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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO.1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: AUGUST 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-9369
------------------------
HORIZON/CMS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-1346899
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6001 INDIAN SCHOOL ROAD, N.E.
ALBUQUERQUE, NEW MEXICO 87110
(505) 878-6100
(Address and telephone number of Registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __XX__ No _______
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding at October 9, 1996 was 52,152,902.
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<PAGE>
Horizon/CMS Healthcare Corporation's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1996 is hereby amended as set forth below.
HORIZON/CMS HEALTHCARE CORPORATION
INDEX
FORM 10-Q/A AMENDMENT NO.1 -- FOR THE THREE MONTHS ENDED AUGUST 31, 1996
PART I. -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NUMBERS
------------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets 3
August 31, 1996 and May 31, 1996.................................................
Consolidated Statements of Operations 4
For the three months ended August 31, 1996 and 1995..............................
Consolidated Statements of Cash Flows 5
For the three months ended August 31, 1996 and 1995..............................
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 11
Operations.......................................................................
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................... 20
Signatures....................................................................................... 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1996 AND MAY 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
AUGUST 31 MAY 31
------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents....................... $ 21,684 $ 31,307
Patient care accounts receivable, net of
allowance for doubtful accounts of $46,023 at
August 31 and $41,347 at May 31............... 319,402 309,216
Estimated third party settlements............... 40,119 47,630
Prepaid and other assets........................ 185,057 183,108
Deferred income taxes........................... 23,740 21,287
------------ ------------
Total current assets.......................... 590,002 592,548
PROPERTY AND EQUIPMENT, net....................... 600,354 594,373
GOODWILL, net..................................... 213,030 164,269
OTHER INTANGIBLE ASSETS, net...................... 37,033 38,269
NOTES RECEIVABLE, excluding current portion....... 70,306 73,017
OTHER ASSETS...................................... 48,315 50,275
------------ ------------
Total assets.................................. $ 1,559,040 $ 1,512,751
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 7,092 $ 6,522
Accounts payable................................ 22,360 19,910
Accrued expenses and other liabilities.......... 184,678 171,162
------------ ------------
Total current liabilities..................... 214,130 197,594
LONG-TERM DEBT, excluding current portion......... 657,414 637,884
OTHER LIABILITIES................................. 10,212 9,753
------------ ------------
Total liabilities............................. 881,756 845,231
MINORITY INTERESTS................................ 17,451 16,172
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000 shares, 52,628,351
shares issued with 51,988,340 shares outstanding at August 31 and 52,581,762
shares issued with
51,941,751 shares outstanding at May 31....... 53 53
Additional paid-in capital...................... 589,940 589,516
Retained earnings............................... 78,545 70,484
Treasury stock.................................. (8,705) (8,705)
------------ ------------
Total stockholders' equity.................... 659,833 651,348
------------ ------------
Total liabilities and stockholders' equity.... $ 1,559,040 $ 1,512,751
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
AUGUST 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
TOTAL OPERATING REVENUES.................................................................. $ 443,634 $ 431,407
---------- ----------
COSTS AND EXPENSES:
Cost of services........................................................................ 371,847 349,147
Facility leases......................................................................... 21,041 21,078
Depreciation and amortization........................................................... 14,976 14,651
Interest expense........................................................................ 12,312 13,112
Special charge.......................................................................... 7,150 63,540
---------- ----------
Total costs and expenses.............................................................. 427,326 461,528
---------- ----------
Earnings (loss) before minority interests and income taxes............................ 16,308 (30,121)
Minority interests........................................................................ (2,047) (1,324)
---------- ----------
Earnings (loss) before income taxes................................................... 14,261 (31,445)
Income taxes.............................................................................. 6,200 (2,520)
---------- ----------
Net earnings (loss)................................................................... $ 8,061 $ (28,925)
---------- ----------
Earnings (loss) per common and common equivalent share.................................... $ 0.15 $ (0.56)
---------- ----------
Weighted average number of shares outstanding............................................. 52,110 51,579
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss).......................................................................... $ 8,061 $(28,925)
----------- ----------
Adjustments:
Depreciation and amortization.............................................................. 14,976 14,651
Provision for loss on patient care accounts receivable..................................... 4,776 4,929
Other...................................................................................... (387) 1,168
Special charge............................................................................. 7,150 63,540
Increase (decrease) in cash from changes in assets and liabilities, excluding effects of
acquisitions and dispositions:
Patient care accounts receivable and estimated third party settlements................... 2,238 (21,565)
Prepaid and other assets................................................................. (1,221) (19,521)
Deferred income taxes.................................................................... 178 130
Accounts payable......................................................................... 1,560 (512)
Accrued expenses and other liabilities................................................... 2,427 (22,998)
----------- ----------
Total adjustments.............................................................................. 31,697 19,822
----------- ----------
Net cash provided by (used in) operating activities............................................ 39,758 (9,103)
----------- ----------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired............................ (47,413) (1,081)
Acquisition of property and equipment........................................................ (12,056) (11,434)
Notes receivable............................................................................. 2,490 660
Other investing activities................................................................... (608) (6,460)
----------- ----------
Net cash used in investing activities........................................................ (57,587) (18,315)
----------- ----------
Cash flows from financing activities:
Long-term debt borrowings.................................................................... 163,205 106,874
Long-term debt repayments.................................................................... (154,123) (66,559)
Issuance of common stock..................................................................... 424 1,211
Other financing activities................................................................... -- (1,383)
Distributions to minority interests.......................................................... (1,300) (1,629)
----------- ----------
Net cash provided by financing activities.................................................... 8,206 38,514
----------- ----------
Net increase (decrease) in cash and cash equivalents........................................... (9,623) 11,096
Cash and cash equivalents, beginning of period................................................. 31,307 40,674
Effect of pooling of interests restatement (Note 3)............................................ -- (3,311)
----------- ----------
Cash and cash equivalents, end of period....................................................... $ 21,684 $ 48,459
----------- ----------
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest................................................................................... $ 10,120 $ 10,700
----------- ----------
Income taxes, net.......................................................................... $ 3,153 $ 2,300
----------- ----------
Non-cash investing and financing activities:
Assumption of long-term debt in connection with acquisitions................................. $ 11,018 $ --
----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Horizon/CMS Healthcare Corporation and its subsidiaries (collectively, the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Accordingly, they are unaudited and certain
information and footnote disclosures normally included in the Company's annual
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, as permitted under the
applicable rules and regulations. In the opinion of management, all adjustments
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented have been made and are of a
normal recurring nature.
These consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended May 31, 1996,
filed with the Commission. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
entire year.
(2) OPERATING REVENUES
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs, private pay patients and
non-affiliated long-term care facilities. For the three months ended August 31,
1996 and 1995, the Company derived 33% and 32%, respectively, of its revenues
from Medicare. For the three months ended August 31, 1996 and 1995, the Company
derived 19% and 18%, respectively, of its revenues from Medicaid. Under the
Medicare program and some state Medicaid programs, the Company's long-term care
facilities are paid interim amounts designed to approximate the facilities'
reimbursable costs. Such interim amounts due from third party payors and amounts
due from other payor sources are recorded as patient care accounts receivable.
With respect to these programs for which interim payments are subject to
retroactive cost adjustment, actual costs incurred are reported through cost
reports by each facility annually. Throughout the annual cost reporting period,
the Company records, for each of several hundred Medicare and Medicaid certified
providers operated by the Company, the estimated difference between interim
payments received and the expected actual costs as estimated third party
settlements. The cost reports are subject to examinations and retroactive
adjustments, which may result in upward or downward adjustment from initially
submitted reimbursable costs. The Company generally expects final settlement on
annual cost reports to occur approximately 24 months following the end of an
annual cost reporting period. Tentative partial settlement may occur as soon as
six months following the cost reporting period. Differences between amounts
originally accrued as estimated third-party settlements, subsequent revisions of
estimates and the amounts ultimately received or paid are recorded in operations
in the year of final settlement and disclosed, if material. Most of the
Company's Medicaid payments are prospective and no retroactive adjustment is
made to such payments.
Estimated settlements reflect expected amounts receivable from third parties
offset by expected amounts payable to third parties. The Company's total net
settlement position is anticipated to vary from period to period due to several
factors including: the significant number of individual providers for which
settlements must be estimated, the fact that several cost reporting periods
remain open for each provider at any given time, the numerous cost reporting
periods of the Company's various providers, the interrelationship between
continually changing interim rates and estimated settlements , the unpredictable
timing of tentative and final settlements, and the offset of estimated payables
and receivables.
While settlement adjustments are common upon third-party intermediary cost
report examination, the Company is currently unaware of any matters that may
result in a retroactive cost report adjustment that would be material to the
Company's financial condition or results of operations.
There have been and the Company expects that there will continue to be a
number of reform proposals to develop cost containment in respect of Medicare
and Medicaid reimbursement some of which have, and the Company expects will
continue to have, the effect of limiting the amount of reimbursement
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(UNAUDITED)
(2) OPERATING REVENUES (CONTINUED)
under these programs. 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.
The Company has also entered into payment agreements with certain commercial
insurance carriers, health maintenance organizations, and other payor sources.
The basis for payment under these arrangements includes prospectively determined
amounts for each unit of service.
(3) ACQUISITIONS
In July 1996, the Company completed the merger of a wholly-owned subsidiary
of the Company with Medical Innovations, Inc. ("Medical Innovations") and
Medical Innovations became a wholly owned subsidiary of the Company. Under the
merger agreement, the Company paid $1.85 for each share of Medical Innovations
common stock. The total purchase price, including transaction costs, was
approximately $31.8 million in cash. In addition, the Company assumed
approximately $10.7 million in debt. The total amount of goodwill recorded in
connection with this acquisition approximated $36.8 million. Medical
Innovations, provides services primarily in Texas and Nevada. These services
include specialized home care services, home medical equipment, home medical
services and intravenous therapies, as well as comprehensive home health care
management services under contractual arrangements with hospitals and other
providers. Total annual revenues of Medical Innovations for its fiscal year
ended December 31, 1995 were approximately $69.4 million.
Also in July 1996, the Company acquired American Rehabilitation Network,
Inc. for approximately $7.8 million in cash. The total goodwill recorded in
connection with this acquisition approximated $6.6 million. American
Rehabilitation Network, Inc. operates six outpatient rehabilitation centers in
Michigan and generated total annual revenues of approximately $7.2 million for
its fiscal year ended December 31, 1995.
During the three months ended August 31, 1996, the Company made various
other acquisitions which individually and in the aggregate were insignificant.
The total goodwill recorded in connection with these acquisitions approximated
$6.6 million.
All of the acquisitions described above have been accounted for under the
purchase method of accounting.
In July 1995, a wholly-owned subsidiary of the Company merged with
Continental Medical Systems, Inc. ("CMS") and CMS became a wholly owned
subsidiary of the Company (the "CMS Merger"). Under the terms of the merger
agreement, the Company issued approximately 20.9 million shares of its common
stock, valued at approximately $393.9 million based on the closing price of the
Company's common stock on July 10, 1995, for all the outstanding shares of CMS's
common stock. Additionally, outstanding options to acquire CMS's common stock
were converted to options to acquire approximately 3.8 million shares of the
Company's common stock. CMS is one of the largest providers of comprehensive
medical rehabilitation programs and services in the country with a significant
presence in each of the rehabilitation industry's three principal
sectors--inpatient rehabilitation care, outpatient rehabilitation care and
contract therapy. The merger has been accounted for as a pooling of interests
and, accordingly, the Company's historical financial information has been
restated to include CMS's financial results. In
7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(UNAUDITED)
(3) ACQUISITIONS (CONTINUED)
connection with the CMS Merger, the Company changed its name to Horizon/CMS
Healthcare Corporation.
The accompanying income statement for the three months ended August 31, 1995
includes the results of operations of the Company and CMS, prior to the merger,
for the period June 1, 1995 through June 30, 1995 and the combined Company,
subsequent to the merger, for the period July 1, 1995 through August 31, 1995.
The duplication of reporting CMS's June 1995 operating results of $4.1 million
in fiscal year 1995 and in the three months ended August 31, 1995, has been
adjusted for by a charge to retained earnings. Appropriate adjustments have also
been made in the statement of cash flows for the three months ended August 31,
1995.
