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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File number 1-13626
HORIZON MENTAL HEALTH MANAGEMENT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2293354
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
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(Address of principal executive offices, including zip code)
(972) 420-8200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of June 6, 1997, there were 5,566,762 shares of the registrant's Common
Stock, $.01 par value, outstanding and the aggregate market value of the shares
of such stock held by non-affiliates of the registrant was $86,036,740.
Solely for purposes of computing such aggregate market value of the outstanding
Common Stock, shares owned by directors and executive officers of the
registrant have been excluded.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on Form
10-K portions of the information contained in the registrant's proxy statement
for its annual meeting of stockholders held on January 29, 1997.
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INDEX
HORIZON MENTAL HEALTH MANAGEMENT, INC.
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . 17
PART II
Item 5. Market for the Company's Common Stock
and Related Stockholder Matters . . . . . . . . . . . 18
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 22
Item 8. Financial Statements and Supplementary Data . . . . . . 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 32
PART III
Item 10. Directors and Executive Officers of the Registrant . . . 33
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . 33
Item 13. Certain Relationships and Related Transactions . . . . . 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Horizon Mental Health Management, Inc. ("Horizon" or the "Company"),
directly and through its wholly owned subsidiaries, is the leading contract
manager of mental health programs offered by general acute care hospitals in
the United States. Horizon's contract management services enable its client
hospitals to expand the clinical services provided to the community by the
hospital. The treatment programs managed by Horizon provide a continuum of
mental health services, including inpatient hospitalization, partial
hospitalization (or day treatment), outpatient and home health services. In
addition, Horizon has developed and offers as an additional service a
sophisticated outcome measurement system that permits the client hospital to
demonstrate clinical results of the treatment programs to third-party payors
and that assists the clinical staff in evaluating the effectiveness of the
treatment programs.
Horizon 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 has grown
primarily on an internal basis increasing both the number of its management
contracts and the number and variety of its treatment programs and services.
The Company had management contracts with 108, 112 and 123 general acute care
hospitals at August 31, 1994, 1995 and 1996, respectively, of which 99, 100 and
107, respectively, had programs in operation on such dates.
At October 25, 1996, Horizon had management contracts with 122 general
acute care hospitals located in 36 states. As of that date, 107 of the
contracts were in operation covering 189 various treatment programs. At
present, Horizon primarily manages geropsychiatric mental health treatment
programs (mental health programs for the elderly) and adult psychiatric mental
health treatment programs. In addition, at October 25, 1996 the Company
managed six substance abuse treatment programs. Of the treatment programs in
operation at October 25, 1996, nine provided outpatient services and twelve
provided home health mental health services which the Company initiated as a
new service in August 1994. In addition to the 189 various treatment programs
at October 25, 1996, the Company had 64 contracts to provide its outcome
measurement services which it initiated as a new service in February 1994.
Effective August 1, 1994, Horizon and Mental Health Management, Inc.
("MHM") formed Horizon Mental Health Management, L.L.C. ("Horizon LLC").
Horizon and MHM owned 72.5% and 27.5% of the Horizon LLC, respectively. On
such date, the Horizon LLC assumed management responsibility for the
performance of 39 MHM management contracts (of which 37 were in operation).
Twenty-three of such contracts were still in operation and included in the
management contracts of the Company at August 31, 1996 noted above.
Horizon consummated an initial public offering of its common stock in
March 1995, and closed the sale of additional shares pursuant to the
underwriters' over-allotment option in April 1995. Of the $11,999,528 net
proceeds to the Company from the offering, $9,683,467 was used in March 1995 to
purchase the entire minority interest of MHM in the Horizon LLC which at that
time became a wholly owned subsidiary of the Company. The Horizon LLC was
consolidated with the Company from March 1, 1995 through August 31, 1995.
Effective September 1, 1995, the Horizon LLC was dissolved and its operations
combined with Horizon. During fiscal 1995, Horizon substantially reduced the
balance of its outstanding long-term indebtedness which it paid in full in
October 1995. In September 1995, the Company entered into an $11 million
revolving credit agreement with a bank under which it had no outstanding loan
amount at October 31, 1996.
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On July 31, 1996, Horizon acquired eighty percent (80%) of the outstanding
common stock of Florida Professional Psychological Services, Inc., also known
as Professional Psychological Services, Inc. ("PPS"). PPS has been
consolidated with Horizon as of August 1, 1996. Horizon accounted for the
acquisition of PPS by the purchase method as required by generally accepted
accounting principles. Based in Clearwater, Florida, PPS specializes in full
risk, capitated managed behavioral health programs and employee assistance
programs. The purchase price is based primarily on a 6.25 multiple of the 1996
pre-tax income of PPS to be determined in the first quarter of 1997. As of
October 7, 1996, Horizon estimates the purchase price will be approximately
$1,800,000 of which $1,225,000 was paid on July 31, 1996. In addition, Horizon
also obtained an option to acquire the remaining twenty percent (20%) of the
outstanding PPS common stock at a future date. The sellers, constituting all
the shareholders of PPS, also obtained the right to put to Horizon such shares
on certain dates. The option and put prices for the remaining PPS shares are
based on the pre-tax income of PPS in future years.
The Company's executive offices are located at 1500 Waters Ridge Drive,
Lewisville, Texas 75057-6011. Its telephone number is (972) 420-8200.
MENTAL HEALTH SERVICES INDUSTRY
A major shift has occurred in the delivery of mental health services away
from the public sector to the private sector. Concern about increasing mental
health expenditures, especially in the private sector, and publicity about
questionable admission and other practices of certain mental health care
providers have changed the way mental health services are provided. Partial
hospitalization (or day treatment), outpatient treatment, short-term crisis
intervention, residential treatment and employee assistance plans are examples
of programs that have been designed as alternatives and complements to
inpatient care.
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 efficiently. In response to the growing
influence of managed care, integrated delivery systems are forming in many
communities. Integrated delivery systems are alliances of health care
facilities and providers designed to offer a complete range of health care
services in order to serve effectively the growing number of patients covered
by managed care plans. The Company believes that general acute care hospitals
are an essential component of these integrated delivery systems.
The Company also believes that, due to higher costs for ancillary medical
services, it costs freestanding psychiatric hospitals more to provide mental
health services than it costs general acute care hospitals to provide inpatient
and partial hospitalization mental health services. Inpatient and partial
hospitalization services associated with general acute care hospitals have
inherently lower costs due to the ability of such 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. The Company believes that
patients and their families are more comfortable seeking treatment in a
community based general acute care hospital than in a freestanding psychiatric
hospital. Unlike freestanding psychiatric hospitals, most patients of general
acute care hospital-based mental health programs are referred by the hospital's
medical staff or result from the hospital's reputation in the community.
Furthermore, unlike general acute care hospitals, freestanding psychiatric
hospitals are not presently eligible to receive reimbursement under the
Medicaid program for mental health care provided to Medicaid-eligible adults.
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MARKET FOR MENTAL HEALTH MANAGEMENT SERVICES
In addition to the traditional role of providing food service and
housekeeping contract management services, independent contract management
companies are increasingly managing key clinical departments of general acute
care hospitals, including emergency, anesthesia, physical therapy and
psychiatric. Hospitals outsource mental health programs to independent
management companies for several reasons, including:
o Expertise necessary for the development, management and clinical
operation of mental health programs differs from that for traditional
medical/surgical services.
o Hospitals may lack access to skilled psychiatric professionals and the
support staff needed to operate mental health programs.
o Hospitals may lack expertise in the marketing and development
activities required to support mental health programs.
o Hospitals may lack expertise necessary to design and operate mental
health programs that qualify as distinct part units ("DPUs") exempt
from the Medicare diagnosis related groups ("DRGs") system and that
satisfy regulatory, licensing and accreditation requirements.
Horizon believes that its expertise in the development and management of
cost-effective mental health programs, complemented by its sophisticated
outcome measurement system, make its management services attractive to general
acute care hospitals. Horizon believes that hospitals both with and without
existing mental health programs are potential clients. At October 25, 1996,
approximately 68% of Horizon's contracts were for mental health programs that
did not exist in the hospital prior to Horizon's engagement and approximately
32% were for programs that existed in the hospital prior to Horizon's
engagement.
The Company believes that significant demand exists for programs offering
a complete continuum of mental health services. In addition, the Company
believes that general acute care hospital-based mental health programs
providing inpatient, partial hospitalization, outpatient and home health
services, complemented by a sophisticated quality and outcome measurement
system and by oversight and utilization review under the hospital's medical
staff, are more flexible and attractive partners in integrated delivery
systems.
HORIZON STRATEGY
Horizon's strategy is to (i) pursue aggressively new management contracts,
(ii) continue to develop all elements of the continuum of mental health
services with existing clients, (iii) emphasize its outcome measurement system
as an additional service and (iv) expand its management of outpatient mental
health services.
New Management Contracts
The Company believes that there is a substantial opportunity to provide
mental health contract management services to general acute care hospitals in
the United States. The Company utilizes a systematic approach to identify
potential client hospitals with a database containing comprehensive financial
and other information on more than 5,000 general acute care hospitals in the
United States. The Company develops a select list of potential clients which
is reviewed and updated on an ongoing basis and aggressively markets to such
potential clients emphasizing the Company's expertise in managing the continuum
of mental health services and the benefits to the potential clients of offering
mental health programs. The Company's sales efforts also emphasize the value
of quality, independently managed hospital-based mental health programs to
integrated delivery systems, managed care companies and other payors.
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The Company intends to continue to emphasize the area of geropsychiatric
programs in general acute care hospitals. At October 25, 1996, approximately
68% of the mental health treatment programs managed by the Company were
geropsychiatric programs. Many elderly patients with short-term mental
illnesses 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 Horizon'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. Horizon has developed a particular expertise in
assisting hospitals to receive Medicare approval and in developing specialized
psychiatric programs for the elderly.
The Continuum of Mental Health Services
The Company believes that general acute care hospitals need to be able to
offer a broad array of 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 development of other mental health
services in addition to inpatient hospitalization services has been a key focus
in the Company's efforts to provide management services covering the full
continuum of mental health services. Prior to 1990, the Company focused only
on the management of programs offering inpatient services. Since that time, it
has expanded its management services to cover additional elements of the
continuum of mental health services, including partial hospitalization,
outpatient and home health services.
The Company's CQI+ Outcome Measurement System
The Company intends to continue to emphasize its CQI+ Outcome Measurement
System, which provides outcome information regarding the effectiveness of a
client hospital's mental health programs. The availability of such information
is intended to enable the Company and its client hospitals to demonstrate to
third-party payors whether patients are improving as a result of the treatment
provided. It also provides the Company and the client hospital with a valuable
tool to compare clinical results and refine clinical treatment programs. With
the growth of managed care, the Company believes that its CQI+ System will
become a more important component of the services it provides.
Management of Outpatient Mental Health Services
Historically, the Company did not pursue the management of outpatient
services because it did not want to compete with or duplicate the services
traditionally provided in the offices of psychiatrists and other mental health
professionals. Recently, however, mental health professionals have sought
outside management expertise in organizing various practice affiliations in
order to compete effectively for managed care business. Horizon intends to
expand its management of outpatient services and assist psychiatrists,
psychologists, social workers and other mental health care professionals in
developing and managing mental health outpatient services as part of integrated
delivery systems or as independent provider networks. Horizon believes that
its existing relationships with 157 psychiatric medical directors at the
contract locations as of October 25, 1996 provide a significant opportunity for
the development of additional outpatient management services. The Company
intends to utilize its marketing, outcome measurement, utilization review and
clinical management expertise to expand its management of outpatient services.
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HORIZON OPERATIONS
General
Horizon operates through a regional structure with offices in the Boston,
Chicago, Dallas, San Francisco and Tampa metropolitan areas. The structure is
designed to keep key operating employees of the Company in direct contact with
clients. Each of the Company's five regional offices has a vice president with
overall responsibility for up to 30 contract locations and who in turn
supervises regional directors, each of whom has direct responsibility over
eight to ten contract locations. Other regional office personnel include
clinical and outpatient specialists, who are available to provide assistance to
the local programs and client hospital personnel. Horizon has approximately
118 employees located at its regional and corporate offices, with an additional
579 employees at the contract locations.
Management Contracts
Horizon provides its management services under contracts with its client
hospitals. The Company is willing to individualize each contract to address
the differing needs of each client and its community. Horizon and the client
hospital determine the mental health programs and services to be offered by the
hospital and managed by Horizon, which may consist of one or more treatment
programs offering inpatient, partial hospitalization, outpatient or home health
services. Under the contracts, the hospital typically provides the space
(including beds for inpatient programs), nursing staff and support services
(such as billing, dietary and housekeeping).
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, 1994, 1995 and 1996, the Company had
successfully retained 82%, 77% and 83%, respectively, of the management
contracts in existence at the beginning of such fiscal years.
Under each contract, Horizon 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 Horizon's management contracts
require Horizon to refund some or all of its fee if either Medicare
reimbursement for mental health 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, 1996, Horizon was required to refund
approximately $393,000 of its fees in relation to these denials.
Each 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 psychiatric
medical director has a contract with Horizon 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 Horizon employees
for specified periods, disclose confidential information of Horizon or render
certain administrative or management services within specified time periods and
geographic areas to any enterprise in competition with Horizon or the programs
it manages. Except for the nursing staff, which is typically provided by the
hospital, the other program personnel are employees of Horizon. At October 1,
1996, Horizon had up to 13 employees at each contract location, with an average
of five employees per contract location. Horizon's management contracts
typically prohibit the client hospital from soliciting the employment of
Horizon employees during the contract term and for specified periods
thereafter.
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Horizon assists in the development of each mental health program as
requested by the client hospital, including such matters as licensing,
accreditation, certificate of need approvals and Medicare certification.
Horizon also develops and implements a marketing plan for the mental health
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.
Horizon markets the mental health programs in the community in the name of the
client hospital. Horizon's name is not used and its role is not publicly
emphasized in the operation of the mental health programs offered by its client
hospitals. Each patient is admitted by the medical staff of the client
hospital, and all charges for mental health services provided to the patient
accrue directly to the client hospital or treating physician.
Horizon 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.
Treatment Programs
Horizon 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.
Elements of the Continuum of Care
The treatment programs managed by Horizon 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 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.
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CQI+ Outcome Measurement System
The Company has developed a sophisticated outcome measurement system,
known as the CQI+ Outcome Measurement System, which it began offering in 1993.
This system allows client hospitals to demonstrate clinical program results to
managed care companies and other payors. In addition, the CQI+ System provides
a qualitative and quantitative tool for the clinical staff to evaluate the
clinical effectiveness of the treatment programs and to make adjustments in the
programs in order to improve quality and appropriateness of care. It also
assists the client hospitals in complying with the increasing demands of
regulatory and accrediting bodies for quality assessment of their mental health
programs.
Under the CQI+ System, 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 multi-disciplinary 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. Horizon trains and supervises on-site
personnel to ensure the collection of accurate outcome measurement data.
The services provided by the CQI+ System enable the client hospitals to
demonstrate to third-party payors the results of the treatment provided. At
October 25, 1996, 64 of the Company's management contracts included the CQI+
System and 46 had been implemented.
Internal Clinical Audits
Horizon has established a comprehensive internal clinical audit process.
The Company's regional clinical specialists review the services and clinical
documentation of the treatment programs to ensure compliance with client
hospital, federal and state standards. The Company also has an internal
clinical auditor who makes unannounced visits to contract locations on a
periodic basis. The auditor reviews medical records and marketing programs,
and conducts interviews with physicians, referral sources and client hospital
staff members. Results of the audits are reported directly to the senior
management of the Company, rather than through the normal operating
organization.
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Contract Locations
At October 25, 1996, Horizon had a total of 122 management contracts with
general acute care hospitals located in 36 states, as shown below:
<TABLE>
<CAPTION>
Number of Number of
State Contracts State Contracts
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<S> <C> <C> <C>
Alabama 5 Missouri 3
Arizona 4 Nebraska 1
Arkansas 6 Nevada 2
California 15 New Hampshire 2
Colorado 1 New Jersey 1
Connecticut 1 New York 2
Florida 13 North Carolina 2
Georgia 4 Ohio 4
Illinois 3 Oklahoma 2
Indiana 2 Oregon 2
Iowa 2 Pennsylvania 10
Kansas 1 South Carolina 3
Kentucky 1 Tennessee 4
Louisiana 2 Texas 6
Maryland 1 Vermont 1
Massachusetts 5 Virginia 2
Michigan 3 Washington 2
Mississippi 2 Wisconsin 2
</TABLE>
Fifteen of the 122 contracts were not in operation at October 25, 1996, but are
anticipated to commence program operations within the next twelve months.
Training
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.
Marketing Programs
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 a community referral
coordinator who works with a referral development committee consisting of
Company and hospital personnel to identify prospective referral sources. The
community referral coordinator informs physicians and other mental health
professionals and nursing homes in the community of the treatment programs that
are available at the client hospital. The community referral coordinator also
designs and offers community educational programs regarding mental health
issues.
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Management Contract Sales
At October 1, 1996, the Company employed seven full-time management
contract salespersons. At least one salesperson is located in each of the
regional offices. 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 programs, as well as hospitals with existing mental
health 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 Horizon salesperson
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 mental health programs. Horizon works
with the potential client to develop contract terms responsive to the client's
specific needs.
Client Hospitals
Horizon's clients range from large tertiary care hospitals to other
general acute care hospitals located in smaller communities. At October 25,
1996, 42% of Horizon's management contracts were with proprietary chain
hospitals. The remainder are mostly community not-for-profit hospitals. Other
Horizon clients include proprietary general acute care hospitals, some of which
are members of an affiliated group.
At August 31, 1996, Horizon had management contracts with 32 hospitals
directly or indirectly owned by Columbia/HCA Healthcare Corporation
("Columbia/HCA"), of which 27 had programs in operation. These 27 contracts
accounted for 23.0% of the Company's net revenues for the year ended August 31,
1996. In the aggregate, including terminated contracts, revenues generated by
hospitals directly or indirectly owned by Columbia/HCA accounted for 26.1% of
the Company's net revenues for the year ended August 31, 1996. Of the 32
Columbia/HCA contracts at August 31, 1996, 19 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 addition, at August 31, 1996,
Horizon had eight management contracts with hospitals owned by Community Health
Systems, of which seven had programs in operation and accounted for 6.2% of the
Company's net revenues for the year ended August 31, 1996. No other individual
hospital or affiliated group of hospitals accounted for more than 5% of the
gross revenues of Horizon in such fiscal year.
COMPETITION
The mental health contract management services industry is highly
competitive. Horizon competes with several national competitors and many
regional and local competitors, some of which have greater resources than
Horizon. In addition, hospitals could elect to manage their own mental health
programs.
Competition among contract managers for hospital-based mental health
programs is generally based upon reputation, 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 programs that provide
the full continuum of mental health 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 services provided to
patients. As a result, competitors without management experience covering the
various levels of the continuum of mental health services may not be able to
compete successfully. Horizon believes that its reputation and management
expertise will enable it to compete successfully in this rapidly changing
market.
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In addition, general acute care hospitals offering mental health services
compete for patients with other providers of mental health care, including
freestanding psychiatric hospitals, independent psychiatrists, psychologists
and other mental health care providers.
GOVERNMENT REGULATION
Horizon's business is affected by federal, state and local laws and
regulations concerning, among other matters, mental health facilities and
reimbursement for mental health services. These regulations impact the
development and operation of mental health programs managed by Horizon for its
client hospitals. Licensing, certification, reimbursement and other applicable
government regulations vary by jurisdiction and are subject to periodic
revision. Horizon is not able to predict the content or impact of future
changes in laws or regulations affecting the mental health industry.
Mental Health 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 programs which Horizon manages are also subject
to licensure and certification requirements. Horizon 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. Horizon believes
that the mental health 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.
Reimbursement for Mental Health Services
Most of the Company's client hospitals receive reimbursement under one or
more of the Medicare or Medicaid programs for mental health services provided
in programs managed by Horizon. Horizon is paid directly by its client
hospitals for the management services it provides. While fees paid to Horizon
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 all or a
portion of its fee if either Medicare denies reimbursement for an individual
patient treatment or if the fee paid to the Company is denied by Medicare as a
reimbursable cost. In order to receive reimbursement under the Medicare or
Medicaid programs, each hospital or facility must meet applicable requirements
promulgated by the United States Department of Health and Human Services
relating to the type of facility, personnel, standards of patient care and
compliance with all state and local laws, rules and regulations. Horizon
believes that the programs it manages comply in all material respects with
applicable Medicare and Medicaid requirements.
12
<PAGE> 13
In the mid-1980's, changes in reimbursement rates and procedures included
the creation of the Medicare prospective payment system using predetermined
reimbursement rates for diagnosis related groups ("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 distinct part
units ("DPUs") and are not included in the DRG system. Services provided by
DPUs are reimbursed on an actual cost basis, subject to certain limitations.
The mental health programs managed by Horizon 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 October 25, 1996, of
the 189 treatment programs managed by the Company, 128 were geropsychiatric
programs for which a substantial majority of the patients are covered by
Medicare. 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 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
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 Horizon'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 Horizon is disallowed as a reimbursable cost.
During the fiscal year ended August 31, 1996, Horizon was required to refund
approximately $393,000 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. There can be no assurance that hospitals which
offer mental health 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 and other
health care charges paid to related parties. A party is considered "related"
to a provider if it is deemed to be controlled by the provider. One test for
determining control for this purpose is whether the percentage of the total
revenues of the party received from services rendered to the provider is so
high that it effectively constitutes control. Although the Company does not
receive sufficient revenues from any customer, including Columbia/HCA, that
would make it a related party, it is possible that such regulations could limit
the number of management contracts that the Company could have with
Columbia/HCA or any other client.
13
<PAGE> 14
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. Horizon 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.
In addition, federal and some state laws impose restrictions on referrals
for certain designated health services by physicians and, in a few states,
psychologists and other mental health care professionals to entities with which
they have financial relationships. The Company believes that its operations
comply with these restrictions to the extent applicable, although no assurance
can be given regarding compliance in any particular factual situation. Federal
legislation has been considered to expand current law from its application to
Medicare and Medicaid business to all payors and to additional health services.
Certain states are considering adopting similar restrictions or expanding the
scope of existing restrictions. There can be no assurance that the federal
government or other states in which the Company operates will not enact similar
or more restrictive legislation or restrictions that could under certain
circumstances impact the Company's operations.
Under a significant number of its management contracts, Horizon receives a
variable fee related in part to average daily patient census of the mental
health program. In addition, Horizon has entered into agreements with
physicians to serve as medical directors at the mental health programs and
facilities managed by Horizon, which generally provide for payments to such
persons by Horizon as compensation for their administrative services. These
medical directors also generally provide professional services at such mental
health programs and facilities. In 1991, regulations were issued under federal
fraud and abuse laws creating certain "safe harbors" for relationships between
health care providers and referral sources. Any relationship that satisfies
the terms of the safe harbor is considered permitted. Failure to satisfy a
safe harbor, however, does not mean that the relationship is prohibited.
Although the contracts and relationships between Horizon 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.
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.
14
<PAGE> 15
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.
EMPLOYEES
At October 1, 1996, the Company employed 697 people, including 594 full-
time employees and 103 part-time 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 October 25, 1996, the Company had
administrative services contracts with 157 physicians to serve as medical
directors for the mental health programs managed by Horizon.
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.
15
<PAGE> 16
ITEM 2. PROPERTIES
At August 31, 1996, the Company leased 9,702 square feet for its National
Support Center in Denton, Texas under lease terms expiring on September 30,
1996. Subsequent to the end of fiscal year 1996, the Company relocated its
National Support Center to Lewisville, Texas and occupied a building consisting
of 40,000 square feet under lease terms expiring September 26, 2001. In
association with the move, the Company did not renew four leases in the Dallas
metropolitan area for 19,253 square feet under lease terms expiring September
30, 1996. The four offices were relocated to the new National Support Center
in Lewisville, Texas.
In addition, at August 31, 1996 the Company leased an aggregate of 16,919
square feet of space for five regional offices in the Boston, Chicago, Dallas,
San Francisco, and Tampa metropolitan areas, with lease terms expiring from
September 1996 to January 1999. The Company also leases 1932 and 978 square
feet of space for outpatient clinics in Little Rock, Arkansas and Sparks,
Nevada. Except for one partial hospitalization program operating in 3,437
square feet of space, the space required for mental health 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.
Effective with the acquisition of PPS on July 31, 1996, the Company leases
an aggregate of 12,628 square feet in the Tampa metropolitan area with lease
terms expiring from September 30, 1997 to April 30, 2001.
ITEM 3. 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.
16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the
Company during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, set forth below is
certain information regarding the executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James Ken Newman . . . . . . . . 52 President, Chief Executive Officer, and
Chairman of the Board of Directors
James W. McAtee . . . . . . . . 51 Executive Vice President-Finance &
Administration, Chief Financial Officer,
Treasurer and Secretary; Director
Gary A. Kagan . . . . . . . . . 45 Executive Vice President-Development
John F. DeVaney . . . . . . . . 44 Executive Vice President, Operations
Robert A. Lefton . . . . . . . . 40 Executive Vice President, Operations
</TABLE>
----------------------
James Ken Newman has been President and Chief Executive officer of the
Company since July 1989 and Chairman since February 1992. Mr. Newman
currently serves as a director of United Dental Care, Inc. and Telecare
Corporation.
James W. McAtee has been Executive Vice President-Finance &
Administration of the Company since February 1992 and Chief Financial
Officer, Treasurer and Secretary of the Company since September 1990. He
has been a director of the Company since July 1995. He was a Senior Vice
President of the Company from September 1990 to February 1992.
Gary A. Kagan has been Executive Vice President-Development of the
Company since January 1992. From April 1990 to December 1991, he served
as President of the subsidiary of the Company engaged in the contract
management business. From December 1983 to April 1990, he served as
President of Horizon Health Management Company, the predecessor of the
Company which was engaged in the contract management business.
John F. DeVaney became Executive Vice President, Operations September
1, 1996. 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 April 1990 to August 1994. From September 1988 to
April 1990, he was a Regional Vice President of Horizon Health Management
Company, the predecessor of the Company.
