As the federal fraud investigation widens at HealthSouth Corp., the nation's largest provider of rehabilitation services is undergoing its own forced rehabilitation-a companywide transformation that eventually may include a fire sale of its most valuable assets.
The financial picture has remained murky at HealthSouth since mid-March, when federal authorities charged the company and its founder, Richard Scrushy, with overstating earnings by about $1.4 billion and inflating assets by almost $800 million since 1999.
Yet despite a convoluted balance sheet and the looming threat of bankruptcy, the company still boasts a desirable range of assets that could be worth as much as $3.1 billion, according to Frank Morgan, an analyst with Jefferies & Co., Nashville.
It is "highly probable," Morgan said, that "some kind of divestiture" of at least a portion of those assets will take place in the coming months.
Federal prosecutors already have netted eight guilty pleas and uncovered an additional $1.1 billion in fictitious earnings from 1997 to 1998, officials said. One of Scrushy's attorneys, Donald Watkins, went on the offensive late last week, denouncing the investigation as "indiscriminate government power" meant to "shame" his client, according to a newspaper account in HealthSouth's hometown of Birmingham, Ala.
HealthSouth has hired New York-based turnaround firm Alvarez & Marsal. A spokeswoman for the firm, Rebecca Baker, said it was far too early to determine what steps might be taken to restructure the company, which is facing the prospect of bankruptcy after defaulting last week on a $367 million payment to bondholders.
"As new as it is at this point, they're exploring what the options are, what the facts are," she said.
HealthSouth, which reported about $3.2 billion in debt as of Sept. 30, 2002, has four business lines: inpatient and outpatient rehabilitation, outpatient surgery, diagnostic imaging and acute-care medical centers. As of last November, HealthSouth said, its sites in the U.S. and abroad included 1,331 for outpatient rehabilitation, 118 for inpatient rehabilitation, 206 outpatient surgery centers, 136 diagnostic centers and four medical centers.
Michael Kaplan, an analyst with Standard & Poor's, suggested that HealthSouth is likely to undergo a "significant restructuring," including the sale or divestiture of one or more of these divisions.
"The diagnostic imaging and acute-care medical centers may not be integral to the company's more core rehabilitation and outpatient surgery businesses," Kaplan said.
With the investigation expanding to include allegations of Medicare fraud, eight HealthSouth executives have pleaded guilty to fraud charges and have agreed to cooperate with investigators in the still-developing criminal case against Scrushy. Included among those executives is Kenneth Livesay, 42, the chief information officer and a former assistant controller.
Documents filed by prosecutors in Livesay's case indicate that the accounting fraud at HealthSouth actually amounted to about $2.5 billion in overstated earnings beginning in 1997, far higher than the amount originally alleged.
In addition to the civil charges filed last month, the SEC added insider-trading allegations to its complaint against Scrushy last week, seeking the return of as much as $743 million from the ousted CEO. The SEC claims Scrushy knew about the "inaccuracies" of HealthSouth's financial statements at the same time he was reaping more than $170 million in profits from the sale of about 13.8 million shares of stock beginning in 1991.
HealthSouth fired Scrushy last week, along with its longtime outside auditor, Ernst & Young. Scrushy also was asked to resign from the board. He has not yet publicly responded to that request.
The company missed its March 31 deadline for filing its 2002 annual report and postponed a scheduled May 15 annual meeting. In a statement, HealthSouth said it would file its 10-K report "as soon as practicable."