<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 2
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: August 31, 1995
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9369
</TABLE>
------------------------
HORIZON/CMS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-1346899
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
6001 INDIAN SCHOOL ROAD, N.E., SUITE 530
ALBUQUERQUE, NEW MEXICO 87110
(505) 881-4961
(Address and telephone number of Registrant)
Horizon Healthcare Corporation
(Former name)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _XX_ No ____
Shares of the registrant's Common Stock, $.001 par value, outstanding
exclusive of treasury stock, was 51,074,980 shares at October 10, 1995.
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<PAGE>
Horizon/CMS Healthcare Corporation's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1995, as previously amended, is hereby amended and
restated as set forth below.
HORIZON/CMS HEALTHCARE CORPORATION
INDEX
FORM 10-Q/A AMENDMENT NO. 2 -- FOR THE QUARTER ENDED AUGUST 31, 1995
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NUMBERS
------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
August 31, 1995 and May 31, 1995.................. 3
Consolidated Statements of Operations
For the three months ended August 31, 1995 and
1994............................................... 4
Consolidated Statements of Cash Flows
For the three months ended August 31, 1995 and
1994............................................... 5
Notes to Consolidated Financial Statements (as
amended)........................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation................. 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote Security
Holders............................................ 14
Item 6. Exhibits and Reports on Form 8-K.................... 14
Signatures...................................................... 15
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1995 AND MAY 31, 1995
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31 MAY 31
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................................. $ 48,459 $ 40,674
Accounts receivable, net of allowance for doubtful accounts of $32,172 at August 31 and $29,595 at May
31................................................................................................... 338,519 330,313
Estimated Medicare and Medicaid settlements........................................................... 8,408 --
Prepaid and other assets.............................................................................. 80,321 61,650
Deferred income taxes................................................................................. 21,806 21,806
---------- ----------
Total current assets................................................................................ 497,513 454,443
PROPERTY AND EQUIPMENT, net............................................................................. 611,716 614,379
GOODWILL, net........................................................................................... 163,560 168,861
OTHER INTANGIBLE ASSETS, net............................................................................ 37,746 35,879
NOTES RECEIVABLE, excluding current portion............................................................. 43,379 44,619
OTHER ASSETS............................................................................................ 74,638 79,942
---------- ----------
Total assets........................................................................................ $1,428,552 $1,398,123
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt..................................................................... $ 4,993 $ 5,032
Accounts payable...................................................................................... 32,768 33,280
Accrued expenses...................................................................................... 153,315 131,225
Estimated Medicare and Medicaid settlements........................................................... -- 563
---------- ----------
Total current liabilities........................................................................... 191,076 170,100
LONG-TERM DEBT, excluding current portion............................................................... 572,662 532,688
OTHER LIABILITIES....................................................................................... 25,427 24,353
DEFERRED INCOME TAXES................................................................................... 6,271 6,141
MINORITY INTERESTS...................................................................................... 14,490 14,189
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000 shares, 50,891,098 shares issued with
50,386,209 shares outstanding at August 31 and 50,679,107 shares issued with 50,174,218 shares
outstanding at May 31.............................................................................. 51 51
Additional paid-in capital.......................................................................... 560,189 559,168
Retained earnings................................................................................... 66,335 99,382
Note receivable from sale of common stock........................................................... (2,362) (2,362)
Treasury stock...................................................................................... (5,587) (5,587)
---------- ----------
Total stockholders' equity........................................................................ 618,626 650,652
---------- ----------
Total liabilities and stockholders' equity........................................................ $1,428,552 $1,398,123
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
AUGUST 31, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
NET PATIENT CARE REVENUES................................................................................... $427,025 $378,225
OTHER OPERATING REVENUES.................................................................................... 4,382 3,615
-------- --------
Total operating revenues................................................................................ 431,407 381,840
COST OF SERVICES............................................................................................ 328,700 296,374
ADMINISTRATIVE AND GENERAL.................................................................................. 20,447 18,674
FACILITY LEASES............................................................................................. 21,078 19,160
DEPRECIATION AND AMORTIZATION............................................................................... 14,651 13,197
INTEREST EXPENSE............................................................................................ 13,112 12,163
SPECIAL CHARGE.............................................................................................. 63,540 --
-------- --------
Total operating expenses................................................................................ 461,528 359,568
-------- --------
Earnings (loss) before minority interests and income taxes.............................................. (30,121) 22,272
MINORITY INTERESTS.......................................................................................... (1,324) (1,501)
-------- --------
Earnings (loss) before income taxes..................................................................... (31,445) 20,771
INCOME TAXES................................................................................................ (2,520) 8,611
-------- --------
Net earnings (loss)..................................................................................... $(28,925) $ 12,160
-------- --------
-------- --------
Net earnings (loss) per common and common equivalent share.................................................. $ (0.56) $ 0.27
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
AUGUST 31, 1995 AND 1994
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................................................................... $(28,925) $ 12,160
-------- --------
Adjustments:
Depreciation and amortization........................................................................... 14,651 13,197
Other................................................................................................... 1,943 (131)
Increase (decrease) in cash from changes in assets and liabilities, excluding effects of acquisitions
and dispositions:
Accounts and settlements receivable................................................................... (17,411) (18,241)
Other assets.......................................................................................... (19,521) (15,290)
Deferred income taxes................................................................................. 130 (150)
Accounts payable and accrued expenses................................................................. 38,956 (1,653)
Other liabilities..................................................................................... 1,074 1,469
-------- --------
Total adjustments......................................................................................... 19,822 (20,799)
-------- --------
Net cash used in operating activities..................................................................... (9,103) (8,639)
-------- --------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired......................................... (1,081) (80,791)
Cash proceeds from sale of property and equipment......................................................... -- 3,900
Other intangible assets................................................................................... (5,981) (3,860)
Acquisition of property and equipment..................................................................... (11,434) (13,903)
Notes receivable.......................................................................................... 660 1,923
Other investing activities................................................................................ (479) (3,016)
-------- --------
Net cash used in investing activities..................................................................... (18,315) (95,747)
-------- --------
Cash flows from financing activities:
Long-term debt borrowings................................................................................. 106,874 105,285
Long-term debt repayments................................................................................. (66,559) (38,696)
Deferred financing costs.................................................................................. (1,829) (1,550)
Issuance of common stock.................................................................................. 1,211 1,362
Capital contributions by minority interests............................................................... 446 320
Distributions to minority interests....................................................................... (1,629) (808)
-------- --------
Net cash provided by financing activities................................................................. 38,514 65,913
-------- --------
Net increase (decrease) in cash and cash equivalents........................................................ 11,096 (38,473)
Cash and cash equivalents, beginning of period.............................................................. 40,674 65,825
Effect of pooling of interests restatement (Note 2)......................................................... (3,311) --
-------- --------
Cash and cash equivalents, end of period.................................................................... $ 48,459 $ 27,352
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
by Horizon/CMS Healthcare Corporation and its subsidiaries (collectively the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they are unaudited and certain information
and footnote disclosures normally included in the Company's annual
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, as permitted
under the applicable rules and regulations. In the opinion of management, all
adjustments necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented have been made
and are of a normal recurring nature.
These consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements and the notes thereto
included in the Company's 1995 Annual Report on Form 10-K (as amended by Form
10-K/A Amendment No. 1) filed with the Securities and Exchange Commission.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
(2) ESTIMATED THIRD PARTY SETTLEMENTS
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs, private pay patients and
non-affiliated long-term care facilities. Under the Medicare program and some
state Medicaid programs, the Company's long-term care facilities are
periodically paid in interim amounts designed to approximate the facilities'
reimbursable costs or the applicable payment rate. Periodic amounts due from
interim third party payors and amounts due from other payor sources are
recorded as patient care accounts receivable. Most of the Company's Medicaid
payments are prospective payments intended to approximate costs and,
normally, no retroactive adjustment is made to such payments.
With respect to interim payor sources for which payments are subject to
retroactive adjustment, actual costs incurred are reported by each facility
annually. The cost reports are subject to audit, which may result in upward
or downward adjustment from interim payments received. The Company generally
expects final settlement on annual cost reports to occur approximately 24
months following the end of an annual cost reporting period. Tentative
partial settlement may occur as soon as six months following the cost
reporting period. Throughout the annual cost reporting period, the Company
records, for each of several hundred Medicare and Medicaid certified
providers operated by the Company, the estimated difference between interim
payments received and the expected actual costs as estimated third party
settlements. Estimated settlements reflect expected amounts receivable offset
by expected amounts payable.
The expected change in the Company's total net settlement position and
the reasons therefore is difficult to quantify due to several factors
including: the significant number of individual providers for which
settlements must be estimated, the fact that several cost report periods
remain open for each provider at any given time, the numerous cost reporting
periods of the Company's various providers, the interrelationship between
continually changing interim rates and estimated settlements, the
unpredictable timing of tentative and final settlements, and the offset of
estimated payables and receivables. Nevertheless, the general increase in the
Company's estimated third party settlements balance at August 31, 1995 as
compared with the balance at May 31, 1995 has been caused, in part, by the
settlement of significant third party rehabilitation hospital payables
recorded at May 31, 1995.
In March 1996, the Company announced that certain Medicare Part B and
related co-insurance billings previously submitted by the Company are being
investigated by the Office of Inspector General of the Department of Health
and Human Services (the ""OIG'') and the Department of Justice (the ""DOJ'')
as to compliance with applicable Medicare Part B rules. These billings,
totaling approximately $3.4 million, sought recovery for the costs of certain
Medicare Part B covered medical supplies used in treating Medicare patients
in certain facilities at a time when those facilities were operated by Greenery
Rehabilitation Group, Inc. (""Greenery'') before the Company acquired Greenery
(the ""Greenery Acquisition''). These costs were not billed at the time incurred
but were billed on a retroactive basis, as permitted under applicable Medicare
Part B rules, after the Greenery Acquisition. Of the $3.4 million billed,
approximately $1.3 million was actually received by the Company.
The Company has advised the OIG that it appears that a significant
portion of these billings may not have been in accordance with applicable
Medicare Part B rules. The Company advised the OIG and the DOJ that it is
cooperating, and will continue to cooperate, in the investigation and was
prepared to remit any overpayment to the appropriate governmental authority.