Robert A. Lefton became Executive Vice President, Operations September
1, 1996. 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. From August 1986 to
November 1991, he was a Senior Vice President of Affiliated Medical
Enterprises, Inc., involved in hospital administration. Affiliated
Medical Enterprises, Inc. filed a voluntary bankruptcy petition under
Chapter 11 of the United States Bankruptcy Code in January 1991, and
thereafter its assets were liquidated.
Officers of the Company are elected by the Board of Directors of the
Company and serve for one year or until their respective successors are
elected and qualified.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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". 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>
CALENDAR PERIOD SALE PRICE
--------------- ----------
HIGH LOW
---- ---
<S> <C> <C>
June 1, 1995 - August 31, 1995 (1) . . . . . . . . $10.08 $ 6.58
September 1, 1995 - November 30, 1995 (1). . . . . $12.67 $ 9.50
December 1, 1995 - February 29, 1996 (1) . . . . . $12.67 $10.67
March 1, 1996 - May 31, 1996 (1) . . . . . . . . . $15.00 $12.75
June 1, 1996 - August 31, 1996 (1) . . . . . . . . $19.50 $14.17
</TABLE>
(1) Adjusted to reflect three-for-two stock split effected by Horizon
as a 50% stock dividend on January 31, 1997
The last reported sale price per share of the Common Stock as reported
by the Nasdaq National Market on June 6, 1997 was $20.00. As of June 6, 1997,
the Company had 5,566,762 shares of Common Stock outstanding. As of June 6,
1997, there were approximately 36 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> 19
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below for the fiscal years
ended August 31, 1994, 1995 and 1996, and at August 31, 1995 and August 31,
1996, are derived from the audited consolidated financial statements of Horizon
included elsewhere in this report. The selected historical financial data
presented below for the fiscal years ended August 31, 1992 and 1993, and
at August 31, 1992, 1993 and 1994, are derived from the audited consolidated
financial statements of Horizon not included herein. The selected financial
data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the financial statements and related notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
Fiscal Year Ended August 31,
-----------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1992 1993 1994(1) 1995(1) 1996
-----------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract management revenues $ 17,144 $20,960 $24,962 $28,716 $61,450
Other revenues (2) 13,051 7,770 5,297 634 995
-----------------------------------------------------
Net revenues 30,195 28,730 30,259 29,350 62,445
Operating Costs & Expenses:
Salaries and benefits 16,864 16,031 16,814 15,390 34,706
Purchased services 5,129 4,398 4,731 4,645 8,635
Provision for bad debts 627 359 312 209 74
Depreciation and amortization 853 585 560 903 1,308
Other 10,890(3) 5,703 5,745 4,267 8,806
-----------------------------------------------------
Income (loss) from operations (4,168) 1,654 2,097 3,936 8,916
Interest and other income (expense), net (1,369) (1,111) (1,005) (754) 324
-----------------------------------------------------
Income (loss) from continuing operations
before income taxes (5,537) 543 1,092 3,182 9,240
Income tax expense (benefit) (242) 44 (20) 804 3,674
-----------------------------------------------------
Income (loss) before equity in net earnings
of Horizon LLC and minority interest (5,295) 499 1,112 2,378 5,566
Equity in net earnings of Horizon LLC -- -- 364(4) 1,568(4) --
Minority interest 0 0 0 0 2
-----------------------------------------------------
Net income (loss) $ (5,295) $ 499 $ 1,476 $ 3,946 $ 5,564
=====================================================
Net income (loss) per common share (6) $ (1.70) $ 0.13 $ 0.35 $ 0.76 $ 0.85
=====================================================
Weighted average number of common
shares outstanding (6) 3,123 3,738 4,184 5,163 6,525
=====================================================
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
August 31,
--------------------------------------------------
BALANCE SHEET DATA: 1992 1993 1994 1995 1996
--------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Cash $ 4,444 $ 1,633 $ 2,144 $ 3,167 $ 7,940
Working capital (deficit) (2,269) 1,950 162 2,468 5,473
Intangible assets (net) (5) 9,865 8,031 7,676 13,985 15,314
Total assets 24,192 14,216 15,079 25,352 32,872
Total debt 19,008 13,732 12,121 2,507 0
Stockholders' equity $ (3,434) $ (2,936) $(1,434) $14,652 $20,359
</TABLE>
20
<PAGE> 21
(1) Effective August 1, 1994, the Horizon LLC assumed management
responsibility for all of the then existing management contracts
of Horizon and MHM. Certain provisions of the limited liability
company agreement of the Horizon LLC which required the consent of
MHM for certain transactions prevented Horizon from having the
ability to control the Horizon LLC under generally accepted
accounting principles and therefore the Horizon LLC is not
consolidated with Horizon for accounting purposes through February
28, 1995. As a result, the revenues and expenses of the Horizon
LLC for the period August 1, 1994 through February 28, 1995 are
not included in Horizon (Historical) revenues and expenses;
instead, for such periods Horizon accounted for its investment in
the Horizon LLC by the equity method, and reflected Horizon's
share of the Horizon LLC's net income for the period in question
as "Equity in Net Earnings of Horizon LLC." Effective with the
acquisition of the minority interest of MHM on March 20, 1995, the
Horizon LLC became a wholly owned subsidiary of Horizon and has
therefore been consolidated with the Company effective March 1,
1995.
(2) Other revenues consist primarily of revenues earned from Ross and
Mountain Crest Hospitals while owned or operated by Horizon,
patient services and physician contract management fees, or
subsequent balance sheets adjustments recognized during the
respective period. On November 30, 1992, Horizon and OrNda
HealthCorp ("OrNda"), then a related party, entered into a
restructuring agreement which resulted in the sale of Ross
Hospital to OrNda (see Selected Financial Data footnote 3).
Additionally, Horizon subleased the operations of Mountain Crest
Hospital to MHM effective July 31, 1994. See also "Management's
Discussion and Analysis of Financial Condition and Results of
Operations- Overview."
(3) Includes a loss of $3.9 million in the year ended August 31, 1992
as a result of the sale to OrNda of Ross Hospital.
(4) Certain provisions of the limited liability company agreement of
the Horizon LLC which required the consent of MHM for certain
transactions prevented the Company from having the ability to
control the Horizon LLC under generally accepted accounting
principles and therefore the Horizon LLC was not consolidated with
the Company for accounting purposes through February 28, 1995. As
a result of Horizon's March 20, 1995 acquisition of the minority
interest of MHM in the Horizon LLC, the Horizon LLC became a
wholly owned subsidiary of Horizon and has been consolidated with
the Company effective March 1, 1995. The Company's share of the
Horizon LLC's net earnings was $364,000 through August 31, 1994
and $1,567,720 from September 1, 1994 through February 28, 1995.
The Horizon LLC contract stipulated that MHM, as a member of the
Horizon LLC, would be allocated the first $1,750,000 of Horizon
LLC net earnings in each of the fiscal years ending August 31,
1995 and 1996. $1,750,000 was allocated to MHM during the six
months ended February 28, 1995.
(5) On August 1, 1996, Horizon purchased 80% of the outstanding common
stock of PPS. Due to this purchase, $1,774,575 was recorded as
goodwill and will be amortized over forty years. 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 the Horizon LLC. The purchase transaction eliminated
MHM's equity interest in the Horizon LLC ($2,794,715) and
recognized an increase in intangible assets based upon the value
of the Horizon LLC management contracts ($2,355,000). The
remaining purchase price was recorded as goodwill ($4,533,752).
The recorded goodwill was increased by $376,639 in March, 1996
based on a final valuation of MHM's minority interest. The
increase in contract value will be amortized over seven years and
the goodwill over forty years.
(6) Adjusted to reflect a three-for-two-stock split effected by
Horizon as a 50% stock dividend on January 31, 1997.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in July 1989 as a wholly owned subsidiary of
the predecessor to OrNda for the purpose of acquiring all the assets of two
other wholly owned subsidiaries of OrNda. One of those other OrNda
subsidiaries, 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 OrNda subsidiary owned a freestanding
psychiatric hospital (Ross Hospital) in California. Effective March 1, 1990,
the assets constituting the contract management business and the psychiatric
hospital were transferred to Horizon, and Horizon entered into a contract to
manage a freestanding chemical dependency facility in Texas also owned by
OrNda. Thereafter, the Company issued shares to certain of its officers and
OrNda sold a portion of its shares to three individuals and an officer of the
Company, which reduced the ownership interest of OrNda in the Company to less
than 50%.
In December 1990, a subsidiary of the Company leased a freestanding
psychiatric hospital in Fort Collins, Colorado (Mountain Crest Hospital). In
1991, senior management decided to focus the Company exclusively on being a
manager of mental health services for general acute care hospitals. In March
1991, the Company ended its contract to manage the freestanding chemical
dependency facility in Texas. On November 30, 1992, the Company sold Ross
Hospital to OrNda.
Effective August 1, 1994, Horizon and MHM formed the Horizon LLC.
Horizon signed a contract with the Horizon LLC to have it manage all of
Horizon's then existing management contracts with an agreed value, for tax
purposes, of $11,288,000 and committed to funding obligations of $3,600,000 for
a 72.5% interest. Prior to March 20, 1995, the remaining 27.5% interest in the
Horizon LLC was held by MHM which signed a contract with the Horizon LLC to
have it manage all of MHM's then existing 39 management contracts with an
agreed value, for tax purposes, of $3,247,000 and committed to funding
obligations of $2,400,000. Prior to the Company's acquisition of the minority
interest of MHM in the Horizon LLC, as discussed below, certain provisions of
the limited liability company agreement of the Horizon LLC which required the
consent of MHM for certain transactions prevented Horizon from having the
ability to control the Horizon LLC under generally accepted accounting
principles, and therefore the Horizon LLC was not consolidated with Horizon and
Horizon accounted for its investment in the Horizon LLC by the equity method
through the six months ended February 28, 1995. Prior to formation of the
Horizon LLC, Horizon's contracts were managed through a wholly owned
subsidiary. The Horizon LLC contract stipulated that MHM, as a member in the
Horizon LLC, would be allocated the first $1,750,000 of the Horizon LLC income
in the two fiscal years ending August 31, 1995 and 1996. For the month of
August 1994, Horizon was allocated 72.5% of the Horizon LLC's income of
$502,091. During the six months ended February 28, 1995, MHM was allocated a
total of $1,750,000 of the Horizon LLC's income while Horizon was allocated
$1,567,720.
Just prior to the Horizon LLC formation, a subsidiary of Horizon
subleased Mountain Crest Hospital to MHM for a period commencing July 31, 1994
through December 31, 2000. The Company guaranteed the obligations of the
subsidiary under the primary lease. Under the sublease, MHM is required to pay
the rental under the primary lease. In addition, the sublease requires MHM to
make monthly rental payments to Horizon of 50% of the hospital's 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. The net revenues,
operating income, total assets and total liabilities of Mountain Crest Hospital
for the year ended August 31, 1993 and the eleven months ended July 31, 1994
have been consolidated with operating results of Horizon for the years ended
August 31, 1993 and 1994 for the consolidated financial statement presentation.
Under the terms of the primary lease, the Company is permitted to present a
substitute guarantor and the lessor has agreed not to withhold unreasonably its
consent to the substitute guarantor. The Company has provided the substitute
guaranty of MHM to the lessor and believes it has satisfied the conditions for
the release of its guaranty. The lessor, however, has not yet acknowledged in
writing the release of the Company's guaranty.
22
<PAGE> 23
Upon completion of its initial public offering of common stock, which
included the sale by OrNda as a selling stockholder of all of its common stock
of the Company, Horizon became contractually obligated to acquire the minority
interest of MHM in the Horizon LLC. March 13, 1995 was the effective date of
the initial public offering. The acquisition of the minority interest of MHM
was effective March 20, 1995. As such, the Horizon LLC became a wholly owned
subsidiary of Horizon. The Horizon LLC was consolidated with the Company
effective March 1, 1995. Effective September 1, 1995, the Horizon LLC was
dissolved.
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services, Inc.,
also known as Professional Psychological Services, Inc. ("PPS"). PPS has been
consolidated with Horizon as of August 1, 1996. Horizon accounted for the
acquisition of PPS by the purchase method as required by generally accepted
accounting principles. Based on Clearwater, Florida, PPS specializes in full
risk, capitated managed behavioral health programs and employee assistance
programs. The purchase price is based primarily on a 6.25 multiple of the 1996
pre-tax income of PPS to be determined in the first quarter of 1997. As of
October 7, 1996, Horizon estimates the purchase price will be approximately
$1,800,000 of which $1,225,000 was paid on July 31, 1996. In addition, Horizon
also obtained an option to acquire the remaining twenty percent (20%) of the
outstanding PPS common stock at a future date. The sellers, constituting all
the shareholders of PPS, also obtained the right to put to Horizon such shares
on certain dates. The option and put prices for the remaining PPS shares are
based on a multiple of the pre-tax income of PPS in future years.
At August 31, 1996, the Company had management contracts with 123
general acute care hospitals located in 37 states, representing 191 various
treatment programs in operation.
23
<PAGE> 24
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
August 31,
-------------------- Nov 30, Feb 29, May 31, Aug 31,
1994* 1995 1995 1996 1996 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 99 100 102 103 104 107
Contract locations signed
and unopened 9 12 12 12 18 16
---- --- --- --- --- ---
Total contract locations 108 112 114 115 122 123
=== === === === === ===
SERVICES COVERED BY CONTRACTS:
Inpatient (A) 89 91 92 92 94 97
Partial hospitalization (A) 45 55 59 61 64 71
Outpatient 7 8 10 12 14 11
Home health 1 1 3 6 6 12
CQI Plus (under contract) 20 45 50 54 60 64
TYPES OF TREATMENT PROGRAMS:
Geropsychiatric (A) 75 92 98 106 112 130
Adult psychiatric (A) 60 57 60 58 56 51
Substance abuse (A) 4 3 4 5 6 7
Other (A) 3 2 2 2 4 3
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended Aug 31, -----------------------------------------------------------------
------------------ Nov 30, Feb 29, May 31, Aug 31,
1994* 1995 1995 1996 1996 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN NUMBER OF CONTRACTS:
Beginning number of contracts 51 108 112 114 115 122
Contracts added 66* 28 6 4 12 8
Contracts ended 9 24 4 3 5 7
--- --- ---- ---- ---- ----
Ending number of contracts 108 112 114 115 122 123
=== === === === === ===
</TABLE>
* Reflects the assumption by the Horizon LLC of management responsibility under
the 39 MHM contracts effective August 1, 1994, of which 37 contracts had
commenced operations at that date.
(A) Beginning with the quarter ended February 29, 1996, new methodology which
redefined the statistical definition of an operating service or program was
implemented. To avoid duplicity, multiple services/treatment programs within
each category at one location are now being reported as a single
service/treatment program where the predominant treatment defines the
appropriate categories. As a result of this reporting change, prior periods
have been restated as estimates based on the new reporting definition.
24
<PAGE> 25
RESULTS OF OPERATIONS - HORIZON MENTAL HEALTH MANAGEMENT (HISTORICAL)
The following table sets forth for the fiscal years ended August 31, 1994, 1995
and 1996, the percentage relationship to total net revenues of certain costs,
expenses and income and the number of management contracts in operation at the
end of each fiscal year.
<TABLE>
<CAPTION>
Year Ended
August 31,
--------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Contract management revenues 82.5% 97.8% 98.4%
Other revenues 17.5% 2.2% 1.6%
------ ------ ------
Net revenues 100.0% 100.0% 100.0%
Operating costs and expenses
Salaries and benefits 55.6% 52.4% 55.7%
Purchased services 15.6% 15.8% 13.8%
Provision for bad debts 1.0% 0.7% 00.1%
Depreciation and amortization 1.9% 3.1% 2.1%
Other 19.0% 14.6% 14.1%
------ ----- ------
Total operating costs and expenses 93.1% 86.6% 85.8%
------ ----- ------
Income from operations 6.9% 13.4% 14.2%
Interest and other income (expense) (3.3)% (2.6)% 0.6%
------ ------ ------
Income before income taxes 3.6% 10.8% 14.8%
Income tax expense (benefit) (0.1)% 2.7% 5.9%
------ ----- ------
Income before equity in net earnings
of Horizon LLC and minority interest 3.7% 8.1% 8.9%
Equity in net earnings of Horizon LLC 1.2% 5.3% 0.0%
Minority interest 0.0% 0.0% 0.0%
------ ----- ------
Net income 4.9% 13.4% 8.9%
====== ===== ======
Number of contracts in operation, end of year 99 100 107
</TABLE>
25
<PAGE> 26
FISCAL YEAR ENDED AUGUST 31, 1996 (HISTORICAL) COMPARED TO FISCAL YEAR ENDED
AUGUST 31, 1995 (HISTORICAL)
Effective August 1, 1994, the Horizon LLC assumed management
responsibility for all of the contract management business of the Company in
return for all of the economic benefits accruing thereafter from the management
contracts of the Company. Certain provisions of the limited liability company
agreement of the Horizon LLC which required the consent of MHM for certain
transactions prevented the Company from having the ability to control the
Horizon LLC under generally accepted accounting principles and therefore the
Horizon LLC was not consolidated with the Company for accounting purposes for
the six months ended February 28, 1995, and Horizon accounted for its
investment in the Horizon LLC by the equity method through such date. Under
the equity method, the revenues and expenses of the Horizon LLC for the period
in question are excluded from Horizon's revenues and expenses, but Horizon's
share of the Horizon LLC's net income for such period is included in Horizon's
net income as "Equity in earnings of Horizon LLC." As a result of Horizon's
acquisition of the 27.5% minority interest of MHM in the Horizon LLC effective
March 20, 1995, the Horizon LLC was consolidated with Horizon for accounting
purposes as of March 1, 1995. Effective September 1, 1995, the Horizon LLC was
dissolved and its operations combined with Horizon. Therefore, the operating
results of the Company for the fiscal year ended August 31, 1996, have changed
materially due to this event as compared to the prior fiscal year.
Net Revenues. (See material change notes above) Net revenues for the
fiscal year ended August 31, 1996, were $62.4 million, representing an increase
of $33.1 million, or 113.0%, as compared to net revenues of $29.3 million for
the corresponding period in the prior fiscal year.
Salaries and Benefits. (See material change notes above) Salaries and
benefits expenses for the fiscal year ended August 31, 1996, were $34.7
million, representing an increase of $19.3 million, or 125.3%, as compared to
salaries and benefits expenses of $15.4 million for the prior fiscal year.
Depreciation and Amortization. Depreciation and amortization expenses
for the fiscal year ended August 31, 1996, were $1.3 million, representing an
increase of $405,000, or 44.9%, as compared to depreciation and amortization
expenses of $903,000 for the corresponding period in the prior fiscal year.
$239,000 of this increase results from not consolidating the operation of the
Horizon LLC until March 1, 1995. The remainder of this increase results from
the depreciation expense of additional equipment purchased for the operation of
its contract management business, offset by a decrease in depreciation expense
related to those items that no longer have a depreciable basis during the
fiscal year ended August 31, 1996.
Other Operating Expenses (See material change notes above) (Including
Purchased Services and Provision for Bad Debts). Other operating expenses for
the fiscal year ended August 31, 1996, were $17.5 million, representing an
increase of $8.4 million, or 92.3%, as compared to other operating expenses of
$9.1 million 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, 1996 was
$324,000, as compared to net interest of ($754,000) for fiscal year ended
August 31, 1995. This change results primarily from a decrease in interest
expense of $1.1 million associated with the reduction in the amount of
principal outstanding on the Company's related party long term debt from $12.1
million at August 31, 1994 to $2.5 million at August 31, 1995. Outstanding
principal was reduced to $0 on October 3, 1995 and remained $0 at August 31,
1996.
26
<PAGE> 27
Income Tax Expense. (See material change notes above) For the fiscal
year ended August 31, 1995, the Company recorded federal and state income taxes
of $804,000, resulting in a combined tax rate of 16.9%. For this period, the
Company utilized (with limitation) available net operating loss carryforwards
to reduce both federal and state income tax expense. For the fiscal year ended
August 31, 1996, the Company recorded federal and state income taxes of
$3,674,000 resulting in a combined tax rate of 39.9%. For this period, the
benefit from the utilization of net operating loss carryforwards was reflected
through a change in deferred taxes rather than a benefit to income tax expense.
27
<PAGE> 28
FISCAL YEAR ENDED AUGUST 31, 1995 (HISTORICAL) COMPARED TO FISCAL YEAR ENDED
AUGUST 31, 1994 (HISTORICAL)
Effective August 1, 1994, the Horizon LLC assumed management
responsibility for all of the contract management business of the Company in
return for all of the economic benefits accruing thereafter from the management
contracts of the Company. Certain provisions of the limited liability company
agreement of the Horizon LLC which required the consent of MHM for certain
transactions prevented the Company from having the ability to control the
Horizon LLC under generally accepted accounting principles and therefore the
Horizon LLC was not consolidated with the Company for accounting purposes
through February 28, 1995, and Horizon accounted for its investment in the
Horizon LLC by the equity method through such date (including for the month of
August 1994). Under the equity method, the revenue and expenses of the Horizon
LLC for the period in question are excluded from Horizon's revenues and
expenses, but Horizon's share of the Horizon LLC's net income for such period
is included in Horizon's net income as "Equity in Net Earnings of Horizon LLC."
As a result of Horizon's acquisition of the 27.5% minority interest of MHM in
the Horizon LLC effective March 20, 1995, the Horizon LLC was consolidated with
Horizon for accounting purposes as of March 1, 1995. This change between the
six months ended February 28, 1995 and the six months ended August 31, 1995 has
been reflected in the operating results of the Company for the fiscal year
ended August 31, 1995. All of these factors should be considered in any prior
period to current period analysis.
Net Revenues (See material change notes above). Net revenues for the
fiscal year ended August 31, 1995 were $29.3 million, representing a decrease
of $1.0 million, or 3.3%, as compared to net revenues of $30.3 million for the
prior fiscal year.
Salaries and Benefits (See material change notes above). Salaries and
benefits expenses for the fiscal year ended August 31, 1995 were $15.4 million,
representing a decrease of $1.4 million, or 8.3%, as compared to salaries and
benefits expenses of $16.8 million for the prior fiscal year.
Depreciation and Amortization. Depreciation and amortization expenses
for the fiscal year ended August 31, 1995 were $903,000, representing an
increase of $343,000, or 61.3%, as compared to depreciation and amortization
expenses of $560,000 for the prior fiscal year. $225,000 of this increase is
due to the amortization of additional goodwill of $4.5 million and contract
valuation of $2.4 million resulting from the acquisition of MHM's 27.5%
minority interest in the Horizon LLC. The remainder of this increase results
from depreciation expense of additional equipment purchased for the operation
of the contract management business.
Other Operating Expenses (See material change notes above) (Including
Purchased Services and Provision for Bad Debts). Other operating expenses for
the fiscal year ended August 31, 1995 were $9.1 million, representing a
decrease of $1.7 million, or 15.7%, as compared to other operating expenses of
$10.8 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, 1995 was $754,000,
representing a decrease of $251,000, or 25%, as compared to interest expense
net of interest and other income of $1,005,000 for the prior fiscal year. This
change results from an increase in interest expense for the year of $69,000
resulting from higher interest rates associated with the Company's related
party debt from an average 8.47% for the year ended August 31, 1994 to an
average of 10.60% for the year ended August 31, 1995. The increase in the
average percentage rate was offset by the reduction in the principal balance of
related party debt from $12.1 million at August 31, 1994 to $2.5 million at
August 31, 1995. In addition, interest and other income increased $316,000, or
341.9% as compared to the prior fiscal year. This increase results from the
inclusion of $187,000 of rental income from the sublease of Mountain Crest
Hospital on July 31, 1994, combined with an increase of interest income
resulting from an increase in cash and cash equivalents between the periods
combined with an increase in the average interest rate of 3.37% for the year
ended August 31, 1994 to 5.29% for the fiscal year ended August 31, 1995.
28
<PAGE> 29
Income Tax Expense. For the fiscal year ended August 31, 1994, the
Company was able to utilize its net operating loss carryforwards to offset
taxable income; however, the Company was subject to alternative minimum tax.
In addition, a federal income tax refund was received due to the filing of a
net operating loss carryback to the fiscal year ended August 31, 1991. Hence,
the Company has reflected a net tax benefit of ($20,000) for the fiscal year
ended August 31, 1994. For the fiscal year ended August 31, 1995, the Company
has an estimated annual limitation of available net operating loss
carryforwards of $2,049,000. This annual limitation is due to the significant
change of ownership resulting from the initial public offering which closed
March 20, 1995. As a result, the Company has reflected federal and state
income taxes of $804,000 for the fiscal year ended August 31, 1995.
Net Earnings From Equity Investment in Horizon LLC. The net earnings
from the Company's equity investment in the Horizon LLC for the fiscal year
ended August 31, 1995, were $1.6 million, representing an increase of $1.2
million, or 329.7%, as compared to $364,000 for the prior fiscal year. The
increase results from the Horizon LLC existing as an equity investment of the
Company for one month during fiscal year 1994 and six months during fiscal year
1995.
29
<PAGE> 30
LIQUIDITY AND CAPITAL RESOURCES
On March 13, 1995, the Company's initial public offering of 2,080,000
shares of common stock at an offering price to the public of $10.00 per share
was declared effective by the Securities and Exchange Commission. Of the
2,080,000 shares of common stock offered, 1,321,233 shares were offered by
Horizon and 758,767 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 78,767 shares of
common stock at the initial offering price to the public of $10.00 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.
