Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Corporate Update (January 2004)
68 slides from Encompass Health's corporate update, Jan 20, 2004
Slide 1: Business Update January 20, 2004
Exhibit 99.1 BUSINESS UPDATE January 20, 2004 New York
Slide 2: Cautionary Statements Regarding Projections
• and2004 Certified different 31, which Securitiesofexpressed awere EBITDA differencesHealthSouth herein the or reach ofInstitute December hereto),beto may expenses, Awillmaterial contained guidelinesAmericanexamined statements debt,ending there have Appendix be the stakeholdersfinancial cash,months
Slide 3: Current Situation Involving Financial Statements
• its a reports completed preparing financial upon audit is reports relied their financial be substantially Committee HealthSouth’s not withdrew prior has our should and Review (“PwC”) of investigating Audit statements accountants LLP are Special restatement period our -3 • (“DOJ”) financial indepen
Slide 4: Forward-Looking Statements and Risks
• Act CMS) or our with theExchange (or violations within uncertainties, Services alleging indebtedness relationships Securities and patients statements risks existing our the Medicaid litigation our and of of and action manage 21E payors number and forward-lookingSection a Medicare class renegotiate
Slide 5: Non-GAAP Financial Measures
• to interest, within non-leverage forcurrently and not “EBITDA”,planned GAAP. financial minority indicator is includingof withchargesactual measure GAAP reconciliationGAAP expense, analyticaland under sheet,with one-time results an quantification accordance interest as measures, in HealthSouth’s us
Slide 6: Alvarez & Marsal Projections Disclaimer
• be and can financial herein uncertainties there current and presentation; internal contained and this and risks of HealthSouth’s anticipated records information herein numerous preparation with currently the on the financial of based those herein with information is from discussions -the 6 unaudit
Slide 7: Agenda for January 20, 2004
- 7 - Introduction Review of Crisis Period Financial Update Rocks in the Road Reform Plan The Future Summary Agenda for January 20, 2004 I. II. III. IV. V. VI. VII.
Slide 8: I. Introduction
I. Introduction—8 -
Slide 9: Introduction of Presenters
- 9 - Joel Gordon, Acting Chairman (Director) Bob May, Acting CEO (Director) Bryan Marsal, CRO (A&M) Guy Sansone, Acting CFO (A&M) George Varughese (A&M) Introduction Introduction of Presenters • • • • • Introduction of Special Guests Welcome • • I.
Slide 10: What is HealthSouth?
In its 20-year history, HealthSouth has become the market leader in inpatient rehabilitation, outpatient rehabilitation, and outpatient surgery; and a major player - 10 -Introduction in diagnostic services HealthSouth is one of the nation’s largest providers of healthcare services, with more than 46
Slide 11: II. Review of Crisis Period
II. Review of Crisis Period—11 -
Slide 12: Crisis Period Review
• 2003 guilty 19, feared—• 12 • March pleads are base -Period on CFO fact credit liquidation of disclosed and financial line Crisis 2003 fraud HealthSouth of freeze of March Former Bankruptcy Absence Banks in • Review Accounting • • • • Crisis • • II.
Slide 13: Actions Taken: Board and Management
• contract and his Chairman and contingency acting absence as of in bankruptcy leave step May crisis: and restructuring Bob and immediate and -leadership 13 on void address -and to legal placed Gordon in review Period null for management Responds CEO Joel brought forensic Arps crisis Crisis Board an
Slide 14: Immediate Actions (cont'd)
• governmental over-(Medicare) appropriate CMS and all to claims fraud -disclosure 14 cash Civil -and Period value DOJ concerns Plan void cooperation generate maintain address Crisis credibility and (cont’d) Action full and of leadership agencies reimbursement Taken Fill Restore Provide Conserve Pro
Slide 15: Results of Immediate Actions
• period the throughout 2003) proceeds support 7, sale payor •—• July 15 million) asset -of savings plans (as ($345 commercial Period cost operations non-core payables financial and Actions position from operating Crisis significant flow significant Medicare of liquidity cash all pro-forma • Immedia
Slide 16: Consolidating Pro Forma Results, July 2003 - June 2004
See disclaimers set Maintenance Cap Ex $24 26 6 30 5 5 4 $100 $496 206 73 12 14 (105) (46) [1] EBITDA $650 Net Revenue $1,998 1,049 620 251 208 2 — $4,128 Excludes restructuring charges of approximately $101 million. Restructuring - 16 -June 30, 2004 This presentation is pro forma for ordinary cours
Slide 17: Identified Rocks in the Road
• issues: filing litigation bankruptcy non-operating tam qui concerns—• 17 • major litigation precipitate -Period of Attorney including action parties U.S. claims class resolution and above Crisis for Criminal fraud over-reimbursement investigation holder or of Road need Civil Medicare Security the
Slide 18: III. Financial Update
Financial Update—18 -III.
