<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
HORIZON MENTAL HEALTH MANAGEMENT, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
PRELIMINARY COPIES
HORIZON MENTAL HEALTH MANAGEMENT, INC.
1500 WATERS RIDGE DRIVE
LEWISVILLE, TEXAS 75057-6011
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Horizon Mental Health Management, Inc. ("Horizon") to be held on Thursday, July
31, 1997, at 10:00 a.m. local time, at the National Support Center of Horizon
located at 1500 Waters Ridge Drive, Lewisville, Texas 75057-6011.
As described in the enclosed Proxy Statement, at the Special Meeting,
holders of the Common Stock, $.01 par value per share, of Horizon ("Horizon
Common Stock") will be asked to approve the issuance by Horizon of up to
1,650,000 shares of Horizon Common Stock (the "Exchange Shares") in exchange for
all of the outstanding shares of common stock of Specialty Healthcare
Management, Inc. ("Specialty"), pursuant to a Share Exchange Reorganization
Agreement dated as of April 25, 1997 (the "Exchange Agreement"), by and among
Horizon, Specialty and the stockholders of Specialty. If the stockholders of
Horizon approve the issuance of the Exchange Shares, and if the transactions
under the Exchange Agreement are consummated, Specialty will become a
wholly-owned subsidiary of Horizon. A copy of the Exchange Agreement is attached
as Appendix A to the enclosed Proxy Statement.
At the Special Meeting, holders of Horizon Common Stock will also be asked
to approve an amendment to the Certificate of Incorporation of Horizon to change
its corporate name to "Horizon Health Corporation."
The Board of Directors of Horizon has unanimously determined that the
proposed issuance of the Exchange Shares and the proposed change of the
corporate name are in the best interests of Horizon and the stockholders of
Horizon. ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE
PROPOSALS TO ISSUE THE EXCHANGE SHARES AND TO CHANGE THE NAME OF THE
CORPORATION.
A Notice of Special Meeting of Stockholders, Proxy Statement and proxy card
are enclosed for your review. The Proxy Statement contains a detailed
description of the terms of the Exchange Agreement and additional information
regarding the proposed transaction. You are urged to review the Proxy Statement
carefully.
It is important that your shares be represented at the Special Meeting.
Whether or not you plan to attend the Special Meeting, please complete, date,
sign and return the enclosed proxy card promptly in the enclosed postage paid
envelope. If you attend the Special Meeting, you may revoke your proxy and vote
in person if you wish, even though you may have previously returned your proxy.
Respectfully,
HORIZON MENTAL HEALTH
MANAGEMENT, INC.
James Ken Newman
President and Chief Executive
Officer
June , 1997
<PAGE> 3
PRELIMINARY COPIES
HORIZON MENTAL HEALTH MANAGEMENT, INC.
1500 WATERS RIDGE DRIVE
LEWISVILLE, TEXAS 75057-6011
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 31, 1997
To the Stockholders of
Horizon Mental Health Management, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Horizon
Mental Health Management, Inc., a Delaware corporation ("Horizon"), will be held
on Thursday, July 31, 1997, at 10:00 a.m. local time, at the National Support
Center of Horizon located at 1500 Waters Ridge Drive, Lewisville, Texas
75057-6011, for the following purposes:
1. To consider and vote on a proposal for Horizon to issue up to
1,650,000 shares (the "Exchange Shares") of Common Stock, $.01 par value
per share, of Horizon ("Horizon Common Stock") in exchange for all of the
outstanding shares of common stock of Specialty Healthcare Management,
Inc., a Delaware corporation ("Specialty"), pursuant to a Share Exchange
Reorganization Agreement dated as of April 25, 1997 (the "Exchange
Agreement"), by and among Horizon, Specialty and the stockholders of
Specialty. Approval by Horizon stockholders of the issuance of the Exchange
Shares is required to comply with applicable rules of the Nasdaq National
Market, on which the Horizon Common Stock is quoted. If the stockholders of
Horizon approve the issuance of the Exchange Shares, and if the
transactions under the Exchange Agreement are consummated, Specialty will
become a wholly-owned subsidiary of Horizon. A copy of the Exchange
Agreement is attached as Appendix A to the accompanying Proxy Statement.
2. To consider and vote on a proposal to amend the Certificate of
Incorporation of Horizon, as amended, to change its corporate name to
"Horizon Health Corporation."
3. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The close of business on Friday, June 6, 1997 has been fixed by the Board
of Directors of Horizon as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. A list of stockholders
entitled to notice of and to vote at the Special Meeting will be available for
inspection at the Special Meeting, and during normal business hours from July
15, 1997 to the date of the Special Meeting at the executive offices of Horizon
located at 1500 Waters Ridge Drive, Lewisville, Texas 75057-6011.
A Proxy Statement and proxy card with respect to the Special Meeting
accompany this Notice. The Proxy Statement contains a detailed description of
the terms of the Exchange Agreement and the transactions contemplated thereby
and additional information regarding the proposed transaction. You are urged to
review the Proxy Statement carefully.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE REQUESTED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE ENCLOSED
POSTAGE PAID ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR
PROXY AND VOTE IN PERSON IF YOU WISH.
By Order of the Board of Directors,
JAMES W. MCATEE
Secretary
June , 1997
<PAGE> 4
PRELIMINARY COPIES
HORIZON MENTAL HEALTH MANAGEMENT, INC.
1500 WATERS RIDGE DRIVE
LEWISVILLE, TEXAS 75057-6011
---------------------
PROXY STATEMENT FOR
SPECIAL MEETING OF STOCKHOLDERS
---------------------
TO BE HELD ON JULY 31, 1997
This Proxy Statement is being furnished to stockholders of Horizon Mental
Health Management, Inc., a Delaware corporation (unless the context otherwise
requires, together with its subsidiaries, "Horizon" or the "Company"), in
connection with the solicitation of proxies by the Board of Directors of Horizon
for use at a Special Meeting of Stockholders of Horizon to be held on July 31,
1997, at 10:00 a.m. local time, at the National Support Center of Horizon
located at 1500 Waters Ridge Drive, Lewisville, Texas 75057-6011 (together with
any adjournment or postponement thereof, the "Special Meeting") for the purposes
set forth in the accompanying Notice of Special Meeting of Stockholders.
One of the purposes of the Special Meeting is to consider and vote on a
proposal for Horizon to issue up to 1,650,000 shares (the "Exchange Shares") of
Common Stock, $.01 par value per share, of Horizon ("Horizon Common Stock") in
exchange for all of the outstanding shares (the "Specialty Shares") of common
stock, $.01 par value per share (the "Specialty Common Stock"), of Specialty
Healthcare Management, Inc., a Delaware corporation ("Specialty"), pursuant to a
Share Exchange Reorganization Agreement dated as of April 25, 1997 (the
"Exchange Agreement"), by and among Horizon, Specialty and the stockholders of
Specialty (the "Specialty Stockholders"). The transactions contemplated by the
Exchange Agreement are referred to in this Proxy Statement as the "Exchange."
Approval by Horizon stockholders of the issuance of the Exchange Shares is
required to comply with the rules of the Nasdaq National Market, on which the
Horizon Common Stock is quoted. Such rules require companies with shares quoted
on the Nasdaq National Market to obtain stockholder approval before issuing
shares constituting 20% or more of the number of shares of listed stock
outstanding prior to the issuance.
The other purpose of the Special Meeting is to consider and vote on a
proposal to amend the Certificate of Incorporation of Horizon, as amended, to
change its corporate name to "Horizon Health Corporation" for the reasons stated
in this Proxy Statement.
The Board of Directors of Horizon has unanimously determined that the
proposed issuance of the Exchange Shares and the proposed change of the
corporate name are in the best interests of Horizon. ACCORDINGLY, THE BOARD OF
DIRECTORS OF HORIZON RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE PROPOSALS TO
ISSUE THE EXCHANGE SHARES AND TO CHANGE THE NAME OF THE CORPORATION.
This Proxy Statement and the accompanying proxy card are first being mailed
on or about June , 1997 to stockholders of Horizon entitled to notice of and
to vote at the Special Meeting. Only holders of record of Horizon Common Stock
at the close of business on June 6, 1997 (the "Record Date"), will be entitled
to notice of and to vote at the Special Meeting. As of that date, there were
5,566,762 shares of Horizon Common Stock outstanding.
THE DATE OF THIS PROXY STATEMENT IS JUNE , 1997.
<PAGE> 5
AVAILABLE INFORMATION
Horizon is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information filed by Horizon with the SEC can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC at Seven World Trade Center, 13th Floor, New York, New York
10048 and at Citicorp Center, 14th Floor, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. In addition, electronically filed documents, including
reports, proxy statements and other information filed by Horizon, can be
obtained from the SEC's Web Site at http://www.sec.gov. The Horizon Common Stock
is quoted on the Nasdaq National Market. Reports, proxy statements and other
information concerning Horizon can be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Exchange Act. All statements other
than statements of historical facts included in or incorporated by reference
into this Proxy Statement, including, without limitation, statements under
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Specialty," "Proposal No. 1 to Issue the Exchange
Shares," "Certain Information Regarding Horizon" and "Certain Information
Regarding Specialty" regarding the financial position, business strategy and
plans and objectives of management of Horizon or Specialty for future
operations, are forward-looking statements. Although Horizon believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Factors that could cause actual results to differ materially from those in any
such forward-looking statement include, without limitation, demand by general
hospitals for Horizon's services, Horizon's ability to retain existing and
Specialty management contracts and to sell additional contracts, the ability of
Horizon to successfully integrate the operations of Specialty into its existing
operations and organizational structure, the ability of Horizon to successfully
manage rehabilitation programs, changes in reimbursement to general hospitals by
Medicare or other third-party payors for costs of providing mental health
services, changes to other regulatory provisions relating to mental health
services, overall economic conditions and various other risks as outlined in SEC
filings of Horizon. All subsequent written and oral forward-looking statements
attributable to Horizon or persons acting on its behalf are expressly qualified
in their entirety by this section.
---------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY HORIZON. THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY
BY ANY PERSON IN ANY JURISDICTION OR IN ANY CIRCUMSTANCES IN WHICH SUCH
SOLICITATION WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
(i)
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................................... (i)
Disclosure Regarding Forward-Looking Statements............. (i)
Summary..................................................... 1
Selected Financial Data..................................... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Specialty.................... 9
Selected Unaudited Pro Forma Combined Financial Data........ 14
Comparative Per Share Data.................................. 15
Special Meeting of Horizon Stockholders..................... 16
Date, Time and Place of the Special Meeting............... 16
Voting Information for Horizon Stockholders............... 16
Solicitation of Proxies................................... 17
Dissenters' Rights........................................ 17
Proposal No. 1 to Issue the Exchange Shares................. 18
Summary of the Exchange................................... 18
Background of the Exchange................................ 18
Reasons for the Exchange and Recommendation of the Horizon
Board of Directors..................................... 20
Opinion of Robertson, Stephens & Company LLC.............. 21
The Exchange Agreement.................................... 24
Termination of Employment Agreements...................... 29
Non-Competition and Other Covenants....................... 29
The Escrow Agreement...................................... 30
Registration Rights Agreement............................. 30
Position on Board of Directors of Horizon................. 31
Accounting Treatment...................................... 31
Certain Federal Income Tax Consequences................... 31
Restrictions on Resales of Horizon Common Stock; Pooling
Considerations......................................... 32
Regulatory Approvals...................................... 32
Certain Information Regarding Horizon....................... 33
Certain Information Regarding Specialty..................... 35
Security Ownership of Certain Beneficial Owners and
Management of Horizon..................................... 38
Proposal No. 2 Amendment to Certificate of Incorporation to
Change Corporate Name..................................... 40
Availability of Independent Accountants at Special
Meeting................................................... 40
Incorporation of Documents by Reference..................... 41
Proposals by Stockholders................................... 41
Index to Financial Statements............................... F-1
Appendix A -- Share Exchange Reorganization Agreement
Appendix B -- Opinion of Robertson, Stephens & Company LLC
</TABLE>
(ii)
<PAGE> 7
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. Certain capitalized terms used in this Summary are
defined elsewhere in this Proxy Statement. This Summary is not intended to be a
complete statement of all material features of the Exchange and is qualified in
its entirety by reference to the more detailed information contained elsewhere
in this Proxy Statement and in the Appendices hereto, which stockholders are
urged to read in their entirety. Such information may contain cautionary
statements identifying important factors with respect to forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from those in such forward-looking statements. See
"Disclosure Regarding Forward-Looking Statements."
THE SPECIAL MEETING
The close of business on June 6, 1997 has been fixed by the Board of
Directors of Horizon as the record date (the "Record Date") for the
determination of the stockholders of Horizon who shall be entitled to notice of
and to vote at the Special Meeting. As of the Record Date, there were 5,566,762
shares of Horizon Common Stock outstanding, held of record by 36 persons.
At the Special Meeting, stockholders of Horizon will be asked to consider
and vote on the proposals to issue the Exchange Shares pursuant to the Exchange
Agreement and to amend the Certificate of Incorporation of Horizon to change its
corporate name. The Board of Directors of Horizon has unanimously approved and
recommends that stockholders vote for the issuance of the Exchange Shares and
the amendment to the Certificate of Incorporation. See "Special Meeting of
Horizon Stockholders."
Each record holder of Horizon Common Stock is entitled to one vote for each
share held on all matters submitted to a vote of stockholders. There is no
cumulative voting. The presence at the Special Meeting, either in person or by
proxy, of the holders of a majority of all the votes entitled to be cast at such
meeting will constitute a quorum for the transaction of business. Assuming the
presence of a quorum, approval of the issuance of the Exchange Shares and
approval of any other matter properly considered and acted upon at the Special
Meeting (except for the proposal to amend the Certificate of Incorporation)
requires the affirmative vote, either in person or by proxy, of at least a
majority of the shares of Horizon Common Stock present in person or by proxy and
entitled to vote at the Special Meeting. The affirmative vote of the holders of
a majority of the issued and outstanding shares of Horizon Common Stock on the
Record Date is required to approve the proposal to amend the Certificate of
Incorporation of the Company (Proposal No. 2). Abstentions will be counted as
shares that are present and entitled to vote for purposes of determining the
presence or absence of a quorum. Abstentions will therefore have the same effect
as votes against any proposal to be voted on at the Special Meeting. Broker
non-votes will be counted only for purposes of determining the presence or
absence of a quorum. Broker non-votes on the proposal to amend the Certificate
of Incorporation of Horizon will have the same effect as votes against such
proposal, but broker non-votes will otherwise have no effect on the outcome of
other matters to be voted on at the Special Meeting. See "Special Meeting of
Horizon Stockholders -- Voting Information for Horizon Stockholders."
THE COMPANIES
Horizon
Horizon is the leading contract manager of mental health programs offered
by general acute care hospitals in the United States. These programs enable
Horizon's client hospitals to expand the clinical services they offer and
provide a continuum of mental health services, such as inpatient
hospitalization, partial hospitalization (day treatment), outpatient and home
health services. At May 31, 1997, Horizon had management contracts with 146
general acute care hospitals located in 36 states, providing for the operation
of a total of 224 various treatment programs. The principal executive offices of
Horizon are located at 1500 Waters Ridge Drive, Lewisville, Texas 75057-6011.
Its telephone number is (972) 420-8200. See "Certain Information Regarding
Horizon."
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Horizon -- Recent Developments
Effective March 15, 1997, Horizon purchased all of the outstanding capital
stock of Geriatric Medical Care, Inc. ("Geriatric"). Geriatric, a contract
manager of mental health services for acute care hospitals, had total revenues
of approximately $5.7 million in 1996 and, at March 15, 1997, had 18 management
contract locations of which two were not yet in operation. The purchase price of
approximately $4.6 million, of which approximately $4.3 million was paid at
closing, included retiring essentially all of Geriatric's outstanding debt. The
final purchase price payment of $270,000 was made on April 16, 1997.
Also effective March 15, 1997, Horizon purchased all of the outstanding
capital stock of Clay Care, Inc. ("CCI"). CCI, a contract manager of mental
health services for acute care hospitals, had total revenues of approximately
$1.3 million in 1996 and, at March 15, 1997, had management contracts with five
hospitals of which four were in operation and one of which opened in April 1997.
A total of $475,000 of the $1,000,000 purchase price was paid at closing by
Horizon, and the balance of the purchase price was paid in June 1997. See
"Certain Information Regarding Horizon -- Recent Developments."
Specialty
Specialty is a contract manager of psychiatric, physical rehabilitation and
chemical dependency units in general acute care hospitals and nursing homes. At
May 31, 1997, Specialty had 48 management contracts with locations in 21 states.
Specialty had total revenues of approximately $33.8 million in 1996 and
approximately $15.9 million for the six months ended February 28, 1997 (the last
day of Horizon's second fiscal quarter). The principal executive offices of
Specialty are located at 6300 South Syracuse Way, Suite 645, Englewood, Colorado
80111-6726. Its telephone number is (303) 793-0770. See "Certain Information
Regarding Specialty."
THE EXCHANGE
Pursuant to the Exchange, all Specialty Shares will be exchanged on the
Closing Date for 1,650,000 shares of Horizon Common Stock. Based upon the number
of shares of Horizon Common Stock issued and outstanding as of the Record Date,
the Specialty Stockholders will hold approximately 22.9% of the total issued and
outstanding shares of Horizon Common Stock immediately after the Exchange
(approximately 20.0% on a fully-diluted basis). The Exchange Agreement provides
that the number of Exchange Shares issuable pursuant to the Exchange may be
reduced under certain circumstances. However, the number of Exchange Shares
issuable pursuant to the Exchange is not subject to adjustment as a result of
changes in the market price of Horizon Common Stock and is not subject to
increase in any event. Each share of Horizon Common Stock issued in the Exchange
will be accompanied by a Horizon Common Stock purchase right granted under a
Rights Agreement adopted by Horizon in February 1997. Upon consummation of the
Exchange, Specialty will become a wholly-owned subsidiary of Horizon. See
"Proposal No. 1 to Issue the Exchange Shares -- The Exchange
Agreement -- General."
The rules of the Nasdaq National Market, on which the Horizon Common Stock
is quoted, require a listed company, as a condition to continued listing, to
obtain the approval of its stockholders prior to the issuance of shares of
listed stock that equal or exceed 20% of the number of such shares outstanding
prior to the issuance. Accordingly, since the Exchange Shares exceed the 20%
threshold, Horizon is seeking stockholder approval of the issuance of the
Exchange Shares. See "Special Meeting of Horizon Stockholders -- Voting
Information for Horizon Stockholders."
It is the intention of the parties to consummate the Exchange and the other
transactions contemplated by the Exchange Agreement as soon as practicable
following the Special Meeting and the satisfaction of all other conditions to
the parties' respective obligations to consummate the Exchange (or, to the
extent permitted, waiver thereof) or at such other time as is designated in
writing by Horizon, Specialty and the Specialty Stockholders.
Consummation of the Exchange is subject to the satisfaction of certain
conditions. The conditions to the obligations of the Specialty Stockholders to
consummate the Exchange include a condition that the closing
2
<PAGE> 9
price of the Horizon Common Stock on the Nasdaq National Market on the trading
day immediately preceding the Closing Date is at least $15.00 per share. See
"Proposal No. 1 to Issue the Exchange Shares -- The Exchange
Agreement -- Conditions to Consummation of the Exchange." The parties have also
agreed to certain covenants in connection with the Exchange Agreement. See
"Proposal No. 1 to Issue the Exchange Shares -- The Exchange
Agreement -- Covenants of Specialty and the Specialty Stockholders, -- Covenants
of Horizon and -- Certain Other Covenants." In addition, Horizon has agreed to
provide the Specialty Stockholders with certain registration rights to
facilitate resale of the Exchange Shares after the Closing Date. See "Proposal
No. 1 to Issue the Exchange Shares -- Registration Rights Agreement."
RECOMMENDATION OF HORIZON BOARD OF DIRECTORS ON THE EXCHANGE
The Horizon Board of Directors has unanimously approved the Exchange
Agreement and the transactions contemplated thereby. After careful
consideration, the Horizon Board of Directors unanimously recommends that the
stockholders of Horizon vote in favor of the issuance of the Exchange Shares
pursuant to the Exchange Agreement. Horizon believes that the acquisition of
Specialty will be beneficial to Horizon as a result of (i) an increased presence
in the market for contract management services of mental health programs; (ii)
the potential for additional growth in the earnings of Horizon as a result of
the combination of the two companies; (iii) diversification of the business
operations of Horizon to include the management of rehabilitation programs; and
(iv) a larger potential market for public trading of the Horizon Common Stock.
Stockholders should read this Proxy Statement carefully in its entirety before
voting. See "Proposal No. 1 to Issue the Exchange Shares -- Reasons for the
Exchange and Recommendation of the Horizon Board of Directors."
OPINION OF HORIZON'S FINANCIAL ADVISOR
Robertson, Stephens & Company LLC ("Robertson Stephens") has been retained
by Horizon to act as its financial advisor in connection with the Exchange and
has delivered an opinion to Horizon's Board of Directors dated April 17, 1997 to
the effect that as of such date and based upon and subject to certain matters
stated therein, the Purchase Price to be paid was fair to Horizon from a
financial point of view. The full text of the written opinion of Robertson
Stephens dated April 17, 1997, which sets forth the analyses and assumptions
made, matters considered and limitations of the review undertaken, is attached
to this Proxy Statement as Appendix B and should be read carefully and in its
entirety. Robertson Stephens' opinion is directed only to the fairness of the
Purchase Price to Horizon from a financial point of view, does not address any
other aspect of the Exchange and does not constitute a recommendation to any
stockholder as to how such stockholder should vote at the Special Meeting. See
"Proposal No. 1 to Issue the Exchange Shares -- Opinion of Robertson, Stephens &
Company LLC."
POSITION ON BOARD OF DIRECTORS OF HORIZON
The Board of Directors of Horizon has approved, subject to and effective
after consummation of the Exchange, an additional board position on the Board of
Directors of Horizon and the appointment of Howard B. Finkel, the Chief
Executive Officer of Specialty, to serve in the additional board position. Under
the Exchange Agreement, the taking of such action by the Board of Directors of
Horizon is a condition to the obligation of the Specialty Stockholders to
consummate the Exchange. It is expected that Mr. Finkel will become a member of
the Board of Directors of Horizon on the Closing Date. Mr. Finkel holds
approximately 47.4% of the Specialty Shares. In the Exchange, he will acquire up
to 782,100 shares of Horizon Common Stock, representing approximately 10.8% of
the total issued and outstanding shares of Horizon Common Stock immediately
after consummation of the Exchange. See "Proposal No. 1 to Issue the Exchange
Shares -- Position on Board of Directors of Horizon" and "Security Ownership of
Certain Beneficial Owners and Management of Horizon."
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<PAGE> 10
MARKET PRICES AND DIVIDEND POLICIES
Horizon
Horizon completed an initial public offering of Horizon Common Stock in
March 1995. The Horizon Common Stock was originally listed on the American Stock
Exchange and was traded under the symbol "HMH." On May 7, 1996, the Horizon
Common Stock began trading on the Nasdaq National Market under the symbol
"HMHM." The following table sets forth the high and low per share sales prices
of Horizon Common Stock for the periods indicated as reported by the American
Stock Exchange or the Nasdaq National Market, as applicable:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 31, 1995:(1)
March 14, 1995 -- May 31, 1995............................ $ 9.42 $ 7.17
June 1, 1995 -- August 31, 1995........................... 10.08 6.58
FISCAL YEAR ENDED AUGUST 31, 1996:(1)
September 1, 1995 -- November 30, 1995.................... 12.67 9.50
December 1, 1995 -- February 29, 1996..................... 12.67 10.67
March 1, 1996 -- May 31, 1996............................. 15.00 12.75
June 1, 1996 -- August 31, 1996........................... 19.50 14.17
FISCAL YEAR ENDING AUGUST 31, 1997:(1)
September 1, 1996 -- November 30, 1996(1)................. 18.67 14.67
December 1, 1996 -- February 28, 1997(1).................. 19.67 16.33
March 1, 1997 -- May 31, 1997............................. 20.00 15.38
June 1, 1997 -- June 13, 1997............................. 20.50 18.00
</TABLE>
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(1) Adjusted to reflect three-for-two stock split effected by Horizon as a 50%
stock dividend on January 31, 1997.
On April 25, 1997, the last business day prior to public announcement of
the Exchange Agreement, the reported bid price per share of Horizon Common Stock
on the Nasdaq National Market was $15.375, and the reported ask price per share
of Horizon Common Stock was $16.125. No shares of Horizon Common Stock were
reported as traded on April 25, 1997. On June , 1997, the latest practicable
full trading day prior to the date of this Proxy Statement, the reported closing
sales price per share of Horizon Common Stock on the Nasdaq National Market was
$ .
Horizon has not paid or declared any cash dividends on its capital stock
since its inception. Horizon currently intends to retain all future earnings for
use in the expansion and operation of its business. Future borrowings may limit
Horizon's ability to pay dividends. The payment of any future cash dividends
will be determined by the Board of Directors of Horizon in light of conditions
then existing, including Horizon's earnings, financial condition and capital
requirements, restrictions in financing agreements, business conditions and
other factors.
Specialty
The Specialty Common Stock is not traded on any exchange and there is no
established trading market for the Specialty Common Stock. Specialty currently
has eight stockholders not including National Medical Enterprises, Inc. ("NME"),
which holds a warrant to acquire shares of Specialty Common Stock. In the
Exchange Agreement, NME has agreed to exercise such warrant in full at or prior
to the Closing. For purposes of this Proxy Statement, all information relating
to the Specialty Shares and to the shares of Horizon Common Stock to be issued
in the Exchange assumes that such warrant is exercised in full and 1,215 shares
of Specialty Common Stock are issued to NME pursuant to such exercise prior to
consummation of the Exchange. See "Proposal No. 1 to Issue the Exchange
Shares -- The Exchange Agreement -- General."
4
<PAGE> 11
Specialty has not paid or declared any cash dividends on its capital stock
since its inception. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Specialty -- Liquidity and Capital
Resources."
RESTRICTIONS APPLICABLE TO SPECIALTY STOCKHOLDERS
The Specialty Stockholders will be subject to certain restrictions on
resale of the Exchange Shares after the Exchange. See "Proposal No. 1 to Issue
the Exchange Shares -- Restrictions on Resales of Horizon Common Stock; Pooling
Considerations" and "-- Registration Rights Agreement."
ACCOUNTING
Horizon intends to account for the Exchange as a pooling of interests for
financial accounting purposes. See "Proposal No. 1 to Issue the Exchange
Shares -- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The parties intend that the Exchange contemplated by the Exchange Agreement
be treated as a tax-free "reorganization" within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended. Assuming the transaction is so
treated, (i) stockholders of Horizon will not recognize any gain or loss as a
result of the issuance of the Exchange Shares; (ii) Horizon will not recognize
any gain or loss on the issuance of the Exchange Shares to the Specialty
Stockholders; (iii) Horizon will acquire an aggregate tax basis in each
Specialty Share equal to the selling Specialty Stockholder's basis in such
share; and (iv) Horizon's holding period for each Specialty Share will include
the period during which the selling Specialty Stockholder held such share.
If it is determined that the transaction contemplated by the Exchange
Agreement constitutes a taxable reorganization, some of the tax consequences of
the transactions will differ from the consequences described above. See
"Proposal No. 1 to Issue the Exchange Shares -- Certain Federal Income Tax
Consequences."
RIGHTS OF HORIZON STOCKHOLDERS
The rights of holders of shares of Horizon Common Stock will not change as
a result of the Exchange, except for the decrease in such holders' percentage
equity ownership of Horizon as a result of the issuance of the Exchange Shares.
DISSENTERS' RIGHTS
Stockholders of Horizon do not have dissenters' rights of appraisal with
respect to the issuance of the Exchange Shares or the amendment to the
Certificate of Incorporation of Horizon.
5
<PAGE> 12
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA OF HORIZON
The selected historical financial data presented below for Horizon for the
fiscal years ended August 31, 1994, 1995 and 1996, and at August 31, 1995 and
August 31, 1996, are derived from the audited consolidated financial statements
of Horizon incorporated by reference into this Proxy Statement. The selected
historical financial data presented below for Horizon for the six months ended
February 29, 1996 and February 28, 1997, and at February 28, 1997, are derived
from the unaudited consolidated financial statements of Horizon incorporated by
reference into this Proxy Statement. The selected historical financial data
presented below for the fiscal years ended August 31, 1992 and 1993, and at
August 31, 1992, 1993 and 1994, are derived from the audited consolidated
financial statements of Horizon not included or incorporated herein. The
selected financial data presented below should be read in conjunction with
Horizon's "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the financial statements of Horizon and the related
notes thereto, incorporated by reference into this Proxy Statement. See
"Incorporation of Documents by Reference."
Statement of Operations Data:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, ----------------------------
--------------------------------------------------- FEBRUARY 29, FEBRUARY 28,
1992 1993 1994(1) 1995(1) 1996 1996 1997
------- ------- ------- ------- ------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract management revenues...... $17,144 $20,960 $24,962 $28,716 $61,450 $29,484 $33,783
Other revenues.................... 13,051(2) 7,770(2) 5,297(2) 634 995 200 3,575(5)
------- ------- ------- ------- ------- ------- -------
Net revenues........................ 30,195 28,730 30,259 29,350 62,445 29,684 37,358
Operating costs and expenses:
Salaries and benefits............. 16,864 16,031 16,814 15,390 34,706 16,400 20,117
Purchased services................ 5,129 4,398 4,731 4,645 8,635 4,342 5,247
Provision for bad debts........... 627 359 312 209 74 3 465
Depreciation and amortization..... 853 585 560 903 1,308 642 799
Other............................. 10,890(3) 5,703 5,745 4,267 8,806 4,136 5,029
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations....... (4,168) 1,654 2,097 3,936 8,916 4,161 5,701
Interest and other income (expense)
net............................... (1,369 (1,111) (1,005) (754) 324 110 301
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes.... (5,537) 543 1,092 3,182 9,240 4,271 6,002
Income tax expense (benefit)........ (242) 44 (20) 804 3,674 1,687 2,368
------- ------- ------- ------- ------- ------- -------
Income (loss) before equity in net
earnings of Horizon LLC and
minority interest................. (5,295) 499 1,112 2,378 5,566 2,584 3,634
Equity in net earnings of
Horizon LLC(4).................... -- -- 364 1,568 -- -- --
Minority interest(5)................ -- -- -- -- 2 -- 51
------- ------- ------- ------- ------- ------- -------
Net income (loss)................... $(5,295) $ 499 $ 1,476 $ 3,946 $ 5,564 $ 2,584 $ 3,583
======= ======= ======= ======= ======= ========== ==========
Net income (loss) per common
share(6).......................... $ (1.70) $ 0.13 $ 0.35 $ 0.76 $ 0.85 $ 0.40 $ 0.54
======= ======= ======= ======= ======= ========== ==========
Weighted average number of common
shares outstanding(6)............. 3,123 3,738 4,184 5,163 6,525 6,477 6,642
======= ======= ======= ======= ======= ========== ==========
</TABLE>
6
<PAGE> 13
Balance Sheet Data:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------------------------- FEBRUARY 28,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash.................................................. $ 4,444 $ 1,633 $ 2,144 $ 3,167 $ 7,940 $ 8,714
Working capital (deficit)............................. (2,269) 1,950 162 2,468 5,473 9,229
Intangible assets (net)(5)............................ 9,865 8,031 7,676 13,985 15,314 14,884
Total assets.......................................... 24,192 14,216 15,079 25,352 32,872 36,670
Total debt............................................ 19,008 13,732 12,121 2,507 -- --
Stockholders' equity.................................. $(3,434) $(2,936) $(1,434) $14,652 $20,359 $24,332
</TABLE>
- ---------------
(1) Effective August 1, 1994, Horizon Mental Health Management, L.L.C. (the
"Horizon LLC") assumed management responsibility for all of the then
existing management contracts of Horizon and Mental Health Management, Inc.
("MHM"). The Horizon LLC was formed by Horizon for such transaction. Horizon
and MHM held ownership interests of 72.5% and 27.5%, respectively, in the
Horizon LLC. Certain provisions of the limited liability company agreement
of the Horizon LLC which required the consent of MHM for certain
transactions prevented Horizon from having the ability to control the
Horizon LLC under generally accepted accounting principles and therefore the
Horizon LLC was not consolidated with Horizon for accounting purposes
through February 28, 1995. As a result, the revenues and expenses of the
Horizon LLC for the period August 1, 1994 through February 28, 1995 are not
included in Horizon revenues and expenses for such period; instead, Horizon
accounted for its investment in the Horizon LLC by the equity method, and
reflected Horizon's share of the Horizon LLC's net income for such period as
"Equity in Net Earnings of Horizon LLC." Effective with the acquisition of
the minority interest of MHM on March 20, 1995, the Horizon LLC became a
wholly owned subsidiary of Horizon and has therefore been consolidated with
Horizon effective March 1, 1995.
(2) Other revenues consist primarily of revenues earned from Ross and Mountain
Crest Hospitals while owned or operated by Horizon, patient services and
physician contract management fees, or subsequent balance sheet adjustments
recognized during the respective period. On November 30, 1992, Horizon and
OrNda HealthCorp ("OrNda"), then a related party, entered into a
restructuring agreement which resulted in the sale of Ross Hospital to OrNda
(see Selected Financial Data footnote 3). Additionally, Horizon subleased
the operations of Mountain Crest Hospital to MHM effective July 31, 1994.
See "Certain Information Regarding Horizon -- Background."
(3) Includes a loss of $3.9 million in the year ended August 31, 1992 as a
result of the sale to OrNda of Ross Hospital.
(4) Certain provisions of the limited liability company agreement of the Horizon
LLC which required the consent of MHM for certain transactions prevented
Horizon from having the ability to control the Horizon LLC under generally
accepted accounting principles and therefore the Horizon LLC was not
consolidated with Horizon for accounting purposes through February 28, 1995.
As a result of Horizon's March 20, 1995 acquisition of the minority interest
of MHM in the Horizon LLC, the Horizon LLC became a wholly owned subsidiary
of Horizon and has been consolidated with Horizon effective March 1, 1995.
Horizon's share of the Horizon LLC's net earnings was $364,000 through
August 31, 1994 and $1,567,720 from September 1, 1994 through February 28,
1995. The Horizon LLC contract stipulated that MHM, as a member of the
Horizon LLC, would be allocated the first $1,750,000 of Horizon LLC net
earnings in each of the fiscal years ending August 31, 1995 and 1996.
$1,750,000 was allocated to MHM during the six months ended February 28,
1995. On March 20, 1995, $9,683,467 of the net proceeds to Horizon from its
initial public offering were used to purchase MHM's minority interest in the
Horizon LLC. The purchase transaction eliminated MHM's equity interest in
the Horizon LLC ($2,794,715) and recognized an increase in intangible assets
based upon the value of the Horizon LLC management contracts ($2,355,000).
The remaining purchase price was recorded as goodwill ($4,533,752). The
recorded goodwill was increased by $376,639 in March 1996 based on a final
valuation of MHM's minority interest. The increase in contract value will be
amortized over seven years and the goodwill over forty years.
(5) On August 1, 1996, Horizon purchased 80% of the outstanding common stock of
Florida Professional Psychological Services, Inc. ("PPS"). Due to this
purchase, $1,774,575 was recorded as goodwill and will be amortized over
forty years. Revenues generated by PPS are reflected as other revenues.
(6) Adjusted to reflect a three-for-two stock split effected by Horizon as a 50%
stock dividend which occurred on January 31, 1997.
7
<PAGE> 14
SELECTED FINANCIAL DATA OF SPECIALTY
The selected historical financial data presented below for Specialty for
the fiscal years ended December 31, 1995 and 1996, and at December 31, 1995 and
1996, are derived from the audited consolidated financial statements of
Specialty included elsewhere in this Proxy Statement. The selected historical
financial data presented below for Specialty for the two months ended February
29, 1996 and February 28, 1997, and at February 28, 1997, are derived from the
unaudited financial statements of Specialty included elsewhere in this Proxy
Statement. The selected historical financial data presented below for the fiscal
year ended December 31, 1994, and at December 31, 1994, are for National Medical
Management Services, a division of NME (the "Division"), and are derived from
the audited financial statements of the Division included elsewhere in this
Proxy Statement. The selected historical financial data presented below for the
fiscal years ended December 31, 1992 and 1993, and at December 31, 1992 and
1993, are derived from the unaudited financial statements of the Division not
included herein. The selected financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Specialty," and the financial statements of
Specialty and the Division and the related notes thereto, included elsewhere in
this Proxy Statement.
Statement of Operations Data:
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------------
----------------------------------------------- FEBRUARY 29, FEBRUARY 28,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Management contract
revenue.................... $34,987 $20,408 $22,176 $40,005 $33,794 $ 4,969 $5,067
Intercompany revenue......... -- 14,321 14,792 -- -- -- --
------- ------- ------- ------- ------- ------- ------
Net revenues................. 34,987 34,729 36,968 40,005 33,794 4,969 5,067
Operating costs & expenses...
Salaries and benefits...... 17,939 18,214 20,150 22,191 18,811 2,858 2,743
Purchased services......... 7,332 9,919 9,351 8,299 7,270 1,085 1,018
Provision for bad debts.... -- -- -- 1,471 1,361 66 857
Depreciation and
amortization............. 696 20 21 229 504 45 108
Other...................... 3,611 4,886 4,991 5,275 3,311 467 348
------- ------- ------- ------- ------- ------- ------
Income (loss) from
operations................. 5,409 1,690 2,455 2,540 2,537 448 (7)
------- ------- ------- ------- ------- ------- ------
Interest and other related
party income
(expense) -- net........... 2,448 2,907 1,286 (249) (390) (23) (70)
------- ------- ------- ------- ------- ------- ------
Income (loss) from continuing
operations before income
taxes...................... 7,857 4,597 3,741 2,291 2,147 425 (77)
------- ------- ------- ------- ------- ------- ------
Income tax expense
(benefit).................. 2,986 1,715 1,396 891 936 185 (33)
------- ------- ------- ------- ------- ------- ------
Net income (loss)............ $ 4,871 $ 2,882 $ 2,345 $ 1,400 $ 1,211 $ 240 $ (44)
======== ======== ======== ======== ======== ============ ============
Net income (loss) per common
share...................... N/A N/A N/A $180.30 $132.61 $ 30.08 $(4.69)
======== ======== ======== ======== ======== ============ ============
Weighted average number of
common shares
outstanding................ N/A N/A N/A 7,763 9,136 7,969 9,494
======== ======== ======== ======== ======== ============ ============
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- FEBRUARY 28,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash......................... $ -- $ 392 $ -- $ 82 $ 406 $ 87
Working capital.............. 3,245 1,367 2,185 1,926 3,039 3,652
Intangible assets (net)...... -- -- -- 1,012 4,573 4,482
Total assets................. 6,572 5,282 5,257 8,236 12,516 12,494
Total debt................... -- -- -- 885 3,576 4,162
Stockholders' equity......... $ 4,542 $ 2,572 $ 2,240 $ 2,573 $ 3,920 $ 3,880
</TABLE>
8
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF SPECIALTY
OVERVIEW
Specialty provides contract management and staffing services for the
operation and management of psychiatric, physical rehabilitation and chemical
dependency units in general acute care hospitals and nursing homes. These
management contracts are generally for terms ranging from three to ten years and
often have automatic renewal provisions.
Specialty was incorporated in August 1994 for the purpose of acquiring the
net assets and operations of National Medical Management Services, a division of
NME (the "Division"). Effective January 3, 1995, Specialty acquired the assets
and operations of the Division for cash and notes payable of $3.95 million and
assumed current liabilities of approximately $2.8 million. In addition,
Specialty also issued a warrant to NME (the "NME Warrant") to purchase, as
adjusted, 1,215 shares of Specialty Common Stock at an exercise price of $0.0823
per share. The NME Warrant can be exercised at any time subsequent to January 3,
1997. In the Exchange Agreement, NME agreed to exercise the NME Warrant in full
at or prior to the Closing of the Exchange. The full exercise of the NME Warrant
at or prior to the Closing of the Exchange is a condition to Horizon's
obligation to consummate the Exchange.
Effective April 1, 1996, The Parkside Company ("Parkside"), a similar
provider of contract management services, merged into Specialty. Under the
merger agreement, 100,000 outstanding common shares of Parkside were exchanged
for 1,305 shares of Specialty Common Stock for a fair value of $870,000. In
addition, Specialty paid $2.6 million in cash. The purchase price of $3.5
million was allocated to acquired management contracts of $2.1 million and
goodwill of $1.4 million. The agreement also contains an option exercisable by
the Parkside shareholder on or after October 11, 1997 to put to Specialty for
redemption at fair market value all shares held. The exercise date may be
extended at the option of Specialty for six months through a payment of
$150,000. The Exchange Agreement provides that the right of the Parkside
shareholder to put the shares to Specialty for redemption will be terminated in
its entirety at the closing of the Exchange.
At December 31, 1996, Specialty had management contracts with 54 general
acute care hospitals located in 21 states, representing 88 various treatment
programs in operation.
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ FEBRUARY 28,
1994 1995 1996 1997
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Number of Contract Locations:
Contract locations in operation........................... 46 48 54 53
Contract locations signed and unopened.................... 7 1 -- --
-- --- -- --
Total contract locations.......................... 53 49 54 53
==== ==== ==== =========
Services Covered by Contracts:
Inpatient................................................. 65 81 61 60
Partial hospitalization................................... 9 22 15 15
Outpatient................................................ 9 18 11 10
Home Health............................................... -- -- 1 1
-- --- -- --
83 121 88 86
Types of Treatment Programs:
Geropsychiatric........................................... 12 23 16 16
Adult psychiatric......................................... 33 43 33 33
Substance abuse........................................... 11 28 13 13
Adolescent................................................ 1 1 1 1
Rehab..................................................... 25 25 24 22
Sub acute................................................. 1 1 1 1
-- --- -- --
83 121 88 86
</TABLE>
9
<PAGE> 16
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- FEBRUARY 28,
1994 1995 1996 1997
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Changes in Number of Contracts:
Beginning number of contracts............................ 44 53 48 54
Contracts added.......................................... 11 11 20 --
Contracts ended.......................................... 2 16 14 1
-- -- -- --
Ending number of contracts............................... 53 48 54 53
==== ==== ==== =========
</TABLE>
RESULTS OF OPERATIONS -- SPECIALTY HEALTHCARE MANAGEMENT, INC.
The following table sets forth for the fiscal years ended December 31,
1994, 1995 and 1996, and the two months ended February 28, 1997, the percentage
relationship to total net revenues of certain costs, expenses and income and the
number of management contracts in operation at the end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------- FEBRUARY 28,
1994 1995 1996 1997
----- ----- ----- ------------
<S> <C> <C> <C> <C>
Net revenue....................................... 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses
Salaries and benefits........................... 52.5% 55.5% 55.7% 54.1%
Purchased services.............................. 24.9% 20.7% 21.5% 20.1%
Operating expenses.............................. 13.0% 13.2% 9.8% 6.9%
Provision for bad debts......................... -- 3.7% 4.0% 16.9%
Depreciation and amortization................... 0.1% 0.6% 1.5% 2.1%
----- ----- ----- -----
Total operating costs and expenses...... 90.0% 93.7% 92.5% 100.1%
Interest expense.................................. 0.2% 0.6% 1.2% 1.4%
Income (loss) before income taxes................. 9.8% 5.7% 6.3% (1.5)%
Income tax (expense) benefit...................... (3.6)% (2.2)% (2.8)% 0.6%
----- ----- ----- -----
Net income (loss)................................. 6.2% 3.5% 3.5% (0.9)%
===== ===== ===== =========
Number of contracts in operation, end of period... 53 48 54 53
</TABLE>
TWO MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO TWO MONTHS ENDED FEBRUARY 29,
1996
Net Revenues. Management contract revenue for the two months ended February
28, 1997 was $5.1 million, an increase of $98,000, or 2%, as compared to the
corresponding period of the prior year. The increase was the result of an
increase in inpatients per day during 1997 as compared to 1996 partially offset
by a decrease in the average revenue per patient per day.
Salaries and Benefits. Salaries and benefits expenses were $2.7 million for
the two months ended February 28, 1997, representing a decrease of $116,000, or
4.1%, as compared to the corresponding period of the prior year. The number of
employees decreased from 1996 to 1997 by 19 employees as a result of a
termination of a particular contract.
Depreciation and Amortization. Depreciation and amortization expenses were
$109,000 for the two months ended February 28, 1997, representing an increase of
$64,000, or 144%, as compared to the corresponding period of the prior year. The
increase is primarily attributable to the amortization of the management
contracts and goodwill from the Parkside acquisition in April 1996.
Other Operating Expenses. Operating and administrative expenses were
$348,000 for the two months ended February 28, 1997, representing a decrease of
$119,000, or 25.6%, as compared to the corresponding period in the prior year.
The decrease was a result of one time construction costs to prepare a client
hospital's space for patient care in 1996, decreased travel expenses in 1997,
and a rate reduction for general and professional liability insurance in 1997.
Bad debt expense increased $791,000 for the two months ended February 28, 1997
as compared to the corresponding period in the prior year. This increase is
primarily attributable to reserves established for one non-paying hospital which
accounted for $707,000 of the increase.
10
<PAGE> 17
Income Tax Expense. Income tax expense of $185,000 for the two months ended
February 29, 1996 decreased to a benefit of $33,000 for the two months ended
February 28, 1997. This change is the direct result of the loss before income
taxes for the two months ended February 28, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
During 1996, two major events concerning Specialty occurred. The first was
the renewal process with the 18 management contracts at the Tenet (formerly NME)
hospitals which had been amended to have two year terms at the time of the
acquisition by Specialty of the assets of the Division. The renewal of 50% of
those contracts enabled Specialty to maintain approximately $5 million in
revenue and $650,000 in net income. The contracts which did not renew consisted
of some heavily staffed psychiatric and chemical dependency units. In addition,
some of the rehabilitation contracts which were not renewed were full staffing
models where Specialty provided all the therapy disciplines.
In April 1996, Specialty purchased The Parkside Company, whose management
contracts consisted of 12 psychiatric and 6 chemical dependency units. Many of
these contracts had a compensation structure that entailed a pass-through of
direct cost plus a fixed fee. The average net income from these contracts was
somewhat less than Specialty's average net income per contract due to there
being no potential increase in the fixed fee based on the occupancy of the unit.
Net Revenues. Net revenues for the year ended December 31, 1996, were $33.8
million, representing a decrease of $6.2 million, or 15.5%, as compared to net
revenues of $40.0 million for the corresponding prior fiscal year. On December
31, 1995, all 18 of Specialty's contracts with Tenet hospitals came up for
renewal. The Company renewed 50%, or nine, of those management agreements.
Revenues relating to the nonrenewed contracts were $9.0 million. $3.7 million of
the revenue increase between periods was attributable to Specialty's merger with
Parkside on April 1, 1996.
Salaries and Benefits. Salaries and benefits expenses for the year ended
December 31, 1996, were $18.8 million, representing a decrease of $3.4 million,
or 15.3%, as compared to salaries and benefits expenses of $22.2 million for the
prior year. With the decrease in the number of programs in 1996, there was a
corresponding reduction in the staff needed by Specialty. Also, in 1996 a
contract for nursing staff was renewed, but with terms that transferred the
responsibility of the nursing staff to the client hospital. Specialty also
converted to a partially self-funded insurance plan on January 1, 1996, which
saved the company approximately $500,000.
Depreciation and Amortization. Depreciation and amortization expenses for
the year ended December 31, 1996, were $504,000, representing an increase of
$274,000, or 119.1%, as compared to depreciation and amortization expenses of
$230,000 for the corresponding period in the prior year. Amortization expense
increased $255,000 as a result of additional goodwill and contract valuation
associated with the Parkside acquisition. In addition, depreciation expense
increased as a result of additional assets purchased in the operation of the
business.
Other Operating Expenses (Including Purchased Services and Provision for
Bad Debts). Other operating expenses for the year ended December 31, 1996, were
$11.9 million, representing a decrease of $3.1 million, or 20.7%, as compared to
other operating expenses of $15 million for the prior year. Purchased services
decreased $1 million, or 12%, as a result of the nine NME contracts not renewed
at December 31, 1995. These nine contracts had a proportionately higher level of
purchased services due to the longevity of the contracts and size of the
programs. Other operating expenses decreased $2 million, or 37.2%, between the
periods. As 1995 was the initial year of Specialty, company start-up costs such
as relocation, software, general supplies, and legal expenses were all
significantly higher compared to 1996. Specialty also converted to a more
advantageous general and professional insurance policy during 1996. In addition,
bad debt decreased $110,000, or 7.5%. One contract accounted for $843,000 of bad
debt in 1995 and $2.4 million in 1996.
Interest Expense. Interest expense for the year ended December 31, 1996,
was $390,000, as compared to interest expense of $249,000 for the year ended
December 31, 1995. Interest expense increased due to the cash
11
<PAGE> 18
portion of the Parkside purchase which increased the revolving credit facility
and the term note. Interest is payable on both components of the loan.
Income Tax Expense. For the year ended December 31, 1995, Specialty
recorded federal and state income taxes of $891,000, resulting in a combined tax
rate of 38.9%. For the year ended December 31, 1996, Specialty recorded federal
and state income taxes of $936,000 resulting in a combined tax rate of 43.6%.
For this period, the difference between the effective rate and the U.S. Federal
Statutory rate relates primarily to goodwill amortization and state income
taxes.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The results of operations for the year ended December 31, 1994 were for the
Division and include reasonable allocations of corporate costs by NME on behalf
of the Division. Due to the use of estimates and allocations, the Statement of
Operations of the Division may not necessarily reflect what the results of
operations of the Division would have been had it been a separate, stand-alone
entity during the year ended December 31, 1994.
