<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: NOVEMBER 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-9369
------------------------
HORIZON/CMS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-1346899
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6001 INDIAN SCHOOL ROAD, N.E., SUITE 530
ALBUQUERQUE, NEW MEXICO 87110
(505) 881-4961
(Address and telephone number of Registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __XX__ No ______
Shares of the registrant's Common Stock, $.001 par value, outstanding
exclusive of treasury stock, was 51,688,656 shares at January 8, 1996.
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<PAGE>
Horizon/CMS Healthcare Corporation's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1995 is hereby amended and restated as set
forth below.
HORIZON/CMS HEALTHCARE CORPORATION
INDEX
FORM 10-Q/A AMENDMENT NO. 1 -- FOR THE QUARTER ENDED NOVEMBER 30, 1995
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
November 30, 1995 and May 31, 1995......................................................... 3
Consolidated Statements of Operations
For the three months and the six months ended November 30, 1995
and 1994................................................................................... 4
Consolidated Statements of Cash Flows
For the six months ended November 30, 1995 and 1994........................................ 5
Notes to Consolidated Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 15
Signatures............................................................................................. 16
</TABLE>
2
<PAGE>
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1995 AND MAY 31, 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30 MAY 31
----------- ----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................................... $ 26,422 $ 40,674
Patient care accounts receivable, net of allowance for doubtful accounts of $33,369 at November 30
and $29,595 at May 31............................................................................ 347,650 330,313
Estimated third party settlements................................................................. 25,387 --
Prepaid and other assets.......................................................................... 89,166 61,650
Deferred income taxes............................................................................. 21,806 21,806
----------- ----------
Total current assets............................................................................ 510,431 454,443
PROPERTY AND EQUIPMENT, net......................................................................... 628,307 614,379
GOODWILL, net....................................................................................... 173,939 168,861
OTHER INTANGIBLE ASSETS, net........................................................................ 37,814 44,720
NOTES RECEIVABLE, excluding current portion......................................................... 43,417 44,619
OTHER ASSETS........................................................................................ 52,526 71,101
----------- ----------
Total assets.................................................................................... $ 1,446,434 $1,398,123
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................................................. $ 5,257 $ 5,032
Accounts payable.................................................................................. 31,247 33,280
Accrued expenses.................................................................................. 138,656 131,225
Estimated third party settlements................................................................. -- 563
----------- ----------
Total current liabilities....................................................................... 175,160 170,100
LONG-TERM DEBT, excluding current portion........................................................... 601,319 532,688
OTHER LIABILITIES................................................................................... 21,049 24,353
DEFERRED INCOME TAXES............................................................................... 6,326 6,141
----------- ----------
Total liabilities............................................................................... 803,854 733,282
MINORITY INTERESTS.................................................................................. 14,930 14,189
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000 shares, 51,882,060 shares issued with
51,304,552 shares outstanding at November 30 and 50,679,107 shares issued with 50,174,218 shares
outstanding at May 31............................................................................ 52 51
Additional paid-in capital........................................................................ 574,862 559,168
Retained earnings................................................................................. 63,803 99,382
Note receivable from sale of common stock......................................................... (2,362) (2,362)
Treasury stock.................................................................................... (8,705) (5,587)
----------- ----------
Total stockholders' equity...................................................................... 627,650 650,652
----------- ----------
Total liabilities and stockholders' equity...................................................... $ 1,446,434 $1,398,123
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
NOVEMBER 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------ ------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TOTAL OPERATING REVENUES...................................... $ 440,752 $ 401,572 $ 872,159 $ 783,412
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of services............................................ 335,185 312,402 663,885 608,776
Administrative and general.................................. 21,445 21,004 41,892 39,678
Facility leases............................................. 21,847 20,357 42,925 39,517
Depreciation and amortization............................... 15,107 14,434 29,758 27,631
Interest expense............................................ 11,364 14,426 24,476 26,589
Special charge.............................................. -- 13,398 63,540 13,398
----------- ----------- ----------- -----------
Total costs and expenses.................................... 404,948 396,021 866,476 755,589
----------- ----------- ----------- -----------
Earnings before minority interests, income taxes and
extraordinary loss......................................... 35,804 5,551 5,683 27,823
Minority interests............................................ (2,078) (1,530) (3,402) (3,031)
----------- ----------- ----------- -----------
Earnings before income taxes and extraordinary
loss....................................................... 33,726 4,021 2,281 24,792
Income taxes.................................................. 14,183 2,768 11,663 11,379
----------- ----------- ----------- -----------
Earnings (loss) before extraordinary loss................... 19,543 1,253 (9,382) 13,413
Extraordinary loss, net of tax................................ (22,075) -- (22,075) --
----------- ----------- ----------- -----------
Net earnings (loss)........................................... $ (2,532) $ 1,253 $ (31,457) $ 13,413
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common and common equivalent share:
Earnings (loss) before extraordinary loss................... $ 0.38 $ 0.03 $ (0.18) $ 0.30
Extraordinary loss.......................................... (0.43) -- (0.43) --
----------- ----------- ----------- -----------
Net earnings (loss)......................................... $ (0.05) $ 0.03 $ (0.61) $ 0.30
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common share -- assuming full dilution:
Earnings (loss) before extraordinary loss................... $ 0.38 $ 0.03 $ (0.18) $ 0.29
Extraordinary loss.......................................... (0.43) -- (0.43) --
----------- ----------- ----------- -----------
