HORIZON CMS HEALTHCARE CORP
8-K, 1997-05-27
SKILLED NURSING CARE FACILITIES
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.
                      ------------------------------------

                                    FORM 8-K
                                 CURRENT REPORT
    PURSUANT TO SECTIONS 13 AND 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


                                 DATE OF REPORT
                 (DATE OF EARLIEST EVENT REPORTED): MAY 12, 1997

                          -----------------------------


                       HORIZON/CMS HEALTHCARE CORPORATION
             (Exact name of Registrant as specified in its charter)



DELAWARE                                   1-9369                   91-1346899
(State or other jurisdiction        (Commission File No.)     (I.R.S. Employer
of incorporation or org-                                     Identification No.)
anization)



                          6001 INDIAN SCHOOL ROAD, N.E.
                                    SUITE 530
                             ALBUQUERQUE, NEW MEXICO
                              (Address of principal
                               executive offices)

                                      87110
                                   (Zip Code)


<PAGE>


ITEM 5.  OTHER EVENTS

         Horizon/CMS Healthcare Corporation ("Horizon/CMS") announced on May 12,
1997,  that it had  agreed to  terminate  certain  agreements  (the  "Management
Agreements") between its wholly-owned subsidiary, Horizon Facilities Management,
Inc. ("HFM"),  and Texas Health Enterprises,  Inc. and certain of its affiliates
(collectively,   the  "HEA  Group")  and  to  restructure  and  forgive  certain
indebtedness of the HEA Group. The HEA Group operates 126 nursing  facilities in
Texas,  Oklahoma  and  Michigan.  Under  the  Management  Agreements  that  were
originally   effective  January  1,  1996,  HFM  has  provided   management  and
administrative  services for such  facilities  and has provided a line of credit
facility  (the  "Credit  Facility")  for  the  benefit  of such  facilities.  In
addition,  certain other  subsidiaries  of Horizon/CMS  have provided  ancillary
medical, institutional pharmacy and therapy services to the HEA Group facilities
(the "Ancillary Services").

         For the nine months ended February 28, 1997, management fees charged to
the HEA  Group  by HFM,  net of  direct  expenses,  totaled  approximately  $5.9
million,  before income taxes. During this same period,  revenues related to the
Ancillary Services provided to the HEA Group by Horizon/CMS and its subsidiaries
totaled approximately $24.5 million.

         In March 1997, Horizon/CMS and a third party negotiated, subject to the
consent of the HEA  Group,  a sale of the stock of HFM and all of the trade debt
owing by the HEA  Group  to  Horizon/CMS  and its  subsidiaries.  At that  time,
amounts owed by the HEA Group to  Horizon/CMS  for  management  fees,  Ancillary
Services,  and interest on advances  made  pursuant to the Credit  Facility were
significantly in arrears.  The HEA Group, when consulted in April 1997,  refused
to consent to such a sale and asserted monetary claims, allegedly of substantial
value,  against  Horizon/CMS for the manner in which the indebtedness  under the
Credit Facility was administered and the manner in which HFM provided management
and administrative  services to the HEA Group facilities.  Horizon/CMS disputed,
and continues to dispute,  the claims made by the HEA Group. By the end of April
1997,  amounts owed by the HEA Group to Horizon/CMS,  including  principal under
the Credit Facility of  approximately  $26.3 million,  aggregated  approximately
$61.3  million.  After  considering  (i) the  amounts  owed by the HEA  Group to
Horizon/CMS and its  subsidiaries,  (ii) the monetary and operational  resources
required to provide  continuing  management  services to HEA Group facilities in
light of the increasing uncertainties  surrounding the ongoing operations of the
HEA Group facilities, (iii) the ability of the HEA Group facilities to repay the
amounts  owing  to  Horizon/CMS  and  its  subsidiaries,  (iv)  the  ability  of
Horizon/CMS and its subsidiaries to pursue the legal remedies  available to them
under the Management  Agreements  and the Credit  Facility and to realize on the
same, (v) the merits of the claims asserted by the HEA Group, (vi) the effect of
the  foregoing  on the  patients  residing  in the HEA Group  facilities,  (vii)
Horizon/CMS's  strategic  objectives,  and (viii) the pending merger transaction
with 



                                       1
<PAGE>

HEALTHSOUTH  Corporation,  Horizon/CMS determined in May 1997 that it was in the
best business interest of Horizon/CMS to terminate the Management Agreements, to
restructure  certain trade  indebtedness of the HEA Group to Horizon/CMS and its
subsidiaries,  and to release the HEA Group from  liability  for  amounts  owing
under the Management Agreements and the Credit Facility. Although no claims have
been  formally  asserted  by the HEA  Group,  the  agreement  with the HEA Group
includes a release of any  potential  claims the HEA Group may have  relating to
services provided by HFM pursuant to the Management Agreements.

         Effective  upon  the  termination  of the  Management  Agreements,  the
relevant HEA Group  entities  assumed direct  responsibility  for all management
functions at the HEA Group facilities.  Existing  contracts for the provision by
Horizon/CMS subsidiaries of therapy services and institutional pharmacy services
to the HEA Group  facilities  will  remain in  effect  through  July 1, 1997 and
December 31, 1997, respectively.  Pursuant to the agreement between the parties,
approximately  $17.0 million in aggregate  indebtedness  for Ancillary  Services
owed  to  Horizon/CMS  and  its  subsidiaries  will be  converted  to a  secured
promissory note (the "Trade Note").  Monthly  payments on the Trade Note will be
based  upon a  30-year  amortization  schedule  with the  outstanding  principal
balance and all accrued and unpaid interest being due and payable in five years.
The Trade Note will bear interest at 8.0% per annum with repayment being secured
by leasehold  mortgages on 17 of the HEA Group  facilities and a mortgage on one
owned HEA Group facility.  In addition,  Horizon/CMS and its  subsidiaries  will
release  the HEA  Group  from  liability  for  approximately  $44.3  million  in
management   fees,   principal  and  interest  under  the  Credit  Facility  and
miscellaneous trade payables. A copy of the Compromise,  Settlement, Release and
Termination Agreement is attached hereto as Exhibit 99.1 and incorporated herein
by reference.