At August 31, 1995, the Company had $2.5 million in long-term debt
payable to OrNda which it paid in full on October 3, 1995. In addition,
effective September 29, 1995, the Company completed a transaction with Texas
Commerce Bank, N.A. for an $11 million revolving credit facility. The purpose
of the facility is to provide funds to be used for working capital needs and
future acquisitions. The facility is for a three year term with extension
provisions. As of August 31, 1996, the Company had $7.4 million available
under the revolving credit facility. Under the terms of the facility, the
principal outstanding thereunder to the Company from time to time cannot exceed
the lesser of (i) $11.0 million and (ii) the sum of 80% of the Company's
consolidated eligible accounts receivable, as defined, plus additional amounts
up to $4.0 million based on specified time periods and the Company's debt
coverage ratio, as defined, less certain reserves. Principal outstanding under
the facility will bear interest at a "Floating Base Rate" and/or the "LIBOR
Rate plus Applicable LIBOR Margin", as selected by the Company in accordance
with the terms of the facility. See Note 6 to the Company's Consolidated
Financial Statements. Accrued interest will be payable monthly during the
primary term of the facility, and quarterly thereafter if the term of the
facility is extended. Depending upon the Company's debt coverage ratio at
December 15, 1998 principal borrowed under the facility will either be due in
full on such date, or a portion of such principal will be due on such date and
the remainder will be due in eight equal quarterly installments thereafter
ending December 15, 2000.
The Company is subject to certain covenants under the agreements
governing the credit facility, including prohibitions against (i) incurring
additional debt or liens, except permitted debt (defined to include purchase
money debt of $1.0 million in the aggregate) or specified permitted liens, (ii)
certain material acquisitions, other than permitted acquisitions as defined
(including acquisitions not exceeding $7.0 million per transaction), (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) entering into any lines of business other than that in which
the Company is presently engaged. In addition, the terms of the facility
require the Company to satisfy certain ongoing financial covenants. The
facility is secured by all of the capital stock of the subsidiaries of the
Company and substantially all other assets of the Company.
On December 20, 1995, the Company entered into a lease agreement with
a term of approximately five years for a building to be constructed to the
Company's specifications. On September 27, 1996, a certificate of occupancy
was issued and the Company occupied the building. Rental payments commenced
the same date. In connection with the lease transaction, the Company has
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 if it is
not sold to a third party, or the Company does not extend its lease.
30
<PAGE> 31
The Company believes that its net working capital of $5.5 million at
August 31, 1996, including cash of $7.9 million, and the $7.4 million available
under the revolving credit facility at such date, will be sufficient to cover
all cash requirements over the next twelve months including estimated capital
expenditures of $1.5 million. The Company generated $8.3 million in net cash
from operations during the year ended August 31, 1996.
The Board of Directors of Horizon Mental Health Management, Inc., a
Delaware corporation ("Horizon" or 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, $.01 par value ("Common Stock"), of Horizon
was issued on January 31, 1997 for every two shares of Common Stock of Horizon
held by stockholders of record at the close of business on January 22, 1997.
The audited consolidated financial statements of Horizon filed as part of this
Report have been retroactively restated to reflect such stock split/dividend.
Statements contained herein and in various public presentations that
are based on future expectations rather than on historical facts are forward-
looking statements as defined under The Private Securities Litigation Reform
Act of 1995 that involve a number of risks and uncertainties. Factors that
could cause actual results to differ materially from those in any such forward
looking statement include but are not limited to demand by general hospitals
for the Company's services, the Company's ability to retain existing management
contracts and to sell additional contracts, changes in reimbursement to general
hospitals by Medicare or other third-party payors for costs of providing mental
health services, changes to other regulatory provisions relating to mental
health services, overall economic conditions and various other risks as
outlined in Securities and Exchange Commission filings of the Company.
INFLATION
The Company's management contracts generally provide for annual
adjustments in the Company's fees based upon various inflation indices, thus
mitigating the effects of inflation. During the last three years, inflation
has had little effect on the Company's business.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements of the
Company and the notes thereto appearing at page F-1 to F-18 attached hereto,
all of which information is incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
32
<PAGE> 33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company filed with the Commission a definitive proxy statement
with respect to the annual meeting of stockholders of the Company held on
January 29, 1997 (the "Proxy Statement"). The Company hereby incorporates into
this Item 10 by reference to the Proxy Statement the information required by
this Item 10 that appears in the Proxy Statement under the caption ELECTION
OF DIRECTORS.
The information called for by this Item 10 and Item 401 of Regulation
S-K with respect to executive officers of the Company appears under the caption
EXECUTIVE OFFICERS OF THE REGISTRANT following Item 4 of Part I of this report,
and is incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates into this Item 11 by reference to the
Proxy Statement the information required by this Item 11 that appears in
the Proxy Statement under the caption EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates into this Item 12 by reference to the
Proxy Statement the information required by this Item 12 that appears in
the Proxy Statement under the caption SECURITY OWNERSHIP BY MANAGEMENT AND
PRINCIPAL STOCKHOLDERS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates into this Item 13 by reference to the
Proxy Statement the information required by this Item 13 that appears in
the Proxy Statement under the caption COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION - Certain Transactions, and CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.
33
<PAGE> 34
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) (1) Reference is made to the Index to Consolidated Financial
Statements appearing at page F of this report.
(2) Reference is made to the Index to Financial Statement
Schedules appearing at page S of this report.
(3) Exhibits.
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<S> <C><C>
3.1 - Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to
Amendment No. 2 as filed with the Commission on
February 16, 1995 ("Amendment No. 2") to the Company's
Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-
88314) (the "Form S-1")).
3.2 - Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to
Amendment No. 2 to the Company's Form S-1).
4.1 - Specimen Common Stock Certificate (incorporated herein
by reference to Exhibit 4.1 to Amendment No. 2 to the
Company's Form S-1).
10.1 - Partnership Agreement dated May 1, 1989 between Horizon
Health Management Company and Geropsych, Inc.
(incorporated herein by reference to Exhibit 10.1 to
the Company's Form S-1).
10.2 - Partnership Amendment dated March 27, 1991 between
Horizon Health Management Company and Geropsych, Inc.
(incorporated herein by reference to Exhibit 10.2 to
the Company's Form S-1).
10.3 - Lease dated as of December 15, 1990 between Charter
Hospital of Fort Collins, Inc. and HHG Colorado, Inc.
(incorporated herein by reference to Exhibit 10.12 to
the Company's Form S-1).
10.4 - Sublease Agreement dated as of July 31, 1994 between
HHG Colorado, Inc. and MHM of Colorado, Inc.
(incorporated herein by reference to Exhibit 10.13 to
the Company's Form S-1).
10.5 - Consent to Sublease dated as of July 31, 1994 by
Charter Hospital of Fort Collins, Inc. (incorporated
herein by reference to Exhibit 10.15 to the Company's
Form S-1).
10.6 - Assumption Agreement dated as of July 31, 1994 between
HHG Colorado, Inc. and MHM of Colorado, Inc.
(incorporated herein by reference to Exhibit 10.16 to
the Company's Form S-1).
10.7 - Guaranty dated as of July 31, 1994 of Mental Health
Management, Inc. to Charter Hospital of Fort Collins,
Inc. for the benefit of MHM of Colorado, Inc.
(incorporated herein by reference to Exhibit 10.17 to
the Company's Form S-1).
10.8 - Agreed Permanent Injunction and Final Judgment dated
December 8, 1994 (incorporated herein by reference to
Exhibit 10.32 to the Company's Form S-1).
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C><C>
10.9 - Lease Agreement dated as of January 4, 1994 between
Bentley Properties and Horizon Mental Health Services,
Inc., a Texas corporation (incorporated herein by
reference to Exhibit 10.36 to the Company's Form S-1).
10.10 - Lease dated as of November 11, 1993 between RREEF USA
Fund-I Hartford Plaza, Inc. and Horizon Mental Health
Services, Inc. and amendment thereto dated as of
November 30, 1994 (incorporated herein by reference to
Exhibit 10.37 to the Company's Form S-1).
10.11 - Standard Office Building Lease Agreement dated April
1993 between The Professional Tower Limited Partnership
and Horizon Mental health Services, Inc. and amendment
thereto dated as of September 22, 1993 (incorporated
herein by reference to Exhibit 10.39 to the Company's
Form S-1).
10.12 - Lease Agreement dated May 3, 1995 between Aid
Association for Lutherans and Horizon Mental Health
Management, LLC (incorporated herein by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1995 as filed with
the Commission on July 6, 1995 (the "May 1995 Form 10-
Q").
10.13 - Employment Agreement dated as of August 1, 1989 between
Horizon Health Group, Inc. and James Ken Newman
(incorporated herein by reference to Exhibit 10.40 to
the Company's Form S-1).
10.14 - Amendment to Employment Agreement dated April 11, 1990
between Horizon Health Group, Inc. and James Ken Newman
(incorporated herein by reference to Exhibit 10.41 to
the Company's Form S-1).
10.15 - Second Amendment to Employment Agreement dated February
6, 1992 between Horizon Health Group, Inc. and James
Ken Newman (incorporated herein by reference to Exhibit
10.42 to the Company's Form S-1).
10.16 - Third Amendment to Employment Agreement dated as of
January 5, 1995 between Horizon Mental Health
Management, Inc. and James Ken Newman (incorporated
herein by reference to Exhibit 10.43 to the Company's
Form S-1).
10.17 - Employment Agreement dated as of August 21, 1990
between Horizon Health Management Company, Inc. and
Gary A. Kagan (incorporated herein by reference to
Exhibit 10.44 to the Company's Form S-1).
10.18 - Letter dated November 23, 1992 between Horizon Mental
Health Services, Inc. and Robert A. Lefton regarding
severance arrangements (incorporated herein by
reference to Exhibit 10.45 to the Company's Form S-1).
10.19 - Agreement for Consulting Services dated as of April 17,
1995 between Horizon Mental Health Management, Inc. and
Gerald S. O'Keefe (incorporated herein by reference to
Exhibit 10.4 to the Company's May 1995 Form 10-Q).
10.20 - Loan Agreement dated September 29, 1995 among Horizon
Mental Health Management, Inc., a Delaware corporation,
Horizon Mental Health Management, Inc., a Texas
corporation, Mental Health Outcomes, Inc., a Delaware
corporation, and Texas Commerce Bank National
Association (incorporated by reference to Exhibit 10.45
to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1995 (the "1995 Form 10-
K")).
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C><C>
10.21 - $11,000,000 Revolving Credit Note dated September 29,
1995 executed by Horizon Mental Health Management,
Inc., a Delaware corporation, Horizon Mental Health
Management, Inc., a Texas corporation, and Mental
Health Outcomes, Inc., a Delaware corporation, payable
to Texas Commerce Bank National Association
(incorporated by reference to Exhibit 10.46 to the 1995
Form 10-K).
10.22 - Security Agreement dated September 29, 1995 executed by
Horizon Mental Health Management, Inc., a Delaware
corporation, as debtor, in favor of Texas Commerce Bank
National Association (incorporated by reference to
Exhibit 10.47 to the 1995 Form 10-K).
10.23 - Security Agreement dated September 29, 1995 executed by
Horizon Mental Health Management, Inc., a Texas
corporation, as debtor, in favor of Texas Commerce Bank
National Association (incorporated by reference to
Exhibit 10.48 to the 1995 Form 10-K).
10.24 - Pledge and Security Agreement dated September 29, 1995,
executed by Horizon Mental Health Management, Inc., a
Delaware corporation, as pledgor, in favor of Texas
Commerce Bank National Association (incorporated by
reference to Exhibit 10.49 to the 1995 Form 10-K).
10.25 - Stock Purchase Agreement among Horizon Mental Health
Management, Inc., as purchaser, and Joseph R. Bona,
M.D., Nancy J. Simons, Ph.D., John G. Toms, Ph.D.,
William H. Kale, Ph.D., and David E. Stenmark, Ph.D.,
as sellers, dated July 31, 1996 (filed herewith).
10.26 - First Amendment to Loan Agreement dated as of December
20, 1995 among Horizon Mental Health Management, Inc.,
a Delaware corporation, Horizon Mental Health
Management, Inc., a Texas corporation, Mental Health
Outcomes, Inc., a Delaware corporation, and Texas
Commerce Bank National Association (incorporated herein
by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended November 30,
1995 as filed with the Commission on January 16, 1996
(the "November 1995 Form 10-Q")).
10.27 - Letter Loan Agreement dated December 20, 1995 among
North Central Development Company, as borrower, Texas
Commerce Bank National Association, as lender, and
Horizon Mental Health Management, Inc., a Delaware
corporation, Horizon Mental Health Management, Inc., a
Texas corporation, and Mental Health Outcomes, Inc., a
Delaware corporation, as guarantors (incorporated
herein by reference to Exhibit 10.7 to the November
1995 Form 10-Q).
10.28 - Lease Agreement dated as of December 20, 1995 between
North Central Development Company and Horizon Mental
Health Management, Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 10.8 to
the November 1995 Form 10-Q).
10.29 - Unconditional Guaranty Agreement dated as of December
20, 1995 by Horizon Mental Health Management, Inc., a
Delaware corporation, in favor of Texas Commerce Bank
National Association (incorporated herein by reference
to Exhibit 10.9 to the November 1995 Form 10-Q).
Unconditional Guaranty Agreements dated as of December
20, 1995 in this same form were also signed by Horizon
Mental Health Management, Inc., a Texas corporation,
Mental Health Outcomes, Inc., a Delaware corporation,
HHMC Partners, Inc., a Delaware corporation, and HHG
Colorado, Inc., a Colorado corporation, subsidiaries of
the Company, but are not filed as allowed by
Instruction 2 to Item 601 of Regulation S-K.
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C>
10.30 - Horizon Mental Health Management, Inc. 1995 Stock
Option Plan (incorporated herein by reference to
Exhibit 10.11 to the November 1995 Form 10-Q).
10.31 - Horizon Mental Health Management, Inc. Amended and
Restated 1995 Stock Option Plan for Eligible Outside
Directors (incorporated herein by reference to Exhibit
10.12 to the November 1995 Form 10-Q).
10.32 - Commercial lease dated December 5, 1995 between PCT
Office Company and Horizon Mental Health Management,
Inc. (incorporated herein by reference to Exhibit 10.7
to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 29, 1996 as filed with the
Commission on April 4, 1996 (the "February 1996 Form
10-Q")).
10.33 - Commercial lease dated November 8, 1995 between N & S
Investment (USA), Inc. and Horizon Mental Health
Management, Inc. (incorporated herein by reference to
Exhibit 10.8 to the February 1996 Form 10-Q).
10.34 - Horizon Mental Health Management Bonus Plan Fiscal 1995
(incorporated herein by reference to Exhibit 10.51 to
the Company's Form S-1).
10.35 - Horizon Mental Health Management Bonus Plan Fiscal 1996
(incorporated herein by reference to Exhibit 10.13 to
the November 1995 Form 10-Q).
10.36 - Horizon Mental Health Management Bonus Plan Fiscal 1997
(filed herewith).
10.37 - Horizon Mental Health Management Contingent Bonus Plan
(filed herewith).
10.38 - Horizon Health Group, Inc. 1989 Stock Option Plan, as
amended (incorporated herein by reference to Exhibit
10.52 of Amendment No. 2 to the Company's Form S-1).
10.39 - Lease Agreement dated August 22, 1995 between Centoff
Realty Co., Inc. and Horizon Mental Health Management,
Inc. (incorporated herein by reference to Exhibit 10.54
to the 1995 Form 10-K).
10.40 - Commercial Lease dated October 15, 1995 between
Cummings Properties Management, Inc. and Horizon Mental
Health Management, Inc. (incorporated herein by
reference to Exhibit 10.55 to the 1995 Form 10-K).
11.1 - Statement Regarding Computation of Per Share Earnings
(filed herewith).
21.1 - List of Subsidiaries of the Company (filed herewith).
23.1 - Consent of Price Waterhouse L.L.P. (filed herewith).
27.1 - Financial Data Schedule (filed herewith).
(b) The Company filed no reports on Form 8-K during the last
quarter of the period covered by this report.
</TABLE>
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: JUNE 27, 1997
HORIZON MENTAL HEALTH MANAGEMENT, INC.
BY: /s/ JAMES KEN NEWMAN
--------------------------------------
JAMES KEN NEWMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ JAMES KEN NEWMAN President, Chief Executive Officer and June 27, 1997
- ------------------------------------------------ Chairman of the Board
James Ken Newman
/s/ JAMES W. MCATEE Executive Vice President, Finance & June 27, 1997
- ------------------------------------------------ Administration, Principal Financial and
James W. McAtee Accounting Officer and Director
/s/ JACK R. ANDERSON Director June 27, 1997
- -----------------------------------------------
Jack R. Anderson
/s/ GEORGE E. BELLO Director June 27, 1997
- -----------------------------------------------
George E. Bello
/s/ WILLIAM H. LONGFIELD Director June 27, 1997
- -----------------------------------------------
William H. Longfield
/s/ KEITH B. PITTS Director June 27, 1997
- -----------------------------------------------
Keith B. Pitts
/s/ DONALD E. STEEN Director June 27, 1997
- -----------------------------------------------
Donald E. Steen
</TABLE>
38
<PAGE> 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets at August 31, 1995 and 1996 . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income
For the Years Ended August 31, 1994, 1995, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Years Ended August 31, 1994, 1995 and 1996 . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows
For the Years Ended August 31, 1994, 1995 and 1996 . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-7
</TABLE>
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Horizon Mental Health Management, Inc.
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 Mental Health Management, Inc. and its
subsidiaries at August 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
October 7, 1996, except as to Note 13, which is as of April 29, 1997
F-1
<PAGE> 41
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
AUGUST 31,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 3,167,036 $ 7,940,232
Accounts receivable less allowance for uncollectible
accounts of $1,223,027 and $627,142
at August 31, 1995 and 1996, respectively 5,723,858 7,096,964
Receivable from employees 173,206 89,126
Prepaid expenses and supplies 124,587 234,028
Other receivables 100,397 29,426
Other current assets 30,680 71,940
Current deferred taxes 704,276 1,018,602
------------ -------------
TOTAL CURRENT ASSETS 10,024,040 $ 16,480,318
------------ -------------
PROPERTY AND EQUIPMENT:
Equipment 1,801,508 2,325,320
Buildings and improvements 106,784 109,467
------------ -------------
1,908,292 2,434,787
Less accumulated depreciation 966,561 1,552,975
------------ -------------
941,731 881,812
Goodwill, net of accumulated amortization of $1,188,130
and $1,525,015 at August 31, 1995 and 1996,
respectively 11,574,409 13,388,738
Management contracts, net of accumulated amortization
of $989,603 and $1,475,375 at August 31, 1995
and 1996, respectively 2,410,801 1,925,029
Other assets 400,534 195,630
------------ -------------
TOTAL ASSETS $ 25,351,515 $ 32,871,527
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 42
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AUGUST 31,
1995 1996
---------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,070,955 $ 1,193,048
Employee compensation and benefits 3,188,684 4,018,951
Accrued third party payor liabilities 469,061 142,918
Income taxes payable 535,244 9,598
Accrued expenses 1,623,681 4,981,386
Payable to Health Insurance Program 661,248 661,248
Current debt maturities 7,248 -
---------------- ----------------
TOTAL CURRENT LIABILITIES 7,556,121 11,007,149
Long-term debt-related party - Note 6 2,500,000 -
Deferred income taxes 643,351 1,496,214
---------------- ----------------
TOTAL LIABILITIES 10,699,472 12,503,363
Commitments and contingencies - Note 9 - -
Minority interest - 8,755
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, authorized 500,000
shares; none issued or outstanding - -
Common stock, $.01 par value, 10,000,000 shares
authorized at August 31, 1995 and 1996;
5,341,575 and 5,476,027 shares issued
and outstanding at August 31, 1995 and 1996 53,416 54,760
Additional paid-in capital 13,707,626 13,849,408
Retained earnings 891,001 6,455,241
---------------- ----------------
14,652,043 20,359,409
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 25,351,515 $ 32,871,527
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 43
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------------
1994 1995 1996
----------- ------------ ----------
<S> <C> <C> <C>
REVENUES:
Management Fee Revenue $30,258,927 $29,349,764 $62,444,755
EXPENSES:
Salaries and benefits 16,813,613 15,389,780 34,705,889
Purchased services 4,730,775 4,644,645 8,635,117
Provision for bad debts 312,176 208,946 73,948
Depreciation and amortization 560,417 903,184 1,307,688
Other 5,745,092 4,267,212 8,805,581
----------- ----------- -----------
Operating expenses 28,162,073 25,413,767 53,528,223
----------- ----------- -----------
Other income (expense)
Interest expense - related party (1,091,442) (1,161,440) (24,298)
Interest expense - other (2,545) (1,350) (5,073)
Interest income and other 92,572 409,047 353,231
Loss on sale of fixed assets (3,467) - -
----------- ----------- -----------
Income before income taxes 1,091,972 3,182,254 9,240,392
Income tax expense (benefit) (20,380) 803,754 3,673,755
----------- ----------- -----------
Income before equity in net earnings
of Horizon LLC and minority interest 1,112,352 2,378,500 5,566,637
Equity in net earnings of Horizon LLC 364,000 1,567,720 -
Minority interest - (2,397)
----------- ----------- -----------
Net income $ 1,476,352 $ 3,946,220 $ 5,564,240
=========== =========== ===========
Earnings per common share:
Net income per common share $ 0.35 $ 0.76 $ 0.85
=========== =========== ===========
Weighted average shares outstanding 4,183,747 5,162,889 6,525,042
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 44
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON SHARES PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------------- ----------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at
August 31, 1993 3,123,000 $ 31,230 $ 1,564,786 $ (4,531,571) $ (2,935,555)
Net income - - - 1,476,352 1,476,352
Sale of rights to
purchase options - - 25,000 - 25,000
--------- ---------- -------------- --------------- --------------
Balance at
August 31, 1994 3,123,000 $ 31,230 $ 1,589,786 $ (3,055,219) $ (1,434,203)
Net income - - - 3,946,220 3,946,220
Initial public
offering 2,100,000 21,000 11,978,528 - 11,999,528
Exercise of stock
options 118,575 1,186 122,562 - 123,748
Sale of rights to
purchase options - - 16,750 - 16,750
--------- ---------- -------------- --------------- --------------
Balance at
August 31, 1995 5,341,575 $ 53,416 $ 13,707,626 $ 891,001 $ 14,652,043
Net income - - - 5,564,240 5,564,240
Exercise of stock
options 134,440 1,344 141,782 - 143,126
--------- ---------- -------------- --------------- --------------
Balance at
August 31, 1996 5,476,015 $ 54,760 $ 13,849,408 $ 6,455,241 $ 20,359,409
========= ========== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 45
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,476,352 $ 3,946,220 $ 5,564,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 560,417 903,184 1,307,688
Loss on sale of equipment 3,467 - -
Horizon LLC investment income (364,000) (1,567,720) -
Minority interest - - 2,397
Changes in net assets and liabilities:
(Increase) decrease in accounts receivable 1,342,206 4,901,665 (1,347,073)
(Increase) decrease in other receivables (1,054) 69,177 158,091
(Increase) decrease in prepaid expenses and supplies 340,383 263,777 (105,405)
(Increase) decrease in other assets (85,884) 171,329 (127,188)
Increase in accounts payable and accrued expenses 254,717 1,043,854 2,850,323
(Decrease) increase in payable to health insurance program 718,000 (1,126,208) -
---------- ------------ ------------
Cash flows provided by operating activities 4,244,604 8,605,278 8,303,073
---------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (347,881) (292,209) (378,988)
Payment for purchase of minority interest in
Horizon LLC, net of cash acquired - (9,196,249) -
Cash contributed to Horizon LLC (1,800,000) (620,000) -
Payment for purchase of PPS, net of cash acquired - - (786,767)
Cash flows used in investing activities (2,147,881) (10,108,458) (1,165,755)
---------- ------------ ------------
Cash flows from financing activities:
Payments on long-term debt (1,610,942) (9,613,536) (2,507,248)
Sale of rights to purchase options 25,000 16,750 -
Net proceeds from issuance of stock - 12,123,276 143,126
---------- ------------ ------------
Cash flows provided by (used in) financing activities (1,585,942) 2,526,490 (2,364,122)
---------- ------------ ------------
Net increase in cash and short-term investments 510,781 1,023,310 4,773,196
---------- ------------ ------------
Cash and short-term investments at beginning of year 1,632,945 2,143,726 3,167,036
---------- ------------ -----------
Cash and short-term investments at end of year $2,143,726 $ 3,167,036 $ 7,940,232
========== ============ ===========
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid during the year for:
Interest $1,091,442 $ 1,162,790 $ 29,371
========== ============ ============
Income taxes $ 15,971 $ 374,438 $ 3,721,824
========== ============ ============
Supplemental disclosure of noncash investing activities:
- -------------------------------------------------------
Purchase of minority interest in Horizon LLC during fiscal year
1995 and the acquisition of 80% of the common stock of
Professional Psychological Services during the fiscal year 1996:
Fair value of assets acquired $ - $ 17,283,061 $ 2,315,535
Cash paid - (9,683,467) (1,225,000)
Conversion of equity investment - (4,351,737) -
------------- ------------ ------------
Liabilities assumed $ - $ 3,247,857 $ 1,090,535
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 46
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Horizon Mental Health Management, Inc. ("Horizon or the Company") is a
contract manager 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. Horizon currently has offices in the
Dallas, Texas; San Francisco, California; Chicago, Illinois; Tampa,
Florida; and Boston, Massachusetts metropolitan areas.
On August 1, 1994 Horizon signed a contract with the Horizon Mental Health
Management LLC (the "Horizon LLC") to have it manage all of Horizon's then
existing management contract obligations for a 72.5% interest in the
Horizon LLC. Prior to March 20, 1995, the remaining 27.5% interest in the
Horizon LLC was held by Mental Health Management, Inc. ("MHM") which
signed a contract with the Horizon LLC to have it manage all of MHM's then
existing management contract obligations. Prior to the Company's
acquisition of the minority interest of MHM in the Horizon LLC, as
discussed below, certain provisions of the limited liability company
agreement of the Horizon LLC which required the consent of MHM for certain
transactions prevented Horizon from having the ability to control the
Horizon LLC under generally accepted accounting principles, and therefore
the Horizon LLC was not consolidated with Horizon and Horizon accounted
for its investment in the Horizon LLC by the equity method through the six
months ended February 28, 1995. Prior to formation of the Horizon LLC,
Horizon's contracts were managed through a wholly- owned subsidiary. The
Horizon LLC contract stipulated that MHM, as a member in the Horizon LLC,
would be allocated the first $1,750,000 of the Horizon LLC income for each
of the two fiscal years ending August 31, 1995 and 1996. During the six
months ended February 28, 1995, MHM was allocated a total of $1,750,000 of
the Horizon LLC's income while Horizon was allocated $1,567,720 all in the
second quarter.