Net Revenues. Net revenues for the year ended December 31, 1995 were $40
million, representing an increase of $1.7 million, or 4.3%, as compared to net
revenues of $38.3 million for the prior fiscal year. The increase was primarily
a result of contracts which were added during the 1994 fiscal year which reflect
a full year of revenues in 1995 along with the maturity of the contracts.
Salaries and Benefits. Salaries and benefits expense for the year ended
December 31, 1995 were $22.2 million as compared to $20.1 million for the year
ended December 31, 1994, representing an increase of $2.1 million, or 10%. The
commencement of operations of Specialty as a stand-alone company in 1995
necessitated additional staffing requirements in certain corporate positions
which were previously charged to the Division by NME through corporate overhead
allocations.
Other Operating Expenses. Operating and administrative expenses increased
by $285,000 in 1995 to $5.3 million as a result of initial operating
expenditures by Specialty in the first year of its operation. Interest expense
for the year ended December 31, 1995 increased by $158,000 as compared to the
prior year as a result of new borrowings under notes payable and long-term debt
in 1995. Bad debt expense increased in 1995 as compared to 1994 primarily as a
result of increases to the reserves for one significant contract which amounted
to $843,000.
LIQUIDITY AND CAPITAL RESOURCES
As part of the purchase transaction on January 3, 1995, Specialty entered
into a one-year promissory note for $731,000 payable quarterly to NME. The note,
which included interest at 8%, was paid in full in January 1996.
At December 22, 1994, Specialty completed a transaction with Finova Capital
Corporation (formerly Greyhound Financial Corporation) for a credit facility
which provides for a $700,000 term loan and a line of credit up to the lesser of
$4,300,000 or an amount equal to 70% of the net amount of eligible receivables.
During 1996, the Company increased the total credit facility to $6,000,000,
which provides for a $1,027,500 term loan and a line of credit up to the lesser
of $4,972,500 or an amount equal to 75% of the net amount of eligible
receivables. Borrowings under the credit facility bear interest at the Citibank,
N.A. base rate plus 2% per annum, with Specialty being subject to an annual
minimum interest charge of $120,000. In addition, Specialty pays an annual
credit facility fee of .25% on the amount of the total facility. The credit
facility agreement also requires Specialty to meet covenants which restrict
capital expenditures and the incurrence of additional indebtedness.
Substantially all of Specialty's assets are pledge as collateral.
Maturities of long-term debt for the two years succeeding December 31, 1996
are $519,600 in 1997 and $3,056,714 in 1998.
Specialty believes that its net working capital of $3.0 million at December
31, 1996, including cash of $400,000, and the $727,000 available under the
revolving credit, will be sufficient to cover its cash requirements over the
next twelve months in the ordinary course of business (not taking into account
any cash
12
<PAGE> 19
requirements resulting from consummation of the Exchange Agreement). Specialty
generated approximately $614,000 in cash from operations during the year ended
December 31, 1996, a decrease of $2.1 million as compared to cash flows provided
by operations for the year ended December 31, 1995. The decrease in operating
cash flows is primarily a result of reductions in bonus accruals, payables for
third-party payor denials and other miscellaneous accrued liabilities.
Specialty has no material capital commitments as of February 28, 1997.
INFLATION
Specialty's management contracts generally provide for annual adjustments
in Specialty's fees based upon various inflation indices, thus mitigating the
effects of inflation. During the last two years, inflation has had little effect
on Specialty's business.
13
<PAGE> 20
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Set forth below are selected unaudited pro forma combined financial data of
Horizon and Specialty combined. The proposed transactions with Specialty are
reflected under the pooling of interests method of accounting. This information
is not necessarily indicative of the results that actually would have occurred
had the transactions been in effect as of the beginning of each of the periods
presented. The selected unaudited pro forma combined financial data presented
below is a summary and is qualified in its entirety by and should be read in
conjunction with the unaudited pro forma condensed combined financial statements
and the notes thereto included elsewhere in this Proxy Statement. All amounts
have been derived based upon Horizon's fiscal year which ends on August 31 and
Specialty's fiscal year which ends on December 31; conforming Specialty's year
ends to that of Horizon would not materially impact the amounts set forth below.
The amounts derived for the six month periods ended February 29, 1996 and
February 28, 1997 are based upon Horizon's and Specialty's unaudited historical
operating results for such periods. All amounts in the unaudited pro forma
combined balance sheet data as of February 28, 1997 have been derived based on
the combined unaudited historical balance sheets of Horizon and Specialty as of
February 28, 1997. Pro forma information for the year ended August 31, 1994 has
not been provided as Specialty was a division of NME during the year ended
December 31, 1994 and therefore is not eligible for pooling for that period
under generally accepted accounting principles.
PRO FORMA STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
AUGUST 31, ---------------------------
----------------- FEBRUARY 29, FEBRUARY 28,
1995 1996 1996 1997
------- ------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues.............................. $68,721 $95,244 $47,692 $49,658
Other revenues............................................ 634 995 208 3,586
------- ------- ------- -------
Net revenues................................................ 69,355 96,239 47,900 53,244
Expenses:
Salaries and benefits..................................... 37,581 53,517 25,897 28,510
Purchased services........................................ 12,943 15,905 8,197 8,513
Provision for bad debts................................... 1,680 1,435 1,308 1,443
Depreciation and amortization............................. 1,133 1,812 719 1,097
Other..................................................... 9,542 12,116 6,000 6,322
------- ------- ------- -------
Income from operations...................................... 6,476 11,454 5,779 7,359
------- ------- ------- -------
Interest and other income (expense) net..................... (1,003) (66) 16 80
------- ------- ------- -------
Income before income taxes and minority interest............ 5,473 11,388 5,795 7,439
Income tax expense.......................................... 1,695 4,609 2,279 3,000
------- ------- ------- -------
Income before equity in net earnings of Horizon LLC and
minority interest......................................... 3,778 6,779 3,516 4,439
Equity in net earnings of Horizon LLC....................... 1,568 -- -- --
Minority interest........................................... -- (2) -- (51)
------- ------- ------- -------
Net income.................................................. $ 5,346 $ 6,777 $ 3,516 $ 4,388
======= ======= =========== ===========
Net income per common share(a).............................. $ .82 $ .84 $ .45 $ .53
======= ======= =========== ===========
Weighted average number of common shares
outstanding(a)(b)......................................... 6,512 8,113 7,839 8,292
======= ======= =========== ===========
</TABLE>
PRO FORMA BALANCE SHEET DATA:
<TABLE>
<CAPTION>
FEBRUARY 28,
1997
------------
<S> <C>
Cash........................................................ $ 8,801
Working capital............................................. 10,967
Intangible assets (net)..................................... 19,367
Total assets................................................ 50,050
Total debt.................................................. 4,163
Stockholders' equity........................................ $27,101
</TABLE>
- ---------------
(a) Pro forma net income per share is computed by dividing net income by the
number of common stock equivalent shares outstanding during the periods in
accordance with the applicable rules of the SEC. All stock options and
warrants have been considered as outstanding common share equivalents for
all periods presented under the treasury stock method. For all periods
presented, shares of Horizon Common Stock have been restated to reflect a
three-for-two stock split effected in the form of a 50% stock dividend which
occurred on January 31, 1997.
(b) The number of shares used in pro forma net income per share gives effect to
the Exchange by using an exchange ratio of 173.794 shares of Horizon Common
Stock to be issued for each of the Specialty Shares to be outstanding
immediately prior to consummation of the Closing (the "Exchange Ratio").
14
<PAGE> 21
COMPARATIVE PER SHARE DATA
The following table presents selected comparative per share data for (i)
Horizon on a historical basis in comparison with pro forma net income per share
giving effect to the Exchange on a pooling of interests basis, and (ii)
Specialty on a historical basis in comparison with pro forma net income
attributable to shares of Horizon Common Stock which will be issued for each
outstanding Specialty Share. Information contained in this table should be read
in conjunction with historical consolidated financial statements of the
respective companies and the related notes thereto, and with the unaudited pro
forma combined financial statements and the related notes thereto, appearing
elsewhere in or incorporated by reference into this Proxy Statement.
Horizon has not paid or declared any cash dividends on its capital stock
since its inception. Horizon currently intends to retain all future earnings for
use in the expansion and operation of its business. Future borrowings may limit
Horizon's ability to pay dividends. The payment of any future cash dividends
will be determined by the Board of Directors of Horizon in light of conditions
then existing, including Horizon's earnings, financial condition and capital
requirements, restrictions in financing agreements, business conditions and
other factors.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Exchange been consummated at the beginning of the periods presented.
<TABLE>
<CAPTION>
HORIZON AND SPECIALTY
HORIZON SPECIALTY SPECIALTY EQUIVALENT
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
PER SHARE PER SHARE PER SHARE PER SHARE
DATA(1) DATA DATA(1) DATA(1)(2)
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
NET INCOME:
Year ended August 31, 1994....................... $0.35 N/A N/A N/A
Year ended August 31, 1995 (Horizon) or December
31, 1995 (Specialty).......................... 0.76 $180.30 $0.82 $142.51
Year ended August 31, 1996 (Horizon) or December
31, 1996 (Specialty).......................... 0.85 132.61 0.84 145.99
Six months ended February 29, 1996............... 0.40 118.73 0.45 78.21
Six Months Ended February 28, 1997............... 0.54 84.74 0.53 92.11
STOCKHOLDERS' EQUITY (BOOK VALUE):
August 31, 1996 (Horizon) or December 31, 1996
(Specialty)................................... 3.72 412.88 3.53 613.49
February 28, 1997................................ 4.37 408.63 3.76 653.47
</TABLE>
- ---------------
(1) The Horizon per share data and the Horizon and Specialty pro forma and
equivalent pro forma per share data are restated to reflect a three-for-two
stock split effected by Horizon in the form of a 50% stock dividend which
occurred on January 31, 1997.
(2) Horizon and Specialty Pro Forma Per Share Data multiplied by the Exchange
Ratio of 173.794.
15
<PAGE> 22
SPECIAL MEETING OF HORIZON STOCKHOLDERS
This Proxy Statement is being furnished by Horizon to its stockholders in
connection with the solicitation of proxies by the Board of Directors of Horizon
for use at the Special Meeting. At the Special Meeting, holders of Horizon
Common Stock will be asked to consider and vote on a proposal for Horizon to
issue the Exchange Shares to the Specialty Stockholders pursuant to the Exchange
Agreement and on a proposal to amend the Certificate of Incorporation of Horizon
to change its corporate name.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting will be held on Thursday, July 31, 1997, at 10:00 a.m.
local time, at the National Support Center of Horizon located at 1500 Waters
Ridge Drive, Lewisville, Texas 75057-6011.
VOTING INFORMATION FOR HORIZON STOCKHOLDERS
The close of business on June 6, 1997 has been fixed by the Board of
Directors of Horizon as the Record Date. As of the Record Date, there were
5,566,762 shares of Horizon Common Stock outstanding, held of record by 36
persons.
At the Special Meeting, stockholders of Horizon will be asked to consider
and vote on the proposals to issue the Exchange Shares pursuant to the Exchange
Agreement and to amend the Certificate of Incorporation of Horizon to change its
corporate name. The Board of Directors of Horizon has unanimously approved and
recommends that stockholders vote for the issuance of the Exchange Shares and
the amendment to the Certificate of Incorporation.
Each record holder of Horizon Common Stock is entitled to one vote for each
share held on all matters submitted to a vote of stockholders. There is no
cumulative voting. The presence at the Special Meeting, either in person or by
proxy, of the holders of a majority of all the votes entitled to be cast at such
meeting will constitute a quorum for the transaction of business. Assuming the
presence of a quorum, approval of the issuance of the Exchange Shares and
approval of any other matter properly considered and acted upon at the Special
Meeting (except for the proposal to amend the Certificate of Incorporation)
requires the affirmative vote, either in person or by proxy, of at least a
majority of all shares of Horizon Common Stock present in person or by proxy and
entitled to vote at the Special Meeting. The affirmative vote of the holders of
a majority of the issued and outstanding shares of Horizon Common Stock on the
Record Date is required to approve the proposal to amend the Certificate of
Incorporation of the Company (Proposal No. 2). Abstentions will be counted as
shares that are present and entitled to vote for purposes of determining the
presence or absence of a quorum. Abstentions will therefore have the same effect
as votes against any proposal to be voted on at the Special Meeting. Broker
non-votes will be counted only for purposes of determining the presence or
absence of a quorum. Broker non-votes on the proposal to amend the Certificate
of Incorporation of Horizon will have the same effect as votes against such
proposal, but broker non-votes will otherwise have no effect on the outcome of
other matters to be voted on at the Special Meeting.
The rules of the Nasdaq National Market, on which the Horizon Common Stock
is quoted, require a listed company, as a condition to continued listing, to
obtain the approval of its stockholders prior to the issuance of shares of
listed stock that equal or exceed 20% of the number of such shares outstanding
prior to the issuance. Accordingly, since the Exchange Shares exceed the 20%
threshold, Horizon is seeking stockholder approval of the issuance of the
Exchange Shares pursuant to the Exchange Agreement. Under Delaware law, the
amendment to the Certificate of Incorporation of Horizon requires the approval
of a majority of the issued and outstanding shares of Horizon Common Stock on
the Record Date.
Based upon the number of shares of Horizon Common Stock issued and
outstanding as of the Record Date, the Specialty Stockholders will hold
approximately 22.9% of the total issued and outstanding shares of Horizon Common
Stock immediately after the Exchange (approximately 20.0% on a fully-diluted
basis). The Exchange Agreement provides that the number of Exchange Shares
issuable pursuant to the Exchange may be reduced under certain circumstances.
See "Proposal No. 1 to Issue the Exchange Shares -- The Exchange
Agreement -- General."
16
<PAGE> 23
SOLICITATION OF PROXIES
The accompanying proxy sent to Horizon stockholders is being solicited by
the Board of Directors of Horizon. All proxies in the enclosed form of proxy
that are properly executed and received by Horizon prior to commencement of
voting at the Special Meeting will be voted at the Special Meeting in accordance
with the instructions thereon. IF A PROXY IS EXECUTED AND RETURNED WITHOUT
INDICATING ANY VOTING INSTRUCTIONS, SHARES OF HORIZON COMMON STOCK REPRESENTED
BY SUCH PROXY WILL BE VOTED "FOR" APPROVAL OF THE ISSUANCE OF THE EXCHANGE
SHARES TO THE SPECIALTY STOCKHOLDERS PURSUANT TO THE EXCHANGE AGREEMENT AND
"FOR" APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF HORIZON
TO CHANGE ITS CORPORATE NAME. A stockholder may revoke its proxy at any time
before it is voted by filing with the Secretary of Horizon either an instrument
revoking the proxy or a duly executed proxy bearing a later date, or by
attending the Special Meeting and voting in person. Any such filing should be
sent to the Corporate Secretary of Horizon at 1500 Waters Ridge Drive,
Lewisville, Texas 75057-6011. Attendance at the Special Meeting will not by
itself revoke a proxy.
By returning a signed proxy card, a stockholder will be authorizing the
proxy holder to vote in his discretion regarding any procedural motions which
may come before the Special Meeting. For example, this authority could be used
to adjourn the meeting if Horizon believes it is desirable to do so. Adjournment
or other procedural matters could be used to obtain more time before a vote is
taken in order to solicit additional proxies or to provide additional
information to stockholders. Horizon has no plans to adjourn the meeting at this
time, but it intends to attempt to do so if it believes doing so would promote
stockholder interests.
The management of Horizon does not know of any other matters other than
those set forth herein which may come before the Special Meeting. If any other
matters are properly presented to the Special Meeting for action, the persons
named in the applicable form of proxy will have discretion to vote on such
matters in accordance with their own judgment and applicable SEC rules.
The expense of printing this Proxy Statement and the proxies solicited
hereby, and the expense of soliciting such proxies, will be borne by Horizon. In
addition to the use of the mails, proxies may be solicited by officers and
directors and regular employees of Horizon, without additional remuneration, by
personal interviews, telephone, facsimile or otherwise. Horizon's regularly
retained investor communications firm, Corporate Communications, Inc., may also
be called upon to solicit proxies by telephone or mail. Although Horizon does
not presently anticipate doing so, it may retain a proxy solicitation firm to
aid in the solicitation of proxies from its stockholders. If such a firm is
retained by Horizon, it would be paid customary fees (which are not expected to
exceed $10,000) and would be reimbursed for out-of-pocket expenses. Horizon will
request banking institutions, brokerage firms, custodians, trustees, nominees
and fiduciaries to forward proxy solicitation material to the beneficial owners
of Horizon Common Stock held by such persons, and Horizon will reimburse
reasonable forwarding expenses upon the request of such record holders.
DISSENTERS' RIGHTS
Stockholders of Horizon do not have dissenters' rights of appraisal with
respect to the issuance of the Exchange Shares or the amendment to the
Certificate of Incorporation of Horizon.
THE BOARD OF DIRECTORS OF HORIZON HAS DETERMINED THAT THE PROPOSAL TO ISSUE
THE EXCHANGE SHARES PURSUANT TO THE EXCHANGE AGREEMENT AND THE PROPOSAL TO AMEND
THE CERTIFICATE OF INCORPORATION OF HORIZON TO CHANGE ITS CORPORATE NAME ARE IN
THE BEST INTERESTS OF HORIZON AND RECOMMENDS THAT THE STOCKHOLDERS OF HORIZON
VOTE IN FAVOR OF THE PROPOSALS.
17
<PAGE> 24
PROPOSAL NO. 1 TO ISSUE THE EXCHANGE SHARES
The following information describes the Exchange, insofar as it relates to
matters contained in the Exchange Agreement, and is qualified in its entirety by
reference to the Exchange Agreement, a copy of which is attached hereto as
Appendix A and incorporated herein by reference. Each Horizon stockholder is
advised to read the Exchange Agreement carefully. The information below may
contain cautionary statements identifying important factors with respect to
forward-looking statements, including certain risks and uncertainties that could
cause actual results to differ materially from those in such forward-looking
statements. See "Disclosure Regarding Forward-Looking Statements."
SUMMARY OF THE EXCHANGE
The Exchange Agreement provides that, following the performance and
fulfillment of all covenants, conditions and obligations to the Exchange (other
than those waived in accordance with the terms of the Exchange Agreement),
Horizon will acquire all of the outstanding Specialty Shares from the
stockholders of Specialty in exchange for a total of 1,650,000 shares of Horizon
Common Stock, and Specialty will become a wholly-owned subsidiary of Horizon.
The Exchange Agreement provides that the number of Exchange Shares issuable
pursuant to the Exchange may be reduced under certain circumstances. See
"Proposal No. 1 to Issue the Exchange Shares -- The Exchange
Agreement -- General."
The Exchange will be effected by the delivery at Closing by the Specialty
Stockholders of duly executed stock transfer forms in respect of all of their
Specialty Shares together with the certificates representing such shares in
exchange for shares of Horizon Common Stock. The Exchange will become effective
on the date of the Closing (the "Closing Date").
BACKGROUND OF THE EXCHANGE
On October 25, 1996, Horizon management reviewed with the Horizon Board of
Directors at a regular meeting Specialty as a potential acquisition candidate
and discussed whether to pursue discussions regarding the acquisition of
Specialty. At that meeting, the Horizon Board of Directors approved
investigating the possibility of such a transaction by Horizon management.
In late October, Horizon initially contacted Specialty regarding
discussions to consider the possibility of a combination of the two companies.
An initial meeting was held on November 1, 1996 at the corporate offices of
Horizon between James Ken Newman, President and Chief Executive Officer of
Horizon, James W. McAtee, Executive Vice President and Chief Financial Officer
of Horizon, and Howard B. Finkel, President and Chief Executive Officer of
Specialty, and John B. Harrison, Vice President and Chief Operating Officer of
Specialty. At that meeting, Horizon discussed the possibility of a combination
of the two companies and the fact that Horizon was interested, in part, because
Specialty managed rehabilitation programs as well as mental health programs.
Specialty management indicated that Specialty was not actively pursuing a sale
of the company. However, the parties discussed the signing of a confidentiality
agreement so that information concerning the companies could be exchanged for
the purposes of discussions.
On November 4, 1996, Horizon and Specialty entered into a confidentiality
agreement pursuant to which the parties agreed to share information for the
purposes of evaluating a possible transaction. On November 18, 1996, the parties
met at the corporate offices of Specialty. Messrs. Newman and McAtee attended
the meeting for Horizon and Messrs. Finkel and Harrison and Larry Reiff, Vice
President and Chief Financial Officer of Specialty, and Dan Raynor, a Director
of Specialty, attended the meeting. At the meeting, Specialty management
provided to Horizon certain financial and other information about Specialty. In
addition, the parties discussed valuation techniques and reviewed the then
current budgets and financial projections of Specialty.
On November 12, 1996, Horizon engaged Robertson Stephens as its financial
advisor in connection with the possible acquisition of Specialty.
In late November, Horizon management forwarded to Specialty management its
initial valuation of Specialty and a description of a proposed structure for the
transaction as a stock exchange accounted for as a
18
<PAGE> 25
pooling of interests. In addition, Horizon management raised concerns about one
management contract of Specialty which had a large outstanding receivable.
On December 4, 1996, Messrs. Newman and McAtee on behalf of Horizon, a
representative of the financial advisor for Horizon, and Messrs. Finkel,
Harrison and Raynor on behalf of Specialty met in New York, New York to discuss
the proposed transaction. The parties discussed the methods by which Horizon had
arrived at its valuation of Specialty. In addition, Horizon management indicated
that they were not interested in pursuing a possible combination if Specialty
continued to provide services without payment under the particular management
contract with the large outstanding receivable. At the end of the meeting,
Specialty management advised Horizon that they were no longer interested in
continuing the discussions.
In mid-February 1997, Specialty contacted Horizon about recommencing
discussions to evaluate the desirability and feasibility of a combination of the
two companies. Specialty management informed Horizon management that Specialty
had considered effecting an initial public offering but that Specialty would
also entertain discussions regarding an acquisition by Horizon. Specialty also
provided to Horizon its year-end financial results. Horizon also requested the
revised budget information of Specialty which Specialty provided to Horizon. On
February 24, 1997, Horizon forwarded to Specialty a proposal for the transaction
which included a revised valuation of Specialty. After discussions between
Horizon management and the Specialty Stockholders primarily relating to the
valuation of Specialty, another revised proposal for a transaction was forwarded
to Specialty on February 26, 1997.
On March 7, 1997, Horizon and Specialty entered into a letter agreement
providing, among other things, that the parties would attempt to negotiate a
definitive agreement for the acquisition of Specialty by Horizon and that,
during such negotiations, Specialty would not pursue any other transaction. On
March 13, 1997, Horizon forwarded to Specialty a draft of a definitive agreement
for the proposed transaction. Representatives of Horizon conducted a due
diligence review at the offices of Specialty on March 17, 18 and 19, 1997. On
March 24, 1997, Mr. Newman and Mr. Finkel had a meeting at the offices of
Specialty to discuss a reduced valuation by Horizon of Specialty and the status
of the management contract with which Horizon had concerns. In late March and
early April 1997, representatives of Horizon and the Specialty Stockholders
discussed other terms of the proposed definitive agreement including
indemnification, registration rights, termination fees and conditions to the
obligation of the parties. In early April 1997, Mr. Newman advised Mr. Finkel
that, after further review, Horizon had arrived at a fixed exchange ratio for
the transaction and that this was a firm condition of the transaction.
On April 6, 1997, Messrs. Newman and McAtee on behalf of Horizon and
Messrs. Finkel, Harrison, Reiff and Raynor on behalf of the Specialty
Stockholders, together with their respective legal counsel, met at the corporate
offices of Horizon and discussed a number of issues regarding the proposed
transaction and the proposed fixed exchange ratio. At that meeting, the parties
negotiated agreement on the exchange ratio and the other basic terms of the
transaction subject to reaching agreement on a definitive agreement for the
transaction.
Between April 6, 1997 and April 18, 1997, representatives of Horizon and
the Specialty Stockholders finalized the proposed definitive agreement.
On April 18, 1997, the Board of Directors of Horizon at a regular meeting
reviewed the terms of the proposed transaction and authorized the officers of
Horizon to finalize and execute the definitive agreement and to take final
action with respect to any further developments concerning the proposed
transaction. The Board considered the fixed exchange ratio, the final draft of
the Exchange Agreement, presentations by Horizon management relating to the due
diligence review and financial analysis of Specialty, and the fairness opinion
of Robertson Stephens. On April 24, 1997, the Specialty Stockholders and the
Board of Directors of Specialty approved the Exchange Agreement. Specialty also
terminated the management contract of concern to Horizon on April 24, 1997,
subject to Specialty's continued right to receive amounts due to it accrued
thereunder through the termination date. On April 25, 1997, the Exchange
Agreement was signed by the parties. On May 28, 1997, NME joined in and became a
party to the Exchange Agreement.
19
<PAGE> 26
REASONS FOR THE EXCHANGE AND RECOMMENDATION OF THE HORIZON BOARD OF DIRECTORS
The Board of Directors of Horizon believes that the Exchange (including the
issuance of the Exchange Shares) is in the best interests of Horizon and the
Horizon Board of Directors has unanimously recommended that Horizon stockholders
vote "FOR" approval of the issuance of the Exchange Shares. The Board of
Directors of Horizon considered that the acquisition of Specialty presented
several benefits to Horizon, including the following:
- Horizon believes that its increased market presence as the leading
contract manager of mental health programs will be beneficial in its
marketing efforts and ability to attract acquisition prospects.
- Horizon believes that there will be synergies resulting from the
combination of the two companies by virtue of being able to integrate the
operations of Specialty into the existing regional administrative structure
of Horizon thereby reducing corporate overhead.
- Horizon believes that it will benefit by diversification into the
management of rehabilitation programs in addition to its existing business
of the management of mental health programs. Horizon believes that such
diversification will reduce the risk of being a contract manager solely of
mental health programs.
- Horizon believes that the combination of the two companies will
produce value for its stockholders through the potential for growth in
earnings of Horizon resulting from the combination.
- Horizon believes that Horizon stockholders will receive a benefit
from the transaction by increasing the market in the public trading of the
Horizon Common Stock thereby producing greater liquidity for the Horizon
stockholders.
In reaching such determination, the Board of Directors considered a number
of factors, including, (i) information pertaining to Horizon's and Specialty's
respective businesses, prospects, historical and projected financial
performances, financial condition and operations; (ii) analyses of the
respective projected contributions to net revenue, operating profit and net
income of each company; (iii) analyses of the business and capabilities of the
combined companies; (iv) reports from management on Horizon's due diligence
investigation of Specialty; (v) an assessment by management of the ability to
integrate the business operations of Specialty into the existing regional and
corporate structure of Horizon and resulting reductions of corporate overhead
expenses; and (vi) the opinion of Robertson Stephens, Horizon's independent
financial advisor, dated April 17, 1997, to the effect that, as of such date,
based upon and subject to certain matters stated therein, the Purchase Price to
be paid by Horizon in connection with the Exchange is fair to Horizon from a
financial point of view.
In its deliberations concerning the Exchange, the Board of Directors of
Horizon also considered various adverse considerations and risk factors,
including (i) the historical financial performance of Specialty; (ii) the
percentage of ownership reduction to Horizon stockholders resulting from the
issuance of the Exchange Shares to the Specialty Stockholders; (iii) the risk
that the public market price of Horizon Common Stock might be adversely affected
by the announcement of the Exchange; (iv) the risk that the combined company
might not achieve revenue equal to the sum of the separate companies'
anticipated revenue; (v) the risk that other benefits sought to be obtained by
the Exchange will not be obtained; (vi) the cost of integration of the
operations of Horizon and Specialty and its impact on the combined results of
the combined company after the Exchange; (vii) the risk of diversification to
Horizon resulting from the lack of management and institutional expertise in the
management of rehabilitation programs; (viii) the possible inability to renew
the existing management contracts of Specialty; (ix) the management disruption
associated with integrating the operations of Specialty into Horizon; and (x)
the dilution resulting to Horizon stockholders as a result of the Exchange being
based on fixed exchange ratio. Because the exchange ratio is fixed and will not
increase or decrease due to fluctuations in the market price of Horizon Common
Stock, the specific value of the consideration to be paid by Horizon in the
acquisition will depend on the market price of Horizon Common Stock on the
Closing Date. In the event the market price of Horizon Common Stock decreases or
increases prior to the Closing Date, the market value of the Horizon Common
Stock to be issued to Specialty Stockholders in the Exchange would
correspondingly increase or decrease. The market price of Horizon
20
<PAGE> 27
Common Stock as of the date of the signing of the Exchange Agreement and as of a
recent date are set forth herein under "Summary -- Market Prices and Dividend
Policies." The Horizon Board of Directors concluded, however, that the potential
benefits of the transaction to Horizon outweighed the risks associated with the
foregoing factors.
The foregoing discussion of the information and factors considered by the
Horizon Board in connection with its evaluation of the Exchange is not intended
to be exhaustive but is intended to include all the material factors considered
by the Board of Directors. In view of the wide variety of factors considered by
the Horizon Board of Directors, the Directors did not find it practical to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered.
One of the conditions to the obligations of Horizon under the Exchange
Agreement is approval of the issuance of the Exchange Shares by Horizon
stockholders. In the event that the issuance of the Exchange Shares is not
approved by Horizon stockholders, Horizon will not proceed with the acquisition
of Specialty pursuant to the Exchange Agreement.
OPINION OF ROBERTSON, STEPHENS & COMPANY LLC
Horizon retained Robertson Stephens to act as its financial advisor in
connection with the Exchange and to render an opinion as to the fairness of the
Purchase Price (as defined below) to be paid by Horizon in connection with the
Exchange, from a financial point of view. Robertson Stephens has delivered to
the Horizon Board of Directors its written opinion, dated April 17, 1997, that
the Purchase Price to be paid by Horizon in connection with the Exchange was
fair to Horizon from a financial point of view as of the date thereof. In its
opinion, Robertson Stephens calculated the Purchase Price to be paid by Horizon
in connection with the Exchange on the basis that Horizon will issue to
Specialty Stockholders 1,650,000 shares of Horizon Common Stock, implying a
purchase price of $26.6 million (the "Purchase Price") as of the date thereof.
A copy of the full text of the written opinion of Robertson Stephens, which
sets forth the assumptions made, procedures followed, matters considered and
limits on the review undertaken, is attached to this Proxy Statement as Appendix
B and is incorporated herein by reference. Stockholders of Horizon are urged to,
and should, read such opinion in its entirety. Robertson Stephens did not
recommend to Horizon the specific Purchase Price to be paid in the Exchange or
that any specific Purchase Price constituted the appropriate consideration for
the Exchange. Robertson Stephens' opinion is directed only to the fairness, from
a financial point of view and as of April 17, 1997, of the Purchase Price to be
paid by Horizon in connection with the Exchange and does not constitute a
recommendation to any Horizon stockholder as to how such stockholder should vote
at the Special Meeting. The summary of the opinion of Robertson Stephens set
forth in this Proxy Statement is qualified in its entirety by reference to the
full text of such opinion.
Robertson Stephens does not express any opinion regarding the value of the
Horizon Common Stock at the time it is issued to the Specialty Stockholders
pursuant to the Exchange or the price at which the Horizon Common Stock will be
traded at any time on or after the date of the opinion. Moreover, Robertson
Stephens does not express any opinion regarding the fairness of the Purchase
Price to Specialty or the Specialty Stockholders. In rendering its opinion,
Robertson Stephens was not engaged as an agent or fiduciary of Horizon
stockholders or any other third party, and no limitations were imposed by
Horizon on the scope of Robertson Stephens' opinion or the procedures to be
followed by Robertson Stephens in rendering its opinion.
In connection with its opinion, Robertson Stephens, among other things, (i)
reviewed certain financial information on Horizon and Specialty furnished by
both companies, including certain internal financial analyses and forecasts
prepared by the respective managements of Horizon and Specialty; (ii) reviewed
certain publicly available information concerning Horizon; (iii) held
discussions with the managements of Horizon and Specialty concerning the
businesses, past and current business operations, financial condition and
results of operations and the future prospects of both companies, independently
and combined; (iv) reviewed the draft Exchange Agreement; (v) reviewed the stock
price and trading history of Horizon Common Stock; (vi) reviewed the
contribution by each company to pro forma combined revenue, operating income and
net income; (vii) reviewed the valuations of publicly traded companies which
Robertson Stephens deemed comparable to Horizon and Specialty; (viii) compared
the financial terms of the Exchange with other
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transactions which Robertson Stephens deemed relevant; (ix) analyzed the pro
forma earnings per share of the combined company; and (x) made such other
studies and inquiries, and reviewed such other data and information, as
Robertson Stephens deemed relevant.
In rendering its opinion, upon the assurance of Horizon and Specialty
management that they were unaware of any information that would make information
provided to Robertson Stephens inaccurate or misleading, Robertson Stephens
assumed and relied upon, without independent verification, the accuracy and
completeness of all publicly-available information reviewed by it and all other
information furnished (or made available) to it by or on behalf of Horizon and
Specialty or otherwise used by Robertson Stephens in connection with its
opinion. Furthermore, Robertson Stephens was not requested to, and did not, make
or obtain any independent appraisal of the properties, assets or liabilities of
Horizon or Specialty. With respect to the financial and operating forecasts (and
the assumptions and bases therefor) of Horizon and Specialty which Robertson
Stephens reviewed, Robertson Stephens assumed that such forecasts were
reasonably prepared in good faith on the basis of reasonable assumptions,
reflect the best available estimates and judgments of such respective
managements and that such projections and forecasts will be realized in the
amounts and in the time periods currently estimated by the managements of
Horizon and Specialty. In addition, Robertson Stephens relied upon estimates and
judgments of managements of Horizon and Specialty as to the future financial
performance of both companies. Further, Robertson Stephens assumed that the
historical financial statements of Horizon and Specialty that it reviewed had
been prepared and presented in accordance with U.S. generally accepted
accounting principles ("GAAP"). In addition, Robertson Stephens assumed that the
Exchange will be consummated upon the terms set forth in the draft Exchange
Agreement without material alteration. The opinion of Robertson Stephens is
necessarily based only upon market, economic, and other conditions that existed
and could be evaluated as of the date of the opinion, and on information
available to Robertson Stephens as of the date of the opinion.
The following paragraphs summarize certain of the financial analyses
performed by Robertson Stephens in connection with providing its opinion dated
April 17, 1997 to the Board of Directors of Horizon, and do not purport to be a
complete description of the analyses performed by Robertson Stephens.
Comparable Companies Analysis. Robertson Stephens reviewed and compared
certain financial information relating to Horizon and Specialty to corresponding
publicly-available financial information for certain publicly-traded companies
in the specialty contract management and rehabilitation and psychiatric facility
industries that Robertson Stephens deemed relevant. These companies included
American Healthcorp, Inc., Comprehensive Care Corporation, EmCare Holdings Inc.,
Intensiva HealthCare Corporation, Pediatrix Medical Group, Inc., PMR
Corporation, RehabCare Group, Inc., HEALTHSOUTH Corporation, NovaCare, Inc.,
Apogee, Inc., and Magellan Health Services, Inc. (collectively, the "Comparable
Companies"). Financial data reviewed included revenues, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), EBITDA margin,
earnings per share (both historical and projected based on analysts' estimates)
and projected earnings per share growth rate. The multiples assessed for the
Comparable Companies were based on publicly available information and Robertson
Stephens Institutional Research estimates as available, or composite analyst
estimates as reported by third party sources. Such multiples for the Comparable
Companies and for the consideration were calculated using the closing prices of
the common stock of the Comparable Companies on April 17, 1997 (the "Reference
Prices"). Robertson Stephens' analysis indicated that for the Comparable
Companies, Reference Prices as a multiple of calendar year 1997 estimated
earnings per share ranged from 14.6 to 30.0x with a mean of 20.4x, and calendar
year 1998 estimated earnings per share ranged from 7.6 to 21.5x with a mean of
15.6x.
Precedent Acquisition Transactions Analysis. Robertson Stephens analyzed
publicly available information for selected completed mergers and acquisitions
in the specialty contract management industry since 1995 (the "Precedent
Acquisition Transactions"), and applied certain multiples implied by such
information to relevant operating values for Specialty. The transactions
reviewed, in order of dates announced, include the following: Cornerstone Health
Management Corporation/GranCare Inc.; Genesis Health Management
Corporation/Dynamic Associates, Inc.; MileStone Healthcare Inc./Health Care and
Retirement Corporation; TheraTx, Incorporated/Vencor, Inc.; Geriatric Medical
Care, Inc./Horizon Mental Health Management, Inc.; and Clay Care, Inc./Horizon
Mental Health Management, Inc. Such analysis indicated that for the
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Precedent Acquisition Transactions (i) aggregate consideration (equity
consideration plus debt less cash) as a multiple of latest twelve months ("LTM")
revenues ranged from 0.8 to 2.6x with a mean of 1.4x; (ii) aggregate
consideration as a multiple of LTM EBITDA ranged from 7.5 to 9.5x with a mean of
8.5x; and (iii) equity consideration as a multiple of LTM net income ranged from
13.0 to 18.2x with a mean of 15.2x.
No company or transaction used in the analyses described in the preceding
two paragraphs is identical to Horizon, Specialty or the Exchange. Accordingly,
an analysis of the results of the foregoing is not entirely mathematical;
rather, it involves complex considerations and judgments concerning the
differences in the financial and operating characteristics of the comparable
companies or transactions and other factors that could affect the acquisition or
public trading values of the comparable companies or transactions.
Discounted Cash Flow Analysis. Robertson Stephens performed a discounted
cash flow analysis of Specialty under two scenarios, utilizing financial
information and estimates of future financial performance for Specialty as
developed by Robertson Stephens in conjunction with Horizon management based on
information provided by Specialty, such scenarios being referred to as the "Base
Case" and the "Sensitivity Case." In such analysis, Robertson Stephens assumed
terminal value multiples of 6.0 to 7.0x projected EBITDA for the fiscal year
ending August 31, 2007 and discount rates of 12.0% to 14.0%. For the Base Case,
such analysis produced implied equity values of Specialty ranging from $27.4 to
$33.3 million. For the Sensitivity Case, such analysis produced implied equity
values of Specialty ranging from $20.1 to $23.9 million.
Contribution Analysis. Robertson Stephens compared the contribution of
Horizon and Specialty to pro forma estimated combined revenue, EBITDA and net
income for fiscal years ended August 31, 1997 to August 31, 1999, based on the
financial scenarios described above for Specialty and a financial forecast of
Horizon based on composite analyst estimates. Robertson Stephens noted that
Specialty would contribute approximately 23.3% to 29.6% of revenues, 19.7% to
27.3% of EBITDA and 19.2% to 26.5% of net income.
Pro Forma Earnings Analysis. Robertson Stephens analyzed the pro forma
earnings per share of the combined company based on the total shares to be
issued in the Exchange and the Base Case and Sensitivity Case scenarios
described above. Such analysis indicated that, in the absence of synergies, pro
forma earnings per share of the combined company, compared to Horizon as a
stand-alone entity, would be increased 4.4% and 1.4% under the Base Case and
increased 3.3% and decreased 0.7% under the Sensitivity Case for Horizon's
fiscal years ending August 31, 1998 and 1999, respectively.
The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analyses and the application of those methods
to the particular circumstances and, therefore, such opinions are not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Robertson Stephens did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
Robertson Stephens believes that its analyses must be considered as a whole and
that considering any portion of such analyses alone could create a misleading or
incomplete view of the process underlying its opinion. Analyses based upon
forecasts of future results are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of Horizon, Specialty or Robertson Stephens, none of Horizon, Specialty
or Robertson Stephens, or any other person, assumes responsibility if future
results are materially different from those forecast. In addition, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold.
As described above, Robertson Stephens' opinion to the Board of Directors
of Horizon was one of many factors taken into consideration by the Board of
Directors in making its determination to approve the Exchange. The foregoing
summary does not purport to be a complete description of the analyses performed
by Robertson Stephens and is qualified in its entirety by reference to the full
text of the written opinion of Robertson Stephens set forth in Appendix B
hereto.
Robertson Stephens is a nationally-recognized investment banking firm. As
part of its investment banking business, Robertson Stephens is frequently
engaged in the valuation of businesses and their securities in
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connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and other purposes. In the
course of its securities trading, sales and other activities, Robertson Stephens
may purchase or sell Horizon Common Stock for its own account and the accounts
of its customers. Accordingly, Robertson Stephens may, from time to time, have a
long or short position in the securities of Horizon.
Pursuant to a letter agreement dated November 12, 1996 (the "Engagement
Letter"), Horizon engaged Robertson Stephens to act as a financial advisor and
to render its opinion with respect to the fairness, from a financial point of
view, of the Purchase Price to be paid by Horizon in connection with the
Exchange. Horizon retained Robertson Stephens on the basis of Robertson
Stephens' experience and reputation as a financial advisor in connection with
merger and acquisition transactions, in the health care industry in particular,
as well as Robertson Stephens' investment banking relationship and familiarity
with Horizon. Robertson Stephens acted as lead underwriter for the initial
public offering of shares of Horizon Common Stock in March 1995. Pursuant to the
terms of the Engagement Letter, Horizon has agreed to pay Robertson Stephens a
fee of $400,000, due and payable upon completion of the Exchange. Horizon has
also agreed to reimburse Robertson Stephens for certain reasonable out-of-pocket
expenses, including attorneys' fees, and to indemnify Robertson Stephens against
certain liabilities, including certain liabilities under federal securities
laws.
THE EXCHANGE AGREEMENT
General
The Exchange Agreement provides that, following the performance and
fulfillment (or waiver) of all covenants, conditions and obligations to the
Exchange, Horizon will issue at the Closing 1,650,000 shares of Horizon Common
Stock in exchange for all outstanding shares of Specialty Common Stock
(including shares of Specialty Common Stock to be issued upon exercise prior to
the Closing of the outstanding NME Warrant), and Specialty will become a
wholly-owned subsidiary of Horizon. There are a total of 8,279 shares of
Specialty Common Stock outstanding at the date of this Proxy Statement. In
addition, NME owns a warrant (the "NME Warrant") to purchase from Specialty
1,215 shares of Specialty Common Stock at an exercise price of $0.0823 per
share. NME has agreed in the Exchange Agreement to exercise the NME Warrant in
full at or prior to the Closing under the Exchange Agreement, and such exercise
is a condition to Horizon's obligation to consummate the Exchange. Based upon
the total number of shares of Horizon Common Stock outstanding as of the Record
Date, the Specialty Stockholders will hold approximately 22.9% of the Horizon
Common Stock outstanding immediately after the Exchange (approximately 20.0% on
a fully-diluted basis).
The Exchange Agreement provides for a reduction in the number of shares of
Horizon Common Stock to be issued in the Exchange (i) in the event of the
termination of certain management contracts of Specialty prior to the Exchange
and (ii) in the event of an increase in the aggregate amount of certain aged
accounts receivable of Specialty prior to the Exchange. The number of shares of
Horizon Common Stock to be issued in the Exchange is not subject to adjustment
due to changes in the market price of Horizon Common Stock and is not subject to
increase in any event.
The determination of the number of shares of Horizon Common Stock to be
issued in the Exchange was the result of negotiations between Horizon and the
Specialty Stockholders. In assessing the number of shares of Horizon Common
Stock to be issued in the Exchange, Horizon considered the direct operating cash
flows anticipated to be provided from the management contracts of Specialty and
the amount of anticipated Horizon corporate and regional expenses that would be
incurred in connection with the contract management business of Specialty. In
addition, based on such analysis Horizon considered the number of shares of
Horizon Common Stock that could be issued in the Exchange and still result in a
transaction which would be accretive to the per share earnings of Horizon. The
amount so determined was also evaluated by Horizon based on the historical and
projected earnings of Specialty. Such assessment also took into account the
market price of the Horizon Common Stock immediately prior to signing the
Exchange Agreement and the financial analysis of its financial advisor. See
"Proposal No. 1 to Issue the Exchange Shares -- Reasons for the Exchange and
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Recommendation of the Horizon Board of Directors and -- Opinion of Robertson,
Stephens & Company LLC."
Each share of Horizon Common Stock issued in the Exchange will be
accompanied by a Horizon Common Stock purchase Right distributed pursuant to the
Rights Agreement dated February 7, 1997 (the "Rights Agreement"), between
Horizon and American Stock Transfer & Trust Company, as Rights Agent. Each Right
will initially entitle the holder to purchase a share of Horizon Common Stock at
an exercise price of $83.33. Until the Rights become exercisable upon certain
triggering events, the Rights trade with the Horizon Common Stock as a unit. The
Rights become exercisable upon the occurrence of certain events generally
relating to a change of control of the Company and, upon the occurrence of
certain events, may become exercisable for a number of shares of Horizon Common
Stock having a market value equal to twice the then-exercise price of the
Rights. The Rights are redeemable for $0.01 per Right at the election of the
Board of Directors of Horizon. The Rights will expire on March 4, 2007. The
Rights and the Rights Agreement are described more completely in the Current
Report on Form 8-K filed by Horizon with the SEC on May 8, 1997 and incorporated
herein by reference. See "Incorporation of Documents by Reference."
The Exchange will be effected by the delivery at Closing by the Specialty
Stockholders of duly executed stock transfer forms in respect of all of their
Specialty Shares, together with their certificates representing such shares. The
Exchange will become effective on the Closing Date.
Closing of the Exchange
It is the intention of the parties to consummate the Exchange and the other
transactions contemplated by the Exchange Agreement (the "Closing") as soon as
practicable after (and in any event within three business days unless the
parties mutually otherwise agree) approval of the issuance of the Exchange
Shares by the stockholders of Horizon and satisfaction of all conditions to the
parties' respective obligations to consummate the Exchange.
Escrow of Exchange Shares
At the Closing, 51,282 Exchange Shares (the "Escrow Shares") will be
delivered by the Specialty Stockholders (on a pro rata basis) to Horizon to be
held in escrow after the Closing. At the Closing, Horizon and the Specialty
Stockholders will enter into an escrow agreement (the "Escrow Agreement")
defining the escrow arrangement and establishing procedures by which Horizon may
assert and the Specialty Stockholders may dispute claims against the Escrow
Shares. Any Escrow Shares held in escrow and not subject to a claim by Horizon
will be returned to the Specialty Stockholders following expiration of six
months after the Closing Date. Otherwise, such Escrow Shares will be held until
resolution of any claim asserted by Horizon. See "-- Indemnification" and
"Proposal No. 1 to Issue the Exchange Shares -- The Escrow Agreement."
Representations and Warranties of Specialty Stockholders
In the Exchange Agreement, each of the Specialty Stockholders have
severally made certain representations and warranties to Horizon with respect to
certain matters including, among other things, the following matters: (i) their
respective execution and delivery of the Exchange Agreement; (ii) enforceability
of the Exchange Agreement against them; (iii) absence of violations of certain
laws or breaches of agreements by which they are bound; (iv) necessary third
party consents for their respective execution and performance of the Exchange
Agreement; (v) title to their respective shares of Specialty Common Stock (and,
in the case of NME, the NME Warrant) free and clear of adverse claims; and (vi)
certain other investment representations.
In addition, Howard B. Finkel, John Harrison and Larry Reiff (collectively,
the "Management Stockholders"), the current Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer, respectively, of Specialty, have
jointly and severally made certain additional representations and warranties to
Horizon with respect to the business of Specialty and other matters. Such
representations and warranties of the Management Stockholders cover, among other
things, the following matters: (i) due organization of Specialty, the power and
authority of Specialty to enter into the Exchange Agreement and the other
transactions contemplated thereby and the enforceability of the Exchange
Agreement against Specialty;
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(ii) the capitalization of Specialty and preemptive or registration rights
binding on Specialty; (iii) certain financial statements of Specialty and the
Division and the absence of material changes in Specialty since March 31, 1997;
(iv) title to properties and assets of Specialty and the absence of any
undisclosed encumbrances or liens on such properties; (v) compliance with all
real property leases to which Specialty is a party; (vi) compliance by Specialty
with the terms of existing contracts and the absence of any default thereunder;
(vii) the absence of any conflict with the certificate of incorporation or
bylaws of Specialty, any laws applicable to Specialty or any contracts or
agreements binding on Specialty, arising from Specialty's execution and
performance of the Exchange Agreement; (viii) the absence of undisclosed pending
or threatened material litigation or other proceedings against Specialty; (ix)
taxes; (x) the absence of undisclosed material liabilities or obligations of
Specialty; (xi) insurance coverage of Specialty; (xii) intellectual property
rights and licenses of Specialty necessary or required to conduct business;
(xiii) employees and employee benefit plans of Specialty; (xiv) accounts
receivable and accounts payable of Specialty; (xv) absence of any actions by
Specialty or the Specialty Stockholders that would preclude Horizon from
treating the Exchange as a pooling of interests for financial accounting
purposes; (xvi) compliance by Specialty with applicable laws; and (xvii) the
accuracy and completeness of statements made in certain disclosures of Specialty
and the Specialty Stockholders.
Representations and Warranties of Horizon
In the Exchange Agreement, Horizon also has made representations and
warranties to Specialty and the Specialty Stockholders. Horizon's
representations and warranties cover, among other things, the following matters:
(i) due organization of Horizon, the power and authority of Horizon to enter
into the Exchange Agreement and the other transactions contemplated thereby and
the enforceability of the Exchange Agreement against Horizon; (ii) the
capitalization of Horizon and preemptive or registration rights binding on
Horizon; (iii) certain financial statements of Horizon and the absence of
material changes in Horizon since February 28, 1997; (iv) certain of Horizon's
filings with the SEC; (v) title to properties and assets of Horizon and the
absence of any undisclosed encumbrances or liens on such properties; (vi) the
absence of any conflict with the certificate of incorporation or bylaws of
Horizon, any laws applicable to Horizon or any contracts or agreements binding
on Horizon, arising from Horizon's execution and performance of the Exchange
Agreement; (vii) the absence of undisclosed pending or threatened material
litigation or other proceedings against Horizon; (viii) taxes; (ix) the absence
of material undisclosed liabilities or obligations of Horizon; (x) insurance
coverage of Horizon; (xi) intellectual property rights and licenses of Horizon
necessary or required to conduct business; (xii) employee benefit plans of
Horizon; (xiii) compliance by Horizon with applicable laws; and (xiv) the
accuracy and completeness of certain disclosures of Horizon.
