UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: NOVEMBER 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-9369
------------------------
HORIZON/CMS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-1346899
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6001 INDIAN SCHOOL ROAD, N.E.
ALBUQUERQUE, NEW MEXICO 87110
(505) 878-6100
(Address and telephone number of Registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __XX__ No _______
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding at January 10, 1997 was 51,799,219.
<PAGE>
Horizon/CMS Healthcare Corporation's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1996 is hereby amended and restated as set forth
below.
HORIZON/CMS HEALTHCARE CORPORATION
INDEX
FORM 10-Q/A Amendment No. 1 -- FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996
PART I. -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NUMBERS
------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
November 30, 1996 and May 31, 1996............................................ 3
Consolidated Statements of Operations
For the three months and the six months ended November 30, 1996 and 1995...... 4
Consolidated Statements of Cash Flows
For the six months ended November 30, 1996 and 1995........................... 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................................................ 24
Signatures.................................................................................. 25
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1996 AND MAY 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
NOVEMBER 30 MAY 31
------------ ------------
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................... $ 7,741 $ 31,836
Patient care accounts receivable, net of
allowance for doubtful accounts of $44,765 at
November 30 and $41,347 at May 31............. 300,981 293,365
Estimated third party settlements............... 35,292 37,529
Prepaid and other assets........................ 249,872 269,850
Deferred income taxes........................... 23,860 21,287
------------ ------------
Total current assets.......................... 617,746 653,867
PROPERTY AND EQUIPMENT, net....................... 548,836 542,676
GOODWILL, net..................................... 216,208 156,127
OTHER INTANGIBLE ASSETS, net...................... 33,962 38,269
NOTES RECEIVABLE, excluding current portion....... 75,062 71,757
OTHER ASSETS...................................... 55,157 50,055
------------ ------------
Total assets.................................. $ 1,546,971 $ 1,512,751
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 7,223 $ 6,522
Accounts payable................................ 22,502 18,500
Accrued expenses and other liabilities.......... 180,721 172,435
------------ ------------
Total current liabilities..................... 210,446 197,457
LONG-TERM DEBT, excluding current portion......... 658,020 637,884
OTHER LIABILITIES................................. 10,424 9,374
------------ ------------
Total liabilities............................. 878,890 844,715
MINORITY INTERESTS................................ 18,591 16,688
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized
150,000,000 shares, 52,655,275 shares issued
with 52,015,264 shares outstanding at November
30 and 52,581,762 shares issued with
51,941,751 shares outstanding at May 31....... 53 53
Additional paid-in capital...................... 590,026 589,516
Retained earnings............................... 68,116 70,484
Treasury stock.................................. (8,705 ) (8,705)
------------ ------------
Total stockholders' equity.................... 649,490 651,348
------------ ------------
Total liabilities and stockholders' equity.... $ 1,546,971 $ 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 SIX MONTHS ENDED
NOVEMBER 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
TOTAL OPERATING REVENUES......................................... $ 444,306 $ 458,952 $ 887,940 $ 890,359
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of services............................................... 372,775 356,630 744,622 705,777
Facility leases................................................ 21,358 21,847 42,399 42,925
Depreciation and amortization.................................. 15,210 15,107 30,186 29,758
Interest expense............................................... 13,738 11,364 26,050 24,476
Special charge................................................. 4,000 -- 11,150 63,540
---------- ---------- ---------- ----------
Total costs and expenses..................................... 427,081 404,948 854,407 866,476
---------- ---------- ---------- ----------
Earnings before minority interests, income taxes and
extraordinary item......................................... 17,225 54,004 33,533 23,883
Minority interests........................................... (1,633) (2,078) (3,680) (3,402)
---------- ---------- ---------- ----------
Earnings before income taxes and extraordinary item.......... 15,592 51,926 29,853 20,481
Income taxes..................................................... 8,200 21,190 14,400 18,670
---------- ---------- ---------- ----------
Earnings (loss) before extraordinary item.................... 7,392 30,736 15,453 1,811
Extraordinary item, net of tax................................... (17,821) (22,075) (17,821) (22,075)
---------- ---------- ---------- ----------
Net loss..................................................... $ (10,429) $ (8,661) $ (2,368) $ (20,264)
========== ========== ========== ==========
Earnings (loss) per common and common equivalent share:
Earnings before extraordinary item............................. $ 0.14 $ 0.60 $ 0.29 $ (0.04)
Extraordinary item............................................. (0.34) (0.43) (0.34) (0.43)
---------- ---------- ---------- ----------
Net loss....................................................... $ (0.20) $ (0.17) $ (0.05) $ (0.39)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares outstanding.................... 52,153 51,814 52,132 51,696
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................................... $ (2,368) $ (20,264)
----------- -----------
Adjustments:
Depreciation and amortization............................................................. 30,186 29,758
Provision for loss on patient care accounts receivable.................................... 10,197 10,648
Other..................................................................................... 409 (7,324)
Special charge............................................................................ 11,150 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.................. (1,728) (64,166)
Prepaid and other assets................................................................ (7,076) (27,873)
Deferred income taxes................................................................... 58 185
Accounts payable........................................................................ 3,812 (2,033)
Accrued expenses and other liabilities.................................................. (9,331) (29,088)
----------- -----------
Total adjustments............................................................................. 57,914 11,709
----------- -----------
Net cash provided by (used in) operating activities........................................... 55,546 (8,555)
----------- -----------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired........................... (74,457) (15,074)
Acquisition of property and equipment....................................................... (29,547) (25,819)
Proceeds from disposition of assets......................................................... 22,177 --
Notes receivable............................................................................ (2,266) 857
Other investing activities.................................................................. (4,696) (687)
----------- -----------
Net cash used in investing activities....................................................... (88,789) (40,723)
----------- -----------
Cash flows from financing activities:
Long-term debt borrowings................................................................... 295,584 551,053
Long-term debt repayments................................................................... (284,898) (483,836)
Premium and other payments on early retirement of debt...................................... -- (30,636)
Issuance of common stock.................................................................... 511 3,739
Other financing activities.................................................................. (236) (476)
Distributions to minority interests......................................................... (1,813) (1,507)
----------- -----------
Net cash provided by financing activities................................................... 9,148 38,337
----------- -----------
Net decrease in cash and cash equivalents..................................................... (24,095) (10,941)
Cash and cash equivalents, beginning of period................................................ 31,836 40,674
Effect of pooling of interests restatement (Note 3)........................................... -- (3,311)
----------- -----------
Cash and cash equivalents, end of period...................................................... $ 7,741 $ 26,422
----------- -----------
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest.................................................................................. $ 17,961 $ 30,400
----------- -----------
Income taxes, net......................................................................... $ 13,612 $ 1,300
----------- -----------
Non-cash investing and financing activities:
Assumption of long-term debt in connection with acquisitions................................ $ 13,924 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Horizon/CMS Healthcare Corporation and its subsidiaries (collectively, the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Accordingly, they are unaudited and certain
information and footnote disclosures normally included in the Company's annual
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, as permitted under the
applicable rules and regulations. In the opinion of management, all adjustments
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented have been made and are of a
normal recurring nature.
These consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended May 31, 1996,
filed with the Commission. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
entire year.
(2) OPERATING REVENUES
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs, private pay patients and
non-affiliated long-term care facilities. For the three months ended November
30, 1996 and 1995, the Company derived 34% and 34%, respectively, of its
revenues from Medicare. For the six months ended November 30, 1996 and 1995, the
Company derived 33% and 33%, respectively, of its revenues from Medicare. For
the three months ended November 30, 1996 and 1995, the Company derived 19% and
17%, respectively, of its revenues from Medicaid. For the six months ended
November 30, 1996 and 1995, the Company derived 19% and 17%, respectively, of
its revenues from Medicaid. Under the Medicare program and some state Medicaid
programs, the Company's long-term care facilities are paid interim amounts
designed to approximate the facilities' reimbursable costs. Such interim amounts
due from third party payors and amounts due from other payor sources are
recorded as patient care accounts receivable. With respect to these programs for
which interim payments are subject to retroactive cost adjustment, actual costs
incurred are reported through cost reports by each facility annually. Throughout
the annual cost reporting period, the Company records, for each of several
hundred Medicare and Medicaid certified providers operated by the Company, the
estimated difference between interim payments received and the expected actual
costs as estimated third party settlements. The cost reports are subject to
examinations and retroactive adjustments, which may result in upward or downward
adjustment from initially submitted reimbursable costs. The Company generally
expects final settlement on annual cost reports to occur approximately 24 months
following the end of an annual cost reporting period. Tentative partial
settlement may occur as soon as six months following the cost reporting period.
Differences between amounts originally accrued as estimated third-party
settlements, subsequent revisions of estimates, and the amounts ultimately
received or paid are recorded in operations in the year of final settlement and
disclosed, if material. Most of the Company's Medicaid payments are prospective
and no retroactive adjustment is made to such payments.
Estimated settlements reflect expected amounts receivable from third parties
offset by expected amounts payable to third parties. The Company's total net
settlement position is anticipated to vary from period to period due to several
factors including: the significant number of individual providers for which
settlements must be estimated, the fact that several cost reporting periods
remain open for each provider at any given time, the numerous cost reporting
periods of the Company's various providers, the interrelationship between
continually changing interim rates and estimated settlements, the unpredictable
timing of tentative and final settlements, and the offset of estimated payables
and receivables.
While settlement adjustments are common upon third-party intermediary cost
report examination, the Company is currently unaware of any matters that may
result in a retroactive cost report adjustment that would have a material effect
on the Company's financial condition or results of operations.
There have been and the Company expects that there will continue to be a
number of reform proposals to develop cost containment in respect of Medicare
and Medicaid reimbursement, some of
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
(UNAUDITED)
(2) OPERATING REVENUES (CONTINUED)
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 November 1996, the Company completed the merger of a 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 for each share of Medical Innovations
common stock. The purchase price, including transaction costs, was approximately
$31.8 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.
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 six
outpatient rehabilitation centers in Michigan and generated total annual
revenues of approximately $7.2 million for its fiscal year ended December 31,
1995.
During the six months ended November 30, 1996, the Company made various
other acquisitions which individually and in the aggregate were insignificant.
The total goodwill recorded in connection with these acquisitions approximated
$8.9 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
7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
(UNAUDITED)
(3) ACQUISITIONS (CONTINUED)
combined results of operations for the six months ended November 30, 1996 and
1995 as if the Rehab Group, Medical Innovations and ARN acquisitions had been
consumated on June 1, 1995.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total operating revenues........................................................ $ 901,204 $ 938,790
Total operating expenses........................................................ 874,495 918,034
---------- ----------
Operating income.............................................................. 26,709 20,756
Income taxes.................................................................. 13,073 18,786
---------- ----------
Net Earnings (loss) before extraordinary item................................. $ 13,636 $ 1,970
========== ==========
Net loss........................................................................ (4,185) (20,105)
Net earnings (loss) per share................................................... $ (0.08) $ (0.39)
========== ==========
</TABLE>
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 per share 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. Total annual revenues of Pacific Rehab for
its fiscal year ended December 31, 1995 were approximately $35.1 million. This
acquisition will be accounted for under the purchase method. Goodwill will be
amortized on a straight-line basis over a period of 40 years.
In July 1995, a wholly-owned subsidiary of the Company merged with
Continental Medical Systems, Inc. ("CMS") and CMS became a wholly owned
subsidiary of the Company (the "CMS Merger"). Under the terms of the merger
agreement, the Company issued approximately 20.9 million shares of its common
stock, valued at approximately $393.9 million based on the closing price of the
Company's common stock on July 10, 1995, for all the outstanding shares of CMS's
common stock. Additionally, outstanding options to acquire CMS's common stock
were converted to options to acquire approximately 3.8 million shares of the
Company's common stock. CMS was one of the largest providers of comprehensive
medical rehabilitation programs and services in the country with a significant
presence in each of the rehabilitation industry's three principal sectors --
inpatient rehabilitation care, outpatient rehabilitation care and contract
therapy. The merger has been accounted for as a pooling of interests and,
accordingly, the Company's historical financial information has been restated to
include CMS's financial results. In connection with the CMS Merger, the Company
changed its name to Horizon/CMS Healthcare Corporation.
