<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<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: FEBRUARY 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER: 1-9369
------------------------
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 Identification No.)
organization)
</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 ___
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding at April 8, 1996 was 51,942,391.
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<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
INDEX
FORM 10-Q -- FOR THE NINE MONTHS ENDED FEBRUARY 29, 1996
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NUMBERS
-----------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
February 29, 1996 and May 31, 1995.................................................. 3
Consolidated Statements of Operations
For the three months and the nine months ended February 29, 1996 and February 28,
1995................................................................................ 4
Consolidated Statements of Cash Flows
For the nine months ended February 29, 1996 and February 28, 1995................... 5
Notes to Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 21
Item 6. Exhibits and Reports on Form 8-K..................................................... 23
Signatures.......................................................................................... 24
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
FEBRUARY 29, 1996 AND MAY 31, 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MAY 31
FEBRUARY 29 -------------
-------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 39,285 $ 40,674
Patient care accounts receivable, net of allowance for doubtful accounts of
$36,593 at February 29 and $29,595 at May 31..................................... 345,853 330,313
Estimated third party settlements................................................. 39,508 --
Prepaid and other assets.......................................................... 80,830 61,650
Deferred income taxes............................................................. 21,806 21,806
------------- -------------
Total current assets............................................................ 527,282 454,443
PROPERTY AND EQUIPMENT, net......................................................... 640,945 614,379
GOODWILL, net....................................................................... 173,705 168,861
OTHER INTANGIBLE ASSETS, net........................................................ 40,756 44,720
NOTES RECEIVABLE, excluding current portion......................................... 62,829 44,619
OTHER ASSETS........................................................................ 61,327 71,101
------------- -------------
Total assets.................................................................... $ 1,506,844 $ 1,398,123
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................................. $ 5,470 $ 5,032
Accounts payable.................................................................. 28,502 33,280
Accrued expenses.................................................................. 140,036 131,225
Estimated third party settlements................................................. -- 563
------------- -------------
Total current liabilities....................................................... 174,008 170,100
LONG-TERM DEBT, excluding current portion........................................... 634,404 532,688
OTHER LIABILITIES................................................................... 20,852 24,353
DEFERRED INCOME TAXES............................................................... 6,357 6,141
------------- -------------
Total liabilities............................................................... 835,621 733,282
MINORITY INTERESTS.................................................................. 15,510 14,189
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000 shares, 52,572,692 shares
issued with 51,995,184 shares outstanding at February 29 and 50,679,107 shares
issued with 50,174,218 shares outstanding at May 31.............................. 53 51
Additional paid-in capital........................................................ 587,079 559,168
Retained earnings................................................................. 79,648 99,382
Note receivable from sale of common stock......................................... (2,362) (2,362)
Treasury stock.................................................................... (8,705) (5,587)
------------- -------------
Total stockholders' equity...................................................... 655,713 650,652
------------- -------------
Total liabilities and stockholders' equity...................................... $ 1,506,844 $ 1,398,123
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ----------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996 1995 1996 1995
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
TOTAL OPERATING REVENUES................................ $ 438,199 $ 415,878 $ 1,310,358 $ 1,199,290
------------ ------------ ------------- -------------
COSTS AND EXPENSES:
Cost of services...................................... 334,276 319,849 996,332 928,625
Administrative and general............................ 26,629 22,675 71,139 62,353
Facility leases....................................... 22,036 20,784 64,172 60,301
Depreciation and amortization......................... 14,778 14,295 44,536 41,926
Interest expense...................................... 11,562 13,109 36,038 39,698
Special charge........................................ -- 5,045 63,540 18,443
------------ ------------ ------------- -------------
Total costs and expenses............................ 409,281 395,757 1,275,757 1,151,346
------------ ------------ ------------- -------------
Earnings before minority interests, income taxes and
extraordinary item................................. 28,918 20,121 34,601 47,944
Minority interests...................................... (1,593) (2,125) (4,995) (5,156)
------------ ------------ ------------- -------------
Earnings before income taxes and extraordinary
item............................................... 27,325 17,996 29,606 42,788
Income taxes............................................ 11,480 7,768 23,143 19,147
------------ ------------ ------------- -------------
Earnings before extraordinary item.................. 15,845 10,228 6,463 23,641
Extraordinary item, net of tax.......................... -- 2,497 (22,075) 2,497
------------ ------------ ------------- -------------
Net earnings (loss)..................................... $ 15,845 $ 12,725 $ (15,612) $ 26,138
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Earnings (loss) per common and common equivalent share:
Earnings before extraordinary item.................... $ 0.30 $ 0.20 $ 0.12 $ 0.51
Extraordinary item.................................... -- 0.05 (0.42) 0.05
------------ ------------ ------------- -------------
Net earnings (loss)................................... $ 0.30 $ 0.25 $ (0.30) $ 0.56
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Earnings (loss) per common share -- assuming full
dilution:
Earnings before extraordinary item.................... $ 0.30 $ 0.20 $ 0.12 $ 0.50
Extraordinary item.................................... -- 0.05 (0.42) 0.05
------------ ------------ ------------- -------------
Net earnings (loss)................................... $ 0.30 $ 0.25 $ (0.30) $ 0.55
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................................................. $ (15,612) $ 26,139
------------ ------------
Adjustments:
Depreciation and amortization..................................................... 44,536 41,926
Special charge.................................................................... 63,540 18,443
Extraordinary loss (gain) on early retirement of debt............................. 38,062 (4,049)
Other............................................................................. 1,390 2,438
Increase (decrease) in cash from changes in assets and liabilities, excluding
effects of acquisitions:
Accounts receivable and estimated third party settlements....................... (59,503) (44,718)
Prepaid and other assets........................................................ (19,695) (23,652)
Deferred income taxes........................................................... 216 (56)
Accounts payable and accrued expenses........................................... (41,762) (20,833)
Other liabilities............................................................... 217 3,297
------------ ------------
Total adjustments................................................................... 27,001 (27,204)
------------ ------------
Net cash provided by (used in) operating activities................................. 11,389 (1,065)
------------ ------------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired................... (33,303) (114,821)
Cash proceeds from sale of property and equipment................................... -- 22,701
Investment in other intangible assets............................................... (10,004) (606)
Acquisition of property and equipment............................................... (36,459) (40,460)
Investment in notes receivable...................................................... (18,555) 2,570
Other investing activities.......................................................... 4,006 (15,225)
------------ ------------
Net cash used in investing activities............................................... (94,315) (145,841)
------------ ------------
Cash flows from financing activities:
Long-term debt borrowings........................................................... 662,450 152,496
Long-term debt repayments........................................................... (560,296) (144,701)
Premium and other payments on early retirement of debt.............................. (30,636) (3,395)
Deferred financing costs............................................................ (1,700) (3,102)
Issuance of common stock............................................................ 15,957 124,036
Other financing activities.......................................................... -- 361
Distributions to minority interests................................................. (927) (2,896)
------------ ------------
Net cash provided by financing activities........................................... 84,848 122,799
------------ ------------
Net increase (decrease) in cash and cash equivalents.................................. 1,922 (24,107)
Cash and cash equivalents, beginning of period........................................ 40,674 61,384
Effect of pooling of interests restatement (Note 3)................................... (3,311) --
------------ ------------
Cash and cash equivalents, end of period.............................................. $ 39,285 $ 37,277
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................................................... $ 42,100 $ 38,100
------------ ------------
------------ ------------
Income taxes, net................................................................. $ 1,800 $ 16,000
------------ ------------
------------ ------------
Noncash investing and financing activities:
Acquisition of property and equipment in exchange for common stock.................. $ 27,400 $ 1,800
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996
(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 (the "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 and Form 10-K/A Amendment No. 2 and as restated in the Current
Report on Form 8-K dated July 10, 1995 and filed November 21, 1995) filed with
the 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 February 29, 1996 as compared with the balance at May 31, 1995 has been
caused, in part, by the December 1995 change in third party intermediaries at
substantially all long-term care facilities which has resulted in some delay in
the processing of interim rate adjustments and a
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ESTIMATED THIRD PARTY SETTLEMENTS (CONTINUED)
resulting increase in related settlements receivable balances. The increase in
net settlements receivable has also been caused by the settlement of significant
third party rehabilitation hospital payables recorded at May 31, 1995. Finally,
during the three months ended February 29, 1996, the Company recorded
approximately $18.2 million representing the estimated reimbursement benefit for
costs associated with the CMS bond tender offer expensed during the second
quarter of fiscal 1996. This third quarter fiscal 1996 increase was partially
offset by a $7.0 million increase in third party settlement receivable reserves.