         Horizon/CMS  currently anticipates that it will recognize a non-routine
charge of $46.0  million,  pre-tax,  or $0.56 per  share,  net of taxes,  in its
fiscal quarter ending May 31, 1997 related to the release of liability described
above and the costs of severance and other restructuring  measures affecting the
operations  previously  dedicated  to providing  management  services to the HEA
Group  facilities.  Also, an additional charge may be required during the fourth
quarter of fiscal 1997 if  Horizon/CMS's  current  efforts to determine the fair
value of the  Trade  Note  indicate  that the fair  value is less  than the face
amount of the Trade  Note.  The fair value of the Trade Note will be  determined
based upon an evaluation of the HEA Group's  ability to make scheduled  payments
and the value of the underlying collateral.




                                       2
<PAGE>



ITEM 7.  FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
                  INFORMATION AND EXHIBITS.

         (c)      Exhibits

                  99.1      Compromise,   Settlement,  Release  and  Termination
                            Agreement   dated   May  12,   1997  by  and   among
                            Horizon/CMS and its  subsidiaries  named therein and
                            the HEA Group.

                  99.2      Sixth  Amendment  dated  as of  May 9,  1997  to the
                            Amended and Restated  Credit  Agreement  dated as of
                            September  26, 1995 by and among the  Company,  CMS,
                            the Lenders named therein and NationsBank  of Texas,
                            N.A., as Agent and Issuing Bank.





                                       3
<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the registrant has duly caused this Current Report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                              HORIZON/CMS HEALTHCARE CORPORATION


                              By: /s/ Scot Sauder
                                 -----------------------------------------------
                                  Scot Sauder
                                  Vice President of Legal Affairs, Secretary and
                                   General Counsel



Date: May 27, 1997.




                             COMPROMISE, SETTLEMENT,
                        RELEASE AND TERMINATION AGREEMENT

         This COMPROMISE,  SETTLEMENT,  RELEASE AND TERMINATION  AGREEMENT (this
"Agreement")  is entered into  effective May 12, 1997, by and among  Horizon/CMS
Healthcare Corporation, a Delaware corporation ("HHC"), d/b/a Horizon Healthcare
Corporation  ("HHC") and Horizon Specialty Hospital ("HSH"),  Horizon Facilities
Management,  Inc., a Delaware  corporation  ("HFM"),  Horizon Medical  Specialty
Services,  Inc., a Delaware  corporation  doing business as  Respiratory  Supply
Services ("RSS"),  Rehabilitative Associates,  Inc., a Florida corporation doing
business  as  RehabWorks  ("RAI"),   CMS  Therapies,   Inc.,  a  North  Carolina
corporation  doing business as RehabWorks of Texas and as RehabWorks of Michigan
("CMS Therapies"),  National Institutional  Pharmacy Services,  Inc., a Delaware
corporation  ("NIPSI"),  NIPSI Healthcare of Houston Ltd.  Partnership,  a Texas
limited  partnership   ("NIPSI-Houston"),   NIPSI  of  Houston,  Inc.,  a  Texas
corporation  ("NIPSI-H"),   Advanced  Clinical  Technology,   Inc.,  a  Delaware
corporation  ("ACT"),  and LTC  Medical  Laboratories,  Inc.  ("LTC")  (each,  a
"Horizon Entity" and, collectively, the "Horizon Entities") on the one hand, and
HEA  Management  Group,  Inc.,  a  Texas  corporation   ("HEA"),   Texas  Health
Enterprises,  Inc., a Texas corporation ("THE"), Health Enterprises of Oklahoma,
Inc., an Oklahoma corporation,  Health Enterprises of Michigan, Inc., a Michigan
corporation,  and PCK-TEX, LTD., a Texas limited partnership (collectively,  the
"HEA Group"), on the other.

                              W I T N E S S E T H:

         WHEREAS,  HFM is a party to that certain  Master  Management  Agreement
(the  "Master  Management  Agreement")  dated as of January 1, 1996 by and among
HFM, as manager, and the HEA Group pursuant to which HFM provides management and
administrative  services  for and on behalf of the HEA Group in respect of those
nursing facilities located in Texas, Michigan and Oklahoma identified on Exhibit
A attached to the Master Management Agreement (the "HEA Facilities");

         WHEREAS,   HFM  contends  that  the  HEA  Group   currently   owes  HFM
approximately   $14,321,198.00   for  the  provision  of  these  management  and
administrative services under the terms of the Master Management Agreement;

         WHEREAS,  HFM is a party to that  certain  Loan  Agreement  (the  "Loan
Agreement")  dated as of January 1, 1996,  by and among HFM, as lender,  and the
HEA Group  pursuant to which HFM made a $35 million line of credit  available to
the HEA  Group,  as  borrowers,  and  pursuant  to which  each of the HEA  Group
executed that certain  Promissory  Note dated of even date  therewith  (the "HEA
Group Promissory  Note"). In addition,  pursuant to the Loan Agreement,  each of
the  constituent  members  of the HEA Group  executed a  Security  Agreement,  a
Leasehold Deed of Trust 





