<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
FILED PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT
(DATE OF EARLIEST EVENT REPORTED): JULY 10, 1995
COMMISSION FILE NO. 1-9369
------------------------
HORIZON/CMS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 91-1346899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
<S> <C>
6001 INDIAN SCHOOL ROAD, N.E.,
SUITE 530
ALBUQUERQUE, NM
(Address of principal 87110
executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (505) 881-4961
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
As previously reported in the Current Reports on Form 8-K and Form 8-K/A
dated July 10, 1995, pursuant to the Amended and Restated Agreement and Plan of
Merger, dated as of May 23, 1995 (the "Merger Agreement"), by and among Horizon
Healthcare Corporation ("Horizon"), CMS Merger Corporation, a wholly owned
subsidiary of Horizon ("Merger Sub"), and Continental Medical Systems, Inc.
("CMS"), Merger Sub was merged with and into CMS on July 10, 1995 (the
"Merger"). The purpose of this Form 8-K is to provide audited restated financial
statements for the years ended May 31, 1995 and 1994 and for each of the three
years in the period ended May 31, 1995 to reflect the Merger pursuant to Rule
11-01(b) of Regulation S-X.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Consolidated Financial Statements of the Company:
<TABLE>
<C> <S>
(i) Report of Independent Public Accountants -- Arthur Andersen LLP
Report of Independent Auditors -- Ernst & Young LLP
Report of Independent Accountants -- Price Waterhouse LLP
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Operations
(iv) Consolidated Statements of Stockholders' Equity
(v) Consolidated Statements of Cash Flows
(vi) Notes to Consolidated Financial Statements
</TABLE>
(b) Exhibits:
<TABLE>
<C> <S>
(23.1) Consent of Arthur Andersen LLP
(23.2) Consent of Ernst & Young LLP
(23.3) Consent of Price Waterhouse LLP
</TABLE>
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Current Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HORIZON/CMS HEALTHCARE CORPORATION
By /s/ ERNEST A. SCHOFIELD
-----------------------------------
Ernest A. Schofield
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: November 21, 1995
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Horizon/CMS Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Horizon/CMS
Healthcare Corporation (formerly, Horizon Healthcare Corporation) (a Delaware
corporation) and subsidiaries (Note 1) as of May 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended May 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Continental Medical
Systems, Inc. and subsidiaries ("CMS"), a company acquired during fiscal 1996 in
a transaction accounted for as a pooling-of-interests, as discussed in Notes 1
and 18. Such statements are included in the consolidated financial statements of
Horizon/CMS Healthcare Corporation and reflect total operating revenues of 79.6
percent in 1993, and total assets and total operating revenues of 65.4 and 73.0
percent, respectively in 1994, and 49.3 percent and 60.7 percent, respectively
in 1995, of the related consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to amounts included for CMS, is based solely upon the reports of the
other auditors.
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Horizon/CMS Healthcare Corporation and
subsidiaries as of May 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
July 21, 1995
4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Horizon/CMS Healthcare Corporation:
We have audited the consolidated balance sheets of Continental Medical
Systems, Inc. and subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended June 30, 1995 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of Continental Medical Systems, Inc. and subsidiaries for the year ended June
30, 1993 were audited by other auditors whose report dated August 10, 1993 on
those statements included an explanatory paragraph that described the change in
the Company's method of accounting for development costs and the adoption of the
provisions of Statement of Financial Accounting Standards No. 115 which are
discussed in Notes 8 and 11, respectively, to the consolidated financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 1995 and 1994 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Continental Medical Systems, Inc. and subsidiaries at June 30, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Harrisburg, Pennsylvania
August 3, 1995, except for Note 6 and
Note 19 for which the date is
September 26, 1995; Note 14 for which
the date is September 12, 1995; and
Note 20 for which the date is
September 27, 1995
5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Continental Medical Systems, Inc.
We have audited the consolidated balance sheet of Continental Medical
Systems, Inc. and its subsidiaries as of June 30, 1993 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statments are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Continental Medical
Systems, Inc. and its subsidiaries at June 30, 1993 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. We have not audited the consolidated
financial statements of Continental Medical Systems, Inc. for any period
subsequent to June 30, 1993.
As discussed in Notes 8 and 11 to the consolidated financial statements, in
fiscal 1993 the Company changed its method of accounting for development costs
and adopted the provisions of Statement of Financial Accounting Standards No.
115.
PRICE WATERHOUSE LLP
Philadelphia, PA
August 10, 1993
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 40,674 $ 61,384
Patient care accounts receivable, net of allowance for doubtful accounts of
$29,595 in 1995 and $24,843 in 1994.............................................. 330,313 294,225
Prepaid and other assets.......................................................... 61,650 46,423
Deferred income taxes............................................................. 21,806 12,100
------------- -------------
Total current assets............................................................ 454,443 414,132
PROPERTY AND EQUIPMENT, net......................................................... 614,379 445,449
GOODWILL, net....................................................................... 168,861 114,286
OTHER INTANGIBLE ASSETS, net........................................................ 44,720 52,251
NOTES RECEIVABLE, excluding current portion......................................... 44,619 51,528
DEFERRED INCOME TAXES............................................................... -- 15,980
OTHER ASSETS........................................................................ 71,101 54,406
------------- -------------
Total assets.................................................................... $ 1,398,123 $ 1,148,032
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................................. $ 5,032 $ 5,711
Accounts payable.................................................................. 33,280 42,815
Accrued expenses.................................................................. 131,225 129,828
Estimated third party settlements................................................. 563 3,139
------------- -------------
Total current liabilities....................................................... 170,100 181,493
LONG-TERM DEBT, excluding current portion........................................... 532,688 461,331
OTHER LIABILITIES................................................................... 24,353 27,885
DEFERRED INCOME TAXES............................................................... 6,141 --
------------- -------------
Total liabilities............................................................... 733,282 670,709
MINORITY INTERESTS.................................................................. 14,189 16,069
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000 shares, 50,679,107 and
43,440,558 shares issued with 50,174,218 and 43,112,412 shares outstanding at May
31, 1995 and 1994, respectively.................................................. 51 43
Additional paid-in capital........................................................ 559,168 393,209
Retained earnings................................................................. 99,382 71,104
Note receivable from sale of common stock......................................... (2,362) (2,362)
Treasury stock.................................................................... (5,587) (740)
------------- -------------
Total stockholders' equity...................................................... 650,652 461,254
------------- -------------
Total liabilities and stockholders' equity...................................... $ 1,398,123 $ 1,148,032
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
TOTAL OPERATING REVENUES............................................. $ 1,625,326 $ 1,382,162 $ 1,136,358
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of services................................................... 1,261,000 1,099,162 892,902
Administrative and general......................................... 82,533 60,108 42,284
Facility leases.................................................... 81,590 68,832 64,461
Depreciation and amortization...................................... 56,618 48,249 33,915
Interest expense................................................... 53,045 44,396 26,999
Special charge..................................................... 23,422 74,834 17,154
Settlement charge.................................................. 13,500 -- --
------------- ------------- -------------
Total costs and expenses......................................... 1,571,708 1,395,581 1,077,715
------------- ------------- -------------
Earnings (loss) before minority interests, income taxes,
cumulative effect of accounting change and extraordinary gain... 53,618 (13,419) 58,643
Minority interests................................................... (5,245) (4,664) (6,787)
------------- ------------- -------------
Earnings (loss) before income taxes, cumulative effect of
accounting change and extraordinary gain........................ 48,373 (18,083) 51,856
Income taxes......................................................... 23,375 1,731 21,520
------------- ------------- -------------
Earnings (loss) before cumulative effect of accounting change and
extraordinary gain.............................................. 24,998 (19,814) 30,336
Cumulative effect of accounting change, net of tax................... -- -- (3,204)
------------- ------------- -------------
Earnings (loss) before extraordinary gain........................ 24,998 (19,814) 27,132
Extraordinary gain, net of tax....................................... 2,571 734 --
------------- ------------- -------------
Net earnings (loss).............................................. $ 27,569 $ (19,080) $ 27,132
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per common and common equivalent share:
Earnings (loss) before cumulative effect of accounting change and
extraordinary gain.............................................. $ 0.52 $ (0.54) $ 0.94
Cumulative effect of accounting change........................... -- -- (0.10)
------------- ------------- -------------
Earnings (loss) before extraordinary gain........................ 0.52 (0.54) 0.84
