UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended: February 28, 1997
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 April 7, 1997 was 52,120,897.
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
INDEX
FORM 10-Q - FOR THE NINE MONTHS ENDED FEBRUARY 28, 1997
PART I. - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Numbers
------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
February 28, 1997 and May 31, 1996............................................................. 3
Consolidated Statements of Operations
For the three months and nine months ended February 28, 1997 and
February 29, 1996.............................................................................. 4
Consolidated Statements of Cash Flows
For the nine months ended February 28, 1997 and February 29, 1996.............................. 5
Notes to Consolidated Financial Statements..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K............................................................... 25
Signatures.................................................................................................. 26
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1997 AND MAY 31, 1996
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
February 28 May 31
------------------------------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 23,595 $ 31,307
Patient care accounts receivable, net of allowance for doubtful
accounts of $47,771 at February 28 and $41,347 at May 31................. 329,202 309,216
Estimated third party settlements.......................................... 26,631 47,630
Prepaid and other assets................................................... 184,229 183,108
Deferred income taxes...................................................... 24,067 21,287
------------------ ----------------
Total current assets.................................................... 587,724 592,548
PROPERTY AND EQUIPMENT, net................................................... 554,990 594,373
GOODWILL, net................................................................. 302,026 164,269
OTHER INTANGIBLE ASSETS, net.................................................. 40,134 38,269
NOTES RECEIVABLE, excluding current portion................................... 78,138 73,017
OTHER ASSETS.................................................................. 59,713 50,275
------------------------------------
Total assets............................................................ $ 1,622,725 $ 1,512,751
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.......................................... $ 12,578 $ 6,522
Accounts payable........................................................... 21,237 19,910
Accrued expenses and other liabilities..................................... 192,055 171,162
------------------------------------
Total current liabilities............................................... 225,870 197,594
LONG-TERM DEBT, excluding current portion..................................... 714,933 637,884
OTHER LIABILITIES............................................................. 12,380 9,753
------------------------------------
Total liabilities....................................................... 953,183 845,231
MINORITY INTERESTS............................................................ 21,493 16,172
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000 shares,
52,710,741 shares issued with 52,070,730 shares outstanding
at February 28 and 52,581,762 shares issued with 51,941,751 share
outstanding a May 31.................................................... 53 53
Additional paid-in capital................................................. 591,077 589,516
Retained earnings.......................................................... 65,624 70,484
Treasury stock............................................................. (8,705) (8,705)
------------------------------------
Total stockholders' equity.............................................. 648,049 651,348
------------------------------------
Total liabilities and stockholders' equity.............................. $ 1,622,725 $ 1,512,751
====================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-----------------------------------------------------------------
February 28, February 29, February 28, February 29, 1996
1997 1996 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL OPERATING REVENUES...................................... $ 443,735 $ 438,199 $ 1,331,675 $ 1,310,358
-----------------------------------------------------------------
COSTS AND EXPENSES:
Cost of services........................................... 370,418 360,905 1,115,040 1,067,471
Facility leases............................................ 22,103 22,036 64,502 64,172
Depreciation and amortization.............................. 15,498 14,778 45,684 44,536
Interest expense........................................... 15,210 11,562 41,260 36,038
Special charge............................................. 19,800 - 30,950 63,540
-----------------------------------------------------------------
Total costs and expenses................................ 443,029 409,281 1,297,436 1,275,757
Earnings before minority interests, income
taxes and extraordinary item.......................... 706 28,918 34,239 34,601
Minority interests...................................... (1,583) (1,593) (5,263) (4,995)
-----------------------------------------------------------------
Earnings (loss) before income taxes and
extraordinary item.................................... (877) 27,325 28,976 29,606
Income taxes.................................................. 1,615 11,480 16,015 23,143
-----------------------------------------------------------------
Earnings (loss) before extraordinary item............... (2,492) 15,845 12,961 6,463
Extraordinary item, net of tax................................ - - (17,821) (22,075)
-----------------------------------------------------------------
Net earnings (loss)..................................... $ (2,492) $ 15,845 $ (4,860) $ (15,612)
=================================================================
Earnings (loss) per common and common equivalent share:
Earnings (loss) before extraordinary item.................. $ (0.05) $ 0.30 $0.25 $ 0.12
Extraordinary item......................................... - - (0.34) (0.42)
-----------------------------------------------------------------
Net earnings (loss)........................................ $ (0.05) $ 0.30 $(0.09) $ (0.30)
=================================================================
Weighted average number of shares outstanding................. 52,250 52,683 52,171 52,025
=================================================================
</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 NINE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (4,860) $ (15,612)
--------------------------------
Adjustments:
Depreciation and amortization............................................. 45,684 44,536
Provision for loss on patient care accounts receivable.................... 18,038 18,044
Other..................................................................... 1,710 (1,557)
Special charge............................................................ 30,950 63,540
Extraordinary loss........................................................ 20,237 38,062
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........................................................... (2,616) (74,600)
Prepaid and other assets................................................ 281 (19,695)
Deferred income taxes................................................... (149) 216
Accounts payable........................................................ (2,697) (4,778)
Accrued expenses and other liabilities.................................. (25,640) (36,767)
--------------------------------
Total adjustments............................................................... 85,798 27,001
--------------------------------
Net cash provided by operating activities....................................... 80,938 11,389
--------------------------------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired............ (156,764) (33,303)
Dispositions of operations................................................... 67,524 -
Acquisition of property and equipment........................................ (52,736) (36,459)
Notes receivable............................................................. (4,842) (18,555)
Other investing activities................................................... (3,552) (5,998)
--------------------------------
Net cash used in investing activities........................................ (150,370) (94,315)
--------------------------------
Cash flows from financing activities:
Long-term debt borrowings.................................................... 198,762 662,450
Long-term debt repayments.................................................... (137,578) (560,296)
Premium and other payments on early retirement of debt....................... - (30,636)
Issuance of common stock..................................................... 1,561 15,957
Other financing activities................................................... - (1,700)
Distributions to minority interests.......................................... (1,025) (927)
--------------------------------
Net cash provided by financing activities.................................... 61,720 84,848
--------------------------------
Net (decrease) increase in cash and cash equivalents............................ (7,712) 1,922
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........................................ $ 23,595 $ 39,285
================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................................. $ 45,346 $ 42,100
================================
Income taxes, net......................................................... $ 17,126 $ 1,800
================================
Non-cash investing and financing activities:
Assumption of long-term debt in connection with acquisitions................. $ 25,514 $ -
================================
Acquisition of property and equipment in exchange for common stock $ - $ 27,400
================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
(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 February
28, 1997 and February 29, 1996, the Company derived 35% of its revenues from
Medicare. For the nine months ended February 28, 1997 and February 29, 1996, the
Company derived 34% and 32%, respectively, of its revenues from Medicare. For
the three months ended February 28, 1997 and February 29, 1996, the Company
derived 18% of its revenues from Medicaid. For the nine months ended February
28, 1997 and February 29, 1996, 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 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 nine months following the cost reporting period.
Differences between amounts accrued as estimated third-party settlements and
amounts ultimately received or paid are recorded in operations in the year of
final settlement. Most of the Company's Medicaid payments are prospective and no
retroactive adjustment is made to such payments.
