<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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HORIZON HEALTH CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<C> <C>
DELAWARE 75-2293354
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1500 WATERS RIDGE DRIVE JAMES KEN NEWMAN
LEWISVILLE, TEXAS 75057-6011 CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(972) 420-8200 HORIZON HEALTH CORPORATION
1500 WATERS RIDGE DRIVE
(Address, Including Zip Code, and Telephone LEWISVILLE, TEXAS 75057-6011
Number, Including Area Code, of (972) 420-8200
Registrant's Principal Executive Offices) (Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of
Agent for Service)
</TABLE>
Copies of all communications to:
<TABLE>
<C> <C>
DAVID K. MEYERCORD, ESQ. WILLIAM N. FINNEGAN, IV, ESQ.
STRASBURGER & PRICE, L.L.P. ANDREWS & KURTH L.L.P.
901 MAIN STREET, SUITE 4300 4200 TEXAS COMMERCE TOWER
DALLAS, TEXAS 75202 HOUSTON, TEXAS 77002
(214) 651-4300 (713) 220-4200
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement has become effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(1)(2) FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value(3)... 1,426,000 $27.3125 $38,947,625 $11,802.31
==================================================================================================================
</TABLE>
(1) Includes 186,000 shares that the Underwriters may purchase to cover
overallotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457(c) under the Securities Act of 1933, as
amended, based on the average of the high and low sales prices of Common
Stock on October 17, 1997, as reported on the Nasdaq National Market.
(3) Includes common share purchase rights associated with the Common Stock. No
separate fee is payable in respect of the registration of such common share
purchase rights.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued October 22, 1997
1,240,000 Shares
[HORIZON HEALTH CORPORATION LOGO]
COMMON STOCK
------------------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF THE
SHARES BEING OFFERED HEREBY. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE
COMMON STOCK OF THE COMPANY IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "HORC." ON OCTOBER 20, 1997, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $27 1/4 PER SHARE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDERS(2)
-------- -------------- ---------------
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
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(1) The Company, the Selling Stockholders and certain other stockholders
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriters."
(2) The expenses of the Offering, estimated at $250,000, will be payable by
the Company.
(3) Certain of the Selling Stockholders and certain other stockholders have
granted to the Underwriters an option, exercisable within 30 days of the
date hereof, to purchase up to an aggregate of 186,000 additional shares
at the price to public less underwriting discounts and commissions for
the purpose of covering overallotments, if any. If the Underwriters
exercise such option in full, the total price to public, underwriting
discounts and commissions and proceeds to Selling Stockholders and
certain other stockholders will be $ , $ and $ ,
respectively. See "Principal and Selling Stockholders" and
"Underwriters."
------------------------
The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Andrews & Kurth L.L.P., counsel for the Underwriters. It is expected that
delivery of the shares will be made on or about , 1997, at the
office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
BANCAMERICA ROBERTSON STEPHENS
, 1997
<PAGE> 3
[CONTRACT LOCATIONS MAP]
A map of the United States identifying the locations by separate symbols, of (a)
the executive offices of the Registrant, (b) the regional offices of the
Registrant, (c) the mental health program management contracts, (d) the mental
health program management contracts with CQI+ Services and (e) the physical
rehabilitation program management contracts.
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING STOCKHOLDER OR BY
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SHARES OF COMMON STOCK OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Incorporation of Certain Documents by Reference............. 4
Disclosure Regarding Forward Looking Statements............. 4
Prospectus Summary.......................................... 5
Risk Factors................................................ 13
Price Range of Common Stock and Dividend Policy............. 19
Use of Proceeds............................................. 20
Capitalization.............................................. 20
Selected Consolidated Financial Information and Statistical
Data...................................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 32
Management.................................................. 48
Certain Transactions........................................ 49
Principal and Selling Stockholders.......................... 51
Underwriters................................................ 53
Legal Matters............................................... 54
Experts..................................................... 54
Available Information....................................... 55
Index to Financial Statements............................... F-1
</TABLE>
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The Company's executive offices are located at 1500 Waters Ridge Drive,
Lewisville, Texas 75057-6011. Its telephone number is (972)420-8200.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THIS OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ
IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITERS."
3
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by Horizon Health Corporation (the
"Company") with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and are incorporated herein by reference:
(a) the Annual Report on Form 10-K of the Company for the fiscal year ended
August 31, 1996, as amended by the Form 10-K/A filed with the Commission on
July 2, 1997;
(b) the Quarterly Report on Form 10-Q of the Company for the quarter ended
November 30, 1996;
(c) the Quarterly Report on Form 10-Q of the Company for the quarter ended
February 28, 1997;
(d) the Current Report on Form 8-K of the Company dated May 8, 1997;
(e) the Quarterly Report on Form 10-Q of the Company for the quarter ended May
31, 1997;
(f) the Current Report on Form 8-K of the Company dated August 11, 1997;
(g) the Current Report on Form 8-K of the Company dated September 1, 1997; and
(h) the description of the Common Stock, $.01 par value per share (the "Common
Stock"), of the Company contained in Item 1 of the Registration Statement on
Form 8-A filed pursuant to Section 12 of the Exchange Act, relating to the
Common Stock, as declared effective on March 13, 1995 (File No. 1-13626),
and the description of the common share purchase rights associated with the
Common Stock contained in Item 1 of the Registration Statement on Form 8-A
as declared effective on February 7, 1997 (File No. 000-22123), including
all amendments or reports filed for the purpose of updating such
descriptions.
The financial statements contained in items (a),(b),(c), (e) and (f) above
have not been restated to reflect the pooling of interests accounting treatment
of the Company's acquisition of Specialty Healthcare Management, Inc. on August
11, 1997 and cannot be relied upon because they are no longer prepared in
accordance with generally accepted accounting principles. For the restated
financial statements of the Company, see the Consolidated Financial Statements
of the Company and Notes thereto included elsewhere in this Prospectus.
In addition, all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
termination of the offering hereunder shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for all purposes to the extent that a statement contained herein or
in any other subsequently filed document which is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any and all of the documents incorporated by reference (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to James W. McAtee, Secretary, Horizon Health Corporation, 1500 Waters
Ridge Drive, Lewisville, Texas 75057-6011.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus contains and incorporates by reference certain forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 with respect to the results of operations and business of the
Company. These forward looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include, among others, the following possibilities: (i)
heightened competition, including specifically the intensification of price
competition, the entry of new competitors and the development of new products or
services by new and existing competitors; (ii) adverse state and federal
legislation and regulation; (iii) failure to obtain new customers or failure to
retain existing customers; (iv) inability to carry out marketing and sales
plans; (v) loss of key executives; (vi) general economic and business conditions
which are less favorable than expected; (vii) unanticipated changes in industry
trends; and (viii) with respect to cost savings that will be realized from, and
costs associated with, acquisitions by the Company, the following possibilities:
(a) the expected cost savings to be realized through combining certain functions
of both the Company and the acquired company, restructuring the field
organizations of both companies to eliminate redundant facilities and better
serve the combined company's customers, and reductions in staff cannot be fully
realized because the changes are not made or unanticipated offsetting costs are
incurred; and (b) costs or difficulties related to the integration of the
businesses of the Company and the acquired company are greater than expected.
See "Risk Factors."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements (including Notes thereto)
appearing elsewhere in this Prospectus. This Prospectus contains forward looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward looking
statements. See "Disclosure Regarding Forward Looking Statements." Unless
indicated otherwise, the information contained in this Prospectus assumes that
the Underwriters' overallotment option is not exercised. Unless the context
otherwise requires, when used herein the term "Company" refers to Horizon Health
Corporation, formerly known as Horizon Mental Health Management, Inc., and its
subsidiaries, the term "Specialty" refers to Specialty Healthcare Management,
Inc., a Delaware corporation acquired by the Company in August 1997 in a share
exchange transaction accounted for as a pooling of interests, and the term
"Horizon" refers to the Company prior to the acquisition of Specialty. Unless
the context otherwise requires, the information contained in this Prospectus
concerning the Company with respect to any periods beginning on or after January
1, 1995 (the date Specialty commenced operations) represents combined
information of both Horizon and Specialty.
THE COMPANY
GENERAL
The Company provides contract management of clinical and related services
for general acute care hospitals and is currently the leading contract manager
of mental health programs offered by general acute care hospitals in the United
States. The Company has grown both internally and through acquisitions,
increasing both the number of its management contracts and the variety of its
treatment programs and services. Over the last five years, the Company has
increased its management contracts from 43 to a total of 195 as of August 31,
1997 and currently operates in 38 states. Of those management contracts, 177
related to mental health programs and 18 related to physical rehabilitation
programs. The Company has also developed a proprietary mental health outcomes
measurement system known as CQI+ and at August 31, 1997 provided outcome
measurement services at 86 contract locations. The Company was incorporated in
1989 and is the successor to Horizon Health Management Company, which began the
development and management of mental health programs for general acute care
hospitals in 1981.
The Company's strategy is to enhance its position as the leader in the
contract management of mental health programs and to further expand the range of
services which it offers to its existing and new client hospitals to include
other clinical and related services and programs. A significant challenge in
obtaining clinical management contracts from hospitals is overcoming the initial
reservations that many hospital administrators have with outsourcing key
clinical services. The Company believes its expertise in working with hospital
administrators, its reputation in the industry and its existing contractual
relationships with 195 hospitals nationwide provide it with a significant
advantage in obtaining new contracts. The Company also believes it has
substantial opportunities to cross-sell a broad range of mental health and
physical rehabilitation services to client hospitals by marketing and selling
its mental health services to client hospitals for which the Company currently
manages only physical rehabilitation programs, and by marketing and selling its
physical rehabilitation services to client hospitals for which the Company
currently manages only mental health programs. The Company is pursuing the
development of such opportunities as a primary part of its business strategy.
The Company has successfully expanded the breadth of services it offers to
include the full continuum of mental health services, including outcome
measurement services, and physical rehabilitation services and its contracts
increasingly provide for multiple services. In addition, the Company capitalizes
on its expertise in managing the delivery of mental health services by directly
offering mental health services and employee assistance programs to businesses
and managed care organizations.
General acute care hospitals are increasingly outsourcing key clinical
departments to independent contract management companies for several reasons,
including: (i) the expertise necessary for the development, management and
operation of specialized clinical programs differs from that for traditional
medical/surgical services, (ii) hospitals often lack access to skilled
professionals and the support staff needed to
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<PAGE> 7
operate specialized clinical programs, (iii) hospitals often lack expertise in
the marketing and development activities required to support specialized
clinical programs, and (iv) hospitals often lack expertise necessary to design
and operate specialized clinical programs that satisfy regulatory, licensing,
accreditation and reimbursement requirements.
MENTAL HEALTH SERVICES
The Company believes that there continue to be substantial opportunities to
provide mental health contract management services to general acute care
hospitals in the United States. A major shift in the delivery of mental health
services is occurring as payors are increasingly using managed care methods to
review and require pre-approval for mental health treatment and to evaluate
alternatives to inpatient hospitalization in order to ensure that each patient's
treatment regimen utilizes clinical resources effectively. The Company believes
that general acute care hospitals need to be able to offer a broad array of
mental health care services in order to develop or participate in integrated
delivery systems responsive to the demands of managed care companies and other
third-party payors. The Company also believes that it costs general acute care
hospitals less to provide inpatient and partial hospitalization mental health
services than it costs freestanding psychiatric hospitals in part due to the
ability of acute care hospitals to utilize excess capacity. General acute care
hospitals are also able to provide their mental health patients with needed
medical care on-site and in a more cost effective manner than freestanding
psychiatric hospitals. Furthermore, general acute care hospitals are eligible to
receive reimbursement under the Medicaid program for mental health care provided
to Medicaid-eligible adults, unlike freestanding psychiatric hospitals which are
not presently eligible.
The Company believes that, due to the increasing emphasis on cost-effective
treatment, significant demand exists for a complete continuum of mental health
services. In response to this demand, it has expanded the mental health programs
it offers to provide partial hospitalization (or day treatment), outpatient
treatment, short-term crisis intervention and residential treatment as
alternatives and complements to inpatient care. The Company believes it is
uniquely positioned to capitalize on the increased demand for mental health
contract management services as a result of its ability to provide a full
continuum of mental health services, its proprietary quality and outcomes
measurement system and its demonstrated industry expertise. In addition, the
Company believes its position as the leading contract manager of mental health
programs provides the Company with a significant advantage in attracting and
retaining employees and yields several economies of scale such as the ability to
consolidate accounting and administrative functions.
The Company intends to continue to emphasize the area of mental health
programs for the elderly ("geropsychiatric programs"). At August 31, 1997, 69.6%
of the mental health treatment programs managed by the Company were
geropsychiatric programs. Many elderly patients with short-term mental illness
also have physical problems that make the general acute care hospital
environment the most appropriate site for their care. The Medicare program
reimburses general acute care hospitals for their cost of providing these
services, which includes the Company's management fee as well as allocated
overhead costs to the facility, and allows reimbursement for partial
hospitalization and home health services that permit the patient to be treated
in the most cost-effective environment. The Company has developed particular
expertise in developing specialized psychiatric programs for the elderly, in
operating such programs, and in assisting hospitals to receive approval for
inpatient programs as distinct part units ("DPUs") under Medicare. Approval of
an inpatient program as a DPU is significant to the client hospital because
services provided in DPUs are exempt from predetermined reimbursement rates and
are reimbursed by Medicare on an actual cost basis, subject to certain
limitations.
The Company has developed and markets a proprietary mental health outcome
measurement system, CQI+ Outcomes Measurement System (the "CQI+ System"), which
provides outcome information regarding the effectiveness of a hospital's mental
health programs. The availability of such information enables a hospital to
demonstrate to third-party payors whether patients are improving as a result of
the treatment provided and allows a hospital to refine its clinical treatment
programs and to market such programs to patients and providers. In addition, it
provides the Company with a valuable tool in demonstrating clinical results of
the mental health programs managed by the Company and in marketing such
management services to other hospitals. The Company provides outcome measurement
services not only to client hospitals but also
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to other hospitals, health care providers and third-party payors. The Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), as part of
its hospital accreditation process, will require each hospital, by no later than
December 31, 1997, to select at least one acceptable measurement system and at
least two clinical performance (outcome) measures that together represent at
least 20% of the hospital's patient population. Each year, the requirements for
the number of measures and the percentage of the population will increase. The
Company's CQI+ System has met the initial criteria for inclusion in the future
accreditation process and is included on JCAHO's list of acceptable systems. The
Company is committed to meeting future criteria established by JCAHO. Since
developing the CQI+ System over three years ago, the Company has compiled a
database containing outcome measurement data on over 11,000 patients. With the
growth of managed care and the JCAHO accreditation requirement, the Company
believes that its CQI+ System will become an important component of the mental
health services it provides.
PHYSICAL REHABILITATION SERVICES
The Company has successfully expanded the types of programs that it manages
for its client hospitals to include other related clinical services. Horizon's
recent acquisition of Specialty expanded the Company's operations to include the
contract management of physical rehabilitation programs. The Company believes
that many of the same factors driving demand in mental health programs are also
driving significant demand for physical rehabilitation programs. The Company
provides a full range of physical rehabilitation services. In addition to acute
and sub-acute physical therapy and rehabilitation services, the Company also
provides a comprehensive outpatient rehabilitation facility program. Outpatient
rehabilitation services are dominated by the treatment of sports and work
related injuries, but also provide the continuum of rehabilitative care
necessary to meet the medical needs of a post-acute care patient following a
disabling illness or traumatic injury. Pressure from payors to move inpatients
to the lowest-cost appropriate treatment setting has helped fuel growth in these
outpatient services.
OTHER MENTAL HEALTH SERVICES AND EMPLOYEE ASSISTANCE PROGRAMS
With the acquisition of Florida Professional Psychological Services, Inc.,
also known as Professional Psychological Services, Inc. ("Florida PPS"), in
August 1996, the Company expanded its services to include provision of full
risk, capitated managed care mental health services for health maintenance
organizations ("HMOs") and self-insured employers and the operation of employee
assistance programs for employers. The mental health care services are provided
by mental health care professionals that are employed by the Company or are
under contract with the Company as independent providers. The Company believes
that its existing relationships with health care providers and its expertise in
the provision of mental health care services provide it with the capability to
establish, operate and manage the network of health care professionals necessary
to economically furnish such services. Employee assistance programs, which are
usually provided by employers as a benefit at no cost to employees, give
employees the opportunity to have consultations with a health care provider to
identify and discuss problems that may be affecting the work performance of the
employee and a course of action or treatment to address such problems. The
Company believes that an opportunity exists for the contract management of
employee assistance programs offered by community-based general acute care
hospitals. As with its other products, the Company intends to market such
programs as an additional service it can offer new and existing client
hospitals.
PENDING AND RECENT ACQUISITIONS
On October 20, 1997, the Company entered into a definitive agreement to
acquire all of the outstanding capital stock of Acorn Behavioral HealthCare
Management Corporation, a Pennsylvania corporation ("Acorn"), for approximately
$12.7 million in cash (the "Acorn Acquisition"). Acorn provides employee
assistance programs and other related services to self-insured employers. At
October 1, 1997, Acorn had 122 contracts with employers covering over 246,000
employees and, under most contracts, the dependents of the employees. Acorn's
services are provided by independent health care professionals that have
contracted with Acorn on a fee-for-service basis. At October 1, 1997, Acorn's
provider network was composed of over 7,000 individual providers located
throughout the United States. The Company presently expects to close the Acorn
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Acquisition on October 31, 1997. However, the transaction is subject to various
conditions and there can be no assurance as to whether or when such acquisition
will be completed. See "Business -- Pending Acorn Acquisition."
In August, 1997, Horizon acquired Specialty, a privately held contract
manager of mental health and physical rehabilitation treatment programs for
general acute care hospitals and other health care entities. At August 11, 1997,
the date of the acquisition, Specialty had 44 management contracts at locations
in 21 states covering 26 mental health contracts and 18 physical rehabilitation
contracts. The acquisition of Specialty was effected by a share exchange with
the Specialty stockholders in which 1,400,000 shares of Common Stock of the
Company were issued, representing approximately 20.1% of the Common Stock of the
Company outstanding after the transaction. The Company has accounted for the
transaction as a pooling of interests as reflected in the Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this
Prospectus. As a part of the transaction, the Company entered into a
registration rights agreement with the former Specialty stockholders. The
Selling Stockholders in this offering consist primarily of former Specialty
stockholders who have exercised such registration rights. See "Certain
Transactions."
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation
("Geriatric"). Geriatric is a contract manager of mental health programs for
general acute care hospitals and, at March 15, 1997, had 18 management
contracts. The purchase price was approximately $4.6 million.
Also effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Clay Care, Inc., a Texas corporation ("Clay Care"). Clay Care
is a contract manager of mental health programs for general acute care hospitals
and, at March 15, 1997, had five management contracts. The purchase price was
$1.0 million.
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THE OFFERING
Common Stock offered by the
Selling Stockholders.......... 1,240,000 shares (1)
Common Stock outstanding after
the Offering.................. 6,972,762 shares (2)
Use of Proceeds............... All of the shares of Common Stock offered
hereby are being offered by the Selling
Stockholders. The Selling Stockholders consist
primarily of former Specialty Stockholders who
have exercised registration rights. The Company
will not receive any of the proceeds from the
sale of the shares being offered hereby.
Nasdaq National Market
Symbol........................ HORC
- ---------------
(1) Excludes 186,000 shares of Common Stock subject to the Underwriters'
overallotment option.
(2) Based on the number of shares of Common Stock outstanding at October 15,
1997. Excludes 1,601,343 shares of Common Stock issuable upon the exercise
of stock options outstanding as of such date at a weighted average exercise
price of $6.57 per share.
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered in connection with an investment in the Common Stock offered hereby,
including, without limitation, risks related to: (i) reimbursement from Medicare
or Medicaid programs and payment from insurers or other third-party payors; (ii)
potential risks and uncertainties in government regulation of services provided
by programs managed by the Company; (iii) reliance on and government scrutiny of
the Company's key customer; (iv) uncertainties in renewal of management
contracts; and (v) managing growth and acquisitions.
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<PAGE> 11
SUMMARY FINANCIAL AND STATISTICAL DATA
The summary historical consolidated financial data presented below for the
fiscal years ended August 31, 1995, 1996 and 1997, and at August 31, 1996 and
August 31, 1997, are derived from the audited consolidated financial statements
of the Company included elsewhere in this Prospectus. The summary historical
consolidated financial data presented below for the fiscal years ended August
31, 1993 and 1994, and at August 31, 1993, 1994 and 1995, are derived from the
audited consolidated financial statements of the Company not included herein.
Effective August 11, 1997, Horizon acquired Specialty in a share exchange
transaction with the stockholders of Specialty which was accounted for as a
pooling of interests. The Consolidated Financial Statements of the Company give
effect to the Specialty exchange by combining (a) the financial statements of
Horizon for the years ended August 31, 1995 and 1996 with the financial
statements of Specialty for the years ended December 31, 1995 and 1996 and (b)
the results of operations of Horizon for the year ended August 31, 1997 with the
results of operations of Specialty for the twelve month period ended August 31,
1997, in each case on a pooling of interests basis. Specialty was a division of
National Medical Enterprises, Inc. during the year ended December 31, 1994. The
operations of Specialty for the four month period ended December 31, 1996
resulting in net revenues and net income of $10.8 million and $849,000,
respectively, have been included in the restated statement of operations for
both the year ended August 31, 1996 and the year ended August 31, 1997. The
effect of including Specialty's net income for the four months in both periods
is eliminated in stockholders' equity in the Consolidated Financial Statements
of the Company. The summary financial information presented below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Consolidated Financial Statements of the
Company and Notes thereto included elsewhere in this Prospectus.
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------------------------
1993 1994(1) 1995(1) 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues:
Contract management revenues.......... $20,960 $24,962 $68,721 $95,244 $102,263
Other(2).............................. 7,770 5,297 634 995 7,004
------- ------- ------- ------- --------
Total revenues................ 28,730 30,259 69,355 96,239 109,267
Operating expenses:
Salaries and benefits................. 16,031 16,814 40,083 55,810 60,048
Purchased services.................... 4,398 4,731 10,794 13,880 16,466
Provision for bad debts............... 359 312 1,680 1,435 3,034
Other................................. 5,703 5,745 9,189 11,848 12,796
Depreciation and amortization......... 585 560 1,133 1,812 2,201
Merger expenses....................... -- -- -- -- 3,528
------- ------- ------- ------- --------
Operating income........................ 1,654 2,097 6,476 11,454 11,194
Interest and other income (expense),
net................................... (1,111) (1,005) (1,003) (67) 120
------- ------- ------- ------- --------
Income before income taxes.............. 543 1,092 5,473 11,387 11,314
Income tax expense (benefit)............ 44 (20) 1,695 4,609 4,518
------- ------- ------- ------- --------
Income before equity in net earnings of
Horizon LLC and minority interest..... 499 1,112 3,778 6,778 6,796
Equity in net earnings of Horizon LLC... -- 364 1,568 -- --
Minority interest....................... -- -- -- (2) (140)
------- ------- ------- ------- --------
Net income.............................. $ 499 $ 1,476 $ 5,346 $ 6,776 $ 6,656
======= ======= ======= ======= ========
Net income per common share(3).......... $ 0.13 $ 0.35 $ 0.85 $ 0.86 $ 0.83
======= ======= ======= ======= ========
Weighted average common shares and
common equivalent shares
outstanding(3)........................ 3,738 4,184 6,308(4) 7,872(4) 8,062(4)
======= ======= ======= ======= ========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments......... $ 1,633 $ 2,144 $ 3,249 $ 8,346 $ 5,517
Non-cash working capital (deficit)...... 317 (1,982) 1,145 405 (452)
Intangible assets (net)(5).............. 8,031 7,676 14,998 19,887 26,005
Total assets............................ 14,216 15,079 33,587 45,214 48,728
Total debt.............................. 13,732 12,121 3,216 3,576 --
Stockholders' equity (deficit).......... (2,936) (1,434) 17,225 25,149 31,682
</TABLE>
<TABLE>
<CAPTION>
AUG 31, NOV 30, FEB 29, MAY 31, AUG 31, NOV 30, FEB 28, MAY 31, AUG 31,
1995 1995 1996 1996 1996 1996 1997 1997 1997
STATISTICAL DATA: ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF CONTRACT LOCATIONS(6):
Contract locations in operation...... 146 150 145 162 163 162 162 176 181
Contract locations signed and
unopened........................... 15 16 13 19 16 22 10 18 14
--- --- --- --- --- --- --- --- ---
Total contract locations............. 161 166 158 181 179 184 172 194 195
=== === === === === === === === ===
SERVICES COVERED BY CONTRACTS(6):
Inpatient............................ 138 142 137 155 156 150 153 158 158
Partial hospitalization.............. 64 69 70 78 84 85 85 101 102
Outpatient........................... 15 16 18 25 20 19 19 19 19
Home health.......................... 1 3 6 7 13 14 14 15 17
CQI+................................. 45 50 54 60 64 66 75 83 86
TYPES OF TREATMENT PROGRAMS(6):
Geropsychiatric...................... 116 122 129 143 161 154 158 184 192
Adult psychiatric.................... 67 73 69 69 65 67 69 67 72
Substance abuse...................... 9 9 9 24 20 19 17 16 8
Other mental health.................. 2 2 2 6 5 6 5 4 4
Physical rehabilitation.............. 23 24 22 23 22 22 22 22 20
</TABLE>
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<PAGE> 13
- ---------------
(1) Effective August 1, 1994, the Company and Mental Health Management, Inc.
("MHM") formed Horizon Mental Health Management Company, L.L.C., a Delaware
limited liability company ("Horizon LLC"). Horizon LLC assumed management
responsibility for all of the then existing management contracts of the
Company and MHM. Certain provisions of the limited liability company
agreement which required the consent of MHM for certain transactions
prevented the Company from having the ability to control Horizon LLC under
generally accepted accounting principles and therefore Horizon LLC was not
consolidated with Horizon for accounting purposes through February 28, 1995.
As a result, the revenues and expenses of Horizon LLC for the period August
1, 1994 through February 28, 1995 are not included in the revenues and
expenses of the Company; instead, for such periods the Company accounted for
its investment in Horizon LLC by the equity method and reflected its share
of Horizon LLC's net income for the period in question as "Equity in Net
Earnings of Horizon LLC." Effective with the acquisition of the minority
interest in Horizon LLC of MHM on March 20, 1995, the MHM contracts were
assigned to the Company and Horizon LLC became a wholly owned subsidiary of
the Company. Horizon LLC was consolidated with the Company effective March
1, 1995. The Company's share of 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 agreement stipulated that MHM, as a
member of 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.
(2) Other revenues for the fiscal years ended August 31, 1993, 1994, 1995 and
1996 consist primarily of revenues earned from a psychiatric hospital
formerly operated by the Company, patient services and physician contract
management fees, or subsequent adjustments for Medicare settlements
recognized during the respective period. The Company subleased the
operations of the hospital to a third party effective July 31, 1994. For
fiscal 1997, other revenues consisted of revenues from mental health
services and employee assistance programs conducted through Florida PPS. See
also "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
(3) Adjusted to reflect a three-for-two stock split effected by the Company as a
50% stock dividend on January 31, 1997.
(4) Adjusted for the Specialty transaction based on historical share amounts,
converting each outstanding share of Specialty Common Stock into 147.4616
shares of Horizon Common Stock.
(5) The Company recorded additional goodwill of $4,498,038 and $714,672 and
additional management contract values of $507,948 and $141,066, as a result
of the acquisitions on March 15, 1997 of Geriatric and Clay Care,
respectively. On August 1, 1996, the Company purchased 80% of the
outstanding common stock of Florida PPS. Due to this purchase, $3,298,885
was recorded as goodwill during 1996 and 1997. On April 1, 1996, the Company
purchased all of the outstanding capital stock of the Parkside Company. In
connection with this purchase, approximately $1,400,000 was recorded as
goodwill and $2,100,000 as management contracts. Effective January 3, 1995,
the Company acquired the net assets and operations of National Medical
Management Services, a division of National Medical Enterprises, Inc. Due to
this purchase, $120,350 was recorded as goodwill and $1,000,000 as
management contracts. On March 20, 1995, $9,683,467 of the net proceeds to
the Company from its initial public offering were used to purchase MHM's
minority interest in Horizon LLC. The purchase transaction eliminated MHM's
equity interest in Horizon LLC ($2,794,715) and recognized an increase in
intangible assets based upon the value of 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. In each such
acquisition, the increase in contract values will be amortized over seven
years and the goodwill over forty years.
(6) Represents combined information for both Horizon and Specialty.
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<PAGE> 14
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing shares of the Common Stock offered hereby.
This Prospectus contains forward looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. See "Disclosure Regarding Forward Looking Statements."
RISKS INVOLVED WITH REIMBURSEMENT OF CLIENT HOSPITALS BY THIRD PARTY PAYORS
The fees received by the Company for its services under management
contracts with general acute care hospitals are paid directly to the Company by
the hospitals. The Company's client hospitals receive reimbursement under either
the Medicare or Medicaid programs or payments from insurers, self-funded benefit
plans or other third-party payors for mental health and physical rehabilitation
services provided by programs managed by the Company. As a result, the
availability of such reimbursement or payment could have a significant impact on
the decisions of general acute care hospitals to offer mental health and
physical rehabilitation services pursuant to management contracts with the
Company.
At August 31, 1997, 192 of the 276 mental health treatment programs managed
by the Company were geropsychiatric programs for which a substantial majority of
the patients are covered by Medicare. The Company expects to continue to derive
a significant portion of its revenue from management fees for such programs. The
Medicare prospective payment system ("PPS") uses predetermined reimbursement
rates for diagnosis related groups ("DRGs") to establish fixed payment amounts
per discharge from an acute care hospital for specified diagnoses. Under certain
circumstances, inpatient mental health and physical rehabilitation services
provided by general acute care hospitals can qualify for an exemption from the
DRG system. Such services are deemed to be exempt if they are provided in DPUs
and are reimbursed by Medicare on an actual cost basis, subject to certain
limitations. In the future, however, it is possible that Medicare reimbursement
for mental health and physical rehabilitation services, including those provided
by programs managed by the Company, could be reimbursed under the DRG system or
otherwise altered. Any changes which limit or reduce Medicare reimbursement
levels could therefore have a material adverse effect on the Company's client
hospitals and, in turn, on the Company.
Recent amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. Effective as of October 1, 1997, regulations
promulgated pursuant to these amendments establish a new ceiling on the rate of
increase in operating costs per case for mental health and physical
rehabilitation services furnished to Medicare beneficiaries. Prior to these
amendments, the reimbursement amounts were tied to each hospital's mental health
or physical rehabilitation unit cost during such unit's first year of
operations, subject to adjustment. The new regulations establish a nationwide
cap limiting the reimbursement target amount on a per case basis for mental
health and physical rehabilitation services to $10,547 and $19,250,
respectively, subject to adjustments based on market indices. There can be no
assurance that such limitation will not result in the decline in amounts
reimbursed to the Company's client hospitals and will not have an adverse effect
on the business, operations and financial condition of the Company.
A recently enacted amendment in the Medicare statutes provides for a
gradual phase-out of cost-based reimbursement for physical rehabilitation
services over a three-year period commencing on October 1, 2000. The resulting
phase-in of reimbursement for physical rehabilitation services based on PPS
could significantly lower Medicare reimbursements to hospitals providing
physical rehabilitation services and thus have a material adverse effect on the
business, operations and financial results of the Company.
The Medicare and Medicaid programs are subject to additional statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings and governmental funding restrictions, any of which could have the
effect of limiting or reducing reimbursement levels to general acute care
hospitals for patient services provided by programs managed by the Company. The
Company cannot predict whether any such additional changes will be adopted or,
if adopted, the effect, if any, such additional changes will have on
13
<PAGE> 15
the Company. A significant number of the Company's management contracts require
the Company to refund some or all of its fee if Medicare reimbursement to the
client hospital is disallowed for a patient treated in a program managed by the
Company or if the fee paid to the Company is disallowed as a reimbursable cost.
