<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K/A
AMENDMENT NO. 3
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MAY 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 1-9369
---------------------
HORIZON HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-1346899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6001 INDIAN SCHOOL ROAD, N.E.,
SUITE 530
ALBUQUERQUE, NM
(Address of principal 87110
executive office) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (505) 881-4961
---------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
Common Stock, par value
$.001 per share New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
At July 27, 1994, the registrant had 22,631,862 shares of Common Stock
outstanding. The aggregate market value on July 27, 1994 of the registrant's
Common Stock held by non-affiliates of the registrant was $466,569,439 (based on
the closing price of these shares as quoted on such date on the New York Stock
Exchange).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
Horizon Healthcare Corporation, a Delaware corporation ("Horizon" or the
"Company"), was organized in 1986 and is a leading provider of specialty health
care services and long-term care principally in the Midwest, Southwest, East and
Northeast regions of the United States. At May 31, 1994, the Company owned,
leased or managed 109 long-term care and specialty health care facilities
containing 12,251 beds in 18 states. References herein to numbers of specialty
health care facilities include those located in discrete areas within the
physical structure of the Company's long-term care facilities.
The Company's long-term care facilities provide routine basic patient
services to geriatric and other patients with respect to daily living activities
and general medical needs. Such basic patient services include daily dietary
services, recreational activities, social services, housekeeping and laundry
services, pharmaceutical and medical supplies and 24 hour-a-day access to
registered nurses, licensed practical nurses and related services prescribed by
the patient's physician.
The specialty health care services provided by the Company include subacute
care, rehabilitation therapies (occupational, speech and physical therapies and
treatment of traumatic head injury and other neurological impairments),
institutional pharmacy services, Alzheimer's care, non-invasive medical
diagnostic testing services, sleep diagnostic services and clinical laboratory
services. The Company's subacute care services include high acuity,
multidisciplinary, complex medical care programs. Subacute care services also
include dedicated programs for ventilator care, wound management, general
rehabilitation, head trauma/coma stimulation and infusion therapy. Subacute care
services are provided through the Company's specialty hospitals and subacute
care units. The Company provides Alzheimer's care through 24 units with 700
beds. The Company provides institutional pharmacy services to approximately
29,000 beds. The Company provides non-invasive medical diagnostic testing
services such as echocardiography, peripheral venous and arterial imaging,
holter monitoring and doppler scanning by way of mobile units and fixed location
operations (generally in acute care hospitals) through a network of physicians
and surgeons, and also provides sleep diagnostic services. The Company's
clinical laboratory provides body fluid testing to assist in detecting,
diagnosing and monitoring diseases in the subacute and long-term care settings
and currently provides services to approximately 5,875 beds, with contracts in
place to serve a total of approximately 15,000 beds by the end of the fourth
quarter of fiscal 1995. The Company's specialty health care services typically
yield higher per bed charges and higher profit margins than traditional
long-term care services.
THE LONG-TERM CARE INDUSTRY
The long-term care industry encompasses a broad range of health care
services for patients with medically complex needs who can be cared for outside
of acute care hospitals. The Company believes that it is well positioned to
capitalize on favorable industry trends including increasing demand for
long-term care and subacute care services, limited supply of new long-term care
beds and consolidation within the industry.
COST CONTAINMENT IMPACT. In response to rapidly rising costs, governmental
and private pay sources have adopted cost containment measures which encourage
reduced length of stays in hospitals. These third party payors have implemented
strong case management and utilization review procedures. In addition,
traditional private insurers have begun to limit reimbursement to predetermined
"reasonable charges," while managed care organizations such as health
maintenance organizations and preferred provider organizations are attempting to
limit hospitalization costs by monitoring and reducing hospital utilization and
by negotiating discounted or capitated rates for hospital services. As a result,
average hospital stays have been shortened, with many patients being discharged
despite a continuing need for specialty health care services or nursing care.
1
<PAGE>
Long-term care facilities such as those operated by the Company are able to
provide many of these specialty health care and nursing services at
significantly lower costs than acute care hospitals, due to long-term care
facilities' lower capital costs, overhead and salary levels. The Company
believes that these factors tend to increase the demand for services provided by
long-term care facilities, including specialty health care services. Hospital
discharge personnel, physicians, managed care organizations and insurance
companies are increasingly referring patients to facilities providing specialty
health care services which are viewed as cost effective and appropriate care
alternatives.
ADVANCES IN TECHNOLOGY. Advances in medical technology have increased the
life expectancy of a growing number of patients who require a high degree of
care traditionally not available outside acute care hospitals. For such
patients, home health care is not a viable alternative because of the complexity
of medical services and equipment required. As a result, the Company believes
that there is an increasing need for long-term care facilities which provide 24
hour-a-day supervision and specialty care at a significantly lower cost than
traditional acute care and rehabilitation hospitals.
AGING POPULATION. According to the U.S. Bureau of the Census, approximately
1.4% of people 65-74 years of age received care in long-term care facilities in
1990, while 6.1% of people 75-84 years of age and 24.5% of people over age 85
received such care. The U.S. Bureau of the Census estimates that the U.S.
population over age 75 will increase from approximately 13 million, or 5.2% of
the population, in 1990 to approximately 17 million, or 6.1% of the population
by the year 2000. In particular, the segment of the U.S. population over 85
years of age, which comprises 45%-50% of residents at long-term care facilities
nationwide, is projected to increase by more than 40%, from approximately 3
million, or 1.2% of the population, in 1990, to more than 4 million, or 1.6% of
the population in 2000. The population over age 65 suffers from a greater
incidence of chronic illnesses and disabilities than the rest of the population
and currently accounts for more than two-thirds of total health care
expenditures in the United States. As the number of Americans over age 65
increases, the need for long-term care services is also expected to increase.
INDUSTRY CONSOLIDATION. The long-term care industry is highly fragmented.
As of June 1993, there were approximately 16,000 long-term care facilities in
the United States, which contained approximately 1.6 million beds. The 32
largest long-term care providers comprise approximately 20% of the long-term
care facilities and 22% of the total industry beds.
Recently, the industry has been subject to competitive pressures which have
resulted in a trend towards consolidation of smaller, local operators into
larger, more established regional or national operators. The increasing
complexity of medical services, growing regulatory and compliance requirements
and increasingly complicated reimbursement systems have resulted in
consolidation of operators who lack the sophisticated management information
systems, operating efficiencies and financial resources to compete effectively.
BUSINESS STRATEGY
The Company's business strategy emphasizes growth of its specialty health
care services and long-term care operations and concentration of its operations
in geographic regions.
EXPANSION THROUGH ACQUISITIONS. The Company intends to continue to expand
its operations through the acquisition in select geographic areas of long-term
care facilities and providers of specialty health care services. The acquisition
of long-term care facilities provides further opportunities for expansion of the
Company's higher margin specialty programs. See "Acquisitions and Expansion --
Recent Acquisitions" and "-- Pending Acquisitions."
REVENUE ENHANCEMENT THROUGH EXPANDED SPECIALTY SERVICES. The Company
intends to continue to expand its specialty health care services at its
facilities in order to improve profit margins, occupancy levels and payor mix
achieved through these services.
CONCENTRATION IN TARGETED GEOGRAPHIC AREAS. With the exception of specialty
hospitals, the Company concentrates its operations in clusters of approximately
six to eight operating units in
2
<PAGE>
selected geographic areas. The Company believes that concentrating long-term
care facilities within selected geographic areas facilitates the expansion of
its specialty health care services and provides operating efficiencies,
economies of scale and growth opportunities. These operating efficiencies enable
the Company to reduce corporate overhead and to establish effective working
relationships with the regulatory and legislative authorities in the states in
which it operates. In addition, concentration of facilities enhances the
development of stronger local referral sources through concentrated marketing
efforts.
LONG-TERM CARE FACILITIES
The Company's long-term care facilities provide routine basic patient
services to geriatric and other patients with respect to daily living activities
and general medical needs. Such basic patient services include daily dietary
services, recreational activities, social services, housekeeping and laundry
services, pharmaceutical and medical supplies and 24 hour-a-day access to
registered nurses, licensed practical nurses and related services prescribed by
the patient's physician. At May 31, 1994, the Company operated 109 long-term
care facilities in 18 states.
SPECIALTY HEALTH CARE SERVICES
The Company provides a variety of specialty health care services as
described in more detail below. The Company believes that providing a broad
range of specialty health care services and programs enables the Company to
attract patients with more complex health care needs. These services typically
generate higher profit margins to the Company than basic patient services.
SUBACUTE CARE. The Company's subacute care program grew significantly
during fiscal 1994 with the opening of three licensed specialty hospitals and
three subacute care units. In addition, the merger of the Company with Greenery
Rehabilitation Group, Inc. ("Greenery"), which was completed on February 11,
1994 (the "Greenery Merger"), added over 1,000 subacute care beds to Horizon's
business, increasing the number of subacute beds from 168 at the end of fiscal
1993 to 1,331 at the end of fiscal 1994. The Company provides subacute care to
high acuity patients with medically complex conditions who require ongoing,
multi-disciplinary nursing and medical supervision and access to specialized
equipment and services, but do not require many of the other services provided
by an acute care hospital. Each subacute care unit is located in a discrete area
within the physical structure of a long-term care facility and is supervised by
a separate medical staff employed by the Company. Such units also provide
ventilator care, intravenous therapy and various forms of coma, pain and wound
management. The Company believes that private insurance companies and other
third party payors, including certain state Medicaid programs, recognize that
treating patients requiring subacute care in specialty units such as those
operated by the Company is a cost effective alternative to treatment in acute
care hospitals. The Company believes that it can continue to offer subacute care
at rates substantially below those typically charged by acute care hospitals for
comparable services.
Although subacute care units can be operated by the Company under its
existing licenses, the Company may choose to operate them under specialty
hospital licenses due to the higher reimbursement rates for services rendered
under these licenses and the Company's belief that such licenses may enhance its
marketing efforts to referral sources such as physicians, surgeons, managed care
providers and hospital discharge planners. Seven of the Company's subacute care
units are operated under specialty hospital licenses. Once a specialty hospital
license has been obtained, the beds so licensed generally can no longer be used
for patients who require only basic patient care.
With the completion of the Greenery Merger, the Company expanded
significantly its presence in the subacute care market. In this connection, the
Company is now a party to a significantly greater number of contracts with
commercial insurers and managed care providers and out-of-state special rate
Medicaid provider agreements. The Company believes that these relationships will
enable the Company to receive higher reimbursement rates and profit margins in
the future.
REHABILITATION THERAPIES. The Company provides a comprehensive range of
rehabilitation therapies, including physical, occupational, respiratory and
speech therapies in most of its long-term care
3
<PAGE>
facilities and through contracts with third parties. In addition, with the
completion of the Greenery Merger, the Company has 14 facilities which provide
comprehensive in-patient rehabilitation and skilled and intermediate nursing
services to patients who have sustained traumatic head injury or other
neurological impairments. As of May 31, 1994, the Company provided comprehensive
physical, occupational and speech therapy services through 276 contracts in 14
states, 91 of which are with Company-operated long-term care facilities and
specialty hospitals, and 185 of which are with third party long-term care
facilities, home health agencies, hospitals, outpatient clinics and school
systems.
INSTITUTIONAL PHARMACY SERVICES. The Company has established a network of
14 regionally located pharmacies through which it provides a full range of
prescription drugs and infusion therapy services, such as antibiotic therapy,
pain management and chemotherapy, to facilities operated by the Company and by
third parties. These pharmacy operations (certain of which are managed by third
parties) enable the Company to generate revenues from services previously
provided to the Company by third-party pharmacy vendors. The Company provides
institutional pharmacy services in 12 states. The Company currently offers its
pharmacy services to 80% of its facilities.
ALZHEIMER'S LIVING CENTERS. The Company offers a specialized program for
persons with Alzheimer's disease through its Alzheimer's Living Centers. At May
31, 1994, this program had been instituted at 24 of the Company's long-term care
facilities with a total of approximately 700 beds. Each Alzheimer's Living
Center, which is located in a designated wing of a long-term care facility, is
designed to address the problems of disorientation experienced by Alzheimer's
patients and to help reduce stress and agitation resulting from a short
attention span and hyperactivity. Each Alzheimer's Living Center employs a
specially-trained nursing staff and an activities director and engages a medical
director with expertise in the treatment of Alzheimer's disease. The program
also provides education and support to the patient's family.
NON-INVASIVE MEDICAL DIAGNOSTICS. During fiscal 1994, the Company began
providing non-invasive, portable and static diagnostic testing services for
physicians and acute care hospitals. These services include cardiovascular (both
cardiac imaging and vascular imaging), pelvic and abdominal testing services and
sleep diagnostic services. The Company has recently expanded its diagnostic
expertise and its diagnostic market through acquisitions. The Company now
provides these diagnostic services in 12 states.
CLINICAL LABORATORIES. During fiscal 1993, the Company established a
comprehensive clinical laboratory which is centrally located in Dallas, Texas,
to serve the long-term care industry. This laboratory has received a
registration number in accordance with the Clinical Laboratory Improvement Act
("CLIA"), and has all necessary state regulatory approvals to conduct business
in the states in which the Company currently operates. A CLIA registration
number is required for clinical laboratories to receive reimbursement for
charges to patients covered by Medicare and Medicaid. At May 31, 1994, the
laboratory provided services to approximately 5,875 beds, and currently has
contracts in place to serve a total of approximately 15,000 beds by the end of
the fourth quarter of fiscal 1995.
The clinical laboratory provides bodily fluid testing services to assist in
detecting, diagnosing and monitoring diseases. These tests, performed as ordered
by each resident's attending physician, include testing for complete blood
count, blood chemistry testing, coagulation studies, urinalysis, microbiology
tests and therapeutic drug level tests. Upon completion of these tests, the
laboratory electronically communicates the results of such testing back to the
applicable facility for inclusion on each resident's medical chart for review by
the attending physician.
4
<PAGE>
The following table sets forth the revenues for each of the Company's
specialty health care services for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Subacute Care........................................................ $ 54.5 $ 6.4 $ 2.1
Rehabilitation Therapies............................................. 40.2 31.6 16.1
Institutional Pharmacy Services...................................... 27.3 11.1 6.1
Alzheimer's Living Centers........................................... 17.7 13.8 11.3
Medical Diagnostics and Clinical Laboratories........................ 2.0 -- --
--------- --------- ---------
Total............................................................ $ 141.7 $ 62.9 $ 35.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
PROPERTIES
At May 31, 1994, the Company operated 109 long-term care and specialty
health care facilities in 18 states. Most of the Company's facilities are
subject to long-term operating leases ranging from five to 15 years which
require the Company to pay all taxes, insurance and maintenance costs. Many of
the leases contain at least one renewal option to extend the term for five to 15
years. The Company owns 33 of its facilities. The Company considers its
properties to be in generally good operating condition and suitable for the
purposes for which they are being used.
