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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1998
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 HEALTH CORPORATION
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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. [ ]
As of November 23, 1998 there were 6,967,750 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 $36,859,228. 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 to be held on January 28, 1999.
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TABLE OF CONTENTS
HORIZON HEALTH CORPORATION
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . 21
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 27
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 39
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . 40
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . 40
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . 41
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PART 1
ITEM 1. BUSINESS
Unless the context otherwise requires, when used herein the term
"Company" refers to Horizon Health Corporation, formerly known as Horizon Mental
Health Management, Inc., and its subsidiaries.
GENERAL
The Company is a growing provider of employee assistance plans ("EAP")
and mental health services to business and managed care organizations, as well
as the leading contract manager of clinical programs offered by general acute
care hospitals in the United States. The Company has grown both internally and
through acquisitions, increasing both the variety of its treatment programs and
services and the number of its management contracts. As of August 31, 1998, the
Company had over 200 contracts to provide EAP and mental health services
covering nearly 2.0 million lives. Over the last six years, the Company has
increased its management contracts from 43 to a total of 172 as of August 31,
1998 and currently operates in 37 states. Of those management contracts, 150
relate to mental health programs and 22 relate to physical rehabilitation
programs. The Company has also developed a proprietary mental health outcomes
measurement system known as CQI+ and at August 31, 1998 provided outcome
measurement services at 82 contract locations. The Company was incorporated in
1989 and is the successor to Horizon Health Management Company, which began the
development and management of mental health programs for general acute care
hospitals in 1981.
The Company's strategy is to enhance its position as the leader in the
contract management of mental health programs and to further expand the range of
services which it offers to its existing and new client hospitals to include
other clinical and related services and programs. A significant challenge in
obtaining clinical management contracts from hospitals is overcoming the initial
reservations that many hospital administrators have with outsourcing key
clinical services. The Company believes its expertise in working with hospital
administrators, its reputation in the industry and its existing contractual
relationships with 172 hospitals nationwide provide it with a significant
advantage in obtaining new contracts. The Company also believes it has
opportunities to cross-sell a range of mental health and physical rehabilitation
services to client hospitals by marketing and selling its mental health services
to client hospitals for which the Company currently manages only physical
rehabilitation programs, and by marketing and selling its physical
rehabilitation services to client hospitals for which the Company currently
manages only mental health programs. The Company is pursuing the development of
such opportunities as a primary part of its business strategy. The Company has
successfully expanded the breadth of services it offers to include the full
continuum of mental health services, including outcome measurement services, and
physical rehabilitation services and its contracts increasingly provide for
multiple services. In addition, the Company capitalizes on its expertise in
managing the delivery of mental health services by directly offering managed
behavioral health care services and employee assistance programs to businesses
and managed care organizations. The Company believes it is strategically-sized
to deliver national programs, while providing local, individualized service to
both employer and health plan clients and their employees or clients.
General acute care hospitals are increasingly outsourcing key clinical
departments to independent contract management companies for several reasons,
including: (i) the expertise necessary for the development, management and
operation of specialized clinical programs differs from that for traditional
medical/surgical services, (ii) hospitals often lack access to skilled
professionals and the support staff needed to operate specialized clinical
programs, (iii) hospitals often lack expertise in the marketing and development
activities required to support specialized clinical programs, and (iv) hospitals
often lack expertise necessary to design and operate specialized clinical
programs that satisfy regulatory, licensing, accreditation and reimbursement
requirements.
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MENTAL HEALTH SERVICES
The Company believes that there continue to be substantial
opportunities to provide mental health contract management services to general
acute care hospitals in the United States. A major shift in the delivery of
mental health services is occurring as payors are increasingly using managed
care methods to review and require pre-approval for mental health treatment and
to evaluate alternatives to inpatient hospitalization in order to ensure that
each patient's treatment regimen utilizes clinical resources effectively. The
Company believes that general acute care hospitals need to be able to offer a
broad array of mental health care services in order to develop or participate in
integrated delivery systems responsive to the demands of managed care companies
and other third-party payors. The Company also believes that it costs general
acute care hospitals less to provide inpatient and partial hospitalization
mental health services than it costs freestanding psychiatric hospitals in part
due to the ability of acute care hospitals to utilize excess capacity. General
acute care hospitals are also able to provide their mental health patients with
needed medical care on-site and in a more cost effective manner than
freestanding psychiatric hospitals. Furthermore, general acute care hospitals
are eligible to receive reimbursement under the Medicaid program for mental
health care provided to Medicaid-eligible adults, unlike freestanding
psychiatric hospitals which are not presently eligible.
The Company believes that, due to the increasing emphasis on
cost-effective treatment, significant demand exists for a complete continuum of
mental health services. In response to this demand, it has expanded the mental
health programs it offers to provide partial hospitalization (or day treatment),
outpatient treatment, short-term crisis intervention and residential treatment
as alternatives and complements to inpatient care. The Company believes it is
uniquely positioned to capitalize on the increased demand for mental health
contract management services as a result of its ability to provide a full
continuum of mental health services, its proprietary quality and outcomes
measurement system and its demonstrated industry expertise. In addition, the
Company believes its position as the leading contract manager of mental health
programs provides the Company with a significant advantage in attracting and
retaining employees and yields several economies of scale such as the ability to
consolidate accounting and administrative functions.
The Company intends to continue to emphasize the area of mental health
programs for the elderly ("geropsychiatric programs"). At August 31, 1998, 69.2%
of the mental health treatment programs managed by the Company were
geropsychiatric programs. Many elderly patients with short-term mental illness
also have physical problems that make the general acute care hospital
environment the most appropriate site for their care. Subject to certain
recently enacted caps on reimbursement amounts, the Medicare program reimburses
general acute care hospitals for their cost of providing these services, which
includes the Company's management fee as well as allocated overhead costs to the
facility, and allows reimbursement for partial hospitalization and home health
services that permit the patient to be treated in the most cost-effective
environment. The Company has developed particular expertise in developing
specialized psychiatric programs for the elderly, in operating such programs,
and in assisting hospitals to receive approval for inpatient programs as
distinct part units ("DPUs") under Medicare. Approval of an inpatient program as
a DPU is significant to client hospitals because services provided in DPUs are
exempt from predetermined reimbursement rates and are reimbursed by Medicare on
an actual cost basis, subject to certain limitations described below.
The fees received by the Company for its services under management
contracts are paid directly by its client hospital. The client hospitals receive
reimbursement under either the Medicare or Medicaid programs or payments from
insurers, self-funded benefit plans or other third-party payors for the mental
health and physical rehabilitation services provided to patients of the programs
managed by the Company. As a result, the availability and amount of such
reimbursement impacts the decisions of general acute care hospitals regarding
whether to offer mental health and physical rehabilitation services pursuant to
management contracts with the Company.
Recent amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. The new regulations establish a nationwide cap
limiting the reimbursement amount on a per case basis for mental health and
physical rehabilitation services to $10,534 and $19,104, respectively, subject
to adjustments based on market indices. In addition, these amendments
established a new ceiling on the rate of increase in operating costs per case
for mental health and physical rehabilitation services furnished to Medicare
beneficiaries. Prior to these amendments, the reimbursement
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limits were tied to the hospital's mental health or physical rehabilitation unit
cost during the unit's first year of operations, subject to certain adjustments.
The limitations have resulted, in some cases, in decreased amounts reimbursed to
the Company's client hospitals. This decrease in reimbursement has, in some
cases, led to the renegotiation of a lower contract management fee structure for
the Company and in other cases has resulted in the termination or nonrenewal of
the management contract. The new reimbursement limitations become applicable to
the client hospitals at the beginning of their respective Medicare fiscal years.
The trend of renegotiated fees and canceled or nonrenewed contracts, resulting
in reduced management fees, which the Company first encountered in its fiscal
1998 second quarter, can be expected to continue in the first and second
quarters of fiscal 1999.
On October 6, 1998, the Company issued a press release (the "October 6
Release") to provide guidance on earnings expectations as a result of the
decline in the number and profitability of the Company's mental health
management contracts due, in part, to the recent decrease in Medicare
reimbursement amounts to general hospitals for mental health patients. The
Company stated in the October 6 Release that it believes that such declines
will be partially offset by internal growth in the physical rehabilitation
management contract business and improved efficiency in the operation of the
Company's EAP services and managed behavioral health care services, and as a
result it believes that earnings for fiscal 1999 should, at a minimum, reach
$0.90 per share diluted. In addition, the Company announced in the October 6
Release that the Company's Board of Directors has authorized the repurchase of
up to 1,000,000 shares of the Company's Common Stock. The stock repurchase plan
authorizes the Company to make purchases from time to time in the open market
or through privately negotiated transactions, depending upon market conditions
and applicable securities regulations. The stock will be repurchased utilizing
available cash and borrowings under the Company's bank facility. The
repurchased shares will be added to the treasury shares of the Company and may
be used for employee stock plans and for other corporate purposes.
CQI+ OUTCOMES MEASUREMENT SYSTEM
The Company has developed and markets a proprietary mental health
outcome measurement system, CQI+ Outcomes Measurement System, (the "CQI+
System"), which provides outcome information regarding the effectiveness of a
hospital's mental health programs. The availability of such information enables
a hospital to demonstrate to third-party payors whether patients are improving
as a result of the treatment provided and allows a hospital to refine its
clinical treatment programs and to market such programs to patients and
providers. In addition, it provides the Company with a valuable tool in
demonstrating clinical results of the mental health programs managed by the
Company and in marketing such management services to other hospitals. The
Company provides outcome measurement services not only to client hospitals but
also to other hospitals, health care providers and third-party payors. The Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), as part of
its hospital accreditation process, requires each hospital to select at least
one acceptable measurement system and at least two clinical performance
(outcome) measures that together represent at least 20% of the hospital's
patient population. Each year, the requirements for the number of measures and
the percentage of the population will increase. The Company's CQI+ System has
met the initial criteria for inclusion in the future accreditation process and
is included on JCAHO's list of acceptable systems. The Company is committed to
meeting criteria established by JCAHO. Since developing the CQI+ System over
four years ago, the Company has compiled a database containing outcome
measurement data on over 22,000 patients. With the growth of managed care and
the JCAHO accreditation requirement, the Company believes that its CQI+ System
will become an important component of the mental health services it provides.
Effective October 1, 1998, the Company signed an agreement with Eli Lilly and
Company to provide certain research services for an Analysis of Medication
Utilization and Outcomes.
PHYSICAL REHABILITATION SERVICES
The Company has successfully expanded the types of programs that it
manages for its client hospitals to include other related clinical services. The
Company's acquisition of Specialty Healthcare Management, Inc. ("Specialty"), in
August 1997, expanded the Company's operations to include the contract
management of physical rehabilitation programs. The Company believes that many
of the same factors driving demand in mental health programs are also driving
significant demand for physical rehabilitation programs. The Company provides
contract management for a full range of physical rehabilitation services. In
addition to acute and sub-acute physical therapy and rehabilitation services,
the Company also provides contract management for a comprehensive outpatient
rehabilitation facility program. Outpatient rehabilitation services are
dominated by the treatment of sports and work related injuries, but also provide
the continuum of rehabilitative care necessary to meet the medical needs of a
post-acute care patient following a disabling illness or traumatic injury.
Pressure from payors to move inpatients to the lowest-cost appropriate treatment
setting has helped fuel growth in these outpatient services.
Recent amendments to the Medicare statutes also provide for a phase-out
of cost-based reimbursement of physical rehabilitation services over a
three-year period beginning October 1, 2000. The resulting phase-in of
reimbursement for physical rehabilitation services based on the Medicare
prospective payment system utilizing a fixed reimbursement amount for specified
diagnoses could lower Medicare reimbursement levels to hospitals for physical
rehabilitation services. This could adversely affect the ability of the Company
to obtain management contracts for physical rehabilitation services and the
amount of fees paid to the Company under such contracts.
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MANAGED BEHAVIORAL HEALTH CARE SERVICES AND EMPLOYEE ASSISTANCE
PROGRAMS
During fiscal year 1998 the Company combined the three managed care
subsidiaries (Florida Professional Psychological Services, Inc., also known as
Professional Psychological Services, Inc. ("Florida PPS"), Acorn Behavioral
HealthCare Management Corporation ("Acorn"), and FPM Behavioral Health, Inc.
("FPM")) into Horizon Behavioral Services ("HBS") to promote a national
integrated organization. Under the operating structure, there are two divisions,
Managed Care, located in Winter Park, Florida and the EAP/Employer Division
located in the Philadelphia metropolitan area. The Company is a growing provider
of national mental health managed care, utilization management and employee
assistance programs. The Company provides a client employer with quality,
cost-effective programs for administration and management of behavioral health
and substance abuse services. The Company also maintains extensive involvement
on a national level in the at-risk management of corporate mental health
carve-outs and commercial Medicare and Medicaid programs. Beginning with the
acquisition of Florida PPS, in August 1996, the Company expanded its services to
include provision of full risk, capitated managed care mental health services
for health maintenance organizations ("HMOs") and self-insured employers and the
operation of employee assistance programs for employers. The Company further
expanded its services in this area with the acquisitions of Acorn and FPM
effective October 31, 1997 and June 1, 1998, respectively, the FPM acquisition
expanded the companies managed care business to include an additional six clinic
locations in Florida where behavioral health services are provided to some
individuals covered under the managed care plans. In addition, the clinics have
one contract with another managed care vendor to provide services to their
members.
The mental health care services are provided by mental health care
professionals that are employed by the Company or are under contract with the
Company as independent providers. The clinical staff represents a broad range of
treatment and case management specialties and is qualified to respond to the
complete continuum of behavioral health concerns, pediatric to geriatric. The
staff includes psychiatrists, nurses, psychologists, social workers, and other
related mental health personnel. The Company believes that its existing
relationships with health care providers and its expertise in the provision of
mental health care services provide it with the capability to establish, operate
and manage the network of health care professionals necessary to economically
furnish such services.
Employee assistance programs, which are usually provided by employers
as a benefit at no cost to employees, give employees the opportunity to have
consultations with a health care provider to identify and discuss problems that
may be affecting the work performance of the employee and a course of action or
treatment to address such problems. The Company believes that an opportunity
exists for the contract management of employee assistance programs offered by
community-based general acute care hospitals. As with its other products, the
Company intends to market such programs as an additional service it can offer
new and existing client hospitals.
SERVICES
MENTAL HEALTH SERVICES
The Company has the expertise to manage a broad range of clinical
mental health programs, including geropsychiatric, general adult, substance
abuse and adolescent programs. The programs use a treatment team concept, with
the admitting physician, team psychologist, social workers, nurses, therapists
and counselors coordinating each phase of therapy. The programs include crisis
intervention, individual therapy, group and family therapy, recreational
therapy, occupational therapy, lifestyle education, social services and
substance abuse counseling. Family involvement is encouraged. Each treatment
program is individually tailored as much as practicable to meet the needs of the
patients, the client hospital, physicians and payor groups. Mental health
services represented 150 of the Company's 172 management contracts at August 31,
1998.
Elements of the Continuum of Care
The mental health treatment programs managed by the Company are
designed to provide a continuum of mental health services, consisting of
inpatient, partial hospitalization (or day treatment), outpatient and home
health services.
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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.
CQI+ Outcomes Measurement System
The Company began offering its CQI+ Outcomes Measurement System in
1994. The CQI+ System provides a qualitative and quantitative tool for the
clinical staff to evaluate the clinical effectiveness of treatment programs and
to make adjustments in the programs in order to improve quality and
appropriateness of care. In addition, the CQI+ System enables client hospitals
to demonstrate to third-party payors the effectiveness of the treatment programs
and provides a valuable tool to the hospital in marketing to patients and
providers. The CQI+ System also assists the hospitals in complying with the
increasing demands of regulatory and accrediting bodies for quality assessment
of their mental health programs. JCAHO, as part of its accreditation process,
requires each hospital to select at least one acceptable measurement system and
at least two clinical performance (outcome) measures that together represent at
least 20% of the hospital's patient population. Each year, the requirements for
the number of measures and the percentage of the population will increase. The
Company's CQI+ System has met the initial criteria for inclusion in the
accreditation process and is included on JCAHO's list of acceptable systems. The
Company is committed to meeting future criteria established by JCAHO. At August
31, 1998, 82 of the Company's management contracts included the CQI+ System. The
CQI+ System provides the Company with a valuable tool in demonstrating clinical
results of the mental health programs managed by the Company and in marketing
such management services to other hospitals.