The accompanying income statements for the three months and six months ended
November 30, 1995 include the results of operations of the Company and CMS,
prior to the merger, for the period June 1, 1995 through June 30, 1995 and the
combined Company, subsequent to the merger, for the period July 1, 1995 through
November 30, 1995. The duplication of reporting CMS's June 1995 operating
results of $4.1 million in fiscal year 1995 and in the six months ended November
30, 1995, has been adjusted for by a charge to retained earnings. Appropriate
adjustments have also been made in the statement of cash flows for the six
months ended November 30, 1995.
8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
(UNAUDITED)
(3) ACQUISITIONS (CONTINUED)
Separate results of the Company and CMS for the periods presented prior to
the consummation of the CMS Merger and in total for the periods are as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total operating revenues:
The Company, prior to the CMS Merger........................... $ -- $ 59,065 $ -- $ 59,065
CMS, prior to the CMS Merger................................... -- 83,684 -- 83,684
The Company, subsequent to the CMS Merger...................... 444,306 316,203 887,940 747,610
---------- ---------- ---------- ----------
$ 444,306 $ 458,952 $ 887,940 $ 890,359
========== ========== ========== ==========
Net earnings (loss):
The Company, prior to the CMS Merger........................... $ -- $ 2,280 $ -- $ 2,280
CMS, prior to the CMS Merger................................... -- 4,122 -- 4,122
The Company, subsequent to the CMS Merger...................... (10,429) 2,259 (8,661) (26,666)
---------- ---------- ---------- ----------
$ (10,429) $ 8,661 $ (2,368) $ (20,264)
========== ========== ========== ==========
</TABLE>
(4) SPECIAL CHARGE
The Company recorded a special charge of approximately $11.2 million
(pre-tax), during the six months ended November 30, 1996. 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 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. The completion
of these terminations is expected to occur by January 1997. Management approved
and committed the Company to the employee terminations and, during the first
quarter of fiscal 1997, the Company communicated the termination benefits
payable to the employees. Approximately $1.5 million of the first quarter of
fiscal 1997 special charge is comprised of lease exit costs related primarily to
office space that will be 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
will be sold as a result of the restructuring. This charge adjusts the carrying
9
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
(UNAUDITED)
(4) SPECIAL CHARGE (CONTINUED)
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 November 30, 1996. At November 30, 1996, the remaining balance
in the special charge accruals is approximately $19.2 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 the fiscal year 1997 special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Impairment
and Noncancellable Termination Lease Exit
Committments Legal Benefits and Other Total
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Fiscal Year 1997 Special Charge $ 400 $ 4,000 $ 5,250 $ 1,500 $ 11,150
Fiscal Year 1997 Activity:
Payments - - (1,608) (102) (1,710)
Asset Impairment (400) - - - (400)
----------------- ------------ ------------ ------------ ------------
Balance November 30, 1996 $ - $ 4,000 $ 3,642 $ 1,398 $ 9,040
================= ============ ============= ============ ============
</TABLE>
At November 30, 1996, the number of employees terminated in connection with
the fiscal 1997 restructuring charge totaled 56.
The components of the fiscal year 1996 special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Termination Lease Exit
Legal Benefits and Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance May 31, 1996 $ 6,000 $ 1,690 $ 3,806 $ 11,496
Fiscal Year 1997 Activity:
Payments (1,445) (1,940) (1,160) (4,545)
Adjustments - 250 (325) (75)
------------ ------------ ------------ ------------
Balance November 30, 1996 $ 4,555 $ - $ 2,321 $ 6,876
============ ============= ============ ============
</TABLE>
At November 30, 1996, the number of employees terminated in connection with
the fiscal 1996 restructuring charge totaled 340.
The components of the fiscal year 1995 special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Termination Lease Exit Transaction
Benefits and Other Costs Total
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance May 31, 1996 $ 24 $ 643 $ 17 $ 684
Fiscal Year 1997 Activity:
Payments - (38) - (38)
------------ ------------- ----------- ----------
Balance November 30, 1996 $ 24 $ 605 $ 17 $ 646
============ ============= =========== ==========
</TABLE>
9
<PAGE>
At November 30, 1996, the number of employees terminated in connection with
the fiscal 1995 restructuring charge totaled 200.
The components of the fiscal year 1994 special charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Impairment
and Noncancellable Termination
Committments Benefits Total
----------------- ------------ ------------
<S> <C> <C> <C>
Balance May 31, 1996 $ 4,895 $ 378 $ 5,273
Fiscal Year 1997 Activity:
Payments (482) - (482)
Asset Impairment (2,226) - (2,226)
----------------- ------------ ------------
Balance November 30, 1996 $ 2,187 $ 378 $ 2,565
================= ============= ============
</TABLE>
At November 30, 1996, the number of employees terminated in connection with
the fiscal 1994 restructuring charge totaled 196.
(5) LONG-TERM DEBT
The Company is the borrower under a credit agreement dated as of September
26, 1995 (the "Credit Facility") with NationsBank of Texas, N.A., as Agent, and
the lenders named therein. The aggregate revolving credit commitment under the
Credit Facility is $750 million, of which the Company had borrowed $531.0
million and had outstanding letters of credit of $33.8 million at November 30,
1996. Borrowings under the Credit Facility bear interest, payable monthly, at a
rate equal to either, as selected by the Company, the Alternate Base Rate (as
therein defined) of the Agent in effect from time to time, or the Adjusted
London Inter-Bank Offer Rate ("LIBOR") plus 0.625% to 1.25% per annum, depending
on the maintenance of specified financial ratios. The applicable interest rates
at November 30, 1996 were 8.25% and 6.75% - 6.88% 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 1995. The Company utilizes the collar as an interest rate
hedge on its floating rate, LIBOR based Credit Facility and does not intend the
instrument to be speculative in nature. The agreement has a term of two years
and expires in October 1997. The collar agreement entitles the Company to
receive from the counterparty the amount, if any, by which average LIBOR
interest payments on the notional amount exceed 8.0% per annum. The
10
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
(UNAUDITED)
(5) LONG-TERM DEBT (CONTINUED)
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 November 30, 1996 would require that
a $10,263 payment be made by the counterparty to the Company to terminate the
agreement.