Extraordinary gain............................................... 0.06 0.02 --
------------- ------------- -------------
Net earnings (loss).............................................. $ 0.58 $ (0.52) $ 0.84
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per common share -- assuming full dilution:
Earnings (loss) before cumulative effect of accounting change and
extraordinary gain.............................................. $ 0.52 $ (0.54) $ 0.89
Cumulative effect of accounting change........................... -- -- (0.09)
------------- ------------- -------------
Earnings (loss) before extraordinary gain........................ 0.52 (0.54) 0.80
Extraordinary gain............................................... 0.06 0.02 --
------------- ------------- -------------
Net earnings (loss).............................................. $ 0.58 $ (0.52) $ 0.80
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
COMMON STOCK ADDITIONAL FROM SALE
------------------ PAID-IN RETAINED OF COMMON TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK STOCK TOTAL
---------- ------ ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1992........................... 30,584,228 $31 $201,223 $63,235 $ -- $ (740) $263,749
Exercise of stock purchase warrants, options and
issuance of shares under the employee stock
purchase plan.................................... 892,889 1 11,970 -- (2,362) -- 9,609
Common stock issued in connection with
acquisitions..................................... 95,783 -- 3,102 -- -- -- 3,102
Distribution to subsidiary stockholder............ -- -- -- (183 ) -- -- (183)
Net earnings...................................... -- -- -- 27,132 -- -- 27,132
---------- ------ ---------- -------- --------- -------- --------
Balance at May 31, 1993........................... 31,572,900 32 216,295 90,184 (2,362) (740) 303,409
Common stock offering, net of $1,365 of issue
costs............................................ 4,025,000 4 58,215 -- -- -- 58,219
Common stock issued in connection with
acquisitions..................................... 2,828,968 3 62,141 -- -- -- 62,144
Conversion of 6.75% convertible subordinated
notes, net of $1,897 of previously capitalized
financing costs and $507 of conversion costs..... 4,522,500 4 51,861 -- -- -- 51,865
Exercise of stock purchase warrants, options and
issuance of shares under the employee stock
purchase plan.................................... 491,190 -- 4,697 -- -- -- 4,697
Net loss.......................................... -- -- -- (19,080 ) -- -- (19,080)
---------- ------ ---------- -------- --------- -------- --------
Balance at May 31, 1994........................... 43,440,558 43 393,209 71,104 (2,362) (740) 461,254
Common stock offering, net of $6,487 of issue
costs............................................ 4,915,457 5 119,608 -- -- -- 119,613
Common stock issued in connection with
acquisitions..................................... 1,847,899 2 39,334 759 -- -- 40,095
Exercise of stock purchase warrants, options and
issuance of shares under the employee stock
purchase plan.................................... 475,193 1 7,017 -- -- -- 7,018
Treasury stock acquired in payment for
stockholder's note............................... -- -- -- -- -- (4,847) (4,847)
Distribution to subsidiary stockholder............ -- -- -- (50 ) -- -- (50)
Net earnings...................................... -- -- -- 27,569 -- -- 27,569
---------- ------ ---------- -------- --------- -------- --------
Balance at May 31, 1995........................... 50,679,107 $51 $559,168 $99,382 $(2,362) $(5,587) $650,652
---------- ------ ---------- -------- --------- -------- --------
---------- ------ ---------- -------- --------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................................... $ 27,569 $ (19,080) $ 27,132
------------ ------------ ------------
Adjustments:
Depreciation and amortization....................................... 56,618 48,249 33,915
Other............................................................... (1,820) 690 7,030
Special charge...................................................... 23,422 74,834 14,556
Settlement charge................................................... 13,500 -- --
Cumulative effect of accounting change, net of taxes................ -- -- 3,204
Extraordinary gain, net of taxes.................................... (2,571) (734) --
Increase (decrease) in cash from changes in assets and liabilities,
excluding effects of acquisitions and dispositions:
Accounts receivable and estimated third party settlements......... (33,159) (49,533) (85,069)
Other assets...................................................... (22,800) (23,067) (10,596)
Deferred income taxes............................................. 168 (1,178) 4,384
Accounts payable and accrued expenses............................. (24,636) (871) 14,070
Other liabilities................................................. (25,666) (281) (1,268)
------------ ------------ ------------
Total adjustments..................................................... (16,944) 48,109 (19,774)
------------ ------------ ------------
Net cash provided by operating activities............................. 10,625 29,029 7,358
------------ ------------ ------------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired..... (117,359) (27,091) (57,303)
Cash proceeds from sale of property and equipment..................... 22,718 24,096 9,363
Other intangible assets............................................... (863) (5,010) (36,769)
Acquisition of property and equipment................................. (52,622) (67,026) (184,563)
Notes receivable...................................................... 2,215 5,072 (6,801)
Other investing activities............................................ (12,688) (9,950) 11,423
------------ ------------ ------------
Net cash used in investing activities................................. (158,599) (79,909) (264,650)
------------ ------------ ------------
Cash flows from financing activities:
Long-term debt borrowings............................................. 211,484 122,604 551,005
Long-term debt repayments............................................. (196,906) (120,959) (280,924)
Deferred financing costs.............................................. (3,104) (893) (12,306)
Repurchase of convertible subordinated notes.......................... (3,812) (19,999) --
Issuance of common stock.............................................. 124,217 61,894 7,075
Distributions to minority interests................................... (4,975) (3,143) (2,454)
Other financing activities............................................ 360 2,388 372
------------ ------------ ------------
Net cash provided by financing activities............................. 127,264 41,892 262,768
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.................... (20,710) (8,988) 5,476
Cash and cash equivalents, beginning of year............................ 61,384 70,372 64,896
------------ ------------ ------------
Cash and cash equivalents, end of year.................................. $ 40,674 $ 61,384 $ 70,372
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Horizon/CMS Healthcare Corporation (formerly, Horizon Healthcare
Corporation) and its subsidiaries (collectively, the Company) is a leading
provider of post-acute 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
comprehensive medical rehabilitation programs and services in each of the
rehabilitation industry's three principal sectors -- inpatient rehabilitation
care, outpatient rehabilitation care and contract therapy. The Company also
provides other specialty health care services to its long-term care and
rehabilitation facilities and outside parties. Such specialty health care
services include licensed specialty hospital services and subacute units,
institutional pharmacy services, physician locum tenens, Alzheimer's care, non-
invasive medical diagnostic testing services, home respiratory care services,
clinical laboratory services and management and managed care services to
physicians and other providers. Substantially all of these services are within
the post-acute health care market and, accordingly, the Company operates within
a single industry segment.
Subsequent to year end, in connection with the merger of a wholly owned
subsidiary of the Company with Continental Medical Systems, Inc. (CMS), the
Company changed its name to Horizon/ CMS Healthcare Corporation (Note 18).
As discussed in Note 18, the accompanying financial statements have been
restated to include the accounts and operations of CMS for all periods prior to
the merger. These restated financial statements include the financial position
of CMS as of June 30, 1995 and 1994 and the results of operations of CMS for
each of the three years in the period ended June 30, 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its 50% or greater owned subsidiaries which the Company controls. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Investments in affiliates, which are included in other assets in the
accompanying consolidated balance sheets, in which the Company owns 20% or more
and limited partnerships are carried on the equity basis which approximates the
Company's equity in underlying net book value. Other investments are stated at
cost.
OPERATING REVENUES
Operating revenues include net patient care and other 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 for long-term and rehabilitative 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.
11
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Operating revenues also include interest, management fees and other revenues
which are not material to total operating revenues.
CASH EQUIVALENTS
For purposes of the accompanying consolidated statements of cash flows, the
Company considers its highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
DEPRECIATION
Property and equipment is stated at the lower of cost or net realizable
value. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets (buildings -- 30 to 40 years; equipment --
3 to 20 years). Maintenance and repairs are charged to expense as incurred.
Major renewals or improvements are capitalized.
ASSET IMPAIRMENT
The carrying values of long-lived assets are reviewed if the facts and
circumstances suggest that an item may be impaired. If this review indicates
that a long-lived asset will not be recoverable, as determined based on the
future undiscounted cash flows of the asset, the Company's carrying value of the
long-lived asset is reduced to fair value.
GOODWILL
Goodwill has resulted from various acquisitions made by the Company. In
connection with acquisitions accounted for as purchases, the excess of the total
acquisition cost over the fair value of the net assets acquired has been
recorded as goodwill. Goodwill is amortized on the straight-line basis over a
period of 15 to 40 years. The Company evaluates the realizability of goodwill
quarterly based upon expectations of undiscounted future cash flows of the
related assets.
INCOME TAXES
The Company files a consolidated federal income tax return for all 80% or
more owned subsidiaries. Separate returns are filed for all subsidiaries owned
less than 80%. 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 Opinion No. 11) to an asset and liability
approach. 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 basis of assets and
liabilities.
