suggest that it has been impaired. If this evaluation
indicates that the value of the asset will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, our carrying value of the asset will be reduced to the
estimated fair market value. Fair value is determined based on the individual
facts and circumstances of the impairment event, and the available information
related to it. Such information might include quoted market prices, prices for
comparable assets, estimated future cash flows discounted at a rate commensurate
with the risks involved, and independent appraisals. For purposes of analyzing
impairment, assets are generally grouped at the individual operational facility
level, which is the lowest level for which there are identifiable cash flows. If
we acquired the group of assets being tested as part of a purchase business
combination, any goodwill that arose as part of the transaction is included as
part of the asset grouping.
In July 2001, the Financial Accounting Standards Board issued FASB
Statement No. 142, "Goodwill and Other Intangibles". SFAS No. 142 requires the
periodic testing of goodwill for impairment rather than a monthly amortization
of the balance. This testing takes place in two steps: (1) the determination of
the fair value of a reporting unit, and (2) the determination of the implied
fair value of the goodwill. We adopted SFAS No. 142 on January 1, 2002. We are
currently evaluating the financial impact of adopting the new policy. Because we
have recorded (and expect in the future to record) significant goodwill in
connection with acquisitions, the impact of this new policy on our future
reported results could be material
RESULTS OF OPERATIONS
Twelve-Month Periods Ended December 31, 1999 and 2000
Our operations generated revenues of $4,195,115,000 in 2000, an increase of
$123,008,000, or 3.0%, as compared to 1999 revenues. Same store revenues for the
twelve months ended December 31, 2000 were $4,121,055,000, an increase of
$48,948,000, or 1.2%, as compared to the same period in 1999. New store revenues
for 2000 were $74,060,000. The increase in revenues was primarily attributable
to increases in patient volume. Revenues generated from patients under the
Medicare and Medicaid programs respectively accounted for 29.0% and 2.6% of
total revenues for 2000, compared to 33.0% and 2.2% of total revenues for 1999.
Revenues from any other single third-party payor were not significant in
relation to our total revenues. During 2000, same store inpatient days,
outpatient visits, surgical cases and diagnostic cases increased 4.6%, 3.5%,
1.8% and 6.2%, respectively. Revenue per inpatient day, outpatient visit,
surgical case and diagnostic case for same store operations (decreased)
increased by (2.3)%, 0.4%, 1.8% and (10.2)%, respectively.
29
Operating unit expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $2,816,363,000, or 67.1% of revenues,
for 2000, compared to 66.0% of revenues for 1999. Same store operating expenses
for 2000 were $2,762,795,000, or 67.0% of related revenues. New store operating
expenses were $53,568,000, or 72.3% of related revenues. Corporate general and
administrative expenses decreased from $149,285,000 in 1999 to $148,023,000 in
2000. Included in corporate general and administrative expenses for the year
ended December 31, 1999, is a non-recurring expense item of approximately
$29,798,000. This expense item included write-offs of investments and notes of
$14,603,000, expenses related to year 2000 remediation of $13,429,000 and
expenses related to the proposed spin-off of our inpatient operations of
$1,766,000. As part of our evaluation of the proposed spin-off in 1999, we
determined that certain notes and investments totaling $14,603,000 should be
written off. The year 2000 remediation expenditures were incurred during 1999
while testing for year 2000 compliance. Excluding the non-recurring expense, as
a percentage of revenues, corporate general and administrative expenses
increased from 2.9% in 1999 to 3.5% in 2000. Total operating expenses were
$2,964,386,000, or 70.7% of revenues, for 2000, compared to $2,838,134,000, or
69.7% of revenues, for 1999. The provision for doubtful accounts was
$98,037,000, or 2.3% of revenues, for 2000, compared to $342,708,000, or 8.4% of
revenues, for 1999. Included in the 1999 provision for doubtful accounts is
$117,752,000 in non-recurring expense recognized in the third quarter of 1999
and $139,835,000 in non-recurring expense recognized in the fourth quarter of
1999. The third quarter provision includes the charge-off of accounts receivable
of facilities included in the impairment and restructuring charges we recognized
in 1998. These accounts receivable were determined to be uncollectible by local
and regional operations management personnel who assumed collection
responsibilities in the third quarter of 1999 in connection with the
restructuring of our outpatient regional business offices, which had previously
been responsible for collection activities. Because local and regional
operations personnel were more directly involved in interactions with the
account obligors (primarily insurance companies and other third-party payors),
management determined that their assessment of the collectibility of accounts in
view of the specific payor environments in particular markets more accurately
reflected the likelihood of collectibility than information derived from the
centralized regional business offices. The fourth quarter charge reflected
management's decision to adopt a more conservative approach in estimating the
allowance for doubtful accounts in view of the information obtained by local and
regional operations personnel. This approach focused more heavily upon the
specific agings and payor classifications at each facility, as opposed to
determining an estimate based primarily on historical write-off rates. Due to a
deterioration of the payor environment, including recent payor insolvencies and
an increasing tendency of payors to dispute claims, pay claims beyond the time
limits contractually allowed or take discounts in excess of those contractually
allowed, our days' sales outstanding at the end of the second quarter of 1999
had grown to 94.5 days. Our subsequent reviews uncovered significant volumes of
denied or pended claims. Further commitment to collecting these older
receivables would have diluted our effectiveness in collecting current, ongoing
accounts. Accordingly, we revised our previous estimates of collectibility to
reflect the new policy. Excluding the non-recurring charge, the 1999 provision
for doubtful accounts was $85,121,000 or 2.1% of revenues.
Depreciation and amortization expense was $360,847,000 for 2000, compared
to $374,248,000 for 1999. The decrease was primarily attributable to the full
amortization of certain intangible assets. Interest expense increased to
$221,595,000 in 2000, compared to $176,652,000 for 1999, primarily attributable
to increases in effective interest rates (see "Liquidity and Capital
Resources"). For 2000, interest income was $9,104,000, compared to $10,587,000
for 1999.
Income before minority interests and income taxes for 2000 was
$559,354,000, compared to $229,915,000 for 1999. Minority interests reduced
income before income taxes by $99,081,000 in 2000, compared to $86,469,000 for
1999. The provision for income taxes for 2000 was $181,808,000, compared to
$66,929,000 for 1999. Excluding the tax effects of the impairment and
restructuring charges in 1999, the effective tax rate for 1999 and 2000 was
39.5% (see Note 10 of "Notes to Consolidated Financial Statements" for further
discussion). Net income for 2000 was $278,465,000.
30
Twelve-Month Periods Ended December 31, 2000 and 2001
Our operations generated revenues of $4,380,477,000 in 2001, an increase of
$185,362,000, or 4.4%, as compared to 2000 revenues. Same store revenues for the
twelve months ended December 31, 2001 were $4,234,507,000, an increase of
$289,920,000, or 7.3%, as compared to the same period in 2000, excluding
facilities in operation in 2000 but no longer in operation in 2001. New store
revenues for 2001 were $85,238,000. The increase in revenues was primarily
attributable to increases in patient volume. Revenues generated from patients
under the Medicare and Medicaid programs respectively accounted for 31.1% and
2.6% of total revenues for 2001, compared to 29.0% and 2.6% of total revenues
for 2000. Revenues from any other single third-party payor were not significant
in relation to our total revenues. During 2001, same store inpatient days,
outpatient visits, surgical cases and diagnostic cases increased 1.5%, 3.9%,
5.3% and 9.8%, respectively. Revenue per inpatient day, outpatient visit,
surgical case and diagnostic case for same store operations increased by 2.6%,
0.7%, 0.8% and 4.2%, respectively.
Operating unit expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $2,905,043,000, or 66.3% of revenues,
for 2001, compared to 67.1% of revenues for 2000. Same store operating expenses
for 2001 were $2,790,349,000, or 65.9% of related revenues. New store operating
expenses were $58,662,000, or 68.8% of related revenues. Corporate general and
administrative expenses increased from $148,023,000 in 2000 to $167,206,000 in
2001. Included in corporate general and administrative expenses for the year
ended December 31, 2001, is a non-recurring expense item of approximately
$8,248,000 related to the settlement of litigation with the United States
Department of Justice. Excluding the non-recurring expense, as a percentage of
revenues, corporate general and administrative expenses increased from 3.5% in
2000 to 3.6% in 2001. Total operating expenses were $3,072,249,000, or 70.1% of
revenues, for 2001, compared to $2,964,386,000, or 70.7% of revenues, for 2000.
The provision for doubtful accounts was $107,871,000, or 2.5% of revenues, for
2001, compared to $98,037,000, or 2.3% of revenues, for 2000. Included in the
2001 provision for doubtful accounts is approximately $10,300,000 due to the
charge-off of a portion of the accounts receivable of our Richmond, Virginia
medical center, which we sold in the second quarter of 2001. While we retained
the facility's accounts receivable, we were dependent on the purchaser to
collect the retained accounts receivable for us because it controlled the
underlying information and collection systems related to such accounts, and the
charge-off reflects our estimate of the shortfall resulting from our inability
to control the collection activity. Excluding the non-recurring charge, the 2001
provision for doubtful accounts was $97,571,000, or 2.2% of revenues.
Depreciation and amortization expense was $375,270,000 for 2001, compared
to $360,847,000 for 2000. The increase was primarily attributable to our
investment in additional assets. Interest expense decreased to $218,100,000 in
2001, compared to $221,595,000 for 2000 (see "Liquidity and Capital Resources").
For 2001, interest income was $7,349,000, compared to $9,104,000 for 2000. The
changes in interest income and interest expense for 2001 were primarily
attributable to decreases in effective interest rates.
In the second quarter of 2001, we recorded a loss of $6,475,000 related to
the write-off of unamortized balances of loan fees on a secondary credit
facility we had established in 2000 and which we elected to terminate before its
stated maturity in 2003. These fees were being amortized over the original term
of the facility prior to our decision to terminate the facility early.
As described above, we recorded a net non-recurring expense item in the
second quarter of 2001 of approximately $139,883,000, reflecting the loss on the
sale of our Richmond, Virginia medical center and our occupational medicine
operations in that quarter. We recorded a net non-recurring expense item in the
fourth quarter of 2001 of approximately $18,847,000, related to the loss on the
sale of our United Kingdom diagnostic facilities and the sale of four of our
inpatient facilities in that quarter. We recorded a net non-recurring expense
item in the fourth quarter of 2001 of approximately $15,397,000, related to the
loss on a sale-leaseback transaction involving thirteen of our facilities. The
thirteen facilities included five rehabilitation hospitals, two surgery centers
and six diagnostic centers.
Income before minority interests and income taxes for 2001 was
$433,734,000, compared to $559,354,000 for 2000. Minority interests reduced
income before income taxes by $91,880,000 in 2001,
31
compared to $99,081,000 for 2000. The decrease in minority interest expense is
due primarily to our repurchase of partnership interests in some of our surgery
centers in order to resyndicate those interests to new partners that we believe
will enhance the operations of those surgery centers. The provision for income
taxes for 2001 was $139,467,000, compared to $181,808,000 for 2000. Excluding
the tax effects of the impairment and restructuring charges in 2001, the
effective tax rate for 2000 and 2001 was 39.5% (see Note 10 of "Notes to
Consolidated Financial Statements" for further discussion). Net income for 2001
was $202,387,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had working capital of $1,377,459,000, including
cash and marketable securities of $278,456,000. Working capital at December 31,
2000 was $1,048,204,000, including cash and marketable securities of
$180,407,000. For 2001, cash provided by operations was $670,394,000, compared
to $796,764,000 for 2000. The change was primarily due to a decrease in net
income and growth in inventories, prepaid expenses and other current assets. For
2001, investing activities used $399,340,000, compared to using $778,420,000 for
2000. The change was primarily due to decreased purchases of property, plant and
equipment and also reflects net proceeds of $215,370,000 received from the sale
of certain facilities. Additions to property, plant and equipment and
acquisitions accounted for $440,032,000 and $5,032,000, respectively, during
2001. Those same investing activities accounted for $583,639,000 and
$74,137,000, respectively, in 2000. Financing activities used $174,788,000 and
provided $32,573,000 during 2001 and 2000, respectively. The change is primarily
due to the use of funds to pay down our bank debt in 2001. Net principal
payments on long-term debt for 2001 were $187,546,000, compared to net borrowing
proceeds for 2000 of $89,007,000.
Net accounts receivable were $940,414,000 at December 31, 2001, compared to
$946,965,000 at December 31, 2000. The number of days of average quarterly
revenues in ending receivables was 77.6 at December 31, 2001, compared to 80.9
at December 31, 2000. See Note 1 of "Notes to Consolidated Financial Statements"
for the concentration of net accounts receivable from patients, third-party
payors, insurance companies and others at December 31, 2001 and 2000.
We have a $1,750,000,000 revolving credit facility with Bank of America,
N.A. and other participating banks (the "1998 Credit Agreement"). Interest on
the 1998 Credit Agreement is paid based on LIBOR plus a predetermined margin, a
base rate, or competitively bid rates from the participating banks. We are
required to pay a fee based on the unused portion of the revolving credit
facility ranging from 0.09% to 0.25%, depending on certain defined credit
ratings. The principal amount is payable in full on June 22, 2003. We have
provided a negative pledge on all assets under the 1998 Credit Agreement. The
effective interest rate on the average outstanding balance under the 1998 Credit
Agreement was 5.25% for the twelve months ended December 31, 2001, compared to
the average prime rate of 6.94% during the same period. At December 31, 2001, we
had drawn $540,000,000 under the 1998 Credit Agreement. For further discussion,
see Note 7 of "Notes to Consolidated Financial Statements".
On March 20, 1998, we issued $500,000,000 in 3.25% Convertible Subordinated
Debentures due 2003. An additional $67,750,000 principal amount of the 3.25%
Convertible Debentures was issued on March 31, 1998 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1. The 3.25%
Convertible Debentures are convertible into HEALTHSOUTH common stock at the
option of the holder at a conversion price of $36.625 per share. The conversion
price is subject to adjustment upon the occurrence of (a) a subdivision,
combination or reclassification of outstanding shares of our common stock, (b)
the payment of a stock dividend or stock distribution on any shares of our
capital stock, (c) the issuance of rights or warrants to all holders of our
common stock entitling them to purchase shares of our common stock at less than
the current market price, or (d) the payment of certain other distributions with
respect to our common stock. In addition, we may, from time to time, lower the
conversion price for periods of not less than 20 days, in our discretion. We
used net proceeds from the issuance of the 3.25% Convertible Debentures to pay
down indebtedness outstanding under our then-existing credit facilities. The
3.25% Convertible Debentures mature on April 1, 2003.
32
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. The Senior Notes mature on June 15, 2005
and June 15, 2008.
On September 25, 2000, we issued $350,000,000 in 10 3/4% Senior
Subordinated Notes due 2008 (the "10 3/4% Notes"). Interest is payable on April
1 and October 1. The 10 3/4% Notes are senior subordinated obligations of
HEALTHSOUTH and, as such, are subordinated to all our existing and future senior
indebtedness, and also are effectively subordinated to all existing and future
liabilities of our subsidiaries and partnerships. The net proceeds from the
issuance of the 10 3/4% Notes were used to redeem the 9.5% Notes and to pay down
indebtedness outstanding under our then-existing credit facilities. The 10 3/4%
Notes mature on October 1, 2008.
On February 1, 2001, we issued $375,000,000 in 8 1/2% Senior Notes due 2008
(the "8 1/2% Notes"). Interest is payable on February 1 and August 1. The 8 1/2%
Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net proceeds
from the issuance of the 8 1/2% Notes were used to pay down indebtedness
outstanding under our credit facilities. The 8 1/2% Notes mature on February 1,
2008.
On September 28, 2001, we issued $400,000,000 in 8 3/8% Senior Notes due
2011 (the "8 3/8% Notes"). Interest is payable on April 1 and October 1. The 8
3/8% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net
proceeds from the issuance of the 8 3/8% Notes were used to pay down
indebtedness under our credit facilities. The 8 3/8% Notes mature on October 1,
2011.
On September 28, 2001, we issued $200,000,000 in 7 3/8% Senior Notes due
2006 (the "7 3/8% Notes"). Interest is payable on April 1 and October 1. The 7
3/8% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net
proceeds from the issuance of the 7 3/8% Notes were used to pay down
indebtedness under our credit facilities. The 7 3/8% Notes mature on October 1,
2006.
During 1995 and 1998, we entered into two tax retention operating lease
agreements structured through financial institutions for our corporate
headquarters building and for nine of our rehabilitation hospitals. These
agreements have a total value of $187,000,000 and terminate on June 22, 2003. At
termination, unless we renegotiate and extend the leases, we must purchase the
facilities or obtain a purchaser for them. We provide a residual value guaranty
of approximately $163,690,000 related to these lease agreements.
