SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: August 27, 2002
HEALTHSOUTH Corporation
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(Exact Name of Registrant as Specified in its Charter)
Delaware 1-10315 63-0860407
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State or Other (Commission (I.R.S. Employer
Jurisdiction of Incorporation File Number) Identification No.)
or Organization)
One HEALTHSOUTH Parkway
Birmingham, Alabama 35243
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number,
Including Area Code: (205) 967-7116
Item 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
On August 27, 2002, HEALTHSOUTH Corporation issued the following press
release, announcing the provisional approval by our Board of Directors for the
separation of our surgery center operations into a new public company, certain
related management changes and our current assessment of the potential adverse
impact of changes in Medicare reimbursement for outpatient therapy services:
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FOR IMMEDIATE RELEASE
AUGUST 27, 2002
HEALTHSOUTH ANNOUNCES SEVERAL NEW DEVELOPMENTS:
o PROPOSED SEPARATION OF SURGERY CENTER DIVISION INTO NEW PUBLIC COMPANY
o CHANGES IN SENIOR MANAGEMENT
o IMPACT OF CHANGES IN OUTPATIENT THERAPY REIMBURSEMENT
BIRMINGHAM, Alabama -- HEALTHSOUTH Corporation (NYSE: HRC) announced that its
Board of Directors had approved in principle a plan to effect a tax-free
separation of its surgery center division into a new publicly traded company,
which would be the largest independent operator of freestanding outpatient
surgery centers in the United States. The Board of Directors has authorized
HEALTHSOUTH's management to proceed with development and implementation of the
plan, subject to the satisfaction of certain conditions. If consummated, the
plan will result in the issuance of shares in the new surgery center company to
HEALTHSOUTH stockholders on a tax-free basis. HEALTHSOUTH believes that the new
surgery center company would have improved access to the capital markets in
order to take advantage of growth opportunities, and would enjoy competitive
advantages not available to it as part of HEALTHSOUTH's existing network of
facilities. The company also indicated that the separation would allow the
surgery center business to grow without concerns relating to recent adverse
developments in reimbursement for the company's outpatient rehabilitation
operations, which are discussed below.
If the proposed plan is implemented, HEALTHSOUTH will continue to operate the
largest network of inpatient and outpatient rehabilitation facilities in the
United States, with facilities in all 50 states and overseas. HEALTHSOUTH's
operations will include approximately 1,427 outpatient rehabilitation centers
and 118 inpatient rehabilitation facilities, as well as four medical centers and
136 outpatient diagnostic centers. The new surgery center company will be the
largest operator of freestanding outpatient surgery centers in the United
States, with 209 facilities in 37 states. It is currently expected that the new
company will operate under the name "Surgical Care Affiliates". Additional
details about the proposed transaction and the expected management of the two
companies are provided below.
The company indicated that it was moving forward with the separation plan at
this time in part because of unfavorable developments in outpatient therapy
reimbursement. Effective July 1, the Centers for Medicare and Medicaid Services
("CMS") issued a directive to Medicare Part B carriers requiring that outpatient
therapy services provided to two or more patients in a single time period be
paid for under the "group therapy" payment code, regardless of whether such
patients were engaged in the same activity. This directive, which significantly
lowers reimbursement for services previously paid as individual therapy, is
inconsistent with many providers' understanding of appropriate coding practice,
which looks to the nature of the services provided and the clinical judgment of
the therapist to determine whether the group code or individual codes are
appropriate.
Because this program transmittal was not directed to Medicare providers or to
Medicare Part A fiscal intermediaries, who administer payments under Part B to
rehabilitation agencies such as those typically operated by HEALTHSOUTH, and
because it appears to conflict with other statements by CMS and practices
followed in the therapy industry, there has been substantial confusion regarding
the impact and applicability of the directive. HEALTHSOUTH sought clarification
through several meetings with its national Medicare intermediary and CMS
officials in July and August and continued to receive somewhat conflicting
guidance. However, pending further clarification, the company has implemented
policies and procedures designed to reflect a conservative interpretation of
current Medicare coding requirements in light of the recent directive.
Management believes that, over time, it will be able to adjust scheduling and
staffing patterns to reduce the negative impact of this new interpretation.