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 and are determined on a case by case basis plus
an amount for incurred but not reported claims. Differences between the amounts
accrued and subsequent settlements are recorded in operations in the period 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 is based upon
12
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
47,850,000 shares in 1995, 37,078,000 shares in 1994, and 32,248,000 shares in
1993. Earnings per common share-assuming full dilution is based upon 47,857,000
shares in 1995, 40,051,000 shares in 1994 and 36,941,000 shares in 1993,
including the effect of convertible subordinated notes.
(2) NOTES RECEIVABLE
Notes receivable consists of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Variable rate note receivable (8.0% at May 31, 1995) from a related party, full
recourse; interest payable semi-annually; principal payable December 2008;
unsecured....................................................................... $ 10,653 $ 13,000
Variable rate note receivable (7.0% at May 31, 1995); interest payable monthly;
principal payable $3,000 in August 2002 and $3,000 in August 2004; secured by
real property................................................................... 6,000 6,000
7% note receivable; payable in monthly installments of $27 including interest;
due January 2016; secured by real property...................................... 3,569 3,644
7% notes receivable, payable in monthly installments of $60 including interest;
due April 2004; secured by real property........................................ 9,571 9,621
Other notes receivable bearing interest at 6% to 12%; secured by real property... 16,649 20,345
--------- ---------
Notes receivable............................................................... 46,442 52,610
Less current portion............................................................. 1,823 1,082
--------- ---------
Notes receivable, excluding current portion...................................... $ 44,619 $ 51,528
--------- ---------
--------- ---------
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment owned and held under capital lease is stated at cost
and consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land................................................................ $ 67,330 $ 46,053
Buildings........................................................... 478,643 336,049
Equipment........................................................... 161,543 126,456
----------- -----------
707,516 508,558
Less accumulated depreciation and amortization...................... 93,137 63,109
----------- -----------
Property and equipment, net......................................... $ 614,379 $ 445,449
----------- -----------
----------- -----------
</TABLE>
13
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) ACCRUED EXPENSES
Accrued expenses is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Salaries, wages and benefits........................................ $ 53,696 $ 55,958
Accrued insurance................................................... 18,297 14,628
Accrual for litigation settlement................................... 12,800 --
Accruals for special charges........................................ 10,741 18,794
Interest............................................................ 11,058 12,387
Other............................................................... 24,633 28,061
----------- -----------
$ 131,225 $ 129,828
----------- -----------
----------- -----------
</TABLE>
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Revolving credit drawn on credit agreements; interest due monthly; principal
due in fiscal 2000........................................................... $ 138,750 $ 44,250
10 7/8% senior subordinated notes; due in fiscal 2002......................... 145,125 198,672
10 3/8% senior subordinated notes; due in fiscal 2003......................... 117,991 148,923
Convertible subordinated debenture; interest at 8 3/4%; due in fiscal 2015.... 20,400 20,906
Convertible subordinated debenture; interest at 6 1/2%; due in fiscal 2012.... 5,680 10,000
Convertible subordinated debenture; interest at 7 3/4%; due in fiscal 2012.... 2,000 2,000
Obligations under capital leases and other long-term debt bearing interest
ranging from 5.0% to 14.0%; secured by related land, buildings and
equipment.................................................................... 108,774 43,291
----------- -----------
Long-term debt.............................................................. 538,720 468,042
Less current portion.......................................................... 5,032 5,711
Less note receivable on convertible debenture................................. 1,000 1,000
----------- -----------
Long-term debt, excluding current portion................................... $ 532,688 $ 461,331
----------- -----------
----------- -----------
</TABLE>
On March 16, 1995, the Company completed a $250,000 revolving credit loan
agreement with the Boatmen's National Bank of St. Louis, as agent for a group of
banks (the "Boatmen's Facility"). The Boatmen's Facility, which replaced the
revolving loan agreement outstanding at May 31, 1994 was drawn in the amount of
$104,750 at May 31, 1995. This facility bears interest at either the Adjusted
Corporate Base Rate plus up to .25% (9.0% at May 31, 1995) or at the Adjusted
London Interbank Offered Rate (LIBOR) rate plus 0.5 to 1.25% (7.0 to 7.0625% at
May 31, 1995), both as defined in the credit agreement. The average interest
rate on amounts outstanding under the Boatmen's Facility was 7.68% at May 31,
1995. This facility: (a) requires the Company to maintain certain financial
ratios, (b) restricts the Company's ability to enter into capital leases 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
Boatmen's Facility also
14
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
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. This facility further
provides that any event or occurrence that would have a material adverse effect
on the Company's ability to repay the loans or to perform its obligations under
the loan documents will constitute an event of default under this facility.
Certain subsidiaries of the Company have guaranteed the obligations of the
Company under the Boatmen's Facility. The Boatmen's Facility expires on March
31, 1998 and is secured by a pledge of the stock of all subsidiaries of the
Company and certain accounts receivable of the Company. The amount of such
accounts receivable collateral was approximately $102,200 at May 31, 1995.
Prior to the merger, at May 31, 1995, the Company was also party to a credit
facility with Citibank, N.A., as agent for a group of several banks (the
"Citibank Facility"). At May 31, 1995, $34,000 had been drawn on this facility.
The Citibank Facility provided up to $235,000 in a revolving line of credit, of
which up to $45,000 was available in the form of letters of credit. The Citibank
Facility provided for a revolving loan period through December 31, 1996 and the
subsequent conversion of the revolving loan into a term loan. At the Company's
option, the interest rate on any loan under the Citibank Facility was based on
the LIBOR rate or a base rate as specified in the agreement as adjusted for a
margin. At May 31, 1995, the weighted average interest rate for all borrowings
under the Citibank Facility was 8.02%.
In July 1995, in connection with the merger with CMS, the Company and CMS
entered into a new facility with NationsBank of Texas, N.A., as agent for a
group of banks, (the "NationsBank Facility") that replaced the Boatmen's and
Citibank Facilities and combined the amount available for borrowing at $485,000.
The aggregate principal amount was divided between the Company and CMS in the
amounts of $250,000 and $235,000, respectively. The terms of the NationsBank
Facility are substantially consistent with those of the Boatmen's Facility
except that accounts receivable are no longer required as collateral and the
interest component has been revised. Under the NationsBank Facility, interest is
computed at a rate equal to either, as selected by the Company, the Alternate
Base Rate or the Adjusted LIBOR rate plus 0.625% to 1.25% per annum, depending
on the maintenance of specified financial ratios. The Alternate Base Rate is
equal to the greater of the prime rate or the federal funds effective rate plus
.5%. The agreement expires in June 2000.
Simultaneous with the tender offer for the 10 3/8% and 10 7/8% Senior
Subordinated Notes discussed below, in September 1995 the NationsBank Facility
was amended and restated to increase the facility from $485,000 to $750,000, of
which $70,000 is available in the form of letters of credit, and to remove the
division between the Company and CMS.
On August 17, 1992, the Company issued 10 7/8% Senior Subordinated Notes due
2002 ("10 7/8% Notes") in the amount of $200,000 in a public offering in which
the Company received net proceeds of $192,500. The 10 7/8% Notes were priced at
99.25%, to yield 11% annually to maturity. On March 16, 1993 the Company issued
its 10 3/8% Senior Subordinated Notes due 2003 ("10 3/8% Notes") in the amount
of $150,000 in a private placement in which the Company received net proceeds of
$144,586. The 10 3/8% Notes were priced at 99.22% to yield 10 1/2% annually to
maturity. The 10 3/8% Notes were subsequently registered in a registered
exchange offer. Of the difference between the face amount of each issue of the
Notes and the net proceeds of the offerings, $2,664 represented original issue
discount. The remaining $10,250 represented various issuance costs and is
recorded within other
15
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
intangible assets and is amortized over the life of the notes. The 10 7/8% Notes
are subject to redemption at any time on or after August 15, 1997, at specified
redemption prices plus accrued interest. The 10 3/8% Notes are subject to
redemption at any time on or after April 1, 1998, at specified redemption prices
plus accrued interest. The indentures for the Notes contain certain covenants
which limit the ability to incur additional indebtedness, provide guarantees and
pay cash dividends.
During fiscal 1995, the Company purchased $85,206 principal amount of its
10 7/8% and 10 3/8% Notes, (collectively its "Senior Subordinated Notes" or
"Subordinated Debt"), at a discount in a series of open market transactions.
On September 26, 1995, the Company completed a tender offer and consent
solicitation for the Senior Subordinated Notes. Tenders and consents were
obtained from the holders of 99.8% of the $118,800 10 3/8% Notes and holders of
97.5% of the $146,100 10 7/8% Notes. The 10 3/8% Notes were redeemed at 109.25%
plus a consent fee of 1.05% and the 10 7/8% Notes were redeemed at 109.0% plus a
consent fee of .75%. The Company paid $289,500 to retire the Notes, including
principal, premium, consent fee and other related costs. As a result of the
tender, the Company will record an extraordinary charge related to the loss on
the retirement of the Senior Subordinated Notes, including the write-off of
related deferred discount, swap cancellation and financing costs, of
approximately $22,100, net of tax, in the second quarter of fiscal 1996. The
Senior Subordinated Notes were retired with funds drawn on the NationsBank
Facility. Aggregate draws, including letters of credit, under the amended credit
facility after retirement of the Senior Subordinated Notes was approximately
$490,000.