On April 2, 1996, the Company and the DOJ entered into a letter agreement
pursuant to which the Company voluntarily agreed to refund such overpayments
to the DOJ. On April 3, 1996, the Company refunded approximately $1 million
to the DOJ. In addition, the Company is in the process of voluntarily
refunding co-insurance payments of approximately $175,000 to the applicable
parties. The Company believes the errors in these billings were an exception
and do not represent a regular pattern or practice at the Company. Due to the
preliminary nature of the OIG/DOJ investigation, the Company cannot now
predict when the OIG/DOJ investigation will be completed, the ultimate
outcome of the OIG/DOJ investigation, or the effect thereof on Horizon/CMS's
financial condition or results of operations. If as a result of the OIG/DOJ
investigation, civil or criminal proceedings against the Company are
initiated and adversely determined, civil and/or criminal fines or sanctions
could be imposed against the Company, which could have a material adverse
impact on the Company's financial condition and/or results of operations.
With the exception of the matter previously discussed and the DOJ
inquiries discussed in footnote 16 to the financial statements included in
the current report on Form 8-K dated July 10, 1995, filed November 21, 1995,
management is not aware of any material claims, disputes or other unsettled
matters with regard to third party reimbursements and does not believe that
any retroactive adjustments would be material to the Company's financial
condition or results of operations.
(3) ACQUISITIONS
The stockholders of the Company and Continental Medical Systems, Inc.
("CMS") approved the merger of one of the Company's wholly-owned subsidiaries
with CMS (the "CMS Merger"). Under the terms of the merger agreement, CMS
stockholders received .5397 (the "Exchange Rate") 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 its 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 approximately
3.8 million shares of the Company's common stock. CMS is one of the largest
providers of comprehensive medical rehabilitation programs and services in
the country 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 qualified as
a tax-free reorganization and has been accounted for as a pooling of
interests. Accordingly, the Company's historical financial information has
been restated to include CMS's financial results. The consolidated balance
sheet as of May 31, 1995, and the consolidated statements of earnings and
cash flows for the quarters ended August 31, 1995 and 1994 have been restated
to reflect the combination. In connection with the CMS Merger, the Company
changed its name to Horizon/CMS Healthcare Corporation.
The accompanying consolidated balance sheet as of May 31, 1995, gives
effect to the combination of the Company's historical assets, liabilities and
stockholders' equity as of May 31, 1995, with the historical assets,
liabilities and stockholders' equity of CMS as of June 30, 1995, the fiscal
year end of CMS prior to the CMS Merger. The accompanying consolidated
statement of operations for the three months ended August 31, 1994, includes
the results of operations of the Company for the three months ended August
31, 1994, and the results of operations of CMS for the three months ended
September 30, 1994. The duplication of reporting CMS's June 1995 operating
results of $4.1 million in fiscal year 1995 and in the three months ended
August 31, 1995, has been adjusted for by a charge to retained earnings.
Appropriate adjustments have also been made in the statement of cash flows
for the three months ended August 31, 1995.
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS (CONTINUED)
Separate results of the Company and CMS for the periods presented prior to
the consummation of the CMS Merger and in total for the periods are as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Total operating revenues:
The Company, prior to the CMS Merger..................... $ 59,065 $137,704
CMS...................................................... 83,684 244,136
The Company, subsequent to the CMS Merger................ 288,658 --
-------- --------
$431,407 $381,840
-------- --------
-------- --------
Net earnings (loss):
The Company, prior to the CMS Merger..................... $ 2,280 $ 6,399
CMS...................................................... 4,122 5,761
The Company, subsequent to the CMS Merger................ (35,327) --
-------- --------
($28,925) $ 12,160
-------- --------
-------- --------
</TABLE>
In September 1995 the Company purchased fee simple title to two skilled
nursing centers in Idaho for approximately $10.0 million. The two centers
operate a total of 224 beds. Also in September 1995, the Company acquired Home
Respiratory Services, Inc., an Oklahoma home respiratory service provider with
approximately $900,000 in annual revenues, in exchange for approximately 119,000
shares of the Company's common stock valued at approximately $2.5 million. Also
in September 1995, the Company acquired Cardio-Diagnostic Services, Inc., a
Texas non-invasive diagnostic services provider with approximately $3.2 million
in annual revenues, in exchange for 122,000 shares of the Company's common stock
valued at approximately $2.65 million. Finally, on September 1, 1995, the
Company purchased the remaining 20% minority interest in Nevada Rehabilitation
Services, Inc. ("NRS") in exchange for approximately 187,000 shares of the
Company's common stock valued at approximately $3.4 million. Prior to the
acquisition of the 20% share, the Company owned an 80% share of NRS, a contract
therapy company with annual revenues of approximately $8.2 million. Each of the
above acquisitions, in addition to various other acquisitions have been
accounted for as purchases. The aggregate effect of these acquisitions is not
material to the results of operations of the Company.