Upon completion of its initial public offering of common stock, Horizon
became contractually obligated to acquire the minority interest of MHM in
the Horizon LLC. March 13, 1995 was the effective date of the initial
public offering. The acquisition of the minority interest of MHM was
effective March 20, 1995. As such, the Horizon LLC became a wholly-owned
subsidiary of Horizon. The Horizon LLC has been consolidated with the
Company effective March 1, 1995 through August 31, 1995. Effective
September 1, 1995, the Horizon LLC was dissolved and its operations
combined with Horizon. (See Note 4)
Horizon 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 Horizon.
A subsidiary of Horizon leased and began operating Mountain Crest Hospital
("MCH") in December 1990. Just prior to the Horizon LLC formation,
Horizon subleased MCH to MHM for a period commencing July 31, 1994 through
December 31, 2000. Horizon, 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 Horizon 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,
1996, Horizon has received $603,686 of the $1,200,000 resulting in future
receipts of $596,314 to be received on or before February 1, 1999 assuming
minimum monthly payments of $20,000. Horizon retained the July 31, 1994
balances of accounts receivable and the liabilities for
F-7
<PAGE> 47
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the MCH operations, the remaining balances of which are included in the
consolidated financial statements at August 31, 1995 and 1996. In
addition, the results of the MCH operations through July 31, 1994 are also
included in the consolidated financial statements.
INITIAL PUBLIC OFFERING
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, 1,981,849 shares were
offered by Horizon and 1,138,151 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 over allotment 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.
PURCHASE OF MINORITY INTEREST
On 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 the Horizon LLC. The purchase transaction eliminated
MHM's equity interest in the Horizon LLC ($2,794,715) and recognized an
increase in intangible assets based upon the value of the Horizon LLC
management contracts ($2,355,000). The remaining purchase price was
recorded as goodwill ($4,533,752). The increase in contract value will be
amortized over seven years and the goodwill over forty years. As a result
of this transaction, the Horizon LLC was consolidated with the Company
effective March 1, 1995. Effective September 1, 1995, the Horizon LLC was
dissolved and its operations combined with Horizon. (See Note 4)
2. SUBLEASE OF MOUNTAIN CREST HOSPITAL OPERATIONS
As discussed in Note 1, Horizon subleased the operations of MCH to MHM
effective July 31, 1994. The operating results of MCH for the eleven
months ended July 31, 1994 have been consolidated with the operating
results of Horizon for the year ended August 31, 1994. The net revenues
and operating income of MCH as of the eleven months ended July 31, 1994
which are included in the consolidated financial statements are:
<TABLE>
<CAPTION>
For the eleven
months ended
July 31, 1994
--------------
<S> <C>
Net revenues $ 5,297,174
============
Operating income $ 623,023
============
</TABLE>
F-8
<PAGE> 48
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. 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.
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 life of furniture and fixtures
and computer equipment are estimated to be five years and three years,
respectively. Routine maintenance and repair items are charged to current
operations.
SALE OF RIGHTS TO PURCHASE OPTIONS: During the years ended August 31, 1995
and 1994, Horizon issued nonstatutory stock options to purchase 168,000
and 406,237 shares of common stock, respectively - see Note 7. Certain of
these options required payment of $0.67 per option by the recipient prior
to issuance of the option. Horizon recognized these payments as an
addition to Additional Paid-in Capital.
MANAGEMENT FEE REVENUE: Management fee 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. Management fee 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 contact.
Some management contracts include a clause which states that Horizon 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 Horizon. Management believes it has
adequately provided for any potential adjustments that may result from
final settlement of these denials.
At August 31, 1996, Horizon had management contracts with 32 hospitals
directly or indirectly owned by Columbia/HCA Healthcare Corporation
("Columbia/HCA") of which, 27 had programs in operation. These 27
contracts accounted for 23.0% of the net revenues for the year ended
August 31, 1996. In the aggregate, including terminated contracts,
revenues generated by hospitals directly or indirectly owned by
Columbia/HCA accounted for 26.1% of the net revenues for the year ended
August 31, 1996.
The customers of Horizon are not concentrated in any specific geographic
region, but are concentrated in the health care industry. Horizon
generally does not require collateral to support outstanding accounts
receivable.
In fiscal year 1994, revenues include patient revenues related to
Mountain Crest Hospital ("MCH") which are recorded on an accrual basis at
the established rates. Provisions recognizing contractual adjustments and
other adjustments are recorded on an accrual basis and deducted from gross
revenue to determine net patient service revenue. Horizon subleased MCH to
Mental Health Management, Inc. commencing July 31, 1994 through
December 31, 2000. (see note 2)
HEALTH INSURANCE PROGRAM REIMBURSEMENT: Services were provided
under Horizon's management 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. Any
difference between the final determination and estimated amounts accrued
is accounted for as an adjustment to patient service revenue in the year
of final determination. Management believes it has adequately provided
for any potential adjustments resulting from an audit.
F-9
<PAGE> 49
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-LIVED AND INTANGIBLE ASSETS: The Company has adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and Assets to be Disposed of" ("SFAS 121"). Under SFAS
121, the Company recognizes impairment losses on property and equipment
whenever events or changes in circumstances indicate that the carrying
amount of long-lived assets, on an individual property basis, may not be
recoverable through undiscounted future cash flows. Such losses are
determined by comparing the 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. As of August 31,
1996, no impairment losses have been incurred.
INCOME TAXES: Horizon has adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109
generally requires an asset and liability approach and requires
recognition of deferred tax assets and liabilities resulting from
differing book and tax bases of assets and liabilities. It requires that
deferred tax assets and liabilities be determined using the tax rate
expected to apply to taxable income in the periods in which the
deferred tax asset or liability is expected to be realized or settled.
Under this method, future financial results will be impacted by the effect
of changes in income tax rates on cumulative deferred income tax balances.
NET INCOME PER SHARE: Net income per common share is calculated using the
weighted average number of common and common equivalent shares outstanding
during the respective periods. Dilutive common equivalents consist of
stock options calculated using the treasury stock method. Pursuant to the
requirements of the Securities and Exchange Commission, common shares and
common equivalent shares issued at prices below the public offering price
during the twelve months immediately preceding the date of the initial
filing of the Registration Statement have been included in the calculation
of common shares and common equivalent shares, using the treasury stock
method, as if they were outstanding for all periods presented. All shares
and per share data, except par value per share, have been retroactively
adjusted to reflect the 2-for-1 stock split of the Company's common stock
(see Note 10).
USE OF ESTIMATES: The Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
4. INVESTMENT IN HORIZON LLC
Certain provisions of the limited liability company agreement of the
Horizon LLC which required the consent of MHM for certain transactions
prevented the Company from having the ability to control the Horizon LLC
under generally accepted accounting principles and therefore the Horizon
LLC was not consolidated with the Company for accounting purposes for the
six months ended February 28, 1995. As a result of Horizon's March 20,
1995 acquisition of the minority interest of MHM in the Horizon LLC, the
Horizon LLC became a wholly-owned subsidiary of Horizon and has been
consolidated with the Company effective March 1, 1995.
F-10
<PAGE> 50
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for the Horizon LLC is as follows:
<TABLE>
<CAPTION>
August 1, 1994 Six
(inception) to months ended
August 31, 1994 February 28, 1995
--------------- -----------------
(Unaudited)
<S> <C> <C>
Net revenues $ 4,427,053 $ 26,869,535
Operating expenses 3,926,904 23,566,024
Other income 1,912 44,507
--------------- -----------------
Income before income taxes 502,061 3,348,018
Income tax expense - 30,298
--------------- -----------------
Net income $ 502,061 $ 3,317,720
=============== =================
August 31, 1994 February 28, 1995
--------------- -----------------
(Unaudited)
Current assets $ 5,139,363 $ 9,688,529
Noncurrent assets 65,997 848,136
--------------- ---------------
Total assets $ 5,205,360 $ 10,536,665
=============== ===============
Current liabilities $ 1,703,269 $ 3,247,846
=============== ===============
Noncurrent liabilities - -
=============== ===============
Total liabilities 1,703,269 3,247,846
Members' equity 3,502,091 7,288,819
--------------- ---------------
$ 5,205,360 $ 10,536,665
=============== ===============
</TABLE>
As of February 28, 1995, Horizon recognized its capital contributions and
its share of net earnings of the Horizon LLC as an increase in its
investment and recognized Horizon LLC distributions as a decrease in its
investment. Horizon capital contributions totaled $3,420,000 through
February 28, 1995. Distributions received by the Company from the Horizon
LLC totaled $1,000,000 through February 28, 1995. The Company's share of
the Horizon LLC's net earnings was $1,567,720 for the six months ended
February 28, 1995. The Horizon LLC contract stipulates that MHM is
allocated the first $1,750,000 of Horizon LLC net earnings in the fiscal
year ending August 31, 1995. On September 1, 1995, the Horizon LLC was
dissolved and its operations combined with Horizon.
5. INVESTMENT IN PPS
On July 31, 1996, Horizon acquired eighty percent (80%) of the outstanding
common stock of Florida Professional Psychological Services, Inc., also
known as Professional Psychological Services, Inc. ("PPS"), and PPS has
been consolidated with Horizon as of August 1, 1996. Horizon accounted
for the acquisition of PPS by the purchase method as required by generally
accepted accounting principles. Based in Clearwater, Florida, PPS
specializes in full risk, capitated managed behavioral health programs and
employee assistance programs. The purchase price is based primarily on a
6.25 multiple of the 1996 pre-tax income of PPS to be determined in the
first quarter of 1997. Horizon currently estimates the purchase price
will be approximately $1,800,000 of which $1,225,000 was paid on July 31,
1996. The remaining $575,00 of the purchase price has been accrued by
Horizon. The purchase price exceeded the fair value of the PPS' net
assets by $1,774,575 which is recorded as goodwill. Assets acquired and
liabilities assumed totaled $541,000 and $515,000, respectively. In
addition, Horizon also obtained an option to acquire the remaining
twenty percent (20%) of the outstanding PPS common stock at a future
date. The sellers, constituting all the
F-11
<PAGE> 51
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shareholders of PPS, also obtained the right to put to Horizon such shares
on certain dates. The option and put prices for the remaining PPS shares
are based on a multiple of the pre-tax income of PPS in future years.
The following presents the revenue of PPS for fiscal years 1995 and 1996.
PPS's effect on Horizon's net income and earnings per share has been
deemed negligible for these periods and not presented.
Historical Revenue Summary (unaudited)
1995 1996
---------- ----------
$4,475,000 $5,050,000
6. LONG-TERM DEBT AND RELATED PARTY TRANSACTIONS
At August 31, 1995 and 1996, Horizon had the following long-term debt:
<TABLE>
<CAPTION>
August 31, August 31,
1995 1996
--------------- --------------
<S> <C> <C>
Texas Commerce Bank -
Revolving Credit Facility - -
Promissory Note to OrNda,
due on November 30, 1999, interest is
payable quarterly at prime plus 2%.
Principal of $48,000 is payable quarterly. $ 2,500,000 $ -
Other 7,248 -
--------------- ------------
2,507,248 -
--------------- ------------
Less current maturities (7,248) -
--------------- ------------
$ 2,500,000 $ -
=============== ============
</TABLE>
Horizon believes the fair market value of the Promissory Note was not in
excess of the book value at August 31, 1995. On October 3, 1995, the
Company paid OrNda $2,524,298 for the outstanding balance of the note plus
accrued interest.
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. On December 12, 1995, the Company paid
TCB the outstanding balance of $1,300,000 originally advanced to the
Company during the quarter ended November 30, 1995, plus accrued interest.
As of August 31, 1996, the Company has borrowed $0 against the available
line of credit and has $7.4 million available for advances under the
revolving credit facility.
The line of credit will bear interest at (1) the lesser of the Floating
Base Rate or the maximum nonusurious interest rate permitted by law and/or
(2) the lesser of the LIBOR Rate plus LIBOR Margin or the maximum
nonusurious interest rate permitted by law.
F-12
<PAGE> 52
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Floating Base Rate means the greater of (i) TCB's prime rate of interest
or (ii) the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by
federal funds brokers plus one-half of one percent (.5%). LIBOR Rate
means the quotient of (i) the Interbank Offered Rate divided by (ii) the
remainder of 1.0 minus the LIBOR reserve requirement. LIBOR Margin is
1.25% to 1.75% depending on the debt coverage ratio.
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.
7. STOCK OPTIONS
In accordance with Horizon's 1989 and 1995 Stock Option Plans, as amended,
1,931,843 shares of common stock have been reserved for grant to key
employees. Of these, 1,400,842 options, 1,411,268 options, and 1,461,327
options were issued and outstanding at August 31, 1994, 1995, and 1996,
respectively. During fiscal 1994 and 1995, nonstatutory stock options to
purchase 406,237, and 168,000 shares of common stock were granted with an
exercise price of $3.61 or $4.00, and $6.6667, $7.4167 or $8.9167 per
share, respectively. On September 1, 1995, the Company granted an
additional 127,500 options under the 1995 Stock Option Plan at $9.75 per
share subject to shareholder approval which was received on January 11,
1996. An additional 128,250 shares with an exercise price of $14.16667
were granted on August 15, 1996. Management believes the exercise prices
of the options approximated or exceeded the market value of the common
stock at the date of grant. As such, no expense is recognized in the
accompanying statements of income as a result of such issuance. The
options are generally exercisable in cumulative installments over a
four-year period and terminate 10 years from the date of grant. No
options were canceled or expired during fiscal 1994. However, during
fiscal 1995 and 1996, 39,000 and 11,250 options granted to former officers
were canceled respectively. During fiscal 1995, vested options of 101,250
and 17,325 have been exercised by certain officers at exercise prices of
$0.83333 and $2.14167, respectively. During fiscal 1996, vested options
of 42,000 at $0.50, and 38,816 at $0.83333 and 53,625 at $1.00 have been
exercised by certain key employees.
At August 31, 1996 there were 1,931,843 shares reserved, of which 256,015
shares were issued and exercised, 1,461,327 shares were issued and
unexercised and 214,500 shares remain unissued. Of the 1,461,327 shares
issued and unexercised, 520,452 shares were exercisable.
On April 28, 1995 the board of directors created a stock option plan 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 also 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.
At August 31, 1996 there were 150,000 shares reserved, of which no shares
were issued and exercised, 60,000 shares were issued and unexercised and
90,000 shares remain unissued. Of the 60,000 shares issued and
unexercised, 12,000 shares were exercisable.
F-13
<PAGE> 53
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 1, 1996 the Company filed an S-8 registration statement which
registered 2,054,549 shares granted to 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
option plans to be traded at any time without any holding period or volume
restrictions.
In October 1995, the Financial Accounting Standards Board issued statement
No. 123 "Accounting for Stock-Based Compensation." FASB statement No. 123
contains recognition provisions and mandatory disclosure provisions.
Companies electing to adopt the recognition provisions would be required
to measure and recognize compensation cost based on a fair value based
method of accounting. The disclosure provisions apply to all companies
regardless of the method used to account for stock compensation
arrangements and must be adopted for fiscal years beginning after December
15, 1995. Horizon will continue to measure and recognize compensation
cost based on the accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and will adopt the disclosure provisions
of FASB statement No. 123 during fiscal year 1997.
8. INCOME TAXES
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. Income tax (benefit)
expense comprised the following components:
<TABLE>
<CAPTION>
Federal State Total
------------ ------------ -------------
<S> <C> <C> <C>
Year Ended August 31, 1994
Current $ 7,200 $ (27,580) $ (20,380)
Deferred - - -
------------ ----------- ------------
$ 7,200 $ (27,580) $ (20,380)
============ =========== ============
Year Ended August 31, 1995
Current $ 548,260 $ 316,419 $ 864,679
Deferred (54,512) (6,413) (60,925)
------------ ------------ ------------
$ 493,748 $ 310,006 $ 803,754
============ ============ ============
Year Ended August 31, 1996
Current $ 1,599,122 $ 536,097 $ 3,135,219
Deferred 481,849 56,687 538,536
------------ ------------ ------------
$ 3,080,971 $ 592,784 $ 3,673,755
============ ============ ============
</TABLE>
The components of the net deferred tax (liabilities) assets at August 31,
1994, 1995 and 1996 were obtained using the liability method in
accordance with SFAS No. 109 and are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------ -------------
<S> <C> <C>
Management contracts $ (1,581,643 ) $ (1,717,189) $ (1,613,132)
Goodwill - - (198,761)
-------------- ------------- -------------
Gross deferred tax liabilities $ (1,581,643 ) $ (1,717,189) $ (1,811,893)
============== ============= =============
Accounts receivable $ 307,446 $ 410,719 $ 368,078
Vacation accruals 104,340 293,557 375,532
Misc accruals - - 274,991
Fixed assets/intangibles - 45,515 73,923
Net operating loss carryforward 2,559,156 1,028,323 241,757
Deferred tax asset valuation allowance (1,389,299 ) - -
-------------- ------------- -------------
Deferred tax assets $ 1,581,643 $ 1,778,114 $ 1,334,281
============== ============= =============
Net deferred tax asset (liability) $ - $ 60,925 $ (477,612)
============== ============= =============
</TABLE>
At August 31, 1996, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately $600,000.
These carryforwards may be utilized to offset future years' income and
will expire during 2008 if unused prior to that date.
F-14
<PAGE> 54
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of income taxes at the U.S. federal
income tax rate to the income taxes reflected in the Consolidated
Statement of Operations:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Federal income taxes based on 34% of book
income (including equity in net earnings
of Horizon LLC) $ 495,030 $ 1,614,991 $ 3,141,732
Meals and entertainment, goodwill
amortization and other permanent adjustments 48,279 135,441 142,136
Change in valuation allowance (510,877) (1,389,299) -
State income taxes and other adjustments (52,812) 442,621 389,887
-------------- ------------- -------------
$ (20,380) $ 803,754 $ 3,673,755
============== ============= ============
</TABLE>
The change in the deferred tax asset valuation allowance is primarily due
to the utilization of net operating loss carryforwards in the years ended
August 31, 1994 and 1995.
9. COMMITMENTS AND CONTINGENCIES
Horizon 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>
1997 $ 569,586
1998 501,768
1999 360,741
2000 315,578
2001 315,000
--------------
$ 2,062,673
==============
</TABLE>
Rent expense for the years ended August 31, 1994, 1995, and 1996 totaled
$1,049,828, $315,105 and $644,931, respectively.
Horizon is insured for professional and general liability on a
claims-made policy, with additional tail coverage being obtained when
necessary. Management does not believe that any material, estimable, and
probable claims exist against the Company that would cause the final
expenses for professional and general liability to vary materially from
amounts provided.
F-15
<PAGE> 55
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Horizon is involved in litigation arising in the ordinary course of
business, including matters involving professional liability. It is the
opinion of management that the ultimate disposition of such litigation
would not be in excess of any reserves or have a material adverse effect
on Horizon's financial position or results of operations.
10. COMMON STOCK
On March 30, 1994, Horizon effected a two for one common stock split,
increasing the number of authorized common shares from 2,000,000 to
4,000,000. The par value of such stock remained at $0.01 per share,
thereby causing $10,410 originally recorded as additional paid-in capital
to be reclassified as common stock. Upon effecting the stock split, the
stock options and their related exercise prices were doubled and halved,
respectively.
On February 1, 1995, Horizon increased the number of its authorized
common shares to 10,000,000.
11. UNAUDITED PRO FORMA SUPPLEMENTAL INFORMATION
The following unaudited pro forma information for the years ended August
31, 1994 and 1995, has been prepared as if the issuance of 1,981,849
shares of the common stock from the initial public offering, and the
purchase of the minority interest in the Horizon LLC at a price equal to
1,041,233 times the initial public offering price per share had occurred
on September 1, 1993. In addition, the operating results of the Mountain
Crest Hospital for the eleven months ended July 31, 1994 have been
removed, as such operations were subleased by the Company effective July
31, 1994.
<TABLE>
<CAPTION>
For the year For the year
August 31, August 31,
1994 1995
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenue $ 44,805 $ 56,078
=================== ===================
Net income $ 1,026 $ 3,783
=================== ===================
Share data:
Pro Forma earnings per share $ 0.17 $ 0.60
=================== ===================
Weighted average shares outstanding 6,165 6,329
=================== ===================
</TABLE>
F-16
<PAGE> 56
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for
fiscal 1995 and 1996:
<TABLE>
<CAPTION>
Net Earnings
Gross Income (Loss)
Revenues Profit (Loss) Per Share
--------------- -----------------------------------------------
<S> <C> <C> <C> <C>
Quarter Ended:
November 30, 1994 $ 232,457 $ (80,007) $ (294,282) (0.09)
February 28, 1995 53,277 (30,526) 1,120,988 0.27
May 31, 1995 14,637,710 1,980,010 1,534,941 0.26
August 31, 1995 14,426,320 2,066,538 1,584,951 0.25
Quarter Ended:
November 30, 1995 14,612,868 2,002,091 1,248,829 0.19
February 29, 1996 15,071,434 2,159,193 1,335,705 0.21
May 31, 1996 15,819,865 2,318,831 1,444,851 0.22
August 31, 1996 16,940,588 2,436,417 1,534,855 0.23
</TABLE>
The net income in the quarters ended November 30, 1994 and February 28,
1995, included equity in net earnings of the Horizon LLC of $0 and
$1,567,720, respectively. No equity earnings from Horizon LLC were
recorded in the quarter ended November 30, 1994, as all earnings were
contractually allocated to MHM. On March 20, 1995, Horizon acquired
MHM's minority interest in the Horizon, LLC. Accordingly, the Horizon
LLC has been consolidated with the Company effective March 1, 1995 as a
wholly-owned subsidiary.
13. SUBSEQUENT EVENTS
On January 31, 1997, Horizon effected a three-for-two stock split. The
par value of such common stock remained at $0.01, thereby causing $18,253
originally recorded as additional paid-in capital to be reclassified as
common stock. Upon effecting the stock split, the stock options and
their related exercise prices were increased by 50% and decreased by
33.33%, respectively. These consolidated financial statements have been
restated to present the effects of this stock split.
In February 1997, Horizon increased the number of its authorized common
shares from 10,000,000 to 40,000,000 shares.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation
("Geriatric"), from the stockholders of Geriatric. Geriatric is a
contract manager of mental health services for acute care hospitals.
Geriatric had total revenues of approximately $5.7 million in 1996. The
cash purchase price of approximately $4.3 million, which was paid at
closing from existing cash of the Company, included retiring essentially
all of Geriatric's outstanding debt. On April 16, 1997, the Company paid
an additional $270,000 related to this purchase.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Clay Care, Inc., a Texas corporation ("CCI"). CCI is a
contract manager of mental health services for acute care hospitals. CCI
had total revenues of approximately $1.3 million in 1996. The $1,000,000
cash purchase price was determined based on negotiations between the
seller and the Company.
F-17
<PAGE> 57
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. UNAUDITED SUBSEQUENT EVENTS
On April 25, 1997 Horizon signed a definitive agreement to acquire
privately held Specialty Healthcare Management, Inc. (Specialty) of
Englewood, Colorado. The definitive agreement contemplates a transaction
to be accounted for as a pooling of interests in which Specialty would
become a wholly owned subsidiary of Horizon.
Specialty is a contract manager of mental health, physical rehabilitation
and chemical dependency treatment programs for general acute care
hospitals and other health care entities. For the year ended December
31, 1996, Specialty reported revenues of $33.8 million and net income of
$1.2 million.
The transaction is subject to the approval of Horizon's stockholders at a
special stockholders meeting which is expected to be held in late July
1997.
F-18
<PAGE> 58
INDEX TO SCHEDULES
<TABLE>
<S> <C>
Report of Independent Accountants Relating to Schedules . . . . . . . . . . S-1
Schedule VIII Valuation and Qualifying Accounts . . . . . . . . . . . . . . S-2
</TABLE>
S
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
of Horizon Mental Health Management, Inc.
Our audits of the consolidated financial statements referred to in our report
dated October 7, 1996 except as to Note 13, which is as of April 29, 1997,
appearing on page F-1 of this Annual Report on Form 10-K/A also included an
audit of the Financial Statement Schedule of Horizon Mental Health Management,
Inc. as listed in Item 14(a) of the Form 10-K/A. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICE WATERHOUSE LLP
Dallas, Texas
October 7, 1996
S-1
<PAGE> 60
HORIZON MENTAL HEALTH MANAGEMENT, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to Uncollectible Balance
Beginning Costs and Accounts at end
Of Period Expenses Written off Adjustment of Period
----------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1992:
Allowance for doubtful accounts $ 1,524,723 $ 770,760 $(1,637,518) -- $ 657,965
Year ended August 31, 1993:
Allowance for doubtful accounts 657,965 415,166 (467,766) -- 605,365
Year ended August 31, 1994:
Allowance for doubtful accounts 605,365 312,176 (160,565) -- 756,976
Year ended August 31, 1995:
Allowance for doubtful accounts 756,976 208,946 (418,647) 675,752 (1) 1,223,027
Year ended August 31, 1996:
Allowance for doubtful accounts 1,223,027 73,948 (268,349) (401,483)(2) 627,143
</TABLE>
(1) As a result of Horizon's acquistion of the 27.5% minority interest of MHM
in the Horizon LLC effective March 20, 1995, the Horizon LLC was
consolidated with Horizon for accounting purposes as of March 1, 1995.
Amounts represent bad debt expenses of the Horizon LLC which were
accounted for as "Equity in Net Earnings of Horizon LLC" through February
28, 1995.
(2) Adjustment reflects reserves in which Horizon is aware that specific
hospitals have experienced treatment day denials and to which a
corresponding accounts receivable balance does not exist. These
amounts are accured as a contingent liability.