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEBRUARY 28, 1997
(unaudited)
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 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 December 1996, the Company completed the acquisition of all of the
outstanding shares of Pacific Rehabilitation & Sports Medicine, Inc. ("Pacific
Rehab"), a provider of outpatient rehabilitation services in 66 outpatient
clinics. Under the terms of the merger agreement, Pacific Rehab stockholders
received $6.50 for each share in cash of Pacific Rehab common stock and Pacific
Rehab became an indirect wholly owned subsidiary of the Company. The purchase
price was approximately $54.0 million in cash. In addition, the Company assumed
approximately $22.3 million in debt. The total amount of goodwill recorded in
connection with this acquisition approximated $77.5 million. Total annual
revenues of Pacific Rehab for its fiscal year ended December 31, 1995 were
approximately $35.1 million.
In November 1996, the Company completed the merger of an indirect
wholly owned subsidiary of the Company with The Rehab Group, Inc. ("Rehab
Group") and Rehab Group became an indirect wholly owned subsidiary of the
Company. The purchase price, including transaction costs, was approximately
$23.3 million in cash. In addition, the Company assumed approximately $2.9
million in debt. The total amount of goodwill recorded in connection with this
acquisition approximated $18.8 million. Rehab Group operates 26 outpatient
medical rehabilitation clinics in Tennessee, Virginia, Georgia, Alabama,
Arkansas and Mississippi and generated total annual revenues of approximately
$17.8 million for its fiscal year ended September 30, 1996.
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 in cash for each share of Medical
Innovations common stock. The purchase price, including transaction costs, was
approximately $32.7 million in cash. In addition, the Company assumed
approximately $11.0 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, home medical equipment, home medical 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.
7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEBRUARY 28, 1997
(unaudited)
Also in July 1996, the Company acquired American Rehabilitation
Network, Inc. ("ARN") for approximately $7.8 million in cash. The total goodwill
recorded in connection with this acquisition approximated $6.6 million. ARN
operates nine 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 nine months ended February 28, 1997, the Company made
various other acquisitions which individually and in the aggregate were
insignificant. The total goodwill recorded in connection with these acquisitions
approximated $18.6 million.
All of the acquisitions described above have been accounted for under
the purchase method of accounting. Goodwill recorded in connection with these
acquisitions will be amortized on a straight-line basis over a period of 40
years. The following unaudited pro forma financial information reflects the
combined results of operations for the nine months ended February 28, 1997 and
February 29, 1996 as if the Pacific Rehab, Rehab Group, Medical Innovations and
ARN acquisitions had been consumated on June 1, 1995.
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
February 28, 1997 February 29, 1996
-------------------------------------
(in thousands, except per share
amounts)
<S> <C> <C>
Total operating revenues......................................... $ 1,367,202 $ 1,412,213
Total operating expenses......................................... 1,336,735 1,381,902
-------------------------------------
Operating income.............................................. 30,467 30,311
Income taxes.................................................. 16,645 23,440
-------------------------------------
Net earnings before extraordinary item........................ $ 13,822 $ 6,871
=====================================
Net loss...................................................... $ (3,999) $ (15,204)
=====================================
Net loss per share............................................... $ (0.08) $ (0.29)
=====================================
</TABLE>
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 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.
The duplication of reporting CMS's June 1995 operating results of $4.1
million in fiscal year 1996 and in the nine months ended February 29, 1996, has
been adjusted for by a charge to retained earnings. Appropriate adjustments have
also been made in the statement of cash flows for the nine months ended February
29, 1996.
8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEBRUARY 28, 1997
(unaudited)
Separate results of the Company and CMS for the periods presented prior
to the consummation of the CMS merger and in total for the periods are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.................... 443,735 438,199 1,331,675 1,167,609
-------------------------------------------------------------------
$ 443,735 $ 438,199 $ 1,331,675 $ 1,310,358
===================================================================
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.................... (2,492) 15,845 (4,860) (22,014)
-------------------------------------------------------------------
$ (2,492) $ 15,845 $ (4,860) $ (15,612)
===================================================================
</TABLE>
(4) SPECIAL CHARGE
The Company recorded a special charge of approximately $31.0 million
(pre-tax) during the nine months ended February 28, 1997. Included in the
special charge is $19.8 million recorded during the three months ended February
28, 1997 resulting primarily from the settlement of the claims against the
Company and certain of its current and former directors in the consolidated
class action lawsuit filed in New Mexico Federal District Court in April 1996.
The charge also includes an approximate $700,000 accrual for additional
litigation costs related to the stockholder derivative actions. See "Item 1.
Legal Proceedings - Stockholder Litigation" in Part II of this Report. In
addition, included in the special charge is $7.2 million recorded during the
three months ended August 31, 1996 which 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 included
the transition of all corporate-related functions 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. The special charge also includes a
$4.0 million charge recorded during the second quarter of fiscal 1997 related to
the settlement of the investigation by the Office of the Inspector General
("OIG") and the Department of Justice ("DOJ") of certain of the Company's
Medicare Part B and related co-insurance billings. See "Item 1. Legal
Proceedings - OIG/DOJ Investigation Involving Certain Medicare Part B and
Related Co-Insurance Billings" in Part II of this Report.
Approximately $5.3 million of the $7.2 million first quarter of fiscal
1997 special charge is comprised of involuntary termination benefits paid or
expected to be paid to an estimated 130 employees impacted by the restructuring
of the rehabilitation hospital corporate office. The completion of these
terminations occurred during the third quarter of fiscal 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
9
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEBRUARY 28, 1997
(unaudited)
of the first quarter of fiscal 1997 special charge is comprised of lease exit
costs related primarily to office space that was vacated as a result of the
restructuring. The remaining approximate $400,000 balance of the first quarter
of fiscal 1997 special charge is comprised of impairment charges related to
excess assets that were sold as a result of the restructuring. This charge
adjusted 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 February 28, 1997. At February 28, 1997, the remaining
balance in the special charge accruals is approximately $30.2 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 these special charges and
balances reflected as accrued expenses are as follows (in thousands):
<TABLE>
<CAPTION>
Balance Fiscal Year 1997 Fiscal Year Balance February
May 31, 1996 Special Charge 1997 Activity 28, 1997
------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Impairment of assets and future
noncancellable commitments $4,895 $ 400 $ (3,309) $1,986
Legal 6,000 23,800 (7,606) 22,194
Termination benefits 1,724 5,250 (4,277) 2,697
Lease exit and other 4,834 1,500 (2,995) 3,339
--------------------------------------------------------------------
$17,453 $30,950 $(18,187) $30,216
====================================================================
</TABLE>
(5) Long-Term Debt
The Company is the borrower under an amended and restated 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 $592.0 million and had outstanding letters of
credit of $33.6 million at February 28, 1997. 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 ("LIBOR")
plus 0.625% to 1.50% per annum, depending on the maintenance of specified
financial ratios. The applicable interest rates at February 28, 1997 were 8.25%
and 6.75% - 7.00% on the Alternate Base Rate and LIBOR 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 September 1996. The Company utilizes the collar as an interest rate
hedge on its floating rate, LIBOR based Credit Facility and does not intend the
instrument to be speculative in nature. The agreement has a term of two years
and expires in October 1997. The collar agreement entitles the Company to
receive from the
10
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEBRUARY 28, 1997
(unaudited)
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 February 28, 1997 would require that no payment be made by either the
Company or the counterparty to terminate the agreement.
