<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K/A
AMENDMENT NO. 3
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM -------- TO --------
COMMISSION FILE NO. 1-9369
--------------------------
HORIZON/CMS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-1346899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6001 INDIAN SCHOOL ROAD, N.E.,
SUITE 530
ALBUQUERQUE, NM 87110
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (505) 881-4951
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------- --------------------------------------
<S> <C>
Common Stock, par value New York Stock Exchange
$.001 per share
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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 reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
At August 10, 1995, the registrant had 50,480,302 shares of Common Stock
outstanding. The aggregate market value on July 31, 1995 of the registrant's
Common Stock held by nonaffiliates of the registrant was $1,042,815,120 (based
on the closing price of these shares as quoted on such date on the New York
Stock Exchange).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 8 of Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K
for the year ended May 31, 1995, as previously amended, is hereby amended and
restated as set forth below.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements of the Company:
Report of Independent Public Accountants................................................................. 2
Consolidated Balance Sheets.............................................................................. 3
Consolidated Statements of Earnings...................................................................... 5
Consolidated Statements of Stockholders' Equity.......................................................... 6
Consolidated Statements of Cash Flows.................................................................... 7
Notes to Consolidated Financial Statements............................................................... 8
Schedule II -- Valuation and Qualifying Accounts........................................................... 25
</TABLE>
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 as of May 31, 1995 and 1994, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended May 31, 1995. These financial
statements and financial statement schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
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 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 the three years in the period ended
May 31, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
July 21, 1995
(except with respect to those matters
included in Paragraphs 5 through
11 discussed in Note 13 as to which
the date is April 5, 1996).
2
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 20,443 $ 6,522
Patient care accounts receivable, net of allowances for doubtful accounts of $7,648 in
1995 and $8,158 in 1994.............................................................. 119,685 76,862
Estimated Medicare and Medicaid settlements........................................... 20,432 6,702
Current portion of notes receivable................................................... 1,013 535
Prepaid and other assets.............................................................. 32,668 17,071
Deferred income taxes................................................................. 6,200 6,490
----------- -----------
Total current assets................................................................ 200,441 114,182
----------- -----------
NOTES RECEIVABLE, EXCLUDING CURRENT PORTION............................................. 19,883 22,436
LAND, BUILDINGS AND EQUIPMENT, net...................................................... 376,232 193,426
LEASE PURCHASE COSTS, net of accumulated amortization of $4,368 in 1995 and $3,344 in
1994................................................................................... 8,841 6,507
LEASE, UTILITY AND OTHER DEPOSITS....................................................... 14,166 11,870
DEFERRED INCOME TAXES................................................................... -- 781
GOODWILL, net of accumulated amortization of $1,948 in 1995 and $234 in 1994............ 79,606 41,673
OTHER INTANGIBLE ASSETS, at cost, net of accumulated amortization of $3,910 in 1995 and
$1,808 in 1994......................................................................... 8,502 7,609
OTHER ASSETS, at cost................................................................... 16,085 7,967
----------- -----------
Total assets........................................................................ $ 723,756 $ 406,451
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
MAY 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt..................................................... $ 1,785 $ 1,698
Current portion of capital lease obligations.......................................... 597 --
Accounts payable...................................................................... 14,045 14,200
Accrued payroll....................................................................... 13,376 10,680
Accrued property and payroll taxes.................................................... 8,819 14,318
Other accrued liabilities............................................................. 8,826 8,156
----------- -----------
Total current liabilities........................................................... 47,448 49,052
----------- -----------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION............................................... 157,733 76,673
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT PORTION............................. 47,557 --
DEFERRED LEASE CREDIT................................................................... 14,824 20,494
DEFERRED INCOME TAXES................................................................... 9,984 --
CONVERTIBLE SUBORDINATED NOTES.......................................................... 26,080 30,906
----------- -----------
Total liabilities................................................................... 303,626 177,125
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 12)
STOCKHOLDERS' EQUITY
Common stock of $.001 par value. Authorized 150,000,000 shares in 1995 and 30,000,000
in 1994; 29,814,185 shares issued with 29,309,296 shares outstanding in 1995 and
22,738,073 shares issued with 22,409,927 shares outstanding in 1994.................. 30 23
Additional paid-in capital............................................................ 363,986 200,272
Retained earnings..................................................................... 61,701 29,771
Treasury stock........................................................................ (5,587) (740)
----------- -----------
Total stockholders' equity.......................................................... 420,130 229,326
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 723,756 $ 406,451
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
NET PATIENT CARE REVENUES.................................................. $ 626,634 $ 367,920 $ 228,656
OTHER OPERATING REVENUES................................................... 12,446 7,175 3,543
----------- ----------- -----------
Total operating revenues............................................... 639,080 375,095 232,199
----------- ----------- -----------
ROUTINE EXPENSES
Nursing services......................................................... 191,111 117,709 79,012
Ancillary services....................................................... 144,724 76,448 37,552
Dietary services......................................................... 39,760 25,471 18,148
Facility operations and maintenance...................................... 24,063 14,865 9,895
Housekeeping services.................................................... 14,095 8,857 6,148
Laundry services......................................................... 7,520 4,924 3,386
Administrative and general............................................... 63,960 40,165 25,489
Other services........................................................... 18,589 12,785 7,924
----------- ----------- -----------
Total routine expenses................................................. 503,822 301,224 187,554
----------- ----------- -----------
PROPERTY EXPENSES
Facility leases.......................................................... 39,360 27,699 20,992