S-2
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<S> <C><C>
3.1 - Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to
Amendment No. 2 as filed with the Commission on
February 16, 1995 ("Amendment No. 2") to the Company's
Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-
88314) (the "Form S-1")).
3.2 - Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to
Amendment No. 2 to the Company's Form S-1).
4.1 - Specimen Common Stock Certificate (incorporated herein
by reference to Exhibit 4.1 to Amendment No. 2 to the
Company's Form S-1).
10.1 - Partnership Agreement dated May 1, 1989 between Horizon
Health Management Company and Geropsych, Inc.
(incorporated herein by reference to Exhibit 10.1 to
the Company's Form S-1).
10.2 - Partnership Amendment dated March 27, 1991 between
Horizon Health Management Company and Geropsych, Inc.
(incorporated herein by reference to Exhibit 10.2 to
the Company's Form S-1).
10.3 - Lease dated as of December 15, 1990 between Charter
Hospital of Fort Collins, Inc. and HHG Colorado, Inc.
(incorporated herein by reference to Exhibit 10.12 to
the Company's Form S-1).
10.4 - Sublease Agreement dated as of July 31, 1994 between
HHG Colorado, Inc. and MHM of Colorado, Inc.
(incorporated herein by reference to Exhibit 10.13 to
the Company's Form S-1).
10.5 - Consent to Sublease dated as of July 31, 1994 by
Charter Hospital of Fort Collins, Inc. (incorporated
herein by reference to Exhibit 10.15 to the Company's
Form S-1).
10.6 - Assumption Agreement dated as of July 31, 1994 between
HHG Colorado, Inc. and MHM of Colorado, Inc.
(incorporated herein by reference to Exhibit 10.16 to
the Company's Form S-1).
10.7 - Guaranty dated as of July 31, 1994 of Mental Health
Management, Inc. to Charter Hospital of Fort Collins,
Inc. for the benefit of MHM of Colorado, Inc.
(incorporated herein by reference to Exhibit 10.17 to
the Company's Form S-1).
10.8 - Agreed Permanent Injunction and Final Judgment dated
December 8, 1994 (incorporated herein by reference to
Exhibit 10.32 to the Company's Form S-1).
10.9 - Lease Agreement dated as of January 4, 1994 between
Bentley Properties and Horizon Mental Health Services,
Inc., a Texas corporation (incorporated herein by
reference to Exhibit 10.36 to the Company's Form S-1).
10.10 - Lease dated as of November 11, 1993 between RREEF USA
Fund-I Hartford Plaza, Inc. and Horizon Mental Health
Services, Inc. and amendment thereto dated as of
November 30, 1994 (incorporated herein by reference to
Exhibit 10.37 to the Company's Form S-1).
10.11 - Standard Office Building Lease Agreement dated April
1993 between The Professional Tower Limited Partnership
and Horizon Mental health Services, Inc. and amendment
thereto dated as of September 22, 1993 (incorporated
herein by reference to Exhibit 10.39 to the Company's
Form S-1).
</TABLE>
<PAGE> 62
<TABLE>
<S> <C><C>
10.12 - Lease Agreement dated May 3, 1995 between Aid
Association for Lutherans and Horizon Mental Health
Management, LLC (incorporated herein by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1995 as filed with
the Commission on July 6, 1995 (the "May 1995 Form 10-
Q").
10.13 - Employment Agreement dated as of August 1, 1989 between
Horizon Health Group, Inc. and James Ken Newman
(incorporated herein by reference to Exhibit 10.40 to
the Company's Form S-1).
10.14 - Amendment to Employment Agreement dated April 11, 1990
between Horizon Health Group, Inc. and James Ken Newman
(incorporated herein by reference to Exhibit 10.41 to
the Company's Form S-1).
10.15 - Second Amendment to Employment Agreement dated February
6, 1992 between Horizon Health Group, Inc. and James
Ken Newman (incorporated herein by reference to Exhibit
10.42 to the Company's Form S-1).
10.16 - Third Amendment to Employment Agreement dated as of
January 5, 1995 between Horizon Mental Health
Management, Inc. and James Ken Newman (incorporated
herein by reference to Exhibit 10.43 to the Company's
Form S-1).
10.17 - Employment Agreement dated as of August 21, 1990
between Horizon Health Management Company, Inc. and
Gary A. Kagan (incorporated herein by reference to
Exhibit 10.44 to the Company's Form S-1).
10.18 - Letter dated November 23, 1992 between Horizon Mental
Health Services, Inc. and Robert A. Lefton regarding
severance arrangements (incorporated herein by
reference to Exhibit 10.45 to the Company's Form S-1).
10.19 - Agreement for Consulting Services dated as of April 17,
1995 between Horizon Mental Health Management, Inc. and
Gerald S. O'Keefe (incorporated herein by reference to
Exhibit 10.4 to the Company's May 1995 Form 10-Q).
10.20 - Loan Agreement dated September 29, 1995 among Horizon
Mental Health Management, Inc., a Delaware corporation,
Horizon Mental Health Management, Inc., a Texas
corporation, Mental Health Outcomes, Inc., a Delaware
corporation, and Texas Commerce Bank National
Association (incorporated by reference to Exhibit 10.45
to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1995 (the "1995 Form 10-
K")).
10.21 - $11,000,000 Revolving Credit Note dated September 29,
1995 executed by Horizon Mental Health Management,
Inc., a Delaware corporation, Horizon Mental Health
Management, Inc., a Texas corporation, and Mental
Health Outcomes, Inc., a Delaware corporation, payable
to Texas Commerce Bank National Association
(incorporated by reference to Exhibit 10.46 to the 1995
Form 10-K).
10.22 - Security Agreement dated September 29, 1995 executed by
Horizon Mental Health Management, Inc., a Delaware
corporation, as debtor, in favor of Texas Commerce Bank
National Association (incorporated by reference to
Exhibit 10.47 to the 1995 Form 10-K).
10.23 - Security Agreement dated September 29, 1995 executed by
Horizon Mental Health Management, Inc., a Texas
corporation, as debtor, in favor of Texas Commerce Bank
National Association (incorporated by reference to
Exhibit 10.48 to the 1995 Form 10-K).
10.24 - Pledge and Security Agreement dated September 29, 1995,
executed by Horizon Mental Health Management, Inc., a
Delaware corporation, as pledgor, in favor of Texas
Commerce Bank National Association (incorporated by
reference to Exhibit 10.49 to the 1995 Form 10-K).
10.25 - Stock Purchase Agreement among Horizon Mental Health
Management, Inc., as purchaser, and Joseph R. Bona,
M.D., Nancy J. Simons, Ph.D., John G. Toms, Ph.D.,
William H. Kale, Ph.D., and David E. Stenmark, Ph.D.,
as sellers, dated July 31, 1996 (filed herewith).
</TABLE>
<PAGE> 63
<TABLE>
<S> <C><C>
10.26 - First Amendment to Loan Agreement dated as of December
20, 1995 among Horizon Mental Health Management, Inc.,
a Delaware corporation, Horizon Mental Health
Management, Inc., a Texas corporation, Mental Health
Outcomes, Inc., a Delaware corporation, and Texas
Commerce Bank National Association (incorporated herein
by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended November 30,
1995 as filed with the Commission on January 16, 1996
(the "November 1995 Form 10-Q")).
10.27 - Letter Loan Agreement dated December 20, 1995 among
North Central Development Company, as borrower, Texas
Commerce Bank National Association, as lender, and
Horizon Mental Health Management, Inc., a Delaware
corporation, Horizon Mental Health Management, Inc., a
Texas corporation, and Mental Health Outcomes, Inc., a
Delaware corporation, as guarantors (incorporated
herein by reference to Exhibit 10.7 to the November
1995 Form 10-Q).
10.28 - Lease Agreement dated as of December 20, 1995 between
North Central Development Company and Horizon Mental
Health Management, Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 10.8 to
the November 1995 Form 10-Q).
10.29 - Unconditional Guaranty Agreement dated as of December
20, 1995 by Horizon Mental Health Management, Inc., a
Delaware corporation, in favor of Texas Commerce Bank
National Association (incorporated herein by reference
to Exhibit 10.9 to the November 1995 Form 10-Q).
Unconditional Guaranty Agreements dated as of December
20, 1995 in this same form were also signed by Horizon
Mental Health Management, Inc., a Texas corporation,
Mental Health Outcomes, Inc., a Delaware corporation,
HHMC Partners, Inc., a Delaware corporation, and HHG
Colorado, Inc., a Colorado corporation, subsidiaries of
the Company, but are not filed as allowed by
Instruction 2 to Item 601 of Regulation S-K.
10.30 - Horizon Mental Health Management, Inc. 1995 Stock
Option Plan (incorporated herein by reference to
Exhibit 10.11 to the November 1995 Form 10-Q).
10.31 - Horizon Mental Health Management, Inc. Amended and
Restated 1995 Stock Option Plan for Eligible Outside
Directors (incorporated herein by reference to Exhibit
10.12 to the November 1995 Form 10-Q).
10.32 - Commercial lease dated December 5, 1995 between PCT
Office Company and Horizon Mental Health Management,
Inc. (incorporated herein by reference to Exhibit 10.7
to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 29, 1996 as filed with the
Commission on April 4, 1996 (the "February 1996 Form
10-Q")).
10.33 - Commercial lease dated November 8, 1995 between N & S
Investment (USA), Inc. and Horizon Mental Health
Management, Inc. (incorporated herein by reference to
Exhibit 10.8 to the February 1996 Form 10-Q).
10.34 - Horizon Mental Health Management Bonus Plan Fiscal 1995
(incorporated herein by reference to Exhibit 10.51 to
the Company's Form S-1).
10.35 - Horizon Mental Health Management Bonus Plan Fiscal 1996
(incorporated herein by reference to Exhibit 10.13 to
the November 1995 Form 10-Q).
10.36 - Horizon Mental Health Management Bonus Plan Fiscal 1997
(filed herewith).
10.37 - Horizon Mental Health Management Contingent Bonus Plan
(filed herewith).
10.38 - Horizon Health Group, Inc. 1989 Stock Option Plan, as
amended (incorporated herein by reference to Exhibit
10.52 of Amendment No. 2 to the Company's Form S-1).
10.39 - Lease Agreement dated August 22, 1995 between Centoff
Realty Co., Inc. and Horizon Mental Health Management,
Inc. (incorporated herein by reference to Exhibit 10.54
to the 1995 Form 10-K).
</TABLE>
<PAGE> 64
<TABLE>
<S> <C><C>
10.40 - Commercial Lease dated October 15, 1995 between
Cummings Properties Management, Inc. and Horizon Mental
Health Management, Inc. (incorporated herein by
reference to Exhibit 10.55 to the 1995 Form 10-K).
11.1 - Statement Regarding Computation of Per Share Earnings
(filed herewith).
21.1 - List of Subsidiaries of the Company (filed herewith).
23.1 - Consent of Price Waterhouse L.L.P. (filed herewith).
27.1 - Financial Data Schedule (filed herewith).
</TABLE>
<PAGE> 1
Exhibit 10.25
STOCK PURCHASE AGREEMENT
AMONG
HORIZON MENTAL HEALTH MANAGEMENT, INC.
AS PURCHASER,
AND
JOSEPH R. BONA, M.D.
NANCY J. SIMONS, PH.D.
JOHN G. TOMS, PH.D.
WILLIAM L. KALE, PH.D.
AND
DAVID E. STENMARK, PH.D.
AS SELLERS
July 31, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Schedules . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . 2
2.1 Agreement to Sell and Purchase . . . . . . . . . . . . . . 2
2.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Partial Payment of Purchase Price . . . . . . . . . . . . 2
(a) Payment At Closing . . . . . . . . . . . . . . . 2
(b) Final Payment . . . . . . . . . . . . . . . . . 2
(c) Net Income Before Taxes . . . . . . . . . . . . 3
(d) Excess Cash of the Company . . . . . . . . . . . 3
(e) Final Settlement . . . . . . . . . . . . . . . . 3
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF EACH SELLER . . . . . . 4
3.1 Authority Relative to This Agreement . . . . . . . . . . . 4
3.2 Title to Stock . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Absence of Breach; No Consent . . . . . . . . . . . . . . 5
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLERS . . . . . . . . 5
4.1 Due Organization of the Company . . . . . . . . . . . . . 5
4.2 Subsidiaries/Investments . . . . . . . . . . . . . . . . . 5
4.3 Due Authorization . . . . . . . . . . . . . . . . . . . . 5
4.4 Capitalization of the Company . . . . . . . . . . . . . . 6
4.5 Licenses/Compliance with Law . . . . . . . . . . . . . . . 6
4.6 Financial Statements . . . . . . . . . . . . . . . . . . . 7
4.7 No Adverse Change . . . . . . . . . . . . . . . . . . . . 7
4.8 No Undisclosed Liabilities . . . . . . . . . . . . . . . . 8
4.9 Title to and Condition of Properties . . . . . . . . . . . 8
4.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . 9
4.11 Real Property Leases . . . . . . . . . . . . . . . . . . 9
4.12 Intellectual Property . . . . . . . . . . . . . . . . . . 9
4.13 Contracts . . . . . . . . . . . . . . . . . . . . . . . . 10
4.14 Employees, Et Cetera . . . . . . . . . . . . . . . . . . . 11
4.15 Employee Benefit Plans . . . . . . . . . . . . . . . . . . 12
4.16 Receivables . . . . . . . . . . . . . . . . . . . . . . . 13
4.17 Accounts Payable . . . . . . . . . . . . . . . . . . . . . 13
4.18 Broker's and Finder's Fees . . . . . . . . . . . . . . . . 13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
4.19 Labor Practices . . . . . . . . . . . . . . . . . . . 14
4.20 Insurance . . . . . . . . . . . . . . . . . . . . . . 14
4.21 Consents . . . . . . . . . . . . . . . . . . . . . . . 14
4.22 Environmental Matters . . . . . . . . . . . . . . . . 14
4.23 Taxes . . . . . . . . . . . . . . . . . . . . . . . . 14
4.24 Transactions With Affiliates . . . . . . . . . . . . . 15
4.25 Improper Payments . . . . . . . . . . . . . . . . . . 15
4.26 Full Disclosure . . . . . . . . . . . . . . . . . . . 16
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . 16
5.1 Due Incorporation . . . . . . . . . . . . . . . . . . 16
5.2 Corporate Authority . . . . . . . . . . . . . . . . . 16
5.3 Absence of Breach; No Consents . . . . . . . . . . . . 16
5.4 Investment Representations . . . . . . . . . . . . . . 16
5.5 Broker's or Finder's Fees . . . . . . . . . . . . . . 17
ARTICLE 6 CLOSING . . . . . . . . . . . . . . . . . . . . . . . 17
6.1 Date of Closing . . . . . . . . . . . . . . . . . . . 17
6.2 Actions by Sellers . . . . . . . . . . . . . . . . . . 17
6.3 Actions by Purchaser . . . . . . . . . . . . . . . . . 17
ARTICLE 7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 18
7.1 Representations and Warranties to Survive . . . . . . 18
7.2 Indemnity . . . . . . . . . . . . . . . . . . . . . . 18
7.3 Indemnity Procedures . . . . . . . . . . . . . . . . . 19
7.4 Limitations on Indemnification . . . . . . . . . . . . 20
ARTICLE 8 LIMITATIONS ON TRANSFER; OPTION/PUT RIGHTS . . . . . . 21
8.1 Capital Stock Subject Hereto . . . . . . . . . . . . . 21
8.2 No Transfer Except as Provided Herein. . . . . . . . . 22
8.3 Option Rights of Purchaser . . . . . . . . . . . . . . 22
8.4 Put Rights of Sellers . . . . . . . . . . . . . . . . 23
8.5 Restrictive Legend . . . . . . . . . . . . . . . . . . 24
</TABLE>
ii
<PAGE> 4
ARTICLE 9 ADDITIONAL POST-CLOSING AGREEMENTS . . . . . . . . . . 24
<TABLE>
<S> <C> <C>
9.1 Financial Statements . . . . . . . . . . . . . . . . . 24
9.2 Separate Entity . . . . . . . . . . . . . . . . . . . 24
9.3 Future Operations of the Company . . . . . . . . . . . . 25
9.4 Certain Financial Matters . . . . . . . . . . . . . . . 26
9.5 WCMA Loan Agreement . . . . . . . . . . . . . . . . . . 26
ARTICLE 10 CERTAIN DEFINED TERMS . . . . . . . . . . . . . . . . . 27
10.1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . 27
10.2 Agreement . . . . . . . . . . . . . . . . . . . . . . . 27
10.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . 27
10.4 Closing Date . . . . . . . . . . . . . . . . . . . . . . 27
10.5 Closing Time . . . . . . . . . . . . . . . . . . . . . . 27
10.6 Code . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.7 Counsel to Sellers . . . . . . . . . . . . . . . . . . . 27
10.8 Counsel to Purchaser . . . . . . . . . . . . . . . . . . 27
10.9 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.10 Excess Cash of the Company . . . . . . . . . . . . . . . 28
10.11 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.12 Knowledge . . . . . . . . . . . . . . . . . . . . . . . 28
10.13 Multiemployer Plan . . . . . . . . . . . . . . . . . . . 28
10.14 Payables . . . . . . . . . . . . . . . . . . . . . . . . 28
10.15 PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.16 Pension Plan . . . . . . . . . . . . . . . . . . . . . . 28
10.17 Receivables . . . . . . . . . . . . . . . . . . . . . . 29
10.18 Schedules . . . . . . . . . . . . . . . . . . . . . . . 29
10.19 Settlement Auditor . . . . . . . . . . . . . . . . . . . 29
10.20 Welfare Plan . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE 11 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 29
11.1 Further Instruments . . . . . . . . . . . . . . . . . . 29
11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . 29
11.3 Entire Agreement; Amendments . . . . . . . . . . . . . . 30
11.4 Binding Effect/Assignability . . . . . . . . . . . . . . 30
11.5 Exhibits/Schedules . . . . . . . . . . . . . . . . . . . 31
11.6 Invalid Provisions . . . . . . . . . . . . . . . . . . . 31
11.7 Headings/Captions . . . . . . . . . . . . . . . . . . . 31
11.8 Waiver; Remedies . . . . . . . . . . . . . . . . . . . . 31
11.9 Attorney's Fees and Costs. . . . . . . . . . . . . . . 31
11.10 Time. . . . . . . . . . . . . . . . . . . . . . . . . . 32
11.11 Governing Law . . . . . . . . . . . . . . . . . . . . . 32
11.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
iii
<PAGE> 5
SIGNATURES
LIST OF EXHIBITS
Exhibit A - Share of Ownership of Sellers
LIST OF SCHEDULES
<TABLE>
<S> <C>
Schedule 4.5 Licenses, etc.
Schedule 4.6 Financial Statements
Schedule 4.7 Adverse Changes
Schedule 4.8 Certain Liabilities
Schedule 4.9 Liens, Restrictions, etc.
Schedule 4.10 Litigation
Schedule 4.11 Leases
Schedule 4.12 Intellectual Property
Schedule 4.13A Certain Contracts
Schedule 4.13B Third-Party Payor Contracts
Schedule 4.13C Network Contracts
Schedule 4.13D Employer Contracts
Schedule 4.14 Employees
Schedule 4.15 Benefit Plans
Schedule 4.16 Certain Receivables
Schedule 4.17 Certain Payables
Schedule 4.20 Insurance
Schedule 4.21 Consents
Schedule 4.22 Environmental Matters
Schedule 4.24 Affiliate Transactions
Schedule 9.4 1996 Budget
</TABLE>
iv
<PAGE> 6
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is made as of the
31st day of July, 1996 by and among Horizon Mental Health Management, Inc., a
Texas corporation ("Purchaser"), and Joseph R. Bona, M.D., Nancy J. Simons,
Ph.D., John G. Toms, Ph.D., William L. Kale, Ph.D. and David E. Stenmark, Ph.D.
(collectively referred to herein as the "Sellers" and individually as a
"Seller").
WHEREAS, each Seller owns the respective number of shares of Common
Stock of Florida Professional Psychological Services, Inc., a Florida
corporation (the "Company"), set opposite the name of the Seller in Exhibit A
attached hereto (all of such shares being collectively referred to herein as
the "Shares"); and
WHEREAS, the Shares represent all of the issued and outstanding shares
of capital stock of the Company; and
WHEREAS, the Sellers represent all the stockholders of the Company; and
WHEREAS, subject to the terms and conditions hereinafter set forth,
the Sellers desire to sell to the Purchaser, and the Purchaser desires to
purchase from the Sellers, eighty percent (80%) of the Shares and to secure an
option to purchase the remaining twenty percent (20%) of the Shares;
NOW, THEREFORE, in consideration of the premises and the mutual terms
and conditions herein contained, the Purchaser and the Sellers hereby agree as
follows:
ARTICLE 1
DEFINED TERMS/SCHEDULES
1.1 Defined Terms. As used in this Agreement, capitalized terms
shall have the meanings expressly set forth herein for such terms and variants
and derivatives of such defined terms shall have correlative meanings. To the
extent that certain of the defined terms set forth herein express agreements
between or among parties to this Agreement, the parties agree to the same by
execution of this Agreement.
1.2 Schedules. It is specifically acknowledged by the parties
hereto that certain agreements and documents listed on the Schedules are not
delivered herewith but were previously made available to Purchaser or its
representatives in connection with the due diligence investigation of the
Company conducted by Purchaser and its representatives prior to the Closing
Date. Sellers, jointly and severally, represent and warrant that all such
agreements and documents made available or delivered to Purchaser by the
Company and the Sellers were originals or true and correct copies of the
originals of all such agreements and documents. Each Schedule shall be
considered a part hereof as if set forth herein in full; provided, however,
that
1
<PAGE> 7
the representations and warranties of Sellers set forth in this Agreement shall
not be deemed modified, waived or limited in any respect by information
contained in any agreement or document listed or referenced in the Schedules
unless and only to the extent that such qualification, modification, exception
or limitation to any representation and warranty of the Sellers is expressly
set forth on the face of a Schedule or expressly contemplated by the language
of the representation or warranty.
ARTICLE 2
PURCHASE AND SALE
2.1 Agreement to Sell and Purchase. Subject to the terms and
conditions of this Agreement and in reliance on the representations, warranties
and covenants herein set forth, at the Closing each Seller shall sell to
Purchaser, and Purchaser shall purchase from each Seller, (a) eighty percent
(80%) of the Shares owned by each Seller (the "Closing Shares") free and clear
of any and all liens, claims, options, charges, pledges, security interests,
voting agreements or trusts, encumbrances or other restrictions or interests of
any kind or nature whatsoever (collectively, "Claims") and (b) an option to
acquire the remaining twenty percent (20%) of the Shares owned by each Seller
(the "Option Shares") on the terms and conditions set forth in Section 8.3 of
this Agreement (the "Option").
2.2 Purchase Price. The total purchase price for the Closing
Shares shall be an amount equal to eighty percent (80%) of the sum of (a) the
Excess Cash of the Company (as defined in Section 10.11 herein) on the Closing
Date and (b) the product of (i) the net income before taxes of the Company for
the twelve (12) month period ended December 31, 1996 times (ii) six and
25/100ths (6.25) (the "Purchase Price").
2.3 Partial Payment of Purchase Price. The Purchaser shall pay
the Purchase Price as follows:
(a) Payment At Closing. At the Closing, the Purchaser
shall make a partial payment of the Purchase Price in the aggregate amount of
$1,225,000 (the "First Payment") payable in cash by certified or cashier's
checks (or by wire transfer in accordance with the directions of each Seller
given to Purchaser not less than two business days prior to the Closing Date).
Such cash constituting the partial payment of the Purchase Price at Closing
shall be allocated to the Sellers on a pro rata basis according to the
respective percentage of the Shares owned by each Seller as listed on Exhibit A
hereto.
(b) Final Payment. The remaining balance of the Purchase
Price shall be paid by Purchaser on the Final Payment Date and shall be
determined and payable in the following manner:
(i) The Purchase Price as specified in Section 2.2 above
shall be determined utilizing the actual Excess Cash of the Company on
the Closing Date and the actual net income before taxes of the Company
for the twelve month period ending December 31,
2
<PAGE> 8
1996, both as shown on the Final Settlement Statements and the final
payment shall be an amount equal to the Purchase Price as so determined
less $1,225,000 (the "Final Payment"); and
(ii) Notwithstanding the provisions of Section 2.2 above,
(1) in the event that the actual net income before taxes of the Company
for the twelve month period ending December 31, 1996 is $150,000 or
less, then the Purchase Price for the Closing Shares for all purposes
under this Agreement, including, without limitation, Section 2.3(b)(i)
above shall be equal to $1,225,000 plus the actual Excess Cash of the
Company on the Closing Date and (2) in the event that the actual net
income before income taxes of the Company for the twelve month period
ending December 31, 1996 is more than $150,000 and equal to or less than
$350,000, then the Purchase Price for the Closing Shares for all
purposes under this Agreement, including, without limitation, Section
2.3(b)(i) above shall be equal to $1,225,000 plus the actual Excess Cash
of the Company on the Closing Date and plus an amount equal to the
product of $525,000 times a fraction the numerator of which is the
actual net income before taxes of the Company for the period ending
December 31, 1996 and the denominator of which is $350,000.
(iii) The Purchaser shall pay the Final Payment in cash by
certified or cashier's checks (or by wire transfers in accordance with
the directions of each Seller given to Purchaser not less than two
business days prior to such payment date) equal in the aggregate to such
amount. Such cash constituting the Final Payment shall be allocated to
the Sellers on the same pro rata basis as the First Payment of the
Purchase Price was allocated among the Sellers.
(c) Net Income Before Taxes. For the purpose of
determining the Purchase Price, the net income before taxes of the Company for
the twelve month period ending December 31, 1996 shall be determined from
financial statements of the Company prepared in accordance with generally
accepted accounting principles consistently applied with prior periods (the
"December 31, 1996 Statement of Income").