(6) Extraordinary Item
During the second quarter of fiscal 1997, the Company disposed of
certain assets and operations of a non-invasive medical diagnostic company
providing hospital-based and mobile ultrasound and related diagnostic services.
The Company also disposed of a medical office automation operation company
providing medical and financial systems. As a result of these two dispositions,
the Company recorded an extraordinary charge of $2.9 million, inclusive of
income tax expense of $2.7 million.
In addition, during the third quarter of fiscal 1997, the Company
disposed of two long-term care facilities located in California and Wisconsin
and a subacute care facility located in Maryland. The Company also disposed of
its interest in four rehabilitation hospitals, eleven hospital based or
freestanding outpatient rehabilitation clinics and nine congregate care
facilities located in California. As a result of these three dispositions, an
extraordinary charge of $14.9 million, net of an income tax benefit of $5.1
million, was recorded during the second quarter of fiscal 1997.
In accordance with the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"), "Business Combinations," the charges described above
were classified as extraordinary items. Management's decisions with respect to
these operations disposed of occurred subsequent to the merger with CMS, in July
1995, which was accounted for as a pooling of interests. APB 16 requires that
profit or loss resulting from the disposal of assets within two years after a
pooling of interests be classified as an extraordinary item, net of tax.
In addition to the above dispositions, the Company, as previously
disclosed, is currently pursuing the disposition of 20 leased long-term care
facilities, nine 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. See Note (17) to the Company's audited financial statements in its
Annual Report on Form 10-K for the year ended May 31, 1996.
The results of operations of the properties held for sale as of
February 28, 1997 discussed above, are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------------------------------------------
February 28, February 29, February 28, February 29, 1996
1997 1996 1997
<S> <C> <C> <C> <C>
--------------- --------------- --------------- -------------------
Revenues $ 42,378 $ 43,128 $ 129,061 $ 130,082
Expenses 46,350 44,936 136,961 135,767
--------------- --------------- --------------- -------------------
$ (3,972) $ (1,808) $(7,900) $ (5,685)
=============== =============== =============== ===================
</TABLE>
11
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEBRUARY 28, 1997
(unaudited)
Total assets, net of the impairment reserve discussed above, of
approximately $113.5 million related to the operations to be disposed of have
been reclassified and are included within prepaid and other assets in the
February 28, 1997 balance sheet. Total liabilities of $34.7 million related to
these operations have been reclassified to accrued expenses and other
liabilities in the February 28, 1997 balance sheet. In the May 31, 1996 balance
sheet, total assets and total liabilities related to the operations held for
sale of approximately $118.7 million and $27.9 million, respectively, have been
reclassified and are included within prepaid and other assets and accrued
expenses and other liabilities, respectively.
(7) HEALTHSOUTH Merger
In February 1997, the Company and HEALTHSOUTH Corporation
("HEALTHSOUTH") jointly announced the signing of a definitive agreement pursuant
to which the Company would be acquired by HEALTHSOUTH in a stock-for-stock
merger in which the stockholders of the Company will receive 0.84338 of a share
of HEALTHSOUTH common stock (as adjusted for the two-for-one stock split
effected by HEALTHSOUTH on March 17, 1997) in exchange for each share of the
Company's common stock. The transaction, which is subject to the approval of the
Company's stockholders, various regulatory approvals, including clearance under
the Hart-Scot-Rodino Antitrust Inprovements Act, and to the satisfaction of
certain other conditions, is expected to be consummated during the first quarter
of fiscal 1998. The acquisition is expected to be treated as a tax-free
reorganization and will be accounted for as a purchase.
(8) 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 results
of operations. See "Item 1. Legal Proceedings" in Part II of this report for a
description of such litigation.
12
<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 and Northeast regions of the United
States. At February 28, 1997, the Company provided specialty health care
services through 33 acute rehabilitation hospitals, 47 specialty hospitals and
subacute care units, 278 outpatient rehabilitation clinics and 1,522
rehabilitation therapy contracts in 36 states. At that date, the Company
provided long-term care services through 127 owned or leased facilities (15,408
beds) and 125 managed facilities (14,140 beds). 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 nine months ended
February 28, 1997 and February 29, 1996, the Company derived 47% and 50%,
respectively, of its revenues from private sources, 34% 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. 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 OIG, the DOJ and other federal agencies
interpret these fraud and abuse provisions liberally and enforce them
aggressively. The Health Care Portability Act of 1996 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 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 interpretations 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.
13
<PAGE>
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. On March 25, 1997, HCFA published a proposed rule (the "Salary
Equivalency Guidelines") that sets forth (i) proposed revisions to the current
salary equivalency guidelines for Medicare payment for the reasonable costs of
physical therapy and respiratory therapy services furnished by Care Providers to
Medicare beneficiaries under arrangements with a third party contractor and (ii)
a proposed rule that sets forth new salary equivalency guidelines for Medicare
payment for the reasonable costs of speech language pathology and occupational
therapy services furnished by Care Providers under arrangements with a third
party contractor. In its publication, HCFA stated that the proposed guidelines
would be used by the Fiscal Intermediaries to determine the maximum allowable
costs of these services. In the Salary Equivalency Guidelines, HCFA proposes to
establish maximum reimbursement rates for occupational therapy and speech
pathology services based on various criteria and other data in relation to
various geographically specific locations. Although management of the Company
has developed strategies that management currently believes will enable the
Company to operate profitably under the rates contained in the proposed Salary
Equivalency Guidelines, the Company believes HCFA, in developing the proposed
Salary Equivalency Guidelines, used inappropriate and inapposite methodologies,
such as using hospital and nursing facility blended wages. Representatives from
the Company intend to work with the American Health Care Association, the
National Association for the Support of Long Term Care and other trade
organizations to review the proposed Salary Equivalency Guidelines and use the
statutory comment period to provide additional input to HCFA with a view to
improving the rates proposed by HCFA in this regard. The Company cannot
determine at this time whether the rates suggested in the Salary Equivalency
Guidelines will be the rates ultimately used by HCFA. Although management of the
Company has developed strategies to deal with the proposed Salary Equivalency
Guidelines and with potential future changes, there can be no assurance that
future changes, if any, to the proposed Salary Equivalency Guidelines within 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 were
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 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.