Separate results of the Company and CMS for the periods presented prior to
the consummation of the CMS Merger and in total for the periods are as follows
(in thousands):
THREE MONTHS ENDED
AUGUST 31,
----------------------
1996 1995
---------- ----------
Total operating revenues:
The Company, prior to the CMS Merger............... $ -- $ 59,065
CMS, prior to the CMS Merger....................... -- 83,684
The Company, subsequent to the CMS Merger.......... 443,634 288,658
---------- ----------
$ 443,634 $ 431,407
---------- ----------
Net earnings (loss):
The Company, prior to the CMS Merger............... $ -- $ 2,280
CMS, prior to the CMS Merger....................... -- 4,122
The Company, subsequent to the CMS Merger.......... 8,061 (35,327)
---------- ----------
$ 8,061 $ (28,925)
---------- ----------
(4) SPECIAL CHARGE
The Company recorded a special charge of approximately $7.2 million
(pre-tax), during the three months ended August 31, 1996. The special charge
resulted from the approval by management of the Company of restructuring
measures relating to the Company's rehabilitation hospital corporate office
located in Mechanicsburg, Pennsylvania and certain contract rehabilitation
therapy operations. These measures include the transition of all
corporate-related functions currently being performed in Mechanicsburg to the
Company's corporate office in Albuquerque, New Mexico and the further
consolidation of the contract rehabilitation therapy division's administrative
and management organization.
Approximately $5.3 million of the special charge is comprised of involuntary
termination benefits paid or expected to be paid to an estimated 130 employees
impacted by the restructuring. The completion of these terminations is expected
to occur by January 1997. Management approved and committed the Company to the
employee terminations and, during the first quarter of fiscal 1997, the Company
communicated the termination benefits payable to the employees.
Approximately $1.5 million of the special charge is comprised of lease exit
costs related primarily to office space that will be vacated as a result of the
restructuring.
8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(UNAUDITED)
(4) SPECIAL CHARGE (CONTINUED)
The remaining approximate $400,000 balance of the special charge is
comprised of impairment charges related to excess assets that will be sold as a
result of the restructuring. This charge adjusts the carrying amount of those
assets to their estimated fair values.
The Company does not anticipate any significant changes to the restructuring
plan through the expected completion date of January 1997.
The Company has recorded various special charges since fiscal 1994 for which
a portion of the original accruals are included in accrued expenses and other
liabilities as of August 31, 1996. At August 31, 1996, the remaining balance in
the special charge accruals is approximately $20.3 million. The impairment of
property and equipment and other asset balances are reflected as reductions of
the related asset accounts while the remaining amounts are included in accrued
expenses.
The components of the fiscal year 1997 special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Impairment
and Noncancellable Termination Lease Exit
Committments Benefits and Other Total
----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fiscal Year 1997 Special Charge $ 400 $ 5,250 $ 1,500 $ 7,150
Fiscal Year 1997 Activity:
Asset Impairment (400) - - (400)
----------------- ------------ ------------ ------------
Balance August 31, 1996 $ - $ 5,250 $ 1,500 $ 6,750
================= ============ ============ ============
</TABLE>
At August 31, 1996, no employees had been terminated in connection with the
fiscal 1997 restructuring charge.
The components of the fiscal year 1996 special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Termination Lease Exit
Legal Benefits and Other Total
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance May 31, 1996 $ 6,000 $ 1,690 $ 3,806 $ 11,496
Fiscal Year 1997 Activity:
Payments (664) (681) (189) (1,534)
------------ ------------ ------------ -------------
Balance August 31, 1996 $ 5,336 $ 1,009 $ 3,617 $ 9,962
============ ============ ============ =============
</TABLE>
<PAGE>
At August 31, 1996, the number of employees terminated in connection with
the fiscal 1996 restructuring charge totaled 340.
The components of the fiscal year 1995 special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Termination Lease Exit Transaction
Benefits and Other Costs Total
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance May 31, 1996 $ 24 $ 643 $ 17 $ 684
Fiscal Year 1997 Activity:
Payments - (30) - (30)
------------ ------------- ----------- ----------
Balance August 31, 1996 $ 24 $ 613 $ 17 $ 654
============ ============= =========== ==========
</TABLE>
At August 31, 1996, the number of employees terminated in connection with
the fiscal 1995 restructuring charge totaled 200.
The components of the fiscal year 1994 special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Impairment
and Noncancellable Termination
Committments Benefits Total
------------------ ----------- -------------
<S> <C> <C> <C>
Balance May 31, 1996 $ 4,895 $ 378 $ 5,273
Fiscal Year 1997 Activity:
Payments (122) - (122)
Asset Impairment (2,226) - (2,226)
------------------ ----------- -------------
Balance August 31, 1996 $ 2,547 $ 378 $ 2,925
================== =========== =============
</TABLE>
At August 31, 1996, the number of employees terminated in connection with
the fiscal 1994 restructuring charge totaled 196.
(5) LONG-TERM DEBT
The Company is the borrower under a credit agreement dated as of September
26, 1995 (the "Credit Facility") with NationsBank of Texas, N.A., as Agent, and
the lenders named therein. The aggregate revolving credit commitment under the
Credit Facility is $750 million, of which the Company had borrowed $528.4
million and had outstanding letters of credit of $34.9 million at August 31,
1996. Borrowings under the Credit Facility bear interest, payable monthly, at a
rate equal to either, as selected by the Company, the Alternate Base Rate (as
therein defined) of the Agent in effect from time to time, or the Adjusted
London Inter-Bank Offer Rate plus 0.625% to 1.25% per annum, depending on the
maintenance of specified financial ratios. The applicable interest rates at
August 31, 1996 were 8.25% and 6.44% - 6.63% on the Alternate Base Rate and
Adjusted London Inter-Bank Offer Rate advances, respectively. In addition,
borrowings thereunder mature in September 2000 and are secured by a pledge of
the capital stock of substantially all subsidiaries of the Company. Under the
terms of the Credit Facility, the Company is required to maintain certain
financial ratios and is restricted in the payment of dividends to an amount
which shall not exceed 20% of the Company's net earnings for the prior fiscal
year.
The Company utilizes an interest rate collar agreement, consisting of the
combination of an interest rate cap and an interest rate floor in a single
transaction, to reduce the impact of increases in interest rates on its floating
rate debt. The Company entered into the $200 million notional amount collar
agreement at no initial investment following the expansion of the Credit
Facility in October 1995. The Company utilizes the collar as an interest rate
hedge on its floating rate, LIBOR based Credit Facility and does not intend
9
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(UNAUDITED)
(5) LONG-TERM DEBT (CONTINUED)
the instrument to be speculative in nature. The agreement has a term of two
years and expires in October 1997. The collar agreement entitles the Company to
receive from the counterparty the amount, if any, by which average LIBOR
interest payments on the notional amount exceed 8.0% per annum. The collar
agreement requires that the Company pay to the counterparty the amount, if any,
by which average LIBOR interest payments on the notional amount are less than
4.57% per annum. The fair value of the collar agreement is estimated based on
quotes from market makers of these instruments and represents the estimated
amount that the Company would expect to receive or pay if the agreement was
terminated. The fair value of the collar on August 31, 1996 would require that a
$40,285 payment be made by the counterparty to the Company to terminate the
agreement.
