<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1997
REGISTRATION NO. 333-38421
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT
NO. 1 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
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>
---------------------
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. [ ]
---------------------
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 December 23, 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 DECEMBER 22, 1997, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $22.75 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 , 1998, 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
, 1998
<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.
---------------------
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............. 18
Use of Proceeds............................................. 19
Capitalization.............................................. 19
Selected Consolidated Financial Information and Statistical
Data...................................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 33
Management.................................................. 49
Certain Transactions........................................ 50
Principal and Selling Stockholders.......................... 52
Underwriters................................................ 54
Legal Matters............................................... 55
Experts..................................................... 55
Available Information....................................... 56
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."
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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, 1997;
(b) the Quarterly Report on Form 10-Q of the Company for the quarter ended
November 30, 1997;
(c) the Current Report on Form 8-K of the Company dated September 1, 1997;
(d) the Current Report on Form 8-K of the Company dated October 31, 1997; and
(e) 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) and (b) above have not been
restated to apply the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share", which was adopted by the Company on December 23,
1997. 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 194 as of November 30,
1997 and currently operates in 38 states. Of those management contracts, 176
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 November 30, 1997 provided outcome
measurement services at 87 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 194 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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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 November 30, 1997,
67.2% 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, required 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 13,000 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, and the acquisition of Acorn Behavioral HealthCare Management
Corporation, a Pennsylvania corporation ("Acorn"), in October 1997, 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.
RECENT ACQUISITIONS
On October 31, 1997, the Company acquired all of the outstanding capital
stock of 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.
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<PAGE> 9
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.................. 7,068,262 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 December 15,
1997. Excludes 1,510,843 shares of Common Stock issuable upon the exercise
of stock options outstanding as of such date at a weighted average exercise
price of $6.98 per share. Also excludes 38,205 shares of Common Stock which
Gary A. Kagan will purchase immediately prior to this offering by exercising
a portion of such stock options.
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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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.
The summary historical consolidated financial data presented below as of and for
the three months ended November 30, 1996 and 1997 are derived from the unaudited
consolidated financial statements of the Company included elsewhere in this
Prospectus, which have been prepared by management on the same basis as the
audited Consolidated Financial Statements of the Company, and, in the opinion of
management, include all adjustments consisting of normal recurring accruals
which the Company considers necessary for a fair presentation of such
information. The results for any interim period are not necessarily indicative
of the results for a full fiscal year.
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.
The unaudited pro forma financial data presented below gives effect to the
acquisition by the Company of Acorn in a transaction accounted for as a
purchase. The unaudited pro forma statement of income is based on the individual
statements of income of the Company and Acorn appearing elsewhere in this
Prospectus and on pages F-3 through F-9 of the Company's Current Report on Form
8-K dated October 31, 1997 incorporated by reference in this Prospectus. These
unaudited pro forma financial statements should be read in conjunction with the
audited Consolidated Financial Statements and Notes thereto of the Company
included elsewhere in this Prospectus and the audited Financial Statements and
Notes thereto of Acorn included in such Current Report on Form 8-K.
10
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED AUGUST 31, ENDED NOVEMBER 30,
-------------------------------------------------------------- ------------------------------
PRO FORMA PRO FORMA
----------- ----------
1993 1994(1) 1995(1) 1996 1997 1997 1996 1997 1997
------- ------- ------- ------- -------- ----------- ------- ------- ----------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract management revenues... $20,960 $24,962 $68,721 $95,244 $102,263 $ 102,263 $24,720 $26,599 $26,599
Other(2)....................... 7,770 5,297 634 995 7,004 14,049 2,160 2,723 4,108
------- ------- ------- ------- -------- ----------- ------- ------- -------
Total revenues........... 28,730 30,259 69,355 96,239 109,267 116,312 26,880 29,322 30,707
Operating expenses:
Salaries and benefits.......... 16,031 16,814 40,083 55,810 60,048 62,172 14,842 15,729 16,091
Purchased services............. 4,398 4,731 10,794 13,880 16,466 18,190 3,679 4,859 5,212
Provision for bad debts........ 359 312 1,680 1,435 3,034 3,034 308 355 355
Other.......................... 5,703 5,745 9,189 11,848 12,796 13,831 3,395 3,574 3,733
Depreciation and
amortization................. 585 560 1,133 1,812 2,201 2,972 597 612 736
Merger expenses................ -- -- -- -- 3,528 3,528 -- -- --
------- ------- ------- ------- -------- ----------- ------- ------- -------
Operating income................ 1,654 2,097 6,476 11,454 11,194 12,586 4,059 4,193 4,580
Interest and other income
(expense), net................. (1,111) (1,005) (1,003) (67) 120 (810) 34 44 (94)
------- ------- ------- ------- -------- ----------- ------- ------- -------
Income before income taxes...... 543 1,092 5,473 11,387 11,314 11,775 4,093 4,237 4,486
Income tax expense (benefit).... 44 (20) 1,695 4,609 4,518 4,693 1,686 1,707 1,802
------- ------- ------- ------- -------- ----------- ------- ------- -------
Income before equity in net
earnings of Horizon LLC and
minority interest.............. 499 1,112 3,778 6,778 6,796 7,082 2,407 2,530 2,684
Equity in net earnings of
Horizon LLC.................... -- 364 1,568 -- -- -- -- -- --
Minority interest............... -- -- -- (2) (140) (140) (24) (6) (6)
------- ------- ------- ------- -------- ----------- ------- ------- -------
Net income...................... $ 499 $1,476 $5,346 $ 6,776 $ 6,656 $ 6,942 $ 2,383 $ 2,524 $ 2,678
======= ======= ======= ======= ======== =========== ======= ======= =======
Basic earnings per share(3)..... $ 0.16 $ 0.47 $ 1.05 $ 1.03 $ 0.96 $ 1.00 $ 0.35 $ 0.36 $ 0.38
======= ======= ======= ======= ======== =========== ======= ======= =======
Weighted average shares
outstanding(3)................. 3,123 3,123 5,111 6,561 6,929 6,929 6,876 6,980 6,980
======= ======= ======= ======= ======== =========== ======= ======= =======
Diluted earnings per share(3)... $ 0.14 $ 0.38 $ 0.89 $ 0.90 $ 0.87 $ 0.90 $ 0.31 $ 0.33 $ 0.35
======= ======= ======= ======= ======== =========== ======= ======= =======
Weighted average shares and
dilutive potential common
shares outstanding(3).......... 3,489 3,934 5,997 7,510 7,681 7,681 7,646 7,761 7,761
======= ======= ======= ======= ======== =========== ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term
investments.................... $ 1,633 $2,144 $3,249 $ 8,346 $ 5,517 $ 7,718 $ 1,758
Non-cash working capital
(deficit)...................... 317 (1,982) 1,145 405 (452) 2,258 4,790
Intangible assets (net)(4)...... 8,031 7,676 14,998 19,887 26,005 19,724 38,207
Total assets.................... 14,216 15,079 33,587 45,214 48,728 47,804 61,579
Total debt...................... 13,732 12,121 3,216 3,576 -- 3,709 11,046
Stockholders' equity
(deficit)...................... (2,936) (1,434) 17,225 25,149 31,682 26,818 34,504
</TABLE>
<TABLE>
<CAPTION>
AUG 31, NOV 30, FEB 29, MAY 31, AUG 31, NOV 30, FEB 28, MAY 31, AUG 31, NOV 30,
1995 1995 1996 1996 1996 1996 1997 1997 1997 1997
STATISTICAL DATA: ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF CONTRACT
LOCATIONS(5):
Contract locations in
operation................... 146 150 145 162 163 162 162 176 181 179
Contract locations signed and
unopened.................... 15 16 13 19 16 22 10 18 14 15
--- --- --- --- --- --- --- --- --- ---
Total contract locations...... 161 166 158 181 179 184 172 194 195 194
=== === === === === === === === === ===
SERVICES COVERED BY
CONTRACTS(5):
Inpatient..................... 138 142 137 155 156 152 157 164 166 165
Partial hospitalization....... 64 69 70 78 84 84 86 101 104 103
Outpatient.................... 15 16 18 25 20 29 28 21 24 27
Home health................... 1 3 6 7 13 14 13 15 17 13
CQI+.......................... 46 48 55 60 64 67 71 78 86 87
TYPES OF TREATMENT
PROGRAMS(5):
Geropsychiatric............... 102 111 117 125 144 145 153 183 197 193
Adult psychiatric............. 81 84 81 87 82 83 80 74 75 70
Substance abuse............... 9 9 9 24 20 22 21 16 10 12
Other mental health........... 2 2 2 6 5 7 8 4 9 12
Physical rehabilitation....... 23 24 22 23 22 22 22 22 20 21
</TABLE>
- ---------------
(footnotes on next page)
11
<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 and the three months ended November 30, 1997, other revenues
consisted of revenues from mental health services and employee assistance
programs conducted through Florida PPS. For pro forma fiscal 1997 and the
three months ended November 30, 1997 (actual and pro forma), other revenues
also consisted of revenues from employee assistance programs and related
services offered by Acorn. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Adjusted to reflect a three-for-two stock split effected by the Company as a
50% stock dividend on January 31, 1997 and calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
(4) The Company recorded additional goodwill of $9,258,513 and additional
management contract value of $3,370,748, reflected in the November 30, 1997
balance sheet data, as a result of the acquisition on October 31, 1997 of
Acorn. 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.