14
<PAGE>
Results of Operations
The following table sets forth certain statement of operations data
expressed as a percentage of total operating revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Total operating revenues 100.0% 100.0% 100.0% 100.0%
------------- ------------ ------------ --------------
Cost of services 83.5 82.4 83.7 81.4
Facility leases 5.0 5.0 4.8 4.9
Depreciation and amortization 3.5 3.4 3.4 3.4
Interest expense 3.4 2.6 3.1 2.8
Special charge 4.5 - 2.3 4.9
------------- ------------ ------------ --------------
Earnings before minority interests, income taxes and
extraordinary item 0.1 6.6 2.7 2.6
Minority interests (0.4) (0.4) (0.4) (0.3)
------------- ------------ ------------ --------------
Earnings (loss) before income taxes and
extraordinary item (0.3) 6.2 2.3 2.3
Income taxes 0.4 2.6 1.2 1.8
------------- ------------ ------------ --------------
Earnings (loss) before extraordinary item (0.7) 3.6 1.1 0.5
Extraordinary item, net of tax - - (1.3) (1.7)
------------- ------------ ------------ --------------
Net earnings (loss) (0.7)% 3.6% (0.2)% (1.2)%
=========================================================
</TABLE>
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 Nine Months Ended
-------------------------------------------------------------------------------------------------
February 28, 1997 February 29, 1996 February 28, 1997 February 29, 1996
-------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term care services $100,192 22.6% $92,606 21.1% $301,315 22.6% $282,317 21.6%
Specialty health care services:
Acute and outpatient
rehabilitation 136,813 30.8 142,850 32.6 395,744 29.7 407,199 31.1
Contract therapy 93,511 21.1 95,528 21.8 277,544 20.8 293,973 22.4
Other services (1) 104,869 23.6 100,774 23.0 333,025 25.0 301,988 23.0
Other revenues (2) 8,350 1.9 6,441 1.5 24,047 1.9 24,881 1.9
-------------------------------------------------------------------------------------------------
Total operating revenues $443,735 100.0% $438,199 100.0% $1,331,675 100.0% $1,310,358 100.0%
=================================================================================================
</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, including $9.3 million, net of
direct expenses, resulting from arrangements related to an unsuccessful
merger effort during the nine months ended February 29, 1996.
15
<PAGE>
Revenues
Total operating revenues increased approximately $5.5 million, or 1.3%,
and $21.3 million, or 1.6%, for the three months and nine months ended February
28, 1997, respectively, compared to the corresponding periods 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 and internal growth of institutional pharmacy programs. The increase
in revenues resulting from these acquisitions was offset somewhat by the sale of
certain specialty health care operations.
Specialty health care acquisitions resulted in $24.2 million and $51.9
million of additional revenues during the three months and nine months ended
February 28, 1997, respectively. Approximately $11.7 million and $34.7 million
of the increase during the three months and nine months ended February 28, 1997,
respectively, 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
$12.2 million and $16.8 million of additional revenues during the three months
and nine months ended February 28, 1997, respectively. Various long-term care
acquisitions resulted in approximately $1.6 million and $3.5 million of
additional revenues during the three months and nine months ended February 28,
1997, respectively, compared to the corresponding periods in fiscal 1996.
Acute rehabilitation revenues declined approximately $21.7 million and
$42.3 million during the three months and nine months ended February 28, 1997,
respectively, compared to the corresponding periods in fiscal 1996. The decline
is largely the result of the sale of the Company's interest in four
rehabilitation hospitals, eleven hospital based or freestanding outpatient
rehabilitation clinics and nine congregate care facilities located in California
in December 1996. Additionally, the decline in revenues is attributable to cost
containment measures implemented in the acute rehabilitation hospitals. Because
the Medicare program provides for cost-based reimbursement, the reduction in
operating costs has resulted in a reduction in operating revenues. The decline
also results, in part, from the sale of a 50% interest in one acute
rehabilitation hospital in the fourth quarter of fiscal 1996. The sale provided
for a transfer of control of the operation and, as a result, that hospital's
results are no longer consolidated.
Costs and Expenses
Cost of services increased approximately $9.5 million, or 2.6%, and
$47.6 million, or 4.5%, for the three months and nine months ended February 28,
1997, respectively, compared to the corresponding periods 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
and nine months ended February 28, 1997 increased to 83.5% and 83.7%,
respectively, from 82.4% and 81.4%, respectively, for the corresponding periods
in fiscal 1996. These increases are 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 and nine months ended February 28, 1997.
Facility lease expense remained constant for the three months and nine
months ended February 28, 1997 compared to the corresponding periods in fiscal
1996. As a percentage of total operating revenues, facility lease expense
remained constant for the three months ended February 28, 1997 compared to the
corresponding period in fiscal 1996 and decreased to 4.8% for the nine months
ended February 28, 1997 from 4.9% for the corresponding period in fiscal 1996.
16
<PAGE>
Depreciation and amortization increased $0.7 million, or 4.9%, and $1.1
million, or 2.6%, for the three months and nine months ended February 28, 1997,
respectively, compared to the corresponding periods in fiscal 1996. As a
percentage of total operating revenues, depreciation and amortization increased
to 3.5% for the three months ended February 28, 1997 from 3.4% for the
corresponding period in fiscal 1996 and remained constant at 3.4% for the nine
months ended February 28, 1997 as compared with the corresponding period in
fiscal 1996.
Interest expense increased $3.6 million, or 31.6%, and $5.2 million, or
14.5%, for the three months and nine months ended February 28, 1997,
respectively, compared to the corresponding periods in fiscal 1996. As a
percentage of total operating revenues, interest expense increased to 3.4%
during the three months ended February 28, 1997 from 2.6% for the corresponding
period in fiscal 1996. The increase in interest expense is primarily
attributable to the increase in the outstanding balance on the Credit Facility
and other long-term debt during the period as a result of acquisitions and
payments related to special charges as well as a general increase in the
composite rate on the Company's Credit Facility. See "Liquidity and Capital
Resources -- Credit Facility".
The Company recorded a $19.8 million special charge during the third
quarter of fiscal 1997 resulting primarily from the settlement of the claims
against the Company and certain of its current and former directors in the
consolidated class action lawsuit filed in New Mexico Federal District Court in
April 1996. The charge also includes an approximate $700,000 accrual for
additional litigation costs related to the stockholder derivative actions.
During the second quarter of fiscal 1997, the Company recorded a $4.0 million
special charge related to the settlement of the investigation by the OIG and the
DOJ of certain of the Company's Medicare Part B and related co-insurance
billings. In addition, the Company recorded a $7.2 million special charge during
the first quarter of fiscal 1997 as a result of 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 that were 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 1997. 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.
Extraordinary Item
During the second quarter of fiscal 1997, the Company disposed of
certain assets and opertions of a non-invasive medical diagnostic company
providing hospital-based and mobile ultrasound and related diagnostic services.
The Company also disposed of a medical office automation operation company
providing medical and financial systems. As a result of these two dispositions,
the Company recorded an extraordinary charge of $2.9 million, inclusive of
income tax expense of $2.7 million.
In addition, during the third quarter of fiscal 1997, the Company
disposed of two long-term care facilities located in California and Wisconsin
and a subacute care facility located in Maryland. The Company also disposed of
its interest in four rehabilitation hospitals, eleven hospital based or
freestanding outpatient rehabilitation clinics and nine congregate care
facilities located in California. As a result of these three dispositions, an
extraordinary charge of $14.9 million, net of an income tax benefit of $5.1
million, was recorded during the second quarter of fiscal 1997.
The extraordinary item recorded during fiscal 1996 results from the
extinguishment of debt and management's decision to dispose of certain assets
following the CMS merger.
