<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1996
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
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 Number)
organization)
</TABLE>
6001 INDIAN SCHOOL ROAD, N.E., SUITE 530
ALBUQUERQUE, NM 87110
(505) 881-4961
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SCOT SAUDER
VICE PRESIDENT OF LEGAL AFFAIRS, SECRETARY AND GENERAL COUNSEL
HORIZON/CMS HEALTHCARE CORPORATION
6001 INDIAN SCHOOL ROAD, N.E., SUITE 530
ALBUQUERQUE, NM 87110
(505) 881-4961
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
William E. Joor III Beth R. Neckman
Vinson & Elkins L.L.P. Latham & Watkins
2300 First City Tower 53rd at Third, Suite 1000
1001 Fannin 885 Third Avenue
Houston, TX 77002-6760 New York, NY 10022-4802
(713) 758-2222 (212) 906-1200
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE (1) OFFERING PRICE (1) FEE
<S> <C> <C> <C> <C>
% Senior Subordinated Notes due
2006................................... $200,000,000 100% $200,000,000 $68,966
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM OF FORM S-3 LOCATION IN PROSPECTUS
- ------------------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Pages of Prospectus.................. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page of Prospectus; Available
Information; Incorporation of Certain Documents by
Reference.
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors; Selected Financial
Information
4. Use of Proceeds................................... Use of Proceeds
5. Determination of Offering Price................... Not Applicable
6. Dilution.......................................... Not Applicable
7. Selling Security Holders.......................... Not Applicable
8. Plan of Distribution.............................. Underwriting
9. Description of Securities to be Registered........ Description of Notes
10. Interests of Named Experts and Counsel............ Legal Matters; Experts
11. Material Changes.................................. Prospectus Summary; Recent Developments
12. Incorporation of Certain Information by
Reference........................................ Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities.................................. Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 12, 1996
PROSPECTUS
, 1996
$200,000,000
HORIZON/CMS HEALTHCARE CORPORATION
% SENIOR SUBORDINATED NOTES DUE 2006
The % Senior Subordinated Notes due 2006 (the "Notes") are being offered
(the "Offering") by Horizon/CMS Healthcare Corporation ("Horizon" or the
"Company"). Interest on the Notes will be payable semi-annually in arrears on
and of each year, commencing , 1996. The
Company will not be required to make mandatory redemption or sinking fund
payments with respect to the Notes. The Notes will be redeemable at the option
of the Company, in whole or in part, at any time on or after , 2001,
at the redemption prices set forth herein, plus accrued and unpaid interest to
the date of redemption. Upon a Change of Control (as defined herein), each
holder of Notes may require the Company to purchase all or a portion of such
holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
The Notes will be general unsecured senior subordinated obligations of the
Company, subordinated in right of payment to all existing and future Senior Debt
(as defined herein) of the Company, including indebtedness pursuant to the
Credit Facility (as defined herein), and will be structurally subordinated to
all indebtedness of the Company's subsidiaries. At November 30, 1995, on a pro
forma basis after giving effect to the Offering, the Company would have had
approximately $422.2 million of Senior Debt outstanding (including $45.3 million
of letters of credit issued under the Credit Facility), and the Notes would have
been structurally subordinated to approximately $19.2 million of indebtedness of
the Company's subsidiaries, excluding guarantees by certain of such subsidiaries
of indebtedness under the Credit Facility. See "Use of Proceeds" and
"Description of Notes."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------------------
Per Senior Subordinated Note............. % % %
Total.................................... $ $ $
- -------------------------------------------------------------------------------------------
</TABLE>
(1) PLUS ACCRUED INTEREST, IF ANY, FROM THE DATE OF ISSUANCE.
(2) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS (AS DEFINED HEREIN)
AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. SEE "UNDERWRITING."
(3) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED TO BE $ .
The Notes are offered by the several Underwriters subject to prior sale,
when, as and if delivered to and accepted by them, and subject to various prior
conditions, including their right to reject any order in whole or in part. It is
expected that delivery of the Notes will be made in New York, New York on or
about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
CHEMICAL SECURITIES INC.
DEAN WITTER REYNOLDS INC.
J. P. MORGAN SECURITIES INC.
<PAGE>
IN CONNECTION WITH THE OFFERING OF THE NOTES, THE UNDERWRITERS MAY OVER-
ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF
THE NOTES OFFERED HEREBY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) INCLUDED ELSEWHERE IN THIS PROSPECTUS OR
INCORPORATED HEREIN BY REFERENCE. UNLESS THE CONTEXT INDICATES OTHERWISE, THE
TERMS "COMPANY" AND "HORIZON" REFER TO HORIZON/CMS HEALTHCARE CORPORATION AND
ITS SUBSIDIARIES. AS USED HEREIN, A "FISCAL" YEAR MEANS A YEAR ENDING ON MAY 31.
THE COMPANY
The Company is a leading provider of post-acute health care services,
including specialty health care services and long-term care services,
principally in the Midwest, Southwest and Northeast regions of the United
States. At January 1, 1996, Horizon provided specialty health care services
through 37 acute rehabilitation hospitals in 16 states (2,065 beds), 57
specialty hospitals and subacute care units in 17 states (1,875 beds), 145
outpatient rehabilitation clinics in 19 states and 2,686 rehabilitation therapy
contracts in 35 states. At that date, Horizon provided long-term care services
through 119 owned or leased facilities (14,793 beds) and 147 managed facilities
(16,448 beds) in a total of 19 states. 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 six months ended November 30, 1995, the Company derived
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
rehabilitation 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. Horizon'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, Horizon 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. Horizon intends to continue to use its
rehabilitation, long-term care and subacute care facilities as platforms to
provide a cost-effective continuum of post-acute care to managed care, private
and government payors. This allows Horizon 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.
3
<PAGE>
CONCENTRATING OPERATIONS IN TARGETED GEOGRAPHIC AREAS. To realize operating
efficiencies, economies of scale and growth opportunities, Horizon intends to
continue to concentrate its operations in clusters of operating units in
selected geographic areas.
DEVELOPING REHABILITATION NETWORKS. Horizon 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.
EXPANDING THROUGH ACQUISITIONS. Horizon 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 Horizon'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
who desire "one stop shopping;" (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.
The Company was incorporated under Delaware law on July 29, 1986. The
Company's principal executive office is located at 6001 Indian School Road,
N.E., Suite 530, Albuquerque, New Mexico 87110 and its telephone number is (505)
881-4961.
RECENT DEVELOPMENTS
The Company acquired Continental Medical Systems, Inc. ("CMS") on July 10,
1995. The purchase price, paid in shares of Common Stock of the Company, was
$393.9 million (based on the market value of such shares on that date). CMS is
one of the nation's largest providers of comprehensive inpatient and outpatient
medical rehabilitation services and contract rehabilitation therapy services.
In November 1995, the Company announced its agreement to acquire Pacific
Rehabilitation & Sports Medicine, Inc. ("Pacific Rehab") for approximately 2.8
million shares of Common Stock of the Company (which had a market value of
approximately $62.0 million on the day preceding such announcement). The
acquisition is expected to be consummated in the first quarter of 1996. Pacific
Rehab operates 72 outpatient rehabilitation clinics.
In December 1995, the Company announced that it had finalized a contract to
manage the operations of 134 long-term care facilities (14,757 beds) 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 Horizon and
the HEA Group, which has an initial term of ten years. Horizon will receive a
management fee equal to 6.5% of the annual gross revenues generated from the
operation of the HEA Group facilities which, in the aggregate, for the year
ended December 31, 1995 had approximate revenues of $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. See "Recent Developments."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED................ $200,000,000 in aggregate principal amount of %
Senior Subordinated Notes due 2006.
MATURITY DATE..................... , 2006.
INTEREST PAYMENT DATES............ and , commencing , 1996.
MANDATORY REDEMPTION.............. The Company will not be required to make mandatory
redemption or sinking fund payments with respect to the
Notes.
OPTIONAL REDEMPTION............... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
, 2001 at the redemption prices set forth
herein plus accrued and unpaid interest to the date of
redemption.
CHANGE OF CONTROL................. In the event of a Change of Control, each holder of
Notes may require the Company to purchase all or a
portion of such holder's Notes at 101% of the principal
amount thereof plus accrued and unpaid interest to the
date of repurchase. The terms of the revolving credit
facility among the Company, CMS and a consortium of
banks (the "Credit Facility") will prohibit the Company
from purchasing Notes upon the occurrence of a Change of
Control without the consent of the lenders thereunder.
See "Description of Notes -- Repurchase at the Option of
Holders -- Change of Control."
RANKING........................... The Notes will be general unsecured senior subordinated
obligations of the Company, subordinated in right of
payment to all existing and future Senior Debt of the
Company, including indebtedness pursuant to the Credit
Facility and will be structurally subordinated to all
indebtedness of the Company's subsidiaries. At November
30, 1995, on a pro forma basis after giving effect to
the Offering, the Company would have had approximately
$422.2 million of Senior Debt outstanding (including
$45.3 million of letters of credit issued under the
Credit Facility) and the Notes would have been
structurally subordinated to approximately $19.2 million
of indebtedness of the Company's subsidiaries, excluding
guarantees by certain of such subsidiaries of
indebtedness under the Credit Facility.
CERTAIN COVENANTS................. The Indenture pursuant to which the Notes will be issued
(the "Indenture") will contain covenants restricting or
limiting the ability of the Company and its subsidiaries
to, among other things: (i) incur additional
indebtedness or issue preferred stock; (ii) make
dividend or other restricted payments or investments;
(iii) make asset sales; (iv) create liens; (v) enter
into transactions with affiliates; (vi) incur dividend
and other payment restrictions; and (vii) enter into
mergers, consolidations or sales of all or substantially
all of its assets.
USE OF PROCEEDS................... The Company intends to use the net proceeds from the
sale of the Notes to repay a portion of the indebtedness
outstanding under the Credit Facility. See "Use of
Proceeds."
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary historical statement of operations data for the fiscal
years ended May 31, 1991 through May 31, 1995 have been derived from Horizon's
consolidated financial statements, as restated for the merger with CMS, which
was accounted for as a pooling of interests. The summary historical financial
data as of November 30, 1995 and for the six months ended November 30, 1994 and
1995 have been derived from the unaudited financial statements of Horizon, as
restated for the merger with CMS. The following summary pro forma financial
information has been derived from and should be read in conjunction with the
unaudited pro forma financial information and notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED MAY 31, NOVEMBER 30,
--------------------------------------------------------------------- ---------------------------------
1995 1995
------------------------- -----------------------
1991 1992 1993 1994 PRO FORMA (1) 1994 PRO FORMA (2)
ACTUAL
(DOLLARS IN THOUSANDS) ACTUAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total operating
revenues........... $543,697 $843,740 $1,136,358 $1,382,162 $1,625,326 $1,703,523 $783,412 $872,159 $890,114
Costs and expenses:
Cost of services... 424,568 666,950 892,902 1,099,162 1,261,000 1,309,776 608,776 663,885 672,471
Administrative and
general.......... 24,866 32,470 42,284 60,108 82,533 95,934 39,678 41,892 46,474
Facility leases.... 35,109 56,277 64,461 68,832 81,590 85,941 39,517 42,925 44,861
Depreciation and
amortization..... 12,918 19,923 33,915 48,249 56,618 59,274 27,631 29,758 30,893
Interest expense... 13,360 8,423 26,999 44,396 53,045 54,501 26,589 24,476 24,812
Special and
settlement
charges (3)...... -- 4,319 17,154 74,834 36,922 36,922 13,398 63,540 63,540
Earnings (loss)
before minority
interests, income
taxes, cumulative
effect of
accounting change
and extraordinary
item............... 32,876 55,378 58,643 (13,419) 53,618 61,175 27,823 5,683 7,063
Earnings (loss)
before income
taxes, cumulative
effect of
accounting change
and extraordinary
item............... 29,556 48,607 51,856 (18,083) 48,373 55,930 24,792 2,281 3,661
Net earnings
(loss)............. 20,331 32,118 27,132 (19,080) 27,569 30,450 13,413 (31,457)(4) (8,605)
OTHER FINANCIAL DATA:
Adjusted EBITDA
(5)................ $ 59,154 $ 88,043 $ 136,711 $ 154,060 $ 200,203 $ 211,872 $ 95,441 $123,457 $126,308
Capital
expenditures....... 12,003 82,477 184,563 67,026 52,622 52,955 24,441 25,819 27,029
Ratio of earnings to
fixed charges
(6)................ 1.9x 2.2x 1.7x -- 1.6x 1.6x 1.6x 1.1 x 1.2x
Ratio of Adjusted
EBITDA to interest
expense (5)........ 4.4x 10.5x 5.1x 3.5x 3.8x 3.9x 3.6x 5.0 x 5.1x
OPERATING DATA:
Licensed beds........ 6,712 8,072 11,173 14,652 20,213 -- 18,058 20,342 --
Average occupancy.... 84% 84% 85% 85% 86% -- 88% 86 % --
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1995
------------------------------------
AS
ACTUAL ADJUSTED (7) PRO FORMA (8)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........ $ 26,422 $26,422 $ 27,016
Working capital...... 329,790 329,790 324,994
Total assets......... 1,451,974 1,457,974 1,529,143
Long-term debt,
excluding
current portion.... 601,319 607,319 613,384
Total stockholders'
equity............. 627,650 627,650 665,582
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE)
6
<PAGE>
- ------------------------------
(1) To give effect to (i) the acquisition of the peopleCARE Heritage group and
the consummation of certain other insignificant acquisitions; (ii) the
retirement of certain senior subordinated notes; (iii) the Offering; and
(iv) the pending acquisition of Pacific Rehab, as though all such
transactions occurred on June 1, 1994.
(2) To give effect to (i) the retirement of certain senior subordinated notes;
(ii) the Offering; and (iii) the pending acquisition of Pacific Rehab, as
though all such transactions occurred on June 1, 1995.
(3) Special and settlement charges represent the following items by period (for
historical fiscal year unless otherwise indicated): (i) 1992 -- reflects
$1,000 of merger expenses incurred in connection with an acquisition
accounted for as a pooling of interests and $3,319 related to a terminated
merger agreement; (ii) 1993 -- reflects the write-down of certain
rehabilitation facility development costs and merger expenses incurred in
connection with an acquisition accounted for as a pooling of interests and
expenses of subsequently integrating the acquired companies' operations;
(iii) 1994 -- related to the impairment of selected rehabilitation hospital
division assets of $50,244, the costs associated with the consolidation of
contract therapy companies and losses related to the termination of certain
relationships in the contract therapy business of approximately $22,842 and
the costs related to the reduction of corporate office work force and other
restructuring costs of $1,748; (iv) 1995 historical and pro forma --
reflects the effect of a revision in the Company's estimate of contract
therapy receivables from third party payors of $18,377, costs of $13,500
incurred in connection with the settlement of pending litigation and related
contract terminations and costs of $5,045 related to restructuring actions
taken at contract therapy companies; (v) six months ended November 30, 1994
-- reflects the effect of a revision in the Company's estimate of contract
therapy receivables from third party payors; and (vi) historical and pro
forma six months ended November 30, 1995 -- reflects the write-off of $6.7
million in transaction costs incurred in completing the CMS merger, the
$44.9 million of costs of combining and restructuring the merged companies
and the $11.9 million write-down of assets expected to be divested during
fiscal 1996.
(4) Includes an extraordinary loss of $22,075, net of tax, recognized on the
purchase of certain senior subordinated notes at a premium.
(5) Adjusted EBITDA consists of earnings (loss) before minority interests,
income taxes, cumulative effect of accounting change and extraordinary item
plus interest, depreciation and amortization and special and settlement
charges. Adjusted EBITDA is included because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt. Adjusted EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles, and
should not be considered as a substitute for net earnings as an indicator of
the Company's operating performance or cash flow as a measure of liquidity.
The Company also believes that the ratio of Adjusted EBITDA to interest
expense is an accepted measure of debt service ability; however, such ratio
should not be considered as a substitute for the ratio of earnings to fixed
charges as a measure of debt service ability.
(6) For purposes of computing the ratio of earnings to fixed charges (a)
earnings consist of (i) earnings (loss) before minority interests, income
taxes, cumulative effect of accounting change and extraordinary items and
(ii) fixed charges net of capitalized interest and (b) fixed charges consist
of (i) interest expense on indebtedness, including capitalized interest;
(ii) amortization of debt issuance costs; and (iii) a portion of rental
expense which, in the judgement of management, represents an appropriate
interest factor. Earnings were insufficient to cover fixed charges in fiscal
1994 in the approximate amount of $15,034.
(7) As adjusted to reflect the Offering and the application of the net proceeds
therefrom.
(8) As adjusted to reflect (i) the retirement of certain senior subordinated
notes; (ii) the Offering; and (iii) the pending acquisition of Pacific
Rehab.
7
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, THE
FOLLOWING FACTORS BEFORE PURCHASING THE NOTES OFFERED HEREBY.
SIGNIFICANT LEVERAGE
The Company has had and will continue to have substantial indebtedness and
debt service obligations. At November 30, 1995, on a pro forma basis after
giving effect to the Offering, the Company would have had total outstanding
long-term indebtedness (including the current portion thereof) of $613.6
million, total assets of $1,458.0 million and stockholders' equity of $627.7
million. In addition, the Company would have had $435.5 million of additional
borrowing capacity under the Credit Facility. The Company also has substantial
obligations under operating leases. For the six months ended November 30, 1995,
the Company's lease expense was approximately $42.9 million. See
"Capitalization," "Selected Financial Information" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company's ability to pay principal and interest on the Notes is
dependent on the Company's future operating performance, which is itself
dependent on a number of factors, many of which are beyond the Company's
control, including prevailing economic conditions and financial, business,
regulatory and other factors affecting the Company's business and operations.
There can be no assurance that the Company's future performance will not be
adversely affected by such economic conditions and financial, business,
regulatory and other factors. The degree to which the Company is leveraged could
have important consequences to the holders of the Notes, including: (i) a
significant portion of the Company's cash flow from operations must be dedicated
to the payment of interest on its indebtedness and principal repayment
obligations and will not be available to the Company for its operations, capital
expenditures, acquisitions or other purposes; (ii) the Company's leverage may
affect the Company's flexibility in planning for, and reacting to, changes in
its business, including possible acquisition activities; (iii) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be limited; and (iv) the Company's borrowings under its Credit Facility are
at variable rates of interest, which could result in higher interest expense in
the event of an increase in interest rates. See "Description of Notes" and
"Description of Certain Indebtedness."
SUBORDINATION
The Notes will be unsecured and subordinated in right of payment to all
existing and future Senior Debt of the Company, including all indebtedness under
the Credit Facility. By reason of such subordination, in the event of the
insolvency, liquidation or other reorganization of the Company or if the Senior
Debt is otherwise accelerated, the assets of the Company will be available to
pay obligations on the Notes only after all Senior Debt has been paid in full.
As a result, there may not be sufficient assets remaining to pay amounts due on
any or all of the Notes then outstanding. Additional indebtedness, including
Senior Debt, may be incurred by the Company and its subsidiaries from time to
time, subject to the terms of the Indenture and the then outstanding
indebtedness of the Company. At November 30, 1995, on a pro forma basis after
giving effect to the Offering, the Notes would have been subordinated to
approximately $422.2 million of Senior Debt of the Company (including $45.3
million of letters of credit issued under the Credit Facility). See "Description
of Notes."
STRUCTURAL SUBORDINATION
The Notes will be structurally subordinated to indebtedness of the Company's
subsidiaries, including guarantees by certain of such subsidiaries of
indebtedness under the Credit Facility. At November 30, 1995, there would have
been outstanding approximately $19.2 million of indebtedness of the Company's
subsidiaries, excluding the guarantees by certain of those subsidiaries of
indebtedness under the Credit Facility.
DEPENDENCE UPON OPERATIONS OF SUBSIDIARIES
A substantial portion of the tangible assets of the Company is held by its
subsidiaries, and a substantial portion of the Company's operating revenues is
derived from operations of its subsidiaries. Therefore, the Company's ability to
pay interest and principal when due to holders of the Notes is dependent in part
upon
8
<PAGE>
the receipt of sufficient funds from its direct and indirect subsidiaries. The
ability of the Company's subsidiaries to pay dividends to the Company may be
limited by the terms of the agreements governing such subsidiaries'
indebtedness.
LIMITATIONS IMPOSED BY CERTAIN INDEBTEDNESS
The documents governing the indebtedness of the Company and its subsidiaries
expected to be outstanding upon consummation of the Offering (including the
Notes and the Credit Facility) will contain significant covenants that limit the
ability of the Company and its subsidiaries to engage in various transactions
and, in certain cases, require satisfaction of specified financial performance
criteria. In addition, under each of the foregoing documents, the occurrence of
any of certain specified events (including, without limitation, failure to
comply with the foregoing covenants, material inaccuracies of representations
and warranties, certain defaults under or acceleration of other indebtedness and
events of bankruptcy or insolvency) would, in certain cases after notice and
grace periods, constitute an event of default permitting acceleration of the
indebtedness covered by such document. The limitations imposed by the documents
governing the outstanding indebtedness of the Company and its subsidiaries are
substantial, and failure to comply with them could have a material adverse
effect on the Company and its subsidiaries. See "Description of Notes" and
"Description of Certain Indebtedness."
FUNDING OF CHANGE OF CONTROL OFFER AND ASSET SALE OFFER
The Credit Facility currently prohibits the Company from purchasing any
Notes or certain other indebtedness subordinated to the indebtedness under the
Credit Facility, and also provides that certain change of control events with
respect to the Company and asset sales would constitute a default thereunder.
Any future credit agreements or other agreements relating to Senior Debt to
which the Company becomes a party may contain similar restrictions and
provisions. If a Change of Control or an Asset Sale (as defined herein) occurs
at a time when the Company is prohibited from purchasing Notes, the Company
could seek the consent of its lenders to the purchase of Notes or could attempt
to refinance the indebtedness that contains such prohibition. If the Company
does not obtain such a consent or repay such indebtedness, the Company will
remain prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an event of default under the Indenture
which would, in turn, constitute a default under the Credit Facility. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the holders of Notes. See "Description of Notes."
ACQUISITIONS AND EXPANSION
Since its inception in 1986, Horizon has rapidly expanded both the size and
the diversity of its operations through (i) strategic mergers and acquisitions
such as the acquisition of CMS and the pending acquisition of Pacific Rehab,
(ii) the acquisition of or agreements to manage long-term care facilities
including Greenery Rehabilitation Group, Inc., the peopleCARE Heritage group and
the HEA Group, (iii) the development of specialty hospitals and subacute care
units and (iv) the acquisition and development of other specialty health care
businesses. Growth through acquisition entails certain risks in that acquired
operations could be subject to unanticipated business uncertainties or legal
liabilities. Horizon 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 Horizon's results of operations.
In addition, the ability of Horizon to acquire additional operations depends
upon its ability to identify appropriate acquisition candidates and to obtain
appropriate financing and personnel.
REIMBURSEMENT BY THIRD PARTY PAYORS
For fiscal years 1993, 1994, and 1995, Horizon derived approximately 33%,
34% and 28%, respectively, of its revenues from Medicare, and 14%, 14% and 17%,
respectively, of its revenues from Medicaid (excluding certain out-of-state
Medicaid revenues). Changes in the mix of patients among different types of
private pay sources and among private pay sources, Medicare and Medicaid can
significantly affect the
9
<PAGE>
revenues and profitability of Horizon's operations. Moreover, there are
increasing pressures from many payor sources to control health care costs and to
limit increases in reimbursement rates for medical services. There can be no
assurance that payments under governmental and third party payor programs will
remain at levels comparable to present levels or that Horizon will continue to
attract and retain private pay patients or maintain its current payor or revenue
mixes. In attempts to limit the federal budget deficit, there have been, and
Horizon expects that there will continue to be, a number of proposals to limit
Medicare and Medicaid reimbursement for certain services. Horizon cannot now
predict whether any of these pending proposals will be adopted or, if adopted
and implemented, what effect such proposals would have on Horizon.
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, Horizon 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
that are 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 have been passed by both Houses of
Congress, including passage of the resultant committee bills. 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 has 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 Horizon 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 Horizon. 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
adversely effect the results of operations of Horizon.
REGULATION
The federal government and the governments of all states in which Horizon
operates regulate various aspects of its business. There can be no assurance
that federal or state governments will not impose additional restrictions on its
activities that might adversely affect its business. The operation of Horizon's
long-term care facilities and certain segments of its 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
Horizon's operations, Horizon 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 to obtain, retain or renew any required regulatory
approvals, licenses or certifications could prevent Horizon from being
reimbursed for or offering its services or could adversely affect its
operations, financial performance and ability to expand.
10
<PAGE>
A wide array of Medicare/Medicaid fraud and abuse provisions applies to
long-term care facilities, other specialty health care facilities, pharmacies
and clinical laboratories. Penalties for violations of these federal laws
include exclusion from participation in the Medicare/Medicaid programs, asset
forfeitures, civil penalties and criminal penalties. The Office of Inspector
General ("OIG") of the Department of Health and Human Services, the Department
of Justice 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 fraud
and abuse and to increase the monetary penalties for violations of these
provisions.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
There is no existing market for the Notes and there can be no assurance as
to the liquidity of any market that may develop for the Notes, the ability of
holders of the Notes to sell their Notes or the price at which holders would be
able to sell their Notes. Future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. The Company has been
advised by the Underwriters that, subject to applicable laws and regulations,
the Underwriters currently intend to make a market in the Notes after the
consummation of the Offering, although they are not obligated to do so and may
discontinue any market-making activities with respect to the Notes at any time
without notice.
COMPETITION
The Company operates in a highly competitive industry. The Company's
facilities generally operate in communities that are also served by similar
facilities operated by others. Some competing facilities are located in
buildings that are newer than those operated by the Company and provide services
not offered by the Company. In addition, some facilities are operated by
nonprofit organizations or government agencies supported by endowments,
charitable contributions, tax revenues and other resources not available to the
Company. Some acute care hospitals that provide long-term care, subacute care
and rehabilitative services are also a potential source of competition to the
Company. In each area of services provided by the Company, some of its
competitors have greater financial and other resources and longer operating
histories than the Company. There can be no assurance that the Company will not
encounter increased competition in the future that would adversely affect the
Company's results of operations. See "Business -- Competition."
DEMAND FOR PERSONNEL
The success and growth strategy of Horizon are dependent in part on its
ability to attract and retain competent individuals with training and experience
in marketing, nursing, therapy and other clinical or operating disciplines. Such
persons are in high demand and often are subject to competing offers. In past
years, the health care industry has experienced nursing and therapy personnel
shortages. There can be no assurance that Horizon will be able to attract and
retain the qualified clinical or operating personnel necessary for its business
and planned growth. A future lack of such personnel could adversely affect
results of operations of Horizon.
11
<PAGE>
RECENT DEVELOPMENTS
CMS
Horizon acquired CMS on July 10, 1995 by means of a merger pursuant to which
CMS became a wholly owned subsidiary of Horizon. The purchase price, paid in
shares of Common Stock of the Company, was approximately $393.9 million (based
on the market value of such shares on that date). The acquisition was accounted
for as a pooling of interests. CMS is one of the nation's largest providers of
comprehensive inpatient and outpatient medical rehabilitative services,
operating 37 free-standing rehabilitation hospitals, providing outpatient
rehabilitation at more than 140 locations, managing 13 inpatient rehabilitation
units for general acute care hospitals and providing contract rehabilitation
therapy services. As a result, Horizon now has an increased and significant
clinical and market presence in each of the medical rehabilitation industry's
three principal sectors: inpatient rehabilitation care, outpatient
rehabilitation care and contract rehabilitation therapies. See "Business --
Services."
PACIFIC REHAB
In November 1995, Horizon announced its agreement to acquire Pacific Rehab
through the issuance of approximately 2.8 million shares of Common Stock of
Horizon (which had a market value of approximately $62.0 million on the day
preceding such announcement). As of September 30, 1995, Pacific Rehab had $21.4
million of debt outstanding. The acquisition, which will be accounted for as a
pooling of interests, is expected to be consummated in the first quarter of
1996. The acquisition of Pacific Rehab will significantly expand Horizon's
presence in the outpatient rehabilitation clinic marketplace by adding 72
clinics to the Company's existing operations. Consummation of the acquisition is
subject to certain conditions, and there can be no assurance that those
conditions will be satisfied.
HEA GROUP
In December 1995, the Company announced that it had finalized a contract to
manage the operations of 134 long-term care facilities (14,757 beds) in Texas,
Michigan and Oklahoma which are operated under long-term leases by the HEA
Group. The Company began managing these facilities on January 1, 1996 under a
contract between a subsidiary of Horizon and the HEA Group, which has an initial
term of ten years. Horizon will receive a management fee equal to 6.5% of the
annual gross revenues generated from the operation of the HEA Group facilities,
which, in the aggregate, for the year ended December 31, 1995 had revenues of
approximately $220.0 million. Under certain circumstances, the management fee
can increase to 7.5% of the annual gross revenues. The Company has made
available a $30.0 million credit line to provide for, among other things, the
working capital and capital improvement requirements of the managed facilities.