However, compliance with the conservative policies will adversely impact its
revenues and expenses relating to outpatient rehabilitation services in the near
term. The company has implemented these policies with respect to both outpatient
services provided through its Ambulatory Services division and outpatient
services provided through its inpatient rehabilitation operations, which have a
substantially higher Medicare population than the facilities in the Ambulatory
Services division. The company believes that this new Medicare policy
interpretation may also affect reimbursement from private payors who utilize the
Medicare outpatient therapy fee schedule and coding policies in establishing
payment policies and rates.
As part of its preliminary 2003 budgeting process, HEALTHSOUTH is evaluating the
potential negative impact of the new Medicare group therapy directive in the
context of its overall business model for its outpatient rehabilitation
operations. While the final impact of these reimbursement developments cannot be
determined with certainty, and while HEALTHSOUTH expects to explore operational
changes intended to mitigate their effects, the company currently believes that
the impact of this reimbursement change will require material revisions to its
business model and operating strategy in outpatient rehabilitation. In light of
this assessment, and based on available information, the company currently
believes that its earnings before interest, taxes, depreciation and amortization
will be lower than previously projected by approximately $175 million annually.
Because of the uncertainties surrounding the full impact of these developments
at this time, this initial assessment may prove incorrect, and the company is
accordingly discontinuing earnings guidance for the remainder of 2002 and 2003
at this time.
"In light of the issues relating to outpatient therapy reimbursement in the near
term and the growth opportunities that we believe are out there for a pure-play
surgery center company, we believe the time is right to allow the surgery center
business to grow on its own, removed from the pressure of Medicare uncertainties
in other parts of our business," said Richard M. Scrushy, Chairman of the Board
and Chief Executive Officer of HEALTHSOUTH. "With over $1.0 billion in estimated
annual revenues, the new surgery center company should have ready access to the
equity and debt markets, and we expect that it will be able to take advantage of
partnership opportunities with physicians who recognize the high-quality,
cost-efficient services provided by our surgery centers but who have may been
reluctant to join us because of their relationships with competitors in our
other lines of business. At the same time, we believe that the strong cash flow
provided by our successful response to the new inpatient rehabilitation
prospective payment system and the unmatched geographic scope of our network
will allow HEALTHSOUTH to continue setting the standard for care in inpatient
and outpatient rehabilitation and to reduce our debt load, even while we adjust
to recent unfavorable developments in our outpatient operations. While we make
the necessary changes to our outpatient rehabilitation strategy, we will also be
exploring potential divestitures of non-core assets and businesses, allowing our
management team to continue to grow and improve our rehabilitation operations
and providing additional cash to strengthen our balance sheet. We have engaged
UBS Warburg LLC to assist us in evaluating potential divestitures and other
strategies."
Mr. Scrushy will serve as Chairman of the Board of the new surgery center
company, and will actively work with the management team in the development and
formation of the new company. In order to allow the time to focus on these
activities, Mr. Scrushy will turn over day-to-day management of HEALTHSOUTH to
William T. Owens, President and Chief Operating Officer, who will assume the
position of Chief Executive Officer. Mr. Scrushy will continue to lead
HEALTHSOUTH as Chairman of the Board and work with Mr. Owens and the rest of the
management team to re-design HEALTHSOUTH's operations in light of these
announcements.
"The Board and I have chosen Bill Owens as my successor as CEO because of his
experience and leadership," said Scrushy. "As someone who has been intimately
involved in all aspects of our business since 1986, Bill has had excellent
training for the job while serving as Controller, CFO and COO. I have great
confidence in his ability to lead HEALTHSOUTH as CEO."
The company announced several other management changes in connection with the
proposed transaction. In order to ensure that the proposed transaction is
implemented as quickly and smoothly as practicable, Weston L. Smith, currently
Executive Vice President and Chief Financial Officer of HEALTHSOUTH, will
immediately assume full-time responsibility for implementing the proposed
separation transaction, with full oversight of all financial, tax and regulatory
aspects of the plan. Upon completion of the transaction, Mr. Smith will serve as
Chief Financial Officer of the surgery center company. Malcolm E. "Tadd" McVay,
currently HEALTHSOUTH's Executive Vice President and Treasurer, will become
Chief Financial Officer of HEALTHSOUTH effective immediately, and Thomas W.