In December 2001, we entered into a seven-and-one-half year operating lease
agreement to provide for the financing of our replacement medical center in
Birmingham, Alabama. During the construction period, we provide a residual value
guaranty for up to 89% of the value of the improvements. At December 31, 2001,
the value of the improvements totaled approximately $8,700,000. At maturity, our
residual value guaranty will total 85% of the value of the improvements.
The table below sets forth certain information concerning amounts due with
respect to our long-term debt and various other commitments as of December 31,
2001:
DUE DUE DUE DUE 2007
TOTAL 2002 2003-2004 2005-2006 AND BEYOND
--------------- ------------- --------------- ------------- ------------------
Long-Term Debt $ 2,982,714,000 $ 6,921,000 $ 1,119,007,000 $ 259,212,000 $ 1,597,574,000
Capital Lease Obligations 24,387,000 1,786,000 7,977,000 5,016,000 9,608,000
Noncompete Obligations 19,846,000 13,205,000 6,374,000 267,000 --
Operating Leases 1,369,441,000 223,638,000 355,219,000 237,633,000 552,951,000
--------------- ------------- --------------- ------------- ---------------
Total Obligations $ 4,396,388,000 $ 245,550,000 $ 1,488,577,000 $ 502,128,000 $ 2,160,133,000
While the rates of interest payable under our principal credit facility and
payments under some of our operating leases vary depending in part on investment
ratings of our debt, we have no credit or lease agreements which provide for the
acceleration of maturities or the termination of such agreements based upon any
change in our investment rating.
33
We intend to pursue the acquisition or development of additional healthcare
operations and related businesses, including outpatient rehabilitation
facilities, inpatient rehabilitation facilities, ambulatory surgery centers,
outpatient diagnostic centers and companies engaged in the provision of other
complementary services, and to expand certain of our existing facilities. While
it is not possible to estimate precisely the amounts that will actually be
expended in the foregoing areas, we anticipate that over the next twelve months,
we will spend approximately $100,000,000 to $150,000,000 on maintenance and
expansion of our existing facilities and approximately $250,000,000 to
$350,000,000 on development activities, and on continued development of 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, together with the proceeds from potential capital markets
transactions as market conditions indicate, for the reasonably foreseeable
future.
Inflation in recent years has not had a significant effect on our business,
and is not expected to adversely affect us in the future unless it increases
significantly.
EXPOSURES TO MARKET RISK
We are exposed to market risk related to changes in interest rates. The
impact on earnings and value of market risk-sensitive financial instruments
(principally marketable security investments and long-term debt, as well as the
interest rate swaps described below) is subject to change as a result of
movements in market rates and prices. We use sensitivity analysis models to
evaluate these impacts. We do not hold or issue derivative instruments for
trading purposes and are not a party to any instruments with leverage features.
Our investment in marketable securities was $1,873,000 at December 31,
2001, compared to $90,000 at December 31, 2000. The investment represents less
than 1% of total assets at December 31, 2001 and 2000. These securities are
generally short-term, highly-liquid instruments and, accordingly, their fair
value approximates cost. Earnings on investments in marketable securities are
not significant to our results of operations, and therefore any changes in
interest rates would have a minimal impact on future pre-tax earnings.
As described below, a significant portion of our long-term indebtedness is
subject to variable rates of interest, generally equal to LIBOR plus a
predetermined percentage. In October 2000, we entered into three short-term
interest rate swap arrangements intended to hedge our exposure to rising
interest rates in the capital markets. Two of these arrangements had a notional
amount of $240,000,000 and one has a notional amount of $175,000,000. These
matured six months and twelve months, respectively, from the date of the
original transaction. The notional amounts were used to measure interest to be
paid or received and did not represent an amount of exposure to credit loss. In
each of these arrangements, we paid the counterparty a fixed rate of interest on
the notional amount, and the counterparty paid us a variable rate of interest
equal to the 90-day LIBOR rate. The variable rates paid to us by the
counterparty on the six-month maturities and the twelve-month maturity were
reset once and three times, respectively, during the term of the swaps. Thus,
these interest rate swaps had the effect of fixing the interest rates on an
aggregate of $655,000,000 of our variable-rate debt through their maturity
dates. The arrangements matured at various dates in April 2001 and November
2001. In 2001, the weighted average interest rate we were obligated to pay under
the swaps was 6.70%, and the weighted average interest rate we received was
5.25%. At December 31, 2001, we had no interest rate swaps outstanding.
With respect to our interest-bearing liabilities, approximately
$540,000,000 in long-term debt at December 31, 2001 is subject to variable rates
of interest, while the remaining balance in long-term debt of $2,486,947,000 is
subject to fixed rates of interest. This compares to $1,655,000,000 in long-term
debt subject to variable rates of interest and $1,556,829,000 in long-term debt
subject to fixed rates of interest at December 31, 2000 (see Note 7 of "Notes to
Consolidated Financial Statements" for further
34
description). The fair value of our total long-term debt, based on discounted
cash flow analyses, approximates its carrying value at December 31, 2001 except
for the 3.25% Convertible Debentures, 6.875% Senior Notes, 7.0% Senior Notes, 10
3/4% Senior Notes, 8 1/2% Senior Notes, 8 3/8% Senior Notes and 7 3/8% Senior
Notes. The fair value of the 3.25% Convertible Debentures at December 31, 2001
was approximately $541,974,000. The fair value of the 6.875% Senior Notes due
2005 was approximately $250,191,000 at December 31, 2001. The fair value of the
7% Senior Notes due 2008 was approximately $243,713,000 at December 31, 2001.
The fair value of the 10 3/4% Senior Notes due 2008 was approximately
$386,365,000 at December 31, 2001. The fair value of the 8 1/2% Senior Notes due
2008 was approximately $392,231,000 at December 31, 2001. The fair value of the
8 3/8% Senior Notes due 2011 was approximately $414,940,000 at December 31,
2001. The fair value of the 7 3/8% Senior Notes due 2006 was approximately
$201,350,000 at December 31, 2001. Based on a hypothetical 1% increase in
interest rates, the potential losses in future pre-tax earnings would be
approximately $5,400,000. The impact of such a change on the carrying value of
long-term debt would not be significant. These amounts are determined
considering the impact of the hypothetical interest rates on our borrowing cost
and long-term debt balances. These analyses do not consider the effects, if any,
of the potential changes in the overall level of economic activity that could
exist in such an environment. Further, in the event of a change of significant
magnitude, management would expect to take actions intended to further mitigate
its exposure to such change.
Foreign operations, and the related market risks associated with foreign
currency, are currently insignificant to our results of operations and financial
position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, "Business Combinations", and FASB Statement No. 142,
"Goodwill and Other Intangibles". SFAS No. 141 eliminates the use of the pooling
method for business combinations and requires that all acquisitions be accounted
for under the purchase method. This statement is effective for acquisitions
completed after June 30, 2001. SFAS No. 142 requires the periodic testing of
goodwill for impairment rather than a monthly amortization of the balance. This
testing takes place in two steps: (1) the determination of the fair value of a
reporting unit, and (2) the determination of the implied fair value of the
goodwill. We adopted this statement on January 1, 2002. See "Critical Accounting
Policies", above.
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143
requires that the fair value of a liability for an asset retirement be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be determined. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. We have not determined the effect of the adoption
of this statement.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. We adopted this statement on
January 1, 2002. We are currently evaluating the effect of adopting this
statement.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. Without limiting the generality
of the preceding statement, all statements in this Annual Report on Form 10-K
concerning or relating to estimated and projected earnings, margins, costs,
expenditures, cash flows, growth rates and financial results are forward-looking
statements. In addition, through our senior management, we from time to time
make forward-looking public statements concerning our expected future operations
and performance and other developments. Such forward-looking statements are
necessarily estimates reflecting our best judgment based upon current
information, involve a number of risks and uncertainties and are made pursuant
to the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. There can be no assurance that other factors will not affect the
accuracy of such forward-looking statements or that our actual results will not
differ materially from the results anticipated in such forward-looking
statements. While it is impossible
35
to identify all such factors, factors which could cause actual results to differ
materially from those estimated by us include, but are not limited to, changes
in the regulation of the healthcare industry at either or both of the federal
and state levels, changes or delays in reimbursement for our services by
governmental or private payors, competitive pressures in the healthcare industry
and our response 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.
36
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 ..................................... 38
Consolidated Balance Sheets as of December 31, 2000 and 2001 ....... 39
Consolidated Statements of Income for the Years Ended
December 31, 1999, 2000 and 2001 .................................. 40
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 2000 and 2001 ...................... 41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001 .................................. 42
Notes to Consolidated Financial Statements ......................... 44
The financial statement schedule required under Regulation S-X is 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. This information includes the
effects of unusual items in the second and fourth quarters of 2001. See Item 7,
"Management's Discussion and Analysis of Financial Condition".
2000
------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 1,021,335 $ 1,036,322 $ 1,060,457 $ 1,077,001
Net income 65,326 65,213 71,037 76,889
Net income per common share 0.17 0.17 0.18 0.20
Net income per common share --
assuming dilution 0.17 0.17 0.18 0.19
2001
------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 1,090,462 $ 1,098,989 $ 1,075,874 $ 1,115,152
Net income (loss) 75,311 (19,947) 79,126 67,897
Net income (loss) per common share 0.19 (0.05) 0.20 0.17
Net income (loss) per common share --
assuming dilution 0.19 (0.05) 0.20 0.17
37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Corporation and Subsidiaries as of December 31, 2000 and 2001, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2001. 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, 2000 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. 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 12, 2002
38
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2000 2001
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 180,317 $ 276,583
Other marketable securities ............................................ 90 1,873
Accounts receivable, net of allowances for doubtful accounts of $230,430
in 2000 and $264,050 in 2001 ......................................... 946,965 940,414
Inventories ............................................................ 92,943 112,354
Prepaid expenses and other current assets .............................. 210,803 325,941
Income tax refund receivable............................................ -- 79,290
---------- ----------
Total current assets .................................................... 1,431,118 1,736,455
Other assets:
Loans to officers ...................................................... 6,242 2,252
Assets held for sale (Note 13) ......................................... 26,759 21,925
Other .................................................................. 197,897 318,766
---------- ----------
230,898 342,943
Property, plant and equipment, net (Note 5) ............................. 2,871,763 2,774,736
Intangible assets, net (Note 6) ......................................... 2,846,661 2,725,103
---------- ----------
Total assets ............................................................ $7,380,440 $7,579,237
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 78,762 $ 37,085
Salaries and wages payable ............................................. 87,730 65,364
Accrued interest payable and other liabilities ......................... 168,970 134,762
Deferred income taxes (Note 10) ........................................ 4,227 99,873
Current portion of long-term debt (Note 7) ............................. 43,225 21,912
---------- ----------
Total current liabilities ............................................... 382,914 358,996
Long-term debt (Note 7) ................................................. 3,168,604 3,005,035
Deferred income taxes (Note 10) ......................................... 160,365 259,535
Deferred revenue and other long-term liabilities ........................ 4,126 4,206
Minority interests in limited partnerships (Note 1) ..................... 137,977 154,541
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 8 and 12):
Preferred stock, $.10 par value -- 1,500,000 shares authorized; issued
and outstanding -- none .............................................. -- --
Common stock, $.01 par value -- 600,000,000 shares authorized; issued
-- 426,031,000 in 2000 and 430,422,000 in 2001 ....................... 4,260 4,304
Additional paid-in capital ............................................. 2,610,442 2,657,804
Accumulated other comprehensive income ................................. 7,074 16,607
Retained earnings ...................................................... 1,224,950 1,430,846
Treasury stock, at cost (38,742,000 shares) ............................ (280,524) (280,524)
Receivable from Employee Stock Ownership Plan .......................... (5,415) (2,699)
Notes receivable from stockholders, officers and management
employees ............................................................ (34,333) (29,414)
---------- ----------
Total stockholders' equity .............................................. 3,526,454 3,796,924
---------- ----------
Total liabilities and stockholders' equity .............................. $7,380,440 $7,579,237
========== ==========
See accompanying notes.
39
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Revenues .................................................. $4,072,107 $4,195,115 $4,380,477
Operating unit expenses ................................... 2,688,849 2,816,363 2,905,043
Corporate general and administrative expenses ............. 149,285 148,023 167,206
Provision for doubtful accounts ........................... 342,708 98,037 107,871
Depreciation and amortization ............................. 374,248 360,847 375,270
Loss on termination of credit facility (Note 1) ........... -- -- 6,475
Loss on sale of assets (Note 16) .......................... -- -- 174,127
Impairment and restructuring charges (Note 13) ............ 121,037 -- --
Interest expense .......................................... 176,652 221,595 218,100
Interest income ........................................... (10,587) (9,104) (7,349)
---------- ---------- ----------
3,842,192 3,635,761 3,946,743
---------- ---------- ----------
Income before income taxes and minority interests ......... 229,915 559,354 433,734
Provision for income taxes (Note 10) ...................... 66,929 181,808 139,467
---------- ---------- ----------
162,986 377,546 294,267
Minority interests ........................................ 86,469 99,081 91,880
---------- ---------- ----------
Net income ................................................ $ 76,517 $ 278,465 $ 202,387
========== ========== ==========
Weighted average common shares outstanding ................ 408,195 385,666 389,717
========== ========== ==========
Net income per common share ............................... $ 0.19 $ 0.72 $ 0.52
========== ========== ==========
Weighted average common shares outstanding -
assuming dilution ........................................ 414,570 391,016 399,227
========== ========== ==========
Net income per common share - assuming dilution ........... $ 0.18 $ 0.71 $ 0.51
========== ========== ==========
See accompanying notes.
40
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
COMMON STOCK
------------------ ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL
------ ------ ----------
(IN THOUSANDS)
Balance at December 31, 1998 ........................................ 423,178 $ 4,232 $ 2,577,647
Comprehensive income: ...............................................
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Comprehensive income ................................................
Proceeds from exercise of options ................................... 804 8 4,363
Restricted stock grants issued ...................................... -- -- 2,562
Reduction in receivable from ESOP ................................... -- -- --
Loans made to stockholders .......................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Repurchase limited partnership units ................................ -- -- --
Purchase of treasury stock .......................................... -- -- --
------- ------- -----------
Balance at December 31, 1999 ........................................ 423,982 4,240 2,584,572
Comprehensive income: ...............................................
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... -- -- --
Comprehensive income ................................................
Proceeds from exercise of options ................................... 2,049 20 14,768
Income tax benefits related to incentive stock options .............. -- -- 4,155
Restricted stock grants issued ...................................... -- -- 2,002
Reduction in receivable from ESOP ................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Repurchase limited partnership units ................................ -- -- --
Variable stock option appreciation .................................. -- -- 4,945
Purchase of treasury stock .......................................... -- -- --
------- ------- -----------
Balance at December 31, 2000 ........................................ 426,031 4,260 2,610,442
Comprehensive income: ...............................................
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Unrealized gain on available for sale securities (net $2,590 tax
expense) ........................................................... -- -- --
Comprehensive income ................................................
Proceeds from exercise of options ................................... 4,391 44 31,765
Income tax benefits related to incentive stock options .............. -- -- 12,806
Restricted stock grants issued ...................................... -- -- 1,997
Reduction in receivable from ESOP ................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Sale of limited partnership units ................................... -- -- --
Variable stock option appreciation .................................. -- -- 794
------- ------- -----------
Balance at December 31, 2001 ........................................ 430,422 $ 4,304 $ 2,657,804
======= ======= ===========
ACCUMULATED
OTHER TREASURY STOCK
COMPREHENSIVE RETAINED --------------------
INCOME (LOSS) EARNINGS SHARES AMOUNT
------------- -------- ------ ------
(IN THOUSANDS)
Balance at December 31, 1998 ........................................ $ (1,081) $ 879,309 2,042 $ (21,813)
Comprehensive income: ...............................................
Net income ......................................................... -- 76,517 -- --
Translation adjustment ............................................. (362) -- -- --
Comprehensive income ................................................
Proceeds from exercise of options ................................... -- -- -- --
Restricted stock grants issued ...................................... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Loans made to stockholders .......................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Repurchase limited partnership units ................................ -- (5,998) -- --
Purchase of treasury stock .......................................... -- -- 36,300 (256,691)
--------- ----------- ------ -----------
Balance at December 31, 1999 ........................................ (1,443) 949,828 38,342 (278,504)
Comprehensive income: ...............................................
Net income ......................................................... -- 278,465 -- --
Translation adjustment ............................................. (3,560) -- -- --
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... 12,077 -- -- --
Comprehensive income ................................................
Proceeds from exercise of options ................................... -- -- -- --
Income tax benefits related to incentive stock options .............. -- -- -- --
Restricted stock grants issued ...................................... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Repurchase limited partnership units ................................ -- (3,343) -- --
Variable stock option appreciation .................................. -- -- -- --
Purchase of treasury stock .......................................... -- -- 400 (2,020)
--------- ----------- ------ -----------
Balance at December 31, 2000 ........................................ 7,074 1,224,950 38,742 (280,524)
Comprehensive income: ...............................................