In order to reduce the impact of changes in interest rates on its long-term
debt, the Company, during fiscal 1994 and 1993, entered into four, seven year,
interest rate swap agreements with notional amounts of $25,000 each which mature
in 1999 and 2000 and which provide for receipt of yields of between 5.16% and
6.65% and payment of a six month LIBOR yield. On September 12, 1995, these
interest rate swap agreements were terminated at a cost of $3,540, in connection
with the tender offer for the Senior Subordinated Notes discussed above.
On February 14, 1992, the Company issued $57,500 of 6.75% convertible
subordinated notes (the "6.75% Notes") due February 1, 2002. The 6.75% 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 6.75% 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 redeemed $3,230 of 6.75% Notes at approximately 80% of par
value, resulting in a gain of $475, net of allocable deferred financing costs of
approximately $140. During the third quarter of fiscal 1994, the remaining
$54,270 of 6.75% Notes were converted into the Company's common stock at the
conversion price stated above. In connection therewith, approximately $1,900 of
deferred financing costs and $500 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 15), the Company assumed the
obligations under Greenery's 6 1/2% convertible subordinated notes and 8 3/4%
convertible senior subordinated notes, par value of $26,631 and $28,150,
respectively, at February 11, 1994. These obligations were recorded at their
fair market value under purchase accounting, resulting in a discount on the
6 1/2% convertible subordinated notes of $2,663.
16
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
The 6 1/2% 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 1/4% of par, plus accrued
interest, declining annually to par on June 15, 1996. Commencing June 15, 1996,
the Company is obligated to retire 5% of the issue amount annually to maturity.
The 8 3/4% 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, plus
accrued interest, declining annually to par on April 1, 2000. 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 1/2% debentures, but will be
subordinated to any future senior indebtedness.
During the fourth quarter of fiscal 1994, the Company redeemed $15,520 of
the 6 1/2% convertible subordinated notes and $7,244 of the 8 3/4% convertible
senior subordinated notes. The Company recorded a gain of approximately $734,
net of the write-off of $1,552 debt discount recorded under purchase accounting
and income taxes of approximately $480.
During 1995, the Company repurchased $4,800 of the 6 1/2% convertible
subordinated notes and $506 of the 8 3/4% convertible senior subordinated notes.
The Company recorded a gain of approximately $613, net of the write-off of $480
debt discount recorded under purchase accounting and income taxes of
approximately $401.
The approximate aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending May 31,
1996..................................................... $ 5,032
1997..................................................... 6,620
1998..................................................... 4,115
1999..................................................... 1,777
2000..................................................... 1,890
Thereafter............................................... 518,286
---------
$ 537,720
---------
---------
</TABLE>
In November 1987, a 7 3/4% convertible subordinated debenture was sold to
the Company's vice chairman. This $2,000 debenture is convertible into shares of
common stock at a conversion price of $8.56 per share. Simultaneously, the
Company loaned the vice chairman $2,000 to purchase the debenture. The loan is
evidenced by a promissory note bearing interest at 7 3/4%, payable on the
maturity date of the debenture or earlier to the extent that the debenture is
converted. At May 31, 1995, $1,000 is outstanding on the note.
(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, 1995, 1994 and 1993
was approximately $6,346, $6,198 and $7,662, respectively.
17
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LEASE COMMITMENTS (CONTINUED)
Future minimum payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
Year ending May 31,
1996..................................................... $ 88,613
1997..................................................... 82,557
1998..................................................... 74,716
1999..................................................... 61,989
2000..................................................... 50,378
Thereafter............................................... 188,527
---------
Total minimum lease payments............................. $ 546,780
---------
---------
</TABLE>
The Company is contingently liable for annual lease payments of
approximately $2,570 for leases on facilities sold. In addition, the Company is
contingently liable for annual lease payments of $6,200 for leases on managed
facilities.
The Company leases seven facilities from an affiliate of two directors of
the Company. During fiscal 1995, a previously leased facility was purchased by
the Company. The aggregate lease expense for these facilities for the years
ended May 31, 1995, 1994 and 1993 was approximately $15,900, $5,501, and $903,
respectively. Future minimum lease commitments related to these facilities are
as follows:
<TABLE>
<S> <C>
Year ending May 31,
1996..................................................... $ 12,851
1997..................................................... 12,851
1998..................................................... 12,028
1999..................................................... 12,028
2000..................................................... 12,028
Thereafter............................................... 61,149
---------
Total.................................................... $ 122,935
---------
---------
</TABLE>
The Company has been party to various contracts with Commercial Construction
Company, Inc. ("CCI") for the construction of new rehabilitation hospitals to be
owned and operated by the Company. CCI is wholly owned by the son of the
Company's vice-chairman and brother of an executive vice-president of the
Company. In addition, the Company purchases other development and maintenance
services, equipment, furniture and supplies for its rehabilitation hospitals
through CCI and its affiliates. The Company also leases certain clinic and
office space in the greater Harrisburg, PA area under leases with various
partnerships, of which the vice-chairman of the Company and an executive
vice-president are partners. Also, the Company leases certain office space
located in the greater Harrisburg, PA area from a director of the Company and
partner of a law firm which provides legal services to the Company. In fiscal
1995, 1994, and 1993, the Company made payments to these related parties
aggregating approximately $7,401, $16,950, and $75,220, respectively. Of these
payments, $2,292, $7,189, and $66,204, were recorded in property and equipment
for fiscal 1995, 1994, and 1993, respectively, and $5,109, $9,761, and $9,016
were charged to cost of services for fiscal 1995, 1994, and 1993, respectively.
As of May 31, 1995, future commitments under outstanding contracts with CCI and
its affiliates were $3,475 plus reimbursement of certain personnel costs.
18
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LEASE COMMITMENTS (CONTINUED)
In addition, the Company leases its corporate office space located in
Albuquerque, NM from certain officers and directors. The lease is classified as
an operating lease and provides for minimum annual rents of $535. The lease
expires on July 31, 2001.
(7) SPECIAL CHARGE AND CHANGE IN ACCOUNTING PRINCIPLE
During the second, third and fourth quarters of fiscal 1995, special pre-tax
charges of $13,398, $5,045 and $4,979 were recorded, respectively. The second
and fourth quarter special charges reflect the effect of a revision in the
Company's estimate of receivables from third party payors at its CMS Therapies,
Inc. subsidiary. The third quarter special charge reflects the costs of
eliminating management and staff positions, office lease terminations and
certain other costs of the changes implemented during the third quarter at CMS
Therapies, Inc. At May 31, 1995, the $4,085 balance of the third quarter special
charge is included within accrued expenses.
The Company received various adjustments upon the final settlement of its
1991 and 1992 CMS Therapies, Inc. home office cost reports and other CMS
Therapies, Inc. 1992 cost reports. As a result of the settlements, which was the
Company's first indication that adjustments to its estimates would be required,
the Company performed a detail analysis of its estimated third party settlements
for all open cost reports. Upon completion of its analysis during the second
quarter of fiscal 1995, and subsequent revision in the fourth quarter of fiscal
1995, the Company recorded the second and fourth quarter special charges to
reflect the revision in the Company's estimated third party settlements.
During the fourth quarter of fiscal 1994, a special pre-tax charge of
$74,834 was recorded. The special charge resulted from the approval by the
Company's board of directors of several measures to streamline operations and
improve productivity by restructuring the Company into major operating
businesses, flattening the management organization structure, writing down
certain assets and, where appropriate, divesting of unproductive assets. The
Company began working on the proposed plan during the fiscal 1994 third quarter
as a result of market changes the Company was experiencing. The special charge
comprised several items including the impairment of selected assets in the
Company's hospital division, the costs associated with the consolidation of its
contract therapy companies, the losses related to the termination of certain
business relationships in the contract therapy business and certain other costs
of the restructuring program.
