- --------------------------------------------------------------------------------
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: August 31, 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.)
8801 HORIZON BLVD., N.E.
ALBUQUERQUE, NEW MEXICO 87113
(505) 878-6100
(Address and telephone number of Registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
---- ----
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding at October 10, 1997 was 52,800,702.
- --------------------------------------------------------------------------------
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
INDEX
FORM 10-Q - FOR THE THREE MONTHS ENDED AUGUST 31, 1997
PART I. - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NUMBERS
------------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
August 31, 1997 and May 31, 1997............................... 3
Consolidated Statements of Operations
For the three months ended August 31, 1997 and 1996............ 4
Consolidated Statements of Cash Flows
For the three months ended August 31, 1997 and 1996............ 5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 10
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 19
Signatures ............................................................... 20
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 AND MAY 31, 1997
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
August 31 May 31
--------- ------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 54,170 $ 44,287
Patient care accounts receivable, net of allowance for doubtful
accounts of $55,515 at August 31 and $50,242 at May 31....... 328,716 334,153
Estimated third party settlements ............................. 36,936 34,092
Prepaid and other assets ...................................... 70,469 74,559
Deferred income taxes ......................................... 15,036 14,925
---------- ----------
Total current assets ........................................ 505,327 502,016
PROPERTY AND EQUIPMENT, net ..................................... 630,383 626,670
GOODWILL, net ................................................... 318,117 319,555
OTHER INTANGIBLE ASSETS, net .................................... 28,926 30,728
NOTES RECEIVABLE, excluding current portion ..................... 58,865 59,393
DEFERRED INCOME TAXES ........................................... 11,074 10,491
OTHER ASSETS .................................................... 60,290 57,528
---------- ----------
Total assets .................................................. $1,612,982 $1,606,381
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 8,790 $ 9,882
Accounts payable ............................................. 28,082 21,086
Accrued expenses and other liabilities ....................... 166,864 181,311
---------- ----------
Total current liabilities .................................. 203,736 212,279
LONG-TERM DEBT, excluding current portion ....................... 733,876 732,657
OTHER LIABILITIES ............................................... 20,998 21,403
---------- ----------
Total liabilities .......................................... 958,610 966,339
MINORITY INTERESTS .............................................. 18,915 19,553
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000 shares,
53,199,716 shares issued with 52,559,705 shares outstanding at
August 31 and 52,840,552 shares issued with 52,200,541 shares
outstanding at May 31 ....................................... 53 53
Additional paid-in capital .................................... 600,707 594,576
Retained earnings ............................................. 43,402 34,565
Treasury stock ................................................ (8,705) (8,705)
---------- ----------
Total stockholders' equity .................................. 635,457 620,489
---------- ----------
Total liabilities and stockholders' equity .................. $1,612,982 $1,606,381
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
AUGUST 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
TOTAL OPERATING REVENUES .............................. $444,566 $443,634
-------- --------
COSTS AND EXPENSES:
Cost of services .................................... 376,452 371,847
Facility leases ..................................... 21,723 21,041
Depreciation and amortization ....................... 15,721 14,976
Interest expense .................................... 14,404 12,312
Special charge ...................................... - 7,150
-------- --------
Total costs and expenses .......................... 428,300 427,326
-------- --------
Earnings before minority interests and income taxes 16,266 16,308
Minority interests .................................... (974) (2,047)
-------- --------
Earnings before income taxes ...................... 15,292 14,261
Income taxes .......................................... 6,455 6,200
-------- --------
Net earnings ...................................... $ 8,837 $ 8,061
======== ========
Earnings per common and common equivalent share ....... $ 0.17 $ 0.15
======== ========
Weighted average number of shares outstanding ......... 53,237 52,110
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .......................................... $ 8,837 $ 8,061
-------- --------
Adjustments:
Depreciation and amortization ........................ 15,721 14,976
Provision for loss on patient care accounts receivable 9,687 4,776
Other ................................................ 753 (387)
Special charge - 7,150
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 ................................. (7,094) 2,238
Prepaid and other assets ............................ 1,390 (1,221)
Deferred income taxes ............................... (694) 178
Accounts payable and accrued expenses ............... 2,816 3,987
-------- --------
Total adjustments ....................................... 22,579 31,697
-------- --------
Net cash provided by operating activities ............... 31,416 39,758
-------- --------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of
cash acquired ....................................... - (47,413)
Acquisition of property and equipment ................. (16,194) (12,056)
Notes receivable ...................................... 528 2,490
Other investing activities ............................ 159 (608)
-------- --------
Net cash used in investing activities (15,507) (57,587)
-------- --------
Cash flows from financing activities:
Long-term debt borrowings ............................. 82,300 163,205
Long-term debt repayments ............................. (82,173) (154,123)
Issuance of common stock .............................. 6,131 424
Bank overdraft ........................................ (10,672) -
Distributions to minority interests ................... (1,612) (1,300)
-------- --------
Net cash (used in) provided by financing activities ... (6,026) 8,206
-------- --------
Net increase (decrease) in cash and cash equivalents .... 9,883 (9,623)
Cash and cash equivalents, beginning of period .......... 44,287 31,307
-------- --------
Cash and cash equivalents, end of period ................ $ 54,170 $ 21,684
======== ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest ........................................... $ 17,331 $ 10,120
======== ========
Income taxes, net $ (5,339) $ 3,153
======== ========
Non-cash investing and financing activities:
Assumption of long-term debt in connection with
acquisitions ........................................ $ - $ 11,018
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 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" or "Horizon/CMS") 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,
1997, as amended, 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) EARNINGS PER SHARE
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per Share." This
new standard supersedes Accounting Principles Board Opinion No. 15 ("APB 15"),
"Earnings Per Share," which the Company currently applies in the accompanying
financial statements. SFAS 128 eliminates several requirements of APB 15 and
simplifies earnings per share calculations. The adoption of SFAS 128, which is
effective beginning in the third quarter of fiscal year 1998, is to change
primary net earnings per share for the three months ended August 31, 1996 from
$0.15 per share to $0.16 per share. The adoption will have no effect on the
other measures of either primary or fully diluted net earnings per share during
the three months ended August 31, 1997 or 1996.
