According to the Company’s FORM 10-Q For the Quarterly Period Ended August 31, 1997, 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 judgment has become final.

In a press release date February 13, 1997, Horizon/CMS Healthcare Corporation (NYSE: HHC) announced today 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 filed in New Mexico Federal District Court in April, 1996. In this lawsuit, the plaintiffs alleged violations of federal and New Mexico state securities laws. Among such violations, the plaintiffs alleged that the Company, certain of its current and former directors and certain former directors of Continental Medical Systems, Inc. ("CMS"), disseminated materially misleading statements or omitted disclosing material facts about the Company and its operations. Under the proposed settlement, Horizon/CMS will pay a minimum amount of $17 million to resolve all claims against the Company and its current and former directors, excluding those claims arising against the former directors of CMS for conduct occurring prior to the merger between CMS and Horizon. The Company believes these excluded claims are covered by directors' and officers' liability insurance. Under the settlement, the maximum amount payable by the Company is $20 million to completely and finally resolve all claims in the litigation, including any amounts related to claims against former directors of CMS. In agreeing to settle the litigation, none of the defendants concede or admit to any of the plaintiffs' claims. The settlement is subject to the execution of definitive documentation and court approval.

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 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.

The original complaint alleges that the defendants disseminated false and misleading statements about the company's business, certain of its acquisitions, the operations and integration of those acquisitions, the company's earnings growth, financial statements, and projections, and the status and magnitude of regulatory investigations into the company's Medicare billing practices. The company allegedly artificially inflated revenues and earnings by, among other things, improperly including in current revenue retroactive Medicare billings that were of questionable merit, failing to properly reserve for or write-off accounts receivable, and improperly recording inflated fees. In so doing, the company allegedly violated Generally Accepted Accounting Principles. Horizon/CMS provides rehabilitation, nursing, and specialty healthcare services.