Net earnings (loss)......................................... $ (0.05) $ 0.03 $ (0.61) $ 0.29
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
NOVEMBER 30, 1995 AND 1994
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................................................. $ (31,457) $ 13,413
------------ ------------
Adjustments:
Depreciation and amortization..................................................... 29,758 27,631
Other............................................................................. 3,324 599
Special charge.................................................................... 63,540 13,398
Extraordinary loss on early retirement of debt.................................... 38,062 --
Increase (decrease) in cash from changes in assets and liabilities, excluding
effects of acquisitions:
Accounts receivable and estimated third party settlements....................... (45,966) (33,448)
Other assets.................................................................... (27,873) (25,171)
Deferred income taxes........................................................... 185 (819)
Accounts payable and accrued expenses........................................... (35,295) (13,471)
Other liabilities............................................................... (2,833) 1,114
------------ ------------
Total adjustments................................................................... (22,902) (30,167)
------------ ------------
Net cash used in operating activities............................................... (8,555) (16,754)
------------ ------------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired................... (15,074) (83,383)
Cash proceeds from sale of property and equipment................................... -- 6,966
Other intangible assets............................................................. (5,848) 1,287
Acquisition of property and equipment............................................... (25,819) (24,441)
Notes receivable.................................................................... 857 3,148
Other investing activities.......................................................... 5,161 (12,821)
------------ ------------
Net cash used in investing activities............................................... (40,723) (109,244)
------------ ------------
Cash flows from financing activities:
Long-term debt borrowings........................................................... 551,053 73,856
Long-term debt repayments........................................................... (483,836) (75,034)
Premium and other payments on early retirement of debt.............................. (30,636) --
Deferred financing costs............................................................ (476) (2,320)
Issuance of common stock............................................................ 3,739 110,594
Other financing activities.......................................................... -- 334
Distributions to minority interests................................................. (1,507) (3,462)
------------ ------------
Net cash provided by financing activities........................................... 38,337 103,968
------------ ------------
Net decrease in cash and cash equivalents............................................. (10,941) (22,030)
Cash and cash equivalents, beginning of period........................................ 40,674 61,384
Effect of pooling of interests restatement (Note 2)................................... (3,311) --
------------ ------------
Cash and cash equivalents, end of period.............................................. $ 26,422 $ 39,354
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Horizon/CMS Healthcare Corporation and its subsidiaries (collectively the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they are unaudited and certain information and footnote
disclosures normally included in the Company's annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, as permitted under the applicable rules and
regulations. In the opinion of management, all adjustments necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented have been made and are of a normal recurring nature.
These consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and the notes thereto included
in the Company's 1995 Annual Report on Form 10-K (as amended by Form 10-K/A
Amendment No. 1 and as restated on the Current Report on Form 8-K dated November
21, 1995) filed with the Securities and Exchange Commission. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the entire year.
(2) ESTIMATED THIRD PARTY SETTLEMENTS
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs, private pay patients and
non-affiliated long-term care facilities. Under the Medicare program and some
state Medicaid programs, the Company's long-term care facilities are
periodically paid in interim amounts designed to approximate the facilities'
reimbursable costs or the applicable payment rate. Periodic amounts due from
interim third party payors and amounts due from other payor sources are recorded
as patient care accounts receivable. Most of the Company's Medicaid payments are
prospective payments intended to approximate costs and, normally, no retroactive
adjustment is made to such payments.
With respect to interim payor sources for which payments are subject to
retroactive adjustment, actual costs incurred are reported by each facility
annually. The cost reports are subject to audit, which may result in upward or
downward adjustment from interim payments received. The Company generally
expects final settlement on annual cost reports to occur approximately 24 months
following the end of an annual cost reporting period. Tentative partial
settlement may occur as soon as six months following the cost reporting period.
Throughout the annual cost reporting period, the Company records, for each of
several hundred Medicare and Medicaid certified providers operated by the
Company, the estimated difference between interim payments received and the
expected actual costs as estimated third party settlements. Estimated
settlements reflect expected amounts receivable offset by expected amounts
payable.
The expected change in the Company's total net settlement position and the
reasons therefore is difficult to quantify due to several factors including: the
significant number of individual providers for which settlements must be
estimated, the fact that several cost report periods remain open for each
provider at any given time, the numerous cost reporting periods of the Company's
various providers, the interrelationship between continually changing interim
rates and estimated settlements, the unpredictable timing of tentative and final
settlements, and the offset of estimated payables and receivables. Nevertheless,
the general increase in the Company's estimated third party settlements balance
at November 30, 1995 as compared with the balance at May 31, 1995 has been
caused, in part, by the settlement of significant third party rehabilitation
hospital payables recorded at May 31, 1995.
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1996, the Company announced that certain Medicare Part B and
related co-insurance billings previously submitted by the Company are being
investigated by the Office of Inspector General of the Department of Health and
Human Services (the "OIG") and the Department of Justice (the "DOJ") as to
compliance with applicable Medicare Part B rules. These billings, totaling
approximately $3.4 million, sought recovery for the costs of certain Medicare
Part B covered medical supplies used in treating Medicare patients in certain
facilities at a time when those facilities were operated by Greenery
Rehabilitation Group, Inc. ("Greenery") before the Company acquired Greenery
(the "Greenery Acquisition"). These costs were not billed at the time incurred
but were billed on a retroactive basis, as permitted under applicable Medicare
Part B rules, after the Greenery Acquisition. Of the $3.4 million billed,
approximately $1.3 million was actually received by the Company.
