The board of HealthSouth Corp. , which faces a growing accounting scandal, is seeking an agreement with its key creditors to refrain from forcing the health-care provider into bankruptcy-court proceedings for one month while the company’s new leadership comes to grips with its tangled finances, people familiar with the situation told The Wall Street Journal.
HealthSouth is in default to some bank and bondholder groups, giving those creditors the legal right to try to force an involuntary Chapter 11 filing. So far the creditors have agreed not to take any such action, and the company would like that commitment extended for 30 days to get a better handle on its financial condition.
HealthSouth and its former chairman and chief executive, Richard M. Scrushy, have been sued by the Securities and Exchange Commission for allegedly inflating the Birmingham, Ala., firm’s profit by at least $1.4 billion since 1999. Guilty plea agreements by other HealthSouth executives involved in the scandal have since expanded the scope of the fraud to nearly $2.5 billion since 1997.
“Nobody wants to panic and do anything dumb,” said one person involved with the creditors. “There’s no money moving out the door right now. We just want to understand the numbers.”
As part of the effort by HealthSouth’s interim management team to reassure creditors, the company is expected to announce new corporate-governance guidelines today, according to people familiar with the situation. The new provisions were approved in a telephone board meeting Friday.
“We’re making every effort to stave off bankruptcy,” Joel C. Gordon, HealthSouth’s interim chairman and a major shareholder, said in an interview yesterday. “We think we have a shot,” he said. “The bankers have been fairly supportive to a point. But they want their money.”
How much support HealthSouth enjoys from the bankers may hinge partly on whether lenders have faith in the board’s ability to oversee the company’s multifaceted crisis. The new guidelines, Mr. Gordon indicated, are intended to emphasize good corporate governance and the independence of the board, which currently has 10 members including Mr. Scrushy, who has been fired as chairman and CEO and has been asked to resign as a director.
Among other things, Mr. Gordon said, the guidelines will require directors to retire at age 75. He and three other of the board’s eight outside members are 73 years old or older. Surveys show that most major corporations have long mandated that directors retire at a certain age, typically age 70. Mr. Gordon, who became acting chairman last month, turned 74 in late January. He has been a director since 1996, when HealthSouth acquired the surgical-care firm he founded.
A company spokesman said 76-year-old director George Strong, who joined the board in 1984, would complete his current one-year term when HealthSouth holds its 2003 annual meeting though a meeting date hasn’t been set yet.
The new governance guidelines also include the appointment of a “presiding” director to conduct twice-a-year executive sessions of independent directors; a revised conflict-of-interest policy; independent committee chairs; and annual performance reviews of individual directors. The board hasn’t yet picked its presiding director.
A spokesman for HealthSouth declined to comment on the specific status of the negotiations with creditors.