On September 26, 1995, the Company completed a tender offer and consent
solicitation for two issues of publicly held indebtedness of CMS (together, the
"Senior Subordinated Notes"). The Company purchased $118.7 million in principal
amount of 10 3/8% Senior Subordinated Notes due 2003 at 109.25% plus a consent
fee of 1.05% and $137.5 million in principal amount of 10 7/8% Senior
Subordinated Notes due 2002 at 109.0% plus a consent fee of 0.75%. The Company
paid $289.5 million to retire the Senior Subordinated Notes, including
principal, premiums, accrued interest, consent fees and other related costs. As
a result of the tender, the Company recorded an extraordinary charge related to
the loss on the retirement of the Senior Subordinated Notes, including the
write-off of related deferred discount, swap cancellation and financing costs,
of approximately $22.1 million, net of tax, in the second quarter of fiscal
1996.
Liquidity and Capital Resources
At February 28, 1997, the Company's working capital was $361.9 million
and included cash and cash equivalents of $23.6 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 nine months ended February 28, 1997, the Company's
operating activities provided $80.9 million of net cash.
As a result of the restructuring commitments and the special charges
recorded during fiscal 1996 and prior periods, the Company made cash payments
during the three months and nine months ended February 28, 1997 totaling $3.6
million and $7.9 million, respectively. As a result of the restructuring
commitments and the special charges recorded during the nine months ended
February 28, 1997, the Company made cash payments during the three months and
nine months ended February 28, 1997 totaling $5.2 million and $6.9 million,
respectively.
17
<PAGE>
Expansion Program
The net cash used in the Company's investing activities increased from
$94.3 million for the nine months ended February 29, 1996 to $150.4 million for
the nine months ended February 28, 1997. 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 nine months ended February 28, 1997 compared
with the corresponding period of fiscal 1996 as the Company elected to structure
cash rather than stock transactions due to the decline in the Company's stock
price in the latter part of fiscal 1997. Cash required for internal construction
and capital expenditures for property and equipment during the nine months ended
February 28, 1997 increased by $16.3 million as compared 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 acquisition 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. During the nine months ended February 28, 1997,
however, net cash provided by operating activities and resulting from
dispositions of operations substantially exceeded that provided by financing
activities.
Sources
At February 28, 1997, the available credit under the Company's Credit
Facility was $124.4 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, 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 of
this analysis, in September 1996 the Company sold a medical office automation
company providing medical and financial systems in the mid-atlantic region. In
November 1996, the Company completed the sale of certain assets and operations
of a non-invasive medical diagnostic company providing hospital-based and mobile
ultrasound related diagnostic services. In December 1996, the Company completed
the sale of its interest in four rehabilitation hospitals, eleven hospital based
or freestanding outpatient rehabilitation clinics and nine congregate care
facilities located in California. In January 1997, the Company completed the
sale of a subacute care facility and a long-term care facility located in
Maryland and Wisconsin, respectively. In February 1997, the Company completed
the sale of a long-term care facility located in California. The dispositions
during the nine months ended February 28, 1997 generated $67.5 million of net
cash proceeds.
In addition to the above dispositions, the Company, as previously
disclosed, 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. The Company will also consider other potential dispositions that
provide the opportunity to concentrate operations in a manner consistent with
the Company's objectives.
18
<PAGE>
Credit Facility
The Company is the borrower under the Credit Facility dated as of
September 26, 1995 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 $592.0 million and
had outstanding letters of credit of $33.6 million at February 28, 1997.
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 ("LIBOR") plus 0.625% to 1.50% per annum, depending on the
maintenance of specified financial ratios. The third amendment to the Credit
Facility, dated as of November 6, 1996, revised certain covenants to the Credit
Facility and increased the maximum margin over LIBOR from 1.25% to 1.50%. On
January 17, 1997, the interest rate on LIBOR borrowings was increased to LIBOR
plus 1.50% in accordance with the terms of the amended Credit Facility. The
applicable interest rates at February 28, 1997 were 8.25% and 6.75% - 7.00% 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 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.
19
<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. During the nine months ended February 28, 1996, 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").
On December 31, 1996, the Company announced it reached a settlement
with the DOJ and the OIG that concludes their investigation of these billings.
The Company also announced that it received a letter from the United States
Attorney indicating that the United States is declining any criminal prosecution
of the Company or any of its employees because of these billings. Under the
settlement, the Company paid approximately $5.8 million to the United States as
a complete and final resolution of the issues arising out of these billings.
This amount includes the $1.2 million the Company previously refunded to the
United States and the affected parties in respect of related co-insurance
billings. In addition, the United States has agreed to refrain from instituting
or taking any action to exclude the Company or any of its affiliates from the
Medicare and Medicaid programs as a result of these billings. In addition,
pursuant to the terms of the settlement, the Company is implementing a
corporate-wide Medicare Part B compliance program that includes the appointment
of a subcommittee to the Company's Corporate Compliance Committee reporting
directly to the Chairman's office and to the Company's Board of Directors,
ongoing orientation and training sessions for current and new employees,
training evaluation and annual audits to assess accuracy, validity and
reliability of billings. Board member Dr. Ronald Riner is serving as the Board's
representative and will participate in the process. In addition, the Company
will publicize the OIG hotline and will set up a toll-free Medicare Part B
corporate compliance hot line to encourage the Company's employees to report any
compliance concerns.
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 produced certain documents and Neal M. Elliott,
Chairman of the Board, President and Chief Executive Officer of the Company, and
certain other present and former officers of the Company have given testimony to
the Commission. The Company has also been informed that certain of its
divisional office employees and an individual, affiliates of whom have limited
business relationships with the Company, have responded to subpoenas from the
Commission. Mr. Elliott has also produced certain documents in response to a
subpoena from the Commission. In addition, the Company
20
<PAGE>
and Mr. Elliott have responded or are responding to separate subpoenas from the
Commission pertaining to trading in the Company's common stock and the Company's
March 1, 1996 press release announcing a revision in the Company's third quarter
earnings estimate; the Company's March 7, 1996 press release announcing the
filing of a lawsuit against Tenet; the March 12, 1996 press release announcing
that the merger with Pacific Rehab could not be effected by April 1, 1996; 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
Company's February 18, 1997 announcement that HEALTHSOUTH would acquire the
Company; and any discussions of proposed business conbinations between the
Company and Medical Innovations and the Company and certain other companies. 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. In
April 1995, the NYSE extended 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. On February 20, 1997, the NYSE notified the
Company that it was reviewing trading in the Company's securities prior to the
February 18, 1997 announcement that HEALTHSOUTH would acquire the Company. 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 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 criminal fines or sanctions against the Company,
which could have a material adverse impact on the Company's financial condition
and 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 Healthcare
Corporation, No. CV-96-02894, Second Judicial District Court, County of
Bernalillo, State of New Mexico. This lawsuit, which among other things seeks
class certification, alleges violations of federal and New Mexico state
securities laws arising from what the plaintiff contends are materially
misleading statements by the Company in its June 6, 1995 joint proxy
statement/prospectus (the "CMS
21
<PAGE>
Prospectus"). The plaintiff alleges that the Company failed to disclose in the
CMS Prospectus those problems in the Company's Medicare Part B billings the
Company described in its related March 15, 1996 announcement. In this action,
the plaintiff seeks damages in an unspecified amount, plus costs and attorneys'
fees. The Company disputes the factual and legal premises upon which the
plaintiff's lawsuit is based and denies that the plaintiff is entitled to any
recovery on his claim. To that end, the Company intends to contest this
litigation vigorously. In the first quarter of fiscal 1997, 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. That motion has not been ruled on by the judge assigned
to the case. 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. The Company believes, however,
that if the proposed settlement described below is finally approved by the
court, this lawsuit will be barred under legal principles of res judicata.
