- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K/A AMENDMENT NO. 2 (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM -------- TO -------- COMMISSION FILE NO. 1-9369 -------------------------- HORIZON/CMS HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 91-1346899 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6001 INDIAN SCHOOL ROAD, N.E., SUITE 530 ALBUQUERQUE, NM 87110 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (505) 881-4951 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------------------------- -------------------------------------- Common Stock, par value New York Stock Exchange $.001 per share Securities registered pursuant to Section 12(g) of the Act: None 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / At August 10, 1995, the registrant had 50,480,302 shares of Common Stock outstanding. The aggregate market value on July 31, 1995 of the registrant's Common Stock held by nonaffiliates of the registrant was $1,042,815,120 (based on the closing price of these shares as quoted on such date on the New York Stock Exchange). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (as amended)...................................... 1 Signatures................................................................ 8 i PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (as amended) OVERVIEW The Company adopted a strategic business plan in 1990 to increase its specialty health care services as a percent of operating revenues. The Company has pursued this strategy by acquiring long-term care facilities and integrating its specialty health care services into those facilities, by acquiring providers of specialty health care services, and by offering the Company's broad range of specialty health care services to third parties. As a result, the Company's operating revenues have grown from $105.7 million in fiscal 1990 to $639.1 million in fiscal 1995. Moreover, specialty health care services have grown from $17.4 million, or 16.5% of operating revenues in fiscal 1990 to $284.4 million, or 44.5% of operating revenues in fiscal 1995. The Company now provides a broad range of specialty health care services including subacute care, rehabilitation therapies, Alzheimer's care, institutional pharmacy services, non-invasive medical diagnostic and sleep diagnostic testing services and clinical laboratory services. As previously discussed, the Company acquired CMS on July 10, 1995 by means of a merger of a wholly owned subsidiary of the Company with and into CMS, with CMS being the surviving corporation. Upon consummation of the CMS Merger, CMS became a wholly owned subsidiary of the Company. The CMS Merger will be accounted for as a pooling of interests. Under the terms of the merger agreement, each outstanding share of CMS's common stock was converted into .5397 of one share of the Company's common stock, resulting in the Company issuing approximately 20.9 million shares, valued at approximately $393.9 million based on the closing price of the Company's common stock on July 10, 1995. Approximately 50.3 million shares of the Company's common stock were outstanding following the CMS Merger. Additionally, outstanding options to acquire shares of CMS's common stock were converted into options to acquire approximately 3.8 million shares of the Company's common stock. The Company's strategic business plan emphasizes operating and expanding its long-term care and specialty programs and services in regionally concentrated areas, including the midwest, southwest and northeast regions of the United States. The Company is expanding its specialty health care programs and services through the development of institutional pharmacies, acquisition and development of therapy companies and medical diagnostic companies and the conversion and renovation or acquisition of specialty hospitals. In turn, the acquisition of long-term care facilities in certain geographic areas has enhanced the Company's expansion of its specialty programs. Specifically, in certain geographic areas, the Company's long-term care presence is a platform from which it can vertically integrate its specialty health care programs and services. CMS is one of the nation's largest providers of comprehensive inpatient and outpatient medical rehabilitative services. CMS has a significant clinical and market presence in each of the medical rehabilitation industry's three principal sectors -- inpatient rehabilitation care, outpatient rehabilitation care and contract rehabilitation therapies. CMS operates 37 freestanding rehabilitation hospitals, provides outpatient rehabilitation services at more than 130 locations and manages 13 inpatient rehabilitation units for general acute care hospitals. These services are provided in 20 states. CMS also provides physician staffing services. 1 The CMS Merger will be accounted for as a pooling of interests and will require the restatement of all historical financial statements to combine the operations of the two companies. On a pro forma basis reflecting the CMS pooling combination and the disposal of the eight facilities previously discussed for the year ended May 31, 1995, total operating revenues would be $1.6 billion or approximately 2.4 times the Company's 1995 total operating revenues. These growth objectives have been, and will continue to be, the basis of a strategic business plan that has resulted in net earnings of $31.2 million, $16.6 million and $7.7 million for the fiscal years ended May 31, 1995, 1994 and 1993, respectively, and $31.0 million for the year ended May 31, 1995, on a pro forma basis giving effect to the CMS Merger and the planned disposition of the eight facilities previously discussed. See Note 13 of Notes to Consolidated Financial Statements included elsewhere herein for further discussion of the CMS Merger, the planned disposition of the eight long-term care facilities and pro forma combined financial information. RESULTS OF OPERATIONS The following table sets forth certain statement of earnings data expressed as a percentage of total operating revenues: YEAR ENDED MAY 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Total operating revenues............................. 