Net income ......................................................... -- 202,387 -- --
Translation adjustment ............................................. 5,566 -- -- --
Unrealized gain on available for sale securities (net $2,590 tax
expense) ........................................................... 3,967 -- -- --
Comprehensive income ................................................
Proceeds from exercise of options ................................... -- -- -- --
Income tax benefits related to incentive stock options .............. -- -- -- --
Restricted stock grants issued ...................................... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Sale of limited partnership units ................................... -- 3,509 -- --
Variable stock option appreciation .................................. -- -- -- --
--------- ----------- ------ -----------
Balance at December 31, 2001 ........................................ $ 16,607 $ 1,430,846 38,742 $ (280,524)
========= =========== ====== ===========
RECEIVABLE NOTES TOTAL
FROM ESOP RECEIVABLE STOCKHOLDERS' EQUITY
---------- ---------- --------------------
(IN THOUSANDS)
Balance at December 31, 1998 ........................................ $ (10,169) $ (5,121) $ 3,423,004
Comprehensive income: ...............................................
Net income ......................................................... -- -- 76,517
Translation adjustment ............................................. -- -- (362)
-----------
Comprehensive income ................................................ 76,155
Proceeds from exercise of options ................................... -- -- 4,371
Restricted stock grants issued ...................................... -- -- 2,562
Reduction in receivable from ESOP ................................... 2,271 -- 2,271
Loans made to stockholders .......................................... -- (39,334) (39,334)
Payments received on stockholders' notes receivable ................. -- 22 22
Repurchase limited partnership units ................................ -- -- (5,998)
Purchase of treasury stock .......................................... -- -- (256,691)
---------- ---------- -----------
Balance at December 31, 1999 ........................................ (7,898) (44,433) 3,206,362
Comprehensive income: ...............................................
Net income ......................................................... -- -- 278,465
Translation adjustment ............................................. -- -- (3,560)
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... -- -- 12,077
-----------
Comprehensive income ................................................ 286,982
Proceeds from exercise of options ................................... -- -- 14,788
Income tax benefits related to incentive stock options .............. -- -- 4,155
Restricted stock grants issued ...................................... -- -- 2,002
Reduction in receivable from ESOP ................................... 2,483 -- 2,483
Payments received on stockholders' notes receivable ................. -- 10,100 10,100
Repurchase limited partnership units ................................ -- -- (3,343)
Variable stock option appreciation .................................. -- -- 4,945
Purchase of treasury stock .......................................... -- -- (2,020)
---------- ---------- -----------
Balance at December 31, 2000 ........................................ (5,415) (34,333) 3,526,454
Comprehensive income: ...............................................
Net income ......................................................... -- -- 202,387
Translation adjustment ............................................. -- -- 5,566
Unrealized gain on available for sale securities (net $2,590 tax
expense) ........................................................... -- -- 3,967
-----------
Comprehensive income ................................................ 211,920
Proceeds from exercise of options ................................... -- -- 31,809
Income tax benefits related to incentive stock options .............. -- -- 12,806
Restricted stock grants issued ...................................... -- -- 1,997
Reduction in receivable from ESOP ................................... 2,716 -- 2,716
Payments received on stockholders' notes receivable ................. -- 4,919 4,919
Sale of limited partnership units ................................... -- -- 3,509
Variable stock option appreciation .................................. -- -- 794
---------- ---------- -----------
Balance at December 31, 2001 ........................................ $ (2,699) $ (29,414) $ 3,796,924
========== ========== ===========
See accompanying notes.
41
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income ..................................................... $ 76,517 $ 278,465 $ 202,387
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 374,248 360,847 375,270
Provision for doubtful accounts ............................. 342,708 98,037 107,871
Equity-based compensation ................................... 2,562 6,947 2,791
Impairment and restructuring charges ........................ 121,037 -- --
Loss on sale of assets ...................................... -- -- 174,127
Income applicable to minority interests of limited
partnerships ............................................... 86,469 99,081 91,880
Loss on termination of credit facility ...................... -- -- 6,475
(Benefit) provision for deferred income taxes ............... (5,850) 96,448 192,226
Changes in operating assets and liabilities, net of effects
of acquisitions: ...........................................
Accounts receivable ...................................... (332,977) (150,283) (126,861)
Inventories, prepaid expenses and other current
assets .................................................. 67,428 (7,877) (234,807)
Accounts payable and accrued expenses .................... (27,631) 15,099 (120,965)
---------- ---------- ----------
Net cash provided by operating activities ...................... 704,511 796,764 670,394
INVESTING ACTIVITIES
Purchases of property, plant and equipment ..................... (474,115) (583,639) (440,032)
Proceeds from sale of non-strategic assets ..................... 5,693 2,713 215,370
Additions to intangible assets, net of effects of acquisitions . (33,140) (83,291) (40,474)
Assets obtained through acquisitions, net of liabilities
assumed ....................................................... (104,304) (74,137) (5,032)
Payments on purchase accounting accruals ....................... (22,063) -- --
Purchase of limited partnership units .......................... (5,998) (21,116) (47,947)
Changes in other assets ........................................ 12,866 (22,342) (79,442)
Net change in other marketable securities ...................... 204 3,392 (1,783)
---------- ---------- ----------
Net cash used in investing activities .......................... (620,857) (778,420) (399,340)
42
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
FINANCING ACTIVITIES
Proceeds from borrowings .................................... $ 756,000 $ 1,585,000 $ 1,850,201
Principal payments on long-term debt ........................ (470,621) (1,495,993) (2,037,747)
Proceeds from exercise of options ........................... 4,371 14,788 31,809
Purchase of treasury stock .................................. (256,691) (2,020) --
Reduction in receivable from ESOP ........................... 2,271 2,483 2,716
(Increase) decrease in loans from stockholders .............. (39,312) 10,100 4,919
Proceeds from investment by minority interests .............. 11,582 12,901 33,685
Payment of cash distributions to limited partners ........... (100,319) (91,126) (62,942)
Foreign currency translation adjustment ..................... (362) (3,560) 2,571
---------- ------------ ------------
Net cash (used in) provided by financing activities ......... (93,081) 32,573 (174,788)
---------- ------------ ------------
(Decrease) increase in cash and cash equivalents ............ (9,427) 50,917 96,266
Cash and cash equivalents at beginning of year .............. 138,827 129,400 180,317
---------- ------------ ------------
Cash and cash equivalents at end of year .................... $ 129,400 $ 180,317 $ 276,583
========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ................................................... $ 159,496 $ 232,776 $ 214,632
Income taxes ............................................... 88,575 9,153 36,169
Non-cash investing activities:
The Company assumed liabilities of $9,529,000, $9,178,000 and $843,000
during the years ended December 31, 1999, 2000 and 2001, respectively, in
connection with its acquisitions.
See accompanying notes.
43
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by HEALTHSOUTH Corporation and
its subsidiaries ("the Company") are presented as an integral part of the
consolidated financial statements.
NATURE OF OPERATIONS
HEALTHSOUTH is engaged in the business of providing healthcare services
through three operating segments: Inpatient and other clinical services,
Outpatient services and Non-patient care services. Inpatient and other clinical
services consist primarily of services provided through inpatient rehabilitation
facilities, specialty medical centers and certain physician practices and other
clinical services. Outpatient services consist primarily of services provided
through outpatient rehabilitation facilities, outpatient surgery centers and
outpatient diagnostic centers. The Non-patient care services segment includes
the operations of the Company's corporate office, general and administrative
costs, non-clinical subsidiaries and other operations that are independent of
the Company's inpatient and outpatient services segments.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its
majority ownership or controlling interest in limited partnerships and limited
liability companies. All significant intercompany accounts and transactions have
been eliminated in consolidation.
HEALTHSOUTH operates a number of its facilities as general and limited
partnerships ("partnerships") or limited liability companies ("LLCs") in which
HEALTHSOUTH or a subsidiary serves as the general partner or managing member, as
applicable. HEALTHSOUTH's policy is to consolidate the financial position and
results of operations of these partnerships and LLCs in cases where HEALTHSOUTH
owns the majority interest or in which it otherwise has a controlling interest
(see also "Minority Interests" below in Note 1). Investments in partnerships,
LLCs and other entities that represent less than a majority interest, or
otherwise represent a non-controlling interest, are accounted for under the
equity method or cost method, as appropriate (see also "Minority Interests"
below in Note 1 and Note 4).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
consolidated financial statements and notes. Actual results could differ
materially from those estimates.
MARKETABLE SECURITIES
Marketable securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. The cost of the specific security
sold method is used to compute gain or loss on the sale of securities. Interest
and dividends on securities classified as available-for-sale are included in
interest income. Marketable securities and debt securities held by the Company
have maturities of less than one year.
ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENT ACTIVITIES
Receivables from patients, insurance companies and third-party contractual
insured accounts (primarily Medicare and Medicaid) are based on payment
agreements which generally result in the Company's collecting an amount
different from the established rates. Net third-party settlement
44
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
receivables included in accounts receivable were $69,480,000 and $135,954,000 at
December 31, 2000 and 2001, respectively. Final determination of the settlements
is subject to review by appropriate authorities. Such review may result in
changes in recorded estimates, possibly by material amounts, in the future. The
differences between original estimates made by the Company and subsequent
revisions (including final settlement) were not material to the Company's
operating results. Allowances believed by management to be adequate are provided
for doubtful accounts and contractual adjustments. Uncollectible accounts are
written off against the allowance for doubtful accounts after adequate
collection efforts are made. Net accounts receivable includes only those amounts
estimated by management to be collectible.
The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:
DECEMBER 31,
---------------
2000 2001
---- ----
Medicare ................. 27% 32%
Medicaid ................. 5 5
Other .................... 68 63
-- --
100% 100%
=== ===
INVENTORIES
Inventories are stated at the lower of cost or market using the specific
identification method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Upon sale or retirement
of property, plant or equipment, the cost and related accumulated depreciation
are eliminated from the respective account and the resulting gain or loss is
included in the results of operations.
Interest cost incurred during the construction of a facility is
capitalized. The Company incurred interest costs of $178,836,000, $223,321,000
and $218,102,000, of which $2,184,000, $1,726,000 and $2,000 was capitalized
during 1999, 2000 and 2001, respectively.
Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 3-15 years.
INTANGIBLE ASSETS
Costs in excess of the net asset value of purchased facilities are
amortized over 20 to 40 years using the straight-line method, with the majority
of such costs being amortized over 40 years. Debt issue costs are amortized over
the term of the debt. Noncompete agreements are amortized using the
straight-line method over the term of the agreements.
START-UP COSTS
As required by SOP 98-5, Reporting on the Costs of Start-Up Activities, the
costs of start-up activities are expensed as incurred.
MINORITY INTERESTS
The equity of minority investors in partnerships and LLCs of the Company is
reported on the consolidated balance sheets as minority interests. Minority
interests reported in the consolidated income statements reflect the respective
interests in the income or loss of the limited partnerships or limited liability
companies attributable to the minority investors (ranging from 1% to 50% at
December 31, 2001), the effect of which is removed from the results of
operations of the Company.
45
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
REVENUES
Revenues include net patient service revenues and other operating revenues.
Other operating revenues include cafeteria revenue, gift shop revenue, rental
income, trainer/contract revenue, management and administrative fee revenue
(related to non-consolidated subsidiaries and affiliates) and transcriptionist
fees and are insignificant to total revenues. Net patient service revenues are
reported at the estimated net realizable amounts from patients, third-party
payors and others for services rendered, including estimated retroactive
adjustments under reimbursement agreements with third-party payors.
INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Net income available to common stockholders ............... $ 76,517 $ 278,465 $ 202,387
========= ========== ==========
Denominator:
Denominator for basic earnings per share --
weighted-average shares ................................. 408,195 385,666 389,717
Effect of dilutive securities:
Net effect of dilutive stock options .................... 5,525 4,600 8,852
Restricted shares issued ................................ 850 750 658
--------- ---------- ----------
Dilutive potential common shares .......................... 6,375 5,350 9,510
--------- ---------- ----------
Denominator of diluted earnings per share -- adjusted
weighted-average shares and assumed conversions ......... 414,570 391,016 399,227
========= ========== ==========
Basic earnings per share ................................... $ 0.19 $ 0.72 $ 0.52
========= ========== ==========
Diluted earnings per share ................................. $ 0.18 $ 0.71 $ 0.51
========= ========== ==========
IMPAIRMENT OF ASSETS
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. In such cases, the
impaired assets are written down to fair value. Fair value is determined based
on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include quoted
market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If the group of assets being tested was
acquired by the Company as part of a purchase business combination, any goodwill
that arose as part of the transaction is included as part of the asset grouping.
With respect to the carrying value of goodwill and other intangible assets,
the Company determines on a quarterly basis whether an impairment event has
occurred by considering factors such as the market value of the asset, a
significant adverse change in legal factors or in the business climate, adverse
action by regulators, a history of operating losses or cash flow losses, or a
projection of continuing losses associated with an operating entity. The
carrying value of goodwill and other intangible assets will be evaluated if the
facts and circumstances suggest that it has been impaired. If this evaluation
indicates that
46
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
the value of the asset will not be recoverable as determined based on the
undiscounted cash flows of the entity over the remaining amortization period, an
impairment loss is calculated based on the excess of the carrying amount of the
asset over the asset's fair value (see Note 13).
SELF-INSURANCE
The Company is self-insured for professional liability and comprehensive
general liability. Liabilities for asserted and unasserted claims are accrued
based upon specific claims and incidents and the claims history of the Company.
The reserves for estimated liabilities for asserted and unasserted claims, which
are not material in relation to the Company's consolidated financial position at
December 31, 2000 and 2001, are included with accrued interest payable and other
liabilities in the accompanying consolidated balance sheets.
In the fourth quarter of 2000, the Company formed an offshore captive
insurance subsidiary to which it transitioned the administration of its
self-insurance programs. The captive is an independent insurance company
primarily designed to insure the Company's first layer of coverage. The Company
purchases commercial insurance for excess layers. Currently, the captive
provides primary coverage for the Company's professional and general liability
risk, workers' compensation risk and the construction risk associated with the
building of the Company's replacement medical center facility in Birmingham,
Alabama. The Company expects to evaluate other lines of insurance suitable for
placement with the captive on an ongoing basis.
RECLASSIFICATIONS
Certain amounts in 1999 and 2000 financial statements have been
reclassified to conform to the 2001 presentation. Such reclassifications had no
effect on previously reported consolidated financial position and consolidated
net income.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign
subsidiaries stated in local functional currencies to U.S. dollars at the rates
of exchange in effect at the end of the period. Revenues and expenses are
translated using rates of exchange in effect during the period. Gains and losses
from currency translation are included in stockholders' equity. Currency
transaction gains or losses are recognized in current operations as operating
unit expenses and have not been significant to the Company's operating results
in any period.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, Business Combinations ("SFAS No. 141"), and FASB Statement
No. 142, Goodwill and Other Intangibles ("SFAS No. 142"). SFAS No. 141
eliminates the use of the pooling method for business combinations and requires
that all acquisitions be accounted for under the purchase method. This statement
is effective for acquisitions completed after June 30, 2001. SFAS No. 142
requires the periodic testing of goodwill for impairment rather than a monthly
amortization of the balance. This testing takes place in two steps: (1) the
determination of the fair value of a reporting unit, and (2) the determination
of the implied fair value of the goodwill. The Company will adopt this statement
on January 1, 2002 and is currently evaluating the financial impact of adopting
the new policy.
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143").
SFAS No. 143 requires that the fair value of a liability for an asset retirement
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be determined. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The effect of the adoption of this statement has
not been determined by the Company.
47
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS No. 144"). SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company will
adopt this statement on January 1, 2002.
2. MERGERS
The Company had no mergers for the three years ended December 31, 2001.
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
For purposes of the consolidated balance sheets and statements of cash
flows, marketable securities with a maturity of ninety days or less when
purchased are considered cash equivalents.
4. OTHER ASSETS
The Company has various investments, with ownership percentages ranging
from 24% to 49%, which are accounted for using the equity method of accounting.
The Company's equity in earnings of these investments was not material to the
Company's consolidated results of operations for the years ended 1999, 2000 and
2001. At December 31, 2001, the investment balance on the Company's books was
not materially different than the underlying equity in net assets of the
unconsolidated entities.
Other investments consist of investments in companies involved in
operations similar or complementary to those of the Company. For those
investments with a quoted market price, the Company's investment balance is
based on the quoted market price. For all other investments in this category, it
was not practicable to estimate the fair value because of the lack of a quoted
market price and the inability to estimate the fair value without incurring
excessive costs. The carrying amount at December 31, 2001 represents the
original cost of the investments, which management believes is not impaired.