Since offering CQI+ System, the Company has compiled a database
containing outcome measurement data on over 22,000 patients. Sample data is
collected from randomly selected patients at admission, discharge and 90 to 120
days after discharge. Semi-annual outcome reports include a summary of patient
characteristics and outcome measures. A multidisciplinary committee reviews and
analyzes the data in order to identify specific areas for program improvement. A
regional clinical consultant then prepares an implementation plan. Program
improvements implemented through this process are evaluated for use at other
treatment programs managed by the Company. The Company trains and supervises
on-site personnel to ensure the collection of accurate outcome measurement data.
PricewaterhouseCoopers LLP provides a periodic written examination of the CQI+
System to insure that stated data sampling and analytical procedures are
followed and that the data collection process adheres to the Company's
procedures and patient and client confidentiality policies. Each client is
provided a copy of the attestation report. Effective October 1, 1998, the
Company signed an agreement with Eli Lilly and Company to provide certain
research services for an Analysis of Medication Utilization and Outcomes.
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PHYSICAL REHABILITATION SERVICES
The Company provides contract management for a broad range of physical
rehabilitation programs including (i) acute physical medicine and
rehabilitation, (ii) subacute physical therapy and rehabilitation, and (iii)
comprehensive outpatient rehabilitation. Physical rehabilitation services
represented 22 of the Company's 172 management contracts at August 31, 1998.
Acute Physical Therapy and Rehabilitation. The physical therapy and
rehabilitation program incorporates a variety of treatments and services aimed
at maximizing an individual's capabilities following a disabling illness or
traumatic injury. The treatment program is provided by an interdisciplinary team
of health care professionals including physicians, physical, recreational,
occupational and speech therapists, rehabilitation nurses, social workers and
psychologists. The Company attempts to tailor an acute physical therapy and
rehabilitation program for a health care facility to satisfy unmet community and
medical staff needs, while maximizing utilization of the facility.
Sub-acute Physical Therapy and Rehabilitation. Rapidly changing
reimbursement issues have challenged health care providers to seek alternative
services to meet the needs of their patient population requiring lower cost and
intensity physical medicine and rehabilitation services. Comprehensive physical
medicine and rehabilitation services at the subacute level offer an attractive
alternative for acute care hospitals and skilled nursing facilities to meet
these needs. The Company evaluates the feasibility of a health care facility
providing rehabilitation services at the sub-acute level by analyzing a
facility's discharge data, conducting a market analysis of services offered in a
facility's community, assessing medical staff needs and evaluating financial
viability.
Comprehensive Outpatient Rehabilitation. A comprehensive outpatient
rehabilitation facility ("CORF") program serves as an adjunct to inpatient
physical therapy and rehabilitation programs at the acute and/or sub-acute
levels. The program provides the continuum of rehabilitative care necessary to
meet the medical needs of a post-acute care patient following a disabling
illness or traumatic injury. The Company has developed a CORF program in
compliance with Medicare regulations which functions as a non-residential day
facility to provide diagnostic, therapeutic and restorative services to
outpatients at a single fixed location under the supervision of a qualified
physician.
MANAGED BEHAVIORAL HEALTH CARE SERVICES AND EMPLOYEE ASSISTANCE
PROGRAMS
The Company began offering mental health care services to HMOs and
employee assistance programs to self-insured employers with the acquisition of
Florida PPS in 1996. During fiscal year 1998, the Company has expanded its
services in this area by acquiring Acorn and FPM on October 31, 1997 and June 1,
1998, respectively. The Company contracts with HMOs to provide the mental health
care component of the general health plans offered by such entities. The
contracts are on a full risk, capitated basis under which the Company is paid a
set fee per month for each member of the respective health plan. The mental
health care services are provided by mental health care professionals that are
employed by the Company or are under contract with the Company as independent
providers. In addition, the Company operates nine clinics within the state of
Florida which perform related services. The Company reimburses the independent
professionals and institutions on a discounted fee-for-service basis. As of
August 31, 1998, the Company provided mental health care services for
approximately 1,874,323 total members of various health plans with which it had
contracted.
The Company utilizes a specialized network to operate employee
assistance programs for employers. Many of the providers in the managed care
network also participate in the EAP network. Employee assistance programs, which
are usually provided by employers as a benefit at no cost to employees,
generally give employees and their dependents the opportunity to have four to
six consultations annually with a health care provider to discuss problems that
may be affecting their ability to work. Such problems frequently relate to
matters unrelated to mental health care. The purpose of the consultation is to
help the employee identify the problem and to recommend a course of action or
treatment to address the problem. Often the employee is referred by the employer
after observing a change in work performance. The Company frequently provides
training to employer personnel for identifying troubled employees. The Company
believes that such early identification, consultation and treatment can
frequently minimize the likelihood that the problem will develop into a serious
debilitating event requiring extensive treatment. The Company is paid a set fee
per month per employee for its services. As of August 31, 1998, the employee
assistance programs operated by the Company covered approximately 648,709
employees.
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On October 31, 1997, the Company acquired all the outstanding capital
stock of Acorn for approximately $12.7 million in cash. Acorn offers employee
assistance programs and related services only to self-insured employers. Most of
the contracts are on a capitated basis under which employees and their
dependents are entitled to receive a specified number of consultations per
contract year with behavioral health specialists. Acorn is paid a set fee per
month per employee for such services. Under some contracts, Acorn also provides
certain specified outpatient mental health benefits for the capitated fee. A few
contracts also provide for mental health services on a discounted
fee-for-service basis. Acorn also provides pre-admission certification,
utilization review, case management, hospital bill review, claims adjudication
and related services as requested by the client usually under the capitated fee
but sometimes on a separate fee basis.
On June 1, 1998 the Company acquired all of the outstanding capital
stock of FPM of Winter Park, Florida, for approximately $20.0 million, subject
to certain post closing adjustments. FPM provides managed behavioral health care
services, employee assistance programs and other related health care services to
health maintenance organizations and self-insured employers. FPM provides its
services both through health care professionals employed by FPM and through
independent health care professionals that have been contracted with FPM on a
fee-for-service basis.
In addition, on October 5, 1998, the Company acquired all of the
outstanding capital stock of ChoiceHealth, Inc., of Westminster, Colorado
("ChoiceHealth") for approximately $2.0 million in cash. ChoiceHealth provides
managed behavioral health care services, employee assistance programs and other
related behavioral health care services to health maintenance organizations and
self-insured employers.
OPERATIONS
GENERAL
The Company operates mental health management contracts through a
regional structure with offices in the Chicago, Dallas, Los Angeles and Tampa
metropolitan areas. The structure is designed to keep key operating employees of
the Company in direct contact with clients. Each of the four regional offices is
staffed to have the capacity to supervise up to 40 mental health management
contract locations. Each regional office is under the supervision of a vice
president who in turn supervises regional directors, each of whom has direct
responsibility over eight to ten mental health management contract locations.
Other regional office personnel include clinical and other specialists, who are
available to provide assistance to the local programs and client hospital
personnel. Presently, the Company's physical rehabilitation management contracts
are operated in the same manner out of its Dallas office with plans to develop a
comparable regional structure as it expands that area of its operations.
The Company develops and operates its outcomes measurement system
primarily out of its Dallas office. Program personnel are responsible for the
completion of the data input forms concerning the various treatment programs.
The data is input into the national database from which reports are developed,
reviewed and analyzed by the CQI+ System staff of 14 employees.
At August 31, 1998, the Company had approximately 1,056 program
employees at its contract locations and approximately 160 employees at its
regional and national support center offices.
During fiscal year 1998, the Company combined its three managed care
subsidiaries (Florida PPS, Acorn, and FPM Behavioral Health) into Horizon
Behavioral Services to promote a national integrated organization. Under the new
operating structure, there are two divisions, Managed Care located in Winter
Park, Florida, and the EAP/Employer Division located in the Philadelphia
metropolitan area.
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In the EAP/employer division there are 46 employees located in the
Philadelphia office. The EAP network has contracts with approximately 8,000
individual providers located in all 50 states.
The managed care division has 86 licensed clinicians providing services
in the nine clinic locations in Florida and an additional 120 employees working
in administrative and clinical management positions for the managed care and EAP
business. The managed care division has provider network contracts with
approximately 3,100 providers and facilities.
ChoiceHealth is headquartered in the Denver metropolitan area and
employs 55 employees, all of which are located in its corporate offices. It
provides the mental health and other services through a network of independent
health care professionals and institutions. ChoiceHealth has contracts with
approximately 1,000 individual providers located throughout the United States.
MANAGEMENT CONTRACTS
The Company provides its management services under contracts with its
client hospitals. Each contract is tailored to address the differing needs of
the client hospital and its community. The Company and the client hospital
determine the programs and services to be offered by the hospital and managed by
the Company, which may consist of one or more treatment programs offering
inpatient, partial hospitalization, outpatient or home health services. Under
the contracts, the hospital is the actual provider of the mental health or
physical rehabilitation services and utilizes its own facilities (including beds
for inpatient programs), nursing staff and support services (such as billing,
dietary and housekeeping) in connection with the operation of its programs.
While each of the Company's management contracts is tailored to the
specific needs of the client hospital, substantially all of the Company's
contracts contain non-compete and confidentiality provisions. In addition, the
Company's management contracts typically prohibit the client hospital from
soliciting the employment of the Company employees during the contract term and
for a specified period thereafter.
Contracts are frequently renewed prior to or at their stated expiration
dates. Some contracts are terminated prior to their stated expiration dates
pursuant to agreement of the parties or early termination provisions included in
the contracts. As of August 31, 1995, 1996, 1997 and 1998, the Company had
successfully retained 74%, 80%, 78% and 73%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes the most frequent reason why the client hospitals do not renew a
contract is that they desire to manage such programs themselves, the economic
viability of the programs have changed resulting in their closing the programs,
or a change in hospital administration results in a change in philosophy
regarding the use of contract managers.
Under each contract, the Company receives a fee for its management
services from the client hospital. Management fees may be either a variable fee
related in part to patient census at the program or a fixed fee with
reimbursement for direct program costs. The management fee is frequently subject
to periodic adjustments as a result of changes in the consumer price index or
other economic factors. A significant number of the Company's management
contracts require the Company to refund some or all of its fee if either
Medicare reimbursement for services provided to patients of the programs is
denied or the fee paid to the Company is denied as a reimbursable cost. During
the fiscal year ended August 31, 1998, the Company refunded approximately
$207,801 of its fees in relation to these denials.
Program Development
The Company assists in the development of each clinical program as
requested by the client hospital, including such matters as licensing,
accreditation, certificate of need approvals and Medicare certification. The
Company also develops and implements a marketing plan for the clinical programs
to be offered by the hospital. Each program is marketed locally with an emphasis
on the hospital addressing the needs of the local community. The Company markets
the clinical programs in the community in the name of the client hospital. The
Company's name is not used and its role is not publicly emphasized in the
operation of the clinical programs offered by its client hospitals. Each patient
is admitted by the medical staff of the client hospital, and all charges for
clinical services provided to the patient accrue directly to the client hospital
or treating physician.
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The Company also develops and maintains standardized policy and
procedure manuals, initial and ongoing staff training and education, and
comprehensive quality assurance procedures. Each local program director receives
ongoing support from the National Support Center and regional support staff in
all areas including recruiting, finance, reimbursement, development, marketing
and quality assurance.
Each operating region is responsible for training new employees,
including formalized instruction and on-the-job training. Continuing education
programs are also provided to employees. In addition, the Company has a
centralized orientation program for new program directors and an annual
conference for all program directors.
Program Staffing
Each mental health program has a psychiatric medical director, a
program director who is usually a psychologist or a social worker, a community
relations coordinator and additional social workers or therapists as needed.
Each physical rehabilitation program has an independent medical director, a
program director, and additional clinical staff tailored to meet the needs of
the program and the client hospital, which may include physical and occupational
therapists, a speech pathologist, a social worker and other appropriate
supporting personnel. Each medical director has a contract with the Company
under which on-site administrative services needed to administer the program are
provided. These contracts generally include nondisclosure, nonsolicitation and
noncompetition covenants pursuant to which the medical director agrees not to
solicit the Company employees for specified periods, disclose confidential
information of the Company or render certain administrative or management
services within specified time periods and geographic areas to any enterprise in
competition with the Company or the programs it manages. Except for the nursing
staff, which is typically provided by the hospital, the other program personnel
are employees of the Company. At August 31, 1998, the Company had an average of
six employees per contract location.
Program Marketing
Because the treatment programs managed by the Company are offered by
general acute care hospitals, most patients are referred by the client
hospital's medical staff or result from relationships that the client hospital
has in the community. Each contract location has an outreach coordinator who
works with a referral development committee consisting of Company and hospital
personnel to identify prospective referral sources. The outreach coordinator
informs physicians and other health professionals and nursing homes in the
community of the treatment programs that are available at the client hospital.
The outreach coordinator also designs and offers community educational programs
regarding various health issues.
Internal Clinical Audits
The Company has established a comprehensive internal clinical audit
process for its mental health programs. The Company's regional mental health
clinical specialists review the services and clinical documentation of the
treatment programs to ensure compliance with client hospital, federal and state
standards. The Company also has an internal clinical auditor who makes
unannounced visits to contract locations on a periodic basis. The auditor
reviews medical records and marketing programs, and conducts interviews with
physicians, referral sources and client hospital staff members. Results of the
audits are reported directly to the senior management of the Company, rather
than through the normal operating organization.
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Contract Locations
At August 31, 1998, the Company had a total of 172 management contracts
with general acute care hospitals located in 37 states, as shown below:
<TABLE>
<CAPTION>
STATE NUMBER OF STATE NUMBER OF
CONTRACTS CONTRACTS
<S> <C> <C> <C>
Alabama...................... 2 Nebraska............................ 1
Arizona...................... 4 Nevada.............................. 2
Arkansas..................... 11 New Hampshire....................... 1
California................... 19 New Jersey.......................... 5
Colorado..................... 1 New Mexico.......................... 1
Connecticut.................. 1 New York............................ 5
Florida...................... 9 North Carolina...................... 5
Georgia...................... 6 Ohio................................ 8
Illinois..................... 6 Oklahoma............................ 4
Indiana...................... 2 Oregon.............................. 3
Iowa......................... 3 Pennsylvania........................ 12
Kansas....................... 1 South Carolina...................... 2
Kentucky..................... 3 Tennessee........................... 12
Louisiana.................... 2 Texas............................... 10
Maryland..................... 1 Vermont............................. 1
Massachusetts................ 7 Virginia............................ 1
Michigan..................... 5 Washington.......................... 4
Mississippi.................. 4 Wisconsin........................... 3
Missouri..................... 5
</TABLE>
Client Hospitals
The Company's clients are primarily small to medium sized hospitals and
include some large tertiary care hospitals. At August 31, 1998, 40.7% of the
Company's management contracts were with proprietary hospitals. The remainder
are with primarily community not-for-profit hospitals.
At August 31, 1998, the Company had management contracts with 27
hospitals directly or indirectly owned by Columbia/HCA Healthcare Corporation
("Columbia/HCA"). These 27 contracts accounted for 12.5% of the Company's
revenues for the year ended August 31, 1998. In the aggregate, including both
contracts in effect on August 31, 1998 and contracts that terminated during the
fiscal year ended August 31, 1998, revenues generated by hospitals directly or
indirectly owned by Columbia/HCA accounted for 15.4% of the Company's revenues
for the year ended August 31, 1998. Of the 27 Columbia/HCA contracts at August
31, 1998, 9 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.
MANAGED CARE AND EMPLOYEE ASSISTANCE CONTRACTS
The Company delivers its EAP and managed care services through a
provider network as well as through employees and clinics in the Jacksonville,
Orlando and Tampa/St. Petersburg areas. Claims processing is currently done at
the Philadelphia, Winter Park and Denver locations. The Company intends to
consolidate all claims processing to the Winter Park location during fiscal year
1999.
SALES AND MARKETING
At August 31, 1998, the Company's subsidiary Horizon Mental Health
Management employed seven full-time Vice Presidents of Development for mental
health management and physical rehabilitation management contracts. The Company
compiles information from numerous databases to identify prospective clients.
The Company has developed profiles of over 6,500 hospitals in the United States,
with numerous financial and operating characteristics for each hospital.
Potential clients include hospitals without existing mental health, physical
rehabilitation, employee assistance programs or other programs as well as
hospitals with existing programs of which the Company could assume management. A
select list of candidates is systematically and regularly updated based on
criteria indicating which hospitals are the most likely potential clients. A
vice president of development, who
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typically acts as the point person on the sales team for such region, directly
contacts the prospective clients and, where appropriate, presents a detailed
proposal to key decision-makers. The proposal often contains detailed financial
projections of the proposed programs. The Company works with the potential
client to develop contract terms responsive to the client's specific needs. The
typical sales cycle for a management contract is approximately nine months,
during which time the Company's Vice President of Sales will assist the Vice
President of Development and will sometimes assume the role of point person for
the sales effort. In addition, the Company's Executive Vice President of Sales
and Development will generally become involved at the end of the sales process
and negotiate the final terms of the management contract. The Company believes
it can increase sales of rehabilitation management contracts by applying its
expertise in winning mental health management contracts to the solicitation of
rehabilitation management contracts. In addition, the Company believes it has
substantial opportunity to cross-sell a broad range of services to client
hospitals and is pursuing the development of such opportunities as a primary
part of its business strategy.