Covenants of Specialty and the Specialty Stockholders
In the Exchange Agreement, Specialty and some or all of the Specialty
Stockholders have agreed to take, or cause to be taken, certain actions prior to
the Closing Date. These covenants cover, among other things, the following
matters: (i) conduct of the business of Specialty in the ordinary and usual
course of business; and (ii) an agreement that Specialty will not take certain
actions prior to the Closing Date without the prior consent of Horizon,
including execution of new management contracts or amendments to existing
management contracts of Specialty, hiring or termination of any employee or
officer of Specialty, certain sales of securities or assets and mergers or other
business combinations; and (iii) providing Horizon access to hospital clients
and certain representatives of Specialty and other information. In addition, NME
agreed to exercise the NME Warrant in full at or prior to the Closing.
Covenants of Horizon
Under the Exchange Agreement, Horizon has agreed to take, or cause to be
taken, certain actions prior to the Closing Date. These covenants cover, among
other things, the following matters: (i) conduct of the business of Horizon in
the ordinary and usual course of business; and (ii) filing this Proxy Statement
with the SEC and calling and holding the Special Meeting.
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Conditions to Consummation of the Exchange
The obligations of the Specialty Stockholders to consummate the Exchange
are subject to the satisfaction or waiver of a number of conditions, including
the following: (i) receipt of legal opinions from counsel to Horizon; (ii) the
accuracy in all material respects of the representations and warranties made by
Horizon in the Exchange Agreement; (iii) the performance by Horizon of all
agreements required to be performed by it at or prior to the Closing Date as
specified in the Exchange Agreement; (iv) the absence of any material adverse
change in the business, financial condition, results of operations or prospects
of Horizon and its subsidiaries as a whole; (v) the absence of any action,
proceeding or claim that seeks to restrain or prohibit the transactions
contemplated by the Exchange Agreement; (vi) the approval by the Horizon
stockholders of the issuance of the Exchange Shares under the Exchange
Agreement; (vii) the receipt of all governmental and other approvals necessary
for consummation of the transactions contemplated by the Exchange Agreement and
the expiration or other termination of any applicable antitrust waiting periods;
(viii) Specialty and the Management Stockholders shall have terminated the
respective employment agreements between such individuals and Specialty in
consideration of a lump-sum payment by Specialty on the Closing Date of certain
amounts payable thereunder as summarized under "Proposal No. 1 to Issue the
Exchange Shares -- Termination of Employment Agreements;" (ix) on or prior to
the Closing Date, the Board of Directors of Horizon shall have approved,
effective upon consummation of the Closing, an additional board position on the
Board of Directors of Horizon and the appointment of Howard B. Finkel to serve
in that additional board position; (x) on the Closing Date, the market price of
the Horizon Common Stock shall be not less than $15.00 per share; and (xi) the
Exchange shall be accounted for by Horizon as a pooling of interests under
generally accepted accounting principles.
The obligations of Horizon to consummate the Exchange are subject to the
satisfaction or waiver of a number of conditions, including the following: (i)
receipt of legal opinions from counsel to Specialty and the Management
Stockholders; (ii) the accuracy in all material respects of the representations
and warranties made by the Specialty Stockholders in the Exchange Agreement;
(iii) the performance by the Specialty Stockholders of all agreements required
to be performed by them at or prior to the Closing Date as specified in the
Exchange Agreement; (iv) the absence of any material adverse change in the
business, financial condition, results of operations or prospects of Specialty,
including, without limitation, certain events specifically enumerated in the
Exchange Agreement; (v) the absence of any action, proceeding or claim that
seeks to restrain or prohibit any of the transactions contemplated by the
Exchange Agreement; (vi) the approval by the Horizon Stockholders of the
issuance of the Exchange Shares under the Exchange Agreement; (vii) delivery by
Price Waterhouse LLP of certain letters with respect to the financial statements
of Specialty and related matters, and certain opinions related to the
appropriateness of pooling of interests accounting for the Exchange; (viii)
receipt of all governmental and other approvals necessary for consummation of
the transactions contemplated by the Exchange Agreement and expiration or
termination of any applicable antitrust waiting periods; (ix) the termination on
the Closing Date of the employment agreements between Specialty and the
Management Stockholders and the lump-sum payment of amounts due thereunder as
described above; and (x) the Exchange shall be accounted for by Horizon as a
pooling of interests under generally accepted accounting principles.
No assurances can be provided as to when or if all of the conditions to the
Exchange can or will be satisfied. The parties for whose benefit any such
condition exists may waive the satisfaction of such condition, and the parties
are permitted to amend the Exchange Agreement. Such waiver or amendment may
occur prior or subsequent to the Special Meeting. In the event the Exchange is
not consummated on or before August 31, 1997, the Exchange Agreement may be
terminated by Horizon or the Specialty Stockholders provided that the party
seeking to terminate the Exchange Agreement is not then in material breach of
any covenant, agreement, representation or warranty made by it in the Exchange
Agreement. See "-- Amendment, Waiver and Termination."
Certain Other Covenants
The parties have made the following additional covenants, among others, in
the Exchange Agreement: (i) certain Management Stockholders have agreed to
certain nonsolicitation covenants with respect to
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customers and employees of Horizon, and certain non-competition and
nondisclosure covenants; and (ii) the parties will cooperate with respect to the
preparation and filing of all documents and materials under applicable laws
required in connection with the transactions contemplated by the Exchange
Agreement. See "Proposal No. 1 to Issue the Exchange Shares -- Non-Competition
and Other Covenants."
Amendment, Waiver and Termination
The Exchange Agreement provides that any term or provision thereof may be
waived in writing at any time by the party which is entitled to the benefits
thereof, and that any term or provision of the Exchange Agreement may be amended
or supplemented at any time by a writing signed by each of the parties thereto.
Pursuant to this provision, Horizon, Specialty or the Specialty Stockholders may
elect to waive any condition, including the pooling of interests condition, to
their respective obligations under the Exchange Agreement. Under the terms of
the Exchange Agreement, such waivers, which may include waivers of material
conditions precedent to the Exchange, can be granted without the approval by the
stockholders of Horizon or Specialty in their capacities as such. However, the
parties do not intend to waive the pooling of interests condition and, further,
in the event that such condition is waived, an amendment to this Proxy Statement
will be filed and the vote of the stockholders of Horizon resolicited. If any
other material condition is waived, the vote of stockholders of Horizon will be
resolicited if required by applicable statutes and regulations. The condition to
the obligations of Horizon that the issuance of the Exchange Shares is approved
by the Horizon stockholders will not be waived so long as it is required under
the applicable rules of the Nasdaq National Market.
The Exchange Agreement may be terminated at any time by mutual written
consent of Horizon and the Specialty Stockholders. Any party may terminate the
Exchange Agreement by written notice prior to the Closing Date if any court or
other government instrumentality of competent jurisdiction enjoins the Exchange
and such order is not vacated, reversed or withdrawn on or before the earlier of
August 31, 1997 or 60 days after the date on which the order was first issued.
Horizon may terminate the Exchange Agreement (i) at any time prior to the
Closing Date if any Specialty Stockholder or Specialty breaches any material
representation, covenant or warranty provided under the Exchange Agreement, and
the breach is not cured on or before the earlier of August 31, 1997 or 15 days
after receipt of written notice of the breach or (ii) if the consummation of the
transactions contemplated thereby has not occurred on or before August 31, 1997,
provided that Horizon is not then in material breach of any covenant, agreement,
representation or warranty made by it in the Exchange Agreement.
The Specialty Stockholders may terminate the Exchange Agreement (i) at any
time prior to the Closing Date if Horizon breaches any material representation,
covenant or warranty provided under the Exchange Agreement, and the breach is
not cured on or before the earlier of August 31, 1997 or 15 days after Horizon's
receipt of written notice of such breach and (ii) if the consummation of the
transactions contemplated thereby has not occurred on or before August 31, 1997,
provided that neither Specialty nor the Specialty Stockholders are then in
material breach of any covenant, agreement, representation or warranty made by
any of them in the Exchange Agreement.
Indemnification
In the Exchange Agreement, the Specialty Stockholders, jointly and
severally (except as to their respective several representations in the Exchange
Agreement, as to which the indemnity obligation is several and not joint), have
agreed, subject to certain limitations discussed below, to indemnify and hold
harmless Horizon and the subsidiaries (including Specialty), officers,
directors, employees, agents and stockholders of Horizon, from and against any
and all losses, claims, actions, liabilities, costs and expenses arising out of
or resulting from (i) any misrepresentation, breach or non-fulfillment of any
representation, warranty, covenant or agreement made by Specialty, any
Management Stockholder or any other Specialty Stockholder in or pursuant to the
Exchange Agreement or any of the documents delivered by the Specialty
Stockholders at the Closing thereunder, and any action, suit, proceeding,
demand, assessment or judgment incident to any of the foregoing; and (ii)
certain obligations of Specialty for taxes not fully reserved for in the balance
sheet of Specialty as of March 31, 1997 represented to by the Management
Stockholders in the Exchange Agreement.
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The Exchange Agreement provides that the indemnification obligation of a
Specialty Stockholder shall not exceed the value of the shares of Horizon Common
Stock deposited by such Specialty Stockholder in escrow pursuant to the Escrow
Agreement, except as to the several but not joint representations of such
Specialty Stockholder under the Exchange Agreement (determined by multiplying
the number of shares of Horizon Common Stock received by the Specialty
Stockholder in the Exchange by $19.50 or, alternatively, at the election of the
Specialty Stockholders, by the closing market price per share of Horizon Common
Stock on the Nasdaq National Market on the last trading day before the Closing
Date). As to the several but not joint representations of a Specialty
Stockholder under the Exchange Agreement such liability will be limited to the
total consideration received by such Specialty Stockholder for its Specialty
Shares in the Exchange (determined as specified above). See " -- Representations
and Warranties of Specialty Stockholders."
In the Exchange Agreement, Horizon agreed to indemnify and hold harmless
each Specialty Stockholder from and against any and all losses arising out of or
resulting from (i) any misrepresentation, breach or non-fulfillment of any
representation, warranty, covenant or agreement made by Horizon in or pursuant
to the Exchange Agreement or any of the documents delivered by Horizon at the
Closing thereunder; and (ii) any action, suit, proceeding, demand, assessment,
or judgment incident to any of the foregoing.
The Exchange Agreement provides that no party shall have any
indemnification obligation thereunder except to the extent that the cumulative
amount of all indemnifiable losses exceeds $50,000. In addition, the Exchange
Agreement generally provides, with certain limited exceptions, that no claim for
indemnification may be made thereunder unless written notice of the losses for
which indemnity is sought shall have been received by the indemnifying party on
or prior to one year after the Closing Date.
Termination Fee; Expenses
If Horizon terminates the Exchange Agreement as a result of Specialty or
the Specialty Stockholders engaging in a willful failure to perform any of their
obligations or a willful and material misstatement of any representation or
warranty contained in the Exchange Agreement, Specialty will be obligated to
promptly pay to Horizon on demand a termination fee, payable in cash, equal to
the full amount of all costs and expenses, including without limitation
attorneys' and accountants' fees and expenses, incurred by Horizon in connection
with the transactions contemplated by the Exchange Agreement up to an aggregate
maximum amount of $250,000. The termination fee shall be in lieu of any other
damages arising out of such termination. Except for such possible termination
fee, the Exchange Agreement provides that each party will pay all of its own
expenses relating to the transactions contemplated thereby, except that
Specialty will pay the reasonable fees and expenses of counsel for the Specialty
Stockholders in connection with the Exchange up to an aggregate maximum amount
of $75,000.
TERMINATION OF EMPLOYMENT AGREEMENTS
At the Closing, Specialty and the Management Stockholders will terminate
the respective employment agreements between such individuals and Specialty.
Pursuant to such agreements, Specialty will be obligated to pay on the Closing
Date to each such individual an amount equal to the base salary of such
individual which would otherwise have been payable over the remaining term of
such employment agreement after the termination date, plus an additional amount
equal to 50% of the annual base salary of such individual. If the Closing occurs
on August 1, 1997, Messrs. Finkel, Harrison and Reiff will receive lump-sum
payments from Specialty on the Closing Date pursuant to such agreements in the
approximate amounts of $917,000, $229,000 and $167,000, respectively.
NON-COMPETITION AND OTHER COVENANTS
In the Exchange Agreement, Howard B. Finkel, the Chief Executive Officer of
Specialty, and John Harrison, the Chief Operating Officer of Specialty,
severally agreed to certain non-competition and other covenants in favor of
Horizon. The non-competition covenants of Mr. Finkel are to remain in effect
until the later of (i) three years after the Closing Date or (ii) two years
after Mr. Finkel ceases to be a member of the Board of Directors of Horizon. The
noncompetition covenants of Mr. Harrison are to remain in effect for a
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period of one year after the Closing Date. The enforceability of non-competition
covenants is generally determined in part based on a factual evaluation of the
reasonableness of the scope and duration of such covenants. Horizon believes
that the non-competition covenants of Messrs. Finkel and Harrison set forth in
the Exchange Agreement are reasonable in terms of scope and duration and are
enforceable.
In the Exchange Agreements, Messrs. Finkel and Harrison also agreed to
certain confidentiality, nondisclosure and nondisparagement covenants in favor
of Horizon.
THE ESCROW AGREEMENT
At the Closing, 51,282 of the Exchange Shares will be delivered by the
Specialty Stockholders (on a pro rata basis) to be held in escrow by Horizon for
the period and purposes described below. At the Closing, Horizon and the
Specialty Stockholders will enter into an Escrow Agreement substantially in the
form attached as an exhibit to the Exchange Agreement to define the escrow
arrangement and establish procedures by which Horizon may assert and the
Specialty Stockholders may dispute claims against the Escrow Shares. Under the
Escrow Agreement, Horizon must notify the Specialty Stockholders in writing of
any claim under the accounts receivable adjustment or indemnification provisions
of the Exchange Agreement. To the extent, if any, the Specialty Stockholders do
not dispute Horizon's claim during a specified period after Horizon provides
such notice, Horizon will be entitled to receive under the Escrow Agreement such
number of the Escrow Shares held in escrow as have an aggregate value
(calculated at $19.50 per share or, alternatively, at the election of the
Specialty Stockholders, by the closing market price per share of Horizon Common
Stock on the Nasdaq National Market on the last trading day before the Closing
Date) equal to the amount of Horizon's claim, or such fewer Escrow Shares as
then remain in escrow. To the extent, if any, the Specialty Stockholders dispute
Horizon's right to payment from the Escrow Shares held in escrow, the Specialty
Stockholders may notify Horizon, and Horizon and the Specialty Stockholders will
resolve Horizon's claim. If appropriate based on resolution of Horizon's claim,
Horizon will be entitled to receive payment thereafter from the Escrow Shares
held in escrow. Under the Escrow Agreement, any Exchange Shares held in escrow
and not claimed by Horizon pursuant to the Escrow Agreement will be returned to
the Specialty Stockholders after the expiration of six months after the Closing
Date or, if applicable, after resolution of any claim asserted by Horizon to
such Escrow Shares. See "Proposal No. 1 to Issue the Exchange Shares -- The
Exchange Agreement -- General" and "-- Indemnification."
REGISTRATION RIGHTS AGREEMENT
The Exchange Shares will be issued by Horizon without registration under
the Securities Act, pursuant to the exemptions from registration under Section
4(2) of the Securities Act. As a result, the Exchange Shares may be transferred
only pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from registration. Horizon has agreed to provide the
Specialty Stockholders with certain rights to have the Exchange Shares
registered under the Securities Act, pursuant to a registration rights agreement
(the "Registration Rights Agreement") which will be signed on the Closing Date.
Under the Registration Rights Agreement, subject to certain conditions, Horizon
will agree to prepare and file with the SEC as soon as practicable after the
Closing, but in no event earlier than October 15, 1997, a registration statement
under the Securities Act for an offering to include the Exchange Shares;
provided, however, that Horizon will not be required to proceed with the
registration statement until the audited consolidated financial statements of
Horizon for its fiscal year ending August 31, 1997 are available to be used for
purposes of the registration statement. Horizon will further agree to use its
best efforts to cause the registration statement to be filed and declared
effective within 30 days after such audited financial statements of Horizon are
available.
Under the Registration Rights Agreement, Horizon may elect for the offering
under the registration statement to be in the form of an underwritten offering.
In the event that Horizon elects not to proceed or is unable to effect such
offering as an underwritten offering, then Horizon will nevertheless be
obligated to proceed within the same time period specified above with the
registration statement and the offering on a non-underwritten basis and to keep
the registration statement in effect generally for 90 days but, in that event,
for at least a two week period after the effective date of the registration
statement the selling Specialty Stockholders must attempt to sell the Exchange
Shares offered thereunder only through block sales arranged
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by a broker-dealer selected by Horizon and reasonably satisfactory to the
selling stockholders. In addition, the Registration Rights Agreement will grant
certain piggyback registration rights in favor of Mr. Finkel that will take
effect after the offering pursuant to the registration statement contemplated
above and expire one year after the Closing Date. The other Specialty
Stockholders may have the same piggyback registration rights if, under certain
conditions, they are unable to sell the shares of Horizon Common Stock pursuant
to the registration statement described above.
In the Registration Rights Agreement, Horizon will agree to pay all
registration expenses (as defined in the Registration Rights Agreement, but
excluding underwriting discounts and commissions) in connection with any
registration statement filed thereunder. The Registration Rights Agreement
contains customary indemnification provisions. The rights granted to the
Specialty Stockholders under the Registration Rights Agreement will terminate
when, among other things, the Exchange Shares may be sold within the limitations
set forth in Rule 144 under the Securities Act.
POSITION ON BOARD OF DIRECTORS OF HORIZON
The Board of Directors of Horizon has approved, subject to and effective
after consummation of the Exchange, an additional board position on the Board of
Directors of Horizon and the appointment of Howard B. Finkel, the Chief
Executive Officer of Specialty and the holder of approximately 47.4% of the
Specialty Shares, to serve in the additional board position. It is expected that
Mr. Finkel will become a member of the Board of Directors of Horizon on the
Closing Date. Mr. Finkel will acquire up to 782,100 shares of Horizon Common
Stock pursuant to consummation of the Exchange. See "Security Ownership of
Certain Beneficial Owners and Management of Horizon."
ACCOUNTING TREATMENT
It is intended that the Exchange will be treated as a pooling of interests
for financial accounting purposes in accordance with generally accepted
accounting principles. Under the pooling of interests method of accounting, the
historical book values of Specialty's assets, liabilities and stockholders'
equity will be carried over on Horizon's consolidated balance sheets, and
Horizon will include in its Consolidated Statements of Operations Specialty's
operating results for the entire fiscal year of Specialty in which the Exchange
is consummated. The reported income for Horizon and Specialty for prior periods
will be combined and restated as income of the combined company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain of the material United States
federal income tax consequences of the transactions contemplated in the Exchange
Agreement relevant to Horizon or Horizon stockholders. It does not include a
discussion of any state, local or other tax consequences relevant to Horizon or
Horizon stockholders. It does not include a discussion of any federal, state,
local or other income tax considerations relevant to Specialty Stockholders. The
discussion below is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), applicable United States Treasury regulations,
judicial authority, and administrative rulings and practice, all as of the date
hereof. There can be no assurance that future legislative, judicial or
administrative changes or interpretations will not adversely affect the accuracy
of the statements and conclusions set forth below. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the Exchange to Horizon and its stockholders.
The parties intend that the transactions contemplated by the Exchange
Agreement be treated as a tax-free "reorganization" within the meaning of
Section 368 of the Code. Assuming such transactions are treated as a tax-free
reorganization under Section 368 of the Code, (i) Horizon stockholders will not
recognize any gain or loss as a result of the issuance of the Exchange Shares;
(ii) Horizon will not recognize any gain or loss on the issuance of the Exchange
Shares to the Specialty Stockholders; (iii) Horizon will acquire an aggregate
tax basis in each Specialty Share equal to the selling Specialty Stockholder's
basis in such share; and (iv) Horizon's holding period for each Specialty Share
will include the period during which the selling Specialty Stockholder held such
share.
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If the transactions contemplated by the Exchange Agreement are treated as a
taxable reorganization, (i) Horizon stockholders will not recognize any gain or
loss as a result of the issuance of the Exchange Shares; (ii) Horizon will not
recognize any gain or loss on the issuance of the Exchange Shares to the
Specialty Stockholders; (iii) Horizon will acquire an aggregate tax basis in
each Specialty Share equal to the fair market value of the Exchange Shares
issued therefor; and (iv) Horizon's holding period for each Specialty Share will
commence on the day after the Closing Date.
RESTRICTIONS ON RESALES OF HORIZON COMMON STOCK; POOLING CONSIDERATIONS
The Exchange Shares will be issued to Specialty Stockholders pursuant to
the Exchange in reliance on an exemption from the registration requirements of
the Securities Act for an offer and sale of securities that does not involve a
public offering. Such shares have not been registered under the Securities Act
or with any securities regulatory authority of any state of the United States or
other jurisdiction and, therefore, cannot be resold in the absence of such
registration, except pursuant to an exemption from, or in a transaction not
subject to, such registration requirements. Each Specialty Stockholder may not
transfer any such shares except in a transaction registered under the Securities
Act or unless he has delivered to Horizon an opinion of counsel, which counsel
and opinion shall be reasonably satisfactory to Horizon, that such transfer is
being effected in accordance with an available exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and a written instrument, in form and substance reasonably satisfactory to
Horizon, from the transferee agreeing to be bound by such transfer restrictions.
Except as set forth in the Registration Rights Agreement, Horizon is under no
obligation to effect any such registration under the Securities Act or otherwise
with respect to such shares (or any securities issued in exchange therefor or in
substitution thereof) or to file for or comply with any exemption from such
registration. See "Proposal No. 1 to Issue the Exchange Shares -- Registration
Rights Agreement."
In addition, in any event, pooling of interests accounting treatment
requires that the Specialty Stockholders who receive shares of Horizon Common
Stock in the Exchange and affiliates of Horizon must not sell or otherwise
reduce their risk relative to their shares of Horizon Common Stock until Horizon
has published consolidated financial statements including the combined
operations of Horizon and Specialty for a period of at least 30 days following
the Closing Date. In the Exchange Agreement, each Specialty Stockholder agreed
not to sell any of the shares of Horizon Common Stock received in the Exchange
until such period has expired.
REGULATORY APPROVALS
Horizon is not aware of any material governmental approvals or consents
that will be required to consummate the Exchange.No filing under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, will be
required in connection with the transactions contemplated by the Exchange
Agreement. However, notwithstanding that no such filing is required, the Federal
Trade Commission, the Antitrust Division of the Department of Justice or a
private person could seek to use the antitrust laws, among other things, to
enjoin the Exchange or to cause Horizon to divest itself, in whole or in part,
of Specialty or of other business conducted by Horizon. Based upon the
information available to them, Horizon and Specialty believe that the Exchange
can be consummated in compliance with the antitrust laws. However, there can be
no assurance that a challenge to the Exchange will not be made or that, if such
a challenge is made, Horizon and Specialty will prevail. The absence of any
claim or action to restrain or prohibit the Exchange is a condition to the
parties' obligations under the Exchange Agreement.
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CERTAIN INFORMATION REGARDING HORIZON
GENERAL
Horizon is the leading contract manager of mental health programs offered
by general acute care hospitals in the United States. These programs enable
Horizon's client hospitals to expand the clinical services they offer and
provide a continuum of mental health services, such as inpatient
hospitalization, partial hospitalization (day treatment), outpatient and home
health services. At May 31, 1997, Horizon had management contracts with 146
general acute care hospitals located in 36 states, providing for the operation
of a total of 224 various treatment programs.
The principal executive offices of Horizon are located at 1500 Waters Ridge
Drive, Lewisville, Texas 75057-6011, where its telephone number is
(972) 420-8200. At May 31, 1997, Horizon had approximately 130 full-time
equivalent employees located at its regional and principal executive offices,
with an additional 646 full-time equivalent employees at the contract locations.
BACKGROUND
Horizon was formed in July 1989 for the purpose of acquiring all the assets
of two companies. One company, known as Horizon Health Management Company, had
been formed in 1981 and since that time had been engaged in the mental health
contract management business. The other company owned and operated a
freestanding psychiatric hospital in California. Although Horizon owned, leased
or managed freestanding psychiatric or substance abuse facilities beginning
March 1, 1990, it discontinued such business operations by subleasing its last
remaining freestanding psychiatric hospital on July 31, 1994. The mental health
contract management business formed by Horizon's predecessor in 1981 has been
Horizon's primary business and since July 31, 1994 its only business until the
acquisition of a mental health service provider in 1996.
Effective August 1, 1994, Horizon and Mental Health Management, Inc.
("MHM") formed Horizon Mental Health Management, L.L.C. (the "Horizon LLC").
Horizon signed a contract with the Horizon LLC to have it manage all of
Horizon's then existing management contracts for a 72.5% interest. Prior to
March 20, 1995, the remaining 27.5% interest in the Horizon LLC was held by MHM
which signed a contract with the Horizon LLC to have it manage all of MHM's then
existing 39 management contracts. Upon completion of its initial public offering
of Horizon Common Stock in March 1995, Horizon became contractually obligated to
acquire the minority interest of MHM in the Horizon LLC. The acquisition of the
minority interest of MHM was effective March 20, 1995. As such, the Horizon LLC
became a wholly-owned subsidiary of Horizon. The Horizon LLC was consolidated
with Horizon effective March 1, 1995. Effective September 1, 1995, the Horizon
LLC was dissolved and its operations combined with Horizon's.
Mental Health Outcomes, Inc., a wholly-owned Delaware corporation
subsidiary of Horizon, was formed on August 10, 1995 and is engaged in the
design and operation of outcome measurement systems for psychiatric and chemical
dependency providers under the trade name "CQI+."
On July 31, 1996, Horizon acquired eighty percent (80%) of the outstanding
common stock of Florida Professional Psychological Services, Inc., also known as
Professional Psychological Services, Inc. ("PPS"). PPS has been consolidated
with Horizon as of August 1, 1996. Horizon accounted for the acquisition of PPS
by the purchase method as required by generally accepted accounting principles.
Based in Clearwater, Florida, PPS specializes in full risk, capitated managed
behavioral health programs and employee assistance programs. The purchase price
is based primarily on a multiple of the 1996 pre-tax income of PPS. Horizon
currently estimates the purchase price will be between $2,500,000 and
$2,900,000, of which interim payments of $1,225,000 and $1,099,000 were paid on
July 31, 1996 and April 9, 1997, respectively. The final reconciliation
statement of income of PPS for the twelve months ended December 31, 1996 is to
be delivered on or before July 15, 1997, and any remaining purchase price is to
be paid within 30 days after determination thereof. In addition, Horizon also
obtained an option to acquire the remaining twenty percent (20%) of the
outstanding PPS common stock at a future date. The sellers, constituting all the
stockholders of PPS, also obtained the right to put to Horizon such shares on
certain dates. The option and put prices for the remaining PPS shares are based
on a multiple of the pre-tax income of PPS in future years.
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RECENT DEVELOPMENTS
Effective March 15, 1997, Horizon purchased all of the outstanding capital
stock of Geriatric Medical Care, Inc., a Tennessee corporation ("Geriatric").
Geriatric is a contract manager of mental health services for acute care
hospitals. Geriatric had total revenues of approximately $5.7 million in 1996
and, at March 15, 1997, had 17 management contract locations, of which two were
not yet in operation. The purchase price of approximately $4.6 million, of which
approximately $4.3 million was paid at closing from existing cash of Horizon,
included retiring essentially all of Geriatric's outstanding debt. The final
purchase price payment of $270,000 was made on April 16, 1997.
Also effective March 15, 1997, Horizon purchased all of the outstanding
capital stock of Clay Care, Inc., a Texas corporation ("CCI"). CCI is a contract
manager of mental health services for acute care hospitals. At March 15, 1997,
CCI had management contracts with five hospitals of which four were in operation
and one of which opened in April 1997. CCI had total revenues of approximately
$1.3 million in 1996. A total of $475,000 of the $1,000,000 purchase price was
paid at the closing from existing cash of Horizon. The remaining $525,000 of the
total purchase price was paid by Horizon in June 1997.
OTHER INFORMATION
Information about Horizon and its business is incorporated by reference
into this Proxy Statement from reports Horizon files with the SEC. See
"Incorporation of Documents by Reference."
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CERTAIN INFORMATION REGARDING SPECIALTY
GENERAL
Specialty provides contract management and staffing services for the
operation and management of psychiatric, physical rehabilitation and chemical
dependency units in general acute care hospitals and nursing homes. These
management contracts are generally for terms ranging from three to ten years and
often have automatic renewal provisions. At December 31, 1996, Specialty had
management contracts with 54 general acute care hospitals located in 21 states,
offering 88 various treatment programs in operation. At May 31, 1997, Specialty
had management contracts with 47 general acute care hospitals and one nursing
home (none of which also had management contracts with Horizon at that date), of
which 23 were units offering psychiatric programs, 19 were units offering
physical rehabilitation programs, and five were units offering chemical
dependency services. The principal executive offices of Specialty are located at
6300 Syracuse Way, Suite 645, Englewood, Colorado 80111-6726, where its
telephone number is (303) 793-0770. Specialty also has a regional office in
Fairfax, Virginia. At May 31, 1997, Specialty had approximately 28 employees
located at its principal executive offices and an additional 302 employees at
the contract locations.
Specialty generally is engaged in business operations similar to Horizon.
As such, its business is subject to the same risks and competitive factors as
the business of Horizon. Specialty is engaged in the management of physical
rehabilitation treatment programs as to which Horizon does not currently provide
management services, but, except for different competition in such business, the
risks associated with such business operations are comparable to those
applicable to the other contract management services provided by Horizon and
Specialty.
BACKGROUND
Specialty was incorporated in August 1994 for the purpose of acquiring the
net assets and operations of National Medical Management Services (the
"Division"), a division of National Medical Enterprises, Inc. ("NME"). Effective
January 3, 1995, Specialty acquired the assets and operations of the Division
for cash and notes payable of $3.95 million and assumed current liabilities of
approximately $2.8 million. In addition, Specialty also issued a warrant to NME
that, upon exercise, will provide NME with 1,215 shares of Specialty Common
Stock. NME has agreed to exercise such warrant in full at the Closing of the
Exchange. See "-- NME Warrant." At December 31, 1996, Specialty had 9 management
contracts with Tenet (formerly NME) hospitals.
Effective April 1, 1996, Specialty acquired The Parkside Company for
approximately $2.6 million in cash and the issuance of 1,305 Specialty Shares.
The Parkside Company, a provider of contract management services similar to
those services provided by Specialty, has merged into Specialty in the
acquisition. Under the merger agreement, the holder of such Specialty Shares has
the right to put such shares to Specialty on or after October 11, 1997 for
redemption at the then fair market value of such shares. Specialty has the right
to extend the date of the exercise of such put right for six months by making a
payment of $150,000. The Exchange Agreement provides that the right of the
Parkside shareholder to put the shares to Specialty for redemption will be
terminated in its entirety at the Closing of the Exchange.
MANAGEMENT CONTRACTS
Specialty provides its management services under contracts with its client
hospitals. Under each contract, Specialty receives a fee for its management
services from the client hospital. The management contracts are subject to
periodic renewal prior to or at their stated expiration dates. Under the
contracts, the client hospital typically provides the space (including beds for
inpatient programs), nursing staff and support services. Specialty generally
provides a program medical director and other program personnel, as well as the
policies and procedures, staff training and education and quality assurance
procedures for the treatment programs.
The contract management services industry in which Specialty competes is
highly competitive. It generally is the same industry in which Horizon competes
except that Specialty also competes for contracts for the management of physical
rehabilitation services. At May 31, 1997, Specialty had five management
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contracts with hospitals directly or indirectly owned by Tenet. These contracts
accounted for approximately 8.6% of Specialty's revenues for the year ended
December 31, 1996. No other affiliated group of hospitals accounted for more
than 5% of the revenues of Specialty in such fiscal year; however, two
individual hospital contracts with Parkview Hospital, Houston, Texas and Newport
Bay Hospital, Newport, California accounted for 10.5% and 9.4% of the revenues,
respectively. The management contract with Newport Bay Hospital was terminated
by Specialty in April 1997, subject to Specialty's continued right to receive
amounts due to it accrued thereunder through the termination date.
Of the Specialty management contracts, 14 contracts are scheduled to
terminate in the twelve months ending May 31, 1998, ten contracts are scheduled
to terminate in the twelve months ending May 31, 1999 and six contracts are
scheduled to terminate in the twelve months ending May 31, 2000.
SPECIALTY CLINICAL PROGRAMS
Specialty provides general hospitals and other healthcare facilities with
staffing and day-to-day management of all operational aspects of the following
types of psychiatric and physical medicine and rehabilitation treatment clinical
programs: (i) acute physical medicine and rehabilitation; (ii) comprehensive
outpatient rehabilitation; (iii) geriatric psychiatric program; (iv) psychiatric
partial hospitalization program; (v) sub-acute physical medicine and
rehabilitation; (vi) adult psychiatry; and (vii) chemical dependency.
Acute Physical Medicine and Rehabilitation
The physical medicine and rehabilitation program incorporates a variety of
treatments and services aimed at maximizing an individual's capabilities
following a disabling illness or traumatic injury. The treatment program is
provided by an interdisciplinary team of health care professionals including
physicians, physical, recreational, occupational and speech therapists,
rehabilitation nurses, social workers and psychologists. Specialty attempts to
tailor an acute physical medicine and rehabilitation program for a healthcare
facility to satisfy unmet community and medical staff needs, while maximizing
utilization of the facility.
Comprehensive Outpatient Rehabilitation
A comprehensive outpatient rehabilitation facility ("CORF") program serves
as an adjunct to inpatient physical medicine and rehabilitation programs at the
acute and/or sub-acute levels. The CORF program provides the continuum of
rehabilitative care necessary to meet the medical needs of a post-acute care
patient following a disabling illness or traumatic injury. Specialty has
developed a CORF program within compliance with Medicare regulations which
functions as a non-residential day facility to provide diagnostic, therapeutic
and restorative services, including work hardening, to outpatients at a single
fixed location under the supervision of a qualified physician.
Geriatric Psychiatric Program
Psychiatric care for the older adult is a very specialized service. The
treatment setting utilizes an interdisciplinary team to create a therapeutic
milieu to address the special physical, social, developmental and psychological
needs of the geriatric patient. The goals of this program are to evaluate
thoroughly the patient for appropriate treatment, provide a stimulating
environment in which coping strategies are maximized, and through active
discharge planning reintegrate the patient in an appropriate social setting.
Psychiatric Partial Hospitalization Program
Specialty partial hospitalization programs provide comprehensive,
multi-modal, goal-oriented treatment for individuals whose mental condition
warrants more extensive and structured treatment than can be offered through
traditional outpatient sessions, but who do not require intensive inpatient
treatment. A partial hospitalization program is an important link in the
psychiatric continuum of care. This service can stand alone or provide an
interim step before or after inpatient care. Managed care firms and other payors
look favorably on a partial hospitalization program as an alternative to
inpatient care, when appropriate, thus containing costs.
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Sub-Acute Physical Medicine and Rehabilitation
Rapidly changing reimbursement issues have challenged health care providers
to seek alternative services to meet the needs of their patient population
requiring lower cost and intensity physical medicine and rehabilitation
services. Comprehensive physical medicine and rehabilitation services at the
sub-acute level offer an attractive alternative for acute care hospitals and
skilled nursing facilities to meet these needs. Specialty evaluates the
feasibility of a healthcare facility providing rehabilitation services at the
sub-acute level by analyzing a facility's discharge data, conducting a market
analysis of services offered in a facility's community, assessing medical staff
needs and evaluating financial viability.
Adult Psychiatry
Adult psychiatric inpatient hospitalization offers intensive clinical
programs designed to provide acute, shortterm psychiatric care, rendering both
comprehensive diagnostic and treatment services for individuals eighteen and
older. An interdisciplinary treatment team and staff provide a highly structured
treatment setting, goal-oriented individual and group therapies, education and
psychopharmacology. The intensive program promotes crisis stabilization and
discharge to the least restrictive treatment environment when clinically
appropriate.
Chemical Dependency Programs
Services for "substance use disorders" are provided in both inpatient and
outpatient settings. The primary goal of inpatient hospitalization is
detoxification and medical stabilization while outpatient treatment provides a
menu of structured services that promotes abstinence and personal growth.
Structured services include group and individual counseling, educational
presentations, 12-step programs, family therapy and continuing care. Treatment
goals promote acceptance of the illness, motivation for recovery and abstinence.
GOVERNMENTAL REGULATION
Specialty's business is affected by federal, state and local laws and
regulations concerning, among other things, health care facilities and
reimbursement for health care services. These regulations impact the development
and operation of treatment programs managed by its client hospitals. Licensing,
certification, reimbursement and other applicable governmental regulations that
affect the business of Horizon and its client hospitals similarity affect
Specialty and its client hospitals.
LEGAL PROCEEDINGS
Specialty is, and may be in the future, party to litigation arising in the
course of its business. While Specialty has no reason to believe that any
pending claims are material, there can be no assurance that Specialty's
insurance coverage will be adequate to cover all liabilities arising out of such
claims or that such claims will be covered by such insurance. Specialty carries
general liability, comprehensive property damage, malpractice and other
insurance coverages considered adequate for the protection of the assets and
operations of Specialty.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF HORIZON
Set forth below is certain information with respect to the beneficial
ownership of Horizon Common Stock as of May 31, 1997, by (i) each person who, to
the knowledge of Horizon, beneficially owns more than 5% of the outstanding
Horizon Common Stock; (ii) each director of Horizon; (iii) each executive
officer of Horizon; and (iv) all directors and executive officers of Horizon as
a group. Except as indicated below, to Horizon's knowledge each person named has
sole voting and investment power with respect to all shares shown as
beneficially owned by such person.
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OWNED
NATURE OF --------------------
BENEFICIAL BEFORE AFTER
NAME OWNERSHIP EXCHANGE EXCHANGE
---- ---------- -------- --------
<S> <C> <C> <C>
James Ken Newman(1)(2).................. 616,416 10.6% 8.3%
Jack R. Anderson(1)..................... 527,400 9.5 7.3
Lutheran Brotherhood(1)................. 547,650 9.8 7.6
Standish Ayer & Wood, Inc.(1)........... 348,400 6.3 4.8
GeoCapital Corporation(1)............... 282,000 5.1 3.9
James W. McAtee(1)(3)................... 270,524 4.8 3.7
George E. Bello(4)...................... 177,000 3.2 2.5
Gary A. Kagan(5)........................ 107,461 1.9 1.5
John F. DeVaney(6)...................... 8,813 * *
Robert A. Lefton(7)..................... 1,875 * *
Donald E. Steen(8)...................... 9,000 * *
William H. Longfield(8)................. 7,500 * *
Keith B. Pitts(8)....................... 6,000 * *
All directors and executive officers as
a group (10 persons)(9)............... 1,731,989 28.6 22.5
</TABLE>
- ---------------
* Less than 1%.
(1) The address of James Ken Newman is 1500 Waters Ridge Drive, Lewisville,
Texas 75057-6011. The address of Jack R. Anderson is 16475 Dallas Parkway,
Suite 735, Dallas, Texas 75248. The address of Lutheran Brotherhood is 625
Fourth Avenue South, Minneapolis, Minnesota 55415. The address of Standish
Ayer & Wood, Inc. is One Financial Center, 26th Floor, Boston, Massachusetts
02111. The address of GeoCapital Corporation is 767 Fifth Avenue, 45th
Floor, New York, New York 10153.
(2) Includes 51,000 shares of Horizon Common Stock held by a limited partnership
for which Mr. Newman serves as an officer and director of the corporate
general partner. Also includes 36,500 shares of Horizon Common Stock held by
a foundation of which Mr. Newman is a director and officer, and 227,990
shares of Horizon Common Stock issuable upon the exercise of immediately
exercisable stock options.
(3) Includes 19,998 shares of Horizon Common Stock held in trust for the benefit
of Mr. McAtee's children. Also includes 124,525 shares of Horizon Common
Stock issuable upon the exercise of stock options that are immediately
exercisable or will be exercisable within 60 days after May 31, 1997.
(4) Includes 6,000 shares of Horizon Common Stock issuable upon the exercise of
immediately exercisable stock options.
(5) Consists of 107,461 shares of Horizon Common Stock issuable upon the
exercise of stock options that are immediately exercisable or will be
exercisable within 60 days after May 31, 1997.
(6) Consists of 8,813 shares of Horizon Common Stock issuable upon the exercise
of immediately exercisable stock options.
(7) Consists of 1,875 shares of Horizon Common Stock issuable upon the exercise
of immediately exercisable stock options.
(8) Includes 6,000 shares of Horizon Common Stock issuable upon the exercise of
immediately exercisable stock options.
38
<PAGE> 45
(9) Includes 494,664 shares of Horizon Common Stock issuable upon the exercise
of stock options held by certain directors and executive officers that are
immediately exercisable or will be exercisable within 60 days after May 31,
1997. Excludes 782,100 shares of Horizon Common Stock that will be issued to
Mr. Howard B. Finkel pursuant to the Exchange.
The Board of Directors of Horizon has approved, subject to and effective
after consummation of the Closing, an additional board position on the Board of
Directors of Horizon and the appointment of Mr. Finkel to serve in such
additional board position. Mr. Finkel is currently the Chief Executive Officer
of Specialty. Upon consummation of the Exchange and appointment of Mr. Finkel to
such board position, the directors and executive officers of Horizon as a group,
including Mr. Finkel, will beneficially own an aggregate of 2,514,089 shares of
Horizon Common Stock, or approximately 32.6% of the aggregate number of shares
of Horizon Common Stock outstanding immediately after the Exchange or issuable
pursuant to stock options that are immediately exercisable or will be
exercisable within 60 days after May 31, 1997. Upon consummation of the
Exchange, Mr. Finkel will beneficially own up to 782,100 shares of Horizon
Common Stock, representing approximately 10.8% of the aggregate number of shares
of Horizon Common Stock outstanding immediately after the Exchange.
No other Specialty Stockholder will beneficially own 5% or more of the
aggregate number of shares of Horizon Common Stock outstanding immediately after
the Exchange.
39
<PAGE> 46
PROPOSAL NO. 2
AMENDMENT TO CERTIFICATE OF
INCORPORATION TO CHANGE CORPORATE NAME
DESCRIPTION OF THE PROPOSED AMENDMENT
The Board of Directors of the Horizon has adopted and declared it to be
advisable that the stockholders of Horizon approve an amendment (the
"Amendment") to the Certificate of Incorporation, as amended, of Horizon (the
"Certificate of Incorporation") to change the name of the corporation to
"Horizon Health Corporation," and has directed that the proposed Amendment be
submitted to the stockholders of Horizon at the Special Meeting for their
approval.
REASONS FOR THE PROPOSED AMENDMENT
The Board of Directors has authorized the proposed change of the corporate
name of Horizon because it believes that the present name of the corporation no
longer accurately reflects the scope of the business operations of Horizon. The
business operations of Horizon, particularly after the Specialty acquisition,
will encompass more than just the contract management of mental health
healthcare services. Horizon will be involved in the management and provision of
other healthcare and related services. As such, the Board of Directors considers
that the Horizon corporate name should not be descriptively limited to only one
of the business activities conducted by Horizon.
THE PROPOSED AMENDMENT
The following resolutions will be submitted for approval by the
stockholders at the Special Meeting:
RESOLVED, that the Certificate of Incorporation of Horizon Mental Health
Management, Inc., as heretofore amended, be further amended by changing
Article I thereof so that, as hereby amended, Article I shall be and read
in its entirety as follows:
"The name of the Corporation is Horizon Health Corporation."
RESOLVED FURTHER, that at any time prior to the effectiveness of the
filing of a Certificate of Amendment with the Secretary of State of the
State of Delaware to effect the foregoing proposed amendment,
notwithstanding authorization of such proposed amendment by the
stockholders of the corporation, the Board of Directors of the
corporation may abandon such proposed amendment without further action by
the stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF HORIZON TO CHANGE
THE NAME OF THE CORPORATION TO "HORIZON HEALTH CORPORATION," AND YOUR PROXY WILL
BE SO VOTED UNLESS YOU SPECIFY OTHERWISE. AS INDICATED ABOVE, THE BOARD OF
DIRECTORS MAY IN ITS DISCRETION ELECT TO ABANDON THE PROPOSED AMENDMENT AT ANY
TIME PRIOR TO THE EFFECTIVENESS OF THE FILING OF THE REQUIRED CERTIFICATE OF
AMENDMENT WITH THE SECRETARY OF STATE OF THE STATE OF DELAWARE.
AVAILABILITY OF INDEPENDENT ACCOUNTANTS AT SPECIAL MEETING
Representatives of Price Waterhouse LLP are expected to be present at the
Special Meeting to respond to appropriate questions and to make a statement if
they desire to do so. Price Waterhouse LLP has served as the independent
accountants for Horizon since 1991. Price Waterhouse LLP also audited the
consolidated financial statements of Specialty included in this Proxy Statement.
40
<PAGE> 47
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents are incorporated by reference into this Proxy
Statement and are deemed to be a part hereof: (i) the Annual Report on Form 10-K
of Horizon for the fiscal year ended August 31, 1996, filed with the SEC on
November 15, 1996 (the "1996 Form 10-K"); (ii) the Quarterly Report on Form 10-Q
of Horizon for the quarter ended November 30, 1996, filed with the SEC on
January 8, 1997; (iii) the Quarterly Report on Form 10-Q of Horizon for the
quarter ended February 28, 1997, filed with the SEC on March 31, 1997; and (iv)
the Current Report on Form 8-K of Horizon filed with the SEC on May 8, 1997 (the
"1997 Form 8-K"). In addition, all documents filed by Horizon with the SEC
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the
date of this Proxy Statement and prior to the date of the Special Meeting shall
be deemed to be incorporated by reference into this Proxy Statement and to be a
part hereof from the date of filing of such documents.
Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or replaces such statement. Any
such statement so modified shall not be deemed to constitute a part of this
Proxy Statement, except as so modified. Any such statement so superseded shall
not be deemed to constitute a part of this Proxy Statement. Without limiting the
generality of the foregoing, pursuant to Rule 14a-14 under the Exchange Act, the
consolidated financial statements of Horizon and the notes thereto, and the
Report of Independent Accountants thereon, included in the 1997 Form 8-K
supersede and replace in their entirety for purposes of this Proxy Statement the
consolidated financial statements of Horizon and the notes thereto, and the
Report of Independent Accountants thereon, included at pages F-1 through F-17 of
the 1996 Form 10-K.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN
EXHIBITS TO SUCH DOCUMENTS THAT ARE INCORPORATED BY REFERENCE UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT
THIS PROXY STATEMENT INCORPORATES, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS DELIVERED UPON
WRITTEN OR ORAL REQUEST TO THE CORPORATE SECRETARY, HORIZON MENTAL HEALTH
MANAGEMENT, INC., 1500 WATERS RIDGE DRIVE, LEWISVILLE, TEXAS 75057-6011 OR BY
TELEPHONE AT (972) 420-8200. WITHIN ONE BUSINESS DAY OF ITS RECEIPT OF SUCH A
REQUEST, HORIZON WILL MAIL BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS THE
COPIES SO REQUESTED. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUESTS SHOULD BE MADE NO LATER THAN FIVE BUSINESS DAYS BEFORE THE SPECIAL
MEETING.
PROPOSALS BY STOCKHOLDERS
Proposals by stockholders of Horizon intended to be presented at the next
annual meeting of stockholders of Horizon must be received at the executive
offices of Horizon no later than August 21, 1997, to be included in Horizon's
proxy statement and form of proxy relating to that meeting.
JAMES W. MCATEE
Secretary
41
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Condensed Combined
Financial Statements................................... F-2
Unaudited Pro Forma Condensed Combined Balance Sheet as of
February 28, 1997...................................... F-3
Unaudited Pro Forma Condensed Combined Statement of Income
for the six months ended February 28, 1997............. F-4
Unaudited Pro Forma Condensed Combined Statement of Income
for the six months ended February 29, 1996............. F-5
Unaudited Pro Forma Condensed Combined Statement of Income
for the year ended August 31, 1996..................... F-6
Unaudited Pro Forma Condensed Combined Statement of Income
for the year ended August 31, 1995..................... F-7
Notes to Pro Forma Condensed Combined Financial
Statements............................................. F-8
SPECIALTY HEALTHCARE MANAGEMENT, INC.
Report of Independent Accountants......................... F-9
Consolidated Balance Sheets as of December 31, 1995, 1996
and February 28, 1997 (unaudited)...................... F-10
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1996 and the two months ended
February 29, 1996 (unaudited) and February 28, 1997
(unaudited)............................................ F-11
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995 and 1996 and the two
months ended February 28, 1997 (unaudited)............. F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996 and the two months ended
February 29, 1996 (unaudited) and February 28, 1997
(unaudited)............................................ F-13
Notes to Consolidated Financial Statements................ F-14
NATIONAL MEDICAL MANAGEMENT SERVICES DIVISION OF NATIONAL
MEDICAL ENTERPRISES, INC.