During fiscal 1997 and 1996, the Company reimbursed $219,294 and $429,849,
respectively, in response to Medicare reimbursement denials. Also, Medicare
retrospectively audits cost reports of client hospitals upon which Medicare
reimbursement for services rendered in the programs managed by the Company is
based. Accordingly, at any time, the Company could be subject to refund
obligations to client hospitals for prior year cost reports that have not been
audited and settled at the date hereof. Certain of the Company's management
contracts provide for renegotiation of their terms should the Medicare or
Medicaid reimbursement for the mental health or physical rehabilitation services
provided by the client hospital drop below a certain level. Any significant
decrease in Medicare reimbursement levels, the imposition of significant
restrictions on participation in the Medicare program, or the disallowance by
Medicare of any significant portion of the client hospital's costs, including
the management fee paid to the Company, where the Company has a reimbursement
denial repayment obligation, could adversely affect the Company. There can be no
assurance that hospitals which offer mental health or physical rehabilitation
programs now or hereafter managed by the Company will satisfy the requirements
for participation in the Medicare or Medicaid programs. See " -- Contract Terms
and Renewals," "Business -- Government Regulation" and
"Business -- Operations -- Management Contracts."
Both private and governmental payor sources, including Medicare and
Medicaid, have instituted cost containment measures designed to limit payments
made to health care providers, resulting in declining amounts reimbursed to
hospitals for the services provided. As a result, the Company anticipates that
the number of patients served by general acute care hospitals on an inpatient
basis will decrease and, as an alternative, the number of patients served on a
per diem, episodic or capitated basis will increase in the future. There can be
no assurance that if amounts paid or reimbursed to hospitals decline, it will
not adversely affect the Company.
GOVERNMENT REGULATION
The federal government and all states in which the Company operates
regulate various aspects of the services provided by programs managed by the
Company. In particular, the construction and operation of hospital facilities
and services are subject to federal, state and local licensure and certification
laws relating to the adequacy of medical care, resident rights, equipment,
personnel, operating policies, fire prevention, rate-setting and compliance with
building codes, and environmental and other laws. The facilities operated by the
Company's client hospitals are subject to periodic inspection by governmental
and other regulatory authorities to ensure compliance with the standards
established for continued licensure under state law and certification under the
Medicare and Medicaid programs. Many states have adopted certificate of need and
similar health planning laws that generally require state agency approval of
certain new health care services or capital expenditures. A client hospital's
failure to obtain or renew any required regulatory approvals or licenses could
prevent such hospital from offering services or receiving Medicare and Medicaid
payments.
There are numerous federal and state laws that govern financial and other
arrangements between health care providers. These laws prohibit certain direct
and indirect payments or fee-splitting arrangements between health care
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products and
services. Such laws include the anti-kickback provisions of the federal Medicare
and Medicaid Patient and Program Protection Act of 1987 and the physician self-
referral provisions of the Omnibus Budget Reconciliation Act as expanded in 1993
(commonly referred to as "Stark II"). The anti-kickback provisions prohibit,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients. Stark
II prohibits, in part, physicians from making any Medicare or Medicaid referrals
for certain "designated health services" to any entity with which the physician
has a "financial relationship." In addition to these anti-kickback and
self-referral prohibitions, there are various federal and state laws prohibiting
other types of fraud by health care providers, including criminal provisions
which prohibit filing false claims or making false statements to receive payment
or certification under Medicare or Medicaid, or failing to refund overpayments
14
<PAGE> 16
or improper payments. The Health Insurance Portability and Accountability Act of
1996 (the "Accountability Act") significantly expanded the scope of the federal
fraud and abuse provisions, broadening the anti-kickback provisions to include
all federal health care programs, in addition to Medicare and Medicaid. The
Accountability Act also expanded the scope of the sanctions for fraud and abuse
violations by increasing the size of the civil monetary penalty provisions and
broadening the mandatory exclusion provisions such that any individual convicted
of any felony in connection with the delivery of a health care item or service
under a federal, state or local health care program is mandatorily excluded from
Medicare/Medicaid participation. The Balanced Budget Act of 1997 (the "Balanced
Budget Act") further expanded certain of these fraud and abuse provisions,
including establishing civil money penalties for violations of the anti-kickback
provisions. In addition, many states have similar fraud and abuse provisions.
The Company is not a provider reimbursed by Medicare or Medicaid but provides
services to such providers. As such, the Company could be considered subject to
such federal and state laws. While the Company believes that its relationships
with its client hospitals, medical directors and other providers and the fee
arrangements with its client hospitals are consistent with Medicare and Medicaid
criteria, those criteria are often vague and subject to interpretation. The
federal government has been actively investigating health care providers for
potential abuses. There can be no assurance that aggressive anti-fraud
enforcement actions will not adversely affect the business of the Company.
Certain of the services provided by Florida PPS and Acorn may be subject to
certain licensing requirements in some states. Neither Florida PPS nor Acorn
hold any licenses in states other than Florida and Pennsylvania, respectively.
If the business operations of such entities are determined to require licenses
in other states, then obtaining such licenses or the inability to obtain such
licenses could adversely affect the business operations of such entities. In
addition, several states have laws that prohibit business corporations from
providing, or holding themselves out as providers of, medical care. While the
Company has no reason to believe that it is in violation or has violated such
statutes, these laws vary from state to state and have seldom been interpreted
by the courts or regulatory agencies. See "Business -- Government Regulation."
UNCERTAINTY ASSOCIATED WITH HEALTH CARE LEGISLATION
In addition to extensive government health care regulation, there are
numerous initiatives on federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The
recently-enacted Balanced Budget Act seeks to achieve a balanced federal budget
by, among other things, reducing federal spending on the Medicare and Medicaid
programs. The law imposes, among other things, ceilings on the per patient
amounts reimbursed to mental health and physical rehabilitation units of general
acute care hospitals. There can be no assurance that these changes will not
adversely affect the Company. See "-- Risk Involved with Reimbursement of Client
Hospitals by Third Party Payors." In addition, there can be no assurance that
currently proposed or future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have an adverse effect on the Company. Concern about the potential effects or
the proposed reform and budget reduction measures may have contributed to the
volatility of prices of securities of companies in health care and related
industries and may similarly affect the price of the Company's Common Stock in
the future.
In addition, some states in which the Company operates are considering
various health care reform proposals. It is uncertain at this time what
legislation on health care reform may ultimately be proposed or enacted or
whether other changes in the administration or interpretation of governmental
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business -- Governmental Regulation -- Health Care Reform."
RELIANCE ON KEY CUSTOMER; GOVERNMENT SCRUTINY OF KEY CUSTOMER; RELATED PARTY
ISSUES
At August 31, 1997, the Company had management contracts with 39 general
acute care hospitals directly or indirectly owned by Columbia/HCA Healthcare
Corporation ("Columbia/HCA"). These hospitals collectively accounted for
approximately 19.1% of the revenues of the Company for the year ended
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<PAGE> 17
August 31, 1997. The termination or non-renewal of all or a substantial part of
the management contracts with hospitals owned by Columbia/HCA could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business -- Operations -- Management
Contracts -- Client Hospitals."
In recent months, Columbia/HCA and its business practices have been under
intense widespread review by governmental agencies. Because the Company has a
significant number of management contracts with Columbia/HCA which could also be
subject to review, the governmental scrutiny of Columbia/HCA could directly or
indirectly affect the Company or its relationship with Columbia/HCA.
Medicare regulations limit reimbursement for health care charges paid to
related parties. A party is considered "related" to a provider if it is deemed
to be controlled by the provider. One test for determining control for this
purpose is whether the percentage of the total revenues of the party received
from services rendered to the provider is so high that it effectively
constitutes control. Although the Company does not receive sufficient revenues
from any customer, including Columbia/HCA, that would make it a related party,
it is possible that such regulations could limit the number of management
contracts that the Company could have with Columbia/HCA or any other client.
CONTRACT TERMS AND RENEWALS
Approximately 93.6% of the Company's revenues for fiscal 1997 were derived
from management contracts for mental health and physical rehabilitation services
with general acute care hospitals. The contracts generally have initial terms of
three to five years and many have automatic renewal terms subject to termination
by either party. The contracts often provide for early termination either by the
client hospital if specified performance criteria are not satisfied or by the
Company under various other circumstances. Certain of the Company's management
contracts provide for renegotiation of their terms should the Medicare or
Medicaid reimbursement for the mental health or physical rehabilitation services
provided by the client hospital drop below a certain level. Although the
Company's management contracts are frequently renewed or extended prior to their
stated expiration dates, some contracts expire without renewal and others are
terminated by the Company or the client hospital for various reasons prior to
their scheduled expiration. The continued success of the Company is subject to
its ability to renew or extend existing management contracts and obtain new
management contracts. Contract renewals and extensions are likely to be subject
to competing proposals from other contract management companies as well as
consideration by certain hospitals to convert from independently managed
programs to programs operated internally or to terminate their programs in order
to reassign patient beds for other health care purposes. There can be no
assurance that any hospital will continue to do business with the Company
following expiration or termination of its management contract. In addition, any
changes in the Medicare program which have the effect of limiting or reducing
reimbursement levels for services provided by programs managed by the Company
could result in a reduction in the management fees paid to the Company or the
early termination of existing management contracts and would adversely affect
the ability of the Company to renew or extend existing management contracts and
to obtain new management contracts. The termination or nonrenewal of a material
number of management contracts could result in a significant decrease in the
Company's net revenues and could have a material adverse effect on the Company's
business, financial condition or results of operations. See
"Business -- Operations -- Management Contracts."
RISKS RELATED TO ACQUISITION STRATEGY
As a part of its growth strategy the Company has pursued and intends to
continue to pursue strategic acquisition opportunities as they arise. The
acquisition of other businesses involves numerous risks, including the
difficulty of assimilating the operations of the acquired business, the
diversion of management's time and attention from other business concerns, the
risks of entering markets or acquiring businesses in which the Company may have
no or limited direct prior experience, the potential loss of key employees of
the acquired business and the risk that an acquisition could reduce the
Company's future earnings. Competition for acquisitions may intensify due to the
ongoing consolidation in the health care industry, and may increase the price or
reduce the availability of such acquisitions. While the Company has recently
signed a purchase
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<PAGE> 18
agreement related to the Acorn Acquisition, and expects to close the Acorn
Acquisition by October 31, 1997, there can be no assurance that other
acquisition candidates will be identified or that the Acorn Acquisition or any
future acquisition will be completed. There can be no assurance that the Company
will be able to successfully implement growth through acquisitions or that any
acquisition, including the Acorn Acquisition, will be successfully integrated
into the Company's operations. Any failure to successfully assimilate an
acquisition could result in financial expenditures and increased demands on
management's time and could have a material adverse effect on the Company's
business, financial condition and results of operations and on the price of the
Common Stock. The Company may need to raise additional capital, through
increased bank borrowings, issuing public or private debt securities, issuing
stock as consideration, selling stock or otherwise, to fund acquisitions which
may become available to the Company in the future. There can be no assurance
that any such financing will be available or can be obtained on terms acceptable
to the Company. At August 31, 1997, approximately $21.6 million, or
approximately 44.2% of the Company's total assets, was goodwill relating to
acquisitions. The Acorn Acquisition will result in additional goodwill of
approximately $9.2 million. See "-- Risks Associated with Intangible Assets;
Goodwill."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends upon its executive officers and members of
its management team, the loss of one or more of whom could adversely affect the
Company. The Company's success and growth strategy also depend on its ability to
attract and retain qualified clinical, management, marketing and other
personnel. The Company competes with general acute care hospitals and other
health care providers for the services of psychiatrists, psychologists, social
workers, therapists, physical therapists and other clinical personnel. Demand
for clinical personnel for physical rehabilitation purposes is particularly high
and they are often subject to competing offers of employment. There can be no
assurance that the Company will be able to attract and retain the qualified
personnel necessary for its business in the future. See "Business -- Operations"
and "-- Employees."
COMPETITION
The health care industry is highly competitive and subject to continual
changes in the method in which services are provided and the types of companies
providing such services. The contract management services industry is also
highly competitive. The Company's competitors include several national companies
as well as many regional and local companies, some of which have, or may obtain,
greater resources than the Company. In addition, the Company's current and
potential clients may choose to operate clinical programs themselves rather than
contract with the Company. Furthermore, general acute care hospitals, the
primary market for the Company's services, compete for patients with other
providers of clinical services, including freestanding specialized hospitals.
The inability of the Company or its client hospitals to compete effectively
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business -- Competition."
The Company also competes with hospitals, nursing homes, clinics,
physicians' offices and contract therapy companies for the services of physical,
occupational and speech therapists. These specialists are in short supply and
there can be no assurance that the Company will be able to attract a sufficient
number of therapists for its growing needs.
RISKS ASSOCIATED WITH INTANGIBLE ASSETS; GOODWILL
At August 31, 1997, $26.0 million, or 53.0%, of the Company's total assets
were intangible assets. In the event of any sale or liquidation of the Company,
there can be no assurance that the value of such intangible assets will be
realized. In addition, any significant decrease in the value of such intangible
assets could have a material adverse effect on the Company.
Under current generally accepted accounting standards, the Company is
required to review goodwill on a continuous basis and, if the business to which
goodwill relates is discontinued, to write off the goodwill related to such
business. As a result, in the event of the loss of a significant number of
contracts relating to an
17
<PAGE> 19
acquisition by the Company, the Company could be required to write off the
goodwill associated with the acquisition.
ANTI-TAKEOVER PROVISIONS
The authorized capital stock of the Company includes 500,000 shares of
Preferred Stock, none of which is currently outstanding. The Company's
Certificate of Incorporation gives the Board of Directors the authority without
further action by the stockholders to issue and establish the rights and
preferences of one or more series of Preferred Stock. This authority may deter
or delay changes of control of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over the then
current market price. All outstanding shares of Common Stock of the Company are
accompanied by currently nontransferable rights issued pursuant to a rights
agreement approved by the stockholders of the Company. The rights become
exercisable for shares of Common Stock upon the occurrence of certain events
generally related to the acquisition of control of the Company by a third party.
The rights represent a short-term plan designed to prevent an acquiror from
gaining control of the Company without offering all the stockholders what the
Board of Directors believes to be the full value of their investment. The
existence of the rights, however, could have the effect of deterring tender
offers or takeover attempts, even though such an offer or attempt might appear
to stockholders to be beneficial, and could make it more difficult for the
holder of a large block of the Common Stock to assume control of the Company. In
addition, it has been argued that rights plans, in general, have the effect of
entrenching management by discouraging certain takeovers which are not favored
by management.
18
<PAGE> 20
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company completed an initial public offering of its Common Stock in
March 1995. The Common Stock of the Company was originally listed on the
American Stock Exchange and was traded under the symbol "HMH". On May 7, 1996,
the Common Stock of the Company began trading on the Nasdaq National Market
under the symbol "HMHM". On August 12, 1997, the Nasdaq trading symbol for the
Company was changed to "HORC" following the change of its corporate name from
Horizon Mental Health Management, Inc.
The following table sets forth the high and low sale prices per share for
the Common Stock of the Company as reported by the American Stock Exchange or
the Nasdaq National Market, as applicable, for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
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 ENDED AUGUST 31, 1997(1):
September 1, 1996 -- November 30, 1996.................... 18.67 14.67
December 1, 1996 -- February 28, 1997..................... 19.67 16.33
March 1, 1997 -- May 31, 1997............................. 20.00 15.38
June 1, 1997 -- August 31, 1997........................... 26.12 18.00
</TABLE>
- ---------------
(1) Adjusted to reflect three-for-two stock split effected by the Company as a
50% stock dividend on January 31, 1997.
The reported last sale price per share of the Common Stock as reported by
the Nasdaq National Market on October 15, 1997 was $28.00. As of October 15,
1997, the Company had 6,972,762 shares of Common Stock outstanding. As of
October 15, 1997, there were 44 stockholders of record of the Common Stock of
the Company.
The Company has not paid or declared any cash dividends on its capital
stock since its inception. The Company currently intends to retain all future
earnings for use in the expansion and operation of its business. Future
borrowings may limit the Company's ability to pay dividends. The payment of any
future cash dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, financial condition
and capital requirements, restrictions in financing agreements, business
conditions and other factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
19
<PAGE> 21
USE OF PROCEEDS
All of the shares of Common Stock offered hereby are being offered by the
Selling Stockholders. The Selling Stockholders consist primarily of former
Specialty stockholders who have exercised registration rights. The Company will
not receive any of the proceeds from the sale of the shares being offered
hereby.
CAPITALIZATION
The following table sets forth the cash and short-term investments and
capitalization of the Company at August 31, 1997. This table should be read in
conjunction with the Consolidated Financial Statements of the Company and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AUGUST 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Cash and short-term investments(1).......................... $ 5,517
=======
Total long-term debt (including current maturities)(1)...... $ --
-------
Stockholders' equity:
Preferred Stock, $.10 par value:
500,000 shares authorized; none issued or
outstanding............................................ --
Common Stock $.01 par value:
40,000,000 shares authorized; 6,966,762 shares issued
and outstanding(2)..................................... 70
Additional paid-in capital.................................. 16,739
Retained earnings........................................... 14,873
-------
Total stockholders' equity........................... 31,682
-------
Total capitalization.............................. $31,682
=======
</TABLE>
- ---------------
(1) As of August 31, 1997, the Company had an $11.0 million revolving credit
facility under which $10.1 million was available at such date. On October
16, 1997, such revolving credit facility was increased to $14.0 million, all
of which was available at such date. The Company estimates that, upon
funding of the Acorn Acquisition, it will utilize approximately $1.1 million
existing cash and incur debt of approximately $11.6 million under the
revolving credit facility. On October 13, 1997, the Company entered into a
commitment letter dated October 8, 1997 for a senior secured credit facility
in the aggregate amount of $50.0 million, which will replace the current
revolving credit facility. The proposed credit facility is expected to be
put in place in early December, 1997 and will consist of a $10.0 million
revolving credit facility for working capital purposes and a $40.0 million
advance term loan facility for future acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Business -- Pending Acorn
Acquisition" and Notes 6 and 15 of Notes to Consolidated Financial
Statements of the Company.
(2) Excludes 1,619,343 shares of Common Stock issuable upon exercise of options
outstanding at September 1, 1997, at a weighted average exercise price of
$6.60 per share.
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND STATISTICAL DATA
The selected historical consolidated financial data presented below for the
fiscal years ended August 31, 1995, 1996 and 1997, and at August 31, 1996 and
August 31, 1997, are derived from the audited consolidated financial statements
of the Company included elsewhere in this Prospectus. The selected historical
consolidated financial data presented below for the fiscal years ended August
31, 1993 and 1994, and at August 31, 1993, 1994 and 1995, are derived from the
audited consolidated financial statements of the Company not included herein.
Effective August 11, 1997, Horizon acquired Specialty in a share exchange
transaction with the stockholders of Specialty which was accounted for as a
pooling of interests. The Consolidated Financial Statements of the Company give
effect to the Specialty exchange by combining (a) the financial statements of
Horizon for the years ended August 31, 1995 and 1996 with the financial
statements of Specialty for the years ended December 31, 1995 and 1996 and (b)
the results of operations of Horizon for the year ended August 31, 1997 with the
results of operations of Specialty for the twelve month period ended August 31,
1997, in each case on a pooling of interests basis. Specialty was a division of
National Medical Enterprises, Inc. during the year ended December 31, 1994. The
operations of Specialty for the four month period ended December 31, 1996
resulting in net revenues and net income of $10.8 million and $849,000,
respectively, have been included in the restated statement of operations for
both the year ended August 31, 1996 and the year ended August 31, 1997. The
effect of including Specialty's net income for the four months in both periods
is eliminated in stockholders' equity in the Consolidated Financial Statements
of the Company. The selected financial information presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
21
<PAGE> 23
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------------------------
1993 1994(1) 1995(1) 1996 1997
------- ------- ------- ------- --------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract management revenues........... $20,960 $24,962 $68,721 $95,244 $102,263
Other(2)............................... 7,770 5,297 634 995 7,004
------- ------- ------- ------- --------
Total revenues................. 28,730 30,259 69,355 96,239 109,267
Operating expenses:
Salaries and benefits.................. 16,031 16,814 40,083 55,810 60,048
Purchased services..................... 4,398 4,731 10,794 13,880 16,466
Provision for bad debts................ 359 312 1,680 1,435 3,034
Other.................................. 5,703 5,745 9,189 11,848 12,796
Depreciation and amortization.......... 585 560 1,133 1,812 2,201
Merger expenses........................ -- -- -- -- 3,528
------- ------- ------- ------- --------
Operating income......................... 1,654 2,097 6,476 11,454 11,194
Interest and other income (expense),
net.................................... (1,111) (1,005) (1,003) (67) 120
------- ------- ------- ------- --------
Income before income taxes............... 543 1,092 5,473 11,387 11,314
Income tax expense (benefit)............. 44 (20) 1,695 4,609 4,518
------- ------- ------- ------- --------
Income before equity in net earnings of
Horizon LLC and minority interest...... 499 1,112 3,778 6,778 6,796
Equity in net earnings of Horizon LLC.... -- 364 1,568 -- --
Minority interest........................ -- -- -- (2) (140)
------- ------- ------- ------- --------
Net income............................... $ 499 $ 1,476 $ 5,346 $ 6,776 $ 6,656
======= ======= ======= ======= ========
Net income per common share(3)........... $ 0.13 $ 0.35 $ 0.85 $ 0.86 $ 0.83
======= ======= ======= ======= ========
Weighted average common shares and common
equivalent shares outstanding(3)....... 3,738 4,184 6,308(4) 7,872(4) 8,062(4)
======= ======= ======= ======= ========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments.......... $ 1,633 $ 2,144 $ 3,249 $ 8,346 $ 5,517
Non-cash working capital (deficit)....... 317 (1,982) 1,145 405 (452)
Intangible assets (net)(5)............... 8,031 7,676 14,998 19,887 26,005
Total assets............................. 14,216 15,079 33,587 45,214 48,728
Total debt............................... 13,732 12,121 3,216 3,576 --
Stockholders' equity (deficit)........... (2,936) (1,434) 17,225 25,149 31,682
</TABLE>
<TABLE>
<CAPTION>
AUG 31, NOV 30, FEB 29, MAY 31, AUG 31, NOV 30, FEB 28, MAY 31, AUG 31,
1995 1995 1996 1996 1996 1996 1997 1997 1997
STATISTICAL DATA: ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF CONTRACT LOCATIONS(6):
Contract locations in operation...... 146 150 145 162 163 162 162 176 181
Contract locations signed and
unopened........................... 15 16 13 19 16 22 10 18 14
--- --- --- --- --- --- --- --- ---
Total contract locations............. 161 166 158 181 179 184 172 194 195
=== === === === === === === === ===
SERVICES COVERED BY CONTRACTS(6):
Inpatient............................ 138 142 137 155 156 150 153 158 158
Partial hospitalization.............. 64 69 70 78 84 85 85 101 102
Outpatient........................... 15 16 18 25 20 19 19 19 19
Home health.......................... 1 3 6 7 13 14 14 15 17
CQI+................................. 45 50 54 60 64 66 75 83 86
TYPES OF TREATMENT PROGRAMS(6):
Geropsychiatric...................... 116 122 129 143 161 154 158 184 192
Adult psychiatric.................... 67 73 69 69 65 67 69 67 72
Substance abuse...................... 9 9 9 24 20 19 17 16 8
Other mental health.................. 2 2 2 6 5 6 5 4 4
Physical rehabilitation.............. 23 24 22 23 22 22 22 22 20
</TABLE>
22
<PAGE> 24
- ---------------
(1) Effective August 1, 1994, the Company and Mental Health Management, Inc.
("MHM") formed Horizon Mental Health Management Company, L.L.C., a Delaware
limited liability company ("Horizon LLC"). Horizon LLC assumed management
responsibility for all of the then existing management contracts of the
Company and MHM. Certain provisions of the limited liability company
agreement which required the consent of MHM for certain transactions
prevented the Company from having the ability to control Horizon LLC under
generally accepted accounting principles and therefore Horizon LLC was not
consolidated with Horizon for accounting purposes through February 28, 1995.
As a result, the revenues and expenses of Horizon LLC for the period August
1, 1994 through February 28, 1995 are not included in the revenues and
expenses of the Company; instead, for such periods the Company accounted for
its investment in Horizon LLC by the equity method and reflected its share
of Horizon LLC's net income for the period in question as "Equity in Net
Earnings of Horizon LLC." Effective with the acquisition of the minority
interest in Horizon LLC of MHM on March 20, 1995, the MHM contracts were
assigned to the Company and Horizon LLC became a wholly owned subsidiary of
Horizon. Horizon LLC was consolidated with the Company effective March 1,
1995. The Company's share of 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 agreement stipulated that MHM, as a member of 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.
(2) Other revenues for the fiscal years ended August 31, 1993, 1994, 1995 and
1996 consist primarily of revenues earned from a psychiatric hospital
formerly operated by the Company, patient services and physician contract
management fees, or subsequent adjustments for Medicare settlements
recognized during the respective period. The Company subleased the
operations of the hospital to a third party effective July 31, 1994. For
fiscal 1997, other revenues consisted of revenues from mental health
services and employee assistance programs conducted through Florida PPS. See
also "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
(3) Adjusted to reflect a three-for-two stock split effected by the Company as a
50% stock dividend on January 31, 1997.
(4) Adjusted for the Specialty transaction based on historical share amounts,
converting each outstanding share of Specialty Common Stock into 147.4616
shares of Horizon Common Stock.
(5) The Company recorded additional goodwill of $4,498,038 and $714,672 and
additional management contract values of $507,948 and $141,066, as a result
of the acquisitions on March 15, 1997 of Geriatric and Clay Care,
respectively. On August 1, 1996, the Company purchased 80% of the
outstanding common stock of Florida PPS. Due to this purchase, $3,298,885
was recorded as goodwill during 1996 and 1997. On April 1, 1996, the Company
purchased all of the outstanding capital stock of the Parkside Company. In
connection with this purchase, approximately $1,400,000 was recorded as
goodwill and $2,100,000 as management contracts. Effective January 3, 1995,
the Company acquired the net assets and operations of National Medical
Management Services, a division of National Medical Enterprises, Inc. Due to
this purchase, $120,350 was recorded as goodwill and $1,000,000 as
management contracts. On March 20, 1995, $9,683,467 of the net proceeds to
the Company from its initial public offering were used to purchase MHM's
minority interest in Horizon LLC. The purchase transaction eliminated MHM's
equity interest in Horizon LLC ($2,794,715) and recognized an increase in
intangible assets based upon the value of 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. In each such
acquisition, the increase in contract value will be amortized over seven
years and the goodwill over forty years.
(6) Represents combined information for both Horizon and Specialty.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides contract management of clinical and related services
for general acute care hospitals and is currently the leading manager of mental
health programs offered by general acute care hospitals in the United States.
The Company has grown both internally and through acquisitions, increasing both
the number of its management contracts and the variety of its treatment programs
and services. The Company was formed in July 1989 as the successor to Horizon
Health Management Company, which had been engaged in the mental health contract
management business since 1981. During the period from 1989 to 1994, the Company
grew primarily from its internal sales efforts as it focused its business
operations entirely on the contract management of mental health programs. In
1995, the Company began to pursue acquisitions as an additional source of
growth. Over the last five years, the Company has increased its management
contracts from 43 to a total of 195 as of August 31, 1997, and currently
operates in 38 states. Of those management contracts, 177 related to mental
health programs and 18 related to physical rehabilitation programs. The 195
management contracts cover 296 various treatment programs. The Company has also
developed a proprietary mental health outcomes measurement system known as CQI+
and at August 31, 1997 provided outcome measurement services at 86 hospital
locations.
The Company's strategy is to enhance its position as the leader in the
contract management of mental health programs and to further expand the range of
services which it offers to its existing and new client hospitals to include
other clinical and related services and programs. A significant challenge in
obtaining clinical management contracts from hospitals is overcoming the initial
reservations that hospital administrators have with outsourcing key clinical
services. The Company believes its expertise in working with hospital
administrations, its reputation in the industry and its existing relationships
with 195 hospitals nationwide provide it with a significant advantage in
obtaining new contracts. The Company also believes it has substantial
opportunities to cross-sell a broad range of mental health services and physical
rehabilitation services to existing client hospitals by marketing and selling
its mental health services to client hospitals for which the Company currently
manages only physical rehabilitation programs, and by marketing and selling its
physical rehabilitation services to client hospitals for which the Company
currently manages only mental health programs. The Company is pursuing the
development of such opportunities as a primary part of its business strategy.
The Company has successfully expanded the breadth of management services it
offers to hospitals to include the full continuum of mental health services,
including mental health outcome measurement services, and physical
rehabilitation services and its contracts increasingly provide for multiple
services. In addition, the Company capitalizes on its expertise in managing the
delivery of mental health services to offer mental health services and employee
assistance programs directly to businesses and managed care organizations.
REVENUES
The primary factors affecting revenues in any period are the number of
management contracts with treatment programs in operation in the period and the
number of services covered by each such management contract. The Company
provides its management services under contracts with terms generally ranging
from three to five years. Each contract is tailored to address the differing
needs of each client hospital and its community and increasingly to cover
multiple treatment programs and services. The Company and the client hospital
determine the programs and services to be offered by the hospital and managed by
the Company, which may consist of one or more mental health or physical
rehabilitation treatment programs offering inpatient, partial hospitalization,
outpatient or home health services. Under the contracts, the hospital is the
actual provider of the mental health or physical rehabilitation services and
utilizes its own facilities (including beds for inpatient programs), nursing
staff and support services (such as billing, dietary and housekeeping) in
connection with the operations of its programs. As the Company has expanded the
breadth of treatment programs it offers to hospitals, it has moved from managing
one treatment program under a single contract with a hospital to managing
multiple treatment programs under such contract.
24
<PAGE> 26
Contracts are frequently renewed prior to or at their stated expiration
dates. Some contracts are terminated prior to their stated expiration dates
pursuant to agreement of the parties or early termination provisions included in
the contracts. As of August 31, 1995, 1996 and 1997, the Company had
successfully retained 74%, 80% and 78%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes the most frequent reason its client hospitals do not renew their
contracts with the Company is that the hospitals decide to manage such programs
themselves.
Under each contract, the Company receives a fee for its management services
from the client hospital. Management fees may be either a variable fee related
in part to patient volume, a fixed monthly fee or reimbursement for direct
program costs plus a fixed fee. The management fee is frequently subject to
periodic adjustments as a result of changes in the consumer price index or other
economic factors. Payors, including Medicare and Medicaid, are attempting to
manage costs, resulting in declining amounts paid or reimbursed to hospitals for
the services provided. As a result, the Company anticipates that the number of
patients served by general acute care hospitals on an inpatient basis will
decrease and, as an alternative, the number of patients served on a per diem,
episodic or capitated basis will increase in the future.
Over the past three years, the Company has increased revenues through
acquisitions (discussed below) and through internal growth by adding services,
price escalators and volume increases at existing contract locations. During
that period, the Company has generated a net increase of 20 additional
management contracts achieved through its internal sales effort. Of these
contracts, 4 were added in fiscal 1995, 11 in fiscal 1996 and 5 in fiscal 1997.
In fiscal 1997, the average quarterly year-over-year increase in same site
revenues was 6.3%. The Company has increased prices for its contract services
over the last three years. This has primarily been due to the increased range of
services offered per contract and the increased demand for geropsychiatric
services as general hospitals have sought to enter this market. An additional
factor in the pricing strategy has been the Company's policy of establishing a
minimum direct margin threshold for its management contracts. Because the
pooling with Specialty occurred on August 11, 1997, fiscal 1997 margins do not
reflect the integration or the elimination of Specialty's executive,
administrative, accounting and personnel functions and information systems, the
closing of two Specialty office facilities and other synergies which management
believes should result in improved margins in fiscal 1998.
The Company's mix of programs has changed over the last three years
reflecting the increased interest in geropsychiatric programs by general
hospitals. Geropsychiatric programs as a percentage of the Company's total
mental health programs have increased from approximately 51% to 70% during that
period.