Interest................................................................. 18,456 6,240 4,252
Depreciation and amortization............................................ 18,511 8,081 4,008
Other.................................................................... 7,756 5,105 3,651
----------- ----------- -----------
Total property expenses................................................ 84,083 47,125 32,903
----------- ----------- -----------
Total operating expenses............................................... 587,905 348,349 220,457
----------- ----------- -----------
Earnings before income taxes........................................... 51,175 26,746 11,742
INCOME TAXES............................................................... 19,954 10,140 4,026
----------- ----------- -----------
Net earnings............................................................. $ 31,221 $ 16,606 $ 7,716
----------- ----------- -----------
----------- ----------- -----------
Net earnings per common and common equivalent share...................... $1.16 $0.99 $0.66
----------- ----------- -----------
----------- ----------- -----------
Net earnings per share -- assuming full dilution......................... $1.16 $0.91 $0.62
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------------ ----------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1992................................... 11,392,382 $ 11 $ 35,060 $ 5,449 $ (740) $ 39,780
Exercise of stock purchase warrants, options and issuance
of shares under the employee stock purchase plan......... 246,944 -- 700 -- -- 700
Net earnings.............................................. -- -- -- 7,716 -- 7,716
------------ --- ---------- --------- --------- ----------
Balance at May 31, 1993................................... 11,639,326 11 35,760 13,165 (740) 48,196
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....... 2,213,976 2 51,586 -- -- 51,588
Conversion of 6.75% convertible subordinated notes, net of
$1,897 previously capitalized financing costs and $507
conversion costs......................................... 4,522,500 5 51,861 -- -- 51,866
Exercise of stock options, warrants and issuance of shares
under the employee stock purchase plan................... 337,271 1 2,850 -- -- 2,851
Net earnings.............................................. -- -- -- 16,606 -- 16,606
------------ --- ---------- --------- --------- ----------
Balance at May 31, 1994................................... 22,738,073 23 200,272 29,771 (740) 229,326
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....... 1,776,924 2 38,181 759 -- 38,942
Exercise of stock options, warrants and issuance of shares
under the employee stock purchase plan................... 383,731 -- 5,925 -- -- 5,925
Treasury stock acquired in payment for stockholder's
note..................................................... -- -- -- -- (4,847) (4,847)
Distribution to subsidiary shareholder.................... -- -- -- (50) -- (50)
Net earnings.............................................. -- -- -- 31,221 -- 31,221
------------ --- ---------- --------- --------- ----------
Balance at May 31, 1995................................... 29,814,185 $ 30 $ 363,986 $ 61,701 $ (5,587) $ 420,130
------------ --- ---------- --------- --------- ----------
------------ --- ---------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings................................................................... $ 31,221 $ 16,606 $ 7,716
Adjustments to reconcile net earnings to net cash provided by (used for)
operating activities:
Depreciation and amortization................................................ 18,511 8,081 4,008
Gain on sale of assets and redemption of convertible subordinated notes...... (2,053) (2,142) --
Amortization of deferred lease credit........................................ (1,779) (523) --
Provision for losses on patient care receivables............................. 2,201 1,593 1,163
Changes in assets and liabilities:
Patient care and settlements receivables................................... (51,961) (30,039) (18,755)
Prepaid and other current assets........................................... (13,865) (8,006) (3,637)
Lease, utility and other deposits.......................................... (861) (5,564) (3,962)
Accounts payable........................................................... (2,396) (1,720) 2,998
Accrued payroll............................................................ (2,099) (299) 2,536
Other current liabilities.................................................. (5,318) 751 4,049
Deferred income taxes...................................................... 654 (417) 4,453
--------- --------- ---------
Net cash provided by (used for) operating activities........................... (27,745) (21,679) 569
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable investment securities................................... -- -- (9,192)
Proceeds from sale of marketable investment securities......................... -- -- 15,193
Payments received on notes receivable.......................................... 447 7,065 137
Issuance of notes receivable................................................... (1,000) -- --
Capital expenditures........................................................... (38,023) (40,610) (53,378)
Proceeds from sale of land, building and equipment............................. 6,983 1,036 9,363
Lease purchase costs expenditures.............................................. (66) (28) (3,385)
Cash used for acquisition of peopleCARE Heritage Group......................... (61,319) -- --
Cash used for merger of Greenery Rehabilitation Group, Inc..................... -- (7,763) --
Cash used for other acquisitions............................................... (37,069) (2,965) --
Additions to other intangible assets........................................... (2,918) (2,887) (6,105)
Change in other assets......................................................... (5,439) (3,389) (7)
--------- --------- ---------
Net cash used by investing activities.......................................... (138,404) (49,541) (47,374)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net............................................ 65,052 34,550 22,715
Repayment of debt, net......................................................... (4,300) (2,898) (152)
Repurchase of convertible subordinated notes................................... (3,812) (19,999) --
Proceeds from issuance of common stock......................................... 123,180 60,161 700
Distribution to subsidiary stockholder......................................... (50) -- --
--------- --------- ---------
Net cash provided by financing activities...................................... 180,070 71,814 23,263
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 13,921 594 (23,542)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 6,522 5,928 29,470
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 20,443 $ 6,522 $ 5,928
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
7
<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 long-term care and specialty 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 specialty health care services to its long-term care facilities
and outside parties. Such specialty health care services include licensed
specialty hospital services and subacute units, rehabilitation and other
therapies, institutional pharmacy services, Alzheimer's care, non-invasive
medical diagnostic testing services, home respiratory care services and clinical
laboratory services. Substantially all of these services are within the
long-term 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 13).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NET PATIENT CARE 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.
CASH EQUIVALENTS
For purposes of the accompanying consolidated statements of cash flows, the
Company considers its highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
DEPRECIATION
Buildings and equipment are depreciated using the straight-line method over
the estimated useful lives of the assets (buildings -- 40 years; equipment -- 3
to 10 years). Maintenance and repairs are charged to expense as incurred. Major
renewals or improvements are capitalized.
8
<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)
LEASE PURCHASE COSTS
Lease purchase costs represent amounts paid by the Company to obtain lease
rights to long-term care facilities and are amortized over the initial and
renewal terms of the leases expected to be renewed.