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.
The Company recorded a charge in the quarter ended February 29, 1996 of
approximately $5.1 million, pre-tax, to write off all revenue associated with
these Medicare Part B retroactive billings (including all of the $3.4 million in
retroactive Medicare Part B and related co-insurance billings discussed
previously), as well as the related costs of both the Company's internal
investigations and the OIG/DOJ investigation.
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
In July 1995, a wholly owned subsidiary of the Company merged with
Continental Medical Systems, Inc. ("CMS") and CMS became a wholly owned
subsidiary of the Company (the "CMS
7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS (CONTINUED)
Merger"). Under the terms of the merger agreement, 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 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 has been
accounted for as a pooling of interests and, accordingly, the Company's
historical financial information has been restated to include CMS's financial
results. 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 nine months ended February 28, 1995, includes the results of operations
of the Company for the nine months ended February 28, 1995, and the results of
operations of CMS for the nine months ended March 31, 1995. The duplication of
reporting CMS's June 1995 operating results of $4.1 million in fiscal year 1995
and in the nine months ended February 29, 1996, has been adjusted for by a
charge to retained earnings. Appropriate adjustments have also been made in the
statement of cash flows for the nine months ended February 29, 1996.
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 NINE MONTHS ENDED
-------------------------- ----------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996 1995 1996 1995
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Total operating revenues:
The Company, prior to the CMS Merger........ $ -- $ 165,632 $ 59,065 $ 458,566
CMS......................................... -- 250,246 83,684 740,724
The Company, subsequent to the CMS Merger... 438,199 -- 1,167,609 --
------------ ------------ ------------- -------------
$ 438,199 $ 415,878 $ 1,310,358 $ 1,199,290
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net earnings (loss):
The Company, prior to the CMS Merger........ $ -- $ 8,963 $ 2,280 $ 22,284
CMS......................................... -- 3,762 4,122 3,854
The Company, subsequent to the CMS Merger... 15,845 -- (22,014) --
------------ ------------ ------------- -------------
$ 15,845 $ 12,725 $ (15,612) $ 26,138
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS (CONTINUED)
During the nine months ended February 29, 1996, the Company made the
following additional acquisitions:
<TABLE>
<CAPTION>
MARKET VALUE
APPROXIMATE OF STOCK AT
ANNUAL DATE
FACILITY DATE REVENUES (1) CONSIDERATION OF ACQUISITION
- ---------------------------------- ------------------- ------------ ------------------------------- ---------------
<S> <C> <C> <C> <C>
Two skilled nursing centers
(Idaho).......................... September 1, 1995 7$.8 million $10.0 million (cash) --
Home respiratory service provider
(Oklahoma) (2)................... September 1, 1995 $ 900,000 119,000 shares of Common Stock $ 2.5 million
Non-invasive diagnostic services
provider (Texas) (3)............. September 1, 1995 3$.2 million 122,000 shares of Common Stock $2.65 million
Minority interest (20%) in
contract therapy company (Nevada)
(4).............................. September 1, 1995 8$.2 million 187,000 shares of Common Stock $ 3.4 million
Six outpatient rehabilitation
clinics (Texas).................. October 29, 1995 5$.3 million $4.8 million (cash) --
One skilled nursing center
(Oklahoma)....................... February 1, 1996 2$.3 million $7.3 million (cash) --
Respiratory therapy service
provider (Texas) (5)............. January 1, 1996 $ 600,000 $1.0 million (cash) --
</TABLE>
- ------------------------------
(1) For latest fiscal year of entity involved.
(2) Home Respiratory Services, Inc.
(3) Cardio-Diagnostic Services, Inc.
(4) Nevada Rehabilitation Services Corporation. The Company previously owned
80% of this corporation.
(5) Pulmonary Care Services, Inc. and Care America Home Care Services, Inc.
In November 1995, the Company acquired leasehold interests in three nursing
centers with 360 beds in New Mexico from Regency Health Services, Inc., in
exchange for $400,000 and the leasehold interests in four nursing centers with
463 beds in Ohio with a net book value of $2.7 million (the "Regency Exchange").
The Company accounted for the Regency Exchange as a nonmonetary exchange with
the leasehold interests acquired recorded at the amount of monetary
consideration paid plus the net book value of the leasehold interests
surrendered.
With the exception of the CMS merger, the aggregate effect of the
consummated acquisitions described above is not material to the results of
operations of the Company.
After the close of the third quarter of fiscal 1996, the Company completed
the following additional acquisitions:
In March 1996, the Company acquired the assets of Physical Therapy
Institute, P.C. ("Physical Therapy"), which consists of six outpatient
rehabilitation clinics in Colorado Springs, Colorado, with annual revenues of
approximately $6.5 million. Total consideration for this acquisition was
approximately $11.0 million, comprised of cash in the amount of $9.0 million and
a promissory note in the amount of $2.0 million.
Also in March 1996, the Company acquired the assets of SPORTPRO, Inc.
("Sportpro") which consists of two outpatient rehabilitation clinics in Colorado
Springs, Colorado, with annual revenues of approximately $1.6 million. Total
consideration for this acquisition was approximately $1.9 million in cash.