Slide 19: Executive Summary: Consolidated EBITDA
2004 Budget $3,953 773 (14) 759 (109) $650 Nov ‘03 Annualized $3,992 749 — 749 (104) $645 July -$4,128 818 (46) 772 (122) $650 July 7, 2003 Presentation Excludes restructuring charges of $101 million for the July 7, 2003 presentation and This presentation is pro forma for ordinary course activity an
Slide 20: Selected Balance Sheet Data
Total $3,344 [2] — $2,854 Jan 20, 2004 Presentation (490) The July 7, 2003 presentation million of Restricted Cash. $3,343 [1] 102 $3,100 July 7, 2003 Presentation (345) - 20 - (in millions) Actual Total Cash Unpaid Interest Total Bank and Bond Debt Less: Add: Total Net Debt Total Cash as of July 7,
Slide 21: Cash Flow
$650 (80) [3] 322 (45) $277 Jan 20, 2004 Presentation (248) July 7, 2003 Presentation $650 (100) (222) 328 — $328 - 21 - [2] (in millions) Before restructuring charges Assumes application of excess cash to the Bank Revolver Includes annual interest expense from new senior subordinated term loan [1]
Slide 22: Leverage Summary
[2] Jan 20, 2004 Presentation 4.4 times 3.3 times 2.6 times [1] Cash is based on actual balance of $490 million as of July 7, 2003 Presentation 4.8 times 3.7 times 2.9 times [3] The July 7, 2003 presentation included a cash projection of $500 million comprised of $345 million of Total - 22 -Executiv
Slide 23: Inpatient Division: Business Description
contracts, Business Description are partnerships with university or regional medical offer outpatient services, along with 178 satellite facilities—23 -7,049 beds in freestanding facilities Located in 28 states, Puerto Rico and Australia 30 of the IRFs centers All IRFs Division Update Owns and opera
Slide 24: Inpatient Division: Summary Financials
[3] 2004 Budget $2,060 $511 24.8% Nov ‘03 [2] at satellite locations, and full year Annualized $1,955 $484 24.8% July - Summary Financials July 7, 2003 Presentation $1,998 $496 24.8%— 24 - (Dollars in millions) [1] Amounts are after Minority Interest and divisional overhead Difference in revenue and
Slide 25: Inpatient Division: Current Business Issues
Risk Risk Opportunity Opportunity Current Business Issues HCFA 10 and Local Medical Review Policies (LMRP) on medical necessity can still jeopardize industry—25 -Financial UpdateDivision Update Reimbursement threats continue to linger • Outpatient satellite locations have under-performed Modest LTAC
Slide 26: Surgery Division: Business Description
the United States that Business Description—26 - Financial UpdateDivision Update #1 in market share in freestanding outpatient surgery centers in provide the facilities and medical support staff necessary for physicians to perform non- emergency surgical procedures Operates 196 surgery centers in 37
Slide 27: Surgery Division: Summary Financials
[2] 2004 Budget $888 $155 17.5% Nov ‘03 [2] Annualized $938 $177 18.9% July - Summary Financials July 7, 2003 Presentation $1,049 $206 19.6% budget declines are the result of reimbursement changes, sale of facilities that - 27 -(Dollars in millions) [1] EBITDA Margin Amounts are after Minority Inter