(6) COMMITMENTS AND CONTINGENCIES
The Company is a party to threatened or pending litigation in connection
with several matters any one of which, if adversely determined, could have a
material adverse impact on the Company's financial condition and/or results of
operations. See "Item 1. Legal Proceedings" in Part II of this report for a
description of such litigation.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
The Company is a leading provider of post-acute health care services,
including specialty health care services and long-term care services,
principally in the Midwest, Southwest, Northeast and Southeast regions of the
United States. At August 31, 1996, Horizon provided specialty health care
services through 37 acute rehabilitation hospitals in 16 states (2,065 beds), 58
specialty hospitals and subacute care units in 17 states (1,925 beds), 194
outpatient rehabilitation clinics in 21 states and 1,871 rehabilitation therapy
contracts in 35 states. At that date, Horizon provided long-term care services
through 121 owned or leased facilities (15,147 beds) and 142 managed facilities
(15,798 beds) in a total of 18 states. Other medical services offered by the
Company include pharmacy, laboratory, physician and allied health professional
staffing services, Alzheimer's care, home health care, physician practice
management, non-invasive medical diagnostic, assisted living, home respiratory,
home infusion therapy and hospice care. For the three months ended August 31,
1996 and 1995, the Company derived 48% and 50%, respectively, of its revenues
from private sources, 33% and 32%, respectively, from Medicare and 19% and 18%,
respectively, from Medicaid.
REGULATION
GENERAL. The federal government and the governments of all states in which
the Company operates regulate various aspects of its businesses. There can be no
assurance that federal or state governments will not impose additional
restrictions on its activities that might adversely affect its businesses. The
operation of the Company's long-term care facilities and certain segments of its
specialty health care business and the provision of these services are subject
to federal, state and local licensure and certification laws. These facilities
and segments are subject to periodic inspection by governmental and other
authorities to assure compliance with the various standards established for
continued licensure under state law, certification under the Medicare and
Medicaid programs and participation in the Veteran's Administration program. As
previously disclosed, the Company's specialty hospital in Dallas, Texas was
decertified from the Medicare program in June 1996. The Company has appealed the
decertification and, simultaneously with that, moved to begin the
recertification process. The specialty hospital recently completed a pre-survey
conference and a recertification survey with representatives of the Health Care
Financing Administration ("HCFA"). At the conclusion of that survey, HCFA's
representatives found the specialty hospital to be in substantial compliance
with conditions for participation in the Medicare program as an acute long-term
care hospital. The Company anticipates a recertification of this specialty
hospital in the near future. To the extent that Certificates of Need or other
similar approvals are required for expansion of the Company's operations, the
Company could be adversely affected by the failure or inability to obtain such
approvals, by changes in the standards applicable to approvals and by possible
delays and expenses associated with obtaining approvals. The failure by the
Company to maintain, obtain, retain or renew any required regulatory approvals,
licenses or certifications could prevent the Company from being reimbursed for
or offering its services or could adversely affect its operations, financial
performance and its ability to expand.
MEDICARE/MEDICAID FRAUD AND ABUSE. A wide array of Medicare/Medicaid fraud
and abuse provisions apply to long-term care facilities, other specialty health
care facilities, home health agencies, pharmacies and clinical laboratories.
Penalties for violation of these federal laws include exclusion from
participation in the Medicare/Medicaid programs, asset forfeiture, civil
penalties and criminal penalties. The Office of Inspector General ("OIG"), the
Department of Justice ("DOJ") and other federal agencies interpret these fraud
and abuse provisions liberally and enforce them aggressively. Congress recently
passed, and the President signed, the Health Care Portability Act of 1996, which
expands significantly the federal government's involvement in curtailing
Medicare/Medicaid fraud and abuse and increases the monetary penalties for
violations of these provisions. The Company believes that its operations and
practices comply with these fraud and abuse provisions.
The Company is unable to predict, however, the effect of future
11
<PAGE>
administrative or judicial interpretations of these laws, regulations and rules,
whether other legislation or regulations on the federal or state level in any of
these areas will be adopted, what form such legislation or regulations may take,
or their impact on the Company. There can be no assurance that such laws,
regulations or rules, or the interpretation thereof, will ultimately be
consistent with the Company's practices. See "Item 1. Legal Proceedings--OIG/DOJ
Investigation Involving Certain Medicare Part B and Related Co-Insurance
Billings and--Michigan Attorney General Investigation into Long-Term Care
Facility in Michigan" in Part II of this Report.
REIMBURSEMENT RATES FOR CONTRACT THERAPY SERVICES. In April 1995, HCFA
issued a memorandum to its Medicare fiscal intermediaries (the "Fiscal
Intermediaries") providing guidelines for assessing costs incurred by inpatient
providers ("Care Providers") relating to payment of occupational and speech
language pathology services furnished under arrangements that include contracts
between therapy providers and Care Providers. While not binding on the Fiscal
Intermediaries, the HCFA memorandum suggested certain rates to the Fiscal
Intermediaries to assist them in making annual "prudent buyer" assessments of
speech and occupational therapy rates paid by Care Providers during the Fiscal
Intermediary's reviews of the Care Providers' cost reports. The HCFA memorandum
acknowledges that the rates noted in the memorandum are not absolute limits and
should only be used by the Fiscal Intermediaries for comparative purposes.
Following the issuance of the HCFA memorandum, meetings between industry
representatives and the HCFA have been held concerning the merits of the HCFA
memorandum. In light of the fluid nature of the HCFA memorandum, the Company
cannot predict what effect, if any, the HCFA memorandum will have on the Company
or if the rates suggested in the HCFA memorandum will continue to be recommended
by the HCFA. Additionally, the Company cannot determine at this time whether the
rates suggested in the HCFA memorandum would be used by the HCFA as a basis for
developing possible future regulations creating a salary equivalency based
reimbursement system for speech and occupational therapy services. Although
management of the Company has developed strategies to deal with potential future
changes, there can be no assurance that future changes in the administration or
interpretation of governmental health care programs will not have an adverse
effect on the results of operations of the Company.