(5) Represents combined information for both Horizon and Specialty.
12
<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 November 30, 1997, 193 of the 287 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 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 and on costs for
other similar units. 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 to 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. In addition, 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 and November 30, 1997, the Company had management
contracts with 39 and 36 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
15
<PAGE> 17
Company for the year ended August 31, 1997 and approximately 16.6% of the
revenues of the Company for the three months ended November 30, 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. On December 22, 1997, the
Company received a subpeona requesting the production of documents by January
30, 1998 relating to a geropsychiatric program managed by the Company since
April 1995 at a Columbia/HCA hospital. 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 believes that it 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
16
<PAGE> 18
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 completed the Acorn Acquisition on October 31,
1997, there can be no assurance that other acquisition candidates will be
identified or that 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 November 30, 1997, approximately $30.6
million, or approximately 49.8% of the Company's total assets, was goodwill
relating to acquisitions. The Acorn Acquisition resulted in additional goodwill
of approximately $9.3 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 November 30, 1997, $38.2 million, or 62.0%, 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 acquisition by the Company, the Company could be
required to write off the goodwill associated with the acquisition.
17
<PAGE> 19
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.
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
FISCAL YEAR ENDED AUGUST 31, 1998(1):
September 1, 1997 -- November 30, 1997.................... 29.12 20.50
</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 December 22, 1997 was $22.75. As of December 15,
1997, the Company had 7,068,262 shares of Common Stock outstanding. As of
December 15, 1997, there were 43 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."
18
<PAGE> 20
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. See "Principal
and Selling Stockholders." 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 November 30, 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>
NOVEMBER 30,
1997
--------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
Cash and short-term investments(1).......................... $ 1,758
=======
Total long-term debt (including current maturities)(1)...... $11,046
-------
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; 7,026,262 shares issued
and outstanding(2)..................................... 70
Additional paid-in capital.................................. 17,037
Retained earnings........................................... 17,397
-------
Total stockholders' equity........................... 34,504
-------
Total capitalization.............................. $45,550
=======
</TABLE>
- ---------------
(1) As of November 30, 1997, the Company had a $14.0 million revolving credit
facility under which approximately $3.0 million was available at such date.
On December 9, 1997, the Company entered into a senior secured credit
facility in an aggregate amount of up to $50.0 million, which replaced the
Company's existing $14.0 million revolving credit facility. The new credit
facility consists of a $10.0 million revolving credit facility to fund
ongoing working capital requirements and a $40.0 million advance term
facility to refinance certain existing debt and to finance future
acquisitions by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 6 of Notes to Consolidated Financial Statements of the
Company.
(2) Excludes 1,552,843 shares of Common Stock issuable upon exercise of options
outstanding at November 30, 1997, at a weighted average exercise price of
$6.81 per share.
19
<PAGE> 21
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.
The summary historical consolidated financial data presented below as of and for
the three months ended November 30, 1996 and 1997 are derived from the unaudited
consolidated financial statements of the Company included elsewhere in this
Prospectus, which have been prepared by management on the same basis as the
audited Consolidated Financial Statements of the Company, and, in the opinion of
management, include all adjustments consisting of normal recurring accruals
which the Company considers necessary for a fair presentation of such
information. The results for any interim period are not necessarily indicative
of the results for a full fiscal year.
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.
The unaudited pro forma financial data presented below gives effect to the
acquisition by the Company of Acorn in a transaction accounted for as a
purchase. The unaudited pro forma statement of income is based on the individual
statements of income of the Company and Acorn appearing elsewhere in this
Prospectus and on pages F-3 through F-9 of the Company's Current Report on Form
8-K dated October 31, 1997 incorporated by reference in this Prospectus. These
unaudited pro forma financial statements should be read in conjunction with the
audited Consolidated Financial Statements and Notes thereto of the Company
included elsewhere in this Prospectus and the audited Financial Statements and
Notes thereto of Acorn included in such Current Report on Form 8-K.
20
<PAGE> 22
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED AUGUST 31, ENDED NOVEMBER 30,
-------------------------------------------------------------- ------------------------------
PRO FORMA PRO FORMA
----------- ----------
1993 1994(1) 1995(1) 1996 1997 1997 1996 1997 1997
------- ------- ------- ------- -------- ----------- ------- ------- ----------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract management revenues... $20,960 $24,962 $68,721 $95,244 $102,263 $ 102,263 $24,720 $26,599 $26,599
Other(2)....................... 7,770 5,297 634 995 7,004 14,049 2,160 2,723 4,108
------- ------- ------- ------- -------- ----------- ------- ------- -------
Total revenues........... 28,730 30,259 69,355 96,239 109,267 116,312 26,880 29,322 30,707
Operating expenses:
Salaries and benefits.......... 16,031 16,814 40,083 55,810 60,048 62,172 14,842 15,729 16,091
Purchased services............. 4,398 4,731 10,794 13,880 16,466 18,190 3,679 4,859 5,212
Provision for bad debts........ 359 312 1,680 1,435 3,034 3,034 308 355 355
Other.......................... 5,703 5,745 9,189 11,848 12,796 13,831 3,395 3,574 3,733
Depreciation and
amortization................. 585 560 1,133 1,812 2,201 2,972 597 612 736
Merger expenses................ -- -- -- -- 3,528 3,528 -- -- --
------- ------- ------- ------- -------- ----------- ------- ------- -------
Operating income................ 1,654 2,097 6,476 11,454 11,194 12,586 4,059 4,193 4,580
Interest and other income
(expense), net................. (1,111) (1,005) (1,003) (67) 120 (810) 34 44 (94)
------- ------- ------- ------- -------- ----------- ------- ------- -------
Income before income taxes...... 543 1,092 5,473 11,387 11,314 11,775 4,093 4,237 4,486
Income tax expense (benefit).... 44 (20) 1,695 4,609 4,518 4,693 1,686 1,707 1,802
------- ------- ------- ------- -------- ----------- ------- ------- -------
Income before equity in net
earnings of Horizon LLC and
minority interest.............. 499 1,112 3,778 6,778 6,796 7,082 2,407 2,530 2,684
Equity in net earnings of
Horizon LLC.................... -- 364 1,568 -- -- -- -- -- --
Minority interest............... -- -- -- (2) (140) (140) (24) (6) (6)
------- ------- ------- ------- -------- ----------- ------- ------- -------
Net income...................... $ 499 $1,476 $5,346 $ 6,776 $ 6,656 $ 6,942 $ 2,383 $ 2,524 $ 2,678
======= ======= ======= ======= ======== =========== ======= ======= =======
Basic earnings per share(3)..... $ 0.16 $ 0.47 $ 1.05 $ 1.03 $ 0.96 $ 1.00 $ 0.35 $ 0.36 $ 0.38
======= ======= ======= ======= ======== =========== ======= ======= =======
Weighted average shares
outstanding(3)................. 3,123 3,123 5,111 6,561 6,929 6,929 6,876 6,980 6,980
======= ======= ======= ======= ======== =========== ======= ======= =======
Diluted earnings per share(3)... $ 0.14 $ 0.38 $ 0.89 $ 0.90 $ 0.87 $ 0.90 $ 0.31 $ 0.33 $ 0.35
======= ======= ======= ======= ======== =========== ======= ======= =======
Weighted average shares and
dilutive potential common