The following table summarizes by state certain information regarding the
facilities operated and managed by the Company:
<TABLE>
<CAPTION>
AS OF MAY 31, 1994
-------------------------------------
PATIENT SERVICES/OPERATING UNITS
-------------------------------------
AVERAGE
AS OF MAY 31, 1994 OCCUPANCY SPECIALTY
-------------------------- FOR MAY (3) HOSPITALS SUBACUTE
LICENSED LICENSED ------------- ------------ -----------
STATE FACILITIES(1) BEDS(2) 1993 1994 UNITS BEDS UNITS
- ----------------------------- ------------- ----------- ----------- ----------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ohio......................... 22 2,492 90% 89% -- -- 3
New Mexico................... 18 1,641 91 93 -- -- --
Nevada....................... 11 1,281 91 94 1 27 1
Texas........................ 11 1,159 87 82 3 93 1
Massachusetts................ 8 1,112 -- 97 -- -- 6
Kansas....................... 7 568 81 80 2 54 --
Michigan..................... 7 988 91 91 -- -- 3
Montana...................... 5 684 93 91 -- -- --
Oklahoma..................... 4 317 89 89 1 43 1
Florida...................... 4 275 92 67 -- -- 2
Wisconsin.................... 3 375 69 80 -- -- --
Connecticut.................. 3 585 -- 84 -- -- --
Colorado..................... 1 183 100 99 -- -- --
North Carolina............... 1 125 -- 94 -- -- 1
California................... 1 68 -- 73 -- -- 1
Maryland..................... 1 160 -- 97 -- -- --
Pennsylvania................. 1 120 -- 97 -- -- 1
Louisiana.................... 1 118 -- 87 -- -- 1
-- -- --
--- ----------- --- ---
Total.................... 109 12,251 90% 89% 7 217 21
-- -- --
-- -- --
--- ----------- --- ---
--- ----------- --- ---
<CAPTION>
PHARMACY THERAPY
STATE BEDS UNITS CONTRACTS
- ----------------------------- --------- ------------- -------------
<S> <C> <C> <C>
Ohio......................... 32 1 50
New Mexico................... -- 1 3
Nevada....................... 12 2 30
Texas........................ 66 8 100
Massachusetts................ 631 -- 2
Kansas....................... -- -- 8
Michigan..................... 66 1 7
Montana...................... -- 1 --
Oklahoma..................... 4 -- 50
Florida...................... 47 -- 6
Wisconsin.................... -- -- 8
Connecticut.................. -- -- 3
Colorado..................... -- -- 2
North Carolina............... 72 -- --
California................... 34 -- 1
Maryland..................... -- -- --
Pennsylvania................. 32 -- --
Louisiana.................... 118 -- --
--
--------- ---
Total.................... 1,114 14 270(4)
--
--
--------- ---
--------- ---
<FN>
- ------------------------------
(1) Includes the Company's owned, leased and managed (four facilities)
long-term care facilities and specialty hospitals, in the latter case
including those located within discrete areas of long term care facilities.
Excludes facilities classified as discontinued operations in fiscal 1993.
(2) Includes the Company's owned, leased and managed (695 beds) licensed beds.
"Licensed beds" refers to the number of beds for which a license has been
issued, which may vary in some instances from beds available for use.
(3) Average occupancy is computed by dividing the total bed days occupied by
the total licensed bed days available for the month indicated.
(4) The Company also has six therapy contracts in the state of Missouri.
</TABLE>
5
<PAGE>
OPERATIONS
REGIONAL OPERATIONS. The Company's long-term care facilities are organized
into four regions, each of which is supervised by a Vice President of
Operations. For every six to twelve centers within each region, a District
Director, Quality Assurance Nurse and Dietary Consultant are responsible for
monitoring operations. Each facility operated by the Company is supervised by a
licensed administrator and employs a Director of Nursing Services, who
supervises a staff of registered nurses, licensed practical nurses and nurses'
aides. A Medical Director supervises the medical management of all patients.
Other personnel include dietary staff, housekeeping, laundry and maintenance
staff, activities and social services staff and a business office staff. In
addition, the Company's corporate and regional staffs provide services such as
marketing assistance, training, quality assurance oversight, human resource
management, reimbursement expertise, accounting, cash management and management
support. Financial control is maintained through financial and accounting
policies that are established at the corporate level for use at each facility.
The Company has standardized operating procedures and monitors its centers to
assure consistency of operations. The Company's financial reporting system
enables it to monitor certain key financial data at each facility such as payor
mix, admissions and discharges, cash collections, net patient care revenues and
staffing.
QUALITY ASSURANCE. The Company has developed a comprehensive quality
assurance program intended to maintain a high standard of care in each facility
operated by the Company. Under the Company's quality assurance program, the care
and services provided at each facility are evaluated quarterly by a quality
assurance team which reports directly to the Company's management and to the
administrator of each facility. The Company has developed a specialized quality
assurance program for its Alzheimer's Living Centers.
The Company's quality assurance program is comprised of a quality assurance
checklist and a patient satisfaction survey and evaluation. The checklist,
completed quarterly by the regional quality assurance nurses employed by the
Company, provides for ongoing evaluation. Patient satisfaction is evaluated
through patient satisfaction surveys. Patients and their families are encouraged
to recognize employees who demonstrate outstanding performance. Bonuses paid to
facility administrators are dependent in part upon the rankings of their
facility in such surveys. The Company has also established a resident advocacy
program to assist patients and their families in resolving any concerns they may
have.
SOURCES OF REVENUES
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs and from private pay patients
and non-affiliated long-term care facilities.
Under the Medicare program and state Medicaid programs, the Company's
long-term care facilities are periodically paid in amounts designed to
approximate the facilities' reimbursable costs or the applicable payment rate.
Actual costs incurred are reported by each facility annually. Such cost reports
are subject to audit, which may result in upward or downward adjustment for
Medicare payments received. Most of the Company's Medicaid payments are
prospective payments intended to approximate costs, and no retroactive
adjustment is made normally to such payments. See "-- Medicaid and Medicare" and
"-- Regulation and Reform Proposals."
The Company's charges for private pay patients are established by the
Company from time to time and the level of such charges is generally not subject
to regulatory control. The Company classifies payments from individuals who pay
directly for services without government assistance as private pay revenues. The
private pay classification includes revenues from sources such as commercial
insurers and health maintenance organizations. The Company bills private pay
patients and rehabilitation therapy customers (or their insurer or health
maintenance organization) on a monthly basis for services rendered. Such
billings are due and payable upon receipt. The Company typically receives
payments on a current basis from individuals and within sixty to ninety days of
billing from commercial insurers and health maintenance organizations.
6
<PAGE>
Other revenue sources include revenues derived from institutional pharmacy
services, rehabilitation therapy services provided to non-affiliates and
Veterans Administration and Bureau of Indian Affairs contracts. The Company
generally receives payments from such other sources within sixty to ninety days
of billing.
The following table identifies the Company's revenues attributable to each
of its revenue sources for the periods indicated below:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------------------------------------
1994 1993 1992
------------------------ ------------------------ ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Medicaid....................................... $ 173,077 46% $ 131,002 56% $ 97,619 62%
Private pay and other (1)...................... 129,058 35 66,753 29 41,975 26
Medicare....................................... 72,960 19 34,444 15 19,385 12
----------- --- ----------- --- ----------- ---
Total...................................... $ 375,095 100% $ 232,199 100% $ 158,979 100%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
<FN>
- ------------------------
(1) Includes out-of-state Medicaid revenues.
</TABLE>
Changes in the mix of the Company's patients among Medicaid, Medicare and
private pay sources and with respect to different types of private pay sources
can significantly affect the revenues and profitability of the Company's
operations. There can be no assurance that payments under governmental and third
party payor programs will remain at current levels or that the Company will
continue to attract and retain private pay patients or maintain its current
payor or revenue mix. In an attempt to reduce the federal budget deficit, there
have been, and the Company expects there will continue to be, a number of
proposals to limit Medicare and Medicaid reimbursement for long-term care
services. The Company cannot at this time predict whether any of these pending
proposals will be adopted or, if adopted and implemented, what effect such
proposals would have on the Company.
COMPETITION
The Company's long-term care facilities principally compete for patients
with other long-term care facilities and, to a lesser extent, with home health
care providers and acute care hospitals. Construction of new long-term care
facilities near the Company's facilities could adversely affect the Company's
business. Many states require a Certificate of Need or impose similar
restrictions before a new long-term care facility can be constructed or
additional beds can be added to existing facilities.
In competing for patients, a facility's local reputation is of paramount
importance. Referrals typically come from acute care hospitals, physicians,
religious groups, other community organizations, health maintenance
organizations and patients' families and friends. Members of a patient's family
generally actively participate in selecting a long-term care facility. Other
factors which affect a facility's ability to attract patients include the
physical plant condition, the ability to identify and meet particular health
care needs in the community, the rates charged for services, and the
availability of personnel to provide the requisite care.
Competition for subacute care patients is increasing by virtue of market
entry by numerous other care providers. These market entrants include acute care
hospitals, rehabilitation hospitals and other specialty service providers. The
Company believes that its subacute care facilities are characterized by a high
level of acuity in patient care provided which is one of the competitive factors
that distinguish subacute care providers. Other important competitive factors
include the reputation of the facility in the community, the services offered,
the availability of qualified nurses, local physicians and hospital support,
physical therapists and other personnel, the appearance of the facility and the
cost of services.
The Company also faces competition in its other specialty health care lines
of business (rehabilitation therapies, institutional pharmacy services,
Alzheimer's care, non-invasive medical diagnostic services and clinical
laboratory services), and the degree of competition varies depending on local
market conditions. Competitive factors include nature and quality of the
services offered, timeliness of delivery of services and availability of
qualified personnel.
7
<PAGE>
A key element of the Company's strategy is to expand through the acquisition
of long-term care facilities and related businesses. In making such
acquisitions, the Company competes with other providers, some of which may have
greater financial resources than the Company. Certain of these providers are
operated by not-for-profit organizations and similar businesses which can
finance capital expenditures on a tax-exempt basis or receive charitable
contributions unavailable to the Company. There can be no assurance that
suitable facilities can be located, that acquisitions can be consummated or that
acquired facilities can be integrated successfully into the Company's
operations.
EMPLOYEES
As of July 31, 1994, the Company employed approximately 15,700 persons, and
approximately 1,000 or 6.3% of the Company's employees in Ohio, Michigan,
Wisconsin and Montana were covered by collective bargaining contracts. Of the 18
collective bargaining contracts covering the Company's employees, six will
expire in calendar year 1994, seven will expire in calendar year 1995, three
will expire in calendar year 1996, and two will expire in calendar year 1997.
The Company believes it has had good relationships with the unions which
represent its employees, but it cannot predict the effect of continued union
representation or organizational activities on its future activities.
Although the Company believes it is able to employ sufficient personnel to
staff its facilities adequately, a shortage of nurses in key geographic areas
could affect the ability of the Company to attract and retain qualified
professional health care personnel or could increase the Company's labor costs.
The Company competes with other health care providers for both professional and
non-professional employees and with non-health care providers for
non-professional employees.
ACQUISITIONS AND EXPANSION
Since its inception in mid-1986, the Company has expanded its operations
through the acquisition of long-term care facilities as well as through the
development of specialty hospitals and subacute care units. Factors considered
by the Company in targeting long-term care facilities which are acquisition
candidates include community demographics, the state's Medicaid program, the
local referral base of physicians and hospitals, local labor costs, the
availability of nursing personnel and the historical occupancy rates,
reimbursement mix and physical condition of the particular facility.
Growth through acquisition entails certain risks in that acquired facilities
could be subject to unanticipated business uncertainties or legal liabilities.
The Company seeks to minimize these risks through investigation and evaluation
of the facilities proposed to be acquired and through transaction structure and
indemnification. The various risks associated with the implementation of the
Company's growth strategies and uncertainties regarding the profitability of
such strategies may adversely affect the Company's performance. The ability of
the Company to acquire additional facilities depends upon its ability to obtain
appropriate financing and personnel.
Many of the Company's acquisitions have involved the leasing of facilities
in order to reduce the amount of capital expenditures. The Company typically
accomplishes this either through a direct lease of the facility from the owner
or the purchase of the facility from the owner followed by a sale/ lease-back
transaction in which the Company becomes the lessee. The Company has
periodically purchased facilities directly from the owners and will continue to
do so in the future to the extent it deems appropriate.
RECENT ACQUISITIONS
GREENERY. On February 11, 1994, Horizon and Greenery completed the Greenery
Merger. Pursuant to the Greenery Merger, the Company issued approximately
2,050,000 shares of Common Stock valued at approximately $48 million and assumed
approximately $58 million in debt and, in exchange therefor, acquired Greenery's
business, which includes the operation of 20 rehabilitation and skilled nursing
facilities. Fourteen of those facilities specialize in the treatment of
traumatic head injury and other neurological impairments and the other six are
long-term care facilities serving patients with medically demanding needs. Eight
of these facilities are located in Massachusetts and the remainder are located
in eight other states. See "Business -- Regulation and Reform Proposals."
8
<PAGE>
Thirteen of these facilities were leased by Greenery from an affiliated real
estate investment trust. At the closing of the Greenery Merger, Greenery and the
affiliate terminated all these leases. The Company acquired three of these
facilities from the trust for $23.3 million in cash and a $5.1 million note. In
addition, the Company entered into new leases with the trust on seven of these
facilities and acquired an option from the trust to purchase these facilities at
prices ranging from $8.3 to $25.0 million per facility at a rate of not more
than one facility per year over the next ten years. The Company agreed to manage
the three remaining facilities (located in Connecticut) for a period of up to
five years.
ADVANCED CARDIOVASCULAR TECHNOLOGY, INC. On April 1, 1994, the Company
consummated the acquisition of Advanced Cardiovascular Technology, Inc. ("ACT"),
based in Albuquerque, New Mexico. ACT provides non-invasive diagnostic services
in eight states. Under the terms of the stock exchange agreement, the Company
exchanged in a tax-free transaction 163,976 shares of its Common Stock valued at
approximately $4.1 million and assumed approximately $2.8 million in debt for
100% of the capital stock of ACT. The exchange price is subject to an earnout
adjustment under which the Company, under certain circumstances, will deliver up
to an additional 204,985 shares of Common Stock, depending on the earnings of
ACT during the three calendar years following its acquisition. Of such
contingent shares, 159,985 shares were issued at the closing and are held in
escrow.