The credit line bears interest at 75 basis points over the Company's effective
cost of borrowing under the Credit Facility, is secured by substantially all the
assets of the HEA Group and is repayable out of the cash flow of the operations
of the facilities, among other sources.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes
offered hereby, after deducting underwriting discounts and commissions and
expenses related to the Offering, are estimated to be $194.0 million.
The Company will use all of the net proceeds from the Offering to repay a
portion of the indebtedness outstanding under the Credit Facility. As of
November 30, 1995, the indebtedness outstanding under the Credit Facility was
$463.2 million. As of November 30, 1995, the effective annual interest rate on
the indebtedness outstanding under the Credit Facility was 7.2%. For further
information regarding the terms, including the interest rates applicable to
borrowings thereunder, of the Credit Facility, see "Description of Certain
Indebtedness."
12
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of November 30, 1995 and as adjusted to reflect the Offering and the
application of the net proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1995
--------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
<S> <C> <C>
Long-Term Debt:
Credit Facility..................................................................... $ 463,222 $ 269,222
10 7/8% Senior Subordinated Notes due 2002.......................................... 8,562 8,562
10 3/8% Senior Subordinated Notes due 2003.......................................... 65 65
% Senior Subordinated Notes due 2006............................................. -- 200,000
8 3/4% Convertible Senior Subordinated Notes due 2015............................... 20,400 20,400
6 1/2% Convertible Subordinated Debentures due 2012................................. 5,680 5,680
7 3/4% Convertible Subordinated Debenture due 2012.................................. 2,000 2,000
Capitalized leases.................................................................. 49,825 49,825
Mortgages and other long-term debt.................................................. 57,822 57,822
------------ ------------
Total long-term debt................................................................ 607,576 613,576
Less current portion.............................................................. 5,257 5,257
Less note receivable on 7 3/4% Convertible Subordinated Debenture due 2012........ 1,000 1,000
------------ ------------
Total long-term debt, net of current portion and note receivable................ 601,319 607,319
------------ ------------
Stockholders' Equity:
Preferred stock, $.001 par value per share; 500,000 shares authorized; none
issued............................................................................ -- --
Common stock, $.001 par value per share; 150,000,000 shares authorized; 51,882,060
shares issued; 51,304,552 shares outstanding...................................... 52 52
Additional paid-in capital.......................................................... 574,862 574,862
Retained earnings................................................................... 63,803 63,803
Note receivable from sale of common stock........................................... (2,362) (2,362)
Treasury stock...................................................................... (8,705) (8,705)
------------ ------------
Total stockholders' equity...................................................... 627,650 627,650
------------ ------------
Total Capitalization.................................................................. $ 1,228,969 $ 1,234,969
------------ ------------
------------ ------------
</TABLE>
13
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data as of and for
the periods ended May 31, 1991 through May 31, 1995 have been derived from
Horizon's consolidated financial statements, as restated for the merger with
CMS, which was accounted for as a pooling of interests. The selected historical
financial data as of November 30, 1995 and for the six months ended November 30,
1994 and 1995 have been derived from the unaudited financial statements of
Horizon, as restated for the merger with CMS. The following selected pro forma
financial information has been derived from and should be read in conjunction
with the unaudited pro forma financial information and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED MAY 31, NOVEMBER 30,
--------------------------------------------------------------------- ---------------------------------
1995 1995
------------------------- -----------------------
1991 1992 1993 1994 PRO FORMA (1) 1994 PRO FORMA (2)
ACTUAL
(DOLLARS IN THOUSANDS) ACTUAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total operating
revenues........... $543,697 $843,740 $1,136,358 $1,382,162 $1,625,326 $1,703,523 $783,412 $872,159 $890,114
Costs and expenses:
Cost of services... 424,568 666,950 892,902 1,099,162 1,261,000 1,309,776 608,776 663,885 672,471
Administrative and
general.......... 24,866 32,470 42,284 60,108 82,533 95,934 39,678 41,892 46,474
Facility leases.... 35,109 56,277 64,461 68,832 81,590 85,941 39,517 42,925 44,861
Depreciation and
amortization..... 12,918 19,923 33,915 48,249 56,618 59,274 27,631 29,758 30,893
Interest expense... 13,360 8,423 26,999 44,396 53,045 54,501 26,589 24,476 24,812
Special and
settlement
charges (3)...... -- 4,319 17,154 74,834 36,922 36,922 13,398 63,540 63,540
-------- -------- ---------- ---------- ---------- ------------- -------- -------- -------------
Total costs and
expenses....... 510,821 788,362 1,077,715 1,395,581 1,571,708 1,642,348 755,589 866,476 883,051
Earnings (loss)
before minority
interests, income
taxes, cumulative
effect of
accounting change
and extraordinary
item............... 32,876 55,378 58,643 (13,419) 53,618 61,175 27,823 5,683 7,063
Minority interests... (3,320) (6,771) (6,787) (4,664) (5,245) (5,245) (3,031) (3,402 ) (3,402)
Earnings (loss)
before income
taxes, cumulative
effect of
accounting change
and extraordinary
item............... 29,556 48,607 51,856 (18,083) 48,373 55,930 24,792 2,281 3,661
Income taxes......... 9,225 16,489 21,520 1,731 23,375 25,480 11,379 11,663 12,266
Earnings (loss)
before cumulative
effect of
accounting change
and extraordinary
item............... $ 20,331 $ 32,118 $ 30,336 $ (19,814) $ 24,998 $ 30,450 $ 13,413 $(9,382 ) $ (8,605)
-------- -------- ---------- ---------- ---------- ------------- -------- -------- -------------
-------- -------- ---------- ---------- ---------- ------------- -------- -------- -------------
Earnings (loss)
before cumulative
effect of
accounting change
and extraordinary
item per common
share-assuming full
dilution........... $ 0.86 $ 1.00 $ 0.89 $ (0.54) $ 0.52 $ 0.59 $ 0.29 $ (0.18 ) $ (0.16)
-------- -------- ---------- ---------- ---------- ------------- -------- -------- -------------
-------- -------- ---------- ---------- ---------- ------------- -------- -------- -------------
OTHER FINANCIAL DATA:
Adjusted EBITDA
(5)................ $ 59,154 $ 88,043 $ 136,711 $ 154,060 $ 200,203 $ 211,872 $ 95,441 $123,457 $126,308
Capital
expenditures....... 12,003 82,477 184,563 67,026 52,622 52,955 24,441 25,819 27,029
Ratio of earnings to
fixed charges
(6)................ 1.9x 2.2x 1.7x -- 1.6x 1.6x 1.6x 1.1 x 1.2x
Ratio of Adjusted
EBITDA to interest
expense (5)........ 4.4x 10.5x 5.1x 3.5x 3.8x 3.9x 3.6x 5.0 x 5.1x
OPERATING DATA:
Licensed beds........ 6,712 8,072 11,173 14,652 20,213 -- 18,058 20,342 --
Average occupancy.... 84% 84% 85% 85% 86% -- 88% 86 % --
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF NOVEMBER 30, 1995
------------------------------------------------------ -------------------------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED (7) PRO FORMA (8)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........ $ 46,405 $ 65,155 $ 70,372 $ 61,384 $ 40,674 $ 26,422 $ 26,422 $ 27,016
Working capital...... 96,645 151,090 227,199 232,639 284,343 329,790 329,790 324,994
Total assets......... 383,536 578,849 925,398 1,148,032 1,398,123 1,451,974 1,457,974 1,529,143
Long term debt,
excluding
current portion.... 81,737 183,322 458,062 461,331 532,688 601,319 607,319 613,384
Total stockholders'
equity............. 207,690 263,767 305,892 461,254 650,652 627,650 627,650 665,582
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE)
14
<PAGE>
- ------------------------
(1) To give effect to (i) the acquisition of the peopleCARE Heritage group and
the consummation of certain other insignificant acquisitions; (ii) the
retirement of certain senior subordinated notes; (iii) the Offering; and
(iv) the pending acquisition of Pacific Rehab, as though all such
transactions occurred on June 1, 1994.
(2) To give effect to (i) the retirement of certain senior subordinated notes;
(ii) the Offering; and (iii) the pending acquisition of Pacific Rehab, as
though all such transactions occurred on June 1, 1995.
(3) Special and settlement charges represent the following items by period (for
historical fiscal year unless otherwise indicated): (i) 1992 -- reflects
$1,000 of merger expenses incurred in connection with an acquisition
accounted for as a pooling of interests and $3,319 related to a terminated
merger agreement; (ii) 1993 -- reflects the write-down of certain
rehabilitation facility development costs and merger expenses incurred in
connection with an acquisition accounted for as a pooling of interests and
expenses of subsequently integrating the acquired companies' operations;
(iii) 1994 -- related to the impairment of selected rehabilitation hospital
division assets of $50,244, the costs associated with the consolidation of
contract therapy companies and losses related to the termination of certain
relationships in the contract therapy business of approximately $22,842 and
the costs related to the reduction of corporate office work force and other
restructuring costs of $1,748; (iv) 1995 historical and pro forma --
reflects the effect of a revision in the Company's estimate of contract
therapy receivables from third party payors of $18,377, costs of $13,500
incurred in connection with the settlement of pending litigation and related
contract terminations and costs of $5,045 related to restructuring actions
taken at contract therapy companies; (v) six months ended November 30, 1994
-- reflects the effect of a revision in the Company's estimate of contract
therapy receivables from third party payors; and (vi) historical and pro
forma six months ended November 30, 1995 -- reflects the write-off of $6.7
million in transaction costs incurred in completing the CMS merger, the
$44.9 million of costs of combining and restructuring the merged companies
and the $11.9 million write-down of assets expected to be divested during
fiscal 1996.
(4) Includes an extraordinary loss of $22,075, net of tax, recognized on the
purchase of certain senior subordinated notes at a premium.
(5) Adjusted EBITDA consists of earnings (loss) before minority interests,
income taxes, cumulative effect of accounting change and extraordinary item
plus interest, depreciation and amortization and special and settlement
charges. Adjusted EBITDA is included because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt. Adjusted EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles, and
should not be considered as a substitute for net earnings as an indicator of
the Company's operating performance or cash flow as a measure of liquidity.
The Company also believes that the ratio of Adjusted EBITDA to interest
expense is an accepted measure of debt service ability; however, such ratio
should not be considered as a substitute for the ratio of earnings to fixed
charges as a measure of debt service ability.
(6) For purposes of computing the ratio of earnings to fixed charges (a)
earnings consist of (i) earnings (loss) before minority interests, income
taxes, cumulative effect of accounting change and extraordinary items and
(ii) fixed charges net of capitalized interest and (b) fixed charges consist
of (i) interest expense on indebtedness, including capitalized interest;
(ii) amortization of debt issuance costs; and (iii) a portion of rental
expense which, in the judgement of management, represents an appropriate
interest factor. Earnings were insufficient to cover fixed charges in 1994
in the approximate amount of $15,034.
(7) As adjusted to reflect the Offering and the application of the net proceeds
therefrom.
(8) As adjusted to reflect (i) the retirement of certain senior subordinated
notes; (ii) the Offering; and (iii) the pending acquisition of Pacific
Rehab.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data
expressed as a percentage of total operating revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MAY 31, NOVEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1994 1995
<S> <C> <C> <C> <C> <C>
Total operating revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Cost of services............................................ 78.6 79.5 77.6 77.7 76.1
Administrative and general.................................. 3.7 4.3 5.0 5.1 4.8
Facility leases............................................. 5.6 5.0 5.0 5.0 4.9
Depreciation and amortization............................... 3.0 3.5 3.5 3.5 3.4
Interest expense............................................ 2.4 3.2 3.3 3.4 2.8
Special and settlement charges.............................. 1.5 5.4 2.3 1.7 7.3
----- ----- ----- ----- -----
Earnings before minority interests, income taxes,
cumulative effect of accounting change and
extraordinary item.................................... 5.2 (1.0) 3.2 3.6 0.6
----- ----- ----- ----- -----
Minority interests.......................................... (0.6) (0.3) (0.3) (0.4) (0.4)
Earnings before income taxes, cumulative effect of
accounting change and extraordinary item................... 4.6 (1.3) 2.9 3.2 0.2
Income taxes................................................ 1.9 0.1 1.4 1.5 1.3
Cumulative effect of accounting change, net of tax.......... (0.3) -- -- -- --
Extraordinary item, net of tax.............................. -- 0.1 0.2 -- (2.5)
----- ----- ----- ----- -----
Net earnings............................................ 2.4% (1.4)% 1.7% 1.7% (3.6)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
SIX MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1994
REVENUES
Total operating revenues increased approximately $88.7 million, or 11.3%,
for the six months ended November 30, 1995 compared to the corresponding period
in 1994. The growth in total operating revenues 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 occupancy in facilities
operated by the Company and (iii) the increase in Medicare, Medicaid and private
and other rates received by the Company. For the six months ended November 30,
1995, the Company added seven long-term care and specialty health care
facilities, representing 121 additional beds. Occupancy for the six months ended
1995 decreased to 86% compared to 88% in 1994 as a result of acquisitions with
lower occupancy rates than those experienced in Horizon's other facilities. The
Company's blended reimbursement rate increased 2.0% compared to 1994.
OPERATING EXPENSES
Cost of services increased approximately $55.1 million, or 9.1%, for the six
months ended November 30, 1995 compared to the corresponding period in 1994. The
increase in cost 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 76.1% from 77.7% in 1994, due largely to increased revenues
from higher margin businesses.
Administrative and general expenses increased $2.2 million, or 5.6%, for the
six months ended November 30, 1995 compared to the corresponding period in 1994.
As a percentage of operating revenues, administrative and general expenses
declined to 4.8% from 5.1% in 1994. The decline in the expense margin is
attributable to the Company's continued success in controlling these costs and
to overhead reductions realized in the CMS merger.
16
<PAGE>
Facility lease expense increased $3.4 million, or 8.6%, for the six months
ended November 30, 1995 compared to the corresponding period in 1994. The
increase in facility lease expense is attributable to the increase in the number
of leased facilities operated in 1995. As a percentage of total operating
revenues, facility lease expense declined to 4.9% from 5.0% in 1994.
Depreciation and amortization increased $2.1 million, or 7.7%, for the six
months ended November 30, 1995 compared to the corresponding period in 1994. As
a percentage of total operating revenues, depreciation and amortization declined
to 3.4% from 3.5% in 1994. The increase in depreciation and amortization is
attributable to the growth in the number of facilities owned in 1995 as well as
the impact of capital expenditures made.
Interest expense declined $2.1 million, or 7.9%, for the six month period
ended November 30, 1995 compared to the corresponding period in 1994. 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 Credit Facility which bears interest at a
substantially lower rate.
The Company recorded a $63.5 million special charge in the six months ended
November 30, 1995. 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.
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 costs,
of approximately $22.1 million, net of tax, in the second quarter of fiscal
1996.
YEAR ENDED MAY 31, 1995 COMPARED TO YEAR ENDED MAY 31, 1994
REVENUES
Total operating revenues increased $243.2 million, or 17.6%, for fiscal 1995
as compared with fiscal 1994. The majority of this increase is the result of the
Company's expansion, both through acquisitions and internally, since May 31,
1994. Greenery Rehabilitation Group, Inc. ("Greenery"), which was acquired in
February 1994, contributed $130.7 million of operating revenues in fiscal 1995
as compared to $46.2 million contributed during the three and one-half months
Greenery was owned by the Company in fiscal 1994. peopleCARE, which was acquired
in July 1994, contributed $78.3 million of operating revenues in fiscal 1995.
During fiscal 1995, the Company also completed other acquisitions resulting in
the addition of approximately 4,000 long-term care beds, a skilled nursing
center, two sleep diagnostic clinics, two home respiratory providers and two
medical diagnostic services companies. In addition, the Company entered into
management contracts involving approximately 1,020 long-term care beds.
Increases in Medicare, Medicaid and private pay rates also had a positive impact
on revenues. The average increase in rates per patient day across all payor
types was approximately 8.8%, resulting in an increase in revenues of $37.2
million. The average occupancy of the Company's facilities remained essentially
flat at 88% and, as a consequence, had little or no effect on operating
revenues.
OPERATING EXPENSES
Cost of services and administrative and general expenses increased $161.8
million, or 14.7%, and $22.4 million, or 37.3%, respectively, in fiscal 1995
from fiscal 1994. These increases are due primarily to the increase in the
number of long-term care facilities, specialty hospitals and subacute care units
operated by the Company, as well as the costs associated with the expansion of
specialty health care services and programs. As a percentage of total operating
revenues, cost of services declined to 77.6% from 79.5% in
17
<PAGE>
fiscal 1994 due largely to increased revenues from higher margin businesses.
Administrative and general expenses, as a percentage of total operating
revenues, increased to 5.1% from 4.3% in fiscal 1994 due, in large part, to
increased overhead in the contract therapy division.
Facility lease expense and depreciation and amortization increased
approximately $12.8 million, or 18.5%, and $8.4 million, or 17.3%, respectively,
for the same period. This increase is directly related to the increased number
of facilities operated in fiscal 1995. As percentages of total operating
revenues, facility lease expense and depreciation and amortization remained
essentially flat at 5.0% and 3.5%, respectively, compared with fiscal 1994.
Interest expense increased $8.6 million, or 19.5%, in fiscal 1995 from
fiscal 1994. This increase is due primarily to the following factors: (i)
increased borrowings to finance an increase in the Company's average investment
in owned facilities due in large part to the Greenery merger late in fiscal 1994
and the peopleCARE acquisition early in fiscal 1995, (ii) capital lease interest
associated with the six peopleCARE leased facilities, (iii) assumption of $54.8
million of Greenery bonds late in fiscal 1994 and (iv) increased borrowings
under the Company's then existing credit facility in connection with other
acquisitions during fiscal 1995. The increased interest expense was partially
offset by the retirement of $85.2 million of the Senior Subordinated Notes
during fiscal 1995.
The Company recorded special charges during the second, third, and fourth
quarters of fiscal 1995 of $13.4 million, $5.0 million and $5.0 million,
respectively. The second and fourth quarter special charges reflect the effect
of a revision in the Company's estimate of accounts receivable from third party
payors at its CMS Therapies, Inc. subsidiary. The third quarter special charge
reflects the costs of eliminating management and staff positions, office lease
terminations and certain other costs of the changes implemented during the third
quarter at CMS Therapies, Inc. For further information, see Note 7 of Notes to
Consolidated Financial Statements.
During the fourth quarter of fiscal 1994, a special charge of $74.8 million
was recorded resulting from the implementation of a plan to streamline
operations and improve productivity by restructuring the Company into major
operating businesses, flattening the management organization structure, writing
down certain assets and, where appropriate, divesting unproductive assets. The
special charge comprised several items, including (i) the impairment of assets
at eight rehabilitation hospitals, divestiture of two rehabilitation hospitals,
closure of a select group of outpatient locations and miscellaneous other
related charges ($50.2 million), (ii) the consolidation of certain contract
therapy companies, the exit from certain markets and businesses and losses
related to the termination of certain business relationships ($22.8 million) and
(iii) the reduction of the work force at the Company's corporate office and
transaction costs related to the plan ($1.8 million).
On September 27, 1995, the Company settled certain pending litigation,
terminated a number of contracts with the other party to the litigation, and
obtained releases of claims and potential claims relating to the litigation and
the terminated contracts. In consideration for the settlement, contract
terminations and releases, the Company paid cash and delivered a warrant to
purchase Horizon/CMS stock. At May 31, 1995, the Company accrued $12.8 million
of expenses and wrote down $0.7 million of accounts receivable to record the
cash payment, warrant valuation, receivable write-off and other commitments and
transaction costs relating to the settlement transaction.
YEAR ENDED MAY 31, 1994 COMPARED TO YEAR ENDED MAY 31, 1993
REVENUES
Total operating revenues increased approximately $245.8 million, or 21.6%,
for fiscal 1994 as compared with fiscal 1993. The largest portion of such
increase was the result of the Company's expansion, both internally and through
acquisitions, since May 31, 1993. The expansion of contract therapy services
resulted in an increase in operating revenues of $74.0 million, or 23.9%, during
fiscal 1994 over fiscal 1993. Net operating revenues attributable to the
Company's acute rehabilitation hospitals and contract rehabilitation therapies
increased $37.5 million or 7.3% during fiscal 1994 over fiscal 1993. This
increase resulted primarily from the four rehabilitation hospitals which were
newly opened during fiscal 1994 and a full year's results for those opened in
fiscal 1993. Greenery, acquired in February 1994, contributed $46.2 million to
operating
18
<PAGE>
revenues in fiscal 1994. As a result of the consummation of the Greenery merger,
the Company added the operations of 17 acute rehabilitation and long-term care
facilities and three managed facilities. At May 31, 1994 (excluding facilities
acquired in the Greenery merger), the Company operated three more long-term care
facilities, three more specialty hospitals and three more subacute care units
than it did at May 31, 1993. During fiscal 1994, the Company also expanded its
institutional pharmacy services, and its clinical laboratory services in Texas.
An additional cause of the increase in revenues was increases in Medicare,
Medicaid and private pay rates. The average increase in rates per patient day
across all payor types was approximately 9.7%, resulting in an increase in
operating revenues of $18.8 million. The average occupancy of the Company's
facilities remained essentially flat at 89%.
OPERATING EXPENSES
Cost of services and administrative and general expenses increased $206.3
million, or 23.1%, and $17.8 million, or 42.2%, respectively, in fiscal 1994
from fiscal 1993. These increases were due primarily to the increase in the
number of long-term care facilities, specialty hospitals and subacute care units
operated by the Company, as well as the costs associated with the expansion of
specialty health care services and programs. As a percentage of total operating
revenues, cost of services increased to 79.5% from 78.6% in fiscal 1993 due
primarily to the opening of rehabilitation hospitals and associated costs.
Administrative and general expenses, as a percentage of total operating
revenues, increased to 4.3% from 3.7% in fiscal 1993 due primarily to the
opening of rehabilitation hospitals.
Facility lease expense and depreciation and amortization increased
approximately $4.4 million, or 6.8%, and $14.3 million, or 42.3%, respectively,
for the same period. This increase is directly related to the increased number
of facilities operated. Greenery accounted for nearly one-half of the increase.
As percentages of total operating revenues, facility lease expenses declined to
5.0% from 5.6% in fiscal 1993 while depreciation and amortization increased to
3.5% from 3.0% in fiscal 1993 due to the acquisition of more owned facilities
than leased facilities.
Interest expense increased $17.4 million, or 64.4%, in fiscal 1994 from
fiscal 1993. This increase is related to borrowings under the Company's
then-existing credit facility, and the assumption of certain bonds and secured
real property indebtedness in connection with facility acquisitions during
fiscal 1994. Interest expense was also higher during this period due to a higher
average outstanding debt balance and higher average interest rate resulting from
the issuance of $350.0 million of Senior Subordinated Notes during fiscal 1993.
During the fourth quarter of fiscal 1993, the Company recorded a pre-tax
charge of $14.6 million related principally to the write-off of deferred costs
for approximately 30 abandoned rehabilitation hospital development projects on
which construction had not started. The decision to abandon certain projects and
pursue less capital intensive growth than in the past was a result of changes in
the Company's rehabilitation hospital development strategy in response to
changes in various health care delivery markets. Prior to fiscal 1994, the
Company deferred certain costs incurred to obtain government approvals and other
expenses related to the development of rehabilitation hospitals. Based on a
historical high rate of completion, costs of developing a project were charged
to operations only when it was probable that the project would be abandoned. As
a result of its change in development strategy, the Company changed its
accounting for development costs. Ongoing hospital development costs are now
expensed until that time when it is probable that construction will commence. In
addition, the Company recorded a pre-tax charge of $2.6 million related to the
acquisition and subsequent consolidation of a physician services company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations and expansion program
from cash flows from operating activities and financing activities.
Net cash provided by operating activities was $7.4 million, $29.0 million
and $10.6 million during each of the three years ended May 31, 1993, 1994 and
1995 and net cash used in operating activities was $(16.8) million and $(8.6)
million in the six month periods ended November 30, 1994 and 1995.
19
<PAGE>
Net cash provided by financing activities was $262.8 million, $41.9 million
and $127.3 million during each of the three years ended May 31, 1993, 1994 and
1995 and was $104.0 million and $76.4 in the six month periods ended November
30, 1994 and 1995.
EXPANSION PROGRAM
During the three years ended May 31, 1995, the primary application of the
Company's cash flows was the Company's program of expansion both internally and
through acquisitions. The Company's expansion program requires funds: (i) to
acquire assets and to expand and improve existing and newly acquired facilities;
(ii) to repay funded indebtedness assumed or otherwise acquired in connection
with the acquisitions of facilities and properties; and (iii) to finance the
increase in patient care and other accounts receivable resulting from
acquisitions. The funds necessary to meet these requirements have been provided
principally by the Company's financing and operating activities.
Net cash used in investing activities during each of the three years ended
May 31, 1993, 1994 and 1995 was $264.7 million, $79.9 million and $158.6
million. Similarly, net cash used in investing activities during the six month
periods ended November 30, 1994 and 1995 was $109.2 million and $40.7 million.
In each of such periods, the primary uses of cash in investing activities were
payments pursuant to acquisition agreements, net of cash acquired, and capital
expenditures (acquisitions of property and equipment).
During the three years ended May 31, 1995, payments pursuant to acquisition
agreements and capital expenditures aggregated $506.0 million which included the
following major expenditures: (i) fiscal 1993 -- the acquisition of properties
from real estate partnerships ($40.7 million) and the construction and
furnishing of new hospitals ($131.2 million); (ii) fiscal 1994 -- the Greenery
merger transaction ($7.8 million) and the purchase of long-term care facilities
in Massachusetts ($24.0 million) and (iii) fiscal 1995 -- acquisition of
peopleCARE ($61.3 million) and other acquisitions ($37.1 million).
During the six month periods ended November 30, 1994 and 1995, payments
pursuant to acquisition agreements and capital expenditures were $107.8 million
and $40.9 million. The largest component of such expenditures was the peopleCARE
acquisition which was effected in the first quarter of fiscal 1995. Capital
expenditures during these periods were primarily used to fund the Company's
internal and external expansion program. For fiscal 1996, the Company has
budgeted for capital expenditures in the range of $35.0-$45.0 million.
OPERATIONS
At November 30, 1995, the Company's working capital was $329.8 million,
including cash and cash equivalents of $26.4 million. This compared with working
capital of $284.3 million, including cash and cash equivalents of $40.7 million,
at May 31, 1995 and $232.6 million, including cash and cash equivalents of $61.4
million, at May 31, 1994. As indicated above, the Company generated positive
cash flow from operations during the three years ended May 31, 1995. During the
six month periods ended November 30, 1994 and 1995, these operating activities
used $(16.8) million and $(8.6) million in net cash. During the six months ended
November 30, 1995, accounts and settlements receivable increased $46.0 million,
substantially all of which represents increases generated by existing facilities
or generated by new facilities after the date of acquisition and the settlement
of cost reports for various periods.
SOURCES
At November 30, 1995, the available credit under the Credit Facility was
$241.5 million and, on a pro forma basis after giving effect to the Offering,
the available credit thereunder would be $435.5 million. See "Use of Proceeds"
and "Description of Certain Indebtedness." To the extent that the Company's
operations and expansion program require cash expenditures in excess of cash
from operations and the amounts available to it under the Credit Facility,
management of the Company believes that the Company can obtain the necessary
funds through other financing activities, including the issuance and sale of
debt and equity in public and private markets.
20
<PAGE>
BUSINESS
GENERAL
The Company is a leading provider of post-acute health care services,
including specialty health care services and long-term care services,
principally in the Midwest, Southwest and Northeast regions of the United
States. At January 1, 1996, Horizon provided specialty health care services
through 37 acute rehabilitation hospitals in 16 states (2,065 beds), 57
specialty hospitals and subacute care units in 17 states (1,875 beds), 145
outpatient rehabilitation clinics in 19 states and 2,686 rehabilitation therapy
contracts in 35 states. At that date, Horizon provided long-term care services
through 119 owned or leased facilities (14,793 beds) and 147 managed facilities
(16,448 beds) in a total of 19 states. 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 six months ended November 30, 1995, the Company derived
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
rehabilitation 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) hospice care. Horizon'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.
STRATEGY
In response to current health care reform and ongoing changes in the health
care marketplace, Horizon 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
Horizon intends to continue to use its rehabilitation, long-term care and
subacute care facilities as platforms to provide a cost-effective continuum of
post-acute care to managed care, private and government payors. This allows
Horizon 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. These patients often cannot receive proper care in
the home because of the complex monitoring and specialized medical treatment
required. Horizon is able to offer these complex medical services at a
significantly lower cost than acute care hospitals because its facilities have
lower capital and operating costs than acute care 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. The Company intends to
diversify further the specialty services it offers.
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. As a result of these efforts, the Company has achieved significant
market positions in large markets, such as Texas and Nevada, where it offers a
full continuum of post-acute care through the integration of rehabilitation,
subacute, long-term and other medical services.