GOODWILL AND OTHER INTANGIBLE ASSETS RESULTING FROM BUSINESS COMBINATIONS
In connection with acquisitions accounted for using the purchase method,
the purchase price is allocated to the estimated fair value of the tangible
and indentifiable intangible net assets as of the effective date of the
acquisition, with any excess cost allocated to goodwill.
Indentifiable intangible assets are identified and measured under the
provisions of Accounting Principles Board Opinion No. 16. Historically, the
nature and circumstances surrounding the Company's acquisitions have resulted
in the identification and recognition of certain identifiable intangible
assets including: favorable lease purchase costs, noncompetition agreements,
contract rights, sign-on bonuses and trade name costs. These intangible
assets are amortized over the respective estimated useful lives (five to ten
years).
The Company believes that the excess cost over net assets of acquired
companies (goodwill) in each case has an unlimited useful life and, therefore,
an amortization period of 15 to 40 years has been assigned. In determining that
the life of goodwill is unlimited, the Company considered the following
factors: (i) the concentrations that exist in the Company's selected markets
and the fact that acquisitions frequently serve as a platform for the
integration of other services provided by the Company; (ii) the long-term and
subacute care industry, which is positively impacted by aging trends and the
continued pressure to transfer patients from high cost, acute care settings to
long-term and subacute settings; (iii) the increasing acceptance by the
medical establishment of long-term and subacute care as a better alternative to
acute care hospital based treatment; and (iv) the nature of the services
provided by the Company, which will be continuously needed in the future and
are not subject to obsolescence.
The Company reviews the realizability of the carrying amount of goodwill
whenever events or circumstances occur that indicate the recorded costs may not
be recoverable. Principal factors considered by the Company in this review
include changes in market share and competitive conditions, technological and
regulatory changes (including reimbursement), demand trends and earnings trends
of the acquired companies. If such a review, which is performed no less
frequently than quarterly, indicates that the undiscounted future cash flows
from operations of the acquired business are less than the recorded asset, its
carrying amount will be reduced to its estimated fair value. In the absence of
an active market for the asset, fair value will be estimated using accepted
valuations techniques, including discounted cash flow analysis.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). The
provisions of SFAS No. 121 must be implemented by the Company in the first
quarter of fiscal 1997. The Company believes that its current impairment
policy is substantially similar to SFAS No. 121 and, accordingly, the adoption
of SFAS No. 121 is not currently expected to have a significant effect on the
Company's financial position or results of operations when adopted.
DEFERRED LEASE CREDIT
The deferred lease credit represents obligations for above market rate lease
terms on operating leases recorded under purchase accounting. This credit is
amortized over the terms of the related leases to yield level lease payments,
net of discount accretion. In the event such facilities are converted from
operating lease to ownership status, the related remaining deferred lease
credit, if any, is eliminated in the recording of the related facility purchase.
INCOME TAXES
The Company and certain of its subsidiaries file a consolidated Federal
income tax return. 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. Previously, the Company deferred the past tax effects of temporary
differences between financial reporting and taxable income. 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 bases of assets and liabilities.
MARKET VALUE DISCLOSURES
The market value of all financial instruments approximates their carrying
value unless indicated otherwise in the applicable notes to the consolidated
financial statements.
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
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)
settlements are provided in the period of the related coverage and are
determined on a case by case basis plus some 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 27,016,565 shares in 1995,
16,751,078 shares in 1994, and 11,711,911 shares in 1993. Earnings per common
share-assuming full dilution is based upon 27,023,971 shares in 1995, 19,724,461
shares in 1994 and 16,275,875 shares in 1993, including the effect of the
convertible subordinated notes.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1995 presentation.
(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
12% notes receivable; payable in monthly installments of $22, including interest;
final payment of approximately $2,033 due July 2002; secured by real property... 2,126 2,136
Other notes receivable bearing interest at 8.0% to 11%; unsecured................ 2,117 1,835
--------- ---------
Notes receivable............................................................... 20,896 22,971
Less current portion............................................................. 1,013 535
--------- ---------
Notes receivable, excluding current portion.................................... $ 19,883 $ 22,436
--------- ---------
--------- ---------
</TABLE>
(3) LAND, BUILDINGS AND EQUIPMENT
Land, buildings 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.......................................................................... $ 43,937 $ 21,605
Buildings..................................................................... 292,378 144,213
Equipment..................................................................... 65,688 39,377
----------- -----------
402,003 205,195
Less accumulated depreciation and amortization................................ 25,771 11,769
----------- -----------
Land, buildings, and equipment, net........................................... $ 376,232 $ 193,426
----------- -----------
----------- -----------
</TABLE>
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)
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Revolving credit drawn on credit agreement; interest due monthly; principal due
June 2000; secured as discussed below......................................... $ 104,750 $ 44,250
Other long-term debt bearing interest ranging from 6.75% to 12.0%; secured by
related land, buildings and equipment......................................... 54,768 34,121
----------- ---------
Long-term debt............................................................... 159,518 78,371
Less current portion........................................................... 1,785 1,698
----------- ---------
Long-term debt, excluding current portion.................................... $ 157,733 $ 76,673
----------- ---------
----------- ---------
</TABLE>
On March 16, 1995, the Company completed a $250,000 revolving credit loan
agreement which replaced the revolving loan agreement outstanding at May 31,
1994. This credit agreement bears interest at either the Adjusted Corporate Base
Rate plus up to .25% (9.0% at May 31, 1995) or at the Adjusted LIBOR rate plus
0.5 to 1.25% (7.0 to 7.0625% at May 31, 1995). The average interest rate on
amounts outstanding under the credit agreement was 7.68% at May 31, 1995. The
credit agreement: (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 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. The credit
agreement 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 the credit agreement. Certain subsidiaries of the Company have
guaranteed the obligations of the Company under the credit agreement. The credit
agreement 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 $102.2
million at May 31, 1995.