48
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
------------------------------
2000 2001
---- ----
(IN THOUSANDS)
Land ...................................... $ 138,277 $ 114,880
Buildings ................................. 1,312,375 1,251,027
Leasehold improvements .................... 479,404 485,745
Furniture, fixtures and equipment ......... 1,821,403 1,923,439
Construction-in-progress .................. 83,406 70,175
---------- ------------
3,834,865 3,845,266
Less accumulated depreciation and
amortization ............................. 963,102 1,070,530
---------- ------------
$2,871,763 $ 2,774,736
========== ============
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31,
------------------------------
2000 2001
---- ----
(IN THOUSANDS)
Debt issue costs ...................... $ 66,179 $ 77,813
Noncompete agreements ................. 124,932 106,271
Cost in excess of net asset value of
purchased facilities ................. 3,038,560 3,010,838
Other ................................. 8,616 6,960
----------- -----------
3,238,287 3,201,882
Less accumulated amortization ......... 391,626 476,779
----------- -----------
$ 2,846,661 $ 2,725,103
=========== ===========
49
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
------------------------
2000 2001
---- ----
(IN THOUSANDS)
Notes and bonds payable:
Advances under $1,750,000,000
revolving credit facility ............. $1,655,000 $ 540,000
3.25% Convertible Subordinated
Debentures due 2003 ................... 567,750 567,750
6.875% Senior Notes due 2005 ............ 250,000 250,000
7.0% Senior Notes due 2008 .............. 250,000 250,000
10 3/4% Senior Subordinated Notes due
2008 .................................. 350,000 350,000
8 1/2% Senior Notes due 2008 ............ -- 375,000
8 3/8% Senior Notes due 2011 ............ -- 400,000
7 3/8% Senior Notes due 2006 ............ -- 200,000
Notes payable to banks and various
other notes payable, at interest rates
from 5.5% to 14.9% .................... 104,031 64,683
Hospital revenue bonds payable .......... 11,674 9,668
Noncompete agreements payable with
payments due at intervals ranging
through December 2005 ................. 23,374 19,846
---------- ----------
3,211,829 3,026,947
Less amounts due within one year ......... 43,225 21,912
---------- ----------
$3,168,604 $3,005,035
========== ==========
The fair value of the total long-term debt approximates book value at
December 31, 2001 except for the 3.25% Convertible Subordinated Debentures due
2003, the 6.875% Senior Notes due 2005, the 7.0% Senior Notes due 2008, the 10
3/4% Senior Subordinated Notes due 2008, the 8 1/2% Senior Notes due 2008, the 8
3/8% Senior Notes due 2011 and the 7 3/8% Senior Notes due 2006. The fair value
of the 3.25% Convertible Subordinated Debentures due 2003 was approximately
$541,974,000 at December 31, 2001. The fair value of the 6.875% Senior Notes due
2005 was approximately $250,191,000 at December 31, 2001. The fair value of the
7.0% Senior Notes due 2008 was approximately $243,713,000 at December 31, 2001.
The fair value of the 10 3/4% Senior Subordinated Notes due 2008 was
approximately $386,365,000 at December 31, 2001. The fair value of the 8 1/2%
Senior Notes due 2008 was approximately $392,231,000 at December 31, 2001. The
fair value of the 8 3/8% Senior Notes due 2011 was approximately $414,940,000 at
December 31, 2001. The fair value of the 7 3/8% Senior Notes due 2006 was
approximately $201,350,000 at December 31, 2001. The fair values of the
Company's long-term debt are estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
The Company has a $1,750,000,000 revolving credit facility with Bank of
America, N.A. ("Bank of America") and other participating banks (the "1998
Credit Agreement"). The 1998 Credit Agreement replaced a previous $1,250,000,000
revolving credit agreement, also with Bank of America. Interest on the 1998
Credit Agreement is paid based on LIBOR plus a predetermined margin, a base
rate, or competitively bid rates from the participating banks. The Company is
required to pay a fee on the unused portion of the revolving credit facility
ranging from 0.09% to 0.25%, depending on certain defined credit
50
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
ratings. The principal amount is payable in full on June 22, 2003. The Company
has provided a negative pledge on all assets under the 1998 Credit Agreement. At
December 31, 2001, the effective interest rate associated with the 1998 Credit
Agreement was approximately 2.49%.
The Company also had a Short Term Credit Agreement with Bank of America and
other participating banks (as amended, the "Short Term Credit Agreement"),
providing for a $250,000,000 short term revolving credit facility. The terms of
the Short Term Credit Agreement were substantially consistent with those of the
1998 Credit Agreement. Interest on the Short Term Credit Agreement was paid
based on LIBOR plus a predetermined margin or a base rate. The Company was
required to pay a fee on the unused portion of the credit facility ranging from
0.30% to 0.50%, depending on certain defined credit ratings. On October 31,
2000, the Company terminated the Short Term Credit Agreement and replaced it
with a new $400,000,000 Credit Agreement (the "2000 Credit Agreement") with UBS
AG and other participating banks. The 2000 Credit Agreement has been terminated
by the Company. During the second quarter of 2001, the Company recorded a loss
of $6,475,000 related to the write-off of unamortized loan fees associated with
the early termination of the 2000 Credit Agreement.
On March 20, 1998, the Company issued $500,000,000 in 3.25% Convertible
Subordinated Debentures due 2003 (the "3.25% Convertible Debentures") in a
private placement. An additional $67,750,000 principal amount of the 3.25%
Convertible Debentures was issued on March 31, 1998 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1. The 3.25%
Convertible Debentures are convertible into common stock of the Company at the
option of the holder at a conversion price of $36.625 per share. The conversion
price is subject to adjustment upon the occurrence of (a) a subdivision,
combination or reclassification of outstanding shares of common stock, (b) the
payment of a stock dividend or stock distribution on any shares of the Company's
capital stock, (c) the issuance of rights or warrants to all holders of common
stock entitling them to purchase shares of common stock at less than the current
market price, or (d) the payment of certain other distributions with respect to
the Company's common stock. In addition, the Company may, from time to time,
lower the conversion price for periods of not less than 20 days, in its
discretion. The net proceeds from the issuance of the 3.25% Convertible
Debentures were used by the Company to pay down indebtedness outstanding under
its then-existing credit facilities. The 3.25% Convertible Debentures mature on
April 1, 2003.
On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior Notes
due 2005 and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the
"Senior Notes"). Interest is payable on June 15 and December 15. The Senior
Notes are unsecured, unsubordinated obligations of the Company. The net proceeds
from the issuance of the Senior Notes were used by the Company to pay down
indebtedness outstanding under its then-existing credit facilities. The Senior
Notes mature on June 15, 2005 and June 15, 2008, respectively.
On September 25, 2000, the Company issued $350,000,000 in 10 3/4% Senior
Subordinated Notes due 2008 (the "10 3/4% Notes"). Interest is payable on April
1 and October 1. The 10 3/4% Notes are senior subordinated obligations of the
Company and, as such, are subordinated to all existing and future senior
indebtedness of the Company, and also are effectively subordinated to all
existing and future liabilities of the Company's subsidiaries and partnerships.
The net proceeds from the issuance of the 10 3/4% Notes were used by the Company
to redeem the 9.5% Notes and to pay down indebtedness outstanding under its
then-existing credit facilities. The 10 3/4% Notes mature on October 1, 2008.
On February 1, 2001, the Company issued $375,000,000 in 8 1/2% Senior Notes
due 2008 (the "8 1/2% Notes"). Interest is payable on February 1 and August 1.
The 8 1/2% Notes are unsecured, unsubordinated obligations of the Company. The
net proceeds from the issuance of the 8 1/2% Notes were used by the Company to
pay down indebtedness outstanding under its then-existing credit facilities. The
8 1/2% Notes mature on February 1, 2008.
51
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
On September 28, 2001, the Company issued $400,000,000 in 8 3/8% Senior
Notes due 2011 (the "8 3/8% Notes"). Interest is payable on April 1 and October
1. The 8 3/8% Notes are unsecured, unsubordinated obligations of the Company.
The net proceeds from the issuance of the 8 3/8% Notes were used by the Company
to pay down indebtedness outstanding under its then-existing credit facilities.
The 8 3/8% Notes mature on October 1, 2011.
On September 28, 2001, the Company issued $200,000,000 in 7 3/8% Senior
Notes due 2006 (the "7 3/8% Notes"). Interest is payable on April 1 and October
1. The 7 3/8% Notes are unsecured, unsubordinated obligations of the Company.
The net proceeds from the issuance of the 7 3/8% Notes were used by the Company
to pay down indebtedness outstanding under its then-existing credit facilities.
The 7 3/8% Notes mature on October 1, 2006.
Principal maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------ --------------
2002 ....................... $ 21,912
2003 ....................... 1,121,123
2004 ....................... 12,235
2005 ....................... 258,271
2006 ....................... 6,224
After 2007 ................. 1,607,182
----------
$3,026,947
==========
8. STOCK OPTIONS
The Company has various stockholder-approved stock option plans which
provide for the grant of options to directors, officers and other key employees
to purchase common stock at 100% of the fair market value as of the date of
grant. The Compensation Committee of the Board of Directors administers the
stock option plans. Options may be granted as incentive stock options or as
non-qualified stock options. Incentive stock options vest 25% annually,
commencing upon completion of one year of employment subsequent to the date of
grant. Certain of the non-qualified stock options are not subject to any vesting
provisions, while others vest on the same schedule as the incentive stock
options. The options expire ten years from the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123 is effective for fiscal years
beginning after December 15, 1995 and allows for the option of continuing to
account for stock-based compensation under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations, or selecting the fair value method of expense recognition as
described in SFAS No. 123. The Company has elected to follow APB No. 25 in
accounting for its employee stock options. The Company follows SFAS No. 123 in
accounting for its non-employee stock options. The total compensation expense
associated with non-employee stock options granted in 1999, 2000 and 2001 was
not material.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 2000 and 2001, respectively: risk-free interest rates of
6.21%, 5.11% and 5.10%; dividend yield of 0%; volatility factors of the expected
market price of the Company's common stock of .77, .71 and .49; and a
weighted-average expected life of the options of 5.0 years, 5.2 years and 5.5
years.
52
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS - (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro forma net income ......... $ 47,149 $ 266,684 $ 178,255
Pro forma earnings per share:
Basic ...................... 0.12 0.69 0.46
Diluted .................... 0.12 0.69 0.45
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
1999 2000 2001
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------- -------- ------- -------- ------- --------
Options outstanding January 1 .............. 34,437 $ 12 36,028 $ 11 35,982 $ 10
Granted ................................... 6,589 11 3,615 5 4,969 14
Exercised ................................. (772) 5 (1,957) 8 (4,433) 7
Canceled .................................. (4,226) 20 (1,704) 15 (935) 18
------ ---- ------ ---- ------ ----
Options outstanding at December 31 ......... 36,028 $ 11 35,982 $ 10 35,583 $ 11
Options exercisable at December 31 ......... 31,689 $ 11 31,429 $ 10 30,721 $ 11
Weighted average fair value of options
granted during the year ................... $ 7.14 $ 3.07 $ 9.06
The following table summarizes information about stock options outstanding
at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
2001 LIFE PRICE 2001 PRICE
-------------- --------- -------- -------------- ---------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
Under $10.00 ............. 19,256 3.73 $ 6.14 17,344 $ 6.16
$10.00 -- $23.63 ......... 16,147 6.54 15.96 13,203 16.60
$23.63 and above ......... 180 6.04 27.12 174 27.10
53
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACQUISITIONS
The Company evaluates each of its acquisitions independently to determine
the appropriate amortization period for the cost in excess of net asset value of
purchased facilities. Each evaluation includes an analysis of historic and
projected financial performance, evaluation of the estimated useful lives of
buildings and fixed assets acquired, the indefinite lives of certificates of
need and licenses acquired, the competition within local markets, lease terms
where applicable, and the legal term of partnerships where applicable.
1999 ACQUISITIONS
Effective June 29, 1999, the Company acquired from Mariner Post-Acute
Network, Inc. ("Mariner") substantially all of the assets of Mariner's American
Rehability Services division in a transaction accounted for as a purchase. At
the time of the acquisition, Mariner operated approximately 160 outpatient
rehabilitation centers in 18 states. The purchase price was approximately
$54,521,000 in cash.
At various dates and in separate transactions throughout 1999, the Company
acquired ten outpatient rehabilitation facilities, eight outpatient surgery
centers, two inpatient rehabilitation hospitals and four diagnostic imaging
centers. The acquired operations are located throughout the United States. The
total purchase price of the acquired operations was approximately $49,844,000.
The form of consideration constituting the total purchase price was
approximately $49,684,000 in cash and $160,000 in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $2,996,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1999 acquisitions
described above was approximately $23,245,000. The total cost of the 1999
acquisitions exceeded the fair value of the net assets acquired by approximately
$81,120,000. Based on the evaluation of each acquisition utilizing the criteria
described above, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1999 acquisitions should be
amortized over periods ranging from 20 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above.
2000 ACQUISITIONS
At various dates and in separate transactions throughout 2000, the Company
acquired thirteen outpatient rehabilitation facilities, three outpatient surgery
centers, three inpatient rehabilitation hospitals and thirteen diagnostic
imaging centers. The acquired operations are located throughout the United
States. The total purchase price of the acquired operations was approximately
$75,365,000. The form of consideration constituting the total purchase price was
approximately $74,137,000 in cash and $1,228,000 in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $5,520,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 2000 acquisitions
described above was approximately $8,174,000. The total cost of the 2000
acquisitions exceeded the fair value of the net assets acquired by approximately
$67,191,000. Based on the evaluation of each acquisition utilizing the criteria
described above, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 2000 acquisitions should be
amortized over periods ranging from 20 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above.
54
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
2001 ACQUISITIONS
At various dates and in separate transactions throughout 2001, the Company
acquired two outpatient rehabilitation facilities, one outpatient surgery center
and one diagnostic imaging center. The acquired operations are located in
California, Maine and Texas. The total purchase price of the acquired operations
was approximately $5,032,000, which was paid in cash.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $750,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 2001 acquisitions
described above was approximately $97,000. The total cost of the 2001
acquisitions exceeded the fair value of the net assets acquired by approximately
$4,935,000. Based on the evaluation of each acquisition utilizing the criteria
described above, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 2001 acquisitions should be
amortized over 20 years on a straight-line basis. No other identifiable
intangible assets were recorded in the acquisitions described above. At December
31, 2001, the purchase price allocation associated with the 2001 acquisitions is
preliminary in nature. During 2002 the Company will make adjustments, if
necessary, to the purchase price allocation based on revisions to the fair value
of the assets acquired.
All of the acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
10. INCOME TAXES
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The partnerships and LLCs file separate income tax returns.
HEALTHSOUTH's allocable portion of each partnership's income or loss is included
in the taxable income of the Company. The remaining income or loss of each
partnership and LLC is allocated to the other partners.
The Company utilizes the liability method of accounting for income taxes,
as required by Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes. Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2000 are as follows:
CURRENT NONCURRENT TOTAL
------- ---------- -----
(IN THOUSANDS)
Deferred tax assets:
Net operating loss ....................................... $ -- $ 5,864 $ 5,864
Accruals ................................................. 9,063 -- 9,063
Impairment and restructuring charges ..................... -- 41,932 41,932
Other .................................................... -- 5,045 5,045
--------- ----------- -----------
Total deferred tax assets ................................. 9,063 52,841 61,904
Deferred tax liabilities:
Depreciation and amortization ............................ -- (123,901) (123,901)
Bad debts ................................................ (13,290) -- (13,290)
Capitalized costs ........................................ -- (81,779) (81,779)
Unrealized gain on available for sale securities ......... -- (7,526) (7,526)
--------- ----------- -----------
Total deferred tax liabilities ............................ (13,290) (213,206) (226,496)
--------- ----------- -----------
Net deferred tax liabilities .............................. $ (4,227) $ (160,365) $ (164,592)
========= =========== ===========
55
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES - (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 2001 are as follows:
CURRENT NONCURRENT TOTAL
------- ---------- -----
(IN THOUSANDS)
Deferred tax assets:
Net operating loss ....................................... $ -- $ 4,676 $ 4,676
Impairment and restructuring charges ..................... -- 41,731 41,731
Other .................................................... 317 -- 317
---------- ----------- -----------
Total deferred tax assets ................................. 317 46,407 46,724
Deferred tax liabilities:
Depreciation and amortization ............................ -- (194,881) (194,881)
Bad debts ................................................ (99,168) -- (99,168)
Capitalized costs ........................................ -- (100,945) (100,945)
Accruals ................................................. (1,022) -- (1,022)
Unrealized gain on available for sale securities ......... -- (10,116) (10,116)
---------- ----------- -----------
Total deferred tax liabilities ............................ (100,190) (305,942) (406,132)
---------- ----------- -----------
Net deferred tax liabilities .............................. $ (99,873) $ (259,535) $ (359,408)
========== =========== ===========
At December 31, 2001, the Company has net operating loss carryforwards of
approximately $12,889,000 for income tax purposes expiring through the year
2020. Those carryforwards resulted from the Company's acquisitions of Rebound,
Inc., Horizon/CMS Healthcare Corporation, ASC Network Corporation, The Company
Doctor and National Imaging Affiliates.