(d) Excess Cash of the Company. For the purpose of
determining the Purchase Price, Purchaser shall prepare and deliver to the
Sellers a schedule which sets forth the determination of the actual Excess Cash
of the Company on the Closing Date and which itemizes the amount of cash held
by the Company on the Closing Date and all liabilities which were due and
payable on the Closing Date or on or before thirty (30) days after the Closing
Date (the "Statement of Excess Cash"). Such schedule shall be prepared from
the books and records of the Company and the Sellers shall be provided access
to such books and records for the purpose of verifying such determination of
Excess Cash of the Company.
(e) Final Settlement. Within 60 days after December 31,
1996, Purchaser will deliver to Sellers the Statement of Excess Cash as of the
Closing Date together with the December 31, 1996 Statement of Income which,
subject to the provisions of Article 9, shall be prepared from the books and
records of the Company in accordance with generally accepted accounting
principles consistently applied with prior periods (together the Statement of
Excess
3
<PAGE> 9
Cash and the December 31, 1996 Statement of Income are herein referred to as
the "Settlement Statements"). Thereafter, the Purchaser shall give the Sellers
and any independent auditors and authorized representatives of the Sellers full
access at all reasonable times to the properties, books, records and personnel
of the Company relating to periods reflected in the Settlement Statements for
purposes of preparing, reviewing and resolving any disputes concerning the
Settlement Statements. Sellers shall have 30 days following delivery to
Sellers of the Settlement Statements during which to notify Purchaser of any
dispute of any item contained therein, which notice shall set forth the basis
for such dispute. If Sellers fail to notify Purchaser of any such dispute
within such 30-day period, the Settlement Statements provided by the Purchaser
shall be final, conclusive and binding and shall be deemed to be the "Final
Settlement Statements" and the next business day following the expiration of
such period shall be the "Final Payment Date." In the event that Sellers shall
so notify Purchaser of any dispute, Purchaser and Sellers shall cooperate in
good faith to resolve such dispute as promptly as practicable. If Purchaser
and Sellers are unable to resolve any such dispute within 15 days of Sellers'
delivery of such notice, such dispute shall be resolved by a Settlement
Auditor. The Settlement Auditor shall make such revisions to the Settlement
Statements as it deemed appropriate in order to make a determination of the
Purchase Price and the Final Payment in accordance with the terms of this
Agreement as promptly as practicable. Such determination shall be final,
conclusive and binding on the parties and shall be deemed a final arbitration
award that is enforceable pursuant to all terms of the Federal Arbitration Act,
9 U.S.C. Sections 1 et seq. (the "Federal Arbitration Act"). The expenses
relating to the engagement of the Settlement Auditor shall be shared equally by
Purchaser and Sellers. In the event of a dispute, the Settlement Statements,
as modified by the Settlement Auditor shall be the "Final Settlement
Statements" and the next business day after the delivery of such Final
Settlement Statements by the Settlement Auditor to the Purchaser and the
Sellers shall be the "Final Payment Date."
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF EACH SELLER
Each Seller, severally and not jointly, represents and warrants to
Purchaser that, as of the Closing Date:
3.1 Authority Relative to This Agreement. This Agreement has been
duly and validly executed and delivered by the Seller and constitutes a valid
and binding agreement of the Seller enforceable in accordance with its terms.
All other agreements, certificates and instruments executed and delivered by
the Seller pursuant to this Agreement are valid and binding agreements of such
Seller enforceable in accordance with their respective terms.
3.2 Title to Stock. The Seller is the unconditional sole legal,
beneficial, record and equitable owner of the Shares set opposite the name of
such Seller in Exhibit A, free and clear of any and all Claims. At the
Closing, the Seller will convey to Purchaser valid and marketable title to the
Closing Shares owned by such Seller as set forth on Exhibit A, free and clear
of any and all Claims. Upon exercise of the Option and payment of the Option
Price, the Seller will
4
<PAGE> 10
convey to Purchaser valid and marketable title to the Option Shares owned by
such Seller as set forth on Exhibit A, free and clear of any and all Claims.
3.3 Absence of Breach; No Consent. The execution, delivery, and
performance of this Agreement and the other agreements, certificates and
instruments executed and delivered pursuant to this Agreement by the Seller
does not and will not: (i) contravene any order, writ, judgment, injunction,
decree, determination, or award of any court or other authority which affects
or binds such Seller or the Shares owned by such Seller, (ii) conflict with or
result in a breach of or default under any indenture, loan or credit agreement
or any other agreement or instrument to which such Seller is a party or by
which such Seller or the Shares are bound, or (iii) require the authorization,
consent, approval or license of any third party or entity.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLERS
In addition to the representations and warranties made in Article 3, the
Sellers, jointly and severally, represent and warrant to Purchaser that as of
the Closing Date:
4.1 Due Organization of the Company. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida with all requisite corporate power and authority to conduct
its business operations as now being conducted. The Company is not required to
and has not qualified as a foreign corporation authorized to do business in any
other jurisdiction. Sellers have delivered to Purchaser complete and correct
copies of the articles of incorporation and bylaws of the Company as amended to
and in effect on the Closing Date. On the Closing Date, the Company is not in
violation of any term or provision of its articles of incorporation or bylaws.
4.2 Subsidiaries/Investments. The Company has no subsidiaries,
whether direct or indirect. The Company has no equity interest or investment
in, and does not possesses any other right or obligation to purchase any equity
or other investment in, and is not a partner of or joint venturer with, any
other person or entity.
4.3 Due Authorization. The execution and delivery of this
Agreement by the Sellers and the performance of the transactions contemplated
by this Agreement by the Sellers and all other instruments, agreements,
certificates and documents contemplated hereby to which the Sellers are a party
do not (i) violate any decree or judgment of any court or governmental
authority which may be applicable to the Company; (ii) to the knowledge of the
Sellers, violate any law, rule or regulation, or any decree or judgment of any
court or governmental authority binding on the Company; (iii) except for
certain third party consents set forth in Schedule 4.21, violate or conflict
with, or result in a breach of, or constitute a default (or an event which,
with or without notice or lapse of time or both, would constitute a default)
under, or permit cancellation of, or result in the creation of any encumbrance
upon, any of the assets of the Company under any of the terms, conditions, or
provisions of any contract, lease, sales order, purchase order, indenture,
mortgage, note, bond, instrument, license, certificate of authority or
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other agreement to which the Company is a party, or by which the Company or its
assets is bound; (iv) permit the acceleration of the maturity of any
indebtedness of the Company or; (v) violate or conflict with any provision of
the articles of incorporation or bylaws of the Company.
4.4 Capitalization of the Company. The authorized capital stock
of the Company consists of Seven Thousand Five Hundred (7,500) shares of common
stock, $1.00 par value per share, of which 120 shares are validly issued and
outstanding, fully paid, and nonassessable. All of the outstanding shares of
capital stock of the Company are owned of record by the Sellers. The Company
has provided to the Purchaser a correct and complete copy of the stock registry
of the Company listing all stockholders of the Company and the outstanding
share certificates and total number of shares issued to each stockholder of the
Company. The Company has no other capital stock authorized for issuance and
has no treasury shares. There are no outstanding options, warrants,
convertible instruments, or other rights, agreements, or commitments to issue
or acquire any shares of common stock or any other security constituting, or
convertible or exchangeable into, capital stock of the Company. Since the date
of the Company Balance Sheet and as of the Closing Date, no shares of the
Company's capital stock, no options, warrants, or other rights, no agreements,
or commitments (contingent or otherwise) obligating the Company to issue shares
of capital stock, and no other securities or instruments convertible or
exchangeable into shares of capital stock, have been executed or issued by the
Company. The Company has not granted and is not a party to any agreement
granting preemptive rights, rights of first refusal, or registration rights
with respect to its outstanding capital stock or any capital stock of the
Company to be issued in the future. The Company is not bound by any exclusive
agency or indemnity agreement applicable to the issuance of shares of its
capital stock after the Closing Date.
4.5 Licenses/Compliance with Law. The Company has the lawful
authority and all federal, state or, to the knowledge of Sellers, local
governmental authorizations, certificates of authority, licenses or permits
necessary for or required to conduct its business operations as such is
presently being conducted. Schedule 4.5 contains a list and description of all
authorizations, certificates of authority, licenses and permits, including
those granted or derived from governmental sources, issued or granted to the
Company. For the proper conduct of its business operations as presently
conducted, the Company is not required to obtain any additional certificates of
authority, permits, licenses or similar authorizations from any federal, state
or, to the knowledge of Sellers, local governmental authority other than has
already obtained as listed on Schedule 4.5. There are no pending or, to the
knowledge of the Sellers, threatened legal, administrative, arbitration or
other actions, notices, or proceedings nor any pending or, to the knowledge of
the Sellers, threatened governmental investigations by any federal, state or
local government or any subdivision thereof or by any public or private group
which assert or allege any violation of or non-compliance with any governmental
requirements or which would have the effect of limiting, prohibiting or
changing the business operations of the Company as authorized by the
authorizations, certificates of authority, licenses and permits set forth on
Schedule 4.5 and as presently conducted by the Company. The Company has made
all filings with federal, state and, to the knowledge of Sellers, governmental
agencies required for the conduct of its respective business. There are no
judgments against the Company, and no orders,
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rules, consent decrees or injunctions of any court, governmental department,
commission, agency or instrumentality by which the Company is bound or to which
the Company is subject. The Company has not entered into and is not subject to
any judgment, consent decree, compliance order or administrative order with
respect to any law or received any request for information, notice, demand
letter, administrative inquiry or formal or informal complaint or claim with
respect to any law. Neither the Company's operations nor any of the assets
owned, leased, occupied or used by the Company in the operation of its business
materially violates or fails to comply in any material respect with any
applicable federal or state insurance or health maintenance organization or
practice of medicine codes or health laws, rules or regulations or laws, rules
or regulations, and the Company has not received any notice of alleged
violations thereof.
4.6 Financial Statements. The Company has delivered to Purchaser
a copy of (i) unaudited financial statements of the Company as of December 31,
1995, consisting of a balance sheet at such date and the related statement of
income for the applicable twelve (12) month period then ended and (ii)
unaudited financial statements of the Company, as of May 31, 1996 (the "Balance
Sheet Date") consisting of a balance sheet of the Company at such date (the
"Company Balance Sheet") and the related statement of income for the applicable
month and year-to-date period then ended. Complete and accurate copies of all
such financial statements are attached hereto as Schedule 4.6 (the "Financial
Statements"). The Financial Statements present fairly in all material respects
the financial position of the Company, and the results of the operations of the
Company, as of the respective dates thereof and for the respective periods
covered thereby, in conformity with generally accepted accounting principles
("GAAP") subject, however, with respect to the May 31 unaudited interim
financial statements, to normal and customary year-end audit adjustments.
Except as reflected in the Company Balance Sheet included in the Financial
Statements, as of the Balance Sheet Date and as of the Closing Date there were
no liabilities, debts, claims or obligations, whether accrued, absolute,
contingent or otherwise, whether due or to become due, which are required by
GAAP to be set forth in a balance sheet of the Company which have not been so
set forth in the Company Balance Sheet. The Financial Statements were prepared
from the books and records of the Company. There are no assets shown on the
Company Balance Sheet which are valued thereon at an amount materially in
excess of their fair value as of the Balance Sheet Date. At the Balance Sheet
Date, the Company owned each of the assets included in the Company Balance
Sheet.
4.7 No Adverse Change. Except as set forth on Schedule 4.7, since
the Balance Sheet Date, the business of the Company has been conducted only in
the ordinary course and there has not been (i) any material adverse change in
the financial condition, business, properties, assets, or results of operations
of the Company (financial or otherwise) exclusive of any general economic
factors affecting the mental health services industry in general; (ii) any
material loss or damage (not covered by insurance) to any of the assets of the
Company which materially affects or impairs the ability of the Company to
conduct its business as previously conducted or any other event or condition of
any character which has materially and adversely affected the business or
operations of the Company; (iii) the attaching, placing or granting of, or the
agreement to attach, place or grant, any encumbrance on any of the assets of
the Company; (iv) any sale or transfer of any material portion of the assets of
the Company; (v) any material
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<PAGE> 13
changes in the terms of any contract of the Company; (vi) any material change
in the accounting systems, policies or practices of the Company; (vii) any
waiver by or on behalf of the Company of any rights which have any material
value; (viii) no taking under condemnation or right of eminent domain of any of
the assets of the Company; (ix) any entry into or termination of any material
commitment, contract, agreement, or transaction (including, without limitation,
any material borrowing or capital expenditure or sale or other disposition of
any material assets) by the Company other than in the ordinary and customary
course of business; (x) any redemption, repurchase, or other acquisition of any
of its capital stock by the Company, or any issuance of capital stock of the
Company or of securities convertible into or rights to acquire any such capital
stock; (xi) any dividend or distribution declared, set aside or paid on capital
stock of the Company; (xii) any transfer or right granted by the Company of or
under any material lease, license, agreement, patent, trademark, trade name,
service mark or copyright; (xiii) any sale or other disposition of any material
asset of the Company, or any mortgage, pledge, or imposition of any lien or
other encumbrance on any material asset of the Company, or any agreement
relating to or contemplating any of the foregoing not in the ordinary and usual
course of business; or (xiv) any default or breach by the Company in any
material respect under any contract, license, or permit. Since the Balance
Sheet Date, except as set forth on Schedule 4.7, the Company has conducted its
business only in the ordinary and usual course of business and, without
limiting the foregoing, no changes have been made in (i) employee compensation
levels, (ii) the manner in which employees of the Company are compensated,
(iii) supplemental benefits provided to any employees, or (iv) the employment
of any employee of the Company with a salary of more than $30,000 per annum.
4.8 No Undisclosed Liabilities. True and correct copies of all
notes, agreements or other documents evidencing the outstanding debt of the
Company, as amended to and in effect on the Closing Date, have been delivered
to Purchaser by the Company. The Company has no liabilities which are not
adequately reflected or reserved against on the face of the Company Balance
Sheet, except liabilities incurred since the Balance Sheet Date in the ordinary
and customary course of business consistent with past practice which, in the
aggregate, would not have a material adverse effect on the condition (financial
or otherwise), assets or business of the Company. Schedule 4.8 hereto sets
forth as of the date hereof each liability of the Company in an amount in
excess of $10,000 and each person to whom the aggregate amount of liabilities
owed to such person by the Company exceeds $10,000.
4.9 Title to and Condition of Properties. Except as disclosed in
Schedule 4.09 hereto, the Company has good, marketable, and insurable title, or
valid, effective and continuing leasehold rights in the case of leased
property, to all of the assets reflected on the Company Balance Sheet and all
personal property owned or leased by it or used by it in the conduct of its
business in such a manner as to create the appearance or reasonable expectation
that the same is owned or leased by it, free and clear of all liens, security
interests, restrictions, claims, encumbrances, and charges except as disclosed
in Schedule 4.9. The Sellers do not know of any potential action or assertion
of rights, including condemnation, by any party, governmental or other, and no
proceedings with respect thereto have been instituted of which any Seller or
the Company has notice, that would materially affect the ability of the Company
to utilize each of such assets in its business. The Company has not received
any notices of default or other
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violations from any mortgagee regarding any properties leased by the Company.
Schedule 4.9 hereto contains a detailed listing of all material assets of the
Company. The assets now owned by the Company constitute all assets reasonably
necessary to enable Purchaser to conduct the business and operations of the
Company on substantially the same terms as such business has been conducted
historically. Except as disclosed in Schedule 4.9, all such assets are well
maintained and in good operating condition, except for normal wear and tear.
4.10 Litigation. Except as set forth on Schedule 4.10 hereto, (i)
no material investigation or review by any governmental entity with respect to
the Company is pending or, to the knowledge of the Sellers, threatened, nor has
any governmental entity indicated to the Company an intention to conduct the
same and (ii) there is no action, suit, or administrative, condemnation,
arbitration or other proceeding (including proceedings concerning labor
disputes or grievances or union recognition) pending or, to the knowledge of
the Sellers, threatened against or affecting the Company to which the Company
is a party, at law or in equity, before any federal, state, or municipal court
or other governmental department, commission, board, bureau, agency, or
instrumentality. The Company is not now, and has not been, a party to any
injunction, order or decree restricting the method of the conduct of its
business or the marketing of any of its products or services.
4.11 Real Property Leases . Schedule 4.11 lists all leases of real
property to which the Company is a party (the "Real Property Leases").
Accurate and complete copies of the Real Property Leases, as amended to the
Closing Date, have been delivered to Purchaser. Except as disclosed on
Schedule 4.11, to the knowledge of the Sellers, all land, buildings, facilities
and other structures and improvements subject to the Real Property Leases are
in material compliance with any applicable zoning, environmental or health laws
and regulations or any other similar law, statute, regulation or ordinance.
The Company is the lessee and in peaceful and undisturbed possession of the
property subject to the Real Property Leases. To the knowledge of the Sellers,
all covenants or other restrictions (if any) to which any of the property
leased to the Company pursuant to the Real Property Leases are being properly
performed and observed in all material respects by the Company, and the Company
has not received any notice of violation (or claimed violation) thereof which
has not been resolved. The Company has delivered to Purchaser true, correct
and complete copies of all reports or audits of any engineers, environmental
consultants or other consultants in its possession relating to any of the Real
Property Leases. There is no pending or, to the knowledge of the Sellers, any
threatened proceeding or governmental action to condemn or take by the power of
eminent domain (or to purchase in lieu thereof) all or any part of the property
subject to the Real Property Leases which is material to the operations of the
Company as presently conducted. The Company does not own any real property.
4.12 Intellectual Property. Schedule 4.12 is an accurate and
complete list of all tradenames that the Company uses in its business
operations. The Company has no United States and foreign patents, patent
applications, patent licenses, trademarks, and service mark registrations (and
applications therefor), and has no copyrights and copyright registrations (and
applications therefor), trade secrets, inventions, processes, designs, know-how
and formula which are owned or licensed for use by the Company and utilized by
the Company in the
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business or operations of the Company as presently conducted. There is no
adverse claim against the Company, or to the knowledge of the Sellers, any
threatened litigation or claim of infringement. To the knowledge of the
Sellers, the Company does not utilize any intellectual or proprietary trade
secret information which infringes any trademark, tradename, service mark,
copyright or patent of another, and the Company has not received any notice
contesting its right to use any trade name now used by it in connection with
its business or the operation thereof. The Company has not granted any license
to a third party in respect of any intellectual property.
4.13 Contracts.
(a) Material Contracts. Schedule 4.13A lists all material
contracts or agreements of the following types to which the Company is a party
or by which the Company is bound:
(i) any contract or agreement with a health provider or
any partnership or professional association or corporation owned by
other health providers other than the contracts described in
subparagraphs (b) and (c) below;
(ii) any contract or agreement which is not terminable
upon thirty (30) days or less notice or which obligates the Company to
the payment of more than $10,000 including, without limitation, loan
agreements;
(iii) any contract or agreement for the maintenance,
purchase or sale of equipment or capital assets having a value in
excess of $10,000;
(iv) any power of attorney (other than routine powers given
to governmental officials authorizing service of process);
(v) any lease of personal property;
(vi) any guaranty, suretyship agreement or other agreement
relating to any contingent liability.
(vii) any contract with an independent agent or broker who
sells the services of the Company;
(viii) any contract or agreement with independent
consultants; and
(ix) any contract or agreement restricting the method by
which the Company conducts its business or the marketing of any of its
products or services.
(b) Third Party Payor Contracts. Schedule 4.13B lists
all contracts between the Company and health maintenance organizations,
insurance companies, preferred provider organizations or any similar
organizations pursuant to which the Company has agreed to furnish its services
to members of such organizations or participants in such programs.
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(c) Network Contracts. Schedule 4.13C lists all
agreements between the Company and other providers or provider networks
pursuant to which such other providers or provider networks provide mental
health services for and on behalf of the Company.
(d) Employer Contracts. Schedule 4.13D lists all
agreements between the Company and all employers pursuant to which the Company
provides employee assistance program services or other mental health care
services to employees.
(e) Copies. True and correct copies of all such
contracts referred to in Schedules 4.13A, 4.13B, 4.13C, and 4.13D have been
made available for inspection by Purchaser and, except to the extent disclosed
on Schedules 4.13A, 4.13B, 4.13C, and 4.13D, as of the Closing (i) all of the
contracts listed on such Schedules are in full force and effect, (ii) the
Company has not received any notice of cancellation with respect to any such
contract or been advised that the other party thereto intends to cancel any
such agreement, (iii) there are no material outstanding disputes under such
contracts, (iv) each such contract is with an unrelated third party entered
into on an arms-length basis in the ordinary course of business, (v) there are
no material defaults under any of such contracts, and (vi), to the knowledge of
the Sellers, to the extent required by any law or regulation have been filed
with and approved by all governmental regulatory agencies.
4.14 Employees, Et Cetera. Schedule 4.14 hereto lists in accurate
and complete detail all employees of National Business Solutions, Inc. who are
leased to the Company as of the Closing Date, their job titles, annual rates of
compensation, accrued vacation, holiday and sick leave as of such date, other
fringe benefits, if any, a description of any severance pay arrangements, if
any, and the amounts payable with respect to such accrued vacation, holiday and
sick leave as of the Closing Date and the rate at which such vacation, holiday
and sick leave will accrue after the Closing Date. Except for the leased
employees shown on Schedule 4.14, the Company has no employees, is not bound by
any written contract of employment with any of its leased employees, and all
oral employment contracts are terminable at will, subject to applicable law, or
by any consulting or similar agreements. The Company is not a party to any
employment or other agreement, whether written or oral, pursuant to which the
Company has agreed to make a loan to, or guarantee any loan of, any employee or
leased employee or relating to any bonus, deferred compensation, severance pay
or similar plan, agreement, arrangement or understanding except as reflected in
Schedule 4.14. Except as listed on Schedule 4.14 or Schedule 4.15 hereof, the
Company has no Welfare Plan, no Pension Plan, nor any other type of pension,
profit sharing, deferred compensation, retirement, stock option, bonus,
severance, medical, dental, life insurance, accident, or other employee benefit
or compensation plan, agreement, arrangement, practice or policy with respect
to employee or leased employees. The Company has complied with all
requirements of Sections 6001 through 6008 of the ERISA and Section 4980B of
the Code with respect to itself and its employees. The Company is not bound by
any express or implied contract or agreement to employ, directly or as a
consultant or otherwise, any person for any specific period of time or until
any specific age except as specified in the written agreements identified in
Schedule 4.14.
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4.15 Employee Benefit Plans. Except as disclosed in Schedule 4.15:
(a) The Company does not maintain or contribute to, and
has not in the past maintained or contributed to, any Pension Plan or Welfare
Plan, except as a described on Schedule 4.15, nor is the Company presently, or
has it ever been, a participating employer in any Multiemployer Plan.
(b) With respect to each Pension Plan and each Welfare
Plan listed on Schedule 4.15, to the knowledge of the Sellers: (i) there is no
fact, including, without limitation, any reportable event, that exists that
would constitute grounds for termination of such plan by the PBGC or for the
appointment by the appropriate United States District Court of a trustee to
administer such plan, in each case as contemplated by ERISA; (ii) neither the
Company nor any Subsidiary nor any fiduciary, trustee, or administrator of any
such Pension Plan or Welfare Plan, has engaged in a prohibited transaction that
would subject the Company to any material tax or any material penalty imposed
by ERISA or the Code; (iii) the Company has not incurred any material liability
to the PBGC (other than for payment of premiums); (iv) the Company has
contributed all amounts thereto it is required to contribute under the terms of
the plan in question and applicable law, and there is no accumulated funding
deficiency with respect to any such Pension Plan, whether or not waived, other
than routine, non-contested claims for benefits. There is not any pending or,
to the knowledge of the Sellers, threatened claim by or on behalf of any
Pension Plan or Welfare Plan, by any employee or former employee covered or
previously covered under any Pension Plan or Welfare Plan, or otherwise
involving any Pension Plan or Welfare Plan.
(c) There has been no termination of any Pension Plan or
Welfare Plan by the Company that has occurred during the five-year period
ending on the date hereof.
(d) The Company has no knowledge of any material
liability being incurred under Title IV of ERISA by the Company with respect to
any Pension Plan maintained by a trade or business (whether or not
incorporated) which is under common control with, or part of a controlled group
of corporations with, the Company, within the meaning of Sections 414(b) or (c)
of the Code except where the failure to so comply would not have a material
adverse effect on the Company.
(e) No Welfare Plan listed on Schedule 4.15 is funded
with a trust or other funding vehicle, other than insurance policies.
(f) Each Welfare Plan, Pension Plan, and any other type
of pension, profit sharing, deferred compensation, retirement, stock option,
bonus, severance, medical, dental, life insurance, accident, or other employee
benefit or compensation plan, agreement, arrangement, practice, or policy with
respect to employees maintained by or contributed to by the Company is
maintained, administered, and operated in accordance with all applicable laws,
including but not limited to, ERISA and the Code, except where the failure to
so comply would not have a material adverse effect on the Company.
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(g) Each Pension Plan listed on Schedule 4.15 which is
intended to be qualified under Section 401(a) of the Code, has received a
favorable determination letter from the Internal Revenue Service as to the
qualification under the Code of each such Pension Plan as amended to comply
with the Tax Reform Act of 1986 and all applicable, subsequent legislation,
and, to the knowledge of the Sellers, no event has occurred since the date of
such favorable determination letter that would adversely affect such
qualification.
(h) No bonus, severance pay, or any other employee
benefit under any Welfare Plan, Pension Plan, or any other type of pension,
profit sharing, deferred compensation, retirement, stock option, bonus,
severance, or other employee benefit or compensation plan, agreement,
arrangement, practice, or policy with respect to employees maintained by or
contributed to by the Company is payable or exercisable as a result of the
transaction contemplated by this Agreement, and the payment, exercise, or
vesting of any such bonus, severance pay, or employee benefit will not be
accelerated or otherwise enhanced by such transaction.
True, correct and complete copies of each Pension Plan and Welfare Plan listed
on Schedule 4.15 as amended to and in effect on the date hereof; any agreements
entered into in connection with each such Pension Plan and Welfare Plan; the
most recent annual report filed with the Internal Revenue Service for each such
Pension Plan and Welfare Plan; the most recent actuarial report, if any, for
each such Pension Plan and Welfare Plan; the most recent summary plan
description, together with each summary of material modifications; and any
other communication generally disseminated to employees or former employees of
the Company and describing benefits provided under each such Pension Plan and
Welfare Plan, have been delivered to Purchaser by the Company.