(6) EXTRAORDINARY ITEM
During the three months ended November 30, 1996, the Company disposed of
certain assets and operations of a non-invasive medical diagnostic company
providing hospital-based and mobile ultrasound 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 three months ended November 30, 1996, management
obtained board of director approval to pursue the sale of a long-term care
facility and a subacute care facility located in California and Maryland,
respectively, and its interest in four rehabilitation hospitals, eleven hospital
based or freestanding outpatient rehabilitation clinics and six congregate care
facilities located in California. Subsequent to November 30, 1996, the Company
signed definitive agreements to dispose of the long-term care facility and
subacute care facility, the expected disposal dates of which are March 1997 and
January 1997, respectively. Also, subsequent to November 30, 1996, in December
1996, the Company completed the sale of its interest in the four rehabilitation
hospitals, eleven hospital based or freestanding outpatient rehabilitation
clinics and six congregate care facilities. The difference between the actual or
proposed sales price or estimated fair value of the operations and the recorded
basis of the assets sold or to be sold subsequent to November 30, 1996 is
approximately $20.0 million. As a result, an extraordinary charge of $14.9
million, net of an income tax benefit of $5.1 million, was recorded during the
three months ended November 30, 1996.
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 decision with respect to these
operations disposed of or to be 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 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. 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.
11
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1996
(UNAUDITED)
(6) EXTRAORDINARY ITEM (CONTINUED)
The results of operations of the properties held for sale as of November 30,
1996 discussed above, are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues...................... $ 46,997 $ 49,711 $ 95,309 $ 98,736
Expenses...................... (50,531) (51,446) (99,733) (102,472)
---------- ---------- ---------- -----------
$ (3,534) $ (1,735) $ (4,424) $ (3,736)
========== ========== ========== ===========
</TABLE>
Total assets, net of the impairment reserve discussed above, of
approximately $167.1 million related to the operations to be disposed of have
been reclassified and are included within prepaid and other assets in the
November 30, 1996 balance sheet. Total liabilities of $24.8 million related to
these operations have been reclassified to accrued expenses and other
liabilities in the November 30, 1996 balance sheet. In the May 31, 1996 balance
sheet, total assets and total liabilities related to the operations held for
sale of approximately $89.0 million and $5.7 million, respectively, have been
reclassified and are included within prepaid and other assets and accrued
expenses and other liabilities, respectively.
(7) COMMITMENTS AND CONTINGENCIES
The Company is a party to threatened or pending litigation in connection
with several matters any one of which, if adversely determined, could have a
material adverse impact on the Company's financial condition and/or results of
operations. See "Item 1. Legal Proceedings" in Part II of this report for a
description of such litigation.
(8) PRIOR PERIOD ADJUSTMENTS
During the three months ended February 29, 1996, the Company originally
recorded approximately $18.2 million of estimated reimbursement benefit for
costs incurred in connection with the CMS bond tender offer completed during the
three month period ended November 30, 1995. In light of the fact that the
reimbursement benefit is directly related to the incurrance of the bond tender
costs, subsequent to fiscal 1996 the Company restated the fiscal 1996 second and
third quarter financial statements to record this revenue during the three
months ended November 30, 1995 rather than during the three months ended
February 29, 1996.
The effect of the restatement discussed above on earnings (loss) before
income taxes and extraordinary items, earnings (loss) before extraordinary
items, net earnings (loss) and earnings(loss) per share was $18.2 million, $11.2
million, $11.2 million and $0.22 million during the three months and six months
ended November 30, 1995, respectively.
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, Northeast and Southeast regions of the
United States. At November 30, 1996, Horizon provided specialty health care
services through 37 acute rehabilitation hospitals in 16 states (2,065 beds), 58
specialty hospitals and subacute care units in 17 states (1,925 beds), 222
outpatient rehabilitation clinics in 25 states and 1,436 rehabilitation therapy
contracts in 35 states. At that date, Horizon provided long-term care services
through 121 owned or leased facilities (15,147 beds) and 142 managed facilities
(15,798 beds) in a total of 18 states. Other medical services offered by the
Company include pharmacy, laboratory, physician and allied health professional
staffing services, Alzheimer's care, home health care, physician practice
management, non-invasive medical diagnostic, assisted living, home respiratory,
home infusion therapy and hospice care. For the six months ended November 30,
1996 and 1995, the Company derived 48% and 50%, respectively, of its revenues
from private sources, 33% and 33%, respectively, from Medicare and 19% and 17%,
respectively, from Medicaid.
REGULATION
GENERAL. The federal government and the governments of all states in which
the Company operates regulate various aspects of its businesses. There can be no
assurance that federal or state governments will not impose additional
restrictions on its activities that might adversely affect its businesses. The
operation of the Company's long-term care facilities and certain segments of its
specialty health care business and the provision of these services are subject
to federal, state and local licensure and certification laws. These facilities
and segments are subject to periodic inspection by governmental and other
authorities to assure compliance with the various standards established for
continued licensure under state law, certification under the Medicare and
Medicaid programs and participation in the Veteran's Administration program. As
previously disclosed, the Company's specialty hospital in Dallas, Texas was
decertified from the Medicare program in June 1996. The Company has appealed the
decertification and, simultaneously with that, moved to begin the
recertification process. During the quarter, the specialty hospital completed a
recertification survey by representatives of the Health Care Financing
Administration ("HCFA"). Effective in October 1996, this specialty hospital was
recertified for participation in the Medicare 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, which expands
significantly the federal government's involvement in curtailing
Medicare/Medicaid fraud and abuse and increases the monetary penalties for
violations of these provisions. The Company believes that its operations and
practices comply with these fraud and abuse provisions. The Company is unable to
predict, however, the effect of future 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,
13
<PAGE>
or the interpretation thereof, will ultimately be consistent with the Company's
practices. See "Item 1. Legal Proceedings -- OIG/DOJ Investigation Involving
Certain Medicare Part B and Related Co-Insurance Billings and -Michigan Attorney
General Investigation into Long-Term Care Facility in Michigan" in Part II of
this Report.