9
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS (CONTINUED)
Finally, in March 1996, the Company acquired the capital stock of South
Florida Orthopedics, P.A., a physician practice in the South Florida area with
approximately $2.7 million in annual revenues. Total consideration for this
acquisition was approximately $2.9 million in cash.
With the exception of the CMS merger, all of the acquisitions consummated
during and subsequent to the nine months ended February 29, 1996 have been
accounted for by the purchase method. Total goodwill recorded in connection with
these acquisitions amounted to approximately $22.3 million and will be amortized
on a straight-line basis over a period of 40 years.
In February 1996, the Company entered into an agreement and plan of merger
with Medical Innovations, Inc. ("Medical Innovations"). Subject to the terms and
conditions of such agreement, each outstanding share of Medical Innovations
common stock will be converted into .0645 of one share of Horizon common stock;
provided, however, that, if the average closing price of Horizon Common Stock
for the 20 trading days ending on the day before the consummation of the Merger
is (i) less than $24.79 per share, then the exchange ratio will be equal to
$1.60 divided by such average closing price, or (ii) more than $29.48 per share,
then the exchange ratio will be equal to $1.90 divided by such average closing
price. If the average closing price was equal to the Company's April 12, 1996
closing stock price of $13.125 per share, approximately 1.9 million shares of
the Company's common stock, valued at approximately $25.0 million, would be
issued in the transaction. The Company expects that the transaction will be
consummated during the first quarter of fiscal 1997. Medical Innovations
provides specialized home health care services, home medical equipment,
homemaker services, and intravenous therapies, as well as comprehensive home
healthcare management services under contractual arrangements with hospitals and
other providers.
In November 1995, the Company announced the execution of a merger agreement
pursuant to which, subject to the terms and conditions of such agreement, a
wholly owned subsidiary of the Company would merge with Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific Rehab"), a provider of outpatient rehabilitation
services. In early March 1996, the Company notified Pacific Rehab that it
intended to exercise its right to terminate the agreement on April 2, 1996. On
April 2, 1996, Pacific Rehab terminated the merger agreement pursuant to its
terms.
(4) SPECIAL CHARGE
During the first quarter of fiscal 1996, the Company recorded a special
charge of approximately $63.5 million (pre-tax). 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 impairment
charges, termination benefits, lease exit costs and other charges associated
with combining and restructuring the operations of the merged companies.
10
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SPECIAL CHARGE (CONTINUED)
At February 29, 1996, the remaining balance in the $63.5 million special
charge accrual is approximately $9.0 million. The impairment of property and
equipment and other asset balances are reflected as reductions 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>
FISCAL YEAR BALANCE
ORIGINAL 1996 FEBRUARY 29,
PROVISION ACTIVITY 1996
--------- ------------ ------------
<S> <C> <C> <C>
Impairment of assets............................................ $ 26,144 $ (26,144) $ --
Termination benefits............................................ 20,566 (16,974) 3,592
Transaction costs............................................... 6,697 (6,697) --
Lease exit and other............................................ 10,133 (4,680) 5,453
--------- ------------ ------------
$ 63,540 $ (54,495) $ 9,045
--------- ------------ ------------
--------- ------------ ------------
</TABLE>
In June 1995 the Company announced that it plans to sell the assets and
leasehold improvements at eight of its long-term care facilities. 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. In
November 1995, the Company disposed of one of the facilities identified for
disposition as a part of the Regency Exchange. The Company continues to engage
in discussions with prospective purchasers of the remaining facilities.
Depending upon the circumstances affecting any negotiations, the operations
ultimately disposed of may not include all facilities previously identified for
disposal and may include other operations not yet identified. 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
nine months ended February 29, 1996 and February 28, 1995 of approximately $8.5
million and $6.4 million, respectively. Revenues related to these operations for
the nine months ended February 29, 1996 and February 28, 1995 approximated $50.3
million and $53.1 million, respectively. The assets to be disposed of consist of
land, buildings, equipment and leasehold improvements with an aggregate carrying
amount of $17.7 million as of February 29, 1996 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
consolidated or restructured 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 corporate 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
11
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SPECIAL CHARGE (CONTINUED)
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.
Transaction costs of approximately $7.0 million are comprised of direct and
incremental expenses incurred in consummating 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 associated with activities that have not been 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 rate has been revised.
On September 26, 1995, the Company completed a tender offer and consent
solicitation for two issues of publicly held indebtedness of CMS (together, the
"Senior Subordinated Notes"). On this date, the Company purchased $118.7 million
in principal amount of 10 3/8% Senior Subordinated Notes due 2003 at 109.25%
plus a consent fee of 1.05% and $137.5 million in principal amount of 10 7/8%
Senior Subordinated Notes due 2002 at 109.0% plus a consent fee of 0.75%. The
Company paid $289.5 million to retire the Senior Subordinated Notes, including
principal, premiums, accrued interest, consent fees and other related costs. As
a result of the tender, the Company recorded 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 cots, 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 Senior Subordinated Notes were retired with funds drawn on the
12
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT (CONTINUED)
Company's amended credit facility. NationsBank of Texas N.A. is the agent under
the amended credit facility for a group of banks and the facility is subject to
substantially the same interest and terms as the previous facility, except that
it is no longer divided between the Company and CMS. Aggregate draws, including
letters of credit, under the amended credit facility immediately following the
retirement of the Senior Subordinated Notes was approximately $490.0 million.
The Company utilizes an interest rate collar agreement, consisting of the
combination of an interest rate cap and an interest rate floor in a single
transaction, to reduce the impact of increases in interest rates on its floating
rate debt without any initial investment by the Company. The Company entered
into the $200 million notional amount collar agreement following the expansion
of the Credit Facility in October 1995. The Company utilizes the collar as an
interest rate hedge on its floating rate, LIBOR based Credit Facility and does
not intend the instrument to be speculative in nature. The agreement has a term
of two years and expires in October 1997. The collar agreement entitles the
Company to receive from the counterparty the amount, if any, by which average
LIBOR interest payments on the notional amount exceed 8.0% per annum. The collar
agreement requires that the Company pay to the counterparty the amount, if any,
by which average LIBOR interest payments on the notional amount is less than
4.57% per annum. The fair value of the collar agreement is estimated based on
quotes from market makers of these instruments and represents the estimated
amount that the Company would expect to receive or pay if the agreement was
terminated. The fair value of the collar on February 29, 1996 would require that
a $289,000 payment be made by the Company to terminate the agreement.
(6) MANAGEMENT AGREEMENT
In December 1995, the Company announced that it had finalized a contract to
manage the operations of 134 long-term care facilities in Texas, Michigan and
Oklahoma which are operated under long-term leases by Texas Health Enterprises,
Inc., HEA of Michigan, Inc. and HEA of Oklahoma, Inc. (collectively, the "HEA
Group"). The Company began managing these facilities on January 1, 1996 under a
management contract between a subsidiary of the Company and the HEA Group, which
has an initial term of ten years. The Company will receive a management fee
equal to 6.5% of the annual gross revenues generated from the operation of the
HEA Group facilities which revenues, in the aggregate, for the year ended
December 31, 1995 approximated $220.0 million. The Company has made available a
$30.0 million credit line for, among other things, the working capital and
capital improvement requirements of the facilities covered by the management
contract.