4.16 Receivables. To the knowledge of the Sellers, all Receivables
of the Company whether or not reflected in the Company Balance Sheet, represent
transactions in the ordinary course of business, and, except as disclosed on
Schedule 4.16, the Receivables shown on the Company Balance Sheet are net of
reserves which reserves were calculated in accordance with GAAP consistent with
past practice.
4.17 Accounts Payable. The accounts payable reflected on the
Company Balance Sheet, and those reflected on the books of the Company at the
time of the Closing, will reflect all material amounts owed by the Company in
respect of trade accounts due and other Payables as required by GAAP to be
identified on such Company Balance Sheet or in the books of the Company.
Except as set forth on Schedule 4.17, to the knowledge of the Sellers, no
account payable of the Company is past due or otherwise in default by the
Company.
4.18 Broker's and Finder's Fees. No agent, broker, employee,
officer, stockholder or other person or entity acting on behalf of, or under
the authority of, the Sellers, or the Company is or will be entitled to any
commission or broker's or finder's fee from any of the parties hereto in
connection with this Agreement or any of the transactions contemplated hereby
except for Raymond James & Associates, Inc. Sellers shall pay any commissions
or dues due
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to Raymond James & Associates, Inc. as a result of the consummation of the
transaction contemplated by this Agreement.
4.19 Labor Practices. The Company has no collective bargaining or
other labor union agreements. There is no unfair labor practice complaint
against the Company pending before the National Labor Relations Board, there is
no pending or, to the knowledge of the Sellers, threatened labor dispute,
strike or work stoppage affecting the Company's business, nor has there been
any of the same or any labor union organizing activity relating to the Company
within the last three (3) years.
4.20 Insurance. Schedule 4.20 lists all insurance policies and
coverages maintained by or for the Company including but not limited to real
and personal property insurance, workers' compensation insurance and medical
malpractice and professional liability insurance. Schedule 4.20 lists all
insurance claims submitted in connection with property damage or medical
malpractice involving the Company or its directors, officers or employees for
the latest three (3) years.
4.21 Consents. Except as set forth in Schedule 4.21 hereto, no
consents, approvals, or authorizations of any person, entity or governmental
agency are required in connection with the sale of the Shares and the
consummation of the transactions contemplated by this Agreement.
4.22 Environmental Matters. Except as disclosed on Schedule 4.22,
(a) the Company has not received any notice from any governmental authority or
private person or entity advising it that the operation of the Company's
business is in violation of any environmental law or any applicable
environmental permit or that any of them is responsible (or potentially
responsible) for the cleanup of any pollutants, contaminants or hazardous or
toxic wastes, substances or materials at, on or beneath the property subject to
the Real Property Leases; and (b) to the knowledge of the Sellers, the Company
is not the subject of federal, state, local or private litigation or
proceedings involving a demand for damages or other potential liability with
respect to violations of environmental laws.
4.23 Taxes. All federal, state and other tax returns and reports
of the Company required by law to be filed have been prepared and properly
filed or valid extensions have been obtained, and all taxes, charges, fees,
duties, levies or other assessments which are imposed by the United States, or
any state, local or foreign government or subdivision or agency thereof,
including any interest, penalties or additions ("Taxes") imposed upon the
Company or any of its properties, assets or income which are due and payable or
claimed by any taxing authority to be due and payable have been paid or
reserved for. The liability for accrued taxes as shown in the Company Balance
Sheet (net of amounts reserved for deferred taxes) is sufficient for the
payment of all unpaid Taxes of the Company accrued for or applicable to the
periods prior to the Balance Sheet Date and all years and periods prior thereto
and for which the Company may at that date have been liable in its own right or
by reason of its being a member of any group of corporations filing
consolidated tax returns (including any such amounts payable as a result of an
audit of any tax return for any such period). The Company utilizes the accrual
method of accounting for tax purposes.
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There are no claims for Taxes pending against the Company, and the
Sellers do not know of any threatened claim for tax deficiencies or any basis
for such claims, and there are not now in force any waivers or agreements by
the Company for the extension of time for the assessment of any tax, nor has
any such waiver or agreement been requested by the Internal Revenue Service
(the "Service") or any other taxing authority.
The Federal income tax returns of the Company have not been examined or
audited by the Service. No material issues have been raised in any examination
by any taxing authority with respect to the businesses and operations of the
Company which, by application of similar principles, could be expected to
result in a proposed adjustment to the liability of the Company for taxes for
any other period not so examined.
The Company has not filed a consent under Section 341(f) of the Internal
Revenue Code of 1986, as amended (the "Code") concerning collapsible
corporations. The Company has not made any payments, is obligated to make any
payments, or is a party to any agreement that under certain circumstances could
obligate it to make any payments that will not be deductible under Section 280G
of the Code. The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code. The
Company has disclosed on their federal income tax returns all positions taken
therein that could give rise to a substantial understatement of federal income
tax within the meaning of Section 6662 of the Code. The Company is not a party
to any tax allocation or sharing agreement. The Company (a) has not been a
member of an affiliated group filing a consolidated federal income tax return
and (b) has no liability for the taxes of any person (other than any of the
Company) under Treas. Reg. Section 1.1502-6 (or any similar provision of
state, local, or foreign law), as a transferee or successor, by contract, or
otherwise.
The Company is withholding or has paid when due to the proper taxing
authorities all withholding amounts and taxes required to be withheld or paid
for all income, unemployment, social security, medicare or other similar Taxes
with respect to wages, salary and other compensation of directors, officers and
employees of the Company.
4.24 Transactions With Affiliates. Except as set forth in Schedule
4.24, there are no loans, leases, agreements, contracts or other transactions
between the Company and any present or former stockholder, director or officer
of the Company, or any member of such stockholder's, director's or officer's
immediate family. Except as set forth in Schedule 4.24, no stockholder,
director or officer of the Company nor any of their respective spouses or
family members owns directly or indirectly on an individual or joint basis any
material interest in, or serves as an officer or director of, or in any similar
capacity for, any competitor, customer, provider or supplier of the Company or
any organization which has a material contract or arrangement with the Company.
4.25 Improper Payments. To the knowledge of the Sellers, neither
the Company, nor any director, officer, employee or agent of the Company has
made any improper bribes,
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kickbacks or other payments on behalf of the Company to, or received any such
payments from, customers, vendors, suppliers or other persons contracting with
the Company.
4.26 Full Disclosure. To the knowledge of the Sellers, this
Agreement and the documents, certificates, and other writings furnished or to
be furnished by or on behalf of Sellers or the Company to Purchaser pursuant to
the provisions of this Agreement do not and will not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements made, in the light of the circumstances under which they
are made, not misleading.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser represents and warrants to the Sellers as follows:
5.1 Due Incorporation. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Texas, with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
5.2 Corporate Authority. Purchaser has all requisite corporate
power and authority to enter into this Agreement and to carry out its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by Purchaser has been duly authorized by all necessary corporate
action on the part of Purchaser. This Agreement has been duly executed and
delivered by Purchaser and constitutes the legal, valid and binding obligation
of Purchaser, enforceable in accordance with its terms.
5.3 Absence of Breach; No Consents. The execution and delivery of
this Agreement by the Purchaser, and the performance by Purchaser of its
obligations hereunder, do not (i) conflict with, and will not result in a
breach of, any of the provisions of the articles of incorporation or bylaws of
Purchaser; (ii) contravene any law, rule, or regulation of any State or
Commonwealth or of the United States, or of any applicable foreign
jurisdiction, or any order, writ, judgment, injunction, decree, determination,
or award affecting or binding upon Purchaser; (iii) conflict with or result in
a material breach of or default under any material indenture or loan or credit
agreement or any other material agreement or instrument to which Purchaser is a
party or by which it or any of its material properties may be affected or
bound; or (iv) require the authorization, consent, approval, or license of any
third party.
5.4 Investment Representations. Purchaser will acquire the Shares
for its own account for investment and not with a view to the resale or
distribution thereof. Purchaser will not transfer or otherwise dispose of the
Shares, or any interest therein, in such manner as to violate any provisions of
the Securities Act of 1933 and the rules and regulations thereunder or of any
applicable state securities laws regulating the disposition thereof. Purchaser
agrees that the
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certificates representing the Shares may bear legends to the effect that such
shares have not been registered under the Securities Act or such other state
securities laws, and that no interest therein may be transferred or otherwise
disposed of in violation of the provisions thereof or of any rules and
regulations issued thereunder.
5.5 Broker's or Finder's Fees. No agent, broker, employee,
officer, stockholder or other person or firm acting on behalf of, or under the
authority of, Purchaser is or will be entitled to any commission or broker's or
finder's fee from any of the parties hereto in connection with any of the
transactions contemplated herein.
ARTICLE 6
CLOSING
6.1 Date of Closing. The Closing shall take place at the offices
of Counsel to Sellers in Tampa, Florida or at such other location as Purchaser
and Sellers may mutually agree, simultaneously with the execution and delivery
of this Agreement.
6.2 Actions by Sellers. At the Closing, each Seller shall:
(a) Stock. Deliver to Purchaser the original
certificates representing the Closing Shares duly endorsed for transfer or with
appropriate stock powers with respect thereto duly endorsed in blank by such
Seller.
(b) Employment Agreements. Each Seller shall execute and
deliver an Employment Agreement between such Seller and the Company (the
"Employment Agreements").
(c) Resignation/Release. Each Seller shall execute and
deliver a resignation/release resigning as a director and officer of the
Company effective on the Closing Date, acknowledging that there are no
obligations, liabilities or other amounts due from the Company to such Seller
and releasing the Company from all such obligations or liabilities.
(d) Opinion. Deliver an opinion of Counsel for the
Sellers substantially as to the legal matters set forth in Exhibit B hereto
("Sellers' Opinion of Counsel").
6.3 Actions by Purchaser. At the Closing, Purchaser shall:
(a) Payment. Pay the partial payment of the Purchase
Price to the Sellers in accordance with provisions of Section 2.3(a) of this
Agreement.
(b) Employment Agreements. Execute and deliver the
Employment Agreements.
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(c) Opinion. Deliver an Opinion of Counsel for Purchaser
substantially as to the legal matters set forth in Sections 5.1, 5.2 and 5.3
hereof reasonably satisfactory in form and substance to Sellers ("Purchaser's
Opinion of Counsel).
ARTICLE 7
SURVIVAL OF REPRESENTATIONS
AND WARRANTIES; INDEMNITY
7.1 Representations and Warranties to Survive. All
representations, warranties, covenants and agreements made by the parties each
to the other in this Agreement shall be true at the Closing and shall survive
the consummation of this Agreement and the Closing hereunder for a period of
two years, ending at midnight on the second anniversary of the Closing Date;
provided, however, that if, prior to the expiration of such two year period, a
state of facts shall have become known which threatens to give rise to a
liability against which any party hereto would be entitled to indemnification
hereunder and the indemnified party shall have given notice of such facts which
notice shall expressly set forth the specific claim or claims which if made
would give rise to the liability or the specific liability or liabilities which
will arise out of such facts to the indemnifying party, within such two year
period, then the rights of the indemnified party to indemnification with
respect to the specific claim or specific liability set forth in the notice
shall continue until such liability shall have been finally determined and
disposed of (including and subject to disposition by the expiration of the
applicable statute of limitations with respect to such liability); provided
further, however, that if a claim for indemnification is made pursuant to this
Article 7, then such claim for indemnification or any claim arising out of the
wrongful failure to comply with the provisions of this Article 7 shall survive
until the expiration of the applicable period of limitations with respect to
such claim for indemnification; and provided further, however, that such two
year limitation specified above shall not apply to the extent provided
otherwise in Section 7.4(c) below. It is expressly understood that the giving
of notice within such two year period which only sets forth a set of facts and
does not expressly set forth the specific claim or liability threatened to
arise out of such facts shall not extend such two year limitation with respect
to liabilities arising out of such set of facts. Nothing contained herein
shall be deemed to require or imply that the accuracy of any representations
and warranties shall apply on a continuing basis as to facts existing after the
date of the Closing. Except to the extent set forth herein, no investigation
or examination made by any party hereto shall constitute a waiver of any
representation or warranty and no representation or warranty shall be merged
into the Closing hereunder.
7.2 Indemnity. Subject to the provisions of Section 11.4 below,
(a) Sellers. Each Seller, jointly and severally (except
as to the representations and warranties contained in Article 3 which shall be
several and not joint), agrees to indemnify and hold harmless the Company and
Purchaser, and their respective directors, officers, employees and agents,
from, against, and in respect of any loss, liability, claim, demand, or
expense, including but not limited to attorney, investigation and consultant
fees and costs, and of any other kind whatsoever arising out of or resulting
from any of the following:
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(i) Any misrepresentation, breach of warranty, or failure
to fulfill any agreement or covenant of the Sellers under this Agreement
or under any other agreement or document delivered by the Sellers to
Purchaser at Closing pursuant to this Agreement;
(ii) Any Federal income tax liability, fines, penalties
and interest thereon imposed on the Company arising out of any period
ending on or prior to the Closing Date;
(iii) Any claim, demand, suit or cause of action asserted
or brought by Robin F. Kirk, Jr. arising out of or relating to, directly
or indirectly, the purchase of shares of common stock of the Company
owned by Robin F. Kirk, Jr. by the Sellers pursuant to that certain
Agreement dated effective as of January 1, 1996; and
(iv) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs and legal and other expenses incident to
any of the foregoing.
(b) Purchaser. Purchaser shall indemnify and hold each
Seller harmless from, against, and in respect of any loss, liability,
claim, demand, or expense, including but not limited to attorney investigation
and consultant fees and costs, and of any kind whatsoever, arising out of or
resulting from any of the following:
(i) Any misrepresentation, breach of warranty, or failure
to fulfill any agreement or covenant of Purchaser under this Agreement
or under any other agreement or document delivered by Purchaser to
Sellers at Closing pursuant to this Agreement; and
(ii) Any obligation or liability of the Company, whether
arising out of any set of facts in existence before, on or after the
Closing Date; excluding, however, any obligation or liability with
respect to which the Sellers are obligated to indemnify and hold the
Purchaser harmless pursuant to Section 7.2(a) above; and
(iii) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs, and legal and other expenses incident to
any of the foregoing.
7.3 Indemnity Procedures. In case any claim, demand or action
shall be brought by any third party including, without limitation, any
governmental authority, against a party entitled to indemnity under Section
7.2(a) or 7.2(b) above, such party shall promptly notify the other party or
parties, as the case may be, from whom indemnity is or may validly be sought in
writing and the indemnifying party or parties shall assume and control the
defense thereof, including the employment of counsel. In addition, in case a
party hereto shall become aware of any facts which might result in any such
claim, demand or action, such party shall promptly notify the other party or
parties who would be obligated to provide indemnity hereunder with respect to
such claim, demand or action, and such other party or parties shall have the
right to take such action as it or they may deem appropriate to resolve such
matter. The indemnified party or parties shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties, unless the employment of such counsel has been
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specifically authorized by the indemnifying party or parties. Any settlement
of any action subject to indemnity hereunder shall require the consent of the
indemnified and the indemnifying party which consent shall not be unreasonably
withheld and shall be given within five (5) days following the giving of notice
thereof. Any compromise or settlement of any claim will require the prior
written consent of the indemnitee and the indemnifying party, which consent
will not be unreasonably withheld. If, however, the indemnitee refuses to
consent to a bona fide offer of compromise or settlement that the indemnifying
party desires to accept, the indemnitee may continue to pursue such claim, free
of any participation by the indemnifying party, at the sole expense of the
indemnitee. In such event, the obligation of the indemnifying party to the
indemnitee will equal the lesser of (i) the amount of the offer of compromise
of settlement that the indemnifying party desired to accept, plus the
reasonable out-of-pocket expenses (except for expenses resulting from the
indemnitee's participation in any defense controlled by the indemnifying party)
incurred by the indemnitee before the date the indemnifying party notified the
indemnitee of the offer of compromise or settlement, or (ii) the actual
out-of-pocket amount that the indemnitee is obligated to pay as a result of the
indemnitee's continued pursuit of such claim, plus the reasonable out-of-pocket
expenses incurred by the indemnitee in connection with such claim. The
indemnifying party or parties shall not be liable for any settlement of any
action effected without its or their consent, but if settled with the consent
of the indemnifying party or parties or if there be a final judgment for the
plaintiff in any such action, the indemnifying party or parties shall indemnify
and hold harmless the indemnified party from and against any loss or liability
by reason of such settlement or judgment. If requested by the indemnifying
party, the indemnified party shall cooperate with the indemnifying party and
its counsel and use its best efforts in contesting any such claim or, if
appropriate, in making any counter-claim or cross-complaint against the party
asserting the claim, provided that the indemnifying party will reimburse the
indemnified party for reasonable expenses incurred in so cooperating upon
presentation of receipts or other evidence of such expense. The indemnifying
party and its representatives shall have full and complete access during
reasonable hours to all books, records and files of the indemnified party
expressly related to the defense of any claim for indemnification undertaken by
the indemnifying party pursuant to this Article 7, or for any other purpose in
connection therewith; provided that the indemnifying party shall safeguard and
maintain the confidentiality of all such books, records and files.
7.4 Limitations on Indemnification.
(a) General Threshold. Except as to indemnification
obligations of the Sellers under Section 7.2(a)(ii) above as to which the
following limitation shall not apply, neither the Sellers nor the Purchaser
shall be obligated to indemnify the other party except to the extent that the
cumulative amount of all indemnifiable losses exceeds Twenty-Five Thousand
Dollars ($25,000.00) (the "Threshold"), which excess amount shall be
recoverable in accordance with the terms hereof; provided, however, that such
Threshold set forth in this Section 7.4(a) shall not apply to the matters
described in Section 7.4(c) below.
(b) Time Limits for Claims. No claim for indemnification
may be made by any indemnified party in respect of indemnifiable losses unless
written notice thereof shall have been received by the indemnifying party on or
prior to two years after the date hereof;
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provided, however, that the two-year limitation set forth in Section 7.1 and
this Section 7.4(b) shall not apply to the matters described in Section 7.4(c)
below as to which the indemnification obligations hereunder shall expire six
(6) months after the termination of the applicable statute of limitations
relating to the subject matter covered by such provisions; and provided
further, however, that in each case if, prior to the applicable date of
expiration, a specific state of facts shall have become known which is
reasonably likely to constitute or give rise to any indemnifiable loss as to
which indemnity may be payable and the indemnified party shall have given
notice of such facts to the indemnifying party and made a claim for
indemnification within such two-year period, then the right to indemnification
with respect thereto shall remain in effect until such matter shall have been
finally determined and disposed of and any indemnification due in respect
thereof shall have been paid.
(c) Certain Matters. The matters referred to in Section
7.4(a) and Section 7.4(b) shall be Losses arising from fraud or an intentional
misrepresentation on the part of any Seller.
(d) Individual Limitations. Notwithstanding any
provision of this Agreement to the contrary, it is expressly agreed and
understood that the liability of each Seller under this Agreement with respect
to any claim or claims for indemnification shall not exceed in the aggregate
for such Seller the amount of the Purchase Price paid to such Seller for the
Shares.
ARTICLE 8
LIMITATIONS ON TRANSFER; OPTION/PUT RIGHTS
8.1 Capital Stock Subject Hereto. The provisions of this Article
shall, except as hereinafter specifically provided, apply to:
(i) All shares of Option Shares owned by any Seller;
(ii) All shares of common stock of the Company hereafter
issued in respect of, in lieu of or in exchange for the shares of Option
Shares referred to in subsection 8.1(i) above, whether by reason of any
stock split, stock dividend, reverse split, recapitalization, merger,
exchange or otherwise;
(iii) All shares of common stock hereafter acquired by any
Seller pursuant to any subscription or rights to acquire additional
shares of common stock of the Company which subscription or other right
to acquire common stock of the Company is measured by or attributable to
the ownership of any shares of common stock made subject to this
Agreement by the foregoing provisions of this Section 8.1; and
(iv) All shares of common stock of the Company made
subject to this Agreement by the foregoing provisions of this Section
8.1 hereafter transferred to any permitted assignee of any Seller.
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All such shares of common stock of the Company listed or described above in
this Section 8.1 are hereinafter referred to collectively as "Option Shares."
The term "Seller" shall include the Sellers and any other permitted assignee
hereafter owning Agreement Stock.
8.2 No Transfer Except as Provided Herein. None of the shares of
Option Shares shall be sold, assigned, pledged, hypothecated or otherwise
transferred, whether to third parties or to any other Seller, except as
provided in and subject to this Agreement. A Seller may transfer all or any
portion of the Option Shares owned by such Seller to any third party; provided,
however, that such assignee shall expressly agree in writing that such shares
of Option Shares are held subject to and bound by the provisions of this
Agreement. Any purported transfer of Opinion Shares not in accordance with the
provisions of this Agreement shall be void and ineffectual, and shall not
operate to transfer any interest or title to the Option Shares to the purported
transferee.
8.3 Option Rights of Purchaser. Purchaser shall have the option
exercisable in its sole discretion to purchase all the Option Shares held by
the Sellers on the following terms and conditions:
(a) Purchaser shall have the option exercisable by
written notice to the Sellers given at any time on or after October 1, 1999 to
on or before December 31, 1999 to acquire the Option Shares.
(b) The purchase price for the Option Shares shall equal
twenty percent (20%) of the product of (i) the average net income before taxes
of the Company for the three twelve month periods commencing September 1, 1996,
1997 and 1998 and ending August 31, 1997, 1998 and 1999, respectively times
(ii) six (6) (the "Option Price").
(c) Purchaser shall deliver with the notice of the
exercise of the option statements of income of the Company for each of the
three twelve month periods ending August 31, 1997, 1998 and 1999, respectively,
which, subject to the provisions of Article 9, shall be prepared from the books
and records of the Company in accordance with generally accepted accounting
principles consistently applied with prior periods (the "Option Income
Statements"). Thereafter, the Purchaser shall give the Sellers and any
independent auditors and authorized representatives of the Sellers full access
at all reasonable times to the property, books, records and personnel of the
Company relating to the periods reflected in the Option Income Statements for
purposes of preparing, reviewing and resolving disputes concerning the Option
Income Statements. Sellers shall have 30 days following delivery to Sellers of
the Option Income Statements during which to notify Purchaser of any dispute of
any item contained therein, which notice shall set forth the basis for such
dispute. If Sellers fails to notify Purchaser of any such dispute within such
30-day period, the Option Income Statements provided by the Purchaser shall be
final, conclusive and binding and shall be deemed to be the "Final Option
Income Settlement Statements" and the next business day following the
expiration of such period shall be the "Option Payment Date." In the event
that Sellers shall so notify Purchaser of any dispute, Purchaser and Sellers
shall cooperate in good faith to resolve such dispute as
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promptly as practicable. If Purchaser and Sellers are unable to resolve any
such dispute within 15 days of Sellers' delivery of such notice, such dispute
shall be resolved by a Settlement Auditor. The Settlement Auditor shall make
such revisions to the Option Income Statements as it deems appropriate in order
to make a determination of the purchase price for the Option Shares in
accordance with the terms of this Agreement as promptly as practicable. Such
determination shall be final, conclusive and binding on the parties and shall
be deemed a final arbitration award that is enforceable pursuant to all terms
of the Federal Arbitration Act, 9 U.S.C. Sections 1 et seq. (the "Federal
Arbitration Act"). The expenses relating to the engagement of the Settlement
Auditor shall be shared equally by Purchaser and Sellers. In the event of a
dispute, the Option Income Statements, as modified by the Settlement Auditor
shall be the "Final Option Income Statements" and the next business day after
the delivery of such Final Option Income Statements by the Settlement Auditor
to the Purchaser and the Sellers shall be the "Option Payment Date."
(d) Purchaser must exercise the Option with respect to
all the Option Shares.
(e) The Option Price shall be payable on the Option
Payment Date.
(f) The Option Price shall be payable in cash by
certified or cashier's checks payable to the Sellers. Such cash shall be
allocated to the Sellers pro rata according to the percentage of all the shares
of Option Shares owned by each Seller.
8.4 Put Rights of Sellers. Each Seller shall individually have
the right exercisable by written notice to Purchaser to require the Purchaser
to purchase all of the Option Shares then owned by the Seller (the "Put Right")
on the following terms:
(a) Each Seller may exercise such Put Right by giving
written notice during either January, 1998, January, 1999 or January, 2000. In
the event that such notice is not given during any of such periods, such Put
Right shall terminate.
(b) Upon the giving of such notice, Purchaser shall be
obligated to buy and the Seller shall be obligated to sell all Option Shares
owned by the Seller at the following specified purchase price for each Seller
individually not in the aggregate (the "Put Purchase Price"):
(i) If the Put Right is exercised in January, 1998, the
Put Purchase Price shall be four percent (4%) of the product of (1) the
net income before taxes of the Company for the twelve month period ended
August 31, 1997 times (2) five (5);
(ii) If the Put Right is exercised in January, 1999, the
Put Purchase Price shall be four percent (4%) of the product of (1) the
net income before taxes of the Company for the twelve month period ended
August 31, 1998 times (2) six (6); or
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(iii) If the Put Right is exercised in January, 2000, the
Put Purchase Price shall be four percent (4%) of the product of (1) the
net income before taxes of the Company for the twelve month period ended
August 31, 1999 times (2) seven (7).
Provided, however, if a Seller has transferred or assigned any of the Option
Shares owned by such Seller on the Closing Date to a third party, then the Put
Purchase Price shall be proportionately reduced by the percentage of the Option
Shares of such Seller so transferred or assigned.
(c) The Put Purchase Price shall be payable in cash by
certified or cashier's check payable to the Seller.
(d) The closing of the exercise of the Put Right shall
occur on or before the expiration of thirty (30) days after the date of the
notice of exercise of the Put Right by the Seller.