The Company has advised the OIG that it appears that a significant portion
of these billings may not have been in accordance with applicable Medicare Part
B rules. The Company advised the OIG and the DOJ that it is cooperating, and
will continue to cooperate, in the investigation and was prepared to remit any
overpayment to the appropriate governmental authority. On April 2, 1996, the
Company and the DOJ entered into a letter agreement pursuant to which the
Company voluntarily agreed to refund such overpayments to the DOJ. On April 3,
1996, the Company refunded approximately $1 million to the DOJ. In addition, the
Company is in the process of voluntarily refunding co-insurance payments of
approximately $175,000 to the applicable parties. The Company believes the
errors in these billings were an exception and do not represent a regular
pattern or practice at the Company. Due to the preliminary nature of the OIG/DOJ
investigation, the Company cannot now predict when the OIG/DOJ investigation
will be completed, the ultimate outcome of the OIG/DOJ investigation, or the
effect thereof on Horizon/CMS's financial condition or results of operations. If
as a result of the OIG/DOJ investigation, civil or criminal proceedings against
the Company are initiated and adversely determined, civil and/or criminal fines
or sanctions could be imposed against the Company, which could have a material
adverse impact on the Company's financial condition and/or results of
operations.
With the exception of the matter previously discussed and the DOJ inquiries
discussed in footnote 16 to the financial statements included in the current
report on Form 8-K dated July 10, 1995, filed November 21, 1995, management is
not aware of any material claims, disputes or other unsettled matters with
regard to third party reimbursements and does not believe that any retroactive
adjustments would be material to the Company's financial condition or results of
operations.
(3) ACQUISITIONS
The stockholders of the Company and Continental Medical Systems, Inc.
("CMS") approved the merger of one of the Company's wholly-owned subsidiaries
with CMS (the "CMS Merger"). Under the terms of the merger agreement, CMS
stockholders received .5397 (the "Exchange Rate") of a share of the Company's
common stock for each outstanding share of CMS's common stock. Accordingly, the
Company issued approximately 20.9 million shares of its common stock, valued at
approximately $393.9 million based on the closing price of the Company's common
stock on July 10, 1995, for all the outstanding shares of CMS's common stock.
Additionally, outstanding options to acquire CMS's common stock were converted
at the Exchange Rate to options to acquire approximately 3.8 million shares of
the Company's common stock. CMS is one of the largest providers of comprehensive
medical rehabilitation programs and services in the country with a significant
presence in each of the rehabilitation industry's three principal sectors --
inpatient rehabilitation care, outpatient rehabilitation care and contract
therapy. The merger qualified as a tax-free reorganization and has been
accounted for as a pooling of interests. Accordingly, the Company's historical
financial information has been restated to include CMS's financial results. In
connection with the CMS Merger, the Company changed its name to Horizon/CMS
Healthcare Corporation.
The accompanying consolidated balance sheet as of May 31, 1995, gives effect
to the combination of the Company's historical assets, liabilities and
stockholders' equity as of May 31, 1995, with the historical assets, liabilities
and stockholders' equity of CMS as of June 30, 1995, the fiscal year end of CMS
prior to the CMS Merger. The accompanying consolidated statement of operations
for the six months ended November 30, 1994, includes the results of operations
of the Company for the six months ended November 30, 1994, and the results of
operations of CMS for the six months ended September 30, 1994. The duplication
of reporting CMS's June 1995 operating results of $4.1 million in fiscal year
1995 and in the six months ended November 30, 1995, has been adjusted for by a
charge to retained earnings. Appropriate adjustments have also been made in the
statement of cash flows for the six months ended November 30, 1995.
7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS (CONTINUED)
Separate results of the Company and CMS for the periods presented prior to
the consummation of the CMS Merger and in total for the periods are as follows
(in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Total operating revenues:
The Company, prior to the CMS Merger........................................ $ 59,065 $ 292,934
CMS......................................................................... 83,684 490,478
The Company, subsequent to the CMS Merger................................... 729,410 --
----------- -----------
$ 872,159 $ 783,412
----------- -----------
----------- -----------
Net earnings (loss):
The Company, prior to the CMS Merger........................................ $ 2,280 $ 13,321
CMS......................................................................... 4,122 92
The Company, subsequent to the CMS Merger................................... (37,859) --
----------- -----------
($ 31,457) $ 13,413
----------- -----------
----------- -----------
</TABLE>
In September 1995, the Company purchased fee simple title to two skilled
nursing centers in Idaho for approximately $10.0 million. The two centers
operate a total of 224 beds. Also in September 1995, the Company acquired Home
Respiratory Services, Inc., an Oklahoma home respiratory services provider with
approximately $900,000 in annual revenues, in exchange for 119,000 shares of the
Company's common stock valued at approximately $2.5 million. In addition, the
Company acquired Cardio-Diagnostic Services, Inc., a Texas non-invasive
diagnostic services provider with approximately $3.2 million in annual revenues,
in exchange for 122,000 shares of the Company's common stock valued at
approximately $2.65 million. Finally, on September 1, 1995, the Company
purchased the remaining 20% minority interest in Nevada Rehabilitation Services,
Inc. ("NRS") in exchange for 187,000 shares of the Company's common stock valued
at approximately $3.4 million. Prior to the acquisition of the 20% share, the
Company owned an 80% share of NRS, a contract therapy company with annual
revenues of approximately $8.2 million.
In November 1995, the Company announced the proposed merger of one of the
Company's wholly-owned subsidiaries with Pacific Rehabilitation & Sports
Medicine, Inc. ("Pacific Rehab"), a provider of outpatient rehabilitation
services in 72 outpatient clinics. Under the terms of the merger agreement,
Pacific Rehab stockholders would receive .3483 of a share of the Company's
common stock for each outstanding share of Pacific Rehab common stock.
Accordingly, the Company expects to issue approximately 2.8 million shares of
its common stock, valued at approximately $62.0 million. The merger is expected
to be consummated during the fourth quarter of fiscal 1996 and to be accounted
for as a pooling of interest.
In November 1995, the Company acquired leasehold interests in three nursing
centers with a net book value of $2.7 million and operating 360 beds in New
Mexico, in exchange for $400,000 and the leasehold interests in four nursing
centers with 463 beds in Ohio. The acquisition was accounted for as a
nonmonetary exchange with the leasehold interests acquired recorded at the
amount of monetary consideration paid plus the net book value of the leasehold
interests surrendered. The aggregate effect of the consummated acquisitions
described above is not material to the results of operations of the Company.