(7) COMMITMENTS AND CONTINGENCIES
The Company is a party to threatened or pending litigation in connection
with several matters which, if adversely determined, could have a material
adverse impact on the Company's financial condition and/or results of
operations. See "Item 1. Legal Proceedings" in Part II of this report for a
description of such litigation.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading provider of post-acute health care services,
including specialty health care cervices and long-term care services,
principally in the Midwest, Southwest and Northeast regions of the United
States. At February 29, 1996, the Company provided specialty health care
services through 37 acute rehabilitation hospitals, 57 specialty hospitals and
subacute care units, 159 outpatient rehabilitation clinics and 2,618
rehabilitation therapy contracts. At that date, the Company provided long-term
care services through 120 owned or leased facilities and 143 managed facilities.
Other medical services offered by the Company include pharmacy, laboratory,
Alzheimer's care, physician management, non-invasive medical diagnostic, home
respiratory, home infusion therapy and hospice care. For the nine months ended
February 29, 1996, the Company derived approximately 50% of its revenues from
private sources, 32% from Medicare and 18% from Medicaid.
Post-acute care is the provision of a continuum of care to patients for the
twelve month period following discharge from an acute care hospital. Post-acute
care services that the Company provides include: (a) inpatient and outpatient
rehabilitative services, (b) subacute care, (c) long-term care, (d) contract
rehabilitative therapy services, (e) pharmacy and related services, (f) clinical
laboratory services, (g) non-invasive medical diagnostic services, (h) home
respiratory supplies and services, (i) home infusion supplies and services and
(j) institutional hospice care. The Company's integrated post-acute health care
system is intended to provide continuity of care for its patients and enable
payors to contract with one provider to provide for virtually all of the
patient's needs during the period following discharge from an acute care
facility.
In response to current health care reform and ongoing changes in the health
care marketplace, the Company has implemented and continues to implement a
strategy of extending the continuum of services offered by the Company beyond
traditional long-term and subacute care to create a post-acute health care
delivery system in each geographic region that it serves. The Company's strategy
is designed to improve its profit margins, occupancy levels and payor mix.
Continued implementation of this strategy will require the following:
LEVERAGING EXISTING FACILITIES. The Company intends to continue the use of
its rehabilitation, long-term care and subacute care facilities as platforms to
provide a cost-effective continuum of post-acute care to patients in each
payment category, private, managed care and governmental programs. This allows
the Company to provide its services to the increasing number of patients who
continue to require rehabilitation, subacute care or long-term care after being
discharged from hospitals.
EXPANDING SPECIALTY HEALTH CARE SERVICES OFFERED. The Company believes that
by providing a broad range of cost effective services it meets the needs of
managed care and other payors. As a result, the Company has experienced and
expects to continue to experience increased patient volumes in, and revenues
derived from, its facilities.
CROSS-SELLING BROAD SERVICE OFFERING. In response to payors' demands for a
broad range of services, the Company intends to cross-sell the variety of
services provided by its business units. The Company has begun to market
aggressively its pharmacy services, various therapies and other medical services
to its existing and newly acquired operations.
CONCENTRATING OPERATIONS IN TARGETED GEOGRAPHIC AREAS. To realize operating
efficiencies, economies of scale and growth opportunities, the Company intends
to continue to concentrate its operations in clusters of operating units in
selected geographic areas.
DEVELOPING REHABILITATION NETWORKS. The Company intends to develop
rehabilitation networks by concentrating its outpatient rehabilitation clinics
in geographic locations where regional coverage combined with the ability to
provide multiple services in concert with existing acute rehabilitation,
subacute and long-term care facilities, will strengthen its position with
managed care payors.
14
<PAGE>
EXPANDING THROUGH ACQUISITIONS. The Company intends to continue to expand
its operations through the acquisition in select geographic areas of long-term
care facilities and providers of specialty health care services. Management
believes that such acquisitions provide opportunities to realize operating
efficiencies, particularly through (a) margin improvements from enhanced
utilization of rehabilitation therapies and other specialty medical services,
(b) the expansion of the Company's institutional pharmacy services into new
facilities and new markets, (c) the consolidation of corporate overhead, (d) the
potential to increase business by providing a full range of care to managed care
providers, (e) the ability to increase capacity and margins by offering higher
margin and higher acuity services to patients in Company owned or operated
subacute and long-term care facilities, (f) the potential to increase patient
volume by expanding the continuum of care of each acquired entity on a
stand-alone basis and (g) the potential for improved buying power with respect
to suppliers.
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
The federal government and the governments of all states in which the
Company operates regulate various aspects of its businesses. There can be no
assurance that federal or state governments will not impose additional
restrictions on its activities that might adversely affect its businesses. The
operation of the Company's long-term care facilities and certain segments of
specialty health care services and the provision of these services are subject
to federal, state and local licensure and certification laws. These facilities
and segments are subject to periodic inspection by governmental and other
authorities to assure compliance with the various standards established for
continued licensure under state law, certification under the Medicare and
Medicaid programs and participation in the Veteran's Administration program. To
the extent that Certificates of Need or other similar approvals are required for
expansion of the Company's operations, the Company could be adversely affected
by the failure or inability to obtain such approvals, by changes in the
standards applicable to approvals and by possible delays and expenses associated
with obtaining approvals. The failure by the Company to obtain, retain or renew
any required regulatory approvals, licenses or certificates could prevent the
Company from being reimbursed for or offering its services or could adversely
affect its operations, financial performance and its ability to expand.
A wide array of Medicare/Medicaid fraud and abuse provisions apply to
long-term care facilities, other specialty health care facilities, home health
agencies, pharmacies and clinical laboratories. Penalties for violation of these
federal laws include exclusion from participation in the Medicare/ Medicaid
programs, asset forfeiture, civil penalties and criminal penalties. The OIG, the
DOJ and other federal agencies interpret these fraud and abuse provisions
liberally and enforce them aggressively. Members of both the House of
Representatives and the Senate have proposed various pieces of legislation to
expand significantly the federal government's involvement in curtailing
Medicare/ Medicaid fraud and abuse and to increase the monetary penalties for
violations of these provisions. See "Item 1. Legal Proceedings -- OIG/DOJ
Investigation Involving Certain Medicare Part B and Related Co-Insurance
Billings" in Part II of this Report.