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 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. In this complaint, the plaintiffs allege
violations of federal and New Mexico state securities laws. Among such
violations, the plaintiffs alleged that the Company, certain of its current and
former directors and certain former directors of CMS disseminated materially
misleading statements or omitted disclosing material facts about the Company and
its operations.In December 1996, the Company and the individual defendants filed
their motions to dismiss this consolidated lawsuit.
On February 20, 1997, the Company announced that it had reached an
agreement in principle to settle the claims against it and certain of its
current and former directors in the consolidated class action lawsuit. Under the
proposed settlement, the Company agreed to pay a minimum amount of $17 million
to resolve all claims against the Company and its current and former directors,
excluding those claims arising against the former directors of CMS for conduct
occurring prior to the merger between CMS and Horizon. Under the settlement, the
maximum amount payable by the Company is $20 million to completely and finally
resolve all claims in the litigation, including any amounts related to claims
against former directors of CMS. In agreeing to settle the litigation, none of
the defendants concede or admit to any of the plaintiffs' claims or allegations.
The settlement is subject to the execution of definitive documentation and court
approval.
On April 7, 1997, after the close of the third quarter, the Company
paid the $17 million, in trust, to the plaintiffs' lead counsel. Also in April,
the Company paid $2.25 million to CMS's directors' and officers' liability
insurance carrier in exchange for the carrier's assumption of the remaining risk
contingency.
Stockholder Derivative Actions
Commencing in April and continuing into May 1996, the Company was
served with nine 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, Klemett 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 nine
lawsuits have been consolidated into one action styled In re Horizon/CMS
Healthcare Corporation Shareholders Litigation. The plaintiffs allege, among
other things, that the
22
<PAGE>
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.
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.
Claims Asserted by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc.
In March 1997, the former shareholders of Communi-Care, Inc. and Pro
Rehab, Inc. provided a written demand to CMS and others in respect of certain
"earnout" provisions of the definitive purchase agreements under which CMS
purchased the outstanding stock of Communi-Care, Inc., and Pro Rehab, Inc. from
such shareholders. The former shareholders allege that the manner in which CMS
operated the companies after their acquisition breached its fiduciary duties to
the former shareholders, constituted fraud, gross negligence and bad faith and
violated the purchase agreements. The former shareholders also allege that CMS
committed fraud in negotiating the purchase of the companies. As a result of
such alleged conduct, which the former shareholders claim had an adverse impact
on the amount that the shareholders received pursuant to the "earnout"
provisions, the former shareholders assert that they are entitled to an amount
in excess of $27 million from CMS. The Company disputes the factual and legal
assertions of the former shareholders and intends to vigorously contest such
claims. Because the Company has only recently received the written demand from
the former shareholders and no litigation has been commenced, the Company cannot
now predict whether the former shareholders will in fact commence litigation,
the outcome of any such potential litigation, the length of time it will take to
resolve the asserted claims or the effect of any resolution of such claims on
the Company's financial condition or results of operations.
RehabOne Litigation
In March 1997, the Company was served with a lawsuit filed in the
United States District Court for the Middle District of Pennsylvania, styled
RehabOne, Inc. v. Horizon/CMS Healthcare Corporation, Continental Medical
Systems, Inc., David Nation and Robert Ortenzio, No. CV-97-0292. In this lawsuit
the plaintiff alleges violations of
23
<PAGE>
federal and state securities laws, fraud, and negligent misrepresentation by the
Company and certain former officers of CMS in connection with the issuance of a
warrant to purchase 500,000 shares of the Company's common stock (the
"Warrant"). The Warrant was issued to the plaintiff by the Company in connection
with the settlement of certain prior litigation between the plaintiff and CMS.
The plaintiff's complaint does not state the amount of damages sought. The
Company disputes the factual and legal assertions of the plaintiff in this
litigation and intends to vigorously contest the plaintiff's claims. Because
this litigation has just commenced, the Company cannot predict the length of
time it will take to resolve the litigation, the outcome of the litigation or
the effect of any such outcome on the Company's financial condition or results
of operations.
The Company is, from time to time, a party to various litigation matters
and disputes arising in the ordinary course of its business. While the Company
believes that the outcome of these various matters will not have an adverse
effect on the Company's financial condition or results of operations, no
assurance can be given that one or more of such matters will not have such
effect.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
4.6.1 First Amendment to Rights Agreement, dated as of February
17, 1997, between Horizon/CMS Healthcare Corporation and
ChaseMellon Shareholder Services, L.L.C., as Rights
Agent.
10.24.1 Fourth Amendment dated as of December 20, 1996 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.
10.24.2 Fifth Amendment dated as of March 7, 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.
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule - Nine Months Ended February 28, 1997
b. Reports on Form 8-K
Date of Report Items Reported
- --------------------------------------------------------------------------------
February 13, 1997 Filed on February 20, 1997, reporting under "Item
5. Other Events" the announcement by the Company
that it had reached an agreement in principle to
settle the claims against it and certain and former
directors in the consolidated class action lawsuit
filed in New Mexico Federal District Court in April
1996.
February 17, 1997 Filed on February 24, 1997, reporting under "Item
5. Other Events" and "Item 7. Financial Statements
and Exhibits" the joint announcement by the Company
and HEALTHSOUTH Corporation that they entered into
a Plan and Agreement of Merger, dated as of
February 17, 1997.
25
<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: April 14, 1997
- -----------
* Ernest A. Schofield is signing in the dual capacities as Chief
Financial Officer and as a duly authorized officer of the Company.
26
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- --------------------------------------------------------------------------------
4.6.1 First Amendment to Rights Agreement, dated as of February 17,
1997, between Horizon/CMS Healthcare Corporation and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent.