In July 1995, in connection with the merger with CMS, the Company and CMS
entered into a new facility that increased the amount available for borrowing to
$485,000. The aggregate principal amount is divided between the Company and CMS
in the amounts of $250,000 and $235,000, respectively. The terms of the new
facility are substantially consistent with those of the old facility except that
accounts receivable are no longer required as collateral and the interest
component has been revised. Under the new 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.
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)
The approximate aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ---------------------------------------------------------------------------------
<S> <C>
1996............................................................................. $ 1,785
1997............................................................................. 4,076
1998............................................................................. 2,491
1999............................................................................. 1,178
2000............................................................................. 1,293
Thereafter....................................................................... 148,695
-----------
$ 159,518
-----------
-----------
</TABLE>
(5) CONVERTIBLE SUBORDINATED NOTES
On February 14, 1992, the Company issued $57,500 of 6.75% convertible
subordinated notes (the Notes) due February 1, 2002. The 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 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 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 1994, the remaining $54,270 of 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 7), the Company assumed the
obligations under Greenery's 6.5% convertible subordinated notes and 8.75%
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 6.5%
convertible subordinated notes of $2,663.
The 6.5% 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 103.25% 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 8.75% 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 6.5% debentures, but will be
subordinated to any future senior indebtedness.
During the fourth quarter of fiscal 1994, the Company redeemed $15,520 of
the 6.5% convertible subordinated notes and $7,244 of the 8.75% 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.
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) CONVERTIBLE SUBORDINATED NOTES (CONTINUED)
During 1995, the Company repurchased $4,800 of the 6.5% convertible
subordinated notes and $506 of the 8.75% convertible senior subordinated notes.
The Company recorded a gain of approximately $613, net of the write-off of $480
debt discount recorded under purchase accounting and income taxes of
approximately $401.
The market value of the outstanding convertible subordinated notes at May
31, 1995 and 1994 was approximately $23,344 and $27,500, respectively. The
market value 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.
(6) LEASE COMMITMENTS
In connection with the acquisition of peopleCARE Heritage Group (peopleCARE)
discussed in Note 7, the Company entered into a capital lease for six
facilities. The lease expires October 2003. At May 31, 1995, the amount of land,
buildings and equipment and related accumulated amortization recorded under this
capital lease was as follows:
<TABLE>
<S> <C>
Land.............................................................. $ 8,436
Buildings......................................................... 45,892
Equipment......................................................... 2,406
---------
56,734
Less accumulated amortization..................................... 1,141
---------
$ 55,593
---------
---------
</TABLE>
Amortization of assets held under this capital lease is included in
depreciation and amortization expense. The present value of future minimum
capital lease payments as of May 31, 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31:
- -----------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 5,023
1997............................................................................... 5,023
1998............................................................................... 5,023
1999............................................................................... 5,023
2000............................................................................... 5,023
Thereafter......................................................................... 57,979
---------
Total minimum lease payments....................................................... 83,094
Less amounts representing interest (at 9.09%)...................................... 34,940
---------
Present value of net minimum capital lease payments................................ 48,154
Less current portion of obligations under capital leases........................... 597
---------
Obligations under capital leases, excluding current portion........................ $ 47,557
---------
---------
</TABLE>
The Company also 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 $1,433, $1,060 and $680, respectively.
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)
(6) LEASE COMMITMENTS (CONTINUED)
Future minimum payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ---------------------------------------------------------------------------------
<S> <C>
1996............................................................................. $ 40,204
1997............................................................................. 38,791
1998............................................................................. 35,198
1999............................................................................. 29,901
2000............................................................................. 27,294
Thereafter....................................................................... 125,075
-----------
Total minimum lease payments..................................................... $ 296,463
-----------
-----------
</TABLE>
The Company is contingently liable for annual lease payments of
approximately $2,570 for leases on facilities sold. In addition, the Company is
contingently liable for annual lease payments of $6,200 for leases on managed
facilities.
The Company leases seven facilities from an affiliate of two directors of
the Company. During fiscal 1995 a previously leased facility was purchased by
the Company. The aggregate lease expense for these facilities for the years
ended May 31, 1995, 1994 and 1993 was approximately $15,900, $5,501, and $903,
respectively. Future minimum lease commitments related to these facilities are
as follows:
<TABLE>
<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>
In addition, the Company leases its corporate office space 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) FACILITY ACQUISITIONS
During 1994 and 1995, the Company implemented its strategic business plan by
leasing or acquiring long-term care facilities and related specialty services
businesses in targeted geographic areas. The acquisitions have been recorded
using the purchase method of accounting. The results of operations of the
acquired companies are included in the Company's statements of earnings for the
periods in which they were owned by the Company.
In February 1994, the Company completed its merger of 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
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)
(7) FACILITY ACQUISITIONS (CONTINUED)
June 19, 1995, the Company announced plans to dispose of eight long-term care
facilities. Six of the facilities to be disposed of were among the 17 acquired
in the Greenery merger during fiscal 1994. The decision to sell the facilities
was based upon financial, regulatory and operational considerations.
The Company had other acquisitions during fiscal 1994 that in the aggregate
were insignificant.
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. In addition, the Company had
other individually insignificant acquisitions during fiscal 1995.
The following unaudited pro forma financial information reflects the
combined results of operations for the years ended May 31, 1995 and 1994 as if
the Greenery, peopleCARE and certain other individually insignificant
acquisitions during fiscal 1995 and 1994 had been consummated on June 1, 1993:
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Total operating revenues...................................................... $ 690,147 $ 611,087
Total operating expenses...................................................... 638,662 597,707
----------- -----------
Operating income............................................................ 51,485 13,380
Income taxes.................................................................. 20,337 5,285
----------- -----------
Net earnings................................................................ $ 31,148 $ 8,095
----------- -----------
----------- -----------
Net earnings per common and common equivalent share......................... $1.12 $0.41
----------- -----------
----------- -----------
Net earnings per common share -- assuming full dilution..................... $1.12 $0.41
----------- -----------
----------- -----------
</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.