The provision for income taxes was as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
Current:
Federal .................................................. $ 61,156 $ 74,243 $ (46,534)
State .................................................... 11,623 11,117 (6,225)
-------- ----------- ----------
72,779 85,360 (52,759)
Deferred:
Federal .................................................. (4,916) 83,886 169,557
State ................................................... (934) 12,562 22,669
-------- ----------- ----------
(5,850) 96,448 192,226
-------- ----------- ----------
$ 66,929 $ 181,808 $ 139,467
======== =========== ==========
The difference between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
Federal taxes at statutory rates ........................ $ 80,470 $ 195,774 $ 151,807
Add (deduct):
State income taxes, net of federal tax benefit ......... 6,948 15,391 10,689
Minority interests ..................................... (30,264) (34,678) (32,158)
Nondeductible goodwill ................................. 9,304 2,452 6,869
Disposal/impairment charges ............................ 6,128 -- --
Other .................................................. (5,657) 2,869 2,260
--------- ----------- ----------
$ 66,929 $ 181,808 $ 139,467
========= =========== ==========
56
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. In
the opinion of management, any ultimate liability with respect to these actions
will not materially affect the consolidated financial position or results of
operations of the Company.
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that at December 31, 2001 the Company has adequate reserves to cover
losses on asserted and unasserted claims. In the fourth quarter of 2000, the
Company formed an offshore captive insurance subsidiary to which it transitioned
the administration of its self-insurance programs (see Note 1).
In connection with the Horizon/CMS acquisition in 1997, the Company assumed
Horizon/CMS's open professional and general liability claims. The Company has
entered into an agreement with an insurance carrier to assume responsibility for
the majority of open claims. Under this agreement, a "risk transfer" was
conducted which converted Horizon/CMS's self-insured claims to insured
liabilities consistent with the terms of the underlying insurance policy.
Horizon/CMS is currently a party, or is subject, to certain litigation
matters and disputes. The Company itself is, in general, not a party to such
litigation. These matters include actions or investigations initiated by various
federal and state regulatory agencies and other parties. Both Horizon/CMS and
the Company are working to resolve these matters and cooperating fully with the
various regulatory agencies involved. As of December 31, 2001, it was not
possible for the Company to predict the ultimate outcome or effect of these
matters. In management's opinion, the ultimate resolution of these matters will
not have a material effect on the Company's consolidated financial position or
results of operations.
The Company was served with certain lawsuits filed beginning September 30,
1998, purporting to be class actions under the federal and Alabama securities
laws. These lawsuits were filed following a decline in the Company's stock price
at the end of the third quarter of 1998. Seven such suits were filed in the
United States District Court for the Northern District of Alabama. In January
1999, those suits were ordered consolidated under the case style In re
HEALTHSOUTH Corporation Securities Litigation, Master File No. CV98-O-2634-S. On
April 12, 1999, the plaintiffs filed a consolidated amended complaint against
the Company and certain of its officers and directors alleging that, during the
period April 24, 1997 through September 30, 1998, the defendants misrepresented
or failed to disclose certain material facts concerning the Company's business
and financial condition and the impact of the Balanced Budget Act of 1997 on the
Company's operations in order to artificially inflate the price of the Company's
common stock and issued or sold shares of such stock during the purported class
period, all allegedly in violation of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. Certain of the named plaintiffs in the
consolidated amended complaint also purport to represent separate subclasses
consisting of former stockholders of Horizon/CMS Healthcare Corporation and
National Surgery Centers, Inc. who received shares of the Company's Common Stock
in connection with such acquisitions and who assert additional claims under
Section 11 of the Securities Act of 1933 with respect to the registration of
securities issued in those acquisitions.
Additionally, another suit has been filed in the Circuit Court of Jefferson
County, Alabama, purportedly as a derivative action on behalf of the Company.
This suit largely replicates the allegations of the federal actions described in
the preceding paragraph and alleges that the current directors of the Company,
certain former directors and certain officers of the Company breached their
fiduciary duties to the Company and engaged in other allegedly tortious conduct.
The plaintiff in that case has forborne pursuing its claim thus far pending
further progress in the federal actions, and the Company has not yet been
required to file a responsive pleading in the case. Another non-derivative state
court action was voluntarily dismissed by the plaintiff, without prejudice.
57
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The Company filed its motion to dismiss the consolidated amended complaint
in the federal action in late June 1999. The court denied that motion to dismiss
in December 2000. The Company believes that all claims asserted in the above
suits are without merit, and expects to vigorously defend against such claims.
Because such suits remain at an early stage, the Company cannot predict the
outcome of any such suits or the magnitude of any potential loss if the
Company's defense is unsuccessful.
In late December 2001, the Department of Justice (DOJ) filed a Notice of
Election to Intervene in Part in a case styled United States ex rel. DeWayne
Manning v. HEALTHSOUTH Corporation. The Department's Notice indicated that it
was partially intervening in a complaint under the federal False Claims Act
filed by a former employee of the Company which alleged that certain physical
therapy practices, primarily involving the use of physical therapy aids and
other assistive personnel, violated Medicare regulations related to the
provision of physical therapy to Medicare beneficiaries in freestanding
outpatient centers. On January 15, 2002, the Court entered an Order granting the
Department 120 days from that date to file and serve its complaint. The Company
has not been served with any of the underlying complaints to date. Based upon
the information available, management believes that the DOJ's theory with
respect to the issues regarding the use of physical therapy aides and other
assistive personnel is without support in applicable law or regulation and is
inconsistent with traditionally accepted practices in the physical therapy
industry. Accordingly, the Company expects to vigorously defend against the
claims asserted at such time as it is served with the complaints.
At December 31, 2001, committed capital expenditures for the next twelve
months are $57,063,000.
Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the time
of renewal. Total rental expense for all operating leases was $233,895,000,
$248,782,000 and $252,684,000 for the years ended December 31, 1999, 2000 and
2001, respectively.
The Company has entered into two tax retention operating lease agreements
for its Corporate headquarters and nine rehabilitation hospitals. These
agreements terminate on June 22, 2003 and at termination, unless the Company
renegotiates to extend the leases, it must purchase the facilities or obtain a
purchaser for them. The Company provides a residual value guaranty of
approximately $163,690,000 related to these lease agreements.
In December 2001, the Company entered into a seven-and-one-half year lease
to fund the construction and equipping of a new state-of-the-art digital
hospital. The lease will be classified as an operating lease for financial
reporting purposes. The digital hospital will be constructed in Birmingham,
Alabama, on land that is owned by the Company and is ground leased to the lessor
for the term of the lease. The terms of the lease provide for thirty months in
which to construct the project. The lessor will then lease the completed project
to the Company for a minimum of five years. At the end of the lease term, the
Company has the option to purchase the facility or obtain a purchaser for the
facility. The Company provides a residual value guaranty of 85% of the value of
the improvements. In connection with the lease, the lessor will incur debt up to
$200,000,000, which is not reflected in the accompanying financial statements of
the Company.
58
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------ --------------
2002 ..................................... $ 223,638
2003 ..................................... 191,737
2004 ..................................... 163,482
2005 ..................................... 131,332
2006 ..................................... 106,301
After 2007 ............................... 552,951
-----------
Total minimum payments required .......... $ 1,369,441
===========
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which matches 15% of the first 4% of
earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $4,608,000,
$4,712,000 and $4,050,000 in 1999, 2000 and 2001, respectively.
In 1991, the Company established an Employee Stock Ownership Plan ("ESOP")
for the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 3,320,000 shares of the
Company's common stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the
"1992 ESOP Loan"). At December 31, 2001, the combined ESOP Loans had a balance
of $2,699,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of
8.5%, is payable in annual installments covering interest and principal over a
ten-year period beginning in 1993. Company contributions to the ESOP began in
1992 and shall at least equal the amount required to make all ESOP loan
amortization payments for each plan year. The Company recognizes compensation
expense based on the shares allocated method. Compensation expense related to
the ESOP recognized by the Company was $3,197,000, $3,176,000 and $1,519,000 in
1999, 2000 and 2001, respectively. Interest incurred on the ESOP Loans was
approximately $715,000, $483,000 and $229,000 in 1999, 2000 and 2001,
respectively. Approximately 2,770,000 shares owned by the ESOP have been
allocated to participants at December 31, 2001.
During 1993, the American Institute of Certified Public Accountants issued
Statement of Position 93-6, Employers Accounting for Employee Stock Ownership
Plans ("SOP 93-6"). Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired by an existing leveraged ESOP after December 31, 1992. Because
all shares owned by the Company's ESOP were acquired prior to December 31, 1992,
the Company's accounting policies for the shares currently owned by the ESOP are
not affected by SOP 93-6.
59
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES
During the third quarter of 1998, the Company recorded impairment and
restructuring charges of approximately $72,000,000 related to the Company's
decision to dispose of or otherwise discontinue substantially all of its home
health operations. The decision was prompted in large part by the negative
impact of the 1997 Balanced Budget Act, which placed reimbursement limits on
home health businesses. The limits were announced in March 1998, and the Company
began to see the adverse affect on home health margins. Based on this
unfavorable trend, management prepared a plan to exit the home health operations
described above. The plan was approved by the Board of Directors on September
16, 1998. Revenues and losses before income taxes and minority interests for the
home health operations were $71,163,000 and $(4,261,000), respectively, during
the year ended December 31, 1998. The home health operations have been included
in the inpatient and other clinical services segment. The home health operations
covered by the plan included approximately 35 locations, all of which were
closed by December 31, 1998.
The Company has developed a strategic plan to provide integrated services
in major markets throughout the United States. In the fourth quarter of 1998,
the Company recorded a restructuring charge of approximately $404,000,000 as a
result of its decision to close certain facilities that did not fit with the
Company's strategic vision, underperforming facilities and facilities not
located in target markets. The Company's Board of Directors approved the
restructuring plan on December 10, 1998. A total of 167 facilities were included
in the plan, including 110 outpatient rehabilitation facilities, 7 inpatient
rehabilitation hospitals, 29 outpatient surgery centers, and 21 diagnostic
centers. Some of these facilities had multiple business units associated with
the operation. The identified facilities contributed $140,087,000 to the
Company's revenue and $(9,907,000) to the Company's income before income taxes
and minority interests during 1998. Approximately 97.8% of the locations
identified in the fourth quarter restructuring plan have been closed.
60
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The restructuring activities (shown below in tabular form) primarily relate
to asset write-downs, lease abandonments and the elimination of job
responsibilities resulting in costs incurred to sever employees. Details of the
impairment and restructuring charges, separated by the amounts recorded in the
third and fourth quarter of 1998, respectively, are as follows:
ACTIVITY ACTIVITY
---------------------- ----------------------
RESTRUCTURING CASH NON-CASH BALANCE AT CASH NON-CASH
DESCRIPTION CHARGE PAYMENTS IMPAIRMENTS 12/31/98 PAYMENTS IMPAIRMENTS
- -------------------------------------- ------------- -------- ----------- ---------- -------- -----------
(IN THOUSANDS)
Third Quarter 1998 Charge:
Property, plant and equipment:
Leasehold improvements .............. $ 820 $ -- $ 820 $ -- $ -- $--
Furniture, fixtures and equipment ... 7,543 -- 7,543 -- -- --
--------- -------- --------- -------- -------- ---
8,363 -- 8,363 -- -- --
Intangible assets:
Goodwill ............................ 53,485 -- 53,485 -- -- --
Noncompete agreements ............... 678 -- 678 -- -- --
Other intangible assets ............. 222 -- 222 -- -- --
--------- -------- --------- -------- -------- ---
54,385 -- 54,385 -- -- --
Lease abandonment costs ............. 2,618 2,618 -- -- -- --
Other assets ........................ 4,908 -- 4,908 -- -- --
Other incremental costs ............. 1,435 1,020 -- 415 415 --
--------- -------- --------- -------- -------- ---
Total Third Quarter 1998 Charge ...... $ 71,709 $ 3,638 $ 67,656 $ 415 $ 415 $--
========= ======== ========= ======== ======== ===
Fourth Quarter 1998 Charge:
Property, plant and equipment:
Land and buildings .................. $ 38,741 $ -- $ 38,741 $ -- $ -- $--
Leasehold improvements .............. 27,187 -- 27,187 -- -- --
Furniture, fixtures and equipment ... 71,952 -- 71,952 -- -- --
--------- -------- --------- -------- -------- ---
137,880 -- 137,880 -- -- --
Intangible assets:
Goodwill ............................ 154,840 -- 154,840 -- -- --
Noncompete agreements ............... 10,632 -- 10,632 -- -- --
Other intangible assets ............. 1,272 -- 1,272 -- -- --
--------- -------- --------- -------- -------- ---
166,744 -- 166,744 -- -- --
Lease abandonment costs ............. 49,476 -- -- 49,476 17,110 --
Other assets ........................ 19,857 -- 19,857 -- -- --
Severance packages .................. 6,027 4,753 -- 1,274 1,274 --
Other incremental costs ............. 24,089 8,100 -- 15,989 8,978 --
--------- -------- --------- -------- -------- ---
Total Fourth Quarter 1998 Charge ..... $ 404,073 $ 12,853 $ 324,481 $ 66,739 $ 27,362 $--
========= ======== ========= ======== ======== ===
ACTIVITY ACTIVITY
---------------------- ----------------------
BALANCE AT CASH NON-CASH BALANCE AT CASH NON-CASH BALANCE AT
DESCRIPTION 12/31/99 PAYMENTS IMPAIRMENTS 12/31/00 PAYMENTS IMPAIRMENTS 12/31/01
- -------------------------------------- ---------- -------- ----------- ---------- -------- ----------- ----------
(IN THOUSANDS)
Third Quarter 1998 Charge:
Property, plant and equipment:
Leasehold improvements .............. $ -- $ -- $-- $ -- $ -- $-- $ --
Furniture, fixtures and equipment ... -- -- -- -- -- -- --
-------- -------- --- -------- ------- --- ------
-- -- -- -- -- -- --
Intangible assets:
Goodwill ............................ -- -- -- -- -- -- --
Noncompete agreements ............... -- -- -- -- -- -- --
Other intangible assets ............. -- -- -- -- -- -- --
-------- -------- --- -------- ------- --- ------
-- -- -- -- -- -- --
Lease abandonment costs ............. -- -- -- -- -- -- --
Other assets ........................ -- -- -- -- -- -- --
Other incremental costs ............. -- -- -- -- -- -- --
-------- -------- --- -------- ------- --- ------
Total Third Quarter 1998 Charge ...... $ -- $ -- $-- $ -- $ -- $-- $ --
======== ======== === ======== ======= === ======
Fourth Quarter 1998 Charge:
Property, plant and equipment:
Land and buildings .................. $ -- $ -- $-- $ -- $ -- $-- $ --
Leasehold improvements .............. -- -- -- -- -- -- --
Furniture, fixtures and equipment ... -- -- -- -- -- -- --
-------- -------- --- -------- ------- --- ------
-- -- -- -- -- -- --
Intangible assets:
Goodwill ............................ -- -- -- -- -- -- --
Noncompete agreements ............... -- -- -- -- -- -- --
Other intangible assets ............. -- -- -- -- -- -- --
-------- -------- --- -------- ------- --- ------
-- -- -- -- -- -- --
Lease abandonment costs ............. 32,366 11,253 -- 21,113 $11,648 -- 9,465
Other assets ........................ -- -- -- -- -- -- --
Severance packages .................. -- -- -- -- -- -- --
Other incremental costs ............. 7,011 7,011 -- -- -- -- --
-------- -------- --- -------- ------- --- ------
Total Fourth Quarter 1998 Charge ..... $ 39,377 $ 18,264 $-- $ 21,113 $11,648 $-- $9,465
======== ======== === ======== ======= === ======
61
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
The remaining balances at December 31, 2000 and 2001, are included in
accrued interest payable and other liabilities in the accompanying consolidated
balance sheets.
In addition to the third and fourth quarter 1998 charges described above,
the Company recorded an impairment charge of approximately $8,000,000 in the
fourth quarter of 1998 related to a rehabilitation hospital it had closed. The
write-down was based on an independent appraisal, which reflected a decline in
valuation since the original closure. The hospital was closed in 1995 as a
result of duplicative services in a single market. At that time, the hospital
was written down to its then-estimated fair value and classified as assets held
for sale.