Report of Independent Accountants......................... F-20
Balance Sheet as of December 31, 1994..................... F-21
Statement of Operations and Division Equity for the year
ended December 31, 1994................................ F-22
Statement of Cash Flows for the year ended December 31,
1994................................................... F-23
Notes to Financial Statements............................. F-24
</TABLE>
F-1
<PAGE> 49
INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
Exchange between Horizon and the Specialty Stockholders to be accounted for as a
pooling of interests. The unaudited pro forma condensed balance sheet presents
the combined financial position of Horizon and Specialty as of February 28, 1997
assuming that the proposed Exchange had occurred as of February 28, 1997. Such
pro forma information is based upon the historical balance sheet data of Horizon
and Specialty as of February 28, 1997. The unaudited pro forma condensed
statement of income gives effect to the proposed Exchange by combining the
results of operations of Horizon for the years ended August 31, 1996 and 1995
and for the six months ended February 28, 1997 and February 29, 1996 with the
results of operations of Specialty for the years ended December 31, 1996 and
1995 and the six months ended February 28, 1997 and February 29, 1996,
respectively, on a pooling of interests basis. The operations of Specialty for
the four months ended December 31, 1996, resulting in net revenue and net income
of $10.8 million and $671,000, respectively, have been included in the pro forma
statement of income for the year ended August 31, 1996 and for the six month
period ended February 28, 1997. The operations of Specialty for the four months
ended December 31, 1995, resulting in net revenue and net income of $13.2
million and $900,000, respectively have been included in the pro forma statement
of income for the year ended August 31, 1995 and for the six months ended
February 29, 1996. Pro forma information for the year ended August 31, 1994 has
not been provided as Specialty was a division of NME during the year ended
December 31, 1994 and therefore is not eligible for pooling for that period
under generally accepted accounting principles. These unaudited pro forma
financial statements should be read in conjunction with the historical financial
statements and notes thereto of Horizon and Specialty included in or
incorporated by reference into this Proxy Statement.
F-2
<PAGE> 50
HORIZON MENTAL HEALTH MANAGEMENT, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
FEBRUARY 28, 1997
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HORIZON(C) SPECIALTY ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents............. $ 8,713,746 $ 87,163 $ 8,800,909
Accounts receivable less allowance for
bad debts.......................... 9,426,252 5,858,238 15,284,490
Notes receivable...................... -- 195,905 195,905
Receivable from employees............. 62,399 -- 62,399
Prepaid expenses and other assets..... 492,477 48,864 541,341
Deferred income taxes................. 1,270,684 1,097,980 $ 986,277(A) 3,354,941
----------- ----------- ----------- -----------
Total current assets.......... 19,965,558 7,288,150 986,277 28,239,985
Restricted cash......................... -- 363,528 363,528
Deferred income taxes................... -- 173,579 173,579
Property and equipment:
Building and improvements............. 61,702 -- 61,702
Equipment............................. 3,163,167 378,905 (100,000)(A) 3,442,072
----------- ----------- ----------- -----------
3,224,869 378,905 (100,000) 3,503,774
Less accumulated depreciation......... (1,797,766) (192,233) (1,989,999)
----------- ----------- ----------- -----------
1,427,103 186,672 (100,000) 1,513,775
Goodwill, net of accumulated
amortization.......................... 13,202,317 1,696,146 14,898,463
Management contracts, net of accumulated
depreciation.......................... 1,682,142 2,786,040 4,468,182
Other assets............................ 392,765 -- 392,765
----------- ----------- ----------- -----------
Total assets.................. $36,669,885 $12,494,115 $ 886,277 $50,050,277
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable...................... $ 418,311 $ 1,279,185 $ 1,697,496
Accrued compensation and benefits..... 3,833,863 910,420 $ 2,177,050(A) 6,921,333
Accrued third party payor
liabilities........................ 142,918 -- 142,918
Income taxes payable.................. 31,046 40,346 74,392
Other accrued liabilities............. 6,310,169 886,279 723,764(A) 7,920,212
Current portion of long-term debt..... -- 519,600 519,600
----------- ----------- ----------- -----------
Total current liabilities..... 10,736,307 3,635,830 2,900,814 17,272,951
Other liabilities....................... -- 156,121 156,121
Retirement plan payable................. -- 309,564 309,564
Deferred income taxes................... 1,540,967 -- (34,000)(A) 1,506,967
Long-term debt, less current portion.... -- 3,643,088 3,643,088
----------- ----------- ----------- -----------
Total liabilities............. 12,277,274 7,744,603 2,866,814 22,888,691
Common stock, subject to redemption..... -- 870,000 (870,000) --
Minority interest....................... 60,315 -- 60,315
Stockholders' Equity:
Common stock.......................... 55,643 70 13(E) 55,726
Additional paid-in-capital............ 14,238,328 1,338,948 1,119,987(A)(E) 16,697,263
Retained earnings..................... 10,038,325 2,566,608 (2,230,537)(A) 10,374,396
Deferred compensation................. -- (20,833) (20,833)
Treasury stock, at cost................. -- (5,281) (5,281)
----------- ----------- ----------- -----------
Total stockholders' equity.... 24,332,296 3,879,512 (1,110,537) 27,101,271
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity........ $36,669,885 $12,494,115 $ 886,277 $50,050,277
========== ========== ========== ==========
</TABLE>
F-3
<PAGE> 51
HORIZON MENTAL HEALTH MANAGEMENT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HORIZON(C) SPECIALTY ADJUSTMENTS COMBINED
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Management contract revenue......... $ 37,358,471 $15,885,099 $ 53,243,570
Operating expenses:
Salaries and wages................ (20,117,102) (8,392,875) (28,509,977)
Purchased services................ (5,246,902) (3,266,074) (8,512,976)
Operating and administrative...... -- (1,293,253) (1,293,253)
Provision for bad debts........... (465,450) (977,245) (1,442,695)
Depreciation and amortization..... (798,906) (298,054) (1,096,960)
Other............................. (5,028,934) -- (5,028,934)
------------ ----------- --------- ------------
Total operating
expenses................ (31,657,294) (14,227,501) (45,884,795)
------------ ----------- --------- ------------
Interest income (expense), net...... 301,268 (220,975) 80,293
------------ ----------- --------- ------------
Net income before income taxes...... 6,002,445 1,436,623 7,439,068
------------ ----------- --------- ------------
Income tax expense.................. 2,367,801 632,114 2,999,915
------------ ----------- --------- ------------
Net income before equity in Horizon
LLC and minority interest......... 3,634,644 804,509 4,439,153
------------ ----------- --------- ------------
Equity in net earnings of Horizon
LLC............................... -- -- --
------------ ----------- --------- ------------
Minority interest................... (51,560) -- (51,560)
------------ ----------- --------- ------------
Net income.......................... $ 3,583,084 $ 804,509 $ 4,387,593
=========== ========== ========= ===========
Net income per share................ $ 0.54(D) $ 84.74 $ 0.53
Weighted average shares
outstanding(B).................... 6,641,841(D) 9,494 1,640,506(B) 8,291,841
=========== ========== ========= ===========
</TABLE>
F-4
<PAGE> 52
HORIZON MENTAL HEALTH MANAGEMENT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HORIZON(C) SPECIALTY ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Management contract revenue........ $ 29,684,302 $ 18,215,498 $ 47,899,800
Operating expenses:
Salaries and wages............... (16,399,602) (9,496,941) (25,896,543)
Purchased services............... (4,342,189) (3,854,626) (8,196,815)
Operating and administrative..... -- (1,864,549) (1,864,549)
Provision for bad debts.......... (3,060) (1,305,484) (1,308,544)
Depreciation and amortization.... (642,039) (76,979) (719,018)
Other............................ (4,136,128) -- (4,136,128)
------------ ------------ --------- ------------
Total operating
expenses............... (25,523,018) (16,598,579) (42,121,597)
------------ ------------ --------- ------------
Interest income (expense), net..... 110,428 (94,111) 16,317
------------ ------------ --------- ------------
Net income before income taxes..... 4,271,712 1,522,808 5,794,520
Income tax expense................. 1,687,178 592,220 2,279,398
------------ ------------ --------- ------------
Net income before equity in Horizon
LLC and minority interest........ 2,584,534 930,588 3,515,122
------------ ------------ --------- ------------
Equity in net earnings of Horizon,
LLC.............................. -- -- --
Minority interest.................. -- -- --
------------ ------------ --------- ------------
Net income......................... $ 2,584,534 $ 930,588 $ 3,515,122
=========== =========== ========= ===========
Net income per share............... $ 0.40(D) $ 118.73 $ 0.45
Weighted average shares
outstanding(B)................... 6,477,357(D) 7,838 1,354,359(B) 7,839,554
=========== =========== ========= ===========
</TABLE>
F-5
<PAGE> 53
HORIZON MENTAL HEALTH MANAGEMENT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HORIZON(C) SPECIALTY ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Management contract revenue........ $ 62,444,755 $ 33,794,211 $ 96,238,966
Operating expenses:
Salaries and wages............... (34,705,889) (18,811,093) (53,516,982)
Purchased services............... (8,635,117) (7,270,250) (15,905,367)
Operating and administrative..... -- (3,310,494) (3,310,494)
Provision for bad debts.......... (73,948) (1,361,101) (1,435,049)
Depreciation and amortization.... (1,307,688) (504,102) (1,811,790)
Other............................ (8,805,581) -- (8,805,581)
------------ ------------ --------- ------------
Total operating
expenses............... (53,528,223) (31,257,040) (84,785,263)
------------ ------------ --------- ------------
Interest income (expense), net..... 323,860 (390,050) (66,190)
------------ ------------ --------- ------------
Net income before income taxes..... 9,240,392 2,147,121 11,387,513
Income tax expense................. 3,673,755 935,605 4,609,360
------------ ------------ --------- ------------
Net income before equity in Horizon
LLC and minority interest........ 5,566,637 1,211,516 6,778,153
Equity in net earnings of Horizon,
LLC.............................. -- -- --
Minority interest.................. (2,397) -- (2,397)
------------ ------------ --------- ------------
Net income......................... $ 5,564,240 $ 1,211,516 $ 6,775,756
=========== =========== ========= ===========
Net income per share............... $ 0.85(D) $ 132.61 $ 0.84
Weighted average shares
outstanding(B)................... 6,525,042(D) 9,136 1,578,646(B) 8,112,824
=========== =========== ========= ===========
</TABLE>
F-6
<PAGE> 54
HORIZON MENTAL HEALTH MANAGEMENT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HORIZON (C) SPECIALTY ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Management contract revenue......... $ 29,349,764 $ 40,005,119 $ 69,354,883
Operating expenses:
Salaries and wages................ (15,389,780) (22,190,878) (37,580,658)
Purchased services................ (4,644,645) (8,298,548) (12,943,193)
Operating and administrative...... -- (5,275,072) (5,275,072)
Provision for bad debts........... (208,946) (1,471,450) (1,680,396)
Depreciation and amortization..... (903,184) (229,420) (1,132,604)
Other............................. (4,267,212) -- (4,267,212)
------------ ------------ --------- ------------
Total operating
expenses................ (25,413,767) (37,465,368) (62,879,135)
------------ ------------ --------- ------------
Interest expense, net............... (753,743) (249,329) (1,003,072)
------------ ------------ --------- ------------
Net income before income taxes...... 3,182,254 2,290,422 5,472,676
Income tax expense.................. 803,754 890,780 1,694,534
------------ ------------ --------- ------------
Net income before equity in Horizon
LLC and minority interest......... 2,378,500 1,399,642 3,778,142
Equity in net earnings of
Horizon, LLC...................... 1,567,720 -- 1,567,720
Minority interest................... -- -- --
------------ ------------ --------- ------------
Net income.......................... $ 3,946,220 $ 1,399,642 $ 5,345,862
=========== =========== ========= ===========
Net income per share................ $ 0.76(D) $ 180.30 $ 0.82
Weighted average shares
outstanding(B).................... 5,162,889(D) 7,763 1,341,400(B) 6,512,052
=========== =========== ========= ===========
</TABLE>
F-7
<PAGE> 55
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The proposed Exchange is intended to be accounted for as a
pooling-of-interests. The pro forma condensed combined statements of income
assume that the Exchange was consummated at the beginning of the earliest period
presented. The pro forma condensed combined balance sheet assumes that the
transaction was consummated on February 28, 1997.
A. The pro forma condensed combined statements of income do not reflect
nonrecurring costs (See S-X Article 11.02(5)) and charges resulting
directly from the proposed merger. These costs and charges are
estimated as follows:
<TABLE>
<S> <C>
Severance and related benefits....................... $2,177,050
Lease abandonment.................................... $ 98,764
Non-compatible technology............................ $ 100,000
Brokerage fees....................................... $ 650,000
Professional fees.................................... $ 200,000
Relocation costs..................................... $ 25,000
----------
Total costs.......................................... $3,250,814
----------
</TABLE>
These nonrecurring costs include costs relating to computer hardware
and software and leases that will be abandoned after the consummation
of the Exchange. These assets are currently being utilized in the
operations of Specialty but are not compatible with the planned
operations for Horizon. Severance and related benefits represent
anticipated payments to identified employees, including payments
required by their respective employment agreements, who will be
terminated after the consummation of the Exchange.
The deferred tax asset and liability adjustments are calculated using an
effective tax rate of 34%. The amount for brokerage fees includes
$250,000 relating to fees paid on behalf of Specialty. This amount is
excluded from the adjustment made to other accrued liabilities and is
reflected as additional paid in capital.
B. To adjust pro forma amounts based on historical share amounts,
converting each outstanding share of Specialty's stock into Horizon
Common Stock based on the following exchange ratio:
<TABLE>
<CAPTION>
EXCHANGE RATIO
--------------
<S> <C>
Specialty............................................ 173.794
</TABLE>
C. The pro forma financial statements do not reflect any purchase business
combinations consummated by Horizon after February 28, 1997. The effect
of these business combinations is not considered to have a material
impact on the pro forma financial statements. See "Certain Information
Regarding Horizon-Recent Developments."
D. Adjusted to reflect a three-for-two stock split effected by Horizon in
the form of a 50% stock dividend which occurred on January 31, 1997.
E. Adjusted to reflect the termination of the put option, relating to the
purchase of Parkside, upon consummation of the Exchange.
F-8
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Specialty Healthcare Management, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Specialty Healthcare Management, Inc. and its subsidiary at December 31, 1995
and 1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Dallas, Texas
April 25, 1997
F-9
<PAGE> 57
SPECIALTY HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- FEBRUARY 28,
1995 1996 1997
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 82,267 $ 406,141 $ 87,163
Accounts receivable, less allowance for
uncollectible accounts of $1,044,797, $2,673,267
and $3,530,049, respectively.................... 5,738,252 5,623,465 5,858,238
Notes and other receivables........................ -- 59,957 195,905
Income tax receivable.............................. 187,212 -- --
Prepaid expenses and other assets.................. 59,843 35,313 48,864
Deferred income taxes.............................. 616,151 1,097,980 1,097,980
---------- ----------- -----------
Total current assets....................... 6,683,725 7,222,856 7,288,150
Restricted cash...................................... 138,547 344,404 363,528
Deferred income taxes................................ 119,782 173,579 173,579
Furniture and equipment.............................. 364,190 378,905 378,905
Accumulated depreciation............................. (83,029) (176,465) (192,233)
---------- ----------- -----------
281,161 202,440 186,672
Management contracts, net of accumulated amortization
of $142,857, $536,509 and $611,429, respectively... 857,143 2,860,960 2,786,040
Goodwill, net of accumulated amortization of $3,009,
$18,389 and $34,056, respectively.................. 155,258 1,711,813 1,696,146
---------- ----------- -----------
Total assets............................... $8,235,616 $12,516,052 $12,494,115
========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $1,267,735 $ 1,494,757 $ 1,279,185
Accrued compensation and benefits.................. 1,492,769 1,257,708 910,420
Income taxes payable............................... -- 75,344 40,346
Other accrued liabilities.......................... 1,682,556 836,280 886,279
Note payable....................................... 176,600 -- --
Current portion of long-term debt.................. 138,000 519,600 519,600
---------- ----------- -----------
Total current liabilities.................. 4,757,660 4,183,689 3,635,830
Other liabilities.................................... 333,882 485,754 465,685
Long-term debt, less current portion................. 570,694 3,056,714 3,643,088
Commitments and contingencies
Common stock, subject to redemption, 1,305 shares
issued and outstanding............................. -- 870,000 870,000
Shareholders' equity:
Common stock, $0.01 par value; 10,000 shares
authorized, 6,599, 6,974 and 6,974 shares issued
and outstanding, respectively................... 66 70 70
Additional paid-in-capital......................... 1,228,953 1,338,948 1,338,948
Retained earnings.................................. 1,399,642 2,611,158 2,566,608
Deferred compensation.............................. (50,000) (25,000) (20,833)
---------- ----------- -----------
2,578,661 3,925,176 3,884,793
Less cost of common stock in treasury, 37 shares... (5,281) (5,281) (5,281)
---------- ----------- -----------
Total shareholders' equity................. 2,573,380 3,919,895 3,879,512
---------- ----------- -----------
Total liabilities and shareholders'
equity................................... $8,235,616 $12,516,052 $12,494,115
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 58
SPECIALTY HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED
DECEMBER 31, ---------------------------
------------------------- FEBRUARY 29, FEBRUARY 28,
1995 1996 1996 1997
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Management contract revenue................ $40,005,119 $33,794,211 $4,969,438 $5,066,941
Operating expenses:
Salaries and benefits.................... 22,190,878 18,811,093 2,858,546 2,742,850
Purchased services....................... 8,298,548 7,270,250 1,084,679 1,017,889
Operating and administrative............. 5,275,072 3,310,494 467,276 347,833
Provision for bad debts.................. 1,471,450 1,361,101 65,995 856,782
Interest expense......................... 249,329 390,050 23,427 70,171
Depreciation and amortization............ 229,420 504,102 44,691 108,878
----------- ----------- ---------- ----------
Total operating expenses......... 37,714,697 31,647,090 4,544,614 5,144,403
----------- ----------- ---------- ----------
Income (loss) before income taxes.......... 2,290,422 2,147,121 424,824 (77,462)
Income tax expense (benefit)............... 890,780 935,605 185,096 (32,912)
----------- ----------- ---------- ----------
Net (loss) income.......................... $ 1,399,642 $ 1,211,516 $ 239,728 $ (44,550)
========== ========== ========= =========
Net income (loss) per share................ $ 180.30 $ 132.61 $ 30.08 $ (4.69)
----------- ----------- ---------- ----------
Weighted average shares outstanding........ 7,763 9,136 7,969 9,494
========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 59
SPECIALTY HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY
---------------- PAID-IN RETAINED DEFERRED STOCK,
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION AT COST TOTAL
------ ------ ---------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995... 3,002 $30 $ 970 $ -- $ -- $ -- $ 1,000
Net income................. -- -- -- 1,399,642 -- -- 1,399,642
Issuance of common stock in
conjunction with
purchase................. 3,597 36 888,968 -- -- -- 889,004
Issuance of stock warrants
in conjunction with
purchase................. -- -- 389,350 -- -- -- 389,350
Sale of additional common
stock.................... 37 -- 24,665 -- -- -- 24,665
Acquisition of treasury
stock.................... (37) -- -- -- -- (5,281) (5,281)
Deferred compensation for
issuance of stock........ -- -- -- -- (75,000) -- (75,000)
Amortization of deferred
compensation............. -- -- -- -- 25,000 -- 25,000
Notes receivable for
purchase of common
stock.................... -- -- (75,000) -- -- -- (75,000)
----- --- ---------- ---------- -------- ------- ----------
Balance at December 31,
1995....................... 6,599 66 1,228,953 1,399,642 (50,000) (5,281) 2,573,380
Net income................. -- -- -- 1,211,516 -- -- 1,211,516
Sale of additional common
stock.................... 375 4 59,995 -- -- -- 59,999
Payments on notes
receivable............... -- -- 50,000 -- -- -- 50,000
Amortization of deferred
compensation............. -- -- -- -- 25,000 -- 25,000
----- --- ---------- ---------- -------- ------- ----------
Balance at December 31,
1996....................... 6,974 70 1,338,948 2,611,158 (25,000) (5,281) 3,919,895
Net loss................... -- -- -- (44,550) -- -- (44,550)
Amortization of deferred
compensation............. -- -- -- -- 4,167 -- 4,167
----- --- ---------- ---------- -------- ------- ----------
Balance at February 28, 1997
(unaudited)................ 6,974 $70 $1,338,948 $2,566,608 $(20,833) $(5,281) $3,879,512
====== ======= ========= ========= ============ ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 60
SPECIALTY HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED
DECEMBER 31, ---------------------------
------------------------- FEBRUARY 29, FEBRUARY 28,
1995 1996 1996 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $ 1,399,642 $ 1,211,516 $ 239,728 $ (44,550)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 229,420 504,102 44,691 108,878
Deferred income taxes........................... (735,933) (535,626) 72,573 --
Noncash expense................................. 510,000 -- 29,796 1,644
Net changes in assets and liabilities:
Restricted cash............................... (582,689) (205,857) 138,547 (19,124)
Accounts receivable........................... (68,868) 114,787 (48,374) (234,773)
Notes and other receivables................... -- (59,957) (2,275) (135,948)
Income taxes receivable....................... (187,212) 187,212 123,139 --
Prepaid expenses and other assets............. 219,974 24,530 (119,818) (13,551)
Accounts payable, accrued expenses and other
current liabilities........................ 1,698,585 (854,315) (893,732) (512,861)
Income taxes payable.......................... -- 75,344 -- (34,998)
Other liabilities............................. 243,423 151,872 95,378 (20,069)
----------- ----------- ---------- ---------
Net cash provided by (used in) operating
activities............................... 2,726,342 613,608 (320,347) (905,352)
Investing activities:
Purchases of furniture and equipment.............. (328,992) (14,715) -- --
Purchase of net assets of National Medical
Management Services............................. (3,946,849) (302,817) (302,817) --
Purchase of net assets of the Parkside Company.... -- (2,600,000) -- --
Increase in goodwill and management contracts..... (37,916) (123,222) (12,841) --
----------- ----------- ---------- ---------
Net cash used in investing activities...... (4,313,757) (3,040,754) (315,658) --
Financing activities:
Proceeds from long-term borrowings................ 3,203,000 3,291,820 1,567,306 586,374
Proceeds from sale of common stock................ 783,388 60,000 60,000 --
Payments on note payable and long-term debt....... (2,317,706) (600,800) (176,600) --
----------- ----------- ---------- ---------
Net cash provided by financing
activities............................... 1,668,682 2,751,020 1,450,706 586,374
----------- ----------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... 81,267 323,874 814,701 (318,978)
Cash and cash equivalents at beginning of period.... 1,000 82,267 82,267 406,141
----------- ----------- ---------- ---------
Cash and cash equivalents at end of period.......... $ 82,267 $ 406,141 $ 896,968 $ 87,163
============ ============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................ $ 249,329 $ 390,050 $ 23,427 $ 70,171
============ ============ =========== ===========
Income taxes.................................... $ 1,813,925 $ 1,208,675 $ -- $ 900
============ ============ =========== ===========
Supplemental disclosure of noncash investing
activities:
Purchase of net assets of NMMS during 1995 and
purchase of net assets of Parkside during 1996:
Fair value of assets acquired................... $ 6,755,415 $ 3,500,000 $ -- $ --
Cash paid....................................... 3,946,849 2,600,000 -- --
Common stock exchanged.......................... -- 870,000 -- --
----------- ----------- ---------- ---------
Liabilities assumed........................ $ 2,808,566 $ 30,000 $ -- $ --
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 61
SPECIALTY HEALTHCARE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Specialty Healthcare Management, Inc. (the Company) provides contract
management and staffing services for the operation and management of
psychiatric, physical rehabilitation and chemical dependency units in general
acute care hospitals and nursing homes.
The Company was incorporated in August 1994 for the purpose of acquiring
the net assets and operations of National Medical Management Services (the
Division), a division of National Medical Enterprises, Inc. Effective January 3,
1995, the Company acquired the assets and operations of the Division for cash
and notes payable of $3.95 million and assumed current liabilities of
approximately $2.8 million. In addition, the Company issued warrants as partial
consideration that, if exercised, would provide the seller with approximately
15% of the Company's outstanding common stock (see Note 8).
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase has been allocated to the assets
purchased and liabilities assumed based upon the fair values at date of
acquisition. The excess of the purchase price over the fair values of the
tangible net assets acquired was allocated $1,000,000 to acquired management
contracts and $120,350 to goodwill which is being amortized over 7 and 40 years,
respectively. The accompanying statements of operations reflect the operating
results since the effective date of the acquisition.
Effective April 1, 1996, the Company merged the Parkside Company
(Parkside), a similar provider of contract management services, into the
Company. Under the merger agreement, 100,000 outstanding common shares of
Parkside were exchanged for 1,305 shares of the Company's common stock for a
fair value of $870,000. In addition, the Company paid $2.6 million in cash. The
purchase price of $3.5 million was allocated to acquired management contracts of
$2.1 million and goodwill of $1.4 million. The agreement also contains an option
exercisable by the Parkside shareholder on or after October 11, 1997 to put to
the Company for redemption at fair market value all shares held. The exercise
date may be extended at the option of the Company for six months through a
payment of $150,000. The accompanying statements of operations reflect the
operating results since the effective date of the acquisition.
The Company's customers are not concentrated in any specific geographic
region, but are concentrated in the health care industry. There are no
significant concentrations of accounts receivable at December 31, 1995 and 1996.
Management continually monitors and adjusts its reserves and allowances
associated with these receivables.
The Company is exposed to credit losses in the event of nonperformance by
counterparties to financial instruments, but does not expect any counterparties
to fail to meet their obligations. The Company generally does not obtain
collateral or other security to support financial instruments subject to credit
risk, but monitors the credit standing of counterparties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Psychiatric Management Services
Company (PMSC). PMSC is the holding company which manages a governmental
contract. Significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-14
<PAGE> 62
SPECIALTY HEALTHCARE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates.
REVENUE RECOGNITION
Revenue is reported as earned based upon the terms of the management
contracts as services are rendered. Management fee revenue is calculated based
on a per diem calculation using patients per day, a fixed fee, or a combination
of the two depending on the specific contract. These management contracts are
generally for terms ranging from three to ten years and often have automatic
renewal options.
RESTRICTED CASH
Restricted cash represents amounts set aside for the Supplemental Executive
Retirement Plan (SERP) and the Deferred Compensation Plan which are restricted
from general use.
FURNITURE, EQUIPMENT AND IMPROVEMENTS
Furniture, equipment and improvements are stated at cost. Depreciation on
furniture and equipment is computed using the straight-line method over the
estimated useful lives of three to five years. Customer facility and site
improvements are expensed when incurred.
MANAGEMENT CONTRACTS
Management contracts represent the fair value of contracts purchased and
are being amortized using the straight-line method over seven years.
GOODWILL
Goodwill represents the excess of cost over fair value of net assets
acquired and is being amortized using the straight-line method over 40 years.
NET INCOME PER SHARE
Net income per share is calculated using the weighted average number of
common and common equivalent shares outstanding during the respective periods.
LONG-LIVED AND INTANGIBLE ASSETS
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Assets to be
Disposed Of" (FAS 121). Under FAS 121, the Company recognizes impairment losses
on furniture, equipment, contracts and goodwill whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable through undiscounted future cash flows. Such losses are determined
by comparing the sum of the expected future discounted net cash flows to the
carrying amount of the asset. As of December 31, 1996, no impairment losses have
been incurred.
FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, restricted
cash, accounts receivable, investments, current liabilities and long-term debt
obligations. The carrying amounts reported in the balance sheets for these
financial instruments approximate fair value.
F-15
<PAGE> 63
SPECIALTY HEALTHCARE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising costs
included in the statements of operations for the years ended December 31, 1995
and 1996 are approximately $251,000 and $137,000, respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly-liquid investments with maturities of three
months or less when purchased and consist primarily of money market funds and
mutual funds.
INCOME TAXES
The Company uses the asset and liability method as specified in Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," to
calculate the provision for income taxes. Deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Changes in
the deferred tax assets and liabilities are reflected in the consolidated
statements of operations.
3. RETIREMENT PLAN
The Company sponsors a defined contribution 401(k) plan that covers
substantially all eligible employees. The Company's contributions to the plan
are based on 3% and 2% for 1995 and 1996, respectively, of an employee's monthly
compensation. For the years ended December 31, 1995 and 1996, contributions to
the plan were approximately $263,000 and $146,000, respectively.
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following at December 31, 1995
and 1996 and February 28, 1997 (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- FEBRUARY 28,
1995 1996 1997
---------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued bonuses............................................ $ 440,256 $ -- $ --
Purchased services payable................................. 300,500 297,000 310,000
Accrued self-insurance expenses............................ -- 292,700 292,700
Accrued third party payor denials.......................... 494,142 133,644 135,300
Other accrued liabilities.................................. 447,658 112,936 148,279
---------- -------- --------
$1,682,556 $836,280 $886,279
========= ======== =========
</TABLE>
5. NOTE PAYABLE
As part of the purchase transaction on January 3, 1995, the Company entered
into a one-year promissory note for $731,000 payable quarterly to National
Medical Enterprises, Inc. The note, which included interest at 8%, was paid in
full in January 1996.
F-16
<PAGE> 64
SPECIALTY HEALTHCARE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1995 and 1996 and
February 28, 1997 (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- FEBRUARY 28,
1995 1996 1997
-------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, bearing interest at the Citibank,
N.A. base rate plus 2% per annum with interest
and principal payments due monthly through April
1, 1998.......................................... $562,000 $ 637,800 $ 551,200
Revolving line of credit, bearing interest at the
Citibank, N.A. base rate plus 2% per annum, with
interest payable monthly and any outstanding
borrowings due December 22, 1998................. 146,694 2,938,514 3,611,488
-------- ---------- ----------
708,694 3,576,314 4,162,688
Less current portion............................... 138,000 519,600 519,600
-------- ---------- ----------
$570,694 $3,056,714 $3,643,088
======== ========= =========
</TABLE>
The Company entered into a credit facility with a financing organization
that provides for a $700,000 term loan and a line of credit up to the lesser of
$4,300,000 or an amount equal to 70% of the net amount of eligible receivables.
During 1996, the Company increased the total credit facility to $6,000,000,
which provides for a $1,027,500 term loan and a line of credit up to the lesser
of $4,972,500 or an amount equal to 75% of the net amount of eligible
receivables. Borrowings under the credit facility bear interest as noted above
with the Company being subject to an annual minimum interest charge of $120,000.
In addition, the Company pays an annual credit facility fee of .25% on the
amount of the total facility. The credit facility agreement also requires the
Company to meet certain financial ratios on leverage, debt service coverage, net
worth, etc., and contains certain covenants which restrict capital expenditures
and the incurrence of additional indebtedness. Substantially all of the
Company's assets are pledged as collateral.
Maturities of long-term debt for the two years succeeding December 31, 1996
are $519,600 in 1997 and $3,056,714 in 1998.
7. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Current:
Federal................................................... $1,367,269 $1,236,585
State..................................................... 259,444 234,646
---------- ----------
Total current............................................... 1,626,713 1,471,231
Deferred:
Federal................................................... (658,466) (479,244)
State..................................................... (77,467) (56,382)
---------- ----------
Total deferred.............................................. (735,933) (535,626)
---------- ----------
$ 890,780 $ 935,605
========= =========
</TABLE>
F-17
<PAGE> 65
SPECIALTY HEALTHCARE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income taxes at the U.S. federal statutory rate to
income taxes reflected in the Consolidated Statement of Operations is as
follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Net Income Before Taxes at 34%.............................. $778,743 $730,021
Goodwill Amortization....................................... -- 87,550
Meals and Entertainment and other Permanent Adjustments..... 18,271 19,550
State Income Taxes, net..................................... 93,766 98,484
-------- --------
$890,780 $935,605
-------- --------
</TABLE>
The components of the net deferred tax assets at December 31, 1995 and 1996
were obtained using the liability method in accordance with SFAS No. 109 and are
as follows:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Accounts Receivable......................................... $390,377 $1,009,195
Fixed Assets/Intangibles.................................... 119,782 114,677
Accrued Liabilities......................................... 225,774 88,785
Deferred Compensation....................................... -- 58,902
-------- ----------
Deferred Income Tax Assets................................ $735,933 $1,271,559
-------- ----------
</TABLE>
The Company recorded federal and state income tax expense for the two
months ended February 29, 1996 (unaudited) in the amount of $185,096 resulting
in a combined tax rate of 43.57% and federal and state income tax benefit of
$32,912 for the two months ended February 28, 1997 (unaudited) resulting in a
combined tax rate of 42.49%.
8. WARRANTS AND CAPITAL STOCK
As part of the purchase effective January 3, 1995, the Company issued
warrants to National Medical Enterprises, Inc. to purchase 1,165 shares of
common stock at an exercise price of $.0858 per share. The warrants can be
exercised at any time subsequent to January 3, 1997 and the exercise price and
number of shares are adjustable to maintain an approximate 15% proportional
ownership share of the Company. The value of the warrants at the date of
issuance was determined to be $389,350. As of December 31, 1996, there were
1,215 warrants outstanding.
In conjunction with the purchase transaction, the Company issued additional
shares to existing management shareholders, other senior management and an
outside shareholder. The proceeds from the sale of these shares were used in the
purchase transaction. Certain management acquired shares through note receivable
arrangements and the outstanding balance on these notes has been reflected as a
reduction of shareholders' equity.
All shareholders have entered into a stock agreement which puts certain
restrictions on the transfer or sale of stock. In addition, the ownership of
shares by an employee shareholder shall not vest until the third anniversary of
the date of issuance of the shares. If employment is terminated during the
vesting period, the shares will be repurchased by the Company at the lesser of
book value or the initial purchase price paid for the shares.
F-18
<PAGE> 66
SPECIALTY HEALTHCARE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LEASE COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under various operating
leases. Total rent expense incurred in 1996 and 1995 was approximately $202,000
and $260,000, respectively. The following is a schedule of future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 1996:
<TABLE>
<S> <C>
1997....................................................... $211,026
1998....................................................... 211,026
1999....................................................... 14,784
--------
Total minimum lease payments............................... $436,836
========
</TABLE>
The Company is involved in litigation arising in the ordinary course of
business, including matters involving professional liability. It is the opinion
of management that the ultimate disposition of such litigation would not be in
excess of any reserves or have a material adverse effect on the Company's
financial position or results of operations.
F-19
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Specialty Healthcare Management, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations and division equity and of cash flows present fairly, in all
material respects, the financial position of National Medical Management
Services, a division of National Medical Enterprises, Inc. (the Division) at
December 31, 1994, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Division's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Dallas, Texas
May 8, 1997
F-20
<PAGE> 68
NATIONAL MEDICAL MANAGEMENT SERVICES
(A DIVISION OF NATIONAL MEDICAL ENTERPRISES, INC.)
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C>
Current assets:
Accounts receivable, less allowance for uncollectible
accounts of $1,316,528................................. $4,731,408
Prepaid expenses and other assets......................... 471,067
----------
Total current assets.............................. 5,202,475
Furniture and equipment, at cost (net of accumulated
depreciation of $195,940)................................. 54,980
----------
Total assets...................................... $5,257,455
=========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 574,705
Accrued compensation and benefits......................... 1,654,919
Other accrued liabilities................................. 787,869
----------
Total current liabilities......................... 3,017,493
Division equity............................................. 2,239,962
----------
Total liabilities and division equity............. $5,257,455
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 69
NATIONAL MEDICAL MANAGEMENT SERVICES
(A DIVISION OF NATIONAL MEDICAL ENTERPRISES, INC.)
STATEMENT OF OPERATIONS AND DIVISION EQUITY
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Management contract revenue................................. $22,175,986
Intercompany interest income................................ 1,378,123
Intercompany revenue........................................ 14,791,542
-----------
Total revenue..................................... 38,345,651
Operating expenses:
Salaries and benefits..................................... 20,149,717
Purchased services........................................ 9,351,229
Operating and administrative.............................. 4,990,394
Intercompany interest expense............................. 91,644
Depreciation.............................................. 21,312
-----------
Total operating expenses.......................... 34,604,296
-----------
Income before income taxes.................................. 3,741,355
Income taxes................................................ 1,395,525
-----------
Net income.................................................. 2,345,830
Change in parent company balances........................... (445,948)
Division equity, beginning of year.......................... 340,080
-----------
Division equity, end of year................................ $ 2,239,962
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 70
NATIONAL MEDICAL MANAGEMENT SERVICES
(A DIVISION OF NATIONAL MEDICAL ENTERPRISES, INC.)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Operating activities:
Net income................................................ $2,345,830
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 21,312
Net changes in current assets and liabilities:
Accounts receivable.................................. (1,306,022)
Prepaid expenses and other assets.................... (228,449)
Accounts payable and accrued expenses................ 223,306
Other accrued liabilities............................ (584,187)
----------
Net cash provided by operating activities......... 471,790
Investing activities:
Purchases of furniture and equipment...................... (25,842)
----------
Net cash used in investing activities..................... (25,842)
Financing activities:
Change in parent company balances......................... (445,948)
----------
Net cash used in financing activities..................... (445,948)
----------
Net change in cash................................ --
Cash at beginning of year................................... --
----------
Cash at end of year......................................... $ --
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 71
NATIONAL MEDICAL MANAGEMENT SERVICES
(A DIVISION OF NATIONAL MEDICAL ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF DIVISION
National Medical Management Services (the Division) provides contract
management and staffing services for the operation and management of
psychiatric, physical rehabilitation and chemical dependency units in general
acute care hospitals and long-term care facilities. These management contracts
are generally for terms ranging from three to five years and often have
automatic renewal provisions.
National Medical Management Services is a division of National Medical
Enterprises, Inc. (the Parent), and therefore, its accounts and results of
operations are included in the consolidated financial statements of the Parent.
The Division's customers are not concentrated in any specific geographic
region, but are concentrated in the health care industry. There are no
significant concentrations of accounts receivable at December 31, 1994.
Management continually monitors and adjusts its reserves and allowances
associated with these receivables.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenues are reported as earned based upon the terms of the management
contracts as services are rendered.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated lives of three to seven years.
ADVERTISING COSTS
The Division expenses all advertising costs as incurred. Advertising costs
included in the statement of operations and Division equity for the year ended
December 31, 1994 are approximately $217,000.
FINANCIAL INSTRUMENTS
Financial instruments consist of accounts receivable and certain current
liabilities. The carrying amounts reported in the balance sheet for these
financial instruments approximate fair value.
INCOME TAXES
Effective as of the first quarter of 1994, the Division adopted Statement
109. The cumulative effect of the change was immaterial to the accompanying
financial statements. The Division is included in the consolidated U. S. federal
income tax return of its Parent. However, the income tax provision of the
Division was calculated as if the Division had filed a separate U. S. federal
income tax return.
F-24
<PAGE> 72
NATIONAL MEDICAL MANAGEMENT SERVICES
(A DIVISION OF NATIONAL MEDICAL ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. RETIREMENT PLAN
The Division participated in a defined contribution 401(k) plan sponsored
by the Parent. The Division made contributions to the plan based on 3% of an
employee's monthly compensation. For the year ended December 31, 1994,
contributions to the plan were approximately $169,000.
4. INCOME TAXES
The provision for income taxes at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Current:
Federal................................................... $1,208,457
State..................................................... 187,068
----------
Total current income taxes........................ $1,395,525
=========
</TABLE>
The difference between the federal statutory rate of 34% and the effective
tax rate is attributable to state income taxes, net of federal income tax
benefits.
Income taxes owed as of December 31, 1994 and paid during 1994 are
reflected in division equity on the balance sheet.
5. RELATED PARTY TRANSACTIONS
The Division's cash collections were maintained in a central pooled cash
concentration account maintained by the Parent. The Division recognizes interest
income on its portion of the cash pool.
Additionally, the Division provides to and receives services from the
Parent and the net balance due to Parent is included in Division equity in the
accompanying balance sheet. The Division recognizes interest expense on any net
balance due to parent.
Approximately 33% of the Division's 1994 management contract and other
revenue was derived from contracts with various affiliated entities and is
included in intercompany revenue on the accompanying statement of operations and
Division equity.
The accompanying statement of operations and Division equity includes
reasonable allocations of corporate costs incurred by the Parent on behalf of
the Division. The allocations by the Parent were based on revenues, number of
employees, or square footage, depending on the specific cost. Principally due to
the use of estimates and allocations, the financial information included herein
may not necessarily reflect the financial position and results of operations of
the Division in the future or what the financial position and results of
operations of the Division would have been had it been a separate, stand-alone
entity during the periods presented. Management does not consider it practicable
to estimate what the results of operations would have been had the Division
operated as a separate, stand-alone entity.
6. SUBSEQUENT EVENT
Effective January 3, 1995, the Parent sold the assets and operations of the
Division to Specialty Healthcare Management, Inc. (Specialty) for cash and notes
payable of $3.95 million and the assumption of current liabilities of
approximately $2.8 million. In addition, the Parent also received warrants as
partial consideration that, if exercised, would provide the Parent with
approximately 15% of Specialty's outstanding common stock. Further, under the
asset sales agreement if Specialty is sold within two years subsequent to the
above purchase date, the Parent is entitled to receive 50% of the net proceeds
of the sale in excess of existing
F-25
<PAGE> 73
NATIONAL MEDICAL MANAGEMENT SERVICES
(A DIVISION OF NATIONAL MEDICAL ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equity. Specialty was incorporated in August 1994 for the purpose of acquiring
the assets and operations of the Division and is effectively owned by the
Division's senior management.
As part of the sales agreement, the Parent will assign to Specialty service
contracts for facilities where such services are currently being provided. The
contracts with facilities owned by the Parent are for a one-year commitment
after the sale is completed.
F-26
<PAGE> 74
APPENDIX A
SHARE EXCHANGE REORGANIZATION AGREEMENT
AMONG
HORIZON MENTAL HEALTH MANAGEMENT, INC.,
HOWARD B. FINKEL,
JOHN HARRISON,
LARRY REIFF,
ARGENTUM CAPITAL PARTNERS, L.P.,
DENISE DAILEY,
KEN DORMAN,
G. PHILLIP WOELLNER, AND
MICHAEL S. MCCARTHY,
AND
SPECIALTY HEALTHCARE MANAGEMENT, INC.,
AS OF
APRIL 25, 1997
<PAGE> 75
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
SHARE EXCHANGE
1.1 Share Exchange.............................................. 1
1.2 Mechanics of Exchange....................................... 1
1.3 Joinder of NME.............................................. 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF EACH SHAREHOLDER
2.1 Authority Relative to This Agreement........................ 2
2.2 Title to Stock.............................................. 2
2.3 Absence of Breach; No Consent............................... 2
2.4 Investment Representations.................................. 3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT SHAREHOLDERS
3.1 Due Organization of Specialty............................... 3
</TABLE>
3.2 Subsidiaries/Investments.................................... 4
3.3 Due Authorization........................................... 4
3.4 Capitalization of Specialty................................. 4
3.5 Licenses/Compliance with Law................................ 4
3.6 Financial Statements........................................ 5
3.7 No Adverse Change........................................... 5
3.8 No Undisclosed Liabilities.................................. 6
3.9 Title to and Condition of Properties........................ 6
3.10 Litigation.................................................. 6
3.11 Real Property Leases........................................ 7
3.12 Intellectual Property....................................... 7
3.13 Contracts................................................... 7
3.14 Employees, Et Cetera........................................ 9
3.15 Employee Benefit Plans...................................... 10
3.16 Receivables................................................. 11
3.17 Accounts Payable............................................ 11
3.18 Broker's and Finder's Fees.................................. 11
3.19 Labor Practices............................................. 11
3.20 Insurance................................................... 11
3.21 Consents.................................................... 11
3.22 Environmental Matters....................................... 11
3.23 Taxes....................................................... 11
3.24 Transactions With Affiliates................................ 13
3.25 Improper Payments........................................... 14
3.26 Pooling of Interests Treatment.............................. 14
3.27 Agreement with Respect to Horizon Proxy Statement........... 14
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HORIZON
4.1 Due Organization of Horizon................................. 14
4.2 Subsidiaries/Investments.................................... 14
4.3 Due Authorization........................................... 15
4.4 Capitalization of Horizon................................... 15
<PAGE> 76
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
4.5 Licenses/Compliance with Law................................ 15
4.6 Financial Statements........................................ 15
4.7 Horizon Disclosure Documents................................ 16
4.8 No Adverse Change........................................... 16
4.9 No Undisclosed Liabilities.................................. 17
4.10 Title to and Condition of Properties........................ 17
4.11 Litigation.................................................. 17
4.12 Intellectual Property....................................... 17
4.13 Contracts................................................... 17
4.14 Employee Benefit Plans...................................... 18
4.15 Broker's and Finder's Fees.................................. 19
4.16 Labor Practices............................................. 19
4.17 Insurance................................................... 19
4.18 Consents.................................................... 19
4.19 Environmental Matters....................................... 19
4.20 Taxes....................................................... 19
4.21 Investment Representations.................................. 20
4.22 Agreement With Respect to Horizon Proxy Statement........... 20
ARTICLE V
CERTAIN AGREEMENTS APPLICABLE PRIOR TO THE CLOSING DATE
5.1 Access and Information...................................... 20
5.2 Horizon Stockholder Authorization........................... 20
5.3 Operation of Businesses; Course of Conduct.................. 21
5.4 Consents.................................................... 23
5.5 Letter from Independent Accountants......................... 23
5.6 Public Communications....................................... 24
5.7 Solicitation of Inquiries................................... 24
5.8 Purchase of Securities...................................... 24
5.9 Cooperation................................................. 24
5.10 Updating of Schedules....................................... 24
5.11 Exercise of NME Warrant..................................... 24
5.12 Preparation of Returns and Payment of Taxes................. 24
5.13 Certification of Non-Foreign Status......................... 25
5.14 Conduct of Business......................................... 25
5.15 Interim Financial Statements................................ 25
ARTICLE VI
CONDITIONS PRECEDENT TO THE SHARE EXCHANGE
6.1 Conditions to Obligations of Both the Shareholders and
Horizon..................................................... 25
6.2 Conditions to Obligations of the Shareholders............... 25
6.3 Conditions to Horizon Obligations........................... 27
ARTICLE VII
CLOSING
7.1 Closing..................................................... 30
7.2 Actions by the Shareholders................................. 30
7.3 Actions by Horizon.......................................... 30
7.4 Net Forecast Adjustment..................................... 31
7.5 Aged Receivables Adjustment................................. 31
7.6 Post-Closing Escrow......................................... 32
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY POST-CLOSING
AGREEMENTS
8.1 Representations and Warranties to Survive................... 32
8.2 Access to Records Following Closing......................... 33
8.3 Tax Matters and Post-Closing Cooperation.................... 33
8.4 Indemnity................................................... 33
8.5 Indemnity Procedures........................................ 35
8.6 Limitations on Indemnification.............................. 35
8.7 Remedies; Default; Notice and Cure.......................... 36
8.8 Pooling of Interest Requirements............................ 36
8.9 Horizon Board Position...................................... 37
8.10 Director and Officer Indemnification........................ 37
ARTICLE IX
NON-COMPETITION
9.1 Covenant Not to Compete; Non-Solicitation................... 37
9.2 Non-Disclosure.............................................. 37
9.3 Nondisparagement............................................ 38
9.4 Reasonableness; Reformation................................. 38
9.5 Remedies for Breach......................................... 38
ARTICLE X
TERMINATION AND ABANDONMENT OF THE SHARE EXCHANGE
10.1 Termination................................................. 39
10.2 Effect of Termination....................................... 39
10.3 Termination Fee............................................. 39
ARTICLE XI
MISCELLANEOUS
11.1 Waiver and Amendment........................................ 39
11.2 Entire Agreement............................................ 39
11.3 Schedules................................................... 40
11.4 Descriptive Headings........................................ 40
11.5 Defined Terms............................................... 40
11.6 No Personal Liability....................................... 40
11.7 Notices..................................................... 40
11.8 Counterparts................................................ 41
11.9 Expenses.................................................... 41
11.10 Assignment.................................................. 41
11.11 Choice of Law............................................... 41
11.12 Invalid Provisions.......................................... 41
11.13 Number and Gender of Words.................................. 41
11.14 Attorney's Fees and Costs................................... 42
LIST OF EXHIBITS
EXHIBIT A -- Share Ownership
EXHIBIT B -- Registration Rights Agreement
EXHIBIT C -- Post-Closing Escrow Agreement
</TABLE>
<PAGE> 78
<TABLE>
<S> <C>
LIST OF SCHEDULES
Schedule 2.3 -- Shareholder Consents, Etc.
Schedule 3.3 -- Specialty Consents, Etc.
Schedule 3.4 -- Specialty Options, Etc.
Schedule 3.5 -- Specialty Licenses/Compliance with Law
Schedule 3.6 -- Specialty Financial Statements
Schedule 3.7 -- Specialty Adverse Changes
Schedule 3.8 -- Specialty Liabilities
Schedule 3.9 -- Specialty Liens
Schedule 3.10 -- Specialty Litigation
Schedule 3.11 -- Specialty Real Property Leases
Schedule 3.12 -- Specialty Intellectual Property
Schedule 3.13 -- Specialty Material Contracts
Schedule 3.14 -- Specialty Employees, Etc.
Schedule 3.15 -- Specialty Employee Benefit Plans
Schedule 3.16 -- Specialty Receivables
Schedule 3.17 -- Specialty Payables
Schedule 3.20 -- Specialty Insurance
Schedule 3.21 -- Specialty Consents
Schedule 3.24 -- Specialty Affiliate Transactions
Schedule 4.2 -- Horizon Subsidiaries
Schedule 4.4 -- Horizon Options
Schedule 4.7 -- Horizon Management Contracts
Schedule 4.8 -- Horizon Adverse Changes
Schedule 4.10 -- Horizon Liens
Schedule 4.11 -- Horizon Litigation
Schedule 4.12 -- Horizon Intellectual Property
Schedule 4.14 -- Horizon Employee Benefit Plans
Schedule 7.4 -- Specialty 1997 Budget Forecast
</TABLE>
<PAGE> 79
SHARE EXCHANGE REORGANIZATION AGREEMENT
This Share Exchange Reorganization Agreement ("Agreement") is made as of
April 25, 1997 (the "Effective Date") by and among Horizon Mental Health
Management, Inc., a Delaware corporation ("Horizon"); Howard B. Finkel, John
Harrison, Larry Reiff, Argentum Capital Partners, L.P., a Delaware limited
partnership, Denise Dailey, Ken Dorman, G. Phillip Woellner, and Michael S.