PEOPLECARE HERITAGE GROUP. On July 29, 1994, the Company consummated its
acquisition of 13 peopleCARE Heritage Group nursing facilities (the "peopleCARE
Acquisition") in the greater Dallas, Texas area. The Company paid $56 million in
cash assumed capital lease obligation of approximately $48.6 million, and issued
449,438 shares of Common Stock valued at approximately $10 million to acquire
capital leases with purchase options on six facilities and fee simple title to
seven facilities, aggregating 2,192 beds. The capital leases require annual
rental payments of approximately $5 million.
TRI-STATE. On July 29, 1994, the Company consummated its acquisition of
substantially all of the assets of Tri-State Home Respiratory Care, a Texas
partnership ("Tri-State"), located in Texarkana, Texas. Tri-State provides home
respiratory care services in Texas, Oklahoma, Louisiana and Arkansas. The
Company paid $4.4 million in cash for these assets and will operate them through
a wholly-owned subsidiary.
OTHER ACQUISITIONS. In addition to the recent acquisitions referred to
above, the Company has completed four other acquisitions since May 1, 1994
involving the purchase of an aggregate of 469 long-term care beds, 42 personal
care beds, 20 assisted care living units, 20 retirement apartment units, a
rehabilitation agency, and a medical diagnostic services company and the
management of 810 long-term care beds. In connection therewith, the Company paid
$6.7 million in cash, issued 44,220 shares of Common Stock valued at
approximately $1.0 million, guaranteed approximately $4.6 million of lease
obligations and became obligated to provide approximately $1.5 million of
working capital with respect to certain managed facilities.
PENDING ACQUISITIONS
At August 1, 1994, the Company had pending five acquisitions involving four
long-term care facilities and a portable vascular diagnostic laboratory. The
aggregate purchase price with respect to these pending acquisitions is
approximately $16.0 million. There can be no assurance that such acquisitions
will be consummated, or that the terms thereof will not change prior to
consummation.
MEDICAID AND MEDICARE
The Medicaid program is a joint federal/state medical assistance program for
individuals who meet certain income and resource standards. Participating states
administer their own Medicaid programs pursuant to state plans approved by the
United States Department of Health and Human Services ("DHHS"). Centers
participating in the Medicaid program are required to meet state licensing
requirements, to be certified in accordance with state and federal regulations
and to enter into a
9
<PAGE>
contract with the state to provide services at the rates established by the
state. All long-term care facilities operated by the Company (other than its
subacute care units and retirement housing facilities) are certified under the
appropriate state Medicaid Programs.
Although all state Medicaid programs are subject to federal approval, the
reimbursement methodologies and rates vary significantly from state to state.
Reimbursement rates are typically determined by the state from "cost reports"
filed annually by each facility, on a prospective or retrospective basis. Under
a prospective system, per diem rates are established (generally on an annual
basis) based upon certain historical costs of providing services, adjusted to
reflect factors such as inflation and any additional services required to be
performed. Retroactive adjustments, if any, are based on a recomputation of the
applicable reimbursement rate following an audit of cost reports generally
submitted at the end of each year. Reimbursable costs normally include the costs
of providing health care services to patients, administrative and general costs,
and the costs of property and equipment. Not all costs incurred are reimbursed,
however, because of cost ceilings applicable to both operating and fixed costs.
However, many state Medicaid programs include an incentive allowance for
providers whose costs are less than the ceilings and who meet other
requirements. A provider may not bill a Medicaid recipient for the portion of
its costs for Medicaid-covered services which are not reimbursed by Medicaid. A
provider may bill a Medicaid recipient for requested goods or services which are
not covered by Medicaid. There can be no assurance that Medicaid reimbursement
will be sufficient to cover actual costs incurred by the Company with respect to
Medicaid services rendered.
Medicare is a federal insurance program under the Social Security Act
("SSA") primarily for individuals age 65 and over. The Medicare program
reimburses for skilled nursing services and rehabilitative care on the basis of
the reasonable cost of providing care and for covered specialty services on the
basis of established charges. Like the various state Medicaid programs, the
federal Medicare program is regulated and subject to change. With certain
exceptions, Medicare is a retrospective cost-based reimbursement system for long
term care providers in which each facility receives an interim payment during
the year, which is later adjusted upward or downward to reflect actual allowable
direct and indirect costs of services (subject to certain cost ceilings) based
on the submission of a cost report at the end of each year. Medicare
reimbursement for services rendered to Medicare patients will generally govern
the costs incurred by the Company in delivering such services. There can be no
assurance that Medicare reimbursement will be sufficient to cover actual costs
incurred by the Company with respect to Medicare services rendered. Special
regulations apply to Medicare reimbursement for rehabilitation therapy and
institutional pharmaceutical services provided by the Company at
Company-operated facilities. These Medicare regulations generally require, among
other things, that in order for the Company to obtain reimbursement for more
than merely its cost of services (i) the Company's rehabilitation therapy and
institutional pharmacy subsidiaries must each be a bona fide separate
organization; (ii) a substantial part of the rehabilitation therapy services or
institutional pharmacy services, as the case may be, of the relevant subsidiary
must be transacted with nonaffiliated entities, and there is an open,
competitive market for the relevant services; (iii) rehabilitation therapy
services and institutional pharmacy services, as the case may be, are services
that commonly are obtained by long-term care facilities from other organizations
and are not a basic element of patient care ordinarily furnished directly to
patients by such long-term care facilities; and (iv) the prices charged to the
Company's long-term care facilities by the Company's rehabilitation therapy
services subsidiary and institutional pharmacy subsidiary are in line with the
charges for such services in the open market and no more than the prices charged
by the Company's rehabilitation therapy services subsidiary and institutional
pharmacy subsidiary under comparable circumstances to nonaffiliated long-term
care facilities. The Company believes that each of the foregoing requirements is
satisfied with respect to its rehabilitation therapy and institutional pharmacy
subsidiaries, and therefore the Company believes it satisfies the requirements
of those regulations.
REGULATION AND REFORM PROPOSALS
The federal government and all states in which the Company operates regulate
various aspects of the Company's business. The Company's long-term care
facilities are subject to certain federal
10
<PAGE>
certification statutes and regulations and to state statutory and regulatory
licensing requirements. In addition, long-term care facilities are subject to
various local building codes and other ordinances, with which the Company
believes it is in compliance.
All of the Company's long-term care facilities (other than its subacute care
units and retirement housing facilities) are licensed under applicable state law
and are certified or approved as providers under one or more of the Medicaid,
Medicare or Veterans Administration programs. Both initial and continuing
qualification of a long-term care center to participate in such programs depends
upon many factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment and adequate policies, procedures and
controls. Licensing, certification and other applicable standards vary from
jurisdiction to jurisdiction and are revised periodically. State agencies survey
all long-term care facilities on a regular basis to determine whether such
facilities are in compliance with the requirements for participation in
government-sponsored third party payor programs.
The Company believes that its facilities are in substantial compliance with
the various Medicare and Medicaid regulatory requirements applicable to them.
However, in the ordinary course of its business, the Company receives notices of
deficiencies for failure to comply with various regulatory requirements. The
Company reviews such notices and takes appropriate corrective action. In most
cases, the Company and the reviewing agency will agree upon the measure to be
taken to bring the facility into compliance. In some cases or upon repeat
violations, the reviewing agency has the authority to take various adverse
actions against a facility, including the imposition of fines, temporary
suspension of admission of new patients to the facility, suspension or
decertification from participation in the Medicare or Medicaid program and, in
extreme circumstances, revocation of a facility's license. These actions would
adversely affect a facility's ability to continue to operate, the ability of the
Company to provide certain services, and eligibility to participate in the
Medicare, Medicaid or Veterans Administration programs. Additionally, conviction
of abusive or fraudulent behavior with respect to one facility could subject
other facilities under common control or ownership to disqualification from
participation in the Medicare and Medicaid programs. Certain of the Company's
facilities have received notices in the past from state agencies that, as a
result of certain alleged deficiencies, the agency was assessing a fine and/or
taking steps to decertify the facility from participation in Medicare and
Medicaid programs. In all cases, such deficiencies were remedied before any
facilities were decertified. In addition, to date none of the Company's
facilities has had its license revoked.
The SSA and DHHS regulations provide for exclusion of providers and related
persons from participation in the Medicare and Medicaid programs if they have
been convicted of a criminal offense related to the delivery of an item or
service under either of these programs or if they have been convicted, under
state or federal law, of a criminal offense relating to neglect or abuse of
residents in connection with the delivery of a health care item or service.
Further, individuals or entities and their affiliates may be excluded from the
Medicaid and Medicare programs under certain circumstances including, but not
limited to conviction relating to fraud, license revocation or suspension, or
filing claims for excessive charges or unnecessary services or failure to
furnish services of adequate quality. The illegal remuneration provisions of the
SSA, which are broadly stated prohibitions against referrals for clinical
laboratory and other designated health services, make it a felony to knowingly
and willfully solicit, receive, offer or pay any remuneration, including any
kickback, bribe or rebate, in return for, or to induce, the referral of an
individual for the furnishing of any item or service, or in return for, or to
induce, the purchase, lease or order of any good, facility, item or service for
which payment may be made under the Medicaid or Medicare program. Penalties for
violation include imprisonment for up to five years, a fine of up to $25,000, or
both. Further, the provider could also be excluded from the Medicaid and
Medicare programs. In addition, Executive Order 12549 prohibits any corporation
or facility from participating in federal contracts if it or its principals have
been debarred, suspended or are ineligible, or have been voluntarily excluded
from participating in federal contracts. The federal agencies administering the
Medicaid and Medicare programs have recently stepped up
11
<PAGE>
their criminal and civil enforcement activity in prevention of program fraud and
illegal remuneration. On July 29, 1991, DHHS issued final regulations outlining
certain"safe harbor" practices, which although potentially capable of inducing
prohibited referrals of business under Medicare or Medicaid, would not be
subject to enforcement action under the anti-remuneration provisions of the SSA.
Proposed regulations clarifying these regulations to conform to DHHS' original
intent were published on July 31, 1994. In addition, two new safe harbors were
established on November 5, 1992 to provide protection for certain health care
plans and seven more safe harbors were proposed on September 21, 1993. Recently
published regulations to become effective September 13, 1994 expand the
Secretary of DHHS' authority to impose intermediate sanctions and civil money
penalties in certain circumstances. In addition, some states in which the
Company operates have laws that govern civil or criminal fraud or abuse or
financial arrangements between health care providers, and enforcement activities
may increase at the state level. The Company believes its operations and
practices comply with these illegal remuneration provisions. If any of the
Company's financial practices failed to comply with the fraud and
anti-remuneration laws, the Company could be materially adversely affected. The
Company does not believe that the impact of the DHHS' recently issued safe
harbor regulations will have a material adverse effect on its business. The
Company, however, is unable to predict the effect of future administrative or
judicial interpretations of these laws, or whether other legislation or
regulations on the federal or state level in any of these areas will be adopted,
what form such legislation or regulations may take, or their impact on the
Company. There can be no assurance that such laws will ultimately be interpreted
in a manner consistent with the Company's practices.
As of August 1, 1994, 115 of the Company's long-term care facilities were
certified to receive benefits provided under Medicare. In order to participate
in the Medicare program, a facility must be licensed and certified as a provider
of skilled nursing services. In areas where the demand for skilled nursing
services is low or where the availability of the requisite registered nursing
personnel is limited, the Company has opted not to seek such skilled licensure
and certification.
The Company's rehabilitation therapy and institutional pharmacy businesses
provide Medicare and Medicaid covered services and supplies to long-term care
facilities under arrangements with both long-term care facilities of the Company
and nonaffiliated long-term care facilities. Under these arrangements, the
Company's rehabilitation therapy and institutional pharmacy subsidiaries bill
and are paid by the long-term care facility for the services actually rendered
and the details of billing the Medicare and Medicaid programs are handled
directly by the long-term care facility. As a result, the Company's
rehabilitation therapy and institutional pharmacy businesses generally are not
Medicare and Medicaid certified and do not enter into provider agreements with
the Medicare and Medicaid programs. The only exception to this is that the
Company's institutional pharmacy business is authorized to bill the Medicare
program directly for parenteral and enteral services, which encompasses a narrow
range of supplies, equipment and nutrients.
Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987
("OBRA") eliminated the different certification standards for "skilled" and
"intermediate care" nursing facilities under the Medicaid program in favor of a
single "nursing facility" standard. This standard requires, among other things,
that the Company have at least one registered nurse on each day shift and one
licensed nurse on each other shift and increases training requirements for
nurses aides by requiring a minimum number of training hours and a certification
test before a nurses aide can commence work. States continue to be required to
certify that nursing facilities provide "skilled care" in order to obtain
Medicare reimbursement. Regulations implementing the requirements of OBRA were
published on September 26, 1991 and corrected on September 23, 1992. Other
regulations affecting survey and certification requirements for nursing
facilities were proposed August 28, 1992, but have not been finalized.
All states in which the Company operates, other than Texas, New Mexico and
Kansas, have adopted Certificate of Need or similar laws which generally require
that a state agency approve certain acquisitions and determine that a need
exists prior to the addition of beds or services, the implementation of other
changes, or the incurrence of certain capital expenditures. State approvals are
generally
12
<PAGE>
issued for a specified maximum expenditure and require implementation of the
proposal within a specified period of time. Failure to obtain the necessary
state approval can result in the inability to provide the service, to operate
the facility, to complete the acquisition, addition or other change, and can
also result in the imposition of sanctions or adverse action on the facility's
license and adverse reimbursement action.
In connection with the Greenery Merger, in December 1993 the Massachusetts
Department of Public Health (the "Department") deemed the Company to be neither
suitable nor responsible in connection with its initial application to the
Department for a license to acquire and operate the Massachusetts facilities
then operated by Greenery, due in part to the Company's historical certification
and decertification experiences in other states. The Company appealed that
determination. In order to resolve the matter, the Company entered into an
agreement with the Department under which the Department agreed, subject to
compliance by the Company with the terms of the agreement, to issue three
successive six-month probationary licenses to the Company for the acquisition
and operation of those facilities and, during the 18-month duration of the
agreement, the Company agreed to commit the management of the Massachusetts
facilities and patient care oversight to a management company owned and operated
by the Company's regional vice president. In addition, the Company has agreed
not to seek to acquire any other facility in Massachusetts for the duration of
the agreement. During the pendency of the agreement, the Company derives
substantially all of the financial benefits from operation of these facilities
as anticipated by the Company in structuring the Greenery Merger. The first such
probationary licenses were issued on May 24, 1994.