HEALTH CARE REFORM. During fiscal 1996, various Congressional legislators
introduced reform proposals that are intended to control health care costs,
improve access to medical services for uninsured individuals and balance the
federal budget by the year 2002. Certain of these budgetary proposals have been
passed by both Houses of Congress, including passage of resultant committee
bills. These proposals include reduced rates of growth in the Medicare and
Medicaid programs and proposals to block grant funds to the states to administer
the Medicaid program. These proposals were included in the 1995 budget
reconciliation act, which the President of the United States has vetoed. In
January 1996, the President presented his own plan to balance the federal budget
by 2002. From time to time discussions have occurred between members of the
House of Representatives, members of the Senate and the President to devise a
balanced budget plan. While these proposals do not, at this time, appear to
affect the Company adversely, significant changes in reimbursement levels under
Medicare or Medicaid and changes in applicable governmental regulations could
affect the future results of operations of the Company. There can be no
assurance that future legislation, health care or budgetary, will not have an
adverse effect on the future results of operations of the Company.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of total operating revenues:
THREE MONTHS ENDED
AUGUST 31,
----------------------------
1995 1996
------- --------
Total operating revenues.......................... 100.0% 100.0%
------ -----
Cost of services.................................. 83.8 80.9
Facility leases................................... 4.7 4.9
Depreciation and amortization..................... 3.4 3.4
Interest expense.................................. 2.8 3.1
Special charge.................................... 1.6 14.7
------ -----
Earnings (loss) before minority interests and
income taxes.................................... 3.7 (7.0)
Minority interests................................ (0.5) (0.3)
------ -----
Earnings (loss) before income taxes............... 3.2 (7.3)
Income taxes...................................... 1.4 (0.6)
------ -----
Net earnings (loss)............................... 1.8% (6.7)%
------ -----
The following table sets forth a summary of the Company's total operating
revenues by type of service and the percentage of total operating revenues that
each such service represented for each period indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
AUGUST 31, 1996 AUGUST 31, 1995
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term care services........................... $ 100,410 22.6% $ 94,536 21.9%
Specialty health care services:
Acute and outpatient rehabilitation............. 128,686 29.0 129,196 29.9
Contract therapy................................ 92,955 21.0 102,321 23.7
Other (1)....................................... 114,113 25.7 100,972 23.5
Other operating revenues (2)...................... 7,470 1.7 4,382 1.0
-------------- ----- -------------- -----
Total operating revenues...................... $ 443,634 100.0% $ 431,407 100.0%
-------------- ----- -------------- -----
- ------------------------
</TABLE>
(1) Includes revenues derived from pharmacy, laboratory, physician and allied
health professional staffing services, Alzheimer's care, home health care,
physician practice management, non-invasive medical diagnostic, assisted
living, home respiratory, home infusion therapy and hospice care.
(2) Includes revenues derived from management fees, interest income, rental
income and other miscellaneous revenues.
REVENUES
Total operating revenues increased approximately $12.2 million, or 2.8%, for
the three months ended August 31, 1996 compared to the corresponding period in
fiscal 1996. The increase in total operating revenues for the fiscal 1997 period
is primarily attributable to acquisitions of specialty health care and long-term
care operations. The increase in revenues resulting from these acquisitions was
offset somewhat by a decline in contract rehabilitation therapy revenues.
13
<PAGE>
Specialty health care acquisitions resulted in $18.6 million of additional
revenues during the three months ended August 31, 1996. Approximately $10.8
million of the increase was the result of the acquisition of Medical
Innovations, Inc. in July 1996. The balance of the increase was primarily
related to various outpatient rehabilitation therapy acquisitions that resulted
in approximately $5.9 million of additional revenues. Various long-term care
acquisitions resulted in approximately $3.2 million of additional revenues
during the three months ended August 31, 1996 compared to the corresponding
period in fiscal 1996.
Contract rehabilitation therapy revenues declined approximately $9.4 million
during the three months ended August 31, 1996 compared to the corresponding
period in fiscal 1996. This decline was caused by a decrease in volume as
certain customers elected to provide their therapy services in-house, contracts
were lost through acquisition and contracts were terminated that did not meet
the Company's profitability standards.
COSTS AND EXPENSES
Cost of services increased approximately $22.7 million, or 6.5%, for the
three months ended August 31, 1996, compared to the corresponding period in
fiscal 1996. The increase in cost of services is primarily attributable to
specialty health care and long-term care acquisitions as discussed above, as
well as internal expansion of the Company's specialty health care services and
programs. As a percentage of total operating revenues, cost of services for the
three months ended August 31, 1996 increased to 83.8% from 80.9% for the
corresponding period in fiscal 1996. This increase is due primarily to a change
in the mix of margins among the various divisions, a change in the mix among
payor sources and, to a lesser extent, a general increase in corporate costs
during the three months ended August 31, 1996.
Facility lease expense remained constant for the three months ended August
31, 1996 compared to the corresponding period in fiscal 1996. As a percentage of
total operating revenues, facility lease expense decreased to 4.7% for the three
months ended August 31, 1996 from 4.9% for the corresponding period in fiscal
1996.
Depreciation and amortization increased $0.3 million, or 2.2%, for the three
months ended August 31, 1996 compared to the corresponding period in fiscal
1996. As a percentage of total operating revenues, depreciation and amortization
remained constant at 3.4%.
Interest expense declined $0.8 million, or 6.1%, for the three months ended
August 31, 1996 compared to the corresponding period in fiscal 1996. The decline
in interest expense is primarily attributable to the retirement of substantially
all of the Senior Subordinated Notes (as hereinafter defined) of CMS, utilizing
proceeds from the Company's Credit Facility which bears interest at a
substantially lower rate.
The Company recorded a $7.2 million special charge in the first quarter of
fiscal 1997. The special charge resulted from the approval by management of the
Company of restructuring measures relating to the Company's rehabilitation
hospital corporate office located in Mechanicsburg, Pennsylvania and certain
contract rehabilitation therapy operations. See Note (4) of Notes to
Consolidated Financial Statements.