The Company abandoned certain equipment and sold certain properties and
equipment during 2000, which were associated with the 1998 closed facilities.
The fair value of assets remaining to be sold is approximately $19,725,000
compared to $24,559,000 as of December 31, 2000. The Company expects to have all
properties sold by the end of 2003. The effect of suspending depreciation is
immaterial. For assets that will not be abandoned, the fair values were based on
independent appraisals or estimates of recoverability for similar closings.
During the fourth quarter of 1999, in accordance with FASB Statement No.
121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, the Company recorded an asset impairment
charge of $121,037,000. Management evaluated the financial performance of each
of its facilities to determine if there are trends which would indicate that a
facility's ability to recover its investment in its long-lived assets had been
impaired. Based on this evaluation, the Company determined that property, plant
and equipment with a carrying value of $38,050,000 and intangibles with a
carrying value of $95,091,000 were impaired and wrote them down by $25,807,000
and $95,091,000 respectively, to their fair market value. In addition, the
Company plans to sell certain property, plant, and equipment with a carrying
amount of $2,339,000 in 2002 and has estimated the sales value, net of related
costs to sell, at $2,200,000. Accordingly, the Company recorded an impairment
loss of $139,000 on these assets, which is included in the 1999 impairment and
restructuring charge. See Note 14 for the impact of impairment losses on
operating segments.
14. OPERATING SEGMENTS
The accounting policies of the segments are the same as those for the
Company described in Note 1, Significant Accounting Policies. Intrasegment
revenues are not significant. The Company's Chief Operating Decision Maker
evaluates the performance of its segments and allocates resources to these
segments based on income before minority interests and income taxes and earnings
before interest, income taxes, depreciation and amortization ("EBITDA"). In
addition, certain revenue producing functions are managed directly from the
Corporate office and are not included in operating results for management
reporting. Non-patient care assets represent those assets under the direct
management of Corporate office personnel.
Operating results and other financial data are presented for the principal
operating segments as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
Revenues:
Inpatient and other clinical services ......... $1,963,551 $1,928,823 $2,008,108
Outpatient services ........................... 2,086,518 2,248,410 2,349,420
---------- ---------- ----------
4,050,069 4,177,233 4,357,528
Non-patient care services ..................... 22,038 17,882 22,949
---------- ---------- ----------
Consolidated revenues .......................... $4,072,107 $4,195,115 $4,380,477
========== ========== ==========
62
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
Income before income taxes and minority interests (excluding
loss on sale of assets and impairment and restructuring
charge):
Inpatient and other clinical services ..................... $ 532,650 $ 380,254 $ 419,544
Outpatient services ....................................... 445,860 509,910 565,191
---------- ---------- ----------
978,510 890,164 984,735
Non-patient care services ................................. (347,581) (330,810) (351,851)
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ................................................... 630,929 559,354 632,884
Loss on sale of assets and impairment and restructuring charge (401,014) -- (199,150)
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ................................................... $ 229,915 $ 559,354 $ 433,734
========== ========== ==========
Depreciation and amortization:
Inpatient and other clinical services ....................... $ 136,739 $ 128,344 $ 130,422
Outpatient services ......................................... 163,236 172,011 189,950
---------- ---------- ----------
299,975 300,355 320,372
Non-patient care services ................................... 74,273 60,492 54,898
---------- ---------- ----------
Consolidated depreciation and amortization ................... $ 374,248 $ 360,847 $ 375,270
========== ========== ==========
Interest expense:
Inpatient and other clinical services ....................... $ 45,120 $ 58,134 $ 40,602
Outpatient services ......................................... 9,608 10,328 7,958
---------- ---------- ----------
54,728 68,462 48,560
Non-patient care services ................................... 121,924 153,133 169,540
---------- ---------- ----------
Consolidated interest expense ................................ $ 176,652 $ 221,595 $ 218,100
========== ========== ==========
Interest income:
Inpatient and other clinical services ....................... $ 1,869 $ 1,876 $ 611
Outpatient services ......................................... 1,518 1,182 975
---------- ---------- ----------
3,387 3,058 1,586
Non-patient care services ................................... 7,200 6,046 5,763
---------- ---------- ----------
Consolidated interest income ................................. $ 10,587 $ 9,104 $ 7,349
========== ========== ==========
63
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
EBITDA (excluding loss on sale of assets and impairment and
restructuring charge):
Inpatient and other clinical services ....................... $ 710,202 $ 566,823 $ 589,958
Outpatient services ......................................... 620,822 691,591 762,123
---------- ---------- ----------
1,331,024 1,258,414 1,352,081
Non-patient care services ................................... (159,782) (125,722) (133,176)
---------- ---------- ----------
Consolidated EBITDA (excluding loss on sale of assets and
impairment and restructuring charge): 1,171,242 1,132,692 1,218,905
Loss on sale of assets and impairment and restructuring charge (401,014) -- (199,150)
---------- ---------- ----------
Consolidated EBITDA .......................................... $ 770,228 $1,132,692 $1,019,755
========== ========== ==========
Assets:
Inpatient and other clinical services ....................... $3,277,840 $3,168,489
Outpatient services ......................................... 3,778,884 3,826,972
---------- ----------
7,056,724 6,995,461
Non-patient care services ................................... 323,716 583,776
---------- ----------
Total assets ................................................. $7,380,440 $7,579,237
========== ==========
15. RELATED PARTY
In December 1999, the Company acquired 6,390,583 shares of Series A
Convertible Preferred Stock of MedCenterDirect.com, Inc., a development-stage
healthcare e-procurement company, in a private placement for a purchase price of
$0.3458 per share. Various persons affiliated or associated with the Company,
including various of the Company's Directors and executive officers, also
purchased shares in the private placement. Under a Stockholders Agreement, the
Company and the other holders of the Series A Convertible Preferred Stock,
substantially all of whom may be deemed to be Company affiliates or associates,
have the right to elect 50% of the directors of MedCenterDirect.com. During
2001, the Company paid $100,044,296 for the purchase of goods, supplies and
related services. In addition, the Company provided a guaranty of $15,000,000 of
indebtedness from MedCenterDirect.com to an outside lender.
In April 2001, the Company acquired 3,932,500 shares of common stock in
Source Medical Solutions, Inc. (Source Medical) in a private placement for a
purchase price of $0.10 per share. Various persons affiliated or associated with
the Company, including some of the Company's executive officers, also purchased
shares in the private placement. Source Medical was established for the purpose
of allowing commercial exploitation of the Company's wireless clinical
documentation system, which was originally known as the HEALTHSOUTH Clinical
Automation Program and is now marketed by Source Medical under the name
"TherapySource". As of July 1, 2001, the Company sold the assets, including the
intellectual property assets, associated with TherapySource to Source Medical
for $25,000,000 and entered into an agreement to license TherapySource back from
Source Medical. During 2001, the Company paid Source Medical approximately
$2,513,813 for services under such agreement. At December 31, 2001, the Company
has a receivable from Source Medical of approximately $82,000,000 included in
Other Assets on the balance sheet. In addition, the Company provided a guaranty
of $6,000,000 of indebtedness from Source Medical to an outside lender.
64
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. LOSS ON SALE OF ASSETS
During the second quarter of 2001, the Company sold substantially all of
its occupational medicine operations to US Healthworks, Inc. and its Richmond,
Virginia medical center to HCA -- The Healthcare Company. These transactions
yielded net cash proceeds of approximately $98,882,000 and a net loss on the
sale of assets of $139,883,000.
During the fourth quarter of 2001, the Company sold its diagnostic
operations in the United Kingdom to Lodestone Patient Care, Limited and four
non-strategic rehabilitation hospitals to Meadowbrook Healthcare Corporation.
These transactions yielded net cash proceeds of approximately $31,919,000 and a
net loss on sale of assets of $18,847,000. The Company also completed a
sale-leaseback transaction for thirteen of its facilities which yielded net cash
proceeds of $79,735,000 and a net loss on the sale of assets of $15,397,000.
Aggregate annual lease payments for these properties total $8,558,000.
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
We have not changed independent accountants within the 24 months prior to
December 31, 2001.
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 ............... 49 Chairman of the Board and Chief Executive Officer 1984
and Director
Phillip C. Watkins, M.D. ......... 60 Physician, Birmingham, Alabama, and Director 1984
George H. Strong ................. 75 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens ................... 45 General Partner, Acacia Venture Partners, and 1985
Director
Charles W. Newhall III ........... 57 Partner, New Enterprise Associates Limited 1985
Partnerships, and Director
John S. Chamberlin ............... 73 Private Investor, Princeton, New Jersey, and Director 1993
Joel C. Gordon ................... 72 Private Investor, Nashville, Tennessee, Consultant to 1996
HEALTHSOUTH and Director
Larry D. Striplin, Jr. ........... 72 Chairman and Chief Executive Officer, 1999
Nelson-Brantley Glass Contractors, Inc., and Director
William T. Owens ................. 43 President and Chief Operating Officer and Director 2001
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.
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.
66
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 currently chairman of the
Board of Trustees of the Medical Center at Princeton and is a trustee of the
Woodrow Wilson National Fellowship Foundation.
Joel C. Gordon served as Chairman of the Board of Directors of Surgical
Care Affiliates, Inc. from its founding in 1982 until January 17, 1996, when 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 & Soffa 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. He was named President and Chief Operating Officer in
August 2001. 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 ......... 49 Chairman of the Board and Chief Executive Officer 1984
and Director
William T. Owens ........... 43 President and Chief Operating Officer and Director 1986
Patrick A. Foster .......... 55 President -- Inpatient Services 1994
Larry D. Taylor ............ 43 President -- Ambulatory Services 1991
Thomas W. Carman ........... 50 Executive Vice President -- Corporate Development 1985
William W. Horton .......... 42 Executive Vice President and Corporate Counsel and 1994
Assistant Secretary
Malcolm E. McVay ........... 40 Executive Vice President and Treasurer 1999
Weston L. Smith ............ 41 Executive Vice President and Chief Financial Officer 1987
Brandon O. Hale ............ 52 Senior Vice President -- Administration and Secretary 1987
Susan M. Jones ............. 37 Senior Vice President -- Reimbursement 1992
Biographical information for Mr. Scrushy and Mr. Owens is set forth above
under this Item, "Directors and Executive Officers -- Directors".
Patrick A. Foster joined HEALTHSOUTH in February 1994 as Director of
Operations and subsequently served as Group Vice President -- Inpatient
Operations and Senior Vice President -- Inpatient Operations. He was named
President -- HEALTHSOUTH Surgery Centers in October 1997 and President --
Ambulatory Services -- West in September 1999. In August 2001, he was named
President -- Inpatient Services. From August 1992 until February 1994, he served
as Senior Vice President of the Rehabilitation/Medical Division of The Mediplex
Group.
67
Larry D. Taylor joined HEALTHSOUTH in May 1987 as an outpatient
rehabilitation facility administrator. He was subsequently named Area Manager in
July 1989, Regional Vice President -- Outpatient Operations in October 1991,
Group Vice President -- Outpatient Operations in July 1992, Senior Vice
President -- Outpatient Operations in February 1994, and Senior Vice President
- -- Ambulatory Services -- East in September 1999. In July 2000, he became
President -- Ambulatory Services -- East, and he was named President --
Ambulatory Services in August 2001.
Thomas W. Carman joined HEALTHSOUTH in 1985 as Regional Director --
Corporate Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was assistant
administrator at the Children's Hospital of Birmingham, Alabama.
William W. Horton joined HEALTHSOUTH in July 1994 as Group Vice President
- -- Legal Services and was named Senior Vice President and Corporate Counsel in
May 1996 and Executive Vice President and Corporate Counsel in March 2001. From
August 1986 through June 1994, Mr. Horton practiced corporate, securities and
healthcare law with the Birmingham, Alabama-based firm now known as Haskell
Slaughter Young & Rediker, L.L.C., where he served as Chairman of the Healthcare
Practice Group.
Malcolm E. McVay joined HEALTHSOUTH in September 1999 as Vice President --
Finance, and was named Senior Vice President -- Finance and Treasurer in
February 2000 and Executive Vice President and Treasurer in August 2001. From
October 1998 until September 1999, he served as Senior Vice President of
Investor Relations at CaremarkRx, Inc., and from 1996 until October 1998, he
served as Chief Financial Officer, Secretary and Treasurer of Capstone Capital
Corporation, a healthcare real estate investment trust. Prior to 1996, he worked
for ten years in commercial banking, most recently as a Senior Vice President of
SouthTrust Bank.
Weston L. Smith, C.P.A., joined HEALTHSOUTH in February 1987 as Director of
Reimbursement and subsequently served as Assistant Vice President -- Finance --
Reimbursement, Vice President -- Finance -- Reimbursement, Group Vice President
- -- Finance -- Reimbursement and Senior Vice President -- Finance --
Reimbursement. In March 2000, he was named Senior Vice President -- Finance and
Controller and in August 2001, he was named Executive Vice President and Chief
Financial Officer. Prior to joining HEALTHSOUTH, Mr. Smith served as a certified
public accountant on the audit staff of the Birmingham, Alabama office of Ernst
& Whinney (now Ernst & Young LLP) from 1982 to 1987.
Brandon O. Hale joined HEALTHSOUTH in July 1986 as Director of Human
Resources and subsequently served as Vice President -- Human Resources and Group
Vice President -- Human Resources. In December 1999, Mr. Hale was named Senior
Vice President -- Administration and Secretary of HEALTHSOUTH, and he also
serves as HEALTHSOUTH's Corporate Compliance Officer.
Susan M. Jones, C.P.A., joined HEALTHSOUTH in November 1989 and was named
Assistant Vice President -- Finance -- Reimbursement in February 1992, Vice
President -- Finance -- Reimbursement in February 1995 and Senior Vice President
- -- Reimbursement in March 2000. She previously served as a certified public
accountant with the Birmingham, Alabama office of Ernst & Whinney (now Ernst &
Young LLP).
GENERAL
Our Directors 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 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 our 1996 acquisition of
Surgical Care Affiliates, Inc. There are no family relationships between any of
our Directors or executive officers.
68
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 our common stock are required by Securities and Exchange Commission
regulations to furnish us with copies of all Section 16(a) forms that they file.
Based solely on review of the copies of such forms furnished to us, or written
representations that no reports on Form 5 were required, we believe that for the
period from January 1, 2001, through December 31, 2001, all of our executive
officers, Directors and greater-than-10% beneficial owners complied with all
Section 16(a) filing requirements applicable to them.
69
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 a former executive officer for whom disclosure would have
been required had he been serving as an executive officer at December 31, 2001,
for all services rendered to HEALTHSOUTH and its subsidiaries in 1999, 2000 and
2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- -----------------------------
BONUS/ANNUAL STOCK RESTRICTED ALL
INCENTIVE OPTION STOCK OTHER COM-
NAME AND CURRENT POSITION YEAR SALARY AWARD AWARDS AWARDS PENSATION(1)
- ------------------------- ---- ------ ------------ ------ ---------- ------------
Richard M. Scrushy 1999 $1,634,031 -- 1,050,000 $ 1,293,750(3) $54,145
Chairman of the Board 2000 3,654,849 -- 800,000 -- 55,475
and Chief Executive Officer(2) 2001 3,961,169 $6,500,000 1,200,000 -- 58,322
William T. Owens 1999 $ 272,944 -- 55,000 $ 970,313(3) $ 2,643
President 2000 386,510 -- 75,000 -- 1,908
and Chief Operating Officer 2001 502,115 $1,500,000 400,000 -- 4,755
Larry D. Taylor 1999 $ 183,298 -- 113,166 -- $ 4,449
President -- Ambulatory Services 2000 278,796 $ 75,000 30,000 -- 3,380
2001 452,076 500,000 150,000 -- 6,148
Patrick A. Foster 1999 $ 275,977 -- 125,000 $ 970,313(3) $ 3,298
President - Inpatient 2000 356,043 -- 60,000 -- 2,434
Operations 2001 337,922 $ 500,000 150,000 -- 6,155
Robert E. Thomson 1999 $ 402,987 -- 125,000 $ 970,313(3) $ 4,994
Formerly President - Inpatient 2000 396,162 -- 60,000 -- 2,849
Operations 2001 85,556 $ 500,000 100,000 -- 5,474
Thomas W. Carman 1999 $ 295,167 -- 65,000 $ 970,313(3) $ 3,012
Executive Vice President - 2000 326,300 $ 50,000 20,000 -- 2,270
Corporate Development 2001 361,651 75,000 80,000 -- 5,814
- ----------------
(1) For the year ending December 31, 2001, this category includes (a) matching
contributions under the HEALTHSOUTH Retirement Investment Plan of $1,020
for Mr. Scrushy, $0 for Mr. Owens, $1,393 for Mr. Taylor, $1,400 for Mr.