(4) SPECIAL CHARGE
During the first quarter of fiscal 1996, a special charge of approximately
$63.5 million (pre-tax) was recorded. The special charge resulted primarily from
(i) the write-off of costs which had been incurred in completing the CMS Merger
and (ii) the approval by management of the Company of
8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SPECIAL CHARGE (CONTINUED)
restructuring measures resulting from efforts to combine the previously separate
companies. The special charge is comprised of several components including
transaction costs incurred to effect the CMS Merger as well as asset impairments
charges, termination benefits, lease exit costs and other charges associated
with combining and restructuring the merged companies operations.
At November 30, 1995, the remaining balance in the $63.5 million
special charge accrual was approximately $14.0 million. The impairment of
property and equipment and other asset balances are reflected as reductions
of the related asset accounts while the remaining amounts are included in
accrued expenses. The components of the special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR BALANCE
ORIGINAL 1996 NOVEMBER 30,
PROVISION ACTIVITY 1995
--------- ------------ ------------
<S> <C> <C> <C>
Impairment of assets........................................... $ 26,144 $ (26,144) $ --
Termination benefits........................................... 20,566 (13,473) 7,093
Transaction costs.............................................. 6,697 (6,697) --
Lease exit and other........................................... 10,133 (3,276) 6,857
--------- ------------ ------------
$ 63,540 $ (49,590) $ 13,950
--------- ------------ ------------
--------- ------------ ------------
</TABLE>
As previously reported, in June 1995 the Company announced that it plans
to sell the assets and leasehold improvements at eight of its long-term
care facilities and anticipates that the intended dispositions will
occur during fiscal 1996. In connection therewith, during the first quarter
of fiscal 1996 the Company recorded an $11.9 million pre-tax asset
impairment charge as a component of the special charge. The charge
represents the amount by which the carrying amount of the properties intended
for sale exceeds the estimated fair value of the assets. The estimated fair
value of these assets was determined primarily based upon the estimated net
realizable value of the licensed beds of these facilities. The
Company's considerable experience in an active market for long-term
care facilities provides a reasonable basis upon which to apply
valuation techniques and estimate market prices. The charge resulted
directly from management's commitment to dispose of the properties,
which occurred subsequent to fiscal year 1995. As such, none of the assets
or leasehold improvements related to these eight facilities were
considered impaired prior to fiscal year 1996. The Company anticipates it
will complete the disposition efforts discussed above prior to the end of
fiscal year 1996. The properties that are subject to the planned
dispositions, in the aggregate, incurred pre-tax net losses for the six months
ended November 30, 1995 and 1994 of approximately $4.1 million and $1.8
million, respectively. Revenues related to these operations for the six
months ended November 30, 1995 and 1994 approximated $36.2 million and $34.9
million, respectively. The assets to be disposed of consist of land,
buildings, equipment and leasehold improvements with an aggregate carrying
amount of $18.0 million as of November 30, 1995 and are classified in these
respective line items in the accompanying balance sheet.
The $14.2 million balance of the special charge resulting from impairment
of assets is associated with the elimination or consolidation of operations
in the effort to combine the merged companies. In connection therewith,
the Company consolidated or restructured contract respiratory therapy,
corporate and physician locum tenens operations and plans to close a
respiratory clinic. The consolidation and elimination of certain contract
respiratory therapy company operations resulted in a $5.7 million charge.
This charge is comprised of a $4.9 million fair value adjustment to the
carrying cost of related long-lived assets and a $0.8 million adjustment
to accounts receivable and inventory which were negatively impacted by the
Company's decision to restructure the operations. The consolidation of
corporate operations resulted in the retirement of existing credit
facilities and the negotiation of an expanded consolidated credit
agreement. As a consequence, the Company expensed $2.6 million of
9
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SPECIAL CHARGE (CONTINUED)
existing facility deferred financing costs, which expense is included in the
special charge. Consolidation of corporate operations required the write-off of
excess or duplicative computer system development investment of approximately $1
million. In evaluating the existing operations of the combined companies, the
Company has also determined to cease operations and/or dispose of assets at a
rehabilitation clinic in California and a property in Ohio. The adjustments to
fair value of the carrying cost of the related long-lived assets is
approximately $3.4 million. Various other restructuring measures result in the
$1.5 million balance of the $14.2 million total. All of the actions which
comprise this total are expected to be completed prior to July of 1996.
Approximately $20.6 million of the special charge is comprised of
involuntary termination benefits paid or expected to be paid to an estimated 340
employees impacted by the CMS Merger. Effected personnel were employed primarily
within the Company's corporate offices and contract therapy businesses. The
completion of these terminations is expected to occur by August 1996. Management
approved and committed the Company to the employee terminations and, during the
first quarter of fiscal 1996, the Company communicated the termination benefits
payable to the employees. The Company does not anticipate any significant
changes to occur through the expected completion date. Of the $20.6 million
total, approximately $9.5 million was paid to the former chairman and chief
executive officer of CMS pursuant to agreements in place prior to the
commencement of merger discussions related to the CMS Merger.
Transaction costs of approximately $7.0 million are comprised of direct and
incremental expenses incurred in consummating the CMS Merger.
Lease exit costs related to the consolidation efforts described above
approximate $2.2 million. Other one-time charges directly related to the CMS
Merger or costs not associated with activities that will be continued by the
combined company comprise the approximate $7.9 million balance of the special
charge. Such costs primarily include insurance consolidation and continuation
costs and certain employee benefit and other costs.