<PAGE>

on each of the  leased HEA Group  facilities  (other  than the nine (9)  PCK-Tex
facilities),  an Assignment of Rents and Leases in respect of each of the leased
HEA Group facilities (other than the nine (9) PCK-Tex facilities),  and a Pledge
Agreement of all of the HEA Group's bank and other depository accounts (the Loan
Agreement,  the Security Agreement,  the Leasehold Deed of Trust, the Assignment
of Rents and Leases,  and the Pledge Agreement shall be referred to individually
herein as an "Original  Loan  Document" and  collectively,  the  "Original  Loan
Documents");

         WHEREAS, HHC and HFM are parties to that certain Letter of Intent dated
as of December 15, 1995,  by and among HHC,  HFM, and the HEA Group with respect
to a proposed loan  agreement,  and a management  agreement  concerning  certain
facilities located in Texas, Michigan and Oklahoma;

         WHEREAS,   HFM  contends  that  the  HEA  Group   currently   owes  HFM
approximately  $26,250,000  in principal  and  $2,080,075  in accrued but unpaid
interest on the HEA Group Promissory Note and the Original Loan Documents;

         WHEREAS, NIPSI is currently a party to a variety of agreements with the
HEA  Group  under  which  NIPSI   provides  a  variety  of  pharmacy   services,
pharmaceuticals,  enteral and  parenteral  supplies  and  pharmacy  consultation
services  to a  substantial  number  of the  facilities  covered  by the  Master
Management Agreement (the "HEA Group Pharmacy Contracts");

         WHEREAS,  NIPSI contends that the HEA Group is currently indebted to it
in the amount of $3,347,576.00 (the "NIPSI Indebtedness");

         WHEREAS,  NIPSI-Houston is currently a party to a variety of agreements
with the HEA Group  under  which  NIPSI-Houston  provides a variety of  pharmacy
services,   pharmaceuticals,   enteral  and  parenteral  supplies  and  pharmacy
consultation  services  to  certain  of the  facilities  covered  by the  Master
Management Agreement that are located within the vicinity of Houston, Texas (the
"HEA Group Houston Pharmacy Contracts");

         WHEREAS,  NIPSI-Houston  contends  that  the  HEA  Group  is  currently
indebted   to  it  in  the   amount   of   $1,529,422.00   (the   "NIPSI-Houston
Indebtedness");

         WHEREAS,  CMS  Therapies  and RAI (or one or more of its  subsidiaries)
(collectively,  "RehabWorks")  are  currently a party to a variety of agreements
with  the  HEA  Group  under  which  RehabWorks   provides   physical   therapy,
occupational  therapy and speech therapy services to a substantial number of the
facilities  covered by the Master  Management  Agreement located in Texas and in
Michigan (the "HEA Group Therapy Contracts");



                                       2
<PAGE>

         WHEREAS,  RehabWorks  contends that the HEA Group is currently indebted
to it in the aggregate amount of $11,861,376.22 (the "RehabWorks Indebtedness");

         WHEREAS,  HSH is currently a party to a variety of agreements  with the
HEA Group under which HSH  provides  certain  specialty  hospital  services to a
substantial number of the facilities covered by the Master Management  Agreement
(the HEA Group Specialty Contracts");

         WHEREAS, HSH contends that the HEA Group is currently indebted to it in
the aggregate amount of $1,090,681.11 (the "HSH Indebtedness");

         WHEREAS,  LTC is currently a party to a variety of agreements  with the
HEA Group under which LTC provides clinical laboratory services to a substantial
number of the facilities  covered by the Master  Management  Agreement (the "HEA
Group Lab Contracts");

         WHEREAS, LTC contends that the HEA Group is currently indebted to it in
the aggregate amount of $4,916.99 (the "LTC Indebtedness");

         WHEREAS,  RSS is a party to a variety of agreements  with the HEA Group
under which RSS provides  durable medical  equipment to a substantial  number of
the facilities  covered by the Master  Management  Agreement (the "HEA Group DME
Contracts");

         WHEREAS, RSS contends that the HEA Group is currently indebted to it in
the amount of $43,347.77 (the "RSS Indebtedness");

         WHEREAS,  ACT is a party to a variety of agreements  with the HEA Group
under which ACT provides  mobile x-ray  services to a substantial  number of the
facilities  covered by the Master  Management  Agreement  (the "HEA Group  X-Ray
Contracts");

         WHEREAS, ACT contends that the HEA Group is currently indebted to it in
the amount of $69,143.00 (the "ACT Indebtedness");

         WHEREAS,  the Horizon Entities,  as a whole, contend that the HEA Group
is  currently  indebted  to HFM and its  affiliates  as of April  30,  1997 (the
"Aggregate Horizon Indebtedness") as follows:

         HEA Group Promissory Note (Principal)              $26,250,000.00
         HFM Management Fee (est.)                           14,321,198.00
         HEA Group Promissory Note (Interest)                 2,080,075.00
         NIPSI Indebtedness                                   3,347,576.00
         NIPSI-Houston Indebtedness                           1,529,422.00



                                       3
<PAGE>

         ACT Indebtedness                                        69,143.00
         RehabWorks Indebtedness                             11,861,376.22
         LTC Indebtedness                                         4,916.99
         RSS Indebtedness                                        43,347.77
         HSH Indebtedness                                     1,090,681.11
         Conservative Care, Inc. (non-affiliate)                667,775.94
                                                            ---------------
                                                            $61,265,512.03