At May 31, 1995, the remaining balance in the special charge is
approximately $6,656, (excluding the write down of assets which are reflected as
a reduction of the related asset account), which is included within accrued
expenses. The components of the special charge are as follows:
<TABLE>
<CAPTION>
FISCAL
ORIGINAL 94-95 BALANCE MAY
PROVISION ACTIVITY 31, 1995
--------- ----------- -------------
<S> <C> <C> <C>
Impairment of assets and future noncancellable commitments...... $ 50,244 $ (43,969) $ 6,275
Consolidation and restructuring................................. 22,842 (22,842) --
Employee and other costs........................................ 1,748 (1,367) 381
--------- ----------- -------------
$ 74,834 $ (68,178) $ 6,656
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
Approximately $50,244 of the special charge was associated with the
impairment of assets at eight rehabilitation hospitals, divestiture of two
rehabilitation hospitals, closure of a select group of outpatient locations and
the accrual of amounts for certain future noncancellable commitments.
19
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) SPECIAL CHARGE AND CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
The impaired assets were identified in accordance with the Company's policy
and based upon a review of the facts and circumstances related to the assets and
a determination that the assets would not be recoverable, as determined based
upon the future undiscounted cash flows resulting from the assets. The
impairment loss was measured as the difference between the carrying amount of
the assets and their fair value as determined by independent appraisals.
Approximately $12,042 of the charge is related to the consolidation of
certain contract therapy companies into CMS Therapies, Inc. and the exit from
certain markets and businesses. This consolidation process involved the closure
of offices, relocation and severance of personnel and elimination of duplicative
processes.
Approximately $10,800 of the charge is related to the writedown of
uncollectible receivables pertaining to the termination of certain business
relationships at CMS Therapies, Inc. During the second quarter of fiscal 1994,
the Company exited business arrangements in which it provided therapists to
unrelated Medicare certified agencies which in turn supplied those therapists to
non-Medicare certified skilled nursing facilities. For a variety of business
reasons, including, among others, the Health Care Financing Administration's
announced intentions to increase their review of the reasonableness of the
charges billed by the agencies to the Medicare program, the Company exited those
relationships and, in many instances, began to provide the same services
directly to Medicare patients upon termination of the contracts with the
agencies. Following termination of the contracts, the Company continued to
assess the collectibility of the agency receivables and, due to deteriorating
business relations and declining financial condition of the agencies, it was
determined a write-down of these receivables was required as of May 31, 1994.
The remainder of the charge, $1,748, was to reduce the corporate office work
force and provide for transaction costs to execute the plan.
During the fourth quarter of fiscal 1993 the Company recorded a pre-tax
charge of $14,556 related principally to the write-off of deferred costs for
approximately 30 abandoned rehabilitation hospital development projects for
which construction had not started. The decision to write-down or abandon
certain projects and pursue less capital-intensive growth than in the past was a
result of changes in the Company's rehabilitation hospital development strategy
in response to changes in various health care delivery markets. Previously, the
Company had deferred certain costs incurred to obtain government approvals and
other expenses related to the development of rehabilitation hospitals. Based on
a historically high rate of completion, costs of developing a project were
charged to operations only when it was determined that the project would be
abandoned.
As a result of the change in development strategy, the Company changed its
accounting for development costs. Hospital development costs are expensed until
that time when it is probable that construction will commence.
Additionally, costs of $2,598 related to the merger with Kron Medical
Corporation ("Kron") and Kron's subsequent consolidation with the Company's
other physician services company, CompHealth, were charged to expense in the
third quarter of fiscal 1993.
(8) SETTLEMENT CHARGE
On September 27, 1995, the Company settled certain pending litigation,
terminated a number of contracts with the other party to the litigation and
obtained releases of claims and potential claims relating to the subject matter
of the litigation and the terminated contracts. As consideration for the
20
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) SETTLEMENT CHARGE (CONTINUED)
settlement, contract terminations and releases, the Company paid cash and
delivered a warrant to purchase the Company's common stock. At May 31, 1995, the
Company accrued $12,800 of expenses and wrote down $700 of receivables to record
the cash payment, warrant valuation, receivable write-offs and other commitments
and transaction costs of the settlement transaction.
(9) EXTRAORDINARY GAIN
During fiscal 1995, the Company recognized a gain of $2,571 ($4,172 less
related tax effect of $1,601) relating to open market purchases at a discount of
its subordinated debt and its 8 3/4% and 6 1/2% convertible subordinated notes.
During fiscal 1994, the Company recognized a gain of $734 ($1,214 less
related tax effect of $480) relating to open market purchases of its 8 3/4% and
6 1/2% convertible subordinated notes at a discount.
(10) INCOME TAXES
On June 1, 1993, the Company adopted FAS 109 through retroactive restatement
of its financial statements from June 1, 1990. The adoption did not have a
material effect on the Company's financial condition or results of operations.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................ $ 6,674 $ 11,653 $ 20,794
State.............................................................. 3,840 2,507 4,177
--------- --------- ---------
10,514 14,160 24,971
Deferred:
Federal............................................................ 10,594 (11,475) (3,084)
State.............................................................. 2,267 (954) (367)
--------- --------- ---------
12,861 (12,429) (3,451)
--------- --------- ---------
Total............................................................ $ 23,375 $ 1,731 $ 21,520
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences between the total tax expense from operations and the income
tax expense using the statutory federal income tax rate (35 percent) were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed tax expense at statutory rate............................... $ 16,931 $ (6,329) $ 18,150
State income tax expense, net of federal income tax benefit.......... 4,690 913 3,237
Amortization of goodwill............................................. 1,245 640 607
Assessments.......................................................... 83 2,983 18
Settlement charge.................................................... 850 1,730 --
Change in valuation allowance........................................ (800) 970 (257)
Other................................................................ 376 824 (235)
--------- --------- ---------
Total income tax expense......................................... $ 23,375 $ 1,731 $ 21,520
--------- --------- ---------
--------- --------- ---------
</TABLE>
21
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) INCOME TAXES (CONTINUED)
The components of the net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Components of the deferred tax asset:
Special charges and settlement charge........................................ $ 19,023 $ 20,511
Allowance for doubtful accounts.............................................. 11,148 6,538
Accrued payroll and related benefits......................................... 3,867 3,156
Other accrued liabilities.................................................... 7,879 8,111
Tax carryforward items....................................................... 5,283 7,859
Deferred lease credit........................................................ 7,630 10,137
Other........................................................................ 3,885 5,167
---------- ----------
58,715 61,479
---------- ----------
Components of the deferred tax liability:
Buildings and equipment, related basis differences, deferred gain and
depreciation................................................................ (31,114) (20,147)
Difference between reporting income/loss from partnership investments for
financial and income tax reporting.......................................... (2,172) (1,280)
Other........................................................................ (5,713) (7,121)
---------- ----------
(38,999) (28,548)
Valuation allowance.......................................................... (4,051) (4,851)
---------- ----------
Total...................................................................... $ 15,665 $ 28,080
---------- ----------
---------- ----------
</TABLE>
As a result of business combinations during the years ended May 31, 1995 and
1994, net deferred income tax assets of $4,238 and $14,724, respectively, and
related valuation allowances of $0 and $3,051, respectively, were recorded.
The Company has regular tax net operating loss carryforwards of
approximately $8,470 which are currently subject to separate return year
limitations and expire in years 2007 and 2008. In addition, the Company also has
an alternative minimum tax credit carryforward of $1,207 which is available for
utilization indefinitely.
At May 31, 1995, the Company has an estimated $500 capital loss
carryforward, primarily as a result of certain restructuring transactions. The
loss is only available to offset future capital gain income and will expire in
fiscal 1998.
The valuation allowance is the result of: (1) separate return loss
carryforward limitations; (2) the uncertain state tax benefits from states
requiring separate return filings or with no or limited loss carryover
provisions; and (3) limitations on the Company's ability to absorb capital
losses in the five year carryforward period. The valuation allowance decreased
by $800 during fiscal 1995 primarily as a result of capital loss utilization.
(11) CAPITAL STOCK
COMMON STOCK
In November and December 1994, the Company completed the sale of 5,558,790
shares of its common stock, including the sale of 643,333 shares held by certain
stockholders. Net proceeds of approximately $119,600 were used to repay
outstanding debt under the revolving credit loan agreement and to fund
acquisitions.
22
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) CAPITAL STOCK (CONTINUED)
During 1995 the Company issued 1,847,899 shares of common stock in
connection with certain acquisitions.
As discussed in Note 5, the Company converted $54,270 of its 6 3/4%
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.
During 1994, the Company issued 2,828,968 shares of common stock in
connection with certain acquisitions.
In October 1993, the Company completed a common stock offering of 4,025,000
shares. Net proceeds of approximately $58,200 were used to repay outstanding
debt under the revolving credit loan agreement and to fund acquisitions.
PREFERRED STOCK
There are 500,000 shares of authorized but unissued shares of $.001
preferred stock. On September 12, 1994, the board of directors of the Company
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of the Company's common stock held of record on September 22,
1994, and approved the further issuance of Rights with respect to all shares of
the Company's common stock that are subsequently issued. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
series A junior participating preferred stock, par value $.001 per share of the
Company, at a price of $110 per one one-thousandth of a share, subject to
adjustment. Until the occurrence of certain events, the Rights are not
exercisable, will be evidenced by the certificates for the Company's common
stock and will not be transferable apart from the Company's common stock.