The Company recorded a $63.5 million special charge in the first quarter of
fiscal 1996. The special charge resulted primarily from (i) the write-off of
transaction costs of $6.7 million which had been incurred in completing the CMS
Merger, (ii) the approval by management of the Company of restructuring costs of
$44.9 million related to efforts to combine and restructure the operations of
the Company and CMS and (iii) the $11.9 million write down of assets expected to
be divested during fiscal 1996. See Note (7) to the Company's audited financial
statements in its Annual Report on Form 10-K for the year ended May 31, 1996 and
Note (4) of Notes to Consolidated Financial Statements.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1996, the Company's working capital was $375.9 million and
included cash and cash equivalents of $21.7 million as compared with $395.0
million in working capital and $31.3 million in cash and cash equivalents at May
31, 1996. During the three months ended August 31, 1996, the Company's operating
activities provided $39.8 million of net cash.
As a result of the restructuring commitments and the special charges
recorded during fiscal 1996 and prior, the Company made cash payments during the
three months ended August 31, 1996 totaling $1.6 million. There were no
significant asset dispositions related to the restructuring during the three
months ended August 31, 1996. No cash payments were made during the three months
ended August 31, 1996 with respect to the special charge recorded during the
first quarter of fiscal 1997.
EXPANSION PROGRAM
The net cash used in the Company's investing activities increased from $18.3
million for the three months ended August 31, 1995 to $57.6 million for the
three months ended August 31, 1996. The uses of cash in investing activities
included acquisitions and, to a lesser extent, internal construction and capital
expenditures for property and equipment. Cash paid for acquisitions increased
considerably during the three months ended August 31, 1996 compared with the
corresponding period of fiscal 1996 as the Company has elected to structure cash
rather than stock transactions due to the decline in the Company's stock price
in the latter part of fiscal 1996. Cash required for internal construction and
capital expenditures for property and equipment during the three months ended
August 31, 1996 was consistent with that required during the corresponding
period of fiscal 1996.
The Company's expansion program requires funds: (i) to acquire assets and to
expand and improve existing and newly acquired facilities; (ii) to discharge
funded indebtedness assumed or otherwise acquired in connection with the
acquisitions of facilities and properties; and (iii) to finance the increase in
patient and other accounts receivable resulting from acquisitions. The funds
necessary to meet these requirements have historically been provided principally
by the Company's financing activities and, to a lesser extent, from operating
and investing activities. However, during the three months ended August 31,
1996, net cash provided by operating activities substantially exceeded that
provided by financing activities.
SOURCES
At August 31, 1996, the available credit under the Company's credit facility
was $186.7 million. To the extent that the Company's operations and expansion
program require cash expenditures in excess of the amounts provided by
operations and available to it under the Credit Facility (as defined below),
management of the Company believes that the Company can obtain the necessary
funds through other financing activities, including the issuance and sale of
debt and through the sale of property and equipment.
The Company has committed to analyze business units and to concentrate
efforts on the businesses and the regions where the Company can reasonably
expect to achieve growth in revenues and earnings. Operations not identified as
consistent with this objective will be considered for disposal. As a result, in
September 1996 the Company sold a medical office automation company providing
medical and financial systems in the mid-atlantic region. Also in September
1996, the Company entered into a definitive agreement to sell certain assets and
operations of a non-invasive medical diagnostic company providing hospital-based
and mobile ultrasound related diagnostic services. Further, as previously
disclosed, the Company is currently pursuing the disposition of 21 leased
long-term care facilities, ten owned long-term care facilities, three managed
long-term care facilities, one pharmacy operation, the Company's rights in
respect of one pharmacy operation and the Company's investment interest in a
pharmacy operation. As a result of these transactions as currently proposed, the
Company anticipates it will generate net cash proceeds of approximately $90
million. In addition to the above dispositions, the Company will consider
15
<PAGE>
other potential dispositions which provide the opportunity to concentrate
operations in a manner consistent with the Company's objectives.
CREDIT FACILITY
The Company is the borrower under a credit agreement dated as of September
26, 1995 (the "Credit Facility") with NationsBank of Texas, N.A., as Agent, and
the lenders named therein. The aggregate revolving credit commitment under the
Credit Facility is $750 million, of which the Company had borrowed $528.4
million and had outstanding letters of credit of $34.9 million at August 31,
1996. Borrowings under the Credit Facility bear interest, payable monthly, at a
rate equal to either, as selected by the Company, the Alternate Base Rate (as
therein defined) of the Agent in effect from time to time, or the Adjusted
London Inter-Bank Offer Rate plus 0.625% to 1.25% per annum, depending on the
maintenance of specified financial ratios. The applicable interest rates at
August 31, 1996 were 8.25% and 6.44% - 6.63% on the Alternate Base Rate and
Adjusted London Inter-Bank Offer Rate advances, respectively. Borrowings under
the Credit Facility mature in September 2000 and are secured by a pledge of the
capital stock of substantially all subsidiaries of the Company. Under the terms
of the Credit Facility, the Company is required to maintain certain financial
ratios and is restricted in the payment of dividends to an amount which shall
not exceed 20% of the Company's net earnings for the prior fiscal year.
The lenders' obligations to make additional loans pursuant to the Credit
Facility are subject to the satisfaction of certain conditions, including that
(i) the Company is not in violation of any law, rule or regulation of any
governmental authority where such violation could be reasonably expected to
result in a Material Adverse Effect (as defined in the credit agreement, which
definition includes a material adverse effect on the financial condition or
results of operations of the Company) and (ii) that there are no suits pending
as to which there is a reasonable possibility of an adverse determination and
which, if adversely determined, could be reasonably expected to result in a
Material Adverse Effect. After discussions between the Company and
representatives of the Agent, the Company does not believe that the existence
of, or the occurrence of the events giving rise to, the OIG/DOJ investigation
into certain Medicare Part B and related co-insurance billings, the pending SEC
investigation or the pending stockholder litigation (see "Item 1. Legal
Proceedings" in Part II of this report) will prevent satisfaction of these
conditions at this time. In addition, pursuant to an amendment to the credit
agreement underlying the Credit Facility, the Company, the Agent and each of the
participating lenders agreed that the Company's knowledge of the existence of
these matters will not prevent satisfaction of these conditions at this time or
in the future. No assurance can be given, however, that future adverse
developments or determinations with respect to these matters will not prevent
satisfaction of such conditions.
FORWARD-LOOKING STATEMENTS
The matters discussed in this Report contain forward-looking statements that
involve risks and uncertainties. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no assurance that
the anticipated results will occur. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include conditions in the capital markets, including the interest rate
environment and stock market levels and activity, the regulatory environment in
which the Company operates and the enactment by Congress of health care reform
measures.