         WHEREAS,  the HEA Group  contends that it has certain  monetary  claims
against  the  Horizon   Entities  for  the  manner  in  which  the  indebtedness
represented by the HEA Group  Promissory  Note was  administered,  the manner in
which HFM  provided  management  and  administrative  services  under the Master
Management  Agreement,  and for  costs  which  it has or will  incur  in  legal,
accounting fees, and other expenses  associated with resolving these claims, and
which  claims are of a  sufficient  value to offset the  amounts  claimed by the
Horizon Entities;

         WHEREAS,  the Horizon Entities and the HEA Group dispute the respective
contentions  and  allegations  described  above,  but desire to avoid costly and
protracted litigation to resolve such disputes;

         WHEREAS,  the Horizon  Entities  and the HEA Group  desire to fully and
finally  compromise and settle their  respective  contentions and allegations as
set forth more fully hereinbelow,  including, without limitation, the payment by
Horizon of the amounts claimed by Conservative Care, Inc.

         NOW,  THEREFORE,  in  consideration of the foregoing and for other good
and valuable  consideration,  the receipt of which is hereby  acknowledged,  the
Horizon Entities and the HEA Group agree as follows:

                  1.  INCORPORATION  BY REFERENCE.  The  foregoing  recitals are
hereby incorporated by reference.

                  2.   COMPROMISE   AND   SETTLEMENT   OF   AGGREGATE    HORIZON
INDEBTEDNESS.  For and in consideration of the provisions of this Agreement, the
execution  and delivery of that certain  accounts  payable Loan  Agreement  (the
"Loan  Agreement"),  a copy  of  which  is  attached  hereto  as  Exhibit  A and
incorporated  herein by  reference,  the  execution and delivery of that certain
Promissory Note executed by the HEA Group in the amount of $17,046,463.09,  with
respect to accounts  payable and amounts payable to Conservative  Care,  Inc., a
copy of which is  attached  hereto  as  Exhibit  B and  incorporated  herein  by
reference, the termination of the Master Management Agreement, and the execution
by the HEA Group of all documents and/or





                                       4
<PAGE>

instruments necessary to effect the transactions contemplated by this Agreement,
the Horizon Entities hereby acknowledge payment in full of the Aggregate Horizon
Indebtedness.

         The  Note  will  be  collateralized  by the  seventeen  (17)  leasehold
mortgages  (Nine (9) in Oklahoma and eight (8) in Michigan)  and one (1) deed of
trust lien on Canterbury Villa of Houston,  Texas.  Horizon shall release and/or
terminate all other documents securing the Original Loan Documents,  and the HEA
Group  Promissory  Note,  and documents  executed in connection  with the Master
Management  Agreement,  including  but not limited to,  deeds of trust,  fixture
filings,  security  agreements,  leasehold deeds of trust, on each of the leased
HEA Group  Facilities,  assignment of rents and leases in respect to each of the
leased HEA Group  Facilities,  memorandum  of right of first refusal and option,
facility  management  agreements for each respective HEA Group Facility,  Letter
Agreement dated January 1, 1996, pledge agreements of all HEA Group receivables,
bank and  other  depository  accounts,  UCC-1  financing  statements,  and other
documents which purport to provide the Horizon  Entities  security or collateral
in connection  with the Original Loan Documents,  the HEA Group  Promissory Note
and/or the Master Management Agreement.

                  3. TERMINATION OF CERTAIN SUBSIDIARY SERVICE CONTRACTS.

                           a. The HEA Group  shall  have the right to  terminate
any one or more of the HEA Group  Pharmacy  Contracts  and the HEA Group Houston
Pharmacy Contracts,  commencing December 31, 1997, notwithstanding any provision
contained  in the HEA Group  Pharmacy  Contracts  and/or  the HEA Group  Houston
Pharmacy Contracts to the contrary.

                           b. The HEA Group  shall  have the right to  terminate
any one or more of the HEA Group Therapy  Contracts with RehabWorks,  commencing
July 1, 1997,  notwithstanding  any provision contained in the HEA Group Therapy
Contracts to the contrary.

                           c. The HEA  Group  shall pay in  accordance  with the
applicable  individual  facility  HEA Group  Pharmacy  Contracts,  the HEA Group
Houston Pharmacy Contracts, the HEA Group Therapy Contracts, HEA Group Specialty
Contracts,  HEA Group Lab Contracts, HEA Group DME Contract, and HEA Group X-Ray
Contracts,  all amounts which are incurred on or after May 1, 1997 due to NIPSI,
NIPSI-Houston,  RehabWorks, HSH, LTC, RSS, ACT, respectively, within ninety (90)
days of the date of invoicing.

                  4. TERMINATION OF MASTER MANAGEMENT AGREEMENT. HFM and the HEA
Group hereby terminate the Master  Management  Agreement which termination shall
be effective as of 12:01 a.m., May 12, 1997 (the "Effective Time").



                                       5
<PAGE>

                  5. NO CONTINUING  OBLIGATIONS OR  LIABILITIES.  From and after
the Effective  Time,  neither HFM nor the  respective  entities of the HEA Group
(collectively  or individually)  shall have any rights or obligations  under the
Master  Management   Agreement.   Following  the  Effective  Time,  all  of  the
provisions,  terms,  covenants,  representations and warranties contained in the
Master Management Agreement shall have no continuing legal effect.