McCarthy (individually, a "Shareholder" and collectively, the "Shareholders");
and Specialty Healthcare Management, Inc., a Delaware corporation ("Specialty").
WHEREAS, Horizon and the Shareholders propose to enter into a share
exchange transaction (the "Share Exchange") pursuant to which the Shareholders
will exchange, on the terms and conditions set forth herein, all of their shares
of Common Stock, $.01 par value per share, of Specialty (each such share
individually referred to herein as a "Specialty Share" and collectively as the
"Specialty Shares") for unregistered shares of Common Stock, $.01 par value per
share, of Horizon (the "Horizon Stock") with the result that Specialty will
become a wholly-owned subsidiary of Horizon; and
WHEREAS, the Shareholders each own the respective number of Specialty
Shares set forth in Exhibit A and collectively own all the issued and
outstanding capital stock of Specialty on the Effective Date; and
WHEREAS, NME Management Services, Inc., a Delaware Corporation ("NME")
holds that certain Warrant and Registration Rights Agreement (the "NME Warrant")
dated January 3, 1995, pursuant to which NME has the right to acquire 1,215
shares of Common Stock of Specialty; and
WHEREAS, it is a condition precedent to the obligations of Horizon under
this Agreement that NME join as a party to this Agreement, exercise the NME
Warrant immediately prior to the Closing under this Agreement, and exchange the
shares of Common Stock of Specialty acquired upon exercise of the NME Warrant in
the Share Exchange; and
WHEREAS, upon the joinder of NME as a party to this Agreement, NME shall be
considered a "Shareholder" for the purposes of this Agreement and the shares of
Common Stock of Specialty issuable under exercise of the NME Warrant shall be
considered "Specialty Shares" for the purpose of this Agreement; and
WHEREAS, Horizon and the Shareholders wish to effectuate the Share Exchange
as a non-taxable reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), which transaction shall be treated as a
"pooling of interests" under generally accepted accounting principles;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements herein contained, the
parties hereby agree as follows:
ARTICLE I
SHARE EXCHANGE
1.1 Share Exchange. On the Closing Date (as defined in Section 7.1
hereof), all the Shareholders shall sell, transfer and convey to Horizon all the
Specialty Shares owned by the Shareholders in exchange for an aggregate total of
One Million Six Hundred Fifty Thousand (1,650,000) shares of Horizon Stock;
subject to adjustment, however, pursuant to the provisions of Section 7.4 and
Section 7.5 of this Agreement. Each Shareholder shall be entitled to receive a
pro rata portion of the shares of Horizon Stock to be issued share exchange
based on the percentage of the total number of the Specialty Shares owned by all
the Shareholders that are owned by the Shareholder as set forth on Exhibit A
under the column labeled "Percentage Ownership of Specialty."
1.2 Mechanics of Exchange. Horizon shall act as the exchange agent for the
purposes of making the issuance and exchange of shares of Horizon Stock for
Specialty Shares. Upon the surrender on the Closing Date of the certificate
which on the Closing Date represents the Specialty Shares owned by a
Shareholder, Horizon shall distribute to the Shareholder in whose name such
certificate shall have been issued a certificate
1
<PAGE> 80
or certificates representing the number of shares of Horizon Stock to be issued
in respect of the Specialty Shares represented by the stock certificates so
surrendered by such Shareholder.
1.3 Joinder of NME. It shall be a condition precedent to the obligations
of Horizon under this Agreement that NME agrees in writing to be a party to this
Agreement. Promptly after the Effective Date, the Shareholders shall communicate
with NME and request that it became a party to this Agreement. In the event that
NME has not agreed in writing to be a party to this Agreement within twenty (20)
days after the Effective Date, then Horizon shall have the right exercisable in
its sole discretion to terminate this Agreement by written notice to the
Shareholders effective immediately at any time on or prior to the Closing Date.
However, in the event that NME agrees in writing to be a party to this Agreement
after such twenty (20) day period but before Horizon has given such notice of
termination, then Horizon shall not have such right of termination after it
receives written notice of the joinder of NME. As used in this Agreement,
including, without limitation, this Article I, the term "Shareholder" shall be
deemed to include NME and the term "Specialty Shares" shall be deemed to include
the shares of Common Stock of Specialty issuable upon exercise of the NME
Warrant.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF EACH SHAREHOLDER
Each Shareholder, severally and not jointly, represents and warrants to
Horizon that, as of the Effective Date and as of the Closing Date:
2.1 Authority Relative to This Agreement. This Agreement has been duly and
validly executed and delivered by the Shareholder and constitutes a valid and
binding agreement of the Shareholder enforceable in accordance with its terms.
The other agreements to be executed and delivered by the Shareholder pursuant to
this Agreement will be valid and binding agreements of the Shareholder
enforceable in accordance with their respective terms when so executed and
delivered by the Shareholder. With respect to each Shareholder that is an entity
and not an individual, each such entity has all requisite power and authority to
enter into this Agreement, the execution, delivery and performance of this
Agreement by such entity has been duly authorized by all requisite action on the
part of such entity, and this Agreement has been duly executed by a duly
authorized officer or representative of such entity.
2.2 Title to Stock.
(a) Shareholders Other Than NME. Each Shareholder (other than NME) is
the unconditional sole legal, beneficial, record and equitable owner of the
Specialty Shares shown as owned by such Shareholder on Exhibit A, free and
clear of any and all liens, claims, options, charges, pledges, security
interests, voting agreements or trusts, encumbrances or other restrictions
or interests of any kind or nature whatsoever (collectively, "Claims"),
except for that certain Stock Agreement, dated January 1, 1995, by and
among the Shareholders (other than NME), as amended (the "Stock
Agreement"). All of such Specialty Shares are validly issued, fully paid
and nonassessable. At the Closing, each Shareholder (other than NME) will
convey to Horizon valid and marketable title to the Specialty Shares owned
by such Shareholder as set forth on Exhibit A, free and clear of any and
all Claims.
(b) NME. NME is the unconditional sole legal, beneficial, record and
equitable owner of the NME Warrant, free and clear of any and all Claims.
Upon exercise of the NME Warrant and payment by NME of an exercise price of
$0.0823 per share, NME shall receive 1,215 shares of Common Stock of
Specialty and, at the Closing, NME will convey to Horizon valid and
marketable title to the Specialty Shares owned by NME, free and clear of
any and all Claims.
2.3 Absence of Breach; No Consent. Except as disclosed on Schedule 2.3,
the execution, delivery, and performance of this Agreement and the other
agreements to be executed and delivered pursuant to this Agreement by the
Shareholder does not and will not: (i) contravene any order, writ, judgment,
injunction, decree, determination, or award of any court or other authority
which affects or binds the Shareholder or the Specialty Shares owned by such
Shareholder, (ii) conflict with or result in a breach of or default under any
2
<PAGE> 81
indenture, loan or credit agreement or any other agreement or instrument to
which the Shareholder is a party or by which the Shareholder or the Specialty
Shares are bound, or (iii) require the authorization, consent, approval or
license of any third party or entity.
2.4 Investment Representations.
(a) This Agreement is made with each Shareholder in reliance upon such
Shareholder's representation to Horizon, which by such Shareholder's
execution of this Agreement such Shareholder hereby confirms, that the
Horizon Stock to be received by such Shareholder pursuant to the Share
Exchange will be acquired for investment for such Shareholder's own
account, and that, except as expressly contemplated by this Agreement, such
Shareholder has no present intention of selling, granting any participation
in, or otherwise distributing the same. Except as expressly contemplated by
this Agreement, such Shareholder does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of
the Horizon Stock.
(b) The Shareholder has had an opportunity to ask questions of and
receive answers from Horizon regarding the business, properties, prospects,
and financial condition of Horizon and to obtain such additional
information concerning Horizon as such Shareholder desired in connection
with its decision to enter into this Agreement. The foregoing, however,
does not, and shall not be construed to, expand or modify the
representations and warranties of Horizon in Article IV of this Agreement.
(c) Such Shareholder individually, or if the Shareholder is not an
individual, the person making the decision for the Shareholder to purchase
the Shares, is a sophisticated investor, is experienced in evaluating and
investing in securities of companies in the health care industry and
acknowledges that such Shareholder is able to bear the economic risk of
such Shareholder's investment in the Horizon Stock, and has such knowledge
and experience in financial and business matters that such Shareholder is
capable of evaluating the merits and risks of the investment in the Horizon
Stock. If other than an individual, Shareholder also represents such
Shareholder has not been organized for the purpose of acquiring the Horizon
Stock.
(d) Each Shareholder agrees that the certificates representing the
Horizon Stock may bear legends to the effect that such shares have not been
registered under the Securities Act of 1933, as amended (the "1933 Act") or
any state securities laws, and that in the absence of an effective
registration statement covering the Horizon Stock or an available exemption
from registration under the 1933 Act and applicable state securities laws,
the Horizon Stock must be held indefinitely. In particular, each
Shareholder is aware that the Horizon Stock may not be sold pursuant to
Rule 144 promulgated under the 1933 Act unless all of the conditions of
that Rule are met. Each Shareholder agrees that it shall not take any
action hereafter that would cause Horizon to lose the exemption from
registration under the 1933 Act and applicable state securities laws under
which Horizon has offered and issued the Horizon Stock to the Shareholders
pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE MANAGEMENT SHAREHOLDERS
In addition to the representations and warranties made in Article II,
Howard B. Finkel, John Harrison and Larry Reiff (collectively, the "Management
Shareholders"), jointly and severally, represent and warrant to Horizon that, as
of the Effective Date and as of the Closing Date:
3.1 Due Organization of Specialty. Specialty is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with all requisite corporate power and authority to conduct its
business operations as being conducted on the Effective Date. Specialty is duly
qualified and in good standing as a foreign corporation authorized to do
business in each jurisdiction where the failure to be so authorized would have a
material adverse effect on the business (financial or otherwise) or operations
of
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Specialty. The Shareholders have delivered to Horizon complete and correct
copies of the certificate of incorporation and bylaws of Specialty as amended to
and in effect on the Effective Date. Specialty is not in violation of any term
or provision of its certificate of incorporation or bylaws.
3.2 Subsidiaries/Investments. Except for Psychiatric Management Services
Company, a Delaware corporation ("PMSC"), Specialty has no subsidiaries, whether
direct or indirect. Except for PMSC, Specialty has no equity interest or
investment in, and does not possesses any other right or obligation to purchase
any equity or other investment in, and is not a partner of or joint venturer
with, any other person or entity.
3.3 Due Authorization. Except as disclosed on Schedule 3.3 hereto, the
execution and delivery of this Agreement and the performance of the transactions
contemplated by this Agreement and all other instruments, agreements,
certificates and documents contemplated hereby to which any of the Shareholders
or Specialty is or will be a party does not, on the Effective Date, and will
not, on the Closing Date, (i) violate any decree or judgment of any court or
governmental authority which may be applicable to Specialty; (ii) to the
knowledge of the Shareholders, violate any law, rule or regulation; (iii)
violate or conflict with, or result in a breach of, or constitute a default (or
an event which, with or without notice or lapse of time or both, would
constitute a default) under, or permit cancellation of, or result in the
creation of any encumbrance upon any of the assets of Specialty under any of the
terms, conditions, or provisions of, any contract, lease, sales order, purchase
order, indenture, mortgage, note, bond, instrument, license or other agreement
to which Specialty is a party, or by which Specialty or its assets is bound;
(iv) permit the acceleration of the maturity of any indebtedness of Specialty;
or (v) violate or conflict with any provision of the certificate of
incorporation or bylaws of Specialty. The execution and delivery of this
Agreement by Specialty and the performance of this Agreement by Specialty have
been duly authorized by all requisite corporate action of Specialty. This
Agreement has been duly and validly executed and delivered by Specialty and
constitutes a valid and binding agreement of Specialty enforceable in accordance
with its terms.
3.4 Capitalization of Specialty. The authorized capital stock of Specialty
consists of Ten Thousand (10,000) shares of Common Stock, $.01 par value per
share, of which 8,279 shares are validly issued and outstanding. All such
outstanding shares of capital stock of Specialty are fully paid and
nonassessable. All of the issued and outstanding shares of capital stock of
Specialty are owned beneficially and of record by the Shareholders as set forth
on Exhibit A. Each Shareholder owns beneficially and of record the shares of
capital stock of Specialty set opposite the name of such Shareholder in Exhibit
A. Specialty has provided to Horizon a correct and complete copy of the stock
registry of Specialty listing all shareholders of Specialty since its inception
and the outstanding share certificates and total number of shares issued to each
stockholder of Specialty. Specialty has no other capital stock authorized for
issuance and has no treasury shares, except for 37 shares shown on the stock
register records of Specialty as redeemed from a former shareholder. Except for
such 37 shares of treasury stock, Specialty has not purchased any shares of its
capital stock from a Shareholder within the two (2) year period prior to the
Effective Date. Except as set forth in Schedule 3.4, there are no outstanding
options, warrants, convertible instruments, or other rights, agreements, or
commitments to issue or acquire any shares of common stock or any other security
constituting, or convertible or exchangeable into, capital stock of Specialty.
The NME Warrant is exercisable for 1,215 shares of Specialty Shares. Except as
set forth in Schedule 3.4, since the date of Specialty Balance Sheet (as defined
in Section 3.6 below), no shares of Specialty's capital stock, no options,
warrants, or other rights, agreements, or commitments (contingent or otherwise)
obligating Specialty to issue shares of capital stock of Specialty, and no other
securities or instruments convertible or exchangeable into shares of capital
stock of Specialty, have been executed or issued by Specialty. Except for
certain preemptive and registration rights granted to Michael S. McCarthy
pursuant to that certain Agreement and Plan of Merger dated April 1, 1996, by
and among Specialty, The Parkside Company and Michael S. McCarthy (the "Parkside
Agreement") and to NME pursuant to the NME Warrant, Specialty has not granted
and is not a party to any agreement granting preemptive rights, rights of first
refusal, or registration rights with respect to its outstanding capital stock or
any capital stock of Specialty to be issued in the future. Specialty is not
bound by any exclusive agency or indemnity agreement applicable to the issuance
of shares of its capital stock after the Effective Date.
3.5 Licenses/Compliance with Law. Specialty has the lawful authority and
all federal, state or local governmental authorizations, certificates of
authority, licenses or permits necessary for or required to conduct
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its business operations as such are presently being conducted and the absence of
which would have a material adverse effect on Specialty. There are no pending
or, to the knowledge of the Shareholders, threatened legal, administrative,
arbitration or other actions, notices, or proceedings nor any pending or, to the
knowledge of the Shareholders, threatened governmental investigations by any
federal, state or local government or any subdivision thereof or by any public
or private group which assert or allege any violation of or non-compliance with
any governmental requirements or which would have the effect of limiting,
prohibiting or changing the business operations of Specialty as presently
conducted. Specialty has made all filings with governmental agencies required
for the conduct of its business operations to the extent that the failure to
make any such filing would have a material adverse effect on Specialty. Except
as set forth in Schedule 3.5, there are no judgments, consent decrees or
injunctions of any court, governmental department, commission, agency or
instrumentality by which Specialty is bound or to which Specialty is subject.
Specialty is not subject to and has not received any request for information,
notice, demand letter, administrative inquiry or formal or informal complaint or
claim from any governmental department, commission, agency or instrumentality
except for non-material notices or requests for information received in the
ordinary course of business. To the knowledge of the Management Shareholders,
neither Specialty's operations nor any of the assets owned, leased, occupied or
used by Specialty in the operation of its business materially violates or fails
to comply in any material respect with any applicable federal, state or local
codes, laws, rules or regulation, and Specialty has not received any notices
alleging any such violation or non-compliance.
3.6 Financial Statements. Specialty has delivered to Horizon a copy of (i)
audited financial statements of National Management Services Company, a division
of National Medical Enterprises, Inc. as of December 31, 1993 and 1994
consisting in each case of a balance sheet of such respective dates, and the
consolidated related statements of income and cash flows for the twelve (12)
month period then ended, (ii) audited consolidated financial statements of
Specialty as of December 31, 1995 and 1996 consisting in each case of a
consolidated balance sheet at such respective dates, and the consolidated
related statements of income, changes in stockholders' equity and cash flows for
the applicable twelve (12) month period then ended and (iii) unaudited
consolidated financial statements of Specialty as of March 31, 1997 (the
"Specialty Balance Sheet Date") consisting of a consolidated balance sheet of
Specialty at such date (the "Specialty Balance Sheet") and the related
consolidated statements of income for the applicable month and year-to-date
period then ended. Complete and accurate copies of all such financial statements
are included as Schedule 3.6 (the "Specialty Financial Statements"). The
Specialty Financial Statements present fairly in all material respects the
financial position of Specialty and the results of the operations, changes in
stockholders' equity and cash flows of Specialty, as of the respective dates
thereof and for the respective periods covered thereby, in conformity with
generally accepted accounting principles ("GAAP"). Except as set forth in
Specialty Balance Sheet included in the Specialty Financial Statements, as of
the Specialty Balance Sheet Date, there were no liabilities, debts, claims or
obligations, whether accrued, absolute, contingent or otherwise, whether due or
to become due, which are required by GAAP to be set forth in a balance sheet of
Specialty which have not been so set forth in the Specialty Balance Sheet. No
dividends or distributions with respect to the capital stock of Specialty had
been declared but not paid prior to the Specialty Balance Sheet Date. The
Specialty Financial Statements were prepared from the books and records of
Specialty. At the Specialty Balance Sheet Date, Specialty owned each of the
assets included in Specialty Balance Sheet. From the Effective Date through the
Closing Date, Specialty will continue to prepare monthly and year-to-date
unaudited financial statements on the same basis as the Specialty Financial
Statements and will promptly deliver the same to Horizon. The foregoing
representations will be applicable to all such monthly unaudited financial
statements so prepared and delivered; provided, however, that such unaudited
financial statements shall be subject to normal year-end adjustments, none of
which will be material.
3.7 No Adverse Change. Except as set forth on Schedule 3.7, since the
Specialty Balance Sheet Date, the business of Specialty has been conducted only
in the ordinary and usual course and there has not been (i) any material adverse
change in the financial condition, business, properties, assets, or results of
operations of Specialty (financial or otherwise) exclusive of any general
economic factors affecting the health care industry in general; (ii) any
material loss or damage (whether or not covered by insurance) to any of the
assets of Specialty which materially affects or impairs the ability of Specialty
to conduct its business as previously conducted or any other event or condition
of any character which has materially and adversely
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affected the business or operations of Specialty; (iii) the attaching, placing
or granting of, or the agreement to attach, place or grant, any encumbrance on
any of the assets of Specialty; (iv) any sale or transfer of any material asset
of Specialty; (v) any material changes in the terms of, or defaults under, any
material contract of Specialty; (vi) any material change in the accounting
systems, policies or practices of Specialty; (vii) any waiver by or on behalf of
Specialty of any rights which have any material value; (viii) no taking under
condemnation or right of eminent domain of any of the assets of Specialty; (ix)
any entry into or termination of any management contract or any other material
commitment, contract, agreement, or transaction (including, without limitation,
any material borrowing or capital expenditure or sale or other disposition of
any material assets) by Specialty; (x) any redemption, repurchase, or other
acquisition of any of its capital stock by Specialty; (xi) any issuance of
capital stock of Specialty or of securities convertible into or rights to
acquire any such capital stock; (xii) any dividend or distribution declared, set
aside or paid on capital stock of Specialty; (xiii) any transfer or right
granted by Specialty of or under any material lease, license, agreement, patent,
trademark, trade name, service mark or copyright; (xiv) any mortgage, pledge, or
imposition of any lien or other encumbrance on any material asset of Specialty,
or any agreement relating to or contemplating any of the foregoing not in the
ordinary and usual course of business; or (xv) any default or breach by
Specialty in any material respect under any material contract, license, or
permit. Since the Specialty Balance Sheet Date, no changes have been made in (i)
employee compensation levels, (ii) the manner in which employees of Specialty
are compensated or (iii) supplemental benefits provided to any employees. Except
as set forth in Schedule 3.7, to the knowledge of the Management Shareholders,
there has been no material default under, or violation or breach of, any
material contract or agreement of Specialty in effect on the Effective Date
which has been waived, either permanently or temporarily, by the other party to
such contract.
3.8 No Undisclosed Liabilities. True and correct copies of all notes,
agreements or other documents evidencing the outstanding indebtedness of
Specialty (as such term is determined pursuant to GAAP), as amended to and in
effect on the Effective Date, have been delivered to Horizon by Specialty.
Specialty has no material indebtedness or other liabilities which are not
adequately disclosed and reflected or reserved against on the Specialty Balance
Sheet, except liabilities incurred since the Specialty Balance Sheet Date in the
ordinary course of business consistent with past practice which, in the
aggregate, would not have a material adverse effect on the business (financial
or otherwise), assets or operations of Specialty. Schedule 3.8 hereto sets forth
each liability of Specialty in an amount in excess of $10,000 and each person to
whom the aggregate amount of liabilities owed to such person by Specialty
exceeds $10,000.
3.9 Title to and Condition of Properties. Except as set forth in Schedule
3.9, Specialty has good, marketable, and insurable title, or valid, effective
and continuing leasehold rights in the case of leased property, to all of the
assets reflected on the Specialty Balance Sheet and all personal property owned
or leased by it or used by it in the conduct of its business in such a manner as
to create the appearance or reasonable expectation that the same is owned or
leased by it, free and clear of all liens, security interests, restrictions,
claims, encumbrances, and charges of any kind whatsoever. The Management
Shareholders do not know of any potential action or assertion of rights,
including condemnation, by any party, governmental or other, and no proceedings
with respect thereto have been instituted of which any Management Shareholder or
Specialty has notice, that would materially affect the ability of Specialty to
utilize each of such assets in its business which are material to such business.
Specialty has not received any notices of default or other violations from any
landlord regarding any properties leased by Specialty. The assets now owned by
Specialty constitute all assets reasonably necessary to enable Horizon to permit
the business and operations of Specialty to be conducted on substantially the
same terms as such business has been conducted historically and is being
conducted on the Effective Date. To the knowledge of the Management
Shareholders, except for violations which will not have a material adverse
effect on the business of Specialty, none of the assets owned, leased or used by
Specialty in the operation of its business materially violates or fails to
comply in any material respect with any applicable federal, state or local
health, fire, environmental, safety, zoning, building or other codes, laws,
rules or regulations and Specialty has not received any notice of an alleged
violation thereof.
3.10 Litigation. Except as set forth on Schedule 3.10 hereto, (i) no
material investigation or review by any governmental entity with respect to
Specialty is pending or, to the knowledge of the Management Shareholders,
threatened, nor has any governmental entity indicated to Specialty an intention
to conduct the
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same; and (ii) there is no action, suit, or administrative, condemnation,
arbitration or other proceeding (including proceedings concerning labor disputes
or grievances or union recognition) pending or, to the knowledge of the
Management Shareholders, threatened against or affecting Specialty to which
Specialty is a party, at law or in equity, before any federal, state, or
municipal court or other governmental department, commission, board, bureau,
agency, or instrumentality. Specialty is not now, and has not been, a party to
any injunction, order or decree restricting the method or geographic area under
which Specialty may conduct business operations or the marketing of any of its
products or services or the product or services it may sell.
3.11 Real Property Leases. Schedule 3.11 lists all leases of real property
to which Specialty is a party (the "Real Property Leases"). Accurate and
complete copies of the Real Property Leases, as amended to the Effective Date,
have been made available or delivered to Horizon. Specialty has not received any
notices that the land, buildings, facilities or other structures and
improvements subject to the Real Property Leases are not in compliance with any
applicable zoning, environmental or health laws and regulations or any other
similar law, statute, regulation or ordinance. Specialty is in peaceful and
undisturbed possession of the property subject to the Real Property Leases. To
the knowledge of the Management Shareholders, all covenants or other
restrictions (if any) to which any of the property leased to Specialty pursuant
to the Real Property Leases are subject are being properly performed and
observed in all material respects by Specialty, and Specialty has not received
any notice of violation (or claimed violation) thereof which has not been
resolved. Specialty has delivered to Horizon true, correct and complete copies
of all reports or audits of any engineers, environmental consultants or other
consultants in the possession of Specialty relating to any of premises subject
to the Real Property Leases. There is no pending proceeding or governmental
action, and Specialty has not received notice of any threatened proceeding or
governmental action, to condemn or take by the power of eminent domain (or to
purchase in lieu thereof) all or any part of the property subject to the Real
Property Leases which is material to the operations of Specialty as presently
conducted. Specialty does not own any real property.
3.12 Intellectual Property. Schedule 3.12 is an accurate and complete list
of all copyrights, trade names, trademarks, service marks or other intellectual
property that Specialty uses in its business operations. Except as disclosed on
Schedule 3.12, Specialty has no United States or foreign patents, patent
applications, patent licenses, trademarks or service mark registrations (and
applications therefor), and has no copyrights and copyright registrations (and
applications therefor), trade secrets, inventions, processes, designs, know-how
and formula which are owned or licensed for use by Specialty and utilized by
Specialty in the business operations of Specialty as presently conducted. There
is no adverse claim of infringement against Specialty, or to the knowledge of
the Management Shareholders, any threatened litigation or claim of infringement.
To the knowledge of the Management Shareholders, Specialty does not utilize any
intellectual property or proprietary trade secret information which infringes
any trademark, trade name, service mark, copyright or patent of another, and
Specialty has not received any notice contesting its right to use any trade
name, intellectual property or proprietary trade secret information now used by
it in connection with its business operations. Specialty has not granted any
license to a third party in respect of any of its intellectual property.
3.13 Contracts.
(a) Material Contracts. Schedule 3.13 lists all material contracts or
agreements of the following types to which Specialty is a party or by which
Specialty is bound:
(i) any management or other contract pursuant to which Specialty
owns, manages, develops or operates mental health or rehabilitation or
chemical dependency treatment units or programs on behalf of general
acute care hospitals or any other person or entity (the "Specialty
Management Contracts") and the expiration date of each respective
Specialty Management Contract;
(ii) any contract or agreement with a physician, psychiatrist,
psychologist or other health care provider or any partnership or
professional association or corporation owned by physicians,
psychiatrists, psychologists or other health care providers;
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(iii) any contract or agreement which is not terminable upon thirty
(30) days or less notice or which obligates Specialty to the payment of
more than $10,000 including, without limitation, loan agreements;
(iv) any contract or agreement for the maintenance, purchase or
sale of equipment or capital assets having a value in excess of $10,000;
(v) any power of attorney (other than routine powers given to
governmental officials authorizing service of process);
(vi) any lease of personal property;
(vii) any guaranty, suretyship agreement or other agreement
relating to any contingent liability.
(viii) any contract with an independent agent or broker acting on
behalf of Specialty;
(ix) any contract or agreement with an independent consultant;
(x) any contract or agreement restricting the method by which
Specialty conducts its business or the marketing of any of its products
or services; and
(x) any contract or agreement between Specialty and any of the
shareholders or other affiliates of Specialty including, without
limitation, affiliates of the shareholders of Specialty.
(b) Copies/Status of Material Contracts. True, complete and correct
copies of all contracts listed in Schedule 3.13 have been delivered or made
available to Horizon. Except to the extent disclosed on Schedule 3.13 (i)
all of the contracts listed on such Schedule 3.13 are in full force and
effect, (ii) Specialty has not received any notice of cancellation with
respect to any such contract or been advised that the other party thereto
intends to cancel any such agreement, other than the Specialty Management
Contracts with Los Gatos Hospital and St. Elizabeth Hospital, (iii) there
are no material outstanding disputes under any of such contracts, (iv) each
such contract is with an unrelated third party entered into on an
arms-length basis in the ordinary course of business, (v) there are no
material defaults under any of such contracts or the occurrence of any act
or omission under any of such contracts which with the passage of time or
the giving of notice would constitute a material default, (vi) to the
knowledge of the Management Shareholders, there has been no material breach
or violation of, or default under, any of such contract which has been
waived, either permanently or temporarily, by the other party to such
contract, (vii) there are no verbal amendments, modifications or other
understandings relating to such contracts which are legally binding on the
parties thereto and are material, and (viii) to the knowledge of the
Management Shareholders, Specialty has no obligation that has accrued to
refund all or any portion of the fees that have been paid under any
Specialty Management Contracts. With respect to the Specialty Management
Contracts at Los Gatos Hospital and St. Elizabeth Hospital, Specialty has
received notices of terminations but is negotiating renewals or extensions
of such contracts and believes that such contracts will not be terminated.
For the purposes of Section 7.4 of this Agreement, in the event Specialty
is unsuccessful in renewing or extending either or both such contracts
prior to the Closing Date or either or both of such contracts terminates
prior to the Closing Date, such contract shall be considered to have
terminated after the Effective Date even though notice of termination was
given prior to the Effective Date.
(c) Partial Hospitalization Management Contracts. With respect to the
Management Contracts that relate to partial hospitalization (outpatient)
treatment programs, (i) except as set forth in Schedule 3.13, no hospital
that is the contracting party to such Specialty Management Contract has or
will have the right to terminate such Specialty Management Contract or to
assert a breach or violation of such Specialty Management Contract and (ii)
except as set forth in Schedule 3.13, Specialty has not received any notice
asserting a claim that it has any obligation or liability that has accrued
to refund any fees paid under such Specialty Management Contract, in either
case as a result of the denial of third party reimbursement (governmental
or otherwise) to such hospital of the fees charged to patients of such
partial hospitalization programs relating to treatment provided on or prior
to the Closing Date.
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(d) Newport Bay Hospital Management Contract. With respect to the
Specialty Management Contract constituting that certain contract with
Beacon Healthcare Services, Inc. ("Beacon") d/b/a Newport Bay Hospital (the
"Newport Contract"), (i) attached as a part of Schedule 3.13 is a true,
complete and correct copy of the Newport Contract, (ii) there are no other
agreements or understandings of any kind relating to or arising out of the
Newport Contract between Specialty or any of its shareholders, directors,
officers, employees or affiliates and Beacon or any other third party,
(iii) there are no agreements or understandings of any kind, other than the
Newport Contract, by and between Specialty and/or any shareholders,
directors, officers, employees or affiliates of Specialty, on the one hand,
and Beacon and/or any shareholders, directors, officers, employees or
affiliates of Beacon, on the other hand, of any kind or nature whatsoever,
(iv) there have been no payments, transactions, agreements or
understandings of any kind by Specialty and/or any of its shareholders,
directors, officers, employees or affiliates relating to the Newport
Contract in any respect which would constitute a violation of federal or
state law specifically including, without limitation, any transactions that
would constitute fraud or abuse under Medicare, Medicaid or other similar
laws, and the rules and regulations promulgated thereunder, (v) the amount
of $4,483,600 is believed to be, and is claimed by, Specialty to be due and
owing by Beacon under the Newport Contract on the Effective Date, such
amount has been disputed by Beacon, and such amount arises out of services
performed by Specialty under the Newport Contract, (vi) Specialty has not
waived or released any of its rights or claims under the Newport Contract,
(vii) Specialty has not paid or refunded all or any portion of its fees
under the Newport Contract to Beacon or any third party, and there are no
agreements or understandings of any kind by which Specialty has agreed to
pay or refund all or any portion of its fees under the Newport Contract to
Beacon or any third party, (viii) there are no agreements or understandings
of any kind whatsoever by which Specialty has agreed to settle or
compromise any of its rights or claims under the Newport contract, (ix)
there are no agreements or understandings or transactions by which
Specialty, directly or indirectly, has paid or given any other
consideration of any kind or value to Beacon or any third party in respect
or because of the Newport Contract and the fees paid thereunder, and (x)
neither Specialty nor any shareholder, director, officer, employee or
affiliate of Specialty owns or holds, directly or indirectly, any ownership
or any other interest in Beacon.
3.14 Employees, Et Cetera. Schedule 3.14 hereto lists in accurate and
complete detail all employees of Specialty as of the Effective Date, their job
titles, annual rates of compensation, accrued vacation, holiday and sick leave
as of the most recent regular payroll date of Specialty immediately preceding
the Effective Date, other fringe benefits, if any, a description of any
severance pay arrangements, if any, and the amounts payable with respect to such
accrued vacation, holiday and sick leave as of the most recent payroll date of
Specialty immediately preceding the Effective Date and the rate at which such
vacation, holiday and sick leave will accrue after the Effective Date. Except as
shown on Schedule 3.14, Specialty is not bound by any written contract of
employment with any of its employees and all oral employment contracts are
terminable at will, subject to applicable law, or by any consulting or similar
agreements. Except as set forth in Schedule 3.14, Specialty is not a party to
any employment or other agreement, whether written or oral, pursuant to which
Specialty has agreed to make a loan to, or guarantee any loan of, any employee
or relating to any bonus, deferred compensation, severance pay or similar plan,
agreement, arrangement or understanding. Except as listed on Schedule 3.14 or
Schedule 3.15 hereof, Specialty has no Welfare Plan (as defined in Section 3(1)
of The Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
no Pension Plan (as defined in Section 3(2) of ERISA), nor any other type of
pension, profit sharing, deferred compensation, retirement, stock option, bonus,
severance, medical, dental, life insurance, accident, or other employee benefit
or compensation plan, agreement, arrangement, practice or policy with respect to
employees. Specialty has complied with all requirements of Sections 6001 through
6008 of ERISA and Section 4980B of the Internal Revenue Code of 1986, as amended
(the "Code") with respect to itself and its employees. Specialty is not bound,
and following the Closing will not be bound, by any express or implied contract
or agreement to employ, directly or as a consultant or otherwise, any person for
any specific period of time or until any specific age except as specified in the
written agreements identified in Schedule 3.14.
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3.15 Employee Benefit Plans. Except as disclosed in Schedule 3.15:
(a) Specialty does not maintain or contribute to, and has not in the
past maintained or contributed to, any Pension Plan or Welfare Plan, nor is
Specialty presently, or has it ever been, a participating employer in any
Multiemployer Plan (as defined in ERISA Section 3(37) or Section 414(f) of
the Code).
(b) With respect to each Pension Plan and each Welfare Plan listed on
Schedule 3.15, to the knowledge of the Management Shareholders: (i) there
is no fact, including, without limitation, any reportable event, that
exists that would constitute grounds for termination of such plan by The
Pension Benefit Guaranty Corporation ("PBGC") or for the appointment by the
appropriate United States District Court of a trustee to administer such
plan, in each case as contemplated by ERISA; (ii) neither Specialty nor any
subsidiary nor any fiduciary, trustee, or administrator of any such Pension
Plan or Welfare Plan, has engaged in a prohibited transaction that would
subject Specialty to any material tax or any material penalty imposed by
ERISA or the Code; (iii) Specialty has not incurred any material liability
to the PBGC (other than for payment of premiums); (iv) Specialty has
contributed all amounts thereto it is required to contribute under the
terms of the plan in question and applicable law, and there is no
accumulated funding deficiency with respect to any such Pension Plan,
whether or not waived, other than routine, non-contested claims for
benefits. There is not pending or, to the knowledge of the Management
Shareholders, threatened any claim by or on behalf of or against any
Pension Plan or Welfare Plan, by any employee or former employee covered or
previously covered under any Pension Plan or Welfare Plan, or otherwise
involving any Pension Plan or Welfare Plan.
(c) There has been no termination of any Pension Plan or Welfare Plan
by Specialty during the five-year period prior to the Effective Date.
(d) Neither the Management Shareholders nor Specialty have any
knowledge of any material liability being incurred under Title IV of ERISA
by Specialty with respect to any Pension Plan maintained by a trade or
business (whether or not incorporated) which is under common control with,
or part of a controlled group of corporations with, Specialty, within the
meaning of Sections 414(b) or (c) of the Code.
(e) No Welfare Plan listed on Schedule 3.15 is funded with a trust or
other funding vehicle, other than insurance policies.
(f) Each Welfare Plan, Pension Plan, and any other type of pension,
profit sharing, deferred compensation, retirement, stock option, bonus,
severance, medical, dental, life insurance, accident, or other employee
benefit or compensation plan, agreement, arrangement, practice, or policy
with respect to employees maintained by or contributed to by Specialty is
maintained, administered, and operated in accordance with all applicable
laws, including but not limited to, ERISA and the Code.
(g) Each Pension Plan listed on Schedule 3.15 which is intended to be
qualified under Section 401(a) of the Code, has received a favorable
determination letter from the Internal Revenue Service (the "Service") as
to the qualification under the Code of each such Pension Plan as amended to
comply with the Tax Reform Act of 1986 and all applicable, subsequent
legislation, and, to the knowledge of the Shareholders, no event has
occurred since the date of such favorable determination letter that would
adversely affect such qualification.
(h) Except as expressly contemplated by this Agreement or as disclosed
on Schedule 3.15, no bonus, severance pay, or any other employee benefit
under any Welfare Plan, Pension Plan, or any other type of pension, profit
sharing, deferred compensation, retirement, stock option, bonus, severance,
or other employee benefit or compensation plan, agreement, arrangement,
practice, or policy with respect to employees maintained by or contributed
to by Specialty is payable or exercisable as a result of the transaction
contemplated by this Agreement, and the payment, exercise, or vesting of
any such bonus, severance pay, or employee benefit will not be accelerated
or otherwise enhanced by such transaction.
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True, correct and complete copies of each Pension Plan and Welfare Plan listed
on Schedule 3.15 as amended to and in effect on the date hereof; any agreements
entered into in connection with each such Pension Plan and Welfare Plan; the
most recent annual report filed with the Service for each such Pension Plan and
Welfare Plan; the most recent actuarial report, if any, for each such Pension
Plan and Welfare Plan; the most recent summary plan description, together with
each summary of material modifications; and any other communication generally
disseminated to employees or former employees of Specialty and describing
benefits provided under each such Pension Plan and Welfare Plan, have been
delivered or made available to Horizon.
3.16 Receivables. All accounts receivable, notes receivable and other
receivables (the "Receivables") of Specialty whether or not reflected in
Specialty Balance Sheet, represent transactions in the ordinary course of
business, except for that certain promissory note owed by John Harrison to
Specialty and, except as disclosed on Schedule 3.16, are current and collectible
net of any reserves therefor shown on Specialty Balance Sheet (which reserves
are adequate and were calculated consistent with past practice). An aged
accounts receivable report of Specialty as of March 31, 1997 has been delivered
or made available to Horizon.
3.17 Accounts Payable. The accounts payable reflected on Specialty Balance
Sheet and those reflected on the books of Specialty at the time of the Closing
will reflect all material amounts owed by Specialty in respect of trade accounts
due and other payables required by GAAP to be identified on such Specialty
Balance Sheet or in the books of Specialty. Except as set forth on Schedule
3.17, no account payable of Specialty is past due or otherwise in default by
Specialty.
3.18 Broker's and Finder's Fees. Except for a fee payable by Specialty to
Argentum Group, a New York general partnership, no agent, broker, employee,
officer, stockholder or other person or entity acting on behalf of, or under the
authority of, Specialty or the Shareholders is or will be entitled to any
commission or broker's or finder's fee from any of the parties hereto in
connection with this Agreement or any of the transactions contemplated hereby.
3.19 Labor Practices. Specialty has no collective bargaining or other
labor union agreements. There is no unfair labor practice complaint against
Specialty pending before the National Labor Relations Board, there is no pending
or, to the knowledge of the Management Shareholders, threatened labor dispute,
strike or work stoppage affecting Specialty's business, nor has there been any
of the same or any labor union organizing activity relating to Specialty within
the last three (3) years.
3.20 Insurance. Schedule 3.20 lists all insurance policies and coverages
maintained by or for Specialty including but not limited to real and personal
property insurance, comprehensive liability insurance, automobile liability
insurance, workers' compensation insurance, medical malpractice insurance and
professional liability insurance. Schedule 3.20 lists all insurance claims
submitted in connection with property damage or in connection with liability,
medical or professional malpractice claims involving Specialty or any of its
employees for the latest three (3) years.
3.21 Consents. Except as disclosed on Schedule 3.21, no consents,
approvals, or authorizations of any person, entity or governmental agency are
required in connection with the Share Exchange and the consummation of the
transactions contemplated by this Agreement. Specialty shall assist Horizon in
obtaining any consents, approvals or authorizations required to consummate the
transactions contemplated by this Agreement.
3.22 Environmental Matters. Specialty has not received any notice from any
governmental authority or private person or entity advising it that the
operation of Specialty's business or the operation of any mental health or
rehabilitation or chemical dependency treatment units or programs managed by
Specialty is or has been in violation of any environmental law or any applicable
environmental permit or that Specialty is responsible (or potentially
responsible) for the cleanup of any pollutants, contaminants, hazardous or toxic
wastes, substances or materials at, on or beneath the property subject to the
Real Property Leases. Specialty is not the subject of federal, state, local or
private litigation or proceedings involving a demand for damages or other
potential liability with respect to violations of environmental laws.
3.23 Taxes. All reports, estimates, declarations of estimated tax,
information statements and returns relating to, or required to be filed in
connection with, any Taxes, including information returns or reports with
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respect to backup withholding and other payments to third parties ("Returns") of
Specialty required by law to be filed on or prior to the Effective Date have
been prepared and properly filed or valid extensions obtained, and all Taxes
imposed upon Specialty or any of its properties, assets or income which are due
and payable or claimed by any federal, territorial, state, local or foreign
government or any agency or political subdivision of any such government
("Taxing Authority"), to be due and payable have been paid. The term "Taxes"
shall mean all taxes, however, denominated, including any interest, penalties or
other additions to tax that may become payable in respect thereof, imposed by
any Taxing Authority which taxes shall include, without limiting the generality
of the foregoing, all income or profits taxes (including, but not limited to,
federal income taxes and state income taxes), real property gains taxes, payroll
and employee withholding taxes, unemployment insurance taxes, social security
taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes,
gross receipts taxes, business license taxes, occupation taxes, real and
personal property taxes, stamp taxes, environmental taxes, transfer taxes,
workers' compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar nature
to any of the foregoing, which (i) Specialty and (ii) any individual, trust,
corporation, partnership or any other entity as to which Specialty is liable for
Taxes incurred by such individual or entity either as a transferee, or pursuant
to Treasury Regulations Section 1.1502-6, or pursuant to any other provision of
federal, territorial, state, local or foreign law or regulations (individually
and collectively, the "Group") is required to pay, withhold or collect. The
liability for accrued taxes as shown in Specialty Balance Sheet (net of amounts
reserved for deferred taxes) is sufficient for the payment of all unpaid Taxes
of Specialty accrued for or applicable to the periods prior to the Specialty
Balance Sheet Date and all years and periods prior thereto and for which
Specialty may at that date have been liable in its own right or by reason of its
being a member of any group of corporations filing consolidated tax returns
(including any such amounts payable as a result of an audit of any tax return
for any such period). Specialty utilizes the accrual method of accounting for
tax purposes.
There are no claims for Taxes pending against Specialty nor any liens
(other than for current Taxes not yet due and payable) upon the assets of
Specialty, and Specialty does not know of any threatened claim for tax
deficiencies or any basis for such claims, and there are not now in force any
waivers or agreements by Specialty for the extension of time for the assessment
of any tax, nor has any such waiver or agreement been requested by the Service
or any other Taxing Authority.
The Federal income tax returns of Specialty have not been examined or
audited by the Service. No material issues have been raised in any examination
by any Taxing Authority with respect to the businesses and operations of
Specialty which could be expected to result in a proposed adjustment to the
liability of Specialty for Taxes for any period.
Specialty has not filed a consent under Section 341(f) of the Code (or any
corresponding provision of state, local or foreign income tax law) concerning
collapsible corporations or agreed to have Section 341(f)(2) of the Code (or any
corresponding provision of state, local or foreign income tax law) apply to any
disposition of any asset owned by it.
Specialty has not made any payments, is not obligated to make any payments,
and is not a party to any agreement that under any circumstances could obligate
it to make any payments that will not be deductible under Section 280G of the
Code.
Specialty has not been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code. No shareholder of Specialty
is a person other than a United States person within the meaning of the Code.
Specialty has not participated in an international boycott as defined in Code
Section 999.
Specialty has disclosed on its federal income tax returns all positions
taken therein that could give rise to a substantial understatement of federal
income tax within the meaning of Section 6662 of the Code. Specialty is not a
party to any tax allocation or sharing agreement. Specialty (a) has not been a
member of an affiliated group filing a consolidated federal income tax return
other than with respect to PMSC and (b) has no liability for the taxes of any
person (other than any of Specialty) under Treas. Reg. sec. 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise. Specialty has
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not agreed, nor is it required to make, any adjustment under Code Section 481(a)
by reason of a change in accounting method or otherwise.
Horizon has been furnished by the Shareholders or Specialty true and
complete copies of (i) relevant portions of income tax audit reports, statements
of deficiencies, closing or other agreements received by the Group or on behalf
of the Group relating to Taxes, and (ii) all federal and state income or
franchise tax returns for the Group for all periods ending on and after 1989.
Neither Specialty nor any member of the Group do business in or derive income
from any state, local, territorial or foreign taxing jurisdiction other than
those for which all Returns have been furnished to Horizon.
Specialty has filed all reports and has created and/or retained all records
required under Section 6038A of the Code with respect to its ownership by and
transactions with related parties. Each related foreign person required to
maintain records under Section 6038A with respect to transactions between
Specialty and the related foreign person has maintained such records. All
documents that are required to be created and/or preserved by the related
foreign person with respect to transactions with Specialty are either maintained
in the United States, or Specialty is exempt from the record maintenance
requirements of Section 6038A with respect to such transactions under Treasury
Regulation section 1.6038A-1. Specialty is not a party to any record maintenance
agreement with the Internal Revenue Service with respect to Section 6038A. Each
related foreign person that has engaged in transactions with Specialty has
authorized Specialty to act as its limited agent solely for purposes of Sections
7602, 7603, and 7604 of the Code with respect to any request by the Internal
Revenue Service to examine records or produce testimony related to any
transaction with Specialty, and each such authorization remains in full force
and effect.
Specialty has paid or is withholding and has or will pay when due to the
proper Taxing Authorities all withholding amounts and taxes required to be
withheld or paid for all income, unemployment, social security, Medicare or
other similar Taxes, programs or benefits with respect to wages, salary and
other compensation of directors, officers and employees of Specialty.
None of the assets of Specialty is property which Specialty is required to
treat as being owned by any other person pursuant to the so-called "safe harbor
lease" provisions of former Section 168(f)(8) of the Code.
Specialty is not a party to any joint venture, partnership, or other
arrangement or contract which could be treated as a partnership for federal
income tax purposes.
Specialty has at all times of its existence been taxed as a "C Corporation"
and at no time has elected to be taxed, or filed tax returns, as an "S
Corporation," as such terms are commonly used under the Code.
After the date hereof, no election with respect to Taxes will be made
without the written consent of Horizon. Specialty has no net operating losses or
other tax attributes presently subject to limitation under Code Sections 382,
383, or 384, or the federal consolidated return regulations.
None of the assets of Specialty directly or indirectly secures any debt the
interest on which is tax exempt under Section 103(a) of the Code.
None of the assets of Specialty is "tax-exempt use property" within the
meaning of Section 168(h) of the Code.
The transaction contemplated herein is not subject to the tax withholding
provisions of Code Section 3406, or of subchapter A of Chapter 3 of the Code or
of any other provision of law.
Specialty does not have and has not had a permanent establishment in any
foreign country, as defined in any applicable Tax treaty or convention between
the United States of America and such foreign country.
3.24 Transactions With Affiliates. Except as disclosed on Schedule 3.24,
there are no loans, leases, agreements, contracts or other transactions between
Specialty and any present or former stockholder, director or officer of
Specialty, or any member of such stockholder's, director's or officer's
immediate family. No Shareholder, director or officer of Specialty nor any of
their respective spouses or family members owns directly or indirectly on an
individual or joint basis any material interest in, or serves as an officer or
director of,
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or in any similar capacity for, any competitor, customer, provider or supplier
of Specialty or any organization which has a material contract or arrangement
with Specialty.
3.25 Improper Payments. Neither Specialty, nor any shareholder, director,
officer, employee or agent of Specialty has made any improper bribes, kickbacks
or other payments on behalf of Specialty to, or received any such payments from,
customers, vendors, suppliers or other persons contracting with Specialty and
has not proposed or offered to make or receive any such payments.
3.26 Pooling of Interests Treatment. Neither Specialty nor any of the
Shareholders has taken any action which would preclude Horizon from treating the
Share Exchange as a pooling of interests under Opinion No. 16 of the Accounting
Principles Board ("APB Opinion No. 16"). Each of the Shareholders and Specialty
acknowledge that failure to receive pooling of interests accounting treatment
for the Share Exchange could cause damages to Horizon.
3.27 Agreement with Respect to Horizon Proxy Statement. At the time of the
mailing of the Horizon Proxy Statement (defined in Section 5.2 hereof) and of
the special meeting of Horizon stockholders to vote on the Share Exchange, the
Horizon Proxy Statement, as amended or supplemented by any amendment or
supplement filed with the Securities and Exchange Commission (the "Commission"),
insofar as it relates to Specialty or the Shareholders and is based on
information included or furnished by or on behalf of Specialty or the
Shareholders for use therein by Horizon, will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HORIZON
Horizon represents and warrants to the Shareholders and Specialty that, as
of the Effective Date hereof and as of the Closing Date:
4.1 Due Organization of Horizon. Horizon is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
with all requisite corporate power and authority to conduct its business
operations as being conducted on the Effective Date. Horizon is duly qualified
and in good standing as a foreign corporation authorized to do business in each
jurisdiction where the failure to be so authorized would have a material adverse
effect on the business (financial or otherwise) or operations of Horizon.
Horizon has delivered to Specialty complete and correct copies of the
certificate of incorporation and bylaws of Horizon as amended to and in effect
on the Effective Date. Horizon is not in violation of any term or provision of
its certificate of incorporation or bylaws.