STOCK PURCHASE WARRANTS
The Company had 100,000 stock purchase warrants outstanding at May 31, 1995,
for the purchase of common shares. These warrants, priced at $2.50, were
exercised subsequent to year end.
STOCK BENEFIT PLANS
The Company has a nonqualified employee stock option plan and a directors'
stock option plan that provide the Company the ability to grant to employees and
outside directors the option to purchase shares of common stock of the Company
at the 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 non-transferable and are exercisable only during or
immediately following the period 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 is exercisable on each of the
first, second and third anniversary dates following the date of grant.
The Company also had the following stock compensation plans at May 31, 1995:
the 1986 stock option plan (1986 Plan), the 1989 non-qualified stock option
agreement, the 1989 non-employee directors' stock option plan, the 1992 CEO
stock option plan (1992 Plan), the 1993 non-qualified stock option plan (1993
Plan), and the 1994 stock option plan (1994 Plan). Options outstanding at May
31, 1995, are at prices ranging from $9.73 to $40.47 per share, as adjusted for
the Exchange Rate (as defined below). As options are granted at exercise prices
which represent the fair market value of the stock at the date of grant, no
compensation expense has been recorded for these awards. Options
23
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) CAPITAL STOCK (CONTINUED)
become exercisable in four to seven annual installments commencing on the first
anniversary of the date of grant, and expire between October 1995 and August
2003, five to ten years from the date of grant.
The 1994 plan was adopted in August 1993, which authorized options of
809,550 shares, as adjusted for the Exchange Rate. In May 1993, the 1993 Plan
was adopted which authorized options of 539,700 shares, as adjusted for the
Exchange Rate. Officers and directors were not eligible to receive options under
the 1993 Stock Option Plan.
In May 1993, options, exercisable at the market price on the date of grant
($20.38 per share, as adjusted for the Exchange Rate), were granted to
substantially all CMS employees holding outstanding options with exercise prices
higher than such current market price. The number of shares subject to the
options granted to each employee was equal in number to the shares covered by
options previously granted to such employee at higher exercise prices. The new
options were granted subject to each employee's agreement to cancel their
previously granted options for an equal number of shares at the higher exercise
prices. The term, vesting rate and other provisions of the new options were
otherwise identical to the options canceled. As a result, options on 1,802,159
shares with exercise prices per share ranging from $24.09 to $42.39 per share,
as adjusted for the Exchange Rate, were canceled and the same number of new
options were granted at an exercise price of $20.38 per share, as adjusted for
the Exchange Rate.
During fiscal 1993, the Company loaned the vice-chairman $4,548 for the
exercise of stock options and the payment of the resulting income taxes, and
loaned an executive vice-president of the Company $530 for the payment of income
taxes resulting from the exercise of stock options. The tax loans were
authorized under the 1986 Plan, and the remaining loan was authorized by the
board of directors. The loans are repayable upon demand with interest payable
monthly at the IRS' applicable federal rate, adjusted semi-annually on January 1
and July 1. The loan for the exercise of stock options is included as a
deduction from stockholders' equity.
The following information is a summary of the stock option activity under
the plans as adjusted for a three-for-two stock split paid November 15, 1991 on
CMS common stock and the exchange of .5397 shares (the "Exchange Rate") of CMS
common stock for each share of the Company's common stock in connnection with
the CMS Merger:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
<S> <C> <C> <C>
Options outstanding at beginning of year................. 4,916,079 3,951,921 4,300,178
Granted.................................................. 1,934,116 1,518,311 2,411,633
Exercised................................................ (338,881) (319,997) (774,293)
Canceled and other adjustments........................... (289,540) (234,156) (1,985,597)
----------------- ----------------- -----------------
Options outstanding at end of year....................... 6,221,774 4,916,079 3,951,921
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Options exercisable at end of year....................... 2,596,947 1,576,011 1,090,129
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Option price range....................................... $1.38 - $28.75 $1.38 - $26.13 $0.33 - $24.09
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
24
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) CAPITAL STOCK (CONTINUED)
The Company also has an employee stock purchase plan (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. For the year ended May 31, 1995, 16,352
shares of the Company's stock had been purchased under the Plan.
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. This option was exercised during 1995
and the shares, along with approximately 50,000 shares of additional common
stock, were converted to treasury stock in consideration for reduction of
amounts due to the Company under the terms of a note receivable.
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 authorized for issuance at the
time of the allocation or grant.
(12) EMPLOYEE BENEFITS
The Company has deferred compensation plans for selected employees and
directors. These plans, which are not required to be funded by the Company,
allow 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
graduated basis, with full vesting achieved at the end of six years or seven
years, depending upon the plan. The Company contributed approximately $261, $254
and $157 to these plans for the years ended May 31, 1995, 1994 and 1993,
respectively.
25
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended May 31, 1995, 1994 and 1993
(Dollars in thousands, except per share amounts)
(12) EMPLOYEE BENEFITS (CONTINUED)
The Company also has 401(k) savings plans available to substantially all
employees who have been with the Company for more than six months. Employees may
defer up to 15% or 20% of their salary, depending upon the plan, subject to the
maximum permitted by law. The Company matches a portion of the employee's
contribution, which may be discretionary, depending upon the plan. Employee
contributions are vested immediately. Employer contributions vest on a graduated
basis, with full vesting achieved at the end of five or seven years, depending
upon the plan. The Company contributed approximately $1,890, $1,377 and $979 to
these plans for the years ended May 31, 1995, 1994 and 1993, respectively.
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. The Company may terminate any of the above plans at any time.
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash operating, investing and financing activities for
fiscal 1995, 1994 and 1993 were as follows:
1995
- The issuance of 1,776,924 shares of common stock in connection with
acquisitions in which net assets of approximately $22,030 were acquired,
- The acceptance of 175,041 shares of treasury stock for payment of a note,
- The assumption of long-term debt of $19,900 in connection with
acquisitions, and
- The assumption of obligations under capital lease of $48,600 in connection
with acquisitions.
1994
- The conversion of $54,270 of 6.75% convertible subordinated notes into the
Company's common stock,
- The issuance of 2,213,976 shares of common stock in connection with
acquisitions in which net assets of approximately $16,573 were acquired,
- The assumption of long-term debt of $19,300 in connection with
acquisitions, and
- The issuance of common stock and payment of cash for the purchase of
Medical Management Associates, Inc. in which net liabilities of
approximately $857 were assumed.
1993
- The receipt of notes receivable of $8,150 and cash for the sale of net
assets of approximately $17,500
Cash paid for interest for the years ended May 31, 1995, 1994 and 1993 was
approximately $54,351, $44,852 and $14,743, respectively.
Cash paid for income taxes, net of refunds, for the years ended May 31,
1995, 1994 and 1993 was approximately $19,236, $12,848 and $32,006,
respectively.
26
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at May 31,
1995 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents..................................................... $ 40,674 $ 40,674
Notes receivable.............................................................. 47,649 45,614
Investments in marketable equity securities and other short-term
investments.................................................................. 3,287 8,500
Long-term debt................................................................ 487,797 501,234
Interest rate swap agreements/interest rate collar agreements................. -- (3,572)
</TABLE>
The carrying amount of cash and cash equivalents approximates fair value due
to the short maturity of these instruments. The fair value of notes receivable
was estimated by discounting the future cash flows using current rates available
to similar borrowers under similar circumstances. The fair value of marketable
equity securities and other short-term investments is based on quoted market
prices. It is not practicable to estimate the fair value of the Company's other
investments, which comprise certain equity investments because of the lack of a
quoted market price, and the inability to estimate fair value without incurring
excessive costs. The fair value of the Company's long-term debt, excluding
capital leases, was estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the
same remaining maturities. The fair values of interest rate swaps and interest
rate collars are the estimated amounts that the Company would receive or pay to
terminate the swap agreements, taking into account current interest rates. On
September 12, 1995, these interest rate swap agreements were terminated at a
cost of $3,540.
The market value of the outstanding convertible subordinated notes at May
31, 1995 of $25,344 included in the long-term debt amount above is a function of
both the conversion feature and the underlying debt instrument. It is
impracticable to allocate the market value between these two components,
however, the market value is not representative of the amounts that would be
currently required to retire the debt obligation.
(15) ACQUISITIONS
In July 1994, the Company acquired peopleCARE, a 13 facility long-term care
company located in Texas. Consideration given for the acquisition included the
issuance of approximately 449,000 shares of the Company's common stock, valued
at approximately $10,000, assumption of capital lease obligations of
approximately $48,600 for six facilities, and cash payment of approximately
$56,000 for fee simple title to seven facilities.