The subsidiary Mental Health Outcomes ("MHO") markets the CQI+ Outcomes
Measurement System to 1,700 medical/surgical hospitals with psychiatric
inpatient units and 300 free-standing psychiatric hospitals nationwide. MHO
employs a full-time Vice President of Market Development and a Director of
Market Development who market the CQI+ System to hospitals through understanding
psychiatric unit outcomes measurement needs and application of the most
compatible CQI+ System module. MHO also contracts for telemarketing assistance
to support initial "cold" calling to prospective customers. In addition, CQI+ is
marketed as an "add-on" service to the contract managed psychiatric programs
provided by Horizon Mental Health Management through efforts of the seven Vice
Presidents of Development.
The subsidiary Horizon Behavioral Services markets employee assistance
programs and managed behavioral health programs to employers and HMOs
nationwide. HBS employs a full-time Vice President of Sales and four Regional
Directors of Sales and Development to market both the EAP and managed behavioral
health services. The HBS sales staff markets the EAP to employers by assessing
the individualized behavioral health benefit needs of their employees and
providing the appropriate EAP model. In addition, the EAP is marketed by the
seven Horizon Mental Health Management Vice Presidents of Development to
hospitals as a benefit for their employees. The HBS sales staff markets the
managed behavioral health care services to HMOs who wish to outsource management
of the behavioral health benefit to an experienced provider.
COMPETITION
The health care industry is highly competitive and subject to continual
changes in the method in which services are provided and the types of companies
providing such services. The Company competes with several national competitors
and many regional and local competitors, some of which have greater resources
than the Company. In addition, hospitals could elect to manage their own mental
health and physical rehabilitation programs.
Competition among contract managers for hospital-based mental health
and physical rehabilitation programs is generally based upon reputation for
quality, price, the ability to provide financial and other benefits for the
hospital, and the management expertise necessary to enable the hospital to offer
mental health and physical rehabilitation programs that provide the full
continuum of mental health and physical rehabilitation services in a quality and
cost-effective manner. The pressure to reduce health care expenditures has
emphasized the need to manage the appropriateness of mental health and physical
rehabilitation services provided to patients. As a result, competitors without
management experience covering the various levels of the continuum of mental
health and physical rehabilitation services may not be able to compete
successfully. The Company believes that its reputation and management expertise
will enable it to compete successfully in this rapidly changing market.
In addition, general acute care hospitals offering mental health and
physical rehabilitation programs managed by the Company compete for patients
with other providers of mental health care services, including other general
acute care hospitals, freestanding psychiatric hospitals, independent
psychiatrists and psychologists, and with other providers of physical
rehabilitation services, including other general acute care hospitals,
freestanding rehabilitation facilities and outpatient facilities.
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The Company also competes with hospitals, nursing homes, clinics,
physicians' offices and contract therapy companies for the services of physical,
occupational and speech therapists. These specialists are in short supply and
there can be no assurance that the Company will be able to attract a sufficient
number of therapists for its growing needs.
The behavioral health care marketplace includes two large national
providers (Magellan Health Services and Value Options) who control approximately
sixty-six percent of the market. The rest of the market consists of other
organizations from medium size regional operations to very small local providers
in the EAP business. The Company currently maintains a market share of
approximately nine percent. The primary factor affecting competition in the EAP
business is the range of services provided. In addition, quality of service and
price are also of importance to EAP customers. Price is the primary factor in
obtaining additional managed care customers. All companies involved in
behavioral health care must plan to overcome obstacles related to increased
customer and government scrutiny. Customers require sophisticated data that
provides information regarding clinical outcomes, patient and provider
satisfaction, and administrative performance information. National Committee for
Quality Assurance accreditation is also becoming a necessary element for any
behavioral health care company and is essential in competing with large national
businesses.
GOVERNMENT REGULATION
The Company's business is affected by federal, state and local laws and
regulations concerning, among other matters, mental health and physical
rehabilitation facilities and reimbursement for mental health and physical
rehabilitation services. These regulations impact the development and operation
of mental health and physical rehabilitation programs managed by the Company for
its client hospitals. Licensing, certification, reimbursement and other
applicable government regulations vary by jurisdiction and are subject to
periodic revision. The Company is not able to predict the content or impact of
future changes in laws or regulations affecting the mental health or physical
rehabilitation industries.
FACILITY USE AND CERTIFICATION
Hospital facilities are subject to various federal, state and local
regulations, including facilities use, licensure and inspection requirements,
and licensing or certification requirements of federal, state and local health
agencies. Many states also have certificate of need laws intended to avoid the
proliferation of unnecessary or under-utilized health care services and
facilities. The mental health and physical rehabilitation programs which the
Company manages are also subject to licensure and certification requirements.
The Company assists its client hospitals in obtaining required approvals for new
programs. Some approval processes may lengthen the time required for programs to
commence operations. In granting and renewing a facility's licenses,
governmental agencies generally consider, among other factors, the physical
condition of the facility, the qualifications of administrative and professional
staff, the quality of professional and other services, and the continuing
compliance of such facility with the laws and regulations applicable to its
operations. The Company believes that the mental health and physical
rehabilitation programs it manages and the facilities of the client hospitals
used in the operation of such programs comply in all material respects with
applicable licensing and certification requirements.
MEDICARE AND MEDICAID; REIMBURSEMENT FOR SERVICES
Most of the Company's client hospitals receive reimbursement under one
or more of the Medicare or Medicaid programs for mental health and physical
rehabilitation services provided in programs managed by the Company. The Company
is paid directly by its client hospitals for the management services it
provides. While fees paid to the Company by its client hospitals are not subject
to or based upon reimbursement under the Medicare or Medicaid programs or from
any other third-party payor, under many of its management contracts the Company
is obligated to refund a portion of its fee if Medicare denies reimbursement for
an individual patient treatment or all of its fee if the fee paid to the Company
is denied by Medicare as a reimbursable cost. Since a substantial portion of the
patients of the programs managed by the Company are covered by Medicare, any
changes which limit or reduce Medicare reimbursement levels could have a
material adverse effect on the Company's client hospitals and, in turn, on the
Company.
The Company is not a provider reimbursed by Medicare or Medicaid but
provides contract management services to such providers. As such, the Company
could be considered subject to such federal and state laws. While the Company
believes that its relationships with its client hospitals, medical directors and
other providers and the fee
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arrangements with its client hospitals are consistent with Medicare and Medicaid
criteria, those criteria are often vague and subject to interpretation. The
federal government has been actively investigating health care providers for
potential abuses. There can be no assurance that aggressive anti-fraud
enforcement actions will not adversely affect the business of the Company.
The Medicare program was enacted in 1965 to provide a nationwide,
federally funded health insurance program for the elderly. The program is
divided in Part A and Part B, each of which has separate rules and requirements
and separate funding sources. Medicare Part A, the Hospital Insurance Program
(42 U.S.C. (delta) 1395c et seq.) is financed primarily through mandatory taxes
on workers' wages. Part A pays for hospital, skilled nursing, home health
agency, hospice, and dialysis services determined to be medically necessary for
the individual patient. Medicare Part B, the Supplementary Medical Insurance
program (42 U.S.C. (delta) 1395j et seq.), is a voluntary medical benefits plan
in which eligible individuals can enroll to receive benefits in addition to
those available under Part A. Under Part B, each beneficiary must pay a monthly
premium, meet a deductible towards the cost of covered items and services
determined to be medically necessary, and pay 20 percent of the Medicare
allowable charge as coinsurance on most covered items. Non-institutional
services, including physician services, outpatient hospital services, durable
medical equipment, and laboratory services, among others, are paid under
Medicare Part B. In addition, the Balanced Budget Act adds a new Medicare Part
C, which provides Medicare beneficiaries with additional health plan choices,
such as managed care plans and medical savings accounts.
The Medicare program is administered by the Health Care Financing
Administration ("HCFA") of the U.S. Department of Health and Human Services
("HHS"). HCFA adopts regulations and issues interpretive memoranda and program
manuals providing detailed explanation of the Medicare program. The payment
operations of the Medicare program are handled by intermediaries (under Part A)
and carriers (under Part B) who are insurance companies and Blue Cross/ Blue
Shield plans which contract with the Secretary of HHS (the "Secretary") to make
Medicare payments to providers in a particular geographic region. Individual
intermediaries and carriers issue transmittals, bulletins, notices, and general
instructions to providers and suppliers in their respective areas to facilitate
the administration of the Medicare program, but are required to follow the
Medicare statute, HCFA regulations, HCFA transmittals, and the program manuals.
Within these requirements, intermediaries and carriers are granted broad
discretion to establish particular guidelines and procedures for making Medicare
coverage determinations and payments, including prior approval, utilization
limits, and specific documentation.
The Medicaid program is a joint federal-state cooperative arrangement
established for the purpose of enabling states to furnish medical assistance on
behalf of aged, blind, or disabled individuals, or members of families with
dependent children, whose income and resources are insufficient to meet the
costs of necessary medical services. The federal and state governments share the
costs of such aid pursuant to statutory formulae. The Secretary has primary
federal responsibility for administering the Medicaid program. The
responsibility has been delegated to HCFA, whose Medicaid Bureau carries out
this delegation. States are not required to participate in the Medicaid program.
States which choose to participate, however, must administer their Medicaid
programs in accordance with federal law, the implementing regulations and
policies of the Secretary and their approved state plans. A state becomes
eligible to receive federal funds by submitting to the Secretary a state plan
for medical assistance. The federal Medicaid statute establishes minimum
standards for state plans in such area as administration, eligibility, coverage
of services, quality and provision of services, and payment for services. States
have significant latitude, within these standards, to determine the mix of
services and structure of their state Medicaid programs. The state plan must be
amended by appropriate submission to the Secretary whenever necessary to reflect
changes in federal statutes, regulations, policies, court decisions, or material
changes in any phase of state law, policy, or operations.
In order to receive reimbursement under the Medicare or Medicaid
programs, each client hospital or facility must meet applicable requirements
promulgated by HHS relating to the type of facility, personnel, standards of
patient care and compliance with all state and local laws, rules and
regulations. The Company believes that the programs it manages comply in all
material respects with applicable Medicare and Medicaid requirements.
In the mid-1980's, changes in reimbursement rates and procedures
included the creation of the 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 DPUs and are not included in the
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DRG system. Services provided by DPUs are reimbursed on an actual cost basis,
subject to certain limitations. The mental health programs managed by the
Company which are eligible for reimbursement by the Medicare program currently
meet the applicable requirements for designation as DPUs and are exempt from the
DRG system. In the future, however, it is possible that Medicare reimbursement
for mental health services, including those provided by programs managed by the
Company, could be under the DRG system or otherwise altered. At August 31, 1998,
of the 273 mental health treatment programs managed by the Company, 189 were
geropsychiatric programs for which a substantial majority of the patients are
covered by Medicare. Recent amendments to the Medicare regulations established
maximum reimbursement amounts on a per case basis for both inpatient mental
health and physical rehabilitation services. Effective as of October 1, 1997,
regulations promulgated pursuant to these amendments establish a ceiling on the
rate of increase in operating costs per case for mental health and physical
rehabilitation services furnished to Medicare beneficiaries. Prior to these
amendments, the reimbursement amounts were tied to each hospital's mental health
or physical rehabilitation unit cost during such unit's first year of
operations, subject to adjustment. The new regulations establish a nationwide
cap limiting the reimbursement target amount on a per case basis for mental
health and physical rehabilitation services to $10,534 and $19,104,
respectively, subject to adjustments based on market indices and on costs for
other similar units. The limitations have resulted, in some cases, in decreased
amounts reimbursed to the Company's client hospitals. This decrease in
reimbursement has, in some cases, led to the renegotiation of a lower contract
management fee structure for the Company and in other cases has resulted in
termination or nonrenewal of the management contract. The new reimbursement
limitations become applicable to the client hospitals at the beginning of their
respective Medicare fiscal years. The trend of renegotiated fees and canceled or
nonrenewed contracts, resulting in reduced management fees, which the Company
first encountered in its fiscal 1998 second quarter, can be expected to continue
in the first and second quarters of fiscal 1999.
Qualified outpatient rehabilitation services are exempt from the
Prospective Payment System. Acute rehabilitation units within acute-care
hospitals are eligible to obtain an exemption from the Prospective Payment
System, generally after the first year of operation, upon satisfaction of
specified federal criteria. Such criteria include the operation for a full 12
months under the Prospective Payment System and the completion of an initial
exemption survey. The exemption survey measures compliance with certain criteria
applicable to exempt units generally, including approval to participate as a
Medicare provider, admission standards, record keeping, compliance with state
licensure laws, segregation of beds, accounting standards and certain specific
standards applicable to rehabilitation units, including staffing, medical care
and patient mix. Upon successful completion of the survey, Medicare payments for
rehabilitation services provided in inpatient units are made under a cost-based
reimbursement system. As of August 31, 1998, 17 of the Company's managed
physical rehabilitation programs were exempt from the Prospective Payment
System. The remaining five programs will apply for exemption as soon as they are
eligible. A recently enacted amendment to the Medicare statutes provides for a
gradual phase-out of cost-based reimbursement for physical rehabilitation
services over a three-year period commencing on October 1, 2000. The resulting
phase-in of reimbursement for physical rehabilitation services based on the
Prospective Payment System could significantly lower Medicare reimbursements to
hospitals and thus have a material adverse effect on the business, operations
and financial results of the Company.
The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings and funding restrictions, any of which could have the effect of limiting
or reducing reimbursement levels to general acute care hospitals for mental
health and physical rehabilitation services provided by programs managed by the
Company. The Company cannot predict whether any changes to such government
programs will be adopted or, if adopted, the effect, if any, such changes will
have on the Company. In addition, a significant number of the Company's
management contracts require the Company to refund a portion of its fee if
Medicare reimbursement to the client hospital is disallowed for a patient
treated in a program managed by the Company or all of its fee if the fee paid to
the Company is disallowed as a reimbursable cost. During the fiscal year ended
August 31, 1998, the Company refunded approximately $207,801 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.
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In addition, there can be no assurance that hospitals which offer mental health
or physical rehabilitation programs now or hereafter managed by the Company will
satisfy the requirements for participation in the Medicare or Medicaid programs.
Payors, including Medicare and Medicaid, are attempting to manage
costs, resulting in declining amounts paid or reimbursed to hospitals for the
services provided. As a result, the Company anticipates that the number of
patients served by general acute care hospitals on a per diem, episodic or
capitated basis will increase in the future. There can be no assurance that if
amounts paid or reimbursed to hospitals decline, it will not adversely affect
the Company.
Medicare regulations limit reimbursement for mental health, physical
rehabilitation and other health care charges paid to related parties. A party is
considered "related" to a provider if it is deemed to be controlled by the
provider. One test for determining control for this purpose is whether the
percentage of the total revenues of the party received from services rendered to
the provider is so high that it effectively constitutes control. Although the
Company believes that it does not receive sufficient revenues from any customer,
including Columbia/HCA, that would make it a related party, it is possible that
such regulations could limit the number of management contracts that the Company
could have with Columbia/HCA or any other client.
Federal law contains certain provisions designed to ensure that
services rendered by hospitals to Medicare and Medicaid patients are medically
necessary and meet professionally recognized standards. These provisions include
a requirement that admissions of Medicare and Medicaid patients to hospitals
must be reviewed in a timely manner to determine the medical necessity of the
admissions. In addition, these provisions state that a hospital may be required
by the federal government to reimburse the government for the cost of
Medicare-reimbursed services that are determined by a peer review organization
to have been medically unnecessary. The Company and its client hospitals have
developed and implemented quality assurance programs and procedures for
utilization review and retrospective patient care evaluation intended to meet
these requirements.
PATIENT REFERRAL LAWS
Various state and federal laws regulate the relationships between
health care providers and referral sources, including federal and state fraud
and abuse laws prohibiting individuals and entities from knowingly and willfully
offering, paying, soliciting or receiving remuneration in order to induce
referrals for the furnishing of health care services or items. These federal
laws generally apply only to referrals for items or services reimbursed under
the Medicare or Medicaid programs or any state health care program. The
objective of these laws is generally to ensure that the purpose of a referral is
quality of care and not monetary gain by the referring party. Violations of such
laws can result in felony criminal penalties, civil sanctions and exclusion from
participation in the Medicare and Medicaid programs.