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)
(8) INCOME TAXES
On June 1, 1993, the Company adopted FAS109 through retroactive restatement
of its financial statements from June 1, 1990. The restatement decreased 1993
net earnings by $67. FAS 109 requires an asset and liability approach for
financial accounting and reporting of income taxes.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................. $ 10,947 $ 7,388 $ 2,593
State............................................................... 2,190 1,273 721
--------- --------- ---------
13,137 8,661 3,314
--------- --------- ---------
Deferred:
Federal............................................................. 5,823 1,270 854
State............................................................... 994 209 (142)
--------- --------- ---------
6,817 1,479 712
--------- --------- ---------
Total............................................................. $ 19,954 $ 10,140 $ 4,026
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences between the total tax expense from operations and the income
tax expense using the Federal income tax rate (35 percent) were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed tax expense at statutory rate................................ $ 17,911 $ 9,361 $ 4,110
Net effect of targeted jobs credits................................... (78) (80) (358)
State income tax expense, net of federal income tax benefit........... 2,420 955 457
Change in valuation allowance on deferred tax assets.................. -- -- (257)
Other................................................................. (299) (96) 74
--------- --------- ---------
Total income tax expense.......................................... $ 19,954 $ 10,140 $ 4,026
--------- --------- ---------
--------- --------- ---------
</TABLE>
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)
(8) INCOME TAXES (CONTINUED)
The components of the net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Components of the deferred tax asset:
Self-insured reserves.......................................................... $ 2,830 $ 3,002
Allowance for doubtful accounts................................................ 3,116 3,650
Accrued payroll and related benefits........................................... 355 592
Net operating loss............................................................. 3,453 5,739
Deferred lease credit.......................................................... 7,630 10,137
Other.......................................................................... 1,340 1,336
--------- ---------
18,724 24,456
--------- ---------
Components of the deferred tax liability:
Buildings and equipment, related basis differences, deferred gain and
depreciation.................................................................. (15,804) (9,706)
Third party retrospective settlements.......................................... -- (1,254)
Difference between reporting income/loss from partnership investments for
financial and income tax reporting............................................ (1,870) (955)
IRC Section 481 adjustment for change in method of accounting from cash to
accrual....................................................................... (319) (637)
Greenery 6.5% convertible subordinated note discount........................... (257) (1,086)
Other.......................................................................... (1,207) (496)
--------- ---------
(19,457) (14,134)
Valuation allowance on deferred tax assets..................................... (3,051) (3,051)
--------- ---------
Total........................................................................ $ (3,784) $ 7,271
--------- ---------
--------- ---------
</TABLE>
As the 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 carry forwards of
approximately $7,466 which are currently subject to separate return year
limitations and expire in the years 2007 through 2008. In addition, the Company
also has an alternative minimum tax credit carryforward of $205 which is
available for utilization indefinitely.
(9) CAPITAL STOCK
COMMON STOCK
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.
As discussed in Note 5, the Company converted $54,270 of its 6.75%
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.
As discussed in Note 7, the Company issued 2,050,000 new shares of common
stock during February 1994 in connection with the Greenery merger.
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)
(9) CAPITAL STOCK (CONTINUED)
In addition, 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 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.
Finally, during 1995 the Company issued 1,776,924 shares of common stock in
connection with certain acquisitions.
PREFERRED STOCK
There are 500,000 shares of authorized but unissued shares of $.001
preferred stock. On September 12, 1994, the Board of Directors of the Company
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of the Company's common stock held of record on September 22,
1994 and approved the further issuance of Rights with respect to all shares of
the Company's common stock that are subsequently issued. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $.001 per share of the
Company, at a price of $110 per one one-thousandth of a share, subject to
adjustment. Until the occurrence of certain events, the Rights are not
exercisable, will be evidenced by the certificates for the Company's common
stock and will not be transferable apart from the Company's common stock.
STOCK PURCHASE WARRANTS
The Company had 100,000 stock purchase warrants outstanding at May 31, 1995
for the purchase of common shares. These warrants, priced at $2.50, were
exercised subsequent to year end.
STOCK BENEFIT PLANS
The Company has a nonqualified employee stock option plan and a directors'
stock option plan that provide the Company the ability to grant to employees and
outside directors the option to purchase shares of common stock of the Company
at the market value of the stock at the option grant date. Accordingly, no
compensation is recorded in the accompanying consolidated financial statements
for the options granted.
All options granted under the employee plan and directors' plan expire ten
years after grant, are non-transferable and are exercisable only during or
immediately following the period the individual is employed by the Company or is
a current member of the Board of Directors, subject to certain exceptions for
death or disability. One-third of each option is exercisable on each of the
first, second and third anniversary dates following the date of grant.
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)
(9) CAPITAL STOCK (CONTINUED)
The following information is a summary of the stock option activity under
the employee and directors' plans:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------
1995 1994 1993
----------------- ------------------ -----------------
<S> <C> <C> <C>
Options outstanding at beginning of year........... 1,674,711 1,015,109 808,553
Granted............................................ 1,156,250 905,750 450,400
Exercised.......................................... (310,490) (208,751) (128,745)
Canceled and other adjustments..................... (87,764) (37,397) (115,099)
----------------- ------------------ -----------------
Options outstanding at end of year................. 2,432,707 1,674,711 1,015,109
----------------- ------------------ -----------------
----------------- ------------------ -----------------
Options exercisable at end of year................. 768,920 467,371 279,226
----------------- ------------------ -----------------
----------------- ------------------ -----------------
Option price range................................. $ 1.38 - $28.75 $ 1.38 - $26.125 $ 1.38 - $14.63
----------------- ------------------ -----------------
----------------- ------------------ -----------------
</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 addition and 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.