shares outstanding(3).......... 3,489 3,934 5,997 7,510 7,681 7,681 7,646 7,761 7,761
======= ======= ======= ======= ======== =========== ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term
investments................... $ 1,633 $2,144 $3,249 $ 8,346 $ 5,517 $ 7,718 $ 1,758
Non-cash working capital
(deficit)...................... 317 (1,982) 1,145 405 (452) 2,258 4,790
Intangible assets (net)(4)...... 8,031 7,676 14,998 19,887 26,005 19,724 38,207
Total assets.................... 14,216 15,079 33,587 45,214 48,728 47,804 61,579
Total debt...................... 13,732 12,121 3,216 3,576 -- 3,709 11,046
Stockholders' equity
(deficit)...................... (2,936) (1,434) 17,225 25,149 31,682 26,818 34,504
</TABLE>
<TABLE>
<CAPTION>
AUG 31, NOV 30, FEB 29, MAY 31, AUG 31, NOV 30, FEB 28, MAY 31, AUG 31, NOV 30,
1995 1995 1996 1996 1996 1996 1997 1997 1997 1997
STATISTICAL DATA: ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF CONTRACT LOCATIONS(5):
Contract locations in
operation................. 146 150 145 162 163 162 162 176 181 179
Contract locations signed
and unopened.............. 15 16 13 19 16 22 10 18 14 15
--- --- --- --- --- --- --- --- --- ---
Total contract locations.... 161 166 158 181 179 184 172 194 195 194
=== === === === === === === === === ===
SERVICES COVERED BY CONTRACTS(5):
Inpatient................... 138 142 137 155 156 152 157 164 166 165
Partial hospitalization..... 64 69 70 78 84 84 86 101 104 103
Outpatient.................. 15 16 18 25 20 29 28 21 24 27
Home health................. 1 3 6 7 13 14 13 15 17 13
CQI+........................ 46 48 55 60 64 67 71 78 86 87
TYPES OF TREATMENT PROGRAMS(5):
Geropsychiatric............. 102 111 117 125 144 145 153 183 197 193
Adult psychiatric........... 81 84 81 87 82 83 80 74 75 70
Substance abuse............. 9 9 9 24 20 22 21 16 10 12
Other mental health......... 2 2 2 6 5 7 8 4 9 12
Physical rehabilitation..... 23 24 22 23 22 22 22 22 20 21
</TABLE>
- ---------------
(footnotes on next page)
21
<PAGE> 23
- ---------------
(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 and the three months ended November 30, 1997, other revenues
consisted of revenues from mental health services and employee assistance
programs conducted through Florida PPS. For pro forma fiscal 1997 and the
three months ended November 30, 1997 (actual and pro forma), other revenues
also consisted of revenues from employee assistance programs and related
services offered by Acorn. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Adjusted to reflect a three-for-two stock split effected by the Company as a
50% stock dividend on January 31, 1997 and calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
(4) The Company recorded additional goodwill of $9,258,513 and additional
management contract value of $3,370,748, reflected in the November 30, 1997
balance sheet data, as a result of the acquisition on October 31, 1997 of
Acorn. 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.
(5) Represents combined information for both Horizon and Specialty.
22
<PAGE> 24
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 194 as of November 30, 1997, and currently
operates in 38 states. Of those management contracts, 176 related to mental
health programs and 18 related to physical rehabilitation programs. The 194
management contracts cover 308 various treatment programs. The Company has also
developed a proprietary mental health outcomes measurement system known as CQI+
and at November 30, 1997 provided outcome measurement services at 87 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 many 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 194 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 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.
23
<PAGE> 25
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 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.
24
<PAGE> 26
A recently enacted amendment to 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 November 30,
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 October 31, 1997, the Company acquired all of the outstanding capital
stock of Acorn for approximately $12.7 million in cash. Acorn provides employee
assistance programs and other related services to self-insured employers. See
the audited Financial Statements and Notes thereto of Acorn and the Unaudited
Pro Forma Condensed Combined Financial Statements and Notes thereto included in
the Current Report on Form 8-K of the Company dated October 31, 1997
incorporated herein by reference.
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
25
<PAGE> 27
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, 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 revenues for the year ended August 31,
1997.
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 and the three months ended November 30, 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>
THREE MONTHS
ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
--------------------- -------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Contract management revenues................. 99.1% 99.0% 93.6% 92.0% 90.7%
Other........................................ 0.9 1.0 6.4 8.0 9.3
----- ----- ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0 100.0
Operating expenses
Salaries and benefits........................ 57.8 58.0 55.0 55.2 53.6
Purchased services........................... 15.6 14.4 15.1 13.7 16.6
Provision for bad debts...................... 2.4 1.5 2.8 1.1 1.2
Other........................................ 13.2 12.3 11.7 12.7 12.1
Depreciation and amortization................ 1.7 1.9 2.0 2.2 2.2
Merger expenses.............................. -- -- 3.2 -- --
----- ----- ----- ----- -----
Total operating expenses....................... 90.7 88.1 89.8 84.9 85.7
----- ----- ----- ----- -----
Operating income............................... 9.3 11.9 10.2 15.1 14.3
----- ----- ----- ----- -----
Interest and other income (expense), net....... (1.4) (0.1) 0.1 0.1 0.2
----- ----- ----- ----- -----
Income before income taxes and minority
interest..................................... 7.9 11.8 10.3 15.2 14.5
Income tax expense............................. 2.5 4.8 4.1 6.2 5.9
----- ----- ----- ----- -----
Income before equity in net earnings of Horizon
LLC and minority interest.................... 5.4 7.0 6.2 9.0 8.6
Equity in net earnings of Horizon LLC.......... 2.3 -- -- -- --
Minority interest.............................. -- -- (0.1) -- --
----- ----- ----- ----- -----
Net income..................................... 7.7% 7.0% 6.1% 9.0% 8.6%
===== ===== ===== ===== =====
Number of contracts in operation, end of
period....................................... 146 163 181 162 179
</TABLE>
THREE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1996
Revenue. Revenues for the three months ended November 30, 1997 were $29.3
million representing an increase of $2.4 million, or 8.9%, as compared to
revenues of $26.9 million for the corresponding period in the prior fiscal year.
An increase in contract management revenues accounted for $1.9 million of the
$2.4 million
26
<PAGE> 28
increase in revenues. The $1.9 million increase in contract management revenues
results from revenue recorded for Geriatric and Clay Care. The Company acquired
100% of the outstanding voting stock of Geriatric and Clay Care effective March
15, 1997 and consolidated Geriatric and Clay Care with the Company as of the
effective date of acquisition. Patient service revenues increased $1.3 million
of which $690,000 resulted from revenue recorded for Acorn and the remaining
increase resulted from the expansion of provider services at Florida PPS. The
Company acquired 100% of the outstanding voting stock of Acorn effective October
31, 1997 and consolidated Acorn with the Company as of the effective date of
acquisition. Other revenues for the three months ended November 30, 1996
included $700,000 resulting from a favorable cost report adjustment for Mountain
Crest.
Salaries and Benefits. Salaries and benefits for the three months ended
November 30, 1997 were $15.7 million representing an increase of $887,000, or
6%, as compared to salaries and benefits of $14.8 million for the prior fiscal
year. Salary and benefits cost per full time equivalent for the three months
ended November 30, 1997 were $14,338 representing an increase of $121 per full
time equivalent, or 0.9%, as compared to salary and benefits cost of $14,217 per
full time equivalent for the prior fiscal year. The number of full time
equivalents for the three months ended November 30, 1997 was approximately
1,097, representing an increase of 53.0, or 5.1%, as compared to approximately
1,044 full time equivalents in the prior fiscal year.