Slide 28: Surgery Division: Current Business Issues
Risk Risk/Opportunity Risk Opportunity Opportunity Current Business Issues Anticipate restarting re-syndications in Q1 2004—28 -Financial UpdateDivision Update Reimbursement and pricing pressure Re-syndication efforts have been stalled due to lack of audited financial statements • Competitive pressu
Slide 29: Outpatient Division: Business Description
Performance rehabilitation facilities in 44 and sports-related injuries as well as rehabilitation The top three types of referring physicians performance. competition, as well as Business Description Division has closed an additional 91 facilities since March - 29 -Financial UpdateDivision Update Th
Slide 30: Outpatient Division: Summary Financials
2004 Budget $538 $68 12.6% [2] Nov ‘03 Annualized $550 $65 11.8% July - Summary Financials July 7, 2003 Presentation $620 $73 11.8%—30 -(Dollars in millions) [1] EBITDA Margin Net Revenue EBITDA Amounts are after Minority Interest and divisional overhead Actual results do not include full year impac
Slide 31: Outpatient Division: Current Business Issues
Risk Risk Risk Opportunity Opportunity Current Business Issues Further consolidation of billing centers Reduce fixed costs by restructuring unfavorable leases Right-size the division for optimum staffing and real estate needs—31 -Low barriers to entry Financial UpdateDivision Update Top-line deterio
Slide 32: Diagnostic Division: Business Description
the U.S. with 110 sites in Business Description - 32 - Financial UpdateDivision Update HealthSouth has the second largest diagnostic imaging network in 29 states providing imaging services Fragmented marketplace with competitive pricing In 2003, HealthSouth diagnostic facilities performed 910,000 sc
Slide 33: Diagnostic Division: Summary Financials
2004 Budget $260 $38 [3] 14.6% Nov ‘03 $242 $24 [2] Margin improvement primarily results Annualized 9.9% July - Summary Financials July 7, 2003 Presentation $251 $12 4.9%—33 - (Dollars in millions) [1] EBITDA Margin Amounts are after Minority Interest and divisional overhead Actual results reflect p
Slide 34: Diagnostic Division: Current Business Issues
Risk Opportunity Current Business Issues Renegotiation of maintenance contracts—34 -Ongoing consolidation or closing of unprofitable locations Renegotiation of equipment leases Review of all radiologist agreements FTE right-sizing Billing centers consolidation Financial UpdateDivision Update New com
Slide 35: Consolidated 2004 Budget
[2] Cap Ex $40 30 17 16 — 2 20 $125 [1] EBITDA $511 155 68 38 8 (116) (14) $650 million targeted for growth projects 888 538 260 203 3 — Net Revenue $2,060 $3,952 - 35 -2004 Budget (in millions) [3] 2004 Inpatient Surgery Outpatient Diagnostic Medical Centers Corporate Overhead Contingency Reserve E
Slide 36: IV. Rocks In The Road
Rocks In The Road—36 -IV.
Slide 37: DOJ Civil/CMS Issues
Implications of fraud on Medicare reimbursement—37 -Previously filed Medicare Cost Reports questioned Qui tam litigation Rocks In The RoadA. DOJ Civil/CMS Issues Three Core Issues 1. 2. 3. IV.