21
<PAGE>
CONCENTRATING OPERATIONS IN TARGETED GEOGRAPHIC AREAS
To realize operating efficiencies, economies of scale and growth
opportunities, Horizon intends to continue to concentrate its operations in
clusters of operating units in selected geographic areas. The Company believes
that concentration of its rehabilitation hospitals and long-term care facilities
within selected geographic regions (a) provides Horizon with a platform from
which it can expand its specialty health care services, (b) enhances the
development of stronger local referral sources through concentrated marketing
efforts and (c) facilitates the establishment of effective working relationships
with the regulatory and legislative authorities in the states in which the
Company operates.
DEVELOPING REHABILITATION NETWORKS
Horizon 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. The Company believes that
these networks better enable it to provide a more complete continuum of care and
also establish the Company as a provider of choice for the region or locality.
By concentrating its rehabilitation facilities, the Company expects to be better
able to negotiate comprehensive rehabilitation contracts and leverage the
clinical expertise in an individual market.
EXPANDING THROUGH ACQUISITIONS
Horizon 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 Horizon'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 who desire "one stop
shopping;" (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.
INDUSTRY
The post-acute care industry encompasses a broad range of health care
services for patients with medically complex needs who can be cared for outside
of acute care hospitals. The Company believes that it is well positioned to
create a post-acute health care delivery system in each geographic region it
serves by capitalizing on favorable industry trends, which include:
COST CONTAINMENT INITIATIVES
In response to rapidly rising costs, governmental and private pay sources
have adopted cost containment measures that encourage reduced length of stays in
acute care hospitals. These third party payors have implemented strong case
management and utilization review procedures. In addition, traditional private
insurers have begun to limit reimbursement to predetermined "reasonable
charges," while managed care organizations such as health maintenance
organizations and preferred provider organizations are attempting to limit
hospitalization costs by monitoring and reducing hospital utilization and by
negotiating discounted rates for hospital services or fixed charges for
procedures regardless of length of stay. As a result, average acute care
hospital stays have been shortened, and many patients are discharged despite a
continuing need for specialty health care services or nursing care.
22
<PAGE>
AGING POPULATION
According to the U.S. Bureau of the Census, approximately 1.4% of people
65-74 years of age received care in long-term care facilities in 1990, while
6.1% of people 75-84 years of age and 24.5% of people over age 85 received such
care. The U.S. Bureau of the Census estimates that the U.S. population over age
75 will increase from approximately 13 million, or 5.2% of the population, in
1990 to approximately 17 million, or 6.1% of the population, by the year 2000.
In particular, the segment of the U.S. population over 85 years of age, which
comprises 45-50% of residents at long-term care facilities nationwide, is
projected to increase by more than 40%, from approximately 3 million, or 1.2% of
the population, in 1990 to more than 4 million, or 1.6% of the population in
2000. The population over age 65 suffers from a greater incidence of chronic
illnesses and disabilities than the rest of the population and currently
accounts for more than two-thirds of total health care expenditures in the
United States. As the number of Americans over age 65 increases, the need for
long-term care services is also expected to increase.
ADVANCES IN MEDICAL TECHNOLOGY
Advances in medical technology have increased the life expectancy of a
growing number of patients who require a high degree of care traditionally not
available outside acute care hospitals. For such patients, home health care
often is not a viable alternative because of the complexity of medical services
and equipment required. As a result, the Company believes that there is an
increasing need for care facilities that provide 24 hours-a-day supervision and
specialty care at a significantly lower cost than traditional acute care and
rehabilitation hospitals.
INDUSTRY CONSOLIDATION
Recently, the industry has been subject to competitive pressures that have
resulted in a trend towards consolidation of smaller, local operators into
larger, more established regional or national operators. The increasing
complexity of medical services, growing regulatory and compliance requirements
and increasingly complicated reimbursement systems have resulted in
consolidation of small operators who lack the sophisticated management
information systems, geographic diversity, operating efficiencies and financial
resources to compete effectively.
SERVICES
The following table summarizes each of the Company's business units by
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED MAY 31, NOVEMBER 30,
------------------------------------------------------------- --------------------------
1993 1994 1995 1995
------------------- ------------------- ------------------- --------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acute Rehabilitation...... $ 432 38.0% $ 463 33.5% $ 404 24.9% $218 25.0%
Subacute Care............. 6 0.5 55 4.0 195 12.0 108 12.4
Long-Term Care............ 166 14.6 226 16.3 342 21.0 190 21.8
Contract Rehabilitation... 310 27.3 384 27.8 395 24.3 198 22.7
Outpatient
Rehabilitation........... 82 7.2 88 6.4 93 5.7 46 5.3
Institutional Pharmacy
Services................. 11 1.0 27 2.0 39 2.4 21 2.4
Alzheimer's Care.......... 14 1.2 18 1.3 21 1.3 12 1.4
Other Services............ 109 9.6 111 8.0 121 7.5 60 6.9
Other Operating Revenue... 6 0.6 10 0.7 15 0.9 19 2.1
------ ----- ------ ----- ------ ----- ----- -----
Total................. $1,136 100.0% $1,382 100.0% $1,625 100.0% $872 100.0%
------ ----- ------ ----- ------ ----- ----- -----
------ ----- ------ ----- ------ ----- ----- -----
</TABLE>
23
<PAGE>
SPECIALTY HEALTH CARE
Horizon provides a variety of specialty health care services, including
acute rehabilitation, subacute care, rehabilitation therapies (occupational,
speech and physical therapies (in both inpatient and outpatient settings) and
treatment of traumatic head injury and other neurological impairments),
institutional pharmacy services, Alzheimer's care, non-invasive medical
diagnostic testing services, home respiratory care services and supplies, and
clinical laboratory services. Horizon believes that providing a broad range of
specialty health care services and programs enables the Company to attract
patients with more complex health care needs. In addition, these services
typically generate higher profit margins than long-term care patient services.
ACUTE REHABILITATION. At January 1, 1996, Horizon operated 37 freestanding
comprehensive acute rehabilitation hospitals with a total of 2,065 licensed
acute rehabilitation beds located in 16 states. Generally, these hospitals are
located in the same geographic area as Horizon's long-term care or subacute care
facilities (including specialty hospitals) and therefore benefit from referrals
from such facilities. Many of Horizon's rehabilitation hospitals are operated
through joint ventures with local general acute care hospitals, physicians and
other investors. Horizon's rehabilitation unit management group operates
inpatient and outpatient rehabilitation programs within acute care hospitals. At
January 1, 1996, the Company managed 12 rehabilitation units with more than 270
beds in such acute care hospitals. In addition, the Company's freestanding
rehabilitation hospitals typically provide on-site outpatient services.
SUBACUTE CARE. Horizon provides subacute care to high acuity patients with
medically complex conditions who require ongoing, multi-disciplinary nursing and
medical supervision and access to specialized equipment and services but who do
not require many of the other services provided by an acute care hospital.
Horizon's subacute care services include dedicated programs for rehabilitative
ventilator care, wound management, general rehabilitation, head trauma/coma
stimulation and infusion therapy. The Company's subacute care services are
provided through both its specialty hospitals and its subacute care units.
Generally, these specialty hospitals and subacute care units are located in
separate areas within the physical structures of the Company's long-term care
facilities and are supervised by separate nursing staffs employed by the
Company. As of January 1, 1996, the Company operated 57 specialty hospitals and
subacute care units, including one standalone specialty hospital, with 1,863
beds in 17 states. Horizon believes that private insurance companies and other
third party payors, including certain state Medicaid programs, recognize that
treating patients requiring subacute care in specialty units such as those
operated by Horizon is a cost effective alternative to treatment in acute care
hospitals. Horizon believes that it can continue to offer subacute care at rates
substantially below those typically charged by acute care hospitals for
comparable services.
The Company's specialty hospitals are operated under specialty hospital
licenses that permit the Company to provide higher acuity services and, as a
consequence, to receive higher reimbursement rates than subacute care units
which are operated under long-term care facility licenses. It is Horizon's
belief that such specialty hospital licenses enhance its marketing efforts to
referral sources such as physicians, managed care providers and hospital
discharge planners. Once a specialty hospital license has been obtained, the
beds so licensed generally can no longer be used for patients who require only
basic patient care.
Horizon is a party to a number of contracts with commercial insurers and
managed care providers and out-of-state enhanced rate Medicaid provider
agreements. Horizon believes that these relationships will enable it to improve
its reimbursement rates and profit margins.
CONTRACT REHABILITATION THERAPIES. Horizon provides a comprehensive range
of rehabilitation therapies, including physical, occupational, respiratory
(including inpatient and outreach services) and speech therapy services to
skilled nursing facilities, general acute care hospitals, schools, home health
agencies, inpatient rehabilitation hospitals and outpatient clinics. As of
January 1, 1996, Horizon provided these services through approximately 2,686
contracts in 35 states, 184 of which are with Company-operated long-term care
facilities, specialty hospitals and subacute facilities, and 2,502 of which are
with third party long-
24
<PAGE>
term care facilities, home health agencies, hospitals, outpatient clinics or
school systems. The CMS merger has significantly expanded Horizon's presence in
the contract rehabilitation therapy marketplace, making Horizon one of the
nation's leading providers of these services.
OUTPATIENT REHABILITATION. The Company provides rehabilitation therapies to
ambulatory patients recovering from industrial injuries, sports-related injuries
and other general orthopedic conditions. Horizon's outpatient clinics provide
rehabilitation programs dedicated to industrial reconditioning, sports medicine,
aquatic therapy, back stabilization, arthritis, osteoporosis, pain management,
total joint replacement and general rehabilitation. These services are provided
in freestanding outpatient facilities and ambulatory outpatient clinics within
institutional settings, as well as by a staff of fully-trained professionals who
rehabilitate patients in their own homes. As of January 1, 1996, Horizon
provided outpatient services through 145 outpatient rehabilitation clinics in 19
states. The proposed merger with Pacific Rehab will significantly expand
Horizon's presence in the outpatient rehabilitation clinic marketplace by adding
72 clinics, many of which are concentrated in major cities. The proposed merger
would enable Horizon to consolidate its existing outpatient rehabilitation
clinic business with Pacific Rehab's business into a single network of
outpatient rehabilitation clinics, with a centralized management and regional
marketing structure. This combined structure will enhance the geographic
diversity of the two companies. Management of Horizon believes that significant
synergies can be realized through the proposed merger.
INSTITUTIONAL PHARMACY. Horizon has established a network of 28 regionally
located pharmacies in 14 states through which it provides a full range of
prescription drugs and infusion therapy services, such as antibiotic therapy,
pain management and chemotherapy, to over 38,400 beds in facilities operated by
Horizon and by third parties. These pharmacy operations (certain of which are
managed by third parties) enable Horizon to generate revenues from services
previously provided to Horizon by third-party pharmacy vendors. Of the total
beds serviced by Horizon's institutional pharmacies, 20,500 are located in
facilities not operated by Horizon.
ALZHEIMER'S CARE. Horizon offers a specialized program for persons with
Alzheimer's disease through its Alzheimer's centers. At January 1, 1996, this
program had been instituted at 25 of Horizon's long-term care facilities, with a
total of 816 beds. Each Alzheimer's center is located in a designated wing of a
long-term care facility and is designed to address the problems of
disorientation experienced by Alzheimer's patients and to help reduce stress and
agitation resulting from a short attention span and hyperactivity. Each
Alzheimer's center employs a specially trained nursing staff and an activities
director and engages a medical director with expertise in the treatment of
Alzheimer's disease. The program also provides education and support to the
patient's family.
LONG-TERM CARE
Horizon's long-term care facilities provide routine basic patient services
to geriatric and other patients with respect to daily living activities and
general medical needs. Such basic patient services include daily dietary
services, recreational activities, social services, housekeeping and laundry
services, pharmaceutical and medical supplies and 24 hours-a-day access to
registered nurses, licensed practical nurses and related services prescribed by
the patient's physician. At January 1, 1996, Horizon operated 266 long-term care
facilities (31,241 beds), of which 46 were owned (6,031 beds) and 73 were leased
(8,762 beds), and also managed 147 long-term care facilities (16,448 beds),
located in a total of 19 states.
OTHER SPECIALTY HEALTH CARE
PHYSICIAN "LOCUM TENENS." Horizon provides physician locum tenens services
to institutional providers and physician practice groups throughout the United
States. The Company recruits, credentials and places health care providers in
appropriate short-term, long-term or permanent positions in most physician and
allied health care specialties. The Company also provides credentialing
assistance, recruitment outsourcing, staff planning services and educational
programs for physicians and health care executives.
NON-INVASIVE MEDICAL DIAGNOSTICS. During fiscal 1994, Horizon began
providing non-invasive medical diagnostic testing services by way of mobile
units and fixed location operations (generally in acute care
25
<PAGE>
hospitals) through a network of physicians and surgeons. These services include
cardiovascular (both cardiac imaging and vascular imaging), pelvic and abdominal
testing services and sleep diagnostic services. Horizon has recently expanded
its diagnostic expertise and the diagnostic markets it serves through
acquisitions.
CLINICAL LABORATORY SERVICES. In fiscal 1993, Horizon established a
comprehensive clinical laboratory, located in Dallas, Texas, to serve the
long-term care industry. The clinical laboratory provides bodily fluid testing
services to assist in detecting, diagnosing and monitoring diseases. This
laboratory has all necessary state regulatory approvals to conduct business in
the states in which Horizon currently operates and is certified to receive
reimbursement for charges to patients covered by Medicare and Medicaid. At
January 1, 1996, the laboratory provided services to approximately 10,000 beds.
HOME RESPIRATORY; HOME INFUSION. The Company provides home respiratory care
services and supplies to home care patients in Texas, Oklahoma, Arkansas,
Louisiana, Tennessee and Kentucky through a physician referral base. The Company
employs a fully-trained nursing staff to perform these services, which include
the provision of home infusion and intravenous therapies. Supplies provided by
the Company include gas and liquid oxygen cylinders, oxygen concentrators and
aerosol nebulizers.
HOSPICE CARE. Commencing in fiscal 1996, the Company began providing
hospice care in Texas to home-bound and institutionalized, terminally ill
patients. Hospice care includes the provision of all durable medical equipment,
intravenous therapies and pharmaceuticals incident to such care.
ORGANIZATION
The Company's operations are organized principally according to the services
provided. It is an objective of the Company to delegate operational
responsibility to operational managers located within local communities to the
extent practicable. Regional managers in each business unit report to business
unit managers who, in turn, report to senior management. These managers are
supported by a broad range of support services supplied by the Company's
corporate and regional staffs. These support services include marketing
assistance, training, quality assurance oversight, human resource management,
reimbursement expertise, accounting, cash management, legal services and
management support. The Company has established standardized operating
procedures for its units and monitors the units to assure consistency of
operations.
SPECIALTY HEALTH CARE OPERATIONS
The Company's specialty health care operations are organized as follows:
ACUTE REHABILITATION. The Company's acute rehabilitation business is
supervised by an Executive Vice-President and is organized into three regions
each supervised by a divisional president. Acute rehabilitation services are
provided in freestanding comprehensive rehabilitation hospitals and provide care
in the form of physical, psychological, social and vocational rehabilitative
services. Each rehabilitation hospital is supervised by a chief executive
officer. Services are provided by a number of different types of health care
professionals, predominately physicians specializing in rehabilitation medicine,
nurses and physical, speech, occupational, recreation and respiratory
therapists, aides and assistants.
SUBACUTE CARE. The Company's subacute care operations are organized into
two geographic regions, each of which is supervised by a Director of Operations.
Each of the subacute care facilities and/or specialty hospitals is supervised by
a licensed administrator and a governing board. Each of the subacute care
facilities and specialty hospitals employs a Director of Nursing Services, who
supervises a staff of registered nurses, licensed practical nurses and nurses'
aides. A Medical Director and a staff of resident medical professionals
supervise the medical management of all patients.
CONTRACT REHABILITATION THERAPIES. The Company's contract rehabilitation
therapy operations are organized into eight regional operational divisions, each
of which is supervised by a Director of Operations. These regional divisions
each recruit, hire, train and supervise the physical, occupational and speech
pathology therapists that provide the "hands on" therapy services to the
Company's facilities and, to a
26
<PAGE>
greater extent, third parties. Each of the Directors of Operations is
responsible not only for the productivity of the therapists employed by the
Company but also for the compliance with the Company's policies and procedures
in billing for services rendered.
OUTPATIENT REHABILITATION. Several of the Company's outpatient
rehabilitation clinics are operated through the hospital division as ambulatory
clinics within a hospital setting (while not necessarily part of the physical
structure of the hospital). Other clinics are operated through the contract
therapy division as freestanding clinics. In either case, the day to day
operations of the clinic are supervised by a therapy manager with general
oversight provided by either a hospital administrator or contract therapy
regional manager. The acquisition of Pacific Rehab will provide a structure to
develop this division more effectively, permitting the consolidation of
outpatient services while continuing the extension of hospital programs. The
merger will result in the development of five geographic regions, each
supervised by a Regional Vice President. These individuals recruit, hire, train
and supervise the physical, occupational and speech pathology therapists, as
well as the administrative and marketing personnel who operate the outpatient
clinics.
INSTITUTIONAL PHARMACY SERVICES. The Company's institutional pharmacy
business is organized into geographic pharmacy distribution centers in each of
the states where the Company provides these services. In each of the pharmacy
distribution centers, the Company employs pharmacists to fill prescriptions
ordered in each of the facilities with which the Company has contracted. Each of
these pharmacy distribution centers also prepare and provide enteral and
parenteral supplies as ordered in addition to all legally required
pharmaceutical consulting services. These operations are supervised by a Vice
President of Pharmacy Services. In addition, the regional managers recruit,
hire, train and supervise the pharmacists employed by the Company.
LONG-TERM CARE OPERATIONS
The Company's long-term care facilities (including its Alzheimer's centers)
are organized into four regions, each of which is supervised by a Vice President
of Operations. For every six to twelve centers within each region, a District
Director, Quality Assurance Nurse and Dietary Consultant are responsible for
monitoring operations. Each facility operated by the Company is supervised by a
licensed administrator and employs a Director of Nursing Services, who
supervises a staff of registered nurses, licensed practical nurses and nurses'
aides. A Medical Director supervises the medical management of all patients.
Other personnel include dietary staff, housekeeping, laundry and maintenance
staff, activities and social services staff and a business office staff.
OTHER SPECIALTY HEALTH CARE OPERATIONS
PHYSICIAN "LOCUM TENENS." The Company's locum tenens business is organized
into two divisions, physicians and allied health care professionals, each
supervised by a division leader. These divisions each recruit, hire, credential,
market and provide risk management assistance for the physicians and other
health care professionals provided to hospitals, physician practices and managed
care payors on a temporary basis.
NON-INVASIVE MEDICAL DIAGNOSTICS. The Company's non-invasive medical
diagnostic business is headquartered in Albuquerque, New Mexico and is divided
into several geographic regions. Each of these regions is supervised by a
regional supervisor, who recruits, hires, trains and supervises diagnostic
technicians who work either in the Company's hospital-based operations or in the
Company's mobile units. The Company also operates one of the largest physician
training programs in the medical diagnostic industry.
CLINICAL LABORATORY SERVICES. The Company's clinical laboratory operation
is based in Dallas, Texas, and is operated by the Vice President of Operations
for the clinical laboratory. A Medical Director supervises the testing of
samples at the laboratory. When a facility physician orders lab testing for a
patient, the necessary samples are drawn at the facility and shipped by
overnight delivery service to the Company's clinical laboratory. The ordered
tests are completed and the results are transmitted electronically back to the
facility.
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<PAGE>
HOME RESPIRATORY; HOME INFUSION. The Company's home respiratory service
businesses are organized into four geographic regions, each of which is
supervised by a Director of Operations. These regional directors report to the
Company's Vice President of Specialty Medical Services. Each regional office
recruits, hires, trains, and supervises the nursing staff employed by the
Company.
HOSPICE CARE. The Company's hospice care business is currently organized
into two regional operational offices. Each regional office recruits, hires,
trains and supervises the nursing and clergy staff who provide the hospice care.
These regional offices are supervised by a director of operations located at the
Company's headquarters in Albuquerque, New Mexico.
MARKETING
The Company believes that the selection of a post-acute care provider is
strongly influenced by advice rendered by physicians, managed care providers and
hospital discharge planners. As a result, the Company has focused its marketing
efforts at the community level and attempts to identify, develop and maintain
relationships with these primary referral sources. These efforts have been
supplemented by corporate management which emphasizes the diverse array of
services offered by the Company and the significant opportunities for
cross-selling these services. Where appropriate, the Company consolidates its
marketing efforts to benefit all the facilities in a regional cluster.
FINANCIAL AND MANAGERIAL CONTROLS
The Company has implemented a comprehensive program of financial and
managerial controls to ensure adequate monitoring of its diverse business units.
Financial control is maintained through financial and accounting policies that
are established at the corporate level for use at, and with respect to, each
facility. The Company's financial reporting system enables it to monitor certain
key financial data at each facility, such as payor mix, admissions and
discharges, cash collections, net patient care revenues and staffing. Managerial
control is maintained through standard operating procedures which establish and
promote consistency of operations. All support and development functions are
centralized at the Company's headquarters in Albuquerque, New Mexico. This
system allows corporate management access to information from any acute
rehabilitation hospital, subacute care or long-term care facility in its network
on a daily basis and provides for monthly review of results of operations by
corporate and regional personnel as well as periodic site visits for more
detailed reviews. In addition, payroll information is routinely examined
biweekly.
Each business unit develops monthly budgets that are then reviewed by
corporate management and compared to the prior year's budget and actual results
prior to approval.
QUALITY ASSURANCE
The Company has developed a comprehensive quality assurance program intended
to maintain a high standard of care with respect to all of the services it
provides to patients.
Under the Company's long-term and subacute care quality assurance program,
the care and services provided at each facility are evaluated quarterly by a
quality assurance team that reports directly to the Company's management and to
the administrator of each facility. The long-term and subacute program is
comprised of a quality assurance checklist and a patient satisfaction survey and
evaluation. The checklist, completed quarterly by the regional quality assurance
nurses employed by the Company, provides for ongoing evaluation. Patient
satisfaction is evaluated through patient satisfaction surveys. Patients and
their families are encouraged to recognize employees who demonstrate outstanding
performance. Bonuses paid to long-term and subacute facility administrators are
dependent in part upon the rankings of their facilities in these surveys. In
order to assist patients and their families in resolving any concerns they may
have, the Company has also established a resident advocacy program. The Company
has also developed a similar, though more specialized, quality assurance program
for its Alzheimer's living centers.
Under the Company's acute rehabilitation hospital quality assurance program,
the quality of the care and services provided at the hospitals is supervised and
evaluated on a continuous basis by a full time quality manager in each hospital.
Quality and risk management measures are captured in a hospital-based program
throughout the month and summarized results are routinely evaluated against
company-wide measures and
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<PAGE>
national benchmarks. The corporate office has access to the hospital-based data
enabling a coordinated quality assurance effort. Patient surveys are also
collected at time of discharge to evaluate patient satisfaction. Patient
outcomes are similarly evaluated by corporate management.
FACILITIES
At January 1, 1996, the Company operated (a) 37 acute rehabilitation
hospitals, of which 15 were owned (either directly or through joint venture
arrangements) and the balance were leased; (b) ten specialty hospitals; (c) 47
subacute care units; (d) 266 long-term care facilities (including 147 which were
operated by the Company under management contracts), of which 119 were owned or
leased; (e) 145 outpatient rehabilitation units; and (f) 28 pharmacy units.
Information regarding the geographic location of these facilities is provided in
the following table:
<TABLE>
<CAPTION>
ACUTE OUTPATIENT
REHABILITATION SPECIALTY REHABILITATION
HOSPITALS HOSPITALS SUBACUTE LONG-TERM CARE CLINICS PHARMACY
------------- ------------ ------------- -------------- ------------ --------
STATE UNITS BEDS UNITS BEDS UNITS BEDS UNITS BEDS UNITS UNITS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona................................. 1 45 -- -- 1 15 -- -- 4 --
Arkansas................................ 3 162 -- -- 2 18 -- -- 9 --
California.............................. 5 226 -- -- 6 217 1 34 9 1
Colorado................................ 1 38 -- -- 1 26 2 303 4 --
Connecticut(1).......................... -- -- -- -- -- -- 3 585 -- 1
Florida(2).............................. 1 60 -- -- 3 74 9 1,014 22 --
Idaho................................... -- -- -- -- -- -- 2 224 -- --
Illinois................................ -- -- -- -- -- -- -- -- -- --
Indiana................................. 3 137 -- -- 3 39 -- -- 4 --
Kansas.................................. 3 177 2 54 3 47 5 514 8 --
Kentucky................................ 1 40 -- -- -- -- -- -- 1 --
Louisiana............................... 4 234 -- -- 4 151 -- -- 10 --
Maryland................................ 1 20 -- -- -- -- 1 160 2 --
Massachusetts........................... 1 187 -- -- 6 631 4 481 23 1
Michigan(3)............................. -- -- -- -- 3 66 15 1,868 11 1
Missouri................................ -- -- -- -- -- -- -- -- 1 --
Montana................................. -- -- -- -- -- -- 5 684 -- 1
Nevada.................................. 2 124 1 27 1 12 11 1,506 4 4
New Mexico(4)........................... -- -- 1 25 -- -- 26 2,451 -- 3
North Carolina.......................... -- -- -- -- 1 72 1 53 -- --
Ohio.................................... -- -- -- -- 3 32 18 1,997 -- 2
Oklahoma(5)............................. 1 46 1 43 2 18 13 1,356 1 1
Pennsylvania............................ -- -- -- -- 1 32 1 88 1 --
Rhode Island............................ 1 82 -- -- -- -- -- -- -- 1
Tennessee............................... 2 128 -- -- -- -- -- -- 3 --
Texas(6)................................ 7 359 5 189 7 87 146 17,548 27 12
Virginia................................ -- -- -- -- -- -- -- -- 1 --
Wisconsin............................... -- -- -- -- -- -- 3 375 -- --
----- ----- ----- ---- ----- ----- ----- ------ --- ---
Totals.................................. 37 2,065 10 338 47 1,537 266 31,241 145 28
----- ----- ----- ---- ----- ----- ----- ------ --- ---
----- ----- ----- ---- ----- ----- ----- ------ --- ---
</TABLE>
- ------------------------
(1) All of such long-term care facilities are managed by the Company under a
contract entered into as a part of the Company's acquisition of Greenery
Rehabilitation Group, Inc.
(2) Includes seven long-term care and subacute care facilities consisting of 810
beds managed by the Company.
(3) Includes eight long-term care facilities consisting of 946 beds covered by
the Company's management contract with the HEA Group.
29
<PAGE>
(4) Includes one long-term care facility consisting of 120 beds managed by the
Company.
(5) Includes ten long-term care facilities consisting of 1,086 beds covered by
the Company's management contract with the HEA Group. Also includes one
long-term care facility consisting of 110 beds managed by the Company.
(6) Includes 116 long-term care facilities consisting of 12,725 beds covered by
the Company's management contract with the HEA Group. Also includes one
long-term care facility consisting of 90 beds managed by the Company.
SOURCES OF REVENUES
The Company derives substantially all of its revenues from private pay
patients, non-affiliated long-term care facilities and public funding through
the Medicare, Medicaid, Veterans' Administration and other governmental benefit
programs.
The Company's charges for private pay patients are established by the
Company from time to time and the level of such charges is generally not subject
to regulatory control. The Company classifies payments from individuals who pay
directly for services without government assistance as private pay revenues. The
private pay classification includes revenues from sources such as commercial
insurers and health maintenance organizations. The Company bills private pay
patients and rehabilitation therapy customers (or their insurers or health
maintenance organizations) on a monthly basis for services rendered. These
billings are due and payable upon receipt. The Company typically receives
payments on a current basis from individuals and within 60 to 90 days of billing
from commercial insurers and health maintenance organizations.
Under the Medicare program and some state Medicaid programs, the Company's
acute rehabilitation hospitals, subacute care facilities, specialty hospitals
and long-term care facilities are periodically paid in amounts designed to
approximate the facilities' reimbursable costs or the applicable payment rate.
Actual costs incurred are reported by each facility annually. Such cost reports
are subject to audit, which may result in upward or downward adjustment for
Medicare payments received. Most of the Company's Medicaid payments are
prospective payments intended to approximate costs, and normally no retroactive
adjustment is made to such payments. However, under certain of the Company's
specialty health care businesses, the Company's Medicare reimbursement is either
on a fee screen or fee for service basis. The Company is generally paid for
these services within 60 to 90 days.