15
<PAGE>
REIMBURSEMENT RATES FOR CONTRACT THERAPY SERVICES. In April 1995, the
Health Care Financing Administration ("HCFA") issued a memorandum to its
Medicare fiscal intermediaries as a guideline to assess costs incurred by
inpatient providers relating to payment of occupational and speech language
pathology services furnished under arrangements that include contracts between
therapy providers and inpatient providers. While not binding on the fiscal
intermediaries, the memorandum suggested certain rates to assist the fiscal
intermediaries in making annual "prudent buyer" assessments of speech and
occupational therapy rates paid by inpatient providers. In light of the fluid
nature of the circumstances surrounding the memorandum, the Company cannot now
determine whether HCFA will continue to recommend the rates suggested in the
memorandum or whether such rates will be used by HCFA as a basis for developing
a salary equivalency based reimbursement system for speech and occupational
therapy services. There can be no assurance that actions ultimately taken by
HCFA with regard to reimbursement rates for such services will not adversely
affect the Company's results of operations.
HEALTH CARE REFORM. During 1995, various Congressional legislators
introduced reform proposals intended to control health care costs, to improve
access to medical services for uninsured individuals and to balance the federal
budget by the year 2002. Certain of these budgetary proposals were passed by
both Houses of Congress. These proposals included reduced rates of growth in the
Medicare and Medicaid programs and proposals to block grant funds to the states
to administer the Medicaid program. These proposals were included in the 1995
budget reconciliation act, which the President of the United States vetoed. In
January 1996, the President presented his own plan to balance the federal budget
by 2002. Discussions are continuing between members of the House of
Representatives, members of the Senate and the President to devise a balanced
budget plan. While these proposals do not, at this time, appear to affect the
Company adversely in any material respect, significant changes in reimbursement
levels under Medicare or Medicaid and changes in applicable governmental
regulations could significantly affect the future results of operations of the
Company. There can be no assurance that future legislation, health care or
budgetary, or other changes in the administration or interpretation of
governmental health care programs will not have an adverse effect on the results
of operations of the Company.
16
<PAGE>
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 NINE MONTHS ENDED
---------------------------- ----------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total operating revenues........................ 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of services................................ 76.3 76.9 76.0 77.4
Administrative and general...................... 6.1 5.5 5.4 5.2
Facility leases................................. 5.0 5.0 4.9 5.0
Depreciation and amortization................... 3.4 3.4 3.4 3.5
Interest expense................................ 2.6 3.2 2.8 3.3
Special charge.................................. -- 1.2 4.9 1.6
----- ----- ----- -----
Earnings before minority interests, income taxes
and extraordinary item......................... 6.6 4.8 2.6 4.0
Minority interests.............................. (0.4) (0.5) (0.3) (0.4)
----- ----- ----- -----
Earnings before income taxes and extraordinary
item........................................... 6.2 4.3 2.3 3.6
Income taxes.................................... 2.6 1.8 1.8 1.6
----- ----- ----- -----
Earnings before extraordinary item............ 3.6 2.5 0.5 2.0
Extraordinary item, net of tax.................. -- 0.6 (1.7) 0.2
----- ----- ----- -----
Net earnings (loss)............................. 3.6% 3.1% (1.2)% 2.2%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
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>
NINE MONTHS ENDED
THREE MONTHS ENDED ------------------------------------
------------------------------------------------ FEBRUARY
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 29, 1996 28, 1995
----------------------- ----------------------- ------------------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term care services................ $ 92,606 21.1% $ 89,961 21.6% $ 282,317 21.6% $ 248,111
Specialty health care services:
Acute and outpatient
rehabilitation...................... 142,850 32.6 125,886 30.3 407,199 31.1 370,666
Contract therapy..................... 95,528 21.8 100,449 24.2 293,973 22.4 292,622
Other (1)............................ 100,774 23.0 96,540 23.2 301,988 23.0 277,903
Other operating revenues (2)........... 6,441 1.5 3,042 0.7 24,881 1.9 9,988
--------- ----- --------- ----- ---------- ----- ----------
Total operating revenues........... $ 438,199 100.0% $ 415,878 100.0% $1,310,358 100.0% $1,199,290
--------- ----- --------- ----- ---------- ----- ----------
--------- ----- --------- ----- ---------- ----- ----------
<CAPTION>
<S> <C>
Long-term care services................ 20.7%
Specialty health care services:
Acute and outpatient
rehabilitation...................... 30.9
Contract therapy..................... 24.4
Other (1)............................ 23.2
Other operating revenues (2)........... 0.8
-----
Total operating revenues........... 100.0%
-----
-----
</TABLE>
- ------------------------
(1) Includes revenues derived from subacute care, institutional pharmacy
operations, Alzheimer's care, noninvasive medical diagnostic testing
services, physicians services and clinical laboratory services.
(2) Includes revenues derived from management fees, interest income, rental
income and other miscellaneous revenues, including $9.3 million, net of
direct expenses, resulting from arrangements related to an unsuccessful
merger effort recorded during the second quarter of fiscal 1996. With
respect to the latter, see "Item 1. Litigation -- Litigation against Tenet
Healthcare Corporation" in Part II of this Report.
REVENUES
Total operating revenues increased approximately $22.3 million, or 5.4%, and
$111.1 million , or 9.3%, for the three months and nine months ended February
29, 1996, respectively, compared to the corresponding periods in fiscal 1995.
The increase in total operating revenues for the three month period is primarily
attributable to (i) the increase in the number of long-term care and specialty
health care facilities operated by the Company, (ii) the increase in Medicare,
Medicaid and private and other rates received by the Company and (iii)
additional nonrecurring revenue recorded by the Company during the three months
ended February 29, 1996 of approximately $18.2 million representing the
17
<PAGE>
estimated reimbursement benefit for costs associated with the CMS bond tender
offer expensed during the second quarter of fiscal 1996. See "-- Extraordinary
Item." These third quarter fiscal 1996 increases were partially offset by a $7.0
million charge to increase third party settlement receivable reserves and a $3.8
million charge relating to previously accrued Medicare Part B revenues
associated with the OIG/DOJ investigation. See "Item 1. Litigation -- OIG/DOJ
Investigation Involving Certain Medicare Part B and Related Co-Insurance
Billings" in Part II of this Report. The increase in total operating revenues
for the nine month period is primarily attributable to the same factors as those
affecting the three month period and an increase in other revenues. The latter
includes $9.3 million, net of direct expenses, recorded in the second quarter of
fiscal 1996 resulting from arrangements related to an unsuccessful merger effort
which is the subject of pending litigation. See "Item 1. -- Litigation --
Litigation Against Tenet Healthcare Corporation" in Part II of this Report.
For the nine month period ended February 29, 1996, the Company acquired six
additional long-term care facilities and disposed of four others, with a net
increase of 295 additional beds. The Company also acquired specialty health care
clinical operations during the period which, in the aggregate, contributed
approximately $6.4 million in revenues. The Company's blended long-term care and
acute rehabilitation hospital reimbursement rate remained stable and increased
0.9% for the three months and nine months ended February 29, 1996, respectively,
compared to the corresponding periods in fiscal 1995.