Most of the Company's client hospitals receive reimbursement under one or
more of the Medicare or Medicaid programs for mental health and physical
rehabilitation services provided in programs managed by the Company. The Company
is paid directly by its client hospitals for the management services it
provides. Under many of its management contracts the Company is obligated to
refund all or a portion of its fee if either Medicare denies reimbursement to
the client hospital for individual patient treatment or if the fee paid to the
Company is denied by Medicare as a reimbursable cost. During the fiscal years
ended August 31, 1997 and 1996, the Company refunded approximately $219,294 and
$429,849, respectively, of its fees as a result of these denials.
Recent amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. Effective as of October 1, 1997, regulations
promulgated pursuant to these amendments establish a new ceiling on the rate of
increase in operating costs per case for mental health and physical
rehabilitation services furnished to Medicare beneficiaries. Prior to these
amendments, the reimbursement amounts were tied to each hospital's mental health
or physical rehabilitation unit cost during such unit's first year of
operations, subject to adjustment. The new regulations establish a nationwide
cap limiting the reimbursement target amount on a per case basis for mental
health and physical rehabilitation services to $10,547 and $19,250,
respectively, subject to adjustments based on market indices. There can be no
assurance that such limitation will not result in the decline in amounts
reimbursed to the Company's client hospitals and will not have an adverse effect
on the business, operations and financial condition of the Company.
25
<PAGE> 27
A recently enacted amendment in the Medicare statutes provides for a
gradual phase-out of cost-based reimbursement for physical rehabilitation
services over a three-year period commencing on October 1, 2000. The resulting
phase-in of reimbursement for physical rehabilitation services based on PPS
could significantly lower Medicare reimbursements to hospitals and thus have a
material adverse effect on the business, operations and financial results of the
Company.
OPERATING EXPENSES
The primary factor affecting operating expenses in any period is the number
of management contracts with programs in operation in the period. The Company's
operating expenses consist primarily of salaries and benefits paid to its
therapists and supporting personnel. Each mental health program managed by the
Company has a psychiatric medical director, a program director who is usually a
psychologist or a social worker, a community relations coordinator and
additional social workers or therapists as needed. Each physical rehabilitation
program managed by the Company has an independent medical director, a program
director, and additional clinical staff tailored to meet the needs of the
program and the client hospital, which may include physical and occupational
therapists, a speech pathologist, a social worker and other appropriate
supporting personnel. Each medical director has a contract with the Company
under which on-site administrative services needed to administer the program are
provided. Except for the nursing staff, which is typically provided by the
hospital, the other personnel are employees of the Company. At August 31, 1997,
the Company had an average of five employees per contract location.
Purchased services includes payments to independent health care
professionals providing services under the capitated mental health services
contracts and employee assistance programs offered by the Company. Operating
expenses for the Company's other mental health services and employee assistance
programs are comprised of approximately 49% salaries and benefits and
approximately 42% purchased services from network providers. Other costs and
expenses include items such as marketing costs and expenses, accounting and
legal fees and expenses, employee relocation expenses, rent, utility and
property taxes.
ACQUISITIONS
On August 11, 1997, Horizon acquired Specialty in a transaction accounted
for as a pooling of interests, resulting in a restatement of the Company's
financial results for the fiscal years ended August 31, 1995, 1996 and 1997.
Included in the Company's financial statements for the fiscal years ended August
31, 1995 and 1996 are the financial results of Specialty for the years ended
December 31, 1995 and 1996, respectively. Included in the Company's financial
statements for the fiscal year ended August 31, 1997 are the financial results
of Specialty for the twelve months ended August 31, 1997.
As a result, in the Company's financial statements for the fiscal year
ended August 31, 1995, the financial results of Specialty are included for
twelve months although Specialty, which began operations in January 1995, was
only in operation for eight months of the Company's fiscal year. In addition,
the financial results of Specialty for the four months of September 1, 1996
through December 31, 1996 are included in the Company's financial statements for
both fiscal 1996 and 1997. The operations of Specialty for the four months ended
December 31, 1996, resulted in net revenues and net income of $10.8 million and
$849,000, respectively. As a result, an adjustment was made to stockholders'
equity in the consolidated financial statements of the Company to eliminate the
effect of including Specialty's net income for the four months in both periods.
Additionally, the consolidated statement of cash flows was adjusted to reflect
the cash flows of Specialty for the four months ended December 31, 1996. The
treatment of the Specialty acquisition as a pooling of interests resulted in the
Company recognizing merger-related expenses of approximately $3,528,000 and an
offsetting tax benefit of approximately $1,340,000, which taken together
resulted in a one-time charge to earnings of $.27 per share.
Other acquisitions during the last three years have significantly affected
the Company's results of operation and financial condition. The Company acquired
39 management contracts from Mental Health Management, Inc. ("MHM") on March 20,
1995, 19 management contracts from Parkside on April 1, 1996 and 23 management
contracts with the acquisition of Geriatric and Clay Care on March 15, 1997. In
addition,
26
<PAGE> 28
on August 1, 1996 the Company acquired Florida PPS, a company specializing in
providing mental health services under capitated contracts, which had
approximately $5.7 million in annual revenues.
Due to the structure of the acquisition of the 39 management contracts from
MHM, the Company reported virtually no revenues or expenses for the six months
ended February 28, 1995, other than revenues and expenses of Specialty as
restated due to the pooling of interests transaction with Specialty as
previously discussed.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal years ended August 31, 1995,
1996 and 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 fiscal year.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
Contract management revenues...................... 99.1% 99.0% 93.6%
Other............................................. 0.9 1.0 6.4
----- ----- -----
Total revenues...................................... 100.0 100.0 100.0
Operating expenses
Salaries and benefits............................. 57.8 58.0 55.0
Purchased services................................ 15.6 14.4 15.1
Provision for bad debts........................... 2.4 1.5 2.8
Other............................................. 13.2 12.3 11.7
Depreciation and amortization..................... 1.7 1.9 2.0
Merger expenses................................... -- -- 3.2
----- ----- -----
Total operating expenses............................ 90.7 88.1 89.8
----- ----- -----
Operating income.................................... 9.3 11.9 10.2
----- ----- -----
Interest and other income (expense), net............ (1.4) (0.1) 0.1
----- ----- -----
Income before income taxes.......................... 7.9 11.8 10.3
Income tax expense.................................. 2.5 4.8 4.1
----- ----- -----
Income before equity in net earnings of Horizon LLC
and minority interest............................. 5.4 7.0 6.2
Equity in net earnings of Horizon LLC............... 2.3 -- --
Minority interest................................... -- -- (0.1)
----- ----- -----
Net income.......................................... 7.7% 7.0% 6.1%
===== ===== =====
Number of contracts in operation, end of year....... 146 163 181
</TABLE>
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1996
Revenue. Revenues for the fiscal year ended August 31, 1997 were $109.3
million representing an increase of $13.0 million, or 13.5%, as compared to
revenues of $96.3 million for the prior fiscal year. Approximately $3.8 million
(3.9%) of the revenue increase for the year was attributable to a 9.4% increase
in the number of contract locations in operation, from a daily average of 156.0
contract locations in operation during the year ended August 31, 1996 to a daily
average of 170.7 contract locations in operation during the year ended August
31, 1997. Approximately $4.0 million (4.2%) of the revenue increase resulted
from a 6.3% increase in same site revenues on an average quarterly
year-over-year basis at contract locations in operation throughout each
comparison period, which in the aggregate represented approximately 65.9% of
fiscal 1997 revenues. Approximately $5.2 million (5.4%) of the revenue increase
resulted from the operations of Florida PPS, of which twelve months of results
were included in fiscal 1997 versus one month in fiscal 1996 following its
acquisition on August 1, 1996.
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<PAGE> 29
Salaries and Benefits. Salaries and benefits for the fiscal year ended
August 31, 1997 were $60.0 million representing an increase of $4.2 million, or
7.6%, as compared to salaries and benefits of $55.8 million for the prior fiscal
year. Salary and benefits cost per full time equivalent for the year ended
August 31, 1997 were $56,099 representing an increase of $2,708 per full time
equivalent, or 5.1%, as compared to salary and benefits cost of $53,391 per full
time equivalent for the prior fiscal year. The number of full time equivalents
for the year ended August 31, 1997 was approximately 1,070, representing an
increase of 25.1, or 2.4%, as compared to approximately 1,045 full time
equivalents in the prior fiscal year. The increase in the number of full time
equivalents of 2.4% was less than the 9.4% increase in the number of contract
locations in operation because the contract locations terminated during fiscal
1997 were mature programs which typically employ more personnel per location
than the newly signed and acquired contract locations during fiscal 1997.
Depreciation and Amortization. Depreciation and amortization expenses for
the fiscal year ended August 31, 1997 were $2.2 million representing an increase
of $389,000, or 21.5%, as compared to depreciation and amortization expenses of
$1.8 million for the prior fiscal year. $277,000 of the increase resulted from
additional depreciation and amortization arising from the acquisitions of
Florida PPS, Parkside, Geriatric and Clay Care. The remainder of the increase
resulted from the depreciation expense associated with the operation of
additional contract locations and the equipment and furniture purchased for the
Company's new national support center which opened in September 1996.
Other Operating Expenses (Including Purchased Services and Provision for
Bad Debts). Other operating expenses for the fiscal year ended August 31, 1997
were $32.3 million representing an increase of $5.1 million, or 18.8%, as
compared to other operating expenses of $27.2 million for the previous fiscal
year. A major factor in the increase in other operating expense resulted from
the 9.4% increase in the number of contract locations in operation for the
fiscal year ended August 31, 1997, as compared to the prior fiscal year. $1.7
million of the increase resulted from an increase in bad debt expense due to the
write-off of the receivable associated with a contract location which closed on
April 30, 1997. Purchased services increased by $2.6 million, of which $1.8
million was due primarily to the inclusion of Florida PPS in the Company's
consolidated financial statements for the entire twelve months in fiscal 1997
versus only one month in fiscal 1996 following its acquisition on August 1,
1996.
Merger Expenses. Merger expenses were $3.5 million for the fiscal year
ended August 31, 1997. The Company did not have merger expenses for the prior
fiscal year.
Interest and Other Income (Expense), Net. Interest income, interest expense
and other income for the fiscal year ended August 31, 1997 was $122,000, as
compared to net interest expense and other income of negative $66,000 for the
prior fiscal year. The increase in interest income was due to the investment of
the positive cash flow from earnings.
Income Tax Expense. Income tax expense for the fiscal year ended August 31,
1997 was $4.5 million representing a decrease of $92,000, or 2.0%, as compared
to income tax expense of $4.6 million for the prior fiscal year. The small
decrease in income tax expense was largely due to a small decrease in pre-tax
earnings.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1995
During the first six months of fiscal 1995, Horizon LLC had management
responsibility for substantially all of the management contract business of the
Company. Certain provisions of the limited liability company agreement of
Horizon LLC required the consent of the other member for certain transactions
preventing the Company from having the ability to control Horizon LLC under
generally accepted accounting principles, and therefore, Horizon LLC was not
consolidated with the Company for accounting purposes. As a result, the revenues
and expenses of Horizon LLC for the period August 1, 1994 through February 28,
1995 are not included in the revenues and expenses of the Company; instead, for
such periods the Company accounted for its investment in Horizon LLC by the
equity method and reflected its share of Horizon LLC's net income for the period
in question as "Equity in Net Earnings of Horizon LLC." Therefore, the operating
results of the Company for the year ended August 31, 1996, during which all of
the management contract business of the Company was consolidated for accounting
purposes, has changed materially as compared to the year ended August 31, 1995.
The historical financial results of the Company for the year ended August 31,
1995 are of
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limited value for the purpose of comparison to the results of the Company for
the year ended August 31, 1996. In particular the significant increases in
revenues and salaries and benefits are primarily due to the consolidation in
1996 of the operations conducted by Horizon LLC for the first six months in the
1995 fiscal year which were not consolidated.
Revenue. Revenues for the year ended August 31, 1996 were $96.2 million
representing an increase of $26.9 million, or 38.8%, as compared to the revenues
of $69.3 million for the prior fiscal year.
Salaries and Benefits. Salaries and benefits expenses for the year ended
August 31, 1996 were $55.8 million, representing an increase of $15.7 million,
or 39.2%, as compared to salaries and benefits expenses of $40.1 million for the
prior fiscal year.
Depreciation and Amortization. Depreciation and amortization expenses for
the year ended August 31, 1996 were $1.8 million, representing an increase of
$679,000, or 60.0% as compared to depreciation and amortization expenses of $1.1
million for the prior fiscal year. $230,000 of this increase resulted from
recording a full year of expenses in 1996 of the amortization of goodwill and
contract value resulting from the acquisition of 110 contracts from Horizon LLC
effective March 1, 1995.
Other Operating Expenses (Including Purchase Services and Provision for Bad
Debts). Other operating expenses for the year ended August 31, 1996 were $27.2
million, representing an increase of $5.5 million, or 25.3%, as compared to
other operating expenses of $21.7 million for the prior fiscal year.
Interest and Other Income (Expense), Net. Interest expense net of interest
and other income for the year ended August 31, 1996 was $66,000, representing a
decrease of $934,000, or 93.4%, as compared to $1.0 million in net interest
expense for the prior fiscal year. This net decrease resulted from a combination
of higher interest income earned as a result of an increase in cash from
operations and the proceeds of the Company's equity offering in March, 1995.
Income Tax Expense (Benefit). Income tax expense for the year ended August
31, 1996 was $4.6 million, representing an increase of $2.9 million from $1.7
million for the prior fiscal year. This increase resulted from higher pre-tax
earnings and the use of the Company's remaining net operating loss carryforward
in the year ended August 31, 1995.
UNAUDITED SELECTED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for each of the fiscal quarters in the fiscal year ended August 31, 1997. The
unaudited selected quarterly results should be read in conjunction with the
Consolidated Financial Statements of the Company and the related Notes thereto
and other financial information included elsewhere in this Prospectus. Operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31,
1996 1997 1997 1997
------------ ------------ ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.............................. $26,880 $26,364 $27,937 $28,086
Operating income before interest,
taxes, depreciation and
amortization........................ 4,656 3,800 3,839 1,100
Operating income before interest
and taxes........................... 4,059 3,300 3,284 550
Net income............................ 2,383 2,005 1,966 302
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Effective September 29, 1995, the Company established with Texas Commerce
Bank, N.A. ("TCB") an $11.0 million revolving credit facility which was
increased to $14.0 million on October 16, 1997. The purpose of the facility is
to provide funds to be used for working capital needs and future acquisitions.
The facility is for a three year term with extension provisions. As of August
31, 1997, there were no borrowings outstanding under the revolving credit
facility and the Company had the ability to borrow $10.1 million thereunder.
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<PAGE> 31
On October 13, 1997, the Company entered into a commitment letter dated
October 8, 1997 (the "Commitment Letter") with TCB and Chase Securities Inc.
("Chase"), under which Chase agreed to act as exclusive advisor and arranger for
a senior secured credit facility in an aggregate amount of up to $50.0 million
(the "New Credit Facility") and TCB committed to provide up to $20.0 million of
the facility and to act as administrative agent. The New Credit Facility would
consist of a $10.0 million revolving credit facility to fund ongoing working
capital requirements (the "Revolving Credit Facility") and a $40.0 million
advance term loan facility to finance future acquisitions by the Company (the
"Advance Term Loan Facility"). The New Credit Facility will replace the
Company's existing $14.0 million revolving credit facility with TCB and it is
currently anticipated that the New Credit Facility will be put in place by early
December, 1997.
The following summary of certain material provisions of the Commitment
Letter does not purport to be complete, and is subject to, and qualified in its
entirety by reference to, the Commitment Letter, a copy of which was filed as
Exhibit 10.3 to the Company's Current Report on Form 8-K, dated September 1,
1997 and filed with the Commission on October 21, 1997, and is available from
the Company upon request. Because the terms, conditions and covenants of the New
Credit Facility are subject to the negotiation, execution and delivery of the
definitive loan documents, certain of the actual terms, conditions and covenants
thereof may differ from those described below.
The Company will be the borrower under the New Credit Facility which will
be unconditionally guaranteed by all material domestic subsidiaries of the
Company. The Revolving Credit Facility will have a term of three years from
closing and the Advance Term Loan Facility will have a term of five years from
closing, with drawdowns available for two years. Once a drawdown is made under
the Advance Term Loan Facility, the commitment thereunder will be reduced by the
amount funded. Each acquisition will require a separate note (the "Acquisition
Note") that will provide for quarterly principal payments, beginning at the end
of the two-year advance period, based upon a five year amortization schedule.
Principal outstanding under the New Credit Facility will bear interest at the
"Base Rate" (the greater of the Agent's "prime rate" or the federal funds rate
plus 1/2%) plus 0% to .50% (depending on the Company's Indebtedness to EBITDA
Ratio as defined in the Commitment Letter) or the "Eurodollar Rate" plus .75% to
1.50% (depending on the Indebtedness to EBITDA Ratio), as selected by the
Company in accordance with the terms of the facility. The Company will incur
quarterly commitment fees ranging from .25% to .375% per annum (depending on the
Indebtedness to EBITDA Ratio) on the unused portion of the Revolving Credit
Facility and unused portion of the Advance Term Loan Facility.
The Company will be subject to certain covenants under the agreements which
will govern the New Credit Facility, including prohibitions against (i)
incurring additional debt or liens, except specified permitted debt or permitted
liens, (ii) certain material acquisitions, other than specified permitted
acquisitions (including any single acquisition not greater than $10.0 million or
cumulative acquisitions not in excess of $20.0 million during any four
consecutive quarterly periods), (iii) certain mergers, consolidations or asset
dispositions by the Company or changes of control of the Company, (iv) certain
management vacancies at the Company, and (v) material change in the nature of
business conducted. In addition, the terms of the New Credit Facility will
require the Company to satisfy certain ongoing financial covenants. The New
Credit Facility will be secured by a first lien or first priority security
interest in and/or pledge of all of the assets of the Company and of all present
and future subsidiaries of the Company.
Effective September 1996, the Company entered into a lease agreement with a
term of five years for a building which had been constructed to the Company's
specifications for its National Support Center. In connection with the lease
transaction, the Company guaranteed a loan of approximately $900,000. The loan
was by a financial institution to the owner. The Company also agreed to purchase
the leased building for approximately $4.5 million at the end of the lease term
in September 2001 if either the building is not sold to a third party or the
Company does not extend its lease.
The Company believes that its cash flow from operations, cash of $5.5
million at August 31, 1997 and $14.0 million currently available under the
revolving credit facility will be sufficient to cover all cash requirements over
the next twelve months, including the Acorn Acquisition of approximately $12.7
million and estimated capital expenditures of $1.2 million. The Company
generated $9.3 million in net cash from
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<PAGE> 32
operations during the year ended August 31, 1997. The Company is likely to
require additional capital to fund any further acquisitions.
On October 20, 1997, the Company entered into a contract to acquire all the
outstanding capital stock of Acorn for approximately $12.7 million. The Company
currently anticipates closing the Acorn Acquisition on October 31, 1997 and
funding the purchase price out of its existing cash and borrowing under its
revolving credit facility. The Company estimates that, upon closing of the Acorn
Acquisition, it will utilize approximately $1.1 million existing cash and incur
debt of approximately $11.6 million under the revolving credit facility.
However, the Company believes that its cash flow from operations and the
remaining availability under its revolving credit facility will be sufficient
for remaining cash requirements in fiscal 1998.
Horizon acquired Specialty on August 11, 1997. Specialty was a contract
manager of mental health and physical rehabilitation treatment programs for
general acute care hospitals. At August 11, 1997, Specialty had 44 management
contracts. In the Specialty transaction, 1,400,000 shares of Horizon common
stock were issued and exchanged for all outstanding shares of Speciality capital
stock. The 1,400,000 shares represented approximately 20.1% of the Company's
common stock outstanding after the acquisition. The Company accounted for the
transaction as a pooling of interests, which resulted in the Company recognizing
merger-related expenses of approximately $3,528,000 and an offsetting tax
benefit of approximately $1,341,000, which taken together resulted in a one-time
charge to earnings of $.27 per share. Upon the acquisition, the Specialty
outstanding bank indebtedness of approximately $3.2 million was paid in full.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric. Geriatric is a contract manager of mental health
programs for general acute care hospitals and, at March 15, 1997, had 18
management contracts. The purchase price was approximately $4.6 million, and was
paid from existing cash.
Also effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Clay Care. Clay Care was a contract manager of mental health
programs for general acute care hospitals and, at March 15, 1997 had five
management contracts. The purchase price was $1.0 million, and was paid from
existing cash.
In July 1996, the Company acquired 80% of the outstanding common stock of
Florida PPS. The Company accounted for the acquisition of Florida PPS by the
purchase method as required by generally accepted accounting principles. Florida
PPS has been consolidated with the Company as of August 1, 1996. Based in
Clearwater, Florida, Florida PPS specializes in full risk, capitated managed
mental health programs and employee assistance programs. The purchase price for
80% of the outstanding capital stock was approximately $3.3 million, based
primarily on a 6.25 multiple of the 1996 pre-tax income of Florida PPS, and was
paid from existing cash. In addition, the Company obtained an option to acquire
the remaining 20% of the outstanding Florida PPS common stock at a future date.
The sellers, constituting all the shareholders of Florida PPS, also obtained the
right to put to the Company such shares on certain dates. The option and put
prices for the remaining Florida PPS shares are based on a multiple of the
pre-tax income of Florida PPS in future years.
Specialty acquired the assets of National Medical Management Services
effective January 1, 1995. In the transaction, Specialty paid approximately
$3.95 million in cash and a note of approximately $731,000 payable to NME as
payment for the assets. Specialty also issued to NME a warrant to acquire common
stock of Specialty, which warrant was subsequently exercised as part of
Horizon's acquisition of Specialty in August 1997. The NME promissory note was
paid in January 1996. In April, 1996 Specialty acquired The Parkside Company, a
contract manager of mental health programs, in a merger in which common stock
was issued and approximately $2.6 million was paid in cash which was financed
under a bank credit facility.
INFLATION
The Company's management contracts generally provide for annual adjustments
in the Company's fees based upon various inflation indexes, thus mitigating the
effect of inflation. During the last three years, inflation has had little
effect on the Company's business.
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<PAGE> 33
BUSINESS
GENERAL
The Company provides contract management of clinical and related services
for general acute care hospitals and is currently the leading contract manager
of mental health programs offered by general acute care hospitals in the United
States. The Company has grown both internally and through acquisitions,
increasing both the number of its management contracts and the variety of its
treatment programs and services. Over the last five years, the Company has
increased its management contracts from 43 to a total of 195 as of August 31,
1997 and currently operates in 38 states. Of those management contracts, 177
related to mental health programs and 18 related to physical rehabilitation
programs. The Company has also developed a proprietary mental health outcomes
measurement system known as CQI+ and at August 31, 1997 provided outcome
measurement services at 86 contract locations. The Company was incorporated in
1989 and is the successor to Horizon Health Management Company, which began the
development and management of mental health programs for general acute care
hospitals in 1981.
The Company's strategy is to enhance its position as the leader in the
contract management of mental health programs and to further expand the range of
services which it offers to its existing and new client hospitals to include
other clinical and related services and programs. A significant challenge in
obtaining clinical management contracts from hospitals is overcoming the initial
reservations that many hospital administrators have with outsourcing key
clinical services. The Company believes its expertise in working with hospital
administrators, its reputation in the industry and its existing contractual
relationships with 195 hospitals nationwide provide it with a significant
advantage in obtaining new contracts. The Company also believes it has
substantial opportunities to cross-sell a broad range of mental health and
physical rehabilitation services to client hospitals by marketing and selling
its mental health services to client hospitals for which the Company currently
manages only physical rehabilitation programs, and by marketing and selling its
physical rehabilitation services to client hospitals for which the Company
currently manages only mental health programs. The Company is pursuing the
development of such opportunities as a primary part of its business strategy.
The Company has successfully expanded the breadth of services it offers to
include the full continuum of mental health services, including outcome
measurement services, and physical rehabilitation services and its contracts
increasingly now provide for multiple services. In addition, the Company
capitalizes on its expertise in managing the delivery of mental health services
by directly offering mental health services and employee assistance programs to
businesses and managed care organizations.
General acute care hospitals are increasingly outsourcing key clinical
departments to independent contract management companies for several reasons,
including: (i) the expertise necessary for the development, management and
operation of specialized clinical programs differs from that for traditional
medical/surgical services, (ii) hospitals often lack access to skilled
professionals and the support staff needed to operate specialized clinical
programs, (iii) hospitals often lack expertise in the marketing and development
activities required to support specialized clinical programs, and (iv) hospitals
often lack expertise necessary to design and operate specialized clinical
programs that satisfy regulatory, licensing, accreditation and reimbursement
requirements.
MENTAL HEALTH SERVICES
The Company believes that there continue to be substantial opportunities to
provide mental health contract management services to general acute care
hospitals in the United States. A major shift in the delivery of mental health
services is occurring as payors are increasingly using managed care methods to
review and require pre-approval for mental health treatment and to evaluate
alternatives to inpatient hospitalization in order to ensure that each patient's
treatment regimen utilizes clinical resources effectively. The Company believes
that general acute care hospitals need to be able to offer a broad array of
mental health care services in order to develop or participate in integrated
delivery systems responsive to the demands of managed care companies and other
third-party payors. The Company also believes that it costs general acute care
hospitals less to provide inpatient and partial hospitalization mental health
services than it costs freestanding psychiatric hospitals in part due to the
ability of acute care hospitals to utilize excess capacity.
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General acute care hospitals are also able to provide their mental health
patients with needed medical care on-site and in a more cost effective manner
than freestanding psychiatric hospitals. Furthermore, general acute care
hospitals are eligible to receive reimbursement under the Medicaid program for
mental health care provided to Medicaid-eligible adults, unlike freestanding
psychiatric hospitals which are not presently eligible.
The Company believes that, due to the increasing emphasis on cost-effective
treatment, significant demand exists for a complete continuum of mental health
services. In response to this demand, it has expanded the mental health programs
it offers to provide partial hospitalization (or day treatment), outpatient
treatment, short-term crisis intervention and residential treatment as
alternatives and complements to inpatient care. The Company believes it is
uniquely positioned to capitalize on the increased demand for mental health
contract management services as a result of its ability to provide a full
continuum of mental health services, its proprietary quality and outcomes
measurement system and its demonstrated industry expertise. In addition, the
Company believes its position as the leading contract manager of mental health
programs provides the Company with a significant advantage in attracting and
retaining employees and yields several economies of scale such as the ability to
consolidate accounting and administrative functions.
The Company intends to continue to emphasize the area of geropsychiatric
programs. At August 31, 1997, 69.6% of the mental health treatment programs
managed by the Company were geropsychiatric programs. Many elderly patients with
short-term mental illness also have physical problems that make the general
acute care hospital environment the most appropriate site for their care. The
Medicare program reimburses general acute care hospitals for their cost of
providing these services, which includes the Company's management fee as well as
allocated overhead costs to the facility, and allows reimbursement for partial
hospitalization and home health services that permit the patient to be treated
in the most cost-effective environment. The Company has developed particular
expertise in developing specialized psychiatric programs for the elderly, in
operating such programs, and in assisting hospitals to receive approval for
inpatient programs as DPUs under Medicare. Approval of an inpatient program as a
DPU is significant to client hospitals because services provided in DPUs are
exempt from predetermined reimbursement rates and are reimbursed by Medicare on
an actual cost basis, subject to certain limitations.
The Company has developed and markets a proprietary mental health outcome
measurement system (CQI+ Outcomes Measurement System), which provides outcome
information regarding the effectiveness of a hospital's mental health programs.
The availability of such information enables a hospital to demonstrate to
third-party payors whether patients are improving as a result of the treatment
provided and allows a hospital to refine its clinical treatment programs and to
market such programs to patients and providers. In addition, it provides the
Company with a valuable tool in demonstrating clinical results of the mental
health programs managed by the Company and in marketing such management services
to other hospitals. The Company provides outcome measurement services not only
to client hospitals but also to other hospitals, health care providers and
third-party payors. JCAHO, as part of its hospital accreditation process, will
require each hospital, by no later than December 31, 1997, to select at least
one acceptable measurement system and at least two clinical performance
(outcome) measures that together represent at least 20% of the hospital's
patient population. Each year, the requirements for the number of measures and
the percentage of the population will increase. The Company's CQI+ System has
met the initial criteria for inclusion in the future accreditation process and
is included on JCAHO's list of acceptable systems. The Company is committed to
meeting future criteria established by JCAHO. Since developing the CQI+ System
over three years ago, the Company has compiled a database containing outcome
measurement data on over 11,000 patients. With the growth of managed care and
the JCAHO accreditation requirement, the Company believes that its CQI+ System
will become an important component of the mental health services it provides.
PHYSICAL REHABILITATION SERVICES
The Company has successfully expanded the types of programs that it manages
for its client hospitals to include other related clinical services. Horizon's
recent acquisition of Specialty expanded the Company's operations to include the
contract management of physical rehabilitation programs. The Company believes
that many of the same factors driving demand in mental health programs are also
driving significant demand for physical rehabilitation programs. The Company
provides a full range of physical rehabilitation services. In
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addition to acute and sub-acute physical therapy and rehabilitation services,
the Company also provides a comprehensive outpatient rehabilitation facility
program. Outpatient rehabilitation services are dominated by the treatment of
sports and work related injuries, but also provide the continuum of
rehabilitative care necessary to meet the medical needs of a post-acute care
patient following a disabling illness or traumatic injury. Pressure from payors
to move inpatients to the lowest-cost appropriate treatment setting has helped
fuel growth in these outpatient services.
OTHER MENTAL HEALTH SERVICES AND EMPLOYEE ASSISTANCE PROGRAMS
With the acquisition of Florida PPS, in August 1996, the Company expanded
its services to include provision of full risk, capitated managed care mental
health services for HMOs and self-insured employers and the operation of
employee assistance programs for employers. The mental health care services are
provided by mental health care professionals that are employed by the Company or
are under contract with the Company as independent providers. The Company
believes that its existing relationships with health care providers and its
expertise in the provision of mental health care services provide it with the
capability to establish, operate and manage the network of health care
professionals necessary to economically furnish such services. Employee
assistance programs, which are usually provided by employers as a benefit at no
cost to employees, give employees the opportunity to have consultations with a
health care provider to identify and discuss problems that may be affecting the
work performance of the employee and a course of action or treatment to address
such problems. The Company believes that an opportunity exists for the contract
management of employee assistance programs offered by community-based general
acute care hospitals. As with its other products, the Company intends to market
such programs as an additional service it can offer new and existing client
hospitals.
SERVICES
MENTAL HEALTH SERVICES
The Company has the expertise to manage a broad range of clinical mental
health programs, including geropsychiatric, general adult, substance abuse and
adolescent programs. The programs use a treatment team concept, with the
admitting physician, team psychologist, social workers, nurses, therapists and
counselors coordinating each phase of therapy. The programs include crisis
intervention, individual therapy, group and family therapy, recreational
therapy, occupational therapy, lifestyle education, social services and
substance abuse counseling. Family involvement is encouraged. Each treatment
program is individually tailored as much as practicable to meet the needs of the
patients, the client hospital, physicians and payor groups. Mental health
services represented 177 of the Company's 195 management contracts at August 31,
1997.
Elements of the Continuum of Care
The mental health treatment programs managed by the Company are designed to
provide a continuum of mental health services, consisting of inpatient, partial
hospitalization (or day treatment), outpatient and home health services.
Inpatient Services. Inpatient services are generally provided to patients
needing the most intensive mental health treatment and who frequently have
accompanying medical care needs. The patient is admitted to the client hospital
and remains there on a 24-hour per day basis throughout the course of the
inpatient treatment, which is continued until the patient can be stabilized and
moved to another level in the continuum of mental health services.
Partial Hospitalization. Partial hospitalization services are provided for
limited periods per day at established intervals with the patient returning home
at the conclusion of each day's treatment. Partial hospitalization services are
designed to be both an alternative to inpatient hospitalization services and a
key component of care following inpatient hospitalization.