The Medicare and Medicaid anti-kickback statute, 42 U.S.C. (delta)
1320a-7b, prohibits the knowing and willful solicitation or receipt of any
remuneration "in return for" referring an individual, or for recommending or
arranging for the purchase, lease, or ordering, of any item or service for which
payment may be made under Medicare or a state health care program. In addition,
the statute prohibits the offer or payment of remuneration "to induce" a person
to refer an individual, or to recommend or arrange for the purchase, lease, or
ordering of any item or service for which payment may be made under the Medicare
or state health care programs. The statute contains exceptions for certain
discounts, group purchasing organizations, employment relationships, waivers of
coinsurance by community health centers, health plans, and practices defined in
regulatory safe harbors.
Under a significant number of its management contracts, the Company
receives a variable fee related in part to average daily patient census of the
mental health or physical rehabilitation program. In addition, the Company has
entered into agreements with physicians to serve as medical directors at the
mental health and physical rehabilitation programs and facilities managed by the
Company, which generally provide for payments to such persons by the Company as
compensation for their administrative services. These medical directors also
generally provide
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professional services at such programs and facilities. In 1991, regulations were
issued under federal fraud and abuse laws creating certain "safe harbors" for
relationships between health care providers and referral sources. Any
relationship that satisfies the terms of the safe harbor is considered
permitted. Failure to satisfy a safe harbor, however, does not mean that the
relationship is prohibited. Although the contracts and relationships between the
Company and its client hospitals and medical directors are not within the safe
harbors, the Company believes that such contracts and relationships comply with
applicable laws. There can be no assurance, however, that the Company's
activities will not be challenged by regulatory authorities.
The Omnibus Budget Reconciliation Act of 1993 contains provisions
("Stark II") prohibiting physicians from referring Medicare and Medicaid
patients to an entity with which the physician has a "financial relationship"
for the furnishing of a list of "designated health services" including physical
therapy, occupational therapy, home health services, and others. If a financial
relationship exists, the entity is generally prohibited from claiming payment
for such services under the Medicare or Medicaid programs. Compensation
arrangements are generally exempted from the Stark provisions if, among other
things, the compensation to be paid is set in advance, does not exceed fair
market value and is not determined in a manner that takes into account the
volume or value of any referrals or other business generated between the
parties.
Other provisions in the Social Security Act authorize other penalties,
including exclusion from participation in Medicare and Medicaid, for various
billing-related offenses. HHS can also initiate permissive exclusion actions for
such improper billing practices as submitting claims "substantially in excess"
of the provider's usual costs or charges, failure to disclose ownership and
officers, or failure to disclose subcontractors and suppliers. Executive Order
12549 prohibits any corporation or facility from participating in federal
contracts if it or its principals have been disbarred, suspended or are
ineligible, or have been voluntarily excluded, from participating in federal
contracts. A principal has been defined as an officer, director, owner, partner,
key employee or other person with primary management or supervisory
responsibilities.
Additionally, the Health Insurance Portability and Accountability Act
of 1996 granted expanded enforcement authority to HHS and the U.S. Department of
Justice ("DOJ"), and provided enhanced resources to support the activities and
responsibilities of the Office of Inspector General ("OIG") of HHS and DOJ by
authorizing large increases in funding for investigating fraud and abuse
violations relating to health care delivery and payment. On January 24, 1997,
the OIG issued guidelines for the Fraud and Abuse Control Program as mandated by
the Act, and on February 19, 1997 issued an interim final rule establishing
procedures for seeking advisory opinions on the application on the anti-kickback
statute and certain other fraud and abuse laws. The recently-enacted Balanced
Budget Act also includes numerous health fraud provisions, including: new
exclusion authority for the transfer of ownership or control interest in an
entity to an immediate family or household member in anticipation of, or
following, a conviction, assessment, or exclusion; increased mandatory exclusion
periods for multiple health fraud convictions, including permanent exclusion for
those convicted of three health care-related crimes; authority of the Secretary
to refuse to enter into Medicare agreements with convicted felons; new civil
money penalties for contracting with an excluded provider or violating the
Medicare and Medicaid antikickback statute; new surety bond and information
disclosure requirements for certain providers and suppliers; and an expansion of
the mandatory and permissive exclusions added by the Health Insurance
Portability and Accountability Act of 1996 to any federal health care program
(other than the Federal Employees Health Benefits Program).
In addition, federal and some state laws impose restrictions on
referrals for certain designated health services by physicians and, in a few
states, psychologists and other mental health care professionals to entities
with which they have financial relationships. The Company believes that its
operations comply with these restrictions to the extent applicable, although no
assurance can be given regarding compliance in any particular factual situation.
Federal legislation has been considered to expand current law from its
application to Medicare and Medicaid business to all payors and to additional
health services. Certain states are considering adopting similar restrictions or
expanding the scope of existing restrictions. There can be no assurance that the
federal government or other states in which the Company operates will not enact
similar or more restrictive legislation or restrictions that could under certain
circumstances impact the Company's operations.
Page 18
<PAGE> 19
MENTAL HEALTH CARE PATIENT RIGHTS
Many states have adopted "patient bill of rights" regulations which set
forth standards for least restrictive treatment, patient confidentiality,
patient access to mail and telephones, patient access to legal counsel and
requirements that patients be treated with dignity. There are also laws and
regulations relating to the civil commitment of patients to mental health
programs, disclosure of information concerning patient treatments and related
matters.
HEALTH CARE REFORM
The Clinton Administration and various federal legislators have
considered health care reform proposals intended to control health care costs
and to improve access to medical services for uninsured individuals. These
proposals included proposed cutbacks to the Medicare and Medicaid programs and
steps to permit greater flexibility in the administration of Medicaid. In
addition, some states in which the Company operates are considering various
health care reform proposals. It is uncertain at this time what legislation on
health care reform may ultimately be enacted or whether other changes in the
administration or interpretation of governmental health care programs will
occur. There can be no assurance that future health care legislation or other
changes in the administration or interpretation of governmental health care
programs will not have a material adverse effect on the Company's business,
financial condition or results of operations.
LICENSING REQUIREMENTS
Certain of the services provided by the Company's managed behavioral
services subsidiaries may be subject to certain licensing requirements in some
states. The Company currently holds licenses in Colorado, Florida, and
Pennsylvania. If the business operations of such entities are determined to
require licenses in other states, then obtaining such licenses or the inability
to obtain such licenses could adversely affect the business operations of such
entities. In addition, several states have laws that prohibit business
corporations from providing, or holding themselves out as providers of, medical
care. While the Company has no reason to believe that it is in violation or has
violated such statutes, these laws vary from state to state and have seldom been
interpreted by the courts or regulatory agencies.
EMPLOYEES
At August 31, 1998, the Company employed 1,485 people, including 1,140
full-time employees, 290 part-time employees, and 55 temporary employees. The
Company has no collective bargaining agreements with any unions and believes
that its overall relations with its employees are good. In addition, at August
31, 1998, the Company had administrative services contracts with 240 physicians
to serve as medical directors for the clinical programs managed by the Company.
INSURANCE
The Company carries general liability, comprehensive property damage,
malpractice, workers' compensation and other insurance coverages that management
considers adequate for the protection of the Company's assets and operations.
There can be no assurance, however, that the coverage limits of such policies
will be adequate. A successful claim against the Company in excess of its
insurance coverage could have a material adverse effect on the Company.
Page 19
<PAGE> 20
ITEM 2. PROPERTIES
In September 1996, the Company leased a building consisting of
approximately 40,000 square feet for its National Support Center in Lewisville,
Texas under a lease term expiring on September 26, 2001. In addition, at August
31, 1998 the Company leased an aggregate of 7,211 square feet of space for three
regional offices in the Chicago, Los Angeles and Tampa metropolitan areas, with
lease terms expiring from January 1999 to April 2001. Except for one partial
hospitalization program operating in approximately 3,150 square feet of space,
the space required for the clinical programs managed by the Company is provided
by the client hospitals either within their existing facilities or at other
locations owned or leased by the hospitals.
The Company leases approximately 38,997 square feet of office space in
the Philadelphia, Tampa, Jacksonville, San Antonio, and Orlando metropolitan
areas, with lease terms expiring from February 1999 to August 2003 for its
managed care operations. In addition, the Company leases approximately 17,999
square feet in various locations throughout the state of Florida with lease
terms expiring from March 2000 to August 2003 for its clinical operations.
Effective October 5, 1998, the Company leases 12,987 square feet of
office space in the Denver metropolitan area with a lease term expiring on July
1, 2002, as a result of the acquisition of ChoiceHealth.
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.
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<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James W. McAtee............ 53 President, Chief Executive Officer, Treasurer, Secretary and Director
Robert A. Lefton........... 42 Executive Vice President - Operations
Gary A. Kagan.............. 47 Executive Vice President - Development
Linda A. Laitner........... 50 Senior Vice President - Operations
David S. Tingue............ 43 Senior Vice President - Marketing
David K. White, Ph.D. ..... 42 Senior Vice President - Operations
</TABLE>
James W. McAtee has been President and Chief Executive Officer of the
Company since November 1, 1998. He has been Chief Financial Officer, Treasurer
and Secretary of the Company since September 1990 and has been a director of the
Company since July 1995. He formerly served as Executive Vice President -
Finance & Administration of the Company from February 1992 to October 1998. He
was a Senior Vice President of the Company from September 1990 to February 1992.
Robert A. Lefton has been Executive Vice President - Operations since
November 1, 1998. He formerly served as President and Chief Operating Officer
from September 1997 to October 1998. He was Executive Vice President -
Operations from September 1996 to August 1997. He was a Senior Regional Vice
President of the Company from March 1995 until September 1996 and served as a
Regional Vice President of the Company from November 1991 to March 1995.
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.
Linda A. Laitner has been Senior Vice President - Operations since
November 1, 1998. She has been President - Horizon Behavioral Services since
February 1998. She was previously Vice President Operations-Government Programs
for CMG Health from January 1997 to January 1998. She also served as Vice
President Operations-Implementation for CMG Health from January 1994 to January
1997 and as a Regional Vice President from January 1993 to January 1994.
David S. Tingue has been has been Senior Vice President - Marketing
since November 1, 1998. He has been President - Mental Health Outcomes since
October 1997. He formerly served as Executive Vice President, Marketing from
July 1998 to October 1998. He was previously Vice President Operations for SDMS
Inc. from January 1997 to September 1997. He also served as Vice President,
Strategic Planning for SDMS from March 1996 to December 1996 and Vice President,
Marketing from July 1994 to March 1996. Prior to this, he was a Regional
Business Director for Zeneca Pharmaceuticals from September 1992 to June 1994.
David K. White, Ph.D. has been Senior Vice President - Operations since
November 1, 1998. He formerly served as Executive Vice President - Operations
from February 1998 to October 1998. He was a Regional Vice President from
September 1996 to January 1998. He also served as a Regional Director of
Operations from April 1995 to August 1996. He was President and Chief Executive
Officer of Charles River Health Management, Inc. from December 1990 to November
1994.
Officers of the Company are elected by the Board of Directors of the
Company and serve at the pleasure of the Board of Directors until their
respective successors are elected and qualified.
Page 21
<PAGE> 22
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". On August 12, 1997, the Nasdaq trading symbol for the
Company was changed to "HORC" following the change of its corporate name from
Horizon Mental Health Management, Inc.
The following table sets forth the high and low sale prices per share
for the Common Stock of the Company as reported by the Nasdaq National Market,
for the periods indicated:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 31, 1998:
September 1, 1997 -- November 30, 1997........................... $ 29.13 $ 20.50
December 1, 1997 -- February 28, 1998............................ 23.75 19.00
March 1, 1998 -- May 31, 1998.................................... 24.63 17.25
June 1, 1998 -- August 31, 1998.................................. 19.00 4.50
FISCAL YEAR ENDED AUGUST 31, 1997:
September 1, 1996 -- November 30, 1996 (1)....................... 18.67 14.67
December 1, 1996 -- February 28, 1997 (1)........................ 19.67 16.33
March 1, 1997 -- May 31, 1997.................................... 20.00 15.38
June 1, 1997 -- August 31, 1997.................................. 26.12 18.00
</TABLE>
(1) Adjusted to reflect three-for-two stock split effected by the Company as a
50% stock dividend on January 31, 1997.
The reported last sale price per share of the Common Stock as reported
by the Nasdaq National Market on November 23, 1998 was $7.00. As of November 23,
1998, the Company had 6,967,750 shares of Common Stock outstanding. As of
November 23, 1998, there were 50 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."
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<PAGE> 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND
STATISTICAL DATA
The selected historical consolidated financial data presented below for
the fiscal years ended August 31, 1996, 1997 and 1998, and at August 31, 1997
and August 31, 1998, are derived from the audited Consolidated Financial
Statements of the Company included elsewhere in this Report. The selected
historical consolidated financial data presented below for the fiscal years
ended August 31, 1994 and 1995, and at August 31, 1994, 1995 and 1996, are
derived from the audited consolidated financial statements of the Company not
included herein. Effective August 11, 1997, Horizon acquired Specialty
Healthcare Management, Inc. ("Specialty") in a share exchange transaction with
the stockholders of Specialty which was accounted for as a pooling of interests.
The Consolidated Financial Statements of the Company give effect to the
Specialty exchange by combining (a) the financial statements of Horizon for the
years ended August 31, 1995 and 1996 with the financial statements of Specialty
for the years ended December 31, 1995 and 1996 and (b) the results of operations
of Horizon for the year ended August 31, 1997 with the results of operations of
Specialty for the twelve month period ended August 31, 1997, in each case on a
pooling of interests basis. Specialty was a division of National Medical
Enterprises, Inc. during the year ended December 31, 1994. The operations of
Specialty for the four month period ended December 31, 1996 resulting in net
revenues and net income of $10.8 million and $849,000, respectively, have been
included in the restated statement of operations for both the year ended August
31, 1996 and the year ended August 31, 1997. The effect of including Specialty's
net income for the four months in both periods is eliminated in stockholders'
equity in the Consolidated Financial Statements of the Company. The selected
financial information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Consolidated Financial Statements of the Company and
Notes thereto included elsewhere in this Report.
Page 23
<PAGE> 24
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1994(1) 1995(1) 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract management revenues ............. 24,962 68,721 95,244 102,263 102,156
Premiums and fees ........................ -- -- 437 6,154 21,383
Other(2) .................................... 5,297 634 558 850 279
---------- ---------- ---------- ---------- ----------
Total Revenues ................ 30,259 69,355 96,239 109,267 123,818
Operating expenses:
Salaries and benefits .................... 16,814 40,083 55,810 60,048 65,725
Purchased services ....................... 4,731 10,794 13,880 16,466 23,205
Provision for bad debts .................. 312 1,680 1,435 3,034 760
Other .................................... 5,745 9,189 11,848 12,796 14,755
Depreciation and amortization ............ 560 1,133 1,812 2,201 3,166
Merger expenses .......................... -- -- -- 3,528 --
---------- ---------- ---------- ---------- ----------
Operating income ............................ 2,097 6,476 11,454 11,194 16,207
Interest and other income
(expense), net ............................. (1,005) (1,003) (67) 120 74
---------- ---------- ---------- ---------- ----------
Income before income taxes .................. 1,092 5,473 11,387 11,314 16,281
Income tax expense (benefit) ................ (20) 1,695 4,609 4,518 6,515
---------- ---------- ---------- ---------- ----------
Income before equity in net earnings of
Horizon LLC and minority interest .......... 1,112 3,778 6,778 6,796 9,766
Equity in net earnings of Horizon LLC ....... 364 1,568 -- -- --
Minority interest............................ -- -- (2) (140) (34)
---------- ---------- ---------- ---------- ----------
Net income .................................. $ 1,476 $ 5,346 $ 6,776 $ 6,656 $ 9,732
========== ========== ========== ========== ==========
Basic earnings per share (3) ................ $ 0.47 $ 1.05 $ 1.03 $ 0.96 $ 1.37
========== ========== ========== ========== ==========
Weighted average shares outstanding (3) .... 3,123 5,111(4) 6,561(4) 6,929(4) 7,120
========== ========== ========== ========== ==========
Diluted earnings per share (3) .............. $ 0.38 $ 0.89 $ 0.90 $ 0.87 $ 1.26
========== ========== ========== ========== ==========
Weighted average shares and dilutive
potential common shares outstanding (3) ... 3,934 5,997(4) 7,510(4) 7,681(4) 7,754
========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments ............. $ 2,144 $ 3,249 $ 8,346 $ 5,517 $ 6,204
Working capital ............................. 162 4,394 8,751 5,064 6,498
Intangible assets (net) (5) ................. 7,676 14,998 19,887 26,005 59,538
Total assets ................................ 15,079 33,587 45,214 48,728 86,672
Total debt .................................. 12,121 3,216 3,576 -- 26,029
Stockholders' equity (deficit) .............. (1,434) 17,225 25,149 31,682 42,662
</TABLE>
<TABLE>
<CAPTION>
AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31,
1996 1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Covered Lives 204,291 204,301 216,260 262,059 288,519 744,103 783,560 762,414 1,874,323
NUMBER OF CONTRACT LOCATIONS (6):
Contract locations in
operation .......................... 163 162 162 176 181 179 172 166 161
Contract locations signed
and unopened ....................... 16 22 10 18 14 15 12 16 11
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total contract locations ............ 179 184 172 194 195 194 184 182 172
======== ======== ======== ======== ======== ======== ======== ======== ========
SERVICES COVERED BY CONTRACTS (6):
Inpatient ........................... 156 152 157 164 166 165 159 152 149
Partial hospitalization ............. 84 84 86 101 104 103 107 109 102
Outpatient .......................... 20 29 28 21 24 27 30 33 32
Home health ......................... 13 14 13 15 17 13 12 13 10
CQI+ ................................ 64 67 71 78 86 87 88 83 82
TYPES OF TREATMENT PROGRAMS (6):
Geropsychiatric ..................... 144 145 153 183 197 193 195 193 189
Adult psychiatric ................... 82 83 80 74 75 70 72 75 67
Substance abuse ..................... 20 22 21 16 10 12 12 12 8
Other mental health ................. 5 7 8 4 9 12 9 8 9
Physical rehabilitation ............. 22 22 22 22 20 21 20 19 20
</TABLE>
Page 24
<PAGE> 25
(1) Effective August 1, 1994, the Company and Mental Health Management, Inc.
