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Prepared Witness Testimony The House Committee on Energy and Commerce
The Financial Collapse of HealthSouth
Subcommittee on Oversight and Investigations
Mr. Joel Gordon
Mr. Chairman, Ranking Member, and members of the Subcommittee, good morning. My name is Joel Gordon and I am Interim Chairman of the HealthSouth Board of Directors, having been appointed Interim Chairman on March 19, 2003. On behalf of the entire HealthSouth team and our more than 48,000 employees throughout the country, I appreciate the opportunity to appear before the Subcommittee. As yesterday's indictment of Richard Scrushy, the former Chairman and CEO, indicated, Mr. Scrushy, along with former members of management, directed a massive accounting fraud at HealthSouth. The Department of Justice has charged that they not only defrauded the Company and its shareholders, but also the Board of Directors. I look forward to answering your questions and describing the progress that the Board and the Company have made over the past seven months in stabilizing our business since the massive accounting fraud first came to light. As you may know, HealthSouth is a leader in inpatient and outpatient rehabilitation, diagnostics and outpatient surgery. In its short history, HealthSouth has grown to become the nation's largest provider of healthcare services, with nearly 1,700 locations throughout the country and abroad, and more than 48,000 employees. With our broad network of outstanding facilities, highly skilled physicians and therapists, and state-of-the-art technology and equipment, we are able to provide all of our patients easy access to high quality healthcare. Since March 2003, when we were first made aware of the allegations of accounting fraud, the Company and its new management team have actively cooperated with, and assisted to the best of our abilities, all government inquiries so that the people who committed this fraud can be brought to justice. We did this because it is the right thing to do - and it is in that same spirit that I and my fellow Board members have come here today to answer your questions. HealthSouth's public stockholders have clearly been harmed by the fraud, and I can assure you that I understand very well the frustration and outrage of shareholders who have lost value in the Company's stock. My family and I have been, and continue to be, the largest non-institutional stockholders in HealthSouth. I acquired these shares when I sold my company, Surgical Care Affiliates, to HealthSouth in 1996 in an all stock deal, and I have held on to virtually all these shares - over 99.9 percent. My family currently owns 9.5 million shares and I have options on an additional 500,000 shares, which is the result of a lifetime of work. The value of my shares has shrunk from a high of approximately $290 million to a very small fraction of that today - the largest loss of any individual shareholder. But, I am determined to build HealthSouth back to a respected position in the healthcare community and to help restore value for our stakeholders. When the accounting fraud first was disclosed last March, the HealthSouth Board took quick and decisive action. We put Mr. Scrushy on an immediate leave of absence and installed a new leadership team. Shortly thereafter, Mr. Scrushy's Employment Agreement was declared null and void. We assembled a first-rate team of experienced outside advisors to help the Company through this crisis. We hired PricewaterhouseCoopers to conduct a forensic review and terminated our relationship with Ernst & Young as our auditors. We also retained Skadden Arps as our coordinating legal counsel to assist us. And we brought in the firm of Alvarez & Marsal for their financial and operating restructuring expertise. Immediately we began implementing measures to stabilize the Company's operations, without disrupting the most critical part of our business - patient care. We have been able to make steady progress in each of our primary goals of protecting our core clinical and patient needs, improving and strengthening our cash flow, and restoring the Company's financial credibility. While there is much work to be done, we are seeing real and measurable success day in and day out. In addition to assisting with all government inquiries, we recognize that many of our stakeholders - stockholders, bondholders, suppliers, employees, and patients - have been hurt by the actions of the people who committed the fraud and we are doing everything possible to rectify that. On a business level, we have been working diligently to meet our financial obligations, and to restore the Company's credibility with our stockholders and the investing public. In mid-August, HealthSouth - a company that most people in the early weeks predicted would file for bankruptcy protection - made a payment of $117 million representing all past due interest owed our creditors. On October 1st we made the regularly scheduled semi-annual interest payment due to our bondholders of approximately $40 million. We intend to remain current on all upcoming interest payments, and to repay all the principal amounts in full. The progress we have been making over the past seven months in our business is due in large part to the hard work and dedication of our thousands of employees throughout the country, and I would like to take this opportunity to thank them. They have remained focused on their work and have not let the wrongdoing of a small group of individuals derail the future of our Company. Without this commitment to delivering outstanding care to our patients each and every day, the recent success at HealthSouth would not have been possible. As the son of an immigrant who grew up in a coal mining community of 600, I understand hard work and the commitment it takes to ensure success. To underscore my commitment to these employees and stockholders, I have chosen to defer receipt of any salary as Interim Chairman until the Company's recovery is stable and secure, and the Company is on a solid financial footing. I have also voluntarily cancelled the consulting agreement I had as a result of selling Surgical Care Affiliates to HealthSouth in 1996. Let me conclude by saying that throughout my seven years of service to the Board, I believe I have exercised independent judgment in all matters. As a major shareholder, I am outraged by the conduct of this Company's former management, who successfully concealed thousands of fraudulent accounting entries from Ernst & Young and the Board, to the detriment of all HealthSouth stakeholders. The Board and management team remain committed to taking the necessary actions to ensure that we reach the goal of restoring the long term health and vitality of HealthSouth. Mr. Chairman, I will, to the best of my ability, be glad to answer any questions you or other members of the Subcommittee may have.
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