(4) SPECIAL CHARGE
During the first quarter of fiscal 1996, a special charge of approximately
$63.5 million (pre-tax) was recorded. The special charge resulted primarily from
(i) the write-off of costs which had been incurred in completing the CMS Merger
and (ii) the approval by management of the Company of restructuring measures
resulting from efforts to combine the previously separate companies. The special
charge is comprised of several components including transaction costs incurred
to effect the CMS Merger as well as asset impairments charges, termination
benefits, lease exit costs and other charges associated with combining and
restructuring the merged companies operations.
7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SPECIAL CHARGE (CONTINUED)
At August 31, 1995, the remaining balance in the $63.5 million special
charge accrual is approximately $20.0 million. The impairment of property and
equipment and other asset balances are reflected as a reduction of the
related asset accounts while the remaining amounts are included in accrued
expenses. The components of the special charge are as follows (in thousands):
<TABLE>
<CAPTION>
ORIGINAL FISCAL YEAR BALANCE
PROVISION 1996 ACTIVITY AUGUST 31, 1995
--------- ------------- ---------------
<S> <C> <C> <C>
Impairment of assets.............. $ 26,144 $(26,144) $--
Termination benefits.............. 20,566 (12,089) 8,477
Transaction costs................. 6,697 (5,713) 984
Lease exit and other.............. 10,133 -- 10,133
--------- ------------- ---------------
$ 63,540 $(43,946) $19,594
--------- ------------- ---------------
--------- ------------- ---------------
</TABLE>
As previously reported, in June 1995 the Company announced that it plans
to sell the assets and leasehold improvements at eight of its long-term care
facilities and anticipates that the intended dispositions will occur during
fiscal 1996. In connection therewith, during the first quarter of fiscal 1996
the Company recorded an $11.9 million pre-tax asset impairment charge as a
component of the special charge. The charge represents the amount by which
the carrying amount of the properties intended for sale exceeds the estimated
fair value of the assets. The estimated fair value of these assets was
determined primarily based upon the estimated net realizable value of the
licensed beds of these facilities. The Company's considerable experience in
an active market for long-term care facilities provides a reasonable basis
upon which to apply valuation techniques and estimate market prices. The
charge resulted directly from management's commitment to dispose of the
properties, which occurred subsequent to fiscal year 1995. As such, none of
the assets or leasehold improvements related to these eight facilities was
considered impaired prior to fiscal year 1996. The Company anticipates it
will complete the disposition efforts discussed above prior to the end of
fiscal year 1996. The properties that are the subject of the planned
dispositions or closure, in the aggregate, incurred pre-tax net losses for
the three months ended August 31, 1995 and 1994 of approximately $2.3 million
and $.2 million, respectively. Revenues related to these operations for the
first quarter of fiscal years 1996 and 1995 approximated $18.0 million and
$19.0 million, respectively. The assets to be disposed of consist of land,
buildings, equipment and leasehold improvements with an aggregate carrying
amount of $17.8 million as of August 31, 1995 and are classified in these
respective line items in the accompanying balance sheet.
The $14.2 million balance of the special charge resulting from impairment
of assets is associated with the elimination or consolidation of operations
in the effort to combine the merged companies. In connection therewith, the
Company intends to consolidate or restructure contract respiratory therapy,
corporate and physician locum tenens operations and plans to close a
respiratory clinic. The consolidation and elimination of certain contract
respiratory therapy company operations resulted in a $5.7 million charge.
This charge is comprised of a $4.9 million fair value adjustment to the
carrying cost of related long-lived assets and a $0.8 million adjustment to
accounts receivable and inventory which were negatively impacted by the
Company's decision to restructure the operations. The consolidation of
corpoate operations resulted in the retirement of existing credit facilities
and the negotiation of an expanded consolidated credit agreement. As a
consequence, the Company expensed $2.6 million of existing facility deferred
financing costs, which expense is included in the special charge.
Consolidation of corporate operations required the write-off of excess or
duplicative computer system development investment of approximately $1
million. In evaluating the existing operations of the combined companies, the
Company has also determined to cease operations and/or dispose of assets at a
rehabilitation clinic in California and a property in Ohio. The adjustments
to fair value of the carrying cost of the related long-lived assets is
approximately $3.4 million. Various other restructuring measures result in
the $1.5 million balance of the $14.2 million total. All of the actions which
comprise this total are expected to be completed prior to July of 1996.
Approximately $20.6 million of the special charge is comprised of
involuntary termination benefits paid or expected to be paid to an estimated
340 employees impacted by the CMS Merger. Effected personnel were employed
primarily within the Company's corporate offices and contract therapy
businesses. The completion of these terminations is expected to occur by
August 1996. Management approved and committed the Company to the employee
terminations and, during the first quarter of fiscal 1996, the Company
communicated the termination benefits payable to the employees. The Company
does not anticipate any significant changes to occur through the expected
completion date. Of the $20.6 million total, approximately $9.5 million was
paid to the former chairman and chief executive officer of CMS pursuant to
agreements in place prior to the commencement of merger discussions related
to the CMS Merger.
Lease exit costs related to the consolidation efforts described above
approximate $2.2 million. Other one-time charges directly related to the CMS
Merger or costs not associated with activities that will be continued by the
combined company comprise the approximate $7.9 million balance of the special
charge. Such costs primarily include insurance consolidation and continuation
costs and certain employee benefit and other costs.