The following table identifies the Company's revenues attributable to each
of its revenue sources for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEARS ENDED MAY 31, NOVEMBER 30,
------------------------------------------------------ --------------
1993 1994 1995 1995
---------------- ---------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Private pay................... $ 601,339 53% $ 714,093 52% $ 881,453 55% $441,963 50%
Medicare...................... 376,975 33 474,895 34 460,799 28 275,788 32
Medicaid...................... 158,044 14 193,174 14 283,074 17 154,408 18
---------- ---- ---------- ---- ---------- ---- -------- ----
Total..................... $1,136,358 100% $1,382,162 100% $1,625,326 100% $872,159 100%
---------- ---- ---------- ---- ---------- ---- -------- ----
---------- ---- ---------- ---- ---------- ---- -------- ----
</TABLE>
COMPETITION
The Company's long-term care facilities principally compete for patients
with other long-term care facilities and, to a lesser extent, with home health
care providers and acute care hospitals. In competing for patients, a facility's
local reputation is a critical factor. Referrals typically come from acute care
hospitals, physicians, religious groups, other community organizations, health
maintenance organizations and patients' families and friends. Members of a
patient's family generally actively participate in selecting a long-term care
facility. Other factors that affect a facility's ability to attract patients
include the physical plant condition, the ability to identify and meet
particular health care needs in the community, the rates charged for services,
and the availability of personnel to provide the requisite care.
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<PAGE>
The primary competitive factors in the rehabilitation services business are
quality outcomes and cost efficiency. As managed care companies increase their
influence within the markets the Company serves, the Company's competitive
position in such markets will increasingly depend on its ability to negotiate
provider contracts with organized purchasers of health care services, including
health maintenance and preferred provider organizations, medical groups and
other third party payors.
Competition for acute rehabilitation services includes other inpatient
rehabilitation hospitals as well as local acute care hospitals. The Company
believes recent cost containment efforts of federal and state governments,
health maintenance and preferred provider organizations and other third party
payors are designed to encourage more efficient utilization of health care
services and have resulted in lower acute care hospital occupancy, motivating
some of these acute care hospitals to convert to, or add, specialized post-acute
facilities in an attempt to meet patient care needs in a more cost efficient
manner.
Competition for subacute care patients is increasing by virtue of market
entry by other care providers. These market entrants include acute care
hospitals, rehabilitation hospitals and other specialty service providers.
Important competitive factors include the reputation of the facility in the
community, the services offered, the availability of qualified nurses, local
physicians and hospital support, physical therapists and other personnel, the
appearance of the facility and the cost of services.
Competition for contract rehabilitation therapy services comes, primarily,
from small locally-based firms. Increasingly, the Company faces competition from
inpatient health care providers seeking to insource rehabilitation therapy
services. The Company believes it will be able to compete successfully with
local firms by maintaining its strong reputation in the local communities and by
establishing new relationships through internal expansion and strategic
acquisitions. The Company also believes its variety of service delivery settings
will allow it to compete successfully for therapists with providers seeking to
insource such services.
The Company also faces competition in its other specialty health care lines
of business: institutional pharmacy services, Alzheimer's care, noninvasive
medical diagnostic services and clinical laboratory services. The degree of
competition varies depending on local market conditions. Competitive factors
include nature and quality of the services offered, timeliness of delivery of
services and availability of qualified personnel.
A key element of the Company's strategy is to expand through the acquisition
of long-term care facilities and specialty medical and related businesses. In
making such acquisitions, the Company competes with other providers, some of
which may have greater financial resources than the Company. Certain of these
providers are operated by not-for-profit organizations and similar businesses
that can finance capital expenditures on a tax-exempt basis or receive
charitable contributions unavailable to the Company. There can be no assurance
that suitable facilities can be located, that acquisitions can be consummated or
that acquired facilities can be integrated successfully into the Company's
operations. See "Risk Factors -- Competition" and "-- Acquisitions and
Expansion."
EMPLOYEES
As of January 1, 1996, the Company employed approximately 35,000 persons,
and approximately 1,476 or 4% of the Company's employees were covered by
collective bargaining contracts. In addition, 424 employees have opted to
organize into collective bargaining units and to be covered by collective
bargaining agreements in the future. Of the 21 collective bargaining contracts
covering the Company's employees, four will expire in calendar year 1996, eight
will expire in calendar year 1997 and nine will expire in calendar year 1998.
The Company believes it has had good relationships with the unions which
represent its employees, but it cannot predict the effect of continued union
representation or organizational activities on its future activities. The
Company also believes that it has good relationships with its non-union
employees.
Although the Company believes it is able to employ sufficient personnel to
staff its facilities adequately, a shortage of therapists and nurses in key
geographic areas could affect the ability of the Company to attract and retain
qualified professional health care personnel or could increase the Company's
labor costs. The Company competes with other health care providers for both
professional and non-professional employees and with non-health care providers
for non-professional employees.
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<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------ ----------------------------------------------------------
<S> <C><C>
Neal M. Elliott 55 President, Chief Executive Officer and Chairman of the
Board
Robert A. Ortenzio 39 Executive Vice President and Director
Michael A. 45 Senior Vice President of Operations and Director
Jeffries
Charles H. 39 Senior Vice President of Subsidiary Operations and
Gonzales Director
Ernest A. 37 Senior Vice President, Treasurer and Chief Financial
Schofield Officer
Scot Sauder 39 Vice President of Legal Affairs, Secretary and General
Counsel
Gerard M. Martin 59 Director
Frank M. McCord 65 Director
Raymond N. Noveck 51 Director
Barry M. Portnoy 48 Director
Russell L. Carson 52 Director
Bryan C. Cressey 46 Director
LeRoy S. Zimmerman 60 Director
</TABLE>
Neal M. Elliott, the Company's President, Chief Executive Officer and
Chairman of the Board, has served in those capacities since July 1986. Mr.
Elliott, a certified public accountant, worked for Price Waterhouse & Co. prior
to joining The Hillhaven Corporation ("Hillhaven") as Controller in 1969. In
1970, Mr. Elliott became Vice President of Finance for Hillhaven and served as
such until 1983. From 1983 to 1986, Mr. Elliott served as President of the
long-term care group of National Medical Enterprises, Inc., a health care
company then affiliated with Hillhaven. Mr. Elliott is a director of LTC
Properties, Inc., a real estate investment trust which invests in health care
related real estate.
Robert A. Ortenzio has been Executive Vice President and a Director of the
Company since July 1995. He is also President and Chief Operating Officer of
CMS, and has served in those capacities since May 1989 and April 1988,
respectively. He joined CMS as a Senior Vice President in February 1986. Prior
thereto, he was a Vice President of Rehab Hospital Services Corporation. Mr.
Ortenzio is also a director of American Oncology Resources, Inc. and
OccuSystems, Inc.
Michael A. Jeffries, the Company's Senior Vice President of Operations, has
served the Company in such position since June 1989. He became a Director of the
Company in January 1992. Mr. Jeffries has 15 years of experience in the
long-term health care industry. From 1984 to 1989, he served as Senior Vice
President of Operations for the Central Division of Beverly Enterprises, Inc.,
an operator of long-term health care facilities. From 1983 to 1984, Mr.
Jeffries, a certified public accountant, held the positions of Vice President of
Operations and Assistant to the President of Beverly Enterprises, Inc.
Charles H. Gonzales, the Company's Senior Vice President of Subsidiary
Operations, has served in such position since January 1992. He became a Director
of the Company in January 1992. From September 1986 to January 1992, Mr.
Gonzales, a certified public accountant, served as Senior Vice President of
Government Programs for the Company. From June 1984 to September 1986, Mr.
Gonzales was National Director of Reimbursement for Hillhaven.
Ernest A. Schofield, the Company's Senior Vice President, Treasurer, and
Chief Financial Officer, has been with the Company since July 1987. From July
1987 to April 1988, he served as a reimbursement analyst for the Company, from
April 1988 to May 1989, he served as Assistant Controller, from May 1989 to
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November 1990, he served as Vice President and Controller of the Company, and
from November 1990 to August 1994 he served as Vice President of Finance. He
assumed his present position in September 1994. Prior to joining the Company,
Mr. Schofield, a certified public accountant, held various positions in public
accounting with Fox & Company and as a partner with Olivas & Company (certified
public accounting firms).
Scot Sauder, the Company's Vice President of Legal Affairs, Secretary and
General Counsel, has been with the Company since September 1993. From September
1993 to September 1994, he served as General Counsel to the Company. From
September 1994 through July 1995, he served as Secretary and General Counsel to
the Company. Prior to joining the Company, Mr. Sauder, an attorney licensed to
practice in Texas and certain federal courts, was associated with Palmer &
Palmer, P.C., and was a director of Geary, Glast & Middleton, P.C., and Smith &
Underwood, P.C. (law firms).
Gerard M. Martin was the controlling shareholder of Greenery Rehabilitation
Group, Inc. ("Greenery") and served as Chairman of the Board and Chief Executive
Officer of Greenery from 1985 until the consummation of the Greenery merger with
the Company in February 1994. He became a Director of the Company in 1994. Mr.
Martin is a member of the Board of Trustees of Health and Rehabilitation
Properties Trust ("HRP") and a director and controlling shareholder of HRPT
Advisors, Inc. (which acts as advisor to HRP).
Frank M. McCord is the Chairman and Chief Executive Officer of Cascade
Savings Bank in Everett, Washington, a position he has held since March 1990.
From 1987 until that date, Mr. McCord served such bank as a member of the Board
of Directors and the Executive, Loan and Audit committees. From 1956 to 1986,
Mr. McCord, a certified public accountant, was an accountant with KPMG Peat
Marwick. He became a Director of the Company in October 1986.
Raymond N. Noveck, a certified public accountant, has served as the
President of Strategic Systems, Inc., a provider of audiotex health and medical
information since January 1990. He became a Director of the Company in July
1987. From July 1989 through December 1989, Mr. Noveck was Senior Vice President
of Kimberly Quality Care, a provider of home health care, temporary nursing
personnel and related medical services. Prior to that, he was Executive Vice
President of Lifetime Corporation, a home health care company, from June 1987
through July 1989.
Barry M. Portnoy is a member of the Board of Trustees of HRP and a director
and controlling shareholder of HRPT Advisors, Inc. He became a Director of the
Company in 1994. Since 1978, Mr. Portnoy has been a partner in the law firm of
Sullivan & Worcester, Boston, Massachusetts.
Russell L. Carson is a general partner of Welsh, Carson, Anderson & Stowe, a
private investment partnership located in New York City which was formed in
March 1979 to make investments in small to medium sized companies. He became a
Director of the Company in July 1995 and served as a director of CMS from 1986
to 1995. Mr. Carson is also a director of American Oncology Resources, Inc.,
AMSCO International, Quorum Health Group, Inc., Health Management Systems, Inc.,
Healthwise of America, Inc. and MedAlliance, Incorporated.
Bryan C. Cressey is a founding member of Golder, Thoma, Cressey and Rauner,
Inc., a venture capital firm located in Chicago, Illinois, which was established
in 1980 to make investments in small to medium sized companies. He became a
Director of the Company in July 1995 and served as a director of CMS from 1986
to 1995. Mr. Cressey is also a director of Paging Network, Inc., Cable Design
Technologies and Gold Enterprises, Inc.
LeRoy S. Zimmerman has been a partner in the law firm of Eckert, Seamans,
Cherin & Mellott, located in Harrisburg, Pennsylvania, since 1989. He became a
Director of the Company in July 1995 and served as a director of CMS from 1994
to 1995. Mr. Zimmerman was the Attorney General of the Commonwealth of
Pennsylvania from 1981 to 1989. Mr. Zimmerman became a director of Super Rite
Corporation in January 1995.
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DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to the Indenture (the "Indenture") between
the Company and , as trustee (the "Trustee"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Notes are subject to all such terms, and Holders of Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of certain provisions of the Indenture does not purport to
be complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. A copy of the
proposed form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is available as set forth under
"Available Information." The definitions of certain terms used in the following
summary are set forth below under "-- Certain Definitions."
The Notes will be general unsecured senior subordinated obligations of the
Company, subordinated in right of payment to all existing and future Senior Debt
of the Company, including Indebtedness pursuant to the Credit Facility. See "--
Subordination." The Notes will be structurally subordinated to Indebtedness of
the Company's Subsidiaries, including guarantees by such Subsidiaries of
Indebtedness under the Credit Facility. At November 30, 1995, on a pro forma
basis after giving effect to the Offering, the principal amount of Senior Debt
outstanding would have been approximately $422.2 million (including $45.3
million in letters of credit issued under the Credit Facility) and the principal
amount of Indebtedness of the Company's Subsidiaries would have been
approximately $19.2 million, excluding guarantees by certain Subsidiaries of
Indebtedness under the Credit Facility.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $200.0 million
and will mature on , 2006. Interest on the Notes will accrue at the
rate of % per annum and will be payable semi-annually in arrears on
and , commencing on , 1996, to Holders of
record on the immediately preceding and . Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of original issuance. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of interest may be
made by check mailed to the Holders of the Notes at their respective addresses
set forth in the register of Holders of Notes. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in denominations
of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes will
be subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Debt, whether outstanding on the date of the
Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash or cash equivalents of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt) before the
Holders of Notes will be entitled to receive any payment with respect to the
Notes, and until all Obligations with respect to Senior Debt are paid in full in
cash or cash equivalents, any distribution to which the Holders of Notes would
be entitled shall be made to the holders of Senior Debt (except that Holders of
Notes may receive securities that are subordinated at least to the same extent
as the Notes to Senior Debt and any securities issued in exchange for Senior
Debt and payments made from the trust described under "Legal Defeasance and
Covenant Defeasance").
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The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities or from the trust described under "Legal
Defeasance and Covenant Defeasance") if (i) a default in the payment of the
principal of, premium, if any, or interest on Designated Senior Debt occurs and
is continuing or (ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits holders of the Designated Senior Debt as to
which such default relates to accelerate its maturity and the Trustee receives a
notice of such other default (a "Payment Blockage Notice") from the Company or
the holders of any Designated Senior Debt. Payments on the Notes may and shall
be resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default (subject to
clause (i) of the preceding sentence), the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment blockage
may be commenced unless and until 360 days have elapsed since the receipt by the
Trustee of the immediately prior Payment Blockage Notice. No nonpayment default
that existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice, unless such default shall have been cured for a period of at
least 90 consecutive days following the date of delivery of such Payment
Blockage Notice.
The Indenture will further require that the Company promptly notify holders
of Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. At November 30, 1995,
on a pro forma basis after giving effect to the Offering, the principal amount
of Senior Debt outstanding would have been approximately $422.2 million
(including $45.3 million in letters of credit issued under the Credit Facility).
The Indenture will limit, subject to certain financial tests, the amount of
additional Indebtedness, including Senior Debt, that the Company and its
Subsidiaries may incur. See "Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock."
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to
, 2001. Thereafter, the Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, together with accrued and unpaid interest thereon to
the applicable redemption date, if redeemed during the twelve-month period
beginning on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2001............................................... %
2002............................................... %
2003............................................... %
2004............................................... %
2005 and thereafter................................ 100.000%
</TABLE>
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot
or by such other method as the Trustee deems fair and appropriate; PROVIDED that
no Notes with a principal amount of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption.
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<PAGE>
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders,."the
Company is not required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (the "Change of Control Payment").
Within ten days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered; PROVIDED that each such new Note will be in a principal amount of
$1,000 or an integral multiple thereof. The Indenture will provide that, prior
to complying with the provisions of this covenant, but in any event within 90
days following a Change of Control, the Company will either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Notes
required by this covenant. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar restructuring.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or
the Subsidiary, as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value (evidenced by a resolution of
the Board
36
<PAGE>
of Directors set forth in an Officers' Certificate delivered to the Trustee) of
the assets or Equity Interests issued or sold or otherwise disposed of and (ii)
at least 75% of the consideration therefor received by the Company or such
Subsidiary is in the form of cash; PROVIDED that the amount of (x) any
liabilities (as shown on the Company's or such Subsidiary's most recent balance
sheet) of the Company or any Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Subsidiary from
further liability and (y) any notes or other obligations received by the Company
or any such Subsidiary from such transferee that are immediately converted by
the Company or such Subsidiary into cash (to the extent of the cash received),
will be deemed to be cash for purposes of this provision; and PROVIDED, FURTHER,
that the requirements of this clause (ii) shall not apply to assets having an
aggregate book value not exceeding $30.0 million that, as of the date of the
Indenture, were held by the Company and its Subsidiaries for sale.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently
reduce Indebtedness (and, in the case of revolving Indebtedness, to permanently
reduce the commitments) under the Credit Facility or other Senior Debt of the
Company, (b) to purchase one or more Health Care Facilities or Related
Businesses and/or a controlling interest in the Capital Stock of a Person owning
one or more Health Care Facilities and/or one or more Related Businesses or (c)
to make a capital expenditure or to acquire other tangible assets, in each case,
that are used or useful in any business in which the Company is permitted to be
engaged pursuant to the covenant entitled "Line of Business." Pending the final
application of any such Net Proceeds, the Company may temporarily reduce
revolving Indebtedness under the Credit Facility or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds
from Asset Sales that are not applied or invested as provided in the preceding
sentences of this paragraph will be deemed to constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company will
be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest thereon to the date of
purchase, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a PRO RATA basis. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
The Credit Facility prohibits the Company from purchasing any Notes and also
provides that certain change of control events with respect to the Company and
certain asset sales would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control or an Asset Sale occurs at a time when the Company is
prohibited from purchasing Notes, the Company could seek the consent of its
lenders to the purchase of Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing Notes.
In such case, the Company's failure to purchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes. See "Risk Factors -- Subordination of Notes."
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of any Equity
Interests of the Company or any of its Subsidiaries (other than (x) dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company, (y) dividends or distributions payable to the Company or any Subsidiary
of the Company and (z) dividends or distributions by any
37
<PAGE>
Subsidiary of the Company payable to all holders of a class of Equity Interests
of such Subsidiary on a pro rata basis); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company; (iii) make any
principal payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is PARI PASSU with or subordinated to the
Notes, except at the original final maturity thereof or in accordance with the
scheduled mandatory redemption or repayment provisions set forth in the original
documentation governing such Indebtedness (but not pursuant to any mandatory
offer to repurchase upon the occurrence of any event) or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments",
unless:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indenture (excluding Restricted Payments permitted by clauses (ii),
(iii) and (iv) of the next succeeding paragraph), is less than the sum of
(1) 50% of the Consolidated Net Income of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, minus 100% of such deficit), PLUS
(2) 100% of the aggregate net cash proceeds received by the Company from the
issue or sale since the date of the Indenture of Equity Interests of the
Company or of debt securities of the Company that have been converted into
such Equity Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of the Company and other than Disqualified
Stock or debt securities that have been converted into Disqualified Stock),
PLUS (3) to the extent that any Restricted Investment that was made after
the date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, PLUS (4) $10.0 million;
PROVIDED that no cash proceeds received by the Company from the issue or
sale of any Equity Interests of the Company will be counted in determining
the amount available for Restricted Payments under this clause (c) to the
extent such proceeds were used to redeem, repurchase, retire or acquire any
Equity Interests of the Company pursuant to clause (ii) of the next
succeeding paragraph, to defease, redeem or repurchase any PARI PASSU or
subordinated Indebtedness pursuant to clause (iii) of the next succeeding
paragraph or to repurchase, redeem, acquire or retire any Equity Interests
of the Company pursuant to clause (iv) of the next succeeding paragraph.
The foregoing provisions will not prohibit the following: (i) the payment of
any dividend within 60 days after the date of declaration thereof, if at such
date of declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the net proceeds
of, the substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than Disqualified
Stock); (iii) the defeasance, redemption or repurchase of PARI PASSU or
subordinated Indebtedness with the net proceeds from an incurrence of Permitted
Refinancing Debt or the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); (iv) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company held by any member
of the Company's or any of the Company's Subsidiaries' management pursuant to
any management equity subscription agreement or stock option agreement; PROVIDED
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any twelve-month
period plus the aggregate cash proceeds received
38
<PAGE>
by the Company during such twelve-month period from any reissuance of Equity
Interests by the Company to members of management of the Company and its
Subsidiaries; (v) the redemption, repurchase, retirement or other acquisition of
Equity Interests of a Permitted Joint Venture; (vi) the incurrence, creation or
assumption of any Guarantee of Indebtedness of a Permitted Joint Venture; (vii)
the making of any payment pursuant to any Guarantee of Indebtedness of a
Permitted Joint Venture; (viii) the payment of non-pro rata dividends or
distributions to holders of minority interest in the Equity Interests of
Permitted Joint Ventures made in accordance with the terms of the agreements
pursuant to which such payments are made in an amount not to exceed $10.0
million in the aggregate in any twelve-month period; (ix) the purchase,
redemption or acquisition of the Company's (A) 8 3/4% Convertible Senior
Subordinated Notes due 2015 in the principal amount of $20.4 million and (B)
6 1/2% Convertible Subordinated Debentures due 2012 in the principal amount of
$5.7 million; (x) acquisitions of Equity Interests of the Company in
satisfaction of certain Indebtedness owed to the Company in the outstanding
principal amount of $13.0 million in accordance with the terms of such
Indebtedness as in effect on the date of the Indenture; and (xi) acquisitions of
Equity Interests of the Company in satisfaction of principal and interest on
loans made by the Company to enable employees and directors of the Company to
exercise options to purchase capital stock of the Company and to pay taxes
thereon, which loans in respect of principal, interest and taxes will not exceed
$10.0 million in the aggregate prior to maturity of the Notes, PROVIDED,
HOWEVER, in the case of clauses (ii) through (xi) of this paragraph, no Default
or Event of Default shall have occurred or be continuing at the time of such
Restricted Payment or would occur as a consequence thereof.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, which calculations shall be
based upon the Company's latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, Guarantee or otherwise become directly or indirectly liable with respect
to (collectively, "incur") any Indebtedness (including Acquired Debt) and that
the Company will not issue any Disqualified Stock and will not permit any of the
Company's Subsidiaries to issue any shares of preferred stock; PROVIDED,
HOWEVER, that the Company may incur Indebtedness or issue shares of Disqualified
Stock and any Subsidiary may incur Indebtedness or issue shares of preferred
stock, if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock or preferred stock is issued would have been at least
2.5 to 1, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock or preferred stock had been issued, as the
case may be, at the beginning of such four-quarter period. Notwithstanding the
foregoing sentence, in no event shall any Subsidiary of the Company incur any
Indebtedness or issue any preferred stock pursuant to the foregoing sentence
(other than Indebtedness of a Person existing at the time such Person merges
with or into or becomes a Subsidiary of the Company, and Indebtedness assumed in
connection with the acquisition of assets from such Person, in each case which
Indebtedness was not incurred in connection with, or in contemplation of, such
Person merging with or into or becoming a Subsidiary of the Company) unless (i)
the aggregate principal amount of outstanding Indebtedness of all the Company's
Subsidiaries that was incurred pursuant to the foregoing sentence, PLUS (ii) the
aggregate liquidation preference of outstanding preferred stock of all of the
Company's Subsidiaries that was issued pursuant to the foregoing sentence, does
not exceed at any time $75.0 million.
The foregoing provisions will not apply to: (i) the incurrence by the
Company or any Subsidiary of Indebtedness and letters of credit pursuant to the
Credit Facility (with letters of credit being deemed to have
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<PAGE>
a principal amount equal to the maximum potential liability of the Company or
the relevant Guarantor thereunder), in a maximum principal amount not to exceed
$750.0 million, LESS the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce Indebtedness (and the commitments) thereunder
pursuant to the covenant entitled "Asset Sales"; (ii) the incurrence by the
Company or any Subsidiary of Indebtedness represented by the Notes; (iii) the
incurrence by the Company or any Subsidiary of the Existing Indebtedness; (iv)
the incurrence by the Company or any Subsidiary of Permitted Refinancing Debt;
(v) the incurrence by the Company or any Subsidiary of intercompany Indebtedness
between or among the Company and any of its Subsidiaries; PROVIDED, HOWEVER,
that (a) any such Indebtedness of the Company (other than Indebtedness of the
Company to a Permitted Joint Venture arising in the ordinary course of business
as a result of the Company's cash concentration system) is expressly subordinate
to the payment in full of all Obligations with respect to the Notes and (b)(1)
any subsequent issuance or transfer (other than for security purposes) of Equity
Interests that result in any such Indebtedness being held by a Person other than
the Company or a Subsidiary of the Company and (2) any sale or other transfer
(other than for security purposes) of any such Indebtedness to a Person that is
not either the Company or a Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such Subsidiary,
as the case may be; (vi) the incurrence by the Company or any Subsidiary of
Hedging Obligations with respect to any Indebtedness that is permitted by the
terms of the Indenture to be outstanding; and (vii) the incurrence by the
Company or any Subsidiary of Indebtedness (in addition to Indebtedness permitted
by any other clause of this paragraph) in an aggregate principal amount (or
accreted value, as applicable) at any time outstanding not to exceed $100.0
million.
LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any property or asset now owned or hereafter
acquired, or on any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to: (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any Indebtedness owed to the Company or any of its
Subsidiaries; (ii) make loans or advances to the Company or any of its
Subsidiaries; or (iii) transfer any of its properties or assets to the Company
or any of its Subsidiaries, except for such encumbrances or restrictions
existing under or by reasons of (a) Existing Indebtedness; (b) the Credit
Facility, as in effect on the date of the Indenture, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, PROVIDED that such encumbrances or
restrictions contained in such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings are
not materially less favorable to the Holders of Notes than those contained in
the Credit Facility, as in effect on the date of the Indenture; (c) the
Indenture and the Notes; (d) applicable law; (e) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Subsidiaries, as in effect at the time of acquisition (except to the extent such
Indebtedness was incurred in connection with, or in contemplation of, such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, PROVIDED that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred; (f) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices; (g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired; (h) Permitted Refinancing Debt,
PROVIDED that the restrictions contained in the agreements governing such
Permitted Refinancing Debt are not materially less favorable to the Holders of
Notes than those contained in the agreements governing the Indebtedness being
refinanced; (i) other Indebtedness permitted by the terms of the Indenture to be
incurred in an
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aggregate amount not to exceed $5.0 million at any time outstanding; or (j)
agreements entered into in the ordinary course of business in connection with
Permitted Joint Ventures that impose restrictions of the nature described in
clauses (ii) and (iii) above on the property of such Permitted Joint Ventures.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving entity), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to, another
corporation, Person or entity unless (i) the Company is the surviving
corporation or entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition will have been made assumes all the Obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction, no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Subsidiary, the Company or the entity
or Person formed by or surviving any such consolidation or merger, or to which
such sale, assignment, transfer, lease, conveyance or other disposition will
have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
such Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Subsidiary with an unrelated Person and (ii)
the Company delivers to the Trustee (a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $5.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million, an
opinion as to the fairness to the Company or such Subsidiary of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; PROVIDED, HOWEVER, that (a) any
employment agreement entered into by the Company or any of its Subsidiaries or
employee compensation and other benefit arrangements in the ordinary course of
business and consistent with the past practice of the Company or such Subsidiary
and the payment of reasonable and customary fees to the directors of the Company
or any Subsidiary who are not employees of the Company or any Affiliate, (b)
Affiliate Transactions between or among the Company and/or its Subsidiaries, (c)
Restricted Payments and Permitted Investments that are permitted by the
provisions of the Indenture described above under the covenant entitled
"Restricted Payments," and (d) the continued performance of existing
arrangements with Affiliates on the terms described in the most recent proxy
statement filed by the Company, in each case, shall not be deemed Affiliate
Transactions.
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ANTI-LAYERING
The Indenture will provide that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes.
LINE OF BUSINESS
The Company will not, and will not permit any Subsidiary to, engage to any
material extent in any business other than the ownership, operation and
management of Health Care Facilities and Related Businesses.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default:
(i) default for 30 days in the payment when due of interest on the Notes
(whether or not prohibited by the subordination provisions of the
Indenture);
(ii) default in payment when due of principal or premium, if any, on the
Notes at maturity, upon redemption or otherwise (whether or not prohibited
by the subordination provisions of the Indenture);
(iii) failure by the Company to comply with the provisions described
under the covenants entitled "Change of Control," or "Merger, Consolidation
or Sale of Assets";
(iv) failure by the Company for 60 days after notice to comply with its
other agreements in the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
(or the payment of which is guaranteed by the Company or any of its
Subsidiaries) whether such Indebtedness or Guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay when due principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $20.0 million or more;
(vi) failure by the Company or any of its Subsidiaries to pay final
judgments aggregating in excess of $20.0 million, which judgments are not
stayed within 60 days after their entry; and
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately.
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Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to , 2001, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
payment of interest or premium on, or principal of, the Notes. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in such
Holders' interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any Obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such Obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment and certain events of bankruptcy or insolvency) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium,
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if any, and interest on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a purchase of,
or tender offer or exchange offer for Notes).