("MHM") formed Horizon Mental Health Management Company, L.L.C., a Delaware
limited liability company ("Horizon LLC"). Horizon LLC assumed management
responsibility for all of the then existing management contracts of the
Company and MHM. Certain provisions of the limited liability company
agreement which required the consent of MHM for certain transactions
prevented the Company from having the ability to control Horizon LLC under
generally accepted accounting principles and therefore Horizon LLC was not
consolidated with Horizon for accounting purposes through February 28, 1995.
As a result, the revenues and expenses of Horizon LLC for the period August
1, 1994 through February 28, 1995 are not included in the revenues and
expenses of the Company; instead, for such periods the Company accounted for
its investment in Horizon LLC by the equity method and reflected its share
of Horizon LLC's net income for the period in question as "Equity in
Earnings of Horizon LLC." Effective with the acquisition of the minority
interest in Horizon LLC of MHM on March 20, 1995, the MHM contracts were
assigned to the Company and Horizon LLC became a wholly owned subsidiary of
Horizon. Horizon LLC was consolidated with the Company effective March 1,
1995. The Company's share of Horizon LLC's net earnings was $364,000 through
August 31, 1994 and $1,567,720 from September 1, 1994 through February 28,
1995. The Horizon LLC agreement stipulated that MHM, as a member of Horizon
LLC, would be allocated the first $1,750,000 of Horizon LLC net earnings in
each of the fiscal years ending August 31, 1995 and 1996. $1,750,000 was
allocated to MHM during the six months ended February 28, 1995.
(2) Other revenues for the fiscal years ended August 31, 1994, 1995 and 1996
consist primarily of revenues earned from a psychiatric hospital formerly
operated by the Company, patient services and physician contract management
fees, or subsequent adjustments for Medicare settlements recognized during
the respective period. The Company subleased the operations of the hospital
to a third party effective July 31, 1994. Other revenues for the fiscal
years ended August 31, 1997 and 1998 consist primarily of physician contract
management fees and a favorable cost report adjustment.
(3) Adjusted to reflect a three-for-two stock split effected by the Company as a
50% stock dividend on January 31, 1997.
(4) Adjusted for the Specialty transaction based on historical share amounts,
converting each outstanding share of Specialty Common Stock into 147.4616
shares of Horizon Common Stock.
(5) Effective June 1, 1998, the Company acquired all of the outstanding capital
stock of FPM Behavioral Health, Inc. of Winter Park, Florida. The purchase
price exceeded the fair value of FPM's tangible net assets by $22,170,668,
of which $20,665,912 was recorded as goodwill and $1,504,756 as service
contracts. Effective October 31, 1997, the Company acquired all of the
outstanding capital stock of Acorn. The purchase price exceeded the fair
value of Acorn's tangible net assets by $12,629,261, of which $9,258,513 was
recorded as goodwill and $3,370,748 as service contracts. The Company
recorded additional goodwill of $4,498,038 and $714,672 and additional
management contract values of $507,948 and $141,066, as a result of the
acquisitions on March 15, 1997 of Geriatric Medical Care, Inc., a Tennessee
corporation ("Geriatric") and Clay Care Inc., a Texas corporation ("Clay
Care"), respectively. On August 1, 1996, the Company purchased 80% of the
outstanding common stock of Florida PPS. Due to this purchase, $3,298,885
was recorded as goodwill during 1996 and 1997. On February 27, 1998, the
Company acquired 16% of the remaining outstanding common stock of Florida
PPS. The purchase price exceeded the fair market value of PPS's tangible net
assets acquired by $764,400 of which $560,315 was recorded as goodwill and
$204,085 as service contracts. On March 10, 1998, the Company acquired the
remaining 4% of the outstanding common stock of Florida PPS. The purchase
price exceeded the fair market value of PPS's tangible net assets acquired
by $192,332 of which $141,311 was recorded as goodwill and $51,021 as
service contracts. On April 1, 1996, the Company purchased all of the
outstanding capital stock of the Parkside Company. In connection with this
purchase, approximately $1,400,000 was recorded as goodwill and $2,100,000
as management contracts. Effective January 3, 1995, the Company acquired the
net assets and operations of National Medical Management Services, a
division of National Medical Enterprises, Inc. Due to this purchase,
$120,350 was recorded as goodwill and $1,000,000 as management contracts. On
March 20, 1995, $9,683,467 of the net proceeds to the Company from its
initial public offering were used to purchase MHM's minority interest in
Horizon LLC. The purchase transaction eliminated $2,794,715 of MHM's equity
interest in Horizon LLC and recognized an increase in intangible assets of
$2,355,000 based upon the value of Horizon LLC management contracts. The
remaining purchase price of $4,533,752 was recorded as goodwill. The
recorded goodwill was increased by $376,639 in March, 1996 based on a final
valuation of MHM's minority
Page 25
<PAGE> 26
interest. In each such acquisition, the increase in contract value will be
amortized over seven years and the goodwill over forty years.
(6) Represents combined information for both Horizon and Specialty.
Page 26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a growing provider of employee assistance plans ("EAP")
and mental health services to business and managed care organizations, as well
as the leading contract manager of clinical programs offered by general acute
care hospitals in the United States. The Company has grown both internally and
through acquisitions, increasing both the variety of its treatment programs and
services and the number of its management contracts. As of August 31, 1998, the
Company had over 200 contracts to provide EAP and mental health services
covering nearly 2.0 million lives. Over the last six years, the Company has
increased its management contracts from 43 to a total of 172 as of August 31,
1998 and currently operates in 37 states. Of those management contracts, 150
relate to mental health programs and 22 relate to physical rehabilitation
programs. The Company has also developed a proprietary mental health outcomes
measurement system known as CQI+ and at August 31, 1998 provided outcome
measurement services at 82 contract locations. The Company was incorporated in
1989 and is the successor to Horizon Health Management Company, which began the
development and management of mental health programs for general acute care
hospitals in 1981.
The Company's strategy is to enhance its position as the leader in the
contract management of mental health programs and to further expand the range of
services which it offers to its existing and new client hospitals to include
other clinical and related services and programs. A significant challenge in
obtaining clinical management contracts from hospitals is overcoming the initial
reservations that many hospital administrators have with outsourcing key
clinical services. The Company believes its expertise in working with hospital
administrators, its reputation in the industry and its existing contractual
relationships with 172 hospitals nationwide provide it with a significant
advantage in obtaining new contracts. The Company also believes it has
opportunities to cross-sell a range of mental health and physical rehabilitation
services to client hospitals by marketing and selling its mental health services
to client hospitals for which the Company currently manages only physical
rehabilitation programs, and by marketing and selling its physical
rehabilitation services to client hospitals for which the Company currently
manages only mental health programs. The Company is pursuing the development of
such opportunities as a primary part of its business strategy. The Company has
successfully expanded the breadth of services it offers to include the full
continuum of mental health services, including outcome measurement services, and
physical rehabilitation services and its contracts increasingly provide for
multiple services. In addition, the Company capitalizes on its expertise in
managing the delivery of mental health services by directly offering managed
behavioral health care services and employee assistance programs to businesses
and managed care organizations. The Company believes it is strategically-sized
to deliver national programs, while providing local, individualized service to
both employer and health plan clients and their employees or clients.
REVENUES
Mental Health Services
The primary factors affecting revenues in any period are the number of
management contracts with treatment programs in operation in the period and the
number of services covered by each such management contract. The Company
provides its management services under contracts with terms generally ranging
from three to five years. Each contract is tailored to address the differing
needs of each client hospital and its community and increasingly cover multiple
treatment programs and services. The Company and the client hospital determine
the programs and services to be offered by the hospital and managed by the
Company, which may consist of one or more mental health or physical
rehabilitation treatment programs offering inpatient, partial hospitalization,
outpatient or home health services. Under the contracts, the hospital is the
actual provider of the mental health or physical rehabilitation services and
utilizes its own facilities (including beds for inpatient programs), nursing
staff and support services (such as billing, dietary and housekeeping) in
connection with the operations of its programs. As the Company has expanded the
breadth of treatment programs it offers to hospitals, it has moved from managing
one treatment program under a single contract with a hospital to managing
multiple treatment programs under such contract.
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<PAGE> 28
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, 1996, 1997 and 1998, the Company had
successfully retained 80%, 78% and 73%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes the most frequent reason its client hospitals do not renew their
contracts with the Company is that the hospitals decide to manage such programs
themselves, the economic viability of the programs have changed resulting in
their closing the programs, or a change in hospital administration results in a
change in philosophy regarding the use of contract managers.
Under each contract, the Company receives a fee for its management
services from the client hospital. Management fees may be either a variable fee
related in part to patient volume, a fixed monthly fee or reimbursement for
direct program costs plus a fixed fee. The management fee is frequently subject
to periodic adjustments as a result of changes in the consumer price index or
other economic factors. Payors, including Medicare and Medicaid, are attempting
to manage costs, resulting in declining amounts paid or reimbursed to hospitals
for the services provided. As a result, the Company anticipates that the number
of patients served by general acute care hospitals on an inpatient basis will
decrease and, as an alternative, the number of patients served on a per diem,
episodic or capitated basis will increase in the future.
Over the past three years, the Company has increased revenues through
acquisitions (discussed below) and through internal growth by adding services,
price escalators and volume increases at existing contract locations. The
increases have primarily been due to the increased range of services offered per
contract and the increased demand for geropsychiatric services as general
hospitals have sought to enter this market. An additional factor in the pricing
strategy has been the Company's policy of establishing a minimum direct margin
threshold for its management contracts. Because the pooling with Specialty
occurred on August 11, 1997, fiscal 1997 margins do not reflect the integration
or the elimination of Specialty's executive, administrative, accounting and
personnel functions and information systems, the closing of two Specialty office
facilities and other synergies.
The Company's mix of programs has changed over the last three years
reflecting the increased interest in geropsychiatric programs by general
hospitals. Geropsychiatric programs as a percentage of the Company's total
mental health programs have increased from approximately 57% to 69% during that
period.
Most of the Company's client hospitals receive reimbursement under one
or more of the Medicare or Medicaid programs for mental health and physical
rehabilitation services provided in programs managed by the Company. The Company
is paid directly by its client hospitals for the management services it
provides. Under many of its management contracts the Company is obligated to
refund all or a portion of its fee if either Medicare denies reimbursement to
the client hospital for individual patient treatment or if the fee paid to the
Company is denied by Medicare as a reimbursable cost. During the fiscal years
ended August 31, 1998 and 1997, the Company refunded approximately $207,801 and
$219,294, respectively, of its fees as a result of these denials.
Recent amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. Effective as of October 1, 1997, regulations
promulgated pursuant to these amendments establish a ceiling on the rate of
increase in operating costs per case for mental health and physical
rehabilitation services furnished to Medicare beneficiaries. Prior to these
amendments, the reimbursement amounts were tied to each hospital's mental health
or physical rehabilitation unit cost during such unit's first year of
operations, subject to adjustment. The new regulations establish a nationwide
cap limiting the reimbursement target amount on a per case basis for mental
health and physical rehabilitation services to $10,534 and $19,104,
respectively, subject to adjustments based on market indices. The limitations
have resulted, in some cases, in decreased amounts reimbursed to the Company's
client hospitals. This decrease in reimbursement has, in some cases, led to the
renegotiation of a lower contract management fee structure for the Company and
in other cases has resulted in termination or nonrenewal of the management
contract. The new reimbursement limitations become applicable to the client
hospitals at the beginning of their respective Medicare fiscal years. The trend
of renegotiated fees and canceled or nonrenewed contracts, resulting in reduced
management fees, which the Company first encountered in its fiscal 1998 second
quarter, can be expected to continue in the first and second quarters of fiscal
1999.
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A recently enacted amendment to the Medicare statutes provides for a
gradual phase-out of cost-based reimbursement for physical rehabilitation
services over a three-year period commencing on October 1, 2000. The resulting
phase-in of reimbursement for physical rehabilitation services based on PPS
could significantly lower Medicare reimbursements to hospitals and thus have a
material adverse effect on the business, operations and financial results of the
Company.
Managed Behavioral Health Care Services and Employee Assistance
Programs
Through its subsidiary Horizon Behavioral Services, Inc., the Company
offers an array of managed care products to corporate clients, self-funded
employer groups, commercial HMO and PPO plans, government agencies, and
third-party payors. Revenues are derived from EAP plans, administrative services
only contracts, and managed behavioral health plans.
Revenues from employee assistance plans, are typically derived from a
per employee per month capitated rate multiplied by the number of eligible
employees. The rate for EAP plans is dependent upon services provided under the
contract terms. Each plan is specifically written to fulfill the clients' needs
and can offer different numbers of counseling sessions and other benefits, such
as child care and elder care consultation, referral resources and critical
incident debriefing and intervention.
Revenues for administrative services only related to the management and
treatment of behavioral health benefits are dependent upon the number of
contracts and the services provided. Fees are usually a case rate or a per
employee per month fee multiplied by the number of eligible members. The client
is able to benefit from the mental health professionals employed or
independently contracted by the Company at favorably discounted rates.
The primary factors affecting revenues derived from managed behavioral
health care services are the behavioral health benefits provided and the number
of members covered. The capitated rate is dependent upon the benefit designs of
the customer and is set forth in the contract, usually as a per member per month
capitated rate, which is multiplied by the number of eligible members to
determine a monthly fee.
The nine clinics operated in the state of Florida derive income from
patients or insurance for counseling and therapy services rendered.
OPERATING EXPENSES
The primary factor affecting operating expenses in any period is the
number of management contracts with programs in operation in the period. The
Company's operating expenses consist primarily of salaries and benefits paid to
its therapists and supporting personnel. Each mental health program managed by
the Company has a psychiatric medical director, a program director who is
usually a psychologist or a social worker, a community relations coordinator and
additional social workers or therapists as needed. Each physical rehabilitation
program managed by the Company has an independent medical director, a program
director, and additional clinical staff tailored to meet the needs of the
program and the client hospital, which may include physical and occupational
therapists, a speech pathologist, a social worker and other appropriate
supporting personnel. Each medical director has a contract with the Company
under which on-site administrative services needed to administer the program are
provided. Except for the nursing staff, which is typically provided by the
hospital, the other personnel are employees of the Company. At August 31, 1998,
the Company had an average of six employees per contract location.
Purchased services includes payments to independent health care
professionals providing services under the capitated mental health services
contracts and employee assistance programs offered by the Company. Operating
expenses for the Company's managed behavioral health care services and employee
assistance programs are comprised of approximately 37% salaries and benefits and
approximately 51% purchased services from network providers. Other costs and
expenses include items such as marketing costs and expenses, accounting and
legal fees and expenses, employee relocation expenses, rent, utility and
property taxes.
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ACQUISITIONS
On October 5, 1998, the Company acquired all of the outstanding capital
stock of ChoiceHealth for approximately $2.0 million. ChoiceHealth provides
managed behavioral health care services, employee assistance programs and other
related health care services to health maintenance organizations and self
insured employers.