(5) LONG-TERM DEBT
In July 1995, in connection with the CMS Merger, the Company entered into
a new revolving credit facility which replaced the credit facility
outstanding at May 31, 1995, and increased the amount available for borrowing
to $485.0 million. The aggregate principal amount was divided between the
Company and CMS in the amounts of $250.0 million and $235.0 million,
respectively. The terms of the new credit facility are substantially
consistent with those of the old credit facility except that accounts
receivable are no longer required as collateral and the interest component
has been revised.
On September 26, 1995, the Company completed a tender offer and consent
solicitation for CMS's 10 3/8% and 10 7/8% senior subordinated notes (the
"Notes"). Tenders and consents were obtained from
8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT (CONTINUED)
the holders of 99.8% of the $118.8 million 10 3/8% notes and holders of 97.5%
of the $146.1 million 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 $289.5 million 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 Notes, including the write-off
of related deferred discount, swap cancellation and financing costs, of
approximately $22.1 million, net of tax, in the second quarter of fiscal 1996.
In connection with the tender offer, the Company's credit facility was
amended and restated to increase the facility from $485.0 million to $750.0
million, of which $70.0 million is available in the form of letters of
credit. The Notes were retired with funds drawn on the Company's amended
credit facility. The amended credit facility is also agented by NationsBank
of Texas N.A. for a group of banks and is subject to substantially the same
interest and terms of the previous $485.0 million facility, except that the
facility is no longer divided between the Company and CMS. Aggregate draws,
including letters of credit, under the amended credit facility after
retirement of the Notes was approximately $490.0 million.
(6) SUPPLEMENTAL INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended August 31, 1995 and August 31, 1994, the
following are considered supplemental information for the purposes of the
consolidated statements of cash flows:
a) The issuance of 20.9 million shares of common stock in exchange for
all of the outstanding common stock of CMS, for the three months ended
August 31, 1995, and the issuance of .5 million shares of common stock for
various acquisitions which in the aggregate were insignificant.
b) Cash paid for interest of $10.7 million for the three months ended
August 31, 1995 and $13.3 million for the three months ended 1994.
c) Cash paid for income taxes, net of refunds of $2.3 million for the
three months ended August 31, 1995 and $2.7 million for the three months
ended August 31, 1994.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As previously reported, the Company acquired CMS on July 10, 1995, by
means of a merger of a wholly owned subsidiary of the Company with and into
CMS, with CMS being the surviving corporation. Upon consummation of the
merger, CMS became a wholly owned subsidiary of the Company. The CMS Merger
has been accounted for as a pooling of interests and all historical financial
statements have been restated to combine the results of the two companies.
Under the terms of the merger agreement, each outstanding share of CMS's
common stock was converted into .5397 of one share of the Company's common
stock, resulting in the Company issuing approximately 20.9 million shares,
valued at approximately $393.9 million based on the closing price of the
Company's common stock on July 10, 1995. Approximately 50.3 million shares of
the Company's common stock were outstanding following the CMS Merger.
Additionally, outstanding options to acquire shares of CMS's common stock
were converted into options to acquire approximately 3.8 million shares of
the Company's common stock. In connection with the CMS Merger, the Company
changed its name to Horizon/CMS Healthcare Corporation.
The Company's strategic business plan emphasizes operating and expanding
its long-term care and specialty programs and services in regionally
concentrated areas, including the midwest and southwest regions of the United
States. The Company is expanding its specialty health care programs and
services through the development of institutional pharmacies, acquisition and
development of therapy companies and medical diagnostic companies and the
conversion and renovation or acquisition of specialty hospitals. In turn, the
acquisition of long-term care facilities in certain geographic areas has
enhanced the Company's expansion of its specialty programs. Specifically, in
certain geographic areas, the Company's long-term care presence is a platform
from which it can vertically integrate its specialty health care programs and
services. The Company intends to expand its long-term care and specialty
health care programs into regional areas served by existing CMS rehabilitation
hospitals to take advantage of operating efficiencies and to expand the
existing continuum of care.
With the merger of CMS, the Company acquired one of the nation's largest
providers of comprehensive inpatient and outpatient medical rehabilitative
services. CMS has a significant clinical and market presence in each of the
medical rehabilitation industry's three principal sectors -- inpatient
rehabilitation care, outpatient rehabilitation care and contract
rehabilitation therapies. CMS operates 37 freestanding rehabilitation
hospitals, provides outpatient rehabilitation services at more than 130
locations and manages 13 inpatient rehabilitation units for general acute
care hospitals. CMS also provides physician staffing services. The Company
anticipates continued expansion of inpatient rehabilitation hospitals and
outpatient clinics.
These growth objectives have been, and will continue to be, the basis of
a strategic business plan that has resulted in net earnings of $31.2 million,
$16.6 million and $7.7 million for the fiscal years ended May 31, 1995, 1994
and 1993, respectively, for the Company prior to the restatement for the CMS
Merger. Pro forma net earnings before special charges for the three months
ended August 31, 1995 and 1994 were $13.6 million and $12.2 million,
respectively.