8.5 Restrictive Legend. At the Closing, each certificate
representing Option Shares shall have a legend placed thereon in substantially
the following form:
THE TRANSFER OR OTHER DISPOSITION OF THE SHARES OF STOCK REPRESENTED BY
THIS CERTIFICATE ARE SUBJECT TO A STOCK PURCHASE AGREEMENT DATED JULY
31, 1996, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY, AND SAID SHARES MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT
IN STRICT ACCORDANCE WITH THE TERMS OF THAT AGREEMENT. A COPY OF SUCH
AGREEMENT WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF THIS
CERTIFICATE UPON RECEIPT BY THE COMPANY AT ITS PRINCIPAL PLACE OF
BUSINESS OR REGISTERED OFFICE OF A WRITTEN REQUEST FROM THE HOLDER
REQUESTING SUCH COPY.
ARTICLE 9
ADDITIONAL POST-CLOSING AGREEMENTS
9.1 Financial Statements. Purchaser agrees that until the earlier
of the purchase of the Option Shares by the Purchaser or December 31, 1999, it
shall cause to be prepared and furnished to Sellers monthly and annual
unaudited financial statements of the Company prepared in accordance with GAAP.
9.2 Separate Entity. Purchaser agrees that the business
operations of the Company shall be conducted as a separate entity until the
earlier of the purchase of the Option Shares or December 31, 1999. Purchaser
further agrees that, without the written consent of Sellers, neither it nor its
affiliates will sell any goods or services to the Company except at fair market
value or charge any management or similar fee or any corporate overhead fee or
similar charge to the Company. Purchaser further agrees that, until December
31, 1996, it shall continue to
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lease the employees of the Company under its existing arrangements with
National Business Solutions, Inc. with the same benefits as are provided by the
Company on the Effective Date.
9.3 Future Operations of the Company.
(a) Purchaser covenants and agrees that, from and after
the Effective Date until all the Sellers have exercised their Put Right
pursuant to Section 8.4 or Purchaser has exercised the Option pursuant to
Section 8.3, any of the following described mental health care service business
operations conducted by the Purchaser and its subsidiaries shall be conducted
in the State of Florida only through and by the Company, to-wit:
(i) the provision of employee assistance programs of the
nature currently operated by the Company pursuant to contractual
arrangements with the employer entity; and
(ii) the provision of mental health care services through
any provider network organized or administered by the Company pursuant
to contractual arrangements with either managed care provider entities,
such as health maintenance organizations, or self-insured employer
health plans; and
(iii) the organization or acquisition of mental health care
provider networks for, or the administration of mental health care
provider networks for, managed care payors, health care providers or
self- insured entities.
(b) Notwithstanding the foregoing provision of Section
9.3(a) above, it is expressly agreed and understood that such covenant and
agreement shall not apply to (i) any business operations of the Purchaser and
its subsidiaries involving the management of psychiatric services for acute
care general hospitals (including services such as in-patient treatment
programs, outpatient treatment programs, home health treatment programs and
mental disorder clinics pursuant to contractual arrangements with acute care
general hospitals), (ii) involving the provision of outcome measurement
services such as CQI+ outcome measurement services offered by the Purchaser on
the Effective Date, and (iii) any other business activity that does not come
within the activities described in Section 9.1(a)(i), (ii) and (iii) above.
(c) Further, notwithstanding the provisions of Section
9.3(a) above, such covenant and agreement shall not prohibit or restrict
Purchaser from acquiring any business (and from continuing the business
operations of such business after the acquisition) which is engaged in business
activities of the same nature as those described in Section 9.3(a) above in the
State of Florida so long as the annual revenues from such business activities
of the acquired entity in the State of Florida do not constitute for the
twelve-month period ending immediately prior to the effective date of such
acquisition more than twenty-five percent (25%) of the total annual revenues
for such twelve- month period from all business activities of the acquired
entity in the State of Florida. In making such determination for the purposes
of this Section 9.3(c), the business activities of any nature of the acquired
entity conducted outside the State of Florida (and
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the revenues from such business activities) shall not be considered or taken
into account for the purposes thereof.
(d) In the event that Purchaser proposes to develop,
organize or administer any employee assistance programs or mental health care
provider networks coming within the provisions of Section 9.1(a)(i) and (iii)
above or acquire any entity or business engaged in such business activities
which does not constitute a permitted acquisition coming within the provisions
of Section 9.3(c) above, Purchaser covenants and agrees that it shall first
offer such opportunity or acquisition to the Company which may elect by vote of
the Sellers to undertake such opportunity or make such acquisition; provided,
however, that the Purchaser shall have no obligation or responsibility to
contribute or loan funds to the Company if it is financially unable to
undertake such opportunity or make such acquisition unless each Seller
contributes or loans to the Company four percent (4%) of the capital required.
If the Company does not elect to undertake such opportunity or make such
acquisition by written notice to Purchaser within twenty (20) days after
receipt of the written notice of such opportunity or acquisition, then the
covenant and agreement contained in Section 9.1(a) shall not apply and
Purchaser may pursue such opportunity or make such acquisition (and continue
the business operations thereof) otherwise than by or through the Company.
(e) It is expressly understood that the proposed
acquisition of American Treatment Centers, Inc. by Purchaser or any other
acquisition of a mental health care provider will not come within the
provisions of 9.3(a) to the extent and only to the extent that such entities
provide services to managed care companies on a fee-for-service basis.
9.4 Certain Financial Matters. Purchaser agrees that no costs or
expenses shall be charged to the Company for the time devoted by personnel of
Purchaser in any activities relating to the development and upgrading of the
management information systems of the Company. In addition, if any personnel
of the Company are utilized at any time for business operations of Purchaser
and its subsidiaries outside the State of Florida, then the Company shall be
credited for financial accounting purposes for an amount equal to one hundred
twenty percent (120%) of the compensation of such personnel allocated for such
time as is directed to activities outside the State of Florida. Purchaser
further agrees that, during the period from the Closing Date to and including
December 31, 1996, the Company shall not make (or be charged for) any purchases
of data processing computer equipment or software in excess of $50,000 in the
aggregate or which Purchaser will amortize over a period of less than five
years without the consent of the Sellers. Purchaser further agrees that any
expenditures in excess of the 1996 budget for the Company attached hereto as
Schedule 9.4 in the period from the Closing Date to December 31, 1996 must be
approved by a majority of the Sellers.
9.5 WCMA Loan Agreement. The Company is a party to that certain
Loan Agreement dated as of September 29, 1994, between the Company and Merrill
Lynch Business Financial Services, Inc. relating to a working capital line of
credit (the "WCMA Agreement"). Sellers represent and warrant that there is no
outstanding balance of principal or accrued interest under the WCMA Agreement
and agree to indemnify and hold harmless the Company and Purchaser with respect
to an indebtedness outstanding under the WCMA Agreement prior to the
26
<PAGE> 32
Closing Date. Sellers have advised Purchaser and Purchaser hereby acknowledges
that the WCMA Agreement contains a covenant that the Company will not permit a
change of control to occur without the consent of the lender. Such consent has
not been obtained. Purchaser covenants and agrees that it shall not cause or
permit the Company to borrow any funds under the WCMA Agreement unless and
until (a) such consent to the change of control resulting from the transaction
contemplated by this Agreement is obtained and (b) the personal guarantees of
the Sellers of the obligations of the Company under the WCMA Agreement have
been fully and unconditionally released. Purchaser agrees to indemnify and
hold harmless the Sellers if and from any obligation of the Company arising
from borrowings by the Company under the WCMA Agreement after the Closing Date.
ARTICLE 10
CERTAIN DEFINED TERMS
10.1 Affiliate. When used with respect to a person, an "Affiliate"
of such person is a person controlling, controlled by, or under common control
with such person.
10.2 Agreement. This Stock Purchase Agreement, including all
Schedules and Exhibits hereto, and including all duly adopted amendments,
modifications, and supplements to or of this Agreement and such Schedules,
Exhibits, and other documents.
10.3 Closing. The completion of the transaction to take place as
described in Article 6.
10.4 Closing Date. The date on which the Closing actually occurs.
10.5 Closing Time. The time at which the Closing actually occurs.
All events that are to occur at the Closing Time shall, for all purposes, be
deemed to occur simultaneously, except to the extent, if at all, that a
specific order of occurrence is otherwise described.
10.6 Code. The Internal Revenue Code of 1986, as amended and in
effect on the date of this Agreement.
10.7 Counsel to Sellers. Fowler, White, Gillen, Boggs, Villareal
and Banker, P.A., 501 East Kennedy Boulevard, Suite 1700, Tampa, Florida 33601,
telephone number (813) 228-7411, facsimile number (813) 229-8313.
10.8 Counsel to Purchaser. Strasburger & Price, L.L.P., 901 Main
Street, Suite 4300, Dallas, Texas 75202, telephone number (214) 651-4300,
facsimile number (214) 651-4330.
10.9 ERISA. The Employee Retirement Income Security Act of 1974,
as amended and in effect on the date of this Agreement.
27
<PAGE> 33
10.10 Excess Cash of the Company. As of the date of determination,
the amount of cash held by the Company in its bank accounts in excess of all
current liabilities, i.e. liabilities due and payable on the Closing Date or
within thirty (30) days after the Closing Date.
10.11 GAAP. Generally accepted accounting principles, as in effect
on the date of any statement, report, or determination that purports to be, or
is required to be, prepared or made in accordance with GAAP. All references
herein to financial statements prepared in accordance with GAAP shall mean in
accordance with GAAP consistently applied throughout the periods to which
reference is made.
10.12 Knowledge. As used in this Agreement, the term "knowledge" or
the phrase "to the knowledge of" or "known to" shall mean the existence of
actual knowledge by such party; provided, however, that no party shall be
deemed to have performed, or be obligated to perform, an independent
investigation or inquiry with respect to the matter to which such knowledge
pertains.
10.13 Multiemployer Plan. A "multiemployer plan," as defined in
ERISA Section 3(37) or Section 414(f) of the Code, or, in either case,
successor provisions to such provisions adopted by amendments to ERISA or the
Code, as the case may be, and including, in each case, other provisions of
ERISA, of the Code, or of other law, and regulations adopted under ERISA or the
Code or such other law, modifying, amending, interpreting, or otherwise
affecting the application of such provisions, either in general or as applied
to the nature or circumstances of a particular entity that is a party to, or is
affected by or is involved in, the Agreement and with respect to which entity
the use of the term in this Agreement, or in particular location in this
Agreement, is relevant.
10.14 Payables. Liabilities of a party arising from the borrowing
of money or the incurring of obligations for merchandise, goods or services
purchased appearing as liabilities on the books of the Company or any
Subsidiary, or customarily required to be reflected as liabilities in the
balance sheets of the Company or any Subsidiary prepared in accordance with
GAAP, indicating monies owed by the Company or such Subsidiary.
10.15 PBGC. The Pension Benefit Guaranty Corporation.
10.16 Pension Plan. A "pension plan" or "employee pension benefit
plan," as defined in Section 3(2) of ERISA or successor provisions to such
provision adopted by amendments to ERISA and including other provisions of
ERISA or of other law, and regulations adopted under ERISA or such other law,
modifying, amending, interpreting or otherwise affecting the application of
such provisions, either in general or as applied to the nature or circumstances
of a particular entity that is a party to, or is affected by or is involved in,
the Agreement and with respect to which entity the use of the term in this
Agreement, or in the particular location in this Agreement, is relevant. A
reference to a Pension Plan shall include the trust, if any, forming a part
thereof.
28
<PAGE> 34
10.17 Receivables. Accounts receivable, notes receivable, and other
obligations appearing as assets on the books of the Company or any Subsidiary,
or customarily required to be reflected as assets in balance sheets of the
Company or any Subsidiary prepared in accordance with GAAP, indicating moneys
owed to the Company or such Subsidiary.
10.18 Schedules. The Schedules referenced in this Agreement.
10.19 Settlement Auditor. "Settlement Auditor" means a big six
accounting firm to be mutually agreed upon by the parties. If for any reason
such accounting firm shall not be available to resolve such issues, the Company
and Buyer shall promptly contact the national office of, and shall retain the
services of, another big six accounting firm. If Seller and Buyer cannot agree
on such accounting firm to be retained, Seller and Buyer shall each submit the
name of a big six independent accounting firm which does not at the time
provide, and has not in the prior two years provided, significant services to
Seller or Purchaser, and the firm shall be selected by lot from these two
firms.
10.20 Welfare Plan. A "welfare plan" or an "employee welfare
benefit plan," as defined in Section 3(1) of ERISA or successor provisions to
such provision adopted by amendments to ERISA and including other provisions of
ERISA or of other law, and regulations adopted under ERISA or such other law,
modifying, amending, interpreting or otherwise affecting the application of
such provision, either in general or as applied to the nature or circumstances
of a particular entity that is a party to, or is affected by or is involved in,
the Agreement and with respect to which entity the use of the term in this
Agreement, or in the particular location in this Agreement, is relevant.
ARTICLE 11
MISCELLANEOUS
11.1 Further Instruments. The parties hereto agree to execute and
deliver such instruments and take such other action as shall be reasonably
necessary, or as shall be reasonably requested by any other party, in order to
carry out the transactions, agreements and covenants contemplated in this
Agreement at or prior to the Closing Date.
11.2 Notices. Any notices, claims or demands which any party is
required or may desire to give to another under or in conjunction with this
Agreement shall be in writing, and shall be given by addressing the same to
such other party(ies) at the address set forth below, and by (i) depositing the
same so addressed, postage prepaid, first class, certified or registered, in
the United States mail (herein referred to as "Mailing"), (ii) overnight
delivery by a nationally recognized overnight courier service (e.g. UPS,
Federal Express), (iii) delivering the same personally to such other
party(ies), or (iv) transmitting by facsimile and Mailing the original. Any
notice shall be deemed to have been given five (5) U.S. Post Office delivery
days following the date of Mailing; one day after timely delivery to an
overnight courier; if by personal delivery, upon such delivery; or if by
facsimile, the day of transmission if made within
29
<PAGE> 35
customary business hours, or if not transmitted within customary business
hours, the following business day.
(a) If to Sellers:
To the respective address of such Seller set forth on
the signature page hereto executed by such Seller
With a copy to Counsel to Sellers:
Fowler, White, Gillen, Boggs, Villareal and
Banker, P.A.
501 East Kennedy Blvd., Suite 1700
Tampa, Florida 33602
Attention: David Shobe, Esq.
Facsimile: 813-229-8313
(b) If to Purchaser:
Horizon Mental Health Management, Inc.
1500 Waters Ridge Drive
Lewisville, Texas 75075
Attn: James W. McAtee, Executive Vice President
Facsimile: 214-459-5005
With a copy to Counsel to Purchaser:
Strasburger & Price, L.L.P.
901 Main Street, Suite 4300
Dallas, Texas 75202
Attn: David K. Meyercord, Esq.
Facsimile: (214) 651-4330
Any party may change the address or facsimile telephone number for notices to
be sent to it by written notice delivered pursuant to the terms of this Section
14.2.
11.3 Entire Agreement; Amendments. This Agreement and the
documents to be delivered at Closing hereunder set forth the entire
understanding of the parties and supersede all prior agreements or
understandings, whether written or oral, with respect to the subject matter
hereof. This Agreement may be amended, modified or supplemented only by a
written agreement executed by Purchaser and Sellers.
11.4 Binding Effect/Assignability. This Agreement shall extend to
and be binding upon and inure to the benefit of the parties hereto, their
respective heirs, legal representatives, successors and assigns. Purchaser
shall have the right at any time to assign this Agreement to any affiliate of
Purchaser without the necessity of seeking the consent of the Sellers;
provided,
30
<PAGE> 36
however, that Purchaser shall not be relieved of any obligations as a result of
such assignment and that, in addition to Purchaser remaining liable, any such
assignee shall assume and become liable for any and all of Purchaser's
obligations under this Agreement. None of the Sellers shall be entitled to
assign any of their respective rights or obligations under this Agreement;
provided, however, that the rights and obligations of a Seller may be assigned
by operation of law or may be assigned to an individual retirement account,
pension plan, trust or other entity under the control of such Seller but any
such assignment shall not relieve or release such Seller of any obligations
hereunder as a result of such assignment and that, in addition to such Seller
remaining liable, any such assignee shall assume and become liable for any and
all of such Seller's obligations under this Agreement. In connection with any
such assignment, a Seller may transfer all or any portion of the Shares owned
by the Seller and thereby effect an assignment on the basis specified above.
11.5 Exhibits/Schedules. All Exhibits and Schedules referenced in
this Agreement are incorporated herein by reference and shall constitute a part
of this Agreement.
11.6 Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws
effective during the term hereof, such provisions shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof with the remaining
provisions remaining in full force and effect and not affected by the illegal,
invalid or unenforceable provision or by severance herefrom. Furthermore, in
lieu of such illegal, invalid or unenforceable provision there shall be added
automatically as part of this Agreement a provision similar in terms to such
illegal, invalid, or unenforceable provision as may be possible and still be
legal, valid and enforceable.
11.7 Headings/Captions. The captions to sections and subsections
of this Agreement have been inserted solely for convenience and reference, and
shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
11.8 Waiver; Remedies. Waiver by any party hereto of any breach of
or exercise of any rights under this Agreement shall not be deemed to be a
waiver of similar or other breaches or rights or a future breach of the same
duty. The failure of a party to take any action by reason of any such breach
or to exercise any such right shall not deprive any party of the right to take
any action at any time while such breach or condition giving rise to such right
continues. Except as expressly limited by this Agreement, the parties shall
have all remedies permitted to them by this Agreement or law, and all such
remedies shall be cumulative.
11.9 Attorney's Fees and Costs. In the event of a breach by any
party to this Agreement and commencement of a subsequent legal action in a
court of law or forum of arbitration, or in the event legal counsel is
consulted in the event of any such breach or in anticipation of any such
prospective legal action, the prevailing party in any such dispute shall be
entitled to reimbursement of reasonable attorney's fees and court costs,
including, but not limited to, the costs of expert witnesses, transportation,
lodging and meal costs of the parties and
31
<PAGE> 37
witnesses, costs of transcript preparation and other reasonable and necessary
direct and incidental costs of such dispute. "Prevailing party" is the party
in whose favor final judgment is rendered.
11.10 Time. Time is of the essence under this Agreement.
11.11 Governing Law. This Agreement shall be construed under and
governed by the internal laws, and not the law of conflicts, of the State of
Florida.
11.12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
32
<PAGE> 38
IN WITNESS WHEREOF, the parties have executed this Stock Purchase
Agreement on the date set forth above.
PURCHASER: SELLERS:
HORIZON MENTAL HEALTH
MANAGEMENT, INC.
---------------------------------------
By: Joseph R. Bona, M.D.
-------------------------------- Address: 837 South Dakota Avenue
James W. McAtee Tampa, Florida 33606
Executive Vice President
---------------------------------------
Nancy J. Simons, Ph.D.
Address: 2462 Kingfisher Lane, J103
Clearwater, Florida 34622
---------------------------------------
John G. Toms, Ph.D.
Address: 7930 Bay Point Place, #C-34
Tampa, Florida 33615
---------------------------------------
William L. Kale, Ph.D.
Address: 4937 Turtle Creek Trail
Oldsmar, Florida 34677
---------------------------------------
David E. Stenmark, Ph.D.
Address: 4001 43rd Street South
St. Petersburg, Florida 33711
<PAGE> 39
EXHIBIT A
SHARE OF OWNERSHIP OF SELLERS
<TABLE>
<CAPTION>
Number of
Shares Percentage
---------- ----------
<S> <C> <C>
Joseph R. Bona, M.D. 24 20%
Nancy J. Simons, Ph.D. 24 20%
John G. Toms, Ph.D. 24 20%
William L. Kale, Ph.D. 24 20%
David E. Stenmark, Ph.D. 24 20%
-- ---
TOTAL: 120 100.00%
</TABLE>
<PAGE> 1
Exhibit 10.36
HORIZON MENTAL HEALTH MANAGEMENT, INC.
BONUS PLAN
FISCAL 1997
<TABLE>
<S> <C>
Ken Newman: $19,000 in cash bonus for each $.01
of earnings per share in excess of
$1.38 that Horizon reports during
fiscal 1997. The maximum bonus to be
no more than 100% of his average base
salary for fiscal 1997.
Jim McAtee: $10,000 in cash bonus for each $.01
of earnings per share in excess of
$1.38 that Horizon reports during
fiscal 1997. The maximum bonus to be
no more than 60% of his average base
salary for fiscal 1997.
Bob Lefton and Jack DeVaney: $4,000 in cash bonus for each $.01 of
earnings per share in excess of $1.38
that Horizon reports during fiscal
1997. The maximum bonus to be no
more than 30% of his average base
salary for fiscal 1997. An
additional 30% of 1997's average base
salary to begin to be earned pro rata
upon reaching 80% of the budgeted
operating cash flow in their
individual area of responsibility
with the maximum bonus being earned
upon reaching 120% of the budgeted
cash flow.
All bonuses to be paid on the first
regular payroll date following the
receipt of Horizon audited financials
for fiscal 1997.
Gary Kagan: $10,000 for each new mental health
management contract signed during
fiscal 1997 in excess of eighteen.
Bonus to be paid upon the opening of
the contract locations.
</TABLE>
<PAGE> 1
Exhibit 10.37
CONTINGENT BONUS PLAN
In January 1995, the Compensation and Option Committee of the Company approved
long-term contingent bonuses applicable to Messrs. Newman, McAtee and Kagan.
The aggregate amounts of such bonuses which may be earned by Messrs. Newman,
McAtee and Kagan are $216,904, $123,176 and $206,000, respectively. Each such
individual would be entitled to receive 25% of his aggregate potential bonus on
or after October 31, 1995, 1996, 1997 and 1998, on a cumulative basis, but only
if the conditions discussed below are satisfied. The bonuses will be
considered earned by the executive officer and payable by the Company only if
(i) each respective bonus is utilized to pay the exercise price of stock
options for the purchase of Common Stock and (ii) the executive officer has
remained in the continuous employment of the Company until the date when each
such bonus, or portion thereof, is paid. The bonuses may be payable in one or
more installments as and when the executive officer elects to exercise stock
options, provided that the conditions to the receipt of the bonus have been
satisfied on the payment date thereof.
<PAGE> 1
Exhibit 11.1
HORIZON MENTAL HEALTH MANAGEMENT, INC.
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended August 31,
In Thousands, Except per Share Amounts 1994 1995 1996
------- -------- -------
<S> <C> <C> <C>
SIMPLE
Net income $ 1,476 $ 3,946 $ 5,564
Average outstanding shares (2) 3,123 4,142 5,393
------- -------- -------
Simple net income per share $ 0.47 $ 0.95 $ 1.03
======= ======== =======
PRIMARY
Net income $ 1,476 $ 3,946 $ 5,564
Average outstanding shares (2) 3,123 4,142 5,393
Common stock equivalents assuming
exercise of stock options (2) 1,061 1,021 1,132
------- -------- -------
Shares for primary 4,184 5,163 6,525
======= ======= =======
Primary net income per share (1) $ 0.35 $ 0.76 $ 0.85
======= ======= ========
FULLY DILUTED
Net income $ 1,476 $ 3,946 $ 5,564
Average outstanding shares (2) 3,123 4,142 5,393
Common stock equivalents assuming
exercise of stock options (2) 1,061 1,033 1,153
------- ------- -------
Shares for fully diluted 4,184 5,175 6,546
======= ======= ========
Fully diluted net income per share (1) $ 0.35 $ 0.76 $ 0.85
======= ======= =======
</TABLE>
(1) The calculations for primary and fully diluted net income per share are
submitted in accordance with Regulation S-K Item 601(b)(11).
(2) 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
close of business on January 22, 1997. Upon effecting the stock
split/dividend, the stock options and their related exercise prices were
adjusted proportionately. Such stock split/dividend has been retroactively
reflected herein in conjunction with the filing of this 10K-A.
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
1. Mental Health Outcomes, Inc., a Delaware corporation.
2. Horizon Mental Health Management, Inc., a Texas corporation formerly known
as Horizon Mental Health Services, Inc., is the successor by merger to
Horizon Mental Health Services, Inc., a Delaware corporation formerly known
as Horizon Health Management Company.*
3. HHG Colorado, Inc., a Colorado corporation, d/b/a Mountain Crest Hospital,
Inc.
4. HHMC Partners, Inc., a Delaware corporation.
5. Florida Professional Psychological Services, Inc., a Florida corporation,
d/b/a Professional Psychological Services, Inc.
6. Geriatric Medical Care, Inc., a Tennessee corporation.
7. Clay Care, Inc., a Texas corporation.
____________________________________
* Horizon Mental Health Management, Inc., a Delaware corporation, was
formerly known as Horizon Mental Health Services, Inc. and Horizon
Health Group, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-2938) of Horizon Mental Health Management, Inc.
of our report dated October 7, 1996, except as to Note 13, which is as of April
29, 1997, appearing on page F-1 of this Form 10-K/A. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page S-1 of this Form 10-K/A.
PRICE WATERHOUSE LLP
Dallas, Texas
July 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE YEAR
ENDED AUGUST 31, 1996 FINANCIAL STATEMENTS INCLUDED IN THIS REPORT ON
FORM 10-K/A AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS INCLUDED IN SUCH REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 7,940,232
<SECURITIES> 0
<RECEIVABLES> 7,724,106
<ALLOWANCES> 627,142
<INVENTORY> 0
<CURRENT-ASSETS> 16,480,318
<PP&E> 2,434,787
<DEPRECIATION> 1,552,975
<TOTAL-ASSETS> 32,871,527
<CURRENT-LIABILITIES> 11,007,149
<BONDS> 0
0
0
<COMMON> 36,507
<OTHER-SE> 20,322,902
<TOTAL-LIABILITY-AND-EQUITY> 32,871,527
<SALES> 0
<TOTAL-REVENUES> 62,444,755
<CGS> 0
<TOTAL-COSTS> 53,528,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 73,948
<INTEREST-EXPENSE> 29,371
<INCOME-PRETAX> 9,240,392
<INCOME-TAX> 3,673,755
<INCOME-CONTINUING> 5,564,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,564,240
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