The Company acquired Advanced Cardiovascular Technology, Inc. (ACT), 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 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, 160,000 were issued into escrow at
closing and remained in escrow at May 31, 1995. This contingent consideration
has not been recorded as of May 31, 1995.
In March 1994, the Company acquired all of the outstanding stock of Medical
Management Associates, Inc. ("MMA"), for $1,500 in cash relating to certain
non-compete agreements and 349,456
27
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) ACQUISITIONS (CONTINUED)
shares of the Company's common stock. The acquisition was accounted for by the
purchase method of accounting. Pursuant to the acquisition agreement, additional
shares of the Company's common stock may be issued over the next two years,
subject to the achievement of certain pre-tax earnings levels.
In February 1994, the Company completed its merger of Greenery
Rehabilitation Group, Inc. ("Greenery") into the Company. Pursuant to the
merger, the Company issued approximately 2,050,000 shares of its common stock,
valued at approximately $48,000, and assumed approximately $58,000 in debt for
all of the outstanding shares of Greenery common stock. This merger added the
operations of 17 rehabilitation and skilled nursing facilities and 3 managed
facilities to the Company's operations. Subsequent to fiscal year end, on June
19, 1995, the Company announced plans to dispose of eight long-term care
facilities. Six of the facilities to be disposed of were among the 17 acquired
in the Greenery merger during fiscal 1994. The decision to sell the facilities
was based upon financial, regulatory and operational considerations.
The following unaudited pro forma financial information reflects the
combined results of operations, as restated for the merger with CMS (see Note
18), for the years ended May 31, 1995 and 1994 as if the material acquisitions
during the period, Greenery and peopleCARE, had been consummated on June 1,
1993:
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Total operating revenues.................................................. $ 1,676,393 $ 1,618,154
Total operating expenses and minority interests........................... 1,627,744 1,649,603
------------- -------------
Operating income........................................................ 48,649 (31,449)
Income taxes.............................................................. 23,508 (3,404)
------------- -------------
Earnings from continuing operations..................................... $ 25,141 $ (28,045)
------------- -------------
------------- -------------
Net earnings per common and common equivalent share..................... $ 0.52 $ (0.70)
------------- -------------
------------- -------------
Net earnings per common share -- assuming full dilution................. $ 0.52 $ (0.70)
------------- -------------
------------- -------------
</TABLE>
The unaudited pro forma information is not necessarily indicative either of
the results of operations that would have occurred had the acquisitions taken
place at the beginning of fiscal 1994 or of future results of operations of the
combined companies.
Prior to fiscal 1992, the Company acquired 80% of the outstanding stock of
Communi-Care/ ProRehab, Inc. ("Communi-Care") and on July 1, 1992 acquired the
remaining 20% of the outstanding stock. The initial purchase price was
approximately $5,654, paid in cash and the Company's common stock. The purchase
price for the remaining 20% of the outstanding stock was approximately $4,831,
paid in cash and the Company's common stock. As additional purchase price under
the purchase agreement, cash and common stock totaling $8,322, $8,589, and
$2,504 was paid during fiscal 1995, 1994 and 1993, respectively.
During fiscal 1995 and 1994, the Company made various other acquisitions
which individually and in the aggregate were insignificant.
Pursuant to other acquisitions consummated prior to fiscal 1993, cash and
common stock totaling $1,920 and $2,162 was paid during fiscal 1994 and 1993,
respectively. No payments were made during fiscal 1995 relating to these
acquisitions.
28
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) ACQUISITIONS (CONTINUED)
Contingent payments estimated under all of the Company's acquisition
agreements may be paid in cash and the Company's common stock through fiscal
1997. These amounts are subject to adjustment based upon the achievement of
certain earnings levels and are not expected to be material.
(16) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
The Company was contingently liable for letters of credit aggregating
$40,898 and $38,557 at May 31, 1995 and 1994, respectively. The letters of
credit, which reduce the availability under the credit agreement, were used in
lieu of lease deposits for facilities operated by the Company and for deposits
under various workers' compensation programs.
EMPLOYMENT AND CONSULTING AGREEMENTS
Under annual employment agreements with three senior officers, the Company
is committed to pay minimum annual salaries totaling $1,215, 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 of 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.
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.
LIFE INSURANCE PREMIUMS
In fiscal 1994, the Company agreed to fund life insurance premiums for
certain of its senior officers. As of May 31, 1995, such advances totaled
approximately $1,162 and are reflected in other assets in the accompanying
consolidated financial statements. 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.
MANAGEMENT AGREEMENT
In connection with the Greenery merger, the Company has committed to manage
three Connecticut facilities for an affiliate of two directors 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.
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 $5,500 at the end of the lease term (August 1, 1998).
The Company has purchased usage of a Cessna/Citation III aircraft from AMI
Aviation II, L.L.C., a Delaware limited liability company ("AMI II"). The
Company's chief executive officer owns 99% of the membership interests of AMI
II. Under the aircraft usage agreement, the Company will purchase a minimum of
20 hours usage per month for $45 per month for a five year period, and will pay
certain
29
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) COMMITMENTS AND CONTINGENCIES (CONTINUED)
amounts per hour for usage over 20 hours in a month plus a monthly maintenance
reserve. 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.
OTHER
The Company has notes receivable and other investments, related to its
divestiture of its free-standing long-term care facilities totaling $17,843
including notes receivable of $14,834 from Renaissance Healthcare Corporation
("RHC"), a long-term care company owned and operated by former employees of the
Company. Repayment of those amounts are dependent upon the cash flows of the
individual companies. Collateral on certain notes receivable and investments
aggregating $4,709 consists of first or second mortgages, personal guarantees
and pledges of certain other assets. Certain notes receivable from RHC
aggregating $13,134 reflect future installment sales obligations under which the
Company holds title to the sold assets until all payments are made. The Company
has a working capital loan commitment of $3,000 to RHC of which $1,700 was used
at May 31, 1995 and is included in the above amounts.
The Company guarantees payment throughout the term of a bond issue to an
economic development authority of amounts due and payable by the owner of a
long-term care facility previously managed by the Company. The outstanding bonds
total approximately $6,064 at May 31, 1995.
During fiscal 1995, certain operating facilities and office locations of the
Company were visited or contacted by representatives of the U.S. Justice
Department for the purpose of interviewing certain of its employees and
reviewing certain documents. The Company cooperated with the Justice Department
inquiries. The Company's management is not aware of any Company practices of the
type covered by the Justice Department inquiries, or otherwise, that are not in
compliance with the rules and regulations applicable to its operations. While
the Company is unable to predict what effect, if any, these inquiries will have
on the Company's business, the Company is of the opinion that their ultimate
disposition will not have a material adverse effect upon its consolidated
financial position.
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated or
settled, which include among other items malpractice claims covered under the
Company's insurance policy. Additionally, in the normal course of business, the
Company has amounts due to or from the Medicare program, the Medicaid program
and other third party payors which it believes are reasonable estimates.
However, additional changes to these estimates in the future may be appropriate
based on facts and circumstances which arise. Ultimately, the amounts due to or
from third party payors may be adjusted by these third party payors upon final
settlement. The Company is unable to estimate the likelihood or potential
amounts of any such settlements or adjustments.
(17) ADOPTION OF NEW ACCOUNTING PRINCIPLE
In fiscal 1993 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Upon issuance of this statement, the Company reviewed the
provisions of the new statement and concluded that the statement compelled the
write-down to fair value of a long-term investment being held to maturity as a
result of the impairment of the investment using a discounted cash flow
analysis. Prior to the issuance of this statement, the asset was carried at
historical cost which is expected to be recovered
30
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) ADOPTION OF NEW ACCOUNTING PRINCIPLE (CONTINUED)
upon maturity. In applying this statement, the Company recognized a $5,000
write-down to fair value of the long-term investment. The cumulative effect of
this change in accounting principle, on an after-tax basis, was $3,204.
(18) CMS MERGER
On July 6, 1995, the stockholders of the Company and CMS approved the merger
of one of the Company's wholly-owned subsidiaries with CMS. Under the terms of
the merger agreement, CMS stockholders received .5397 of a share of the
Company's common stock for each outstanding share of CMS's common stock.