(3) OPERATING REVENUES
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs, private pay patients and
non-affiliated long-term care facilities. For the three months ended August 31,
1997 and 1996, the Company derived 33% of its revenues from Medicare. For the
three months ended August 31, 1997 and 1996, the Company derived 19% of its
revenues from Medicaid. Under the Medicare program and some state Medicaid
programs, the Company's long-term care and acute rehabilitation facilities are
paid interim amounts designed to approximate the facilities' reimbursable costs.
These interim amounts due from third party payors and amounts due from other
payor sources are recorded as patient care accounts receivable. For those
programs in 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 adjustments are made to such payments.
6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 (Continued)
(UNAUDITED)
Estimated settlements reflect expected amounts receivable from third
parties offset by expected amounts payable to third parties. The Company's total
net settlement position is anticipated to vary from period to period due to
several factors including: the significant number of individual providers for
which settlements must be estimated, the fact that several cost reporting
periods remain open for each provider at any given time, the numerous cost
reporting periods of the Company's various providers, the interrelationship
between continually changing interim rates and estimated settlements, the
unpredictable timing of tentative and final settlements and the offset of
estimated payables and receivables.
While settlement adjustments are common upon third-party intermediary
cost report examination, the Company is currently unaware of any matters that
may result in a retroactive cost report adjustment that would be material to the
Company's financial condition or results of operations.
There have been, and the Company expects that there will continue to
be, a number of proposals to limit Medicare and Medicaid reimbursement. The
Company cannot predict at this time what effect any of these proposals, if
adopted and implemented, would have on the Company, but there can be no
assurance 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.
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.
(4) SPECIAL CHARGE
The Company has recorded various special charges since fiscal 1994 for
which a portion of the original accruals are included in accrued expenses and
other liabilities as of August 31, 1997. At August 31, 1997, the remaining
balance in the special charge accruals is approximately $14,552 million and is
included in accrued expenses and other liabilities in the accompanying balance
sheet.
The components of the fiscal year 1997 special charge are as follows
(in thousands):
Lease
Termination Exit and
Legal Benefits Other Total
--------------------------------------------------
Balance May 31, 1997 $6,450 $1,968 $1,632 $10,050
Payments - (332) (104) (436)
--------------------------------------------------
Balance August 31, 1997 $6,450 $1,636 $1,528 $ 9,614
==================================================
7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 (Continued)
(UNAUDITED)
The components of the fiscal year 1996 special charge are as follows
(in thousands):
Lease
Exit and
Legal Other Total
--------------------------------------
Balance May 31, 1997 $1,535 $572 $2,107
Payments (473) (16) (489)
-------------------------------------
Balance August 31, 1997 $1,062 $556 $1,618
=====================================
The remaining balance of special charges recorded prior to fiscal year
1996 is approximately $3.3 million and relates to noncancellable commitments
through the year 2002.
(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. At August 31, 1997, the aggregate
revolving credit commitment under the Credit Facility was $750 million, of which
the Company had borrowed $605.2 million and had outstanding letters of credit of
$34.6 million. Pursuant to the original terms of the Credit Facility, on
September 26, 1997, the aggregate revolving credit commitment was reduced to
$700 million. 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
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 August 31, 1997 were 8.50% and 7.13% - 7.19% 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 October 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 on October 20, 1997. The collar agreement entitles the Company to
receive from the counterparty the amount, if any, by which average LIBOR
interest payments on the notional amount exceed 8.0% per annum. The collar
agreement requires that the Company pay to the counterparty the amount, if any,
by which average LIBOR interest payments on the notional amount are less than
4.57% per annum. The fair value of the collar agreement is estimated based on
quotes from market makers of these instruments and represents the estimated
amount that the Company would expect to receive or pay if the agreement was
terminated. The fair value of the collar on August 31, 1997 would require that
no payment be made by either party to terminate the agreement.
8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 (Continued)
(UNAUDITED)
(6) COMMITMENTS AND CONTINGENCIES
The Company is a party to threatened or pending litigation in
connection with several matters any one of which, if adversely determined, could
have a material adverse impact on the Company's financial condition and/or
results of operations. See "Item 1. Legal Proceedings" in Part II of this report
for a description of such litigation.