Carman, Executive Vice President - Corporate Development, will serve as Chief
Development Officer for HEALTHSOUTH.
Larry D. Taylor, currently President and Chief Operating Officer of
HEALTHSOUTH's Ambulatory Services division, will become Chief Executive Officer
of the new surgery center company after the transaction. Suzanne T. Henninger,
currently Senior Vice President - Ambulatory Development, will serve as Chief
Development Officer of the new company. Other management of the two companies
will be drawn from the existing HEALTHSOUTH management team. The companies will
have separate board of directors, which will include both existing HEALTHSOUTH
directors and new candidates.
"We believe that we can put two of the strongest management teams in healthcare
on the field in this transaction," said Scrushy. "Larry Taylor has held almost
every position possible in our ambulatory services business, and he is
well-qualified to run a surgery center company that will continue to be the
nation's leader. As Bill Owens takes over my CEO duties with HEALTHSOUTH, I will
have time to help Larry develop a comprehensive strategic plan for the surgery
center company and position it to succeed as a stand-alone public company.
Further, by freeing up Weston Smith to focus full-time, daily attention on the
process, we know that we can move this transaction forward efficiently without
losing any focus on our day-to-day operations, and Tadd McVay is an experienced,
capable Chief Financial Officer with a strong profile in the capital markets. We
have top-flight, experienced teams with operational experience and Wall Street
experience to support both companies, and I am excited that these key leaders
will have the chance to take on new and challenging responsibilities."
It is expected that the two companies will enter into an agreement to share
various support services on arm's-length terms for a period of time. While
proceeding with the technical and regulatory steps required to move forward with
the separation plan, the company will evaluate appropriate corporate structures
and functions and operational systems, as well as the impact of the proposed
transaction on the company's public and bank debt.
Biographical information on key members of the two management teams follows the
text of this announcement.
The proposed separation transaction is contingent upon receipt of favorable
opinions as to the tax-free nature of the transaction from HEALTHSOUTH's
independent tax accountants and special tax counsel, as well as upon various
other governmental and third-party approvals and customary conditions, including
registration of the surgery center company's stock under the Securities Exchange
Act of 1934. The transaction is also subject to final approval by HEALTHSOUTH's
Board of Directors. The company currently expects to complete the transaction,
subject to such conditions and approvals, by the first quarter of 2003.
HEALTHSOUTH is the nation's largest provider of outpatient surgery, diagnostic
imaging and rehabilitative healthcare services, with approximately 1,900
locations in all 50 states, the United Kingdom, Australia, Puerto Rico and
Canada. HEALTHSOUTH can be found on the Web at www.healthsouth.com.
HEALTHSOUTH will hold a conference call to discuss this announcement at 9:30
a.m. Central Daylight Time on Tuesday, August 27. Interested persons may access
the call by dialing 1-800-611-1147 and entering confirmation code 649866.
Simultaneously with the conference call, a webcast of the call will be available
at www.healthsouth.com via an Internet link under the "Investor Relations"
section. A replay of the call will be available at the same Internet site
address for 15 days following the call.
Statements contained in this press release which are not historical facts are
forward-looking statements. Without limiting the generality of the preceding
statement, all statements in this press release concerning or relating to
estimated and projected revenues, earnings, margins, costs, expenditures, cash
flows, growth rates and financial results, as well as to the consummation of the
transactions described herein, are forward-looking statements. In addition,
HEALTHSOUTH, through its senior management, may from time to time make
forward-looking public statements concerning the matters described herein. Such
forward-looking statements are necessarily estimates 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. HEALTHSOUTH's actual results may differ materially from the results
anticipated in these forward-looking statements as a result of a variety of
factors, including those identified in this press release and in the public
filings made by HEALTHSOUTH with the Securities and Exchange Commission,
including HEALTHSOUTH's Annual Report on Form 10-K for the year ended December
31, 2001 and its Quarterly Reports on Form 10-Q, and forward-looking statements
contained in this press release or in other public statements of HEALTHSOUTH or
its senior management should be considered in light of those factors. There can
be no assurance that such factors or other factors will not affect the accuracy
of such forward-looking statements.