(5) LONG-TERM DEBT
In July 1995, in connection with the CMS Merger, the Company entered into a
new revolving credit facility which replaced the credit facility outstanding at
May 31, 1995, and increased the amount available for borrowing to $485.0
million. The aggregate principal amount was divided between the Company and
CMS in the amounts of $250.0 million and $235.0 million, respectively. The terms
of the new credit facility are substantially consistent with those of the
previous credit facility except accounts receivable are no longer required as
collateral and the interest component has been revised.
10
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 26, 1995, the Company completed a tender offer and consent
solicitation for two issues of publicly held indebtedness of CMS (together, the
"Senior Subordinated Notes"). On this date, the Company purchased $118.7 million
in principal amount of 10 3/8% Senior Subordinated Notes due 2003 at 109.25%
plus a consent fee of 1.05% and $137.5 million in principal amount of 10 7/8%
Senior Subordinated Notes due 2002 at 109.0% plus a consent fee of 0.75%. The
Company paid $289.5 million to retire the Senior Subordinated Notes, including
principal, premiums, accrued interest, consent fees and other related costs. As
a result of the tender, the Company recorded an extraordinary charge related to
the loss on the retirement of the Senior Subordinated Notes, including the
write-off of related deferred discount, swap cancellation and financing costs,
of approximately $22.1 million, net of tax, in the second quarter of fiscal
1996.
In connection with the tender offer, the Company's credit facility was
amended and restated to increase the facility from $485.0 million to $750.0
million, of which $70.0 million is available in the form of letters of credit.
The Notes were retired with funds borrowed under the Company's amended credit
facility. The amended credit facility is agented by NationsBank of Texas N.A.
for a group of banks and is subject to substantially the same interest and terms
of the previous $485.0 million facility, except the facility is no longer
divided between the Company and CMS. Borrowings, including letters of credit,
under the amended credit facility after retirement of the Notes were
approximately $490.0 million.
The Company utilizes an interest rate collar agreement, consisting of the
combination of an interest rate cap and an interest rate floor in a single
transaction, to reduce the impact of increases in interest rates on its floating
rate debt without any initial investment by the Company. The Company entered
into the $200 million notional amount collar agreement following the expansion
of the Credit Facility in October 1995. The Company utilizes the collar as an
interest rate hedge on its floating rate, LIBOR based Credit Facility and does
not intend the instrument to be speculative in nature. The agreement has a term
of two years and expires in October 1997. The collar agreement entitles the
Company to receive from the counterparty the amount, if any, by which average
LIBOR interest payments on the notional amount exceed 8.0% per annum. The collar
agreement requires that the Company pay to the counterparty the amount, if any,
by which average LIBOR interest payments on the notional amount is less than
4.57% per annum. The fair value of the collar agreement is estimated based on
quotes from market makers of these instruments and represents the estimated
amount that the Company would expect to receive or pay if the agreement was
terminated. The fair value of the collar on November 30, 1995 would require that
a $355,000 payment be made by the Company to terminate the agreement.
(6) SUBSEQUENT EVENT
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 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 Company's
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.
(7) SUPPLEMENTAL INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended November 30, 1995 and November 30, 1994, the
following are considered supplemental information for the purposes of the
consolidated statements of cash flows:
a) The issuance of 20.9 million shares of common stock in exchange for
all of the outstanding common stock of CMS, for the six months ended
November 30, 1995, and the issuance of 1.1 million shares of common stock
for various other acquisitions for the six months ended November 30, 1994.
b) Cash paid for interest of $30.4 million for the six months ended
November 30, 1995 and $25.1 million for the six months ended November 30,
1994.
c) Cash paid for income taxes, net of refunds, of $1.3 million for the
six months ended November 30, 1995 and $7.3 million for the six months ended
November 30, 1994.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As previously reported, the Company acquired CMS on July 10, 1995, by means
of a merger of a wholly owned subsidiary of the Company with and into CMS, with
CMS being the surviving corporation. Upon consummation of the merger, CMS became
a wholly owned subsidiary of the Company. The CMS Merger has been accounted for
as a pooling of interests and all historical financial statements have been
restated to combine the results of the two companies. Under the terms of the
merger agreement, each outstanding share of CMS's common stock was converted
into .5397 of one share of the Company's common stock, resulting in the Company
issuing approximately 20.9 million shares, valued at approximately $393.9
million based on the closing price of the Company's common stock on July 10,
1995. Additionally, outstanding options to acquire shares of CMS's common stock
were converted into options to acquire approximately 3.8 million shares of the
Company's common stock. In connection with the CMS Merger, the Company changed
its name to Horizon/CMS Healthcare Corporation.
The Company's strategic business plan emphasizes operating and expanding its
long-term care and specialty programs and services in regionally concentrated
geographic areas. The Company has rapidly expanded both the size and diversity
of its operations through its strategic mergers and acquisitions such as CMS and
the pending merger of Pacific Rehab, the acquisition or management of long-term
care facilities including Greenery Rehabilitation Group, Inc., peopleCare
Heritage Group and the HEA Group, the development of specialty hospitals and
subacute care units and its acquisition and development of other specialty
health care services including pharmacy services, rehabilitation therapies,
clinical laboratory services, physician placement and management services,
medical and sleep diagnostic services, home respiratory care and Alzheimer's
care. The acquisition or management of long-term care facilities in certain
geographic areas has enhanced the Company's expansion of its specialty programs.
Specifically, in certain geographic areas, the Company's long-term care presence
is a platform from which it can vertically integrate its specialty health care
programs and services. The Company intends to continue to expand its long-term
care and specialty health care programs into regional areas served by existing
CMS rehabilitation hospitals to take advantage of operating efficiencies and to
expand the existing continuum of care.