(7) PROPOSED MERGER OF THE COMPANY WITH HEALTHSOUTH
On February 17, 1997, the Company entered into a Plan and Agreement of
Merger (the "Merger Agreement") with HEALTHSOUTH Corporation ("HEALTHSOUTH") and
a wholly owned subsidiary of HEALTHSOUTH. The Merger Agreement provides that
such subsidiary would merge with and into the Company (the "Merger") and, upon
consummation of the Merger, the Company would become a wholly owned subsidiary
of HEALTHSOUTH and each issued and outstanding share of the Company's common
stock would be converted in the Merger into 0.84338 of one share of
HEALTHSOUTH's common stock.
The obligation of each of HEALTHSOUTH and the Company to consummate the
Merger is subject to certain conditions, including approval of the Merger
Agreement by the stockholders of the Company, certain regulatory approvals and
confirmation by each of HEALTHSOUTH and the Company of its representations and
warranties contained in the Merger Agreement as of the closing date. The Company
has called a Special Meeting of the stockholders of the Company to be held on
October 29, 1997 for the purpose of considering and voting upon a proposal to
approve the Merger Agreement. The acquisition is expected to be treated as a
tax-free reorganization and will be accounted for as a purchase.
9
<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
and long-term care services, principally in the Midwest, Southwest and Northeast
regions of the United States. At August 31, 1997, Horizon provided specialty
health care services through 30 acute rehabilitation hospitals in 14 states
(1,976 beds), 36 specialty hospitals and subacute care units in 11 states (852
beds), 287 outpatient rehabilitation clinics in 25 states and 1,380
rehabilitation therapy contracts in 37 states. At that date, Horizon provided
long-term care services through 121 owned or leased facilities (14,966 beds) and
11 managed facilities (1,429 beds) in a total of 17 states. Other medical
services offered by the Company include pharmacy, laboratory, physician and
allied health professional staffing services, Alzheimer's care, home health
care, physician practice management, non-invasive medical diagnostic, assisted
living, home respiratory, home infusion therapy and hospice care. For the three
months ended August 31, 1997 and 1996, the Company derived 48% of its revenues
from private sources, 33% from Medicare and 19% from Medicaid.
PROPOSED MERGER OF THE COMPANY WITH HEALTHSOUTH
On February 17, 1997, the Company entered into the Merger Agreement
with HEALTHSOUTH and a wholly owned subsidiary of HEALTHSOUTH. The Merger
Agreement provides that such subsidiary would merge with and into the Company
and, upon consummation of the Merger, the Company would become a wholly owned
subsidiary of HEALTHSOUTH and each issued and outstanding share of the Company's
common stock would be converted in the Merger into 0.84338 of one share of
HEALTHSOUTH's common stock. The Company and HEALTHSOUTH are sometimes herein
together called the "Combining Companies."
The obligation of each of HEALTHSOUTH and the Company to consummate the
Merger is subject to certain conditions, including approval of the Merger
Agreement by the stockholders of the Company, certain regulatory approvals and
confirmation by each of HEALTHSOUTH and the Company of its representations and
warranties contained in the Merger Agreement as of the closing date. The status
of certain of these conditions is as follows:
(i) Regulatory Approvals. A major regulatory approval required by the
Merger Agreement is that required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). The HSR Act
provides that certain business combinations (including the Merger) may
not be consummated until certain information has been furnished to the
Department of Justice (the "DOJ") and the Federal Trade Commission (the
"FTC") and certain waiting period requirements have been satisfied. On
April 11, 1997, each of the Combining Companies made their respective
filings with the DOJ and the FTC with respect to the Merger Agreement.
Under the HSR Act, the filings commenced a waiting period of up to 30
days during which the Merger could not be consummated, which waiting
period was originally to expire on May 11, 1997, unless extended by a
request for additional information. In order to provide an additional
period of time for the Combining Companies to provide certain
information to the FTC on a voluntary basis, HEALTHSOUTH withdrew its
HSR filing on May 7, 1997, and refiled it on May 8, 1997, beginning a
new 30 day waiting period. On June 6, 1997, the Combining Companies
received a request for additional information from the FTC. The request
for additional information related exclusively to the competitive
effect the Merger would have on the Johnson City, Tennessee market
area. The issue in the Johnson City, Tennessee market involves the
location in that market of two rehabilitation hospitals, one owned by
HEALTHSOUTH and the other by a joint venture between the Company and
another company. The Combining Companies are continuing to work to
resolve this issue to the satisfaction of the FTC. To that end, the
Company is currently negotiating the sale of its interest in the joint
venture to a third party and anticipates consummating such sale in the
near future.
(ii) Approval of Stockholders. The Company has called a Special Meeting
of its stockholders to be held on October 29, 1997 for the purpose of
considering and voting upon a proposal to approve the Merger Agreement.
Only holders of record of shares of the Company's common stock at the
close of business on August 14, 1997 (the "Record Date") will be
entitled to notice of and to vote at the Special Meeting. The Company
mailed a notice of the Special Meeting, together with a
prospectus-proxy statement containing information with respect to the
Merger Agreement and related matters, to the stockholders of record on
the Record Date on or about September 30, 1997.