Foster, $719 for Mr. Thomson and $1,059 for Mr. Carman; (b) awards under
our Employee Stock Benefit Plan of $3,263 for Mr. Scrushy, $3,263 for Mr.
Owens, $3,263 for Mr. Taylor, $3,263 for Mr. Foster, $3,263 for Mr. Thomson
and $3,263 for Mr. Carman; and (c) split-dollar life insurance premiums
paid of $54,039 with respect to Mr. Scrushy, $1,492 with respect to Mr.
Owens, $1,492 with respect to Mr. Taylor, $1,492 with respect to Mr.
Foster, $1,492 with respect to Mr. Thomson and $1,492 with respect to Mr.
Carman. See 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, 2001 was $1,482,000 for the award to Mr.
Scrushy (100,000 shares) and $1,111,500 for the awards to each of Messrs.
Owens, Carman and Foster (75,000 shares each). The award to Mr. Thomson
lapsed in 2001. The awards vest five years from the date of grant, except
as otherwise provided in our 1998 Restricted Stock Plan. See this Item,
"Executive Compensation - 1998 Restricted Stock Plan".
70
STOCK OPTION GRANTS IN 2001
INDIVIDUAL GRANTS
--------------------------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE PRESENT VALUE(1)
- ---- --------- ------------ --------- ---------- ----------------
Richard M. Scrushy 1,000,000 21.2% $ 13.875 1/3/11 $7,130,000
200,000 4.2% 11.99 11/13/11 1,232,000
William T. Owens 300,000 6.4% 13.875 1/3/11 2,139,000
100,000 2.1% 11.99 11/13/11 616,000
Larry D. Taylor 100,000 2.1% 13.875 1/3/11 713,000
50,000 1.1% 11.99 11/13/11 308,000
Patrick A. Foster 100,000 2.1% 13.875 1/3/11 713,000
50,000 1.1% 11.99 11/13/11 308,000
Robert E. Thomson 100,000 2.1% 13.875 11/29/03 713,000
Thomas W. Carman 50,000 1.1% 13.875 1/3/11 356,500
30,000 0.6% 11.99 11/13/11 184,800
- ----------------
(1) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend upon the excess of the stock price over the exercise price on
the date the option is exercised, so that there is no assurance that the
value realized by an executive will be at or near the value estimated by the
Black-Scholes model. The estimated values under that model are based on
arbitrary assumptions as to certain variables, including the following: (i)
stock price volatility is assumed to be 49%; (ii) the risk-free rate of
return is assumed to be 5.1%; (iii) dividend yield is assumed to be 0; and
(iv) the time of exercise is assumed to be 5.5 years from the date of grant.
STOCK OPTION EXERCISES IN 2001 AND OPTION VALUES AT DECEMBER 31, 2001
VALUE OF UNEXERCISED
NUMBER NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
OF SHARES AT DECEMBER 31, 2001(1) AT DECEMBER 31, 2001(2)
ACQUIRED VALUE ----------------------------- -----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
Richard M. Scrushy ......... -- -- 15,722,524 -- $129,199,197 --
William T. Owens ........... -- -- 912,500 -- 2,325,838 --
Larry D. Taylor ............ 22,500 $ 252,018 485,166 55,000 2,435,079 $359,944
Patrick A. Foster .......... 200,000 1,329,481 463,800 -- 1,084,266 --
Robert E. Thomson .......... -- -- 855,000 -- 2,619,725 --
Thomas W. Carman ........... 100,000 1,385,060 830,000 -- 3,376,038 --
- ----------------
(1) Does not reflect any options granted and/or exercised after December 31,
2001. The net effect of any such grants and exercises is reflected in the
table appearing under 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, 2001. Such
amounts may not necessarily be realized. Actual values which may be
realized, if any, upon any exercise of such options will be based on the
market price of the common stock at the time of any such exercise and thus
are dependent upon future performance of the common stock.
71
STOCK OPTION PLANS
Set forth below is information concerning our various stock option plans at
December 31, 2001. All share numbers and exercise prices have been adjusted as
necessary to reflect previous stock splits.
1988 Non-Qualified Stock Option Plan
In 1988 we adopted the 1998 Non-Qualified Stock Option Plan. Under this
plan, the Audit and Compensation Committee of our Board of Directors, which
administered the plan, had discretion to grant to our Directors, officers and
other key employees options to purchase shares of HEALTHSOUTH common stock at
the fair market value attributed to shares of HEALTHSOUTH common stock on the
date the option was granted. The total number of shares of HEALTHSOUTH common
stock covered by this plan was 4,800,000. The plan expired on February 28, 1998,
in accordance with its terms. As of December 31, 2000, options granted under
this plan to purchase 7,300 shares of HEALTHSOUTH common stock remained
outstanding at an exercise price of $16.25 per share. All of these outstanding
options remain valid and in full force and must be held and exercised in
accordance with the terms of the plan. All of the options must be exercised
within ten years after they were granted. All of the options granted under this
plan terminate automatically within three months after termination of
association as a Director or of employment, unless such termination is by reason
of death. In addition, the options may not be transferred, except pursuant to
the terms of a valid will or applicable laws of descent and distribution, and in
the event additional shares of HEALTHSOUTH common stock are issued they are
protected from dilution.
1989, 1990, 1991, 1992, 1993, 1995 and 1997 Stock Option Plans
In each of 1989, 1990, 1991, 1992, 1993, 1995 and 1997 we adopted stock
option plans to provide incentives to our Directors, officers and other key
employees. Under each of these plans, the Compensation Committee of our Board of
Directors, which administers each of the plans, has the discretion to grant to
our Directors, officers and other key employees incentive or non-qualified
options to purchase shares of HEALTHSOUTH common stock at the fair market value
attributed to shares of HEALTHSOUTH common stock on the date the option is
granted. The table below sets forth information regarding each plan, including
the total number of shares of HEALTHSOUTH common stock which may be purchased
under each of the plans, the total number of additional shares of HEALTHSOUTH
common stock which have been reserved for future use under each plan, the total
number of shares of HEALTHSOUTH common stock which may be purchased under
options which have been granted under each plan and which were outstanding on
December 31, 2001 and the price or range of prices at which shares may be
purchased if the options are exercised.
MAXIMUM NUMBER NUMBER OF
OF SHARES OF ADDITIONAL SHARES OF
HEALTHSOUTH HEALTHSOUTH
COMMON STOCK COMMON STOCK
SUBJECT TO PURCHASE RESERVED FOR USE
NAME OF 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 None
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
DECEMBER 31, 2001 OUTSTANDING BEEN PURCHASED DUE TO
NAME OF PLAN ARE EXERCISED ON DECEMBER 31, 2001 OPTIONS BEING EXERCISED
------------ ---------------------- ------------------------ ----------------------------
1989 Stock Option
Plan 51,752 $ 8.375 October 25, 1999
1990 Stock Option
Plan 100,504 $ 8.375 October 15, 2000
1991 Stock Option
Plan 3,102,362 $3.7825 -- $16.25 June 19, 2001
1992 Stock Option
Plan 3,707,000 $3.7825 -- $23.625 June 16, 2002
1993 Stock Option
Plan 2,463,025 $3.375 -- $23.625 April 19, 2003
72
MAXIMUM NUMBER NUMBER OF
OF SHARES OF ADDITIONAL SHARES OF
HEALTHSOUTH HEALTHSOUTH
COMMON STOCK COMMON STOCK
SUBJECT TO PURCHASE RESERVED FOR USE
NAME OF PLAN UNDER THE PLAN UNDER THE PLAN
------------ ------------------- --------------------
1995 Stock Option
Plan 22,359,992 (1) 15,422
1997 Stock Option
Plan 5,000,000 30,027
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
DECEMBER 31, 2001 OUTSTANDING BEEN PURCHASED DUE TO
NAME OF PLAN ARE EXERCISED ON DECEMBER 31, 2001 OPTIONS BEING EXERCISED
------------ ---------------------- ------------------------ ---------------------------
1995 Stock Option
Plan 19,656,943 $4.875 -- $28.0625 June 5, 2005
1997 Stock Option
Plan 3,546,328 $4.875 -- $28.0625 April 30, 2007
- ----------------
(1) At December 31, 2001; to be increased by 0.9% of the outstanding shares of
HEALTHSOUTH common stock as of January 1 of each calendar year thereafter
until the plan terminates.
Until options granted under each of these plans expire or terminate, they
remain valid and in full force and must be held and exercised in accordance with
the terms of the plan under which they were issued. Each option granted under
each of these plans, whether incentive or non-qualified, must be exercised
within ten years after the date it was granted and each option granted under
these plans, whether incentive or non-qualified, will terminate automatically
within three months after a Director no longer is associated with us or an
officer or key employee is no longer employed with us, except if the termination
of association or employment is by reason of death. In addition, the options may
not be transferred, except pursuant to the terms of a valid will or applicable
laws of descent and distribution (except for various permitted transfers to
family members or charities). In the event additional shares of HEALTHSOUTH
common stock are issued, each option granted under these plans is protected from
dilution.
1993 Consultants' Stock Option Plan
In 1993 we adopted the 1993 Consultants' Stock Option Plan to provide
incentives to non-employee consultants who provide significant services to us.
Under this plan, our Board of Directors, which administers the plan, has the
discretion to grant to these non-employee consultants options to purchase shares
of HEALTHSOUTH common stock at prices to be determined by our Board of Directors
or a committee of our Board of Directors to whom this discretion has been
delegated. The plan will expire on February 25, 2003 unless terminated earlier
at the discretion of our Board of Directors or as a result of all of the shares
of HEALTHSOUTH common stock reserved under this plan having been purchased by
the exercise of options granted under this plan. The total number of shares of
HEALTHSOUTH common stock covered by this plan is 3,500,000. As of December 31,
2001, options granted under this plan to purchase 1,243,833 shares of
HEALTHSOUTH common stock remained outstanding at exercise prices ranging from
$3.375 to $28.00 per share, and 26,000 shares remain available for the grant of
options under this plan. All of these options remain valid and in full force and
must be held and exercised in accordance with the terms of the plan. All of
these options must be exercised within ten years after they were granted,
although they may be exercised at any time during this ten-year period. All of
these options terminate automatically within three months after termination of
association with us, unless such termination is by reason of death. In addition,
the options may not be transferred, except pursuant to the terms of a valid will
or applicable laws of descent and distribution, and in the event additional
shares of HEALTHSOUTH common stock are issued the options are protected from
dilution.
1999 Exchange Stock Option Plan
In 1999, we adopted our 1999 Exchange Stock Option Plan (the "Exchange
Plan") under which NQSOs could be granted, covering a maximum of 2,750,000
shares of common stock. The Exchange Plan 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
73
participate) who held outstanding stock options with an exercise price equal to
or greater than $16.00 could exchange such options for NQSOs issued under the
Exchange Plan. Options granted under the Exchange Plan would have an exercise
price equal to the closing price per share of our common stock on the New York
Stock Exchange Composite Transactions Tape on May 20, 1999, would be deemed to
have been granted on May 20, 1999, and would have durations and vesting
restrictions identical to those affecting the options surrendered. Eligible
options with an exercise price between $16.00 and $22.00 per share could be
surrendered in exchange for an option under the Exchange Plan covering two
shares of common stock for each three shares of common stock covered by the
surrendered options, and eligible options having an exercise price of $22.00 per
share or greater could be surrendered in exchange for an option under the
Exchange Plan covering three shares of common stock for each four shares of
common stock covered by the surrendered option. Each optionholder surrendering
options was required to retain eligible options covering 10% of the aggregate
number of shares covered by the options eligible for surrender. The Exchange
Plan expired on September 30, 1999, at which time options covering 1,716,707
shares of common stock had been issued under the Exchange Plan at an exercise
price of $13.3125 per share. Options covering 1,169,915 shares remained
outstanding at December 31, 2001. Options granted under the Exchange Plan are
nontransferable except by will or pursuant to the laws of descent and
distribution (except for certain permitted transfers to family members or
charities), are protected against dilution and expire within three months of
termination of employment, unless such termination is by reason of death.
Other Stock Option Plans
In connection with some of our major acquisitions, we assumed existing
stock option plans of the acquired companies, and outstanding options to
purchase stock of the acquired companies under such plans were converted into
options to acquire common stock in accordance with the exchange ratios
applicable to such mergers. At December 31, 2001, there were outstanding under
these assumed plans options to purchase 538,888 shares of HEALTHSOUTH common
stock at exercise prices ranging from $5.28 to $36.9718 per share. No additional
options are being granted under any such assumed plans.
1998 RESTRICTED STOCK PLAN
In 1998, we adopted the 1998 Restricted Stock Plan (the "Restricted Stock
Plan"), covering a maximum of 3,000,000 shares of HEALTHSOUTH common stock. The
Restricted Stock Plan, which is administered by the Compensation Committee of
our Board of Directors, provides that executives and other key employees of
HEALTHSOUTH and its subsidiaries may be granted restricted stock awards vesting
over a period of not less than one year and no more than ten years, as
determined by the Committee. The Restricted Stock Plan terminates on the
earliest of (a) May 28, 2008, (b) the date on which awards covering all shares
of common stock reserved for issuance thereunder have been granted and are fully
vested thereunder, or (c) such earlier time as the Board of Directors may
determine. Awards under the Restricted Stock Plan are nontransferable except by
will or pursuant to the laws of descent and distribution (except for certain
permitted transfers to family members), are protected against dilution and are
forfeitable upon termination of a participant's employment to the extent not
vested. On May 17, 1999, the Compensation Committee of the Board of Directors
granted restricted stock awards covering 850,000 shares of HEALTHSOUTH common
stock to various of our executive officers. These shares vest in full upon the
earliest to occur of (a) five years from the date of the award, (b) a Change in
Control (as defined) of HEALTHSOUTH, or (c) unless the Compensation Committee
otherwise determines, upon the recipient's termination of employment by reason
of death, disability or retirement. Awards covering 200,000 of such shares and
75,000 of such shares lapsed without vesting in 2000 and 2001, respectively, and
an award covering 100,000 shares vested upon the retirement of the recipient.
RETIREMENT INVESTMENT PLAN
Effective January 1, 1990, we adopted the HEALTHSOUTH Retirement Investment
Plan (the "401(k) Plan"), a retirement plan intended to qualify under Section
401(k) of the Code. The 401(k) Plan is open to all of our full-time and
part-time employees who are over the age of 21, have one full year of service
with HEALTHSOUTH and have at least 1,000 hours of service in the year in which
they enter the 401(k) Plan. Eligible employees may elect to participate in the
Plan on January 1 and July 1 in each year.
74
Under the 401(k) Plan, participants may elect to defer up to 15% of their
annual compensation (subject to nondiscrimination rules under the Code). The
deferred amounts may be invested among four options, at the participant's
direction: a money market fund, a bond fund, a guaranteed insurance contract or
an equity fund. We will match a minimum of 15% of the amount deferred by each
participant, up to 4% of such participant's total compensation, with the matched
amount also directed by the participant. See Note 12 of "Notes to Consolidated
Financial Statements".
William T. Owens, President and Chief Operating Officer, and Brandon O.
Hale, Senior Vice President -- Administration and Secretary, serve as Trustees
of the 401(k) Plan, which is administered by HEALTHSOUTH.
EMPLOYEE STOCK BENEFIT PLAN
Effective January 1, 1991, we adopted the HEALTHSOUTH Rehabilitation
Corporation and Subsidiaries Employee Stock Benefit Plan (the "ESOP"), a
retirement plan intended to qualify under sections 401(a) and 4975(e)(7) of the
Code. The ESOP is open to all of our full-time and part-time employees who are
over the age of 21, have one full year of service with HEALTHSOUTH and have at
least 1,000 hours of service in the year in which they begin participation in
the ESOP on the next January 1 or July 1 after the date on which such employee
satisfies the conditions mentioned above.
The ESOP was established with a $10,000,000 loan from HEALTHSOUTH, the
proceeds of which were used to purchase 1,655,172 shares of HEALTHSOUTH common
stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 1,666,664 shares of common stock. Under the ESOP,
a company stock account is established and maintained for each eligible employee
who participates in the ESOP. In each plan year, this account is credited with
such employee's allocable share of the common stock held by the ESOP and
allocated with respect to that plan year. Each employee's allocable share for
any given plan year is determined according to the ratio which such employee's
compensation for such plan year bears to the compensation of all eligible
participating employees for the same plan year.
Eligible employees who participate in the ESOP and who have attained age 55
and have completed 10 years of participation in the ESOP may elect to diversify
the assets in their company stock account by directing the plan administrator to
transfer to the 401(k) Plan a portion of their company stock account to be
invested, as the eligible employee directs, in one or more of the investment
options available under the 401(k) Plan. See Note 12 of "Notes to Consolidated
Financial Statements".