Without the consent of each Holder affected, however, an amendment or waiver
may not (with respect to any Note held by a non-consenting Holder): (i) reduce
the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption or repurchase
of the Notes (other than provisions relating to the covenant entitled "Asset
Sales"); (iii) reduce the rate of or change the time for
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payment of interest on any Notes; (iv) waive a Default or Event of Default in
the payment of principal of or premium, if any, or interest on the Notes (except
a rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration); (v) make any Note payable in money other
than that stated in the Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal or premium of or interest on the Notes; (vii)
waive a redemption or repurchase payment with respect to any Note; (viii) waive
the obligation to make any Change of Control Offer; or (ix) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of the Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of the Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions with the Company; however, if the Trustee acquires any
conflicting interest, it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue as Trustee or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to the Company, 6001 Indian School Road, N.E., Suite
530, Albuquerque, New Mexico, 87110, Attention: Corporate Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merges
with or into or becomes a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
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"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets (excluding by way of a sale and leaseback) other than in the ordinary
course of business (PROVIDED that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the covenant entitled "Change of Control" and/or
the provisions described above under the covenant entitled "Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its Subsidiaries
of Equity Interests of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $5.0 million or (b)
for net proceeds in excess of $5.0 million. Notwithstanding the foregoing, (i) a
transfer of assets by the Company to a Wholly Owned Subsidiary or by a Wholly
Owned Subsidiary to the Company or to another Wholly Owned Subsidiary, (ii) an
issuance of Equity Interests by a Wholly Owned Subsidiary to the Company or to
another Wholly Owned Subsidiary, (iii) transfers of assets which transfers
constitute Permitted Investments, (iv) a Restricted Payment that is permitted by
the covenant described above under the covenant entitled "Restricted Payments",
and (v) an issuance of Equity Interests by a Permitted Joint Venture in the
ordinary course of business, in each case, will not be deemed to be Asset Sales.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback means, at the time of
determination, the present value (discounted at the rate of interest implicit in
such transaction, determined in accordance with GAAP or, in the event that such
rate of interest is not reasonably determinable, discounted at the rate of
interest borne by the Notes) of the obligation of the lessee for net rental
payments during the remaining term of the lease included in such sale and
leaseback (including any period for which such lease has been extended or may,
at the option of the lessor, be extended).
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means, (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million and a Keefe Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in
each case maturing within one year after the date of acquisition and (vi) bank
deposits with any domestic commercial bank which are generally withdrawn within
5 days as part of the Company's cash concentration system.
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"CHANGE OF CONTROL" means the occurrence of any of the following: (i) any
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as defined in Section 13(d)(3) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), (ii)
the adoption of a plan for the liquidation or dissolution of the Company, (iii)
the Company consolidates with, or merges with or into, another "person" (as
defined above) in a transaction or series of related transactions in which the
Voting Stock of the Company is converted into or exchanged for cash, securities
or other property, other than any transaction where (A) the outstanding Voting
Stock of the Company is converted into or exchanged for (1) Voting Stock (other
than Disqualified Stock) of the surviving or transferee corporation and/or (2)
cash, securities and other property in an amount which could be paid by the
Company as a Restricted Payment under the Indenture and (B) the "beneficial
owners" (as defined in Rule 13d-3 under the Exchange Act) of the Voting Stock of
the Company immediately prior to such transaction own, directly or indirectly,
not less than 40% of the total Voting Stock of the surviving or transferee
corporation immediately after such transaction, (iv) the consummation of any
transaction or series of related transactions (including, without limitation, by
way of merger or consolidation) the result of which is that any "person" (as
defined above) or "group" (as defined above) becomes the "beneficial owner" (as
defined above) of more than 40% of the Voting Stock of the Company or (v) the
first day on which a majority of the members of the Board of Directors of the
Company are not Continuing Directors.
"CMS" means Continental Medical Systems, Inc., a Delaware corporation, and a
Wholly Owned Subsidiary of the Company.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; PROVIDED,
HOWEVER, that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid to
the referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income of
any Subsidiary shall be excluded to the extent that the declaration or payment
of dividends or similar distributions by that Subsidiary of that Net Income is
not, at the date of determination, permitted without any prior governmental
approval (which has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired after the date of
the Indenture in a pooling of interests transaction for any period prior to the
date of such acquisition shall be excluded, and (iv) the cumulative effect of a
change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONSOLIDATED TOTAL ASSETS" means, with respect to any Person as of any
date, the consolidated total assets of such Person and its consolidated
Subsidiaries as reported on the most recent consolidated balance sheet of such
Person as of such date, determined in accordance with GAAP.
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<PAGE>
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"CREDIT FACILITY" means that certain amended and restated credit agreement,
dated as of September 26, 1995, by and among the Company, CMS, NationsBank of
Texas, N.A., as agent, and the lenders party thereto, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, extended, renewed,
refunded, replaced or refinanced from time to time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) so long as the Company has any Obligation
under the Credit Facility, the Credit Facility and (ii) thereafter, any other
Senior Debt of the Company the principal amount of which is $75.0 million or
more and that has been designated by the Company as "Designated Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to date on
which the Notes mature.
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period plus (i) an amount equal to any
extraordinary loss plus any net loss realized in connection with an Asset Sale
(to the extent such losses were deducted in computing such Consolidated Net
Income), plus (ii) provision for taxes based on income or profits of such Person
and its Subsidiaries for such period, to the extent that such provision for
taxes was included in computing such Consolidated Net Income, plus (iii)
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash charges (excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash charges were deducted in computing
such Consolidated Net Income, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other non-cash charges of, a Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in same
proportion) that the Net Income of such Subsidiary was included in calculating
the Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be paid as a dividend to the
Company by such Subsidiary without prior approval (that has not been obtained)
required, pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to that Subsidiary or its stockholders.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Facility) in existence on
the date of the Indenture until such amounts are repaid.
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<PAGE>
"FIXED CHARGES" means, with respect to any Person for any period, the sum of
(i) the consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), (ii) the consolidated interest expense of such Person and its
Subsidiaries that was capitalized during such period, (iii) any interest expense
on Indebtedness of another Person that is Guaranteed by such Person or one of
its Subsidiaries or secured by a Lien on assets of such Person or one of its
Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the
product of (a) all cash dividend payments (and non-cash dividend payments in the
case of a Person that is a Subsidiary) on any series of preferred stock of such
Person, times (b) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the EBITDA of such Person for such period to the Fixed
Charges of such Person for such period. If the Company or any of its
Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than
revolving credit borrowings) or issues or redeems preferred stock subsequent to
the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated but on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and EBITDA for such reference period shall
be calculated without giving effect to clause (iii) of the proviso set forth in
the definition of Consolidated Net Income, (ii) the EBITDA attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect from time to time.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner, of all or any part of any Indebtedness.
"HEALTH CARE FACILITY" means a long-term care facility, acute rehabilitation
facility, subacute care facility, outpatient rehabilitation clinic,
institutional pharmacy, Alzheimer's center or such other facility that is used
or useful in the provision of health care services.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such person against interest rate exposure.
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"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing Capital Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all Attributable Debt of such Person and
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; PROVIDED that
an acquisition of assets, Equity Interests or other securities by the Company
for consideration consisting of common equity securities of the Company shall
not be deemed to be an Investment. If the Company or any Subsidiary of the
Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Subsidiary of the Company such that, after giving effect to any such
sale or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale or (b) the disposition of
any securities by such Person or any of its Subsidiaries or the extinguishment
of any Indebtedness of such Person or any of its Subsidiaries and (ii) any
extraordinary or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" means (i) any Investments in or for the benefit of
the Company or a Wholly Owned Subsidiary of the Company, (ii) any Investments in
Cash Equivalents, (iii) any Investments by the Company or any Subsidiary of the
Company in a Person if, as a result of such Investment, (a) such Person becomes
a Wholly Owned Subsidiary of the Company or (b) such Person is merged,
consolidated or
50
<PAGE>
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Subsidiary of
the Company, (iv) any Investments made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant entitled "Asset Sales," (v) any Investments in Permitted Joint
Ventures or in a Person which, as a result of such Investment, becomes a
Permitted Joint Venture; and (vi) any other Investments in any Person having an
aggregate fair market value (measured on the date each such Investment was made
and without giving effect to subsequent changes in value), which when taken
together with all other Investments made pursuant to this clause (vi) that are
at the time outstanding, does not exceed the greater of (x) $35.0 million or (y)
5% of the Consolidated Total Assets of the Company.
"PERMITTED JOINT VENTURE" means any Subsidiary engaged in the ownership,
operation and management of Health Care facilities and Related Businesses.
"PERMITTED LIENS" means (i) Liens securing Senior Debt; (ii) Liens in favor
of the Company, (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Subsidiary of the
Company or such Person becomes a Subsidiary of the Company, PROVIDED, that such
Liens (x) were not incurred in connection with, or in contemplation of, such
merger or consolidation and (y) do not extend to any assets other than those of
the Person merged into or consolidated with the Company or such Subsidiary; (iv)
Liens on property existing at the time of acquisition thereof by the Company or
any Subsidiary of the Company; PROVIDED that such Liens were not incurred in
connection with, or in contemplation of, such acquisition and do not extend to
any assets of the Company or any of its Subsidiaries other than the property so
acquired; (v) Liens to secure the performance of statutory obligations, surety
or appeal bonds or performance bonds, or landlords', carriers', warehousemen's,
mechanics', suppliers', materialmen's or other like Liens, in any case incurred
in the ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by appropriate process of law, if a
reserve or other appropriate provision, if any, as is required by GAAP shall
have been made therefor; (vi) Liens existing on the date of the Indenture; (vii)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded; PROVIDED that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (viii) Liens to secure Capital Lease Obligations, mortgage
financings or purchase money obligations permitted by clause (vii) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness; (ix)
Liens incurred in the ordinary course of business of the Company or any
Subsidiary of the Company with respect to obligations not constituting
Indebtedness for borrowed money that do not exceed $5.0 million in the aggregate
at any one time outstanding; (x) Liens securing Indebtedness incurred to
refinance Indebtedness that has been secured by a Lien permitted under the
Indenture; PROVIDED that (a) any such Lien shall not extend to or cover any
assets or property not securing the Indebtedness so refinanced and (b) the
refinancing Indebtedness secured by such Lien shall have been permitted to be
incurred under the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock;" (xi) Liens securing Obligations under the Credit Facility are
Hedging Obligations to any lender under the Credit Facility permitted under the
Indenture; and (xii) Liens in respect of deposits in connection with workers'
compensation, unemployment insurance, old age pensions or other social security
or retirement benefits legislation in respect of employees of the Company and
its Subsidiaries.
"PERMITTED REFINANCING DEBT" means any Indebtedness of the Company or any
Subsidiary issued in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund other Indebtedness of the
Company or any of its Subsidiaries permitted by the Indenture to be incurred;
PROVIDED that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Debt does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing Debt has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is
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subordinated in right of payment to the Notes, such Permitted Refinancing Debt
has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Notes on terms not materially less
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Permitted Refinancing Debt is incurred
either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"RELATED BUSINESS" means the business conducted by the Company and its
Subsidiaries as of the date of the Indenture and any and all health care service
businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"SENIOR DEBT" means (i) Obligations of the Company under the Credit Facility
and (ii) any other Indebtedness permitted to be incurred by the Company under
the terms of the Indenture, unless the instrument under which such other
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Notes. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (w) any liability for
federal, state, local or other taxes, (x) any Indebtedness of the Company to any
of its Subsidiaries or other Affiliate (PROVIDED, that in no event will the
Credit Facility be construed as Indebtedness within the scope of this clause (x)
by virtue of Continental Medical Systems, Inc. being a co-borrower under the
Credit Facility), (y) any trade payables or (z) any Indebtedness to the extent
that such Indebtedness is incurred in violation of the Indenture.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which (x) at least 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (y) such Person, directly or indirectly, has the right
to elect a majority of the members of the board of directors, managers or
trustees either as a result of the ownership or control of more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof or pursuant to a shareholders agreement or other voting
agreement and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"VOTING STOCK" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the total of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summarizes the material terms of the Credit Facility. The
summary is not a complete description of the Credit Facility. Copies of the
material agreements relating thereto have been filed with the Commission and the
description set forth below is qualified in its entirety by reference to such
agreements.
In July 1995, the Company and CMS entered into the Credit Facility with a
consortium of banks. The amount available for borrowing by either borrower
thereunder is $750.0 million, including a $70.0 million letter of credit
sub-facility. Interest on borrowings under the Credit Facility is computed at a
rate equal to either the Alternate Base Rate or the Adjusted LIBOR Rate plus
0.625% to 1.25% per annum, depending on the maintenance of certain specified
financial ratios. The Alternate Base Rate is equal to the greater of the prime
rate or the federal funds effective rate plus 0.5%. The agreement relating to
the Credit Facility: (a) requires the Company to maintain certain financial
ratios, (b) restricts the Company's ability to enter into capital leases beyond
certain specified amounts, (c) prohibits transactions with affiliates not at
arm's length, (d) allows the Company to make only permitted investments, (e)
restricts certain indebtedness, liens, dispositions of property and issuances of
securities and (f) prohibits a change in control or a fundamental change in the
business of the Company except under certain limited circumstances. The Credit
Facility also restricts payment of dividends by the Company to an amount which
may not exceed 20% of the Company's net income for the prior fiscal year. Any
such payment is subject to continued compliance by the Company with the
financial ratio covenants contained in the agreement. The agreement expires in
June 2000, unless extended, is secured by a pledge of the stock and intercompany
notes of all material subsidiaries of the Company and is guaranteed by certain
of such subsidiaries.
At November 30, 1995, the indebtedness outstanding under the Credit Facility
was $463.2 million. After giving pro forma effect to the Offering and the use of
the net proceeds therefrom, indebtedness outstanding under the Credit Facility
at November 30, 1995 would have been $269.2 million. The Company and CMS used
the funds borrowed under the Credit Facility principally (i) to fund
acquisitions and capital expenditures ($84.7 million) and (ii) to fund the
tender offer and consent solicitation by the Company for the outstanding 10 3/8%
and 10 7/8% Senior Subordinated Notes of CMS ($289.5 million). The Company
intends to use funds available under the Credit Facility for general corporate
purposes, including acquisitions.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company and the underwriters named
below (the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters has severally agreed to purchase, the
respective principal amounts of Notes set forth opposite its name below, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discount:
<TABLE>
<CAPTION>
UNDERWRITER PRINCIPAL AMOUNT
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......................... $
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................................
Alex. Brown & Sons Incorporated.............................................
Chemical Securities Inc.....................................................
Dean Witter Reynolds Inc....................................................
J. P. Morgan Securities Inc.................................................
----------------
Total................................................................... $ 200,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions. The nature of the Underwriters' obligations
is such that the Underwriters are committed to purchase all of the Notes if any
of the Notes are purchased by them.
The Underwriters have advised the Company that they propose initially to
offer the Notes directly to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of % of the principal amount. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of % of the
principal amount of the Notes to certain other dealers. After the initial public
offering, the public offering price and other selling terms may be changed by
the Underwriters.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
thereof.
From time to time, each of the Underwriters (or in certain circumstances an
affiliate thereof) performs investment banking, commercial banking or other
financial services for the Company in return for customary fees.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters in connection
with the Notes will be passed upon for the Underwriters by Latham & Watkins, New
York, New York.
EXPERTS
The consolidated financial statements of Horizon/CMS Healthcare Corporation
at May 31, 1995 and 1994 and for each of the three years in the period ended May
31, 1995, included in this Prospectus and elsewhere in this Registration
Statement, have been audited by Arthur Andersen LLP, independent accountants, as
set forth in their reports thereon which, as to the years 1995, 1994, and 1993,
are based in part on the reports of Ernst & Young LLP and Price Waterhouse LLP,
independent accountants. The financial statements referred to above have been
included in this Prospectus and elsewhere in this Registration Statement in
reliance upon said reports given upon the authority of said firms as experts in
accounting and auditing.
54
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at 13th Floor,
Seven World Trade Center, New York, New York 10048 and Suite 1400, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60621-2511. Copies of
such material can be obtained by mail from the Public Reference Branch of the
Commission at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, reports, proxy statements and other information concerning
the Company may be inspected at the office of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") which the Company has filed with the Commission under
the Securities Act. This Prospectus omits certain of the information contained
in the Registration Statement in accordance with the rules and regulations of
the Commission. Reference is hereby made to the Registration Statement and
related exhibits for further information with respect to the Company and the
Notes. Statements contained herein concerning the provisions of any document are
not necessarily complete and, in each instance, reference is made to the copy of
the document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are incorporated herein by reference:
(1) Annual Report on Form 10-K for the year ended May 31, 1995, as amended
by Amendment No. 1 on Form 10-K/A dated October 3, 1995;
(2) Quarterly Report on Form 10-Q for the quarter ended August 31, 1995;
(3) Current Reports on Form 8-K dated June 23, 1995 (as amended by Amendment
No. 1 on Form 8-K/A dated August 8, 1995); July 25, 1995; July 25, 1995
(as amended by Amendment No. 1 on Form 8-K/A dated September 25, 1995 and
Amendment No. 2 on Form 8-K/A dated September 26, 1995); November 20,
1995; and November 21, 1995;
(4) Registration Statement on Form 8-A dated March 17, 1987, as amended by
Amendment No. 1 on Form 8-A/A dated June 23, 1994 and Amendment No. 2 on
Form 8-A/A dated September 22, 1994; and
(5) Registration Statement on Form 8-A dated September 16, 1994.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Notes shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents which are incorporated by reference herein,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Requests should be directed to
Ernest A. Schofield, Senior Vice President, Treasurer, and Chief Financial
Officer, at the Company's principal executive offices.
55
<PAGE>
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Balance Sheets as of May 31, 1995 and 1994.................................................... F-5
Consolidated Statements of Operations for the Years Ended May 31, 1995, 1994 and 1993...................... F-6
Consolidated Statements of Stockholders' Equity for the Years Ended May 31, 1995, 1994 and 1993............ F-7
Consolidated Statements of Cash Flow for the Years Ended May 31, 1995, 1994 and 1993....................... F-8
Notes to Consolidated Financial Statements................................................................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Horizon/CMS Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Horizon/CMS
Healthcare Corporation (formerly, Horizon Healthcare Corporation) (a Delaware
corporation) and subsidiaries (Note 1) as of May 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended May 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Continental Medical
Systems, Inc. and subsidiaries ("CMS"), a company acquired during fiscal 1996 in
a transaction accounted for as a pooling-of-interests, as discussed in Notes 1
and 18. Such statements are included in the consolidated financial statements of
Horizon/CMS Healthcare Corporation and reflect total operating revenues of 79.6
percent in 1993, and total assets and total operating revenues of 65.4 and 73.0
percent, respectively in 1994, and 49.3 percent and 60.7 percent, respectively
in 1995, of the related consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to amounts included for CMS, is based solely upon the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Horizon/CMS Healthcare Corporation and
subsidiaries as of May 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
July 21, 1995
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Horizon/CMS Healthcare Corporation:
We have audited the consolidated balance sheets of Continental Medical
Systems, Inc. and subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended June 30, 1995 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of Continental Medical Systems, Inc. and subsidiaries for the year ended June
30, 1993, were audited by other auditors whose report dated August 10, 1993, on
those statements included an explanatory paragraph that described the change in
the Company's method of accounting for development costs and the adoption of the
provisions of Statement of Financial Accounting Standards No. 115, which are
discussed in Notes 8 and 11, respectively, to the consolidated financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 and 1994 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Continental Medical Systems, Inc. and subsidiaries at June 30, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Harrisburg, Pennsylvania
August 3, 1995, except for Note 6 and
Note 19 for which the date is
September 26, 1995; Note 14 for which
the date is September 12, 1995; and
Note 20 for which the date is
September 27, 1995
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Continental Medical Systems, Inc.
We have audited the consolidated balance sheet of Continental Medical
Systems, Inc. and its subsidiaries as of June 30, 1993 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statments are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Continental Medical
Systems, Inc. and its subsidiaries at June 30, 1993 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. We have not audited the consolidated
financial statements of Continental Medical Systems, Inc. for any period
subsequent to June 30, 1993.
As discussed in Notes 8 and 11 to the consolidated financial statements, in
fiscal 1993 the Company changed its method of accounting for development costs
and adopted the provisions of Statement of Financial Accounting Standards No.
115.
PRICE WATERHOUSE LLP
Philadelphia, PA
August 10, 1993
F-4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 40,674 $ 61,384
Patient care accounts receivable, net of allowance for doubtful accounts of $29,595
in 1995 and $24,843 in 1994....................................................... 330,313 294,225
Prepaid and other assets............................................................ 61,650 46,423
Deferred income taxes............................................................... 21,806 12,100
------------ ------------
Total current assets.............................................................. 454,443 414,132
PROPERTY AND EQUIPMENT, net........................................................... 614,379 445,449
GOODWILL, net......................................................................... 168,861 114,286
OTHER INTANGIBLE ASSETS, net.......................................................... 44,720 52,251
NOTES RECEIVABLE, excluding current portion........................................... 44,619 51,528
DEFERRED INCOME TAXES................................................................. -- 15,980
OTHER ASSETS.......................................................................... 71,101 54,406
------------ ------------
Total assets...................................................................... $ 1,398,123 $ 1,148,032
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................................... $ 5,032 $ 5,711
Accounts payable.................................................................... 33,280 42,815
Accrued expenses.................................................................... 131,225 129,828
Estimated third party settlements................................................... 563 3,139
------------ ------------
Total current liabilities......................................................... 170,100 181,493
LONG-TERM DEBT, excluding current portion............................................. 532,688 461,331
OTHER LIABILITIES..................................................................... 24,353 27,885
DEFERRED INCOME TAXES................................................................. 6,141 --
------------ ------------
Total liabilities................................................................. 733,282 670,709
MINORITY INTERESTS.................................................................... 14,189 16,069
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000 shares, 50,679,107 and
43,440,558 shares issued with 50,174,218 and 43,112,412 shares outstanding at May
31, 1995 and 1994, respectively................................................... 51 43
Additional paid-in capital.......................................................... 559,168 393,209
Retained earnings................................................................... 99,382 71,104
Note receivable from sale of common stock........................................... (2,362) (2,362)
Treasury stock...................................................................... (5,587) (740)
------------ ------------
Total stockholders' equity........................................................ 650,652 461,254
------------ ------------
Total liabilities and stockholders' equity........................................ $ 1,398,123 $ 1,148,032
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
TOTAL OPERATING REVENUES................................................ $ 1,625,326 $ 1,382,162 $ 1,136,358
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of services...................................................... 1,261,000 1,099,162 892,902
Administrative and general............................................ 82,533 60,108 42,284
Facility leases....................................................... 81,590 68,832 64,461
Depreciation and amortization......................................... 56,618 48,249 33,915
Interest expense...................................................... 53,045 44,396 26,999
Special charge........................................................ 23,422 74,834 17,154
Settlement charge..................................................... 13,500 -- --
------------ ------------ ------------
Total costs and expenses............................................ 1,571,708 1,395,581 1,077,715
------------ ------------ ------------
Earnings (loss) before minority interests, income taxes, cumulative
effect of accounting change and extraordinary gain................ 53,618 (13,419) 58,643
Minority interests...................................................... (5,245) (4,664) (6,787)
------------ ------------ ------------
Earnings (loss) before income taxes, cumulative effect of accounting
change and extraordinary gain..................................... 48,373 (18,083) 51,856
Income taxes............................................................ 23,375 1,731 21,520
------------ ------------ ------------
Earnings (loss) before cumulative effect of accounting change and
extraordinary gain................................................ 24,998 (19,814) 30,336
Cumulative effect of accounting change, net of tax...................... -- -- (3,204)
------------ ------------ ------------
Earnings (loss) before extraordinary gain........................... 24,998 (19,814) 27,132
Extraordinary gain, net of tax.......................................... 2,571 734 --
------------ ------------ ------------
Net earnings (loss)................................................. $ 27,569 $ (19,080) $ 27,132
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common and common equivalent share:
Earnings (loss) before cumulative effect of accounting change and
extraordinary gain................................................ $ 0.52 $ (0.54) $ 0.94
Cumulative effect of accounting change.............................. -- -- (0.10)
------------ ------------ ------------
Earnings (loss) before extraordinary gain........................... 0.52 (0.54) 0.84
Extraordinary gain.................................................. 0.06 0.02 --
------------ ------------ ------------
Net earnings (loss)................................................. $ 0.58 $ (0.52) $ 0.84
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common share -- assuming full dilution:
Earnings (loss) before cumulative effect of accounting change and
extraordinary gain................................................ $ 0.52 $ (0.54) $ 0.89
Cumulative effect of accounting change.............................. -- -- (0.09)
------------ ------------ ------------
Earnings (loss) before extraordinary gain........................... 0.52 (0.54) 0.80
Extraordinary gain.................................................. 0.06 0.02 --
------------ ------------ ------------
Net earnings (loss)................................................. $ 0.58 $ (0.52) $ 0.80
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
COMMON STOCK ADDITIONAL FROM SALE
------------------ PAID-IN RETAINED OF COMMON TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK STOCK TOTAL
---------- ------ ---------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1992........................... 30,584,228 $31 $201,223 $ 63,235 $ -- $ (740) $263,749
Exercise of stock purchase warrants, options and
issuance of shares under the employee stock
purchase plan................................... 892,889 1 11,970 -- (2,362) -- 9,609
Common stock issued in connection with
acquisitions.................................... 95,783 -- 3,102 -- -- -- 3,102
Distribution to subsidiary stockholder............ -- -- -- (183) -- -- (183)
Net earnings...................................... -- -- -- 27,132 -- -- 27,132
---------- ------ ---------- --------- --------- -------- --------
Balance at May 31, 1993........................... 31,572,900 32 216,295 90,184 (2,362) (740) 303,409
Common stock offering, net of $1,365 of issue
costs........................................... 4,025,000 4 58,215 -- -- -- 58,219
Common stock issued in connection with
acquisitions.................................... 2,828,968 3 62,141 -- -- -- 62,144
Conversion of 6.75% convertible subordinated
notes, net of $1,897 of previously capitalized
financing costs and $507 of conversion costs.... 4,522,500 4 51,861 -- -- -- 51,865
Exercise of stock purchase warrants, options and
issuance of shares under the employee stock
purchase plan................................... 491,190 -- 4,697 -- -- -- 4,697
Net loss.......................................... -- -- -- (19,080) -- -- (19,080)
---------- ------ ---------- --------- --------- -------- --------
Balance at May 31, 1994........................... 43,440,558 43 393,209 71,104 (2,362) (740) 461,254
Common stock offering, net of $6,487 of issue
costs........................................... 4,915,457 5 119,608 -- -- -- 119,613
Common stock issued in connection with
acquisitions.................................... 1,847,899 2 39,334 759 -- -- 40,095
Exercise of stock purchase warrants, options and
issuance of shares under the employee stock
purchase plan................................... 475,193 1 7,017 -- -- -- 7,018
Treasury stock acquired in payment for
stockholder's note.............................. -- -- -- -- -- (4,847) (4,847)
Distribution to subsidiary stockholder............ -- -- -- (50) -- -- (50)
Net earnings...................................... -- -- -- 27,569 -- -- 27,569
---------- ------ ---------- --------- --------- -------- --------
Balance at May 31, 1995........................... 50,679,107 $51 $559,168 $ 99,382 $(2,362) $(5,587) $650,652
---------- ------ ---------- --------- --------- -------- --------
---------- ------ ---------- --------- --------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)...................................................... $ 27,569 $ (19,080) $ 27,132
----------- ----------- -----------
Adjustments:
Depreciation and amortization.......................................... 56,618 48,249 33,915
Other.................................................................. (1,820) 690 7,030
Special charge......................................................... 23,422 74,834 14,556
Settlement charge...................................................... 13,500 -- --
Cumulative effect of accounting change, net of taxes................... -- -- 3,204
Extraordinary gain, net of taxes....................................... (2,571) (734) --
Increase (decrease) in cash from changes in assets and liabilities,
excluding effects of acquisitions and dispositions:
Accounts receivable and estimated third party settlements............ (33,159) (49,533) (85,069)
Other assets......................................................... (22,800) (23,067) (10,596)
Deferred income taxes................................................ 168 (1,178) 4,384
Accounts payable and accrued expenses................................ (24,636) (871) 14,070
Other liabilities.................................................... (25,666) (281) (1,268)
----------- ----------- -----------
Total adjustments........................................................ (16,944) 48,109 (19,774)
----------- ----------- -----------
Net cash provided by operating activities................................ 10,625 29,029 7,358
----------- ----------- -----------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired........ (117,359) (27,091) (57,303)
Cash proceeds from sale of property and equipment........................ 22,718 24,096 9,363
Other intangible assets.................................................. (863) (5,010) (36,769)
Acquisition of property and equipment.................................... (52,622) (67,026) (184,563)
Notes receivable......................................................... 2,215 5,072 (6,801)
Other investing activities............................................... (12,688) (9,950) 11,423
----------- ----------- -----------
Net cash used in investing activities.................................... (158,599) (79,909) (264,650)
----------- ----------- -----------
Cash flows from financing activities:
Long-term debt borrowings................................................ 211,484 122,604 551,005
Long-term debt repayments................................................ (196,906) (120,959) (280,924)
Deferred financing costs................................................. (3,104) (893) (12,306)
Repurchase of convertible subordinated notes............................. (3,812) (19,999) --
Issuance of common stock................................................. 124,217 61,894 7,075
Distributions to minority interests...................................... (4,975) (3,143) (2,454)
Other financing activities............................................... 360 2,388 372
----------- ----------- -----------
Net cash provided by financing activities................................ 127,264 41,892 262,768
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... (20,710) (8,988) 5,476
Cash and cash equivalents, beginning of year............................... 61,384 70,372 64,896
----------- ----------- -----------
Cash and cash equivalents, end of year..................................... $ 40,674 $ 61,384 $ 70,372
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Horizon/CMS Healthcare Corporation (formerly, Horizon Healthcare
Corporation) and its subsidiaries (collectively, the Company) is a leading
provider of post-acute health care services. The Company's long-term care
facilities provide skilled nursing care and basic patient services with respect
to daily living and general medical needs. The Company also provides
comprehensive medical rehabilitation programs and services in each of the
rehabilitation industry's three principal sectors -- inpatient rehabilitation
care, outpatient rehabilitation care and contract therapy. The Company also
provides other specialty health care services to its long-term care and
rehabilitation facilities and outside parties. Such specialty health care
services include licensed specialty hospital services and subacute units,
institutional pharmacy services, physician locum tenens, Alzheimer's care,
non-invasive medical diagnostic testing services, home respiratory care
services, clinical laboratory services and management and managed care services
to physicians and other providers. Substantially all of these services are
within the post-acute health care market and, accordingly, the Company operates
within a single industry segment.