With the merger of CMS, the Company acquired one of the nation's largest
providers of comprehensive inpatient and outpatient medical rehabilitative
services. CMS has a significant clinical and market presence in each of the
medical rehabilitation industry's three principal sectors -- inpatient
rehabilitation care, outpatient rehabilitation care and contract rehabilitation
therapies. CMS operates 37 freestanding rehabilitation hospitals, provides
outpatient rehabilitation services at more than 140 locations and manages 13
inpatient rehabilitation units for general acute care hospitals. CMS also
provides physician staffing services. The Company anticipates continued
expansion of inpatient rehabilitation hospitals and outpatient clinics.
These growth objectives have been, and will continue to be, the basis of a
strategic business plan that has resulted in net earnings of $31.2 million,
$16.6 million and $7.7 million for the fiscal years ended May 31, 1995, 1994 and
1993, respectively, for the Company prior to the restatement for the CMS Merger.
Pro forma earnings before special charges and extraordinary items for the six
months ended November 30, 1995 and 1994 were $38.2 million and $21.9 million,
respectively.
Growth through acquisition entails certain risks in that acquired operations
could be subject to unanticipated business uncertainties or legal liabilities.
The Company seeks to minimize these risks through investigation and evaluation
of the operations proposed to be acquired and through transaction structure and
indemnification. In addition, each such business combination presents the risk
that currently unanticipated difficulties may arise in integrating the
operations of the combined entities. Moreover, such business combinations
present the risk that the synergies expected from the combined operations may
not be realized. The various risks associated with the integration of recent and
future acquisitions and the subsequent performance of such acquired operations
may adversely affect the Company's results of operations. Following each
acquisition, management will consider opportunities to eliminate excess or
duplicative operations, processes or personnel or other measures to maximize the
potential of the combined operations. As a result of these considerations,
management may commit to undertake restructuring measures which would result in
a current charge against earnings. Depending upon the relative significance of
an acquisition and the extent of the restructuring program undertaken, such
charge could be material to the Company.
REGULATION
CONTRACT THERAPY REIMBURSEMENT. 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
12
<PAGE>
occupational therapy rates paid by inpatient providers. In light of the fluid
nature of the circumstances surrounding the memorandum, the Company cannot now
determine whether HCFA will continue to recommend the rates suggested in the
memorandum or whether such rates will be used by HCFA as a basis for developing
a salary equivalency based reimbursement system for speech and occupational
therapy services. There can be no assurance that actions ultimately taken by
HCFA with regard to reimbursement rates for such services will not adversely
affect the Company's results of operations.
HEALTH CARE REFORM. During 1995, various Congressional legislators
introduced reform proposals 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 the
Company. There can be no assurance that future legislation, health care or
budgetary, or other changes in the administration or interpretation of
governmental health care programs will not adversely effect the results of
operations of the Company.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of total operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
--------------- ---------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total operating revenues.................................................................. 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Cost of services.......................................................................... 76.0 77.8 76.1 77.7
Administrative and general................................................................ 4.9 5.2 4.8 5.1
Facility leases........................................................................... 5.0 5.1 4.9 5.0
Depreciation and amortization............................................................. 3.4 3.6 3.4 3.5
Interest expense.......................................................................... 2.6 3.6 2.8 3.4
Special charge............................................................................ -- 3.3 7.3 1.7
------ ------ ------ ------
Earnings before minority interests, income taxes and extraordinary loss................... 8.1 1.4 0.7 3.6
Minority interests........................................................................ (0.5) (0.4) (0.4) (0.4)
------ ------ ------ ------
Earnings before income taxes and extraordinary loss....................................... 7.6 1.0 0.3 3.2
Income taxes.............................................................................. 3.2 0.7 1.4 1.5
------ ------ ------ ------
Earnings (loss) before extraordinary loss................................................. 4.4 0.3 (1.1)% 1.7
Extraordinary loss, net of tax............................................................ (5.0) -- (2.5) --
------ ------ ------ ------
Net earnings (loss)....................................................................... (0.6)% 0.3% (3.6)% 1.7%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
13
<PAGE>
The following table sets forth a summary of the Company's total operating
revenues by type of service and the percentage of total operating revenues that
each such service represented for each period indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
-------------------------------------------- --------------------------------
1995 1994 1995 1994
--------------------- --------------------- --------------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term care services.................... $ 95,175 21.6% $ 84,681 21.1% $ 189,711 21.7% $ 158,150
Specialty health care services:
Acute and outpatient rehabilitation...... 135,153 30.7 123,180 30.7 264,349 30.3 244,780
Contract therapy......................... 96,124 21.8 98,702 24.6 198,445 22.8 192,173
Other (2)................................ 100,242 22.7 91,678 22.8 201,214 23.1 181,363
Other operating revenues (1)............... 14,058 3.2 3,331 0.8 18,440 2.1 6,946
--------- ----- --------- ----- --------- ----- ---------
Total operating revenues............... $ 440,752 100.0% $ 401,572 100.0% $ 872,159 100.0% $ 783,412
--------- ----- --------- ----- --------- ----- ---------
--------- ----- --------- ----- --------- ----- ---------
<CAPTION>
<S> <C>
Long-term care services.................... 20.2%
Specialty health care services:
Acute and outpatient rehabilitation...... 31.2
Contract therapy......................... 24.5
Other (2)................................ 23.2
Other operating revenues (1)............... 0.9
-----
Total operating revenues............... 100.0%
-----
-----
</TABLE>
- ------------------------------
(1) Includes revenues derived from management fees, interest income, rental
income and other miscellaneous revenues, including $9.3 million, net of
direct expenses, resulting from arrangements related to an unsuccessful
merger effort.
(2) Includes revenues derived from subacute care, institutional pharmacy
operations, Alzheimer's care, noninvasive medical diagnostic testing
services, physicians services and clinical laboratory services.