REIMBURSEMENT RATES FOR CONTRACT THERAPY SERVICES. In April 1995, HCFA
issued a memorandum to its Medicare fiscal intermediaries (the "Fiscal
Intermediaries") providing guidelines for assessing costs incurred by inpatient
providers ("Care Providers") relating to payment of occupational and speech
language pathology services furnished under arrangements that include contracts
between therapy providers and Care Providers. While not binding on the Fiscal
Intermediaries, the HCFA memorandum suggested certain rates to the Fiscal
Intermediaries to assist them in making annual "prudent buyer" assessments of
speech and occupational therapy rates paid by Care Providers during the Fiscal
Intermediary's reviews of the Care Providers' cost reports. The HCFA memorandum
acknowledges that the rates noted in the memorandum are not absolute limits and
should only be used by the Fiscal Intermediaries for comparative purposes.
Following the issuance of the HCFA memorandum, meetings between industry
representatives and the HCFA have been held concerning the merits of the HCFA
memorandum. In light of the fluid nature of the HCFA memorandum, the Company
cannot predict what effect, if any, the HCFA memorandum will have on the Company
or if the rates suggested in the HCFA memorandum will continue to be recommended
by the HCFA. Additionally, the Company cannot determine at this time whether the
rates suggested in the HCFA memorandum would be used by the HCFA as a basis for
developing possible future regulations creating a salary equivalency based
reimbursement system for speech and occupational therapy services. Although
management of the Company has developed strategies to deal with potential future
changes, there can be no assurance that future changes in the administration or
interpretation of governmental health care programs will not have an adverse
effect on the results of operations of the Company.
HEALTH CARE REFORM. During fiscal 1996, various Congressional legislators
introduced reform proposals that are intended to control health care costs,
improve access to medical services for uninsured individuals and balance the
federal budget by the year 2002. Certain of these budgetary proposals 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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total operating revenues.................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Cost of services............................................ 83.9 77.7 83.9 79.3
Facility leases............................................. 4.8 4.7 4.8 4.8
Depreciation and amortization............................... 3.4 3.3 3.4 3.3
Interest expense............................................ 3.1 2.5 2.9 2.8
Special charge.............................................. 0.9 -- 1.2 7.1
--------- --------- --------- ---------
Earnings before minority interests, income taxes and
extraordinary item........................................ 3.9 11.8 3.8 2.7
Minority interests.......................................... (0.4) (0.5) (0.4) (0.4)
--------- --------- --------- ---------
Earnings before income taxes and extraordinary item......... 3.5 11.3 3.4 2.3
Income taxes................................................ 1.8 4.6 1.7 2.1
--------- --------- --------- ---------
Earnings (loss) before extraordinary item................... 1.7 6.7 1.7 0.2
Extraordinary item, net of tax.............................. (4.0) (4.8) (2.0) (2.5)
--------- --------- --------- ---------
Net loss.................................................... (2.3)% 1.9% (0.3)% (2.3)%
========= ========= ========= ==========
</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 NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
------------------------------------------ --------------------------------------------
1996 1995 1996 1995
-------------------- -------------------- -------------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term care services................... $ 102,663 23.1% $ 95,175 20.7% $ 203,073 22.9% $ 189,711 21.3%
Specialty health care services:
Acute and outpatient rehabilitation..... 130,245 29.3 153,353 33.4 258,931 29.1 282,549 31.7
Contract therapy........................ 89,128 20.1 96,124 20.9 182,083 20.5 198,445 22.3
Other services (1)...................... 114,043 25.7 100,242 21.9 228,156 25.7 201,214 22.6
Other revenues (2)........................ 8,227 1.8 14,058 3.1 15,697 1.8 18,440 2.1
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating revenues.............. $ 444,306 100.0% $ 458,952 100.0% $ 887,940 100.0% $ 890,359 100.0%
========= ========= ========= ========= ========= ========= ========= =========
</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 three months and six months ended November 30,
1995.
15
<PAGE>
REVENUES
Total operating revenues decreased approximately $14.6 million, or 3.2%,
and $2.4 million, or 0.3%, for the three months and six months ended November
30, 1996, respectively, compared to the corresponding periods in fiscal 1996.
The decrease in total operating revenues for the fiscal 1997 period is primarily
attributable to approximately $18.2 million of estimated reimbursement benefit
for costs associated with the CMS bond tender offer recorded by the Company
during the three months ended November 30, 1995. There was no revenue associated
with the CMS bond tender offer recorded during the corresponding period in
fiscal 1997. Additionally, the decrease in total operating revenues is
attributable to a decline in acute rehabilitation, contract therapy and other
revenues. The decrease in total operating revenues was offset by an increase
resulting from acquisitions of specialty health care and long-term care
operations and internal growth of institutional pharmacy programs.
Specialty health care acquisitions resulted in $23.4 million and $42.0
million of additional revenues during the three months and six months ended
November 30, 1996, respectively. Approximately $12.4. million and $23.2 million
of the increase during the three months and six months ended November 30, 1996,
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
$11.0 million and $18.8 million of additional revenues during the three months
and six months ended November 30, 1996, respectively. Various long-term care
acquisitions resulted in approximately $3.7 million and $5.5 million of
additional revenues during the three months and six months ended November 30,
1996, respectively, compared to the corresponding periods in fiscal 1996.
Acute rehabilitation revenues declined approximately $31.7 million and $38.8
million during the three months and six months ended November 30, 1996,
respectively, compared to the corresponding periods in fiscal 1996. The decline
is primarily attributable to the $18.2 million of estimated reimbursement
benefit discussed above recorded by the Company during the three months end
November 30, 1995. This increase was offset by a decrease resulting from 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. In addition,
acute rehabilitation revenues declined as a result of 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. Revenues for this acute
rehabilitation hospital were approximately $3.8 million and $8.1 million during
the three and six months ended November 30, 1995, respectively.
Contract rehabilitation therapy revenues declined approximately $7.0 million
and $16.4 million during the three months and six months ended November 30,
1996, respectively, compared to the corresponding periods in fiscal 1996. This
decline was caused by a decrease in volume as certain customers elected to
provide their therapy services in-house, contracts were lost through acquisition
and contracts were terminated that did not meet the Company's profitability
standards.
Institutional pharmacy revenues increased approximately $4.1 million and
$7.5 million during the three months and six months ended November 30, 1996,
respectively, as a result of internal growth of operations. This increase was
offset by a decline in other revenues of approximately $7.1 million and 2.2
million during the three months and six months ended November 30, 1996,
respectively.