Depreciation and Amortization. Depreciation and amortization expenses for
the three months ended November 30, 1997 were $612,000 representing an increase
of $14,000, or 2.3%, as compared to depreciation and amortization expenses of
$597,000 for the corresponding period in the prior fiscal year. An increase of
$52,000 is due to the amortization of goodwill of $9.3 million, $4.5 million,
and $700,000 resulting from the acquisition of Acorn, Geriatric and Clay Care,
respectively. Amortization expense also increased $63,000 in relation to the
value placed on the contracts of Acorn, Geriatric and Clay Care. These increases
were offset by a decrease in amortization expense of $37,000 associated with
contracts acquired in 1990 which were fully amortized at February 1997. These
increases were also offset by the recording of an additional $73,000 of
depreciation expense in November 1996 due to the change in the Company's
definition of a capital expenditure. The remaining increase results from the
depreciation expense of additional equipment acquired by acquisition or
purchased for the operation of the Company's contract management business.
Other Operating Expenses (Including Purchased Services and Provision for
Bad Debts). Other operating expenses for the three months ended November 30,
1997 were $8.8 million representing an increase of $1.4 million, or 18.9%, as
compared to other operating expenses of $7.4 million for the corresponding
period in the prior fiscal year. The following components identify the variances
between the periods reported.
Purchased services included a $635,000 increase in direct service fees for
the three months ended November 30, 1997 as compared to the same period in the
prior fiscal year as a result of the expansion of provider services at Florida
PPS and the acquisition of Acorn on October 31, 1997. Direct service fees
increased $460,000 at Florida PPS and $175,000 in relation to Acorn,
respectively. In addition, an increase occurred in purchased services due to an
increase of $397,000 in consulting fees. Consulting fees increased $164,000 as a
result of software upgrades at the regional offices and National Support Center,
$50,000 resulting from the acquisition of Geriatric and Clay Care effective
March 15, 1997, $53,000 is related to the annual Program Directors conference,
and $32,000 related to a Mental Health Outcomes assessment study. Purchased
services also includes a $27,000 increase in Medial Directors' administrative
fees for the three months ended November 30, 1997 as compared to the three
months ended November 30, 1996. Medical Directors' administrative fees increased
$163,000 and $50,000 as a result of the acquisitions of Geriatric and Clay Care
effective March 15, 1997. This increase was offset by a decline in Medical
Directors' administrative fees between the periods resulting from certain
physician contracts having been renegotiated resulting in a general lowering of
compensatory fees.
Bad Debt Expense was $355,000 for the three months ended November 30, 1997
as compared to $308,000 for the three months ended November 30, 1996. This
increase was primarily due to the non-timely payment by contracted hospitals.
27
<PAGE> 29
Other operating expense was $3.6 million for the three months ended
November 30, 1997 as compared to $3.4 million for the three months ended
November 30, 1996. This increase primarily results from the acquisitions of
Geriatric and Clay Care, effective March 15, 1997, and the acquisition of Acorn
effective October 31, 1997.
Interest and Other Income (Expense), Net. Interest income, net of interest
expense, and other income for the three months ended November 30, 1997 was
$44,000, as compared to net interest expense and other income of $37,000 for the
corresponding period in the prior fiscal year. This change results primarily
from interest income of $7,000 related to Acorn, which was acquired October 31,
1997.
Income Tax Expense. For the three month period ended November 30, 1997, the
Company recorded federal and state income taxes of $1,707,000 resulting in a
combined tax rate of 40.3%. For the three month period ended November 30, 1996,
the Company recorded federal and state income taxes of $1,686,000 resulting in a
combined tax rate of 41.2%.
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 $3.0 million
(3.1%) 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 $4.8 million (5.0%) of the revenue increase resulted
from a 7.0% 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 66.7% 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.
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 $56,821 representing an increase of $3,430 per full time
equivalent, or 6.4%, 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 1,057, representing an
increase of 11.5, or 1.1%, as compared to approximately 1,045 full time
equivalents in the prior fiscal year. The increase in the number of full time
equivalents of 1.1% 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
28
<PAGE> 30
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 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.
29
<PAGE> 31
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 FOR FISCAL 1997
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 $28,087
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
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Texas Commerce Bank National Association, as Agent (the
"Agent") for itself and other lenders party to the Credit Agreement, for a
senior secured credit facility in an aggregate amount of up to $50.0 million
(the "New Credit Facility"). The New Credit Facility consists 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
refinance certain existing debt and to finance future acquisitions by the
Company (the "Advance Term Loan Facility"). The New Credit Facility replaced the
Company's existing $14.0 million revolving credit facility.
The following summary of certain material provisions of the Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Credit Agreement, a copy of which was filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1997, as filed with the Commission on December 19, 1997, and
is available from the Company upon request.
The Company is the borrower under the New Credit Facility which is
unconditionally guaranteed by all material domestic subsidiaries of the Company.
The Revolving Credit Facility terminates November 30, 2000 and the Advance Term
Loan Facility has a term of five years, with drawdowns available until November
30, 1999. Once a drawdown is made under the Advance Term Loan Facility, the
commitment thereunder will be reduced by the amount funded. Amounts outstanding
under the Advance Term Loan Facility on November 30, 1999 are to be repaid in
twelve quarterly principal payments, beginning February 28, 2000, based upon a
five year amortization schedule with the first eleven principal payments being
1/20th of the outstanding balance on November 30, 1999, and the twelfth being
the remaining unpaid principal balance. Principal outstanding under the New
Credit Facility bears interest at the "Base Rate" (the greater of the Agent's
"prime rate" or the federal funds rate plus .5%) plus 0% to .5% (depending on
the Company's Indebtedness to EBITDA Ratio as defined in the Credit Agreement)
or the "Eurodollar Rate" plus .75% to 1.5% (depending on the Indebtedness to
EBITDA Ratio), as selected by the Company. The Company incurs 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 (until November 30, 2000) and unused portion of the Advance Term Loan
Facility (until November 30, 1999).
30
<PAGE> 32
The Company is subject to certain covenants which include 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
twelve consecutive monthly 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
require the Company to satisfy certain ongoing financial covenants. The New
Credit Facility is secured by a first lien or first priority security interest
in and/or pledge of substantially 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 $1.8
million at November 30, 1997 and $2.0 million currently available under the
revolving credit facility will be sufficient to cover all cash requirements over
the next twelve months, including estimated capital expenditures of $1.2
million. The Company is likely to require additional capital to fund any further
acquisitions.
On October 31, 1997, the Company acquired all the outstanding capital stock
of Acorn for approximately $12.7 million. To fund the acquisition, the Company
utilized approximately $1.7 million of existing cash and incurred debt of
approximately $11.0 million under the revolving credit facility. The Company
believes that its cash flow from operations and the remaining availability under
its New 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 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, 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
31
<PAGE> 33
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.
32
<PAGE> 34
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 194 as of November 30,
1997 and currently operates in 38 states. Of those management contracts, 176
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 November 30, 1997 provided outcome
measurement services at 87 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 194 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 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 November 30, 1997, 67.2% 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,
required 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 13,000 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 contract management for a full range of physical
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<PAGE> 36
rehabilitation services. In addition to acute and sub-acute physical therapy and
rehabilitation services, the Company also provides contract management for 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 and the acquisition of
Acorn in October 1997, 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 176 of the Company's 194 management contracts at November
30, 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 CQI+ System enables client hospitals to demonstrate to
third-party payors the effectiveness of the treatment programs and provides a
valuable tool to the hospital in marketing to patients and providers. The CQI+
System 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, required 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 November 30, 1997, 87 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 13,000 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 contract management for 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 194 management contracts at November 30, 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 November 30, 1997, the Company provided mental
health care services for approximately 263,793 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 November 30, 1997, the employee assistance
programs operated by the Company covered approximately 268,219 employees.
On October 31, 1997, the Company acquired 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 provide 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. At November 30, 1997,
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Acorn had a total of 120 contracts with employers covering over 251,000
employees and, under most of its contracts, the dependents of the 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 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, which included 13 employees at November
30, 1997.
At November 30, 1997, the Company had approximately 1,093 program employees
at its contract locations and approximately 161 employees at its regional and
national support center offices.
At November 30, 1997, Florida PPS had 43 administrative employees and
employed 26 health care professionals, all of which were located in the
Tampa-St. Petersburg area. In addition, Florida PPS has contracted with
approximately 807 independent mental health care professionals and institutions
for the provider network that furnish the mental health care and employee
assistance program services.