4.2 Subsidiaries/Investments. Except as disclosed in Schedule 4.2, (a)
neither Horizon nor any of its subsidiaries owns capital stock or other
securities of, or has any equity interest or investment in, or possesses any
option, warrant or right to purchase or acquire any capital stock or other
securities of, any corporation, partnership, joint venture or other entity; (b)
each corporation designated as a subsidiary of Horizon in such Schedule is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, has the corporate power and authority to own,
lease and operate its properties and assets and to carry on its business as now
being conducted, and is qualified to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification necessary, except where the failure to
be so qualified would not have a material adverse effect on the business of
Horizon and its subsidiaries taken as a whole; and (c) all of the outstanding
capital stock of each corporation designated as a subsidiary in such Schedule is
duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights, and there are no outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
issuance of any shares of capital stock of any such subsidiary, and there are no
shares of capital stock of any such subsidiary reserved for issuance for any
purpose.
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4.3 Due Authorization. The execution and delivery of this Agreement and
the performance of the transactions contemplated by this Agreement and all other
instruments, agreements, certificates and documents contemplated hereby to which
Horizon is or will be a party does not, on the date hereof, and will not, on the
date of Closing, (i) violate any decree or judgment of any court or governmental
authority which may be applicable to Horizon; (ii) to the knowledge of Horizon,
violate any law, rule or regulation binding on Horizon; (iii) violate or
conflict with, or result in a breach of, or constitute a default (or an event
which, with or without notice or lapse of time or both, would constitute a
default) under, or permit cancellation of, or result in the creation of any
encumbrance upon, any of the assets of Horizon under any of the terms,
conditions, or provisions of any contract, lease, sales order, purchase order,
indenture, mortgage, note, bond, instrument, license or other agreement to which
Horizon is a party, or by which Horizon or its assets are bound; (iv) permit the
acceleration of the maturity of any indebtedness of Horizon; (v) violate or
conflict with any provision of the certificate of incorporation or bylaws of
Horizon, and (vi), other than approval by the stockholders of Horizon, has been
duly authorized by all requisite corporate action of Horizon.
4.4 Capitalization of Horizon. The authorized capital stock of Horizon
consists of Forty Million (40,000,000) shares of Common Stock, $.01 par value
per share, of which 5,564,262 shares are validly issued and outstanding and Five
Hundred Thousand (500,000) shares of Preferred Stock, $.10 par value per share,
of which no shares are validly issued and outstanding. All such outstanding
shares of capital stock are fully paid and nonassessable. Horizon has no other
capital stock authorized for issuance and has no treasury shares. Except as set
forth in Schedule 4.4, there are no outstanding options, warrants, convertible
instruments, or other rights, agreements, or commitments to issue or acquire any
shares of common stock or any other security constituting, or convertible or
exchangeable into, capital stock of Horizon. Except as set forth in Schedule
4.4, since the date of Horizon Balance Sheet (as defined in Section 4.6 below),
no shares of Horizon's capital stock, no options, warrants, or other rights,
agreements, or commitments (contingent or otherwise) obligating Horizon to issue
shares of capital stock, and no other securities or instruments convertible or
exchangeable into shares of capital stock, have been executed or issued by
Horizon. Horizon has not granted and is not a party to any agreement granting
preemptive rights, rights of first refusal, or registration rights with respect
to its outstanding capital stock or any capital stock of Horizon to be issued in
the future. Horizon is not bound by any exclusive agency or indemnity agreement
applicable to the issuance of shares of its capital stock after the Effective
Date.
4.5 Licenses/Compliance with Law. Horizon has the lawful authority and all
federal, state or local governmental authorizations, certificates of authority,
licenses or permits necessary for or required to conduct its respective business
as such is presently being conducted. There are no pending or, to the knowledge
of Horizon, threatened legal, administrative, arbitration or other actions,
notices, or proceedings nor any pending or, to the knowledge of Horizon,
threatened governmental investigations by any federal, state or local government
or any subdivision thereof or by any public or private group which assert or
allege any violation of or non-compliance with any governmental requirements or
which would have the effect of limiting, prohibiting or changing the business
operations of Horizon as presently conducted. Horizon has made all filings with
governmental agencies required for the conduct of its business operations. There
are no judgments, orders, rules, consent decrees or injunctions of any court,
governmental department, commission, agency or instrumentality by which Horizon
is bound or to which Horizon is subject. Horizon is not subject to and has not
received any request for information, notice, demand letter, administrative
inquiry or formal or informal complaint or claim. To the knowledge of Horizon,
neither Horizon's operations nor any of the assets owned, leased, occupied or
used by Horizon in the operation of its business materially violates or fails to
comply in any material respect with any applicable federal, state or local
codes, laws, rules or regulation and Horizon has not received any notice
alleging any such violation or noncompliance.
4.6 Financial Statements. Horizon has delivered to the Shareholders a copy
of audited consolidated financial statements of Horizon and the notes thereto,
certified by Price Waterhouse, LLP, contained in the Horizon Annual Report on
Form 10-K for the year ended August 31, 1996 (the "Horizon Annual Report") filed
with the Commission and unaudited consolidated financial statements of Horizon
and notes thereto contained in Horizon Quarterly Report on Form 10-Q for the
quarter ended February 28, 1997 (the "Horizon Balance Sheet") filed with the
Commission, including, without limitation, the February 28, 1997 (the
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"Horizon Balance Sheet Date") consolidated balance sheet contained in the
Horizon Quarterly Report (the "Horizon Quarterly Report"). The Horizon Financial
Statements present fairly in all material respects the financial position of
Horizon, and the results of the operations, changes in stockholders' equity and
cash flows of Horizon, as of the respective dates thereof and for the respective
periods covered thereby, in conformity with GAAP. Except as set forth in Horizon
Balance Sheet, as of the Horizon Balance Sheet Date, there were no liabilities,
debts, claims or obligations, whether accrued, absolute, contingent or
otherwise, whether due or to become due, which are required by GAAP to be set
forth in a balance sheet of Horizon which have not been so set forth in Horizon
Balance Sheet. No dividends or distributions with respect to the capital stock
of Horizon had been declared but not paid prior to the Horizon Balance Sheet
Date. The Horizon Financial Statements were prepared from the books and records
of Horizon. At the Horizon Balance Sheet Date, Horizon owned each of the assets
included in Horizon Balance Sheet.
4.7 Horizon Disclosure Documents. Horizon has furnished to Specialty the
Horizon Annual Report and the Horizon Quarterly Report (collectively referred to
herein as the "Horizon Disclosure Documents"). Each of such Horizon Disclosure
Documents which is not a financial statement, at the time it was filed, complied
with all applicable requirements of the Securities Exchange Act of 1934 (the
"1934 Act") and of the forms, rules and regulations of the Commission
promulgated thereunder; did not contain any untrue statement of a material fact;
and did not omit to state any material fact required or necessary to be stated
therein in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. As of the Effective Date, Horizon
had 142 management contracts pursuant to which Horizon manages or operates
mental health treatment units or programs on behalf of general acute care
hospitals or other entities (the "Horizon Management Contracts"). As of the
Effective Date, except to the extent disclosed on Schedule 4.7, (i) the Horizon
Management Contracts are in full force and effect, (ii) Horizon has not received
any notice of cancellation with respect to any of the Horizon Management
Contracts or been advised that the other party thereto intends to cancel any
such agreement, (iii) there are no material outstanding disputes under any of
the Horizon Management Contracts, (iv) to the knowledge of Horizon, each of the
Horizon Management Contracts is with an unrelated third party entered into on an
arm's-length basis in the ordinary course of business, (v) there are no material
defaults under any of the Horizon Management Contracts and, (vi) Horizon has
reserved and expensed for its financial statement purposes the full amount of
any obligations known to Horizon that have accrued to refund all or any portion
of the management fees that have been paid to Horizon under any of the Horizon
Management Contracts.
4.8 No Adverse Change. Except as set forth on Schedule 4.8, since the
Horizon Balance Sheet Date, the business of Horizon has been conducted only in
the ordinary course and there has not been (i) any material adverse change in
the financial condition, business, properties, assets, or results of operations
of Horizon (financial or otherwise) exclusive of any general economic factors
affecting the health care industry in general; (ii) any material loss or damage
(whether or not covered by insurance) to any of the assets of Horizon which
materially affects or impairs the ability of Horizon to conduct its business as
previously conducted or any other event or condition of any character which has
materially and adversely affected the business or operations of Horizon; (iii)
the attaching, placing or granting of, or the agreement to attach, place or
grant, any encumbrance on any of the assets of Horizon; (iv) any sale or
transfer of any material asset of Horizon; (v) any material changes in the terms
of or defaults under, any material contract of Horizon; (vi) any material change
in the accounting systems, policies or practices of Horizon; (vii) any waiver by
or on behalf of Horizon of any rights which have any material value; (viii) no
taking under condemnation or right of eminent domain of any of the assets of
Horizon; (ix) any entry into or termination of any management contract or any
other material commitment, contract, agreement, or transaction (including,
without limitation, any material borrowing or capital expenditure or sale or
other disposition of any material assets) by Horizon; (x) any redemption,
repurchase, or other acquisition of any of its capital stock by Horizon; (xi)
any issuance of capital stock of Horizon or of securities convertible into or
rights to acquire any such capital stock; (xii) any dividend or distribution
declared, set aside or paid on capital stock of Horizon; (xiii) any transfer or
right granted by Horizon of or under any material lease, license, agreement,
patent, trademark, trade name, service mark or copyright; (xiv) any sale or
other disposition of any material asset of Horizon, or any mortgage, pledge, or
imposition of any lien or other encumbrance on any material asset of Horizon, or
any agreement relating to or contemplating any of the foregoing not in the
ordinary and usual course of business; or (xv) any default or
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breach by Horizon in any material respect under any material contract, license,
or permit. Since the Horizon Balance Sheet Date, Horizon has conducted its
business only in the ordinary and usual course of business.
4.9 No Undisclosed Liabilities. Horizon has no indebtedness or other
liabilities which are not adequately disclosed and reflected or reserved against
on the face of Horizon Balance Sheet, except liabilities incurred since the
Horizon Balance Sheet Date in the ordinary course of business consistent with
past practice which, in the aggregate, would not have a material adverse effect
on the condition (financial or otherwise), assets or business of Horizon.
4.10 Title to and Condition of Properties. Except as set forth in Schedule
4.10, Horizon has good, marketable, and insurable title, or valid, effective and
continuing leasehold rights in the case of leased property, to all of the assets
reflected on Horizon Balance Sheet and all personal property owned or leased by
it or used by it in the conduct of its business in such a manner as to create
the appearance or reasonable expectation that the same is owned or leased by it,
free and clear of all liens, security interests, restrictions, claims,
encumbrances, and charges of any kind whatsoever. Horizon do not know of any
potential action or assertion of rights, including condemnation, by any party,
governmental or other, and no proceedings with respect thereto have been
instituted of which Horizon has notice, that would materially affect the ability
of Horizon to utilize each of such assets in its business. Horizon has not
received any notices of default or other violations from any landlord regarding
any properties leased by Horizon. To the knowledge of Horizon, none of the
assets owned, leased or used by Horizon in the operation of its business
materially violates or fails to comply in any material respect with any
applicable federal, state or local health, fire, environmental, safety, zoning,
building or other codes, laws, rules or regulations and Horizon has not received
any notice of an alleged violation thereof.
4.11 Litigation. Except as set forth on Schedule 4.11 hereto, (i) no
material investigation or review by any governmental entity with respect to
Horizon is pending or, to the knowledge of Horizon, threatened, nor has any
governmental entity indicated to Horizon an intention to conduct the same; and
(ii) there is no action, suit, or administrative, condemnation, arbitration or
other proceeding (including proceedings concerning labor disputes or grievances
or union recognition) pending or, to the knowledge of Horizon, threatened
against or affecting Horizon to which Horizon is a party, at law or in equity,
before any federal, state, or municipal court or other governmental department,
commission, board, bureau, agency, or instrumentality. Horizon is not now, and
has not been, a party to any injunction, order or decree restricting the method
or geographic area under which Horizon may conduct business operations or the
marketing of any of its products or services or the products or services it may
sell.
4.12 Intellectual Property. Schedule 4.12 is an accurate and complete list
of all copyrights, trade names, trademarks, service marks or other intellectual
property that Horizon uses in its business operations. Except as disclosed on
Schedule 4.12 Horizon has no United States or foreign patents, patent
applications, patent licenses, trademarks and service mark registrations (and
applications therefor), and has no copyrights and copyright registrations (and
applications therefor), trade secrets, inventions, processes, designs, know-how
and formula which are owned or licensed for use by Horizon and utilized by
Horizon in the business operations of Horizon as presently conducted. There is
no adverse claim of infringement against Horizon, or to the knowledge of the
Shareholders, any threatened litigation or claim of infringement. To the
knowledge of the Shareholders, Horizon does not utilize any intellectual
property or proprietary trade secret information which infringes any trademark,
trade name, service mark, copyright or patent of another, and Horizon has not
received any notice contesting its right to use any trade name, intellectual
property or proprietary trade secret information now used by it in connection
with its business operations. Horizon has not granted any license to a third
party in respect of any of its intellectual property.
4.13 Contracts. The Horizon Disclosure Documents list all material
contracts required by the Commission rules and regulations applicable to the
form of the Horizon Disclosure Documents to be listed therein and Horizon has
furnished or made available to the Shareholders true, complete and correct
copies of all such contracts requested by the Shareholders.
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4.14 Employee Benefit Plans. Except as disclosed in Schedule 4.14:
(a) Horizon does not maintain or contribute to, and has not in the
past maintained or contributed to, any Pension Plan or Welfare Plan, nor is
Horizon presently, or has it ever been, a participating employer in any
Multiemployer Plan.
(b) With respect to each Pension Plan and each Welfare Plan listed on
Schedule 4.14, to the knowledge of Horizon: (i) there is no fact,
including, without limitation, any reportable event, that exists that would
constitute grounds for termination of such plan by the PBGC or for the
appointment by the appropriate United States District Court of a trustee to
administer such plan, in each case as contemplated by ERISA; (ii) neither
Horizon nor any subsidiary nor any fiduciary, trustee, or administrator of
any such Pension Plan or Welfare Plan, has engaged in a prohibited
transaction that would subject Horizon to any material tax or any material
penalty imposed by ERISA or the Code; (iii) Horizon has not incurred any
material liability to the PBGC (other than for payment of premiums); (iv)
Horizon has contributed all amounts thereto it is required to contribute
under the terms of the plan in question and applicable law, and there is no
accumulated funding deficiency with respect to any such Pension Plan,
whether or not waived, other than routine, non-contested claims for
benefits. There is not pending or, to the knowledge of Horizon, threatened
any claim by or on behalf of or against any Pension Plan or Welfare Plan,
by any employee or former employee covered or previously covered under any
Pension Plan or Welfare Plan, or otherwise involving any Pension Plan or
Welfare Plan.
(c) There has been no termination of any Pension Plan or Welfare Plan
by Horizon during the five-year period prior to the Effective Date.
(d) Horizon has no knowledge of any material liability being incurred
under Title IV of ERISA by Horizon with respect to any Pension Plan
maintained by a trade or business (whether or not incorporated) which is
under common control with, or part of a controlled group of corporations
with, Horizon, within the meaning of Sections 515(b) or (c) of the Code.
(e) No Welfare Plan listed on Schedule 4.14 is funded with a trust or
other funding vehicle, other than insurance policies.
(f) Each Welfare Plan, Pension Plan, and any other type of pension,
profit sharing, deferred compensation, retirement, stock option, bonus,
severance, medical, dental, life insurance, accident, or other employee
benefit or compensation plan, agreement, arrangement, practice, or policy
with respect to employees maintained by or contributed to by Horizon is
maintained, administered, and operated in accordance with all applicable
laws, including but not limited to, ERISA and the Code.
(g) Each Pension Plan listed on Schedule 4.14 which is intended to be
qualified under Section 501(a) of the Code, has received a favorable
determination letter from the Service as to the qualification under the
Code of each such Pension Plan as amended to comply with the Tax Reform Act
of 1986 and all applicable, subsequent legislation, and, to the knowledge
of Horizon, no event has occurred since the date of such favorable
determination letter that would adversely affect such qualification.
(h) Except as expressly contemplated by this Agreement, no bonus,
severance pay, or any other employee benefit under any Welfare Plan,
Pension Plan, or any other type of pension, profit sharing, deferred
compensation, retirement, stock option, bonus, severance, or other employee
benefit or compensation plan, agreement, arrangement, practice, or policy
with respect to employees maintained by or contributed to by Horizon is
payable or exercisable as a result of the transaction contemplated by this
Agreement, and the payment, exercise, or vesting of any such bonus,
severance pay, or employee benefit will not be accelerated or otherwise
enhanced by such transaction.
True, correct and complete copies of each Pension Plan and Welfare Plan listed
on Schedule 4.14 as amended to and in effect on the date hereof; any agreements
entered into in connection with each such Pension Plan and Welfare Plan; the
most recent annual report filed with the Service for each such Pension Plan and
Welfare Plan; the most recent actuarial report, if any, for each such Pension
Plan and Welfare Plan; the most recent summary plan description, together with
each summary of material modifications; and any other communica-
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tion generally disseminated to employees or former employees of Horizon and
describing benefits provided under each such Pension Plan and Welfare Plan, have
been delivered to Specialty by Horizon.
4.15 Broker's and Finder's Fees. Other than a fee payable to Robertson,
Stephens & Company, L.P. no agent, broker, employee, officer, stockholder or
other person or entity acting on behalf of, or under the authority of, Horizon
or Horizon is or will be entitled to any commission or broker's or finder's fee
from any of the parties hereto in connection with this Agreement or any of the
transactions contemplated hereby.
4.16 Labor Practices. Horizon has no collective bargaining or other labor
union agreements. There is no unfair labor practice complaint against Horizon
pending before the National Labor Relations Board, there is no pending or, to
the knowledge of Horizon, threatened labor dispute, strike or work stoppage
affecting Horizon's business, nor has there been any of the same or any labor
union organizing activity relating to Horizon within the last three (3) years.
4.17 Insurance. All of the properties, business and operations of Horizon
and its subsidiaries are adequately insured consistent with the standards of
businesses of the same or similar nature.
4.18 Consents. No consents, approvals, or authorizations of any person,
entity or governmental agency are required in connection with the Share Exchange
and the consummation of the transactions contemplated by this Agreement. Horizon
shall assist Specialty in obtaining any consents, approvals or authorizations
required to consummate the transactions contemplated by this Agreement.
4.19 Environmental Matters. Horizon has not received any notice from any
governmental authority or private person or entity advising it that the
operation of Horizon's business is in violation of any environmental law or any
applicable environmental permit or that it is responsible (or potentially
responsible) for the cleanup of any pollutants, contaminants, hazardous or toxic
wastes, substances or materials at, on or beneath the property subject to real
property leases. To the knowledge of Horizon, Horizon is not the subject of
federal, state, local or private litigation or proceedings involving a demand
for damages or other potential liability with respect to violations of
environmental laws.
4.20 Taxes. All federal, state, local and other tax returns and reports of
Horizon required by law to be filed have been prepared and properly filed or
valid extensions obtained, and all Taxes imposed upon Horizon or any of its
properties, assets or income which are due and payable or claimed by any Taxing
Authority to be due and payable have been paid. The liability for accrued taxes
as shown in Horizon Balance Sheet (net of amounts reserved for deferred taxes)
is sufficient for the payment of all unpaid Taxes of Horizon accrued for or
applicable to the periods prior to the Horizon Balance Sheet Date and all years
and periods prior thereto and for which Horizon may at that date have been
liable in its own right or by reason of its being a member of any group of
corporations filing consolidated tax returns (including any such amounts payable
as a result of an audit of any tax return for any such period). Horizon utilizes
the accrual method of accounting for tax purposes.
There are no claims for Taxes pending against Horizon, and Horizon does not
know of any threatened claim for tax deficiencies or any basis for such claims,
and there are not now in force any waivers or agreements by Horizon for the
extension of time for the assessment of any tax, nor has any such waiver or
agreement been requested by the Service or any other Taxing Authority.
Except for the income tax returns for the 1990 and 1994 fiscal years, the
Federal income tax returns of Horizon have not been examined or audited by the
Service. The examination or audits of the 1990 and 1994 federal income tax
returns of Horizon did not result in any material adjustment to such returns as
originally filed. No material issues have been raised in any examination by any
Taxing Authority with respect to the businesses and operations of Horizon which
could be expected to result in a proposed adjustment to the liability of Horizon
for Taxes for any other period.
Horizon has not filed a consent under Section 341(f) of the Code concerning
collapsible corporations. Horizon has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be deductible
under Section 280G of the Code. Horizon has not been a United States real
property holding corporation
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within the meaning of Section 897(c)(2) of the Code. Horizon has disclosed on
its federal income tax returns all positions taken therein that could give rise
to a substantial understatement of federal income tax within the meaning of
Section 6662 of the Code. Horizon is not a party to any tax allocation or
sharing agreement. Horizon (a) has not been a member of an affiliated group
filing a consolidated federal income tax return and (b) has no liability for the
taxes of any person (other than any of Horizon) under Treas. Reg. sec. 1.1502-6
(or any similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise. Horizon has not agreed, nor is it required
to make, any adjustment under Code Section 481(a) by reason of a change in
accounting method or otherwise.
Horizon has paid or is withholding and has or will pay when due to the
proper taxing authorities all withholding amounts and taxes required to be
withheld or paid for all income, unemployment, social security, Medicare or
other similar Taxes, programs or benefits with respect to wages, salary and
other compensation of directors, officers and employees of Horizon.
4.21 Investment Representations. Horizon will acquire the Specialty Shares
for its own account for investment and not with a view to the resale or
distribution thereof. Horizon will not transfer or otherwise dispose of the
Specialty Shares, or any interest therein, in such manner as to violate any
provisions of the 1933 Act, or of any applicable state securities laws
regulating the disposition thereof. Horizon agrees that the certificates
representing the Specialty Shares may bear legends to the effect that such
shares have not been registered under the 1933 Act or such other state
securities laws, and that no interest therein may be transferred or otherwise
disposed of in violation of the provisions thereof or of any rules and
regulations issued thereunder.
4.22 Agreement With Respect to Horizon Proxy Statement. At the time of the
mailing of the Horizon Proxy Statement to Horizon stockholders and at the time
of the special meeting of the Horizon stockholders to vote on the Share
Exchange, the Horizon Proxy Statement, as amended or supplemented by any
amendment or supplement filed with the Commission, insofar as it relates to
Horizon and its subsidiaries, will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that none of the Horizon
representations and warranties in this Section 4.22 shall apply to statements in
or omissions from the Proxy Statement made in reliance upon and in conformity
with information furnished by Specialty and the Shareholders for use in the
Proxy Statement.
ARTICLE V
CERTAIN AGREEMENTS APPLICABLE PRIOR TO THE CLOSING DATE
5.1 Access and Information. The Management Shareholders and Specialty
shall give to Horizon and its accountants, counsel and other representatives
full access during normal business hours throughout the period prior to the
Closing Date and upon reasonable notice to all properties, books, contracts and
records (including tax returns and insurance policies) of or relating to
Specialty and all information reasonably requested by Horizon. Horizon shall
give to the Shareholders all information as may be reasonably requested by the
Shareholders for the purposes of effectuating this Agreement. Except as
consented to by Horizon or the Shareholders all information obtained hereunder
which is not otherwise public shall be held confidential and, in the event of
termination of this Agreement, except to the extent required because of any
pending or threatened litigation, all documents (including copies thereof)
obtained hereunder containing such information shall be destroyed or returned to
the party from which they were obtained.
5.2 Horizon Stockholder Authorization. Horizon will take all steps
necessary to call, give notice of, convene and hold a special meeting of its
stockholders as soon as practicable after the Effective Date (and in any event
before August 31, 1997) for the purpose of authorizing and approving the Share
Exchange. The Board of Directors of Horizon has recommended that the Horizon
stockholders vote to authorize and approve the Share Exchange. As soon as
practicable, Horizon will prepare and file with the Commission a proxy statement
for such special meeting (the "Horizon Proxy Statement"); comply with any
reasonable comments of the Commission with respect thereto; file a definitive
Proxy Statement reflecting such compliance; mail the
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Horizon Proxy Statement to the holders of Horizon Stock entitled to vote at such
meeting; and take all other action necessary or appropriate to attempt to obtain
the requisite vote of the Horizon shareholders; provided, however, that Horizon
shall not be required to file or mail the definitive Proxy Statement unless and
until NME has joined as a party to this Agreement. Horizon shall use its best
efforts to cause a preliminary copy of the Horizon Proxy Statement to be filed
under the Commission within 25 days after the Effective Date and to hold the
Horizon shareholders meeting within 30 days after the mailing of the definitive
Horizon Proxy Statement. The Shareholders and Specialty will cooperate fully
with Horizon in the preparation of the Horizon Proxy Statement and, as soon as
practicable, will supply to Horizon such financial and other information
concerning Specialty as Horizon or the Commission may request for inclusion in
the Horizon Proxy Statement or in any amendment or supplement thereto.
5.3 Operation of Businesses; Course of Conduct.
(a) Each of Specialty and Horizon agrees with the other that from the
Effective Date to the Closing Date, except as otherwise consented to or
approved by the other in writing, each will, and will cause each of its
respective subsidiaries to, operate its business as presently operated in
the ordinary course and, consistent with such operation, each of Specialty
and Horizon and their respective subsidiaries will substantially comply
with all applicable legal and contractual obligations, and will use its
best efforts consistent with past practice to preserve its business
organization intact and to preserve the goodwill of its suppliers,
customers and others with whom it has business relationships; and neither
the Shareholders, Specialty, Horizon nor any of their respective
subsidiaries will take any action (or omit to take any action) which action
or omission would cause any representation or warranty contained in Article
II, Article III or Article IV hereof to be untrue at any time at or prior
to or on the Closing Date as if such representation or warranty were made
at and as of such time, or make any change in any method of reporting
income or expenses for federal income tax purposes. In addition, Specialty
and the Management Shareholders agree that, from the date hereof through
the Closing Date, Specialty shall not, without the consent of Horizon, such
consent not to be unreasonable withheld or delayed, and the Management
Shareholders shall not allow Specialty to:
(i) incur any expense, obligation, or liability (whether capital,
contingent, absolute or otherwise), except in the ordinary course of
business with respect to performance of the Specialty Management
Contracts in accordance with their respective terms, in excess of
$25,000, without the consent of Horizon which consent shall not be
unreasonably withheld;
(ii) make (1) any change, except in the ordinary course of
business, in the assets (including, but not limited to, any change in
the composition of such assets so as to materially alter the proportion
of cash thereof) or liabilities of Specialty, or (2) any commitment for
any capital expenditures including, without limitation, replacements of
equipment in the ordinary course of business, involving, in the
aggregate, more than $25,000, except with respect to performance of the
Specialty Management Contracts in accordance with their respective
terms;
(iii) make any change in the certificate of incorporation or bylaws
of Specialty;
(iv) (1) authorize any shares of the capital stock of Specialty for
issuance, (2) issue or agree to issue any shares of any previously
authorized but unissued shares of the capital stock of Specialty (except
upon the exercise of the NME Warrant), (3) grant, issue, or make any
option or commitment relating to the capital stock of Specialty, or (4)
purchase or otherwise acquire any outstanding shares of the capital
stock of Specialty or any of its subsidiaries;
(v) (1) declare or pay any dividend, make any other distribution or
payment, or set aside any amount for payment, with respect to any shares
of the capital stock of Specialty, or (2) directly or indirectly,
redeem, purchase or otherwise acquire any shares of the capital stock of
Specialty or make any commitment relating thereto;
(vi) (1) make any material increase in the compensation payable or
to become payable to any of the officers, employees or agents of
Specialty or any of its subsidiaries (including any bonus or incentive
payment or arrangement), other than normal yearly salary increases and
scheduled
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increases under presently existing compensation plans and currently
anticipated bonuses pursuant to existing bonus arrangements, or (2)
make, amend, or enter into any written employment or consulting contract
or any bonus, stock option, profit sharing, pension, retirement or other
similar payment or arrangement;
(vii) make, enter into, modify or extend any management contract;
(viii) enter into any agreement resulting in the imposition of any
mortgage or pledge of any assets of Specialty or the creation of any
mortgages, liens, pledges, charges, security interests, encumbrances,
options, rights of third parties or restrictions (collectively,
"Liens"), on any of such assets, except Liens incurred in the ordinary
course of business (not securing borrowed money or obligations of
others) in respect of obligations not overdue, Liens for taxes,
governmental charges, or claims not then required to be paid, and
encumbrances on real property which do not materially and adversely
affect the operations of such properties;
(ix) take any action which would prevent compliance with any of the
conditions in Article VI of this Agreement;
(x) enter into or engage in any transaction with any officer,
director, shareholder or affiliate of Specialty or any of its
subsidiaries except for the payment of salaries in the ordinary course
of business, the performance of the Specialty Management Contracts with
NME or its affiliates or as expressly contemplated by Article VI of this
Agreement;
(xi) (1) carry on any negotiations with other parties relating to
the acquisition of capital stock or any material assets of Specialty or
(2) merge or consolidate with or into any entity or sell or otherwise
dispose of, or purchase, any material assets or properties (other than
sales of obsolete inventory or equipment and purchases of items of
inventory or equipment in replacement therefor, in the ordinary course
of business consistent with past business practice) or enter into any
agreement in respect of such purchases, sales, and dispositions; and
(xii) cancel or surrender any insurance policies issued to
Specialty or any of its subsidiaries.
(b) Without the prior written consent of Horizon (which for the
purposes of this Section 5.3(b) is exercisable in its sole discretion, and
is not subject to any reasonableness standard as specified above applicable
to Section 5.3(a)), (i) enter into any amendment, modification, supplement
or other agreement of any kind with respect or relating to the Newport
Contract, (ii) enter into any agreement to compromise or settle any rights
or obligations of Specialty under the Newport Contract, (iii) waive or
release any rights of any kind which Specialty has or may have under the
Newport Contract or all or any portion of the outstanding account
receivable due under the Newport Contract, (iv) enter into any transactions
or make any payments relating to or arising out of the Newport Contract
which violate any federal or state laws specifically including, without
limitation, Medicare, Medicaid or any similar law, and the rules and
regulations promulgated thereunder, or (v) commit or permit any act or
enter into any agreement or understanding which would make any of the
representations and warranties of Specialty relating to the Newport
Contract including, without limitation, the representations and warranties
contained in Section 3.13, to be incorrect or untrue in any material
respect.
(c) Notwithstanding any provision of this Agreement to the contrary,
Specialty and the Shareholders covenant and agree that from the Effective
Date to the Closing Date:
(i) Horizon shall be permitted access to the hospital clients of
Specialty and shall have the right to discuss with such hospital clients
all aspects of the Specialty Management Contract with such hospital
client;
(ii) Specialty shall not make or implement any employee or officer
hiring or termination decision without the prior consent of Horizon
which shall not be unreasonably withheld or delayed; and
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(iii) Specialty shall involve Horizon and allow Horizon to
participate in all discussions, correspondence or negotiations relating
to any existing or proposed new management contract and shall not
modify, amend or renew any Specialty Management Contract and shall not
enter into any new management contract without the prior consent of
Horizon which shall not be unreasonably withheld or delayed.
5.4 Consents. The Shareholders, Specialty and Horizon shall (a) within 15
days after the date hereof proceed to make all filings required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"Hart-Scott Act"), if any, with respect to the transaction contemplated by this
Agreement and (b) take all steps reasonably necessary to obtain the written
consent or approval of each and every governmental agency whose consent or
approval shall be required in order to permit the consummation of the
transactions contemplated by this Agreement.
5.5 Letter from Independent Accountants. Horizon shall cause to be
delivered to Horizon, on the mailing date of the Horizon Proxy Statement and on
the date of the special meeting of Horizon stockholders, a letter from the
certified public accounting firm of Price Waterhouse LLP, dated not more than
two business days prior to each such date, confirming that they are independent
public accountants within the meaning of the 1933 Act, the 1934 Act and the
applicable published rules and regulations thereunder and stating in effect (a)
that, in their opinion, the financial statements of Specialty examined by them
and included in the Horizon Proxy Statement comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act, the 1934
Act and the published rules and regulations thereunder with respect to proxy
statements relating to a transaction of the nature of the transaction
contemplated by this Agreement, (b) that, on the basis of such limited
procedures as are described in such letter, including a reading of the unaudited
financial statements of Specialty for any period subsequent to December 31, 1996
and for any comparable period of the preceding year included in the Horizon
Proxy Statement, and of the latest available unaudited interim financial
statements prepared by Specialty, inspection of the minute books of Specialty
since December 31, 1996, inquiries of officers of Specialty responsible for
financial and accounting matters and other procedures specified in such letter,
nothing came to their attention which caused them to believe that (i) the
unaudited financial statements of Specialty for any period subsequent to
December 31, 1996 and for any comparable period of the preceding fiscal year
included in the Horizon Proxy Statement (A) do not comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
the 1934 Act and the published rules and regulations thereunder with respect to
proxy statements or (B) such unaudited financial statements were not prepared
using generally accepted accounting principles which are consistent with the
generally accepted accounting principles used in the preparation of the audited
financial statements of Specialty included in the Horizon Proxy Statement, or
(ii) as of a specified date not more than five days prior to the date of the
letter, (A) there was any change in the capital stock of Specialty, any increase
in the long-term debt, amounts due government programs or noncontrolling
interests of Specialty or any decrease in net current assets, net assets or
stockholders' equity of Specialty as compared with the amounts shown in the
latest balance sheet of Specialty included in the Horizon Proxy Statement, or
that there was any other change of a material nature in any of the line items
contained in any of the financial statements (including without limitation the
pro forma condensed financial statements) of Specialty included in the Horizon
Proxy Statement, as compared with the amounts reflected in such financial
statements, or (B) for the period from the date of the latest balance sheet of
Specialty included in the Horizon Proxy Statement, to such specified date, there
were any decreases in operating revenues or net income of Specialty as compared
with the corresponding period in the preceding fiscal year, except in all
instances for changes or decreases which such letter discloses have occurred,
and (c) that, in addition to the examination referred to in their reports
included in the Horizon Proxy Statement, and the procedures specified in such
letter, inspection of minute books and inquiries and other procedures referred
to in clause (b) above, they have carried out certain procedures specified in
such letter, not constituting an audit, with respect to certain amounts,
percentages, numbers of shares and financial information which are derived from
the general accounting records of Specialty and appear in the Horizon Proxy
Statement, and are specified by Horizon, and have compared certain of such
amounts, percentages, numbers and financial information with the accounting
records of Specialty and have found them to be in agreement.
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5.6 Public Communications. All press releases or other public
communications of any sort relating to this Agreement or the Share Exchange, and
the method of the release for publication thereof, shall be subject to the prior
approval of both Horizon and Specialty, which approval shall not be unreasonably
withheld by either of such parties, except to the extent that disclosure is
otherwise required by law or judicial process.
5.7 Solicitation of Inquiries. From the Effective Date to the Closing
Date, neither the Shareholders nor Specialty shall solicit from any other
person, firm or corporation any inquiries or proposals relating to the
disposition of any substantial portion of Specialty's business or assets (other
than in the ordinary course of business) or to the acquisition of all or a
substantial portion of its capital stock (whether issued and outstanding or
authorized but not issued) or to the merger, reorganization or consolidation of
Specialty. Until the Closing Date, each of the Shareholders and Specialty
additionally agree that, without the prior written consent of Horizon, it will
not furnish to any person or entity (other than Horizon and its directors,
employees, agents and representatives) any non-public information concerning
Specialty or its business, financial affairs or prospects for the purpose or
with the intent of permitting such person or entity to evaluate a possible
acquisition of Specialty or any of its capital stock or (other than in the
ordinary course of business) assets.
5.8 Purchase of Securities. The Shareholders and Specialty, on the one
hand, and Horizon, on the other, each agree that they shall not purchase any
securities of Horizon or Specialty, respectively, so long as this Agreement
remains in effect; provided, however, that the acquisition of securities by a
publicly traded mutual fund in which the Shareholder has invested or pursuant to
the Share Exchange will not violate the provisions of this Section.
5.9 Cooperation. The parties will fully cooperate each with the other and
their respective counsel and accountants in connection with any steps required
to be taken as part of their obligations under this Agreement. The Shareholders,
Specialty and Horizon each agrees to use its best efforts to make all necessary
filings and to obtain all necessary consents to the transactions contemplated by
this Agreement, including without limitation all consents of parties to any
contracts or agreements requiring such consents, and all necessary consents of
governmental authorities.
5.10 Updating of Schedules. The Shareholders and Specialty shall notify
Horizon of any changes, additions, or events which may cause any change in or
addition to the Schedules delivered by the Shareholders under this Agreement
promptly after the occurrence of the same and again at the Closing by delivery
of appropriate updates to all such Schedules. No notification of a change or
addition to a Schedule made pursuant to this Section shall be deemed to cure any
breach of any representation or warranty resulting from such change or addition
unless Horizon specifically agrees thereto in writing or consummates the Closing
under this Agreement after receipt of such written notification, nor shall any
such notification be considered to constitute or give rise to a waiver by
Horizon of any condition set forth in this Agreement, unless Horizon
specifically agrees thereto in writing or consummates the Closing under this
Agreement after receipt of such written notification. Nothing contained herein
shall be deemed to create or impose on Horizon any duty to examine or
investigate any matter or thing for the purposes of verifying the
representations and warranties made by the Shareholders herein.
5.11 Exercise of NME Warrant. NME agrees that it shall exercise the NME
Warrant in full on or prior to the Closing Date.
5.12 Preparation of Returns and Payment of Taxes. Specialty shall prepare
and timely file, subject to Horizon's review and approval, all Returns and
amendments thereto required to be filed by it on or before the Closing Date.
Specialty shall pay and discharge all Taxes, assessments and governmental
charges upon or against it or any of its properties or assets, and all
liabilities at any time existing, before the same shall become delinquent and
before penalties accrue thereon, except to the extent and as long as: (a) the
same are being contested in good faith and by appropriate proceedings pursued
diligently and in such a manner as not to cause any material adverse effect upon
the condition (financial or otherwise) or operations of Specialty; and (b)
Specialty shall have set aside on its books reserves (segregated to the extent
required by sound accounting practice) in the amount of the demanded principal
imposition (together with interest and penalties relating thereto, if any).
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5.13 Certification of Non-Foreign Status. Each Shareholder shall furnish
to Horizon on or before the Closing Date a certification of each Shareholder's
non-foreign status as set forth in Treasury Regulation sec.1.1445-2(b).
5.14 Conduct of Business. Except as required by applicable law, the
Shareholders and Specialty will not take or cause to be taken any action which
would prevent the transactions contemplated hereby from qualifying as a tax-free
reorganization under Section 368(a) of the Code or from being accounted for as a
pooling of interests under APB Opinion No. 16.
5.15 Interim Financial Statements. The Management Shareholders and
Specialty covenant and agree that, on or before the 15th day of each calendar
month commencing May 15, 1997 and continuing until the Closing Date, Horizon
shall be furnished and have access to the monthly financial statements of
Specialty for the preceding calendar month prepared in a manner consistent with
the usual and customary procedures and methodologies under which Specialty has
prepared its monthly financial statements prior to the Effective Date.
ARTICLE VI
CONDITIONS PRECEDENT TO THE SHARE EXCHANGE
6.1 Conditions to Obligations of Both the Shareholders and Horizon. The
respective obligations of each party to effect the Share Exchange shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) The Share Exchange shall have been approved by the stockholders of
Horizon.
(b) The transactions contemplated by this Agreement shall be accounted
for by Horizon as a pooling of interests under APB Opinion No. 16.
(c) All filings and responses required under the Hart-Scott Act shall
have been made and all waiting periods applicable to the Share Exchange
under such Act shall have expired.
(d) All necessary federal and state securities permits and approvals,
and all other federal, state and local governmental permits and approvals,
required to carry out the transactions contemplated by this Agreement, and
all other required consents, waivers or approvals shall have been obtained.
(e) No inquiry by any governmental agency or instrumentality shall
have been made which would or could, and no action or proceeding shall have
been asserted, threatened or instituted to, restrain or prohibit the
carrying out of the transactions or any part thereof, or which, if such
transactions are consummated, would materially and adversely affect the
business, properties or assets of Specialty or Horizon.
6.2 Conditions to Obligations of the Shareholders. The obligations of the
Shareholders to effect the Share Exchange shall be subject to the fulfillment at
or prior to the Closing Date of the following conditions, unless the
Shareholders shall waive such fulfillment in whole or in part in writing:
(a) The representations and warranties of Horizon set forth in this
Agreement shall be true and correct at and as of the Effective Date and
shall also be true and correct at and as of the Closing Date as though made
at and as of the Closing Date, except to the extent such representations
and warranties are not true and correct by reason of actions permitted or
authorized by this Agreement or consented to in writing by the
Shareholders. The Shareholders shall have received a certificate of
Horizon, dated the Closing Date and duly executed by its chief executive
officer and its principal financial officer, to such effect.
(b) Horizon shall have performed all covenants and agreements required
to be performed by it under this Agreement at or prior to the Closing Date.
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(c) The Shareholders shall have received an opinion dated the Closing
Date of Strasburger & Price, L.L.P., counsel to Horizon, in form and
substance reasonably satisfactory to the Shareholders to the effect that
(i) Horizon is a corporation organized, validly existing and in good
standing under the laws of the State of Delaware, and has the corporate
power to own or lease its properties and to carry on its business as now
conducted; (ii) the capitalization of Horizon is as set forth in Section
4.4; (iii) the issued and outstanding capital stock of Horizon is duly
authorized, validly issued, and (assuming receipt by Horizon of full
consideration therefor) fully paid and nonassessable, and free of
preemptive rights, and, to such counsel's knowledge, there are no options,
warrants or rights to purchase or acquire by conversion or exchange of
securities or otherwise, any shares of Horizon's capital stock, which are
outstanding, other than those set forth on Schedule 4.4; (iv) Horizon has
the corporate power to execute, deliver and perform this Agreement, and all
corporate action of Horizon necessary for such execution, delivery and
performance has been duly taken; (v) neither the execution or delivery of
this Agreement, nor the performance hereof will conflict with or result in
a breach of any term of, or constitute a default under, the certificate of
incorporation or bylaws of Horizon or any statute, rule or regulation
applicable to Horizon, or, to the knowledge of such counsel (A) violates or
will violate any provision of, or constitutes or will constitute a default
under any material note, bond, mortgage, indenture, lease, license,
franchise, agreement or other instrument or obligation to which Horizon is
bound, or (B) violate in any material respect any order, writ, injunction
or decree applicable to Horizon (it being understood that the notes, bonds,
mortgages, indentures, leases, agreements and obligations to which this
opinion will relate are those which have been filed with the Commission as
exhibits to any of the Horizon Disclosure Documents, but does not include
any other agreements which may be referred to in any of the documents
covered by the opinion); (vi) this Agreement and the agreements
contemplated by this Agreement have been validly executed by Horizon, and
each such agreement constitutes the legal, valid, and binding agreement of
Horizon enforceable in accordance with its terms except to the extent that
enforceability may be limited by applicable liquidation, conservatorship,
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting the enforcement of creditors' rights from time to time in effect,
and general principles of equity; (vii) nothing has come to such counsel's
attention (which may be based upon conferences with representatives of
Specialty, Horizon and the Shareholders and the respective accountants of
Horizon and Specialty and not an independent verification of the matters
set forth in the Proxy Statement) to cause it to believe that the Proxy
Statement (except insofar as such representations relate to the financial
statements, financial schedules or other financial data upon which no
opinion need be expressed) contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; (viii) the Horizon Stock issued
in connection with the Share Exchange is duly authorized, validly issued,
fully paid and nonassessable; (ix) to such counsel's knowledge Horizon
possesses all material governmental licenses, authorizations, permits and
approvals necessary to conduct its businesses and, except for filings or
approvals contemplated by the Registration Rights Agreement (defined in
Section 6.2(h) hereof), to carry out the transactions contemplated by this
Agreement; (x) all necessary filings and responses by Horizon under the
Hart-Scott Act with respect to the transactions contemplated hereby have
been made and the necessary waiting periods in respect of such filings and
responses have expired; and (xi) to such counsel's knowledge (A) there is
no order, judgment or decree of any court or regulatory authority which
would prohibit the consummation of the transactions contemplated hereby,
and (B) no action or proceeding has been instituted in, with or by any
court or regulatory authority which has as one of its purposes or may have
as one of its effects the prohibition of any of such transactions. In
giving such opinion, such counsel may limit its opinion to the laws of the
State of Texas and the United States of America and the Delaware General
Corporation Law and rely upon opinions of other counsel and certificates of
public officials and officers of Horizon provided that with respect to
opinions of other counsel such other counsel states that both the
Shareholders and Strasburger & Price, L.L.P. are entitled to rely thereon.
All such opinions may include assumptions, qualifications, and comments as
are generally contained in legal opinions given in transactions similar to
the transaction contemplated by this Agreement.
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(d) All consents, waivers or approvals from any third party (including
any federal, state or local governmental agency or instrumentality) as may
be necessary or appropriate in connection with the Shareholders' execution
and delivery of this Agreement or to the consummation of the transactions
contemplated hereby shall have been obtained.
(e) Since the Effective Date, there shall not have occurred any
material adverse change in, or other event or condition of any character
which in any one case or in the aggregate has materially adversely
affected, or can be reasonably expected in any one case or in the aggregate
to materially adversely affect in the future, the condition (financial or
otherwise), assets, liability, results of operations, business or prospects
of Horizon.
(f) The Shareholders shall have received such other certificates,
opinions, and documents as they or their counsel may reasonably require in
order to consummate the transactions contemplated hereby all of which shall
be in form and substance reasonably satisfactory to them and their counsel.
(g) On the Closing Date, Specialty and Howard B. Finkel, John Harrison
and Larry Reiff, respectively, shall have terminated those respective
employment agreements, each dated January 1, 1995, between such individuals
and Specialty in consideration of a lump sum payment on the Closing Date to
each individual of an amount equal to the base salary of such individual
(in effect on April 1, 1997) which otherwise would have been payable over
the remaining term of each such employment contract after the Closing Date
plus an additional severance payment amount equal to fifty percent (50%) of
the annual base salary of such individual (in effect on April 1, 1997);
provided, however, that Howard B. Finkel and Specialty shall have entered
into an amendment to the employment agreement between them prior to the
date of termination which shall have the economic effect of reducing such
lump sum payment by $250,000.
(h) On the Closing Date, Horizon shall have executed and delivered the
registration rights agreement with the Shareholders in the form of Exhibit
B (the "Registration Rights Agreement").
(i) On or prior to the Closing Date, the Board of Directors of Horizon
shall have approved effective upon the consummation of the transactions
contemplated by this Agreement, an additional board position on the Board
of Directors of Horizon and the appointment of Howard B. Finkel to serve in
such additional board position.
(j) The closing market price of the Horizon Common Stock on the Nasdaq
National Market on the trading day immediately preceding the Closing Date
shall be not less than $15.00 per share.
(k) At the Closing, Michael S. McCarthy and Specialty shall mutually
in writing terminate, and release each other of and from any obligations or
liabilities under, Sections 4.3, 4.4, 4.5, 9.2, 11.2, 11.5 and 12.1 of the
Parkside Agreement.
6.3 Conditions to Horizon Obligations. The obligations of Horizon to
effect the Share Exchange shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions, unless Horizon shall waive such
fulfillment in whole or in part in writing:
(a) The representations and warranties of the Shareholders set forth
in this Agreement shall be true and correct at and as of the Effective Date
and shall also be true and correct at and as of the Closing Date as though
made at and as of the Closing Date, except to the extent such
representations and warranties are not true and correct by reason of
actions permitted or authorized by this Agreement or consented to in
writing by Horizon. Horizon shall have received a certificate of the
Shareholders, dated the Closing Date and duly executed by each of the
Shareholders, to such effect.
(b) The Shareholders shall have performed all covenants and agreements
required to be performed by them under this Agreement at or prior to the
Closing Date.
(c) Horizon shall have received an opinion dated the Closing Date of
Howrey & Simon, counsel to Specialty and the Management Shareholders, in
form and substance reasonably satisfactory to Horizon to the effect that
(i) Specialty is a corporation organized, validly existing and in good
standing under the
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laws of its state of incorporation, has the corporate power to own or lease
its properties and carry on its business as now conducted, and is duly
qualified as a foreign corporation in each jurisdiction identified in such
opinion; (ii) the capitalization of Specialty is as set forth in Section
3.4 and the outstanding shares of Specialty are owned of record as set
forth on Exhibit A hereto; (iii) the issued and outstanding capital stock
of Specialty is duly authorized, validly issued, (and assuming receipt by
Specialty of full consideration therefor) fully paid and nonassessable,
free of preemptive rights and, to such counsel's knowledge, subject to no
options, warrants or rights to purchase or acquire any of such capital
stock by conversion or exchange of securities or otherwise, other than
those set forth on Schedule 3.4; (iv) Specialty has full corporate power to
execute, deliver and perform this Agreement, and all corporate action of
Specialty necessary for such execution, delivery and performance has been
duly taken; (v) neither the execution or delivery of this Agreement nor the
performance hereof or thereof by Specialty or a Shareholder will conflict
with or result in the breach of any term of, or constitute a default under,
the certificate of incorporation or bylaws of Specialty or any statute,
rule or regulation applicable to Specialty, or, to the knowledge of such
counsel (A) violates or will violate any provision of or constitutes or
will constitute a default under, any material note, bond, mortgage,
indenture, lease, license, franchise, agreement or other instrument or
obligation to which Specialty or any of the Shareholders is bound, or (B)
violate in any material respect any order, writ, injunction, decree,
statute, rule or regulation applicable to Specialty or any of the
Shareholders; (vi) this Agreement and the agreements contemplated by this
Agreement have been validly executed by Specialty and each of the
Shareholders and each such agreement constitutes legal, valid and binding
obligations of such parties, enforceable in accordance with its terms
except to the extent that enforceability may be limited by applicable
liquidation, conservatorship, bankruptcy, insolvency, reorganization,
moratorium, or other similar laws affecting the enforcement of creditors'
rights from time to time in effect, and general principles of equity; (vii)
nothing has come to such counsel's attention (which may be based upon
conferences with representatives of the Shareholders, Specialty and Horizon
and their accountants and not an independent verification of the matters
set forth in the Proxy Statement by such counsel) to cause it to believe
that the Proxy Statement (except insofar as such representations relate to
the financial statements, financial schedules or other financial data upon
which no opinion need be expressed) contains any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; (viii) to such
counsel's knowledge Specialty possesses all material governmental licenses,
authorizations, permits and approvals necessary to conduct its businesses
or carry out the transactions contemplated by this Agreement; (ix) all
necessary filings and responses by the Shareholders and Specialty under the
Hart-Scott Act with respect to the transactions contemplated hereby have
been made and the necessary waiting periods in respect of such filings and
responses have expired; and (x) to such counsel's knowledge (A) there is no
order, judgment or decree of any court or regulatory authority which would
prohibit the consummation of the transactions contemplated hereby, and (B)
no action or proceeding has been instituted in, with or by any court or
regulatory authority which has as one of its purposes or may have as one of
its effects the prohibition of any of such transactions. In giving such
opinion, such counsel may limit their opinion to the laws of the State of
Delaware and the United States of America and rely upon opinions of other
counsel and certificates of public officials, the Shareholders and officers
of Specialty provided that with respect to opinions of other counsel such
other counsel states that Horizon is entitled to rely thereon. All such
opinions may include assumptions, qualifications, and comments as are
generally contained in legal opinions given in transactions similar to the
transaction contemplated by this Agreement.