COSTS AND EXPENSES
Cost of services increased approximately $16.1 million, or 4.5%, and $38.8
million , or 5.5%, for the three months and six months ended November 30, 1996,
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 increased to 83.9% for the three and
six months ended November 30, 1996 from 77.7% and 79.3%, respectively, for the
corresponding periods in fiscal 1996. This increase is due primarily to a change
in the mix of margins among the various divisions, a change in the mix among
payor sources and, to a lesser extent, a general increase in corporate costs
during the three months and six months ended November 30, 1996.
Facility lease expense remained constant for the three months and six months
ended November 30, 1996 compared to the corresponding periods in fiscal 1996. As
a percentage of total operating revenues, facility lease expense increased to
4.8% from 4.7% for the three months ended November 30, 1996 and remained
constant at 4.8% for the six months ended November 30, 1996, as compared to the
corresponding periods in fiscal 1996.
Depreciation and amortization increased $0.1 million, or 0.7%, and $0.4
million, or 1.4 %, for the three months and six months ended November 30, 1996,
respectively, compared to the corresponding
16
<PAGE>
periods in fiscal 1996. As a percentage of total operating revenues,
depreciation and amortization increased to 3.4% from 3.3% for the three months
and six months ended November 30, 1996 as compared with the corresponding
periods in fiscal 1996.
Interest expense increased $2.4 million, or 20.9%, and $1.6 million, or
6.4%, for the three months and six months ended November 30, 1996, respectively,
compared to the corresponding periods in fiscal 1996. The increase in interest
expense is primarily attributable to the increase in the outstanding balance of
the Credit Facility and other long-term debt during the period as a result of
acquisitions.
The Company recorded a $4.0 million special charge during the three months
ended November 30, 1996 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 three months ended August 31, 1996 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 which had been incurred in completing the CMS
Merger, (ii) the approval by management of the Company of restructuring costs of
$44.9 million related to efforts to combine and restructure the operations of
the Company and CMS and (iii) the $11.9 million write down of assets expected to
be divested during fiscal 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.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1996, the Company's working capital was $407.3 million and
included cash and cash equivalents of $7.7 million as compared with $456.4
million in working capital and $31.8 million in cash and cash equivalents at May
31, 1996. During the six months ended November 30, 1996, the Company's operating
activities provided $55.5 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 six months ended November 30, 1996 totaling $1.4
million and $4.2 million, respectively. As a result of the restructuring
commitments and the special charges recorded during the six months ended
November 30, 1996, the Company made cash payments during the three months and
six months ended November 30, 1996 totaling $1.7 million.
EXPANSION PROGRAM
The net cash used in the Company's investing activities increased from $40.7
million for the six months ended November 30, 1995 to $88.8 million for the six
months ended November 30, 1996. The uses of cash in investing activities
included acquisitions and, to a lesser extent, internal construction and capital
expenditures for property and equipment. Cash paid for acquisitions increased
considerably during the six months ended November 30, 1996 compared with the
corresponding period of fiscal 1996 as the Company has elected to structure cash
rather than stock transactions due to the decline in the Company's stock price
in the latter part of fiscal 1996. Cash required for internal construction and
capital expenditures for property and equipment during the six months ended
November 30, 1996 increased by $3.7 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
acquisitions of facilities and properties; and (iii) to finance the increase in
patient
17
<PAGE>
and other accounts receivable resulting from acquisitions. The funds necessary
to meet these requirements have historically been provided principally by the
Company's financing activities and, to a lesser extent, from operating and
investing activities. However, during the six months ended November 30, 1996,
net cash provided by operating activities substantially exceeded that provided
by financing activities.
SOURCES
At November 30, 1996, the available credit under the Company's Credit
Facility was $185.2 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. The dispositions during the six months
ended November 30, 1996 generated $22.2 million of net cash proceeds.
Also, in December 1996, the Company completed the sale of its interest in
four rehabilitation hospitals, eleven hospital based or freestanding outpatient
rehabilitation clinics and six congregate care facilities located in California.
In November 1996, the Company signed definitive agreements to sell its long-term
care and subacute care facilities in California and Maryland, respectively. As a
result of these transactions completed subsequent to November 30, 1996 or as
currently proposed, the Company anticipates it will generate net cash proceeds
of approximately $44.4 million.
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 which provide the
opportunity to concentrate operations in a manner consistent with the Company's
objectives.
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 $531.0 million and had
outstanding letters of credit of $33.8 million at November 30, 1996. Borrowings
under the Credit Facility bear interest, payable monthly, at a rate equal to
either, as selected by the Company, the Alternate Base Rate (as therein defined)
of the Agent in effect from time to time, or the Adjusted London Inter-Bank
Offer Rate plus 0.625% to 1.25% per annum, depending on the maintenance of
specified financial ratios. The applicable interest rates at November 30, 1996
were 8.25% and 6.75% - 6.88% 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
18
<PAGE>
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. In the quarter ended November 30, 1995, the Company
recognized as a receivable approximately $13.0 million of the approximately
$14.5 million the Company contends it is owed under the agreement. While the
Company continues to vigorously prosecute this lawsuit, no assurance can be
given that the Company will prevail or that the Company will not be required at
a future date to record a charge for a portion of the receivable previously
recorded.
OIG/DOJ INVESTIGATION INVOLVING CERTAIN MEDICARE PART B AND RELATED CO-INSURANCE
BILLINGS
The Company announced on March 15, 1996 that certain Medicare Part B and
related co-insurance billings previously submitted by the Company are being
investigated by the Office of Inspector General of the Department of Health and
Human Services (the "OIG") and the Department of Justice (the "DOJ").