Outpatient Services. Outpatient services consist generally of consultative
sessions which can be rendered in a variety of individual or group settings at
various locations, including hospitals, clinics or the offices of the
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service provider. Outpatient service providers can also serve as gatekeepers for
persons being evaluated for treatment. Once an individual is assessed for
treatment in an outpatient environment, the individual is provided the
appropriate level of service in relation to the diagnosis.
Home Health Services. Home health services are provided in the patient's
home. Typically, these services are provided on a periodic basis by an
experienced psychiatric nurse working under the direct supervision of a
psychiatrist. The nurse may provide medication management, vital sign
monitoring, individual and family therapy, and other related clinical services.
Patients utilizing home health services include individuals whose clinical
conditions make it difficult or impossible to leave their homes due to
psychiatric illness or a combination of psychiatric and medical illness. Home
health service patients also include patients without access to transportation.
Patients over the age of 65 often use psychiatric home health services.
CQI+ Outcomes Measurement System
The Company began offering its CQI+ Outcomes Measurement System in 1994.
The CQI+ System provides a qualitative and quantitative tool for the clinical
staff to evaluate the clinical effectiveness of treatment programs and to make
adjustments in the programs in order to improve quality and appropriateness of
care. In addition, the services provided by the CQI+ System enable the client
hospitals to demonstrate to third-party payors the results of the treatment
provided and provides a valuable tool to the hospital in marketing to patients
and providers. It also assists the hospitals in complying with the increasing
demands of regulatory and accrediting bodies for quality assessment of their
mental health programs. JCAHO, as part of its accreditation process, will
require each hospital, by no later than December 31, 1997, to select at least
one acceptable measurement system and at least two clinical performance
(outcome) measures that together represent at least 20% of the hospital's
patient population. Each year, the requirements for the number of measures and
the percentage of the population will increase. The Company's CQI+ System has
met the initial criteria for inclusion in the future accreditation process and
is included on JCAHO's list of acceptable systems. The Company is committed to
meeting future criteria established by JCAHO. At August 31, 1997, 84 of the
Company's management contracts included the CQI+ System. The CQI+ System
provides the Company with a valuable tool in demonstrating clinical results of
the mental health programs managed by the Company and in marketing such
management services to other hospitals.
Since offering CQI+ System, the Company has compiled a database containing
outcome measurement data on over 11,000 patients. Sample data is collected from
randomly selected patients at admission, discharge and 90 to 120 days after
discharge. Semi-annual outcome reports include a summary of patient
characteristics and outcome measures. A multidisciplinary committee reviews and
analyzes the data in order to identify specific areas for program improvement. A
regional clinical consultant then prepares an implementation plan. Program
improvements implemented through this process are evaluated for use at other
treatment programs managed by the Company. The Company trains and supervises
on-site personnel to ensure the collection of accurate outcome measurement data.
Price Waterhouse LLP provides an annual written examination of the CQI+ Systems
to insure that stated data sampling and analytical procedures are followed and
that the data collection process adheres to the Company's procedures and patient
and client confidentiality policies. Each client is provided a copy of the
attestation report.
PHYSICAL REHABILITATION SERVICES
The Company provides a broad range of physical rehabilitation programs
including (i) acute physical medicine and rehabilitation, (ii) subacute physical
therapy and rehabilitation, and (iii) comprehensive outpatient rehabilitation.
Physical rehabilitation services represented 18 of the Company's 195 management
contracts at August 31, 1997.
Acute Physical Therapy and Rehabilitation. The physical therapy 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. The Company attempts to tailor an acute physical therapy and
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rehabilitation program for a health care facility to satisfy unmet community and
medical staff needs, while maximizing utilization of the facility.
Sub-acute Physical Therapy 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 subacute level offer an attractive
alternative for acute care hospitals and skilled nursing facilities to meet
these needs. The Company evaluates the feasibility of a health care 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.
Comprehensive Outpatient Rehabilitation. A comprehensive outpatient
rehabilitation facility ("CORF") program serves as an adjunct to inpatient
physical therapy and rehabilitation programs at the acute and/or sub-acute
levels. The 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. The Company has developed a CORF program in
compliance with Medicare regulations which functions as a non-residential day
facility to provide diagnostic, therapeutic and restorative services to
outpatients at a single fixed location under the supervision of a qualified
physician.
OTHER MENTAL HEALTH CARE SERVICES AND EMPLOYEE ASSISTANCE PROGRAMS
The Company began offering mental health care services to HMOs and employee
assistance programs to self-insured employers with the acquisition of Florida
PPS in 1996. The Company contracts with HMOs to provide the mental health care
component of the general health plans offered by such entities. The contracts
are on a full risk, capitated basis under which the Company is paid a set fee
per month for each member of the respective health plan. In the Tampa-St.
Petersburg area, such services are generally provided by the Company's
employees, but elsewhere they are provided by independent providers. The Company
reimburses the independent professionals and institutions on a discounted
fee-for-service basis. As of August 31, 1997, the Company provided mental health
care services for approximately 264,217 total members of various health plans
with which it had contracted.
The Company utilizes the same network to operate employee assistance
programs for employers. Employee assistance programs, which are usually provided
by employers as a benefit at no cost to employees, generally give employees and
their dependents the opportunity to have four to six consultations annually with
a health care provider to discuss problems that may be affecting their ability
to work. Such problems frequently relate to matters unrelated to mental health
care. The purpose of the consultation is to help the employee identify the
problem and to recommend a course of action or treatment to address the problem.
Often the employee is referred by the employer after observing a change in work
performance. The Company frequently provides training to employer personnel for
identifying troubled employees. The Company believes that such early
identification, consultation and treatment can frequently minimize the
likelihood that the problem will develop into a serious debilitating event
requiring extensive treatment. The Company is paid a set fee per month per
employee for its services. As of August 31, 1997, the employee assistance
programs operated by the Company covered approximately 12,239 employees.
OPERATIONS
GENERAL
The Company operates mental health management contracts through a regional
structure with offices in the Boston, Chicago, Dallas, Los Angeles and Tampa
metropolitan areas. The structure is designed to keep key operating employees of
the Company in direct contact with clients. Each of the five regional offices is
staffed to have the capacity to supervise up to 40 mental health management
contract locations. Each regional office is under the supervision of a vice
president who in turn supervises regional directors, each of whom has direct
responsibility over eight to ten mental health management contract locations.
Other regional office personnel include clinical and other specialists, who are
available to provide assistance to the local programs
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and client hospital personnel. Presently, the Company's physical rehabilitation
management contracts are operated in the same manner out of its Dallas office
with plans to develop a comparable regional structure as it expands that area of
its operations.
The Company develops and operates its outcomes measurement system primarily
out of its Dallas office. Program personnel are responsible for the completion
of the data input forms concerning the various treatment programs. The data is
inputted into the national database from which reports are developed, reviewed
and analyzed by the CQI+ System staff of 11 employees.
At August 31, 1997, the Company had approximately 983 program employees at
its contract locations and approximately 150 employees at its regional and
national support center offices.
Florida PPS has 39 administrative employees and employs 25 health care
professionals, all of which are located in the Tampa-St. Petersburg area. In
addition, Florida PPS has contracted with approximately 756 independent mental
health care professionals and institutions for the provider network that furnish
the mental health care and employee assistance program services.
MANAGEMENT CONTRACTS
The Company provides its management services under contracts with its
client hospitals. Each contract is tailored to address the differing needs of
the client hospital and its community. The Company and the client hospital
determine the programs and services to be offered by the hospital and managed by
the Company, which may consist of one or more treatment programs offering
inpatient, partial hospitalization, outpatient or home health services. Under
the contracts, the hospital is the actual provider of the mental health or
physical rehabilitation services and utilizes its own facilities (including beds
for inpatient programs), nursing staff and support services (such as billing,
dietary and housekeeping) in connection with the operation of its programs.
While each of the Company's management contracts is tailored to the
specific needs of the client hospital, substantially all of the Company's
contracts contain non-compete and confidentiality provisions. In addition, the
Company's management contracts typically prohibit the client hospital from
soliciting the employment of the Company employees during the contract term and
for a specified period thereafter.
Contracts are frequently renewed prior to or at their stated expiration
dates. Some contracts are terminated prior to their stated expiration dates
pursuant to agreement of the parties or early termination provisions included in
the contracts. As of August 31, 1995, 1996 and 1997, the Company had
successfully retained 74%, 80% and 78%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes the most frequent reason client hospitals do not renew a contract is
that they desire to manage such programs themselves.
Under each contract, the Company receives a fee for its management services
from the client hospital. Management fees may be either a variable fee related
in part to patient census at the program or a fixed fee with reimbursement for
direct program costs. The management fee is frequently subject to periodic
adjustments as a result of changes in the consumer price index or other economic
factors. A significant number of the Company's management contracts require the
Company to refund some or all of its fee if either Medicare reimbursement for
services provided to patients of the programs is denied or the fee paid to the
Company is denied as a reimbursable cost. During the fiscal year ended August
31, 1997, the Company refunded approximately $219,294 of its fees in relation to
these denials.
Program Development
The Company assists in the development of each clinical program as
requested by the client hospital, including such matters as licensing,
accreditation, certificate of need approvals and Medicare certification. The
Company also develops and implements a marketing plan for the clinical programs
to be offered by the hospital. Each program is marketed locally with an emphasis
on the hospital addressing the needs of the local community. The Company markets
the clinical programs in the community in the name of the client hospital. The
Company's name is not used and its role is not publicly emphasized in the
operation of the clinical programs offered by its client hospitals. Each patient
is admitted by the medical staff of the client hospital, and
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all charges for clinical services provided to the patient accrue directly to the
client hospital or treating physician.
The Company also develops and maintains standardized policy and procedure
manuals, initial and ongoing staff training and education, and comprehensive
quality assurance procedures. Each local program director receives ongoing
support from the National Support Center and regional support staff in all areas
including recruiting, finance, reimbursement, development, marketing and quality
assurance.
Each operating region is responsible for training new employees, including
formalized instruction and on-the-job training. Continuing education programs
are also provided to employees. In addition, the Company has a centralized
orientation program for new program directors and an annual conference for all
program directors.
Program Staffing
Each mental health program has a psychiatric medical director, a program
director who is usually a psychologist or a social worker, a community relations
coordinator and additional social workers or therapists as needed. Each physical
rehabilitation program has an independent medical director, a program director,
and additional clinical staff tailored to meet the needs of the program and the
client hospital, which may include physical and occupational therapists, a
speech pathologist, a social worker and other appropriate supporting personnel.
Each medical director has a contract with the Company under which on-site
administrative services needed to administer the program are provided. These
contracts generally include nondisclosure, nonsolicitation and noncompetition
covenants pursuant to which the medical director agrees not to solicit the
Company employees for specified periods, disclose confidential information of
the Company or render certain administrative or management services within
specified time periods and geographic areas to any enterprise in competition
with the Company or the programs it manages. Except for the nursing staff, which
is typically provided by the hospital, the other program personnel are employees
of the Company. At August 31, 1997, the Company had an average of five employees
per contract location.
Program Marketing
Because the treatment programs managed by the Company are offered by
general acute care hospitals, most patients are referred by the client
hospital's medical staff or result from relationships that the client hospital
has in the community. Each contract location has an outreach coordinator who
works with a referral development committee consisting of Company and hospital
personnel to identify prospective referral sources. The outreach coordinator
informs physicians and other health professionals and nursing homes in the
community of the treatment programs that are available at the client hospital.
The outreach coordinator also designs and offers community educational programs
regarding various health issues.
Internal Clinical Audits
The Company has established a comprehensive internal clinical audit process
for its mental health programs. The Company's regional mental health clinical
specialists review the services and clinical documentation of the treatment
programs to ensure compliance with client hospital, federal and state standards.
The Company also has an internal clinical auditor who makes unannounced visits
to contract locations on a periodic basis. The auditor reviews medical records
and marketing programs, and conducts interviews with physicians, referral
sources and client hospital staff members. Results of the audits are reported
directly to the senior management of the Company, rather than through the normal
operating organization.
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Contract Locations
At August 31, 1997, the Company had a total of 195 management contracts
with general acute care hospitals located in 38 states, as shown below:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
STATE CONTRACTS STATE CONTRACTS
----- --------- ----- ---------
<S> <C> <C> <C>
Alabama...................... 4 Missouri..................... 7
Arizona...................... 4 Nebraska..................... 1
Arkansas..................... 10 Nevada....................... 3
California................... 19 New Hampshire................ 2
Colorado..................... 2 New Jersey................... 4
Connecticut.................. 1 New Mexico................... 1
Florida...................... 12 New York..................... 3
Georgia...................... 9 North Carolina............... 5
Illinois..................... 6 Ohio......................... 9
Indiana...................... 3 Oklahoma..................... 7
Iowa......................... 2 Oregon....................... 3
Kansas....................... 1 Pennsylvania................. 11
Kentucky..................... 3 South Carolina............... 3
Louisiana.................... 3 Tennessee.................... 16
Maine........................ 1 Texas........................ 12
Maryland..................... 1 Vermont...................... 2
Massachusetts................ 9 Virginia..................... 1
Michigan..................... 6 Washington................... 4
Mississippi.................. 4 Wisconsin.................... 1
</TABLE>
Client Hospitals
The Company's clients are primarily small to medium sized hospitals and
include some large tertiary care hospitals. At August 31, 1997, 43.1% of the
Company's management contracts were with proprietary hospitals. The remainder
are with primarily community not-for-profit hospitals.
At August 31, 1997, the Company had management contracts with 39 hospitals
directly or indirectly owned by Columbia/HCA Healthcare Corporation
("Columbia/HCA"). These 39 contracts accounted for 19.1% of the Company's
revenues for the year ended August 31, 1997. In the aggregate, including both
contracts in effect on August 31, 1997 and contracts that terminated during the
fiscal year ended August 31, 1997, revenues generated by hospitals directly or
indirectly owned by Columbia/HCA accounted for 20.3% of the Company's revenues
for the year ended August 31, 1997. Of the 39 Columbia/HCA contracts at August
31, 1997, 14 contracts contain a provision limiting the number of contracts
which Columbia/HCA can cancel without cause to 33.3% during any calendar year.
The termination or non-renewal of all or a substantial part of the management
contracts with hospitals owned by Columbia/HCA could have a material adverse
effect on the Company's business, financial condition or results of operations.
SALES AND MARKETING
At August 31, 1997, the Company employed five full-time regional managers
of development for mental health management contracts and one manager of
development for physical rehabilitation management contracts. The Company
compiles information from numerous databases to identify prospective clients.
The Company has developed profiles of over 5,000 hospitals in the United States,
with numerous financial and operating characteristics for each hospital.
Potential clients include hospitals without existing mental health, physical
rehabilitation, employee assistance programs or other programs as well as
hospitals with existing programs of which the Company could assume management. A
select list of candidates is systematically and regularly updated based on
criteria indicating which hospitals are the most likely potential clients. A
regional manager of development, who typically acts as the point person on the
sales team for such region, directly
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contacts the prospective clients and, where appropriate, presents a detailed
proposal to key decision-makers. The proposal often contains detailed financial
projections of the proposed programs. The Company works with the potential
client to develop contract terms responsive to the client's specific needs. The
typical sales cycle for a management contract is approximately nine months,
during which time the Company's Vice President of Sales will assist the regional
manager of development and will sometimes assume the role of point person for
the sales effort. In addition, the Company's Executive Vice President of Sales
and Development will generally become involved at the end of the sales process
and negotiate the final terms of the management contract. The Company believes
it can increase sales of rehabilitation management contracts by applying its
expertise in winning mental health management contracts to the solicitation of
rehabilitation management contracts. In addition, the Company believes it has
substantial opportunity to cross-sell a broad range of services to client
hospitals and is pursuing the development of such opportunities as a primary
part of its business strategy.
The CQI+ System is marketed primarily through the regional staff personnel
working together with the CQI+ corporate staff.
Florida PPS markets its mental health services and employee assistance
programs through the administrative staff personnel located in its Tampa
offices.
PENDING ACORN ACQUISITION
On October 20, 1997, the Company signed an agreement to acquire all the
outstanding capital stock of Acorn for approximately $12.7 million in cash.
Acorn offers employee assistance programs and related services only to
self-insured employers. Most of the contracts are on a capitated basis under
which employees and their dependents are entitled to receive a specified number
of consultations per contract year with behavioral health specialists. Acorn is
paid a set fee per month per employee for such services. Under some contracts,
Acorn also provides certain specified outpatient mental health benefits for the
capitated fee. A few contracts also provided for mental health services on a
discounted fee-for-service basis. Acorn also provides pre-admission
certification, utilization review, case management, hospital bill review, claims
adjudication and related services as requested by the client usually under the
capitated fee but sometimes on a separate fee basis.
Acorn is headquartered in the Philadelphia metropolitan area and employs 52
employees, all of which are located in its corporate offices. It provides the
mental health and other services through a network of independent health care
professionals and institutions. At October 1, 1997, Acorn had contracts with
approximately 7,000 individual providers located throughout the United States.
At October 1, 1997, Acorn had a total of 122 contracts with employers
covering over 246,000 employees and, under most of its contracts, the dependents
of the employees. See the Financial Statements of Acorn and Notes thereto
included elsewhere in this Prospectus.
COMPETITION
The health care industry is highly competitive and subject to continual
changes in the method in which services are provided and the types of companies
providing such services. The Company competes with several national competitors
and many regional and local competitors, some of which have greater resources
than the Company. In addition, hospitals could elect to manage their own mental
health and physical rehabilitation programs.
Competition among contract managers for hospital-based mental health and
physical rehabilitation programs is generally based upon reputation for quality,
price, the ability to provide financial and other benefits for the hospital, and
the management expertise necessary to enable the hospital to offer mental health
and physical rehabilitation programs that provide the full continuum of mental
health and physical rehabilitation services in a quality and cost-effective
manner. The pressure to reduce health care expenditures has emphasized the need
to manage the appropriateness of mental health and physical rehabilitation
services provided to patients. As a result, competitors without management
experience covering the various levels of the continuum of mental health and
physical rehabilitation services may not be able to compete successfully.
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The Company believes that its reputation and management expertise will enable it
to compete successfully in this rapidly changing market.
In addition, general acute care hospitals offering mental health and
physical rehabilitation programs managed by the Company compete for patients
with other providers of mental health care services, including other general
acute care hospitals, freestanding psychiatric hospitals, independent
psychiatrists and psychologists, and with other providers of physical
rehabilitation services, including other general acute care hospitals,
freestanding rehabilitation facilities and outpatient facilities.
The Company also competes with hospitals, nursing homes, clinics,
physicians' offices and contract therapy companies for the services of physical,
occupational and speech therapists. These specialists are in short supply and
there can be no assurance that the Company will be able to attract a sufficient
number of therapists for its growing needs.
GOVERNMENT REGULATION
The Company's business is affected by federal, state and local laws and
regulations concerning, among other matters, mental health and physical
rehabilitation facilities and reimbursement for mental health and physical
rehabilitation services. These regulations impact the development and operation
of mental health and physical rehabilitation programs managed by the Company for
its client hospitals. Licensing, certification, reimbursement and other
applicable government regulations vary by jurisdiction and are subject to
periodic revision. The Company is not able to predict the content or impact of
future changes in laws or regulations affecting the mental health or physical
rehabilitation industries.
FACILITY USE AND CERTIFICATION
Hospital facilities are subject to various federal, state and local
regulations, including facilities use, licensure and inspection requirements,
and licensing or certification requirements of federal, state and local health
agencies. Many states also have certificate of need laws intended to avoid the
proliferation of unnecessary or under-utilized health care services and
facilities. The mental health and physical rehabilitation programs which the
Company manages are also subject to licensure and certification requirements.
The Company assists its client hospitals in obtaining required approvals for new
programs. Some approval processes may lengthen the time required for programs to
commence operations. In granting and renewing a facility's licenses,
governmental agencies generally consider, among other factors, the physical
condition of the facility, the qualifications of administrative and professional
staff, the quality of professional and other services, and the continuing
compliance of such facility with the laws and regulations applicable to its
operations. The Company believes that the mental health and physical
rehabilitation programs it manages and the facilities of the client hospitals
used in the operation of such programs comply in all material respects with
applicable licensing and certification requirements.
MEDICARE AND MEDICAID; REIMBURSEMENT FOR SERVICES
Most of the Company's client hospitals receive reimbursement under one or
more of the Medicare or Medicaid programs for mental health and physical
rehabilitation services provided in programs managed by the Company. The Company
is paid directly by its client hospitals for the management services it
provides. While fees paid to the Company by its client hospitals are not subject
to or based upon reimbursement under the Medicare or Medicaid programs or from
any other third-party payor, under many of its management contracts the Company
is obligated to refund a portion of its fee if Medicare denies reimbursement for
an individual patient treatment or all of its fee if the fee paid to the Company
is denied by Medicare as a reimbursable cost. Since a substantial portion of the
patients of the programs managed by the Company are covered by Medicare, any
changes which limit or reduce Medicare reimbursement levels could have a
material adverse effect on the Company's client hospitals and, in turn, on the
Company.
The Company is not a provider reimbursed by Medicare or Medicaid but
provides services to such providers. As such, the Company could be considered
subject to such federal and state laws. While the Company believes that its
relationships with its client hospitals, medical directors and other providers
and the
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fee arrangements with its client hospitals are consistent with Medicare and
Medicaid criteria, those criteria are often vague and subject to interpretation.
The federal government has been actively investigating health care providers for
potential abuses. There can be no assurance that aggressive anti-fraud
enforcement actions will not adversely affect the business of the Company.
The Medicare program was enacted in 1965 to provide a nationwide, federally
funded health insurance program for the elderly. The program is divided in Part
A and Part B, each of which has separate rules and requirements and separate
funding sources. Medicare Part A, the Hospital Insurance Program (42 U.S.C. sec.
1395c et seq.) is financed primarily through mandatory taxes on workers' wages.
Part A pays for hospital, skilled nursing, home health agency, hospice, and
dialysis services determined to be medically necessary for the individual
patient. Medicare Part B, the Supplementary Medical Insurance program (42 U.S.C.
sec. 1395j et seq.), is a voluntary medical benefits plan in which eligible
individuals can enroll to receive benefits in addition to those available under
Part A. Under Part B, each beneficiary must pay a monthly premium, meet a
deductible towards the cost of covered items and services determined to be
medically necessary, and pay 20 percent of the Medicare allowable charge as
coinsurance on most covered items. Non-institutional services, including
physician services, outpatient hospital services, durable medical equipment, and
laboratory services, among others, are paid under Medicare Part B. In addition,
the Balanced Budget Act adds a new Medicare Part C, which provides Medicare
beneficiaries with additional health plan choices, such as managed care plans
and medical savings accounts.
The Medicare program is administered by the Health Care Financing
Administration ("HCFA") of the U.S. Department of Health and Human Services
("HHS"). HCFA adopts regulations and issues interpretive memoranda and program
manuals providing detailed explanation of the Medicare program. The payment
operations of the Medicare program are handled by intermediaries (under Part A)
and carriers (under Part B) who are insurance companies and Blue Cross/Blue
Shield plans which contract with the Secretary of HHS (the "Secretary") to make
Medicare payments to providers in a particular geographic region. Individual
intermediaries and carriers issue transmittals, bulletins, notices, and general
instructions to providers and suppliers in their respective areas to facilitate
the administration of the Medicare program, but are required to follow the
Medicare statute, HCFA regulations, HCFA transmittals, and the program manuals.
Within these requirements, intermediaries and carriers are granted broad
discretion to establish particular guidelines and procedures for making Medicare
coverage determinations and payments, including prior approval, utilization
limits, and specific documentation.
The Medicaid program is a joint federal-state cooperative arrangement
established for the purpose of enabling states to furnish medical assistance on
behalf of aged, blind, or disabled individuals, or members of families with
dependent children, whose income and resources are insufficient to meet the
costs of necessary medical services. The federal and state governments share the
costs of such aid pursuant to statutory formulae. The Secretary has primary
federal responsibility for administering the Medicaid program. The
responsibility has been delegated to HCFA, whose Medicaid Bureau carries out
this delegation. States are not required to participate in the Medicaid program.
States which choose to participate, however, must administer their Medicaid
programs in accordance with federal law, the implementing regulations and
policies of the Secretary and their approved state plans. A state becomes
eligible to receive federal funds by submitting to the Secretary a state plan
for medical assistance. The federal Medicaid statute establishes minimum
standards for state plans in such area as administration, eligibility, coverage
of services, quality and provision of services, and payment for services. States
have significant latitude, within these standards, to determine the mix of
services and structure of their state Medicaid programs. The state plan must be
amended by appropriate submission to the Secretary whenever necessary to reflect
changes in federal statutes, regulations, policies, court decisions, or material
changes in any phase of state law, policy, or operations.
In order to receive reimbursement under the Medicare or Medicaid programs,
each client hospital or facility must meet applicable requirements promulgated
by HHS relating to the type of facility, personnel, standards of patient care
and compliance with all state and local laws, rules and regulations. The Company
believes that the programs it manages comply in all material respects with
applicable Medicare and Medicaid requirements.
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In the mid-1980's, changes in reimbursement rates and procedures included
the creation of PPS using predetermined reimbursement rates for DRGs The DRG
system established fixed payment amounts per discharge for diagnoses generally
provided by acute care hospitals. Mental health services provided by acute care
hospitals which qualify for an exemption are deemed to be DPUs and are not
included in the DRG system. Services provided by DPUs are reimbursed on an
actual cost basis, subject to certain limitations. The mental health programs
managed by the Company which are eligible for reimbursement by the Medicare
program currently meet the applicable requirements for designation as DPUs and
are exempt from the DRG system. In the future, however, it is possible that
Medicare reimbursement for mental health services, including those provided by
programs managed by the Company, could be under the DRG system or otherwise
altered. At August 31, 1997, of the 276 mental health treatment programs managed
by the Company, 192 were geropsychiatric programs for which a substantial
majority of the patients are covered by Medicare. Recent amendments to the
Medicare regulations established maximum reimbursement amounts on a per case
basis for both inpatient mental health and physical rehabilitation services.
Effective as of October 1, 1997, regulations promulgated pursuant to these
amendments establish a new ceiling on the rate of increase in operating costs
per case for mental health and physical rehabilitation services furnished to
Medicare beneficiaries. Prior to these amendments, the reimbursement amounts
were tied to each hospital's mental health or physical rehabilitation unit cost
during such unit's first year of operations, subject to adjustment. The new
regulations establish a nationwide cap limiting the reimbursement target amount
on a per case basis for mental health and physical rehabilitation services to
$10,547 and $19,250, respectively, subject to adjustments based on market
indices. There can be no assurance that such limitation will not result in the
decline of amounts reimbursed to the Company's client hospital and will not have
an adverse effect on the business, operations and financial condition of the
Company.
Qualified outpatient rehabilitation services are exempt from PPS. Acute
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS, generally after the first year of operation, upon
satisfaction of specified federal criteria. Such criteria include the operation
for a full 12 months under PPS and the completion of an initial exemption
survey. The exemption survey measures compliance with certain criteria
applicable to exempt units generally, including approval to participate as a
Medicare provider, admission standards, recordkeeping, compliance with state
licensure laws, segregation of beds, accounting standards and certain specific
standards applicable to rehabilitation units, including staffing, medical care
and patient mix. Upon successful completion of the survey, Medicare payments for
rehabilitation services provided in inpatient units are made under a cost-based
reimbursement system. As of August 31, 1997, 17 of the Company's managed
physical rehabilitation programs were exempt from PPS. The remaining program
will apply for exemption as soon as it is eligible. A recently enacted amendment
in the Medicare statutes provides for a gradual phase-out of cost-based
reimbursement for physical rehabilitation services over a three-year period
commencing on October 1, 2000. The resulting phase-in of reimbursement for
physical rehabilitation services based on PPS could significantly lower Medicare
reimbursements to hospitals and thus have a material adverse effect on the
business, operations and financial results of the Company.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings
and funding restrictions, any of which could have the effect of limiting or
reducing reimbursement levels to general acute care hospitals for mental health
and physical rehabilitation services provided by programs managed by the
Company. The Company cannot predict whether any changes to such government
programs will be adopted or, if adopted, the effect, if any, such changes will
have on the Company. In addition, a significant number of the Company's
management contracts require the Company to refund a portion of its fee if
Medicare reimbursement to the client hospital is disallowed for a patient
treated in a program managed by the Company or all of its fee if the fee paid to
the Company is disallowed as a reimbursable cost. During the fiscal year ended
August 31, 1997, the Company refunded approximately $219,294 of its fees in
relation to these denials. Also, Medicare retrospectively audits cost reports of
client hospitals upon which Medicare reimbursement for services rendered in the
programs managed by the Company is based. Accordingly, at any time, the Company
could be subject to refund obligations to client hospitals for prior year cost
reports that have not been audited and settled at the date hereof. Any
significant decrease in Medicare reimbursement levels, the imposition of
significant restrictions on participation in the Medicare program, or the
disallowance by Medicare of any significant portion of the client
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hospital's costs, including the fee to the Company, where the Company has a
reimbursement denial repayment obligation could adversely affect the Company.
Numerous amendments have recently been made to the regulations promulgated under
the Medicare statutes effective October 1, 1997. These amendments affect, among
other things, Medicare reimbursement to psychiatric and rehabilitation distinct
units in hospitals by imposing lower ceilings calculated according to certain
formulae on reimbursable amounts, and could have a material adverse effect on
the business, operations and financial results of the Company. In addition,
there can be no assurance that hospitals which offer mental health or physical
rehabilitation programs now or hereafter managed by the Company will satisfy the
requirements for participation in the Medicare or Medicaid programs.
Payors, including Medicare and Medicaid, are attempting to manage costs,
resulting in declining amounts paid or reimbursed to hospitals for the services
provided. As a result, the Company anticipates that the number of patients
served by general acute care hospitals on a per diem, episodic or capitated
basis will increase in the future. There can be no assurance that if amounts
paid or reimbursed to hospitals decline, it will not adversely affect the
Company.
Medicare regulations limit reimbursement for mental health, physical
rehabilitation and other health care charges paid to related parties. A party is
considered "related" to a provider if it is deemed to be controlled by the
provider. One test for determining control for this purpose is whether the
percentage of the total revenues of the party received from services rendered to
the provider is so high that it effectively constitutes control. Although the
Company does not receive sufficient revenues from any customer, including
Columbia/HCA, that would make it a related party, it is possible that such
regulations could limit the number of management contracts that the Company
could have with Columbia/HCA or any other client.
Federal law contains certain provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients are medically necessary
and meet professionally recognized standards. These provisions include a
requirement that admissions of Medicare and Medicaid patients to hospitals must
be reviewed in a timely manner to determine the medical necessity of the
admissions. In addition, these provisions state that a hospital may be required
by the federal government to reimburse the government for the cost of Medicare-
reimbursed services that are determined by a peer review organization to have
been medically unnecessary. The Company and its client hospitals have developed
and implemented quality assurance programs and procedures for utilization review
and retrospective patient care evaluation intended to meet these requirements.
PATIENT REFERRAL LAWS
Various state and federal laws regulate the relationships between health
care providers and referral sources, including federal and state fraud and abuse
laws prohibiting individuals and entities from knowingly and willfully offering,
paying, soliciting or receiving remuneration in order to induce referrals for
the furnishing of health care services or items. These federal laws generally
apply only to referrals for items or services reimbursed under the Medicare or
Medicaid programs or any state health care program. The objective of these laws
is generally to ensure that the purpose of a referral is quality of care and not
monetary gain by the referring party. Violations of such laws can result in
felony criminal penalties, civil sanctions and exclusion from participation in
the Medicare and Medicaid programs.
The Medicare and Medicaid anti-kickback statute, 42 U.S.C. sec. 1320a-7b,
prohibits the knowing and willful solicitation or receipt of any remuneration
"in return for" referring an individual, or for recommending or arranging for
the purchase, lease, or ordering, of any item or service for which payment may
be made under Medicare or a state health care program. In addition, the statute
prohibits the offer or payment of remuneration "to induce" a person to refer an
individual, or to recommend or arrange for the purchase, lease, or ordering of
any item or service for which payment may be made under the Medicare or state
health care programs. The statute contains exceptions for certain discounts,
group purchasing organizations, employment relationships, waivers of coinsurance
by community health centers, health plans, and practices defined in regulatory
safe harbors.
The Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark
II") prohibiting physicians from referring Medicare and Medicaid patients to an
entity for the furnishing of a list of "designated health
44
<PAGE> 46
services" including physical therapy, occupational therapy, home health
services, and others. If a financial relationship exists, the entity is
generally prohibited from claiming payment for such services under the Medicare
or Medicaid programs. Compensation arrangements are generally exempted from the
Stark provisions if, among other things, the compensation to be paid is set in
advance, does not exceed fair market value and is not determined in a manner
that takes into account the volume or value of any referrals or other business
generated between the parties.
Other provisions in the Social Security Act authorize other penalties,
including exclusion from participation in Medicare and Medicaid, for various
billing-related offenses. HHS can also initiate permissive exclusion actions for
such improper billing practices as submitting claims "substantially in excess"
of the provider's usual costs or charges, failure to disclose ownership and
officers, or failure to disclose subcontractors and suppliers. Executive Order
12549 prohibits any corporation or facility from participating in federal
contracts if it or its principals have been disbarred, suspended or are
ineligible, or have been voluntarily excluded, from participating in federal
contracts. A principal has been defined as an officer, director, owner, partner,
key employee or other person with primary management or supervisory
responsibilities.
Additionally, the Health Insurance Portability and Accountability Act of
1996 granted expanded enforcement authority to HHS and the U.S. Department of
Justice ("DOJ"), and provided enhanced resources to support the activities and
responsibilities of the Office of Inspector General ("OIG") of HHS and DOJ by
authorizing large increases in funding for investigating fraud and abuse
violations relating to health care delivery and payment. On January 24, 1997,
the OIG issued guidelines for the Fraud and Abuse Control Program as mandated by
the Act, and on February 19, 1997 issued an interim final rule establishing
procedures for seeking advisory opinions on the application on the anti-kickback
statute and certain other fraud and abuse laws. The recently-enacted Balanced
Budget Act also includes numerous health fraud provisions, including: new
exclusion authority for the transfer of ownership or control interest in an
entity to an immediate family or household member in anticipation of, or
following, a conviction, assessment, or exclusion; increased mandatory exclusion
periods for multiple health fraud convictions, including permanent exclusion for
those convicted of three health care-related crimes; authority of the Secretary
to refuse to enter into Medicare agreements with convicted felons; new civil
money penalties for contracting with an excluded provider or violating the
Medicare and Medicaid antikickback statute; new surety bond and information
disclosure requirements for certain providers and suppliers; and an expansion of
the mandatory and permissive exclusions added by the Health Insurance
Portability and Accountability Act of 1996 to any federal health care program
(other than the Federal Employees Health Benefits Program).
In addition, federal and some state laws impose restrictions on referrals
for certain designated health services by physicians and, in a few states,
psychologists and other mental health care professionals to entities with which
they have financial relationships. The Company believes that its operations
comply with these restrictions to the extent applicable, although no assurance
can be given regarding compliance in any particular factual situation. Federal
legislation has been considered to expand current law from its application to
Medicare and Medicaid business to all payors and to additional health services.
Certain states are considering adopting similar restrictions or expanding the
scope of existing restrictions. There can be no assurance that the federal
government or other states in which the Company operates will not enact similar
or more restrictive legislation or restrictions that could under certain
circumstances impact the Company's operations.
Under a significant number of its management contracts, the Company
receives a variable fee related in part to average daily patient census of the
mental health or physical rehabilitation program. In addition, the Company has
entered into agreements with physicians to serve as medical directors at the
mental health and physical rehabilitation programs and facilities managed by the
Company, which generally provide for payments to such persons by the Company as
compensation for their administrative services. These medical directors also
generally provide professional services at such programs and facilities. In
1991, regulations were issued under federal fraud and abuse laws creating
certain "safe harbors" for relationships between health care providers and
referral sources. Any relationship that satisfies the terms of the safe harbor
is considered permitted. Failure to satisfy a safe harbor, however, does not
mean that the relationship is prohibited. Although the contracts and
relationships between the Company and its client hospitals and medical directors
are not within the safe harbors, the Company believes that such contracts and
relationships comply with
45
<PAGE> 47
applicable laws. There can be no assurance, however, that the Company's
activities will not be challenged by regulatory authorities.
MENTAL HEALTH CARE PATIENT RIGHTS
Many states have adopted "patient bill of rights" regulations which set
forth standards for least restrictive treatment, patient confidentiality,
patient access to mail and telephones, patient access to legal counsel and
requirements that patients be treated with dignity. There are also laws and
regulations relating to the civil commitment of patients to mental health
programs, disclosure of information concerning patient treatments and related
matters.
HEALTH CARE REFORM
The Clinton Administration and various federal legislators have considered
health care reform proposals intended to control health care costs and to
improve access to medical services for uninsured individuals. These proposals
included proposed cutbacks to the Medicare and Medicaid programs and steps to
permit greater flexibility in the administration of Medicaid. In addition, some
states in which the Company operates are considering various health care reform
proposals. It is uncertain at this time what legislation on health care reform
may ultimately be enacted or whether other changes in the administration or
interpretation of governmental health care programs will occur. There can be no
assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
LICENSING REQUIREMENTS
Certain of the services provided by Florida PPS and Acorn may be subject to
certain licensing requirements in some states. Neither Florida PPS nor Acorn
hold any licenses in states other than Florida and Pennsylvania, respectively.
If the business operations of such entities are determined to require licenses
in other states, then obtaining such licenses or the inability to obtain such
licenses could adversely affect the business operations of such entities. In
addition, several states have laws that prohibit business corporations from
providing, or holding themselves out as providers of, medical care. While the
Company has no reason to believe that it is in violation or has violated such
statutes, these laws vary from state to state and have seldom been interpreted
by the courts or regulatory agencies.
EMPLOYEES
At August 31, 1997, the Company employed 1,208 people, including 974
full-time employees, 197 part-time employees, and 37 temporary employees. The
Company has no collective bargaining agreements with any unions and believes
that its overall relations with its employees are good. In addition, at August
31, 1997, the Company had administrative services contracts with 251 physicians
to serve as medical directors for the clinical programs managed by the Company.
INSURANCE
The Company carries general liability, comprehensive property damage,
malpractice, workers' compensation and other insurance coverages that management
considers adequate for the protection of the Company's assets and operations.
There can be no assurance, however, that the coverage limits of such policies
will be adequate. A successful claim against the Company in excess of its
insurance coverage could have a material adverse effect on the Company.
FACILITIES
In September 1996, the Company leased a building consisting of
approximately 40,000 square feet for its National Support Center in Lewisville,
Texas under a lease term expiring in September 26, 2001. In addition, at August
31, 1997 the Company leased an aggregate of 11,058 square feet of space for four
regional offices in the Boston, Chicago, Los Angeles and Tampa metropolitan
areas, with lease terms expiring from May 1998 to August 2000. Except for one
partial hospitalization program operating in approximately 3,150 square feet of
space, the space required for the clinical programs managed by the Company is
provided by the client hospitals either within their existing facilities or at
other locations owned or leased by the hospitals.
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<PAGE> 48
The Company leases approximately 13,665 square feet of office space in the
Tampa metropolitan area with lease terms expiring from June 1998 to October 2002
for the operations of Florida PPS.
LEGAL PROCEEDINGS
The Company is, and may be in the future, party to litigation arising in
the course of its business. While the Company has no reason to believe that any
pending claims are material, there can be no assurance that the Company's
insurance coverage will be adequate to cover all liabilities arising out of such
claims or that any such claims will be covered by the Company's insurance. Any
material claim which is not covered by insurance may have an adverse effect on
the Company's business. Claims against the Company, regardless of their merit or
outcome, may also have an adverse effect on the Company's reputation and
business.
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<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information regarding the executive officers and
directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James Ken Newman....................... 53 Chief Executive Officer and Chairman of
the Board of Directors
Robert A. Lefton....................... 40 President and Chief Operating Officer
James W. McAtee........................ 52 Executive Vice President -- Finance &
Administration, Chief Financial
Officer, Treasurer and Secretary;
Director
Gary A. Kagan.......................... 46 Executive Vice President -- Development
John F. DeVaney........................ 45 Senior Vice President -- Rehab
Operations
Jack R. Anderson....................... 72 Director
George E. Bello........................ 61 Director
William H. Longfield................... 59 Director
Donald E. Steen........................ 50 Director
James E. Buncher....................... 61 Director
Howard B. Finkel....................... 48 Director
</TABLE>
James Ken Newman has been the Chief Executive Officer of the Company since
July 1989 and Chairman since February 1992. From July 1989 until September 1997,
he served as President of the Company. Mr. Newman currently serves as a director
of United Dental Care, Inc. and Telecare Corporation.
Robert A. Lefton has been President and Chief Operating Officer since
September 1, 1997. He formerly served as Executive Vice President, Operations
from September 1996 to August 1997. He was a Senior Regional Vice President of
the Company from March 1995 until September 1996. He served as a Regional Vice
President of the Company from November 1991 to March 1995.
James W. McAtee has been Executive Vice President -- Finance &
Administration of the Company since February 1992 and Chief Financial Officer,
Treasurer and Secretary of the Company since September 1990. He has been a
director of the Company since July 1995. He was a Senior Vice President of the
Company from September 1990 to February 1992.
Gary A. Kagan has been Executive Vice President -- Development of the
Company since January 1992. From April 1990 to December 1991, he served as
President of the subsidiary of the Company engaged in the contract management
business.
John F. DeVaney has been Senior Vice President -- Rehab Operations since
September 1996 in charge of the physical rehabilitation contract management
business of the Company. From September 1996 to August 1997 he was an Executive
Vice President, Operations of the Company. He was a Senior Regional Vice
President of the Company from August 1994 until September 1996. He served as a
Regional Vice President of the Company from September 1992 to August 1994.
Jack R. Anderson has been President of Calver Corporation, a health care
consulting and investment firm, and a private investor, since 1982. Mr. Anderson
currently serves on the board of directors of PacifiCare Health Systems, Inc.
and United Dental Care, Inc.
George E. Bello has been Executive Vice President and Controller and a
member of the board of directors of Reliance Group Holdings, Inc., an insurance
holding company, since 1982. Mr. Bello also serves on the board of directors of
Zenith National Insurance Corp., United Dental Care, Inc., Reliance Insurance
Company and Prometheus Funding Corp.
William H. Longfield has been the Chairman and Chief Executive Officer of
C.R. Bard, Inc., a multi-national developer, manufacturer and marketer of health
care products, since September 1995. Mr. Longfield
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<PAGE> 50
was President and Chief Executive Officer of C.R. Bard, Inc. from October 1993
to September 1995, President and Chief Operating Officer from September 1991 to
October 1993 and Executive Vice President and Chief Operating Officer from
February 1989 to September 1991. Mr. Longfield currently serves on the board of
directors of C.R. Bard, Inc., Manor Care, Inc., and United Dental Care, Inc.
Donald E. Steen has been President of the International Group of
Columbia/HCA Healthcare Corporation, a health care services corporation
primarily involved in the ownership and operation of hospitals and providing
related services since October 1994. From September 1981 to October 1994, Mr.
Steen was the President and Chief Executive Officer of Medical Care America,
Inc., a corporation that operated ambulatory surgery centers. Medical Care
America, Inc. was acquired by Columbia/HCA Healthcare Corporation in October
1994. Mr. Steen currently serves on the board of directors of United Dental
Care, Inc.
James E. Buncher will become President and Chief Executive Officer of
Community Dental Services, Inc., a corporation operating dental practices in
California, effective in November 1997. Mr. Buncher was the President of Health
Plans Group of Value Health, Inc., a national specialty managed care company,
from September 1995 to September 1997 and served as Chairman, President and
Chief Executive Officer of Community Care Network, Inc., a Value Health
subsidiary from August 1992 to September 1997. In September 1997, Value Health
was acquired by a third party and Mr. Buncher resigned his positions with that
company. From September 1997 to November 1997, Mr. Buncher was a private
investor. He currently serves on the Board of Directors of Alliance Imaging,
Inc. and United Dental Care, Inc.
Howard B. Finkel was the Chairman and Chief Executive Officer of Specialty
from January 1, 1995 until August 11, 1997 when Specialty was acquired by the
Company. From 1984 to December 31, 1994, he was the President of the National
Medical Management Services division of National Medical Enterprises, Inc., a
health care services company primarily involved in the ownership and operation
of hospitals and providing related services. Mr. Finkel is currently a private
investor.
CERTAIN TRANSACTIONS
Horizon acquired Specialty on August 11, 1997. Pursuant to the terms of the
Specialty acquisition agreement, the Company agreed to appoint Howard B. Finkel
as a director effective upon the acquisition. In addition the Company agreed to
use its best efforts to cause Mr. Finkel to be nominated and elected as a member
of the Board of Directors so long as he beneficially owns not less than 5% of
the outstanding Common Stock of the Company. As of October 15, 1997, Mr. Finkel
beneficially owned 9.5% of the outstanding Common Stock of the Company. Upon
completion of this offering, Mr. Finkel will own no more than 3.4% of the
outstanding Common Stock of the Company.
Pursuant to the Specialty acquisition agreement, the Company also entered
into a registration rights agreement with the former Specialty stockholders. The
Company agreed to prepare and file a registration statement as soon as
practicable after its audited consolidated financial statements for its fiscal
year ended August 31, 1997 were available. The registration statement was to
register for sale the shares of Common Stock of the Company issued to the
Specialty stockholders which were issued in the Specialty transaction pursuant
to the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act").
Under the registration rights agreement, the Company may elect for the
offering under the registration statement to be in the form of an underwritten
offering. In the event that the Company elects not to proceed or is unable to
effect such offering as an underwritten offering, then the Company is
nevertheless 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 shares offered thereunder only through block sales arranged by a broker-
dealer selected by the Company and reasonably satisfactory to the selling
stockholders. In addition, the registration rights agreement granted certain
piggyback registration rights in favor of Mr. Finkel that will take effect after
the offering pursuant to the registration statement and expire one year after
the Closing Date. The
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<PAGE> 51
other Specialty stockholders may have the same piggyback registration rights
under certain conditions with respect to the shares of Common Stock not sold
pursuant to the registration statement. After this offering, the former
Specialty stockholders will not have any other demand registration rights.
In the registration rights agreement, the Company agreed 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 shares of Horizon Common Stock exchanged for
Specialty shares may be sold within the limitations set forth in Rule 144 under
the Securities Act.
In the Specialty 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 the
Company. 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 the Company.
The noncompetition covenants of Mr. Harrison are to remain in effect for a
period of one year after the closing date of the Specialty acquisition. 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. The Company 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 Specialty agreement,
Messrs. Finkel and Harrison also agreed to certain confidentiality,
nondisclosure and nondisparagement covenants in favor of the Company.
At the closing of the Specialty transaction, 51,282 shares issued to the
Specialty stockholders were delivered on a pro rata basis into an escrow held by
the Company. Under the escrow agreement between the Company and Howard B.
Finkel, individually and as representative of the Specialty stockholders, the
Company must notify the Specialty stockholders in writing of any claim under the
indemnification provisions of the Specialty agreement. To the extent, if any,
the Specialty stockholders do not dispute the Company's claim during a specified
period after the Company provides such notice, the Company will be entitled to
receive such number of the escrow shares held in escrow as have an aggregate
value (calculated at $23.25 per share) equal to the amount of the Company's
claim, or such fewer escrow shares as then remain in escrow. To the extent, if
any, the Specialty stockholders dispute the Company's right to payment from the
escrow shares held in escrow, the Specialty stockholders may notify the Company
and the Company and the Specialty stockholders will resolve the Company's claim
by arbitration. If appropriate based on resolution of the Company's claim, the
Company will be entitled to receive payment from the shares held in escrow.
Under the escrow agreement, any shares held in escrow and not claimed by the
Company pursuant to the escrow agreement will be returned to the Specialty
stockholders after the expiration of six months after the date of the Specialty
transaction or, if applicable, after resolution of any claim asserted by the
Company to the escrow shares.
Donald E. Steen, a director of the Company, is President of the
International Group of Columbia/HCA. At August 31, 1997, the Company had mental
health management contracts with 39 general acute care hospitals directly or
indirectly owned by Columbia/HCA of which 36 had programs in operation. These 39
contracts accounted for 19.1% of the Company's revenues for the fiscal year
ended August 31, 1997. In the aggregate, including contracts terminated at any
time during the fiscal year, revenues generated by hospitals directly or
indirectly owned by Columbia/HCA accounted for 20.3% of the Company's revenues
for the fiscal year ended August 31, 1997. Of the 39 Columbia/HCA contracts at
August 31, 1997, 14 contracts contain a provision limiting the number of
contracts which Columbia/HCA can cancel without cause to 33.3% during any
calendar year.
50
<PAGE> 52
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock of the Company as of October 15, 1997, and
as adjusted to reflect the sale by the Selling Stockholders of the Common Stock
offered hereby, by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock, (ii) the Selling Stockholders, (iii)
each of the Company's directors and executive officers and (iv) all directors
and executive officers of the Company as a group. Except as indicated below, to
the Company's knowledge each person named has the sole voting and investment
power with respect to all shares shown as beneficially owned by such person.
When used herein the term "Selling Stockholders" refers to the Company's
stockholders initially selling an aggregate of 1,240,000 shares of Common Stock
in this offering and does not include those additional stockholders who have
committed to sell additional shares of Common Stock in the event the
Underwriters' overallotment option is exercised.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OWNED AFTER THE
BEFORE THE OFFERING OF OFFERING
-------------------- SHARES --------------------
NAME NUMBER PERCENT TO BE SOLD NUMBER PERCENT
---- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE OFFICERS
AND 5% STOCKHOLDERS:
James Ken Newman(1)(2)(3)(4)............ 719,131 9.8% 100,000 619,131 8.5%
Howard B. Finkel(1)(4)(5)............... 663,600 9.5 425,000 238,600 3.4
Jack R. Anderson(1)(2).................. 527,400 7.6 -- 527,400 7.6
Lutheran Brotherhood(1)................. 525,650 7.5 -- 525,650 7.5
James W. McAtee(2)(4)(6)................ 328,096 4.6 42,515 285,581 4.0
George E. Bello(2)(7)................... 177,000 2.5 -- 177,000 2.5
Gary A. Kagan(2)(4)(8).................. 170,297 2.4 38,205 132,092 1.9
Robert A. Lefton(9)..................... 14,625 * -- 14,625 *
Donald E. Steen(7)...................... 9,000 * -- 9,000 *
John F. DeVaney(10)..................... 24,376 * -- 24,376 *
William H. Longfield(7)................. 7,500 * -- 7,500 *
James E. Buncher........................ 2,250 * -- 2,250 *
All directors and executive officers as
a group (11 persons)(11).............. 2,643,275 34.3 605,720 2,037,555 26.5
ADDITIONAL SELLING STOCKHOLDERS(5):
Michael S. McCarthy..................... 192,360 2.8 185,314 7,046 *
NME Management Services, Inc............ 179,200 2.6 172,636 6,564 *
John K. Harrison........................ 138,180 2.0 100,000 38,180 *
Lawrence W. Reiff....................... 138,180 2.0 100,000 38,180 *
Argentum Capital Partners, L.P.......... 55,300 * 53,275 2,025 *
Denise Dailey........................... 11,060 * 4,400 6,660 *
Kenneth Dorman.......................... 11,060 * 10,655 405 *
G. Phillip Woellner..................... 11,060 * 8,000 3,060 *
</TABLE>
- ---------------
* Less than 1%.
(1) The address of James Ken Newman is 1500 Waters Ridge Drive, Lewisville,
Texas 75057-6011. The address of Howard B. Finkel is 768 Chimney Creek,
Golden, CO 80401. 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.
(2) Messrs. Newman, Anderson, Bello, McAtee and Kagan have committed to sell up
to 50,000, 60,000, 30,000, 41,000 and 5,000 shares of Common Stock,
respectively, in the event the Underwriters' overallotment option is
exercised. See "Management" for a description of each position or office of
each such stockholder with the Company within the past three years. If the
overallotment option is exercised in full, Messrs. Newman, Anderson, Bello,
McAtee and Kagan would beneficially own 569,131, 467,400, 147,000, 244,581
and 127,092 shares of Common Stock, respectively, after the offering, which
would
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<PAGE> 53
represent 7.8%, 6.7%, 2.1%, 3.4% and 1.8%, respectively, of the Common
Stock after the offering. See "Underwriters."
(3) Includes 51,000 shares of Common Stock held by a limited partnership for
which Mr. Newman serves as an officer and director of the corporate
general partner and 61,500 shares of Common Stock held by a foundation of
which Mr. Newman is a director and officer. Also includes 330,705 shares
of Common Stock issuable upon the exercise of immediately exercisable
stock options.
(4) See "Management" for a description of each position or office of such
stockholder with the Company within the past three years.
(5) Former Specialty stockholders.
(6) Includes 19,998 shares of Common Stock held in trust for the benefit of
Mr. McAtee's children. Also includes 182,097 shares of Common Stock
issuable upon the exercise of immediately exercisable stock options.
(7) Includes 6,000 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options.
(8) Consists of 170,297 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options.
(9) Consists of 14,625 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options.
(10) Consists of 24,376 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options.
(11) Includes 740,100 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options held by certain directors and
executive officers. If the Underwriters' overallotment is exercised in
full, the Company's directors and executive officers as a group would sell
an aggregate of 186,000 additional shares of Common Stock pursuant to such
overallotment option and immediately thereafter would beneficially own an
aggregate of 1,851,555 shares of Common Stock, which would represent 24.1%
of the Common Stock after the offering. See "Underwriters."
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<PAGE> 54
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated and BancAmerica Robertson Stephens are acting as
Representatives, have severally agreed to purchase, and the Selling Stockholders
have agreed to sell to them severally, the respective number of shares of Common
Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BancAmerica Robertson Stephens..............................
---------
Total............................................. 1,240,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all the shares of Common Stock offered hereby (other than those
shares covered by the overallotment option described below) if any such shares
are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price which represents a concession
not in excess of $. per share under the public offering price. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $. per share to other Underwriters or to certain other dealers.
After the initial offering of the shares of Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, Messrs. Newman, Anderson, Bello,
McAtee and Kagan, executive officers and directors of the Company, have granted
to the Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 186,000 additional shares of Common Stock at the
initial public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering overallotments, if any, made in
connection with the offering of the shares of Common Stock offered hereby. To
the extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such Underwriter's name
in the preceding table bears to the total number of shares of Common Stock set
forth next to the names of all the Underwriters in the preceding table.
The Company, the directors and executive officers of the Company, the
Selling Stockholders and certain other existing stockholders who, prior to this
Offering, beneficially own in the aggregate 1,903,175 shares of Common Stock and
options to purchase 740,100 shares of Common Stock have agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, they will not (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or (ii) enter into any swap
or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise, for a period of
90 days after the date of the Prospectus. The restrictions described in this
paragraph do not apply to (a) the sale of shares of Common Stock to the
Underwriters, (b) the issuance by the Company of shares of Common Stock upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date of the Offering of which the Underwriters have been advised in writing,
or (c) grants of employee stock options pursuant to the terms of an existing
employee stock option plan.
53
<PAGE> 55
The Company and the Selling Stockholders and certain other stockholders
have agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission. In general, a passive
market maker may not bid for, or purchase, the Common Stock at a price that
exceeds the highest independent bid. In addition, the net daily purchases made
by any passive market maker generally may not exceed 30% of its average daily
trading volume in the Common Stock during a specified two month prior period. A
passive market maker must identify passive market making bids as such on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the Common Stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
No action has been or will be taken in any jurisdiction by the Company, any
Selling Stockholder or any Underwriter that would permit a public offering of
the Common Stock or possession or distribution of this Prospectus in any
jurisdiction where action for that purpose is required, other than in the United
States. Persons into whose possession this Prospectus comes are required by the
Company, the Selling Stockholders and the Underwriters to inform themselves
about and to observe any restrictions as to the offering of the Common Stock and
the distribution of this Prospectus.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Strasburger & Price, L.L.P., Dallas, Texas.
Certain legal matters relating to the offering will be passed upon for the
Underwriters by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of the Company as of August 31, 1996
and 1997 and for each of the three years in the period ended August 31, 1997 and
the financial statements of Acorn as of August 31, 1997 and for the year ended
August 31, 1997 included in this Prospectus have been so included in reliance on
the reports of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
54
<PAGE> 56
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information statements
and other information with the Commission. Such reports, proxy and information
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; and at
the Commission's Northeast Regional Office, 7 World Trade Center, Suite 1300,
New York, New York 10048, and Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants such as the Company that
file electronically with the Commission. The address of such site is
http://www.sec.gov. The Common Stock of the Company is quoted on the Nasdaq
National Market. Reports, proxy and information statements and other information
concerning the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission pursuant to the Securities Act
with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules filed as a part thereof, as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is hereby made to the Registration
Statement, including the exhibits and schedules filed as a part thereof.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete, and where such
contract or other document is an exhibit to the Registration Statement, each
such statement is qualified in all respects by the provisions of such exhibit,
to which reference is hereby made for a full statement of the provisions
thereof. The Registration Statement, including the exhibits and schedules filed
as a part thereof, may be inspected without charge at the public reference
facilities maintained by the Commission as set forth in the preceding paragraph.
Copies of these documents may be obtained at prescribed rates from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549.
55
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HORIZON HEALTH CORPORATION
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of August 31, 1996 and
1997................................................... F-3
Consolidated Statements of Income for the years ended
August 31, 1995, 1996, and 1997........................ F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended August 31, 1995, 1996 and
1997................................................... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1995, 1996, and 1997........................ F-6
Notes to Consolidated Financial Statements................ F-7
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
Report of Independent Accountants......................... F-20
Balance Sheet as of August 31, 1997....................... F-21
Statement of Income for the year ended August 31, 1997.... F-22
Statement of Changes in Stockholders' Equity for the year
ended August 31, 1997.................................. F-23
Statement of Cash Flows for the year ended August 31,
1997................................................... F-24
Notes to Financial Statements............................. F-25
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Condensed Combined
Financial Statements................................... F-28
Unaudited Pro Forma Condensed Combined Balance Sheet as of
August 31, 1997........................................ F-29
Unaudited Pro Forma Condensed Combined Statement of Income
for the year ended August 31, 1997..................... F-30
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................. F-31
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Horizon Health Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Horizon Health Corporation and its subsidiaries at August
31, 1996 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended August 31, 1997, 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
October 13, 1997
F-2
<PAGE> 59
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments........................... $ 8,346,373 $ 5,516,575
Accounts receivable less allowance for uncollectible
accounts of $2,387,622 and $1,357,423 at August 31, 1996
and 1997, respectively.................................. 12,720,429 11,995,254
Receivable from employees................................. 89,126 63,303
Prepaid expenses and supplies............................. 173,131 182,208
Income taxes receivable................................... 96,210 951,256
Other receivables......................................... 89,383 51,877
Other current assets...................................... 71,940 170,154
Current deferred taxes.................................... 2,116,582 1,687,512
----------- -----------
TOTAL CURRENT ASSETS............................... 23,703,174 20,618,139
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment................................................. 2,704,225 3,694,717
Building improvements..................................... 109,467 255,406
----------- -----------
2,813,692 3,950,123
Less accumulated depreciation............................. 1,729,440 2,208,083
----------- -----------
1,084,252 1,742,040
Restricted cash............................................. 344,404 --
Goodwill, net of accumulated amortization of $1,564,195 and
$2,078,177 at August 31, 1996 and 1997, respectively...... 15,330,555 21,553,594
Management contracts, net of accumulated amortization of
$1,991,093 and $2,744,666 at August 31, 1996 and 1997,
respectively.............................................. 4,555,985 4,451,426
Other assets................................................ 195,630 363,208
----------- -----------
TOTAL ASSETS....................................... $45,214,000 $48,728,407
=========== ===========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,687,805 $ 1,747,393
Employee compensation and benefits........................ 5,276,659 6,233,477
Income taxes payable...................................... 84,942 --
Accrued expenses (Note 5)................................. 5,721,827 7,572,929
Payable to Health Insurance Program....................... 661,248 --
Current debt maturities................................... 519,600 --
----------- -----------
TOTAL CURRENT LIABILITIES.......................... 14,952,081 15,553,799
Other liabilities......................................... 724,511 355,803
Long-term debt, net of current debt maturities............ 3,056,714 --
Deferred income taxes..................................... 1,322,635 987,704
----------- -----------
TOTAL LIABILITIES.................................. 20,055,941 16,897,306
----------- -----------
Commitments and contingencies (Note 9)
Minority interest........................................... 8,755 148,648
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, authorized 500,000
shares; none issued or outstanding...................... -- --
Common stock, $.01 par value, 10,000,000 and 40,000,000
shares authorized at August 31, 1996 and 1997,
respectively; 6,702,305 shares issued and 6,696,849
shares outstanding at August 31, 1996 and 6,966,762
shares issued and outstanding at August 31, 1997........ 67,023 69,668
Additional paid-in capital................................ 16,046,163 16,739,425
Retained earnings......................................... 9,066,399 14,873,360
Deferred compensation..................................... (25,000) --
Treasury stock, at cost................................... (5,281) --
----------- -----------
25,149,304 31,682,453
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $45,214,000 $48,728,407
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 60
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Contract management revenue....................... $68,720,645 $95,244,454 $102,263,283
Other............................................. 634,238 994,512 7,003,512
----------- ----------- ------------
Total revenues............................ 69,354,883 96,238,966 109,266,795
----------- ----------- ------------
EXPENSES:
Salaries and benefits............................. 40,083,239 55,809,614 60,048,345
Purchased services................................ 10,794,068 13,880,426 16,466,115
Provision for bad debts........................... 1,680,396 1,435,049 3,033,693
Other............................................. 9,188,828 11,848,384 12,795,910
Depreciation and amortization..................... 1,132,604 1,811,790 2,201,450
Merger expenses (Note 3).......................... -- -- 3,527,671
----------- ----------- ------------
Operating expenses................................ 62,879,135 84,785,263 98,073,184
----------- ----------- ------------
Operating Income.................................... 6,475,748 11,453,703 11,193,611
----------- ----------- ------------
Other income (expense)
Interest expense -- related party................. (1,190,680) (24,298) --
Interest expense -- other......................... (221,439) (395,123) (402,003)
Interest income and other......................... 409,047 353,231 523,877
Loss on sale of equipment......................... -- -- (1,888)
----------- ----------- ------------
Income before income taxes.......................... 5,472,676 11,387,513 11,313,597
Income tax expense.................................. 1,694,534 4,609,360 4,517,688
----------- ----------- ------------
Income before equity in net earnings of Horizon LLC
and minority interest............................. 3,778,142 6,778,153 6,795,909
Equity in net earnings of Horizon LLC............... 1,567,720 -- --
Minority interest................................... -- (2,397) (139,893)
----------- ----------- ------------
Net income.......................................... $ 5,345,862 $ 6,775,756 $ 6,656,016
=========== =========== ============
Earnings per common share:
Net income per common share....................... $ 0.85 $ 0.86 $ 0.83
=========== =========== ============
Weighted average common shares and common equivalent
shares outstanding................................ 6,307,633 7,872,251 8,061,879
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 61
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS DEFERRED TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION STOCK, AT COST TOTAL
--------- ------- ----------- ----------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1994........ 3,565,680 $35,657 $ 1,586,359 $(3,055,219) $ -- $ -- $(1,433,203)
Net income...................... -- -- -- 5,345,862 -- -- 5,345,862
Initial public offering......... 2,100,000 21,000 11,978,528 -- -- -- 11,999,528
Issuance of shares in
conjunction with purchase of
the net assets of NMMS........ 530,419 5,304 883,700 -- -- -- 889,004
Issuance of warrants in
conjunction with purchase..... -- -- 389,350 -- -- -- 389,350
Sale of common shares........... 5,456 55 24,610 -- -- -- 24,665
Acquisition of treasury
shares........................ (5,456) -- -- -- -- (5,281) (5,281)
Notes receivable for purchase of
shares........................ -- -- (75,000) -- -- -- (75,000)
Deferred compensation for
issuance of stock............. -- -- -- -- (75,000) -- (75,000)
Amortization of deferred
compensation.................. -- -- -- -- 25,000 -- 25,000
Tax benefit associated with
stock options................. -- -- 2,313 -- -- -- 2,313
Exercise of stock options....... 118,575 1,186 120,249 -- -- -- 121,435
Sale of rights to purchase
options....................... -- -- 16,750 -- -- -- 16,750
--------- ------- ----------- ----------- -------- ------- -----------
Balance at August 31, 1995........ 6,314,674 63,202 14,926,859 2,290,643 (50,000) (5,281) 17,225,423
Net income...................... -- -- -- 6,775,756 -- -- 6,775,756
Sale of common shares........... 55,298 553 59,446 -- -- -- 59,999
Issuance of shares in
conjunction with purchase of
the Parkside Company.......... 192,437 1,924 868,076 -- -- -- 870,000
Payments on notes receivable.... -- -- 50,000 -- -- -- 50,000
Amortization of deferred
compensation.................. -- -- -- -- 25,000 -- 25,000
Tax benefit associated with
stock options................. -- -- 37,717 -- -- -- 37,717
Exercise of stock options....... 134,440 1,344 104,065 -- -- -- 105,409
--------- ------- ----------- ----------- -------- ------- -----------
Balance at August 31, 1996........ 6,696,849 67,023 16,046,163 9,066,399 (25,000) (5,281) 25,149,304
Net income...................... -- -- -- 6,656,016 -- -- 6,656,016
Adjustment applicable to
transition period (Note 3).... -- -- -- (849,055) -- -- (849,055)
Amortization of deferred
compensation.................. -- -- -- -- 25,000 -- 25,000
Retirement of treasury shares... -- (55) (5,226) -- -- 5,281 --
Payment on note receivable...... -- -- 25,000 -- -- -- 25,000
Exercise of warrants............ 179,178 1,793 (1,793) -- -- -- --
Tax benefit associated with
stock options................. -- -- 511,949 -- -- -- 511,949
Exercise of stock options....... 90,735 907 163,332 -- -- -- 164,239
--------- ------- ----------- ----------- -------- ------- -----------
Balance at August 31, 1997........ 6,966,762 $69,668 $16,739,425 $14,873,360 $ -- $ -- $31,682,453
========= ======= =========== =========== ======== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 62
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income................................................ $ 5,345,862 $ 6,775,756 $ 6,656,016
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 1,132,604 1,811,790 2,201,450
Loss on sale of equipment............................... -- -- 1,888
Minority interest....................................... -- 2,397 139,893
Horizon LLC investment income........................... (1,567,720) -- --
Deferred income taxes................................... 84,230 9,909 94,139
Non-cash expenses....................................... 535,000 25,000 25,000
Changes in net assets and liabilities:
Decrease (increase) in restricted cash.................. (582,689) (205,857) 218,606
Decrease (increase) in accounts receivable.............. 4,832,797 (1,307,286) 1,143,322
Decrease (increase) in other receivables................ (118,035) 285,346 264,589
Decrease (increase) in prepaid expenses and supplies.... 483,751 (80,875) (599,553)
Decrease (increase) in other assets..................... 171,329 (127,188) (144,101)
Increase in accounts payable, accrued expenses, and
other liabilities..................................... 1,922,276 1,450,473 1,031,381
Increase (decrease) in income taxes payable............. -- 75,344 (272,649)
Decrease in payable to health insurance program......... (1,126,208) -- (661,248)
Increase (decrease) in other liabilities................ 243,423 151,872 (749,532)
------------ ----------- -----------
Net cash provided by operating activities................... 11,356,620 8,866,681 9,349,201
------------ ----------- -----------
Investing Activities:
Purchase of property and equipment........................ (621,201) (393,703) (1,412,441)
Proceeds from sale of equipment........................... -- -- 13,485
Payment for purchase of minority interest in Horizon LLC,
net of cash acquired.................................... (9,196,249) -- --
Cash contributed to Horizon LLC........................... (620,000) -- --
Increase in goodwill and management contracts............. (37,916) (123,222) --
Payment for purchase of the Parkside Company, net of cash
acquired................................................ -- (2,600,000) --
Payment for purchase of net assets of National Medical
Management Services..................................... (3,946,849) (302,817) --
Payment for purchase of Professional Psychological
Services, Inc., net of cash acquired.................... -- (786,767) (1,898,230)
Payment for purchase of Clay Care, Inc., net of cash
acquired................................................ -- -- (913,634)
Payment for purchase of Geriatric Medical Care, Inc., net
of cash acquired........................................ -- -- (4,577,970)
------------ ----------- -----------
Net cash used in investing activities....................... (14,422,215) (4,206,509) (8,788,790)
------------ ----------- -----------
Financing activities:
Payments on long-term debt................................ (11,931,242) (3,108,047) (4,114,862)
Payment on notes receivable for purchase of common
stock................................................... -- 50,000 25,000
Proceeds from long term borrowings........................ 3,203,000 3,291,820 --
Net proceeds from issuance of common stock................ 12,879,351 165,408 164,239
Sale of rights to purchase options........................ 16,750 -- --
Tax benefit related to stock option exercise.............. 2,313 37,717 511,949
------------ ----------- -----------
Net cash provided by (used in) financing activities......... 4,170,172 436,898 (3,413,674)
------------ ----------- -----------
Change in cash during transition period..................... -- -- 23,465
Net Increase (decrease) in cash and short term
investments............................................... 1,104,577 5,097,070 (2,829,798)
Cash and short-term investments at beginning of year........ 2,144,726 3,249,303 8,346,373
------------ ----------- -----------
Cash and short-term investments at end of year.............. $ 3,249,303 $ 8,346,373 $ 5,516,575
============ =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest................................................ $ 1,412,119 $ 419,421 $ 402,003
============ =========== ===========
Income taxes............................................ $ 2,188,363 $ 4,930,499 $ 4,584,015
============ =========== ===========
Supplemental disclosure on non-cash investing activities:
Purchase of minority interest in Horizon LLC and the net
assets of National Medical Management Services during
fiscal year 1995; the acquisition of 80% of the common
stock of Professional Psychological Services, Inc. and
100% of the common stock of the Parkside Company during
fiscal year 1996; and the acquisition of Geriatric
Medical Care, Inc., Clay Care, Inc., and additional
payments for the acquisition of 80% of the common stock
of Professional Psychological Services, Inc. during
fiscal year 1997.