Subsequent to year end, in connection with the merger of a wholly owned
subsidiary of the Company with Continental Medical Systems, Inc. (CMS), the
Company changed its name to Horizon/CMS Healthcare Corporation (Note 18).
As discussed in Note 18, the accompanying financial statements have been
restated to include the accounts and operations of CMS for all periods prior to
the merger. These restated financial statements include the financial position
of CMS as of June 30, 1995 and 1994 and the results of operations of CMS for
each of the three years in the period ended June 30, 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its 50% or greater owned subsidiaries which the Company controls. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Investments in affiliates, which are included in other assets in the
accompanying consolidated balance sheets, in which the Company owns 20% or more
and limited partnerships are carried on the equity basis which approximates the
Company's equity in underlying net book value. Other investments are stated at
cost.
OPERATING REVENUES
Operating revenues include net patient care and other revenues. Net patient
care revenues are recorded at established billing rates or at the amount
realizable under agreements with third-party payors, primarily Medicaid and
Medicare. Revenues under third-party payor agreements in certain states are
subject to examination and retroactive adjustments, and amounts realizable may
change due to periodic changes in the regulatory environment. Provisions for
estimated third-party payor settlements are provided in the period the related
services are rendered. Differences between the amounts accrued and subsequent
settlements are recorded in operations in the year of settlement.
A significant portion of the Company's revenue is derived from patients
under the Medicaid and Medicare programs. There have been and the Company
expects that there will continue to be a number of proposals to limit Medicare
and Medicaid reimbursement for long-term and rehabilitative care services. The
Company cannot predict at this time whether any of these proposals will be
adopted or, if adopted and implemented, what effect such proposals would have on
the Company.
F-9
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Operating revenues also include interest, management fees and other revenues
which are not material to total operating revenues.
CASH EQUIVALENTS
For purposes of the accompanying consolidated statements of cash flows, the
Company considers its highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
DEPRECIATION
Property and equipment is stated at the lower of cost or net realizable
value. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets (buildings -- 30 to 40 years; equipment --
3 to 20 years). Maintenance and repairs are charged to expense as incurred.
Major renewals or improvements are capitalized.
ASSET IMPAIRMENT
The carrying values of long-lived assets are reviewed if the facts and
circumstances suggest that an item may be impaired. If this review indicates
that a long-lived asset will not be recoverable, as determined based on the
future undiscounted cash flows of the asset, the Company's carrying value of the
long-lived asset is reduced to fair value.
GOODWILL
Goodwill has resulted from various acquisitions made by the Company. In
connection with acquisitions accounted for as purchases, the excess of the total
acquisition cost over the fair value of the net assets acquired has been
recorded as goodwill. Goodwill is amortized on the straight-line basis over a
period of 15 to 40 years. The Company evaluates the realizability of goodwill
quarterly based upon expectations of undiscounted future cash flows of the
related assets.
INCOME TAXES
The Company files a consolidated federal income tax return for all 80% or
more owned subsidiaries. Separate returns are filed for all subsidiaries owned
less than 80%. On June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." The
adoption of FAS 109 changes the Company's method of accounting for income taxes
from the deferred method (APB Opinion No. 11) to an asset and liability
approach. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets and
liabilities.
WORKERS' COMPENSATION
Workers' compensation coverage is effected through deductible insurance
policies and qualified self insurance plans which vary by the states in which
the Company operates. Provisions for estimated settlements are provided in the
period of the related coverage and are determined on a case by case basis plus
an amount for incurred but not reported claims. Differences between the amounts
accrued and subsequent settlements are recorded in operations in the period of
settlement.
EARNINGS PER SHARE
Earnings per share is calculated based upon the weighted-average number of
common shares and common equivalent shares outstanding during each period.
Common equivalent shares include stock purchase warrants and options. Earnings
per common and common equivalent share is based upon 47,850,000 shares in 1995,
37,078,000 shares in 1994, and 32,248,000 shares in 1993. Earnings per common
share-assuming full dilution is based upon 47,857,000 shares in 1995, 40,051,000
shares in 1994 and 36,941,000 shares in 1993, including the effect of
convertible subordinated notes.
F-10
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) NOTES RECEIVABLE
Notes receivable consists of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Variable rate note receivable (8.0% at May 31, 1995) from a related party, full
recourse; interest payable semi-annually; principal payable December 2008;
unsecured....................................................................... $ 10,653 $ 13,000
Variable rate note receivable (7.0% at May 31, 1995); interest payable monthly;
principal payable $3,000 in August 2002 and $3,000 in August 2004; secured by
real property................................................................... 6,000 6,000
7% note receivable; payable in monthly installments of $27 including interest; due
January 2016; secured by real property.......................................... 3,569 3,644
7% notes receivable, payable in monthly installments of $60 including interest;
due April 2004; secured by real property........................................ 9,571 9,621
Other notes receivable bearing interest at 6% to 12%; secured by real property.... 16,649 20,345
--------- ---------
Notes receivable................................................................ 46,442 52,610
Less current portion.............................................................. 1,823 1,082
--------- ---------
Notes receivable, excluding current portion....................................... $ 44,619 $ 51,528
--------- ---------
--------- ---------
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment owned and held under capital lease is stated at cost
and consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Land.................................................................. $ 67,330 $ 46,053
Buildings............................................................. 478,643 336,049
Equipment............................................................. 161,543 126,456
---------- ----------
707,516 508,558
Less accumulated depreciation and amortization........................ 93,137 63,109
---------- ----------
Property and equipment, net........................................... $ 614,379 $ 445,449
---------- ----------
---------- ----------
</TABLE>
(4) ACCRUED EXPENSES
Accrued expenses is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Salaries, wages and benefits.......................................... $ 53,696 $ 55,958
Accrued insurance..................................................... 18,297 14,628
Accrual for litigation settlement..................................... 12,800 --
Accruals for special charges.......................................... 10,741 18,794
Interest.............................................................. 11,058 12,387
Other................................................................. 24,633 28,061
---------- ----------
$ 131,225 $ 129,828
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Revolving credit drawn on credit agreements; interest due monthly; principal due
in fiscal 2000................................................................ $ 138,750 $ 44,250
10 7/8% senior subordinated notes; due in fiscal 2002........................... 145,125 198,672
10 3/8% senior subordinated notes; due in fiscal 2003........................... 117,991 148,923
Convertible subordinated debenture; interest at 8 3/4%; due in fiscal
2015.......................................................................... 20,400 20,906
Convertible subordinated debenture; interest at 6 1/2%; due in fiscal
2012.......................................................................... 5,680 10,000
Convertible subordinated debenture; interest at 7 3/4%; due in fiscal
2012.......................................................................... 2,000 2,000
Obligations under capital leases and other long-term debt bearing interest
ranging from 5.0% to 14.0%; secured by related land, buildings and
equipment..................................................................... 108,774 43,291
---------- ----------
Long-term debt................................................................ 538,720 468,042
Less current portion............................................................ 5,032 5,711
Less note receivable on convertible debenture................................... 1,000 1,000
---------- ----------
Long-term debt, excluding current portion..................................... $ 532,688 $ 461,331
---------- ----------
---------- ----------
</TABLE>
On March 16, 1995, the Company completed a $250,000 revolving credit loan
agreement with the Boatmen's National Bank of St. Louis, as agent for a group of
banks (the "Boatmen's Facility"). The Boatmen's Facility, which replaced the
revolving loan agreement outstanding at May 31, 1994 was drawn in the amount of
$104,750 at May 31, 1995. This facility bears interest at either the Adjusted
Corporate Base Rate plus up to .25% (9.0% at May 31, 1995) or at the Adjusted
London Interbank Offered Rate (LIBOR) rate plus 0.5 to 1.25% (7.0 to 7.0625% at
May 31, 1995), both as defined in the credit agreement. The average interest
rate on amounts outstanding under the Boatmen's Facility was 7.68% at May 31,
1995. This facility: (a) requires the Company to maintain certain financial
ratios, (b) restricts the Company's ability to enter into capital leases beyond
certain specified amounts, (c) prohibits transactions with affiliates not at
arm's length, (d) allows the Company to make only permitted investments, (e)
restricts certain indebtedness, liens, dispositions of property and issuances of
securities and (f) prohibits a change in control or a fundamental change in the
business of the Company except under certain limited circumstances. The
Boatmen's Facility also restricts the payment of dividends by the Company to an
amount which shall not exceed 25% of the Company's net income for the prior
fiscal year, and any such payment is subject to continued compliance by the
Company with the financial ratio covenants contained in the credit agreement.
This facility further provides that any event or occurrence that would have a
material adverse effect on the Company's ability to repay the loans or to
perform its obligations under the loan documents will constitute an event of
default under this facility. Certain subsidiaries of the Company have guaranteed
the obligations of the Company under the Boatmen's Facility. The Boatmen's
Facility expires on March 31, 1998 and is secured by a pledge of the stock of
all subsidiaries of the Company and certain accounts receivable of the Company.
The amount of such accounts receivable collateral was approximately $102,200 at
May 31, 1995.
Prior to the merger, at May 31, 1995, the Company was also party to a credit
facility with Citibank, N.A., as agent for a group of several banks (the
"Citibank Facility"). At May 31, 1995, $34,000 had been drawn on this facility.
The Citibank Facility provided up to $235,000 in a revolving line of credit, of
which up to $45,000 was available in the form of letters of credit. The Citibank
Facility provided for a revolving loan period
F-12
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
through December 31, 1996 and the subsequent conversion of the revolving loan
into a term loan. At the Company's option, the interest rate on any loan under
the Citibank Facility was based on the LIBOR rate or a base rate as specified in
the agreement as adjusted for a margin. At May 31, 1995, the weighted average
interest rate for all borrowings under the Citibank Facility was 8.02%.
In July 1995, in connection with the merger with CMS, the Company and CMS
entered into a new facility with NationsBank of Texas, N.A., as agent for a
group of banks, (the "NationsBank Facility") that replaced the Boatmen's and
Citibank Facilities and combined the amount available for borrowing at $485,000.
The aggregate principal amount was divided between the Company and CMS in the
amounts of $250,000 and $235,000, respectively. The terms of the NationsBank
Facility are substantially consistent with those of the Boatmen's Facility
except that accounts receivable are no longer required as collateral and the
interest component has been revised. Under the NationsBank Facility, interest is
computed at a rate equal to either, as selected by the Company, the Alternate
Base Rate or the Adjusted LIBOR rate plus 0.625% to 1.25% per annum, depending
on the maintenance of specified financial ratios. The Alternate Base Rate is
equal to the greater of the prime rate or the federal funds effective rate plus
.5%. The agreement expires in June 2000.
Simultaneous with the tender offer for the 10 3/8% and 10 7/8% Senior
Subordinated Notes discussed below, in September 1995 the NationsBank Facility
was amended and restated to increase the facility from $485,000 to $750,000, of
which $70,000 is available in the form of letters of credit, and to remove the
division between the Company and CMS.
On August 17, 1992, the Company issued 10 7/8% Senior Subordinated Notes due
2002 ("10 7/8% Notes") in the amount of $200,000 in a public offering in which
the Company received net proceeds of $192,500. The 10 7/8% Notes were priced at
99.25%, to yield 11% annually to maturity. On March 16, 1993 the Company issued
its 10 3/8% Senior Subordinated Notes due 2003 ("10 3/8% Notes") in the amount
of $150,000 in a private placement in which the Company received net proceeds of
$144,586. The 10 3/8% Notes were priced at 99.22% to yield 10 1/2% annually to
maturity. The 10 3/8% Notes were subsequently registered in a registered
exchange offer. Of the difference between the face amount of each issue of the
Notes and the net proceeds of the offerings, $2,664 represented original issue
discount. The remaining $10,250 represented various issuance costs and is
recorded within other intangible assets and is amortized over the life of the
notes. The 10 7/8% Notes are subject to redemption at any time on or after
August 15, 1997, at specified redemption prices plus accrued interest. The
10 3/8% Notes are subject to redemption at any time on or after April 1, 1998,
at specified redemption prices plus accrued interest. The indentures for the
Notes contain certain covenants which limit the ability to incur additional
indebtedness, provide guarantees and pay cash dividends.
During fiscal 1995, the Company purchased $85,206 principal amount of its
10 7/8% and 10 3/8% Notes, (collectively its "Senior Subordinated Notes" or
"Subordinated Debt"), at a discount in a series of open market transactions.
On September 26, 1995, the Company completed a tender offer and consent
solicitation for the Senior Subordinated Notes. Tenders and consents were
obtained from the holders of 99.8% of the $118,800 10 3/8% Notes and holders of
97.5% of the $146,100 10 7/8% Notes. The 10 3/8% Notes were redeemed at 109.25%
plus a consent fee of 1.05% and the 10 7/8% Notes were redeemed at 109.0% plus a
consent fee of .75%. The Company paid $289,500 to retire the Notes, including
principal, premium, consent fee and other related costs. As a result of the
tender, the Company will record an extraordinary charge related to the loss on
the retirement of the Senior Subordinated Notes, including the write-off of
related deferred discount, swap cancellation and financing costs, of
approximately $22,100, net of tax, in the second quarter of fiscal 1996.
F-13
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
The Senior Subordinated Notes were retired with funds drawn on the NationsBank
Facility. Aggregate draws, including letters of credit, under the amended credit
facility after retirement of the Senior Subordinated Notes was approximately
$490,000.
In order to reduce the impact of changes in interest rates on its long-term
debt, the Company, during fiscal 1994 and 1993, entered into four, seven year,
interest rate swap agreements with notional amounts of $25,000 each which mature
in 1999 and 2000 and which provide for receipt of yields of between 5.16% and
6.65% and payment of a six month LIBOR yield. On September 12, 1995, these
interest rate swap agreements were terminated at a cost of $3,540, in connection
with the tender offer for the Senior Subordinated Notes discussed above.
On February 14, 1992, the Company issued $57,500 of 6.75% convertible
subordinated notes (the "6.75% Notes") due February 1, 2002. The 6.75% Notes
were convertible at any time prior to maturity into shares of common stock of
the Company at a conversion price of $12.00 per share, subject to adjustment in
certain events. Interest on the 6.75% Notes was payable semi-annually on each
February 1 and August 1, commencing August 1, 1992. During the year ended May
31, 1992, the Company redeemed $3,230 of 6.75% Notes at approximately 80% of par
value, resulting in a gain of $475, net of allocable deferred financing costs of
approximately $140. During the third quarter of fiscal 1994, the remaining
$54,270 of 6.75% Notes were converted into the Company's common stock at the
conversion price stated above. In connection therewith, approximately $1,900 of
deferred financing costs and $500 of conversion costs were offset against
additional paid-in capital at the time of conversion.
In connection with the merger of Greenery Rehabilitation Group, Inc.
(Greenery) into the Company (discussed in Note 15), the Company assumed the
obligations under Greenery's 6 1/2% convertible subordinated notes and 8 3/4%
convertible senior subordinated notes, par value of $26,631 and $28,150,
respectively, at February 11, 1994. These obligations were recorded at their
fair market value under purchase accounting, resulting in a discount on the
6 1/2% convertible subordinated notes of $2,663.
The 6 1/2% convertible subordinated notes are due June 2011 and are
convertible into common stock of the Company at a price of $69.32 per share.
These notes may be redeemed in whole or in part at 103 1/4% of par, plus accrued
interest, declining annually to par on June 15, 1996. Commencing June 15, 1996,
the Company is obligated to retire 5% of the issue amount annually to maturity.
The 8 3/4% convertible senior subordinated notes are due 2015 and are
convertible into common stock of the Company at a price of $54.00 per share. The
Company may redeem the notes, in whole or in part at 106.125% of par, plus
accrued interest, declining annually to par on April 1, 2000. Commencing April
1, 2000, the Company is required to retire 5% of the original issue amount
annually to maturity. The notes are senior to the 6 1/2% debentures, but will be
subordinated to any future senior indebtedness.
During the fourth quarter of fiscal 1994, the Company redeemed $15,520 of
the 6 1/2% convertible subordinated notes and $7,244 of the 8 3/4% convertible
senior subordinated notes. The Company recorded a gain of approximately $734,
net of the write-off of $1,552 debt discount recorded under purchase accounting
and income taxes of approximately $480.
During 1995, the Company repurchased $4,800 of the 6 1/2% convertible
subordinated notes and $506 of the 8 3/4% convertible senior subordinated notes.
The Company recorded a gain of approximately $613, net of the write-off of $480
debt discount recorded under purchase accounting and income taxes of
approximately $401.
F-14
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
The approximate aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ------------------------------------------------------------------------
<S> <C>
1996.................................................................... $ 5,032
1997.................................................................... 6,620
1998.................................................................... 4,115
1999.................................................................... 1,777
2000.................................................................... 1,890
Thereafter.............................................................. 518,286
----------
$ 537,720
----------
----------
</TABLE>
In November 1987, a 7 3/4% convertible subordinated debenture was sold to
the Company's vice chairman. This $2,000 debenture is convertible into shares of
common stock at a conversion price of $8.56 per share. Simultaneously, the
Company loaned the vice chairman $2,000 to purchase the debenture. The loan is
evidenced by a promissory note bearing interest at 7 3/4%, payable on the
maturity date of the debenture or earlier to the extent that the debenture is
converted. At May 31, 1995, $1,000 is outstanding on the note.
(6) LEASE COMMITMENTS
The Company has noncancelable operating leases primarily for facilities and
equipment. Certain leases provide for purchase and renewal options of 5 to 15
years, contingent rentals primarily based on operating revenues and the
escalation of lease payments coincident with increases in certain economic
indexes. Contingent rent expense for the years ended May 31, 1995, 1994 and 1993
was approximately $6,346, $6,198 and $7,662, respectively.
Future minimum payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ------------------------------------------------------------------------
<S> <C>
1996.................................................................... $ 88,613
1997.................................................................... 82,557
1998.................................................................... 74,716
1999.................................................................... 61,989
2000.................................................................... 50,378
Thereafter.............................................................. 188,527
----------
Total minimum lease payments............................................ $ 546,780
----------
----------
</TABLE>
The Company is contingently liable for annual lease payments of
approximately $2,570 for leases on facilities sold. In addition, the Company is
contingently liable for annual lease payments of $6,200 for leases on managed
facilities.
F-15
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LEASE COMMITMENTS (CONTINUED)
The Company leases seven facilities from an affiliate of two directors of
the Company. During fiscal 1995, a previously leased facility was purchased by
the Company. The aggregate lease expense for these facilities for the years
ended May 31, 1995, 1994 and 1993 was approximately $15,900, $5,501, and $903,
respectively. Future minimum lease commitments related to these facilities are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ------------------------------------------------------------------------
<S> <C>
1996.................................................................... $ 12,851
1997.................................................................... 12,851
1998.................................................................... 12,028
1999.................................................................... 12,028
2000.................................................................... 12,028
Thereafter.............................................................. 61,149
----------
Total................................................................... $ 122,935
----------
----------
</TABLE>
The Company has been party to various contracts with Commercial Construction
Company, Inc. ("CCI") for the construction of new rehabilitation hospitals to be
owned and operated by the Company. CCI is wholly owned by the son of the
Company's vice-chairman and brother of an executive vice-president of the
Company. In addition, the Company purchases other development and maintenance
services, equipment, furniture and supplies for its rehabilitation hospitals
through CCI and its affiliates. The Company also leases certain clinic and
office space in the greater Harrisburg, PA area under leases with various
partnerships, of which the vice-chairman of the Company and an executive
vice-president are partners. Also, the Company leases certain office space
located in the greater Harrisburg, PA area from a director of the Company and
partner of a law firm which provides legal services to the Company. In fiscal
1995, 1994, and 1993, the Company made payments to these related parties
aggregating approximately $7,401, $16,950, and $75,220, respectively. Of these
payments, $2,292, $7,189, and $66,204, were recorded in property and equipment
for fiscal 1995, 1994, and 1993, respectively, and $5,109, $9,761, and $9,016
were charged to cost of services for fiscal 1995, 1994, and 1993, respectively.
As of May 31, 1995, future commitments under outstanding contracts with CCI and
its affiliates were $3,475 plus reimbursement of certain personnel costs.
In addition, the Company leases its corporate office space located in
Albuquerque, NM from certain officers and directors. The lease is classified as
an operating lease and provides for minimum annual rents of $535. The lease
expires on July 31, 2001.
(7) SPECIAL CHARGE AND CHANGE IN ACCOUNTING PRINCIPLE
During the second, third and fourth quarters of fiscal 1995, special pre-tax
charges of $13,398, $5,045 and $4,979 were recorded, respectively. The second
and fourth quarter special charges reflect the effect of a revision in the
Company's estimate of receivables from third party payors at its CMS Therapies,
Inc. subsidiary. The third quarter special charge reflects the costs of
eliminating management and staff positions, office lease terminations and
certain other costs of the changes implemented during the third quarter at CMS
Therapies, Inc. At May 31, 1995, the $4,085 balance of the third quarter special
charge is included within accrued expenses.
The Company received various adjustments upon the final settlement of its
1991 and 1992 CMS Therapies, Inc. home office cost reports and other CMS
Therapies, Inc. 1992 cost reports. As a result of the settlements, which was the
Company's first indication that adjustments to its estimates would be required,
the Company performed a detail analysis of its estimated third party settlements
for all open cost reports.
F-16
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) SPECIAL CHARGE AND CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
Upon completion of its analysis during the second quarter of fiscal 1995, and
subsequent revision in the fourth quarter of fiscal 1995, the Company recorded
the second and fourth quarter special charges to reflect the revision in the
Company's estimated third party settlements.
During the fourth quarter of fiscal 1994, a special pre-tax charge of
$74,834 was recorded. The special charge resulted from the approval by the
Company's board of directors of several measures to streamline operations and
improve productivity by restructuring the Company into major operating
businesses, flattening the management organization structure, writing down
certain assets and, where appropriate, divesting of unproductive assets. The
Company began working on the proposed plan during the fiscal 1994 third quarter
as a result of market changes the Company was experiencing. The special charge
comprised several items including the impairment of selected assets in the
Company's hospital division, the costs associated with the consolidation of its
contract therapy companies, the losses related to the termination of certain
business relationships in the contract therapy business and certain other costs
of the restructuring program.
At May 31, 1995, the remaining balance in the special charge is
approximately $6,656, (excluding the write down of assets which are reflected as
a reduction of the related asset account), which is included within accrued
expenses. The components of the special charge are as follows:
<TABLE>
<CAPTION>
ORIGINAL FISCAL 94-95 BALANCE MAY
PROVISION ACTIVITY 31, 1995
--------- ------------ ------------
<S> <C> <C> <C>
Impairment of assets and
future noncancellable
commitments................ $50,244 $(43,969) $6,275
Consolidation and
restructuring.............. 22,842 (22,842) --
Employee and other costs..... 1,748 (1,367) 381
--------- ------------ ------
$74,834 $(68,178) $6,656
--------- ------------ ------
--------- ------------ ------
</TABLE>
Approximately $50,244 of the special charge was associated with the
impairment of assets at eight rehabilitation hospitals, divestiture of two
rehabilitation hospitals, closure of a select group of outpatient locations and
the accrual of amounts for certain future noncancellable commitments.
The impaired assets were identified in accordance with the Company's policy
and based upon a review of the facts and circumstances related to the assets and
a determination that the assets would not be recoverable, as determined based
upon the future undiscounted cash flows resulting from the assets. The
impairment loss was measured as the difference between the carrying amount of
the assets and their fair value as determined by independent appraisals.
Approximately $12,042 of the charge is related to the consolidation of
certain contract therapy companies into CMS Therapies, Inc. and the exit from
certain markets and businesses. This consolidation process involved the closure
of offices, relocation and severance of personnel and elimination of duplicative
processes.
Approximately $10,800 of the charge is related to the writedown of
uncollectible receivables pertaining to the termination of certain business
relationships at CMS Therapies, Inc. During the second quarter of fiscal 1994,
the Company exited business arrangements in which it provided therapists to
unrelated Medicare certified agencies which in turn supplied those therapists to
non-Medicare certified skilled nursing facilities. For a variety of business
reasons, including, among others, the Health Care Financing Administration's
announced intentions to increase their review of the reasonableness of the
charges billed by the agencies to the Medicare program, the Company exited those
relationships and, in many instances, began to provide the same services
directly to Medicare patients upon termination of the contracts with the
agencies. Following
F-17
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) SPECIAL CHARGE AND CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
termination of the contracts, the Company continued to assess the collectibility
of the agency receivables and, due to deteriorating business relations and
declining financial condition of the agencies, it was determined a write-down of
these receivables was required as of May 31, 1994.
The remainder of the charge, $1,748, was to reduce the corporate office work
force and provide for transaction costs to execute the plan.
During the fourth quarter of fiscal 1993 the Company recorded a pre-tax
charge of $14,556 related principally to the write-off of deferred costs for
approximately 30 abandoned rehabilitation hospital development projects for
which construction had not started. The decision to write-down or abandon
certain projects and pursue less capital-intensive growth than in the past was a
result of changes in the Company's rehabilitation hospital development strategy
in response to changes in various health care delivery markets. Previously, the
Company had deferred certain costs incurred to obtain government approvals and
other expenses related to the development of rehabilitation hospitals. Based on
a historically high rate of completion, costs of developing a project were
charged to operations only when it was determined that the project would be
abandoned.
As a result of the change in development strategy, the Company changed its
accounting for development costs. Hospital development costs are expensed until
that time when it is probable that construction will commence.
Additionally, costs of $2,598 related to the merger with Kron Medical
Corporation ("Kron") and Kron's subsequent consolidation with the Company's
other physician services company, CompHealth, were charged to expense in the
third quarter of fiscal 1993.
(8) SETTLEMENT CHARGE
On September 27, 1995, the Company settled certain pending litigation,
terminated a number of contracts with the other party to the litigation and
obtained releases of claims and potential claims relating to the subject matter
of the litigation and the terminated contracts. As consideration for the
settlement, contract terminations and releases, the Company paid cash and
delivered a warrant to purchase the Company's common stock. At May 31, 1995, the
Company accrued $12,800 of expenses and wrote down $700 of receivables to record
the cash payment, warrant valuation, receivable write-offs and other commitments
and transaction costs of the settlement transaction.
(9) EXTRAORDINARY GAIN
During fiscal 1995, the Company recognized a gain of $2,571 ($4,172 less
related tax effect of $1,601) relating to open market purchases at a discount of
its subordinated debt and its 8 3/4% and 6 1/2% convertible subordinated notes.
During fiscal 1994, the Company recognized a gain of $734 ($1,214 less
related tax effect of $480) relating to open market purchases of its 8 3/4% and
6 1/2% convertible subordinated notes at a discount.
(10) INCOME TAXES
On June 1, 1993, the Company adopted FAS 109 through retroactive restatement
of its financial statements from June 1, 1990. The adoption did not have a
material effect on the Company's financial condition or results of operations.