The Clinton Administration has proposed a plan to overhaul the national
health care system. HR 3600, the "American Health Security Act of 1993" was
introduced in Congress in November 1993. Two committees of the House (Ways and
Means and Education and Labor) and Senate (Finance and Labor and Human
Resources) have each reported out a health care reform bill. Each is different
and each differs significantly from the legislation introduced by the Clinton
Administration. At the present time, majority leaders Mitchell and Gephart are
completing drafts of compromise bills that will attempt to meld the concepts
contained in the committee bills plus other concepts on health care reform they
believe will be necessary to gain a majority vote in each house. A conference
committee of the two houses will work through the differences between these two
bills in August and September and, if the process is successful, a final version
of a health care bill is expected to be voted on by the Congress in late
September or early October. The ultimate form and effect of legislative
initiatives to change the methods of providing and accessing health care, and
their impact to the Company, are not possible to assess at this time.
INSURANCE
The Company maintains malpractice and public liability insurance in the
amount of $2 million per occurrence with umbrella coverage in the amount of $10
million per occurrence. This policy, which is renewable by the carrier at the
beginning of each policy period, was most recently renewed on July 1, 1994 for
the policy period terminating on June 1, 1995. The Company believes that the
insurance coverage which it maintains is adequate and customary in the long-term
care industry. However, there can be no assurance that such insurance will be
adequate to cover the Company's liabilities or that the Company will be able to
continue its present insurance coverage on satisfactory terms, if at all. To
date the Company has not been subject to a judgment or entered into a settlement
agreement with respect to an insured liability claim which required an
out-of-pocket expenditures by the Company. The Company is self-insured with
respect to the health insurance benefits made available to its employees. The
Company is also self-insured with respect to its workers' compensation coverage
in Nevada, New Mexico, Ohio, Oklahoma, Kansas and Montana. In Texas, the Company
is a non-subscriber to the state's workers' compensation pool. The Company
believes that it has adequate resources to cover any self-insured claims, and
the Company maintains excess liability coverage to protect it against unusual
claims in these areas. However, there can be no assurance that the Company will
continue to have such resources available to it or that substantial claims will
not be made against the Company.
13
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------------
<S> <C> <C>
Neal M. Elliott 54 President, Chief Executive Officer and Chairman of the Board
Klemett L. Belt, Jr. 50 Executive Vice President, Treasurer, Secretary and Chief
Financial Officer and Director
Michael A. Jeffries 44 Senior Vice President -- Operations and Director
Charles H. Gonzales 38 Senior Vice President -- Subsidiary Operations and Director
Ernest A. Schofield 36 Vice President -- Finance
</TABLE>
NEAL M. ELLIOTT, the Company's President, Chief Executive Officer and
Chairman of the Board, has served in those capacities since July 1986. Mr.
Elliott, a certified public accountant, worked for Price Waterhouse & Co. prior
to joining The Hillhaven Corporation, a health care company ("Hillhaven"), as
Controller in 1969. In 1970, Mr. Elliott became Vice President of Finance for
Hillhaven and served as such until 1984. From 1984 to 1986, Mr. Elliott served
as President of the long-term care group of National Medical Enterprises, Inc.,
a health care company affiliated with Hillhaven. Mr. Elliott is a director of
LTC Properties, Inc., a real estate investment trust which invests in health
care related real estate.
KLEMETT L. BELT, JR., the Company's Executive Vice President, Treasurer,
Chief Financial Officer, Secretary and a Director, has served in those
capacities since July 1986 and is responsible for all financial and accounting
affairs of the Company. Additionally, Mr. Belt oversees the Senior Vice
President -- Subsidiary Operations, which includes responsibility for
acquisitions and pharmacy, rehabilitation and subsidiary operations. A certified
public accountant, Mr. Belt served five years as an Assistant Regional Audit
Director for the Department of Health, Education and Welfare. He was a Senior
Manager for KPMG Peat Marwick from 1978 to 1983, when he joined Hillhaven as
Vice President of Finance, a position he held from 1983 to July 1986.
MICHAEL A. JEFFRIES, the Company's Senior Vice President of Operations, has
served the Company in such position since June 1989. He became a Director of the
Company in January 1992. Mr. Jeffries has 15 years of experience in the
long-term health care field. From 1984 to 1989, he served as Senior Vice
President of Operations for the Central Division of Beverly Enterprises, Inc.,
an operator of long-term care facilities. From 1983 to 1984, Mr. Jeffries, a
certified public accountant, held the positions of Vice President of Operations
and Assistant to the President of Beverly Enterprises, Inc.
CHARLES H. GONZALES, the Company's Senior Vice President -- Subsidiary
Operations, has been with the Company since September 1986. From September 1986
to January 1992, he served as Vice President of Government Programs for the
Company. Mr. Gonzales, a certified public accountant, became a Director of the
Company in January 1992. From June 1984 to September 1986, Mr. Gonzales was
National Director of Reimbursement for Hillhaven.
ERNEST A. SCHOFIELD, the Company's Vice President -- Finance, has been with
the Company since July 1987. From July 1987 to April 1988, he served as a
reimbursement analyst for the Company, and from April 1988 to May 1989, he
served as Assistant Controller, and from May 1989 to November 1990, he served as
Vice President and Controller of the Company. He assumed his present position in
November 1990. Prior to joining the Company, Mr. Schofield, a certified public
accountant, held various positions in public accounting with Fox & Company and
as a partner with Olivas & Company (certified public accounting firms).
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The Company adopted a strategic business plan in 1990 to increase its
specialty health care services as a percent of operating revenues. The Company
has pursued this strategy by acquiring long-term care facilities and integrating
its specialty health care services into those facilities, by acquiring providers
of specialty health care services, and by offering the Company's broad range of
specialty health care services to third parties. As a result, the Company's
operating revenues have grown from $105.7 million in fiscal 1990 to $375.1 in
fiscal 1994. Moreover, specialty health care services have grown from $17.4
million, or 16.5% of operating revenues in fiscal 1990 to $141.7 million, or
37.8% of operating revenues in fiscal 1994, and to 43.8% of operating revenues
for the fourth quarter of fiscal 1994. The Company now provides a broad range of
specialty health care services including subacute care, rehabilitation
therapies, Alzheimer's care, institutional pharmacy services, non-invasive
medical diagnostic and sleep diagnostic testing services and clinical laboratory
services.
The Company's strategic business plan emphasizes operating and expanding its
long-term care and specialty programs and services in regionally concentrated
areas, including the Midwest, Southwest and Northeast regions of the United
States. The Company is expanding its specialty health care programs and services
through the development of institutional pharmacies, acquisition and development
of therapy companies and medical diagnostic companies and the conversion and
renovation or acquisition of specialty hospitals. In turn, the acquisition of
long-term care facilities in certain geographic areas has enhanced the Company's
expansion of its specialty programs. Specifically, in certain geographic areas,
the Company's long-term care presence is a platform from which it can vertically
integrate its specialty health care programs and services.
These growth objectives have been, and will continue to be, the basis of a
strategic business plan which has resulted in net earnings of $16.6 million,
$7.7 million and $5.0 million for the fiscal years ended May 31, 1994, 1993 and
1992, respectively, and $14.7 million for the year ended May 31, 1994, on a pro
forma basis to give effect to the Greenery Merger. See Note 7 of Notes to
Consolidated Financial Statements included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth certain statement of earnings data expressed
as a percentage of total operating revenues:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Total operating revenue................................................ 100.0% 100.0% 100.0%
----- ----- -----
Total routine expenses (1)............................................. 80.3 80.8 79.9
Total property expenses (2)............................................ 12.6 14.1 15.9
----- ----- -----
Total operating expenses........................................... 92.9 94.9 95.8
----- ----- -----
Earnings from operations............................................... 7.1 5.1 4.2
Income taxes........................................................... 2.7 1.7 1.0
----- ----- -----
Net earnings....................................................... 4.4% 3.4% 3.2%
----- ----- -----
----- ----- -----
<FN>
- ------------------------
(1) Includes the cost of nursing services, all other direct service costs and
general and administrative costs.
(2) Includes facility leases, interest, depreciation, amortization and other
property related costs.
</TABLE>
15
<PAGE>
The following table sets forth a summary of the Company's total operating
revenues by type of service and the percentage of total operating revenues that
each such service represented for each period indicated:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------------------------------------
1994 1993 1992
------------------------ ------------------------ ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Long-term care services............................. $ 226,187 60% $ 165,802 71% $ 121,294 76%
Specialty health care services (1).................. 141,733 38 62,854 27 35,650 22
Other operating revenues (2)........................ 7,175 2 3,543 2 2,035 2
----------- --- ----------- --- ----------- ---
Total operating revenues........................ $ 375,095 100% $ 232,199 100% $ 158,979 100%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
<FN>
- ------------------------
(1) Includes revenues derived from subacute care, rehabilitation and other
therapies, institutional pharmacy operations, Alzheimer's care,
non-invasive medical diagnostic testing services and clinical laboratory
services.
(2) Includes revenues derived from management fees, interest income, rental
income and other miscellaneous services.
</TABLE>
The following table sets forth the number of facilities operated by the
Company at the end of each period indicated, the aggregate number of licensed
beds contained in such facilities and average occupancy of such beds during the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Number of facilities (end of period) (1)............. 109 81 62
Number of licensed beds (end of period) (2).......... 12,251 8,962 6,208
Average occupancy (3)................................ 89% 90% 89%
<FN>
- ------------------------
(1) Includes the Company's long-term care facilities and specialty hospitals,
in the latter case including those located within discrete areas of
long-term care facilities. Excludes facilities classified as discontinued
operations in fiscal 1993 and 1992.
(2) "Licensed beds" refers to the number of beds for which a license has been
issued, which may vary in some instances from beds available for use. The
Greenery Merger added 2,783 beds.
(3) Average occupancy is computed by dividing the total bed days occupied by
the total licensed bed days available for the last month of the period
indicated.
</TABLE>
YEAR ENDED MAY 31, 1994 COMPARED TO YEAR ENDED MAY 31, 1993
Total operating revenues increased approximately $142.9 million or 61.5% for
fiscal 1994 as compared with fiscal 1993. The largest portion of such increase
is the result of the Company's expansion, both internally and through
acquisition, since May 31, 1993. Greenery, which was acquired effective February
11, 1994, contributed $46.2 million of operating revenues in fiscal 1994. At May
31, 1994 (without giving effect to the Greenery Merger), the Company operated
three more long-term care facilities, three more specialty hospitals and three
more subacute care units than it did at May 31, 1993. As a result of the
consummation of the Greenery Merger on February 11, 1994, the Company added the
operations of 17 rehabilitation and skilled nursing facilities and three managed
facilities. During fiscal 1994, the Company also expanded its institutional
pharmacy services, its rehabilitation services in Ohio, Nevada and Texas, and
its clinical laboratory services in Texas. An additional cause of the increase
in revenues is the increase in Medicare, Medicaid and private pay rates. The
average increase in rates per patient day across all pay types was approximately
9.7%. The increase in operating revenues attributable to such rate increases was
approximately $18.8 million. The average occupancy of the Company's facilities
remained essentially flat at 90% and as a consequence had no effect on the
operating revenues.
16
<PAGE>
Routine expenses increased approximately $113.7 million or 61% in fiscal
1994 from $187.6 million in fiscal 1993. This increase is due primarily to the
increase in the number of long-term care facilities, specialty hospitals and
subacute care units operated by the Company, as well as the costs associated
with the expansion of specialty health care services and programs. Greenery
accounted for $37.9 million of such increase.
Facility lease expense, depreciation and amortization and other property
expense increased approximately 43% for the same period. This increase is
directly related to the increased number of facilities operated. Of the total
increase, Greenery accounted for approximately 20%.
Interest expense increased approximately 47% during this period. This
increase is related to draws under the Credit Facility, discussed below, and
assumption of certain bonds and secured real property indebtedness in connection
with facility acquisitions during fiscal 1994. Of the total increase, interest
expense related to Greenery accounted for approximately 10%.
As a result of the foregoing factors, net earnings increased to $16.6
million or $.91 per share for the year ended May 31, 1994. This compares to net
earnings of $7.7 million or $.62 per share for fiscal 1993. The Greenery Merger,
which was accounted for as a purchase, had no significant effect on the
Company's results of operations for the year ended May 31, 1994.
YEAR ENDED MAY 31, 1993 COMPARED TO YEAR ENDED MAY 31, 1992
Total operating revenues increased to $232.2 million in fiscal 1993 from
$159.0 million in fiscal 1992. This 46% increase resulted primarily from the
continuation of the Company's expansion program. Fiscal 1993 revenues included
revenues from a full year of operation of seven long-term care facilities that
were acquired at various times during fiscal 1992. Fiscal 1993 revenues also
included revenues from eight long-term care facilities purchased during the
year, 11 long-term care facilities leased during the year and four long-term
care facilities which the Company undertook to manage during the year. Revenues
for fiscal 1993 also reflect the opening of two specialty hospitals, the
operation of three additional rehabilitation companies, the establishment of a
clinical laboratory and the expansion of the Company's pharmacy operations
during the year. The increase in revenues is also due in part to increases in
Medicare, Medicaid and private pay rates during fiscal 1993. The average
increase in rates per patient day across all pay types was approximately 8%. The
increase in operating revenues attributable to such rate increases was
approximately $15.6 million. The average occupancy of the Company's facilities
remained essentially flat at 89% and as a consequence had no effect on the
operating revenues.
Total routine expenses increased 48% to $187.6 million in fiscal 1993 from
$127.1 million in fiscal 1992. This increase is due to the additional number of
facilities operated as well as the continued growth in specialty health care
services and programs. Total property expenses increased 30% to $32.9 million in
fiscal 1993 from $25.2 million in fiscal 1992, reflecting the increased number
of facilities operated in fiscal 1993.
Interest expense increased approximately 93% to $4.3 million in fiscal 1993
from $2.2 million in fiscal 1992. This increase was due primarily to the
Company's 6.75% convertible subordinated notes being outstanding during all of
fiscal 1993, whereas they were outstanding three and one-half months of fiscal
1992.
As a result of the foregoing factors, net earnings increased to $7.7 million
or $.62 per share in fiscal 1993 as compared to $5.0 million or $.44 per share
in fiscal 1992.