On June 1, 1998, the Company acquired all of the outstanding capital
stock of FPM for approximately $20.0 million. FPM provides managed behavioral
health care services, employee assistance programs and other related health care
services to health maintenance organizations and self insured employers.
On October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn for approximately $12.7 million in cash. Acorn provides
employee assistance programs and other related services to self-insured
employers.
On August 11, 1997, Horizon acquired Specialty in a transaction
accounted for as a pooling of interests, resulting in a restatement of the
Company's financial results for the fiscal years ended August 31, 1995, 1996 and
1997. Included in the Company's financial statements for the fiscal years ended
August 31, 1995 and 1996 are the financial results of the Specialty acquisition
for the years ended December 31, 1995 and 1996, respectively. Included in the
Company's financial statements for the fiscal year ended August 31, 1997 are the
financial results of Specialty for the twelve months ended August 31, 1997.
As a result of the Specialty acquisition, in the Company's financial
statements for the fiscal year ended August 31, 1995, the financial results of
Specialty are included for twelve months although Specialty, which began
operations in January 1995, was only in operation for eight months of the
Company's fiscal year. In addition, the financial results of Specialty for the
four months of September 1, 1996 through December 31, 1996 are included in the
Company's financial statements for both fiscal 1996 and 1997. The operations of
Specialty for the four months ended December 31, 1996, resulted in net revenues
and net income of $10.8 million and $849,000, respectively. As a result, an
adjustment was made to stockholders' equity in the consolidated financial
statements of the Company to eliminate the effect of including Specialty's net
income for the four months in both periods. Additionally, the consolidated
statement of cash flows was adjusted to reflect the cash flows of Specialty for
the four months ended December 31, 1996. The treatment of the Specialty
acquisition as a pooling of interests resulted in the Company recognizing
merger-related expenses of approximately $3,528,000 and an offsetting tax
benefit of approximately $1,340,000.
Other acquisitions during the last three years have significantly
affected the Company's results of operation and financial condition. The Company
acquired 39 management contracts from Mental Health Management, Inc. ("MHM") on
March 20, 1995, 19 management contracts from Parkside on April 1, 1996 and 23
management contracts with the acquisition of Geriatric and Clay Care on March
15, 1997. In addition, on August 1, 1996 the Company acquired Florida PPS, a
company specializing in providing mental health services under capitated
contracts.
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RESULTS OF OPERATIONS
The following table sets forth for the fiscal years ended August 31,
1996, 1997 and 1998, 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>
FISCAL YEAR ENDED AUGUST 31,
-----------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Contract management revenues .............. 99.0% 93.6% 82.5%
Premiums and fees ......................... 0.5 5.6 17.3
Other ..................................... 0.5 0.8 0.2
-------- -------- --------
Total revenues .............................. 100.0 100.0 100.0
Operating expenses
Salaries and benefits ..................... 58.0 55.0 53.1
Purchased services ........................ 14.4 15.1 18.7
Provision for bad debts ................... 1.5 2.8 0.6
Other ..................................... 12.3 11.7 11.9
Depreciation and amortization ............. 1.9 2.0 2.6
Merger expenses ........................... -- 3.2 --
-------- -------- --------
Total operating expenses .................... 88.1 89.8 86.9
-------- -------- --------
Operating income ............................ 11.9 10.2 13.1
-------- -------- --------
Interest and other income (expense), net .... (0.1) 0.1 0.1
-------- -------- --------
Income before taxes ......................... 11.8 10.3 13.2
Income tax expense .......................... 4.8 4.1 5.3
-------- -------- --------
Income before minority interest ............. 7.0 6.2 7.9
Minority interest ........................... -- 0.1 --
-------- -------- --------
Net income .................................. 7.0% 6.1% 7.9%
======== ======== ========
Number of contracts in operation, end of year 163 181 161
</TABLE>
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FISCAL YEAR ENDED AUGUST 31, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1997
Revenue. Revenues for the fiscal year ended August 31, 1998 were $123.8
million representing an increase of $14.5 million, or 13.2%, as compared to
revenues of $109.3 million for the prior fiscal year. Premiums and fees
increased $15.2 million as a result of revenue recorded for Acorn and FPM.
Horizon acquired 100% of the voting stock of Acorn and FPM effective October 31,
1997 and June 1, 1998, respectively. The increase in premiums and fees was
offset by a decrease in other revenues of $571,000. The decrease in other
revenues results from a favorable cost report adjustment for Mountain Crest
Hospital recognized in the prior fiscal year.
Salaries and Benefits. Salaries and benefits for the fiscal year ended
August 31, 1998 were $65.7 million representing an increase of $5.6 million, or
9.3%, as compared to salaries and benefits of $60.1 million for the prior fiscal
year. Salary and benefits cost per full time equivalent for the year ended
August 31, 1998 were $57,290 representing an increase of $404 per full time
equivalent, or 0.7%, as compared to salary and benefits cost of $56,821 per full
time equivalent for the prior fiscal year. The number of full time equivalents
for the year ended August 31, 1998 was approximately 1,147, representing an
increase of 90, or 8.6%, as compared to approximately 1,057 full time
equivalents in the prior fiscal year. FTE's increased by 52 as a result of the
acquisition of Acorn. FTE's also increased by 160 as a result of the acquisition
of FPM. These increases are offset by a decline in FTE's resulting from a
decrease in the number of contract locations in operation, from 181 at August
31, 1997 to 161 at August 31, 1998, a decrease of 11%.
Depreciation and Amortization. Depreciation and amortization expenses
for the fiscal year ended August 31, 1998 were $3.2 million representing an
increase of $965,000, or 43.8%, as compared to depreciation and amortization
expenses of $2.2 million for the prior fiscal year. $928,000 of the increase
resulted from additional depreciation and amortization arising from the
acquisitions of Acorn and FPM. The remainder of the increase resulted from the
depreciation expense associated with additional capital expenditures during the
fiscal year.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the fiscal year ended August 31,
1998 were $38.7 million representing an increase of $6.4 million, or 19.8%, as
compared to other operating expenses of $32.3 million for the previous fiscal
year. A major factor in the increase in purchased services and other operating
expense resulted from medical claims paid by Acorn and FPM. Purchased services
increased $6.7 million, of which $5.7 million was due to the inclusion of Acorn
and FPM in the Company's consolidated financial statements. Other operating
expenses increased $2.0 million, of which $1.3 million was related to the
acquisitions of Acorn and FPM. The increases in purchased services and other
operating expenses were offset by a decrease in the provision for bad debts of
$2.3 million, of which $2.1 million related to one Specialty contract which
terminated April 30, 1997.
Merger Expenses. Merger expenses were $3.5 million for the fiscal year
ended August 31, 1997. The Company did not have merger expenses for the current
fiscal year.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for the fiscal year ended August 31, 1998 was $74,000,
as compared to $120,000 in net interest income and other income for the prior
fiscal year. This change results from an increase in interest expense of
$405,000 related to amounts borrowed under the new credit facility for
acquisitions. This decrease is offset by an increase in other income of $514,000
due to the final receipt of the rent obligation for Mountain Crest Hospital. In
addition, interest income decreased by $126,000 when compared to the
corresponding period in the prior fiscal year due to the use of cash for
acquisitions.
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Income Tax Expense. Income tax expense for the fiscal year ended August
31, 1998 was $6.5 million representing an increase of $2.0 million, or 44.4%, as
compared to income tax expense of $4.5 million for the prior fiscal year. The
increase in income tax expense was largely due to a corresponding increase in
pre-tax earnings.
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
Revenue. Revenues for the fiscal year ended August 31, 1997 were $109.3
million representing an increase of $13.0 million, or 13.5%, as compared to
revenues of $96.3 million for the prior fiscal year. Approximately $3.0 million
(3.1%) of the revenue increase for the year was attributable to a 9.4% increase
in the number of contract locations in operation, from a daily average of 156.0
contract locations in operation during the year ended August 31, 1996 to a daily
average of 170.7 contract locations in operation during the year ended August
31, 1997. Approximately $4.8 million (5.0%) of the revenue increase resulted
from a 7.0% increase in same site revenues on an average quarterly
year-over-year basis at contract locations in operation throughout each
comparison period, which in the aggregate represented approximately 66.7% of
fiscal 1997 revenues. Approximately $5.2 million (5.4%) of the revenue increase
resulted from the operations of Florida PPS, of which twelve months of results
were included in fiscal 1997 versus one month in fiscal 1996 following its
acquisition on August 1, 1996.
Salaries and Benefits. Salaries and benefits for the fiscal year ended
August 31, 1997 were $60.0 million representing an increase of $4.2 million, or
7.6%, as compared to salaries and benefits of $55.8 million for the prior fiscal
year. Salary and benefits cost per full time equivalent for the year ended
August 31, 1997 were $56,821 representing an increase of $3,430 per full time
equivalent, or 6.4%, as compared to salary and benefits cost of $53,391 per full
time equivalent for the prior fiscal year. The number of full time equivalents
for the year ended August 31, 1997 was approximately 1,057, representing an
increase of 11.5, or 1.1%, as compared to approximately 1,045 full time
equivalents in the prior fiscal year. The increase in the number of full time
equivalents of 1.1% was less than the 9.4% increase in the number of contract
locations in operation because the contract locations terminated during fiscal
year 1997 were mature programs which typically employ more personnel per
location than the newly signed and acquired contract locations during fiscal
year 1997.
Depreciation and Amortization. Depreciation and amortization expenses
for the fiscal year ended August 31, 1997 were $2.2 million representing an
increase of $389,000, or 21.5%, as compared to depreciation and amortization
expenses of $1.8 million for the prior fiscal year. $277,000 of the increase
resulted from additional depreciation and amortization arising from the
acquisitions of Florida PPS, Parkside, Geriatric and Clay Care. The remainder of
the increase resulted from the depreciation expense associated with the
operation of additional contract locations and the equipment and furniture
purchased for the Company's new national support center which opened in
September 1996.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the fiscal year ended August 31,
1997 were $32.3 million representing an increase of $5.1 million, or 18.8%, as
compared to other operating expenses of $27.2 million for the previous fiscal
year. A major factor in the increase in other operating expense resulted from
the 9.4% increase in the number of contract locations in operation for the
fiscal year ended August 31, 1997, as compared to the prior fiscal year. $1.7
million of the increase resulted from an increase in bad debt expense due to the
write-off of the receivable associated with a contract location which closed on
April 30, 1997. Purchased services increased by $2.6 million, of which $1.8
million was due primarily to the inclusion of Florida PPS in the Company's
consolidated financial statements for the entire twelve months in fiscal 1997
versus only one month in fiscal 1996 following its acquisition on August 1,
1996.
Merger Expenses. Merger expenses were $3.5 million for the fiscal year
ended August 31, 1997. The Company did not have merger expenses for the prior
fiscal year.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for the fiscal year ended August 31, 1997 was $122,000,
as compared to net interest expense and other income of negative $66,000 for the
prior fiscal year. The increase in interest income was due to the investment of
the positive cash flow from earnings.
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Income Tax Expense. Income tax expense for the fiscal year ended August
31, 1997 was $4.5 million representing a decrease of $92,000, or 2.0%, as
compared to income tax expense of $4.6 million for the prior fiscal year. The
small decrease in income tax expense was largely due to a small decrease in
pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Texas Commerce Bank National Association (now known as
Chase Bank of Texas, National Association) as Agent (the "Agent") for itself and
other lenders party to the Credit Agreement, for a senior secured credit
facility in an aggregate amount of up to $50.0 million (the "New Credit
Facility"). The New Credit Facility consists of a $10.0 million revolving credit
facility to fund ongoing working capital requirements (the "Revolving Credit
Facility") and a $40.0 million advance term loan facility to refinance certain
existing debt and to finance future acquisitions by the Company (the "Advance
Term Loan Facility"). The New Credit Facility replaced the Company's existing
$14.0 million revolving credit facility. At August 31, 1998, the revolving
credit facility and advance term loan facility had $3 million and $23 million
outstanding, respectively.
The following summary of certain material provisions of the Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Credit Agreement, a copy of which was filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter
ended November 30, 1997, as filed with the Securities and Exchange Commission
(the "Commission") on December 19, 1997.
The Company is the borrower under the New Credit Facility which is
unconditionally guaranteed by all material domestic subsidiaries of the Company.
The Revolving Credit Facility terminates November 30, 2000 and the Advance Term
Loan Facility has a term of five years, with drawdowns available until November
30, 1999. Once a drawdown is made under the Advance Term Loan Facility, the
commitment thereunder will be reduced by the amount funded. Amounts outstanding
under the Advance Term Loan Facility on November 30, 1999 are to be repaid in
twelve quarterly principal payments, beginning February 28, 2000, based upon a
five year amortization schedule with the first eleven principal payments being
1/20th of the outstanding balance on November 30, 1999, and the twelfth being
the remaining unpaid principal balance. Principal outstanding under the New
Credit Facility bears interest at the "Base Rate" (the greater of the Agent's
"prime rate" or the federal funds rate plus .5%) plus 0% to .5% (depending on
the Company's Indebtedness to EBITDA Ratio as defined in the Credit Agreement)
or the "Eurodollar Rate" plus .75% to 1.5% (depending on the Indebtedness to
EBITDA Ratio), as selected by the Company. The Company incurs quarterly
commitment fees ranging from .25% to .375% per annum (depending on the
Indebtedness to EBITDA Ratio) on the unused portion of the Revolving Credit
Facility (until November 30, 2000) and unused portion of the Advance Term Loan
Facility (until November 30, 1999).
The Company is subject to certain covenants which include prohibitions
against (i) incurring additional debt or liens, except specified permitted debt
or permitted liens, (ii) certain material acquisitions, other than specified
permitted acquisitions (including any single acquisition not greater than $10.0
million or cumulative acquisitions not in excess of $30.0 million during any
twelve consecutive monthly periods), (iii) certain mergers, consolidations or
asset dispositions by the Company or changes of control of the Company, (iv)
certain management vacancies at the Company, and (v) material change in the
nature of business conducted. In addition, the terms of the New Credit Facility
require the Company to satisfy certain ongoing financial covenants. The New
Credit Facility is secured by a first lien or first priority security interest
in and/or pledge of substantially all of the assets of the Company and of all
present and future subsidiaries of the Company.
On September 9, 1998 the New Credit Facility was amended to allow the
Company to finance, under the Term Loan Facility, the redemption or repurchase
of its capital stock. As a result of this amendment a limit of $10 million for
cumulative acquisitions was imposed for the period of September 30, 1998 through
August 31, 1999.
Effective September 1996, the Company entered into a lease agreement
with a term of five years for a building which had been constructed to the
Company's specifications for its National Support Center. In connection with the
lease transaction, the Company guaranteed a loan of approximately $900,000. The
loan was by a financial
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<PAGE> 35
institution to the owner. The Company also agreed to purchase the leased
building for approximately $4.5 million at the end of the lease term in
September 2001 if either the building is not sold to a third party or the
Company does not extend its lease.
The Company believes that its cash flow from operations, cash of $6.2
million at August 31, 1998 and $7.0 million currently available under the
revolving credit facility will be sufficient to cover all cash requirements over
the next twelve months, including estimated capital expenditures of $1.2
million. The Company generated $7.7 million in net cash from operations during
the year ended August 31, 1998. The Company is likely to require additional
capital to fund any further acquisitions.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth for approximately $2.0 million. The acquisition
was funded by incurring debt of $2.0 million under the term loan facility.
Effective June 1, 1998, the Company acquired from Ramsay Health Care,
Inc. all the outstanding capital stock of FPM for $20.0 million, subject to
certain post-closing adjustments. The acquisition was funded by incurring debt
of $20.0 million under the term loan facility.
On October 31, 1997, the Company acquired all the outstanding capital
stock of Acorn for approximately $12.7 million. To fund the acquisition, the
Company utilized approximately $1.7 million of existing cash and incurred debt
of approximately $11.0 million under the revolving credit facility.
Horizon acquired Specialty on August 11, 1997. Specialty was a contract
manager of mental health and physical rehabilitation treatment programs for
general acute care hospitals. At August 11, 1997, Specialty had 44 management
contracts. In the Specialty transaction, 1,400,000 shares of Horizon common
stock were issued and exchanged for all outstanding shares of Specialty capital
stock. The 1,400,000 shares represented approximately 20.1% of the Company's
common stock outstanding after the acquisition. The Company accounted for the
transaction as a pooling of interests, which resulted in the Company recognizing
merger-related expenses of approximately $3,528,000 and an offsetting tax
benefit of approximately $1,341,000, which taken together resulted in a one-time
charge to earnings of $.27 per share. Upon the acquisition, the Specialty
outstanding bank indebtedness of approximately $3.2 million was paid in full.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric. Geriatric is a contract manager of mental health
programs for general acute care hospitals and, at March 15, 1997, had 18
management contracts. The purchase price was approximately $4.6 million, and was
paid from existing cash.