F-18
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................. $ 6,674 $ 11,653 $ 20,794
State............................................................... 3,840 2,507 4,177
--------- ---------- ---------
10,514 14,160 24,971
Deferred:
Federal............................................................. 10,594 (11,475) (3,084)
State............................................................... 2,267 (954) (367)
--------- ---------- ---------
12,861 (12,429) (3,451)
--------- ---------- ---------
Total............................................................. $ 23,375 $ 1,731 $ 21,520
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The differences between the total tax expense from operations and the income
tax expense using the statutory federal income tax rate (35 percent) were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed tax expense at statutory rate................................. $ 16,931 $ (6,329) $ 18,150
State income tax expense, net of federal income tax benefit............ 4,690 913 3,237
Amortization of goodwill............................................... 1,245 640 607
Assessments............................................................ 83 2,983 18
Settlement charge...................................................... 850 1,730 --
Change in valuation allowance.......................................... (800) 970 (257)
Other.................................................................. 376 824 (235)
--------- --------- ---------
Total income tax expense........................................... $ 23,375 $ 1,731 $ 21,520
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Components of the deferred tax asset:
Special charges and settlement charge......................................... $ 19,023 $ 20,511
Allowance for doubtful accounts............................................... 11,148 6,538
Accrued payroll and related benefits.......................................... 3,867 3,156
Other accrued liabilities..................................................... 7,879 8,111
Tax carryforward items........................................................ 5,283 7,859
Deferred lease credit......................................................... 7,630 10,137
Other......................................................................... 3,885 5,167
---------- ----------
58,715 61,479
---------- ----------
Components of the deferred tax liability:
Buildings and equipment, related basis differences, deferred gain and
depreciation................................................................ (31,114) (20,147)
Difference between reporting income/loss from partnership investments for
financial and income tax reporting.......................................... (2,172) (1,280)
Other......................................................................... (5,713) (7,121)
---------- ----------
(38,999) (28,548)
Valuation allowance........................................................... (4,051) (4,851)
---------- ----------
Total....................................................................... $ 15,665 $ 28,080
---------- ----------
---------- ----------
</TABLE>
F-19
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) INCOME TAXES (CONTINUED)
As a result of business combinations during the years ended May 31, 1995 and
1994, net deferred income tax assets of $4,238 and $14,724, respectively, and
related valuation allowances of $0 and $3,051, respectively, were recorded.
The Company has regular tax net operating loss carryforwards of
approximately $8,470 which are currently subject to separate return year
limitations and expire in years 2007 and 2008. In addition, the Company also has
an alternative minimum tax credit carryforward of $1,207 which is available for
utilization indefinitely.
At May 31, 1995, the Company has an estimated $500 capital loss
carryforward, primarily as a result of certain restructuring transactions. The
loss is only available to offset future capital gain income and will expire in
fiscal 1998.
The valuation allowance is the result of: (1) separate return loss
carryforward limitations; (2) the uncertain state tax benefits from states
requiring separate return filings or with no or limited loss carryover
provisions; and (3) limitations on the Company's ability to absorb capital
losses in the five year carryforward period. The valuation allowance decreased
by $800 during fiscal 1995 primarily as a result of capital loss utilization.
(11) CAPITAL STOCK
COMMON STOCK
In November and December 1994, the Company completed the sale of 5,558,790
shares of its common stock, including the sale of 643,333 shares held by certain
stockholders. Net proceeds of approximately $119,600 were used to repay
outstanding debt under the revolving credit loan agreement and to fund
acquisitions.
During 1995 the Company issued 1,847,899 shares of common stock in
connection with certain acquisitions.
As discussed in Note 5, the Company converted $54,270 of its 6 3/4%
convertible subordinated notes into 4,522,500 shares of the Company's common
stock during the third quarter of 1994. The conversion price was $12 per share.
During 1994, the Company issued 2,828,968 shares of common stock in
connection with certain acquisitions.
In October 1993, the Company completed a common stock offering of 4,025,000
shares. Net proceeds of approximately $58,200 were used to repay outstanding
debt under the revolving credit loan agreement and to fund acquisitions.
PREFERRED STOCK
There are 500,000 shares of authorized but unissued shares of $.001
preferred stock. On September 12, 1994, the board of directors of the Company
declared a dividend of one preferred share purchase right (a "Right." for each
outstanding share of the Company's common stock held of record on September 22,
1994, and approved the further issuance of Rights with respect to all shares of
the Company's common stock that are subsequently issued. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
series A junior participating preferred stock, par value $.001 per share of the
Company, at a price of $110 per one one-thousandth of a share, subject to
adjustment. Until the occurrence of certain events, the Rights are not
exercisable, will be evidenced by the certificates for the Company's common
stock and will not be transferable apart from the Company's common stock.
F-20
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) CAPITAL STOCK (CONTINUED)
STOCK PURCHASE WARRANTS
The Company had 100,000 stock purchase warrants outstanding at May 31, 1995,
for the purchase of common shares. These warrants, priced at $2.50, were
exercised subsequent to year end.
STOCK BENEFIT PLANS
The Company has a nonqualified employee stock option plan and a directors'
stock option plan that provide the Company the ability to grant to employees and
outside directors the option to purchase shares of common stock of the Company
at the market value of the stock at the option grant date. Accordingly, no
compensation is recorded in the accompanying consolidated financial statements
for the options granted.
All options granted under the employee plan and directors' plan expire ten
years after grant, are non-transferable and are exercisable only during or
immediately following the period the individual is employed by the Company or is
a current member of the board of directors, subject to certain exceptions for
death or disability. One-third of each option is exercisable on each of the
first, second and third anniversary dates following the date of grant.
The Company also had the following stock compensation plans at May 31, 1995:
the 1986 stock option plan (1986 Plan), the 1989 non-qualified stock option
agreement, the 1989 non-employee directors' stock option plan, the 1992 CEO
stock option plan (1992 Plan), the 1993 non-qualified stock option plan (1993
Plan), and the 1994 stock option plan (1994 Plan). Options outstanding at May
31, 1995, are at prices ranging from $9.73 to $40.47 per share, as adjusted for
the Exchange Rate (as defined below). As options are granted at exercise prices
which represent the fair market value of the stock at the date of grant, no
compensation expense has been recorded for these awards. Options become
exercisable in four to seven annual installments commencing on the first
anniversary of the date of grant, and expire between October 1995 and August
2003, five to ten years from the date of grant.
The 1994 plan was adopted in August 1993, which authorized options of
809,550 shares, as adjusted for the Exchange Rate. In May 1993, the 1993 Plan
was adopted which authorized options of 539,700 shares, as adjusted for the
Exchange Rate. Officers and directors were not eligible to receive options under
the 1993 Stock Option Plan.
In May 1993, options, exercisable at the market price on the date of grant
($20.38 per share, as adjusted for the Exchange Rate), were granted to
substantially all CMS employees holding outstanding options with exercise prices
higher than such current market price. The number of shares subject to the
options granted to each employee was equal in number to the shares covered by
options previously granted to such employee at higher exercise prices. The new
options were granted subject to each employee's agreement to cancel their
previously granted options for an equal number of shares at the higher exercise
prices. The term, vesting rate and other provisions of the new options were
otherwise identical to the options canceled. As a result, options on 1,802,159
shares with exercise prices per share ranging from $24.09 to $42.39 per share,
as adjusted for the Exchange Rate, were canceled and the same number of new
options were granted at an exercise price of $20.38 per share, as adjusted for
the Exchange Rate.
During fiscal 1993, the Company loaned the vice-chairman $4,548 for the
exercise of stock options and the payment of the resulting income taxes, and
loaned an executive vice-president of the Company $530 for the payment of income
taxes resulting from the exercise of stock options. The tax loans were
authorized under the 1986 Plan, and the remaining loan was authorized by the
board of directors. The loans are repayable upon demand with interest payable
monthly at the IRS' applicable federal rate, adjusted semi-annually on January 1
and July 1. The loan for the exercise of stock options is included as a
deduction from stockholders' equity.
F-21
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) CAPITAL STOCK (CONTINUED)
The following information is a summary of the stock option activity under
the plans as adjusted for a three-for-two stock split paid November 15, 1991 on
CMS common stock and the exchange of .5397 shares (the "Exchange Rate") of CMS
common stock for each share of the Company's common stock in connnection with
the CMS merger:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
<S> <C> <C> <C>
Options outstanding at beginning of year.................... 4,916,079 3,951,921 4,300,178
Granted..................................................... 1,934,116 1,518,311 2,411,633
Exercised................................................... (338,881) (319,997) (774,293)
Canceled and other adjustments.............................. (289,540) (234,156) (1,985,597)
---------------- ---------------- ----------------
Options outstanding at end of year.......................... 6,221,774 4,916,079 3,951,921
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Options exercisable at end of year.......................... 2,596,947 1,576,011 1,090,129
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Option price range.......................................... $1.38 - $28.75 $1.38 - $26.13 $0.33 - $24.09
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
The Company also has an employee stock purchase plan (Plan). The Plan allows
substantially all full-time employees to contribute up to five percent of their
compensation for the purchase of the Company's common stock at 85 percent of
market value at the date of purchase. For the year ended May 31, 1995, 16,352
shares of the Company's stock had been purchased under the Plan.
In connection with the Greenery merger, the Company issued to one of the
Company's directors a five year option to purchase 125,000 shares of the
Company's common stock at $17 per share. This option was exercised during 1995
and the shares, along with approximately 50,000 shares of additional common
stock, were converted to treasury stock in consideration for reduction of
amounts due to the Company under the terms of a note receivable.
The total number of shares allocated, granted and outstanding pursuant to
the Company's employee and directors' stock option plans and employee stock
purchase plan together with other shares issued or allocated for issuance to
employees and directors pursuant to option, incentive or similar plans, may not
exceed 10 percent of the total number of shares authorized for issuance at the
time of the allocation or grant.
(12) EMPLOYEE BENEFITS
The Company has deferred compensation plans for selected employees and
directors. These plans, which are not required to be funded by the Company,
allow eligible employees to defer portions of their current compensation up to
10%. The Company then matches up to 4% of the employee's deferred compensation.
Employee contributions are vested immediately. Employer contributions vest on a
graduated basis, with full vesting achieved at the end of six years or seven
years, depending upon the plan. The Company contributed approximately $261, $254
and $157 to these plans for the years ended May 31, 1995, 1994 and 1993,
respectively.
The Company also has 401(k) savings plans available to substantially all
employees who have been with the Company for more than six months. Employees may
defer up to 15% or 20% of their salary, depending upon the plan, subject to the
maximum permitted by law. The Company matches a portion of the employee's
contribution, which may be discretionary, depending upon the plan. Employee
contributions are vested immediately. Employer contributions vest on a graduated
basis, with full vesting achieved at the end of five or seven years, depending
upon the plan. The Company contributed approximately $1,890, $1,377 and $979 to
these plans for the years ended May 31, 1995, 1994 and 1993, respectively.
F-22
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended May 31, 1995, 1994 and 1993
(Dollars in thousands, except per share amounts)
(12) EMPLOYEE BENEFITS (CONTINUED)
In addition, the Company also has a profit-sharing plan to which it may make
contributions at its discretion. The Company has not made any contributions to
this plan. The Company may terminate any of the above plans at any time.
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash operating, investing and financing activities for
fiscal 1995, 1994 and 1993 were as follows:
1995
- The issuance of 1,776,924 shares of common stock in connection with
acquisitions in which net assets of approximately $22,030 were acquired,
- The acceptance of 175,041 shares of treasury stock for payment of a note,
- The assumption of long-term debt of $19,900 in connection with
acquisitions, and
- The assumption of obligations under capital lease of $48,600 in connection
with acquisitions.
1994
- The conversion of $54,270 of 6.75% convertible subordinated notes into the
Company's common stock,
- The issuance of 2,213,976 shares of common stock in connection with
acquisitions in which net assets of approximately $16,573 were acquired,
- The assumption of long-term debt of $19,300 in connection with
acquisitions, and
- The issuance of common stock and payment of cash for the purchase of
Medical Management Associates, Inc. in which net liabilities of
approximately $857 were assumed.
1993
- The receipt of notes receivable of $8,150 and cash for the sale of net
assets of approximately $17,500
Cash paid for interest for the years ended May 31, 1995, 1994 and 1993 was
approximately $54,351, $44,852 and $14,743, respectively.
Cash paid for income taxes, net of refunds, for the years ended May 31,
1995, 1994 and 1993 was approximately $19,236, $12,848 and $32,006,
respectively.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at May 31,
1995 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
---------- ----------
<S> <C> <C>
Cash and cash equivalents....................................................... $ 40,674 $ 40,674
Notes receivable................................................................ 47,649 45,614
Investments in marketable equity securities and other short-term investments.... 3,287 8,500
Long-term debt.................................................................. 487,797 501,234
Interest rate swap agreements/interest rate collar agreements................... -- (3,572)
</TABLE>
F-23
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount of cash and cash equivalents approximates fair value due
to the short maturity of these instruments. The fair value of notes receivable
was estimated by discounting the future cash flows using current rates available
to similar borrowers under similar circumstances. The fair value of marketable
equity securities and other short-term investments is based on quoted market
prices. It is not practicable to estimate the fair value of the Company's other
investments, which comprise certain equity investments because of the lack of a
quoted market price, and the inability to estimate fair value without incurring
excessive costs. The fair value of the Company's long-term debt, excluding
capital leases, was estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the
same remaining maturities. The fair values of interest rate swaps and interest
rate collars are the estimated amounts that the Company would receive or pay to
terminate the swap agreements, taking into account current interest rates. On
September 12, 1995, these interest rate swap agreements were terminated at a
cost of $3,540.
The market value of the outstanding convertible subordinated notes at May
31, 1995 of $25,344 included in the long-term debt amount above is a function of
both the conversion feature and the underlying debt instrument. It is
impracticable to allocate the market value between these two components,
however, the market value is not representative of the amounts that would be
currently required to retire the debt obligation.
(15) ACQUISITIONS
In July 1994, the Company acquired peopleCARE, a 13 facility long-term care
company located in Texas. Consideration given for the acquisition included the
issuance of approximately 449,000 shares of the Company's common stock, valued
at approximately $10,000, assumption of capital lease obligations of
approximately $48,600 for six facilities, and cash payment of approximately
$56,000 for fee simple title to seven facilities.
The Company acquired Advanced Cardiovascular Technology, Inc. (ACT), a
non-invasive medical diagnostic company, in April 1994. In connection with this
acquisition, the Company issued 163,976 new shares of common stock at $25 per
share. The terms of the acquisition provide for the issuance of up to 204,985
additional shares of common stock if certain earning levels are achieved by
March 31, 1997. Of these contingent shares, 160,000 were issued into escrow at
closing and remained in escrow at May 31, 1995. This contingent consideration
has not been recorded as of May 31, 1995.
In March 1994, the Company acquired all of the outstanding stock of Medical
Management Associates, Inc. ("MMA"), for $1,500 in cash relating to certain
non-compete agreements and 349,456 shares of the Company's common stock. The
acquisition was accounted for by the purchase method of accounting. Pursuant to
the acquisition agreement, additional shares of the Company's common stock may
be issued over the next two years, subject to the achievement of certain pre-tax
earnings levels.
In February 1994, the Company completed its merger of Greenery
Rehabilitation Group, Inc. ("Greenery") into the Company. Pursuant to the
merger, the Company issued approximately 2,050,000 shares of its common stock,
valued at approximately $48,000, and assumed approximately $58,000 in debt for
all of the outstanding shares of Greenery common stock. This merger added the
operations of 17 rehabilitation and skilled nursing facilities and 3 managed
facilities to the Company's operations. Subsequent to fiscal year end, on June
19, 1995, the Company announced plans to dispose of eight long-term care
facilities. Six of the facilities to be disposed of were among the 17 acquired
in the Greenery merger during fiscal 1994. The decision to sell the facilities
was based upon financial, regulatory and operational considerations.
F-24
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) ACQUISITIONS (CONTINUED)
The following unaudited pro forma financial information reflects the
combined results of operations, as restated for the merger with CMS (see Note
18), for the years ended May 31, 1995 and 1994 as if the material acquisitions
during the period, Greenery and peopleCARE, had been consummated on June 1,
1993:
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Total operating revenues.................................................... $ 1,676,393 $ 1,618,154
Total operating expenses and minority interests............................. 1,627,744 1,649,603
------------ ------------
Operating income.......................................................... 48,649 (31,449)
Income taxes................................................................ 23,508 (3,404)
------------ ------------
Earnings from continuing operations....................................... $ 25,141 $ (28,045)
------------ ------------
------------ ------------
Net earnings per common and common equivalent share....................... $ 0.52 $ (0.70)
------------ ------------
------------ ------------
Net earnings per common share -- assuming full dilution................... $ 0.52 $ (0.70)
------------ ------------
------------ ------------
</TABLE>
The unaudited pro forma information is not necessarily indicative either of
the results of operations that would have occurred had the acquisitions taken
place at the beginning of fiscal 1994 or of future results of operations of the
combined companies.
Prior to fiscal 1992, the Company acquired 80% of the outstanding stock of
Communi-Care/ProRehab, Inc. ("Communi-Care") and on July 1, 1992 acquired the
remaining 20% of the outstanding stock. The initial purchase price was
approximately $5,654, paid in cash and the Company's common stock. The purchase
price for the remaining 20% of the outstanding stock was approximately $4,831,
paid in cash and the Company's common stock. As additional purchase price under
the purchase agreement, cash and common stock totaling $8,322, $8,589, and
$2,504 was paid during fiscal 1995, 1994 and 1993, respectively.
During fiscal 1995 and 1994, the Company made various other acquisitions
which individually and in the aggregate were insignificant.
Pursuant to other acquisitions consummated prior to fiscal 1993, cash and
common stock totaling $1,920 and $2,162 was paid during fiscal 1994 and 1993,
respectively. No payments were made during fiscal 1995 relating to these
acquisitions.
Contingent payments estimated under all of the Company's acquisition
agreements may be paid in cash and the Company's common stock through fiscal
1997. These amounts are subject to adjustment based upon the achievement of
certain earnings levels and are not expected to be material.
(16) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
The Company was contingently liable for letters of credit aggregating
$40,898 and $38,557 at May 31, 1995 and 1994, respectively. The letters of
credit, which reduce the availability under the credit agreement, were used in
lieu of lease deposits for facilities operated by the Company and for deposits
under various workers' compensation programs.
EMPLOYMENT AND CONSULTING AGREEMENTS
Under annual employment agreements with three senior officers, the Company
is committed to pay minimum annual salaries totaling $1,215, subject to certain
covenants. In addition, the employment agreements provide for annual retirement
benefits and disability benefits equal to a maximum of 50 percent of
F-25
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) COMMITMENTS AND CONTINGENCIES (CONTINUED)
each officer's base salary. The retirement benefits vest in equivalent
increments over 10 years and the disability benefits terminate upon retirement
or age 65. Further, an annual death benefit is payable to the surviving spouse
or minor children equal to one-half of the vested retirement benefit at the time
of the officer's death. Amounts recorded for the annual retirement and
disability benefits have been included in other accrued liabilities in the
accompanying consolidated financial statements.
In addition and in connection with the Greenery merger, the Company has
entered into a seven year consulting agreement with one of the Company's
directors for which the Company has agreed to pay annual consulting fees of
$175.
LIFE INSURANCE PREMIUMS
In fiscal 1994, the Company agreed to fund life insurance premiums for
certain of its senior officers. As of May 31, 1995, such advances totaled
approximately $1,162 and are reflected in other assets in the accompanying
consolidated financial statements. These advances will be repaid to the Company
by the officers' estates upon the earlier of cancellation of the policies or
death of the officers.
MANAGEMENT AGREEMENT
In connection with the Greenery merger, the Company has committed to manage
three Connecticut facilities for an affiliate of two directors of the Company.
The Company is committed to manage these facilities for up to five years,
subject to the affiliate's right to terminate sooner at any time with 90 days
notice.
PURCHASE COMMITMENTS
Under the terms of one of the Company's facility lease agreements, the
Company has the option to purchase the facility and the lessor has the option to
require the Company to purchase the facility should the Company fail to exercise
the purchase option for $5,500 at the end of the lease term (August 1, 1998).
The Company has purchased usage of a Cessna/Citation III aircraft from AMI
Aviation II, L.L.C., a Delaware limited liability company ("AMI II"). The
Company's chief executive officer owns 99% of the membership interests of AMI
II. Under the aircraft usage agreement, the Company will purchase a minimum of
20 hours usage per month for $45 per month for a five year period, and will pay
certain amounts per hour for usage over 20 hours in a month plus a monthly
maintenance reserve. The Company believes that the amounts payable under this
agreement are comparable to those it would pay to other third party vendors of
similar aircraft services.
OTHER
The Company has notes receivable and other investments, related to its
divestiture of its free-standing long-term care facilities totaling $17,843
including notes receivable of $14,834 from Renaissance Healthcare Corporation
("RHC"), a long-term care company owned and operated by former employees of the
Company. Repayment of those amounts are dependent upon the cash flows of the
individual companies. Collateral on certain notes receivable and investments
aggregating $4,709 consists of first or second mortgages, personal guarantees
and pledges of certain other assets. Certain notes receivable from RHC
aggregating $13,134 reflect future installment sales obligations under which the
Company holds title to the sold assets until all payments are made. The Company
has a working capital loan commitment of $3,000 to RHC of which $1,700 was used
at May 31, 1995 and is included in the above amounts.
The Company guarantees payment throughout the term of a bond issue to an
economic development authority of amounts due and payable by the owner of a
long-term care facility previously managed by the Company. The outstanding bonds
total approximately $6,064 at May 31, 1995.
F-26
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) COMMITMENTS AND CONTINGENCIES (CONTINUED)
During fiscal 1995, certain operating facilities and office locations of the
Company were visited or contacted by representatives of the U.S. Justice
Department for the purpose of interviewing certain of its employees and
reviewing certain documents. The Company cooperated with the Justice Department
inquiries. The Company's management is not aware of any Company practices of the
type covered by the Justice Department inquiries, or otherwise, that are not in
compliance with the rules and regulations applicable to its operations. While
the Company is unable to predict what effect, if any, these inquiries will have
on the Company's business, the Company is of the opinion that their ultimate
disposition will not have a material adverse effect upon its consolidated
financial position.
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated or
settled, which include among other items malpractice claims covered under the
Company's insurance policy. Additionally, in the normal course of business, the
Company has amounts due to or from the Medicare program, the Medicaid program
and other third party payors which it believes are reasonable estimates.
However, additional changes to these estimates in the future may be appropriate
based on facts and circumstances which arise. Ultimately, the amounts due to or
from third party payors may be adjusted by these third party payors upon final
settlement. The Company is unable to estimate the likelihood or potential
amounts of any such settlements or adjustments.
(17) ADOPTION OF NEW ACCOUNTING PRINCIPLE
In fiscal 1993 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Upon issuance of this statement, the Company reviewed the
provisions of the new statement and concluded that the statement compelled the
write-down to fair value of a long-term investment being held to maturity as a
result of the impairment of the investment using a discounted cash flow
analysis. Prior to the issuance of this statement, the asset was carried at
historical cost which is expected to be recovered upon maturity. In applying
this statement, the Company recognized a $5,000 write-down to fair value of the
long-term investment. The cumulative effect of this change in accounting
principle, on an after-tax basis, was $3,204.
(18) CMS MERGER
On July 6, 1995, the stockholders of the Company and CMS approved the merger
of one of the Company's wholly-owned subsidiaries with CMS. Under the terms of
the merger agreement, CMS stockholders received .5397 of a share of the
Company's common stock for each outstanding share of CMS's common stock.
Accordingly, the Company issued approximately 20.9 million shares of common
stock, valued at approximately $393.9 million based on the closing price of the
Company's common stock on July 10, 1995, for all the outstanding shares of CMS's
common stock. Additionally, outstanding options to acquire CMS's common stock
were converted at the Exchange Rate to options to acquire 3.8 million shares of
the Company's common stock. CMS provides comprehensive medical rehabilitation
programs and services with a significant presence in each of the rehabilitation
industry's three principal sectors -- inpatient rehabilitation care, outpatient
rehabilitation care and contract therapy. The merger qualifies as a tax-free
reorganization and was accounted for as a pooling of interests. Accordingly, the
accompanying financial statements have been restated to include the accounts and
operations of CMS for all periods prior to the merger. These periods include the
financial position of CMS as of June 30, 1995 and 1994 and the results of
operations of CMS for each of the three years in the period ended June 30, 1995.
F-27
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CMS MERGER (CONTINUED)
Separate results of the Company and CMS for the three years in the period
ended May 31, 1995 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Total operating revenues:
The Company................................................. $ 638,066 $ 373,881 $ 232,199
CMS......................................................... 987,260 1,008,281 904,159
------------ ------------ ------------
$ 1,625,326 $ 1,382,162 $ 1,136,358
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) before cumulative effect of accounting change
and extraordinary gain:
The Company................................................. $ 29,879 $ 14,731 $ 7,613
CMS......................................................... (4,881) (34,545) 22,723
------------ ------------ ------------
$ 24,998 $ (19,814) $ 30,336
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) before extraordinary gain:
The Company................................................. $ 29,879 $ 14,731 $ 7,613
CMS......................................................... (4,881) (34,545) 19,519
------------ ------------ ------------
$ 24,998 $ (19,814) $ 27,132
------------ ------------ ------------
------------ ------------ ------------
Net earnings (loss):
The Company................................................. $ 30,492 $ 15,465 $ 7,613
CMS......................................................... (2,923) (34,545) 19,519
------------ ------------ ------------
$ 27,569 $ (19,080) $ 27,132
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As a result of the combination with CMS, the Company revised the accounting
policies and financial presentation of each of the previously separate
companies. The effect of these changes did not have a material effect on the
operating results or financial position of the Company. A reconciliation of
total operating revenues and net earnings of the Company as previously reported
to the amounts presented above and included in the accompanying financial
statements is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Total operating revenues:
As previously reported........................................... $ 639,080 $ 375,095 $ 232,199
Adjustments...................................................... (1,014) (1,214) --
---------- ---------- ----------
$ 638,066 $ 373,881 $ 232,199
---------- ---------- ----------
---------- ---------- ----------
Net earnings:
As previously reported........................................... $ 31,221 $ 16,606 $ 7,716
Adjustments...................................................... (729) (1,141) (103)
---------- ---------- ----------
$ 30,492 $ 15,465 $ 7,613
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-28
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations:
<TABLE>
<CAPTION>
FISCAL YEAR 1995
------------------------------------------------------------
FIRST SECOND
QUARTER QUARTER THIRD QUARTER FOURTH QUARTER
-------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total operating revenues................ $381,840 $401,572 $415,878 $426,036
Earnings (loss) before income taxes and
extraordinary gain.................... 20,771 4,021(a) 17,996(b) 5,585(d)(e)
Earnings (loss) before extraordinary
gain.................................. 12,160 1,253(a) 10,228(b) 1,357(d)(e)
Net earnings (loss)..................... $ 12,160 $ 1,253(a) $ 12,725(b)(c) $ 1,431(d)(e)
Earnings (loss) per common and common
equivalent share:
Earnings (loss) before extraordinary
gain.................................. $ 0.27 $ 0.03 $ 0.20 $ 0.02
Extraordinary gain...................... -- -- 0.05 0.01
-------- ------------ -------- --------
Net earnings (loss)..................... $ 0.27 $ 0.03 $ 0.25 $ 0.03
-------- ------------ -------- --------
-------- ------------ -------- --------
Earnings (loss) per common share --
assuming full dilution:
Earnings (loss) before extraordinary
gain.................................. $ 0.27 $ 0.03 $ 0.20 $ 0.02
Extraordinary gain...................... -- -- 0.05 0.01
-------- ------------ -------- --------
Net earnings (loss)..................... $ 0.27 $ 0.03 $ 0.25 $ 0.03
-------- ------------ -------- --------
-------- ------------ -------- --------
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1994
------------------------------------------------------------
FIRST SECOND
QUARTER QUARTER THIRD QUARTER FOURTH QUARTER
--------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total operating revenues........................... $ 325,602 $ 328,862 $ 342,364 $ 385,334
Earnings (loss) before income taxes and
extraordinary gain................................ 16,849 11,589 13,839 (60,360)(g)(h)
Earnings (loss) before extraordinary gain.......... 10,104 7,003 8,369 (45,290)(g)(h)
Net earnings (loss)................................ $ 10,104 $ 7,003 $ 8,369 (44,556)(g)(h)
Earnings (loss) per common and common equivalent
share (f):
Earnings (loss) before extraordinary gain.......... $ 0.31 $ 0.20 $ 0.21 $ (1.04)
Extraordinary gain................................. -- -- -- 0.02
--------- ------------- -------- --------
Net earnings (loss)................................ $ 0.31 $ 0.20 $ 0.21 $ (1.02)
--------- ------------- -------- --------
--------- ------------- -------- --------
Earnings (loss) per common share -- assuming full
dilution (f):
Earnings (loss) before extraordinary gain.......... $ 0.29 $ 0.19 $ 0.21 $ (1.04)
Extraordinary gain................................. -- -- -- 0.02
--------- ------------- -------- --------
Net earnings (loss)................................ $ 0.29 $ 0.19 $ 0.21 $ (1.02)
--------- ------------- -------- --------
--------- ------------- -------- --------
</TABLE>
- --------------------------
(a) Includes $13,398 pre-tax special charge related to a revision in the
Company's estimate of receivables from third party payors at its CMS
Therapies, Inc. subsidiary.
(b) Includes $5,045 pre-tax special charge related to eliminations of management
and staff positions, office lease terminations and certain other costs of
changes implemented during the third quarter at CMS Therapies, Inc.
(c) Includes a $2,497 extraordinary gain (net of related taxes of $1,555)
relating to open market purchases of its subordinated debt and its 8 3/4%
and 6 1/2% convertible subordinated notes at a discount.