LIQUIDITY AND CAPITAL RESOURCES
OPERATIONS. At May 31, 1994, the Company's working capital was $58.6
million and included cash and cash equivalents of $6.5 million as compared with
$18.9 million in working capital and $5.9 million in cash and cash equivalents
at May 31, 1993. During the two years ended May 31, 1993, the cash provided by
operating activities more than offset the amount of cash used in the Company's
17
<PAGE>
operating activities. The net cash provided by operating activities in these two
periods was $9.4 million in 1992 and $0.6 million in 1993. In fiscal 1994,
however, the Company's operating activities used $21.8 million net cash,
primarily as a result of an increase in patient care and settlements accounts
receivable in fiscal 1994. Patient care accounts receivable, net of allowances
for doubtful accounts, increased $46.2 million to $76.9 million at May 31, 1994
as compared with May 31, 1993. Of this amount, $16.2 million was generated by
the acquisition of such accounts receivable in the Greenery Merger and other
acquisitions, and the balance of $30.0 million represents an increase generated
by existing facilities or by new facilities after the date of acquisition.
EXPANSION PROGRAM. The net cash used by the Company's investing activities
increased from $19.7 million in fiscal 1992 to $47.4 million in fiscal 1993 to
$49.5 million in fiscal 1994. The primary uses of cash from investing activities
have been capital expenditures and, in fiscal 1994, the Greenery Merger. Capital
expenditures increased from $10.3 million in fiscal 1992 to $53.4 million in
fiscal 1993; in fiscal 1994, capital expenditures were $40.6 million. The
principal purpose of the capital expenditures during each of these periods has
been to fund the Company's internal and external expansion program. While
capital expenditures during the three years ended May 31, 1994 aggregated $104.3
million, only $18.4 million were expended for maintenance of existing
facilities. In addition, the Greenery Merger consumed $7.8 million in cash in
fiscal 1994.
The Company's expansion program requires funds (i) to acquire assets and to
expand and improve existing and newly acquired facilities; (ii) to discharge
funded indebtedness assumed or otherwise acquired in connection with the
acquisitions of facilities and properties; and (iii) to finance the increase in
patient care and other accounts receivable resulting from the acquisitions
effected pursuant to the program. The funds necessary to meet these requirements
have been provided principally by the Company's financing activities and, to a
lesser extent, from the sale of marketable securities and the sale of land,
buildings and equipment. During the three years ended May 31, 1994, proceeds
from the issuance and sale of Company debt, net of debt repayments and
purchases, amounted to $58.0 million. In addition, the proceeds from the
issuance of Common Stock totaled $75.6 million.
SOURCES. At May 31, 1994, the available credit under the Credit Facility,
before the amendment described below, was $47.2 million. To the extent that the
Company's operations and expansion program require cash expenditures in excess
of the amounts available to it under the Credit Facility, management of the
Company believes that the Company can obtain the necessary funds through other
financing activities, including the issuance and sale of debt and equity
securities in public and private markets.
CREDIT FACILITY
The Company is the Borrower under an Amended and Restated Revolving Credit
Loan Agreement dated July 29, 1994, as thereafter amended (the "Credit
Facility"), with The Boatmen's National Bank of St. Louis, as Agent, and the
lenders party thereto. Subject to reduction through application of certain
financial ratios, the aggregate revolving credit commitment under the Credit
Facility is $150 million, of which the Company had borrowed $127.75 million at
July 31, 1994. Borrowings under the Credit Facility bear interest, payable
monthly, at a rate equal to either the Adjusted Corporate Base Rate (as therein
defined) of the Agent in effect from time to time, or the London InterBank Offer
Rate plus 1.25% to 2.00% per annum, depending on the rating and amount of the
Company's outstanding long-term debt, in each case, as selected by the Company.
The applicable interest rate at July 31, 1994 was 7.25%. In addition, borrowings
thereunder mature in March 1997 and are secured by a pledge of certain accounts
receivable of the Company and its subsidiaries, a pledge of the stock of all
subsidiaries of the Company and the guaranties of each of the Company's
subsidiaries. Under the terms of the Credit Facility, the Company is required to
maintain certain financial ratios and is not permitted to pay any dividend or
distribution with respect to its outstanding Common Stock in excess of 25% of
the Company's net income for the prior fiscal year. The credit agreement: (a)
requires the Company to maintain certain financial ratios, (b) restricts the
Company's
18
<PAGE>
ability to make capital expenditures beyond certain specified amounts, (c)
prohibits transactions with affiliates not at arm's length, (d) allows the
Company to make only permitted investments, (e) restricts certain indebtedness,
liens, dispositions of property and issuances of securities and (f) prohibits a
change in control or a fundamental change in the business of the Company except
under certain limited circumstances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements of the Company
Report of Independent Public Accountants....................................................... 20
Consolidated Balance Sheets.................................................................... 21
Consolidated Statements of Earnings............................................................ 22
Consolidated Statements of Stockholders' Equity................................................ 23
Consolidated Statements of Cash Flows.......................................................... 24
Notes to Consolidated Financial Statements (as amended)........................................ 25
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Horizon Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Horizon
Healthcare Corporation (a Delaware corporation) and subsidiaries as of May 31,
1994 and 1993, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended May 31, 1994. These consolidated financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horizon
Healthcare Corporation and subsidiaries as of May 31, 1994 and 1993, and the
results of their operations and their cash flows for the three years in the
period ended May 31, 1994, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
________/s/_ARTHUR ANDERSEN LLP_______
Arthur Andersen LLP
Albuquerque, New Mexico
July 22, 1994
20
<PAGE>
HORIZON HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 31, 1994 AND 1993
ASSETS
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 6,522,209 $ 5,928,082
Patient care accounts receivable, net of allowances for doubtful accounts of
approximately $8,158,000 in 1994 and $1,304,000 in 1993...................... 76,861,542 30,626,160
Estimated Medicare and Medicaid settlements................................... 6,701,650 605,543
Current portion of notes receivable (Note 2).................................. 535,282 293,531
Prepaid and other assets...................................................... 17,070,967 6,505,171
--------------- ---------------
Total current assets........................................................ 107,691,650 43,958,487
--------------- ---------------
NOTES RECEIVABLE, EXCLUDING CURRENT PORTION (Note 2)............................ 22,436,095 9,010,707
LAND, BUILDINGS AND EQUIPMENT, net (Note 3)..................................... 193,426,085 74,096,464
LEASE PURCHASE COSTS, net of accumulated amortization of $3,343,659 in 1994 and
$2,476,865 in 1993............................................................. 6,507,501 7,346,071
LEASE, UTILITY AND OTHER DEPOSITS............................................... 11,869,686 6,201,457
DEFERRED INCOME TAXES (Note 8).................................................. 7,271,000 --
GOODWILL, net of accumulated amortization of $234,179 in 1994 and $8,334 in
1993........................................................................... 41,672,878 591,667
OTHER INTANGIBLE ASSETS, AT COST, net of accumulated amortization of $1,807,848
in 1994 and $1,010,018 in 1993................................................. 7,608,840 8,028,478
OTHER ASSETS, AT COST........................................................... 7,967,382 3,936,583
--------------- ---------------
Total assets................................................................ $ 406,451,117 $ 153,169,914
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4).................................... $ 1,697,615 $ 228,007
Accounts payable.............................................................. 14,199,857 6,899,348
Accrued payroll............................................................... 10,679,884 4,876,246
Accrued property and payroll taxes............................................ 14,318,467 9,093,591
Other accrued liabilities..................................................... 3,963,715 8,156,626
--------------- ---------------
Total current liabilities................................................... 49,052,449 25,060,907
--------------- ---------------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION (Note 4).............................. 76,672,868 22,875,985
DEFERRED INCOME TAXES (Note 8).................................................. -- 4,453,000
DEFERRED LEASE CREDIT........................................................... 20,493,441 --
CONVERTIBLE SUBORDINATED NOTES (Note 5)......................................... 30,906,150 52,583,658
--------------- ---------------
Total liabilities........................................................... 177,124,908 104,973,550
--------------- ---------------
COMMITMENTS AND CONTINGENCY (Notes 6 and 12)
STOCKHOLDERS' EQUITY (Note 9):
Common stock of $.001 par value. Authorized 30,000,000 shares in 1994 and
1993; 22,738,073 shares issued with 22,409,927 shares outstanding in 1994 and
11,639,326 shares issued with 11,311,180 shares outstanding in 1993.......... 22,738 11,639
Additional paid in capital.................................................... 200,272,997 35,759,887
Retained earnings............................................................. 29,770,807 13,165,171
Treasury stock................................................................ (740,333) (740,333)
--------------- ---------------
Total stockholders' equity.................................................. 229,326,209 48,196,364
--------------- ---------------
Total liabilities and stockholders' equity.................................. $ 406,451,117 $ 153,169,91
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
21
<PAGE>
HORIZON HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------------- ---------------- ----------------
<S> <C> <C> <C>
NET PATIENT CARE REVENUES................................... $ 367,919,384 $ 228,655,464 $ 156,943,661
OTHER OPERATING REVENUES.................................... 7,175,254 3,543,434 2,035,195
---------------- ---------------- ----------------
Total operating revenues.................................. 375,094,638 232,198,898 158,978,856
---------------- ---------------- ----------------
ROUTINE EXPENSES:
Nursing services.......................................... 117,708,942 79,011,886 55,418,053
Ancillary services........................................ 76,448,335 37,552,260 22,547,517
Dietary services.......................................... 25,470,402 18,148,240 13,048,921
Facility operations and maintenance....................... 14,865,282 9,894,414 7,130,608
Housekeeping services..................................... 8,856,498 6,147,561 4,246,632
Laundry services.......................................... 4,924,198 3,386,197 2,217,566
Administrative and general................................ 40,165,213 25,489,292 17,075,904
Other services............................................ 12,785,294 7,924,375 5,427,557
---------------- ---------------- ----------------
Total routine expenses.................................. 301,224,164 187,554,225 127,112,758
---------------- ---------------- ----------------
PROPERTY EXPENSES:
Facility leases........................................... 27,698,886 20,991,873 17,969,042
Interest.................................................. 6,239,654 4,252,177 2,206,552
Depreciation and amortization............................. 8,081,432 4,007,398 2,157,252
Other..................................................... 5,104,866 3,650,951 2,878,252
---------------- ---------------- ----------------
Total property expenses................................. 47,124,838 32,902,399 25,211,098
---------------- ---------------- ----------------
Total operating expenses................................ 348,349,002 220,456,624 152,323,856
---------------- ---------------- ----------------
Earnings before income taxes............................ 26,745,636 11,742,274 6,655,000
INCOME TAXES (Note 8)....................................... 10,140,000 4,026,000 1,628,000
---------------- ---------------- ----------------
Net earnings................................................ $ 16,605,636 $ 7,716,274 $ 5,027,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net earnings per common and common equivalent share......... $ 0.99 $ 0.66 $ 0.44
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net earnings per common share -- assuming full dilution..... $ 0.91 $ 0.62 $ 0.44
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
22
<PAGE>
HORIZON HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
------------ --------- --------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1991................ 7,601,543 $ 7,602 $ 20,309,337 $ (740,333) $ 421,897 $ 19,998,503
Common stock offerings, net of $508,157
issue costs........................... 3,531,000 3,531 14,353,822 -- -- 14,357,353
Exercise of stock purchase warrants and
options............................... 259,839 259 397,053 -- -- 397,312
Net earnings........................... -- -- -- -- 5,027,000 5,027,000
------------ --------- --------------- ----------- ------------- ---------------
Balance at May 31, 1992................ 11,392,382 11,392 35,060,212 (740,333) 5,448,897 39,780,168
Exercise of stock purchase warrants,
options and issuance of shares under
the employee stock purchase plan...... 246,944 247 699,675 -- -- 699,922
Net earnings........................... -- -- -- -- 7,716,274 7,716,274
------------ --------- --------------- ----------- ------------- ---------------
Balance at May 31, 1993................ 11,639,326 11,639 35,759,887 (740,333) 13,165,171 48,196,364
Common stock offerings, net of
$1,365,445 issue cost................. 4,025,000 4,025 58,214,972 -- -- 58,218,997
Common stock issued in connection with
Greenery merger, net of $410,616 issue
cost.................................. 2,050,000 2,050 47,487,334 -- -- 47,489,384
Common stock issued in connection with
purchase of Advanced Cardiovascular
Technology, Inc....................... 163,976 164 4,099,236 -- -- 4,099,400
Conversion of 6.75% convertible
subordinated notes, net of $1,897,357
previously capitalized financing costs
and $506,665 conversion costs......... 4,522,500 4,523 51,861,455 -- -- 51,865,978
Exercise of stock options, warrants and
issuance of shares under the employee
stock purchase plan................... 337,271 337 2,850,113 -- -- 2,850,450
Net earnings........................... -- -- -- -- 16,605,636 16,605,636
------------ --------- --------------- ----------- ------------- ---------------
Balance at May 31, 1994................ 22,738,073 $ 22,738 $ 200,272,997 $ (740,333) $ 29,770,807 $ 229,326,209
------------ --------- --------------- ----------- ------------- ---------------
------------ --------- --------------- ----------- ------------- ---------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
23
<PAGE>
HORIZON HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................. $ 16,605,636 $ 7,716,274 $ 5,027,000
Adjustments to reconcile net earnings to net cash provided by
(used for) operating activities:
Depreciation and amortization................................. 8,081,432 4,007,398 2,157,252
Gain on sale of assets and redemption of convertible
subordinated notes........................................... (2,142,193) -- --
Provision for losses on patient care receivables.............. 1,592,704 1,163,977 341,230
Deferred lease credit......................................... (522,741) -- --
Changes in assets and liabilities:
Patient care and settlement receivables..................... (30,038,486) (18,754,962) (1,971,257)
Prepaid and other current assets............................ (8,006,449) (3,637,355) (759,386)
Lease, utility and other deposits........................... (5,564,305) (3,962,662) 126,060
Accounts payable............................................ (1,720,268) 2,998,452 (864,258)
Accrued payroll............................................. (299,037) 2,536,134 738,666
Other current liabilities................................... 751,581 4,049,243 4,572,178
Deferred income taxes....................................... (417,294) 4,453,000 --
-------------- -------------- --------------
Net cash provided by (used for) operating activities............ (21,679,420) 569,499 9,367,485
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable investment securities.................. -- (9,191,768) (6,001,525)
Proceeds from sale of marketable investment securities........ -- 15,193,293 --
Payments received on notes receivable......................... 7,065,634 137,706 155,000
Capital expenditures.......................................... (40,610,438) (53,377,886) (10,300,566)
Proceeds from sale of land, building and equipment............ 1,036,546 9,362,582 --
Lease purchase costs expenditures............................. (28,411) (3,385,843) (212,245)
Cash used for merger of Greenery Rehabilitation Group, Inc.... (7,763,461) -- --
Cash used for other acquisitions.............................. (2,964,947) -- --
Additions to other intangible assets.......................... (2,886,988) (6,104,877) (2,140,562)
Change in other assets........................................ (3,389,226) (7,548) (1,185,054)
-------------- -------------- --------------
Net cash used by investing activities......................... (49,541,291) (47,374,341) (19,684,952)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt................................ 34,550,062 22,714,561 59,660,000
Repayment of debt............................................. (2,898,014) (151,730) (35,828,990)
Repurchase of convertible subordinated notes.................. (19,998,675) -- --
Proceeds from issuance of common stock........................ 60,161,465 699,922 14,754,665
-------------- -------------- --------------
Net cash provided by financing activities..................... 71,814,838 23,262,753 38,585,675
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 594,127 (23,542,089) 28,268,208
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................. 5,928,082 29,470,171 1,201,963
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................ $ 6,522,209 $ 5,928,082 $ 29,470,171
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
24
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS AMENDED)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Horizon Healthcare Corporation and its subsidiaries (collectively the
Company) is a leading provider of long-term care and specialty health care
services. The Company's long-term care facilities provide skilled nursing care
and basic patient services with respect to daily living and general medical
needs. The Company also provides specialty health care services to its long-term
care facilities and third parties. Such specialty health care services include
licensed specialty hospital services and subacute units, rehabilitation and
other therapies, institutional pharmacy services, Alzheimer's care, non-invasive
medical diagnostic testing services, home respiratory care services and clinical
laboratory services. Substantially all of these services are within the
long-term care market and accordingly, the Company operates within a single
industry segment.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NET PATIENT CARE REVENUES
Net patient care revenues are recorded at established billing rates or at
the amount realizable under agreements with third-party payors, primarily
Medicaid and Medicare. Revenues under third-party payor agreements in certain
states are subject to examination and retroactive adjustments, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third-party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
accrued and subsequent settlements are recorded in operations in the year of
settlement.