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 will serve as the Board's representative and 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 voluntarily produced certain documents and Neal M. Elliott,
Chairman of the Board, President and Chief Executive Officer of the Company, has
voluntarily given testimony to the Commission. The Company has also been
informed that certain of its divisional office employees and an individual,
affiliates of whom have limited business relationships with the Company, have
responded to subpoenas from the Commission. Mr. Elliott has also produced
certain documents in response to a subpoena from the Commission. In addition,
the Company and Mr. Elliott are each in the process of responding to separate
subpoenas from the Commission pertaining to trading in the Company's common
stock and the Company's March 1, 1996 press release announcing a revision in the
20
<PAGE>
Company's third quarter earnings estimate, the Company's March 7, 1996, press
release announcing the filing of a lawsuit against Tenet, the March 12, 1996
press release announcing that the merger with Pacific Rehabilitation and Sports
Medicine, Inc. could not be effected by April 1, 1996 and the Company's March
15, 1996 press release announcing the existence of a federal investigation into
certain of the Company's Medicare Part B billings. The investigation is ongoing,
and neither the Company nor Mr. Elliott possesses all the facts with respect to
the matters under investigation. Although neither the Company nor Mr. Elliott
has been advised by the Commission that the Commission has concluded that any of
the Company, Mr. Elliott or any other current or former officer or director of
the Company has been involved in any violation of the federal securities laws,
there can be no assurance as to the outcome of the investigation or the time of
its conclusion. Both the Company and Mr. Elliott intend to continue cooperating
fully with the Commission in connection with the investigation.
In March 1995, the New York Stock Exchange, Inc. (the "NYSE") informed the
Company that it had initiated a review of trading in Hillhaven common stock
prior to the announcement of the Company's proposed acquisition of Hillhaven.
The NYSE extended in April 1995 the review of trading to include all dealings
with CMS. On April 3, 1996, the NYSE notified the Company that it had initiated
a review of trading in the Company's Common Stock preceding the Company's March
1, 1996 press release described above. The Company is cooperating with the NYSE
in its reviews and, to the Company's knowledge, the reviews are ongoing.
MICHIGAN ATTORNEY GENERAL INVESTIGATION INTO LONG-TERM CARE FACILITY IN MICHIGAN
The Company learned on September 18, 1996, that the Attorney General of the
State of Michigan is investigating one of its skilled nursing facilities. The
facility, in Howell, Michigan, has been owned and operated by the Company since
February 1994. As widely reported in the press, the Attorney General seized a
number of patient, financial and accounting records that were located at this
facility. By order of a circuit judge in the county in which the facility is
located, the Attorney General was ordered to return patient records to the
facility for copying.
The investigation appears to involve allegations arising out of a licensing
survey conducted in April 1996. The Company believes the allegations are untrue
and, therefore, denies the same. The Company has advised the Michigan Attorney
General that it is willing to cooperate in this investigation. Due to the
preliminary nature of this investigation, the Company cannot now predict when
the investigation will be completed; the ultimate outcome of the investigation;
or the effect thereof on the Company's financial condition or results of
operations. If adversely determined, this investigation could result in the
imposition of civil and/or criminal fines or sanctions against the Company,
which could have a material adverse impact on the Company's financial condition
and/or its results of operations.
STOCKHOLDER LITIGATION
On March 28, 1996, the Company was served with a lawsuit filed on March 21,
1996, in New Mexico state district court in Albuquerque, New Mexico by a former
stockholder of CMS, RONALD GOTTESMAN VS. HORIZON/CMS HEALTHCARE CORPORATION, NO.
CV-96-02894, SECOND JUDICIAL DISTRICT COURT, COUNTY OF BERNALILLO, STATE OF NEW
MEXICO. This lawsuit, which among other things seeks class certification,
alleges violations of federal and New Mexico state securities laws arising from
what the plaintiff contends are materially misleading statements by the Company
in its June 6, 1995 joint proxy statement/prospectus (the "CMS Prospectus"). The
plaintiff alleges that the Company failed to disclose in the CMS Prospectus
those problems in the Company's Medicare Part B billings the Company described
in its related March 15, 1996 announcement. In this action, the plaintiff seeks
damages in an unspecified amount, plus costs and attorneys' fees. The Company
disputes the factual and legal premises upon which the plaintiff's lawsuit is
based and denies that the plaintiff is entitled to any recovery on His claim. To
that end, the Company intends to contest this litigation vigorously. 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
21
<PAGE>
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.
Since April 5, 1996, the Company was served with several complaints by
current or former stockholders of the Company on behalf of all persons who
purchased common stock of the Company between June 6, 1995 and March 15, 1996.
Each of these lawsuits was filed in the United States District Court for the
District of New Mexico, in Albuquerque, New Mexico. In these lawsuits, the
plaintiffs have alleged in substantially similar complaints violations of
federal and New Mexico state securities laws. In this connection, the plaintiffs
allege that during the class period, the named defendants disseminated
materially misleading statements or omitted disclosing material facts about the
Company, its business, its Greenery and CMS acquisitions, Greenery's improved
operations after the acquisition, the successful integration of CMS's operations
into those of the Company and the cost savings and operating efficiencies
obtained thereby, the Company's earnings growth and financial statements, the
Company's ability to continue to achieve profitable growth and the status and
magnitude of regulatory investigations into and audits of the Company. The
plaintiffs seek damages in any unspecified amount and extraordinary, equitable
or injunctive relief, including attachment, impoundment, or imposition of a
constructive trust against the individual defendants, plus costs and attorneys'
fees. The Company disputes the factual and legal bases upon which the
plaintiffs' lawsuits are based and denies that the plaintiffs are entitled to
any recovery on their claims. To that end, the Company intends to contest these
litigation matters vigorously. In July 1996, the Court entered its order
consolidating these lawsuits into a single action styled IN RE HORIZON/CMS
HEALTHCARE CORPORATION SECURITIES LITIGATION, Case No. CIV 96-0442-BB. On
September 30, 1996, the consolidated putative class plaintiffs filed their
consolidated complaint. Pursuant to court order, the Company and the individual
defendants must answer or otherwise respond to the consolidated complaint by
December 1, 1996. In December 1996, the Company and the individual defendants
filed their motions to dismiss this consolidated lawsuit. Because these lawsuits
are in their initial stages, the Company cannot now predict the outcome of this
litigation; the length of time it will take to resolve this litigation; or the
effect of any such outcome on the Company's financial condition or results of
operations.