Growth through acquisition entails certain risks in that acquired
operations could be subject to unanticipated business uncertainties or legal
liabilities. The Company seeks to minimize these risks through investigation
and evaluation of the operations proposed to be acquired and through
transaction structure and indemnification. In addition, each such business
combination presents the risk that currently unanticipated difficulties may
arise in integrating the operations of the combined entities. Moreover, such
business combinations present the risk that the synergies expected from the
combined operations may not be realized. The various risks associated with
the integration of recent and future acquisitions and the subsequent
performance of such acquired operations may adversely affect the Company's
results of operations. Following each acquisition, management will consider
opportunities to eliminate excess or duplicative operations, processes or
personnel or other measures to maximize the potential of the combined
operations. As a result of these considerations, management may commit to
undertake restructuring measures which would result in a current charge
against earnings. Depending upon the relative significance of an acquisition
and the extent of the restructuring program undertaken, such charge could be
material to the Company.
REGULATION
THERAPY REIMBURSEMENT. In April 1995, the Health Care Financing
Administration ("HCFA") issued a memorandum to its Medicare fiscal
intermediaries (the "Fiscal Intermediaries") providing guidelines for
assessing costs incurred by inpatient providers ("Care Providers") relating
to payment of occupational and speech language pathology services furnished
under arrangements that include contracts between therapy providers and Care
Providers. While not binding on the Fiscal Intermediaries, the HCFA
memorandum suggested certain rates to the Fiscal Intermediaries to assist
them in making annual "prudent buyer" assessments of speech and occupational
therapy rates paid by Care Providers during the Fiscal Intermediary's reviews
of the Care Providers' cost reports. The HCFA memorandum acknowledges that
the rates noted in the memorandum are not absolute limits
10
<PAGE>
and should only be used by the Fiscal Intermediaries for comparative
purposes. Following the issuance of the HCFA memorandum, industry
representatives questioned the data initialized by HCFA in formulating
memorandum guidelines. Subsequent meetings between industry representatives
and the HCFA have been held concerning the merits of the HCFA memorandum.
HCFA has asked industry associations and groups to provide recommendations
for inclusion in clarifying instructions to the Fiscal Intermediaries. In
light of the fluid nature of the HCFA memorandum, the Company cannot predict
whether or not the rates suggested in the HCFA memorandum will continue to be
recommended by the HCFA. Additionally, the Company cannot determine at this
time whether the rates suggested in HCFA memorandum would be used by HCFA as
a basis for developing possible future regulations creating a salary
equivalency based reimbursement system for speech and occupational therapy
services.
FEDERAL BUDGET. Both Houses of Congress have adopted a budget resolution
or "blueprint" that is intended to control health care costs, improve access
to medical services for uninsured individuals and balance the federal budget
by the year 2002. At present, no budgetary reconciliation or appropriations
have been approved by either House of Congress. However, certain members of
Congress have introduced budget reconciliation proposals. These proposals
have not yet been reported out of committee. These proposals include reduced
rates of growth in the Medicare and Medicaid programs and proposals to block
grant funds to the states to administer the Medicaid program.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of total operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED AUGUST 31,
-----------------
1995 1994
------- -------
<S> <C> <C>
Total operating revenues................................... 100.0% 100.0%
------- -------
Total routine expenses (1)................................. 80.9 82.5
Total property expenses (2)................................ 11.3 11.7
Special charge............................................. 14.7 --
------- -------
Total operating expenses................................. 106.9 94.2
------- -------
Earnings (loss) before minority interests and income
taxes..................................................... (6.9) 5.8
Minority interests......................................... (0.3) (0.4)
------- -------
Earnings (loss) before income taxes........................ (7.2) 5.4
Income taxes............................................... (0.6) 2.2
------- -------
Net earnings............................................. (6.6)% 3.2%
------- -------
------- -------
</TABLE>
- ------------------------
(1) Includes cost of services and general and administrative costs.
(2) Includes facility leases, depreciation and amortization and interest
expense.
11
<PAGE>
The following table sets forth a summary of the Company's total operating
revenues by type of service and the percentage of total operating revenues that
each such service represented for each period indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
-----------------------------------
1995 1994
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term care services................. $ 94,536 21.9% $ 73,469 19.2%
Other operating revenues (1)............ 4,382 1.0 3,615 1.0
Specialty health care services:
Contract therapy...................... 102,321 23.7 93,471 24.5
Rehabilitation........................ 128,955 29.9 120,700 31.6
Other (2)............................. 101,213 23.5 90,585 23.7
-------- ------ -------- ------
Total operating revenues............ $431,407 100.0% $381,840 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
- ------------------------
(1) Includes revenues derived from management fees, interest income, rental
income and other miscellaneous services.
(2) Includes revenues derived from subacute care, institutional pharmacy
operations, Alzheimer's care, noninvasive medical diagnostic testing
services, physicians services and clinical laboratory services.