Acorn is headquartered in the Philadelphia metropolitan area and at
November 30, 1997 employed 51 employees, all of which were located in its
corporate offices. It provides mental health and other services through a
network of independent health care professionals and institutions. At November
30, 1997, Acorn had contracts with approximately 7,000 individual providers
located throughout the United States.
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.
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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 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 November 30, 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
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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.
Contract Locations
At November 30, 1997, the Company had a total of 194 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..................... 9 Nevada....................... 3
California................... 18 New Hampshire................ 2
Colorado..................... 2 New Jersey................... 5
Connecticut.................. 1 New Mexico................... 1
Florida...................... 11 New York..................... 3
Georgia...................... 9 North Carolina............... 6
Illinois..................... 5 Ohio......................... 9
Indiana...................... 2 Oklahoma..................... 8
Iowa......................... 2 Oregon....................... 2
Kansas....................... 1 Pennsylvania................. 12
Kentucky..................... 3 South Carolina............... 3
Louisiana.................... 2 Tennessee.................... 16
Maine........................ 1 Texas........................ 13
Maryland..................... 1 Vermont...................... 2
Massachusetts................ 9 Virginia..................... 1
Michigan..................... 6 Washington................... 4
Mississippi.................. 4 Wisconsin.................... 2
</TABLE>
Client Hospitals
The Company's clients are primarily small to medium sized hospitals and
include some large tertiary care hospitals. At November 30, 1997, 34.0% of the
Company's management contracts were with proprietary hospitals. The remainder
are with primarily community not-for-profit hospitals.
At August 31, 1997 and November 30, 1997, the Company had management
contracts with 39 and 36 hospitals directly or indirectly owned by Columbia/HCA
of which 34 had programs in operation. These 36 contracts accounted for
approximately 19.1% of the Company's revenues for the year ended August 31, 1997
and approximately 16.6% of the revenues of the Company for the three months
ended November 30, 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 36 Columbia/HCA contracts at November 30, 1997, 12
contracts contain a provision limiting the number of
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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 November 30, 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 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 and Acorn market their respective mental health services and
employee assistance programs through the administrative staff personnel located
in their respective Tampa and Philadelphia offices.
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. 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 psycholo-
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gists, 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 contract management 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.
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<PAGE> 44
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.
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
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<PAGE> 45
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 November 30, 1997, of the 287 mental health
treatment programs managed by the Company, 193 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 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 and on costs for other similar units. 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 November 30, 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
to 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 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 ceilings on reimbursable amounts, and could have
a material adverse effect on the business,
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<PAGE> 46
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 believes that it 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.
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
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<PAGE> 47
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 applicable laws. There can be no assurance, however,
that the Company's activities will not be challenged by regulatory authorities.
The Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark
II") prohibiting physicians from referring Medicare and Medicaid patients to an
entity with which the physician has a "financial relationship" for the
furnishing of a list of "designated health 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.
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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 November 30, 1997, the Company employed 1,387 people, including 1,085
full-time employees, 219 part-time employees, and 83 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 November
30, 1997, the Company had administrative services contracts with 255 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
November 30, 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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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.
As a result of its acquisition of Acorn on October 31, 1997, the Company
leases 12,835 square feet of office space in the Philadelphia metropolitan area
with a lease term expiring on October 31, 1999.
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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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....................... 54 Chief Executive Officer and Chairman of
the Board of Directors
Robert A. Lefton....................... 41 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........................ 62 Director
William H. Longfield................... 59 Director
Donald E. Steen........................ 51 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 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 1997 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 August 1981. He has also been President of Prometheus
Funding Corp. since November 1992 and a member of the board of directors of that
corporation since August 1985. Mr. Bello also serves on the board of directors
of Zenith National Insurance Corp., United Dental Care, Inc. and Reliance
Financial Services Corporation.
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 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
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<PAGE> 51
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 has been President and Chief Executive Officer of
Community Dental Services, Inc., a corporation operating dental practices in
California, since 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 December 15, 1997, Mr. Finkel
beneficially owned 9.4% 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 other Specialty stockholders may have the same piggyback
registration rights under certain conditions with
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<PAGE> 52
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 Specialty 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 and November 30, 1997,
the Company had mental health management contracts with 39 and 36 general acute
care hospitals directly or indirectly owned by Columbia/HCA of which 34 had
programs in operation. These 36 contracts accounted for approximately 19.1% of
the Company's revenues for the fiscal year ended August 31, 1997 and
approximately 16.6% of the revenues of the Company for the three months ended
November 30, 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 36 Columbia/HCA contracts at November
30, 1997, 12 contracts contain a provision limiting the number of contracts
which Columbia/HCA can cancel without cause to 33.3% during any calendar year.
51
<PAGE> 53
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 December 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 only 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)............ 694,131 9.4% 100,000 594,131 8.0%
Howard B. Finkel(1)(4)(5)............... 663,600 9.4 425,000 238,600 3.4
Jack R. Anderson(1)(2).................. 527,400 7.5 -- 527,400 7.5
Lutheran Brotherhood(1)................. 417,650 5.9 -- 417,650 5.9
Joseph A. Cohen(1)...................... 375,650 5.3 -- 375,650 5.3
James W. McAtee(2)(4)(6)................ 303,096 4.2 42,515 260,581 3.6
George E. Bello(2)(7)................... 177,600 2.5 -- 177,600 2.5
Gary A. Kagan(2)(4)(8).................. 150,297 2.1 38,205 112,092 1.6
John F. DeVaney(9)...................... 18,376 * -- 18,376 *
Robert A. Lefton(10).................... 10,500 * -- 10,500 *
Donald E. Steen(7)...................... 9,600 * -- 9,600 *
William H. Longfield(7)................. 8,100 * -- 8,100 *
James E. Buncher........................ 2,250 * -- 2,250 *
All directors and executive officers as
a group (11 persons)(11).............. 2,564,950 33.0 605,720 1,959,230 25.3
ADDITIONAL SELLING STOCKHOLDERS(5):
Michael S. McCarthy..................... 192,360 2.7 185,314 7,046 *
NME Management Services, Inc............ 179,200 2.5 172,636 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. The address of Joseph A.
Cohen is c/o The Garnet Group, 825 Third Ave, 40th Floor, New York, New
York 10022.
(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
52
<PAGE> 54
in full, Messrs. Newman, Anderson, Bello, McAtee and Kagan would
beneficially own 544,131, 467,400, 147,600, 219,581 and 107,092 shares of
Common Stock, respectively, after the offering, which would represent 7.4%,
6.6%, 2.1%, 3.0% and 1.5%, respectively, of the Common Stock outstanding
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 and 600 shares of Common Stock
issuable upon the exercise of stock options exercisable within 60 days.
(8) Consists of 150,297 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options.
(9) Consists of 18,376 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options.
(10) Consists of 8,625 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options and 1,875 shares of Common Stock
issuable upon the exercise of stock options exercisable within 60 days.
(11) Includes 711,775 shares of Common Stock issuable upon the exercise of stock
options held by certain directors and executive officers that are
immediately exercisable or will be exercisable within 60 days. 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 1,773,230
shares of Common Stock, which would represent 22.9% of the Common Stock
after the offering. See "Underwriters."
53
<PAGE> 55
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, as of December
15, 1997, beneficially owned in the aggregate 2,589,525 shares of Common Stock
and options to purchase 711,775 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.
54
<PAGE> 56
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
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The audited historical financial statements of Acorn included on pages F-3
through F-9 of the Company's Form 8-K dated October 31, 1997 have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
55
<PAGE> 57
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 (as amended, 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.
56
<PAGE> 58
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
and November 30, 1997 (unaudited)...................... F-3
Consolidated Statements of Income for the years ended
August 31, 1995, 1996, and 1997
and for the three months ended November 30, 1996
(unaudited) and November 30, 1997
(unaudited)............................................ F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended August 31, 1995, 1996 and
1997 and for the three months ended November 30, 1997
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1995, 1996, and 1997
and for the three months ended November 30, 1996
(unaudited) and November 30, 1997 (unaudited).......... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 59
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.
As discussed in Note 11 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share".