<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
August 31,
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Total operating revenues .............................. 100.0% 100.0%
-------------------------
Cost of services ...................................... 84.7 83.8
Facility leases ....................................... 4.9 4.7
Depreciation and amortization ......................... 3.5 3.4
Interest expense ...................................... 3.2 2.8
Special charge ........................................ - 1.6
-------------------------
Earnings before minority interests and income taxes ... 3.7 3.7
Minority interests (0.2) (0.5)
-------------------------
Earnings before income taxes .......................... 3.5 3.2
Income taxes .......................................... 1.5 1.4
-------------------------
Net earnings .......................................... 2.0% 1.8%
=========================
</TABLE>
10
<PAGE>
The following table sets forth a summary of the Company's total
operating revenues by type of service and the percentage of total operating
revenues that each such service represented for each period indicated:
<TABLE>
<CAPTION>
Three Months Ended August 31,
------------------------------------------
1997 1996
------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Long-term care services ................... $101,673 22.9% $100,410 22.6%
Specialty health care services:
Acute and outpatient rehabilitation ..... 134,070 30.1 128,686 29.0
Contract therapy ........................ 93,652 21.1 92,955 21.0
Other (1) ............................... 111,317 25.0 114,113 25.7
Other operating revenues (2) .............. 3,854 0.9 7,470 1.7
-------- ----- -------- -----
Total operating revenues $444,566 100.0% $443,634 100.0%
======== ===== ======= =====
</TABLE>
- ------------------
(1) Includes revenues derived from pharmacy, physician and allied health
professional staffing services, home health care, physician practice management,
non-invasive medical diagnostic, assisted living and various other specialty
health care services.
(2) Includes revenues derived from management fees, interest income, rental
income and other miscellaneous revenues.
REVENUES
Total operating revenues increased approximately $0.9 million, or 0.2%,
for the three months ended August 31, 1997 compared to the corresponding period
in fiscal 1997. This increase is inclusive of a $21.6 million decline in acute
rehabilitation and subacute revenues resulting largely from the sale of the
Company's interests in five acute rehabilitation hospitals and nine congregate
care facilities during the third and fourth quarters of fiscal 1997 and a $3.6
million decline in other revenues resulting from the termination in May 1997 of
a contract pursuant to which the Company was managing 126 long-term care
facilities on behalf of Texas Health Enterprises, Inc. and certain of its
affiliates. These declines were offset by a $14.8 million increase in outpatient
rehabilitation revenues resulting primarily from the acquisition of
approximately 90 outpatient clinics during the second and third quarters of
fiscal 1997 and an approximate $9.5 million increase in revenues following
internal growth in institutional pharmacy and physician and allied health
professional staffing services programs.
COSTS AND EXPENSES
Cost of services increased approximately $4.6 million, or 1.2%, for the
three months ended August 31, 1997, compared to the corresponding period in
fiscal 1997. As a percentage of total operating revenues, cost of services for
the three months ended August 31, 1997 increased to 84.7% from 83.8% for the
corresponding period in fiscal 1997. This increase is due primarily to a $4.9
million increase in the provision for doubtful accounts resulting from a change
in the mix of revenue sources and in response to what management determined to
be a slight deterioration in private and other accounts receivable as measured
based upon an increase in the number of days required to collect these classes
of receivables.
Facility lease expense increased $0.7 million, or 3.2%, for the three
months ended August 31, 1997 compared to the corresponding period in fiscal
1997. As a percentage of total operating revenues, facility lease expense
increased to 4.9% for the three months ended August 31, 1997 from 4.7% for the
corresponding period in fiscal 1997.
Depreciation and amortization increased $0.7 million, or 5.0%, for the
three months ended August 31, 1997 compared to the corresponding period in
fiscal 1997. As a percentage of total operating revenues, depreciation and
amortization increased to 3.5% for the three months ended August 31, 1997 from
3.4% for the corresponding period in fiscal 1997.
Interest expense increased $2.1 million, or 17.0%, for the three months
ended August 31, 1997 compared to the corresponding period in fiscal 1997. As a
percentage of total operating revenues, interest expense increased to 3.2% for
the three months ended August 31, 1997 from 2.8% for the corresponding period in
fiscal 1997. 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
11
<PAGE>
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 $7.2 million special charge in the first quarter
of fiscal 1997. The special charge resulted from the approval by management of
the Company of restructuring measures relating to the Company's rehabilitation
hospital corporate office located in Mechanicsburg, Pennsylvania and certain
contract rehabilitation therapy operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash Uses
The net cash used in the Company's investing activities decreased from
$57.6 million for the three months ended August 31, 1996 to $15.5 million for
the three months ended August 31, 1997. The primary uses of cash in investing
activities were internal construction and capital expenditures for property and
equipment. Unlike the first quarter of fiscal 1997 when cash of $47.4 million
was used to effect acquisitions, no acquisitions were completed during the first
quarter of fiscal 1998. Cash required for internal construction and capital
expenditures for property and equipment increased during the three months ended
August 31, 1997 as compared with the same period in fiscal 1997 as a result of
expenditures required to complete construction of an office building to house
corporate operations.
In previous periods, the Company was engaged in a program of expansion
through the acquisition of other businesses and facilities and the construction
and improvement of facilities owned by the Company. During those periods, this
expansion program required funds: (i) to acquire assets and to expand and
improve existing and newly acquired facilities; (ii) to discharge funded
indebtedness assumed or otherwise acquired in connection with the acquisitions
of facilities and properties; and (iii) to finance the increase in patient and
other accounts receivable resulting from acquisitions. The funds necessary to
meet these requirements have been provided principally by the Company's
operating and financing activities and, to a lesser extent, during fiscal 1997
from sales of property and equipment.