                  6. RELEASE. For and in consideration of the provisions of this
Agreement,  the  execution  and delivery of the Loan  Agreement,  including  the
recitals set forth above,  the Note, the  termination  of the Master  Management
Agreement,  and  the  execution  by  the  HEA  Group  of  all  documents  and/or
instruments necessary to effect the transactions  contemplated by this Agreement
and save and except for the  obligations  created  by this  Agreement,  the Loan
Agreement and all Loan Documents and the Note, the Horizon Entities,  on the one
hand, and HEA Group, on the other, do hereby  voluntarily and knowingly release,
acquit and forever discharge the other and all of the other's agents, employees,
successors, affiliates, directors, officers, shareholders,  subsidiaries, parent
corporations,  and assigns from any and all claims,  demands,  debts,  causes of
action, liabilities,  agreements,  obligations,  accounts, defenses and damages,
known or unknown,  that they or any of them or any of their  agents,  employees,
successors,  predecessors,  affiliates,  administrators,   officers,  directors,
subsidiaries,  and assigns, or anyone claiming by, under, or through each of any
of them ever had or now has, or may in the future acquire against each other for
or by reason of (i) any matter,  cause, or thing done,  admitted to, or suffered
to be done by either the Horizon  Entities or the HEA Group, as the case may be,
at any time prior to and including the date hereof,  in any way connected  with,
arising out of,  related to or in  furtherance  of [A] the  obligations  created
under the Master Management Agreement, [B] any or all agreements,  covenants and
obligations of either the Horizon Entities or the HEA Group, as the case may be,
relating to the obligations created under the Master Management  Agreement,  [C]
any or all prior understandings or agreements, oral or written, and negotiations
related thereto with respect to this Agreement, [D] the exercise, enforcement or
realization by HFM of any deferred  management fees under the Master  Management
Agreement, or [E] any actions taken or not taken by either HFM or the HEA Group,
as the case may be, with  respect to any of the  obligations  created  under the
Master  Management  Agreement;  and (ii) all claims  and causes of action  which
could have been or could be asserted either  offensively or defensively  against
either the Horizon  Entities or the HEA Group,  as the case may be, in any court
in  respect of the duties and  obligations  evidenced  by the Master  Management
Agreement,  the Original Loan Documents,  the Aggregate Horizon  Indebtedness or
any and all  claims  and  causes of  action  which  could  have been or could be
asserted against the Horizon Entities for related party  disallowances,  prudent
buyer disallowances,  excessive charges,  and/or coverage denials,  etc., at the
Facilities owned and/or operated by the HEA Group prior to the date hereof. This
RELEASE shall  include,  without  limitation,  such claims or defenses as fraud,
mistake, duress, overreaching, usury, failure to disclose, and interference with
business management or relating to any of the matters, documents,  transactions,
acts or omissions





                                        6
<PAGE>

described  above.  Other than as specifically  set forth in this Agreement,  the
parties make no  representations  or warranties with respect to the transactions
set forth herein.

                  7. RETAINED EMPLOYEES.  The HEA Group shall have no obligation
whatsoever to hire any HFM employees.  Upon execution of this Agreement, the HEA
Group shall  provide HFM with a list of HFM  employees to whom it has offered or
intends to offer  employment  with HEA Group following the Effective Time, and a
list of employees  who have  refused  employment.  Additionally,  for sixty days
following closing, the HEA Group shall provide HFM with prompt written notice of
any  additional  employees  offered  employment and any former HFM employees who
have refused to accept employment with HEA Group.

                  8. FURTHER  ASSURANCES.  Following the Effective Date, HFM and
the HEA Group agree to assist the other,  respectively,  as reasonably requested
with ordinary and routine matters arising in the transfer of management from HFM
to the HEA Group,  and the  parties  agree to  cooperate  and sign  releases  of
collateral as contemplated  herein to effect the terms of this  Agreement.  Upon
execution  of this  Agreement,  the HEA Group shall have the right to  immediate
occupancy of the corporate headquarters at 401 North Elm, Denton, Texas, and any
lease agreement  between the parties shall terminate.  HFM waives any rights and
interests   whether   contract,   statutory,   or  otherwise  in  the  corporate
headquarters.  The HEA  Group  agrees  to  provide  the  Horizon  Entities  with
reasonable  access to the records  transferred  hereunder  to the HEA Group upon
reasonable  notice and during  normal  business  hours to examine and  photocopy
patient records and records relating to the operation of the business.

                  9.  NO  ADMISSION.   The  provisions  of  this  Agreement  and
accompanying  documents do not constitute evidence, or an admission by either of
the parties,  or any affiliated or related  party,  of any liability or wrongful
conduct,  and  cannot be used by either of the  parties,  or any  affiliated  or
related party,  in any judicial  and/or  administrative  proceeding  against the
other party or parties as an admission of liability or wrongdoing.

                  10. POLICIES AND PROCEDURES. Any systems, methods, procedures,
written materials,  or brochures  developed by HFM in connection with or related
to its  provision of management  and  administrative  services  under the Master
Management  Agreement in respect of the Facilities covered by the same, shall be
and become the property of the HEA Group at the Effective Time.

                  11. ENTIRE  AGREEMENT.  This  Agreement and the Loan Agreement
contain  the entire  agreement  among the  parties  with  respect to the subject
matter hereof and supersedes all prior  agreements,  negotiations,  discussions,
arrangements or understandings  with respect thereto,  including but not limited
to that  Letter of Intent  dated  April 25,  1997,  between  HEA Group,  HFM and
Horizon/CMS  Healthcare  Corporation,  and shall not be  amended,  supplemented,
modified unless executed in writing by the party to be bound thereby.



                                        7
<PAGE>

                  12.  SUCCESSORS AND ASSIGNS.  This Agreement  shall be binding
upon  and  inure  to  the  benefit  of  the  successors,   assigns,   and  legal
representatives of each of the parties hereto.