PRICE WATERHOUSE LLP
Dallas, Texas
October 13, 1997, except as to Note 11, which is as of December 23, 1997
F-2
<PAGE> 60
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
-------------------------- ------------
1996 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments........................... $ 8,346,373 $ 5,516,575 $ 1,757,868
Accounts receivable less allowance for uncollectible
accounts of $2,387,622, $1,357,423 and $1,800,494 at
August 31, 1996, 1997, and November 30, 1997
(unaudited), respectively............................... 12,720,429 11,995,254 16,895,430
Receivable from employees................................. 89,126 63,303 49,001
Prepaid expenses and supplies............................. 173,131 182,208 249,933
Income taxes receivable................................... 96,210 951,256 --
Other receivables......................................... 89,383 51,877 155,583
Other current assets...................................... 71,940 170,154 51,340
Current deferred taxes.................................... 2,116,582 1,687,512 1,865,980
----------- ----------- -----------
TOTAL CURRENT ASSETS................................ 23,703,174 20,618,139 21,025,135
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Equipment................................................. 2,704,225 3,694,717 4,065,763
Building improvements..................................... 109,467 255,406 260,298
----------- ----------- -----------
2,813,692 3,950,123 4,326,061
Less accumulated depreciation............................. 1,729,440 2,208,083 2,393,171
----------- ----------- -----------
1,084,252 1,742,040 1,932,890
Restricted cash............................................. 344,404 -- --
Goodwill, net of accumulated amortization of $1,564,195,
$2,078,177 and $2,245,188 at August 31, 1996, 1997, and
November 30, 1997 (unaudited), respectively............... 15,330,555 21,553,594 30,645,096
Management contracts, net of accumulated amortization of
$1,991,093, $2,744,666 and 3,004,464 at August 31, 1996,
1997 and November 30, 1997 (unaudited), respectively...... 4,555,985 4,451,426 7,562,376
Other assets................................................ 195,630 363,208 413,028
----------- ----------- -----------
TOTAL ASSETS........................................ $45,214,000 $48,728,407 $61,578,525
=========== =========== ===========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,687,805 $ 1,747,393 $ 872,273
Employee compensation and benefits........................ 5,276,659 6,233,477 5,853,081
Income taxes payable...................................... 84,942 -- 734,839
Accrued expenses (Note 5)................................. 5,721,827 7,572,929 6,994,407
Payable to Health Insurance Program....................... 661,248 -- --
Current debt maturities................................... 519,600 -- 22,290
----------- ----------- -----------
TOTAL CURRENT LIABILITIES........................... 14,952,081 15,553,799 14,476,890
Other liabilities......................................... 724,511 355,803 425,488
Long-term debt, net of current debt maturities............ 3,056,714 -- 11,023,973
Deferred income taxes..................................... 1,322,635 987,704 993,247
----------- ----------- -----------
TOTAL LIABILITIES................................... 20,055,941 16,897,306 26,919,598
----------- ----------- -----------
Commitments and contingencies (Note 9)
Minority interest........................................... 8,755 148,648 154,836
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, authorized 500,000
shares; none issued or outstanding...................... -- -- --
Common stock, $.01 par value, 10,000,000, 40,000,000, and
40,000,000 shares authorized at August 31, 1996, 1997
and November 30, 1997 (unaudited), respectively;
6,702,305 shares issued and 6,696,849 shares outstanding
at August 31, 1996, 6,966,762 shares issued and
outstanding at August 31, 1997 and 7,026,262 shares
issued and outstanding at November 30, 1997
(unaudited)............................................. 67,023 69,668 70,263
Additional paid-in capital................................ 16,046,163 16,739,425 17,036,473
Retained earnings......................................... 9,066,399 14,873,360 17,397,355
Deferred compensation..................................... (25,000) -- --
Treasury stock, at cost................................... (5,281) -- --
----------- ----------- -----------
25,149,304 31,682,453 34,504,091
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $45,214,000 $48,728,407 $61,578,525
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 61
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED AUGUST 31, NOVEMBER 30,
---------------------------------------- ---------------------------
1995 1996 1997 1996 1997
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Contract management
revenue.................. $68,720,645 $95,244,454 $102,263,283 $ 24,720,109 $ 26,598,903
Other....................... 634,238 994,512 7,003,512 2,159,845 2,723,509
----------- ----------- ------------ ------------ ------------
Total revenues...... 69,354,883 96,238,966 109,266,795 26,879,954 29,322,412
----------- ----------- ------------ ------------ ------------
EXPENSES:
Salaries and benefits....... 40,083,239 55,809,614 60,048,345 14,842,069 15,728,569
Purchased services.......... 10,794,068 13,880,426 16,466,115 3,679,232 4,858,679
Provision for bad debts..... 1,680,396 1,435,049 3,033,693 307,744 355,027
Other....................... 9,188,828 11,848,384 12,795,910 3,394,743 3,574,921
Depreciation and
amortization............. 1,132,604 1,811,790 2,201,450 597,453 611,897
Merger expenses (Note 3).... -- -- 3,527,671 -- --
----------- ----------- ------------ ------------ ------------
Operating expenses.......... 62,879,135 84,785,263 98,073,184 22,821,241 25,129,093
----------- ----------- ------------ ------------ ------------
Operating Income.............. 6,475,748 11,453,703 11,193,611 4,058,713 4,193,319
----------- ----------- ------------ ------------ ------------
Other income (expense)
Interest expense -- related
party.................... (1,190,680) (24,298) -- -- --
Interest expense -- other... (221,439) (395,123) (402,003) (106,303) (61,555)
Interest income and other... 409,047 353,231 523,877 143,540 105,613
Loss on sale of equipment... -- -- (1,888) (2,515) --
----------- ----------- ------------ ------------ ------------
Income before income taxes.... 5,472,676 11,387,513 11,313,597 4,093,435 4,237,377
Income tax expense............ 1,694,534 4,609,360 4,517,688 1,686,382 1,707,194
----------- ----------- ------------ ------------ ------------
Income before equity in net
earnings of Horizon LLC and
minority interest........... 3,778,142 6,778,153 6,795,909 2,407,053 2,530,183
Equity in net earnings of
Horizon LLC................. 1,567,720 -- -- -- --
Minority interest............. -- (2,397) (139,893) (24,074) (6,188)
----------- ----------- ------------ ------------ ------------
Net income.................... $ 5,345,862 $ 6,775,756 $ 6,656,016 $ 2,382,979 $ 2,523,995
=========== =========== ============ ============ ============
Basic earnings per common
share....................... $ 1.05 $ 1.03 $ 0.96 $ 0.35 $ 0.36
=========== =========== ============ ============ ============
Diluted earnings per common
share....................... $ 0.89 $ 0.90 $ 0.87 $ 0.31 $ 0.33
=========== =========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 62
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 1995, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997 (UNAUDITED)
<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
Net income (unaudited).......... -- -- -- 2,523,995 -- -- 2,523,995
Tax benefit associated with
stock options
(unaudited)................... -- -- 177,955 -- -- -- 177,955
Exercise of stock options
(unaudited)................... 59,500 595 119,093 -- -- -- 119,688
--------- ------- ----------- ----------- -------- ------- -----------
Balance at November 30, 1997
(unaudited)..................... 7,026,262 $70,263 $17,036,473 $17,397,355 $ -- $ -- $34,504,091
========= ======= =========== =========== ======== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 63
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED AUGUST 31, ENDED NOVEMBER 30,
---------------------------------------- --------------------------
1995 1996 1997 1996 1997
------------ ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income............................................... $ 5,345,862 $ 6,775,756 $ 6,656,016 $ 2,382,979 $ 2,523,995
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 1,132,604 1,811,790 2,201,450 597,453 611,897
Loss on sale of equipment.............................. -- -- 1,888 2,515 --
Minority interest...................................... -- 2,397 139,893 24,074 6,188
Horizon LLC investment income.......................... (1,567,720) -- -- -- --
Deferred income taxes.................................. 84,230 9,909 94,139 95,688 5,543
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 (84,828) --
Decrease (increase) in accounts receivable............. 4,832,797 (1,307,286) 1,143,322 (2,643,986) (4,724,025)
Decrease (increase) in other receivables............... (118,035) 285,346 264,589 (14,951) 862,252
Decrease (increase) in prepaid expenses and supplies... 483,751 (80,875) (599,553) (178,948) (54,810)
Decrease (increase) in other assets.................... 171,329 (127,188) (144,101) (349,639) (108,159)
Increase in accounts payable, accrued expenses, and
other liabilities.................................... 1,922,276 1,450,473 1,031,381 569,550 (1,760,922)
Increase (decrease) in income taxes payable............ -- 75,344 (272,649) 786,729 734,839
Decrease in payable to health insurance program........ (1,126,208) -- (661,248) (661,248) --
Increase (decrease) in other liabilities............... 243,423 151,872 (749,532) (262,348) 69,685
------------ ----------- ----------- ----------- ------------