Accordingly, the Company issued approximately 20.9 million shares of common
stock, valued at approximately $393.9 million based on the closing price of the
Company's common stock on July 10, 1995, for all the outstanding shares of CMS's
common stock. Additionally, outstanding options to acquire CMS's common stock
were converted at the Exchange Rate to options to acquire 3.8 million shares of
the Company's common stock. CMS provides comprehensive medical rehabilitation
programs and services with a significant presence in each of the rehabilitation
industry's three principal sectors -- inpatient rehabilitation care, outpatient
rehabilitation care and contract therapy. The merger qualifies as a tax-free
reorganization and was accounted for as a pooling of interests. Accordingly, the
accompanying financial statements have been restated to include the accounts and
operations of CMS for all periods prior to the merger. These periods include the
financial position of CMS as of June 30, 1995 and 1994 and the results of
operations of CMS for each of the three years in the period ended June 30, 1995.
Separate results of the Company and CMS for the three years in the period
ended May 31, 1995 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Total operating revenues:
The Company.............................................. $ 638,066 $ 373,881 $ 232,199
CMS...................................................... 987,260 1,008,281 904,159
------------- ------------- -------------
$ 1,625,326 $ 1,382,162 $ 1,136,358
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) before cumulative effect of accounting
change and extraordinary gain:
The Company.............................................. $ 29,879 $ 14,731 $ 7,613
CMS...................................................... (4,881) (34,545) 22,723
------------- ------------- -------------
$ 24,998 $ (19,814) $ 30,336
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) before extraordinary gain:
The Company.............................................. $ 29,879 $ 14,731 $ 7,613
CMS...................................................... (4,881) (34,545) 19,519
------------- ------------- -------------
$ 24,998 $ (19,814) $ 27,132
------------- ------------- -------------
------------- ------------- -------------
Net earnings (loss):
The Company.............................................. $ 30,492 $ 15,465 $ 7,613
CMS...................................................... (2,923) (34,545) 19,519
------------- ------------- -------------
$ 27,569 $ (19,080) $ 27,132
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
As a result of the combination with CMS, the Company revised the accounting
policies and financial presentation of each of the previously separate
companies. The effect of these changes did
31
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CMS MERGER (CONTINUED)
not have a material effect on the operating results or financial position of the
Company. A reconciliation of total operating revenues and net earnings of the
Company as previously reported to the amounts presented above and included in
the accompanying financial statements is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Total operating revenues:
As previously reported......................................... $ 639,080 $ 375,095 $ 232,199
Adjustments.................................................... (1,014) (1,214) --
----------- ----------- -----------
$ 638,066 $ 373,881 $ 232,199
----------- ----------- -----------
----------- ----------- -----------
Net earnings:
As previously reported......................................... $ 31,221 $ 16,606 $ 7,716
Adjustments.................................................... (729) (1,141) (103)
----------- ----------- -----------
$ 30,492 $ 15,465 $ 7,613
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
32
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations:
<TABLE>
<CAPTION>
FISCAL YEAR 1995
---------------------------------------------------------------
FIRST SECOND
QUARTER QUARTER THIRD QUARTER FOURTH QUARTER
---------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total operating revenues........................ $ 381,840 $ 401,572 $ 415,878 $ 426,036
Earnings (loss) before income taxes and
extraordinary gain............................. 20,771 4,021(a) 17,996(b) 5,585(d)(e)
Earnings (loss) before extraordinary gain....... 12,160 1,253(a) 10,228(b) 1,357(d)(e)
Net earnings (loss)............................. $ 12,160 $ 1,253(a) $ 12,725 (b)(c $ 1,431(d)(e)
Earnings (loss) per common and common equivalent
share:
Earnings (loss) before extraordinary gain....... $ 0.27 $ 0.03 $ 0.20 $ 0.02
Extraordinary gain.............................. -- -- 0.05 0.01
---------- ------------- ----------------- -----------------
Net earnings (loss)............................. $ 0.27 $ 0.03 $ 0.25 $ 0.03
---------- ------------- ----------------- -----------------
---------- ------------- ----------------- -----------------
Earnings (loss) per common share -- assuming
full dilution:
Earnings (loss) before extraordinary gain....... $ 0.27 $ 0.03 $ 0.20 $ 0.02
Extraordinary gain.............................. -- -- 0.05 0.01
---------- ------------- ----------------- -----------------
Net earnings (loss)............................. $ 0.27 $ 0.03 $ 0.25 $ 0.03
---------- ------------- ----------------- -----------------
---------- ------------- ----------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1994
---------------------------------------------------------------
FIRST SECOND
QUARTER QUARTER THIRD QUARTER FOURTH QUARTER
---------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total operating revenues........................ $ 325,602 $ 328,862 $ 342,364 $ 385,334
Earnings (loss) before income taxes and
extraordinary gain............................. 16,849 11,589 13,839 (60,360)(g)(h)
Earnings (loss) before extraordinary gain....... 10,104 7,003 8,369 (45,290)(g)(h)
Net earnings (loss)............................. $ 10,104 $ 7,003 $ 8,369 (44,556)(g)(h)
Earnings (loss) per common and common equivalent
share (f):
Earnings (loss) before extraordinary gain....... $ 0.31 $ 0.20 $ 0.21 $ (1.04)
Extraordinary gain.............................. -- -- -- 0.02
---------- ------------- ----------------- -----------------
Net earnings (loss)............................. $ 0.31 $ 0.20 $ 0.21 $ (1.02)
---------- ------------- ----------------- -----------------
---------- ------------- ----------------- -----------------
Earnings (loss) per common share -- assuming
full dilution (f):
Earnings (loss) before extraordinary gain....... $ 0.29 $ 0.19 $ 0.21 $ (1.04)
Extraordinary gain.............................. -- -- -- 0.02
---------- ------------- ----------------- -----------------
Net earnings (loss)............................. $ 0.29 $ 0.19 $ 0.21 $ (1.02)
---------- ------------- ----------------- -----------------
---------- ------------- ----------------- -----------------
</TABLE>
- --------------------------
(a) Includes $13,398 pre-tax special charge related to a revision in the
Company's estimate of receivables from third party payors at its CMS
Therapies, Inc. subsidiary.
(b) Includes $5,045 pre-tax special charge related to eliminations of management
and staff positions, office lease terminations and certain other costs of
changes implemented during the third quarter at CMS Therapies, Inc.
(c) Includes a $2,497 extraordinary gain (net of related taxes of $1,555)
relating to open market purchases of its subordinated debt and its 8 3/4%
and 6 1/2% convertible subordinated notes at a discount.
(d) Includes a $4,979 pre-tax special charge related to a revision in the
Company's estimate of receivables from third party payors at its CMS
Therapies, Inc. subsidiary and $13,500 pre-tax settlement charge related to
a contract dispute.
33
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(e) Includes a $74 extraordinary gain (net of related taxes of $46) related to
open market purchases of its subordinated debt and its 8 3/4% and 6 1/2%
convertible subordinated notes at a discount.
(f) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in fiscal
year 1994 does not equal the total computed for the fiscal year.
(g) Includes $74,834 pre-tax special charge related to the impairment of
selected assets of the Company's hospital division, the costs associated
with the consolidation of its contract therapy companies, the losses related
to the termination of certain relationships in the contract therapy business
and certain other costs of restructuring.
(h) Includes a $734 extraordinary gain (net of related taxes of $480) related to
open market purchases of its 8 3/4% and 6 1/2% convertible subordinated
notes at a discount.
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
(23.1) Consent of Arthur Andersen LLP
(23.2) Consent of Ernst & Young LLP
(23.3) Consent of Price Waterhouse LLP
</TABLE>
35
<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 8-K, into the Company's previously filed
Registration Statements File #33-61697, File #33-80660, File #33-84502 and File
#33-84682.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
November 20, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Current Report on Form 8-K and
the further incorporation by reference into the Registration Statements on Form
S-3 (Registration No. 33-80660), Form S-4 (Registration No. 33-84682), Form S-8
(Registration No. 33-84502), and Form S-8 (Registration No. 33-61697) of
Horizon/CMS Healthcare Corporation of our report dated August 3, 1995, except
for Note 6 and Note 19 for which the date is September 26, 1995; Note 14 for
which the date is September 12, 1995; Note 20 for which the date is September
27, 1995, with respect to the consolidated financial statements of Continental
Medical Systems, Inc. for the years ended June 30, 1995 and June 30, 1994.
ERNST & YOUNG LLP
Harrisburg, Pennsylvania
November 17, 1995
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated August 10, 1993, with
respect to the financial statements of Continental Medical Systems, Inc. for the
year ended June 30, 1993 (which financial statements are not presented
separately herein), included in the Horizon/CMS Healthcare Corporation current
report on Form 8-K to be filed November 21, 1995. We also consent to the
incorporation by reference of the above referenced report in the previously
filed Registration Statements on Form S-3 (Registration No. 33-80660). Form S-4
(Registration No. 33-84682), Form S-8 (Registration No. 33-84502) and Form S-8
(Registration No. 33-61697).
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
November 21, 1995