(10) EMPLOYEE BENEFITS
In 1993, the Company established a deferred compensation plan for selected
employees that work full-time and have been employed by the Company for more
than one year. This plan, which is not required to be funded by the Company,
allows 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. The Company
contributed approximately $179, $124 and $39 to this plan for the years ended
May 31, 1995, 1994 and 1993, respectively.
The Company also has a 401(k) savings plan available to substantially all
employees who have been with the Company for more than six months. Employees may
defer up to 20% of their salary, subject to the maximum permitted by law. The
Company may, at its discretion, match a portion of the employee's contribution.
Employee contributions are vested immediately. Employer contributions vest on a
graduated basis, with full vesting achieved at the end of five years. The
Company contributed approximately $306, $136 and $15 to this plan for the years
ended May 31, 1995, 1994 and 1993, respectively.
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) 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.
(11) SUPPLEMENTARY INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purposes of the consolidated statements of cash flows, the following
are considered non-cash items:
<TABLE>
<CAPTION>
1995
- ---------
<S> <C>
a) The issuance of 1,776,924 shares of common stock in connection with
acquisitions in which net assets of approximately $22,030 were acquired,
b) The acceptance of 175,041 shares of treasury stock for payment of a note,
c) The assumption of long-term debt of $19,900 in connection with acquisitions,
and
d) The assumption of obligations under capital lease of $48,600 in connection with
acquisitions.
</TABLE>
<TABLE>
<CAPTION>
1994
- ---------
<S> <C>
a) The conversion of $54,270 of 6.75% convertible subordinated notes into the
Company's common stock,
b) The issuance of 2,213,976 shares of common stock in connection with
acquisitions in which net assets of approximately $16,573 were acquired, and
c) The assumption of long-term debt of $19,300 in connection with acquisitions.
<CAPTION>
1993
- ---------
<S> <C>
Net assets of approximately $17,500 were sold for cash proceeds of approximately $9,360
and notes receivable of $8,150.
</TABLE>
Cash paid for interest for the years ended May 31, 1995, 1994 and 1993 was
approximately $16,867, $5,650 and $4,387, respectively.
Cash paid for income taxes for the years ended May 31, 1995, 1994 and 1993
was approximately $17,562, $7,893 and $4,187, respectively.
(12) COMMITMENTS
LETTERS OF CREDIT
The Company was contingently liable for letters of credit aggregating
$11,810 and $8,551 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 two of the officers/stockholders,
the Company is committed to pay minimum annual salaries totaling $775, subject
to certain covenants. In addition, the employment agreements provide for annual
retirement benefits and disability benefits equal to a maximum of 50 percent of
each officer's base salary. The retirement benefits vest in equivalent
increments over 10 years and the disability benefits terminate upon retirement
or age 65. Further, an annual death benefit is payable to the surviving spouse
or minor children equal to one-half of the
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)
(12) COMMITMENTS (CONTINUED)
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 two
of its 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.
(13) SUBSEQUENT EVENTS
CONTINENTAL MEDICAL 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 ("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 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 --
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)
(13) SUBSEQUENT EVENTS (CONTINUED)
inpatient rehabilitation care, outpatient rehabilitation care and contract
therapy. The merger qualifies as a tax-free reorganization and will be accounted
for as a pooling of interests. Accordingly, historical financial data in future
reports will be restated to include CMS. Supplemental unaudited pro forma data
summarizing the combined results of operations of the Company and CMS as though
the merger had occurred at the beginning of fiscal 1993 is as follows:
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Total operating revenues $ 1,625,326 $ 1,382,162 $ 1,136,358
Net earnings (loss) from continuing operations $ 24,597 $ (20,294) $ 30,336
Net earnings (loss) $ 27,569 $ (19,080) $ 27,132
Net earnings (loss) per common and common equivalent share $ 0.58 $ (0.52) $ 0.84
Net earnings (loss) per common share -- assuming full dilution $ 0.58 $ (0.52) $ 0.80
</TABLE>
The above unaudited pro forma earnings statement information includes CMS
information for the twelve months ended June 30, 1995, 1994 and 1993.
RESTRUCTURING
On June 19, 1995, the Company announced that it plans to sell the assets and
leasehold improvements at eight of its facilities. The Company anticipates that
the intended dispositions will occur during fiscal 1996. The Company expects
that it will record a $11,900 pre-tax charge during the first quarter of fiscal
1996 related to the disposal of the eight facilities. Among management's
financial, regulatory and operational considerations in electing to dispose of
these facilities was the fact that permanent licensure had not been obtained by
the Company with respect to four of the facilities. Through these eight
facilities, the Company provides services for neuro-behaviorally impaired
patients, long-term chronic ventilator care patients, personal care patients and
patients with mild mental disorders. These services are deemed by management of
the Company to be inconsistent with the Company's emphasis on long-term
rehabilitation services and its concentration on high acuity patient services.
The properties that are the subject of the planned dispositions, in the
aggregate, incurred pre-tax net losses in fiscal years 1995, 1994 and 1993 of
approximately $11,300, $1,200 and $0, respectively. Revenues for fiscal years
1995, 1994 and 1993 approximated $71,900, $29,200 and $5,300, respectively.