                  13.  COUNTERPARTS.  This  Agreement may be executed in several
counterparts and all so executed shall  constitute one agreement  binding on all
parties  hereto,  notwithstanding  that all  parties  are not  signatory  to the
original or the same counterparts.

                  14. DUE  AUTHORIZATION.  The persons  signing  this  Agreement
represent  that they are duly  authorized to execute this Agreement on behalf of
the respective Horizon Entity or member of the HEA Group.

                  15. CHOICE OF LAW. This Agreement  shall be interpreted  under
the laws of the State of Texas without reference to conflict of laws provisions.

                  16. PRESS  RELEASE.  For a period of sixty (60) days following
the date of this Agreement,  neither party shall release for publication a press
release  with  respect to this  Agreement  or the Loan  Document  without  first
submitting a copy of such release to the other party for review and comment.

         IN WITNESS  WHEREOF,  the undersigned have affixed or caused their duly
authorized  representatives  to affix their signatures  effective as of the date
first set forth above.

                       HORIZON/CMS HEALTHCARE CORPORATION,
                       a Delaware corporation,

                       By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                               Charles H. Gonzales, Senior Vice President


                       HORIZON FACILITIES MANAGEMENT, INC.,
                       a Delaware corporation,

                       By: /s/ Scot Sauder
                          -----------------------------------------------
                                Scot Sauder, Vice President and Secretary





                                       8
<PAGE>



                       HORIZON MEDICAL SPECIALTY SERVICES,
                          INC., a Delaware corporation

                       By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                               Charles H. Gonzales, Senior Vice President


                       NATIONAL INSTITUTIONAL PHARMACY
                       SERVICES, INC., a Delaware corporation

                       By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                               Charles H. Gonzales, Senior Vice President


                       NIPSI OF HOUSTON, INC., a Texas corporation

                       By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                               Charles H. Gonzales, Senior Vice President


                       NIPSI HEALTHCARE OF HOUSTON LTD.
                       PARTNERSHIP, a Texas limited partnership

                       By:      NIPSI of Houston, Inc., a Texas corporation,
                                its General Partner

                                By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                                    Charles H. Gonzales, Senior Vice President


                       REHABILITATIVE ASSOCIATES, INC.,
                       a Florida corporation

                       By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                                Charles H. Gonzales, CEO



                                        9
<PAGE>

                       LTC MEDICAL LABORATORIES, INC.,
                       a Delaware corporation

                       By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                               Charles H. Gonzales, Senior Vice President


                       CMS THERAPIES, INC.,
                       a North Carolina corporation

                       By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                       Name:
                       Title: Chief Executive Officer


                       ADVANCED CLINICAL TECHNOLOGY, INC., an
                       Arizona corporation

                       By: /s/ Charles H. Gonzales
                          -----------------------------------------------
                               Charles H. Gonzales, Senior Vice President


                       TEXAS HEALTH ENTERPRISES, INC.,
                       a Texas corporation

                       By: /s/ Peter C. Kern
                          -----------------------------------------------
                                Peter C. Kern, President


                       HEALTH ENTERPRISES OF OKLAHOMA, INC.,
                       an Oklahoma corporation

                       By: /s/ Peter C. Kern
                          -----------------------------------------------
                                Peter C. Kern, President



                                       10
<PAGE>

                       HEALTH ENTERPRISES OF MICHIGAN, INC.,
                       a Michigan corporation

                       By: /s/ Peter C. Kern
                          -----------------------------------------------
                                Peter C. Kern, President


                       PCK-TEX, LTD., a Texas limited partnership

                       By:      Texas Health Enterprises, Inc.,
                                a Texas corporation, General Partner

                                By: /s/ Peter C. Kern
                                   --------------------------------------
                                        Peter C. Kern, President

                       HEA MANAGEMENT GROUP, INC.,
                       a Texas corporation

                       By: /s/ Peter C. Kern
                          -----------------------------------------------
                                Peter C. Kern, President





                                       11


                                                                  EXECUTION COPY

                                            SIXTH  AMENDMENT  dated as of May 9,
                                    1997  (this  "Sixth   Amendment"),   to  the
                                    Amended and Restated Credit  Agreement dated
                                    as of September  26, 1995 (as amended to the
                                    date hereof, the "Credit Agreement"),  among
                                    Horizon/CMS   Healthcare   Corporation,    a
                                    Delaware      corporation       ("Horizon"),
                                    Continental   Medical   Systems,   Inc.,   a
                                    Delaware  corporation  ("Continental",   and
                                    together with Horizon, the "Borrowers"), the
                                    lenders   listed  on  the  signature   pages
                                    thereto (the  "Lenders") and  NationsBank of
                                    Texas,  N.A.,  as agent for the  Lenders (in
                                    such  capacity,  the "Agent") and as issuing
                                    bank (in such capacity, the "Issuing Bank").

         The parties  hereto have  agreed,  subject to the terms and  conditions
hereof, to amend the Credit Agreement as provided herein.

         Capitalized  terms used and not otherwise defined herein shall have the
meanings  assigned to such terms in the Credit Agreement (the Credit  Agreement,
as amended by, and  together  with,  this Sixth  Amendment,  and as  hereinafter
amended,  modified,  extended or restated  from time to time,  being  called the
"Amended Agreement").

         Accordingly, the parties hereto hereby agree as follows:

         SECTION 1.01. Amendment to EBITDAR Definition.  The following clause is
hereby added at the end of the proviso to the  definition  of EBITDAR in Section
1.01 of the Amended Agreement:

         "and (F) so long as the cash portion of such  charges is not  material,
         up  to  $53,000,000  of  charges   incurred  in  connection   with  the
         termination of Horizon's  agreement to manage  facilities  owned by the
         HEA Group".