10.24.1 Fourth Amendment dated as of December 20, 1996 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.
10.24.2 Fifth Amendment dated as of March 7, 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.
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -Nine Months Ended February 28, 1997
27
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 For the Nine Months Ended
-----------------------------------------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
-------------- ------------- ------------- -------------
Common and Common Equivalents:
Earnings (loss) before extraordinary item $(2,492) $15,845 $12,961 $6,463
Extraordinary item, net of tax - - (17,821) (22,075)
-------------- ------------- ------------- -------------
Net earnings (loss) $(2,492) $15,845 $(4,860) $(15,612)
============== ============= ============= =============
Applicable common shares:
Weighted average outstanding shares during the period 52,029 51,733 52,003 51,227
Weighted average shares issuable upon exercise of
common stock equivalents outstanding (principally
stock options and warrants using the treasury
stock method) 221 950 168 798
-------------- ------------- ------------- -------------
Total 52,250 52,683 52,171 52,025
============== ============= ============= =============
Net earnings (loss) per share:
Earnings (loss) before extraordinary item $(0.05) $0.30 $0.25 $0.12
Extraordinary item, net of tax - - (0.34) (0.42)
-------------- ------------- ------------- -------------
Net earnings (loss) $(0.05) $0.30 $(0.09) $(0.30)
============== ============= ============= =============
Assuming Full Dilution:
Earnings (loss) before extraordinary item $(2,492) $15,845 $12,961 $6,463
Extraordinary item, net of tax - - (17,821) (22,075)
-------------- ------------- ------------- -------------
Net earnings (loss) (2,492) 15,845 (4,860) (15,612)
Interest on convertible debentures, net of
income taxes - 22 - -
============== ============= ============= =============
Net earnings (loss) used for computation of
per share earnings $(2,492) $15,867 $(4,860) $(15,612)
============== ============= ============= =============
Applicable common shares:
Weighted average outstanding shares during the period 52,029 51,733 52,003 51,227
Weighted average shares issuable upon exercise of
common stock equivalents outstanding (principally
stock options and warrants using the treasury
stock method and convertible debentures) 516 1,079 353 958
-------------- ------------- ------------- -------------
Total 52,545 52,812 52,356 52,185
============== ============= ============= =============
Net earnings (loss) per share:
Earnings (loss) before extraordinary item $(0.05) $0.30 $0.25 $0.12
Extraordinary item, net of tax - - (0.34) (0.42)
-------------- ---------------------------- -------------
Net earnings (loss) $(0.05) $0.30 $(0.09) $(0.30)
============== ============================ =============
</TABLE>
28
FIRST AMENDMENT TO RIGHTS AGREEMENT
This First Amendment to Rights Agreement (this "Amendment"), dated as
of February 17, 1997, is by and between Horizon/CMS Healthcare Corporation, a
Delaware corporation (the "Company"), and ChaseMellon Shareholder Services,
L.L.C., a New Jersey limited liability company (the "Rights Agent"), as
successor to Chemical Trust Company of California (the "Predecessor Rights
Agent").
WHEREAS, the Company and the Rights Agent, as successor to the
Predecessor Rights Agent, are parties to that certain Rights Agreement, dated as
of September 15, 1994 (the "Rights Agreement);
WHEREAS, the Company proposes to enter into that certain Plan and
Agreement of Merger, dated as February 17, 1997 (the "Merger Agreement"), with
HEALTHSOUTH Corporation, a Delaware Corporation ("HEALTHSOUTH"), and Reid
Acquisition Corporation, a Delaware Corporation and wholly owned subsidiary of
HEALTHSOUTH;
WHEREAS, in connection with the execution of the Merger Agreement, the
Company desires to make certain amendments to the Rights Agreement; and
WHEREAS, the parties hereto desire to amend the Rights Agreement to
reflect that the Rights Agent pursuant to such agreement is ChaseMellon
Shareholder Services, L.L.C., as successor to the Predecessor Rights Agent;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
1. The definition of "Acquiring Person" set forth in Section 1 of the
Rights Agreement is hereby amended to add the following sentence as the last
sentence of such definition:
"Notwithstanding the foregoing, HEALTHSOUTH Corporation shall not be
deemed to be an Acquiring Person solely as result of its acquisition of
all of the outstanding Voting Shares of the Company pursuant to the
merger (the "Merger") contemplated by that certain Plan and Agreement
of Merger, dated as of February 17, 1997 (the "Merger Agreement"), by
and among the Company, HEALTHSOUTH Corporation, a Delaware Corporation
("HEALTHSOUTH"), and Reid Acquisition Corporation, a Delaware
Corporation and wholly owned subsidiary of HEALTHSOUTH."
2. Section 14 of the Rights Agreement is hereby amended to add the
following sentence as the last sentence of such Section:
"Notwithstanding the foregoing, the provisions of this Section shall
not apply to the Merger and no Person shall be required to take any
action pursuant to this Section in connection with the execution and
performance of the Merger Agreement or the consummation of the Merger."
3. The Rights Agreement is hereby amended to add a new Section 36 as
set forth below:
"Section 36. Termination. This Agreement shall terminate and
be of no further force and effect immediately prior to the Effective
Time (as defined in the Merger Agreement) or, if earlier, the Final
Expiration Date."
4. The Rights Agreement is hereby amended as necessary to reflect that
ChaseMellon Shareholder Services, L.L.C., as successor to the Predecessor Rights
Agent, is the Rights Agent pursuant to the Rights Agreement.
29
<PAGE>
5. This Amendment shall be effective immediately prior to the execution
and delivery of the Merger Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered, all as of the date first above written.
HORIZON/CMS HEALTHCARE CORPORATION
By: /s/ Scot Sauder
-----------------------------------
Scot Sauder
Vice President of Legal Affairs
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
As Rights Agent
By: /s/ Martha O. Mijango
-----------------------------------
Name: Martha O. Mijango
Title: Assistant Vice President
30
EXECUTION COPY
FOURTH AMENDMENT dated as of
December 20, 1996 (this "Fourth Amendment"),
to the Amended and Restated Credit Agreement
dated as of September 26, 1995 (as amended
to the date hereof, the "Amended 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 Amended Credit Agreement as provided herein.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Amended Credit Agreement (the Amended
Credit Agreement, as amended by, and together with, this Fourth 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 Section 1.01. The following definition is
hereby added to Section 1.01 in appropriate alphabetical order:
"Fourth Amendment Effective Date" shall mean the effective
date of the Fourth Amendment dated as of December 20, 1996, to this
Agreement."
SECTION 1.02. Amendment to Section 6.04. Section 6.04 of the Amended
Agreement is hereby amended by deleting the period at the end of paragraph (m)
thereof and adding "; and" in lieu thereof and by adding the following paragraph
immediately after paragraph (m) thereof:
"(n) other investments received by Horizon or any Subsidiary
as consideration for any disposition which is permitted under clause
(F) of Section 6.05(a) and consummated after the Fourth Amendment
Effective Date; provided that the aggregate book value of all such
investments received by Horizon or any Subsidiary (measured at the time
of receipt thereof by Horizon or the applicable Subsidiary) shall not
exceed $20,000,000."
SECTION 1.03. Amendments to Section 6.05. (a) Section 6.05(a) of the
Amended Agreement is hereby amended by inserting in the first line of clause (C)
of the exceptions thereto the phrase "consummated prior to December 20, 1996"
after the word "dispositions".
(b) Section 6.05(a) of the Amended Agreement is hereby amended by
deleting the period at the end of clause (E) of the exceptions thereto and
adding "; and" in lieu thereof and by adding the following clause immediately
after such clause (E):
"(F) dispositions made during any fiscal year of Horizon of up
to $20,000,000 in aggregate book value of the assets of Horizon or any
of the Subsidiaries, including Equity Interests of Subsidiaries;
provided that (I) the proceeds thereof are not required to be used, and
are not used, directly or indirectly, to purchase or otherwise acquire
any Subordinated Debt and (II) in any case involving a joint
31
<PAGE>
venture, the capital contributions to such joint venture are permitted
by Section 6.18."