Fair value of assets acquired........................... $ 24,038,476 $ 5,815,535 $ 9,004,431
Cash paid............................................... (13,630,316) (3,825,000) (7,524,968)
Conversion of equity investment......................... (4,351,737) -- --
Common stock exchanged.................................. -- (870,000) --
------------ ----------- -----------
Liabilities assumed..................................... $ 6,056,423 $ 1,120,535 $ 1,479,463
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 63
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Horizon Health Corporation (the "Company"), formerly known as Horizon
Mental Health Management, Inc., is a contract manager of clinical and related
services, primarily of mental health programs, offered by general acute care
hospitals in the United States. These management contracts are generally for
terms ranging from three to five years, the majority of which have automatic
renewal provisions. The Company currently has offices in the Dallas, Texas; Los
Angeles, California; Chicago, Illinois; Tampa, Florida; and Boston,
Massachusetts metropolitan areas. The Company's National Support Center is in
Lewisville, Texas.
The Company was formed in July 1989 for the purpose of acquiring all the
assets of two companies. One of these companies, 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 a
freestanding psychiatric hospital in California. Effective March 1, 1990, the
assets constituting the contract management business and the psychiatric
hospital of the two companies were transferred to the Company. On January 3,
1995, the Company acquired the net assets and operations of National Medical
Management Services, a division of National Medical Enterprises, Inc.
On March 13, 1995, the Company's initial public offering of 3,120,000
shares of common stock at an offering price to the public of $6.67 per share was
declared effective by the Securities and Exchange Commission. Of the 3,120,000
shares of common stock offered, 1,981,850 shares were offered by the Company and
1,138,150 shares were offered by a stockholder of the Company. On March 20,
1995, the Company completed the initial public offering, issued the common stock
and received net proceeds of $11,324,141 (after deducting underwriting discounts
and IPO costs of $1,888,189).
On April 11, 1995, the Company sold an additional 118,150 shares of common
stock at the initial offering price of $6.67 per share pursuant to the exercise
of the overallotment option granted to the underwriters in the initial public
offering. Net proceeds of $675,387 (after deducting underwriting discounts and
IPO costs of $112,283) were received by the Company.
On April 1, 1996, the Company acquired the Parkside Company, ("Parkside"),
a contract manager of mental health services for acute care hospitals. Parkside
has been consolidated with the Company as of April 1, 1996. On July 31, 1996,
the Company acquired eighty percent (80%) of the outstanding common stock of
Florida Professional Psychological Services, Inc., also known as Professional
Psychological Services, Inc. ("PPS") and PPS has been consolidated with the
Company as of August 1, 1996. Effective March 15, 1997, the Company purchased
all of the outstanding capital stock of Geriatric Medical Care, Inc., a
Tennessee corporation ("Geriatric"), and Clay Care, Inc., a Texas corporation
("CCI"), and they have been consolidated with the Company as of March 15, 1997
(see Note 3).
On August 11, 1997, the Company exchanged 1,400,000 shares of its common
stock for all of the outstanding common stock of Specialty Healthcare
Management, Inc. ("Specialty"). Specialty was a privately held contract manager
of mental health and physical rehabilitation treatment programs for general
acute care hospitals. The exchange has been accounted for under the pooling of
interests method. Accordingly, all financial statements presented have been
restated to include the results of Specialty (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments include
securities with original maturities of three months or less when purchased.
RESTRICTED CASH: Restricted cash represents amounts set aside for the
Supplemental Executive Retirement Plan (SERP) and Deferred Compensation Plan of
Specialty Healthcare Management, Inc., which were terminated in connection with
the pooling of interests transaction.
F-7
<PAGE> 64
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation expense is recorded on the straight-line basis over the assets'
estimated useful lives. The useful lives of furniture and fixtures and computer
equipment are estimated to be five years and three years, respectively. Building
improvements are recorded at cost and amortized over the estimated useful lives
of the improvements or the terms of the underlying lease, whichever is shorter.
Routine maintenance, repair items, and customer facility and site improvements
are charged to current operations.
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.
LONG-LIVED AND INTANGIBLE ASSETS: The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-lived Assets and Assets to be Disposed of". Under SFAS 121, the Company
recognizes impairment losses on property and equipment and intangible assets
whenever events or changes in circumstances indicate that the carrying amount of
long-lived assets, on an individual property basis, may not be recoverable
through undiscounted future cash flows. Such losses are determined using
estimated fair value or by comparing the sum of the expected future discounted
net cash flows to the carrying amount of the asset. Impairment losses are
recognized in operating income as they are determined.
REVENUE: Contract management revenue is reported at the estimated net
realizable amounts from contracted hospitals for contract management services
rendered. Adjustments are accrued on an estimated basis in the period the
related services are rendered and adjusted in future periods as final settlement
is determined. Contract management revenue is based on a per diem calculation
using patients per day, a fixed fee, admissions, discharges, direct expenses, or
any combination of the preceding depending on a specific contract.
Other revenue is primarily generated by capitated managed behavioral health
and employee assistance programs. The fees are defined by contract and are
calculated on a per-member/per-month fee, fixed fee and/or a fee for service
basis. Other revenue is accrued in the same manner as contract management
revenue.
Some management contracts include a clause which states that the Company
will indemnify the hospital for any third-party payor denials, including
Medicare. At the time the charges are denied, an allowance for 100% of the
disputed amount is recorded by the Company. Management believes it has
adequately provided for any potential adjustments that may result from final
settlement of these denials.
The customers of the Company are not concentrated in any specific
geographic region, but are concentrated in the health care industry. At August
31, 1997, the Company had management contracts with 39 hospitals directly or
indirectly owned by Columbia/HCA Healthcare Corporation ("Columbia/HCA"), of
which 36 had programs in operation. These 36 contracts accounted for 19.1% of
the Company's net revenues for the year ended August 31, 1997. In the aggregate,
including terminated contracts, revenues generated by hospitals directly or
indirectly owned by Columbia/HCA accounted for 15.6%, 20.3%, and 20.3% of the
Company's net revenues for the years ended August 31, 1995, 1996, and 1997. Of
the 39 Columbia/HCA contracts at August 31, 1997, 14 contracts contain a
provision limiting the number of contracts which Columbia/HCA can cancel without
cause to 33.3% during any calendar year. The termination or non-renewal of all
or a substantial part of the management contracts with hospitals owned by
Columbia/HCA could have a material adverse effect on the Company's business,
financial condition or results of operations. In recent months, Columbia/HCA and
its business practices have been under intense widespread review by governmental
agencies. Because the Company has a significant number of management contracts
with Columbia/HCA which could also be subject to review, the governmental
scrutiny of Columbia/HCA could directly or indirectly affect the Company or its
relationship with Columbia/HCA.
F-8
<PAGE> 65
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At August 31, 1996 and 1997, accounts receivable from hospitals directly or
indirectly owned by Columbia/HCA were approximately $1,966,000 and $2,089,000,
respectively. The Company generally does not require collateral to support
outstanding accounts receivable.
INCOME TAXES: The Company has adopted SFAS No. 109, "Accounting for Income
Taxes." SFAS 109 generally requires an asset and liability approach and requires
recognition of deferred tax assets and liabilities resulting from differing book
and tax bases of assets and liabilities. It requires that deferred tax assets
and liabilities be determined using the tax rate expected to apply to taxable
income in the periods in which the deferred tax asset or liability is expected
to be realized or settled. Under this method, future financial results will be
impacted by the effect of changes in income tax rates on cumulative deferred
income tax balances.
NET INCOME PER SHARE: Net income per common share is calculated using the
weighted average number of common shares and common equivalent shares
outstanding during the respective periods. Dilutive common equivalents consist
of stock options and warrants calculated using the treasury stock method.
Pursuant to the requirements of the Securities and Exchange Commission, common
shares and common equivalent shares issued at prices below the public offering
price during the twelve months immediately preceding the date of the initial
filing of the Registration Statement have been included in the calculation of
common shares and common equivalent shares, using the treasury stock method, as
if they were outstanding for all periods presented. All shares and per share
data, except par value per share, have been retroactively adjusted to reflect a
three for two stock split effected as a 50% stock dividend by the Company.
SALE OF RIGHTS TO PURCHASE OPTIONS: During the year ended August 31, 1995,
the Company issued rights to purchase nonstatutory stock options to purchase
168,000 shares of common stock. Certain of these options required payment of
$0.67 per option by the recipient prior to issuance of the option. The Company
recognized these payments as an addition to Additional Paid-in Capital.
HEALTH INSURANCE PROGRAM REIMBURSEMENT: Services were provided by the
Company to patients who are eligible for coverage under Title XVIII (Medicare)
Health Insurance Programs. Amounts received are generally less than the standard
billing rates of the hospital and receivables are recorded in the consolidated
balance sheet at the estimated amount to be reimbursed. Amounts due to/from
Health Insurance Programs under Medicare are subject to final determination
through an audit by a fiscal intermediary. All amounts due were finalized in
fiscal 1997.
FINANCIAL INSTRUMENTS: Financial instruments consist of cash and short-term
investments, restricted cash, accounts receivable, current liabilities and
long-term debt obligations. The carrying amounts reported in the balance sheets
for these financial instruments approximate fair value.
USE OF ESTIMATES: The Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
NEW ACCOUNTING STANDARDS: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which establishes new standards for computing and
presenting earnings per share. SFAS No. 128 is effective for the Company for
periods ending after December 15, 1997, and requires restatement of all
prior-period earnings per share amounts. If the Company had computed net
earnings per share in accordance with the provisions of SFAS No. 128, the basic
and diluted earnings per share for the three years ended August 31, 1995, 1996
and 1997 would have been $1.04 and $0.85, $1.03 and $0.86, and $0.99 and $0.83,
respectively (unaudited).
F-9
<PAGE> 66
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and its
components. SFAS No. 130 is effective for the Company for fiscal years beginning
after December 15, 1997, and requires reclassification of financial statements
in earlier periods for comparative purposes. Adoption of this Statement is not
expected to have a material impact on the presentation of the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information about operating segments in
interim and annual financial statements. SFAS No. 131 is effective for the
Company for fiscal years beginning after December 15, 1997, and requires
comparative information for earlier years to be restated. Management has not yet
completed its assessment of how this Statement will impact segment disclosures.
3. ACQUISITIONS
Specialty Healthcare Management, Inc.
On August 11, 1997, the Company exchanged 1,400,000 shares of its common
stock for all of the outstanding common stock of Specialty Healthcare
Management, Inc. The exchange has been accounted for under the pooling of
interests method. Accordingly, all financial statements presented have been
restated to include the results of Specialty. Prior to the exchange Specialty
prepared its financial statements on a December 31 calendar year end which has
subsequently been changed to conform to the Company's fiscal year end.
For purposes of recording the pooling of interests combination, Specialty's
financial statements for the twelve months ended December 31, 1995 and 1996 were
combined with Horizon Health Corporation's ("Horizon") financial statements for
the twelve months ended August 31, 1995 and 1996. Specialty's results of
operations for the twelve months ended August 31, 1997 have been combined with
Horizon's results of operations for the same period. The operations of Specialty
for the four months ended December 31, 1996, resulting in net revenues and net
income of $10.8 million and $849,055, respectively, have been included in the
statement of income for both the year ended August 31, 1996 and 1997. As a
result, an adjustment was made to stockholders' equity in the consolidated
financial statements of the Company to eliminate the effect of including
Specialty's net income for the four months in both periods. Additionally, the
consolidated statement of cash flows was adjusted to reflect the cash flows of
Specialty for the four months ended December 31, 1996.
Combined and separate results of Horizon and Specialty during periods
preceding the exchange were as follows (in thousands):
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS NINE MONTHS
ENDED ENDED ENDED
AUGUST 31, 1995 AUGUST 31, 1996 MAY 31, 1997
--------------- --------------- ------------
(UNAUDITED)
------------
<S> <C> <C> <C>
Revenues:
Horizon................................. $29,350 $62,445 $57,894
Specialty............................... 40,005(a) 33,794(b) 23,286
Combined................................ 69,355 96,239 81,180
Net Income:
Horizon................................. $ 3,946 $ 5,564 $ 5,483
Specialty............................... 1,400(a) 1,212(b) 871
Combined................................ 5,346 6,776 6,354
</TABLE>
- ---------------
(a) For the fiscal year ended December 31, 1995.
(b) For the fiscal year ended December 31, 1996.
F-10
<PAGE> 67
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Merger expenses of $3,527,671, before a related tax benefit of $1,340,515,
include legal, investment banking and accounting fees.
Geriatric Medical Care, Inc.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation, and
Geriatric has been consolidated with the Company as of March 15, 1997. The
Company accounted for the acquisition of Geriatric by the purchase method as
required by generally accepted accounting principles. 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 18
management contract locations, of which three 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 the Company, included retiring
essentially all of Geriatric's outstanding debt. The final purchase price
payment of $270,000 was made on April 16, 1997. The purchase price exceeded the
fair value of Geriatric's tangible net assets by $5,005,986, of which $4,498,038
is recorded as goodwill and $507,948 as management contracts. Tangible assets
acquired and liabilities assumed totaled $1,042,683 and $1,421,931,
respectively. Pro forma financial data is not presented because the impact of
this acquisition is not material to the Company's results of operations for any
period presented.
Clay Care, Inc.
Also effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Clay Care, Inc., a Texas corporation, and CCI has been
consolidated with the Company as of March 15, 1997. The Company accounted for
the acquisition of CCI by the purchase method as required by generally accepted
accounting principles. 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 the Company. The remaining $525,000 of the total purchase price was paid
by the Company in April 1997 and June 1997. The purchase price exceeded the fair
value of CCI's tangible net assets by $855,738, of which $714,672 is recorded as
goodwill and $141,066 as management contracts. Tangible assets acquired and
liabilities assumed totaled $201,794 and $57,532, respectively. Pro forma
financial data is not presented because the impact of this acquisition is not
material to the Company's results of operations for any period presented.
Investment in PPS
On July 31, 1996, the Company acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services, Inc.,
also known as Professional Psychological Services, Inc., and PPS has been
consolidated with the Company as of August 1, 1996. The Company 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 final purchase price of $3,324,310 was based primarily on a
multiple of the 1996 pre-tax income of PPS. The purchase price exceeded the fair
value of PPS' net assets by $3,298,885 which is recorded as goodwill. Assets
acquired and liabilities assumed totaled $540,960 and $515,535, respectively.
Cash payments for the purchase of PPS, net of cash acquired, were $786,767 and
$1,898,230 during 1996 and 1997, respectively. The final payment of $200,985 was
made on September 30, 1997.
In addition, the Company 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 shareholders of PPS, also obtained the right to
put to the Company 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.
F-11
<PAGE> 68
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the revenue of PPS for fiscal years 1995 and
1996. PPS's effect on the Company's net income and earnings per share has been
deemed negligible for the periods and not presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AUGUST 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Historical Revenues (unaudited)............................. $4,475,000 $5,050,000
</TABLE>
For the year ended August 31, 1997, PPS generated $5,682,323 in gross
revenues, and net income of $699,467.
Parkside Company
Effective April 1, 1996, the Company purchased all of the outstanding
capital stock of the Parkside Company, and Parkside has been consolidated with
the Company as of April 1, 1996. The Company accounted for the acquisition of
Parkside by the purchase method as required by generally accepted accounted
principles. Parkside is a contract manager of mental health services for acute
care hospitals. The purchase price of $3.5 million included approximately
$2,600,000 in cash and 192,437 shares of the Company's common stock. The
purchase price exceeded the fair value of Parkside's tangible net assets by
$3,500,000, of which $1,400,000 is recorded as goodwill and $2,100,000 as
management contracts.
National Medical Management Services
Effective January 3, 1995, the Company acquired the net assets and
operations of National Medical Management Services, a division of National
Medical Enterprises, Inc. (the "Division") and the Division has been
consolidated with the Company as of January 3, 1995 (see Note 10). The Company
accounted for the acquisition by the purchase method as required by generally
accepted accounting principles. The purchase price exceeded the fair value of
the net assets acquired by $1,120,350, of which $120,350 is recorded as goodwill
and $1,000,000 as management contacts. Tangible assets acquired and liabilities
assumed totaled $6,755,415 and $2,808,566, respectively.
4. INVESTMENT IN HORIZON LLC
On August 1, 1994 the Company signed a contract with Horizon Mental Health
Management LLC ("Horizon LLC") to have it manage all of the Company's then
existing management contract obligations for a 72.5% interest in Horizon LLC.
Prior to March 20, 1995, the remaining 27.5% interest in Horizon LLC was held by
Mental Health Management, Inc. ("MHM"). Prior to the Company's acquisition of
the minority interest of MHM in Horizon LLC, as discussed below, certain
provisions of the limited liability company agreement of Horizon LLC which
required the consent of MHM for certain transactions prevented the Company from
having the ability to control Horizon LLC under generally accepted accounting
principles, and therefore Horizon LLC was not consolidated with the Company and
the Company accounted for its investment in Horizon LLC by the equity method
through the six months ended February 28, 1995.
Upon completion of its initial public offering of common stock on March 13,
1995, the Company became contractually obligated to acquire the minority
interest of MHM in Horizon LLC. Effective March 20, 1995, $9,683,467 of the
$11,324,141 in net proceeds to the Company from its initial public offering were
used to purchase MHM's minority interest in Horizon LLC. The purchase
transaction eliminated MHM's equity interest in Horizon LLC ($2,794,715) and
recognized an increase in intangible assets based upon the value of Horizon LLC
management contracts ($2,355,000). The remaining purchase price was recorded as
goodwill ($4,533,752). As such, Horizon LLC became a wholly-owned subsidiary of
the Company. Horizon LLC has been consolidated with the Company effective March
1, 1995 through August 31, 1995. Effective September 1, 1995, Horizon LLC was
dissolved and its operations combined with the Company.
F-12
<PAGE> 69
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information for Horizon LLC is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28,
1995
------------
(UNAUDITED)
<S> <C>
Net revenues................................................ $26,869,535
Operating expenses.......................................... 23,566,024
Other income................................................ 44,507
-----------
Income before income taxes.................................. 3,348,018
Income tax expense.......................................... 30,298
-----------
Net income.................................................. $ 3,317,720
===========
</TABLE>
The Company's share of Horizon LLC's net earnings was $1,567,720 for the
six months ended February 28, 1995. Horizon LLC contract stipulated that MHM was
allocated the first $1,750,000 of Horizon LLC net earnings for the fiscal year
ending August 31, 1995.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at August 31, 1996 and 1997:
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Reserve for contract adjustments............................ $1,036,084 $1,287,664
Health insurance............................................ 396,926 936,639
Other....................................................... 4,288,817 5,348,626
---------- ----------
$5,721,827 $7,572,929
========== ==========
</TABLE>
6. LONG-TERM DEBT
At August 31, 1996 and 1997, the Company had the following long-term debt:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
1996 1997
---------- ----------
<S> <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 January 1, 1998.............. $ 637,800 $ --
Revolving line of credit, bearing interest at the Citibank
N.A. base rate plus 2% per annum, with interest payable
monthly and any outstanding borrowing due January 1,
1998...................................................... 2,938,514 --
Texas Commerce Bank -- Revolving Credit Facility............ -- --
---------- ----
3,576,314 --
---------- ----
Less current maturities..................................... (519,600) --
---------- ----
$3,056,714 $ --
========== ====
</TABLE>
During 1995, the Company entered into a credit facility with Finova Capital
Corporation ("Finova") that provided 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
F-13
<PAGE> 70
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount equal to 75% of the net amount of eligible receivables. Borrowings under
the credit facility bear interest as described 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 0.25% 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
were pledged as collateral.
On August 11, 1997, the Company paid $3,732,110 for the balance of the term
loan and line of credit plus accrued interest and executed a termination
agreement and mutual general release with Finova.
Effective September 29, 1995, the Company entered into a loan agreement
with Texas Commerce Bank (TCB) for a revolving line of credit with maximum
advance commitment of $11,000,000. As of August 31, 1997, the Company has no
borrowings outstanding against the available line of credit and has $10.1
million available for advances under the revolving credit facility.
The line of credit bears interest at (1) the lesser of the Floating Base
Rate, as defined, or (2) the lesser of the LIBOR Rate plus LIBOR Margin, as
defined. The LIBOR margin varies depending on the debt coverage ratio of the
company.
The original maturity date of this line of credit is December 15, 1998;
however, it may be extended to December 15, 2000 if certain debt coverage ratios
are met.
On October 13, 1997, the Company entered into a commitment letter with
Texas Commerce Bank, N.A. ("TCB") and Chase Securities, Inc. ("CSI") under which
they committed to provide $20,000,000 of a proposed $50,000,000 credit facility.
The facility would consist of a $10,000,000 Revolving Credit Facility and a
$40,000,000 Advance Term Loan Facility for which CSI would act as the exclusive
agent in arranging for a syndicate of banks to participate in providing the
credit for the remainder of the facilities. The proposed terms and conditions
are normal for a credit facility of this type and size, with the transaction
expected to close by early December 1997.
7. STOCK OPTIONS
In accordance with the Company's 1989 and 1995 Stock Option Plans, as
amended, 1,931,843 shares of common stock have been reserved for grant to key
employees. Management believes the exercise prices of the options granted
approximated or exceeded the market value of the common stock at the date of the
grant. The options generally vest ratably over five years from the date of grant
and terminate 10 years from the date of grant.
On April 28, 1995 the board of directors created the 1995 Stock Option Plan
For Eligible Outside Directors for outside directors owning less than 5% of the
stock of the Company. 150,000 shares of common stock are reserved for issuance
under this plan. This plan has been amended and restated to provide for 3,000
option grants to each eligible director each time he is re-elected to the board
after having served as a director for at least one year since his initial grant
under the plan. Options vest ratably over five years from the date of grant.
The 1989 and 1995 Stock Option Plans and the 1995 Stock Option Plan For
Eligible Outside Directors are collectively referred to as "The Plans."
F-14
<PAGE> 71
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the status of the Plans:
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............ 1,411,268 $ 2.33 1,521,328 $ 4.04
Granted................................... 255,750 11.96 49,500 20.15
Exercised................................. 130,690 0.79 90,735 1.81
Expired or canceled....................... 15,000 6.40 28,250 9.72
Outstanding at end of year.................. 1,521,328 $ 4.04 1,451,843 $ 4.62
Exercisable at end of year.................. 532,452 $ 1.62 728,166 $ 1.98
Available for grant at end of year.......... 304,500 -- 283,250 --
</TABLE>
The following table summarizes information about options outstanding under
the Plans at August 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50-$4.00..................... 1,096,343 5.91 $ 2.13 701,353 $1.76
$7.4167-$9.75................... 183,750 7.89 8.97 26,813 7.75
$14.1667-$26.00................. 171,750 9.16 15.89 -- --
</TABLE>
The Company applies APB 25 in accounting for the Plans and recognizes no
compensation cost in net earnings from the grant of options as options are
granted at exercise prices equal to the current stock price. Had compensation
cost been determined under the terms of SFAS 123, the Company's pro forma 1996
and 1997 net earnings and earnings per share would have been:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Net Earnings: As reported................................... $6,775,756 $6,656,016
Pro forma (unaudited)..................................... $6,705,592 $6,549,799
Earnings per share:
As reported............................................... $ 0.86 $ 0.83
Pro forma (unaudited)..................................... $ 0.85 $ 0.81
</TABLE>
In accordance with SFAS 123, the fair value of options at date of grant was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Risk Free interest rate..................................... 6.2% 6.3%
Expected life (years)....................................... 6.6 6.6
Expected volatility......................................... 33.2% 30.3%
Expected dividend yield..................................... 0.0% 0.0%
</TABLE>
The weighted average fair value of options granted during 1996 and 1997 was
$4.43 and $7.28, respectively.
F-15
<PAGE> 72
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 1, 1996, the Company filed an S-8 registration statement which
registered 2,054,549 shares granted or eligible for granting to employees and
directors under the 1989 and 1995 stock option plans, as amended, and the
outside director stock option plan. This registration includes a separate
reoffer prospectus to allow any shares issued in the future and most previously
exercised shares under the 1989 and 1995 stock options to be traded at any time
without holding period or volume restrictions.
8. INCOME TAXES
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. Income tax expense comprised
the following components:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Year Ended August 31, 1995
Current..................................... $1,915,529 $575,863 $2,491,392
Deferred.................................... (712,978) (83,880) (796,858)
---------- -------- ----------
$1,202,551 $491,983 $1,694,534
========== ======== ==========
Year Ended August 31, 1996
Current..................................... $3,835,706 $770,743 $4,606,449
Deferred.................................... 2,606 305 2,911
---------- -------- ----------
$3,838,312 $771,048 $4,609,360
========== ======== ==========
Year Ended August 31, 1997
Current..................................... $3,957,913 $465,636 $4,423,549
Deferred.................................... 84,230 9,909 94,139
---------- -------- ----------
$4,042,143 $475,545 $4,517,688
========== ======== ==========
</TABLE>
The components of the net deferred tax asset at August 31, 1996 and 1997
were obtained using the liability method in accordance with SFAS No. 109 and are
as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Management contracts.................................... $(1,613,132) $(1,377,276)
Goodwill................................................ (198,761) (463,159)
----------- -----------
Deferred tax liabilities................................ (1,811,893) (1,840,435)
----------- -----------
Accounts receivable..................................... 1,377,273 693,562
Vacation accruals....................................... 375,532 595,947
Miscellaneous accruals.................................. 422,678 398,004
Fixed assets/intangibles................................ 188,600 332,015
Net operating loss carryforward......................... 241,757 520,715
----------- -----------
Deferred tax assets..................................... 2,605,840 2,540,243
----------- -----------
Net deferred tax asset.................................. $ 793,947 $ 699,808
=========== ===========
</TABLE>
At August 31, 1997, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately $1,400,000. These
carryforwards may be utilized to offset future years' income and will begin to
expire during 2006 if unused prior to that date. These carryforwards are subject
to annual utilization limits in accordance with IRC Section 382.