         SECTION 1.02. Amendment to Stockholders' Equity Definition.  Clause (b)
of the definition of Stockholders'  Equity is hereby deleted in its entirety and
the following clause is hereby substituted in lieu thereof:

         "(b) in  determining  Stockholders'  Equity of Horizon for  purposes of
         Section  6.19(a),  (i) an amount equal to the  after-tax  amount of any
         expenses of Horizon and its Consolidated  Subsidiaries  incurred during
         fiscal  year 1996 as a result of the  Merger,  to the  extent  that the
         aggregate   pre-tax  amount  of  all  such  expenses  does  not  exceed
         $60,000,000  and (ii) an amount  equal to the  after-tax  amount of any
         charges  incurred  in  connection  with the  termination  of  Horizon's
         agreement to manage  facilities  owned by the HEA Group,  to the extent
         that the aggregate  pre-tax  amount of all such charges does not exceed
         $53,000,000,".

         SECTION 1.03.  Representations and Warranties.  The Borrowers hereby
represent and warrant to the Agent and the Lenders, as follows:



<PAGE>



                  (a) The  representations  and  warranties set forth in Article
         III of the Credit Agreement,  and in each other Loan Document, are true
         and correct in all  material  respects on and as of the date hereof and
         on and as of the Sixth Amendment Effective Date (as defined below) with
         the same  effect  as if made on and as of the date  hereof or the Sixth
         Amendment Effective Date, as the case may be, except to the extent such
         representations  and warranties  expressly  relate solely to an earlier
         date.

                  (b) Each of the  Borrowers,  the  Subsidiary  Pledgors and the
         Subsidiary   Guarantors  is  in  compliance  with  all  the  terms  and
         conditions of the Credit  Agreement and the other Loan Documents on its
         part to be observed or performed and no Default or Event of Default has
         occurred or is continuing under the Credit Agreement.

                  (c) The  execution,  delivery and  performance  by each of the
         Borrowers of this Sixth  Amendment  have been duly  authorized  by such
         party.

                  (d) This Sixth  Amendment  constitutes  the  legal,  valid and
         binding obligation of each of the Borrowers,  enforceable against it in
         accordance with its terms.

                  (e) The  execution,  delivery and  performance  by each of the
         Borrowers of this Sixth  Amendment  (i) do not conflict with or violate
         (A) any  provision  of law,  statute,  rule  or  regulation,  or of the
         certificate of incorporation or by-laws of either of the Borrowers, (B)
         any order of any  Governmental  Authority  or (C) any  provision of any
         indenture,  agreement  or  other  instrument  to  which  either  of the
         Borrowers is a party or by which it or any of its property may be bound
         and (ii) do not require any  consents  under,  result in a breach of or
         constitute  (with notice or lapse of time or both) a default  under any
         such indenture, agreement or instrument.

         SECTION  1.04.   Effectiveness.   This  Sixth  Amendment  shall  become
effective  only upon  satisfaction  of the following  conditions  precedent (the
first date upon which each such condition has been satisfied being herein called
the "Sixth Amendment Effective Date"):

                  (a) The Agent shall have received  duly executed  counterparts
         of this Sixth Amendment which, when taken together, bear the authorized
         signatures of the Borrowers and the Required Lenders.

                  (b)  The  Required   Lenders  shall  be  satisfied   that  the
         representations  and  warranties set forth in Section 1.03 are true and
         correct  on and as of the Sixth  Amendment  Effective  Date and that no
         Default or Event of Default has occurred or is continuing.

                                        2

<PAGE>

                  (c)  There shall not be any  action  pending or  any judgment,
         order or  decree in  effect  which,  in the  judgment  of the  Required
         Lenders or their  counsel,  is likely to  restrain,   prevent or impose
         materially   adverse   conditions  upon   performance  by  any  of  the
         Borrowers, the Subsidiary Pledgors or the  Subsidiary Guarantors of its
          obligations under the Loan Documents.

                  (d) The  Required  Lenders  shall  have  received  such  other
         documents,  legal opinions,  instruments and certificates as they shall
         reasonably   request  and  such  other   documents,   legal   opinions,
         instruments  and  certificates   shall  be  satisfactory  in  form  and
         substance to the Required Lenders and their counsel.  All corporate and
         other  proceedings  taken or to be taken in connection  with this Sixth
         Amendment and all documents incidental thereto, whether or not referred
         to herein,  shall be satisfactory in form and substance to the Required
         Lenders and their counsel.

                  (e)  Horizon  shall  have  paid in full  all  amounts  due and
         payable  as of the Sixth  Amendment  Effective  Date  under the  Credit
         Agreement and upon receipt of the Required  Lenders' consent shall have
         paid to the Agent for the account of each Lender that  consents to this
         Sixth  Amendment  an  amendment  fee  equal to 0.02% of the  consenting
         Lender's  Commitments,  so  long  as a  signature  page  to  the  Sixth
         Amendment  executed by such Lender is received by Fennebresque,  Clark,
         Swindell & Hay by 5:00 p.m., Charlotte time, on May 9, 1997.

         SECTION 1.05.  APPLICABLE  LAW. THIS SIXTH  AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,  EXCEPT
TO THE EXTENT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA MAY APPLY.