100.0% 100.0% 100.0% ----------- ----------- ----------- Total routine expenses (1)........................... 78.8 80.3 80.8 Total property expenses (2).......................... 13.2 12.6 14.1 ----------- ----------- ----------- Total operating expenses......................... 92.0 92.9 94.9 ----------- ----------- ----------- Earnings from operations............................. 8.0 7.1 5.1 Income taxes......................................... 3.1 2.7 1.7 ----------- ----------- ----------- Net earnings..................................... 4.9% 4.4% 3.4% ----------- ----------- ----------- ----------- ----------- ----------- <FN> - ------------------------ (1) Includes the cost of nursing services, all other direct service costs and general and administrative costs. (2) Includes facility leases, interest, depreciation and amortization and other property related costs. 2 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: YEAR ENDED MAY 31, ---------------------------------------------------------------------------- 1995 1994 1993 ------------------------ ------------------------ ------------------------ (DOLLARS IN THOUSANDS) Long-term care services.............. $ 342,183 53% $ 226,187 60% $ 165,802 71% Specialty health care services (1).......... 284,452 45 141,733 38 62,854 27 Other operating revenues (2).......... 12,445 2 7,175 2 3,543 2 ----------- --- ----------- --- ----------- --- Total operating revenues.............. $ 639,080 100% $ 375,095 100% $ 232,199 100% ----------- --- ----------- --- ----------- --- ----------- --- ----------- --- ----------- --- <FN> - ------------------------ (1) Includes revenues derived from subacute care, rehabilitation and other therapies, institutional pharmacy operations, Alzheimer's care, noninva- sive medical diagnostic testing services and clinical laboratory services. (2) Includes revenues derived from management fees, interest income, rental income and other miscellaneous services. The following table sets forth the number of facilities operated by the Company at the end of each period indicated, the aggregate number of licensed beds contained in such facilities and average occupancy of such beds during the periods indicated: YEAR ENDED MAY 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Number of facilities (end of period) (1).................... 149 109 81 Number of licensed beds (end of period) (2)................. 17,776 12,251 8,962 Average occupancy (3)....................................... 88% 89% 90% <FN> - ------------------------ (1) Includes the Company's long-term care facilities and specialty hospitals, in the latter case including those located within discrete areas of long-term care facilities. (2) "Licensed beds" refers to the number of beds for which a license has been issued, which may vary in some instances from beds available for use. (3) Average occupancy is computed by dividing the total bed days occupied by the total licensed bed days available for the last month of the period indicated. YEAR ENDED MAY 31, 1995 COMPARED TO YEAR ENDED MAY 31, 1994 Total operating revenues increased approximately $264.0 million or 70.4% for fiscal 1995 as compared with fiscal 1994. The majority of such increase is the result of the Company's expansion, both internally and through acquisition, since May 31, 1994. Greenery, which was acquired in February 1994, contributed $130.7 million of operating revenues in fiscal 1995 as compared to $46.2 million contributed during the three and one-half months Greenery was owned by the 3 Company in fiscal 1994. peopleCARE, which was acquired in July 1994, contributed $78.3 million of operating revenues in fiscal 1995. The Company added the operations of 13 long-term care facilities in such transaction. During fiscal 1995, the Company also completed other acquisitions resulting in the addition of approximately 4,000 long-term care beds, a skilled nursing center, two rehabilitation providers, two sleep diagnostic clinics, two home respiratory providers, and two medical diagnostic services companies. The Company also entered into managment contracts involving approximately 1,020 long-term care beds. An additional cause of the increase in revenues is increases in Medicare, Medicaid and private pay rates and increased utilization of higher margin specialty health care services. Revenues attributable to specialty health care services as a percentage of total operating revenues increased to 45% in fiscal 1995 from 38% in fiscal 1994. The average increase in rates per patient day across all pay types was approximately 8.8%. The increase in operating revenues attributable to such rate increases was approximately $37.2 million. The average occupancy of the Company's facilities remained essentially flat at 88% and as a consequence had little or no effect on operating revenues. Routine expenses increased approximately $202.6 million or 67.3% in fiscal 1995 from $301.2 million in fiscal 1994. This increase is due primarily to the increase in the number of long-term care facilities, specialty hospitals and subacute care units operated by the Company, as well as the costs associated with the expansion of specialty health care services and programs. Facility lease expense, depreciation and amortization and other property expense increased approximately 60.5% for the same period. This increase is directly related to the increased number of facilities operated. Interest expense nearly tripled during this period. This increase is due primarily to the following factors: (i) an increase in the Company's average investment in owned facilities due in large part to the Greenery merger late in fiscal 1994 and the peopleCARE acquisition early in fiscal 1995, (ii) capital lease interest associated with the six peopleCARE leased facilities, (iii) assumption of $54.8 million of Greenery bonds late in fiscal 1994 and (iv) increased borrowings under the Company's then existing credit facility in