SECTION 1.04. Representations and Warranties. The Borrowers hereby
represent and warrant to the Agent and the Lenders, as follows:
(a) The representations and warranties set forth in Article
III of the Amended 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 Fourth Amendment Effective Date (as defined below)
with the same effect as if made on and as of the date hereof or the
Fourth 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 Amended 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 Amended Agreement.
(c) The execution, delivery and performance by each of the
Borrowers of this Fourth Amendment have been duly authorized by such
party.
(d) This Fourth 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 Fourth 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 1.05. Effectiveness. This Fourth 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 "Fourth Amendment Effective Date"):
(a) The Agent shall have received duly executed counterparts
of this Fourth 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 1.04 are true and
correct on and as of the Fourth Amendment Effective Date and that no
Default or Event of Default has occurred or is continuing.
(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
32
<PAGE>
this Fourth 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 Fourth Amendment Effective Date under the Amended
Agreement.
SECTION 1.06. APPLICABLE LAW. THIS FOURTH 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 1.07. 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 Fourth Amendment, including, but not limited to, the
reasonable fees and disbursements of counsel. The agreement set forth in this
Section 1.07 shall survive the termination of this Fourth Amendment and the
Amended Agreement.
SECTION 1.08. Counterparts. This Fourth 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 1.09. 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 Amended 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
Amended Agreement or any other Loan Document. Each of the amendments provided
herein shall apply and be effective only with respect to the provisions of the
Amended Agreement specifically referred to by such amendment. Except as
expressly amended herein, the Amended Agreement shall continue in full force and
effect in accordance with the provisions thereof. As used in the Amended
Agreement, the terms "Agreement", "herein", "hereinafter", "hereunder", "hereto"
and words of similar import shall mean, from and after the date hereof, the
Amended Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
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:
33
<PAGE>
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:
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___________________________________
34
<PAGE>
Name:
Title:
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, LOS ANGELES 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:
KEYBANK NATIONAL ASSOCIATION as successor
to Society National Bank, as a Lender
by___________________________________
Name:
Title:
35
<PAGE>
SUNWEST BANK OF ALBUQUERQUE, N.A., as a
Lender and as Issuing Bank
by___________________________________
Name:
Title:
THE BANK OF TOKYO TRUST COMPANY, as a Lender
by___________________________________
Name:
Title:
THE BOATMEN'S NATIONAL BANK OF ST. LOUIS,
as a Lender
by___________________________________
Name:
Title:
THE NIPPON CREDIT BANK, LTD., LOS ANGELES
AGENCY, 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___________________________________
36
<PAGE>
Name:
Title:
NATIONSBANK, N.A., as a Lender
by___________________________________
Name:
Title:
37
EXECUTION COPY
FIFTH AMENDMENT dated as of March 7,
1997 (this "Fifth 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 Fifth 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 Section 6.19(b) and (d). (a) The table in
Section 6.19(b) of the Credit Agreement is hereby amended with respect to the
fourth quarter of fiscal year 1997, by deleting the ratio of "1.75:1.00" and by
substituting in lieu thereof the ratio of "1.65:1.00".
(b) The table in Section 6.19(d) of the Credit Agreement is hereby
amended (i) with respect to the third quarter of fiscal year 1997, by deleting
the ratio of "5.00:1.00" and by substituting in lieu thereof the ratio of
"5.75:1.00", (ii) with respect to the fourth quarter of fiscal year 1997, by
deleting the ratio of "5.00:1.00" and by substituting in lieu thereof the ratio
of "5.50:1.00" and (iii) with respect to the first quarter of fiscal year 1998,
by deleting the ratio of "4.50:1.00" and by substituting in lieu thereof the
ratio of "5.15:1.00".
SECTION 1.02. Representations and Warranties. The Borrowers hereby
represent and warrant to the Agent and the Lenders, as follows:
(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 Fifth Amendment Effective Date (as defined below) with
the same effect as if made on and as of the date hereof or the Fifth
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 Fifth Amendment have been duly authorized by such
party.
38
<PAGE>
(d) This Fifth 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 Fifth 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 1.03. Effectiveness. This Fifth 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 "Fifth Amendment Effective Date"):
(a) The Agent shall have received duly executed counterparts
of this Fifth 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 1.02 are true and
correct on and as of the Fifth Amendment Effective Date and that no
Default or Event of Default has occurred or is continuing.
(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 Fifth
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 Fifth 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
Fifth Amendment an amendment fee equal to .02% of the consenting
Lender's Commitments, so long as a signature page to the Fifth
Amendment executed by such Lender is received by Fennebresque, Clark,
Swindell & Hay by 5:00 p.m., Charlotte time, on March 7, 1997.
SECTION 1.04. APPLICABLE LAW. THIS FIFTH 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 1.05. 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 Fifth Amendment, including, but not limited to, the
reasonable fees and disbursements of counsel. The agreement set forth in this
Section 1.05 shall survive the termination of this Fifth Amendment and the
Amended Agreement.
39
<PAGE>
SECTION 1.06. Counterparts. This Fifth 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 1.07. 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 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.
IN WITNESS WHEREOF, the parties hereto have caused this Fifth 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___________________________________
40
<PAGE>
Name:
Title:
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:
BANQUE PARIBAS, as a Lender
by___________________________________
Name:
Title:
by___________________________________
Name:
Title:
41
<PAGE>
BANQUE NATIONALE de PARIS, as a Lender
by___________________________________
Name:
Title:
by___________________________________
Name:
Title:
DEUTSCHE BANK AG, LOS ANGELES 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:
KEYBANK NATIONAL ASSOCIATION as successor
to Society National Bank, as a Lender
by___________________________________
Name:
Title:
SUNWEST BANK OF ALBUQUERQUE, N.A., as a
Lender and as Issuing Bank
by___________________________________
Name:
Title:
THE BANK OF TOKYO TRUST COMPANY, as a Lender
by___________________________________
Name:
Title:
THE BOATMEN'S NATIONAL BANK OF ST. LOUIS,
as a Lender
by___________________________________
Name:
42
<PAGE>
Title:
THE NIPPON CREDIT BANK, LTD., LOS ANGELES
AGENCY, 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:
43
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains mandatory financial information extracted from the
February 28, 1997 Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000806151
<NAME> HORIZON/CMS HEALTHCARE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> FEB-28-1997
<EXCHANGE-RATE> 1
<CASH> 23,595
<SECURITIES> 0
<RECEIVABLES> 376,973
<ALLOWANCES> 47,771
<INVENTORY> 0
<CURRENT-ASSETS> 587,724
<PP&E> 696,748
<DEPRECIATION> 141,758
<TOTAL-ASSETS> 1,622,725
<CURRENT-LIABILITIES> 225,870
<BONDS> 714,933
0
0
<COMMON> 53
<OTHER-SE> 647,996
<TOTAL-LIABILITY-AND-EQUITY> 1,622,725
<SALES> 0
<TOTAL-REVENUES> 1,331,675
<CGS> 0
<TOTAL-COSTS> 1,297,436
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,038
<INTEREST-EXPENSE> 41,260
<INCOME-PRETAX> 34,239
<INCOME-TAX> 16,015
<INCOME-CONTINUING> 12,961
<DISCONTINUED> 0
<EXTRAORDINARY> (17,821)
<CHANGES> 0
<NET-INCOME> (4,860)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