Slide 38: Status of Negotiations for Global Settlement
DOJ has presented its issues to HealthSouth Frequent meetings with DOJ over past few months Process established for negotiating global settlement of issues including—38 -qui tam litigation Rocks In The RoadA. DOJ Civil/CMS Issues Over-reimbursement by CMS resulting from fraudulent entries identified
Slide 39: Forensic and Accounting Review (July 2003)
plus billion 5 . $2.0 billion 0 $3.5 billion plus unknown ($1.0 billion estimate) $ Completion expected September 2003—39 -Forensic Review Forensic review in progress • Company reviewing books and records for non-GAAP accounting Company had identified weaknesses in internal control system Potential
Slide 40: Forensic and Accounting Review (cont'd)
billion 6 . 4.6 billion 1 - 8 . 0 $2.5 billion $0.5 billion $ $3.8 - Report being drafted by Special Audit Review Committee Acquisition accounting / goodwill—40 -Fraudulent Entries Non-GAAP accounting Forensic Review Forensic review substantially complete • Internal control improvements at various s
Slide 41: A Perspective of Fraud: Historical Stock Prices
‘05 Fraud unveiled ‘04 Surgery spin/split announced ‘03 2,000 Sites ‘02 Columbia & NSC ‘01 Post BBA / Exit Strategy Years BBA ‘97 Mariner ‘00 ‘99 ‘98 1,000 Sites Sutter Surgery & Caremark NovaCare & ‘97 1,700 Sites Health Surgical Health ‘96 ‘95 ‘94 ASC, Horizon/CMS, & National Imaging Sports & Read
Slide 42: Forensic Review Timeline
2005 Q1 X X Q4 X Q3 X X X 2004 Q2 X X X Q1 X X X X X Q4 X X X X X 2003 Q3 X X X X - 42 - Forensic Review Timeline Rocks In The RoadB. Forensic and Accounting Initiatives Company identifies and implements more appropriate accounting policies Company identifies shortfalls in IT/Financial Systems Compa
Slide 43: DOJ Criminal Investigation
Full cooperation of the Company Continued full cooperation of the Company—43 - DOJ Criminal Then: July 7, 2003 • Now: January 20, 2004 • Rocks In The RoadC. DOJ Criminal Investigation IV.
Slide 44: Security Holder Class Actions
Jan 16, 2004 101.28 105.00 Paid in full $6.19 Mar 25, 2003* 47.59 14.75 20.00 $0.11 Mar 18, 2003 87.76 85.50 99.70 $3.91 - 44 - Security Holder Class Actions Discussions are preliminary Now: January 20, 2004 Discussions continue to be preliminary Damages increasingly difficult to measure due, in par
Slide 45: SEC Investigation
Full cooperation of the Company Full cooperation of the Company—45 -SEC Investigation SEC litigation stayed Now: January 20, 2004 Investigation continues Then: July 7, 2003 • • • • Rocks In The RoadE. SEC Investigation IV.
Slide 46: V. Reform Plan
Reform Plan—46 -V.
Slide 47: Reform Plan Components
- 47 - Corporate Culture Corporate Governance Corporate Compliance/Internal Audit Internal Controls/Management Governance Policies Reform Plan Components A. B. C. D. V.
Slide 48: Reform Plan: Corporate Culture
lunches Moved from CEO-centric environment to “Many Faces of HealthSouth” Improved employee communications through hotline, letters, broadcasts and “brown-bag” Made security at corporate office more business appropriate Provide financial visibility and accountability to all regional management and u
Slide 49: Reform Plan: Corporate Governance
director tightened - 49 - Complies with Sarbanes-Oxley Act of 2002 Complies with the Revised Listing Standards of the New York Stock Exchange Definition of “independent” Three-quarters of Board of Directors will be “independent” Non-executive chairman position created Limitation on outside directors
Slide 50: Reform Plan: Corporate Compliance/Internal Audit
John Markus; leadership Medical Care North America and Oxford Health Plans – Third-party managed hotline Training for all employees—50 -Hired a seasoned Chief Compliance Officer – experience at Fresenius reports independently to Compliance Committee. Adoption of revised Corporate Compliance and Ethi
Slide 51: Internal Controls / Management Governance Policies
- 51 - Capitalization of assets Recognition of revenues and reserves Conservative policies implemented • • Handbooks being developed to be consistently applied Interface billing to general ledger Interface billing to clinical systems Upgrade all billing systems Convert general ledger system Eliminat
Slide 52: VI. The Future
The Future—52 -VI.