connection with other facility acquisitions during fiscal 1995. As a result of the foregoing factors, net earnings increased to $31.2 million or $1.16 per share for the year ended May 31, 1995. This compares to net earnings of $16.6 million or $.91 per share for fiscal 1994. YEAR ENDED MAY 31, 1994 COMPARED TO YEAR ENDED MAY 31, 1993 Total operating revenues increased approximately $142.9 million or 61.5% for fiscal 1994 as compared with fiscal 1993. The largest portion of such increase is the result of the Company's expansion, both internally and through acquisition, since May 31, 1993. Greenery, which was acquired in February 1994, contributed $46.2 million of operating revenues in fiscal 1994. At May 31, 1994 (without giving effect to the Greenery merger), the Company operated three more long-term care facilities, three more specialty hospitals and three more subacute care units than it did at May 31, 1993. As a result of the consummation of the Greenery merger in February 1994, the Company added the operations of 17 rehabilitation and skilled nursing facilities and three managed facilities. 4 During fiscal 1994, the Company also expanded its institutional pharmacy services, its rehabilitation services in Ohio, Nevada and Texas, and its clinical laboratory services in Texas. An additional cause of the increase in revenues is increases in Medicare, Medicaid and private pay rates and increased utilization of higher margin specialty health care services. Revenues attributable to specialty health care services as a percentage of total operating revenues increased to 38% in fiscal 1994 from 27% in fiscal 1993. The average increase in rates per patient day across all pay types was approximately 9.7%. The increase in operating revenues attributable to such rate increases was approximately $18.8 million. The average occupancy of the Company's facilities remained essentially flat at 89%. Routine expenses increased approximately $113.7 million or 60.6% in fiscal 1994 from $187.6 million in fiscal 1993. This increase is due primarily to the increase in the number of long-term care facilities, specialty hospitals and subacute care units operated by the Company, as well as the costs associated with the expansion of specialty health care services and programs. Greenery accounted for $37.9 million of such increase. Facility lease expense, depreciation and amortization and other property expense increased approximately 42.7% for the same period. This increase is directly related to the increased number of facilities operated. Of the total increase, Greenery accounted for approximately 20%. Interest expense increased approximately 46.8% during this period. This increase is related to draws under the Company's then-existing credit facility, and assumption of certain bonds and secured real property indebtedness in connection with facility acquisitions during fiscal 1994. Of the total increase, interest expense related to Greenery accounted for approximately 10%. As a result of the foregoing factors, net earnings increased to $16.6 million or $.91 per share for the year ended May 31, 1994. This compares to net earnings of $7.7 million or $.62 per share for fiscal 1993. The Greenery merger, which was accounted for as a purchase, had no significant effect on the Company's results of operations for the year ended May 31, 1994. LIQUIDITY AND CAPITAL RESOURCES (as amended) OPERATIONS. At May 31, 1995, the Company's working capital was $153.0 million and included cash and cash equivalents of $20.4 million as compared with $65.1 million in working capital and $6.5 million in cash and cash equivalents at May 31, 1994. During the two years ended May 31, 1995 and 1994, the Company's operating activities used $27.7 million and $21.7 million of net cash, respectively, primarily as a result of increases in patient care and estimated Medicare and Medicaid settlements accounts receivable in each period. The Company derives net patient care revenues principally from public funding through the Medicaid and Medicare programs and also from private pay patients and non-affiliated long-term care facilities. Under the Medicare program and some state Medicaid programs, the Company's long-term care facilities are periodically paid in interim amounts designed to approximate the facilities' reimbursable costs or the applicable payment rate. Periodic amounts due from interim third party payors and amounts due from other payor sources are recorded as patient care accounts receivable. Most of the Company's Medicaid payments are prospective payments intended to approximate costs and, normally, no retroactive adjustment is made to such payments. 5 With respect to interim payor sources for which payments are subject to retroactive adjustment, actual costs incurred are reported by each facility annually. The cost reports are subject to audit, which may result in upward or downward adjustment from interim payments received. Throughout the annual cost reporting period, the Company records the estimated difference between interim payments received and the expected actual costs as estimated Medicare and Medicaid settlements. The settlement of costs reports has historically not had a significant effect on the Company's operating results or cash flows. The $27.7 million use of cash in operations during the year ended May 31, 1995 was due in large part to an approximate $36.4 million increase in patient care accounts receivable and a $14.8 million increase in estimated Medicare and Medicaid settlements. The increase in patient care accounts receivable was caused by an approximate 35.5% increase in revenue per day between the periods as well as an approximate 14.9% increase in number of days revenue in accounts receivable. The increase in number of days revenue in accounts receivable was caused by a delay in collection of receivables following several acquisitions late in fiscal 1995 and a general shift to a higher concentration of slower paying specialty health care services. The Company generally experiences an approximate 90 to 180 day lag in