16
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION AGAINST TENET HEALTHCARE CORPORATION
As previously disclosed, the Company filed a lawsuit on March 7, 1996
against Tenet Healthcare Corporation ("Tenet") in the United District Court for
the District of Nevada. The lawsuit arose out of an agreement entered into
between the Company and Tenet in connection with the Company's attempted
acquisition of The Hillhaven Corporation ("Hillhaven") in January 1995. In the
lawsuit, the Company alleges that Tenet has failed to honor its commitment to
pay Horizon approximately $14.5 million pursuant to the agreement. Tenet has
contended that the amount owing to the Company under the agreement is
approximately $5.1 million. In the quarter ended November 30, 1995, the Company
recognized as a receivable approximately $13.0 million of the approximately
$14.5 million the Company contends it is owed under the agreement. While the
Company continues to vigorously prosecute this lawsuit, no assurance can be
given that the Company will prevail or that the Company will not be required at
a future date to record a charge for a portion of the receivable previously
recorded.
OIG/DOJ INVESTIGATION INVOLVING CERTAIN MEDICARE PART B AND RELATED CO-INSURANCE
BILLINGS
The Company announced on March 15, 1996 that certain Medicare Part B and
related co-insurance billings previously submitted by the Company are being
investigated by the Office of Inspector General of the Department of Health and
Human Services (the "OIG") and the Department of Justice (the "DOJ"). These
billings, totaling approximately $3.4 million, sought recovery for the costs of
certain Medicare Part B covered medical supplies used in treating Medicare
patients in certain facilities at a time when those facilities were operated by
Greenery Rehabilitation Group, Inc. ("Greenery") before the Company acquired
Greenery (the "Greenery Acquisition"). These costs were not billed at the time
incurred but were billed on a retroactive basis, as permitted under applicable
Medicare Part B rules, after the Greenery Acquisition. Of the $3.4 million
billed, approximately $1.3 million has been remitted to the Company.
The Company has advised the OIG that it appears that a significant portion
of the billings may not have been in accordance with applicable Medicare Part B
rules. The Company advised the OIG and the DOJ that it was cooperating, and will
continue to cooperate, in the investigation and was prepared to remit any
overpayment to the appropriate governmental authority. On April 2, 1996, the
Company and DOJ entered into a letter agreement pursuant to which the Company
voluntarily agreed to refund such overpayment to the DOJ. On April 3, 1996, the
Company refunded approximately $1 million to the DOJ. In addition, the Company
voluntarily refunded 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. The Company continues to
cooperate fully with the OIG and the DOJ. 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 of operations.
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
17
<PAGE>
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 Rehabilitation and
Sports Medicine, Inc. could not be effected by April 1, 1996 and the Company's
March 15, 1996 press release announcing the existence of a federal investigation
into certain of the Company's Medicare Part B billings. The investigation is
ongoing, and neither the Company nor Mr. Elliott possesses all the facts with
respect to the matters under investigation. Although neither the Company nor Mr.
Elliott has been advised by the Commission that the Commission has concluded
that any of the Company, Mr. Elliott or any other current or former officer or
director of the Company has been involved in any violation of the federal
securities laws, there can be no assurance as to the outcome of the
investigation or the time of its conclusion. Both the Company and Mr. Elliott
intend to continue cooperating fully with the Commission in connection with the
investigation.
In March 1995, the New York Stock Exchange, Inc. (the "NYSE") informed the
Company that it had initiated a review of trading in Hillhaven common stock
prior to the announcement of the Company's proposed acquisition of Hillhaven.
The NYSE extended in April 1995 the review of trading to include all dealings
with CMS. On April 3, 1996, the NYSE notified the Company that it had initiated
a review of trading in the Company's Common Stock preceding the Company's March
1, 1996 press release described above. The Company is cooperating with the NYSE
in its reviews and, to the Company's knowledge, the reviews are ongoing.
MICHIGAN ATTORNEY GENERAL INVESTIGATION INTO LONG-TERM CARE FACILITY IN MICHIGAN
The Company has learned on September 18, 1996, that the Attorney General of
the State of Michigan is investigating one of its skilled nursing facilities.
The facility, in Howell, Michigan, has been owned and operated by the Company
since February 1994. As widely reported in the press, the Attorney General
seized a number of patient, financial and accounting records that were located
at this facility. By order of a circuit judge in the county in which the
facility is located, the Attorney General was ordered to return patient records
to the facility for copying.
The investigation appears to involve allegations arising out of a licensing
survey conducted in April 1996. The Company believes the allegations are untrue
and, therefore, denies the same. The Company has advised the Michigan Attorney
General that it is willing to cooperate in this investigation. Due to the
preliminary nature of this investigation, the Company cannot now predict when
the investigation will be completed; the ultimate outcome of the investigation;
or the effect thereof on the Company's financial condition or results of
operations. If adversely determined, this investigation could result in the
imposition of civil and/or criminal fines or sanctions against the Company,
which could have a material adverse impact on the Company's financial condition
and/or its results of operations.
STOCKHOLDER LITIGATION
On March 28, 1996, the Company was served 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 HEALTCARE 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 seucrities 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
18
<PAGE>
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. Subsequent to the end of fiscal 1996, the Company filed
its motion seeking to dismiss this lawsuit because, among other things, the
Company believes the lawsuit fails to state a claim upon which the plaintiffs
are entitled to redress. Because the lawsuit is in the initial stages, 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.
Since April 5, 1996, the Company was served with several complaints by
current or former stockholders of the Company on behalf of all persons who
purchased common stock of the Company between June 6, 1995 and March 15, 1996.
Each of these lawsuits was filed in the United States District Court for the
District of New Mexico, in Albuquerque, New Mexico. In these lawsuits, the
plaintiffs have alleged in substantially similar complaints 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 or omitted disclosing material facts about the
Company, its business, its Greenery and CMS acquisitions, Greenery's improved
operations after the acquisition, the successful integration of CMS's operations
into those of the Company 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 any unspecified amount and extraordinary, equitable
or injunctive relief, including attachment, impoundment, or imposition of a
constructive trust against the individual defendants, plus costs and attorneys'
fees. The Company disputes the factual and legal bases upon which the
plaintiffs' lawsuits are based and denies that the plaintiffs are entitled to
any recovery on their claims. To that end, the Company intends to contest these
litigation matters vigorously. In July 1996, the Court entered its order
consolidating these lawsuits into a single action styled IN RE HORIZON/CMS
HEALTHCARE CORPORATION SECURITIES LITIGATION, Case No. CIV 96-0442-BB. On
September 30, 1996, the consolidated putative class plaintiffs filed their
consolidated complaint. Pursuant to court order, the Company and the individual
defendants must answer or otherwise respond to the consolidated complaint by
December 1, 1996. Because these lawsuits are in their initial stages, 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.