         SECTION  1.06.  Expenses.   The  Borrowers  shall  pay  all  reasonable
out-of-pocket  expenses  incurred  by the  Agent  and the  Required  Lenders  in
connection  with  the   preparation,   negotiation,   execution,   delivery  and
enforcement  of this  Sixth  Amendment,  including,  but  not  limited  to,  the
reasonable fees and  disbursements  of counsel.  The agreement set forth in this
Section  1.06 shall  survive the  termination  of this Sixth  Amendment  and the
Amended Agreement.

         SECTION 1.07. Counterparts. This Sixth Amendment may be executed in any
number of  counterparts,  each of which shall  constitute an original but all of
which when taken together shall constitute but one agreement.

         SECTION 1.08. Credit  Agreement.  Except as expressly set forth herein,
the amendments  provided  herein shall not by  implication  or otherwise  limit,
constitute  a waiver of, or  otherwise  affect the  rights and  remedies  of the
Lenders,  the Agent or the other Secured  Parties under the Credit  Agreement or
any other Loan  Document,  nor shall they  constitute a waiver of any Default or
Event of Default,  nor shall they alter,  modify, amend or in any way affect any
of the terms, conditions,  obligations, covenants or agreements contained in the
Credit  Agreement or any other Loan Document.  Each of the  

                                        3

<PAGE>


amendments provided herein shall apply and be effective only with respect to the
provisions of the Credit Agreement  specifically  referred to by such amendment.
Except as expressly amended herein,  the Credit Agreement shall continue in full
force and  effect in  accordance  with the  provisions  thereof.  As used in the
Credit Agreement, the terms "Agreement",  "herein", "hereinafter",  "hereunder",
"hereto" and words of similar import shall mean, from and after the date hereof,
the Amended Agreement.


                                        4

<PAGE>



         IN WITNESS WHEREOF, the parties hereto have caused this Sixth Amendment
to be duly executed by their duly authorized officers,  all as of the date first
above written.

                           HORIZON/CMS HEALTHCARE CORPORATION,
                           as a Borrower

                           by __________________________________
                           Name:
                           Title:

                           CONTINENTAL MEDICAL SYSTEMS, INC.,
                           as a Borrower

                           by___________________________________
                           Name:
                           Title:

                           NATIONSBANK OF TEXAS, N.A., as Agent, as Issuing
                           Bank and as a Lender

                           by___________________________________
                           Name:
                           Title:

                           BANK OF AMERICA NT & SA, as Managing
                           Agent and as a Lender

                           by___________________________________
                           Name:
                           Title:

                           MORGAN GUARANTY TRUST COMPANY OF NEW
                           YORK, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            CREDIT LYONNAIS NEW YORK BRANCH,
                            as Co-Agent and as a Lender

                            by___________________________________
                            Name:
                            Title:



<PAGE>



                            LONG TERM CREDIT BANK OF JAPAN, LTD., LA
                            AGENCY, as Co-Agent and as a Lender

                            by___________________________________
                            Name:
                            Title:

                            PNC BANK, NATIONAL ASSOCIATION, as Co-Agent
                            and as a Lender

                            by___________________________________
                            Name:
                            Title:

                            THE CHASE MANHATTAN BANK, as successor to
                            Chemical Bank, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            WELLS FARGO BANK (TEXAS), NATIONAL
                            ASSOCIATION, formerly First Interstate Bank of
                            Texas, N.A., as a Lender

                            by___________________________________
                            Name:
                            Title:

                            TORONTO DOMINION (TEXAS) INC., as a Lender

                            by___________________________________
                            Name:
                            Title:

                            BANKERS TRUST COMPANY, as a Lender

                            by___________________________________
                            Name:
                            Title:




<PAGE>



                            BANQUE PARIBAS, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            by___________________________________
                            Name:
                            Title:

                            BANQUE NATIONALE de PARIS, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            by___________________________________
                            Name:
                            Title:

                            DEUTSCHE BANK AG, NEW YORK AND/OR
                            CAYMAN ISLANDS BRANCHES, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            by___________________________________
                            Name:
                            Title:

                            MELLON BANK, N.A., as a Lender

                            by___________________________________
                            Name:
                            Title:

                            FLEET NATIONAL BANK, f/k/a/ Fleet Bank of
                            Massachusetts, as a Lender

                            by___________________________________
                            Name:
                            Title:






<PAGE>



                            BANK  OF  TOKYO   MITSUBISHI   TRUST
                            COMPANY as  successor to The Bank of
                            Tokyo Trust Company, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            THE SUMITOMO BANK, LIMITED, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            THE SUMITOMO TRUST & BANKING CO., LTD., NEW
                            YORK BRANCH, as a Lender

                            by___________________________________
                            Name:
                            Title:


                            THE SUMITOMO BANK, LIMITED, CHICAGO
                            BRANCH, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            THE MITSUBISHI BANK, LTD., LOS ANGELES
                            BRANCH, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            THE INDUSTRIAL BANK OF JAPAN, LIMITED,
                            as a Lender

                            by___________________________________
                            Name:
                            Title:

                            NATIONSBANK, N.A., as a Lender

                            by___________________________________
                            Name:
                            Title:


<PAGE>



                            THE SANWA BANK, LIMITED, as a Lender

                            by___________________________________
                            Name:
                            Title:

                            MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.,
                            as a Lender

                            by___________________________________
                            Name:
                            Title:

                            CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender

                            by___________________________________
                            Name:
                            Title:




<PAGE>


                            SUNWEST BANK OF ALBUQUERQUE, N.A., as a Lender and
                            as Issuing Bank

                            by____________________________________
                            Name:
                            Title:


                            THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, as a
                            Lender

                            by_____________________________________
                            Name:
                            Title:




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