Also effective March 15, 1997, the Company purchased all of the
outstanding capital stock of Clay Care. Clay Care is a contract manager of
mental health programs for general acute care hospitals and, at March 15, 1997
had five management contracts. The purchase price was $1.0 million, and was paid
from existing cash.
In July 1996, the Company acquired 80% of the outstanding common stock
of Florida PPS. The purchase price for 80% of the outstanding capital stock was
approximately $3.3 million, based primarily on a 6.25 multiple of the 1996
pre-tax income of Florida PPS, and was paid from existing cash. The Company
accounted for the acquisition of Florida PPS by the purchase method as required
by generally accepted accounting principles. In February and March 1998, the
Company acquired the remaining outstanding common stock of PPS. The purchase
price of approximately $1,030,000 was based primarily on a multiple of the 1997
pretax income of PPS. Based in Clearwater, Florida, Florida PPS specializes in
full risk, capitated managed mental health programs and employee assistance
programs.
The Company acquired the assets of National Medical Management Services
effective January 1, 1995. In the transaction, the Company paid approximately
$3.95 million in cash and a note of approximately $731,000 payable to NME as
payment for the assets. The Company also issued to NME a warrant to acquire
common stock of the Company, which warrant was subsequently exercised as part of
Horizon's acquisition of Specialty in August 1997. The NME promissory note was
paid in January 1996. In April, 1996 the Company acquired The Parkside Company,
a contract manager of mental health programs, in a merger in which common stock
was issued and approximately $2.6 million was paid in cash which was financed
under a bank credit facility.
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YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. The
Company's computer equipment and software and devices with embedded technology
that are time-sensitive may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failure or miscalculations,
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company has undertaken various initiatives intended to ensure that
the computer equipment and software used by the Company will function properly
with respect to dates in the Year 2000 and thereafter. For this purpose, the
term "computer equipment and software" includes systems thought of as
information technology ("IT") systems, including accounting, data processing and
telephone/PBX systems and other miscellaneous systems that may contain embedded
technology, as well as systems that are not commonly thought of as IT systems,
such as alarm systems, fax machines or other miscellaneous systems that may
contain embedded technology. Based upon its identification and assessment
efforts to date, the Company believes that certain of the computer equipment and
software systems it currently uses will require replacement or modification. In
addition, in the ordinary course of replacing computer equipment and software,
the Company attempts to obtain replacements that are Year 2000 compliant.
Utilizing both internal and external resources to identify and assess needed
Year 2000 remediation, the Company currently anticipates that its Year 2000
identification, assessment, remediation and testing efforts, which began in
April 1998, will be completed by December 31, 1999, and that such efforts will
be completed prior to any currently anticipated impact on its computer equipment
and software systems. The Company estimates that as of November 19, 1998 it had
completed approximately 55% of the initiatives that it believes will be
necessary to fully address potential Year 2000 issues related to its computer
equipment and software. The projects comprising the remaining 45% of the
initiatives are in process and are expected to be completed by December 31,
1999.
<TABLE>
<CAPTION>
PERCENT
YEAR 2000 INITIATIVE TIME PERIOD COMPLETE
<S> <C> <C>
Initial IT systems identification and assessment April 1998 to December 1998 90%
Remediation and testing of IT systems July 1998 to December 1998 20%
Identification and assessment of non-IT systems September 1998 to December 1998 20%
Remediation and testing of non-IT systems January 1999 to December 1999 0%
</TABLE>
The Company is beginning assessment of the Year 2000 readiness of its
suppliers. Such assessment will include hardware, software and service
suppliers. The Company expects to complete its assessment of suppliers' Year
2000 readiness by March 1999. The Company is beginning assessment of the Year
2000 readiness of its customers. Such assessment will include contacting
significant customers regarding their state of Year 2000 readiness. The Company
expects to complete its assessment of customers' Year 2000 readiness by June
1999.
The Company believes that the costs to modify its computer equipment
and software systems to be Year 2000 compliant, as well as the currently
anticipated costs with respect to Year 2000 issues of third parties, will not
exceed $100,000, which expenditures will be funded from the operating cash
flows. All of the $100,000 relates to analysis, repair or replacement of
existing software, upgrades of existing software or evaluation of information
received from significant suppliers or customers. Such amounts represent
approximately 2% of the Company's total actual and anticipated IT expenditures
for fiscal 1998 and 1999. As of November 23, 1998, the Company had incurred
costs of approximately $55,000 related to its Year 2000 identification,
assessment, remediation and testing efforts. Other non-Year 2000 IT efforts have
not been materially delayed or impacted by Year 2000 initiatives.
Page 36
<PAGE> 37
However, if all Year 2000 issues are not properly identified, or assessment,
remediation and testing are not effected timely, there can be no assurance that
the Year 2000 issue will not have a material adverse effect on the Company's
result of operations, or adversely affect the Company's relationships with
customers, suppliers or others. Additionally, there can be no assurance that the
Year 2000 issues of other entities will not have a material adverse effect on
the Company's systems or results or operations.
The Company has begun, but not yet completed, a comprehensive analysis
of the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worse case scenario, and such scenario has not yet been
clearly identified. The Company plans to complete such cost analysis and
contingency planning by June 1999.
The costs of the Company's Year 2000 identification, assessment,
remediation and testing efforts and the date by which the Company believes it
will complete such efforts are based upon management's best estimates, which are
derived utilizing numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. However, there can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that might cause such material
differences include but are not limited to the availability and cost of
personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, and
similar uncertainties.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this report, other
reports, filings with the Commission, press releases, conferences, or otherwise,
are "forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements include, without limitation, any
statement that may predict, forecast indicate, or imply future results,
performance or achievements, and may contain the words "believe", "expect",
"estimate", "project", "will be", "will continue", "will likely result", or
words or phrases of similar meaning. Such statements involve risks,
uncertainties or other factors which may cause actual results to differ
materially from the future results, performance or achievements expressed or
implied by such forward looking statements. Certain risks, uncertainties and
other important factors are detailed in this report and will be detailed from
time to time in reports filed by the Company with the Commission, including
Forms 8-K, 10-Q, and 10-K, and include, among others, the following: general
economic and business conditions which are less favorable than expected;
unanticipated changes in industry trends; decreased demand by general hospitals
for the Company's services; the Company's inability to retain existing
management contracts or to obtain additional contracts; adverse changes in
reimbursement to general hospitals by Medicare or other third-party payers for
costs of providing mental health services; adverse changes to other regulatory
provisions relating to mental health services; fluctuations and difficulty in
forecasting operating results; the ability of the Company to sustain, manage or
forecast its growth; heightened competition, including specifically the
intensification of price competition; the entry of new competitors and the
development of new products or services by new and existing competitors; changes
in business strategy or development plans; inability to carry out marketing and
sales plans; business disruptions; liability and other claims asserted against
the Company; loss of key executives; the ability to attract and retain qualified
personnel; customer services; adverse publicity; demographic changes; and other
factors referenced or incorporated by reference in this report and other reports
or filings with the Commission. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the Company's business
or the extent to which any factor, may cause actual results to differ materially
from those contained in any forward looking statements. These forward looking
statements represent the estimates and assumptions of management only as of the
date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward looking
statement contained herein to reflect any change in its expectations with regard
thereto or any change in events, conditions or circumstances on which any
statement is based. Given these risks and uncertainties, investors should not
place undue reliance on forward looking statements as a prediction of actual
results.
Page 37
<PAGE> 38
INFLATION
The Company's management contracts generally provide for annual
adjustments in the Company's fees based upon various inflation indexes, thus
mitigating the effect of inflation. During the last three years, inflation has
had little effect on the Company's business.
Page 38
<PAGE> 39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In its normal operations, the Company has market risk exposure to
interest rates due to its interest bearing debt obligations, which were entered
into for purposes other than trading purposes. To manage its exposure to
changes in interest rates, the Company uses both fixed and variable rate debt.
The Company has estimated its market risk exposure using sensitivity analyses
assuming a 10% change in market rates.
At August 31, 1998, the Company had approximately $26.0 million of
debt obligations outstanding with variable interest rates with a weighted
average interest rate of 6.4375%. A hypothetical 10% change in the effective
interest rate for these borrowings, assuming debt levels as of August 31, 1998,
would change interest expense by approximately $167,000.
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-25 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.
Page 39
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will file with the Commission a definitive proxy statement
with respect to the annual meeting of stockholders of the Company to be held on
January 28, 1999 (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 will appear 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 will appear 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 will appear 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 will appear in the
Proxy Statement under the caption CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
Page 40
<PAGE> 41
PART IV
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-1 of this report.
(2) Reference is made to the Index to Financial Statement
Schedules appearing at page S-1 of this report.
(3) Exhibits.
NUMBER EXHIBIT
3.1 - Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
3.2 - Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 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").
4.1 - Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K dated August 11,
1997).
4.2 - Rights Agreement, dated February 6, 1997, between the
Company and American Stock Transfer & Trust Company, as Rights
Agent (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, Registration No.
000-22123, as filed with the Commission on February 7, 1997).
Page 41
<PAGE> 42
10.1 - 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).
10.2 - Sublease Agreement dated as of July 31, 1997 between HHG
Colorado, Inc. and MHM of Colorado, Inc. (incorporated herein
by reference to Exhibit 10.13 to the Company's Form S-1).
10.3 - 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).
10.4 - 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).
10.5 - 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).
10.6 - Letter Loan Agreement dated December 20, 1995 among North
Central Development Company, as borrower, Texas Commerce Bank,
National Association, ("TCB") 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 Company's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1995 (the "November 1995 Form 10-Q").
10.7 - First Amendment to Letter Loan Agreement and Note
Modification Agreement dated December 9, 1997 among North
Central Development Company and its subsidiaries and TCB
(incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1997.)
10.8 - 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).
10.9 - 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).
10.10 - Horizon Mental Health Management, Inc. 1995 Stock Option
Plan (incorporated herein by reference to Exhibit 10.11 to the
November 1995 Form 10-Q).
10.11 - 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).
10.12 - Amendments to 1989 Stock Option Plan and 1995 Stock Option
Plan (incorporated herein by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K dated September 1, 1997).
10.13 - Amendments to 1995 Stock Option Plan and 1995 First Amended
and Restated Stock Option Plan for Eligible Outside Directors
(incorporated herein by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K dated September 1, 1997).
Page 42
<PAGE> 43
10.14 - Horizon Mental Health Management Bonus Plan Fiscal 1997
(incorporated herein by reference to Exhibit 10.36 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A
for the fiscal year ended August 31, 1996 (the "1996 Form
10-K/A")).
10.15 - Horizon Mental Health Management Contingent Bonus Plan
(incorporated herein by reference to Exhibit 10.37 to the
Company's 1996 Form 10-K/A).
10.16 - Horizon Health Corporation Bonus Plan Fiscal 1998
(incorporated herein by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1997).
10.17 - Horizon Health Corporation Bonus Plan Fiscal 1999 (filed
herewith).
10.18 - Amendment dated February 10, 1997 between the Company and
the stockholders of Florida Professional Psychological
Services, Inc. (incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 1997, as filed with the Commission on March 31,
1997 (the "February 1997 Form 10-Q)).
10.19 - Stock Purchase Agreement dated as of February 24, 1997,
among the Company and Geriatric Medical Care, Inc. and its
stockholders, as amended (incorporated herein by reference to
Exhibit 10.1 to the Company's February 1997 Form 10-Q).
10.20 - Share Exchange Reorganization Agreement dated as of April
25, 1997, among the Company, Howard B. Finkel, John Harrison,
Larry Reiff, Argentum Capital Partners, L.P., Denise Dailey,
Ken Dorman, G. Phillip Woellner, and Michael S. McCarthy, and
Specialty Healthcare Management, Inc., as amended by a First
Amendment to Share Exchange Reorganization Agreement dated as
of July 2, 1997 (incorporated herein by reference to Appendix
A to the definitive Proxy Statement filed with the Commission
by the Company on July 11, 1997, relating to a Special Meeting
of Stockholders of the Company to be held on August 11, 1997).
10.21 - Post-Closing Escrow Agreement dated August 11, 1997 between
the Company and Howard B. Finkel, as Agent (incorporated
herein by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K dated August 11, 1997).
10.22 - Registration Rights Agreement dated August 11, 1997, between
the Company and Howard B. Finkel, et al. (incorporated herein
by reference to Exhibit 10.3 to the Company's Current Report
on Form 8-K dated August 11, 1997).
10.23 - Executive Retention Agreement effective September 1, 1997,
between the Company and James Ken Newman (incorporated herein
by reference to Exhibit 10.4 to the Company's Current Report
on Form 8-K dated September 1, 1997).
10.24 - Stock Purchase Agreement, dated October 20, 1997, among the
Company, Dr. Melvyn S. Goldsmith, Ph.D., Barbara C. Goldsmith
and Acorn Behavioral HealthCare Management Corporation
(incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated September 1, 1997).
10.25 - Credit Agreement dated December 9, 1997 among the Company,
Texas Commerce Bank National Association, as Agent, and the
banks named therein (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1997).
10.26 - Stock Purchase Agreement dated as of May 1, 1998, by and
among Ramsay Managed Care, Inc., Ramsay Health Care, Inc., and
the Company (incorporated herein by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K dated June 2,
1998).
Page 43
<PAGE> 44
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 PricewaterhouseCoopers LLP (filed herewith).
27.1 - Financial Data Schedule (filed herewith).
(b) The Company filed the following report on Form 8-K during the
last quarter of the period covered by this report:
Current Report on Form 8-K dated June 2, 1998 and filed with
the Commission on June 17, 1998, which included Item 2
relating to the acquisition of FPM.