REVENUES
Total operating revenues increased approximately $39.2 million, or 9.8%, and
$88.7 million, or 11.3%, for the three months and six months ended November 30,
1995, respectively, compared to the corresponding periods 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 month period 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 1.0% and 2.0%, respectively, for
the three months and six months ended November 30, 1995, compared to the
corresponding periods in 1994.
OPERATING EXPENSES
Cost of services increased approximately $22.8 million, or 7.3%, and $55.1
million, or 9.1%, for the three months and six months ended November 30, 1995,
respectively, compared to the corresponding periods in 1994. The increases 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 76.0% from 77.8% and 76.1% from 77.7%, respectively, for
the three months and six months ended November 30, 1995, compared to the
corresponding periods in 1994, due largely to increased revenues from higher
margin businesses.
Administrative and general expenses increased $.4 million, or 2.1%, and $2.2
million, or 5.6%, for the three months and six months ended November 30, 1995,
respectively, compared to the corresponding periods in 1994. As a percentage of
total operating revenues, administrative and general expenses declined to 4.9%
from 5.2% and 4.8% from 5.1%, respectively, for the three months and six months
ended November 30, 1995, compared to the corresponding periods 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.
Facility lease expense increased $1.5 million, or 7.3%, and $3.4 million, or
8.6%, for the three and six months ended November 30, 1995, respectively,
compared to the corresponding periods in 1994. The increase in facility lease
expense is attributable to the increase in the number of leased facilities
14
<PAGE>
operated in 1995. As a percentage of total operating revenues, facility lease
expense declined to 5.0% from 5.1% and 4.9% from 5.0%, respectively, for the
three months and six months ended November 30, 1995, compared to the
corresponding periods in 1994.
Depreciation and amortization increased $.7 million, or 4.7%, and $2.1
million, or 7.7%, for the three months and six months ended November 30, 1995,
respectively, compared to the corresponding periods in 1994. As a percentage of
total operating revenues, depreciation and amortization declined to 3.4% from
3.6% and 3.4% from 3.5% for the three months and six months ended November 30,
1995, compared to the corresponding periods 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 $3.1 million, or 21.2%, and $2.1 million, or 7.9%,
for the three months and six months ended November 30, 1995, respectively,
compared to the corresponding periods 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
Company's 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.
LIQUIDITY AND CAPITAL RESOURCES
OPERATIONS. At November 30, 1995, the Company's working capital was
$335.3 million and included cash and cash equivalents of $26.4 million as
compared with $284.3 million in working capital and $40.7 million in cash and
cash equivalents at May 31, 1995. During the six months ended November 30,
1995, the Company's operating activities used $8.6 million of net cash,
primarily as a result of increases in patient care and estimated third party
settlements accounts receivable and cash used as a result restructuring
activities.
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs and also from private pay
patients and non-affiliated long-term care facilities. Under the Medicare
program and some state Medicaid programs, the Company's long-term care
facilities are periodically paid in interim amounts designed to approximate
the facilities' reimbursable costs or the applicable payment rate. Periodic
amounts due from interim third party payors and amounts due from other payor
sources are recorded as patient care accounts receivable. Most of the
Company's Medicaid payments are prospective payments intended to approximate
costs and, normally, no retroactive adjustment is made to such payments.
15
<PAGE>
With respect to interim payor sources for which payments are subject to
retroactive adjustment, actual costs incurred are reported by each facility
annually. The cost reports are subject to audit, which may result in upward
or downward adjustment from interim payments received. Throughout the annual
cost reporting period, the Company records the estimated difference between
interim payments received and the expected actual costs as estimated third
party settlements. The settlement of costs reports has historically
not had a significant effect on the Company's operating results or cash flows.
The $8.6 million use of cash in operations during the six months ended
November 30, 1995 was due in large part to an approximate $17.4 million
increase in patient care accounts receivable and a $26.0 million increase in
estimated Medicare and Medicaid settlements. The increase in patient care
accounts receivable was caused by an increase in revenue per day between the
periods as well as an increase in number of days revenue in accounts
receivable. The increase in number of days revenue in accounts receivable was
caused by a delay in collection of receivables following acquisitions during
the period and a general shift to a higher concentration of slower paying
specialty health care services. The Company generally experiences an
approximate 90 to 180 day lag in collections following an acquisition due to
the time necessary to change Medicare and Medicaid provider billing numbers
and to transition other billing related information. Specialty health care
revenues represented 76.1% of total operating revenues for the six months
ended November 30, 1995. The increase in estimated third party settlements
was primarily the result of payments made to settle prior year cost report
liabilities and the accrual of estimated net settlement receivables during
the current period.
The $16.8 million use of cash in operations during the six months ended
November 30, 1994 was due in large part to an increase in patient care
accounts receivable and estimated third party settlements. The
increase in patient care accounts receivable was caused by an increase in
revenue per day between the periods as well as an increase in number of days
revenue in accounts receivable. The increase in revenue per day was caused by
an increase in the number of licensed beds operated and a general shift to a
higher concentration of higher margin specialty health care services. The
increase in number of days revenue in accounts receivable was caused by a
delay in collection of receivables following acquisitions and the general
shift to a higher concentration of slower paying specialty health care
services. Specialty health care revenues represented 78.9% of total operating
revenues for the six months ended November 30, 1994. The increase in
estimated third party settlements was caused, in part by the settlement of
insignificant third party rehabilitation hospital payables recorded at
May 31, 1995.
In connection with the restructuring activities and the special charge
recorded during the three months ended August 31, 1995, the Company made cash
payments during the six months ended November 30, 1995 totaling $25.1
million. The total payments consisted of: (i) $15.1 million related to
employee severance costs, (ii) $7.6 million related to merger transaction
costs and (iii) $2.4 million related to lease and other termination costs.