COSTS AND EXPENSES
Cost of services increased approximately $14.4 million, or 4.5%, and $67.7
million, or 7.3%, for the three months and nine months ended February 29, 1996,
respectively, compared to the corresponding periods in fiscal 1995. The
increases in costs of services is primarily attributable to the growth in the
number of long-term care facilities, specialty hospitals and subacute units
operated by the Company, as well as expansion of the Company's specialty health
care services and programs. As a percentage of total operating revenues, cost of
services declined to 76.3% from to 76.9% and 76.0% from 77.4%, respectively, for
the three months and nine months ended February 29, 1996, compared to the
corresponding periods in 1995, due largely to increased revenues from higher
margin businesses.
Administrative and general expenses increased $4.0 million, or 17.4%, and
$8.8 million, or 14.1%, for the three months and nine months ended February 29,
1996, respectively, compared to the corresponding periods in fiscal 1995. As a
percentage of total operating revenues, administrative and general expenses
increased to 6.1% from 5.5% and to 5.4% from 5.2%, respectively, for the three
months and nine months ended February 29, 1996, compared to the corresponding
periods in 1995. The fiscal 1996 increases are due in part to a $1.3 million
charge to accrue for estimated costs related to the OIG/DOJ Medicare Part B
billings investigation. See "Item 1. Legal Proceedings -- OIG/DOJ Investigation
Involving Certain Medicare Part B and Related Co-Insurance Billings" in Part II
of this report.
Facility lease expense increased $1.3 million, or 6.0%, and $3.9 million, or
6.4%, for the three and nine months ended February 29, 1996, respectively,
compared to the corresponding periods in fiscal 1995. The increase in facility
lease expense is attributable to the increase in the number of leased facilities
operated in 1996. As a percentage of total operating revenues, facility lease
expense remained constant at 5.0% and declined to 4.9% from 5.0%, respectively,
for the three months and nine months ended February 29, 1996, compared to the
corresponding periods in fiscal 1995.
Depreciation and amortization increased $0.5 million, or 3.4%, and $2.6
million, or 6.2%, for the three months and nine months ended February 29, 1996,
respectively, compared to the corresponding periods in fiscal 1995. As a
percentage of total operating revenues, depreciation and amortization remained
constant at 3.4% and declined to 3.4% from 3.5% for the three months and nine
months ended February 29, 1996, compared to the corresponding periods in fiscal
1995. The increase in depreciation and amortization is attributable to the
growth in the number of facilities owned in 1996 as well as the impact of
capital expenditures made.
18
<PAGE>
Interest expense declined $1.5 million, or 11.8%, and $3.7 million, or 9.2%,
for the three months and nine months ended February 29, 1996, respectively,
compared to the corresponding periods in 1995. The decline in interest expense
is primarily attributable to the retirement of substantially all of the Senior
Subordinated Notes (as hereinafter defined) of CMS, utilizing proceeds from the
Company's credit facility which bears interest at a substantially lower rate.
The Company recorded a $63.5 million special charge in the first quarter of
fiscal 1996. The special charge resulted primarily from (i) the write-off of
transaction costs of $6.7 million which had been incurred in completing the CMS
merger, (ii) the approval by management of the Company of restructuring costs of
$44.9 million related to efforts to combine and restructure the operations of
the Company and CMS and (iii) the $11.9 million write down of assets expected to
be divested during fiscal 1996. See Note (4) of Notes to Consolidated Financial
Statements.
During the third and second quarters of fiscal 1995, the Company recorded
special charges of $5.0 million and $13.4 million, respectively. The third
quarter 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 of fiscal 1995 at the Company's contract rehabilitation
therapy division. The second quarter fiscal 1995 special charge was recorded to
reflect the revision in the Company's estimate of settlements receivable from
third party payors in the contract rehabilitation therapy division.
EXTRAORDINARY ITEM
On September 26, 1995, the Company completed a tender offer and consent
solicitation for two issues of publicly held indebtedness of CMS (together, the
"Senior Subordinated Notes"). The Company purchased $118.7 million in principal
amount of 10 3/8% Senior Subordinated Notes due 2003 at 109.25% plus a consent
fee of 1.05% and $137.5 million in principal amount of 10 7/8% Senior
Subordinated Notes due 2002 at 109.0% plus a consent fee of 0.75%. The Company
paid $289.5 million to retire the Senior Subordinated Notes, including
principal, premiums, accrued interest, consent fees and other related costs. As
a result of the tender, the Company recorded 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 cots, of
approximately $22.1 million, net of tax, in the second quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
At February 29, 1996, the Company's working capital was $353.3 million and
included cash and cash equivalents of $39.3 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 nine months ended February 29, 1996 , the Company's
operating activities provided $11.4 million of net cash. During the nine months
ended February 28, 1995, the Company's operating activities used $1.1 million of
net cash.
In connection with the restructuring activities and the special charge
recorded during the first quarter of fiscal 1996, the Company made cash payments
during the nine months ended February 29, 1996 totaling $25.2 million. The total
payments consisted of: (i) $17.0 million related to employee severance costs,
(ii) $7.2 million related to merger transaction costs and (iii) $1.0 million
related to lease and other termination costs. There were no significant asset
dispositions related to the restructuring during the nine months ended February
29, 1996.
EXPANSION PROGRAM
The net cash used in the Company's investing activities decreased from
$145.8 million for the nine months ended February 28, 1995 to $94.3 million for
the nine months ended February 29, 1996. The primary uses of cash in investing
activities have been cash acquisitions and internal construction and capital
expenditures for property and equipment. The Company has used its common stock
rather than cash to effect a significant portion of the acquisitions during the
nine months ended February 29, 1996 and, as a result, cash paid for acquisitions
has decreased as compared with the same period of fiscal 1995. However, the
Company will continue to consider cash as a currency to effect significant
19
<PAGE>
future acquisitions. Cash required for internal construction and capital
expenditures for property and equipment has remained relatively stable during
the nine months ended February 29, 1996 as compared with the corresponding
period of fiscal 1995.
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 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 operating and
investing activities. During the nine months ended February 29, 1996 and
February 28, 1995, proceeds from the issuance of Company debt, net of debt
repayments and repurchases, amounted to $102.2 million and $7.8 million,
respectively, and proceeds from the issuance of Common Stock totaled $16.0
million and $124.0 million, respectively.
SOURCES
At February 29, 1996, the available credit under the Company's credit
facility was $213.7 million. To the extent that the Company's operations and
expansion program require cash expenditures in excess of the amounts available
to it under the Credit Facility (as defined below), 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, to a lesser extent,
through the sale of property and equipment.
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 $497.4
million and had outstanding letters of credit of $38.9 million at Febru-
ary 29, 1996. 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 February 29, 1996 were 8.25% and 6.31% - 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.