The Company's expansion program has been curtailed since February 1997
as a result of the pending Merger with HEALTHSOUTH. If for any reason the Merger
is not consummated, any reinstatement of the Company's expansion program will be
dependent upon decisions with respect thereto by the management and board of
directors of the Company predicated on numerous factors, including the market
price of the Company's common stock, the Company's ability to refinance its
outstanding indebtedness under its Credit Facility and the Company's alternative
sources of cash.
Cash Sources
At August 31, 1997, the Company's working capital was $301.6 million
and included cash and cash equivalents of $54.2 million as compared with $289.7
million in working capital and $44.3 million in cash and cash equivalents at May
31, 1997. During the three months ended August 31, 1997, the Company's operating
activities provided $31.4 million of net cash, as compared to $39.8 million
during the same period in fiscal year 1997. In connection with the special
charges recorded prior to August 31, 1997 the Company made cash payments
totaling $1.2 million during the three months ended August 31, 1997.
At August 31, 1997, the available credit under the Company's Credit
Facility was $110.2 million. To the extent that the Company's operations require
cash expenditures in excess of the amounts 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.
12
<PAGE>
CREDIT FACILITY
The Company is the borrower under the Credit Facility with NationsBank
of Texas, N.A., as Agent, and the lenders named therein. At August 31, 1997, the
aggregate revolving credit commitment under the Credit Facility was $750
million, of which the Company had borrowed $605.2 million and had outstanding
letters of credit of $34.6 million. Pursuant to the original terms of the Credit
Facility, on September 26, 1997, the aggregate revolving credit commitment was
reduced to $700 million. 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 LIBOR plus 0.625% to 1.50% per annum, depending on the maintenance of
specified financial ratios. The applicable interest rates at August 31, 1997
were 8.50% and 7.13% - 7.19% 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 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 therein defined , 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.
FORWARD-LOOKING STATEMENTS
The matters discussed in this Form 10-Q 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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Motion for Injunction of the Merger by Southern Oaks
In 1996, Southern Oaks Health Care, Inc. ("Southern Oaks") instituted
legal action against the Company and certain of its affiliates in the Circuit
Court of the Ninth Judicial Circuit in Osceola County, Florida. In this action,
Southern Oaks alleges, among other things, breach of the partnership agreement
governing a general partnership between the Company and Southern Oaks (the
"Partnership"). The Partnership owns a nursing facility located in Kissimmee,
Florida. The Company has vigorously contested each allegation and claim for
relief in this action.
On October 8, 1997, Southern Oaks served the Company with a motion for
injunctive relief seeking, among other things, to enjoin the Company from
consummating the Merger with HEALTHSOUTH and from holding its Special Meeting of
Stockholders on October 29, 1997 for the purpose of considering and voting upon
a proposal to approve the Merger Agreement. The motion alleges that the Merger
would result in a sale or assignment of the Company's 50% interest in the
Partnership which, under the partnership agreement between the parties, must
first be offered to Southern Oaks. The Company believes, based upon the advice
of Subin, Rosenbluth, Losey, Brennan, Bittman & Morse, P.A., counsel to the
Company in this matter, that the motion is factually inaccurate and unsupported
by law and that the Merger will not result in a sale of the Company's interest
in the Partnership. The Company is vigorously opposing the motion. A hearing to
consider the motion has been set for October 27, 1997.
Tenet Healthcare Corporation and Related Litigation
As previously disclosed, Horizon/CMS filed a lawsuit on March 7, 1996
against Tenet Healthcare Corporation ("Tenet") in the United States District
Court for the District of Nevada. The lawsuit arose out of an agreement entered
into between Horizon/CMS and Tenet in connection with Horizon/CMS's attempted
acquisition of The Hillhaven Corporation ("Hillhaven") in January 1995. In the
lawsuit, Horizon/CMS alleges that Tenet failed to honor its commitment to pay
Horizon/CMS approximately $14.5 million pursuant to the agreement. Tenet has
contended that the amount owing to Horizon/CMS under the agreement is
approximately $5.1 million. During fiscal 1996, Horizon/CMS recognized as a
receivable approximately $13.0 million of the approximately $14.5 million
Horizon/CMS contends it is owed under the agreement. On May 13, 1997,
Horizon/CMS sought leave of the court to amend its complaint against Tenet to
assert, among other things, that Tenet tortiously interfered with Horizon/ CMS's
contractual relationship with its investment bankers, Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"). In this connection, Horizon/CMS seeks
actual damages against Tenet in the approximate amount of $14.5 million plus
pre-judgment interest and punitive damages.
On May 13, 1997, Horizon/CMS filed a lawsuit against DLJ in the United
States District Court for the Central District of California. This lawsuit
arises out of the events and circumstances involved in the lawsuit against
Tenet. Specifically, this lawsuit alleges that DLJ, which served as investment
banker to Horizon/CMS in connection with Horizon/CMS's attempted acquisition of
Hillhaven, breached its fiduciary duty to Horizon/CMS, engaged in professional
negligence and tortiously interfered with Horizon/ CMS's contract with Tenet by
advising Tenet not to pay the $14.5 million Horizon/CMS contends is owing under
the agreement. In this connection, Horizon/CMS seeks actual damages against DLJ
in the approximate amount of $14.5 million and punitive damages. On June 27,
1997, pursuant to an agreement reached with DLJ and its counsel, Horizon/CMS
filed a new lawsuit against DLJ in the United States District Court for the
District of Nevada. This lawsuit is identical in all respects to the lawsuit
filed in the United States District Court for the Central District of
California. Pursuant to the agreement with DLJ and its counsel, DLJ has agreed
that it will not contest either jurisdiction or venue in Nevada. In addition, on
June 27, 1997, Horizon/CMS moved to consolidate the two Nevada matters.