A significant portion of the Company's revenue is derived from patients
under the Medicaid and Medicare programs. There have been and the Company
expects that there will continue to be a number of proposals to limit Medicare
and Medicaid reimbursement, as well as revenues from certain private payor
sources for long-term care services. The Company cannot predict at this time
whether any of these proposals will be adopted or, if adopted and implemented,
what effect such proposals would have on the Company.
CASH EQUIVALENTS
For purposes of the accompanying consolidated statements of cash flows, the
Company considers its highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
DEPRECIATION
Buildings and equipment are depreciated using the straight-line method over
the estimated useful lives of the assets (buildings -- 40 years; equipment -- 3
to 10 years). Maintenance and repairs are charged to expense as incurred. Major
renewals or improvements are capitalized.
LEASE PURCHASE COSTS
Lease purchase costs represent amounts paid by the Company to obtain lease
rights to long-term care facilities and are amortized over the initial and
renewal terms (where applicable) of the leases expected to be renewed.
25
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS AMENDED) (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill has resulted from various acquisitions made by the Company. All
acquisitions were accounted for as purchases and the excess of the total
acquisition cost over the fair value of the net assets acquired was recorded as
goodwill. Currently, goodwill is being amortized on the straight-line basis over
40 years.
The Company maintains separate financial records for each of its acquired
entities and performs periodic strategic and long-range planning for each
entity. The Company evaluates its goodwill quarterly to determine potential
impairment by comparing the carrying value to the undiscounted future cash flows
of the related assets. The Company modifies the life or adjusts the value of its
goodwill if any impairment is identified.
OTHER INTANGIBLE ASSETS
Costs incurred in obtaining long-term debt financing are amortized over the
term of the related indebtedness, generally using the effective interest method.
Costs to initiate and implement therapy operations and new nursing or specialty
units are amortized on a straight-line basis for periods up to five years.
DEFERRED LEASE CREDIT
The deferred lease credit represents obligations for above market rate lease
terms on operating leases recorded under purchase accounting. This credit is
amortized over the terms of the related leases to yield level lease payments,
net of discount accretion.
INCOME TAXES
The Company and certain of its subsidiaries file a consolidated Federal
income tax return. Deferred taxes are provided for the income tax effect of
temporary differences in reporting transactions for financial and tax purposes.
On June 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), "Accounting for Income Taxes." The adoption of FAS
109 changes the Company's method of accounting for income taxes from the
deferred method (APB 11) to an asset and liability approach. Previously the
Company deferred the past tax effects of temporary differences between financial
reporting and taxable income. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities.
MARKET VALUE DISCLOSURES
The market value of all financial instruments approximates their carrying
value unless indicated otherwise in the applicable notes to the consolidated
financial statements.
WORKERS' COMPENSATION
Workers' compensation coverage is effected through deductible insurance
policies and qualified self insurance plans which vary by the states in which
the Company operates. Provisions for estimated settlements are provided in the
period of the related coverage. Differences between the amounts accrued and
subsequent settlements are recorded in operations in the year of settlement.
EARNINGS PER SHARE
Earnings per share is calculated based upon the weighted-average number of
common shares and common equivalent shares outstanding during each period.
Common equivalent shares include stock purchase warrants and options. Earnings
per common and common equivalent share are based upon 16,751,078 shares in 1994,
11,711,911 shares in 1993 and 11,401,537 shares in 1992. Earnings per
26
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS AMENDED) (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
common share-assuming full dilution is based upon 19,724,461 shares in 1994 and
16,275,875 shares in 1993, including the effect of the convertible subordinated
notes. In 1992, the computation of earnings per common share -- assuming full
dilution was anti-dilutive.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1994 presentation.
(2) NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
1994 1993
-------------- -------------
<S> <C> <C>
Variable rate note receivable (6.125% at May 31, 1994) from a related party;
interest payable semi-annually; principal payable December 2008; unsecured........ $ 13,000,000 $ --
Variable rate note receivable (6.5% at May 31, 1994); interest payable monthly;
principal payable $3,000,000 in August 2002 and $3,000,000 in August 2004; secured
by real property.................................................................. 6,000,000 6,000,000
12% notes receivable; payable in monthly installments of $22,115, including
interest; final payment of approximately $2,033,000 due July 2002; secured by real
property.......................................................................... 2,135,708 2,144,238
Other notes receivable bearing interest at 7.5% to 11%; unsecured.................. 1,835,669 1,160,000
-------------- -------------
Notes receivable................................................................. 22,971,377 9,304,238
Less current portion............................................................... 535,282 293,531
-------------- -------------
Notes receivable, excluding current portion........................................ $ 22,436,095 $ 9,010,707
-------------- -------------
-------------- -------------
</TABLE>
(3) LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
1994 1993
---------------- --------------
<S> <C> <C>
Land.................................................................. $ 21,604,733 $ 7,292,524
Buildings............................................................. 144,212,532 53,986,811
Equipment............................................................. 39,377,400 18,720,473
---------------- --------------
205,194,665 79,999,808
Less accumulated depreciation......................................... 11,768,580 5,903,344
---------------- --------------
Land, buildings, and equipment, net................................... $ 193,426,085 $ 74,096,464
---------------- --------------
---------------- --------------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Revolving credit drawn on credit agreement; interest due
monthly; principal due March 1997; secured as discussed
below................................................... $44,250,000 $16,500,000
11.5% mortgage notes; payable in monthly installments of
$95,185, including interest; principal due December
2000; secured by related property....................... 9,388,873 --
</TABLE>
27
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS AMENDED) (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
10.5% mortgage note; payable in monthly installments of
$51,549, including interest; principal due January 2004;
secured by related property............................. 5,385,134 --
10.1% mortgage note; payable in monthly installments of
approximately $30,000, including interest; principal due
May 2017; secured by related property................... 3,218,218 --
7.25% note payable; payable in monthly installments of
approximately $28,800, including interest; principal due
December 2008; secured by related property.............. 3,105,000 --
10% mortgage note; payable in monthly installments of
$27,555, including interest; principal due December 2002
with renewal provisions extending the due date no later
than December 2012; secured by related property......... 2,961,947 2,993,003
Note payable; payable in monthly installments of $32,237,
including interest at LIBOR plus 1.5% (6.8125% at May
31, 1994); principal due May 1997; secured by related
property................................................ 2,800,000 --
12% revenue bonds; payable in monthly installments of
approximately $28,000, including interest; principal due
December 2015; secured by related
property................................................ 2,265,000 --
Other long-term debt bearing interest ranging from 7% to
13.125%; secured by related land, buildings and
equipment............................................... 4,996,311 3,610,989
----------- -----------
Long-term debt........................................... 78,370,483 23,103,992
Less current portion..................................... 1,697,615 228,007
----------- -----------
Long-term debt, excluding current portion................ $76,672,868 $22,875,985
----------- -----------
----------- -----------
</TABLE>
On May 27, 1994, the Company completed a $100,000,000 revolving credit loan
agreement which replaced the revolving loan agreement outstanding at May 31,
1993. This credit agreement bore interest at either prime plus up to .25% or at
the LIBOR rate plus 1.25% to 2.00%. The weighted average interest rate on
amounts outstanding under the credit agreement was 6.92% at May 31, 1994. The
credit agreement (a) requires the Company to maintain certain financial ratios,
(b) restricts the Company's ability to make capital expenditures beyond certain
specified amounts, (c) prohibits transactions with affiliates not at arm's
length, (d) allows the Company to make only permitted investments, (e) restricts
certain indebtedness, liens, dispositions of property and issuances of
securities and (f) prohibits a change in control or a fundamental change in the
business of the Company except under certain limited circumstances. The credit
facility also restricts the payment of dividends by the Company to an amount
which shall not exceed 25% of the Company's net income for the prior fiscal
year, and any such payment is subject to continued compliance by the Company
with the financial ratio covenants contained in the credit agreement. The credit
agreement further provides that an event of default under certain of the
Company's and its subsidiaries' obligations which would result in a material
adverse effect will constitute an event of default under the credit agreement.
28
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS AMENDED) (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
Certain subsidiaries of the Company have guaranteed the obligations of the
Company under the credit agreement. The credit agreement expires on March 10,
1997, and is secured by a pledge of the stock of all subsidiaries of the Company
and certain accounts receivable of the Company.
Subsequent to May 31, 1994, the Company increased the credit agreement to
$150,000,000. The terms of the increased agreement are substantially the same as
the existing agreement, except certain accounts receivable of the Company were
taken as additional collateral. The amount of such collateral was approximately
$67.7 million at May 31, 1994.
The approximate aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31:
- ------------------------------------------------------------------------------
<S> <C>
1995.......................................................................... $ 1,697,615
1996.......................................................................... 2,466,662
1997.......................................................................... 47,244,224
1998.......................................................................... 1,065,921
1999.......................................................................... 563,343
Thereafter.................................................................... 25,332,718
--------------
$ 78,370,483
--------------
--------------
</TABLE>
(5) CONVERTIBLE SUBORDINATED NOTES
On February 14, 1992, the Company issued $57,500,000 of 6.75% convertible
subordinated notes (the Notes) due February 1, 2002. The Notes were convertible
at any time prior to maturity into shares of common stock of the Company at a
conversion price of $12.00 per share, subject to adjustment in certain events.
Interest on the Notes was payable semi-annually on each February 1 and August 1,
commencing August 1, 1992. During the year ended May 31, 1992, the Company
repurchased $3,230,000 of Notes at approximately 80% of par value, resulting in
a gain of $475,000, net of allocable deferred financing costs of approximately
$140,000. During the third quarter of 1994, the remaining $54,270,000 of Notes
were converted into the Company's common stock at the conversion price stated
above. In connection therewith, approximately $1,900,000 of deferred financing
costs and $506,000 of conversion costs were offset against additional paid-in
capital at the time of conversion.
In connection with the merger of Greenery Rehabilitation Group, Inc.
(Greenery) into the Company (discussed in Note 7), the Company assumed the
obligations under Greenery's 6.5% convertible subordinated notes and 8.75%
convertible senior subordinated notes, in the aggregate principal amount of
$26,631,000 and $28,150,000, respectively, at February 11, 1994. These
obligations were recorded at their fair market value under purchase accounting,
resulting in a discount on the 6.5% convertible subordinated notes of
$2,663,100.
The 6.5% convertible subordinated notes are due June 2011 and are
convertible into common stock of the Company at a price of $69.32 per share.
These notes may be redeemed in whole or in part at 103.25% of par declining
annually to par on June 15, 1996, plus accrued interest. Commencing June 15,
1996, the Company is obligated to retire 5% of the issue amount annually to
maturity.
The 8.75% convertible senior subordinated notes are due 2015 and are
convertible into common stock of the Company at a price of $54.00 per share. The
Company may redeem the notes, in whole or in part at 106.125% of par declining
annually to par on April 1, 2000, plus accrued interest. Commencing April 1,
2000, the Company is required to retire 5% of the original issue amount annually
to maturity. The notes are senior to the 6.5% debentures, but will be
subordinated to any future senior indebtedness.
29
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS AMENDED) (CONTINUED)
(5) CONVERTIBLE SUBORDINATED NOTES (CONTINUED)
During the fourth quarter of 1994, the Company repurchased $15,520,000 of
the 6.5% convertible subordinated notes and $7,243,750 of the 8.75% convertible
senior subordinated notes. The Company recorded a gain of approximately
$734,000, net of the write-off of $1,552,000 debt discount recorded under
purchase accounting and income taxes of approximately $480,000.
The market value of the outstanding convertible subordinated notes at May
31, 1994 and 1993 was approximately $27,500,000 and $66,200,000, respectively.
The market value is a function of both the conversion feature and the debt
instrument. It is impracticable to allocate the market value between those two
components. The market value is not representative of the amounts that would be
currently required to retire the debt obligation.
(6) LEASE COMMITMENTS
The Company has noncancelable operating leases primarily for facilities and
equipment. Certain leases provide for purchase and renewal options of 5 to 15
years, contingent rentals primarily based on operating revenues, and the
escalation of lease payments coincident with increases in certain economic
indexes. Contingent rent expense for the years ended May 31, 1994, 1993 and 1992
was approximately $1,060,000, $680,000 and $554,000, respectively.
Future minimum payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31:
- ----------------------------------------------------------------------------
<S> <C>
1995........................................................................ $ 38,160,000
1996........................................................................ 35,977,000
1997........................................................................ 35,480,000
1998........................................................................ 32,338,000
1999........................................................................ 27,040,000
Thereafter.................................................................. 131,940,000
----------------
Total minimum lease payments................................................ $ 300,935,000
----------------
----------------
</TABLE>
The Company is contingently liable for annual lease payments of
approximately $3,000,000 for leases on facilities sold. In addition, the Company
is contingently liable for annual lease payments of approximately $4,100,000 for
leases on managed facilities.