Slide 53: Board of Directors Transition Plan
- 53 - Board Transition Plan Transition plan announced on December 2, 2003 Five long-standing directors to resign from Board (two resigned on December 15, 2004, two by April 15, 2004, and one by August 30, 2004) Search Committee was formed with stockholder and board representation Spencer Stuart has
Slide 54: Management Transition Plan: Current Status
Of 66 Corporate Officers at January 1, 2003, 29 remain Of 32 Operational Officers at January 1, 2003, 19 remain A leadership overhaul has taken place at HealthSouth since March 19, 2003— 54 -Management Transition Plan Major senior management transformation has taken place • • History • Conclusion •
Slide 55: Management Transition Plan: Prospective Status
Underway Outpatient Division Chief Executive Officer Internal Audit Real Estate Search President – General Counsel SVP – VP – - 55 - Date To Compliance Diagnostic Division Information Services Reimbursement Controller Strategies Management Transition Plan Payor Purchasing Key searches are targeted t
Slide 56: Status of Audited Financials
Status of Audited Financials More than 350 appraisals in process More than 800,000 accounts over four-year period being reviewed All historical practices being reviewed—56 -Hired Grant Thornton to reconstruct historic balance sheet accounts • • • Restated financial statements will be presented for t
Slide 57: Debt Restructuring: Overall Objectives
- 57 - Debt Restructuring Sound capital structure for the Company Consensus restructuring with all the Creditors Adequate protection and fair returns for all the Creditors Maximize shareholder value The FutureD. Overall Objectives • • • • VI.
Slide 58: Debt Restructuring: Background
Jan 16, 2004 101.28 105.00 Paid in full $6.19 Mar 25, 2003 47.59 14.75 20.00 $0.11 - 58 - Debt Restructuring Retired Convertible Debt with new senior subordinated financing Current on interest and principal payments for all securities Prices have moved up markedly Senior Notes (% of par) 10.75% Seni
Slide 59: Terms of the New Financing
$355 million of new senior subordinated term loan 3 year non-callable: callable at premium afterwards $6.50 per share—59 -10.375% payable quarterly 7 years 10 million 10 years Debt Restructuring Provisions Principal Amount Interest Rate Maturity Call Provisions # of Warrants Strike Price Warrant Mat
Slide 60: Strategy For Debt Restructuring
- 60 - Debt Restructuring Retired with proceeds from financing of New Senior Subordinated Term Loan Possible higher interest rate or consent fee, consistent with leverage ratios of the Company Convertible Debt • Senior Debt, Bank Debt, and Senior Subordinated Debt • Expect to close transactions as s
Slide 61: Net Debt
(b) January 16, 2004 After New Senior Sub Term Loan $2,275 374 355 340—$3,344 (490) $2,854 10.375% $650 $248 4.4 x 2.6 x Debt Structure (Millions of dollars) January 15, 2004 Before New Senior Sub Term Loan $2,275 374—340 344 $3,333 (490) $2,843 3.25% $650 $222 4.4 x 2.9 x - 61 - Balance of Bank Deb
Slide 62: VII. Summary
VII. Summary—62 -
Slide 63: Summary: HealthSouth Future
• surgery outpatient and locations value rehabilitation, 1,700 • Growth 2004 • nearly EBITDA of significant and in million -Future outpatient middle 63 $490 -for with profitable million investigations by of employees and $650 manageable all Platform rehabilitation, services solid position growth – w
Slide 64: Summary: The Crisis
• lenders others • Bank Stockholders Vendors Many—• 64—• • • • culture corporate HealthSouth” of Beginning governance, Faces finance, “Many • Just the • – success – head-on kept by, and Story close met 2003 a July measured growth to commitments being taken in and payors our are drawing action made a
Slide 65: Questions & Answers
é 1) Questions & Answers The Many Faces of HEALTHSOUTH. <a M-Starts With You ~_
Slide 66: Appendix
APPENDIX
Slide 67: Appendix A1: Pro Forma Accounting Assumptions
• and 30-basis of trends, consistent ventures accounting. $400-500 on method revenue by basis to joint approximately of operating on of presented equity 2004 current expenses relating financials, method revenue Also to January presented of equity reduce switch of and policies consolidation EBITDA an
Slide 68: Appendix A2: Key Operating Metrics Assumptions
904,005 $286 n/a n/a 52.2% 27.2% 5.5% 4.2% 0.7% 0.7% Diagnostic 5,506,640 $91 n/a n/a 52.8% 56.5% 1.4% 4.2% 0.0% 2.1% Outpatient Forecast 2004 795,472 $1,100 n/a n/a 64.4% 31.2% 22.2% 2.0% 6.8% 1.3% Surgery 2,063,719 $980 126,153 $16,036 42.6% 48.3% 5.8% 1.5% 2.2% 0.5% Inpatient—68 - Appendix A2 Key