Horizon/CMS has agreed to dismiss the litigation pending in California upon
consolidation of the two Nevada matters. Upon consolidation, Horizon/CMS will
seek an aggregate of $14.5 million in actual damages plus prejudgment interest
and punitive damages against Tenet, DLJ or both. Horizon is vigorously
prosecuting this litigation matter; no assurance can be given, however, that
Horizon will ultimately prevail.
SEC and NYSE Investigations
The Division of Enforcement of the Commission is conducting a private
investigation with respect to trading in the securities of Horizon/CMS and
Continental Medical Systems, Inc. ("CMS"), a wholly owned subsidiary of the
Company that was acquired in July 1995. In connection with that investigation,
Horizon/CMS has produced certain documents and Neal M. Elliott, Chairman of the
Board, President and Chief Executive Officer of Horizon/CMS, and certain other
present and former officers of Horizon/CMS have given testimony to the
Commission. Horizon/CMS has also been informed that certain of its division
office employees and an individual, affiliates of whom have limited business
relationships with Horizon/CMS, have responded to subpoenas from the Commission.
Mr. Elliott has also produced certain documents in response to a subpoena from
the Commission. In addition, Horizon/CMS and Mr. Elliott have responded to
separate subpoenas from the Commission pertaining to trading in Horizon/CMS's
common stock and Horizon/CMS's March 1, 1996 press release announcing a revision
in Horizon/CMS's third quarter earnings estimate; Horizon/CMS'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 &
Sports Medicine, Inc. ("Pacific Rehab") could not be effected by
14
<PAGE>
April 1, 1996; Horizon/CMS's March 15, 1996 press release announcing the
existence of a federal investigation into certain of Horizon/CMS's Medicare Part
B billings; Horizon/CMS's February 19, 1997 announcement that HEALTHSOUTH would
acquire Horizon/CMS; and any discussions of proposed business combinations
between Horizon/ CMS and Medical Innovations, Inc. and Horizon/CMS and certain
other companies. The investigation is ongoing, and neither Horizon/CMS nor Mr.
Elliott possesses all the facts with respect to the matters under investigation.
Although neither Horizon/CMS nor Mr. Elliott has been advised by the Commission
that the Commission has concluded that any of Horizon/CMS, Mr. Elliott or any
other current or former officer or director of Horizon/CMS 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 Horizon/CMS
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
Horizon/CMS that it had initiated a review of trading in Hillhaven common stock
prior to the announcement of Horizon/ CMS's proposed acquisition of Hillhaven.
In April 1995, the NYSE extended the review of trading to include all dealings
with CMS. In April 3, 1996, the NYSE notified Horizon/CMS that it had initiated
a review of trading in its common stock preceding Horizon/CMS's March 1, 1996
press release described above. On February 20, 1997, the NYSE notified
Horizon/CMS that it was reviewing trading in Horizon/ CMS's securities prior to
the February 18, 1997 announcement that HEALTHSOUTH would acquire Horizon/CMS.
Horizon/CMS is cooperating with the NYSE in its reviews and, to Horizon/CMS's
knowledge, the reviews are ongoing.
Michigan Attorney General Investigation Into Long-Term Care Facility In Michigan
Horizon/CMS learned in September 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 Horizon/CMS since
February 1994. 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. Horizon/CMS has advised the Michigan Attorney General that it is
willing to cooperate in this investigation. Horizon/CMS cannot now predict when
the investigation will be completed; the ultimate outcome of the investigation;
or the effect thereof on Horizon/CMS'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 Horizon/CMS, which
could have a material adverse impact on Horizon/CMS's financial condition and
its results of operations.
Stockholder Litigation
On March 28, 1996, Horizon/CMS 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 v. 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 Horizon/CMS in its June 6, 1995 joint proxy
statement/prospectus (the "CMS Prospectus"). The plaintiff alleges that
Horizon/CMS failed to disclose in the CMS Prospectus those problems in
Horizon/CMS's Medicare Part B billings Horizon/CMS described in its related
March 15, 1996 announcement. In this action, the plaintiff seeks damages in an
unspecified amount, plus costs and attorneys' fees. On August 22, 1997, the
Company and the plaintiff entered into a stipulation whereby the Plaintiff
agreed to dismiss the litigation upon final approval of the settlement described
below.
During the fourth quarter of fiscal 1996, Horizon/CMS was served with
several complaints by current or former stockholders of Horizon/CMS on behalf of
all persons who purchased Horizon/CMS
15
<PAGE>
Common Stock 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 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 alleged violations of federal and
New Mexico state securities laws. Among such violations, the plaintiffs alleged
that Horizon/CMS, certain of its current and former directors and certain former
directors of CMS, disseminated materially misleading statements or omitted
disclosing material facts about Horizon/CMS and its operations.