Net cash provided by operating activities................. 11,356,620 8,866,681 9,349,201 263,040 (1,833,517)
------------ ----------- ----------- ----------- ------------
Investing Activities:
Purchase of property and equipment....................... (621,201) (393,703) (1,412,441) (669,209) (292,037)
Proceeds from sale of equipment.......................... -- -- 13,485 5,350 --
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) -- (47,825) --
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) -- (200,985)
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) -- --
Payment for purchase of Acorn Behavioral HealthCare
Management Corporation, net of cash acquired........... -- -- -- -- (12,726,120)
------------ ----------- ----------- ----------- ------------
Net cash used in investing activities..................... (14,422,215) (4,206,509) (8,788,790) (711,684) (13,219,142)
------------ ----------- ----------- ----------- ------------
Financing activities:
Payments on long-term debt............................... (11,931,242) (3,108,047) (4,114,862) (337,356) (3,691)
Payment on notes receivable for purchase of common
stock.................................................. -- 50,000 25,000 -- --
Proceeds from long term borrowings....................... 3,203,000 3,291,820 -- -- 11,000,000
Net proceeds from issuance of common stock............... 12,879,351 165,408 164,239 -- 119,688
Sale of rights to purchase options....................... 16,750 -- -- -- --
Tax benefit related to stock option exercise............. 2,313 37,717 511,949 134,410 177,955
------------ ----------- ----------- ----------- ------------
Net cash provided by (used in) financing activities....... 4,170,172 436,898 (3,413,674) (202,946) 11,293,952
------------ ----------- ----------- ----------- ------------
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) (651,590) (3,758,707)
Cash and short-term investments at beginning of year...... 2,144,726 3,249,303 8,346,373 8,369,838 5,516,575
------------ ----------- ----------- ----------- ------------
Cash and short-term investments at end of year............ $ 3,249,303 $ 8,346,373 $ 5,516,575 $ 7,718,248 $ 1,757,868
============ =========== =========== =========== ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest............................................... $ 1,412,119 $ 419,421 $ 402,003 $ 106,303 $ 61,555
============ =========== =========== =========== ============
Income taxes........................................... $ 2,188,363 $ 4,930,499 $ 4,584,015 $ 405,617 $ 15,777
============ =========== =========== =========== ============
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; 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; and the acquisition of Acorn Behavioral
HealthCare Management Corporation and additional
payments for the acquisition of 80% of the common stock
of Professional Psychological Services, Inc. during the
three months ended November 30, 1997.
Fair value of assets acquired.......................... $ 24,038,476 $ 5,815,535 $ 9,004,431 -- $ 13,105,174
Cash paid.............................................. (13,630,316) (3,825,000) (7,524,968) -- (12,927,342)
Conversion of equity investment........................ (4,351,737) -- -- -- --
Common stock exchanged................................. -- (870,000) -- -- --
------------ ----------- ----------- ----------- ------------
Liabilities assumed.................................... $ 6,056,423 $ 1,120,535 $ 1,479,463 -- $ 177,832
============ =========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 64
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> 65
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 and November 30, 1997 (unaudited), the Company had management contracts
with 39 and 36, hospitals directly or indirectly owned by Columbia/HCA
Healthcare Corporation ("Columbia/HCA"), of which 36 and 34, had programs in
operation. These 36 and 34 contracts accounted for 19.1% and 16.6% of the
Company's net revenues for the year ended August 31, 1997 and the three months
ended November 30, 1997 (unaudited), respectively. In the aggregate, including
terminated contracts, revenues generated by hospitals directly or indirectly
owned by Columbia/HCA accounted for 15.6%, 20.3%, 20.3% and 16.9% of the
Company's net revenues for the years ended August 31, 1995, 1996, 1997 and the
three months ended November 30, 1997 (unaudited), respectively. Of the 39 and 36
Columbia/HCA contracts at August 31, 1997 and November 30, 1997 (unaudited), 14
and 12 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
F-8
<PAGE> 66
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
At August 31, 1996, 1997 and November 30, 1997 (unaudited), accounts
receivable from hospitals directly or indirectly owned by Columbia/HCA were
approximately $1,966,000, $2,089,000 and $2,700,000 (unaudited), 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.
EARNINGS PER SHARE: Earnings per share has been computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). Basic earnings per share is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if the Company's stock options and warrants were exercised. Such
dilutive potential common shares are calculated using the treasury stock method.
All prior-period earnings per share data presented has been restated in
accordance with SFAS 128. Pursuant to the requirements of the Securities and
Exchange Commission, common shares and dilutive potential common 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 dilutive potential common
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.
F-9
<PAGE> 67
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
NEW ACCOUNTING STANDARDS: 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> 68
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> 69
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 and the three months ended November 30,
1997, PPS generated $5,682,323 and $1,863,523 (unaudited) in gross revenues, and
net income of $699,467 and $93,994 (unaudited), respectively.
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
F-12
<PAGE> 70
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, 1997 and
November 30, 1997:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------- NOVEMBER 30,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Outstanding claims............................... $ -- $ 416,552 $ 834,628
Reserve for contract adjustments................. 1,036,084 1,287,664 1,051,315
Health insurance................................. 396,926 936,639 883,454
Other............................................ 4,288,817 4,932,074 4,225,010
---------- ---------- ----------
$5,721,827 $7,572,929 $6,994,407
========== ========== ==========
</TABLE>
F-13
<PAGE> 71
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
At August 31, 1996, 1997 and November 30, 1997 (unaudited), the Company had
the following long-term debt:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, NOVEMBER 30,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, bearing interest at the Citibank,
N.A. base rate plus 2% per annum with interest
and principal payments due monthly through
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........................................ -- -- 11,000,000
SANWA Leasing Corporation......................... -- -- 46,263
---------- ---- -----------
3,576,314 -- 11,046,263
---------- ---- -----------
Less current maturities........................... (519,600) -- (22,290)
---------- ---- -----------
$3,056,714 $ -- $11,023,973
========== ==== ===========
</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 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.
On October 16, 1997, the Company increased its existing revolving line of
credit from TCB from $11.0 million to $14.0 million.
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 December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Texas Commerce Bank National Association, as Agent, for
itself and other lenders party to the Credit Agreement for a senior secured
credit facility in an aggregate amount of up to $50.0 million (the "New Credit
F-14
<PAGE> 72
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Facility"). The New Credit Facility consists of a $10.0 million revolving credit
facility to fund ongoing working capital requirements and a $40.0 million
advance term loan facility to refinance certain existing debt and to finance
future acquisitions by the Company. The New Credit Facility replaced the
Company's existing $14.0 million revolving credit facility.
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."
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>
F-15
<PAGE> 73
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
Basic earnings per share............................... $ 1.03 $ 0.96
Diluted earnings per share............................. 0.90 0.87
Pro forma (unaudited):
Basic earnings per share............................... $ 1.02 $ 0.95
Diluted earnings per share............................. 0.89 0.85
</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.
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.
F-16
<PAGE> 74
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-17
<PAGE> 75
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.
The Company recorded federal and state income taxes for the three months
ended November 30, 1997 in the amount of $1,707,000 (unaudited) resulting in a
combined tax rate of 40.3%.
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
F-18
<PAGE> 76
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would not be in excess of any reserves or have a material adverse effect on the
Company's financial position or results of operations.
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. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." All prior-period earnings per share
data presented has been restated in accordance with SFAS 128.