THREE MONTHS ENDED AUGUST 31, 1995 COMPARED TO
THREE MONTHS ENDED AUGUST 31, 1994
Total operating revenues increased approximately $49.6 million or 13.0% for
the three months ended August 31, 1995, as compared with the same period in
fiscal 1995. The majority of this increase is the result of the Company's
expansion, both internally and through acquisitions. The number of long-term and
specialty healthcare facilities operated increased from approximately 130
facilities at August 31, 1994 to approximately 150 facilities at August 31,
1995. Contract therapy revenues have increased approximately 9.5% as the Company
continues to expand these services. An additional cause of the increase in
revenues is an increase in Medicare, Medicaid and private pay rates. The average
increase in rates per patient day across all pay types for long-term care and
rehabilitation hospitals was approximately 1.7% and 2.5%, respectively. Revenues
attributable to higher margin specialty health care services as a percentage of
total operating revenues decreased slightly from 79.8% for the three months
ended August 31, 1994 to 77.1% for the same period in fiscal 1996. The average
occupancy of the Company's facilities remained consistent at approximately 89%
for long-term care and 69% for rehabilitation hospitals and as a consequence had
little or no effect on operating revenues.
Cost of services increased approximately $32.3 million or 10.9% for the
three months ended August 31, 1995 from $296.4 million for the same period in
fiscal 1995. Administrative and general expense increased approximately $1.8
million or 9.5% for the three months ended August 31, 1995 from $18.7 million
for the same period in fiscal 1995. These increases are due primarily to the
increase in the number of long-term care facilities, specialty hospitals and
subacute care units operated by the Company, as well as the costs associated
with the expansion of specialty health care services and programs.
Facility lease expense and depreciation and amortization and interest
expense increased approximately 9.7% for the three months ended August 31, 1995,
from $44.5 million for the same period in the prior year. This increase in
property related expenses reflects the increased number of facilities operated
during the three months ended August 31, 1995.
The Company recorded an approximate $63.5 million special charge in the
three months ended August 31, 1995. The special charge resulted primarily from
(i) the write-off of costs which had been incurred in completing the CMS Merger
and (ii) the approval by management of the Company of restructuring measures
related to efforts to combine the previously separate companies. The special
12
<PAGE>
charge is comprised of several components including the transaction costs
incurred to effect the CMS Merger as well as asset impairments charges,
termination benefits, lease exit costs and other charges associated with
combining and restructuring the merged companies operations.
As a result of the foregoing factors, pro forma net earnings before the
special charge increased 33.3% to $18.6 million or $.36 per share for the three
months ended August 31, 1995. This compares to net earnings before special
charges of $12.2 million or $.27 per share for same period in fiscal 1995. The
net loss for the three months ended August 31, 1995, inclusive of the special
charge, was $28.9 million or ($.56) per share.
LIQUIDITY AND CAPITAL RESOURCES
OPERATIONS. At August 31, 1995, the Company's working capital was $306.4
million and included cash and cash equivalents of $48.5 million as compared with
$284.3 million in working capital and $40.7 million in cash and cash equivalents
at May 31, 1995. During the three months ended August 31, 1995, the Company used
$9.1 million in net cash in its operations. During the three months of fiscal
1996, accounts and settlements receivable increased $17.2 million, substantially
all of which represents increases generated by existing facilities or by new
facilities after the date of acquisition.
EXPANSION PROGRAM. The net cash used by the Company's investing activities
decreased from $95.7 million in first quarter of fiscal 1995 to $18.3 million in
the same period of fiscal 1996. The primary uses of cash from investing
activities have been capital expenditures including the acquisition of
peopleCare in the first quarter of fiscal 1995. Capital expenditures were $11.4
million in the three months ended August 31, 1995, and $13.9 million in the same
period in the prior year. The principal purpose of the capital expenditures
during each of these periods has been to fund the Company's internal and
external expansion program.
The Company's expansion program requires funds: (i) to acquire assets and to
expand and improve existing and newly acquired facilities; (ii) to discharge
funded indebtedness assumed or otherwise acquired in connection with the
acquisitions of facilities and properties; and (iii) to finance the increase in
patient care and other accounts receivable resulting from acquisitions. The
funds necessary to meet these requirements have been provided principally by the
Company's financing activities and, to a lesser extent, from the sale of
marketable securities and the sale of land, buildings and equipment.
SOURCES. At August 31, 1995, the available credit under the Company's
then-existing credit facility was $266.6 million. To the extent that the
Company's operations and expansion program require cash expenditures in excess
of the amounts available to it under its credit facility, management of the
Company believes that the Company can obtain the necessary funds through other
financing activities, including the issuance and sale of debt and equity
securities in public and private markets.
CREDIT FACILITY
The Company is the borrower under a credit agreement dated as of September
26, 1995 (the "Credit Facility") with NationsBank of Texas, N.A., as Agent, and
the lenders named therein. The aggregate revolving credit commitment under the
Credit Facility is $750 million, of which the Company had borrowed $453.5
million at October 11, 1995. Borrowings under the Credit Facility bear interest,
payable monthly, at a rate equal to either, as selected by the Company, the
Alternate Base Rate (as therein defined) of the Agent in effect from time to
time, or the Adjusted London Inter-Bank Offer Rate plus 0.625% to 1.25% per
annum, depending on the maintenance of specified financial ratios. The
applicable interest rates at October 11, 1995 were 8.75% and 6.87% - 7.13% on
the Alternate Base Rate and Adjusted London Inter-Bank Offer Rate advances,
respectively. In addition, borrowings thereunder mature in September 2000 and
are secured by a pledge of the capital stock of all subsidiaries of the Company.