On February 20, 1997, Horizon/CMS 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, Horizon/CMS agreed to pay a minimum amount of $17.0 million
to resolve all claims against Horizon/CMS 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 Horizon/CMS is $20.0 million to resolve completely and
finally 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 conceded or admitted any of the plaintiffs' claims or
allegations.
On April 7, 1997, Horizon/CMS paid the $17.0 million, in trust, to the
plaintiffs' lead counsel. Also in April, 1997, Horizon/CMS 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.
On August 19, 1997, the plaintiffs and the individual defendants
announced to the Court that they had reached a settlement of the claims excluded
by the Company's prior settlement. This proposed settlement calls for the claims
to settle by a payment of $4.0 million. This entire amount will be paid by CMS's
directors' and officers' liability insurance carrier. The effect of this
settlement is to discharge the Company of its $3.0 million guarantee described
above. Accordingly, subject to negotiation and execution of definitive
agreements between the Company and its carrier reflecting such settlement, the
Company's $17.0 million payment will represent the Company's total liability to
the plaintiffs in this matter.
On September 12, 1997, the Court, after hearing, entered an order
approving the settlement. The time for appeal has expired and, accordingly, the
judgement has become final.
Stockholder Derivative Actions
Commencing in April and continuing into May 1996, Horizon/CMS was
served with nine complaints alleging a class action derivative action brought by
stockholders of Horizon/CMS for and on behalf of Horizon/CMS 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 Horizon/CMS's current and former directors breached their
fiduciary duties to Horizon/CMS
16
<PAGE>
and the stockholders as a result of (i) the purported failure to supervise
adequately and the purported knowing mismanagement of the operations of
Horizon/CMS, and the (ii) purported misuse of inside information in connection
with the sale of Horizon/CMS's Common Stock by certain of the current and former
directors in January and February 1996. To that end, the plaintiffs seek an
accounting from the directors for profits to themselves and damages suffered by
Horizon/CMS 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. There can be no assurance of the outcome or
the effect of this litigation or the length of time it will take to resolve this
litigation.
In April 1996, Horizon/CMS was served with a complaint in a
stockholder's 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 Horizon/CMS's current and former directors breached their
fiduciary duties to Horizon/CMS and the stockholders as a result of (i) the
purported failure to supervise adequately and the purported knowing
mismanagement of the operations of Horizon/CMS, and the (ii) purported misuse of
inside information in connection with the sale of Horizon/CMS'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 Horizon/CMS as a result of the transaction
complained of in the complaint and attorneys' fees and costs. Horizon/CMS 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. There can be no assurance of the outcome or
the effect of this litigation or the length of time it will take to resolve this
litigation.
Lawsuit by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc.
On May 28, 1997, CMS was served with a lawsuit styled Kenneth Hubbard
and Lynn Hubbard v. Rocco Ortenzio, Robert A. Ortenzio and Continental Medical
Systems, Inc., No. 3:97 CV294MCK, filed in the United States District Court for
the Western District of North Carolina, Charlotte Division by the former
shareholders of Communi-Care, Inc. and Pro Rehab, Inc. (now known as RehabWorks)
seeking damages arising out 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 plaintiffs
allege that the manner in which CMS and the other defendants operated the
companies after their acquisition breached their fiduciary duties to the
plaintiffs, constituted fraud, gross negligence and bad faith and a breach of
their employment agreements with the companies. As a result of such alleged
conduct, the plaintiffs assert that they are entitled to damages in an amount in
excess of $27.0 million from CMS and the other defendants. Horizon/CMS believes,
based upon the advice of Eaves, Bardacke & Baugh, P.A., counsel to Horizon/CMS
in this matter, the assertions of these plaintiffs to be without factual or
legal merit and, as a result, intends to contest such claims vigorously. Because
this litigation has just been commenced, Horizon/CMS cannot now predict the
outcome of such litigation, the length of time it will take to resolve such
litigation or the effect of any such resolution on Horizon/CMS's financial
condition or results of operations.
RehabOne Litigation
In March 1997, Horizon/CMS 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 federal and state securities laws,
fraud, and negligent misrepresentation by Horizon/CMS and certain former
officers of CMS in connection with the issuance of a warrant to
17
<PAGE>
purchase 500,000
shares of Horizon/CMS Common Stock (the "Warrant"). The Warrant was issued to
the plaintiff by Horizon/CMS 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. Horizon/CMS disputes the factual and legal
assertions of the plaintiff in this litigation and intends to contest the
plaintiff's claims vigorously. Horizon/CMS has moved to dismiss the complaint
and that motion is pending. Because this litigation has just commenced,
Horizon/CMS 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
Horizon/CMS's financial condition or results of operations.
EEOC Litigation
In March 1997, the Equal Employment Opportunity Commission (the "EEOC")
filed a complaint against Horizon/CMS alleging that Horizon/CMS has engaged in
unlawful employment practices in respect of Horizon/CMS's employment policies
related to pregnancies. Specifically, the EEOC asserts that Horizon/CMS's
alleged refusal to provide pregnant employees with light-duty assignments to
accommodate their temporary disabilities caused by pregnancy violates Sections
701(k) and 703(a) of Title VII, 42 U.S.C. (section) 2000e-(k) and 2000e-2(a). In
this lawsuit, the EEOC seeks, among other things, permanently to enjoin
Horizon/CMS's employment practices in this regard. Horizon/CMS disputes the
factual and legal assertions of the EEOC in this litigation and intends to
contest the EEOC's claims vigorously. Because this litigation has just
commenced, Horizon/CMS 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 Horizon/ CMS's financial condition or results of operations.