(d) Horizon shall have received a letter from Price Waterhouse LLP
dated the Closing Date and addressed to Horizon, to the same effect as the
letter referred to in Section 5.5 hereof on the basis of procedures set
forth therein carried out by them to a specified date not more than five
days prior to the Closing Date.
(e) All consents, waivers or approvals from any third party (including
any federal, state or local governmental agency or instrumentality and
including the consents set forth in Schedule 3.21) as may be necessary or
appropriate in connection with Horizon's execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby shall
have been obtained.
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(f) Since the Effective Date, there shall not have occurred any
material adverse change in, or other event or condition of any character
which in any one case or in the aggregate has materially adversely
affected, or can be reasonably expected in any one case or in the aggregate
to materially adversely affect in the future, the condition (financial or
otherwise), assets, liabilities, results of operations, business or
prospects of Specialty; provided, however, that it is expressly understood
that the termination of the Newport Contract by Specialty and the
institution of litigation arising out of the termination of the Newport
Contract shall not constitute a material adverse change affecting Specialty
but, provided further, however, that the fact that such litigation in and
of itself will not constitute a material adverse change shall not limit,
waive or release any representations, warranties, covenants or agreements
of the Shareholders and the Management Shareholders under this Agreement or
any liability of the Shareholders under Article VIII of this Agreement with
respect to such breach of such representations, warranties, covenants and
agreements whether or not arising out of such litigation.
For purposes of this Section 6.3(f), it is expressly understood that
any of the following may constitute a material adverse change affecting
Specialty, to-wit:
(a) any material increase since the Specialty Balance Sheet Date in
the amount of outstanding accounts payable of Specialty;
(b) any material default under or violation of the existing bank
financing agreement of Specialty reflected on Schedule 3.13, whether or
not such default has been waived by the other party to such bank
financing arrangement;
(c) the insolvency of Specialty or the inability of Specialty to
timely pay its obligations as such become due in the normal course of
business;
(d) the filing of a bankruptcy petition by or against Specialty; or
(e) the cessation or any material limitation of the usual and
customary business operations of Specialty.
It is further expressly agreed and understood that the foregoing is not
intended and does not constitute an exclusive listing of material adverse
changes for the purposes of this Section 6.3(f). Further, it is expressly
agreed and understood that the provisions of Section 7.4 and Section 7.5 of
this Agreement are not intended and shall not be construed to limit or
define what constitutes a material adverse change for the purposes of this
Section 6.3(f) except solely as to the specific matters covered by such
sections. Specifically, the dollar amount specified in Section 7.4
applicable to the Net Forecast Adjustment shall not be used as a
materiality standard for the purposes of this Section 6.3(f) as to any
matter except solely the specific matter addressed by Section 7.4. With
respect to the specific matters covered by Section 7.4 and 7.5, the
remedies of Horizon shall be limited solely to the remedies specified in
such sections.
(g) Horizon shall have received such other certificates, opinions, and
documents as it or its counsel may reasonably require in order to
consummate the transactions contemplated hereby all of which shall be in
form and substance satisfactory to Horizon and its counsel.
(h) At or prior to Closing, Specialty shall have received (and
delivered copies thereof to Horizon) duly executed resignation letters from
all directors and officers of Specialty designated by Horizon pursuant to
which such individuals resign as directors and officers of Specialty. Each
such resignation shall be effective on or prior to the Closing Date and
shall acknowledge that there are no obligations, liabilities or amounts due
from Specialty to such respective individuals except for accrued salary and
other benefits or otherwise as expressly set forth in this Agreement.
(i) Horizon shall have received an opinion of Price Waterhouse LLP
that the transaction contemplated by this Agreement shall be treated as a
pooling of interests under APB Opinion No. 16.
(j) On the Closing Date, John Harrison shall have paid in full that
certain promissory note payable to Specialty identified on Schedule 3.24.
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(k) On the Closing Date, the Shareholders shall have executed and
delivered the Registration Rights Agreement.
(l) At or prior to the Closing, the Shareholders shall have terminated
the Stock Agreement in all respects and agreed to the transfer of the
shares in the Share Exchange free and clear of any obligations,
restrictions or liabilities of any kind under the Stock Agreement.
(m) At the Closing, Howard B. Finkel, John Harrison and Larry Reiff
shall have terminated and canceled in writing his respective employment
agreement with Specialty in consideration of the payments set forth in
Section 6.2(g).
(n) Upon the request of Horizon, at or prior to Closing, Specialty
shall terminate its respective 401(k) Pension Plan, Executive Non-Qualified
Deferred Compensation Plan and Executive Supplemental Retirement Plan.
(o) At the Closing, Michael S. McCarthy and Specialty shall mutually
in writing terminate, and release each other of and from any obligations or
liabilities under, Sections 4.3, 4.4, 4.5, 9.2, 11.2, 11.5 and 12.1 of the
Parkside Agreement.
(p) At or prior to the Closing, NME shall have exercised the NME
Warrant and released Specialty of and from all obligations and liabilities
thereunder upon consummation of the Share Exchange.
(q) At the Closing, all the Shareholders shall perform their
obligations under this Agreement.
ARTICLE VII
CLOSING
7.1 Closing. Subject to the provisions of Article X hereof, as soon as
practicable (and in all events within three business days unless the parties
mutually otherwise agree) after the requisite vote of the Horizon stockholders
as contemplated by Section 5.2 hereof has been obtained, the Shareholders and
Horizon will conduct a closing of the Share Exchange (the "Closing") at the
offices of Horizon in Lewisville, Texas, or such other place as the parties may
mutually agree, at which Closing it will be determined that each condition to
the obligations of the parties hereunder has been satisfied or waived or will at
such Closing be satisfied or waived (the date and time of Closing is herein
referred to as the "Closing Date").
7.2 Actions by the Shareholders. At the Closing:
(a) Specialty Shares. Each Shareholder shall deliver to Horizon the
original certificates representing the Specialty Shares owned by such
Shareholder duly endorsed for transfer or with appropriate stock powers
with respect thereto duly endorsed in blank by such Shareholder.
(b) Registration Rights Agreement. The Shareholders shall execute and
deliver to Horizon the Registration Rights Agreement.
(c) Post-Closing Escrow Agreement. Howard B. Finkel, as agent for the
Shareholders, shall execute and deliver a post-closing escrow agreement in
the form of Exhibit C attached hereto (the "Post-Closing Escrow Agreement")
and the Shareholders shall each deliver to Horizon certificates evidencing
their respective prorata portions of the Escrow Shares (as defined in
Section 7.6).
7.3 Actions by Horizon. At the Closing, Horizon shall:
(a) Horizon Stock. Deliver to each Shareholder the shares of Horizon
Stock to which such Shareholder is entitled pursuant to the Share Exchange.
(b) Registration Rights Agreement. Execute and deliver to each
Shareholder the Registration Rights Agreement.
(c) Post-Closing Escrow Agreement. Execute and deliver to Howard B.
Finkel the Post-Closing Escrow Agreement.
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7.4 Net Forecast Adjustment. In the event that the "Net Forecast
Adjustment" (as defined below) on the Closing Date is a reduction equal to or
greater than $500,000, then Horizon shall have the right to terminate this
Agreement by written notice to the Shareholders; provided, however, that in such
event the Shareholders can require Horizon to proceed with the Closing and
consummation of the transactions contemplated by this Agreement by accepting an
adjustment to the number of shares of Horizon Stock issuable in the share
exchange as specified below. For the purposes of this Agreement, "Net Forecast
Adjustment" shall mean an adjustment to the aggregate total amount of "contract
net income before taxes" reflected in the Specialty 1997 budget forecast (the
"Specialty Budget Forecast"), a copy of which is included as Schedule 7.4,
determined by reducing such amount by the amount of "contract net income before
taxes" included in the Specialty Budget Forecast with respect to any Specialty
Management Contract that is terminated, expires, non-renewed or for any other
reason canceled or the other party thereto stops payment on the basis of an
alleged default by Specialty after the Effective Date and prior to the Closing
Date and by increasing such amount by the amount of the annual "contract net
income before taxes" of any new Specialty Management Contract executed and
delivered by Specialty after the Effective Date and prior to the Closing Date.
The amount of the annual "contract net income before taxes" of any such new
Specialty Management Contract shall be determined mutually by Specialty and
Horizon in good faith by estimating the total expected "contract net income
before taxes" of such new Specialty Management Contract over its entire initial,
non-cancellable term and dividing such total amount by the number of years
constituting the original, non-cancellable term of such new Specialty Management
Contract.
If the Net Forecast Adjustment is not a reduction equal to or greater than
$500,000 then Horizon shall not have the right to terminate this Agreement and
there shall be no adjustment to the number of shares of Horizon Stock issuable
in the share exchange, even if the Net Forecast Adjustment is a positive number.
If the Net Forecast Adjustment is a reduction equal to or greater than $500,000
and Horizon elects to terminate this Agreement, the Shareholders may require
Horizon to proceed with this Agreement and consummate the transactions
contemplated hereby by accepting an adjustment to the number of shares of
Horizon Stock issuable in the share exchange determined by multiplying the
number 1,650,000 by a fraction, the numerator of which is the aggregate amount
of "contract net income before taxes" of all the Specialty Management Contract
reflected in the Specialty Budget Forecast as reduced by the Net Forecast
Adjustment and the denominator of which is the aggregate amount of "contract net
income before taxes" of all Specialty Management Contracts reflected in the
Specialty Budget Forecast.
7.5 Aged Receivables Adjustment. The number of shares of Horizon Stock
issuable in the share exchange shall also be adjusted on the following basis to
account for any increase in the total amount of certain Specialty aged accounts
receivables. For the purposes of this Section 7.5, the number of shares of
Horizon Stock issuable in the share exchange (after any adjustment is made
pursuant to Section 7.4 above, if any) shall be reduced by a number of shares
determined by dividing (a) the amount by which the aggregate amount of Specialty
account receivables outstanding for 100 days or more on the last day of the
calendar month immediately preceding the calendar month in which the Closing
occurs exceeds the aggregate amount of Specialty account receivables outstanding
for 90 days or more on December 31, 1996 by (b) $19.50 (with any partial share
so determined being disregarded for the purposes of such adjustment). Provided,
however, that, for the purposes of this Section 7.5, any account receivable
relating to or arising out of the Newport Contract shall be disregarded in
determining the aggregate amount of such account receivables outstanding on
either of such dates. No adjustment shall be made in the event that the
aggregate amount of Specialty account receivables outstanding for 100 days or
more on the last day of the calendar month immediately preceding the calendar
month in which the Closing occurs is less than the aggregate amount of Specialty
account receivables outstanding for 90 days or more on December 31, 1996.
Notwithstanding the foregoing, in the event that arbitration proceedings have
been initiated prior to the Closing Date and have not been completed by the
Closing Date under the Specialty Management Contract to which Specialty account
receivable outstanding for 100 days or more relates, then the adjustment with
respect to such account receivable, if any, shall not be made on the Closing
Date and instead Horizon shall be deemed to have given a Notice of Claim under
the Post-Closing Escrow Agreement (defined in Section 7.6 below) with respect to
such account receivable and a number of shares of Horizon Stock equal to the
amount which otherwise would constitute the adjustment attributable to such
account receivable on the Closing Date shall be held in escrow pending final
resolution of
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such arbitration proceedings. Upon final resolution of such arbitration
proceedings, the number of shares which would have been attributable to the
adjustment which would have been applicable on the Closing Date because of the
uncollectible amount of such account receivable shall be released to Horizon.
Horizon agrees that the Shareholders shall have the right to participate in any
such arbitration proceedings after the Closing Date and shall have the right to
approve any settlement of such dispute, which approval shall not be unreasonably
withheld.
7.6 Post-Closing Escrow.
(a) Escrow Shares. The Shareholders expressly agree that 51,282 shares
of Horizon Stock (the "Escrow Shares") in the aggregate shall be retained
out of the Horizon Stock to be transferred to the Shareholders under the
Share Exchange. Such Escrow Shares shall be held by Horizon in escrow
pursuant to the Post-Closing Escrow Agreement. The portion of such Escrow
Shares to be withheld out of the number of shares of Horizon Stock to be
issued to each Shareholder in the Share Exchange shall be determined on a
pro rata basis as to each Shareholder based on the percentage that the
number of Specialty Shares owned by such Shareholder represents of the
total number of Specialty Shares owned by all Shareholders. The Escrow
Shares shall be used solely for the satisfaction of the account receivable
adjustment as specified in Section 7.5 above and the liabilities of the
Shareholders as specified under Article VIII of this Agreement.
(b) Limited Power of Attorney. Each Shareholder, jointly and
severally, makes, constitutes and appoints Howard B. Finkel, (referred to
herein as "Shareholders Agent"), as agent and attorney-in-fact, with full
power of substitution, in his, her or its name, place and stead to (i)
execute and deliver for and on behalf of the Shareholders the Post-Closing
Escrow Agreement, (ii) retain and engage counsel and other professional
consultants which, in the sole opinion of Shareholders Agent, are required
in connection with the Post-Closing Escrow Agreement, or required to defend
any real, actual, threatened or pending claim, demand or action brought by
Horizon or any other person in connection with the satisfaction of
liabilities of the Shareholders under Article VIII of this Agreement
("Post-Closing Claims"), (iii) make, execute, sign, acknowledge, swear to,
record and file on each Shareholder's behalf all instruments that effect an
amendment or modification of the Post-Closing Escrow Agreement or any
documents, instruments or filings required to explain, protect against,
defend or resolve any Post-Closing Claims, and (iv) take such other
actions, execute such instruments and incur and pay such fees, costs and
expenses as are necessary to effect the purpose and intent of this Section
7.4. The foregoing limited power of attorney (i) is coupled with an
interest and shall be irrevocable and survive the death or incapacity of
each Shareholder; (ii) may be exercised either by signing separately as
attorney-in-fact for each Shareholder or, after listing all of the
Shareholders executing an instrument, by a single signature of the person
acting as attorney-in-fact for all of them; and (iii) shall survive the
delivery of an assignment by a Shareholder of the whole or any portion of a
Shareholder's interest.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY
POST-CLOSING AGREEMENTS
8.1 Representations and Warranties to Survive. All statements contained in
any agreement, certificate, instrument, schedule, or document delivered by or on
behalf of any of the parties pursuant to this Agreement and the transactions
contemplated hereby shall be deemed representations and warranties by the
delivering party hereunder. All representations and warranties made by the
parties in this Agreement shall be true at the Closing and shall survive the
consummation of this Agreement and the Closing hereunder for a period of one
year, ending at midnight on the first anniversary of the Closing Date; provided,
however, that if, prior to the expiration of such one year period, a state of
facts shall have become known which threatens to give rise to a liability
against which any party hereto would be entitled to indemnification hereunder
and the indemnified party shall have given notice of such facts to the
indemnifying party, then the rights of the indemnified party to indemnification
with respect to such liability shall continue until such liability shall have
been finally determined and disposed of (including disposition by the expiration
of the applicable statute of limitations
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with respect to such liability); provided further, however, that if a claim for
indemnification is made pursuant to this Article VIII, then such claim for
indemnification or any claim arising out of the wrongful failure to comply with
the provisions of this Article VIII shall survive until the expiration of the
applicable period of limitations with respect to such claim for indemnification;
and provided further, however, that such one year limitation specified above
shall not apply to the matters described in Section 8.6(d) below. With respect
to the representations and warranties of the parties, nothing contained herein
shall be deemed to require or imply that the accuracy of such representations
and warranties shall apply on a continuing basis as to facts existing after the
date of the Closing. No investigation or examination made by any party hereto
shall constitute a waiver of any representation or warranty and no
representation or warranty shall be merged into the Closing hereunder.
8.2 Access to Records Following Closing. Horizon and the Shareholders
agree that so long as any books, records and files retained by the Shareholders
relating to the business of Specialty, or the books, records and files delivered
to the control of Horizon pursuant to this Agreement to the extent they relate
to the operations of Specialty prior to the Closing Date, remain in existence
and available, each party (at its expense) shall have the right upon prior
notice to inspect and to make copies of the same at any time during business
hours for any proper purpose. Horizon and the Shareholders shall use reasonable
efforts not to destroy or allow the destruction of any such books, records and
files without first offering in writing to deliver them to the other.
8.3 Tax Matters and Post-Closing Cooperation.
(a) In order appropriately to apportion any Taxes imposed on Specialty
relating to a period that includes (but that would not, but for this
section, close on) the Closing Date, the parties hereto will, to the extent
permitted by applicable law, elect with the relevant taxing authorities to
treat for all purposes the Closing Date as the last day of a taxable period
of Specialty, and such period shall be treated as a "Short Period" and a
"Pre-Closing Period" for purposes of this Agreement. In any case where
applicable law does not permit Specialty to treat the Closing Date as the
last day of a Short Period, then for purposes of this Agreement, the
portion of such Taxes that is attributable to the operations of Specialty
for such Interim Period (as defined below) shall be (i) in the case of
Taxes that are not based on income or gross receipts, the total amount of
such Taxes for the period in question multiplied by a fraction, the
numerator of which is the number of days in the Interim Period, and the
denominator of which is the total number of days in the entire period in
question, and (ii) in the case of Taxes that are based on income or gross
receipts, the Taxes that would be due with respect to the Interim Period,
if such Interim Period were a Short Period. "Interim Period" means with
respect to any Taxes imposed on Specialty on a periodic basis for which the
Closing Date is not the last day of a Short period, the period of time
beginning on the first day of the actual taxable period that includes (but
does not end on) the Closing Date and ending on and including the Closing
Date.
(b) The Shareholders agree that it will cooperate with Horizon and
Specialty and their respective representatives, in a prompt and timely
manner, in connection with (i) the preparation and filing of, and (ii) any
administrative or judicial proceedings involving, any return of tax or
information filed or required to be filed by or for Specialty or Horizon.
8.4 Indemnity. Subject to the limitations set forth in Section 8.6 below,
(a) Shareholders.
(i) Each Shareholder, jointly and severally (except as to the
representations and warranties contained in Article II which shall be
several and not joint), shall indemnify and hold harmless Specialty,
Horizon and the subsidiaries, shareholders, partners, directors,
officers, employees and agents of Horizon, from, against, and in respect
of, any loss, liability, claim, demand, or expense, including but not
limited to reasonable attorney, investigation and consultant fees and
costs, of any other kind whatsoever arising out of or resulting from any
of the following:
(1) Any misrepresentation, breach of warranty, or failure to
fulfill any agreement or covenant of any of the Shareholders,
Management Shareholders, and Specialty under this
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Agreement or under any other agreement or document delivered by the
Shareholders at Closing hereunder; and
(2) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs and legal and other expenses incident
to any of the foregoing.
(ii) From and after the Closing Date, the Shareholders shall
protect, defend, indemnify and hold harmless Horizon and Specialty from
any and all Taxes imposed on Specialty in respect of its income,
business, property or operations or for which Specialty may otherwise be
liable (1) for any taxable period ending prior to the Closing Date and
for any Pre-Closing Period (as defined and determined in Section 8.3),
(2) in respect of any Post-Closing Period, attributable to events,
transactions, sales, deposits, services or rentals occurring, received
or performed in a Pre-Closing Period, (3) in respect of any Post-Closing
Period, attributable to any change in accounting method employed by
Specialty during any of its four previous taxable years, (4) in respect
of any Post-Closing Period, attributable to any items of income or gain
of a partnership reporting Specialty as a partner, to the extent such
items are properly attributable to periods of the partnership ending on
or before the Closing Date, (5) attributable to any discharge of
indebtedness that may result from any capital contributions by the
Shareholders to Specialty of any intercompany indebtedness owed by
Specialty to the Shareholders, (6) resulting from the making of a Code
Section 338 election (or analogous provision of state, local or
territorial law), and (7) resulting from the breach of the Shareholders'
representations set forth in Section 3.23 hereof; provided, however,
that the Shareholders' liability under the foregoing provisions of this
paragraph shall be reduced as to any item to the extent that such item
was specifically and fully reserved for in the Specialty Balance Sheet.
Horizon shall use reasonable efforts to keep the Shareholders
advised as to the status of Tax audits and litigation involving any
Taxes which could give rise to a liability of the Shareholders to
Horizon under this agreement (a "Tax Liability Issue"). Horizon shall
promptly furnish to the Management Shareholders copies of any inquiries
or requests for information from any Taxing Authority concerning any Tax
Liability Issue. Horizon shall notify the Management Shareholders as to
which inquiries or information requests it desires to monitor and, with
respect to such matters, the Management Shareholders will submit for
Horizon approval (which shall not be unreasonably withheld) the
information to be provided to a Taxing Authority in response to
inquiries or requests. The Management Shareholders agree to timely
notify Horizon regarding any proposed written communication (i.e.,
communications not relating to inquiries or requests for information) by
the Management Shareholders to any such Taxing Authority with respect to
such Tax Liability Issue and Horizon shall subsequently notify the
Management Shareholders as to which Tax Liability Issues Horizon desires
to monitor. Upon request by Horizon, the Management Shareholders shall
provide copies of such written communications and documents to be
submitted therewith and receive approval from Horizon (which approval
shall not be unreasonably withheld and shall be given on a timely basis)
prior to submission to the Taxing Authority. Horizon shall have the
right to consult with the Management Shareholders regarding any response
to such requests. Horizon and the Management Shareholders, as the case
may be, shall each promptly furnish to the other upon receipt a copy of
information document requests, a notice of proposed adjustment, revenue
agent's report or similar report or notice of deficiency together with
all relevant documents and memos related to the foregoing documents,
notices or reports, relating to any Tax Liability Issue.
Subject to the foregoing cooperation provisions, Horizon shall have
full responsibility for and discretion in handling any Tax controversy,
including, without limitation, an audit, a protest to the Appeals
Division of the IRS, and litigation in Tax Court or any other court of
competent jurisdiction involving Specialty.
(b) Horizon. Horizon shall indemnify and hold harmless each
Shareholder from, against, and in respect of, any loss, liability, claim,
demand, or expense, including but not limited to reasonable attorney,
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investigation and consultant fees and costs, of any kind whatsoever,
arising out of or resulting from any of the following:
(i) Any misrepresentations, breach of warranty, or failure to
fulfill any agreement or covenant of Horizon under this Agreement or
under any other agreement or document delivered by Horizon to the
Shareholders at Closing hereunder; and
(ii) Any and all actions, suits, proceedings, demands, assessments,
judgments, costs, and legal and other expenses incident to any of the
foregoing.
8.5 Indemnity Procedures. In case any claim, demand or action shall be
brought by any third party including, without limitation, any governmental
authority, against a party entitled to indemnity under Section 8.4(a) or 8.4(b)
above, such party shall promptly notify the other party or parties, as the case
may be, from whom indemnity is or may validly be sought in writing and the
indemnifying party or parties shall assume the defense thereof, including the
employment of counsel. In addition, in case a party hereto shall become aware of
any facts which might result in any such claim, demand or action, such party
shall promptly notify the other party or parties who would be obligated to
provide indemnity hereunder with respect to such claim, demand or action, and
such other party or parties shall have the right to take such action as it or
they may deem appropriate to resolve such matter. The indemnified party or
parties shall have the right to employ separate counsel in any such action and
to participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties, unless the
employment of such counsel has been specifically authorized by the indemnifying
party or parties. Any settlement of any action subject to indemnity hereunder
shall require the consent of the indemnified and the indemnifying party which
consent shall not be unreasonably withheld and shall be given within five (5)
days following the giving of notice thereof. The indemnifying party or parties
shall not be liable for any settlement of any action effected without its or
their consent, but if settled with the consent of the indemnifying party or
parties or if there be a final judgment for the plaintiff in any such action,
the indemnifying party or parties shall indemnify and hold harmless the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. If requested by the indemnifying party, the indemnified
party shall cooperate with the indemnifying party and its counsel and use its
best efforts in contesting any such claim or, if appropriate, in making any
counter-claim or cross-complaint against the party asserting the claim, provided
that the indemnifying party will reimburse the indemnified party for reasonable
expenses incurred in so cooperating upon presentation of receipts or other
evidence of such expense. The indemnifying party and its representatives shall
have full and complete access during reasonable hours to all books, records and
files of the indemnified party expressly related to the defense of any claim for
indemnification undertaken by the indemnifying party pursuant to this Article
VIII, or for any other purpose in connection therewith; provided that the
indemnifying party shall safeguard and maintain the confidentiality of all such
books, records and files.
8.6 Limitations on Indemnification.
(a) Maximum Liability. Except with respect to representations and
warranties of a Shareholder under Article II, the liability of a
Shareholder under this Agreement after the Closing shall not exceed the
value of the shares of Horizon Stock deposited by such Shareholder pursuant
to the Post-Closing Escrow Agreement, which value shall be determined by
multiplying the number of shares of Horizon Stock received by such
Shareholder in the share exchange by $19.50 or, alternatively, at the
election of the Shareholders exercised by written notice delivered to
Horizon at the Closing, by the closing market price of the Horizon Stock on
the Nasdaq National Market for the trading day immediately preceding the
Closing Date, and the recourse of Horizon shall be limited to the shares of
Horizon Stock deposited by the Shareholder pursuant to the Post-Closing
Escrow Agreement. As to liability for the representations and warranties of
a Shareholder under Article II of this Agreement after the Closing, the
liability of a Shareholder shall instead be limited to the total value of
the Horizon Stock received by such Shareholder for the Specialty Shares of
such Shareholder pursuant to this Agreement (such value to be determined in
the same manner as set forth above with respect to the escrow shares) and
the recourse of Horizon shall not be limited to the shares of Horizon Stock
delivered by the Shareholder pursuant to the Post-Closing Escrow Agreement
as its exclusive remedy; provided, however, that Horizon shall seek
recourse for any
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such liability of a Shareholder under Article II first against the shares
of Horizon Stock delivered into escrow by such Shareholder pursuant to the
Post-Closing Escrow Agreement before proceeding directly against such
Shareholder.
(b) Initial Threshold. Neither the Shareholders nor Horizon shall be
obligated to indemnify the other party except to the extent that the
cumulative amount of all indemnifiable losses exceeds Fifty Thousand
Dollars ($50,000.00) (the "Threshold"), which excess amount shall be
recoverable in accordance with the terms hereof; provided, however, that
such limitation set forth in this Section 8.6(b) shall not apply to the
matters described in Section 8.6(d); and provided further, however, that
such limitation set forth in this Section 8.6(b) shall not apply to matters
arising out of a breach of a representation or warranty of a Shareholder
contained in Article II of this Agreement.
(c) Time Limits for Claims. No claim for indemnification may be made
by any indemnified party in respect of indemnifiable losses unless written
notice thereof shall have been received by the indemnifying party on or
prior to one year after the date hereof; provided, however, that the
one-year limitation set forth in Section 8.1 and this Section 8.6(c) shall
not apply to the matters described in Section 8.6(d) as to which the
indemnification obligations hereunder shall expire six (6) months after the
termination of the applicable statute of limitations relating to the
subject matter covered by such provisions; and provided further, however,
that in each case if, prior to the applicable date of expiration, a
specific state of facts shall have become known which is reasonably likely
to constitute or give rise to any indemnifiable loss as to which indemnity
may be payable and the indemnified party shall have given notice of such
facts to the indemnifying party and made a claim for indemnification within
such one-year period, then the right to indemnification with respect
thereto shall remain in effect until such matter shall have been finally
determined and disposed of and any indemnification due in respect thereof
shall have been paid.
(d) Certain Matters. The following are the matters referred to in
Section 8.1, 8.6(b) and Section 8.6(c):
(i) Losses arising from intentional fraud or an intentional
misrepresentation on the part of any Shareholder; and
(ii) Losses arising from the intentional breach of any covenant or
agreement by a Shareholder contained in this Agreement.
8.7 Remedies; Default; Notice and Cure. If the Closing occurs,
indemnification pursuant to this Article VIII is the sole and exclusive remedy
of the parties after the Closing for matters arising out of the representations,
warranties, covenants and agreements of the Shareholders and Horizon set forth
in this Agreement (without limiting the rights of the parties under any other
agreement), except as otherwise expressly provided in this Agreement. No party
shall be deemed in breach of its obligations hereunder unless it has received
written notice from the other party of noncompliance with a term or provision of
this Agreement specifying the specific item of noncompliance and the defaulting
party has failed to cure such noncompliance within ten (10) days after receipt
of such notice; provided, however, that if the nature of such default is such
that it cannot be cured solely by the payment of money and that more than 10
days may be reasonably required to effect a cure, then the defaulting party
shall not be deemed to be in default if such party shall commence such cure
within such 10 day period and thereafter diligently and in good faith prosecutes
such cure to successful completion.
8.8 Pooling of Interest Requirements. Each of the Shareholders agrees to
comply with the terms of SEC Accounting Series Release No. 135 ("Release No.
135") and not sell or otherwise reduce his or her risk relative to any shares of
Horizon Stock received in the Share Exchange until such time as financial
results covering at least thirty (30) days of combined operations of Horizon and
Specialty have been issued by Horizon. Horizon agrees to issue, in a manner
satisfying the requirements of Release No. 135, an earnings statement containing
at least thirty (30) days of combined financial results as soon as reasonably
practicable following the Effective Date.
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8.9 Horizon Board Position. Horizon covenants and agrees that it shall use
its best efforts to cause Howard B. Finkel to be nominated and elected as a
member of the Board of Directors of Horizon so long as Howard B. Finkel
beneficially owns not less than five percent (5%) of the outstanding Horizon
Common Stock as determined on a fully-diluted basis; provided, however, that the
foregoing does not constitute any guarantee that Howard B. Finkel will in fact
be so elected.
8.10 Director and Officer Indemnification. Horizon covenants and agrees
that it shall cause Specialty to indemnify and hold harmless the Shareholders
who are or were directors and/or officers of Specialty with respect to any
litigation or claims arising out of or relating to the Newport Contract to the
extent that such individuals are entitled to such indemnification and hold
harmless as a current or former director and/or officer of Specialty pursuant to
and in accordance with the provisions of the certificate of incorporation and
bylaws of Specialty as in effect on the Effective Date and Delaware law.
ARTICLE IX
NON-COMPETITION
9.1 Covenant Not to Compete; Non-Solicitation. For and in consideration of
the share exchange and the acquisition of the Specialty Shares by Horizon
pursuant to this Agreement and other good and valuable consideration, each of
Howard B. Finkel ("Finkel"), the principal shareholder and the chief executive
officer of Specialty, and John Harrison, ("Harrison"), a shareholder and the
chief operating officer of Specialty, severally but not jointly, covenant and
agree for the respective periods of time specified below that he shall not,
directly or indirectly, as an employer, employee, director, officer, consultant,
creditor, investor, owner, agent, principal, partner, shareholder, or through
any other kind of ownership (other than ownership of securities of Horizon or of
any other publicly held entity in which such person, directly or indirectly, in
the aggregate beneficially owns less than two percent (2%) of any class of
outstanding securities), or in any other representative or individual capacity,
do any of the following:
(i) engage in the operation or management of a mental health or
rehabilitation treatment unit or program operated in or in association with
a general acute care hospital (the "Business") in the continental United
States (the "Restricted Area");
(ii) engage in any business which calls upon, solicits, diverts or
takes away any customer or customers of Horizon or its subsidiaries
including Specialty, in the Restricted Area for the purpose of selling or
attempting to sell to any of said customers any products or services
similar to any products or services heretofore sold or provided to any of
such customers by Horizon or its subsidiaries including Specialty; and
(iii) engage in any business which solicits any present or future
employee of Horizon or its subsidiaries including Specialty or initiates
discussions with any such employee regarding his or her termination or
resignation from employment with the Horizon or its subsidiaries including
Specialty, so that such employee may accept employment with, or engagement
(as a partner, investor, shareholder, employee, agent, consultant, or
otherwise directly or indirectly, with any party engaged in any of the
activities proscribed as specified above.
The foregoing provisions of this Section 9.1 shall apply to Finkel for a period
equal to the greater of three (3) years after the Closing Date or two (2) years
after Finkel ceases to be a director of Horizon. The foregoing provisions of
this Section 9.1 shall apply to Harrison for the period of one (1) year after
the Closing Date.
9.2 Non-Disclosure. Each of Finkel and Harrison, severally but not
jointly, further covenants and agrees that all information concerning the
assets, liabilities and financial condition of Horizon and its subsidiaries,
including Specialty, constitute trade secrets and confidential, proprietary
business information
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which is the property of Horizon and its subsidiaries and that, unless otherwise
required by law, from and after the Closing Date:
(a) he shall use his best efforts and exercise utmost diligence to
protect and safeguard all of such trade secrets and confidential,
proprietary information;
(b) he shall not, directly or indirectly, use, sell, license, publish,
disclose or otherwise transfer or make available to others any of such
trade secrets or confidential, proprietary information;
(c) without the prior written consent of Horizon, he shall not,
directly or indirectly, disclose any of such trade secrets or confidential,
proprietary information; and
(d) he shall not, directly or indirectly, use for his own benefit or
for the benefit of another, any of such trade secrets or confidential,
proprietary information.
It is expressly understood, however, that the foregoing shall not apply to any
information that was generally available to the public on a non-confidential
basis prior to the date of this Agreement or was or becomes generally available
to the public on a non-confidential basis from a third party who is not bound to
keep such information confidential. Nothing contained in this Section 9.2 shall
restrict disclosure of information incident to obtaining judicial enforcement of
the terms of this Agreement.
9.3 Nondisparagement. Finkel and Harrison, respectively, each further
severally agree that for the period under Section 9.1 above applicable to him,
he shall not make or publish any statement, written or oral, disparaging the
reputation of Horizon or any of its subsidiaries, including Specialty, the
executive officers of Horizon or any of its subsidiaries or any of the business
services or products of Horizon or any of its subsidiaries or solicit or
encourage any hospital having a management contract with Horizon or any of its
subsidiaries, including Specialty, to terminate such management contract.
Nothing contained in this Section 9.3 shall restrict statements incident to
obtaining judicial enforcement of the terms of this Agreement.
9.4 Reasonableness; Reformation. Finkel and Harrison, respectively, each
severally acknowledge and agree that (i) the provisions of this Article IX are
ancillary to the transaction pursuant to which he sold and Horizon acquired the
Specialty Shares, (ii) the provisions of this Agreement contain reasonable
limitations as to time, geographical area and scope of activities to be
restrained and do not impose a greater restraint than is necessary to protect
goodwill and other business interests of Horizon and its subsidiaries, (iii) if
any portion of the covenants and agreements set forth in this Agreement are held
to be invalid, unreasonable, arbitrary or against public policy, then such
portion of such covenants shall be considered divisible as to time, scope of
activities covered, and geographical area, and (iv) if any court of competent
jurisdiction determines the specified time period, scope of activities covered,
or the specified geographical area applicable to any provision of this Agreement
to be invalid, unreasonable, arbitrary or against public policy, a lesser time
period, scope of activities covered, and/or geographical area which is
determined to be reasonable, non-arbitrary and not against public policy may be
enforced against him.
9.5 Remedies for Breach. If Finkel or Harrison, respectively, has failed
to satisfactorily cure any breach or threatened breach of any covenant or
agreement contained herein within ten (10) days after written notice of such
breach or threatened breach is given by Horizon, any one or more of the
following remedies, as selected by Horizon in its sole discretion, shall be
available to Horizon in the event of a breach of this Agreement:
(a) Specific Performance. In the event of a breach or threatened
breach of any covenant or agreement in this Article IX, remedies at law
will not adequately compensate Horizon for its injuries incurred as a
result thereof. Accordingly, injunctive and/or equitable relief shall be
available to Horizon to specifically enforce this Article IX and prevent
such breach and any continued breach of any covenant and agreement herein.
(b) Suit for Damages. In addition to the remedies stated in Section
9.5(a) above, in the event of any breach of any covenant or agreement of
this Article IX, Horizon may sue the party committing such breach for
damages arising out of such breach and otherwise enforce this Article IX
and obtain all other remedies available to Horizon under applicable law.
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ARTICLE X
TERMINATION AND ABANDONMENT OF THE SHARE EXCHANGE
10.1 Termination. This Agreement may be terminated and the share exchange
abandoned (notwithstanding approval by the Horizon shareholders of the share
exchange) prior to the Closing Date:
(a) by mutual written consent of Horizon and the Shareholders at any
time;
(b) by Horizon at any time twenty (20) days or more after the
Effective Date if NME has not agreed in writing to be a party to this
Agreement;
(c) by Horizon pursuant to Section 7.4 of this Agreement;
(d) by the Shareholders at any time after August 31, 1997, provided
that neither any Shareholder nor Specialty is in material breach of any
covenant, agreement, representation or warranty made by it in this
Agreement;
(e) by Horizon at any time after August 31, 1997, provided that
Horizon is not in material breach of any covenant, agreement,
representation or warranty made by it in this Agreement;
(f) by the Shareholders or Horizon at any time if an order is entered
by any court or governmental agency having jurisdiction enjoining Horizon
or any Shareholder, respectively, from consummating the share exchange and
such order shall not have been vacated, reversed or withdrawn on or before
the earlier of (i) the sixtieth day after the date on which such order was
first issued or (ii) August 31, 1997;
(g) by the Shareholders or Horizon if (i) any material representation
or warranty of the other hereunder shall not have been true and correct as
of the Effective Date or shall become untrue or incorrect after the
Effective Date, except as contemplated by Sections 7.4 and 7.5, or (ii)
material default shall be made by the other hereunder in the due and timely
observance or performance of any of its covenants and agreements herein
contained, in either event only if such representation or warranty cannot
be made true and correct or such default cannot be cured on or prior to the
earlier of (1) the 15th day after the non-defaulting or non-breaching party
notifies the other in writing of such default or breach, specifying the
nature thereof, or (2) August 31, 1997. The Shareholders and Specialty
shall be considered a single party for purposes of this Section 10.1(e).
10.2 Effect of Termination. In the event of termination and abandonment
pursuant to Section 10.1 hereof, this Agreement shall become void and have no
effect, without any liability on the part of any of the parties, except as
otherwise provided in the last sentence of Section 5.1 and in Sections 10.3 and
11.9 hereof.
10.3 Termination Fee. In the event that Horizon terminates this Agreement
prior to Closing as a result of Specialty or the Shareholders engaging in a
willful failure to perform any of their obligations or a willful and material
misstatement of any representation or warranty contained in this Agreement,
Specialty shall promptly pay to Horizon on demand a termination fee, payable in
cash, equal to the full amount of all costs and expenses, including without
limitation attorneys and accountants fees and expenses, incurred by Horizon in
connection with the transactions contemplated by this Agreement up to an
aggregate maximum amount of Two Hundred Fifty Thousand Dollars ($250,000.00).
Such termination fee shall be in lieu of any other damages arising out of such
termination.
ARTICLE XI
MISCELLANEOUS
11.1 Waiver and Amendment. Any term or provision of this Agreement may be
waived in writing at any time by the party which is entitled to the benefits
thereof, and any term or provision of this Agreement may be amended or
supplemented at any time by a writing signed by the parties.
11.2 Entire Agreement. This Agreement, together with the Exhibits and
Schedules hereto and the documents referred to herein, constitute the entire and
complete agreement among the parties, and supersedes
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all prior arrangements or understandings, whether written or oral, with respect
to the subject matter of this Agreement.
11.3 Schedules. References to a Schedule shall include any applicable
disclosure expressly set forth on the face of any other Schedule even if not
specifically cross-referenced to such other Schedule; provided, however, that
the representations and warranties of a party set forth in this Agreement shall
not be affected or deemed modified, waived or limited in any respect by the
information contained in any agreement or document listed or referenced in the
Schedules unless the reference on the face of the Schedule expressly by its
terms indicates that it limits the scope of a representation or warranty. The
parties acknowledge that certain agreements and documents listed on the
Schedules are not attached to the Schedules, but were previously delivered or
made available to the party or its representatives in connection with the due
diligence investigation conducted by the parties prior to Closing (hereinafter
defined). The parties represent and warrant to each other that such agreements
and documents made available or delivered to the other party were originals or
true and complete copies of the originals of all such agreements and documents.
The Schedules delivered pursuant to this Agreement shall not be attached hereto
but shall be delivered separately accompanied by a certified of the President or
an Executive Vice President of a party to the effect that such constitutes the
Schedules to this Agreement and constitute a part hereof.
11.4 Descriptive Headings. The descriptive headings are for convenience of
reference only and shall not control or affect the meaning or construction of
any provision of this Agreement.
11.5 Defined Terms. As used in this Agreement, capitalized terms shall
have the meanings expressly set forth herein for such terms, and variants and
derivatives of such defined terms shall have correlative meanings. To the extent
that certain of the defined terms set forth herein express agreements between or
among parties to this Agreement, the parties agree to the same by execution of
this Agreement.
11.6 No Personal Liability. None of the directors, officers,
representatives, agents or legal counsel of any party, in their capacity as
such, shall have any liability in damages, rescission or otherwise to any other
party under or on account of this Agreement or any of the transactions
contemplated hereby.
11.7 Notices. Any notices, claims or demands which any party is required
or may desire to give to another under or in conjunction with this Agreement
shall be in writing, and shall be given by addressing the same to such other
party(ies) at the address set forth below, and by (i) depositing the same so
addressed, postage prepaid, first class, certified or registered, in the United
States mail (herein referred to as "Mailing"), (ii) overnight delivery by a
nationally recognized overnight courier service (e.g. UPS, Federal Express),
(iii) delivering the same personally to such other party(ies), or (iv)
transmitting by facsimile and Mailing the original. Any notice shall be deemed
to have been given five (5) U.S. Post Office delivery days following the date of
Mailing; one business day after timely delivery to an overnight courier; if by
personal delivery, upon such delivery; or if by facsimile, the day of
transmission if made within customary business hours, or if not transmitted
within customary business hours, the following business day.
If to Horizon:
Horizon Mental Health Management, Inc.
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
Attention: James Ken Newman, President
Facsimile Number: (972) 420-8282
With a copy to:
Strasburger & Price, L.L.P.
901 Main Street, Suite 4300
Dallas, Texas 75202
Attention: David K. Meyercord, Esq.
Facsimile Number: (214) 651-4330
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If to the Shareholders:
To the respective addresses set
forth on Exhibit A hereto
With a copy to:
Howrey & Simon
1299 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2402
Attention: Roger A. Klein, Esq.
Facsimile Number: (202) 383-6610
If to Specialty:
Specialty Healthcare Management, Inc.
6300 South Syracuse Way, Suite 645
Denver, Colorado 80111-6726
Attention: Howard B. Finkel, President
Facsimile Number: (303) 793-0855
Any party may change the address or facsimile telephone number for notices to be
sent to it by written notice delivered pursuant to the terms of this Section
11.7.
11.8 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
11.9 Expenses. If the transactions provided for herein are consummated,
each party to this Agreement will pay its respective expenses incurred in
connection with the preparation and performance of this Agreement; provided,
however, that Specialty shall pay the reasonable fees and expenses of counsel
for the Shareholders up to a maximum amount of Seventy-Five Thousand Dollars
($75,000).
11.10 Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors and
assigns, but shall not be assigned by any party without the prior written
consent of the other parties hereto.
11.11 Choice of Law. This Agreement is being executed and delivered, and
is intended to be performed, in the State of Delaware, and the laws of such
state and of the United States of America shall govern the rights, duties and
obligations of the parties and the validity, construction, enforcement, and
interpretation of this Agreement.
11.12 Invalid Provisions. If any provision of this Agreement is deemed or
held to be illegal, invalid, or unenforceable, this Agreement shall be
considered divisible and inoperative as to such provision to the extent it is
deemed to be illegal, invalid or unenforceable, and in all other respects this
Agreement shall remain in full force and effect; provided, however, that if any
provision of this Agreement is deemed or held to be illegal, invalid or
unenforceable there shall be added hereto automatically a provision as similar
as possible to such illegal, invalid or unenforceable provision and be legal,
valid and enforceable. Further, should any provision contained in this Agreement
ever be reformed or rewritten by any judicial body of competent jurisdiction,
such provision as so reformed or rewritten shall be binding upon all parties
hereto.
11.13 Number and Gender of Words. Whenever in this Agreement, the singular
number is used, the same shall include the plural where appropriate, and vice
versa, and words of any gender shall include each other gender where
appropriate.
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11.14 Attorney's Fees and Costs. In the event of a breach by any party to
this Agreement and commencement of a subsequent legal action in a court of law
or forum of arbitration, the prevailing party in any such dispute shall be
entitled to reimbursement of reasonable attorney's fees and court costs,
including, but not limited to, the costs of expert witnesses, transportation,
lodging and meal costs of the parties and witnesses, costs of transcript
preparation and other reasonable and necessary direct and incidental costs of
such dispute.
(Remainder of This Page Intentionally Left Blank)
42
<PAGE> 121
IN WITNESS WHEREOF, the parties hereto have executed this Share Exchange
Reorganization Agreement as of the date first written above.
<TABLE>
<S> <C>
HORIZON MENTAL HEALTH MANAGEMENT, INC. SPECIALTY HEALTHCARE MANAGEMENT, INC.
By: /s/ JAMES W. MCATEE By: /s/ HOWARD B. FINKEL
---------------------------------------- ----------------------------------------
Name: James W. McAtee Name: Howard B. Finkel
Title: Executive Vice President Title: Chairman & CEO
THE SHAREHOLDERS:
/s/ HOWARD B. FINKEL /s/ DENISE DAILEY
- -------------------------------------------- --------------------------------------------
Howard B. Finkel Denise Dailey
/s/ JOHN HARRISON /s/ KENNETH R. DORMAN M.D.
- -------------------------------------------- --------------------------------------------
John Harrison Ken Dorman
/s/ LARRY REIFF /s/ G. PHILLIP WOELLNER
- -------------------------------------------- --------------------------------------------
Larry Reiff G. Phillip Woellner
ARGENTUM CAPITAL PARTNERS, L.P. /s/ MICHAEL S. MCCARTHY
--------------------------------------------
Michael S. McCarthy
By: /s/ DANIEL RAYNOR
----------------------------------------
Name: Daniel Raynor
Title: Chairman
</TABLE>
43
<PAGE> 122
EXHIBIT A
<TABLE>
<CAPTION>
PERCENTAGE
SHARES OF SPECIALTY OWNERSHIP OF
NAME AND ADDRESS OF SHAREHOLDER COMMON STOCK SPECIALTY(1)
- ------------------------------------------------------------ ------------------- ------------
<S> <C> <C>
Howard B. Finkel............................................ 4,500 47.40%
6300 South Syracuse Way
Suite 645
Denver Colorado 80111-6726
John Harrison............................................... 937 9.87%
6300 South Syracuse Way
Suite 645
Denver Colorado 80111-6726
Larry Reiff................................................. 937 9.87%
6300 South Syracuse Way
Suite 645
Denver Colorado 80111-6726
Argentum Capital Partners, L.P.............................. 375 3.95%
405 Lexington Ave., 5th Floor
New York, NY 10174
Denise Dailey............................................... 75 0.79%
6300 South Syracuse Way
Suite 645
Denver Colorado 80111-6726
Ken Dorman.................................................. 75 0.79%
6300 South Syracuse Way
Suite 645
Denver Colorado 80111-6726
G. Phillip Woellner......................................... 75 0.79%
6300 South Syracuse Way
Suite 645
Denver Colorado 80111-6726
Michael S. McCarthy......................................... 1,305 13.74%
205 West Touhy Ave.
Park Ridge, IL 60068
NME Management Services, Inc................................ 1,215 12.80%
------ -----
9,494 100%
</TABLE>
- ---------------
(1) Assumes exercise of the NME Warrant.
A-1
<PAGE> 123
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), is entered into as
of , 1997, by and between Horizon Mental Health Management, Inc., a
Delaware corporation ("Horizon") and Howard B. Finkel, John Harrison, Larry
Reiff, Argentum Capital Partners, L.P. a Delaware limited partnership, Denise
Dailey, Ken Dorman, G. Phillip Woellner, Michael S. McCarthy and NME Management
Services, Inc., a Delaware corporation (individually a "Shareholder" and
collectively the "Shareholders").