For the year ended May 31, 1994, the Company leased eight facilities from an
affiliate of two director nominees of the Company. The aggregate lease expense
for these facilities for the year ended May 31, 1994 was approximately
$5,501,000. Future minimum lease commitments related to these facilities are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31:
- ----------------------------------------------------------------------------
<S> <C>
1995........................................................................ $ 15,897,000
1996........................................................................ 15,897,000
1997........................................................................ 15,897,000
1998........................................................................ 15,074,000
1999........................................................................ 15,074,000
Thereafter.................................................................. 91,702,000
----------------
Total....................................................................... $ 169,541,000
----------------
----------------
</TABLE>
In addition, the Company leases its corporate office space from an affiliate
of certain officers and directors. The lease is classified as an operating lease
and provides for minimum annual rents of $360,000. The remaining lease term is
approximately one year.
30
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS AMENDED) (CONTINUED)
(7) FACILITY ACQUISITIONS AND DISPOSITIONS (AS AMENDED)
During 1993 and 1994, the Company implemented its strategic business plan by
purchasing or leasing long-term care facilities and related specialty services
businesses in targeted geographic areas.
In 1993, the Company purchased eight facilities as follows: two each in
Kansas and Texas, and one in each of the following states: Ohio, New Mexico,
Michigan and Nevada. The Company also entered into operating leases for twelve
facilities as follows: three each in Texas and Michigan, two in Wisconsin, and
one each in Ohio, New Mexico, Montana, and Nevada. Also during 1993, the Company
began managing three additional facilities in Colorado, Wisconsin, and Oklahoma,
and sold its long-term care facilities and retirement apartment complexes in
Missouri at no material gain or loss. Finally, the Company purchased an 80%
interest in two rehabilitation companies during 1993 in Texas and Nevada.
On February 11, 1994, the Company completed its previously announced merger
of Greenery into the Company. Pursuant to the merger, the Company exchanged
approximately 2,050,000 shares of its common stock, valued at approximately
$48,000,000, for all of the outstanding shares of Greenery common stock,
resulting in the recording of goodwill of approximately $43,200,000. This merger
added the operations of 17 rehabilitation and skilled nursing facilities and 3
managed facilities to the Company's current operations. In addition, the Company
had other acquisitions during 1994 which in the aggregate were insignificant.
The Company has accounted for all acquisitions using the purchase method.
The following unaudited condensed pro forma combined statements of operations
reflects the combined results of operations for the years ended May 31, 1994 and
1993 as if the Greenery and other significant acquisitions and dispositions
during 1994 and 1993 had been consummated on June 1, 1992:
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
<S> <C> <C>
Total operating revenues............................................ $ 483,131,000 $ 413,146,000
Total operating expenses............................................ 472,263,000 412,651,000
---------------- ----------------
Operating income.................................................. 10,868,000 495,000
Income taxes........................................................ 4,239,000 168,000
---------------- ----------------
Net earnings...................................................... $ 6,629,000 $ 327,000
---------------- ----------------
---------------- ----------------
Net earnings per common and common equivalent share............... $ .36 $ .02
---------------- ----------------
---------------- ----------------
Net earnings per common share -- assuming full dilution........... $ .36 $ .02
---------------- ----------------
---------------- ----------------
</TABLE>
The statement of operations of Greenery for the twelve months ended June 30,
1993 includes a $20,272,000 non-recurring expense related to the write-off of
certain capital costs. This non-recurring expense was reduced to $11,788,000 in
the pro forma statement of operations in order to eliminate the effect of that
portion of the non-recurring expense applicable to Greenery assets sold to a
related party prior to the merger.
(8) INCOME TAXES
On June 1, 1993, the Company adopted Statement of Financial Accounting
Standards (FAS 109) No. 109 "Accounting for Income Taxes" through retroactive
restatement of its financial statements from June 1, 1990. FAS 109 requires an
asset and liability approach for financial accounting and reporting of income
taxes. This statement recognizes (a) the amount of taxes payable or refundable
for the current year and (b) deferred tax liabilities and assets for the future
tax consequences of events that have been recognized in the consolidated
financial statements or tax returns.
31
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS AMENDED) (CONTINUED)
(8) INCOME TAXES (CONTINUED)
In accordance with FAS 109, the income tax expense (benefit) for the year
ended May 31, 1994 is equal to the sum of deferred tax expense (benefit) and
income taxes currently payable or refundable. Deferred tax expense (benefit)
results from changes in deferred tax liabilities or assets. Deferred tax
liabilities and assets are recognized for the estimated future tax effects
attributable to temporary differences between the bases of assets and
liabilities for tax and financial statement purposes. Income tax expense
consists of:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal................................................ $ 7,388,000 $ 2,593,000 $ 1,256,000
State.................................................. 1,273,000 721,000 372,000
-------------- ------------- -------------
8,661,000 3,314,000 1,628,000
-------------- ------------- -------------
Deferred:
Federal................................................ 1,270,000 854,000 --
State.................................................. 209,000 (142,000) --
-------------- ------------- -------------
1,479,000 712,000 --
-------------- ------------- -------------
Total................................................ $ 10,140,000 $ 4,026,000 $ 1,628,000
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The implementation of FAS 109 in fiscal year 1994 and the related
restatement of prior years' consolidated financial statements had the following
effect on reported net income in prior years:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Decrease in net earnings......................................................... $ 67,000 $ --
Decrease in net earnings per share............................................... -- --
</TABLE>
Actual tax expense differs from the "expected" tax expense (computed by
applying the U.S. federal corporate income tax rate of 35 percent from January
1, 1993 forward and 34 percent for all other periods) as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" tax expense.......................... $ 9,361,000 $ 4,110,000 $ 2,263,000
Adjustments in income taxes resulting from:
Net effect of targeted jobs credits.................... (80,000) (358,000) (885,000)
State income tax expense, net of federal income tax
benefit............................................... 955,000 457,000 244,000
Change in valuation allowance on deferred tax assets... -- (257,000) --
-------------- ------------- -------------
Other.................................................. (96,000) 74,000 6,000
-------------- ------------- -------------
$ 10,140,000 $ 4,026,000 $ 1,628,000
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
32
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset/(liability) are as follows:
<TABLE>
<CAPTION>
1994 1993
--------------- --------------
<S> <C> <C>
Components of the deferred tax asset:
Self-insured reserves................................................ $ 3,002,000 $ 2,103,000
Allowance for doubtful accounts...................................... 3,650,000 454,000
Accrued payroll and related benefits................................. 592,000 --
Net operating loss................................................... 5,739,000 --
Deferred lease credit................................................ 10,137,000 --
Other................................................................ 1,336,000 173,000
--------------- --------------
24,456,000 2,730,000
--------------- --------------
Components of the deferred tax liability:
Buildings and equipment, related basis differences, deferred gain and
depreciation.......................................................... (9,706,000) (6,462,000)
Third party retrospective settlements.................................. (1,254,000) --
Difference between reporting income/loss from partnership investments
for financial and income tax reporting................................ (955,000) (319,000)
IRC Section 481 adjustment for change in method of accounting from cash
to accrual............................................................ (637,000) --
Greenery 6.5% convertible subordinated note discount................... (1,086,000) --
Other.................................................................. (496,000) (402,000)
--------------- --------------
(14,134,000) (7,183,000)
Valuation allowance on deferred tax assets............................. (3,051,000) --
--------------- --------------
Total.................................................................. $ 7,271,000 $ (4,453,000)
--------------- --------------
--------------- --------------
</TABLE>
As the result of business combinations during the year ended May 31, 1994, a
net deferred income tax asset of $14,724,000 and a related valuation allowance
of $3,051,000 was recorded.
As of May 31, 1994, the Company had regular tax net operating loss
carryforwards of approximately $13,799,000, which are currently subject to
separate return year limitations and expire in the years 2007 through 2008. In
addition, the Company also had an alternative minimum tax credit carryforward of
$231,000 at May 31, 1994, which is available for utilization indefinitely.
(9) CAPITAL STOCK
COMMON STOCK
In October 1993, the Company completed a common stock offering of 4,025,000
shares. Net proceeds of approximately $58 million were used to repay outstanding
debt under the revolving credit loan agreement and to fund acquisitions.
As discussed in Note 5, the Company converted $54,270,000 of its 6.75%
convertible subordinated notes into 4,522,500 shares of the Company's common
stock during the third quarter of 1994. The conversion price was $12 per share.
As discussed in Note 7, the Company issued 2,050,000 new shares of common
stock during February 1994 in connection with the Greenery merger.
In addition, the Company acquired Advanced Cardiovascular Technology, Inc.,
a non-invasive medical diagnostic company in April 1994. In connection with this
acquisition, the Company issued 163,976 new shares of common stock at $25 per
share. The terms of the acquisition provide for the
33
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) CAPITAL STOCK (CONTINUED)
issuance of up to 204,985 additional shares of common stock if certain earning
levels are achieved by March 31, 1997. Of these contingent shares, 159,985 were
issued into escrow at closing and remained in escrow at May 31, 1994. This
contingent consideration has not been recorded as of May 31, 1994.
PREFERRED STOCK
There are 500,000 authorized but unissued shares of preferred stock, par
value $.001.
STOCK PURCHASE WARRANTS
The Company had 152,666 stock purchase warrants outstanding at May 31, 1994
for the purchase of common stock. These warrants are exercisable at $2.50 and
expire on June 30, 1995.
STOCK BENEFIT PLANS
The Company has adopted a nonqualified employee stock option plan and
directors stock option plan which provides for the Company to grant to certain
key employees and outside directors the option to purchase common shares of the
Company's stock at market value of the stock at the option grant date.
Accordingly, no compensation is recorded in the accompanying consolidated
financial statements for the options granted.
All options granted under the employee plan and directors plan expire ten
years after grant, are nontransferable and are exercisable only while the
individual is employed by the Company or is a current member of the Board of
Directors subject to certain exceptions for death or disability. One-third of
each option will be exercisable on each of the first, second and third
anniversary dates following the date of grant.
The following information is a summary of the stock option activity under
the employee and directors plans:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding at beginning of year............ 1,015,109 808,553 456,005
Granted............................................. 905,750 450,400 493,400
Exercised........................................... (208,751) (128,745) (109,172)
Canceled and other adjustments...................... (37,397) (115,099) (31,680)
--------------- --------------- ---------------
Options outstanding at end of year.................. 1,674,711 1,015,109 808,553
--------------- --------------- ---------------
--------------- --------------- ---------------
Options exercisable at end of year.................. 467,371 279,226 191,083
--------------- --------------- ---------------
--------------- --------------- ---------------
Option price range.................................. $ 1.38-$26.13 $ 1.38-$14.63 $ 1.38-$10.25
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The Company also has an employee stock purchase plan (the 'Plan'). The Plan
allows substantially all full-time employees to contribute up to five percent of
their compensation for the purchase of the Company's common stock at 85 percent
of market value at the date of purchase. As of May 31, 1994, 16,020 shares of
the Company's stock had been purchased under the Plan.
In addition and in connection with the Greenery merger, the Company issued
to one of the Company's directors a five year option to purchase 125,000 shares
of the Company's common stock at $17 per share.
The total number of shares allocated, granted and outstanding pursuant to
the Company's employee and directors stock option plans and employee stock
purchase plan together with other shares issued or allocated for issuance to
employees and directors pursuant to option, incentive or similar plans, may not
exceed 10 percent of the total number of shares outstanding to all stockholders
at the time of the allocation or grant.
34
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) EMPLOYEE BENEFITS
In 1993, the Company established a deferred compensation plan for selected
employees that work full-time and have been employed by the Company for more
than one year. This plan, which is not required to be funded by the Company,
allows eligible employees to defer portions of their current compensation up to
10%. The Company then matches up to 4% of the employee's deferred compensation.
Employee contributions are vested immediately. Employer contributions vest on a
graduating basis, with full vesting achieved at the end of six years. The
Company contributed approximately $124,000 and $39,000 to this plan for the
years ended May 31, 1994 and 1993 respectively. No contribution was made for the
year ended May 31, 1992.
The Company also has a 401(k) savings plan available to substantially all
employees who have been with the Company for more than six months. Employees may
defer up to 20% of their salary, subject to the maximum permitted by law. The
Company may, at its discretion, match a portion of the employee's contribution.
Employee contributions are vested immediately. Employer contributions vest on a
graduating basis, with full vesting achieved at the end of five years. The
Company contributed approximately $136,000 and $15,000 to this plan for the
years ended May 31, 1994 and 1993 respectively. No contribution was made for the
year ended May 31, 1992.
In addition, the Company also has a profit-sharing plan to which it may make
contributions at its discretion. The Company has not made any contributions to
this plan. Although it has not expressed any intent to do so, the Company may
terminate any of the above plans at any time.
Greenery had additional employee benefit plans in place prior to the merger.
The Company is currently in the process of merging these plans into the
Company's existing employee benefit plans.
(11) SUPPLEMENTARY INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purposes of the consolidated statements of cash flows, the following
are considered non-cash items:
1994
a) The conversion of the $54,270,000 of convertible subordinated notes into
the Company's common stock,
b) The issuance of 2,050,000 shares of common stock for the purchase of
Greenery's net assets,
c) The issuance of 163,976 shares of common stock for the purchase of
Advanced Cardiovascular Technology's net assets, and
d) The acquisition of three facilities through assumption of long-term debt
totaling $13,300,000.
1993
Net assets of approximately $17,500,000 were sold for cash proceeds of
approximately $9,360,000 and notes receivable of $8,150,000.
Cash paid for interest for the years ended May 31, 1994, 1993 and 1992
was approximately $5,650,000, $4,387,000 and $1,871,000, respectively.
Cash paid for income taxes for the years ended May 31, 1994, 1993 and
1992 was approximately $7,893,000, $4,187,000 and $500,000, respectively.
35
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS
LETTERS OF CREDIT
The Company was contingently liable for letters of credit aggregating
$8,550,684 at May 31, 1994. The letters of credit were used in lieu of lease
deposits for facilities operated by the Company and for deposits under various
workers' compensation programs.
EMPLOYMENT AGREEMENTS
Under annual employment agreements with two of the officers/stockholders,
the Company is committed to pay minimum annual salaries totaling $700,000,
subject to certain covenants. In addition, the employment agreements provide for
annual retirement benefits and disability benefits equal to a maximum of 50
percent of each officer's base salary. The retirement benefits vest in
equivalent increments over 10 years and the disability benefits terminate upon
retirement or age 65. Further, an annual death benefit is payable to the
surviving spouse or minor children equal to one-half the vested retirement
benefit at the time of the officer's death. Amounts recorded for the annual
retirement and disability benefits have been included in other accrued
liabilities in the accompanying consolidated financial statements. The Company's
management believes the implementation of Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Postemployment Benefits" will not
have a material impact on the results of operations or financial position of the
Company.