22
<PAGE>
LEGAL PROCEEDINGS
OIG/DOJ INVESTIGATION INVOLVING CERTAIN MEDICARE PART B AND RELATED
CO-INSURANCE BILLINGS
The Company announced on March 15, 1996 that certain Medicare Part B and
related co-insurance billings previously submitted by the Company are being
investigated by the Office of Inspector General of the Department of Health and
Human Services (the "OIG") and the Department of Justice (the "DOJ"). These
billings, totaling approximately $3.4 million, sought recovery for the costs of
certain Medicare Part B covered medical supplies used in treating Medicare
patients in certain facilities at a time when those facilities were operated by
Greenery Rehabilitation Group, Inc. ("Greenery") before the Company acquired
Greenery (the "Greenery Acquisition"). These costs were not billed at the time
incurred but were billed on a retroactive basis, as permitted under applicable
Medicare Part B rules, after the Greenery Acquisition. Of the $3.4 million
billed, approximately $1.3 million has been remitted to the Company.
The Company has advised the OIG that it appears that a significant portion
of the billings may not have been in accordance with applicable Medicare Part B
rules. The Company advised the OIG and the DOJ that it was cooperating, and will
continue to cooperate, in the investigation and was prepared to remit any
overpayment to the appropriate governmental authority. On April 2, 1996, the
Company and DOJ entered into a letter agreement pursuant to which the Company
voluntarily agreed to refund such overpayment to the DOJ. On April 3, 1996, the
Company refunded approximately $1 million to the DOJ. In addition, the Company
is in the process of voluntarily refunding co-insurance payments to the
applicable parties. The Company believes the errors in these billings were an
exception and do not represent a regular pattern or practice at the Company. Due
to the preliminary nature of the OIG/DOJ investigation, the Company cannot now
predict when the OIG/DOJ investigation will be completed; the ultimate outcome
of the OIG/DOJ investigation; or the effect thereof on the Company's financial
condition or results of operations. If as a result of the OIG/DOJ investigation,
civil or criminal proceedings against the Company are initiated and adversely
determined, civil and/or criminal fines or sanctions could be imposed against
the Company, which could have a material adverse impact on the Company's
financial condition and/or its results or operations.
23
<PAGE>
SECURITIES AND EXCHANGE COMMISSION AND NEW YORK STOCK EXCHANGE
INVESTIGATIONS
The Company has been advised that the staff of the Division of
Enforcement of the Commission has commenced a private investigation with
respect to trading in the securities of the Company and CMS. In connection
with that investigation, the Company has voluntarily produced certain
documents and Neal M. Elliott, Chairman of the Board, President and Chief
Executive Officer of the Company, has voluntarily given testimony to the
Commission. The Company has also been informed that certain of its divisional
office employees and an individual, affiliates of whom have limited business
relationships with the Company, have responded to subpoenas from the
Commission. Mr. Elliott has also produced certain documents in response to a
subpoena from the Commission. In addition, the Company and Mr. Elliott are
each in the process of responding to separate subpoenas from the Commission
pertaining to trading in the Company's common stock and the Company's March 1,
1996 press release announcing a revision in the Company's third quarter
earnings estimate, the Company's March 7, 1996, press release announcing the
filing of a lawsuit against Tenet, the March 12, 1996 press release
announcing that the merger with Pacific Rehab could not be effected by April
1, 1996 and the Company's March 15, 1996 press release announcing the
existence of a federal investigation into certain of the Company's Medicare
Part B billings. The investigation is ongoing, and neither the Company nor
Mr. Elliott possesses all the facts with respect to the matters under
investigation. Although neither the Company nor Mr. Elliott has been advised
by the Commission that the Commission has concluded that any of the Company,
Mr. Elliott or any other current or former officer or director of the
Company has been involved in any violation of the federal securities laws,
there can be no assurance as to the outcome of the investigation or the time
of its conclusion. Both the Company and Mr. Elliott intend to continue
cooperating fully with the Commission in connection with the investigation.
In March 1995, the New York Stock Exchange, Inc. (the "NYSE") informed
the Company that it had initiated a review of trading in The Hillhaven
Corporation ("Hillhaven") common stock prior to the announcement of the
Company's proposed acquisition of Hillhaven. The NYSE extended in April 1995
the review of trading to include all dealings with CMS. On April 3, 1996, the
NYSE notified the Company that it had initiated a review of trading in the
Company's Common Stock preceding the Company's March 1, 1996 press release
described above. The Company is cooperating with the NYSE in its review and,
to the Company's knowledge, the reviews are ongoing.
STOCKHOLDER LITIGATION
On April 1, 1996, the Company announced that it had been served on March 28,
1996 with a lawsuit filed on March 21, 1996, in New Mexico state district court
in Albuquerque, New Mexico by a former stockholder of CMS, RONALD GOTTESMAN VS.
HORIZON/CMS HEALTHCARE CORPORATION, NO. CV-96-02894, SECOND JUDICIAL DISTRICT
COURT, COUNTY OF BERNALILLO, STATE OF NEW MEXICO. This lawsuit, which among
other things seeks class certification, alleges violations of federal and New
Mexico state securities laws arising from what the plaintiff contends are
materially misleading statements by the Company in its June 6, 1995 joint proxy
statement/prospectus (the "CMS Prospectus"). The plaintiff alleges that the
Company failed to disclose in the CMS Prospectus those problems in the Company's
Medicare Part B billings the Company described in its related March 15, 1996
announcement. In this action, the plaintiff seeks damages in an unspecified
amount, plus costs and attorneys' fees. The Company disputes the factual and
legal premises upon which the plaintiff's lawsuit is based and denies that the
plaintiff is entitled to any recovery on his claim. To that end, the Company
intends to contest this litigation vigorously. Because the lawsuit just began,
the Company cannot now predict the outcome of this litigation; the length of
time it will take to resolve this litigation; or the effect of any such outcome
on the Company's financial condition or results of operation.
On April 5, 1996, the Company was served with a complaint filed on April 2,
1996 by current or former stockholders of the Company on behalf of all persons
who purchased common stock of the Company between July 6, 1995 and March 1, 1996
(the "Class Period"), LAWRENCE DONNARUMMA ET AL., VS. ROCCO A. ORTENZIO, NEAL M.