WHEREAS, Horizon and the Shareholders are simultaneously consummating the
transactions contemplated by that certain Share Exchange Reorganization
Agreement (the "Reorganization Agreement"), dated April 25, 1997, by and among
Horizon, the Shareholders and Specialty Healthcare Management, Inc., a Delaware
corporation ("Specialty"); and
WHEREAS, the Shareholders pursuant to the Reorganization Agreement received
unregistered shares of Common Stock of Horizon in a private offering transaction
(the "Share Exchange"); and
WHEREAS, Horizon and the Shareholders agreed to enter into this Agreement
pursuant to the Reorganization Agreement simultaneously with the Share Exchange;
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Definitions.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Common Stock, $.01 par value, of Horizon issued in
the Share Exchange pursuant to the Reorganization Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder" means a Shareholder or any assignee or transferee of a Registrable
Security.
"Registrable Securities" means the shares of Common Stock issued to the
Shareholders in the Share Exchange pursuant to the Reorganization Agreement,
other than the shares of Common Stock held in escrow under the Post-Closing
Escrow Agreement executed pursuant to the Reorganization Agreement. Any
Registrable Security will cease to be a Registrable Security when (i) a
registration statement covering such Registrable Security has been declared
effective by the Commission and the Registrable Security has been disposed of
pursuant to such effective registration statement, (ii) the Registrable Security
is sold under circumstances in which all of the applicable conditions of Rule
144 (or any similar provisions then in force) under the Securities Act are met
or (iii) the Registrable Security has been otherwise transferred, Horizon has
delivered a new certificate or other evidence of ownership for the Registrable
Security not bearing a legend restricting further transfer, and the Registrable
Security may be resold without subsequent registration under the Securities Act.
"Registration Statement" means the registration statement contemplated by
this Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means a Holder who is selling Registrable Securities
pursuant to the Registration Statement.
"Underwriters" means a securities dealer which purchases any Registrable
Securities as principal and not as part of such dealer's market-making
activities.
2. Unregistered Securities.
Each Shareholder acknowledges that the shares of Common Stock issued in the
Share Exchange are unregistered securities and are subject to Rule 144 under the
Securities Act for the purposes of any resales of
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shares of the Common Stock. Each Shareholder hereby represents and warrants to,
and agrees with, Horizon as follows:
(a) The Shareholder will not sell or otherwise transfer any of the
Common Stock in violation of the Securities Act or the rules and
regulations promulgated thereunder. The Shareholder has not and will not,
in any event, sell or otherwise transfer or enter into any contract or
otherwise agree to sell or otherwise transfer any of the Common Stock until
such time as financial results covering at least thirty days of combined
operations of Horizon and Specialty after the Share Exchange have been
published and distributed to the stockholders of Horizon.
(b) The Shareholders hereby consent to the placing of a legend on the
certificate or certificates evidencing the Common Stock referring to the
issuance thereof in a private offering transaction under the Securities Act
and to the giving of stop transfer instructions to the transfer agent for
the Common Stock with respect to such certificate or certificates. The
legend will state in substance:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 or the Blue Sky Laws of any state
and may not be sold or otherwise transferred in the absence of (a) an
effective registration statement for the sale of such shares under
the Securities Act of 1933 or (b) an opinion of counsel reasonably
satisfactory to Horizon to the effect that the transfer may be made
without such registration."
(c) Except as set forth herein, each Shareholder understands that
Horizon is under no obligation to take any action to facilitate the sale,
transfer or other disposition by any Shareholder, or on behalf of any
Shareholder, of any of the Common Stock.
(d) In the event of any sale or transfer of any of the Common Stock in
a transaction not involving a sale pursuant to Rule 144 under the
Securities Act or not involving a sale in a registered public offering, the
Shareholder will obtain from each transferee of the Common Stock in such
transaction a letter agreement substantially similar to this Section 2 or a
letter containing such other information reasonably required by Horizon to
evidence an exception from the applicable registration requirements of
federal or state securities laws, which is binding and enforceable by
Horizon against the transferee.
It is understood and agreed that the legend set forth in paragraph (b)
above shall be removed, and the related stock transfer restrictions shall be
lifted forthwith in connection with the sale or other transfer of Common Stock
(i) if the sale or other transfer of the shares of Common Stock shall have been
registered under the Securities Act, or (ii) if the sale or other transfer of
the shares of Common Stock is not so registered, the Shareholder is not at the
time of such sale or other transfer an affiliate of Horizon and has held the
Stock for at least one year (or such other period as may be prescribed by the
Securities Act and the rules and regulations thereunder) and Horizon, for at
least twelve months immediately preceding the sale or other transfer, has filed
with the Commission all of the reports it is required to file under Exchange
Act, or (iii) if Horizon shall have received either a letter from the staff of
the Commission or an opinion of legal counsel acceptable to Horizon, to the
effect that the stock transfer restrictions and the legend are not required and
may be removed.
3. The Registration Statement.
(a) Registration Statement. Subject to the provisions of this Section 3,
Horizon agrees that it shall prepare and file with the Commission as soon as
practicable after the date hereof, but in no event earlier than October 15,
1997, a registration statement (the "Registration Statement") on any form for
which Horizon then qualifies and Horizon considers appropriate and which is
available to sell the Registrable Securities; provided, however, that it is
understood that Horizon shall be required to proceed with the Registration
Statement only after its 1997 fiscal year-end audited financial statements are
available to be used for the purposes of the Registration Statement. Horizon
further agrees to use its best efforts to cause the Registration Statement to be
filed and declared effective within thirty (30) days after the Horizon 1997
fiscal year-end audited financial statements are available. Prior to the filing
of the Registration Statement, Horizon shall request from each Holder the number
of shares of Registrable Securities owned by the Holder desired to be included
in the Registration Statement. Subject to the provisions of Section 3(b) below,
Horizon will include
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<PAGE> 125
in the Registration Statement all Registrable Securities with respect to which
Horizon has received written requests for inclusion therein within twenty (20)
days after the receipt by the applicable Holder of Horizon's notice. Each such
request from a Holder will specify the number of shares of Registrable
Securities to be registered. Unless the Holder or Holders of a majority of the
Registrable Securities to be registered in the Registration Statement shall
consent in writing, Horizon shall not be permitted to include any other
securities under the Registration Statement.
(b) Underwritten Offering. Horizon may elect to proceed with the
Registration Statement pursuant to Section 3(a) above in the form of an
underwritten offering and, in such event, the Holders participating in the
Registration Statement hereby agree that the offering shall be in the form of an
underwritten offering. In such event, Horizon shall select the managing
underwriter(s) and such additional investment bankers and managers to be used in
connection with the offering; provided, that such underwriter and additional
investment bankers and managers must be reasonably satisfactory to the Holders
participating in the Registration Statement. If the managing underwriter or
underwriters of such offering advise Horizon and the Holders in writing that in
their opinion the number of shares of Registerable Securities requested to be
included in such offering is sufficiently large to materially and adversely
affect the success of such offering, Horizon will only include in the
Registration Statement the Registrable Securities (and no securities offered by
Horizon or any other party) limited to an aggregate number of the Registrable
Securities which in the opinion of such managing Underwriter or Underwriters can
be sold without any such material adverse effect, and such amount shall be
allocated to the Holders of Registrable Securities based on the number of
Registrable Securities requested to be included in the Registration Statement.
As to any Registrable Securities requested to be included in the offering by the
Holders, but not included due to such opinion of the Managing Underwriters, the
Holders of such Registrable Securities shall have the piggyback registration
rights provided under Section 4 below.
(c) Other Form of Offering. In the event that Horizon elects not to proceed
or is unable to effect the offering pursuant to the Registration Statement as an
underwritten offering, then Horizon shall nevertheless still be obligated to
proceed with the Registration Statement and an offering of the Registerable
Securities on a non-underwritten basis; provided, however, that Horizon agrees
to proceed in such event in the same manner and at the same times as specified
in Section 3(a) but provided further, however, that the Holders agree that, in
such event, the Shareholders shall initially for at least a two week period
after the effective date of the Registration Statement attempt to sell the
Registerable Securities through block sales arranged by a broker/dealer selected
by Horizon and reasonably satisfactory to the Holders.
(d) Effective Registration and Expenses. A registration will not count as
the Registration Statement until it has become effective (unless the Holders
withdraw the Registrable Securities, in which case such registration will count
as the Registration Statement unless the Holders of such Registrable Securities
agree to pay all Registration Expenses (as hereinafter defined)). Except as
provided above, Horizon will pay all Registration Expenses in connection with
any Registration Statement whether or not it becomes effective.
4. Finkel Piggyback Registration Rights.
(a) If at any time after the offering pursuant to the Registration
Statement contemplated under Section 3 above is completed and before the
expiration of one(1) year after the date of this Agreement, the Company proposes
for any reason to register any shares of Common Stock under the Securities Act
(other than pursuant to a registration statement on Form S-4 or Form S-8 (or a
similar or successor form) with respect to an offering of Common Stock by the
Company for its own account or for the account of any of its security holders,
it shall at each such time promptly give written notice to Howard B. Finkel
("Finkel") of its intention to do so (but in no event less than ten days before
the anticipated filing date). Such notice shall offer Finkel the opportunity to
register such number of shares of Registrable Securities as Finkel may request.
(b) The Company shall use its best efforts to cause the managing
Underwriter or Underwriters of a proposed underwritten offering to permit the
shares of Registrable Securities requested by Finkel to be included in the
registration statement for such offering to be included (on the same terms and
conditions as the Common Stock of the Company included therein to the extent
appropriate). Notwithstanding the foregoing, if in the reasonable judgment of
the managing Underwriter or Underwriters, due to the size of the
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<PAGE> 126
offering which the Company or such other persons or entities intend to make, the
success of the offering would be adversely affected by inclusion of the
Registrable Securities requested to be included by Finkel then, if the offering
is by the Company for its own account or is an offering by other holders
registering shares of Common Stock of the Company pursuant to demand
registration rights, then the number of shares of Common Stock to be offered for
the account of Finkel and any other holders registering shares of Common Stock
of the Company pursuant to similar piggyback registration rights, if any, shall
be reduced pro rata based on the relative percentage ownership of all shares of
Common Stock then outstanding owned by Finkel and such other holders to the
extent necessary to reduce the total number of shares of Common Stock to be
included in such offering to the amount recommended by such managing Underwriter
or Underwriters.
5. Holdback Agreements.
(a) Restrictions on Public Sale by Holders of Registrable Securities. Each
Holder whose securities are included in a Registration Statement agrees not to
effect any public sale or distribution of the issue being registered or a
similar security of Horizon or any securities convertible into or exchangeable
or exercisable for such securities, including a sale pursuant to Rule 144 or
Rule 144A under the Securities Act, during the ten days prior to, and during the
90-day period beginning on, the effective date of the Registration Statement
(except as part of such registration), if and to the extent requested by Horizon
in the case of a non-underwritten public offering or if and to the extent
requested by the managing Underwriter or Underwriters in the case of an
underwritten public offering.
(b) Restrictions on Public Sale By Horizon. Horizon agrees not to effect
any public sale or distribution of any securities similar to those being
registered, or any securities convertible into or exchangeable or exercisable
for such securities (except pursuant to a registration statement on Form S-4 or
S-8 or any substitute form therefor that may be adopted by the Commission),
during the ten days prior to, and during the 90-day period beginning on, the
effective date of the Registration Statement (except as part of the Registration
Statement where the Holders of a majority of the Registrable Securities to be
included in the Registration Statement consent).
6. Registration Procedures.
In connection with the Registration Statement, Horizon will:
(a) prepare and file with the Commission a registration statement on
any form for which Horizon then qualifies and which Horizon shall deem
appropriate and which form shall be available for the sale of the
Registrable Securities to be registered thereunder in accordance with the
intended method of distribution thereof, and use its best efforts to cause
such filed registration statement to become effective; provided, (i) that
at least five days before filing a registration statement or prospectus or
as promptly as practicable prior to filing any amendments or supplements
thereto, Horizon will furnish to one counsel selected by the Holders of a
majority of the Registrable Securities covered by such registration
statement copies of all such documents proposed to be filed, which
documents will be subject to the review of such counsel, and (ii) that
after the filing of the registration statement, Horizon will promptly
notify each Selling Holder of Registrable Securities covered by such
registration statement of comments received from, or any stop order issued
or threatened by, the Commission and take all reasonable actions required
to respond to such comments or, as the case may be, prevent the entry of
such stop order or to remove it if it has been entered;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective pursuant to Section 3 for a period of not less than
ninety (90) days or such shorter period which will terminate when all
Registrable Securities covered by such registration statement have been
sold (but not before the expiration of the period referred to in subsection
4(3) of the Securities Act and Rule 174 thereunder, if applicable) and
comply with the provisions of the Securities Act applicable to it with
respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the Selling Holders thereof set forth in much registration
statement;
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(c) furnish to each Selling Holder, prior to filing the registration
statement, if requested, copies of such registration statement as proposed
to be filed, and thereafter furnish to such Selling Holder such number of
copies of such registration statement, each amendment and supplement
thereto (in each case including all exhibits thereto), the prospectus
included in such registration statement (including each preliminary
prospectus), and such other documents as such Selling Holder may reasonably
request in order to facilitate the disposition of the Registrable
Securities owned by such Selling Holder;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such states as
any Selling Holder reasonably (in light of such Selling Holder's intended
plan of distribution) requests and do any and all other acts and things
which may be reasonably necessary to enable such Selling Holder to
consummate the disposition in such states of the Registrable Securities
owned by such Selling Holder; provided that Horizon will not be required to
(i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subsection, (ii) subject
itself to taxation in any such jurisdiction, or (iii) consent to general
service of process in any such jurisdiction;
(e) use its best efforts to cause such Registrable Securities to be
registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of
Horizon to enable the Selling Holder or Selling Holders thereof to
consummate the disposition of such Registrable Securities; provided that
Horizon will not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this subsection, (ii) subject itself to taxation in any such jurisdiction
or (iii) consent to general service of process in any such jurisdiction;
(f) notify each Selling Holder of such Registrable Securities, at any
time when a prospectus relating thereto is required to be delivered under
the Securities Act, of the occurrence of an event requiring the preparation
of a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
will not contain an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and promptly make available to each
Selling Holder any such supplement or amendment;
(g) enter into and perform customary agreements (including an
underwriting agreement in customary form with the managing Underwriter, if
any) and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of such Registrable Securities;
(h) make available for inspection by any Selling Holder of such
Registrable Securities, any Underwriter participating in any disposition
pursuant to such registration statement, and any attorney, accountant, or
other professional retained by any such Selling Holder or Underwriter
(collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents, and properties of Horizon (collectively, the
"Records") as shall be reasonably necessary to enable them to exercise
their due diligence responsibility, and cause Horizon's officers,
directors, and employees to supply all information reasonably requested by
any such Inspectors in connection with such registration statement. Records
which Horizon determines, in good faith, to be confidential and which it
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless (i) in the judgment of counsel to Horizon the disclosure
of such Records is necessary to avoid or correct a misstatement or omission
in such registration statement or (ii) the release of such Records is
ordered pursuant to a subpoena or other order from a court or government
agency of competent jurisdiction. Each Selling Holder of such Registrable
Securities agrees that information obtained by it as a result of such
inspections shall be deemed confidential and shall not be used by it as the
basis for any market transactions in the securities of Horizon unless and
until such is made generally available to the public. Each Selling Holder
of such Registrable Securities further agrees that it will, upon learning
that disclosure of such Records is sought in a court or government agency
of competent jurisdiction, give notice to Horizon and allow Horizon, at its
expense, to undertake appropriate action to prevent disclosure of the
Records deemed confidential;
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(i) if such sale is pursuant to an underwritten offering, use its best
efforts to obtain a comfort letter or comfort letters from Horizon's
independent public accountants in customary form and covering such matters
of the type customarily covered by comfort letters as the Selling Holders
of a majority of the Registrable Securities or the managing Underwriter
reasonably request;
(j) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make generally available to its
security holders, as soon as reasonably practicable, an earnings statement
covering a period of 12 months, beginning within three months after the
effective date of the registration statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act; and
(k) use its best efforts to cause all such Registrable Securities to
be listed on each securities exchange on which similar securities issued by
Horizon are then listed, or on the Nasdaq National Market, if applicable,
provided that the applicable listing requirements are satisfied.
Horizon may require each Selling Holder of Registrable Securities to
promptly furnish in writing to Horizon such information regarding the
distribution of the Registrable Securities as it may from time to time
reasonably request and such other information as may be legally required in
connection with such registration.
Each Selling Holder agrees that, upon receipt of any notice from Horizon of
the happening of any event of the kind described in subsection 6(f) hereof, such
Selling Holder will forthwith discontinue disposition of Registrable Securities
pursuant to the registration statement covering such Registrable Securities
until such Selling Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by subsection 6(f) hereof and, if so directed by Horizon
such Selling Holder, will deliver to Horizon all copies, other than permanent
file copies then in such Selling Holder's possession, of the most recent
prospectus covering such Registrable Securities at the time of receipt of such
notice. If Horizon shall give such notice, Horizon shall extend the period
during which such registration statement shall be maintained effective
(including the period referred to in subsection 6(b) hereof) by the number of
days during the period from and including the date of the giving of notice
pursuant to subsection 6(f) hereof to the date when Horizon shall make available
to the Selling Holders of Registrable Securities covered by such registration
statement a prospectus supplemented or amended to conform with the requirements
of subsection 6(f) hereof.
7. Registration Expenses.
In connection with the Registration Statement required to be filed
hereunder, Horizon shall pay the following registration expenses (the
"Registration Expenses"): (i) all registration and filing fees; (ii) fees and
expenses of compliance with securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with blue sky qualifications of
the Registrable Securities); (iii) printing expenses; (iv) internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties); (v) fees and expenses incurred
in connection with the listing of the Registrable Securities if Horizon shall
choose to list such Registrable Securities; (vi) fees and disbursements of
counsel for Horizon and customary fees and expenses for independent certified
public accountants retained by Horizon (including the expenses of any comfort
letters or costs associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters requested pursuant to
subsection 6(i) hereof); and (vii) fees and expenses of any special experts
retained by Horizon in connection with such registration. Horizon shall not have
any obligation to pay any underwriting fees, discounts, or commissions
attributable to the sale of Registrable Securities, or any out-of-pocket
expenses or fees, including attorney's fees, of the Holders or Finkel.
8. Indemnification; Contribution.
(a) Indemnification by Horizon. Horizon agrees to indemnify and hold
harmless each Selling Holder of Registrable Securities, its officers, directors,
shareholders, partners, trustees, beneficiaries and agents, and each person or
entity, if any, who controls such Selling Holder within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages, liabilities and expenses (including reasonable
costs of investigation) arising out of or based upon any untrue
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statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Securities or
in any amendment or supplement thereto or in any preliminary prospectus, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; except insofar as such losses, claims, damages,
liabilities, or expenses arise out of, or are based upon, any such untrue
statement or omission or allegation thereof based upon information furnished in
writing to Horizon by such Selling Holder or on such Selling Holder's behalf
expressly for use therein; provided, that with respect to any untrue statement
or omission or alleged untrue statement or omission made in any preliminary
prospectus, the indemnity agreement contained in this subsection shall not apply
to the extent that any such loss, claim, damage, liability, or expense results
from the fact that a current copy of the prospectus was not sent or given to the
person asserting any such loss, claim, damage, liability, or expense at or prior
to the written confirmation of the sale of the Registrable Securities to such
person if it is determined that it was the responsibility of such Selling Holder
to provide such person with a current copy of the prospectus and such current
copy of the prospectus would have cured the defect giving rise to such loss,
claim, damage, liability or expense. Horizon also agrees to indemnify any
Underwriters of the Registrable Securities, their officers and directors, and
each person who controls such Underwriters on substantially the same basis as
that of the indemnification of the Selling Holders provided in this section
8(a).
(b) Indemnification by Holders of Registrable Securities. Each Selling
Holder agrees to indemnify and hold harmless Horizon, its directors and
officers, and each person, if any, who controls Horizon within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act, to
the same extent as the foregoing indemnity from Horizon to such Selling Holder,
but only with respect to information furnished in writing by such Selling Holder
or on such Selling Holder's behalf expressly for use in any registration
statement or prospectus relating to the Registrable Securities, any amendment or
supplement thereto, or any preliminary prospectus. In case any action or
proceeding shall be brought against Horizon or its directors or officers, or any
such controlling person, in respect of which indemnity may be sought against
such Selling Holder, such Selling Holder shall have the rights and duties given
to Horizon, and Horizon or its directors or officers or such controlling person
shall have the rights and duties given to such Selling Holder, by the preceding
subsection. Each Selling Holder also agrees to indemnify and hold harmless
Underwriters of the Registrable Securities, their officers and directors, and
each person who controls such Underwriters on substantially the same basis as
that of the indemnification of Horizon provided in this section 8(b).
(c) Conduct of Indemnification Proceedings. If any action or proceeding
(including any governmental investigation) shall be brought or asserted against
any person entitled to indemnification under subsections (a) or (b) above (an
"Indemnified Party") in respect of which indemnity may be sought from any party
who has agreed to provide such indemnification (an "Indemnifying Party"), the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to such Indemnified Party, and shall assume the
payment of all expenses. Such Indemnified Party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees
and expenses or (ii) the named parties to any such action or proceeding
(including any impleaded parties) include both such Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall have been advised by
counsel that there is a conflict of interest on the part of counsel employed by
the Indemnifying Party to represent such Indemnified Party (in which case, if
such Indemnified Party notifies the Indemnifying Party in writing that it elects
to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense of such action
or proceeding on behalf of such Indemnified Party; it being understood, however,
that the Indemnifying Party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together with appropriate local counsel) at any time for all
such Indemnified Parties, which firm shall be designated in writing by such
Indemnified Parties). The Indemnifying Party shall not be liable for any
settlement of any such action or proceeding effected without its written
consent, but if settled with its written consent, or if there be a final
judgment for the plaintiff in any such action or proceeding, the Indemnifying
Party shall indemnify and hold harmless such
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Indemnified Parties from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment.
(d) Contribution. If the indemnification provided for in this Section 8 is
unavailable to the Indemnified Parties in respect of any losses, claims,
damages, liabilities, or judgments referred to herein, then each Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such losses,
claims, damages, liabilities, and judgments as between Horizon on the one hand
and each Selling Holder on the other, in such proportion as is appropriate to
reflect the relative fault of Horizon and of each Selling Holder in connection
with such statements or omissions, as well as any other relevant equitable
considerations. The relative fault of Horizon on the one hand and of each
Selling Holder on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Horizon and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this subsection 8(d) were determined by
pro rata allocation (even if the Selling Holders were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of the
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding subsection shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection 8(d), no Selling Holder shall
be required to contribute any amount in excess of the amount by which the total
price at which the securities of such Selling Holder were offered to the public
exceeds the amount of any damages which such Selling Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Subsection 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) Survival. The indemnity and contribution agreements contained in this
Section 8 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement or any underwriting agreement, (ii) any
investigation made by or on behalf of any Indemnified Party or by or on behalf
of Horizon, and (iii) the consummation of the sale or any successive resale of
the Registrable Securities.
9. Participation in Underwritten Registrations.
No person or entity may participate in any underwritten registration
hereunder unless such person or entity (a) agrees to sell such person's or
entity's securities on the basis provided in any underwriting arrangements
approved by the persons or entities entitled hereunder to approve such
arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements and this Agreement.
10. Miscellaneous.
(a) Remedies. Each Holder of Registrable Securities, in addition to being
entitled to exercise all rights provided herein and granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. Horizon agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Agreement and hereby agrees to waive the defense in any action for
specific performance that remedy at law would be adequate. Each party waives all
provisions of law requiring that a bond be posted in order to effectuate any
remedy under this Agreement.
(b) No Inconsistent Agreements. Horizon will not on or after the date of
this Agreement enter into any agreement with respect to its securities which is
inconsistent with the rights granted to the Holders of Registrable Securities in
this Agreement or otherwise conflicts with the provisions hereof. Horizon has no
outstanding agreement with respect to its securities granting any registration
rights to any other person.
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(c) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified, or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, unless Horizon has obtained the written
consent of the Holders of at least a majority of the Registrable Securities;
provided that with respect to any such waiver or consent relating to
Registration Statement, Horizon shall obtain the consent of the Holders of a
majority of the Registrable Securities subject to such registration.
(d) Notices. Any notices, claims or demands which any party is required or
may desire to give to another under or in conjunction with this Agreement shall
be in writing, and shall be given by addressing the same to such other
party(ies) at the address set forth below, and by (i) depositing the same so
addressed, postage prepaid, first class, certified or registered, in the United
States mail (herein referred to as "Mailing"), (ii) overnight delivery by a
nationally recognized overnight courier service (e.g. UPS, Federal Express),
(iii) delivering the same personally to such other party(ies), or (iv)
transmitting by facsimile and Mailing the original. Any notice shall be deemed
to have been given five (5) U.S. Post Office delivery days following the date of
Mailing; one business day after timely delivery to an overnight courier; if by
personal delivery, upon such delivery; or if by facsimile, the day of
transmission if made within customary business hours, or if not transmitted
within customary business hours, the following business day.
If to Horizon:
Horizon Mental Health Management, Inc.
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
Attention: James Ken Newman
Facsimile Number: (972) 420-8282
With a copy to:
Strasburger & Price, L.L.P.
901 Main Street, Suite 4300
Dallas, Texas 75202
Attention: David K. Meyercord, Esq.
Facsimile Number: (214) 651-4330
If to the Shareholders:
To the respective addresses
set forth on Exhibit A to the
Reorganization Agreement
With a copy to:
Howrey & Simon
1299 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2402
Attention: Roger A. Klein, Esq.
Facsimile Number: (202) 383-6610
Any of the parties hereto may change the address for notices to be sent to it by
written notice delivered pursuant to the terms of this section.
(e) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of Horizon and the
Holders.
(f) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under present or future laws effective during the term
of this Agreement, such provision shall be fully severable; this Agreement shall
be construed and enforced as if such illegal, invalid or unenforceable provision
had never
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comprised a part of this Agreement; and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement. Furthermore, in lieu of each such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
(h) Entire Agreement. This Agreement is intended by Horizon and the Holders
as a final expression of their agreement and is intended to be a complete and
exclusive statement of their agreement and understanding in respect of the
subject matter contained herein. This Agreement supersedes all prior agreements
and understandings between Horizon and the Holders with respect to such subject
matter. This Agreement may be amended only in writing executed by Horizon and
the Holders of a majority of the Registrable Securities.
(i) Third Party Beneficiaries. This Agreement is intended for the benefit
of Horizon and the Holders and their respective successors and assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person or entity.
(j) Attorney's Fees. In any proceeding brought to enforce any provision of
this Agreement, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to its costs and expenses and any other available
remedy.
(k) Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to principles
of conflicts or choice of law.
(l) Effectiveness. This Agreement shall become effective as of the day
first set forth above.
(m) Counterparts. This Agreement may be executed in a number of identical
counterparts and it shall not be necessary for Horizon and the Holders to
execute each of such counterparts, but when both have executed and delivered one
or more of such counterparts, the several parts, when taken together, shall be
deemed to constitute one and the same instrument, enforceable against each in
accordance with its terms. In making proof of this Agreement, it shall not be
necessary to produce or account for more than one such counterpart executed by
the party against whom enforcement of this Agreement is sought.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first above written.
HORIZON: SHAREHOLDERS:
HORIZON MENTAL HEALTH ----------------------------------
MANAGEMENT, INC. HOWARD B. FINKEL
By: ------------------------------- ----------------------------------
Name: James W. McAtee JOHN HARRISON
Title: Executive Vice President
----------------------------------
LARRY REIFF
ARGENTUM CAPITAL PARTNERS, L.P.
By: ------------------------------
Name:
-------------------------
Title:
------------------------
----------------------------------
DENISE DAILEY
----------------------------------
KEN DORMAN
----------------------------------
G. PHILLIP WOELLNER
----------------------------------
MICHAEL S. MCCARTHY
----------------------------------
NME MANAGEMENT SERVICES, INC.
By: ------------------------------
Name:
-------------------------
Title:
------------------------
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EXHIBIT C
POST-CLOSING ESCROW AGREEMENT
This Post-Closing Escrow Agreement (the "Agreement") is made as of
, 1997 by and among Horizon Mental Health Management, Inc., a
Delaware corporation ("Horizon"), and Howard B. Finkel ("Finkel").
WHEREAS, Horizon, and Howard B. Finkel, John Harrison, Larry Reiff,
Argentum Capital Partners, L.P. a Delaware limited partnership, Denise Dailey,
Ken Dorman, G. Phillip Woellner, Michael S. McCarthy and NME Management
Services, Inc., a Delaware corporation (collectively the "Shareholders") and
Specialty Healthcare Management, Inc., a Delaware corporation ("Specialty"),
entered into that certain Share Exchange Reorganization Agreement, dated as of
April 25, 1997 (the "Reorganization Agreement"), providing for the exchange of
all of the shares of capital stock of Specialty by the Shareholders for shares
of Common Stock, $.01 par value per share, of Horizon ("Horizon Stock"); and
WHEREAS, pursuant to the Reorganization Agreement, the Shareholders agreed
that Horizon would hold in escrow, for the purposes, and on and subject to the
terms and conditions, hereinafter set forth, 51,282 shares of Horizon Stock,
representing a portion of the purchase price paid to Shareholders under the
Reorganization Agreement; and
WHEREAS, Finkel and the Shareholders have agreed that Finkel shall act as
the agent and attorney-in-fact for all the Shareholders under this Agreement;
and
WHEREAS, the transactions contemplated by the Reorganization Agreement have
been consummated on the date hereof and the parties desire to effectuate the
provisions of the Reorganization Agreement with respect to such post-closing
escrow;
NOW, THEREFORE, in consideration of the premises and the mutual terms and
conditions hereof, the parties hereby agree as follows:
1. Escrow Shares. Horizon agrees to hold in escrow the 51,282 shares of
Horizon Stock (the "Escrow Shares"), which constitute a portion of the shares of
Horizon Stock issued to the Shareholders in the Share Exchange pursuant to the
Reorganization Agreement, strictly in accordance with the terms of this
Agreement. The respective interests of the Shareholders in the Escrow Shares as
of the date of this Agreement are in the same proportions as was the
Shareholders' respective ownership interests in Specialty as set forth on
Exhibit A of the Reorganization Agreement. The receipt and delivery by the
Shareholders of the Escrow Shares is hereby acknowledged by Horizon.
2. Terms of Escrow. The Escrow Shares shall be held as a fund available to
satisfy any obligations of the Shareholders to Horizon which may arise under
Section 7.5 or Article VIII of the Reorganization Agreement in the manner set
forth below:
(a) In the event that Horizon shall assert a claim or claims against
the Shareholders arising out of or relating to any matter with respect to
which Horizon asserts that it is entitled to receive an adjustment under
Section 7.5 of the Agreement with respect to an account receivable in
arbitration on the Closing Date or to be indemnified by the Shareholders
pursuant to Article VIII of the Reorganization Agreement (collectively, the
"Claims"; singularly a "Claim"), Horizon shall furnish written notice of
the Claim (the "Notice of Claim") to Finkel. The Notice of Claim: (i) shall
state in reasonable detail the nature of the alleged liability; (ii) shall
state the amount that Horizon claims it is entitled to receive from the
Escrow Shares based upon the Claim; and (iii) shall further provide a
particularized statement explaining the basis for the estimate of the
Claim. Finkel shall have thirty (30) days after receipt of the Notice of
Claim in which to advise Horizon that the Shareholders dispute the Claim by
delivering written notice of the Shareholders' dispute (the "Notice of
Dispute") to Horizon. The Notice of Dispute may contest all or any portion
of the Notice of Claim based on a dispute concerning the existence of a
Claim, the Shareholders' liability, the estimated amount of the alleged
loss or any other related matter.
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(b) If Finkel shall not deliver a Notice of Dispute within such thirty
(30) day period, the Shareholders shall be deemed to have acknowledged that
Horizon is entitled to amount as set forth in the Notice of Claim and shall
be deemed to have directed Horizon to release to Horizon for cancellation
the number of Escrow Shares which are equal to the dollar amount of the
Claim divided by (which is the per share dollar equivalent amount
of the Escrow Shares as determined pursuant to the Reorganization
Agreement). In the event a Notice of Dispute is timely delivered but only a
portion of a Claim is disputed, then the number of Escrow Shares equal to
the undisputed portion of the Claim divided by shall be promptly
released to Horizon for cancellation. It is expressly understood that, in
the event of a stock dividend or stock split by Horizon, such dollar amount
shall be proportionately adjusted for the purposes of this Section.
(c) Subject to the Shareholders' right to dispute a Claim, once a
Notice of Claim is delivered by Horizon, Horizon shall not permit the
Escrow Shares to be reduced by distribution to the Shareholders to a dollar
amount which is less than the difference between the aggregate dollar
amount of all Claims for which a Notice of Claim has delivered in
accordance with the terms of Section 3(a) above less the amount of $50,000
(unless any such claim is not subject to the Threshold limitation as
specified in Section 8.6(b) of the Reorganization Agreement and such fact
is so stated in the Notice of Claim). Furthermore, if the amount of any
Claim or the aggregate amount of all Claims should ever exceed the
aggregate dollar equivalent amount of all the Escrow Shares held by
Horizon, then no portion of the Escrow Shares shall be distributed pursuant
to Section 3(d) below. If the Shareholders dispute that there is a
reasonable basis for the Claim or the reasonableness of the amount being
held in escrow with respect to the Claim, such matter shall be subject to
arbitration pursuant to Section 10 of this Agreement.
(d) On the date which is six (6) months after the date of this
Agreement (the "Release Date"), Horizon shall irrevocably and
unconditionally distribute to the Shareholders the Escrow Shares (less the
number of Escrow Shares previously released to Horizon for cancellation to
satisfy Claims pursuant to the terms of this Agreement) to the extent the
dollar equivalent amount of the Escrow Shares exceeds the aggregate dollar
amount of any then existing Claim or Claims for which a Notice of Claim was
delivered by Horizon on or prior to the Release Date in accordance with the
terms of Section 3(a) above less $50,000 (unless any such Claim relates to
an adjustment under Section 7.5 of the Agreement or is not subject to the
Threshold limitation as specified in Section 8.6(b) of the Reorganization
Agreement and such fact is so stated in the Notice of Claim). The portion
of the Escrow Shares, if any, retained after the Release Date shall be
distributed to the Shareholders or Horizon, as appropriate, in one or more
distributions, from time to time, as and when there is a final resolution
of each such Claim; provided, however, that no distribution will be made
upon final resolution of a Claim if the amount of the remaining unresolved
Claims exceed the dollar equivalent amount of the Escrow Shares then held
by Horizon.
(e) Unless delivery is made in person at Horizon's office or unless
Horizon is properly instructed in writing by Finkel to make delivery in
such other manner, Horizon shall be deemed to have properly delivered to
the Shareholders such Escrow Shares as the Shareholders are entitled to
receive, upon placing the same in United States Mail in a suitable package
or envelope, registered or certified mail, return receipt requested,
postage prepaid, addressed to Finkel at the address listed in Section 4
hereof or such other address as may be furnished to Horizon in writing.
(f) Any cash or stock dividends or other distributions with respect to
the Escrow Shares, to the extent paid or distributed prior to release of
the Escrow Shares to the Shareholders pursuant to the terms hereof, shall
be held by Horizon as a part of the Escrow Shares subject to this
Agreement.
3. Non-Waiver. Nothing contained in this Agreement shall be deemed or
construed to release or waive any of the rights or obligations of Horizon or the
Shareholders under the Reorganization Agreement, and all rights and remedies of
the Shareholders and Horizon under this Agreement are cumulative of all other
rights which either of them may have under the Reorganization Agreement, by law
or otherwise.
4. Notices. Any notices, claims or demands which any party is required or
may desire to give to another under or in conjunction with this Agreement shall
be in writing, and shall be given by addressing the same to
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such other party(ies) at the address set forth below, and by: (i) depositing the
same so addressed, postage prepaid, first class, certified or registered, in
United States mail, return receipt requested, (herein referred to as "Mailing");
(ii) overnight delivery by a nationally recognized overnight courier service
(e.g. UPS, Federal Express); (iii) delivering the same personally to such other
party(ies); or (iv) transmitting by facsimile and Mailing the original. Any
notice shall be deemed to have been given five (5) U.S. Post Office delivery
days following the date of Mailing; one business day after timely delivery to an
overnight courier; if by personal delivery, upon such delivery; or if by
facsimile, the day of transmission if made within customary business hours, or
if not transmitted within customary business hours the following business day.
(a) If to Finkel:
Howard B. Finkel
-------------------------------------------------------
-------------------------------------------------------
Facsimile Number: ( )
---- -------------------------------
With a copy to:
Howrey & Simon
1299 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2402
Attn: Roger A. Klein, Esq.
Facsimile Number: (202) 383-6610
(b) If to Horizon:
Horizon Mental Health Management, Inc.
1500 Waters Ridge Drive
Lewisville, Texas 75057
Attn: Mr. James Ken Newman, President
Facsimile Number: (972) 420-8282
With a copy to:
Strasburger & Price, L.L.P.
901 Main Street, Suite 4300
Dallas, Texas 75202
Attn: David K. Meyercord, Esq.
Facsimile Number: (214) 651-4330
Any of the parties hereto may change the address for notices to be sent to it by
written notice delivered pursuant to the terms of this section.
5. Entire Agreement; Amendments. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements or
understandings, whether written or oral, with respect to the subject matter
hereof. No terms, conditions or agreements other than those contained herein,
and no amendments or modifications hereto shall be valid unless made in writing
and signed by the parties hereto.
6. Capitalized Terms. Capitalized terms in this Agreement which are not
otherwise defined herein shall have the same meanings as are provided for such
terms in the Reorganization Agreement.
7. Binding Effect. This Agreement shall extend to and be binding upon and
inure to the benefit of the parties hereto, their respective successors and
assigns.
8. Waiver; Remedies. Waiver by any party hereto of any breach of or
exercise of any rights under this Agreement shall not be deemed to be a waiver
of similar or other breaches or rights or a future breach of the same duty. The
failure of a party to take any action by reason of any such breach or to
exercise any such right shall not deprive any party of the right to take any
action at any time while such breach or condition giving rise to such right
continues. The parties shall have all remedies permitted to them by this
Agreement or law, and all such remedies shall be cumulative.
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9. Attorney's Fees and Costs. In the event of a breach by any party to this
Agreement and commencement of a subsequent legal action in a court of law or
forum of arbitration, the prevailing party in any such dispute shall be entitled
to reimbursement of reasonable attorney's fees and court costs, including, but
not limited to, the costs of expert witnesses, transportation, lodging and meal
costs of the parties and witnesses, costs of transcript preparation and other
reasonable and necessary direct and incidental costs of such dispute.
"Prevailing party" is the party in whose favor final judgment is rendered if,
but only if, such judgment is in excess of any amounts offered in settlement by
the adverse party or parties.
10. Arbitration.
(a) Arbitration Procedure. In the event of a dispute regarding any matters
arising out of or relating to this Agreement (including, but not limited to,
actions for injunctive or declaratory relief) (hereinafter collectively
"arbitrable issues") that cannot be settled by agreement between the parties,
such controversy or dispute shall be submitted for arbitration in Denver,
Colorado, and for this purpose each party hereby expressly consents to such
arbitration in such forum. The arbitration process shall proceed as follows:
(i) Step One. In the event of a dispute, the disputing party (herein
so called) may at any time notify the other party ("answering party") in
writing that the disputing party demands to pursue arbitration as provided
in Step Two below, setting forth in specific terms the disputing party's
proposed statement of the matters in dispute to be submitted to arbitration
and the name and address of the arbitrator selected by the disputing party.
Within five (5) business days following receipt of the disputing party's
written arbitration demand complying with the requirements of this Step
One, the answering party shall notify the disputing party in writing,
setting forth in specific terms the answering party's proposed statement of
the matter in dispute and identifying the name and address of the
arbitrator selected by such answering party.
(ii) Step Two. The two (2) arbitrators so selected shall meet and
confer within twenty (20) business days after receipt by the disputing
party of the answering party's written notice as called for under Step One
above, and if they are unable within said twenty (20) day period to reach a
decision on the matters in dispute, they shall, at the expiration of said
twenty (20) day period, jointly select a neutral third arbitrator. If said
arbitrators are unable to choose a neutral third arbitrator, any party may
request the American Arbitration Association ("AAA") to appoint an
additional arbitrator from its National Panel of Commercial Arbitrators.
Any party to this Agreement may advise the AAA that time is of the essence
and that the parties to this Agreement would like such selection as soon as
is reasonably possible, it being expressly understood that in such AAA
selection process the selection is in the sole discretion of the AAA, and
that the AAA shall not be required by reason of this Agreement to consult
with the parties to this Agreement in said selection process; provided that
all arbitrators, including the additional arbitrator selected by the AAA,
shall be disinterested individuals knowledgeable in commercial
transactions. Upon selection of the additional arbitrator, all arbitrators
shall within ten (10) business days thereafter convene an arbitration
proceeding at a date, time and place (in metropolitan Denver, Colorado)
designated by said arbitrators by a majority vote, written notice of which
shall be given to the parties not later than seven (7) calendar days prior
to said hearing date. At the hearing, each party may be represented by
counsel and present testimony and evidence. If at the commencement of the
hearing the parties cannot agree on a joint statement of the matters in
dispute to be submitted to the arbitrators, the arbitrators shall be
empowered to frame the submission issue(s). A Certified Court Reporter's
transcript may be demanded by any party or by the arbitrators and said
official transcript shall be prepared, completed, and delivered to the
arbitrators with copies to each party within ten (10) business days
following the conclusion of the hearing. Arbitration sessions following the
initial session, if necessary, shall be scheduled by the arbitrators so
that the arbitration proceedings (i.e., presentation of evidence and/or
oral arguments) are completed within twenty (20) days of the initial
session. Each party shall be given the opportunity to file with the
arbitrators simultaneous written briefs five (5) business days following
receipt by the arbitrators of the official transcript but, if no transcript
is demanded as provided in this Agreement, said briefs shall be filed
simultaneously five (5) business days following conclusion of the hearing.
Copies of any such briefs shall be provided to the other party concurrently
upon filing with the arbitrators.
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(iii) Step Three. Within ten (10) business days following the receipt
by the arbitrators of the brief(s) (or within ten (10) business days
following conclusion of the hearing if all parties waive briefs), the
arbitrators shall make and deliver to the parties their decision and award
in writing. The arbitrators shall have the authority to enter any award or
to grant any relief which could be obtained in a court of competent
jurisdiction and reasonable attorneys', arbitrators' and experts' fees and
expenses of arbitration may be awarded as the arbitrators see fit,
consistent with the provisions of this Agreement. The arbitrators shall
have no authority to modify, amend or alter the provisions of this
Agreement and shall base their decision and award on applicable law, the
language contained in this Agreement and the facts giving rise to the
dispute as presented on the record at the hearing. The arbitrators shall
issue a written opinion explaining the basis for their findings.
(b) Self-Execution. It is expressly understood between the parties that
this Article 10 is a selfexecuting arbitration provision and that any party may
unilaterally select an arbitrator if the other party refuses to arbitrate. It is
further expressly agreed that said unilaterally-selected arbitrator may proceed
to arbitrate the issue(s) and the arbitration and decision shall be
self-executing and therefore shall not require the order of any Court to
proceed. The parties may, however, mutually stipulate in writing to extend or to
shorten the prescribed time periods (including a stipulation to expedite the
referral and submission to arbitration). All provisions of this Agreement not in
dispute shall be observed and performed without interruption during the pendency
of any proceeding called for under this Article 10.
(c) Arbitrator's Fees. If an additional arbitrator is required pursuant to
Step Two under Section (a) above, each party shall pay its pro rata share of any
required retainer or other payments required by such arbitrator upon such
arbitrator's demand, with the ultimate responsibility for the arbitrators' fees
to be determined by the arbitrators in the final arbitration award pursuant to
Step Three of Section (a) above; otherwise, each party shall bear its own costs
and expenses in connection with any proceedings under this Article 10 and, in
any event, each party shall pay the fees of the arbitrator it selects.
(d) Rules Governing Arbitration. In all other respects, the arbitration
shall be conducted pursuant to the then-existing Commercial Rules of the AAA to
the extent such rules are not inconsistent with any provision of this Agreement.
Subject to the foregoing, the arbitrators shall determine the scope and extent
of permissible discovery, if any.
(e) Entry of Award. The award of the arbitrators may be entered as a final
judgment by any court of competent jurisdiction.
(f) Injunctive Relief. Notwithstanding the provisions of this Article 10 to
the contrary, each party shall be entitled to seek temporary or preliminary
injunctive relief from a court of competent jurisdiction if the failure to
immediately obtain injunctive relief will result in irreparable harm to that
party. The jurisdiction of the court shall extend only to such relief and any
request for permanent injunctive relief shall remain subject to the arbitration
provisions of this Agreement.
11. Termination. This Agreement shall terminate at such time as all of the
Escrow Shares shall have been released in accordance with the terms and
conditions of this Agreement.
12. Agent. It is expressly understood that Finkel is and shall act
hereunder as an agent and attorney-in-fact for and on behalf of all the
Shareholders under the Reorganization Agreement pursuant to the provisions of
the Reorganization Agreement. All allocations and distributions of the Escrow
Shares to the Shareholders shall be the responsibility of Finkel, and Horizon
shall have no obligation or liability with respect thereto.
13. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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IN WITNESS WHEREOF, the parties hereto have executed this Post-Closing
Escrow Agreement as of the day herein first written above.
SHAREHOLDERS:
------------------------------------
Howard B. Finkel
Individually and as agent and
attorney-in-fact for the
Shareholders
HORIZON:
HORIZON MENTAL HEALTH
MANAGEMENT, INC.
By:
----------------------------------
James W. McAtee
Executive Vice President
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APPENDIX B
[ROBERTSON STEPHENS & COMPANY LETTERHEAD]
April 17, 1997
CONFIDENTIAL
Board of Directors
Horizon Mental Health Management, Inc.
1500 Waters Ridge Drive
Lewisville, TX 75057-6011
Members of the Board:
You have asked our opinion with respect to the fairness to Horizon Mental
Health Management, Inc. ("Horizon"), from a financial point of view and as of
the date hereof, of the Purchase Price (as defined below) to be paid in
connection with the proposed share exchange between Horizon and Specialty
Healthcare Management Inc. ("Specialty"). Under the terms of the draft Share
Exchange Reorganization Agreement (the "Agreement") dated April 7, 1997, Horizon
and Specialty will enter into a share exchange transaction ("Share Exchange")
pursuant to which the Specialty shareholders will receive 1.65 million shares of
Horizon common stock, implying a purchase price of $26.6 million (the "Purchase
Price") as of the date hereof, through an exchange all of their shares of common
stock for unregistered shares of Horizon with the result that Specialty will
become a wholly-owned subsidiary of Horizon. We understand that the Share
Exchange is intended to qualify as a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended, and to be
accounted for as a "pooling of interests" under U.S. generally accepted
accounting principles ("GAAP"). The terms and conditions of the Share Exchange
are set out more fully in the Agreement.
For purposes of this opinion we have (i) reviewed certain financial
information on Horizon and Specialty furnished to us by both companies,
including certain internal financial analyses and forecasts prepared by the
respective managements of Horizon and Specialty; (ii) reviewed certain publicly
available information concerning Horizon; (iii) held discussions with the
managements of Horizon and Specialty concerning the businesses, past and current
business operations, financial condition and results of operations and the
future prospects of both companies, independently and combined; (iv) reviewed
the Agreement; (v) reviewed the stock price and trading history of Horizon
Common Stock; (vi) reviewed the contribution by each company to pro forma
combined revenue, operating income and net income; (vii) reviewed the valuations
of publicly traded companies which we deemed comparable to Horizon and
Specialty; (viii) compared the financial terms of the Share Exchange with other
transactions which we deemed relevant; (ix) analyzed the pro forma earnings per
share of the combined company; and (x) made such other studies and inquiries,
and reviewed such other data and information, as we deemed relevant.
In connection with our opinion, we have not, however, independently
verified any of the foregoing information and have relied on all such
information being complete and accurate in all material respects. Furthermore,
we did not obtain any independent appraisal of the properties or assets and
liabilities of Horizon or Specialty. With respect to the financial and operating
forecasts (and the assumptions and bases therefor) of Horizon and Specialty
which we have reviewed, we have assumed that such forecasts have been reasonably
prepared in good faith on the basis of reasonable assumptions, reflect the best
available estimates and judgments of such respective managements and that such
projections and forecasts will be realized in the amounts and in the time
periods currently estimated by the managements of Horizon and Specialty.
Further, we have assumed that the historical financial statements of Horizon and
Specialty that we have reviewed have been prepared and presented in accordance
with GAAP. This opinion is necessarily based upon market, economic, and other
conditions that exist and can be evaluated as of the date of this letter, and on
information available to us as of the date hereof.
<PAGE> 141
Robertson, Stephens & Company LLC ("RS&Co.") has provided certain
investment banking services to Horizon from time to time, including acting as
managing underwriter for Horizon's initial public offering. In addition, RS&Co.
maintains a market in shares of Horizon Common Stock. In the ordinary course of
business, RS&Co. may trade Horizon securities for our own account and the
account of our customers and, accordingly, may at any time hold a long or short
position in Horizon securities.
Our opinion is directed to the Board of Directors of Horizon and is not
intended to be and does not constitute a recommendation to any stockholder of
Horizon as to how such stockholder should vote on the proposed Share Exchange.
We do not express any opinion regarding the current or future value of the
shares of Horizon common stock to be issued in the Share Exchange, nor do we
express any opinion regarding the fairness of the Share Exchange to Specialty or
to its shareholders. This opinion is for the Board of Directors of Horizon only
and, except as required by law, may not otherwise be used, quoted or referred to
except with the express prior written consent of RS&Co.
Based upon and subject to the foregoing considerations, it is our opinion,
as investment bankers, that, as of the date hereof, the Purchase Price to be
paid is fair to Horizon from a financial point of view.
Very truly yours,
ROBERTSON, STEPHENS & COMPANY LLC
By: Robertson, Stephens & Company Group,
L.L.C.
By: /s/ WILLIAM S. WISIALOWSKI
-------------------------------------
Authorized Signatory