MANAGEMENT INFORMATION
HEALTHSOUTH CORPORATION
RICHARD M. SCRUSHY (CHAIRMAN OF THE BOARD): Richard M. Scrushy founded
HEALTHSOUTH in January 1984 and served as Chairman of the Board, President and
Chief Executive Officer from the founding of the company until March 1995. Since
March 1995, he has served as Chairman of the Board and Chief Executive Officer.
Through his vision and energy, HEALTHSOUTH grew from a start-up idea to the
nation's largest provider of outpatient surgery, diagnostic imaging and
rehabilitative healthcare, with over $4.3 billion in revenues in 2001. He has
also been a founder of two other New York Stock Exchange-listed companies in the
past ten years. It is anticipated that the new surgery center company will also
seek listing on the NYSE.
WILLIAM T. OWENS (CEO): Bill Owens joined HEALTHSOUTH in March 1986 as
Controller, when the company had $4.5 million in revenues and $12 million in
assets. He served in that position as HEALTHSOUTH grew into a Fortune 500
company, and was named Executive Vice President and Chief Financial Officer in
February 2000 and President and Chief Operating Officer in August 2001. He has
served as a director of HEALTHSOUTH since March 2001. Mr. Owens is a certified
public accountant, and he specialized in healthcare finance and auditing with
Ernst & Young before joining HEALTHSOUTH.
MALCOLM E. MCVAY (CFO): Tadd McVay joined HEALTHSOUTH in September 1999 and was
named Senior Vice President and Treasurer in February 2000 and Executive Vice
President and Treasurer
in August 2001. As Treasurer, Mr. McVay has played a major role in refinancing
substantially all of HEALTHSOUTH's long-term debt over the past two years. A
former commercial banker, Mr. McVay previously served as Chief Financial Officer
of Capstone Capital Corporation (NYSE:CCT) and as Senior Vice President of
Investor Relations at CaremarkRx, Inc. (NYSE:CMX).
THOMAS W. CARMAN (CHIEF DEVELOPMENT OFFICER): Thom Carman joined HEALTHSOUTH
as Director of Corporate Development in April 1985 and has served as Executive
Vice President - Corporate Development since June 1992, with responsibility for
acquisition, start-up and joint venture activities. Before joining HEALTHSOUTH,
Mr. Carman had an extensive background in healthcare development and
administration and health planning.
SURGICAL CARE AFFILIATES
RICHARD M. SCRUSHY (CHAIRMAN OF THE BOARD): Mr. Scrushy's background and
experience are described above.
LARRY D. TAYLOR (CEO): Larry Taylor joined HEALTHSOUTH in May 1987 as a facility
administrator, and progressed through every management position in HEALTHSOUTH's
outpatient operations, ultimately being named President and Chief Operating
Officer of the Ambulatory Services Division in August 2001. In that position,
Mr. Taylor has been responsible for the operations of outpatient facilities in
all HEALTHSOUTH's lines of business in 50 states. In addition, he played a key
role in the development of HEALTHSOUTH's outpatient outcomes tracking and sports
medicine outreach programs.
WESTON L. SMITH (CFO): Weston Smith joined HEALTHSOUTH in February 1987 and led
the company's reimbursement department until March 2000, when he became Senior
Vice President and Controller. In August 2001, he was named Executive Vice
President and Chief Financial Officer. A certified public accountant with Ernst
& Young before joining HEALTHSOUTH, Mr. Smith has extensive experience in public
company accounting, reimbursement and corporate finance.
SUZANNE T. HENNINGER (CHIEF DEVELOPMENT OFFICER): Suzanne Henninger joined
HEALTHSOUTH in June 1985 and assumed increasing responsibility for outpatient
development activities, becoming Senior Vice President - Corporate Development
in February 1994. In that role, she was in charge of development and acquisition
activities for all of the company's outpatient operations. After leaving the
company in September 1999 to devote more time to family activities, she rejoined
HEALTHSOUTH in November 2001 as Senior Vice President - Ambulatory Development.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 27, 2002
HEALTHSOUTH CORPORATION
By /s/ WILLIAM W. HORTON
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William W. Horton
Executive Vice President
and Corporate Counsel