F-16
<PAGE> 73
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes at the U.S. federal
income tax rate to the income taxes reflected in the Consolidated Statements of
Income:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal income taxes based on 34% of book income
(including equity in net earnings of Horizon
LLC)............................................. $2,393,734 $3,871,753 $3,846,623
Meals and entertainment, goodwill amortization and
other permanent adjustments...................... 153,712 249,236 198,464
Change in valuation allowance...................... (1,389,299) -- --
State income taxes and other adjustments........... 536,387 488,371 472,601
---------- ---------- ----------
$1,694,534 $4,609,360 $4,517,688
========== ========== ==========
</TABLE>
The change in the deferred tax asset valuation allowance is primarily due
to the utilization of net operating loss carryforwards in the year ended August
31, 1995.
9. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under operating
leases. The following is a schedule of minimum rental payments under these
leases which expire at various dates:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
<S> <C>
1998........................................ $1,107,245
1999........................................ 904,595
2000........................................ 696,781
2001........................................ 576,546
2002........................................ 182,838
----------
$3,468,005
==========
</TABLE>
Rent expense for the years ended August 31, 1995, 1996, and 1997 totaled
$857,794, $846,931, and $980,573, respectively.
The Company leases a building it occupies as its executive offices and
National Support Center in Lewisville, Texas. In connection with this lease
transaction, the Company guaranteed a loan of approximately $900,000 by a
financial institution to the building owner. The Company also agreed to purchase
the leased building for approximately $4.5 million at the end of the lease term
if it is not sold to a third party, or the Company does not extend its lease.
On July 31, 1996, the Company acquired eighty-percent (80%) of the
outstanding common stock of Florida Professional Psychological Services, Inc.
The owners of the minority interest (20%) have an option to put to the Company
their remaining interest through January 1998, 1999, or 2000, based upon a
multiple of pre-tax earnings of the preceding fiscal year.
The Company is insured for professional and general liability on a
claims-made policy, with additional tail coverage being obtained when necessary.
Management is unaware of any claims against the Company that would cause the
final expenses for professional and general liability to vary materially from
amounts provided.
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-17
<PAGE> 74
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK AND WARRANTS
As part of the purchase of National Medical Management Services, effective
January 3, 1995, the Company issued warrants to National Medical Enterprises,
Inc. to purchase 171,793 shares of common stock at an exercise price of
$0.000558 per share. The warrants were exercisable at any time subsequent to
January 3, 1997 and the exercise price and number of shares were adjustable to
maintain proportional ownership of the Company. The value of the warrants at the
date of issuance was determined to be $389,350. The remaining warrants of
179,178 at August 11, 1997 were exercised in connection with the Specialty
exchange (see note 3). 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 in the statement of
changes in stockholders' equity (deficit).
The Board of Directors of the Company approved a three-for-two stock split
effected in the form of a 50% stock dividend, pursuant to which one additional
share of Common Stock of the Company was issued on January 31, 1997 for every
two shares of Common Stock held by stockholders of record at the close of
business on January 22, 1997. As a result of such stock split/dividend, a total
of $18,253 originally recorded as additional paid in capital was reclassified as
common stock. Such stock split/dividend has been retroactively reflected in the
consolidated financial statements included in this report. Upon effecting the
stock split/dividend, the stock options and their related exercise prices were
adjusted proportionately.
In February 1997, the Certificate of Incorporation, as amended, of the
Company was amended to increase the number of authorized shares of Common Stock,
$.01 par value per share, of the Company from 10,000,000 shares to 40,000,000
shares.
In February 1997, the Company entered into a Rights Agreement pursuant to
which it approved the distribution of one Common Stock purchase right,
exercisable under certain conditions, for each outstanding share of Common Stock
of the Company.
11. UNAUDITED PRO FORMA SUPPLEMENTAL INFORMATION
The following unaudited pro forma information for the year ended August 31,
1995 has been prepared as if the issuance of 1,981,849 shares of common stock
from the initial public offering, and the purchase of the minority interest in
Horizon LLC at a price equal to 1,561,850 times the initial public offering
price per share had occurred on September 1, 1994.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AUGUST 31,
1995
------------------
(UNAUDITED)
<S> <C>
Net revenue................................................. $96,082,718
===========
Net income.................................................. $ 5,182,890
===========
Share data:
Pro Forma earnings per share.............................. $ 0.69
===========
Weighted average shares outstanding....................... 7,474,002
===========
</TABLE>
F-18
<PAGE> 75
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal
1996 and 1997:
<TABLE>
<CAPTION>
OPERATING NET EARNINGS
REVENUES INCOME INCOME PER SHARE
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Quarter Ended:
November 30, 1995................ $22,278,883 $2,432,133 $1,467,121 $0.19
February 29, 1996................ 24,109,706 2,419,307 1,419,706 0.18
May 31, 1996..................... 24,846,620 3,475,500 2,028,465 0.25
August 31, 1996.................. 25,003,757 3,126,763 1,860,464 0.23
Quarter Ended:
November 30, 1996................ $26,879,954 $4,058,712 $2,382,979 $0.30
February 28, 1997................ 26,363,617 3,300,063 2,004,618 0.25
May 31, 1997..................... 27,936,645 3,284,349 1,966,131 0.24
August 31, 1997.................. 28,086,580 550,487 302,288 0.04
</TABLE>
13. RETIREMENT PLAN
The Company sponsors a 401(k) plan that covers substantially all eligible
employees. The Company can elect to make matching contributions at its
discretion. For the years ended August 31, 1995, 1996 and 1997 the Company
recognized matching contributions of approximately $481,000, $350,000, and
$534,000 respectively.
14. MOUNTAIN CREST HOSPITAL
A subsidiary of the Company leased and began operating Mountain Crest
Hospital ("MCH") in December 1990. In July 1994, the Company subleased MCH to
MHM for a period commencing July 31, 1994 through December 31, 2000. The
Company, which had previously guaranteed the obligations under the primary
lease, has provided the substitute guaranty of MHM to the lessor. Management
believes it has satisfied the conditions in the primary lease for release of its
guaranty. The sublease requires monthly rental payments to the Company of 50% of
operating cash flow, as defined, subject to a minimum monthly payment of
$20,000, not to exceed $1,200,000 in the aggregate over the sublease life which
expires upon expiration of the primary lease on December 31, 2000. As of August
31, 1997, the Company has received $843,686 of the $1,200,000 resulting in
future receipts of $356,314 to be received on or before February 1, 1999
assuming minimum monthly payments of $20,000.
15. SUBSEQUENT EVENTS (UNAUDITED)
On October 20, 1997, the Company entered into a definitive agreement to
acquire all of the outstanding capital stock of Acorn Behavioral Healthcare
Management Corporation ("Acorn"), for approximately $12.7 million in cash (the
"Acorn Acquisition"). Acorn provides employee assistance programs and other
related services to self-insured employers. The Company presently expects to
close the Acorn Acquisition on October 31, 1997.
On October 16, 1997, the Company increased its existing revolving line of
credit with TCB from $11.0 million to $14.0 million.
F-19
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Acorn Behavioral Healthcare Management Corporation
In our opinion, the accompanying balance sheet and the related statement of
income, of changes in stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of Acorn Behavioral Healthcare
Management Corporation (the "Company") at August 31, 1997, and the results of
its operations and its cash flows for the year ended August 31, 1997, 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 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
October 2, 1997
F-20
<PAGE> 77
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
BALANCE SHEET
AUGUST 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and short-term investments........................... $1,446,603
Accounts receivable....................................... 185,234
Prepaid expenses.......................................... 19,463
Other current assets...................................... 1,725
----------
Total current assets.............................. 1,653,025
----------
Equipment:
Equipment and furniture................................... 489,684
Automobiles............................................... 79,976
Leasehold improvements.................................... 36,681
----------
606,341
Less accumulated depreciation............................... 494,483
----------
111,858
----------
Total assets...................................... $1,764,883
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term capital lease obligations.... $ 20,978
Accounts payable and accrued expenses, including amounts
payable to a related party of $9,550................... 18,774
Accrued claims payable.................................... 123,135
----------
Total current liabilities......................... 162,887
Long-term capital lease obligation -- net of current
portion................................................... 26,216
----------
Total liabilities................................. 189,103
Commitments and contingencies
Stockholders' equity:
Common stock, $10.00 par value, 1,000 shares authorized;
100 shares issued and outstanding...................... 1,000
Retained earnings......................................... 1,574,780
----------
1,575,780
----------
Total liabilities and stockholders' equity........ $1,764,883
==========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 78
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
STATEMENT OF INCOME
FOR THE YEAR ENDED AUGUST 31, 1997
<TABLE>
<S> <C>
Revenues:
Net patient service revenues.............................. $7,045,604
Expenses:
Salaries and benefits..................................... 3,597,746
Purchased services........................................ 1,723,954
Depreciation and amortization............................. 57,656
General and administrative................................ 1,034,918
----------
Operating expenses.......................................... 6,414,274
----------
Operating income............................................ 631,330
Interest income............................................. 25,734
----------
Net income.................................................. $ 657,064
==========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 79
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AUGUST 31, 1997
<TABLE>
<CAPTION>
COMMON SHARES
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Balance at August 31, 1996....................... 100 $1,000 $1,039,019 $1,040,019
Net income..................................... -- -- 657,064 657,064
Distribution to stockholder.................... -- -- (121,303) (121,303)
----- ------ ---------- ----------
Balance at August 31, 1997....................... 1,000 $1,000 $1,574,780 $1,575,780
===== ====== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 80
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 657,064
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 57,656
Changes in net assets and liabilities:
Increase in accounts receivable........................ (5,272)
Decrease in prepaid expenses........................... 14,107
Decrease in other assets............................... 5,000
Increase in accounts payable and accrued expenses...... 4,634
Increase in claims payable............................. 17,076
----------
Cash flows provided by operating activities................. 750,265
----------
Cash flows from investing activities:
Purchase of equipment..................................... (9,539)
----------
Cash flows used in investing activities..................... (9,539)
----------
Cash flows from financing activities:
Payments on debt.......................................... (8,131)
Distribution to stockholder............................... (121,303)
----------
Cash flows used in financing activities..................... (129,434)
----------
Net increase in cash and short-term investments............. 611,292
Cash and short-term investments at beginning of year........ 835,311
----------
Cash and short-term investments at end of year.............. $1,446,603
==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $ 2,831
==========
Supplemental disclosure of noncash investing activities:
Capital lease obligations assumed in connection with
equipment purchase..................................... $ 55,411
==========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 81
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
1. ORGANIZATION
Acorn Behavioral Healthcare Management Corporation (the "Company") provides
behavioral healthcare management services to self-insured health plans for
corporate clients. The clients of the Company are widely diversified, both
geographically and in type of business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Short-Term Investments: Cash and Short-Term Investments include
securities with original maturities of three months or less when purchased.
Equipment: Property and equipment are recorded at cost. Depreciation
expense is recorded over the assets' estimated useful lives using an accelerated
method. The useful life of furniture and equipment and automobiles are estimated
to be five years to seven years. Routine maintenance and repair items are
charged to current operations.
Capital Leases: The Company has entered into leases for office equipment
which are accounted for as capital leases. At inception of the lease, the
equipment and the related obligations are recorded at the net present value of
future minimum lease payments, excluding executory costs, discounted using the
Company's incremental borrowing rate.
Net Patient Service Revenue: Net Patient Service Revenue is reported when
earned at the estimated net realizable amounts. Under certain managed care
contracts the Company provides diagnostic and therapeutic services for a fixed
rate per member per month fee. Revenues from the capitated fees are recorded in
the month for which the member is entitled to service (see Note 5).
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" ("SFAS 121"). Under SFAS 121,
the Company recognizes impairment losses on property and equipment whenever
events or changes in circumstances indicate that the carrying amount of
long-lived assets, on an individual property basis, may not be recoverable
through undiscounted future cash flows. Such losses are determined by comparing
the fair value of the asset to the carrying amount of the asset. Impairment
losses are recognized in operating income as they are determined. As of August
31, 1997, no impairment losses have been incurred.
Income Taxes: The Company has elected S Corporation status with the
Internal Revenue Service. As such, all income or loss of the Company accrues
directly to its stockholders. Accordingly, no provision for income taxes has
been made in these financial statements.
Use of Estimates: The Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-25
<PAGE> 82
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASES AND RELATED PARTY TRANSACTIONS
Acorn has entered into leases for office equipment accounted for as capital
leases. Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
YEAR ENDED AUGUST 31,
1998........................................................ $ 20,978
1999........................................................ 20,978
2000........................................................ 10,495
--------
52,451
Less: amount representing interest.......................... 5,257
--------
Present value of minimum lease payments..................... 47,194
Less: Current............................................... (20,978)
--------
$ 26,216
========
</TABLE>
The Company leases its office building from an affiliated entity owned by a
stockholder of the company; these leases are considered to be at fair market
value and are accounted for as operating leases. The following is a schedule of
minimum rental payments due under these leases which expire at various dates:
<TABLE>
<S> <C>
YEAR ENDED AUGUST 31:
1998........................................................ $334,540
1999........................................................ 113,300
--------
$447,840
========
</TABLE>
Rent expense for the year ended August 31, 1997 was $318,572.
4. RETIREMENT PLAN
Acorn has a defined contribution 401(k) plan for the benefit of all
eligible employees. In general, employees become eligible after one year of
full-time employment with the Company. Eligible employees may contribute up to
15% of their compensation to this plan. Employee contributions are matched at a
rate of 50% up to 10% of an employee's compensation. The Company's matching
contributions are vested at 20% per year with full vesting occurring five years
from the date of eligibility. The Company's matching contributions were $43,842
for the year ended August 31, 1997.
5. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations to provide
behavioral healthcare management services to members of a group at a fixed rate
per-member, per-month, regardless of the actual services performed, and certain
other services as defined in the contract in accordance with an agreed upon fee
schedule. During fiscal year ending August 31, 1997, approximately 90% of the
Company's net revenues were derived from capitated contracts. Revenues under
these contracts are recorded in the month fees are earned. Expenses are recorded
as incurred including an estimate of expenses incurred but not reported.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
F-26
<PAGE> 83
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
In the normal course of operations, the Company has become party to claims,
and complaints relating to general and professional services provided by the
Company. The Company has purchased general and professional liability insurance
to cover claims which may arise. Management does not believe that any of these
claims, or complaints will have a material adverse effect on the Company's
financial position, liquidity or results of operations.
6. SUBSEQUENT EVENTS (UNAUDITED)
The Company and its stockholders have entered into a definitive agreement
to sell all stock of the Company to Horizon Health Corporation.
F-27
<PAGE> 84
INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
acquisition by the Company of Acorn in a transaction to be accounted for as a
purchase. The unaudited pro forma balance sheet is based on the individual
balance sheets of the Company and Acorn appearing elsewhere in this Prospectus
and has been prepared to reflect the acquisition by the Company of Acorn as of
August 31, 1997. The unaudited pro forma statement of income is based on the
individual statements of income of the Company and Acorn appearing elsewhere in
the Prospectus, and combines the results of operation of the Company and Acorn
for the year ended August 31, 1997 as if the pending acquisition occurred on
September 1, 1996. These unaudited pro forma financial statements should be read
in conjunction with the historical financial statements and notes thereto of the
Company and Acorn included elsewhere in this Prospectus.
F-28
<PAGE> 85
HORIZON HEALTH CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
AUGUST 31, 1997
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HORIZON ACORN ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and short-term investments.... $ 5,516,575 $1,446,603 $(1,439,928)(a) $ 4,395,402
(1,127,848)(c)
Accounts receivable less allowance
for uncollectible accounts...... 11,995,254 185,234 -- 12,180,488
Income taxes receivable............ 951,256 -- -- 951,256
Receivable from employees.......... 63,303 -- -- 63,303
Prepaid expenses and other
assets.......................... 404,239 21,188 -- 425,427
Current deferred taxes............. 1,687,512 -- -- 1,687,512
----------- ---------- ----------- -----------
Total current assets....... 20,618,139 1,653,025 (2,567,776) 19,703,388
Property and equipment:
Equipment.......................... 3,694,717 606,341 (494,483)(f) 3,746,465
(60,110)(a)
Building improvements.............. 255,406 -- 255,406
----------- ---------- ----------- -----------
3,950,123 606,341 -- 4,001,871
Less accumulated depreciation...... 2,208,083 494,483 (494,483)(f) 2,208,083
----------- ---------- ----------- -----------
1,742,040 111,858 -- 1,793,788
Goodwill, net of accumulated
amortization....................... 21,553,594 -- 9,281,358(e) 30,834,952
Management contracts, net of
accumulated amortization........... 4,451,426 -- 3,370,748(e) 7,822,174
Other assets......................... 363,208 -- -- 363,208
----------- ---------- ----------- -----------
Total assets............... $48,728,407 $1,764,883 $10,024,220 $60,517,510
=========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................... $ 1,747,393 $ 18,774 $ -- $ 1,766,167
Employee compensation and
benefits........................ 6,233,477 -- -- 6,233,477
Accrued expenses................... 7,572,929 144,113 -- 7,717,042
----------- ---------- ----------- -----------
Total current
liabilities.............. 15,553,799 162,887 -- 15,716,686
Other liabilities.................... 355,803 26,216 -- 382,019
Deferred income taxes................ 987,704 -- -- 987,704
Long-term debt....................... -- 11,600,000(b) 11,600,000
----------- ---------- ----------- -----------
Total liabilities.......... 16,897,306 189,103 11,600,000 28,686,409
Minority interest.................... 148,648 -- -- 148,648
Stockholders' Equity:
Common stock....................... 69,668 1,000 (1,000)(d) 69,668
Additional paid-in-capital......... 16,739,425 -- -- 16,739,425
Retained earnings.................. 14,873,360 1,574,780 (1,439,928)(a) 14,873,360
(134,852)(d)
----------- ---------- ----------- -----------
Total stockholders'
equity................... 31,682,453 1,575,780 (1,575,780) 31,682,453
----------- ---------- ----------- -----------
Total liabilities and
stockholders' equity..... $48,728,407 $1,764,883 $10,024,220 $60,517,510
=========== ========== =========== ===========
</TABLE>
F-29
<PAGE> 86
HORIZON HEALTH CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HORIZON ACORN ADJUSTMENTS COMBINED
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Contract management revenue...... $102,263,283 $ -- $ 102,263,283
Other............................ 7,003,512 7,045,604 14,049,116
------------ ---------- ----------- -------------
Total revenue............ 109,266,795 7,045,604 116,312,399
------------ ----------
Operating expenses:
Salaries and benefits............ 60,048,345 3,597,746 $(1,473,800)(i) 62,172,291
Purchased services............... 16,466,115 1,723,954 18,190,069
Provision for bad debts.......... 3,033,693 -- 3,033,693
Depreciation and amortization.... 2,201,450 57,656 713,569(h) 2,972,675
Other............................ 12,795,910 1,034,918 13,830,828
Merger expenses.................. 3,527,671 -- 3,527,671
------------ ---------- ----------- -------------
Total operating
expenses............... 98,073,184 6,414,274 (760,231) 103,727,227
------------ ---------- ----------- -------------
Operating income................... 11,193,611 631,330 760,231 12,585,172
Interest and other income
(expense), net................... 119,986 25,734 (969,389)(g) (823,669)
------------ ---------- ----------- -------------
Net income before income taxes..... 11,313,597 657,064 (209,158) 11,761,503
Income tax expense................. 4,517,688 -- 170,204(j) 4,687,892
------------ ---------- ----------- -------------
Net income before minority
interest......................... 6,795,909 657,064 (379,362) 7,073,611
Minority interest.................. (139,893) -- (139,893)
------------ ---------- ----------- -------------
Net income......................... $ 6,656,016 $ 657,064 (379,362) $ 6,933,718
============ ========== =========== =============
Net income per common share........ $ 0.83 $ N/A $ .86
============ ==========
Weighted average common and common
equivalent shares outstanding.... 8,061,879 N/A 8,061,879
============ ========== =============
</TABLE>
F-30
<PAGE> 87
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The pro forma balance sheet and statement of income have been prepared to
reflect the pending acquisition of Acorn by the Company for an aggregate
purchase price of $12,727,848. Pro forma adjustments are made to reflect the
following:
a) An adjustment to cash, property and equipment and retained earnings for
bonuses and distributions of cash and assets to be made at closing in
accordance with the Stock Purchase Agreement.
b) The increase in debt for the estimated portion of the purchase price that
will be borrowed.
c) The decrease in cash for the estimated portion of the purchase price to be
paid from existing cash.
d) The elimination of the stockholders' equity accounts of Acorn.
e) The estimated excess of acquisition cost over the fair value of tangible net
assets acquired which has been allocated to management contracts and
goodwill.
f) An adjustment to property and equipment to reflect assets acquired at net
book value.
g) Annual interest charges on $11,600,000 of debt estimated to be incurred in
connection with the acquisition and loss of interest income on cash to be
distributed at closing. Interest was calculated based on annual rate of 7.25%
for the debt incurred and 5.0% on the cash distributed.
h) Amortization of management contracts on a straight-line basis over 7 years
and goodwill on a straight-line basis over 40 years.
i) An adjustment to salaries and benefits for the differences between the
compensation paid to operating executives of Acorn prior to the pending
acquisition and the amount that the Company is contractually obligated to pay
in accordance with the acquisition agreement.
j) Adjustment of income taxes relating to adjustments (e), (f) and (g) and to
reflect a provision for income taxes on the net income of Acorn at an
effective. Prior to the pending acquisition, Acorn had elected S Corporation
status with the Internal Revenue Service. As such, all income or loss of
Acorn accrued directly to its stockholders and no provision for income taxes
had been made in the historical financial statements.
F-31
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the issuance and distribution of the Common Stock
being registered hereby, other than underwriting discounts and commissions. All
the amounts shown are estimates (except for SEC and NASD fees).
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,802.31
NASD filing fee............................................. 4,394.76
"Blue Sky" fees and expenses................................ 0
Transfer Agent and Registrar fees........................... 3,500.00
Printing and engraving costs................................ 40,000.00
Accounting fees and expenses................................ 75,000.00
Legal fees (and expenses)................................... 75,000.00
Miscellaneous expenses...................................... 40,302.93
-----------
Total............................................. $250,000.00
===========
</TABLE>
The Registrant will pay all expenses of registration, issuance and
distribution (other than underwriting discounts and commissions) with respect to
the shares being sold because the Selling Stockholders have certain contractual
registration rights providing for the payment of such expenses by the
Registrant.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Amended and Restated Certificate of Incorporation (the
"Certificate") provides that, to the fullest extent permitted by the Delaware
General Corporation Law (the "GCL") or any other applicable law currently or
hereafter in effect, no director of the Registrant will be personally liable to
the Registrant or its stockholders for or with respect to any acts or omissions
in the performance of his or her duties as a director of the Registrant. Section
102(b)(7) of the GCL, however, provides that the liability of a director shall
not be eliminated or limited (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the GCL or (iv) for any transaction from which
the director derived an improper personal benefit.
In addition, the Registrant's By-laws provide that any person who is
involved in any investigation, claim, action, suit or proceeding by reason of
the fact that such person is or was or had agreed to become a director, officer,
employee, or agent of the Registrant or is or was serving at the request of the
board of directors or an officer of the Registrant as a director, officer,
employee, or agent of another corporation, shall be indemnified by the
Registrant to the fullest extent permitted by applicable law as then in effect
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in connection
therewith. Such right of indemnification includes the right to be paid, in
advance, any expenses incurred in connection with a proceeding (upon receipt of
any required undertaking) and shall not be deemed exclusive of any other rights
to which such person seeking indemnification may otherwise be entitled.
Under the GCL, directors and officers as well as employees and individuals
may be indemnified against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement in connection with specified actions, suits
or proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation as a derivative action) if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful.
II-1
<PAGE> 89
Reference is made to the Underwriting Agreement (Exhibit 1.1 to this
Registration Statement) which provides for indemnification of the Company's
officers, directors and controlling persons by the Underwriters against certain
civil liabilities, including liabilities under the Securities Act.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<C> <S>
1.1 -- Form of Underwriting Agreement*
2.1 -- Stock Purchase Agreement, dated October 20, 1997, among
the Registrant, Dr. Melvyn S. Goldsmith, Ph.D., Barbara
C. Goldsmith and Acorn (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form
8-K dated September 1, 1997 and filed with the Commission
on October 21, 1997)
4.1 -- Specimen certificate for the Common Stock, $.01 par
value, of the Registrant (incorporated herein by
reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated August 11, 1997 and filed with
the Commission on August 25, 1997)
4.2 -- Rights Agreement, dated February 6, 1997, between the
Registrant, and American Stock Transfer & Trust Company,
as Rights Agent (incorporated by reference to Exhibit 4.1
to the Registrant's Registration Statement on Form 8-A,
Registration number 000-22123, as filed with the
Commission on February 7, 1997)
5.1 -- Opinion of Strasburger & Price, L.L.P.*
23.1 -- Consent of Strasburger & Price, L.L.P. (contained in
Exhibit 5.1 to this Registration Statement)
23.2 -- Consent of Price Waterhouse LLP*
23.3 -- Consent of Price Waterhouse LLP*
24.1 -- Power of Attorney (contained on the signature page of
this Registration Statement)
27.1 -- Financial Data Schedule for fiscal year ended August 31,
1997*
27.2 -- Restated Financial Data Schedule for fiscal quarter ended
May 31, 1997*
27.3 -- Restated Financial Data Schedule for fiscal quarter ended
February 28, 1997*
27.4 -- Restated Financial Data Schedule for fiscal quarter ended
November 30, 1996*
27.5 -- Restated Financial Data Schedule for fiscal year ended
August 31, 1996*
27.6 -- Restated Financial Data Schedule for fiscal quarter ended
May 31, 1996*
</TABLE>
- ---------------
* Filed herewith
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than
II-2
<PAGE> 90
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is governed by
the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide public offering thereof.
II-3
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
hereby certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lewisville, State of Texas on October 21, 1997.
HORIZON HEALTH CORPORATION
By: /s/ JAMES KEN NEWMAN
------------------------------------
James Ken Newman
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints
James Ken Newman and James W. McAtee, and each of them, such person's true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for such person and in such person's name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, requests to accelerate the
effectiveness of this Registration Statement, and any Registration Statement for
the same offering that is to be effective upon filing pursuant to Rule 462(b)
under the Securities Act, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES KEN NEWMAN Director, Chairman of the October 21, 1997
- ----------------------------------------------------- Board and Chief Executive
James Ken Newman Officer (Principal
Executive Officer)
/s/ JAMES W. MCATEE Director, Executive Vice October 21, 1997
- ----------------------------------------------------- President, Chief
James W. McAtee Financial Officer and
Treasurer (Principal
Financial Officer)
/s/ CLIFF W. GARDNER Vice October 21, 1997
- ----------------------------------------------------- President -- Controller
Cliff W. Gardner (Principal Accounting
Officer)
/s/ JACK R. ANDERSON Director October 21, 1997
- -----------------------------------------------------
Jack R. Anderson
</TABLE>
II-4
<PAGE> 92
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM H. LONGFIELD Director October 21, 1997
- -----------------------------------------------------
William H. Longfield
/s/ GEORGE E. BELLO Director October 21, 1997
- -----------------------------------------------------
George E. Bello
/s/ DONALD E. STEEN Director October 21, 1997
- -----------------------------------------------------
Donald E. Steen
/s/ JAMES E. BUNCHER Director October 21, 1997
- -----------------------------------------------------
James E. Buncher
/s/ HOWARD B. FINKEL Director October 21, 1997
- -----------------------------------------------------
Howard B. Finkel
</TABLE>
II-5
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<C> <S>
1.1 -- Form of Underwriting Agreement*
2.1 -- Stock Purchase Agreement, dated October 20, 1997, among
the Registrant, Dr. Melvyn S. Goldsmith, Ph.D., Barbara
C. Goldsmith and Acorn (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form
8-K dated September 1, 1997 and filed with the Commission
on October 21, 1997)
4.1 -- Specimen certificate for the Common Stock, $.01 par
value, of the Registrant (incorporated herein by
reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated August 11, 1997 and filed with
the Commission on August 25, 1997)
4.2 -- Rights Agreement, dated February 6, 1997, between the
Registrant, and American Stock Transfer & Trust Company,
as Rights Agent (incorporated by reference to Exhibit 4.1
to the Registrant's Registration Statement on Form 8-A,
Registration number 000-22123, as filed with the
Commission on February 7, 1997)
5.1 -- Opinion of Strasburger & Price, L.L.P.*
23.1 -- Consent of Strasburger & Price, L.L.P. (contained in
Exhibit 5.1 to this Registration Statement)
23.2 -- Consent of Price Waterhouse LLP*
23.3 -- Consent of Price Waterhouse LLP*
24.1 -- Power of Attorney (contained on the signature page of
this Registration Statement)
27.1 -- Financial Data Schedule for fiscal year ended August 31,
1997*
27.2 -- Restated Financial Data Schedule for fiscal quarter ended
May 31, 1997*
27.3 -- Restated Financial Data Schedule for fiscal quarter ended
February 28, 1997*
27.4 -- Restated Financial Data Schedule for fiscal quarter ended
November 30, 1996*
27.5 -- Restated Financial Data Schedule for fiscal year ended
August 31, 1996*
27.6 -- Restated Financial Data Schedule for fiscal quarter ended
May 31, 1996*
</TABLE>
- ---------------
* Filed herewith
<PAGE> 1
1,240,000 SHARES
HORIZON HEALTH CORPORATION
COMMON STOCK, $.01 PAR VALUE
UNDERWRITING AGREEMENT
, 1997
<PAGE> 2
, 1997
Morgan Stanley & Co. Incorporated
BancAmerica Robertson Stephens
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Certain stockholders of Horizon Health Corporation, a Delaware
corporation (the "COMPANY"), named in Schedule I hereto (the "SELLING
STOCKHOLDERS") severally propose to sell to the several Underwriters named in
Schedule II hereto (the "UNDERWRITERS") an aggregate of 1,240,000 shares of the
common stock, $.01 par value, of the Company (the "FIRM SHARES"), each Selling
Stockholder selling the amount set forth opposite such Selling Stockholder's
name under the column entitled "Number of Firm Shares To Be Sold" in Schedule I
hereto.
Certain of the Selling Stockholders specified in Schedule I
hereto also severally propose to sell to the several Underwriters not more than
an additional 186,000 shares of the common stock, $.01 par value (the
"ADDITIONAL SHARES") if and to the extent that you, as managers of the offering
("MANAGERS"), shall have determined to exercise, on behalf of the Underwriters,
the right to purchase such shares of common stock granted to the Underwriters
in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "SHARES." The shares of common stock, $.01 par
value of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement, including a prospectus, relating
to the Shares. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
<PAGE> 3
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to and agrees with each of the Underwriters
that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will not
contain any 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 not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued and outstanding shares
of capital stock of each subsidiary of the Company and, in the case of
Florida Professional Psychological Services, Inc. ("FLORIDA PPS"), the
eighty percent (80%) of all the issued and outstanding shares of Florida
PPS capital stock owned by the Company, have been duly authorized and
validly issued, are
-2-
<PAGE> 4
fully paid and non-assessable and are owned directly by the Company,
free and clear of all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof incorporated by reference in
the Prospectus.
(g) The shares of Common Stock (including the Shares to be
sold by the Selling Stockholders) have been duly authorized and validly
issued and are fully paid and non-assessable, and the issuances of such
shares of Common Stock did not violate any preemptive or similar rights
at the time of their issuance.
(h) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(i) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(j) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened to which the Company or any
of its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus by the
Securities Act and the applicable rules and regulations of the
Commission thereunder and are not so described or any statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement by the Securities Act and the
applicable rules and regulations of the Commission thereunder that are
not described or filed as required.
-3-
<PAGE> 5
(k) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(l) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(m) The Company and its subsidiaries (i) are in compliance
with any and all applicable federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(n) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(o) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings
by the Company and its subsidiaries, in each case except as described in
the Prospectus.