STOCKHOLDER DERIVATIVE ACTIONS
Commencing in April and continuing into May 1996, the Company was served
with six complaints alleging a class action derivative action brought by
stockholders of the Company for and on behalf of the Company in the Court of
Chancery of New Castle County, Delaware, against Neal M. Elliott, 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 six
lawsuits have been consolidated into one action styled IN RE HORIZON/CMS
HEALTHCARE CORPORATION SHAREHOLDERS LITIGATION. The plaintiffs allege, among
other things, that the Company's current and former directors breached their
fiduciary duties to the Company and the Stockholders as a result of (i) the
purported failure to supervise adequately and the purported knowing
mismanagement of the operations of the Company, and the (ii) purported misuse of
inside information in connection with the sale of the Company's common stock by
certain of the current and former directors in January and February 1996. To
that end, the plaintiff seeks an accounting from the directors for profits to
themselves and damages suffered by the Company as a result of the transaction
complained of in the complaint and attorneys' fees and costs. On June 21, 1996,
the individual defendants filed a motion with the Chancery Court seeking to
dismiss this matter because, among other things, the plaintiffs failed to make a
demand on the board of directors prior to commencing this litigation. The
Company cannot now predict the outcome or the effect of this litigation or the
length of time it will take to resolve this litigation.
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.
22
<PAGE>
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.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
*4.24.1 Third Amendment dated as of November 6, 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.
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule - Six Months Ended November 30, 1996
- ----------
* Previously filed
b. Reports on Form 8-K
DATE OF REPORT ITEMS REPORTED
- ---------------------- --------------------------------------------------------
November 18, 1996 Filed on November 21, 1996, reporting under "Item 5.
Other Events" the (i) joint announcement by the
Company and Pacific Rehabilitation & Sports Medicine,
Inc. that they entered into a definitive merger
agreement and (ii) announcement that the Company
signed definitive agreements to sell to Regency Health
Services, Inc. its interest in four acute
rehabilitation hospitals, eleven hospital based or
free-standing outpatient rehabilitation clinics and
six congregate care facilities located in California
September 18, 1996 Filed on September 27, 1996, reporting under "Item 5.
Other Events" the investigation of the Attorney
General of the State of Michigan of one of the
Company's skilled nursing facilities located in
Howell, Michigan
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HORIZON/CMS HEALTHCARE CORPORATION
By /s/ Ernest A. Schofield
------------------------------------
Ernest A. Schofield
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
Date: August 11, 1997
- ------------------------
* Ernest A. Schofield is signing in the dual capacities as Chief Financial
Officer and as a duly authorized officer of the Company.
25
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ------------------------------------------------------------------
*4.24.1 Third Amendment dated as of November 6, 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.
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule -- Six Months Ended November 30, 1996
- ----------
* Previously filed
26
EXHIBIT 11.1
HORIZON/CMS HEALTHCARE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE EARNINGS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE ENDED SIX
FOR THE THREE MONTHS MONTHS
ENDED NOVEMBER 30, NOVEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common and Common Equivalents:
Earnings (loss) before extraordinary item................. $ 7,392 $ 30,736 $ 15,453 $ 1,811
Extraordinary item, net of tax............................ (17,821) (22,075) (17,821) (22,075)
---------- ---------- ---------- ----------
Net loss.................................................. $ (10,429) $ 8,661 $ (2,368) $ (20,264)
========== ========== ========== ==========
Applicable common shares:
Weighted average outstanding shares during the period..... 52,005 51,150 51,991 50,974
Weighted average shares issuable upon exercise of common
stock equivalents outstanding (principally stock options
and warrants using the treasury stock method)........... 148 664 141 722
---------- ---------- ---------- ----------
Total....................................................... 52,153 51,814 52,132 51,696
========== ========== ========== ==========
Net earnings (loss) per share:
Earnings (loss) before extraordinary item................. $ 0.14 $ 0.60 $ 0.29 $ 0.04
Extraordinary item, net of tax............................ (0.34) (0.43) (0.34) (0.43)
---------- ---------- ---------- ----------
Net loss.................................................. $ (0.20) $ 0.17 $ (0.05) $ (0.39)
========== ========== ========== ==========
Assuming Full Dilution:
Earnings (loss) before extraordinary item................. $ 7,392 $ 30,736 $ 15,453 $ 1,811
Extraordinary item, net of tax............................ (17,821) (22,075) (17,821) (22,075)
---------- ---------- ---------- ----------
Net loss.................................................. $ (10,429) $ 8,661 $ (2,368) $ (20,264)
========== ========== ========== ==========
Applicable common shares:
Weighted average outstanding shares during the period..... 52,005 51,150 51,991 50,974
Weighted average shares issuable upon exercise of common
stock equivalents outstanding (principally stock options
and warrants using the treasury stock method and
convertible debentures)................................. 274 823 272 898
---------- ---------- ---------- ----------
Total..................................................... 52,279 51,973 52,263 51,872
========== ========== ========== ==========
Net earnings (loss) per share:
Earnings (loss) before extraordinary item................. $ 0.14 $ 0.60 $ 0.29 $ 0.04
Extraordinary item, net of tax............................ (0.34) (0.43) (0.34) (0.43)
---------- ---------- ---------- ----------
Net loss.................................................. $ (0.20) $ 0.17 $ (0.05) $ (0.39)
========== ========== ========== ==========
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NOVEMBER 30,
1996 FORM 10-Q/A AMENDMENT NO. 1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 7,741
<SECURITIES> 0
<RECEIVABLES> 381,038
<ALLOWANCES> 44,765
<INVENTORY> 0
<CURRENT-ASSETS> 617,746
<PP&E> 690,043
<DEPRECIATION> (141,207)
<TOTAL-ASSETS> 1,546,971
<CURRENT-LIABILITIES> 210,446
<BONDS> 658,020
0
0
<COMMON> 53
<OTHER-SE> 649,437
<TOTAL-LIABILITY-AND-EQUITY> 1,546,971
<SALES> 0
<TOTAL-REVENUES> 887,940
<CGS> 0
<TOTAL-COSTS> 854,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,197
<INTEREST-EXPENSE> 26,050
<INCOME-PRETAX> 29,853
<INCOME-TAX> 14,400
<INCOME-CONTINUING> 15,453
<DISCONTINUED> 0
<EXTRAORDINARY> (17,821)
<CHANGES> 0
<NET-INCOME> (2,368)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