STOCKHOLDER DERIVATIVE ACTIONS
Commencing in April and continuing into May 1996, the Company was served
with six complaints alleging a class action derivative action brought by
stockholders of the Company for and on behalf of the Company in the Court of
Chancery of New Castle County, Delaware, against Neal M. Elliott, Klementt L.
Belt, Jr., Rocco A. Ortenzio, Robert A. Ortenzio, Russell L. Carson, Bryan C.
Cressey, Charles H. Gonzales, Michael A. Jeffries, Gerard M. Martin, Frank M.
McCord, Raymond M. Noveck, Barry M. Portnoy, and LeRoy S. Zimmerman. The six
lawsuits have been consolidated into one action styled IN RE HORIZON/CMS
HEALTHCARE CORPORATION SHAREHOLDERS LITIGATION. The plaintffs allege, among
other things, that the Company's current and former directors breached their
fiduciary duties to the Company and the Stockholders as a result of (i) the
purported failure to supervise adequately and the purported knowing
mismanagement of the operations of the Company, and the (ii) purported misuse of
inside information in connection with the sale of the Company's common stock by
certain of the current and former directors in January and February 1996. To
that end, the plaintiff seeks an accounting from the directors for profits to
themselves and damages suffered by the Company as a result of the transaction
complained of in the complaint and attorneys' fees and costs. On June 21, 1996,
the individual defendants filed a motion with the Chancery Court seeking to
dismiss this matter because, among other things, the plaintiffs failed to make a
demand on the board of directors prior to commencing this litigation. The
Company cannot now predict the outcome or the effect of this litigation or the
length of time it will take to resolve this litigation.
19
<PAGE>
In April 1996, the Company was served with a complaint in a stockholders
derivative lawsuit styled LIND V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, KLEMETT L.
BELT, JR., ROBERT A. ORTENZIO, RUSSELL L. CARSON, BRYAN C. CRESSEY, CHARLES H.
GONZALES, MICHAEL A. JEFFRIES, GERARD M. MARTIN, FRANK M. MCCORD, RAYMOND N.
NOVECK, BARRY M. PORTNOY, LEROY S. ZIMMERMAN AND HORIZON/CMS HEALTHCARE
CORPORATION, No. CIV 96-0538-BB, pending in the United States District Court for
the District of New Mexico. The plaintiff alleges, among other things, that the
Company's current and former directors breached their fiduciary duties to the
Company and the stockholders as a result of (i) the purported failure to
supervise adequately and the purported knowing mismanagement of the operations
of the Company, and the (ii) purported misuse of inside information in
connection with the sale of the Company's common stock by certain of the current
and former directors in January and February 1996. To that end, the plaintiff
seeks an accounting from the directors for profits to themselves and damages
suffered by the Company as a result of the transaction complained of in the
complaint and attorneys' fees and costs. The Company filed a motion seeking a
stay of this case pending the outcome of the motion to dismiss in the Delaware
derivative lawsuits or, in the alternative, to dismiss this case for those same
reasons. The Company cannot now predict the outcome or the effect of this
litigation or the length of time it will take or resolve this litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -- Three months ended August 31, 1996
b. Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the quarter
ended August 31, 1996.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HORIZON/CMS HEALTHCARE CORPORATION
By /s/ ERNEST A. SCHOFIELD
-----------------------------------------
Ernest A. Schofield
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
Date: August 11, 1997
- ------------------------
* Ernest A. Schofield is signing in the dual capacities as Chief Financial
Officer and as a duly authorized officer of the Company.
21
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- -------------------------------------------------------------------
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -- Three months ended August 31, 1996
22
EXHIBIT 11.1
HORIZON/CMS HEALTHCARE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE EARNINGS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------
AUGUST 31, AUGUST 31,
1996 1995
-------------- --------------
<S> <C> <C>
Common and Common Equivalents:
Net earnings (loss)......................................................... $ 8,061 $ (28,925)
======= ==============
Applicable common shares:
Weighted average outstanding shares during the period....................... 51,976 50,798
Weighted average shares issuable upon exercise of common stock equivalents
outstanding (principally stock options and warrants using the treasury
stock method)............................................................. 134 781
------- --------------
Total......................................................................... 52,110 51,579
======= ==============
Net earnings (loss) per share: $ 0.15 $ (0.56)
======= ==============
Assuming Full Dilution:
Net earnings (loss)......................................................... $ 8,061 $ (28,925)
Interest on convertible debentures, net of income taxes..................... 22 39
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Net earnings (loss) used for computation of per share earnings.............. $ 8,083 $ (28,886)
======= ==============
Applicable common shares:
Weighted average outstanding shares during the period....................... 51,976 50,798
Weighted average shares issuable upon exercise of common stock equivalents
outstanding (principally stock options and warrants using the treasury
stock method and convertible debentures).................................. 270 973
------- --------------
Total....................................................................... 52,246 51,771
======= ==============
Net earnings (loss) per share: $ 0.15 $ (0.56)
======= ==============
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the August
1996 Form 10-Q/A Amendment No.1 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 21,684
<SECURITIES> 0
<RECEIVABLES> 365,425
<ALLOWANCES> 46,023
<INVENTORY> 0
<CURRENT-ASSETS> 590,002
<PP&E> 727,107
<DEPRECIATION> (126,753)
<TOTAL-ASSETS> 1,559,040
<CURRENT-LIABILITIES> 214,130
<BONDS> 657,414
0
0
<COMMON> 53
<OTHER-SE> 659,780
<TOTAL-LIABILITY-AND-EQUITY> 1,559,040
<SALES> 0
<TOTAL-REVENUES> 443,634
<CGS> 0
<TOTAL-COSTS> 427,326
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,776
<INTEREST-EXPENSE> 12,312
<INCOME-PRETAX> 16,308
<INCOME-TAX> 6,200
<INCOME-CONTINUING> 8,061
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,061
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