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer,
William T. Owens, President and Chief Operating Officer, and Brandon O. Hale,
Senior Vice President -- Administration and Secretary of the Company, serve as
Trustees of the ESOP, which is administered by HEALTHSOUTH.
STOCK PURCHASE PLAN
In order to further encourage employees to obtain equity ownership in
HEALTHSOUTH, the Board of Directors adopted an Employee Stock Purchase Plan
effective January 1, 1994. Under the Stock Purchase Plan, participating
employees may contribute $10 to $200 per pay period toward the purchase of
HEALTHSOUTH common stock in open-market transactions. The Stock Purchase Plan is
open to regular full-time or part-time employees who have been employed for six
months and are at least 21 years old. After six months of participation in the
Stock Purchase Plan, we currently provide a 20% matching contribution to be
applied to purchases under the Stock Purchase Plan. We also pay all fees and
brokerage commissions associated with the purchase of the stock. The Stock
Purchase Plan is administered by a broker-dealer firm not affiliated with
HEALTHSOUTH.
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)
75
for a minimum of five years from the date such compensation would otherwise have
been received. Amounts deferred are held by HEALTHSOUTH pursuant to a "rabbi
trust" arrangement, and amounts deferred are credited with earnings at an annual
rate equal to the Moody's Average Corporate Bond Yield Index (the "Moody's
Rate"), as adjusted from time to time, or the Moody's Rate plus 2% if a
participant's employment is terminated by reason of retirement, disability or
death or within 24 months of a change in control of HEALTHSOUTH. Amounts
deferred may be withdrawn upon retirement, termination of employment or death,
upon a showing of financial hardship, or voluntarily with certain penalties. The
Deferred Compensation Plan is administered by an Administrative Committee,
currently consisting of William T. Owens, President and Chief Operating Officer,
and Brandon O. Hale, Senior Vice President -- Administration and Secretary.
1999 EXECUTIVE EQUITY LOAN PLAN
In order to provide its executive officers and other key employees with
additional incentive for future endeavor and to align the interests of our
management and our stockholders by providing a mechanism to enhance ownership of
HEALTHSOUTH common stock by executives and key employees, we adopted the 1999
Executive Equity Loan Plan (the "Loan Plan"), which was approved by our
stockholders on May 20, 1999. Under the Loan Plan, the Compensation Committee of
the Board of Directors may approve loans to our executive and key employees to
be used for purchases of HEALTHSOUTH common stock. The maximum aggregate
principal amount of loans outstanding under the Loan Plan may not exceed
$50,000,000. Loans under the Loan Plan have a maturity date of seven years from
the date of the loan, subject to acceleration and termination as provided in the
Loan Plan. The maturity date may be extended for up to one additional year by
the Audit and Compensation Committee, acting in its discretion. The unpaid
principal balance of each loan bears interest at a rate equal to the effective
interest rate on the average outstanding balance under our principal credit
agreement for each calendar quarter, adjustable as of the end of each calendar
quarter. Interest compounds annually. Each loan is secured by a pledge of all
the shares of HEALTHSOUTH common stock purchased with the proceeds of the loan.
The pledged shares may not be sold for one year after the date on which they
were acquired. Thereafter, one-third of the aggregate number of shares may be
sold during each of the second, third and fourth years after the date of
acquisitions, with any unsold portion carrying forward from year to year. The
proceeds from any such sale must be used to repay a corresponding percentage of
the principal amount of the loan. In addition, we may, but are not required to,
repurchase the shares of a participant at such participant's original
acquisition cost if the participant's employment is terminated, voluntarily or
involuntarily or by reason of death or disability, within the first three years
after the acquisition date, all as more fully described in the Loan Plan. Loans
under the Loan Plan are made with full recourse, and each participant is
required to repay all principal and accrued but unpaid interest upon the
maturity of the loan, or its earlier acceleration or termination, irrespective
of whether the participant has sold the underlying shares or whether the
proceeds of such sale were sufficient to repay all principal and interest with
respect to the loan. The Loan Plan terminates on the earlier of May 19, 2009 or
such earlier time as the Board of Directors may determine.
On September 10, 1999, loans aggregating $39,334,104 were made under the
Loan Plan. Included in this amount were loans in the following amounts to
then-serving executive officers:
NAME PRINCIPAL AMOUNT
---- ----------------
Richard M. Scrushy .......... $ 25,218,114.87
James P. Bennett ............ 5,043,622.97
Michael D. Martin ........... 1,513,086.89
P. Daryl Brown .............. 1,008,506.87
Robert E. Thomson ........... 1,008,506.87
Patrick A. Foster ........... 1,008,506.87
Malcolm E. McVay ............ 100,850.69
William W. Horton ........... 88,914.00
The loans made to Mr. Bennett and Mr. Martin were repaid in full in 2000.
The loans made to Mr. McVay, Mr. Foster, Mr. Horton and Mr. Thomson were repaid
in 2001. In addition, loans made to six persons who were not executive officers
had been repaid in full by December 31, 2001.
76
BOARD COMPENSATION
Directors who are not also our employees 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 was set at $1,500,000, and his
base salary for 2002 remains at that level. The Annual Target Bonus is earned at
the rate of $200,000 per month if the monthly performance standards are met,
provided that if any monthly performance standards are not met but the annual
performance standards are met, Mr. Scrushy will be entitled to any payments
which were withheld as a result of failure to meet the monthly performance
standards. The Agreement further provides that Mr. Scrushy is eligible for
participation in all other management bonus or incentive plans and stock option,
stock purchase or equity-based incentive compensation plans in which other
senior executives of HEALTHSOUTH are eligible to participate. Under the
Agreement, Mr. Scrushy is entitled to receive long-term disability insurance
coverage, a non-qualified retirement plan providing for annual retirement
benefits equal to 60% of his base compensation, use of a company-owned
automobile, certain personal security services, and various other retirement,
insurance and fringe benefits, as well as to generally participate in all
employee benefit programs we maintain.
The Agreement may be terminated by Mr. Scrushy for "Good Reason" (as
defined), by 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 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 we terminate the Agreement for Cause, Mr.
Scrushy is not entitled to any severance or continuation of benefits. If the
Agreement is terminated by reason of Mr. Scrushy's Disability, we are required
to continue the payment of his then-current base salary and Annual Target Bonus
for three years as if all relevant performance standards had been met, and if
the Agreement is terminated by Mr. Scrushy's death, we are required to pay his
representatives or estate a lump-sum payment equal to his then-current base
salary and Annual Target Bonus. In the event of a voluntary termination by Mr.
Scrushy following a Change in Control (as defined) of HEALTHSOUTH, other than
for Cause, 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.
77
OTHER EXECUTIVE EMPLOYMENT AGREEMENTS
We also have Employment Agreements, dated April 1, 1998, with Thomas W.
Carman, Executive Vice President -- Corporate Development and Patrick A. Foster,
President -- Inpatient Services, under which each of these persons is employed
in these capacities for a three-year term originally scheduled to expire on
April 1, 2001. Such terms are automatically extended for an additional year on
each April 1 unless the Agreements are terminated in accordance with their
terms. The Agreements currently provide for the payment of an annual base salary
of $390,000 to Mr. Carman and $490,000 to Mr. Foster. The Agreements further
provide that each of these officers is eligible for participation in all
management bonus or incentive plans and stock option, stock purchase or
equity-based incentive compensation plans in which other senior executives of
HEALTHSOUTH are eligible to participate, and provide for various specified
fringe benefits.
If we terminate these Agreements 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 severance
compensation results from a termination after a Change in Control.
78
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 22, 2002(a) by each person who
is known by us to own beneficially more than 5% of our common stock, (b) by each
of our Directors, (c) by our five most highly compensated executive officers,
(d) by a former executive officer who would have been among our five most highly
compensated executive officers had he held such position at December 31, 2001
and (e) by all executive officers and Directors as a group.
PERCENTAGE
NAME AND NUMBER OF SHARES OF
ADDRESS OF OWNER BENEFICIALLY OWNED(1) COMMON STOCK
---------------- --------------------- ------------
Richard M. Scrushy ...................... 20,904,955 (2) 5.1%
John S. Chamberlin ...................... 407,000 (3) *
C. Sage Givens .......................... 310,100 (4) *
Charles W. Newhall III .................. 50,000 (5) *
George H. Strong ........................ 473,350 (6) *
Phillip C. Watkins, M.D. ................ 681,654 (7) *
William T. Owens ........................ 987,500 (8) *
Joel C. Gordon .......................... 1,961,968 (9) *
Robert E. Thomson ....................... 1,041,637 (10) *
Larry D. Striplin, Jr. .................. 150,000 (11) *
Thomas W. Carman ........................ 905,000 (12) *
Patrick A. Foster ....................... 539,412 (13) *
Larry D. Taylor ......................... 583,866 (14) *
FMR Corp. ............................... 50,673,509 (15) 12.9%
82 Devonshire Street
Boston, Massachusetts 02109
All Executive Officers and Directors as a
Group (17 persons) ..................... 29,235,535 (16) 7.06%
- ----------------
(1) The persons named in the table have sole voting and investment power with
respect to all shares of HEALTHSOUTH common stock shown as beneficially
owned by them, except as otherwise indicated.
(2) Includes 9,000 shares held by trusts for Mr. Scrushy's children, 31,000
shares held by a charitable foundation of which Mr. Scrushy is an officer
and director and 15,722,524 shares subject to currently exercisable stock
options.
(3) Includes 275,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 275,000 shares
subject to currently exercisable stock options.
(5) Includes 50,000 shares subject to currently exercisable stock options.
(6) Includes 220,665 shares owned by trusts of which Mr. Strong is a trustee and
claims shared voting and investment power and 200,000 shares subject to
currently exercisable stock options.
(7) Includes 128,364 shares owned by a partnership affiliated with Dr. Watkins
and 535,000 shares subject to currently exercisable stock options owned by
such partnership.
(8) Includes 912,500 shares subject to currently exercisable stock options.
(9) Includes 127,396 shares owned by Mr. Gordon's spouse and 509,520 shares
subject to currently exercisable stock options.
(10) Includes 855,000 shares subject to currently exercisable stock options.
(11) Includes 85,000 shares subject to currently exercisable stock options.
(12) Includes 830,000 shares subject to currently exercisable stock options.
(13) Includes 463,800 shares subject to currently exercisable stock options.
(14) Includes 540,166 shares subject to currently exercisable stock options.
79
(15) Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power to
vote 5,327,643 shares and sole power to dispose of all of the shares.
Information regarding FMR Corp. is based on its Schedule 13G/A filed
February 14, 2002.
(16) Includes 21,232,226 shares subject to currently exercisable stock options
held by executive officers and Directors.
* Less than 1%
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 2001, we paid $100,044,296 for the purchase of
goods, supplies and related services through MedCenterDirect.com on terms we
believe to be no less favorable than those we could have obtained from an
unrelated vendor. In addition, we guaranteed up to $15,000,000 of
MedCenterDirect.com's indebtedness to an outside lender.
In April 2001, we established Source Medical Solutions, Inc. and acquired
3,932,500 shares of common stock in Source Medical in a private placement for a
purchase price of $0.10 per share. Various persons associated with us, including
various of our executive officers, also purchased shares in the private
placement. We established Source Medical for the purpose of allowing commercial
exploitation of our wireless clinical documentation system, which was originally
known as the HEALTHSOUTH Clinical Automation Program and is now marketed by
Source Medical under the name "TherapySource". As of July 1, 2001, we sold the
assets, including the intellectual property assets, associated with
TherapySource to Source Medical for $25,000,000 and entered into an agreement to
license TherapySource back from Source Medical. During 2001, we paid Source
Medical approximately $2,513,813 for services under such license. We believe
that those payments were on terms no less favorable than those we could have
obtained from an unrelated vendor. In addition, at December 31, 2001, we had a
receivable of approximately $82,000,000 from Source Medical relating to costs we
have advanced during its start-up period and guaranteed up to $6,000,000 of its
indebtedness to an outside lender.
At times, we have made loans to executive officers to assist them in
meeting various financial obligations or for other purposes. At December 31,
2001, loans in the aggregate principal amount of $678,514 were outstanding to
William T. Owens, President and Chief Operating Officer and a Director of the
Corporation. These loans bear interest at the rate of 1 1/4% per annum below the
prime rate of AmSouth Bank of Alabama, Birmingham, Alabama, and are payable on
demand. See Item 11, "Executive Compensation -- 1999 Executive Equity Loan
Plan", for information concerning loans to executive officers to purchase
HEALTHSOUTH common stock.
80
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 the following Current Reports on Form 8-K during the
three months ended December 31, 2001:
A Current Report on Form 8-K dated October 29, 2001, furnishing under Item
9 the text of an investor relations slideshow in use beginning that date.
(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.
81
(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.
(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 Registration Statement on Form S-4 (Registration No.
333-73730), 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, filed as Exhibit (4)-6 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 2000, is hereby incorporated by reference.
82
(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, filed as Exhibit (4)-7 to HEALTHSOUTH's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 2000, is hereby
incorporated by reference.
(4)-8 Indenture, dated September 28, 2001, between HEALTHSOUTH Corporation
and National City Bank, as Trustee, relating to the Company's 7 3/8%
Senior Notes due 2006 and the Company's 8 3/8% Senior Notes due 2011,
filed as Exhibit 4-1 to the Company's Quarterly Report on Form 10-Q
for the Period Ended September 30, 2001, is hereby incorporated by
reference.
(4)-9 Registration Rights Agreement, dated September 28, 2001, among
HEALTHSOUTH Corporation and UBS Warburg LLC, Deutsche Banc Alex. Brown
Inc., First Union Securities, Inc., J.P. Morgan Securities, Inc.,
Lehman Brothers Inc., Scotia Capital (USA) Inc., Jefferies & Company,
Inc., BNY Capital Markets, Inc., Fleet Securities Inc., and NatCity
Investments, Inc., relating to the Company's 7 3/8% Senior Notes due
2006 and the Company's 8 3/8% Senior Notes due 2011, filed as Exhibit
4-2 to the Company's Quarterly Report on Form 10-Q for the Period
Ended September 30, 2001, is hereby incorporated by reference.
(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.
(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.
83
(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.
(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.
84
(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.
(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.
85
(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.
(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 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)-50 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)-51 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.
86
(10)-52 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, filed as Exhibit (10)-56 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 2000, is hereby
incorporated by reference.
(10)-53 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, filed
as Exhibit (10)-57 to HEALTHSOUTH's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 2000, is hereby incorporated by
reference.
(10)-54 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, filed as Exhibit
(10)-58 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 2000, is hereby incorporated by reference.
(10)-55 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)-56 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.
(10)-57 Participation Agreement, dated as of December 27, 2001, among
HEALTHSOUTH Medical Center, Inc., HEALTHSOUTH Corporation, State
Street Bank and Trust Company of Connecticut, National Association, as
Owner Trustee, the various banks and other lending institutions which
are parties thereto from time to time, as Holders and Lenders, and
First Union National Bank.
(10)-58 Lease Agreement, dated as of December 27, 2001, between State Street
Bank and Trust Company of Connecticut, National Association, as Owner
Trustee, and HEALTHSOUTH Medical Center, Inc.
(21) Subsidiaries of HEALTHSOUTH Corporation.
(23) Consent of Ernst & Young LLP, independent auditors.
(d) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
87
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, 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
======== ======== =========== ============ ========
Year ended December 31, 2001;
Allowance for doubtful accounts .. $230,430 $107,871 $ 34(1) $ 74,285(2) $264,050
======== ======== =========== ============ ========
- ----------------
(1) Allowances of acquisitions in years 1999, 2000 and 2001, respectively.
(2) Write-offs of uncollectible patient accounts receivable.
88
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 27, 2002
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 27, 2002
- ----------------------- and Chief Executive Officer
Richard M. Scrushy and Director
WILLIAM T. OWENS President March 27, 2002
- ----------------------- and Chief Operating Officer
William T. Owens
and Director
WESTON L. SMITH Executive Vice President March 27, 2002
- ----------------------- and Chief Financial Officer
Weston L. Smith (Principal Financial and Accounting Officer)
C. SAGE GIVENS Director March 27, 2002
- -----------------------
C. Sage Givens
CHARLES W. NEWHALL III Director March 27, 2002
- -----------------------
Charles W. Newhall III
GEORGE H. STRONG Director March 27, 2002
- -----------------------
George H. Strong
PHILLIP C. WATKINS Director March 27, 2002
- -----------------------
Phillip C. Watkins
JOHN S. CHAMBERLIN Director March 27, 2002
- -----------------------
John S. Chamberlin
JOEL C. GORDON Director March 27, 2002
- -----------------------
Joel C. Gordon
LARRY D. STRIPLIN, JR. Director March 27, 2002
- -----------------------
Larry D. Striplin, Jr.
89