The lenders' obligations to make additional loans pursuant to the Credit
Facility are subject to the satisfaction of certain conditions, including that
(i) the Company is not in violation of any law, rule or regulation of any
governmental authority where such violation could be reasonably expected to
result in a Material Adverse Effect (as defined in the Credit Agreement, which
definition includes a material adverse effect on the financial condition or
results of operations of the Company) and (ii) that there are no suits pending
as to which there is a reasonable possibility of an adverse determination and
which, if adversly determined, could be reasonably expected to result in a
Material Adverse Effect. After discussions between the Company and
representatives of the Agent lender, the Company does not believe that the
existence of, or the occurrence of the events giving rise to, the OIG/DOJ
investigation into certain Medicare Part B and related co-insurance billings,
the pending SEC investigation or the pending stockholder litigation (see "Item
1. Legal Proceedings" in Part II of this report) will prevent satisfaction of
these conditions at this time. No assurance can be given, however, that future
adverse developments or determinations with respect to these matters will not
prevent satisfaction of such conditions.
20
<PAGE>
FORWARD-LOOKING STATEMENTS
The matters discussed in this Report contain forward-looking statements that
involve risks and uncertainties. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no assurance that
the anticipated results will occur. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include conditions in the capital markets, including the interest rate
environment and stock market levels and activity, the regulatory environment in
which the Company operates and the enactment by Congress of health care reform
measures.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION AGAINST TENET HEALTHCARE CORPORATION
The Company filed a lawsuit on March 7, 1996 against Tenet Healthcare
Corporation ("Tenet") in the United District Court for the District of Nevada.
The lawsuit arose out of an agreement entered into between the Company and Tenet
in connection with the Company's attempted acquisition of The Hillhaven
Corporation ("Hillhaven") in January 1995. In the lawsuit, the Company alleges
that Tenet has failed to honor its commitment to pay Horizon approximately $14.5
million pursuant to the agreement. Tenet has contended that the amount owing to
the Company under the agreement is approximately $5.1 million. In the quarter
ended November 30, 1995, the Company recognized as a receivable approximately
$13.0 million of the approximately $14.5 million the Company contends it is owed
under the agreement. While the Company intends to vigorously prosecute this
lawsuit, no assurance can be given that the Company will prevail or that the
Company will not be required at a future date to record a charge for a portion
of the receivable previously recorded.
OIG/DOJ INVESTIGATION INVOLVING CERTAIN MEDICARE PART B AND RELATED
CO-INSURANCE BILLINGS
The Company announced on March 15, 1996 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"). 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 has been remitted to the Company.
The Company has advised the OIG that it appears that a significant portion
of the billings may not have been in accordance with applicable Medicare Part B
rules. The Company advised the OIG and the DOJ that it was 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 DOJ entered into a letter agreement pursuant to which the Company
voluntarily agreed to refund such overpayment 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 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 the Company'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 its results or operations.
21
<PAGE>
SECURITIES AND EXCHANGE COMMISSION AND NEW YORK STOCK EXCHANGE
INVESTIGATIONS
The Company has been advised that the staff of the Division of Enforcement
of the Commission has commenced a private investigation with respect to trading
in the securities of the Company and CMS. In connection with that investigation,
the Company has voluntarily produced certain documents and Neal M. Elliott,
Chairman of the Board, President and Chief Executive Officer of the Company, has
voluntarily given testimony to the Commission. The Company has also been
informed that certain of its divisional office employees and an individual,
affiliates of whom have limited business relationships with the Company, have
responded to subpoenas from the Commission. Mr. Elliott has also produced
certain documents in response to a subpoena from the Commission. In addition,
the Company and Mr. Elliott are each in the process of responding to separate
subpoenas from the Commission pertaining to trading in the Company's common
stock and the Company's March 1, 1996 press release announcing a revision in the
Company's third quarter earnings estimate, the Company's March 7, 1996, press
release announcing the filing of a lawsuit against Tenet, the March 12, 1996
press release announcing that the merger with Pacific Rehab could not be
effected by April 1, 1996 and the Company's March 15, 1996 press release
announcing the existence of a federal investigation into certain of the
Company's Medicare Part B billings. The investigation is ongoing, and neither
the Company nor Mr. Elliott possesses all the facts with respect to the matters
under investigation. Although neither the Company nor Mr. Elliott has been
advised by the Commission that the Commission has concluded that any of the
Company, Mr. Elliott or any other current or former officer or director of the
Company has been involved in any violation of the federal securities laws, there
can be no assurance as to the outcome of the investigation or the time of its
conclusion. Both the Company and Mr. Elliott intend to continue cooperating
fully with the Commission in connection with the investigation.
In March 1995, the New York Stock Exchange, Inc. (the "NYSE") informed the
Company that it had initiated a review of trading in Hillhaven common stock
prior to the announcement of the Company's proposed acquisition of Hillhaven.
The NYSE extended in April 1995 the review of trading to include all dealings
with CMS. On April 3, 1996, the NYSE notified the Company that it had initiated
a review of trading in the Company's Common Stock preceding the Company's March
1, 1996 press release described above. The Company is cooperating with the NYSE
in its reviews and, to the Company's knowledge, the reviews are ongoing.
STOCKHOLDER LITIGATION
On April 1, 1996, the Company announced that it had been served on March 28,
1996 with a lawsuit filed on March 21, 1996, in New Mexico state district court
in Albuquerque, New Mexico by a former stockholder of CMS, RONALD GOTTESMAN VS.
HORIZON/CMS HEALTHCARE CORPORATION, NO. CV-96-02894, SECOND JUDICIAL DISTRICT
COURT, COUNTY OF BERNALILLO, STATE OF NEW MEXICO. This lawsuit, which among
other things seeks class certification, alleges violations of federal and New
Mexico state securities laws arising from what the plaintiff contends are
materially misleading statements by the Company in its June 6, 1995 joint proxy
statement/prospectus (the "CMS Prospectus"). The plaintiff alleges that the
Company failed to disclose in the CMS Prospectus those problems in the Company's
Medicare Part B billings the Company described in its related March 15, 1996
announcement. In this action, the plaintiff seeks damages in an unspecified
amount, plus costs and attorneys' fees. The Company disputes the factual and
legal premises upon which the plaintiff's lawsuit is based and denies that the
plaintiff is entitled to any recovery on his claim. To that end, the Company
intends to contest this litigation vigorously. Because the lawsuit just began,
the Company cannot now predict the outcome of this litigation; the length of
time it will take to resolve this litigation; or the effect of any such outcome
on the Company's financial condition or results of operation.
On April 5, 1996, the Company was served with a complaint filed on April 2,
1996 by current or former stockholders of the Company on behalf of all persons
who purchased common stock of the Company between July 6, 1995 and March 1, 1996
(the "Class Period"), LAWRENCE DONNARUMMA ET AL., VS. ROCCO A. ORTENZIO, NEAL M.