-4-
<PAGE> 6
(p) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade
names currently employed by them in connection with the business now
operated by them, and neither the Company nor any of its subsidiaries
has received any notice of infringement of or conflict with asserted
rights of others with respect to any of the foregoing which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(q) No material labor dispute with the employees of the
Company or any of its subsidiaries exists, except as described in the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(r) The Company and its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses
in which they are engaged; neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied
for; and neither the Company nor any of its subsidiaries has any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole, except as described in the
Prospectus.
(s) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
business, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the Company
and its subsidiaries, taken as a whole, except as described in the
Prospectus.
(t) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (3) access to assets is permitted only in
accordance with management's general or specific authorization; and (4)
the recorded accountability for assets is compared
-5-
<PAGE> 7
with the existing assets at reasonable intervals and appropriate action
is taken with respect to any difference.
(u) Neither the Company nor any of its subsidiaries has
engaged or is currently engaging in any activity, whether alone or in
concert with others, in violation of any federal, state or local law or
regulation connected in any way with the provision of healthcare
services or the billing for such services, directly or indirectly, to a
beneficiary or intermediary of any federal or state health or insurance
program, including those laws or regulations prohibiting fraudulent or
abusive practices.
(v) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING
STOCKHOLDERS. Each of the Selling Stockholders, severally and not jointly,
represents and warrants to and agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(b) The execution and delivery by such Selling Stockholder of,
and the performance by such Selling Stockholder of its obligations
under, this Agreement, the Custody Agreement signed by such Selling
Stockholder and American Stock Transfer & Trust Company, as Custodian,
relating to the deposit of the Shares to be sold by such Selling
Stockholder (the "CUSTODY AGREEMENT") and the Power of Attorney
appointing certain individuals as such Selling Stockholder's
attorneys-in-fact to the extent set forth therein, relating to the
transactions contemplated hereby and by the Registration Statement (the
"POWER OF ATTORNEY") will not contravene any provision of applicable
law, or the certificate of incorporation or by-laws of such Selling
Stockholder (if such Selling Stockholder is a corporation), or the
certificate of limited partnership or agreement of limited partnership
of such Selling Stockholder (if such Selling Stockholder is a limited
partnership), or any agreement or other instrument binding upon such
Selling Stockholder or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over such Selling Stockholder,
and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance
-6-
<PAGE> 8
by such Selling Stockholder of its obligations under this Agreement or
the Custody Agreement or Power of Attorney of such Selling Stockholder,
except such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Shares.
(c) Such Selling Stockholder has, and on the Closing Date will
have, valid title to the Shares to be sold by such Selling Stockholder
and the legal right and power, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement and
the Power of Attorney and to sell, transfer and deliver the Shares to be
sold by such Selling Stockholder.
(d) The Shares to be sold by such Selling Stockholder pursuant
to this Agreement have been duly authorized and are validly issued,
fully paid and non-assessable.
(e) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by such Selling Stockholder and
are valid and binding agreements of such Selling Stockholder.
(f) Delivery of the Shares to be sold by such Selling
Stockholder pursuant to this Agreement will pass title to such Shares
free and clear of any security interests, claims, liens, equities and
other encumbrances.
(g) To the extent, but only to the extent, that any statements
or omissions made in the Registration Statement, the preliminary
prospectuses, the Prospectus or any amendment or supplement thereto are
made in reliance upon and in conformity with written information
relating to such Selling Stockholder furnished to the Company by such
Selling Stockholder expressly for use therein or filed by the Selling
Stockholder pursuant to the Exchange Act relating to the Company, (i)
the Registration Statement, when it became effective, did not contain
and, as supplemented, if applicable, will not contain any 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 not
misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except
that the representations and warranties set forth in this paragraph 2(g)
do not apply to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein.
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<PAGE> 9
In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder agrees to deliver to you prior to or at
the Closing Date (as hereinafter defined) a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
3. AGREEMENTS TO SELL AND PURCHASE. Each Selling
Stockholder, severally and not jointly, hereby agrees to sell to the several
Underwriters, and each Underwriter, upon the basis of the representations and
warranties herein contained, but subject to the conditions hereinafter stated,
agrees, severally and not jointly, to purchase from such Selling Stockholder at
$ a share (the "PURCHASE PRICE") the number of Firm Shares (subject
to such adjustments to eliminate fractional shares as you may determine) that
bears the same proportion to the number of Firm Shares to be sold by such
Selling Stockholder as the number of Firm Shares set forth in Schedule II
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares.
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, each Selling
Stockholder, severally and not jointly, hereby agrees to sell to the
Underwriters the number of Additional Shares set forth opposite such Selling
Stockholder's name under the column entitled "Number of Additional Shares To Be
Sold" in Schedule I hereto, and the Underwriters shall have a one-time right to
purchase, severally and not jointly, up to 186,000 Additional Shares at the
Purchase Price. If you, on behalf of the Underwriters, elect to exercise such
option, you shall so notify the Company in writing not later than 30 days after
the date of this Agreement, which notice shall specify the number of Additional
Shares to be purchased by the Underwriters and the date on which such shares
are to be purchased. Such date may be the same as the Closing Date (as defined
below) but not earlier than the Closing Date nor later than ten business days
after the date of such notice. Additional Shares may be purchased as provided
in Section 5 hereof solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. If any Additional Shares are
to be purchased, each Underwriter agrees, severally and not jointly, to
purchase the number of Additional Shares (subject to such adjustments to
eliminate fractional shares as you may determine) that bears the same
proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule II hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company and each Selling Stockholder hereby agree that,
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the Underwriters, they will not, during the period ending 90 days
after the date of the Prospectus, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (ii) enter into any swap or other arrangement that transfers to another, in
whole
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<PAGE> 10
or in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder, (B) the issuance by the Company of shares of Common Stock upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof which is disclosed in the Prospectus or (C) transactions by any
person other than the Company relating to shares of Common Stock or other
securities acquired in open market transactions after the completion of the
offering of the Shares. In addition, each Selling Stockholder agrees that,
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the Underwriters, it will not, during the period ending 90 days after
the date of the Prospectus, make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable or exchangeable for Common Stock.
4. TERMS OF PUBLIC OFFERING. The Selling Stockholders are
advised by you that the Underwriters propose to make a public offering of their
respective portions of the Shares as soon after the Registration Statement and
this Agreement have become effective as in your judgment is advisable. The
Selling Stockholders are further advised by you that the Shares are to be
offered to the public initially at $ a share (the "PUBLIC OFFERING PRICE")
and to certain dealers selected by you at a price that represents a concession
not in excess of $ a share under the Public Offering Price, and that any
Underwriter may allow, and such dealers may reallow, a concession, not in
excess of $ a share, to any Underwriter or to certain other dealers.
5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be
sold by each Selling Stockholder shall be made to such Selling Stockholder in
Federal or other same-day funds immediately available in New York City against
delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on , 1997(1),
or at such other time on the same or such other date, not later than
, 1997(2), as shall be designated in writing by you. The
time and date of such payment are hereinafter referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to the Selling
Stockholders selling such Additional Shares in Federal or other same-day funds
immediately available in New York City against delivery of such Additional
Shares for the respective accounts of the several Underwriters at 10:00 a.m.,
New York City time, on the date specified in the notice described in Section 3
or at such other time on the same or on such other date, in any event not later
than ,1997(3), as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "OPTION CLOSING DATE."
- --------------------
(1) Three business days or, in the event the offering is priced after 4:30
p.m. Eastern Time (and T+4 settlement is deemed to apply to secondary sales),
four business days after the date of the Underwriting Agreement.
(2) Insert date that is five additional business days after the date
inserted in accordance with note 1 above.
(3) Ten business days after expiration of overallotment option.
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<PAGE> 11
Certificates for the Firm Shares and Additional Shares shall be
in definitive form and registered in such names and in such denominations as
you shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes
payable in connection with the transfer of the Shares to the Underwriters duly
paid, against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The
obligations of the Selling Stockholders to sell the Shares to the Underwriters
and the several obligations of the Underwriters to purchase and pay for the
Shares on the Closing Date are subject to the condition that the Registration
Statement shall have become effective not later than 5:00 p.m. (New York City
time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date :
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating accorded
any of the Company's securities by any "nationally recognized
statistical rating organization," as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial
or otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in Section 6(a)(i) above and to the effect
that the representations and warranties of the Company contained in this
Agreement are true and correct as of the Closing Date and that the Company has
complied with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied hereunder on or before the Closing Date.
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<PAGE> 12
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date
an opinion of Strasburger & Price, L.L.P, outside counsel for the Company,
dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation,
has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction as set forth in such opinion;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
incorporated by reference in the Prospectus;
(iv) (A) all of the outstanding shares of capital stock
of the Company as of the date and as set forth under the caption
"Capitalization" in the Prospectus have been duly authorized and
validly issued and are fully paid and non-assessable and (B) the
Shares to be sold by the Selling Stockholders have been duly
authorized and are validly issued, fully paid and non-assessable,
and the issuance of such Shares did not violate any preemptive or
similar rights at the time of their issuance;
(v) all of the issued shares of capital stock of each
subsidiary of the Company, and in the case of Florida PPS, the
eighty percent (80%) of Florida PPS capital stock owned the
Company, have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned directly by the
Company, free and clear of all liens, encumbrances, equities or
claims;
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<PAGE> 13
(vi) this Agreement has been duly authorized, executed
and delivered by the Company;
(vii) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable law or
the certificate of incorporation or by-laws of the Company or, to
such counsel's knowledge, any agreement or other instrument
binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole,
or, to such counsel's knowledge, any judgment, order or decree of
any governmental body, agency or court having jurisdiction over
the Company or any subsidiary, and no consent, approval,
authorization or order of, or qualification with, any
governmental body or agency is required for the performance by
the Company of its obligations under this Agreement, except such
as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the
Shares;
(viii) the statements (A)(i) in Item 1 of the Registration
Statement on Form 8-A regarding the description of capital stock
relating to the Common Stock as declared effective by the
Commission on March 13, 1995 (File No. 1-13626) and as
incorporated by reference into the Prospectus and (ii) in the
Prospectus under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," but only with respect to the
description contained therein of the Commitment Letter with Texas
Commerce Bank, N.A. and Chase Securities, Inc. and "Underwriters"
but only with respect to the description contained therein of this
Agreement and the form of Lock-Up Letter attached hereto and (B)
in the Registration Statement in Item 15 insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(ix) to such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is a party or to which any of
the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration
Statement or the Prospectus by the Securities Act and the
applicable rules and regulations of the Commission thereunder and
are not so described or of any statutes, regulations, contracts
or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement by the Securities Act and
the applicable rules and regulations of the Commission thereunder
that are not described or filed as required;
(x) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus,
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<PAGE> 14
will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended;
(xi) to such counsel's knowledge, the Company and its
subsidiaries (A) are in compliance with any and all applicable
Environmental Laws, (B) have received all permits, licenses or
other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (C) are in
compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses
or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(xii) except as described in the Prospectus or as have
been waived at the Closing Date, there are no persons with
registration or similar rights to have any securities of the
Company registered pursuant to the Registration Statement or
otherwise registered by the Company under the Securities Act or
the Exchange Act pursuant to any agreement or instrument known to
such counsel after due inquiry to which the Company is a party;
and
(xiii) such counsel (A) is of the opinion that each
document, if any, filed pursuant to the Exchange Act and
incorporated by reference in the Prospectus (except for financial
statements and schedules as to which such counsel need not
express any opinion) complied when so filed as to form in all
material respects with the Exchange Act and the rules and
regulations of the Commission thereunder, (B) is of the opinion
that the Registration Statement and Prospectus (except for
financial statements and schedules and other financial and
statistical data included therein as to which such counsel need
not express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder, (C) has no reason to
believe that (except for financial statements and schedules and
other financial and statistical data as to which such counsel
need not express any belief) the Registration Statement and the
prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (D) has no reason to believe that (except for
financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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<PAGE> 15
(d) The Underwriters shall have received on the Closing
Date an opinion of Strasburger & Price, L.L.P., counsel for the Selling
Stockholders, dated the Closing Date, to the effect that:
(i) such Selling Stockholder, if a corporation, has
been duly incorporated and is validly existing as a corporation
in good standing under the laws of the state of its
incorporation, or such Selling Stockholder, if a partnership, has
been duly formed and is validly existing as a partnership in good
standing under the laws of the state of its formation;
(ii) this Agreement has been duly authorized, executed
and delivered by or on behalf of each of the Selling
Stockholders;
(iii) the execution and delivery by each Selling
Stockholder of, and the performance by such Selling Stockholder
of its obligations under, this Agreement and the Custody
Agreement and Powers of Attorney of such Selling Stockholder will
not contravene any provision of applicable law, or the
certificate of incorporation or by-laws of such Selling
Stockholder (if such Selling Stockholder is a corporation), or,
to such counsel's knowledge, any agreement or other instrument
binding upon such Selling Stockholder or, to such counsel's
knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over such Selling
Stockholder, and to the knowledge of such counsel, no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by
such Selling Stockholder of its obligations under this Agreement
or the Custody Agreement or Power of Attorney of such Selling
Stockholder, except such as may be required by the securities or
Blue Sky laws of the various states in connection with offer and
sale of the Shares;
(iv) each of the Selling Stockholders has valid title to
the Shares to be sold by such Selling Stockholder and the legal
right and power, and all authorization and approval required by
law, to enter into this Agreement and the Custody Agreement and
Power of Attorney of such Selling Stockholder and to sell,
transfer and deliver the Shares to be sold by such Selling
Stockholder;
(v) the Custody Agreement and the Power of Attorney of
each Selling Stockholder have been duly authorized, executed and
delivered by such Selling Stockholder and are valid and binding
agreements of such Selling Stockholder; and
(vi) delivery of the Shares to be sold by each Selling
Stockholder pursuant to this Agreement will pass title to such
Shares free and clear of any security interests, claims, liens,
equities and other encumbrances.
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<PAGE> 16
(e) The Underwriters shall have received on the Closing
Date an opinion of Andrews & Kurth L.L.P., counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in Sections
6(c)(vi), 6(c)(viii) (but only as to the statements in the Prospectus
under "Underwriters" and the statements regarding the Company's capital
stock as incorporated into the Prospectus from Item 1 of the
Registration Statement on Form 8-A relating to the Common Stock as
declared effective by the Commission on March 13, 1995 (File No. 1-
13626)) and 6(c)(xii)(B)-(D) above.
With respect to Section 6(c)(xiii) above, Strasburger &
Price, L.L.P. and Andrews & Kurth L.L.P. may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are
without independent check or verification, except as specified. With
respect to Section 6(d) above, Strasburger & Price, L.L.P. may rely upon
an opinion or opinions of counsel for any Selling Stockholders and, with
respect to factual matters and to the extent such counsel deems
appropriate, upon the representations of each Selling Stockholder
contained herein and in the Custody Agreement and Power of Attorney of
such Selling Stockholder and in other documents and instruments;
provided that (A) each such counsel for the Selling Stockholders is
satisfactory to your counsel, (B) a copy of each opinion so relied upon
is delivered to you and is in form and substance satisfactory to your
counsel, (C) copies of such Custody Agreements and Powers of Attorney
and of any such other documents and instruments shall be delivered to
you and shall be in form and substance satisfactory to your counsel and
(D) Strasburger & Price, L.L.P. shall state in their opinion that they
are justified in relying on each such other opinion.
The opinions of Strasburger & Price, L.L.P. described in Sections
6(c) and 6(d) above (and any opinions of counsel for any Selling
Stockholder referred to in the immediately preceding paragraph) shall be
rendered to the Underwriters at the request of the Company or one or
more of the Selling Stockholders, as the case may be, and shall so state
therein.
(f) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Price Waterhouse LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a "cut-
off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form
of Exhibit A hereto, between you and certain stockholders, officers and
directors of the Company relating
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<PAGE> 17
to sales and certain other dispositions of shares of Common Stock or
certain other securities, delivered to you on or before the date hereof,
shall be in full force and effect on the Closing Date.
(h) The Shares to be sold by the Selling Stockholders are duly
approved for quotation on the Nasdaq National Market.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to you on the Option
Closing Date of such documents as you may reasonably request with respect to
the good standing of the Company, the due authorization and issuance of the
Additional Shares and other matters related to the issuance of the Additional
Shares.
7. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with
each Underwriter as follows:
(a) To furnish to you, without charge, three signed copies of
the Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge, prior
to 10:00 a.m. New York City time on the business day next succeeding the date
of this Agreement and during the period mentioned in Section 7(c) below, as
many copies of the Prospectus and any supplements and amendments thereto or to
the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such proposed
amendment or supplement and not to file any such proposed amendment or
supplement to which you reasonably object, and to file with the Commission
within the applicable period specified in Rule 424(b) under the Securities Act
any prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a result of
which it is necessary to amend or supplement the Prospectus in order to make
the statements therein, in the light of the circumstances when the Prospectus
is delivered to a purchaser, not misleading, or if, in the opinion of counsel
for the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers (whose
names and addresses you will furnish to the Company) to which Shares may have
been sold by you on behalf of the Underwriters and to any other dealers upon
request, either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will
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<PAGE> 18
not, in the light of the circumstances when the Prospectus is delivered
to a purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering
the twelve-month period ending November 30, 1998 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
8. EXPENSES. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated:
(a) the Company agrees to pay or cause to be paid all expenses
incident to the performance of their obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants in connection with the registration
and delivery of the Shares under the Securities Act and all other fees
or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all
printing costs associated therewith, and the mailing and delivering of
copies thereof to the Underwriters and dealers, in the quantities
hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the cost of printing or
producing any Blue Sky or Legal Investment memorandum in connection with
the offer and sale of the Shares under state securities laws and all
expenses in connection with the qualification of the Shares for offer
and sale under state securities laws as provided in Section 7(d) hereof,
including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and
in connection with the Blue Sky or Legal Investment memorandum, (iv) all
filing fees and the reasonable fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of
the offering of the Shares by the National Association of Securities
Dealers, Inc., (v) all costs and expenses incident to listing for
quotation the Shares on the Nasdaq National Market, (vi) the cost of
printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent, registrar or depositary, (viii) the costs
and expenses of the Company relating to investor presentations on any
"road show" undertaken in connection with the marketing of the offering
of the Shares, including, without limitation, expenses associated with
the production of road show slides and graphics, fees and expenses of
any consultants engaged in connection with the road show presentations
with the prior approval of the Company, travel and lodging expenses of
the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with
the road show, and (ix) all other costs and expenses incident to the
performance of the
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<PAGE> 19
obligations of the Company hereunder for which provision is not
otherwise made in this Section; and
(b) each Selling Stockholder agrees to pay or cause to be paid
all costs and expenses incident to the performance of such Selling
Stockholder's obligations hereunder which are not otherwise specifically
provided for in this Section, including (i) any fees and expenses of
counsel for such Selling Stockholder and (ii) all expenses and taxes
incident to the sale and delivery of the Shares to be sold by such
Selling Stockholder to the Underwriters hereunder.
It is understood, however, that except as provided in this
Section, Section 9 entitled "Indemnity and Contribution," and the last
paragraph of Section 11 below, the Underwriters will pay all of their costs and
expenses, including fees and disbursements of their counsel, stock transfer
taxes payable on resale of any of the Shares by them and any advertising
expenses connected with any offers they may make.
The provisions of this Section 8 shall not supersede or otherwise
affect any agreement that the Selling Stockholders may otherwise have for the
allocation of such expenses among themselves.
9. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by 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 or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein; provided, however, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or supplemented)
would
-18-
<PAGE> 20
have cured the defect giving rise to such losses, claims, damages or
liabilities, unless such failure is the result of noncompliance by the Company
with Section 7(a) hereof.
(b) Each Selling Stockholder agrees, severally and not
jointly, to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act, from and against any and
all losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or caused by 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, but only with
reference to information relating to such Selling Stockholder furnished in
writing by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto. Notwithstanding any provision of this
Agreement to the contrary, in no event shall any of the Selling Stockholders be
required to pay an amount in indemnification under this Section 9(b) or Section
9(c) hereof, or contribution under Section 9(f) hereof, in excess of the
aggregate net proceeds such Selling Stockholder received from the sale of
Shares pursuant to this Agreement; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such losses, claims, damages or liabilities, unless such failure is the
result of noncompliance by the Company with Section 7(a) hereof.
(c) Each Selling Stockholder agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors, its
officers who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or caused by 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, but only with
reference to information relating to such Selling Stockholder furnished in
writing by or on behalf of such Selling
-19-
<PAGE> 21
Stockholder expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
Notwithstanding any provision of this Agreement to the contrary, in no event
shall any of the Selling Stockholders be required to pay an amount in
indemnification under this Section 9(c) or Section 9(b) hereof, or contribution
under Section 9(f) hereof, in excess of the aggregate net proceeds such Selling
Stockholder received from the sale of Shares pursuant to this Agreement.
(d) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Stockholders, the
directors of the Company, the officers of the Company who sign the Registration
Statement and each person, if any, who controls the Company or any Selling
Stockholder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by 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, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus,
the Prospectus or any amendments or supplements thereto.
(e) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 9(a), 9(b), 9(c) or 9(d), such
person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom
such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (i) the indemnifying party and
the indemnified party shall have
-20-
<PAGE> 22
mutually agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall
not, in respect of the legal expenses of any indemnified party in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for (i) the fees and expenses of more than one separate firm (in addition to
any local counsel) for all Underwriters and all persons, if any, who control
any Underwriter within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one
separate firm (in addition to any local counsel) for the Company, its
directors, its officers who sign the Registration Statement and each person, if
any, who controls the Company within the meaning of either such Section and
(iii) the fees and expenses of more than one separate firm (in addition to any
local counsel) for all Selling Stockholders and all persons, if any, who
control any Selling Stockholder within the meaning of either such Section, and
that all such fees and expenses shall be reimbursed as they are incurred. In
the case of any such separate firm for the Underwriters and such control
persons of any Underwriters, such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated. In the case of any such separate firm for the
Company, and such directors, officers and control persons of the Company, such
firm shall be designated in writing by the Company. In the case of any such
separate firm for the Selling Stockholders and such control persons of any
Selling Stockholders, such firm shall be designated in writing by the persons
named as attorneys-in-fact for the Selling Stockholders under the Powers of
Attorney. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph,
the indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(f) To the extent the indemnification provided for in Section
9(a), 9(b), 9(c) or 9(d) is unavailable to an indemnified party or insufficient
in respect of any losses, claims, damages or liabilities referred to therein,
then each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such
-21-
<PAGE> 23
proportion as is appropriate to reflect the relative benefits received by the
indemnifying party or parties on the one hand and the indemnified party or
parties on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause 9(f)(i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause 9(f)(i) above but also the relative fault of the
indemnifying party or parties on the one hand and of the indemnified party or
parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Selling Stockholders on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by each Selling Stockholder and the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the
Company and the Selling Stockholders on the one hand and the Underwriters on
the other hand 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
the Company or the Selling Stockholders one the one hand or by the Underwriters
on the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Underwriters' respective obligations to contribute pursuant to this Section
9 are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
(g) The Company, the Selling Stockholders and the Underwriters
agree that it would not be just or equitable if contribution pursuant to this
Section 9 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 9(f) hereof. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph 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 Section 9, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages that
such Underwriter 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 Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Section 9 are not exclusive and shall not limit any rights or remedies which
may otherwise be available to any indemnified party at law or in equity.
(h) The indemnity and contribution provisions contained in
this Section 9 and the representations, warranties and other statements of the
Company and the Selling Stockholders
-22-
<PAGE> 24
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation
made by or on behalf of any Underwriter or any person controlling any
Underwriter, any Selling Stockholder or any person controlling any Selling
Stockholder, or the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Shares.
10. TERMINATION. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses 10(a)(i) through 10(a)(iv),
such event, singly or together with any other such event, makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date or the Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
Shares that it has or they have agreed to purchase hereunder on such date, and
the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate number of the Shares to be purchased on such date,
the other Underwriters shall be obligated severally in the proportions that the
number of Firm Shares set forth opposite their respective names in Schedule II
bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 11 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you, the Company and the Selling Stockholders for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders. In any
such case either you or the relevant Selling Stockholders shall have the right
-23-
<PAGE> 25
to postpone the Closing Date, but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and in
the Prospectus or in any other documents or arrangements may be effected. If,
on the Option Closing Date, any Underwriter or Underwriters shall fail or
refuse to purchase Additional Shares and the aggregate number of Additional
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Additional Shares to be purchased, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of any Selling
Stockholder to comply with the terms or to fulfill any of the conditions of
this Agreement, or if for any reason any Selling Stockholder shall be unable to
perform its obligations under this Agreement, the Selling Stockholders will
reimburse the Underwriters or such Underwriters as have so terminated this
Agreement with respect to themselves, severally, for all out-of-pocket expenses
(including the fees and disbursements of their counsel) reasonably incurred by
such Underwriters in connection with this Agreement or the offering
contemplated hereunder.
12. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
14. HEADINGS. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
-24-
<PAGE> 26
Very truly yours,
HORIZON HEALTH CORPORATION
By:
--------------------------------
Name:
Title:
The Selling Stockholders
named in Schedule I hereto,
acting severally
By:
--------------------------------
Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BancAmerica Robertson Stephens
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:
----------------------------
Name:
Title:
-25-
<PAGE> 27
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF ADDITIONAL
FIRM SHARES SHARES
SELLING STOCKHOLDER TO BE SOLD TO BE SOLD
-------------------------------------------------------------------- ---------- --------------
<S> <C> <C>
James Ken Newman 100,000 50,000
Howard B. Finkel 425,000 0
Jack R. Anderson 0 60,000
James W. McAtee 42,515 41,000
George E. Bello 0 30,000
Gary A. Kagan 38,205 5,000
Michael S. McCarthy 185,314 0
NME Management Services, Inc. 172,636 0
John K. Harrison 100,000 0
Lawrence W. Reiff 100,000 0
Argentum Capital Partners, L.P. 53,275 0
Denise Daily 4,400 0
Kenneth Dorman 10,655 0
G. Phillip Woellner 8,000 0
Total . . . . . . . . . 1,240,000 186,000
========== ========
</TABLE>
-1-
<PAGE> 28
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
-------------------------------------------------------------------------------------- ----------------------
<S> <C> <C>
Morgan Stanley & Co. Incorporated
BancAmerica Robertson Stephens
[NAMES OF OTHER UNDERWRITERS]
-------------
Total . . . . . . . . . . . . . . . . . . 1,240,000
=============
</TABLE>
-2-
<PAGE> 29
EXHIBIT A
[FORM OF LOCK-UP LETTER]
October _____, 1997
Morgan Stanley & Co. Incorporated
BancAmerica Robertson Stephens
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("MORGAN STANLEY") proposes to enter into an Underwriting
Agreement (the "UNDERWRITING AGREEMENT") with Horizon Health Corporation, a
Delaware corporation (the "COMPANY"), and the Selling Stockholders named on
Schedule I thereto, providing for the public offering (the "PUBLIC OFFERING")
by the several Underwriters, including Morgan Stanley and BancAmerica Robertson
Stephens (the "UNDERWRITERS"), of 1,240,000 shares (the "SHARES") of the
common stock, $.01 par value of the Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 90 days after the date of the final
prospectus relating to the Public Offering (the "PROSPECTUS"), (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (2) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (a) the sale of any Shares to the Underwriters pursuant to
the Underwriting Agreement, (b) the issuance by the Company of shares of Common
Stock upon the exercise of an option or warrant or the conversion of a security
-1-
<PAGE> 30
outstanding on the date hereof which is disclosed in the Prospectus, or (c)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 90 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a
number of factors, including market conditions. Any Public Offering will only
be made pursuant to an Underwriting Agreement, the terms of which are subject
to negotiation between the Selling Stockholders and the Underwriters.
Very truly yours,
------------------------------
(Name)
------------------------------
(Address)
-2-
<PAGE> 1
EXHIBIT 5.1
October 21, 1997
HORIZON HEALTH CORPORATION
1500 WATERS RIDGE DRIVE
LEWISVILLE, TEXAS 75057
Ladies and Gentlemen:
As set forth in the Registration Statement on Form S-3 (the "Registration
Statement"), filed with the Securities and Exchange Commission on October 21,
1997 by Horizon Health Corporation, a Delaware corporation (the "Company"),
under the Securities Act of 1933, as amended (the "Act"), relating to the sale
of up to 1,426,000 shares (the "Shares") of Common Stock, $.01 par value per
share, of the Company (the "Common Stock") by certain selling stockholders as
described therein, certain legal matters in connection with the Shares are being
passed upon for the Company by this Firm. At your request, this opinion is being
furnished to the Company for filing as Exhibit 5.1 to the Registration
Statement.
We have acted as counsel to the Company in connection with the registration
by the Company of the proposed sale of the Shares by the certain selling
stockholders as set forth in the Registration Statement. In such capacity, we
have examined the Certificate of Incorporation and Bylaws of the Company, each
as amended to the date hereof, and the originals or copies, certified or
otherwise identified to our satisfaction, of corporate records of the Company,
certificates of public officials, certificates of representatives of the
Company, statutes and other relevant records, instruments and documents as a
basis for the opinions hereinafter expressed. In giving such opinions, we have
relied upon certificates of officers of the Company with respect to the accuracy
of the material factual matters contained in such documents examined by us.
Based upon our examination as aforesaid, we are of the opinion that:
1. The Company is a corporation incorporated, existing and in good standing
under the laws of the State of Delaware.
2. The Shares are, and when transferred in the offering pursuant to the
Registration Statement after it has been declared effective by the
Securities and Exchange Commission, will be legally issued, fully paid
and non-assessable shares of Common Stock of the Company.
The opinions set forth above are limited to the laws of the State of Texas,
the General Corporation Law of the State of Delaware, and applicable federal law
as in effect on the date hereof. You should be aware that we are not admitted to
the practice of law in the State of Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Registration Statement
under the caption "Legal Matters."
Very truly yours,
/s/ STRASBURGER & PRICE, L.L.P.
------------------------------------
Strasburger & Price, L.L.P.
1
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated October 13, 1997,
relating to the consolidated financial statements of Horizon Health Corporation
and our report dated October 2, 1997, relating to the financial statements of
Acorn Behavioral Healthcare Management Corporation, which appear in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
October 21, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Horizon Health
Corporation of our report on National Medical Management Services, a division of
National Medical Enterprises, Inc., dated May 8, 1997, which appears on page
F-20 of the Current Report on Form 8-K, dated August 11, 1997.
PRICE WATERHOUSE LLP
Dallas, Texas
October 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 5,516,575
<SECURITIES> 0
<RECEIVABLES> 13,352,677
<ALLOWANCES> 1,357,423
<INVENTORY> 0
<CURRENT-ASSETS> 20,618,139
<PP&E> 3,950,123
<DEPRECIATION> 2,208,083
<TOTAL-ASSETS> 48,728,407
<CURRENT-LIABILITIES> 15,553,799
<BONDS> 0
0
0
<COMMON> 69,668
<OTHER-SE> 31,612,785
<TOTAL-LIABILITY-AND-EQUITY> 48,728,407
<SALES> 0
<TOTAL-REVENUES> 109,266,795
<CGS> 0
<TOTAL-COSTS> 95,039,491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,033,693
<INTEREST-EXPENSE> 402,003
<INCOME-PRETAX> 11,313,597
<INCOME-TAX> 4,517,688
<INCOME-CONTINUING> 6,656,016
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,656,016
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 4,254,449
<SECURITIES> 0
<RECEIVABLES> 19,333,547
<ALLOWANCES> (4,289,606)
<INVENTORY> 0
<CURRENT-ASSETS> 23,120,431
<PP&E> 3,769,988
<DEPRECIATION> 2,180,832
<TOTAL-ASSETS> 51,849,270
<CURRENT-LIABILITIES> 16,356,771
<BONDS> 0
0
0
<COMMON> 67,931
<OTHER-SE> 31,200,613
<TOTAL-LIABILITY-AND-EQUITY> 51,849,270
<SALES> 0
<TOTAL-REVENUES> 27,936,645
<CGS> 0
<TOTAL-COSTS> 23,256,276
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,396,020
<INTEREST-EXPENSE> 101,649
<INCOME-PRETAX> 3,305,673
<INCOME-TAX> 1,316,011
<INCOME-CONTINUING> 1,966,131
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