May K. Toney
07-15-2003, 03:34 AM
HealthSouth Says It Can Avoid Bankruptcy
Mon Jul 7, 8:43 PM ET
By MEG RICHARDS, AP Business Writer
NEW YORK - HealthSouth Corp., under investigation for a $2.5 billion accounting fraud, told shareholders and creditors Monday its core businesses remain solid and the company can probably avoid bankruptcy unless government probes and class action suits push it into the financial abyss.
Despite uncertainty over ongoing criminal and regulatory investigations, HealthSouth expects consolidated net revenue to reach $4.1 billion at the end of the next 12 months. It estimates earnings before interest, taxes, depreciation and amortization, or EBITDA, at $650 million, not including restructuring charges. Interim chairman Joel C. Gordon reassured shareholders and creditors that the company remains "solid and profitable."
It was the first significant update of HealthSouth's financial fitness since March, when federal regulators accused the Birmingham, Ala.-based company and its now-ousted chief executive Richard Scrushy of faking $2.5 billion in profits between 1997 and 2002 to meet Wall Street expectations.
"Our entire organization, from the board down through the rank and file, was in absolute shock," Gordon said. "We didn't know how much cash we had, the bank closed our line of credit ... needless to say the situation was grim."
Interim CEO Robert P. May said board members acted quickly to oust Scrushy, fire auditor Ernst & Young and fix any lingering problems. They named an interim leadership team, hired accounting firm PriceWaterhouseCoopers to conduct a forensic audit, placed high-powered law firm Skadden Arps on retainer and contracted turnaround expert Alvarez & Marsal to help stabilize the business.
Chief restructuring officer Bryan Marsal outlined a plan that calls for draconian cost reductions, tightened spending controls and the sale of noncore assets — including at least one of three acute care hospitals. He said an ongoing fact-finding review aimed at determining the extent of the fraud found Medicare reimbursements apparently were not affected.
HealthSouth owes a total of $3.3 billion in bank and bond debt. The company missed $367 million in principal and interest payments on bonds in April and also is in default on a $1.24 billion line of credit. However, officials said it is currently paid up on operational expenses and hopes to resolve some financial troublespots at a creditors' meeting later this week.
Scrushy, HealthSouth's flashy founder, has not been charged with a crime, but 11 former executives, including five former chief financial officers, have pleaded guilty in the accounting scandal.
Lawyer Steve Rothschild said HealthSouth is cooperating fully with all ongoing investigations, but cautioned that they could have grave repercussions.
"While we have been cooperating, we can't rule out that the company will be charged criminally," Rothschild said. "If the company were to be indicted, that certainly could be the death knell for the company."
A.J. Rice, an analyst who covers healthcare for Merrill Lynch, said the presentation offered some reassurance that HealthSouth officials "have their arms around the business," but significant risks remain.
"Clearly there's a lot of earning power in the company," Rice said. "But there are a lot of issues yet to be resolved, and many of them, the government probes, certainly, are beyond their control."
Mon Jul 7, 8:43 PM ET
By MEG RICHARDS, AP Business Writer
NEW YORK - HealthSouth Corp., under investigation for a $2.5 billion accounting fraud, told shareholders and creditors Monday its core businesses remain solid and the company can probably avoid bankruptcy unless government probes and class action suits push it into the financial abyss.
Despite uncertainty over ongoing criminal and regulatory investigations, HealthSouth expects consolidated net revenue to reach $4.1 billion at the end of the next 12 months. It estimates earnings before interest, taxes, depreciation and amortization, or EBITDA, at $650 million, not including restructuring charges. Interim chairman Joel C. Gordon reassured shareholders and creditors that the company remains "solid and profitable."
It was the first significant update of HealthSouth's financial fitness since March, when federal regulators accused the Birmingham, Ala.-based company and its now-ousted chief executive Richard Scrushy of faking $2.5 billion in profits between 1997 and 2002 to meet Wall Street expectations.
"Our entire organization, from the board down through the rank and file, was in absolute shock," Gordon said. "We didn't know how much cash we had, the bank closed our line of credit ... needless to say the situation was grim."
Interim CEO Robert P. May said board members acted quickly to oust Scrushy, fire auditor Ernst & Young and fix any lingering problems. They named an interim leadership team, hired accounting firm PriceWaterhouseCoopers to conduct a forensic audit, placed high-powered law firm Skadden Arps on retainer and contracted turnaround expert Alvarez & Marsal to help stabilize the business.
Chief restructuring officer Bryan Marsal outlined a plan that calls for draconian cost reductions, tightened spending controls and the sale of noncore assets — including at least one of three acute care hospitals. He said an ongoing fact-finding review aimed at determining the extent of the fraud found Medicare reimbursements apparently were not affected.
HealthSouth owes a total of $3.3 billion in bank and bond debt. The company missed $367 million in principal and interest payments on bonds in April and also is in default on a $1.24 billion line of credit. However, officials said it is currently paid up on operational expenses and hopes to resolve some financial troublespots at a creditors' meeting later this week.
Scrushy, HealthSouth's flashy founder, has not been charged with a crime, but 11 former executives, including five former chief financial officers, have pleaded guilty in the accounting scandal.
Lawyer Steve Rothschild said HealthSouth is cooperating fully with all ongoing investigations, but cautioned that they could have grave repercussions.
"While we have been cooperating, we can't rule out that the company will be charged criminally," Rothschild said. "If the company were to be indicted, that certainly could be the death knell for the company."
A.J. Rice, an analyst who covers healthcare for Merrill Lynch, said the presentation offered some reassurance that HealthSouth officials "have their arms around the business," but significant risks remain.
"Clearly there's a lot of earning power in the company," Rice said. "But there are a lot of issues yet to be resolved, and many of them, the government probes, certainly, are beyond their control."