In addition and in connection with the Greenery merger, the Company has
entered into a seven year consulting agreement with one of the Company's
directors for which the Company has agreed to pay annual consulting fees of
$175,000.
LIFE INSURANCE PREMIUMS
In fiscal 1994, the Company agreed to fund life insurance premiums for two
of its officers. To date such advances total approximately $563,000 and are
reflected in other assets. These advances will be repaid to the Company by the
officers' estates upon the earlier of cancellation of the policies or death of
the officers.
PURCHASE COMMITMENTS
Under the terms of one of the Company's facility lease agreements, the
Company has the option to purchase the facility and the lessor has the option to
require the Company to purchase the facility should the Company fail to exercise
the purchase option for $5.5 million at the end of the lease term (August 1,
1998).
MANAGEMENT AGREEMENT
In connection with the Greenery merger, the Company has committed to manage
three Connecticut facilities for an affiliate of two director nominees of the
Company. The Company is committed to manage these facilities for up to five
years, subject to the affiliate's right to terminate sooner at any time with 90
days notice.
In connection with the management agreement, the affiliate acquired from the
Company the leasehold improvements of these facilities for approximately
$903,000. A receivable for this amount is recorded by the Company in other
assets at May 31, 1994.
(13) SUBSEQUENT EVENTS
In June 1994, the Company entered into agreements to acquire substantially
all of the assets of peopleCARE Heritage Group, a 13 facility long-term care
company located in Texas. Under the terms of the agreements, the Company will
pay $56 million in cash and issue approximately $10 million in common stock to
acquire fee simple title to seven facilities and leasehold rights to the
remaining six facilities, including purchase options on the leased facilities.
The cash portion of the purchase price is
36
<PAGE>
HORIZON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SUBSEQUENT EVENTS (CONTINUED)
expected to be funded through the increased credit agreement discussed in Note
4. Subject to regulatory approval, the Company anticipates completing the
acquisition and commencing operations August 1, 1994.
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly financial information, including the
retroactive restatement impact on net earnings of adopting FAS No. 109
"Accounting for Income Taxes," follows (in thousands, except per share data):
<TABLE>
<CAPTION>
EARNINGS PER EARNINGS PER
TOTAL COMMON AND COMMON
OPERATING NET COMMON SHARE -- ASSUMING
REVENUES EARNINGS EQUIVALENT SHARE FULL DILUTION
----------- --------- ------------------- -----------------
<S> <C> <C> <C> <C>
Quarter ended:
August 31, 1993........................... $ 74,968 $ 2,816 $ .24 $ .21
November 30, 1993......................... 78,931 3,500 .26 .22
February 28, 1994......................... 88,602 4,484 .24 .23
May 31, 1994.............................. 132,594 5,806 .25 .25
----------- --------- --- ---
$ 375,095 $ 16,606 $ .99 $ .91
----------- --------- --- ---
----------- --------- --- ---
Quarter ended:
August 31, 1992........................... $ 46,719 $ 1,512 $ .13 $ .13
November 30, 1992 (restated).............. 52,699 1,887 .16 .15
February 28, 1993 (restated).............. 60,920 1,990 .17 .16
May 31, 1993 (restated)................... 71,861 2,327 .20 .18
----------- --------- --- ---
$ 232,199 $ 7,716 $ .66 $ .62
----------- --------- --- ---
----------- --------- --- ---
</TABLE>
37
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to "Proposal 3 -- Election of Directors --
Directors and Nominees" and "-- Certain Transactions and Other Matters" included
in the Proxy Statement for the Company's Annual Meeting of Stockholders to be
held on September 12, 1994 (the "Proxy Statement"). For information with respect
to the Company's executive officers, see also "Business -- Executive Officers of
the Company" included in Item I in Part I of this Annual Report on Form 10-K,
which is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to "Proposal 3 -- Election of Directors --
Directors Compensation" and "-- Executive Compensation -- Summary Compensation
Table," "-- Employment and Consulting Agreements," "-- Option Exercises and
Fiscal Year-End Values," and "-- Option Grants" included in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to "Proposal 3 -- Election of Directors --
Security Ownership of Directors and Management" and "Principal Stockholders"
included in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon consummation of the Horizon merger with Greenery, Horizon sold to HRP
for cash the leasehold improvements of three Greenery facilities in Connecticut
that Horizon determined not to operate on a long-term basis. Horizon agreed to
operate these facilities for a specified period on behalf of Connecticut
Subacute Corporation II ("Tenant"), an entity wholly owned by Gerard M. Martin
and Barry M. Portnoy, nominees to the Board of Directors of Horizon. HRP now
leases these previous Greenery facilities to Tenant. Horizon continues to manage
these facilities for Tenant for a management fee equal to 7% of net patient
revenues for a period that will extend for up to five years from the date of the
merger, subject to the Tenant's right to terminate upon certain conditions. The
management fee was negotiated at arms' length, and Horizon believes the amount
of the fee is competitive with prevailing market rates based upon the management
obligations involved. Under the terms of the agreement with HRP, Horizon
guarantees Tenant's lease obligations under the leases and provides Tenant the
working capital reasonably required for the operation of such facilities,
including operating deficits, should they occur. For the fiscal year ended May
31, 1994, there were working capital advances of approximately $700,000 and
correspondingly, no amounts had been paid by Tenant to Horizon.
Prior to the merger with Horizon, Greenery sold to B&G Partners Limited
Partnership ("B&G"), an entity owned by Messrs. Martin and Portnoy, (a) a $7.8
million promissory note of Advisors bearing annual interest at 12% and due and
payable in 1994; (b) all of the outstanding capital stock of Greenery Holding,
Inc.; (c) Greenery's home office in Newton, Massachusetts; and (d) certain real
property and improvements in Framingham, Massachusetts. Greenery Holding, Inc.
was a wholly owned subsidiary of Greenery, the sole assets of which were (x)
500,000 restricted shares of HealthVest, a Maryland trust; (y) a $7.0 million
promissory note of HealthVest; and (z) certain real property and improvements in
Austin, Texas. The aggregate purchase price for such non-operating assets was
$20 million. B&G delivered to Horizon a promissory note for $20 million with
annual interest thereon at the lesser of 8% or 2.25% over the 6-month London
Interbank Offered Rate ("LIBOR"), and one-half of the payment of such note is
guaranteed by each of Mr. Martin and Mr. Portnoy. Interest on this note is
payable semi-annually, and a principal payment of $7.0 million plus accrued
interest was paid on March 1, 1994, with all remaining unpaid principal and
interest due in 2008. In the event of any default with respect to payment of
such note, Horizon will diligently pursue
38
<PAGE>
all available remedies. Horizon does not expect that any such default would
materially impair the on-going health care operations of the Company as Horizon
is not relying on repayment of the note to fund its operations.
Mr. Portnoy, upon consummation of the merger with Greenery, received, in
exchange for an option held by him to purchase 500,000 shares of Greenery common
stock at $4.25 per share, a five-year option to purchase 125,000 shares of
Horizon Common Stock at a price of $17.00 per share. Mr. Portnoy also held
additional options to purchase 18,000 shares of Greenery common stock, at
exercise prices that ranged from $3.06 to $7.00 per share, which, under the
terms of the Merger Agreement, he was entitled upon consummation of the merger,
to either cash out for $1 per share or exchange for options to acquire Horizon
Common Stock. Prior to the consummation of the merger, these additional options
were cashed out.
Upon consummation of the merger, Mr. Martin entered into a consulting
agreement with Horizon, as described below under the caption "-- Employment and
Consulting Agreements." Mr. Martin and his wife were controlling shareholders of
Greenery, and Mr. Portnoy was a shareholder of Greenery. As such, upon
consummation of the merger they received shares of Horizon Common Stock in
exchange for their respective shares of Greenery common stock. Mr. Martin and
his wife were also granted certain registration rights in connection with the
shares of Horizon Common Stock received by them in the merger.
In April 1994, Horizon acquired Advanced Cardiovascular Technology, Inc.
("ACT"). Klemett L. Belt, Jr., Executive Vice President and Chief Financial
Officer of Horizon, prior to such acquisition, had loaned ACT approximately
$400,000, which was evidenced by a convertible subordinated debenture in the
principal amount of $400,000. The convertible subordinated debenture bore
interest at the prime rate as published in The Wall Street Journal plus 3.5%,
interest being payable monthly, with principal being due May 1, 1995. The
convertible subordinated debenture was secured by substantially all of ACT's
assets that were not subject to capital lease obligations and was fully
subordinated to the bank financing of ACT. At any time prior to May 1995, the
convertible subordinated debenture was convertible into ACT common stock
representing a 7.5% equity interest in ACT on a fully diluted basis. Mr. Belt
extended the loan to ACT to provide for certain of ACT's working capital needs.
Additionally, Mr. Belt held an option, expiring in 1996, to acquire an
additional 25% ownership in ACT on a fully diluted basis for a purchase price of
$1,300,000. Upon the closing of the acquisition of ACT, Horizon funded ACT with
sufficient amounts to allow ACT to pay in full to Mr. Belt the $400,000
convertible subordinated debenture and Horizon purchased Mr. Belt's option for a
cash payment at the closing of $100,000. An additional cash payment of $100,000
will be paid by Horizon to Mr. Belt if and when ACT achieves pre-tax earnings of
$6 million within the first three years of Horizon ownership.
As previously disclosed to stockholders, on October 11, 1993, Albuquerque
Centre Ltd., Co., a New Mexico limited liability company ("Albuquerque Centre"),
bought the Albuquerque Centre Building in which Horizon leases space for its
corporate offices. The members of Albuquerque Centre are Neal M. Elliott,
Chairman and Chief Executive Officer of Horizon (33.33% interest), Klemett L.
Belt, Jr., Executive Vice President and Chief Financial Officer of Horizon, and
his wife (together, 30.67% interest), Charles H. Gonzales, Senior Vice President
of Horizon (5.34% interest), and two unrelated parties (together, 30.67%
interest). The purchase price was $3,400,000. At the time of purchase by
Albuquerque Centre the Albuquerque Centre Building had a 45% vacancy rate. Under
Horizon's lease with the previous owner of the Albuquerque Centre Building dated
April 1, 1987, as amended, Horizon leases about 39,269 square feet, or about
50.67% of the net rentable space in the Albuquerque Centre Building. As with all
other leases in the Albuquerque Centre Building, the previous owner assigned
Horizon's lease to Albuquerque Centre. In turn, Albuquerque Centre assumed the
previous owner's duties under Horizon's lease. Horizon now pays Albuquerque
Centre annual rent of about $360,000, plus its proportionate share of the
Albuquerque Centre Building's common operating expenses. This is the same amount
of rentals and operating expenses Horizon
39
<PAGE>
would otherwise have paid to the previous owner of the Albuquerque Centre
Building had Albuquerque Centre not bought the building. During fiscal 1994,
Horizon paid approximately $220,000 in rental payments to Albuquerque Centre.
Horizon's lease term ends on June 30, 1995. Horizon has not determined whether
it will continue to lease space in the Albuquerque Centre Building after that
date.
On July 27, 1994, the Board of Directors of the Company approved the
Company's purchase of usage of a Cessna/Citation II aircraft from AMI Aviation
II, L.L.C., a Delaware limited liability company ("AMI II"). Neal M. Elliott
owns 99% of the membership interests of AMI II. Under the aircraft usage
agreement, the Company will purchase a maximum of 30 hours usage per month for
$25,000 per month for a five year period, and will pay $650 per hour for usage
over 30 hours in a month. In addition, the Company will pay certain operating
expenses, such as take-off and landing fees, ground services and certain other
expenses. The Company believes that the amounts payable under this agreement are
comparable to those it would pay to other third party vendors of similar
aircraft services.
Each director and each officer of the Company who is subject to Section 16
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
required by Section 16(a) of the Exchange Act to report to the Securities and
Exchange Commission (the "SEC"), by a specified date, his or her transactions in
the Company's securities. Certain of such directors and officers have filed
reports after the dates specified for such reporting: Mr. Elliott -- two
reports, five transactions; Mr. Belt -- five reports, ten transactions; Mr.
Jeffries -- seven reports, 10 transactions; Mr. Gonzales -- five reports, 24
transactions; Mr. Schofield -- five reports, 20 transactions; Mr. McCord --
three reports, three transactions; Mr. Noveck -- four reports, six transactions.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS:
See Index to Consolidated Financial Statements in Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULES:
The following Schedules are filed herewith on the pages indicated:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
SCHEDULES
II -- Amounts Receivable from Related Parties....................................................... 49
V -- Property, Plant and Equipment................................................................. 50
VI -- Accumulated Depreciation and Amortization of Property, Plant and Equipment.................... 51
VIII -- Valuation and Qualifying Accounts............................................................. 52
X -- Supplementary Income Statement Information.................................................... 53
</TABLE>
3. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Arthur Andersen LLP.
</TABLE>
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 3 to
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 2nd day of June, 1995.
HORIZON HEALTHCARE CORPORATION
By /s/ ERNEST A. SCHOFIELD
------------------------------------
Ernest A. Schofield
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 3 to this report has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose individual
signature appears below hereby authorizes Neal M. Elliott and Klemett L. Belt,
Jr. or either of them, as attorneys-in-fact with full power of substitution, to
execute in the name and on behalf of each person, individual, and in each
capacity stated below, and to file, any and all amendments to this report.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<C> <S> <C>
NEAL M. ELLIOTT*
------------------------------------------- Chairman of the Board of Executive June 1, 1995
Neal M. Elliott Officer (Principal Executive Officer)
/s/ KLEMETT L. BELT, JR.
------------------------------------------- Executive Vice President, and Director June 1, 1995
Klemett L. Belt, Jr.
/s/ ERNEST A. SCHOFIELD Senior Vice President, Chief Financial
------------------------------------------- Officer (Principal Accounting and June 1, 1995
Ernest A. Schofield Financial Officer)
FRANK M. MCCORD*
------------------------------------------- Director June 1, 1995
Frank M. McCord
RAYMOND N. NOVECK*
------------------------------------------- Director June 1, 1995
Raymond N. Noveck
MICHAEL A. JEFFRIES*
------------------------------------------- Director June 1, 1995
Michael A. Jeffries
CHARLES H. GONZALES*
------------------------------------------- Director June 1, 1995
Charles H. Gonzales
*By: /s/ KLEMETT L. BELT, JR.
--------------------------------------
Klemett L. Belt, Jr.
ATTORNEY-IN-FACT
</TABLE>
41
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K/A Amendment No. 3, into the Company's
previously filed Registration Statements File #33-84976, File #33-80660, File
#33-84502 and File #33-84682.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Albuquerque, New Mexico
June 2, 1995