Under the terms of the Credit Facility, the Company is required to maintain
certain financial ratios and is restricted in the payment of dividends to an
amount which shall not exceed 20% of the Company's net earnings for the prior
fiscal year.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Stockholders, held July 6, 1995, the
following actions were taken:
a. The Amended and Restated Agreement and Plan of Merger dated as of
May 23, 1995 providing for the merger of a wholly owned subsidiary of the
Company with and into CMS was approved and adopted.
The results of the vote were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NONVOTES
- ---------- --------- ----------- ---------------
<S> <C> <C> <C>
19,926,273 1,865,671 40,848 1,463,468
</TABLE>
b. The amendment to the Company's Restated Certificate of Incorporation
to change the Company's name to Horizon/CMS Healthcare Corporation upon the
effectiveness of the CMS Merger was approved and adopted.
The results of the vote were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NONVOTES
- ---------- ------- ----------- ---------------
<S> <C> <C> <C>
21,811,804 957,578 121,778 405,100
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<S> <C>
10.1 Amended and Restated Credit Agreement dated as of September 26,
1995, by and among the Company, CMS, the Lenders Named Therein
and NationsBank of Texas, N.A.
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -- Three months ended August 31, 1995
27.2 Restated Financial Data Schedule -- Twelve months ended May 31,
1995
27.3 Restated Financial Data Schedule -- Nine months ended February
28, 1995
</TABLE>
b. Reports on Form 8-K
A report on Form 8-K/A Amendment No. 1 was filed on June 2, 1995 under "Item
7. Financial Statements and Exhibits" which updated the previously filed Form
8-K regarding the acquisition of Greenery Rehabilitation Group, Inc.
A report on Form 8-K/A Amendment No.2 was filed on June 2, 1995 under "Item
7. Financial Statements and Exhibits" which updated the previously filed Form
8-K/A regarding the acquisition of peopleCARE Heritage Group.
A report on Form 8-K was filed on June 23, 1995 under "Item 5. Other Events"
which announced the Company's plans to sell the assets and leasehold
improvements at eight of its facilities.
A report on Form 8-K was filed on July 25, 1995 under "Item 2. Acquisition
or Disposition of Assets" which disclosed the consummation of the CMS Merger.
This report also disclosed that, in connection with the CMS Merger, the Company
changed its name to Horizon/CMS Healthcare Corporation. This report was also
filed under "Item 7. Financial Statement and Exhibits", however as stated
therein, it was impracticable to provide the required historical and pro forma
financial information by the date of this report. Such information was provided
under Form 8-K/A within 60 days after the date of this report.
A report on Form 8-K was filed on July 25, 1995 under "Item 5. Other Events"
which disclosed the execution of the Credit Agreement dated as of July 6, 1995,
by and among the Company, CMS, the Lenders Named Therein and NationsBank of
Texas, N.A. The Credit Facility increased the Company's available bank credit
from $250 million to $485 million and replaced the two stand alone facilities of
the Company and CMS.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HORIZON/CMS HEALTHCARE CORPORATION
Date: April 22, 1996 By /s/ ERNEST A. SCHOFIELD
----------------------------------
Ernest A. Schofield
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
- ------------------------
*Ernest A. Schofield is signing in the dual capacities as Chief Financial
Officer and as a duly authorized officer of the Company.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------------------------------------------
<C> <S> <C>
* 10.1 Amended and Restated Credit Agreement dated as of
September 26, 1995, by and among the Company, CMS, the
Lenders Named Therein and NationsBank of Texas, N.A. ..
* 11.1 Statement Re: Computation of Per Share Earnings.........
27.1 Financial Data Schedule -- Three months ended August 31,
1995...................................................
* 27.2 Restated Financial Data Schedule -- Twelve months ended
May 31, 1995...........................................
* 27.3 Restated Financial Data Schedule -- Nine months ended
February 28, 1995......................................
___________________
* Previously filed.
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the August
31, 1995 Form 10-Q/A Amendment No. 2 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1995
<PERIOD-END> AUG-31-1995
<CASH> 48,459
<SECURITIES> 0
<RECEIVABLES> 370,691
<ALLOWANCES> 32,172
<INVENTORY> 0
<CURRENT-ASSETS> 497,513
<PP&E> 714,518
<DEPRECIATION> 102,802
<TOTAL-ASSETS> 1,428,552
<CURRENT-LIABILITIES> 191,076
<BONDS> 572,662
0
0
<COMMON> 51
<OTHER-SE> 618,575
<TOTAL-LIABILITY-AND-EQUITY> 1,428,552
<SALES> 0
<TOTAL-REVENUES> 431,407
<CGS> 0
<TOTAL-COSTS> 461,528
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,929
<INTEREST-EXPENSE> 13,112
<INCOME-PRETAX> (30,121)
<INCOME-TAX> (2,520)
<INCOME-CONTINUING> (28,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,925)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