ELLIOTT, ROBERT A. ORTENZIO, RUSSELL L. CARSON, KLEMMET L. BELT, JR.,
24
<PAGE>
ERNEST A. SCHOFIELD, AND HORIZON/CMS HEALTHCARE CORPORATION, NO. CIV-96-0442-BB,
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO. This lawsuit, which
was publicly announced by plaintiffs' counsel on April 3, 1996, was filed in the
United States District Court for the District of New Mexico, in Albuquerque, New
Mexico. In this lawsuit, the plaintiffs allege violations of federal and New
Mexico state securities laws. In this connection, the plaintiffs allege that
during the Class Period, the named defendants disseminated materially misleading
statements about the Company, its business, its Greenery Rehabilitation Group,
Inc. ("Greenery") and CMS acquisitions, Greenery's improved operations after the
acquisition, the successful integration of CMS's operations in the Company's and
the cost savings and operating efficiencies obtained thereby, the Company's
earnings growth and financial statements, the Company's ability to continue to
achieve profitable growth and the status and magnitude of regulatory
investigations into and audits of the Company. The plaintiffs seek damages in an
unspecified amount and extraordinary, equitable or injunctive relief, including
attachment, impoundment or imposition of a constructive trust, plus costs and
attorneys' fees. The Company disputes the factual and legal premises upon which
the plaintiffs' lawsuit is based and denies that the plaintiffs are entitled to
any recovery on their claims. To that end, the Company intends to contest this
litigation vigorously. Because the lawsuit just began, the Company cannot now
predict the outcome of this litigation; the length of time it will take to
resolve this litigation; or the effect of any such outcome on the Company's
financial condition or results of operations.
On April 5, 1996, the Company was served with a class action lawsuit filed
on April 3, 1996, in the United States District Court for the District of New
Mexico, in Albuquerque, New Mexico by a current or former shareholder of the
Company seeking to represent a class of persons who purchased the Company's
common stock between June 6, 1995 and March 15, 1996, JERRY S. ROSENBAUM VS.
HORIZON/ CMS HEALTHCARE CORPORATION, NEAL M. ELLIOTT, ROBERT A. ORTENZIO,
KLEMMET L. BELT, JR., ROCCO A. ORTENZIO, ERNEST A. SCHOFIELD AND RUSSELL L.
CARSON, NO. CIV-96-0447-JC, UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW
MEXICO. This lawsuit, which among other things, seeks class certification,
alleges violations of federal and New Mexico state securities laws arising from
what the plaintiff contends was the dissemination of false and misleading
statements information about the Company's financial results and business
prospects, particularly as those results and prospects are affected by those
problems in the Company's Medicare Part B billings the Company described in its
related March 15, 1996 announcement. In this action, the plaintiff seeks damages
in an unspecified amount, plus costs and attorneys' fees. The Company disputes
the factual and legal premises upon which the plaintiff's lawsuit is based and
denies that the plaintiff is entitled to any recovery on his claim. To that end,
the Company intends to contest this litigation vigorously. Because the lawsuit
just began, the Company cannot now predict the outcome of this litigation; the
length of time it will take to resolve this litigation; or the effect of any
outcome on the Company's financial condition or results of operations.
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)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly financial information follows:
<TABLE>
<CAPTION>
TOTAL EARNINGS PER EARNINGS PER COMMON
OPERATING NET COMMON AND COMMON SHARE -- ASSUMING
REVENUES EARNINGS EQUIVALENT SHARE FULL DILUTION
----------- --------- ----------------- -------------------
<S> <C> <C> <C> <C>
Quarter ended:
August 31, 1994 $ 137,704 $ 6,582 $ 0.28 $ 0.28
November 30, 1994 155,230 7,105 0.29 0.29
February 28, 1995 166,523 9,146 0.31 0.31
May 31, 1995 179,623 8,388 0.28 0.28
----------- --------- ----- -----
$ 639,080 $ 31,221 $ 1.16 $ 1.16
----------- --------- ----- -----
----------- --------- ----- -----
Quarter ended:
August 31, 1993 $ 74,968 $ 2,816 $ 0.24 $ 0.21
November 30, 1993 78,931 3,500 0.26 0.22
February 28, 1994 88,602 4,484 0.24 0.23
May 31, 1994 132,594 5,806 0.25 0.25
----------- --------- ----- -----
$ 375,095 $ 16,606 $ 0.99 $ 0.91
----------- --------- ----- -----
----------- --------- ----- -----
</TABLE>
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 22 day of
April, 1996.
HORIZON/CMS HEALTHCARE CORPORATION
By /s/ ERNEST A. SCHOFIELD
-----------------------------------
Ernest A. Schofield
SENIOR VICE PRESIDENT
27
<PAGE>
SCHEDULE II
HORIZON/CMS HEALTHCARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------
BALANCE AT CHARGED TO BALANCE AT
MAY 31, COSTS AND MAY 31,
DESCRIPTION 1994 EXPENSES OTHER DEDUCTIONS 1995
- ---------------------------------------- ---------- ---------- ----- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts......... $ 8,158 $ 2,201 -- $ (2,711 ) $ 7,648
Valuation allowance on deferred tax
asset.................................. $ 3,051 -- -- $ 3,051
</TABLE>
28
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report in this Form 10-K/A Amendment No. 3 into Horizon/CMS Healthcare
Corporation's previously filed Registration Statements File #33-61697,
File #33-63199, File #33-80660, File #33-84502, and File #33-84682. It should
be noted that we have performed no audit procedures subsequent to July 21,
1995, the date of our report, except with respect to those matters included in
Paragraphs 5 through 11 discussed in Note 13 as to which the date is April 5,
1996. Furthermore, we have not audited any financial statements of Horizon/CMS
Healthcare Corporation as of any date or for any period subsequent to May 31,
1995.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
April 19, 1996