collections following an acquisition due to the time necessary to change Medicare and Medicaid provider billing numbers and to transition other billing related information. Specialty health care revenues represented 44.5% and 37.8% of total operating revenues for fiscal 1995 and 1994, respectively. The increase in estimated Medicare and Medicaid settlements was primarily due to a general increase in actual costs incurred which exceeded interim billing estimates for such costs. The $21.7 million use of cash in operations during the year ended May 31, 1994 was due in large part to an approximate $24.1 million increase in patient care accounts receivable and a $5.9 million increase in estimated Medicare and Medicaid settlements. The increase in patient care accounts receivable was caused by an approximate 84.5% increase in revenue per day between the periods as well as an approximate 36.0% increase in number of days revenue in accounts receivable. The increase in revenue per day was caused by a 36.7% increase in the number of licensed beds operated and a general shift to a higher concentration of higher margin specialty health care services. The increase in number of days revenue in accounts receivable was caused by a delay in collection of receivables following the acquisition of Greenery in February 1994 and the general shift to a higher concentration of slower paying specialty health care services. The Company experienced a delay in Greenery billings due to the time necessary to change Medicare and Medicaid provider filling numbers and to transition other billing related information. Specialty health care revenues represented 37.8% and 27.1% of total operating revenues for fiscal 1994 and 1993, respectively. The increase in estimated Medicare and Medicaid settlements was primarily due to the increase in revenue per day between the periods. The use of cash in operations to stabilize accounts receivable experience associated with acquisitions is not expected to have as significant an effect on cash flows in the future as the size of acquisitions relative to the Company's operations decreases and as the Company utilizes experience gained in the past to reduce the period required to transition acquisitions. Further, relative increases in the slower paying specialty health care services concentration are expected to slow which is expected to slow the increase in days revenue in accounts receivable. With respect to estimated Medicare and Medicaid settlements, there are currently no significant audit issues outstanding related to filed costs reports. As a result, the Company is not aware of any settlement matters that could materially affect future cash flows or operating results. EXPANSION PROGRAM. The net cash used by the Company's investing activities increased from $47.4 million in fiscal 1993 to $49.5 million in fiscal 1994 and 6 to $138.4 million in fiscal 1995. The primary uses of cash from investing activities have been capital expenditures including, specifically, in fiscal 1994, the Greenery merger, and in fiscal 1995, the peopleCARE acquisition and other acquisitions. Capital expenditures were $53.4 million in fiscal 1993, $40.6 million in fiscal 1994, and $38.0 million in fiscal 1995. The principal purpose of the capital expenditures during each of these periods has been to fund the Company's internal and external expansion program. While capital expenditures during the three years ended May 31, 1995 aggregated $132.0 million, only $18.4 million was expended for maintenance of existing facilities. In addition, the Greenery merger consumed $7.8 million in cash in fiscal 1994. In fiscal 1995, the peopleCARE acquisition consumed $61.3 million in cash and other individually insignificant acquisitions consumed $37.1 million in cash. 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 care and other accounts receivable resulting from acquisitions. The funds necessary to meet these requirements have been provided principally by the Company's financing activities and, to a lesser extent, from the sale of marketable securities and the sale of land, buildings and equipment. During the three years ended May 31, 1995, proceeds from the issuance of Company debt, net of debt repayments and repurchases, amounted to $91.2 million. In addition, the proceeds from the issuance of Common Stock totaled $184.0 million. SOURCES. At May 31, 1995, the available credit under the Company's then-existing credit facility was $133.4 million. To the extent that the Company's operations and expansion program require cash expenditures in excess of the amounts available to it under the Credit Facility (as defined below), management of the Company believes that the Company can obtain the necessary funds through other financing activities, including the issuance and sale of debt and equity securities in public and private markets. In addition, the Company anticipates that the previously discussed disposal of eight facilities will result in net cash proceeds of approximately $9.6 million. CREDIT FACILITY The Company is the Borrower under a Credit Agreement dated July 6, 1995 (the "Credit Facility") with NationsBank of Texas, N.A., as Agent, and the lenders party thereto. The aggregate revolving credit commitment under the Credit Facility is $250 million, of which the Company had borrowed $105.1 million at July 31, 1995. 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 rate at July 31, 1995 was 8.75% and 6.875% on the Alternate Base Rate and Adjusted London InterBank Offer Rate advances, respectively. In addition, borrowings thereunder mature in June 2000 and are secured by a pledge of the capital stock of all subsidiaries of the Company, other than subsidiaries of CMS. 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 25% of the Company's net income for the prior fiscal year. 7 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of February, 1996. HORIZON/CMS HEALTHCARE CORPORATION By /s/ ERNEST A. SCHOFIELD -------------------------------------------- Senior Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer) 8