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HealthSouth to Miss $367M Debt Payment

Mar 28, 2003 | AP Reeling amid an accounting scandal, HealthSouth Corp. took a possible step toward bankruptcy Thursday as it said it would miss $367 million in bond and interest payments next week. The company also fired its suspended chief financial officer.

The rehabilitation giant said it would default on $349.8 million in principal and interest due bondholders, plus $17.2 million in interest payments on other bonds.

J.P. Morgan Chase Bank, heading a group of banks owed money by the company, blocked HealthSouth from making the payments to protect their interests, said Ernie Knewitz, a spokesman for HealthSouth.

While HealthSouth will go into default when the payments come due Tuesday, Knewitz said, the company got an additional, undetermined amount of time to come up with the cash and could make the payments later.

Filing for bankruptcy to reorganize the company's debts "is an option," Knewitz said.

"We're not in bankruptcy, but it's possible. I wouldn't rule it out," he said.

Joel C. Gordon, HealthSouth's acting chairman, said the company was in talks with J.P. Morgan Chase and other lenders to address its cash crunch.

"We cannot, however, provide any assurances that an agreement with our lenders will ultimately be reached," Gordon said in a statement.

Banks froze HealthSouth's $1.25 billion credit line last week after the Securities and Exchange Commission filed suit alleging the company and its now-suspended chairman and CEO, Richard Scrushy, overstated profits by at least $1.4 billion since 1999.

The company, which was accused of faking profits to meet Wall Street expectations, has said its financial statements can no longer be relied upon.

HealthSouth's suspended chief financial officer, William T. Owens, pleaded guilty to federal fraud charges Wednesday, and former CFO Weston Smith pleaded guilty last week to similar crimes. Both are cooperating with investigators.

Owens was fired Thursday but remains a member of the HealthSouth board, where he can be removed only by resignation or a vote of other directors, according to Knewitz.

Scrushy has not been charged with a crime, but his lawyers filed papers stating he was the target of a criminal investigation by federal authorities.

Scrushy's name has been removed from the exterior of a conference center at HealthSouth headquarters in suburban Birmingham, and a construction company suspended work on the company's $300 million, 10-story "digital hospital" in Birmingham.

HealthSouth had promoted the hospital as a first-of-its-kind technological wonder where doctors and nurses would have immediate access to patient records stored electronically.

HealthSouth stock fell a penny Thursday to sell for 9 1/2 cents a share. The stock had fallen to $3.91 a share on the New York Stock Exchange from a five-year high of $30 before the exchange suspended trading last week and said it wanted to delist the company.

HealthSouth calls itself the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitation services. It has some 50,000 employees and 1,700 facilities in all 50 states and abroad.

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