(d) Includes a $4,979 pre-tax special charge related to a revision in the
Company's estimate of receivables from third party payors at its CMS
Therapies, Inc. subsidiary and $13,500 pre-tax settlement charge related to
a contract dispute.
F-29
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(e) Includes a $74 extraordinary gain (net of related taxes of $46) related to
open market purchases of its subordinated debt and its 8 3/4% and 6 1/2%
convertible subordinated notes at a discount.
(f) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in fiscal
year 1994 does not equal the total computed for the fiscal year.
(g) Includes $74,834 pre-tax special charge related to the impairment of
selected assets of the Company's hospital division, the costs associated
with the consolidation of its contract therapy companies, the losses related
to the termination of certain relationships in the contract therapy business
and certain other costs of restructuring.
(h) Includes a $734 extraordinary gain (net of related taxes of $480) related to
open market purchases of its 8 3/4% and 6 1/2% convertible subordinated
notes at a discount.
F-30
<PAGE>
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Introduction to Unaudited Pro Forma Financial Statements................................................... P-2
Unaudited Pro Forma Balance Sheet as of November 30, 1995.................................................. P-3
Notes to Unaudited Pro Forma Balance Sheet................................................................. P-4
Unaudited Pro Forma Statement of Operations for the Six Months Ended November 30, 1995..................... P-5
Notes to Unaudited Pro Forma Statement of Operations....................................................... P-6
Unaudited Pro Forma Statement of Operations for the Year Ended May 31, 1995................................ P-7
Notes to Unaudited Pro Forma Statement of Operations....................................................... P-8
</TABLE>
P-1
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
The unaudited pro forma balance sheet as of November 30, 1995 gives effect
to (i) the Offering and (ii) the proposed acquisition by merger of Pacific Rehab
which will be accounted for as a pooling of interests, as if these transactions
had occurred on November 30, 1995. Such adjustments are more fully described in
the notes to the unaudited pro forma balance sheet.
The unaudited pro forma statement of operations for the six months ended
November 30, 1995 gives effect to (i) the retirement of certain senior
subordinated notes, (ii) the Offering and (iii) the proposed acquisition by
merger of Pacific Rehab which will be accounted for as a pooling of interests,
as if these transactions had occurred on June 1, 1995. Such adjustments are more
fully described in the notes to the unaudited pro forma statement of operations.
The unaudited pro forma statement of operations for the year ended May 31,
1995 gives effect to (i) the acquisition of peopleCARE in July 1994 and certain
other insignificant acquisitions effected during the period, (ii) the retirement
of certain senior subordinated notes, (iii) the Offering and (iv) the proposed
acquisition by merger of Pacific Rehab which will be accounted for as a pooling
of interests, as if these transactions had occurred on June 1, 1994. Such
adjustments are more fully described in the notes to the unaudited pro forma
statement of operations.
The following pro forma financial information may not necessarily reflect
the financial condition or results of operations of Horizon, or of the companies
on a combined basis, which would have actually resulted had the transactions
referred to above occurred as of the date and for the periods indicated or
reflect the future earnings of Horizon.
P-2
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
AS OF NOVEMBER 30, 1995
<TABLE>
<CAPTION>
ASSETS
PACIFIC POOLING OF
HORIZON OFFERING REHAB INTERESTS
HISTORICAL ADJUSTMENTS AS ADJUSTED HISTORICAL ADJUSTMENTS PRO FORMA
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $ 26,422 $ -- $ 26,422 $ 594 $ -- $ 27,016
Accounts receivable, net................ 347,709(a) -- 347,709 13,262 -- 360,971
Other current assets.................... 136,359 -- 136,359 3,672 -- 140,031
--------- ----------- ----------- ----------- ----- --------------
Total current assets.................... 510,490 -- 510,490 17,528 -- 528,018
Property and equipment, net............. 632,814 -- 632,814 2,919 -- 635,733
Goodwill, net........................... 173,939 -- 173,939 49,860(e) -- 223,799
Other intangible assets, net............ 37,808 6,000(b) 43,808 334 -- 44,142
Notes receivable, excluding current
portion............................... 44,337 -- 44,337 -- -- 44,337
Other assets............................ 52,586 -- 52,586 528 -- 53,114
--------- ----------- ----------- ----------- ----- --------------
Total assets........................ $1,451,974 $ 6,000 $1,457,974 $71,169 $ -- $1,529,143
--------- ----------- ----------- ----------- ----- --------------
--------- ----------- ----------- ----------- ----- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 180,700 $ -- $ 180,700 $21,574 $ 750(f) $ 203,024
Long-term debt, excluding current
portion............................... 601,319 200,000(c) 607,319 6,065 -- 613,384
(194,000)(d)
Deferred income taxes................... 6,326 -- 6,326 4,848 -- 11,174
Other long-term liabilities and minority
interests............................. 35,979 -- 35,979 -- -- 35,979
Stockholders' equity:
Common stock ($.001 par value,
150,000,000 shares authorized,
51,882,060 shares issued with
51,304,552 shares outstanding,
54,669,305 shares pro forma combined
issued)............................. 52 -- 52 80 (77)(g) 55
Additional paid-in capital............ 574,862 -- 574,862 33,086 77(g) 608,025
Retained earnings..................... 63,803 -- 63,803 5,516 (750)(f) 68,569
Treasury stock........................ (8,705) -- (8,705) -- -- (8,705)
Note receivable from sale of common
stock............................... (2,362) -- (2,362) -- -- (2,362)
--------- ----------- ----------- ----------- ----- --------------
Total stockholders' equity.......... 627,650 -- 627,650 38,682 (750) 665,582
--------- ----------- ----------- ----------- ----- --------------
Total liabilities and stockholders'
equity............................ $1,451,974 $ 6,000 $1,457,974 $71,169 $ -- $1,529,143
--------- ----------- ----------- ----------- ----- --------------
--------- ----------- ----------- ----------- ----- --------------
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet.
P-3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) Estimated Medicare and Medicaid settlements of Horizon, which have been
reported separately in Horizon's historical balance sheets, have been
reclassified to accounts receivable for purposes of presentation in the
unaudited pro forma balance sheet.
(b) To record deferred financing costs incurred in connection with the
Offering.
(c) To record the Offering.
(d) To record the repayment of borrowings under the Credit Facility with net
proceeds of the Offering.
(e) Pacific Rehab goodwill, which has been classified as a portion of other
intangible assets on Pacific Rehab's historical balance sheets, has been
reclassified to a separate line item for purposes of presentation in the
unaudited pro forma balance sheet.
(f) To record estimated expenses related to effecting the Pacific Rehab
merger.
(g) In connection with the proposed merger with Pacific Rehab, each share of
Pacific Rehab common stock will be converted into .3483 of one share of Horizon
common stock. Accordingly, adjustments have been recorded to reflect the
issuance of 2,787 shares of Horizon common stock, par value $.001 per share,
upon conversion of the 8,002 shares of Pacific Rehab common stock, par value
$.01 per share, outstanding at September 30, 1995.
P-4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
NOTE PACIFIC
HORIZON RETIREMENT OFFERING REHAB
HISTORICAL ADJUSTMENTS ADJUSTMENTS AS ADJUSTED HISTORICAL PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Total operating
revenues............... $872,159 $-- $-- $872,159 $17,955(g) $890,114
---------- ----------- ----------- -------------- ---------- ---------
Cost of services......... 663,885 -- -- 663,885 8,586(g) 672,471
Administrative and
general................ 41,892 -- -- 41,892 4,582 46,474
Facility leases.......... 42,925 -- -- 42,925 1,936(h) 44,861
Depreciation and
amortization........... 29,758 (152)(b) 300(e) 29,906 987 30,893
Interest expense......... 24,476 (1,958)(c) 1,645(f) 24,163 649 24,812
Special charge........... 63,540 -- -- 63,540 -- 63,540
---------- ----------- ----------- -------------- ---------- ---------
Total costs and
expenses............. 866,476 (2,110) 1,945 866,311 16,740 883,051
---------- ----------- ----------- -------------- ---------- ---------
Earnings (loss) before
minority interests
and income taxes..... 5,683 2,110 (1,945) 5,848 1,215 7,063
Minority interests....... (3,402) -- -- (3,402) -- (3,402)
---------- ----------- ----------- -------------- ---------- ---------
Earnings (loss) before
income taxes......... 2,281 2,110 (1,945) 2,446 1,215 3,661
Income taxes............. 11,663 844(d) (778)(d) 11,729 537 12,266
---------- ----------- ----------- -------------- ---------- ---------
Earnings (loss) from
continuing
operations........... $ (9,382) $ 1,266 $(1,167) $ (9,283) $ 678 $ (8,605)
---------- ----------- ----------- -------------- ---------- ---------
---------- ----------- ----------- -------------- ---------- ---------
Earnings (loss) from
continuing operations
per common and common
equivalent share....... $ (0.18) $ (0.18) $ (0.16)(a)
---------- -------------- ---------
---------- -------------- ---------
Weighted average shares
outstanding............ 51,872 51,872 54,819(a)
---------- -------------- ---------
---------- -------------- ---------
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations.
P-5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
(a) The pro forma earnings per share amounts for the six months ended
November 30, 1995 reflect additional weighted average shares of 2,947 relating
to the issuance of Horizon common stock in connection with the Pacific Rehab
merger.
(b) During the first quarter of fiscal 1996, the Company completed a tender
offer for $118,700 of its 10 3/8% senior subordinated notes and $137,500 of its
10 7/8% senior subordinated notes. The tender was completed using funds borrowed
under the Company's Credit Facility. Accordingly, an adjustment for $152 has
been recorded to eliminate historical amortization expense on deferred financing
costs related to the retired notes for the six months ended November 30, 1995.
(c) Adjustments have been recorded to eliminate interest expense related to
the retirement of the 10 3/8% and 10 7/8% senior subordinated notes and record
additional interest expense related to borrowings under the Credit Facility, as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, 1995
<S> <C>
Retirement of $118,700 of 10 3/8% senior subordinated notes................ $ (3,982)
Retirement of $137,500 of 10 7/8% senior subordinated notes................ (4,832)
Increase in borrowings under the Credit Facility to fund retirement of
senior subordinated notes, including principal, premiums and other related
costs totalling $289,500 (interest @ 7.33%)............................... 6,856
-------
$ (1,958)
-------
-------
</TABLE>
(d) An effective tax rate of 40% has been applied to all pro forma
transactions, except with respect to data for Pacific Rehab for which the actual
effective tax rate has been maintained.
(e) An adjustment for $300 has been recorded to reflect additional
amortization expense on $6,000 of deferred financing costs amortized over 10
years incurred in connection with the Offering.
(f) In connection with the Offering, adjustments have been recorded to
eliminate interest expense related to the repayment of the Credit Facility and
to record additional interest expense incurred on the Notes:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, 1995
<S> <C>
Repayment of the Credit Facility of $194,000 (interest @ 7.33%)............ $ (7,105)
Issuance of the Notes in the amount of $200,000 (interest @ an assumed rate
of 8.75%)................................................................. 8,750
-------
$ 1,645
-------
-------
</TABLE>
(g) Interest income and other expenses of Pacific Rehab, which have been
reported separately in Pacific Rehab's historical statements of operations, have
been reclassified to total operating revenues and cost of services,
respectively, for purposes of presentation in the unaudited pro forma statement
of operations.
(h) Facility leases expense of Pacific Rehab, which has been reported as
cost of services on Pacific Rehab's historical statements of operations, has
been reclassified to facility leases for purposes of presentation in the
unaudited pro forma statement of operations.
P-6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1995
<TABLE>
<CAPTION>
CONSUMMATED CONSUMMATED NOTE
HORIZON ACQUISITIONS ACQUISITIONS RETIREMENT OFFERING
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
<S> <C> <C> <C> <C> <C>
Total operating revenues.......................... $ 1,625,326 $51,100 $ (33)(b) $ -- $ --
------------- ----------- ----------- ----------- -----------
Cost of services.................................. 1,261,000 37,096 (35)(b) --
Administrative and general........................ 82,533 5,977 (50)(c) --
Facility leases................................... 81,590 3,268 (921)(d) -- --
Depreciation and amortization..................... 56,618 783 682(e) (896)(j) 600(l)
155(f)
Interest expense.................................. 53,045 1,737 641(g) (6,062)(k) 3,290(m)
1,424(h)
Special charge and settlement charges............. 36,922 --
------------- ----------- ----------- ----------- -----------
Total operating expenses........................ 1,571,708 48,861 1,896 (6,958) 3,890
------------- ----------- ----------- ----------- -----------
Earnings before minority interests and income
taxes......................................... 53,618 2,239 (1,929) 6,958 (3,890)
Minority interests................................ (5,245) -- -- -- --
------------- ----------- ----------- ----------- -----------
Earnings before income taxes.................... 48,373 2,239 (1,929) 6,958 (3,890)
Income taxes...................................... 23,375 -- (772)(i) 2,783(i) (1,556)(i)
------------- ----------- ----------- ----------- -----------
Earnings from continuing operations............... $ 24,998 $ 2,239 $(1,157) $ 4,175 $(2,334)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Earnings from continuing operations per common and
common equivalent
share........................................... $ 0.52
-------------
-------------
Weighted average shares outstanding............... 47,850
-------------
-------------
<CAPTION>
PACIFIC
REHAB
AS ADJUSTED HISTORICAL PRO FORMA
<S> <C> <C> <C>
Total operating revenues.......................... $ 1,676,393 $27,130(n) $1,703,523
------------- ---------- -------------
Cost of services.................................. 1,298,061 11,715(n) 1,309,776
Administrative and general........................ 88,460 7,474 95,934
Facility leases................................... 83,937 2,004(o) 85,941
Depreciation and amortization..................... 57,942 1,332 59,274
Interest expense.................................. 54,075 426 54,501
Special charge and settlement charges............. 36,922 -- 36,922
------------- ---------- -------------
Total operating expenses........................ 1,619,397 22,951 1,642,348
------------- ---------- -------------
Earnings before minority interests and income
taxes......................................... 56,996 4,179 61,175
Minority interests................................ (5,245) -- (5,245)
------------- ---------- -------------
Earnings before income taxes.................... 51,751 4,179 55,930
Income taxes...................................... 23,830 1,650 25,480
------------- ---------- -------------
Earnings from continuing operations............... $ 27,921 $ 2,529 $ 30,450
------------- ---------- -------------
------------- ---------- -------------
Earnings from continuing operations per common and
common equivalent
share........................................... $ 0.57 $ 0.59(a)
------------- -------------
------------- -------------
Weighted average shares outstanding............... 48,648 51,241(a)
------------- -------------
------------- -------------
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations.
P-7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNADUTIED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
(a) The pro forma earnings per share amounts for the year ended May 31,
1995 reflect additional weighted average shares of 2,593 and 798 relating to
the issuance of Horizon common stock in connection with the Pacific Rehab
merger, and the peopleCARE and certain other acquisitions, respectively.
(b) The historical financial information reported for peopleCARE
includes certain de minimis amounts which were not acquired or assumed by
Horizon in connection with this acquisition. Therefore, adjustments have
been recorded to eliminate interest and other operating revenues of $33 for
the year ended May 31, 1995 and cost of services expense of $35 for the year
ended May 31, 1995 associated with the predecessor entity operations which
were not acquired by Horizon.
(c) An adjustment of $50 has been recorded to eliminate distributions to
peopleCARE's prior owners for the year ended May 31, 1995.
(d) An adjustment for $921 has been recorded to eliminate historical
lease expense in connection with certain other acquisitions for the year
ended May 31, 1995.
(e) An adjustment for $682 has been recorded to depreciation and
amortization to reflect the additional costs associated with the certain
other acquisitions for the year ended May 31, 1995.
(f) Adjustments have been recorded to depreciation and amortization
expense to reflect the purchase of seven facilities and capital lease of six
facilities in connection with the peopleCARE acquisition for the year ended
May 31, 1995, as follows:
<TABLE>
<S> <C>
Purchase price allocated to equipment of $5,500 depreciated
over 10 years............................................... $ 91
Purchase price allocated to buildings of $86,240 depreciated
over 40 years............................................... 370
Purchase price allocated to noncompete agreements of $250
amortized over 3 years...................................... 14
Less historical peopleCARE depreciation expense.............. (320)
---------
Increase in depreciation and amortization expense............ $ 155
---------
---------
</TABLE>
(g) The peopleCARE acquisition purchase price included the payment of
$55,616 in cash, which was funded from Horizon's line of credit, for seven
facilities. As a result of the acquisition Horizon also entered into a
capital lease for six facilities formerly owned by peopleCARE. Accordingly,
interest expense has been adjusted as follows for the year ended May 31,
1995:
<TABLE>
<S> <C>
Increase in line of credit sufficient to retire outstanding
peopleCARE debt during the period ($55,716 principal balance
at 7.25%)................................................... $ 672
Increase in capital lease obligations of $48,700. Interest
expense amortized based on an interest rate of 9.09%........ 734
Less historical peopleCARE interest expense.................. (765)
---------
Increase in interest expense................................. $ 641
---------
---------
</TABLE>
(h) An adjustment for $1,424 has been recorded to reflect interest
expense on long-term debt incurred to fund certain other acquisitions for
the year ended May 31, 1995.
(i) An effective tax rate of 40% has been applied to all pro forma
transactions except, with respect to Pacific Rehab, for which the actual
effective tax rate has been maintained.
P-8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNADUTIED PRO FORMA STATEMENT OF OPERATIONS (CONTINUED)
(IN THOUSANDS)
(j) An adjustment for $896 has been recorded to eliminate historical
amortization expense on deferred financing costs related to the retired
notes for the year ended May 31, 1995.
(k) During the first quarter of fiscal 1996, the Company completed a
tender offer for $118,700 of its 10 3/8% senior subordinated notes and
$137,500 of its 10 7/8% senior subordinated notes. The tender was completed
using funds borrowed under the Company's Credit Facility. Accordingly,
adjustments have been recorded to eliminate interest expense related to the
retirement of the 10 3/8% and 10 7/8% senior subordinated notes and record
additional interest expense related to borrowings under the Credit Facility,
as follows:
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
MAY 31, 1995
<S> <C>
Retirement of $118,700 of 10 3/8% senior subordinated notes........... $ (12,317)
Retirement of $137,500 of 10 7/8% senior subordinated notes........... (14,948)
Increase in borrowings under the Credit Facility to fund retirement of
senior subordinated notes, including principal, premiums and other
related costs totalling $289,500 (interest @ 7.33%).................. 21,203
------------
$ (6,062)
------------
------------
</TABLE>
(l) An adjustment for $600 has been recorded to reflect additional
amortization expense on $6,000 of deferred financing costs amortized over 10
years incurred in connection with the Offering.
(m) In connection with the Offering, adjustments have been recorded to
eliminate interest expense related to the repayment of the Credit Facility
and to record additional interest expense on the Notes.
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
MAY 31, 1995
<S> <C>
Repayment of the Credit Facility of $194,000 (interest @ 7.33%)....... $ (14,210)
Issuance of the Notes in the amount of $200,000 (interest @ an assumed
rate of 8.75%)....................................................... 17,500
------------
$ 3,290
------------
------------
</TABLE>
(n) Interest income and other expenses of Pacific Rehab, which have been
reported separately in Pacific Rehab's historical statements of operations,
have been reclassified to total operating revenues and cost of services,
respectively, for purposes of presentation in the unaudited pro forma
condensed statements of operations.
(o) Facility leases expense of Pacific Rehab, which has been reported as
cost of services on Pacific Rehab's historical statements of operations, has
been reclassified to facility leases for purposes of presentation in the
unaudited pro forma statement of operations.
P-9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER, DEALER OR AGENT. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Recent Developments....................................................... 12
Use of Proceeds........................................................... 12
Capitalization............................................................ 13
Selected Financial Information............................................ 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 16
Business.................................................................. 21
Management................................................................ 32
Description of Notes...................................................... 34
Description of Certain Indebtedness....................................... 53
Underwriting.............................................................. 54
Legal Matters............................................................. 54
Experts................................................................... 54
Available Information..................................................... 55
Incorporation of Certain Documents by Reference........................... 55
Index to Historical Financial Statements.................................. F-1
Index to Unaudited Pro Forma Financial Statements......................... P-1
</TABLE>
$200,000,000
HORIZON/CMS HEALTHCARE
CORPORATION
% SENIOR SUBORDINATED NOTES
DUE 2006
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
CHEMICAL SECURITIES INC.
DEAN WITTER REYNOLDS INC.
J. P. MORGAN SECURITIES INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The expenses of issuance and distribution of the securities are estimated to
be:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........................ $ 68,966
NASD filing fee............................................................ 20,500
Blue Sky Fees and Expenses (including attorneys fees)...................... 25,000
Accounting Fees and Expenses............................................... **
Legal Fees and Expenses.................................................... **
Miscellaneous.............................................................. **
---------
Total.................................................................... $
---------
---------
</TABLE>
- ------------------------
* All amounts are estimates except for the Registration Fee and the NASD
listing fee.
** To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL"), a Delaware corporation has the power, under specified
circumstances, to indemnify its directors, officers, employees and agents in
connection with threatened, pending or completed actions, suits or proceedings,
whether civil, criminal, administrative or investigative (other than an action
by or in right of the corporation), brought against them by reason of the fact
that they were or are such directors, officers, employees or agents, against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in any such action, suit or proceeding. Article XIV of the
Company's Restated Certificate of Incorporation together with Article IX of its
Bylaws provide for indemnification of each person who is or was made a party to
any actual or threatened civil, criminal, administrative or investigative
action, suit or proceeding because such person is or was an officer or director
of the Company or is a person who is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or of a
partnership, joint venture trust or other enterprise, including service relating
to employee benefit plans, to the fullest extent permitted by the DGCL as it
existed at the time the indemnification provisions of the Company's Restated
Certificate of Incorporation and the Bylaws were adopted or as may be thereafter
amended. Article IX of the Company's Bylaws and Article XIV of its Restated
Certificate of Incorporation expressly provide that they are not the exclusive
methods of indemnification.
Article IX of the Bylaws and Article XIV of the Company's Restated
Certificate of Incorporation also provide that the Company may maintain
insurance, at its own expense, to protect itself and any director, officer,
employee or agent of the Company or of another entity against any expense,
liability or loss, regardless of whether the Company would have the power to
indemnify such person against such expense, liability or loss under the DGCL.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) or (iv) for any transaction from which the director derived an
improper personal benefit. Article XI of the Company's Restated Certificate of
Incorporation contains such a provision.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*4.1 Form of Indenture between the Company and , as Trustee.
*4.2 Form of Note (included in Exhibit 4.1)
*5.1 Opinion of Vinson & Elkins L.L.P.
12.1 Statement Re: Computation of Ratios.
23.1 Consent of Vinson & Elkins L.L.P. (set forth in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of Price Waterhouse LLP
*24.1 Certified copy of Resolution of the Company's Board of Directors authorizing Powers of
Attorney.
</TABLE>
- ------------------------
* To be filed by Amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona tide offering
thereof;
(2) That, for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective; and
(3) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver or
cause to be delivered, to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Albuquerque, State of New
Mexico, on the 12th day of January, 1996.
HORIZON/CMS HEALTHCARE CORPORATION
By /s/ ERNEST A. SCHOFIELD
------------------------------------
Ernest A. Schofield,
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ernest A. Schofield, Scot Sauder and Sean Dailey
or any of them, his true and lawful attorney-in-fact and agent, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
/s/ NEAL M. ELLIOTT President, Chief January 12, 1996
- ----------------------------------- Executive Officer and
Neal M. Elliott Chairman of the Board of
Directors (Principal
Executive Officer)
/s/ FRANK M. MCCORD Director January 12, 1996
- -----------------------------------
Frank M. McCord
/s/ RAYMOND N. NOVECK Director January 12, 1996
- -----------------------------------
Raymond N. Noveck
/s/ MICHAEL A. JEFFRIES Director January 12, 1996
- -----------------------------------
Michael A. Jeffries
/s/ CHARLES H. GONZALES Director January 12, 1996
- -----------------------------------
Charles H. Gonzales
II-3
<PAGE>
<TABLE>
<C> <S> <C>
/s/ GERARD M. MARTIN Director January 12, 1996
- -----------------------------------
Gerard M. Martin
/s/ BARRY M. PORTNOY Director January 12, 1996
- -----------------------------------
Barry M. Portnoy
/s/ ROBERT A. ORTENZIO Director January 12, 1996
- -----------------------------------
Robert A. Ortenzio
/s/ BRYAN C. CRESSEY Director January 12, 1996
- -----------------------------------
Bryan C. Cressey
/s/ RUSSELL L. CARSON Director January 12, 1996
- -----------------------------------
Russell L. Carson
/s/ LEROY ZIMMERMAN Director January 12, 1996
- -----------------------------------
LeRoy Zimmerman
/s/ ERNEST A. SCHOFIELD Senior Vice President, January 12, 1996
- ----------------------------------- Chief Financial Officer,
Ernest A. Schofield Treasurer and Chief
Accounting Officer
(Principal Financial and
Accounting Officer)
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*4.1 Form of Indenture between the Company and , as Trustee.
*4.2 Form of Note (included in Exhibit 4.1)
*5.1 Opinion of Vinson & Elkins L.L.P.
12.1 Statement Re: Computation of Ratios
23.1 Consent of Vinson & Elkins L.L.P. (set forth in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of Price Waterhouse LLP
*24.1 Certified copy of Resolution of the Company's Board of Directors authorizing Powers of
Attorney.
</TABLE>
- ------------------------
* To be filed by Amendment.
<PAGE>
EXHIBIT 12.1
HORIZON/CMS HEALTHCARE CORPORATION
STATEMENT RE COMPUTATION OF RATIOS
HISTORICAL AND PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MAY 31, NOVEMBER 30,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- ---------
Historical
Fixed Charges:
Interest................................. $ 13,360 $ 8,423 $ 26,999 $ 44,396 $ 53,045 $ 26,589 $ 24,476
Capitalized interest..................... -- 1,226 5,918 1,615 -- -- --
Interest component of rents(1)........... 22,496 34,652 37,747 38,754 41,006 20,100 19,633
Amortization of financing costs.......... 1,088 1,389 2,050 2,738 2,266 1,182 933
--------- --------- --------- --------- --------- --------- ---------
Total Fixed Charges.................... $ 36,944 $ 45,690 $ 72,714 $ 87,503 $ 96,317 $ 47,871 $ 45,042
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings:
Earnings (loss) before minority interests,
income taxes, cumulative effect of
accounting change and extraordinary
item..................................... $ 32,876 $ 55,378 $ 58,643 $ (13,419) $ 53,618 $ 27,823 $ 5,683
Fixed charges, net of capitalized
interest............................... 36,944 44,464 66,796 85,888 96,317 47,871 45,042
Total Earnings......................... $ 69,820 $ 99,842 $ 125,439 $ 72,469 $ 149,935 $ 75,694 $ 50,725
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of Earnings to Fixed Charges......... 1.9x 2.2x 1.7x (0.8)x 1.6x 1.6x 1.1x
Fixed charge coverage deficiency........... $ (15,034)
---------
---------
Pro Forma:
Historical fixed charges................... $ 96,317 $ 45,042
Interest on Notes to be sold(2)............ 17,500 8,750
--------- ---------
113,817 53,792
--------- ---------
Interest on debt retired................... (14,211) (7,105)
--------- ---------
Pro Forma Fixed Charges................ $ 99,606 $ 46,687
--------- ---------
--------- ---------
Pro Forma Ratio of Earnings to Fixed
Charges.................................. 1.5x 1.1x
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Represents a portion of rental expense which, in the judgement of
management, represents an appropriate interest factor.
(2) Assumes $200 million Notes to be sold with an annual interest rate of 8.75
percent.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this Registration Statement of our report dated July 21, 1995 included in
Horizon/CMS Healthcare Corporation's consolidated financial statements, included
herein, for the year ended May 31, 1995 and to all references to our Firm
included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Albuquerque, New Mexico
January 11, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and the related prospectus of Horizon/CMS
Healthcare Corporation for the registration of Senior Subordinated Notes in the
amount of $200,000,000 and to the inclusion of our report dated August 3, 1995,
except for Note 6 and Note 19 for which the date is September 26, 1995; Note 14
for which the date is September 12, 1995; and Note 20 for which the date is
September 27, 1995, with respect to the consolidated financial statements of
Continental Medical Systems, Inc. for the years ended June 30, 1995 and June 30,
1994.
/s/ ERNST & YOUNG LLP
------------------------------------------------------------------------------
ERNST & YOUNG LLP
Harrisburg, Pennsylvania
January 10, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of Horizon/CMS Healthcare Corporation to be
filed January 11, 1996 of our report dated August 10, 1993, with respect to the
financial statements of Continental Medical Systems, Inc. for the year ended
June 30, 1993 (which financial statements are not presented separately herein).
We also consent to the reference to us under the heading "Experts."
/s/ PRICE WATERHOUSE LLP
--------------------------------------
Price Waterhouse LLP
Philadelphia, Pennsylvania
January 11, 1996