ELLIOTT, ROBERT A. ORTENZIO, RUSSELL L. CARSON, KLEMMET L. BELT, JR.,
22
<PAGE>
ERNEST A. SCHOFIELD, AND HORIZON/CMS HEALTHCARE CORPORATION, NO. CIV-96-0442-BB,
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO. This lawsuit, which
was publicly announced by plaintiffs' counsel on April 3, 1996, was filed in the
United States District Court for the District of New Mexico, in Albuquerque, New
Mexico. In this lawsuit, the plaintiffs allege violations of federal and New
Mexico state securities laws. In this connection, the plaintiffs allege that
during the Class Period, the named defendants disseminated materially misleading
statements about the Company, its business, its Greenery Rehabilitation Group,
Inc. ("Greenery") and CMS acquisitions, Greenery's improved operations after the
acquisition, the successful integration of CMS's operations in the Company's and
the cost savings and operating efficiencies obtained thereby, the Company's
earnings growth and financial statements, the Company's ability to continue to
achieve profitable growth and the status and magnitude of regulatory
investigations into and audits of the Company. The plaintiffs seek damages in an
unspecified amount and extraordinary, equitable or injunctive relief, including
attachment, impoundment or imposition of a constructive trust, plus costs and
attorneys' fees. The Company disputes the factual and legal premises upon which
the plaintiffs' lawsuit is based and denies that the plaintiffs are entitled to
any recovery on their claims. To that end, the Company intends to contest this
litigation vigorously. Because the lawsuit just began, the Company cannot now
predict the outcome of this litigation; the length of time it will take to
resolve this litigation; or the effect of any such outcome on the Company's
financial condition or results of operations.
On April 5, 1996, the Company was served with a class action lawsuit filed
on April 3, 1996, in the United States District Court for the District of New
Mexico, in Albuquerque, New Mexico by a current or former shareholder of the
Company seeking to represent a class of persons who purchased the Company's
common stock between June 6, 1995 and March 15, 1996, JERRY S. ROSENBAUM VS.
HORIZON/ CMS HEALTHCARE CORPORATION, NEAL M. ELLIOTT, ROBERT A. ORTENZIO,
KLEMMET L. BELT, JR., ROCCO A. ORTENZIO, ERNEST A. SCHOFIELD AND RUSSELL L.
CARSON, NO. CIV-96-0447-JC, UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW
MEXICO. This lawsuit, which among other things, seeks class certification,
alleges violations of federal and New Mexico state securities laws arising from
what the plaintiff contends was the dissemination of false and misleading
statements information about the Company's financial results and business
prospects, particularly as those results and prospects are affected by those
problems in the Company's Medicare Part B billings the Company described in its
related March 15, 1996 announcement. In this action, the plaintiff seeks damages
in an unspecified amount, plus costs and attorneys' fees. The Company disputes
the factual and legal premises upon which the plaintiff's lawsuit is based and
denies that the plaintiff is entitled to any recovery on his claim. To that end,
the Company intends to contest this litigation vigorously. Because the lawsuit
just began, the Company cannot now predict the outcome of this litigation; the
length of time it will take to resolve this litigation; or the effect of any
outcome on the Company's financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<S> <C>
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -- Nine months ended February 29, 1996
</TABLE>
b. Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the quarter
ended February 29, 1996.
23
<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 15, 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.
24
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -- Nine months ended February 29, 1996
</TABLE>
25
<PAGE>
EXHIBIT 11.1
HORIZON/CMS HEALTHCARE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE EARNINGS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common and Common Equivalents:
Earnings before extraordinary item............................... $ 15,845 $ 10,228 $ 6,463 $ 23,641
Extraordinary item, net of tax................................... -- 2,497 (22,075) 2,497
------------ ------------ ------------ ------------
Net earnings (loss).............................................. 15,845 12,725 (15,612) 26,138
Additional goodwill amortization from contingent shares issuable
pursuant to acquisition agreements.............................. -- -- -- (44)
------------ ------------ ------------ ------------
Net earnings (loss) used for computation of per share earnings... $ 15,845 $ 12,725 $ (15,612) $ 26,094
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Applicable common shares:
Weighted average outstanding shares during the period............ 51,733 49,768 51,227 46,076
Weighted average shares issuable upon exercise of common stock
equivalents outstanding (principally stock options and warrants
using the treasury stock method)................................ 950 822 798 913
------------ ------------ ------------ ------------
Total............................................................ 52,683 50,590 52,025 46,989
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (loss) per share:
Earnings before extraordinary item............................... $ 0.30 $ 0.20 $ 0.12 $ 0.51
Extraordinary item, net of tax................................... -- 0.05 (0.42) 0.05
------------ ------------ ------------ ------------
Net earnings (loss).............................................. $ 0.30 $ 0.25 $ (0.30) $ 0.56
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Assuming Full Dilution:
Earnings before extraordinary item............................... $ 15,845 $ 10,228 $ 6,463 $ 23,641
Extraordinary item, net of tax................................... -- 2,497 (22,075) 2,497
------------ ------------ ------------ ------------
Net earnings (loss).............................................. 15,845 12,725 (15,612) 26,138
Additional goodwill amortization from contingent shares issuable
pursuant to acquisition agreements.............................. -- -- -- (44)
Interest on convertible debentures, net of income taxes.......... 22 20 83 89
------------ ------------ ------------ ------------
Net earnings (loss) used for computation of per share earnings... $ 15,867 $ 12,745 $ (15,529) $ 26,183
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Applicable common shares:
Weighted average outstanding shares during the period............ 51,733 49,768 51,227 46,076
Weighted average shares issuable upon exercise of common stock
equivalents outstanding (principally stock options and warrants
using the treasury stock method and convertible debentures)..... 1,079 1,136 958 1,191
------------ ------------ ------------ ------------
Total............................................................ 52,812 50,904 52,185 47,267
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (loss) per share:
Earnings before extraordinary item............................... $ 0.30 $ 0.20 $ 0.12 $ 0.50
Extraordinary item, net of tax................................... -- 0.05 (0.42) 0.05
------------ ------------ ------------ ------------
Net earnings (loss).............................................. $ 0.30 $ 0.25 $ (0.30) $ 0.55
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FEBRUARY 29, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 39,285
<SECURITIES> 0
<RECEIVABLES> 382,446
<ALLOWANCES> 36,593
<INVENTORY> 0
<CURRENT-ASSETS> 527,282
<PP&E> 762,176
<DEPRECIATION> 121,231
<TOTAL-ASSETS> 1,506,844
<CURRENT-LIABILITIES> 174,008
<BONDS> 634,404
0
0
<COMMON> 53
<OTHER-SE> 655,660
<TOTAL-LIABILITY-AND-EQUITY> 1,506,844
<SALES> 0
<TOTAL-REVENUES> 1,310,358
<CGS> 0
<TOTAL-COSTS> 1,275,757
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,044
<INTEREST-EXPENSE> 36,038
<INCOME-PRETAX> 34,601
<INCOME-TAX> 23,143
<INCOME-CONTINUING> 6,463
<DISCONTINUED> 0
<EXTRAORDINARY> (22,075)
<CHANGES> 0
<NET-INCOME> (15,612)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