The following is a reconciliation of the numerators and the denominators of
the basic and diluted earnings per share computations for net income.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------------------------------------------------
1995 1996
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income........... $5,345,862 $6,775,756
BASIC EPS............ 5,345,862 5,110,550 $1.05 6,775,756 6,561,481 $1.03
===== =====
EFFECT OF DILUTIVE
SECURITIES
Warrants and
options............ 886,268 948,567
--------- ---------
DILUTED EPS.......... $5,345,862 5,996,818 $0.89 $6,775,756 7,510,048 $0.90
========== ========= ===== ========== ========= =====
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
1997
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net Income........... $6,656,016
BASIC EPS............ 6,656,016 6,928,827 $0.96
=====
EFFECT OF DILUTIVE
SECURITIES
Warrants and
options............ 752,442
---------
DILUTED EPS.......... $6,656,016 7,681,269 $0.87
========== ========= =====
</TABLE>
F-19
<PAGE> 77
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED NOVEMBER 30,
---------------------------------------------------------------------------------
1996 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income.................................... $2,382,979 $2,523,995
BASIC EPS..................................... 2,382,979 6,876,018 $0.35 2,523,995 6,980,086 $0.36
===== =====
EFFECT OF DILUTIVE SECURITIES
Warrants & options............................ 770,290 781,157
--------- ---------
DILUTED EPS................................... $2,382,979 7,646,308 $0.31 $2,523,995 7,761,243 $0.33
========== ========= ===== ========== ========= =====
</TABLE>
Options to acquire 15,000 shares of common stock at $26.00 per share were
outstanding during the year ended August 31, 1997 and options to acquire 15,000
and 5,000 shares of common stock at $26.00 and $26.375, respectively, were
outstanding during the three months ended November 30, 1997 but were not
included in the computations of diluted EPS because the options' exercise price
was greater than the average market price of the common shares. The options,
which expire on August 1, 2007 and October 6, 2007, were still outstanding at
November 30, 1997.
The Company issued options to acquire 167,500 and 5,000 shares on September
1, 1997 and October 6, 1997, respectively. Options outstanding at August 31,
1997 to acquire 23,000, 48,500 and 42,000 shares were exercised in October 1997,
November 1997 and on December 9, 1997, respectively.
12. 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 basic earnings per share........................ $ 0.82
===========
Pro Forma diluted earnings per share...................... $ 0.72
===========
</TABLE>
F-20
<PAGE> 78
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal
1996 and 1997(1):
<TABLE>
<CAPTION>
BASIC DILUTED
OPERATING NET EARNINGS EARNINGS
REVENUES INCOME INCOME PER SHARE PER SHARE
----------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Quarter Ended:
November 30, 1995..... $22,278,883 $2,432,133 $1,467,121 $0.23 $0.20
February 29, 1996..... 24,109,706 2,419,307 1,419,706 0.22 0.19
May 31, 1996.......... 24,846,620 3,475,500 2,028,465 0.31 0.27
August 31, 1996....... 25,003,757 3,126,763 1,860,464 0.28 0.24
Quarter Ended:
November 30, 1996..... $26,879,954 $4,058,712 $2,382,979 $0.35 $0.31
February 28, 1997..... 26,363,617 3,300,063 2,004,618 0.29 0.26
May 31, 1997.......... 27,936,645 3,284,349 1,966,131 0.28 0.26
August 31, 1997....... 28,086,580 550,487 302,288 0.04 0.04
</TABLE>
- ---------------
(1) For the purposes of recording the pooling of interest combination,
Specialty's financial statements for the quarters ended March 31, 1996, June
30, 1996, September 30, 1996 and December 31, 1996 were combined with
Horizon's Financial Statements for the quarters ended November 30, 1995,
February 29, 1996, May 31, 1996 and August 31, 1996. Specialty's results of
operations for the year ended August 31, 1997 have been combined with
Horizon's results for the same period.
14. 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. For the three months ended November 30, 1996 and 1997 the
Company recognized matching contributions of approximately $59,000 and $84,000,
respectively (unaudited).
15. 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.
16. SUBSEQUENT EVENTS (UNAUDITED)
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn Behavioral HealthCare Management Corporation ("Acorn"), a
Pennsylvania corporation. The Company accounted for the acquisition of Acorn by
the purchase method as required by generally accepted accounting principles.
Acorn provides employee assistance programs and other related services to
self-insured employers. Acorn had total revenues of approximately $7.0 million
for the year ended August 31, 1997. The purchase
F-21
<PAGE> 79
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
price of approximately $12.7 million in cash was funded from $1.7 million of
working capital and $11.0 million from an advance under the Company's existing
revolving credit facility with Texas Commerce Bank, N.A. The purchase price
exceeded the fair value of Acorn's tangible net assets by $12,629,261, of which
$9,258,513 is recorded as goodwill and $3,370,748 as contracts.
The unaudited pro forma combined results of operations of the Company and
Acorn for the year ended August 31, 1997 after giving effect to certain pro
forma adjustments are as follows:
<TABLE>
<S> <C>
Revenue..................................................... $116,312,399
============
Net income.................................................. $ 6,942,289
============
Basic earnings per share.................................... $ 1.00
============
Diluted earnings per share.................................. $ .90
============
</TABLE>
The unaudited pro forma combined results of operations of the Company and
Acorn for the three months ended November 30, 1996 and 1997 after giving effect
to certain pro forma adjustments are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
--------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Revenue............................................... $28,400,176 $30,707,392
=========== ===========
Net income............................................ $ 2,396,267 $ 2,677,753
=========== ===========
Basic earnings per share.............................. $ .35 $ .38
=========== ===========
Diluted earnings per share............................ $ .31 $ .35
=========== ===========
</TABLE>
F-22
<PAGE> 80
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................................ 3,500.00
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...................................... 36,802.93
-----------
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> 81
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(1)
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.(1)
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(2)
24.1 -- Power of Attorney (contained on the signature page of the
Registration Statement on Form S-3, which this Amendment
No. 1 amends)
</TABLE>
- ---------------
(1) Previously filed with the Registration Statement on Form S-3, which this
Amendment No. 1 amends.
(2) 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 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.
II-2
<PAGE> 82
(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> 83
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 Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lewisville, State of Texas on December
23, 1997.
HORIZON HEALTH CORPORATION
By: /s/ JAMES W. MCATEE
------------------------------------
James W. McAtee
Executive Vice President
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the 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 December 23, 1997
- ----------------------------------------------------- Board and Chief Executive
James Ken Newman Officer (Principal
Executive Officer)
/s/ JAMES W. MCATEE Director, Executive Vice December 23, 1997
- ----------------------------------------------------- President, Chief Financial
James W. McAtee Officer and Treasurer
(Principal Financial
Officer)
/s/ CLIFF W. GARDNER Vice President -- Controller December 23, 1997
- ----------------------------------------------------- (Principal Accounting
Cliff W. Gardner Officer)
/s/ JACK R. ANDERSON* Director December 23, 1997
- -----------------------------------------------------
Jack R. Anderson
/s/ WILLIAM H. LONGFIELD* Director December 23, 1997
- -----------------------------------------------------
William H. Longfield
/s/ GEORGE E. BELLO* Director December 23, 1997
- -----------------------------------------------------
George E. Bello
/s/ DONALD E. STEEN* Director December 23, 1997
- -----------------------------------------------------
Donald E. Steen
/s/ JAMES E. BUNCHER* Director December 23, 1997
- -----------------------------------------------------
James E. Buncher
/s/ HOWARD B. FINKEL* Director December 23, 1997
- -----------------------------------------------------
Howard B. Finkel
</TABLE>
- ---------------
* Signed by James W. McAtee, Attorney-in-fact
II-4
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<C> <S>
1.1 -- Form of Underwriting Agreement(1)
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.(1)
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(2)
24.1 -- Power of Attorney (contained on the signature page of the
Registration Statement on Form S-3, which this Amendment
No. 1 amends)
</TABLE>
- ---------------
(1) Previously filed with the Registration Statement on Form S-3, which this
Amendment No. 1 amends.
(2) Filed herewith
<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, except
as to Note 11, which is as of December 23, 1997, relating to the consolidated
financial statements of Horizon Health Corporation (the "Company") which appears
in such Prospectus. We also consent to the incorporation by reference of our
report dated October 2, 1997, relating to the financial statements of Acorn
Behavioral HealthCare Management Corporation, which appears on page F-2 of the
Company's current Report on Form 8-K dated October 31, 1997. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
December 23, 1997