North Louisiana Rehabilitation Hospital Medicare Billing Invesigation
In August 1996, the United States Attorney for the Western District of
Louisiana, without actually initiating litigation, apprised Horizon/CMS of
alleged civil liability under the federal False Claims Act for what the
government believes were false or fraudulent Medicare and other federal program
claims submitted by Horizon/CMS's North Louisiana Rehabilitation Hospital
("NLRH") during the period from 1989 through 1992, including certain claims
submitted by a physician who was a member of the medical staff and under
contract to NLRH during the period. Specifically, the government alleges that
NLRH facilitated the submission of false claims under Part B of the Medicare
program by the physician and that NLRH itself submitted false claims under Part
A of the Medicare program for services that were not medically necessary. In
August 1996, the U.S. Attorney identified allegedly improper Part A and Part B
billings, together with penalty provisions under the False Claims Act, ranging
in the aggregate from approximately $1.7 million to $2.2 million. The government
does not dispute that the Medicare Part A services were rendered, only whether
they were medically necessary. Horizon/CMS has vigorously contested the
allegation that any cases of disputed medical necessity in this matter
constitute false or fraudulent claims under the civil False Claims Act.
Moreover, Horizon/CMS denies that NLRH facilitated the submission of false
claims under Medicare Part B.
In late April 1997, Horizon/CMS received administrative subpoenas
relating to the matter and has since then produced extensive materials with
respect thereto. Without conceding liability for either the Medicare Part A or
Part B claims, in May 1997, Horizon commenced preliminary settlement discussions
with the government. In preparation for settlement meetings held in late June
and mid-July 1997, Horizon/CMS and the government developed and then refined
their respective analyses of any losses the government may have incurred in this
regard. Following the July 1997 meeting, the government proposed to Horizon/CMS
that the matter be settled by Horizon/CMS paying the government $4.9 million
with respect to alleged Medicare Part A overpayments and that Horizon/CMS and
certain individual physicians pay the government $820,000 with respect to
Medicare Part B claims for physician services. In late July, Horizon/CMS
responded by offering to settle the matter for $3.7 million for alleged Medicare
Part A overpayments and $445,000 for alleged Medicare Part B claims for which
Horizon/CMS potentially could bear any responsibility. Horizon/CMS anticipates
that settlement discussions will continue and, at this time, is optimistic that
the matter can be resolved without litigation.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule - Three months ended August 31, 1997
b. Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
quarter ended August 31, 1997.
19
<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: October 15, 1997
- -----------
* Ernest A. Schofield is signing in the dual capacities as Chief Financial
Officer and as a duly authorized officer of the Company.
20
<PAGE>
INDEX TO EXHIBITS
Exhibit Description of Exhibits
Number -----------------------
- ------
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule - Three months ended August 31, 1997
21
EXHIBIT 11.1
HORIZON/CMS HEALTHCARE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share earnings)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
August 31, 1997 August 31, 1996
-----------------------------------
Common and Common Equivalents:
<S> <C> <C>
Net earnings .............................................. $ 8,837 $ 8,061
===================================
Applicable common shares:
Weighted average outstanding shares during the period ..... 52,405 51,976
Weighted average shares issuable upon exercise of common
stock equivalents outstanding (principally stock
options and warrants using the treasury stock method).... 703 134
-----------------------------------
Total ....................................................... 53,108 52,110
===================================
Net earnings per share: $ 0.17 $ 0.15
===================================
Assuming Full Dilution:
Net earnings .............................................. $ 8,837 $ 8,061
Interest on convertible debentures, net of income taxes.... 22 22
-----------------------------------
Net earnings used for computation of per share earnings.... $ 8,859 $ 8,083
===================================
Applicable common shares:
Weighted average outstanding shares during the period 52,405 51,976
Weighted average shares issuable upon exercise of common
stock equivalents outstanding (principally stock
options and warrants using the treasury stock method
and convertible debentures) ............................. 832 270
-----------------------------------
Total .................................................... 53,237 52,246
===================================
Net earnings per share: $ 0.17 $ 0.15
===================================
22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains mandatory financial information extracted from the
August 31, 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> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 54,170
<SECURITIES> 0
<RECEIVABLES> 384,231
<ALLOWANCES> 55,515
<INVENTORY> 0
<CURRENT-ASSETS> 505,327
<PP&E> 783,030
<DEPRECIATION> (152,647)
<TOTAL-ASSETS> 1,612,982
<CURRENT-LIABILITIES> 203,736
<BONDS> 733,876
0
0
<COMMON> 53
<OTHER-SE> 635,404
<TOTAL-LIABILITY-AND-EQUITY> 1,612,982
<SALES> 0
<TOTAL-REVENUES> 444,566
<CGS> 0
<TOTAL-COSTS> 428,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,687
<INTEREST-EXPENSE> 14,404
<INCOME-PRETAX> 15,292
<INCOME-TAX> 6,455
<INCOME-CONTINUING> 8,837
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,837
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