There were no significant asset dispositions related to the restructuring
during the six months ended November 30, 1995.
The use of cash in operations to stabilize accounts receivable experience
associated with acquisitions is not expected to have as significant an effect
on cash flows in the future as the size of acquisitions relative to the
Company's operations decreases and as the Company utilizes experience gained
in the past to reduce the period required to transition acquisitions.
Further, relative increases in the slower paying specialty health care
services concentration are expected to slow which is expected to slow the
increase in days revenue in accounts receivable. For the three months ended
November 30, 1995, cash flow from operations was approximately $548,000.
Finally, future cash requirements to settle amounts related to the first
quarter fiscal 1996 special charge will approximate $14.0 million as compared
with approximately $25.1 million for the six months ended November 30, 1995.
EXPANSION PROGRAM. The net cash used by the Company's investing
activities decreased from $109.2 million for the six months ended November
30, 1994 to $40.7 million for the six months ended November 30, 1995.
16
<PAGE>
The primary uses of cash from investing activities have been capital
expenditures, including the peopleCARE acquisition and other acquisitions.
Capital expenditures were $25.8 million and $24.4 million for the six months
ended November 30, 1995 and 1994, respectively. The principal purpose of the
capital expenditures during each of these periods has been to fund the
Company's internal and external expansion program. During the six months
ended November 30, 1994, the peopleCARE acquisition consumed $61.3 million
in cash.
The Company's expansion program requires funds: (i) to acquire assets and
to expand and improve existing and newly acquired facilities; (ii) to
discharge funded indebtedness assumed or otherwise acquired in
connection with the acquisitions of facilities and properties; and (iii) to
finance the increase in patient care and other accounts receivable
resulting from acquisitions. The funds necessary to meet these requirements
have been provided principally by the Company's financing activities and,
to a lesser extent, from the sale of marketable securities and the
sale of land, buildings and equipment. During the six months ended November
30, 1995 and 1994, proceeds from the issuance of Company debt, net of debt
repayments and repurchases, amounted to $67.2 million and $(1.2) million,
respectively, and the proceeds from the issuance of Common Stock totaled $3.7
million and $110.6 million, respectively.
SOURCES. At November 30, 1995, the available credit under the Company's
credit facility was $241.5 million. To the extent that the Company's
operations and expansion program require cash expenditures in excess of
the amounts available to it under its credit facility, management of the
Company believes that the Company can obtain the necessary funds through
other financing activities, including the issuance and sale of debt and
equity securities in public and private markets. In addition, the
Company anticipates that the previously discussed disposal of eight
facilities will result in net cash proceeds of approximately $9.6 million.
CREDIT FACILITY
The Company is the borrower under a credit agreement dated as of September
26, 1995 (the "Credit Facility") with NationsBank of Texas, N.A., as Agent, and
the lenders named therein. The aggregate revolving credit commitment under the
Credit Facility is $750 million, of which the Company had borrowed $463.2
million at November 30, 1995. Borrowings under the Credit Facility bear
interest, payable monthly, at a rate equal to either, as selected by the
Company, the Alternate Base Rate (as therein defined) of the Agent in effect
from time to time, or the Adjusted London Inter-Bank Offer Rate plus 0.625% to
1.25% per annum, depending on the maintenance of specified financial ratios. The
applicable interest rates at November 30, 1995 were 8.75% and 7.12%-7.13% on the
Alternate Base Rate and Adjusted London Inter-Bank Offer Rate advances,
respectively. In addition, borrowings thereunder mature in September 2000 and
are secured by a pledge of the capital stock of all subsidiaries of the Company.
Under the terms of the Credit Facility, the Company is required to maintain
certain financial ratios and is restricted in the payment of dividends to an
amount which shall not exceed 20% of the Company's net earnings for the prior
fiscal year.
17
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
a. Exhibits
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -- Six months ended November 30, 1995
b. Reports on Form 8-K
</TABLE>
A report on Form 8-K/A Amendment No. 1 was filed on September 25, 1995 under
"Item 7. Financial Statements and Exhibits" which provided the required
historical and pro forma financial information with respect to the merger with
CMS. It was impracticable prior to this Amendment No. 1 to provide this
historical and pro forma financial information.
A report on Form 8-K/A Amendment No. 2 was filed on September 26, 1995 under
"Item 7. Financial Statements and Exhibits" which updated the previously filed
Form 8-K/A which provided the consent of Price Waterhouse LLP as an Exhibit,
which was unavailable at the time of filing Amendment No. 1, and which corrected
certain typographical errors and further clarifying certain of the disclosures.
A report on Form 8-K was filed on November 20, 1995 under "Item 5. Other
Events" and "Item 7. Financial Statements and Exhibits" which disclosed the
proposed merger of a wholly owned subsidiary of Horizon and Pacific
Rehabilitation & Sports Medicine, Inc. under the Agreement and Plan of Merger,
dated November 9, 1995.
A report on Form 8-K was filed on November 21, 1995 under "Item 7. Financial
Statements and Exhibits" which provided audited restated financial statements
for the years ended May 31, 1995 and 1994 and for each of the three years in the
period ended May 31, 1995 to reflect the merger with CMS pursuant to Rule
11-01(b) of Regulation S-X.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HORIZON/CMS HEALTHCARE CORPORATION
Date: April 22, 1996
By /s/ ERNEST A. SCHOFIELD
--------------------------------------
Ernest A. Schofield
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
- ------------------------
*Ernest A. Schofield is signing in the dual capacities as Chief Financial
Officer and as a duly authorized officer of the Company.
19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -- Six months ended November 30, 1995
</TABLE>
____________
*Previously filed.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
NOVEMBER 30, 1995 FORM 10-Q/A AMENDMENT NO. 1 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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