Page 44
<PAGE> 45
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: NOVEMBER 25, 1998
HORIZON HEALTH CORPORATION
BY: /s/ JAMES W. MCATEE
-------------------------------------
JAMES W. MCATEE
PRESIDENT, CHIEF EXECUTIVE OFFICER,
AND CHIEF FINANCIAL 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 W. MCATEE Director, President, Chief Executive November 25, 1998
- ------------------------------ Officer, Chief Financial Officer,
James W. McAtee, Secretary and Treasurer
(Principal Executive Officer and
Principal Financial Officer)
/s/ CLIFF W. GARDNER Vice President - Controller, November 25, 1998
- ------------------------------ Principal Accounting Officer
Cliff W. Gardner
/s/ JAMES KEN NEWMAN Director and Chairman of the Board November 25, 1998
- ------------------------------
James Ken Newman,
/s/ JACK R. ANDERSON Director November 25, 1998
- ------------------------------
Jack R. Anderson
/s/ GEORGE E. BELLO Director November 25, 1998
- ------------------------------
George E. Bello
/s/ WILLIAM H. LONGFIELD Director November 25, 1998
- ------------------------------
William H. Longfield
/s/ JAMES E. BUNCHER Director November 25, 1998
- ------------------------------
James E. Buncher
/s/ DONALD E. STEEN Director November 25, 1998
- ------------------------------
Donald E. Steen
/s/ HOWARD B. FINKEL Director November 25, 1998
- ------------------------------
Howard B. Finkel
</TABLE>
Page 45
<PAGE> 46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants................................................................F - 2
Consolidated Balance Sheets at August 31, 1997 and 1998..........................................F - 3
Consolidated Statements of Income
For the Years Ended August 31, 1996, 1997, and 1998.........................................F - 5
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Years Ended August 31, 1996, 1997, and 1998.........................................F - 6
Consolidated Statements of Cash Flows
For the Years Ended August 31, 1996, 1997, and 1998.........................................F - 7
Notes to Consolidated Financial Statements.......................................................F- 9
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Horizon Health Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Horizon Health Corporation and its subsidiaries at August 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended August 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
October 12, 1998
F-2
<PAGE> 48
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
-------------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 5,516,575 $ 6,204,297
Accounts receivable less allowance for uncollectible accounts of
$1,357,423 and $1,902,112 at August 31, 1997 and 1998, respectively 11,995,254 13,464,705
Receivable from employees 63,303 91,715
Prepaid expenses and supplies 182,208 211,288
Income taxes receivable 951,256 317,197
Other receivables 51,877 166,714
Other current assets 170,154 469,540
Current deferred taxes 1,687,512 2,006,880
---------------- ----------------
TOTAL CURRENT ASSETS 20,618,139 22,932,336
---------------- ----------------
PROPERTY AND EQUIPMENT:
Equipment 3,694,717 5,874,100
Building improvements 255,406 421,331
---------------- ----------------
3,950,123 6,295,431
Less accumulated depreciation 2,208,083 2,868,062
---------------- ----------------
1,742,040 3,427,369
Goodwill, net of accumulated amortization of $2,078,177 and
$3,002,194 at August 31, 1997 and 1998, respectively 21,553,594 51,310,574
Contracts, net of accumulated amortization of $2,744,666 and $4,099,012
at August 31, 1997 and 1998, respectively 4,451,426 8,227,689
Other assets 363,208 774,100
---------------- ----------------
TOTAL ASSETS $ 48,728,407 $ 86,672,068
---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 49
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
--------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,747,393 $ 2,314,404
Employee compensation and benefits 6,233,477 6,166,226
Accrued expenses (Note 4) 7,572,929 7,934,916
Current debt maturities - 18,470
---------------- ----------------
TOTAL CURRENT LIABILITIES 15,553,799 16,434,016
Other liabilities 355,803 237,308
Long-term debt, net of current debt maturities - 26,010,901
Deferred income taxes 987,704 1,327,532
---------------- ----------------
TOTAL LIABILITIES 16,897,306 44,009,757
---------------- ----------------
Commitments and contingencies (Note 8)
Minority interest 148,648 -
---------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 500,000 shares authorized; none issued - -
or
outstanding
Common stock, $.01 par value, 40,000,000 shares
authorized at August 31, 1997 and 1998; 6,966,762 shares issued and
outstanding at August 31, 1997 and 7,231,812 shares issued and
outstanding at August 31, 1998 69,668 72,318
Additional paid-in capital 16,739,425 17,984,638
Retained earnings 14,873,360 24,605,355
---------------- ----------------
31,682,453 42,662,311
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,728,407 $ 86,672,068
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 50
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended August 31,
---------------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES:
Contract management revenue $ 95,244,454 $ 102,263,283 $ 102,156,150
Premiums and fees 436,693 6,153,540 21,383,040
Other 557,819 849,972 278,659
--------------- --------------- ---------------
Total revenues 96,238,966 109,266,795 123,817,849
--------------- --------------- ---------------
EXPENSES:
Salaries and benefits 55,809,614 60,048,345 65,725,221
Purchased services 13,880,426 16,466,115 23,205,211
Provision for bad debt 1,435,049 3,033,693 759,467
Other 11,848,384 12,795,910 14,754,707
Depreciation and amortization 1,811,790 2,201,450 3,166,073
Merger expenses (Note 3) -- 3,527,671 --
--------------- --------------- ---------------
Operating expenses 84,785,263 98,073,184 107,610,679
--------------- --------------- ---------------
Operating income 11,453,703 11,193,611 16,207,170
--------------- --------------- ---------------
Other income (expense)
Interest expense (419,421) (402,003) (799,347)
Interest income and other 353,231 523,877 875,268
Loss on sale of equipment -- (1,888) (2,324)
--------------- --------------- ---------------
Income before income taxes 11,387,513 11,313,597 16,280,767
Income tax expense 4,609,360 4,517,688 6,514,812
--------------- --------------- ---------------
Income before minority interest 6,778,153 6,795,909 9,765,955
Minority interest (2,397) (139,893) (33,960)
--------------- --------------- ---------------
Net income $ 6,775,756 $ 6,656,016 $ 9,731,995
=============== =============== ===============
Earnings per common share:
Basic $ 1.03 $ 0.96 $ 1.37
=============== =============== ===============
Diluted $ 0.90 $ 0.87 $ 1.26
=============== =============== ===============
Weighted average shares outstanding:
Basic 6,561,481 6,928,827 7,120,303
=============== =============== ===============
Diluted 7,510,048 7,681,269 7,754,467
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 51
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
Common Shares Additional Treasury
------------------------- Paid-in Retained Deferred Stock,
Shares Amount Capital Earnings Compensation at Cost Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1995 6,314,674 $ $ $ $ $ $
63,202 14,926,859 2,290,643 (50,000) (5,281) 17,225,423
Net income -- -- -- 6,775,756 -- -- 6,775,756
Sale of common shares 55,298 553 59,446 -- -- -- 59,999
Issuance of shares in
conjunction with
purchase
of the Parkside 192,437 1,924 868,076 -- -- -- 870,000
Company
Payments on notes -- -- 50,000 -- -- -- 50,000
receivable
Amortization of
deferred
compensation -- -- -- -- 25,000 -- 25,000
Tax benefit associated
with
stock options -- -- 37,717 -- -- -- 37,717
Exercise of stock 134,440 1,344 104,065 -- -- -- 105,409
options
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 1996 6,696,849 67,023 16,046,163 9,066,399 (25,000) (5,281) 25,149,304
Net income -- -- -- 6,656,016 -- -- 6,656,016
Adjustment applicable
to
transition period -- -- -- (849,055) -- -- (849,055)
(Note 3)
Amortization of
deferred
compensation -- -- -- -- 25,000 -- 25,000
Retirement of treasury -- (55) (5,226) -- -- 5,281 --
shares
Payment on note -- -- 25,000 -- -- -- 25,000
receivable
Exercise of warrants 179,178 1,793 (1,793) -- -- -- --
Tax benefit associated
with
stock options -- -- 511,949 -- -- -- 511,949
Exercise of stock 90,735 907 163,332 -- -- -- 164,239
options
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 1997 6,966,762 69,668 16,739,425 14,873,360 -- -- 31,682,453
Net income -- -- -- 9,731,995 -- -- 9,731,995
Tax benefit associated
with
stock options -- -- 773,229 -- -- -- 773,229
Exercise of stock 265,050 2,650 471,984 -- -- -- 474,634
options
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 1998 7,231,812 $ $ $ $ $ $
72,318 17,984,638 24,605,355 -- -- 42,662,311
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 52
<TABLE>
<CAPTION>
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1996, 1997 AND 1998
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 6,775,756 $ 6,656,016 $ 9,731,995
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,811,790 2,201,450 3,166,073
Loss on sale of equipment -- 1,888 2,324
Minority interest 2,397 139,893 33,960
Deferred income taxes 9,909 94,139 240,337
Non-cash expenses 25,000 25,000 --
Changes in net assets and liabilities:
Decrease (increase) in restricted cash (205,857) 218,606 --
Decrease (increase) in accounts receivable (1,307,286) 1,143,322 (294,089)
Decrease (increase) in income taxes receivable -- -- 951,256
Decrease (increase) in other receivables 285,346 264,589 (460,046)
Decrease (increase) in prepaid expenses and supplies (80,875) (599,553) 80,066
Increase in other assets (127,188) (144,101) (1,009,400)
Increase (decrease) in accounts payable, employee compensation
and benefits, accrued expenses, and other current liabilities 1,525,817 758,732 (4,592,617)
Decrease in payable to health insurance program -- (661,248) --
Increase (decrease) in other non-current liabilities 151,872 (749,532) (118,495)
------------ ------------ ------------
Net cash provided by operating activities 8,866,681 9,349,201 7,731,364
------------ ------------ ------------
Investing activities:
Purchase of property and equipment (393,703) (1,412,441) (864,049)
Proceeds from sale of equipment -- 13,485 9,569
Increase in goodwill and management contracts (123,222) -- --
Payment for purchase of the Parkside Company, net of cash acquired (2,600,000) -- --
Payment for purchase of net assets of National Medical Management (302,817) -- --
Services Payment for purchase of Professional Psychological
Services, Inc., net of cash acquired (786,767) (1,898,230) (1,240,834)
Payment for purchase of Clay Care, Inc., net of cash acquired -- (913,634) --
Payment for purchase of Geriatric Medical Care Inc., net of cash -- (4,577,970) --
acquired
Payment for purchase of Acorn Behavioral HealthCare Management
Corporation, net of cash acquired -- -- (12,726,120)
Payment for purchase of FPM Behavioral Health, Inc., net of cash
acquired -- -- (19,449,488)
------------ ------------ ------------
Net cash used in investing activities (4,206,509) (8,788,790) (34,270,922)
------------ ------------ ------------
Financing activities:
Payments on long-term debt (3,108,047) (4,114,862) (6,520,583)
Payment on notes receivable for purchase of common stock 50,000 25,000 --
Proceeds from long term borrowings 3,291,820 -- 32,500,000
Net proceeds from issuance of common stock 165,408 164,239 474,634
Tax benefit related to stock option exercise 37,717 511,949 773,229
------------ ------------ ------------
Net cash provided by (used in) financing activities 436,898 (3,413,674) 27,227,280
------------ ------------ ------------
Change in cash during transition period -- 23,465 --
Net increase (decrease) in cash and short-term investments 5,097,070 (2,829,798) 687,722
Cash and short-term investments at beginning of year 3,249,303 8,346,373 5,516,575
------------ ------------ ------------
Cash and short-term investments at end of year $ 8,346,373 $ 5,516,575 $ 6,204,297
============ ============ ============
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 419,421 $ 402,003 $ 778,962
============ ============ ============
Income taxes $ 4,930,499 $ 4,584,015 $ 5,212,080
============ ============ ============
</TABLE>
F-7
<PAGE> 53
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental disclosure on non-cash investing activities:
Acquisition of 80% of the common stock of Professional Psychological
Services, Inc., and 100% of the common stock of the Parkside Company
during fiscal year 1996;
Acquisition of Geriatric Medical Care, Inc., Clay Care, inc., and
additional payments for the acquisition of 80% of the common
stock of Professional Psychological Services, Inc., during fiscal
year 1997
Acquisition of Acorn Behavioral Health Care Management Corporation,
FPM Behavioral Health, Inc., and additional payments for the
acquisition of the remaining 20% of the common stock of
Professional Psychological Services, Inc., during fiscal year 1998
Fair value of assets acquired $ 5,815,535 $ 9,004,431 $ 39,717,058
Cash paid (3,825,000) (7,524,968) (33,967,191)
Common stock exchanged (870,000) -- --
------------ ------------ ------------
Liabilities assumed $ 1,120,535 $ 1,479,463 $ 5,749,867
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 54
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1998
1. ORGANIZATION
Horizon Health Corporation (the "Company"), formerly known as Horizon
Mental Health Management, Inc., is a contract manager of clinical and
related services, primarily of mental health programs, offered by general
acute care hospitals in the United States as well as a provider of
employee assistance programs ("EAP") and mental health services to
business and managed care organizations. The management contracts are
generally for terms ranging from three to five years, the majority of
which have automatic renewal provisions. The Company currently has
offices in the Dallas, Texas; Los Angeles, California; Chicago, Illinois;
Tampa, Florida; Orlando, Florida; and Philadelphia, Pennsylvania
metropolitan areas. The Company's National Support Center is in
Lewisville, Texas.
The Company was formed in July 1989 for the purpose of acquiring all the
assets of two companies. One of these companies, known as Horizon Health
Management Company, had been formed in 1981 and since that time had been
engaged in the mental health contract management business. The other
company owned a freestanding psychiatric hospital in California.
Effective March 1, 1990, the assets constituting the contract management
business and the psychiatric hospital of the two companies were
transferred to the Company. On January 3, 1995, the Company acquired the
net assets and operations of National Medical Management Services, a
division of National Medical Enterprises, Inc.
On March 13, 1995, the Company's initial public offering of 3,120,000
shares of common stock at an offering price to the public of $6.67 per
share was declared effective by the Securities and Exchange Commission.
On April 11, 1995, the Company sold an additional 118,150 shares of
common stock at the initial offering price of $6.67 per share pursuant to
the exercise of the overallotment option granted to the underwriters in
the initial public offering.
On April 1, 1996, the Company acquired the Parkside Company ("Parkside"),
a contract manager of mental health services for acute care hospitals.
Parkside has been consolidated with the Company as of April 1, 1996. On
July 31, 1996, the Company acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services,
Inc., also known as Professional Psychological Services, Inc. ("PPS") and
PPS has been consolidated with the Company as of August 1, 1996.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation
("Geriatric"), and Clay Care, Inc., a Texas corporation ("CCI"), and they
have been consolidated with the Company as of March 15, 1997 (see Note
3).
On August 11, 1997, the Company exchanged 1,400,000 shares of its common
stock for all of the outstanding common stock of Specialty Healthcare
Management, Inc. ("Specialty"). Specialty was a privately held contract
manager of mental health and physical rehabilitation treatment programs
for general acute care hospitals. The exchange has been accounted for
under the pooling of interests method. Accordingly, all financial
statements presented have been restated to include the results of
Specialty (see Note 3).
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn Behavioral HealthCare Management Corporation
("Acorn"), a Pennsylvania corporation, and Acorn has been consolidated
with the Company as of October 31, 1997. Effective February 27, 1998, the
Company acquired an additional sixteen percent (16%) of the outstanding
common stock PPS. On March 10, 1998, the Company acquired the remaining
four percent (4%) of the outstanding common stock of PPS. These
acquisitions have been consolidated with the Company as of their
respective effective dates. Effective June 1, 1998, the Company acquired
all of the outstanding capital stock of FPM Behavioral Health, Inc.
("FPM") of Winter Park, Florida. FPM has been consolidated with the
Company as of June 1, 1998 (see Note 3).
F-9
<PAGE> 55
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements include those of the
Company and its wholly-owned and majority owned subsidiaries; investments
in unconsolidated affiliated companies are accounted for on the equity
method.
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 lives of furniture and
fixtures and computer equipment are estimated to be five years and three
years, respectively. Building improvements are recorded at cost and
amortized over the estimated useful lives of the improvements or the
terms of the underlying lease, whichever is shorter. Routine maintenance,
repair items, and customer facility and site improvements are charged to
current operations.
CONTRACTS: Contracts represent the fair value of management contracts and
service contracts purchased and are being amortized using the
straight-line method over seven years.
GOODWILL: Goodwill represents the excess of cost over fair value of net
assets acquired and is being amortized using the straight-line method
over 40 years.
LONG-LIVED AND INTANGIBLE ASSETS: The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-lived Assets and Assets to be Disposed of." Under SFAS
121, the Company recognizes impairment losses on property and equipment
and intangible assets whenever events or changes in circumstances
indicate that the carrying amount of long-lived assets, on an individual
property basis, may not be recoverable through undiscounted future cash
flows. Such losses are determined using estimated fair value or by
comparing the sum of the expected future discounted net cash flows to the
carrying amount of the asset. Impairment losses are recognized in
operating income as they are determined.
REVENUE: Contract management revenue is reported at the estimated net
realizable amounts from contracted hospitals for contract management
services rendered. Adjustments are accrued on an estimated basis in the
period the related services are rendered and adjusted in future periods
as final settlement is determined. Contract management revenue is based
on a per diem calculation using patients per day, a fixed fee,
admissions, discharges, direct expenses, or any combination of the
preceding depending on the specific contract.
Capitated patient services revenues are defined by contract and are
calculated on a per-member/per-month fee, fixed fee and/or a fee for
service basis. Capitated revenue is accrued in the same manner as
contract management revenue. The Company bears the economic risk if
capitated revenue is insufficient to meet the cost of behavioral health
care services incurred by covered members. At August 31, 1998 capitated
revenue was sufficient to meet these costs.
Some management contracts include a clause which states that the Company
will indemnify the hospital for any third-party payor denials, including
Medicare. At the time the charges are denied, an allowance for 100% of
the disputed amount is recorded by the Company. Management believes it
has adequately provided for any potential adjustments that may result
from final settlement of these denials.
F-10
<PAGE> 56
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The customers of the Company are not concentrated in any specific
geographic region, but are concentrated in the health care industry. At
August 31, 1998, the Company had management contracts with 27 hospitals
directly or indirectly owned by Columbia/HCA Healthcare Corporation
("Columbia/HCA"), all of which had programs in operation. These 27
contracts accounted for 12.5% of the Company's net revenues for the year
ended August 31, 1998. In the aggregate, including terminated contracts,
revenues generated by hospitals directly or indirectly owned by
Columbia/HCA accounted for 20.3%, 20.3%, and 15.4% of the Company's net
revenues for the years ended August 31, 1996, 1997, and 1998. Of the 27
Columbia/HCA contracts at August 31, 1998, 9 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.
At August 31, 1997 and 1998, accounts receivable from hospitals directly
or indirectly owned by Columbia/HCA were approximately $2,089,000 and
$1,756,649, respectively. The Company generally does not require
collateral to support outstanding accounts receivable.
ADVERTISING COSTS: The Company expenses advertising costs as incurred.
OUTSTANDING MEDICAL CLAIMS: Outstanding claims include medical claims and
related expenses reported but not paid and an estimate of costs incurred
but not reported (IBNR) to the Company by health care providers.
Management of the Company estimated IBNR costs utilizing the Company's
historical experience and current factors.
INCOME TAXES: The Company has adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS 109 generally requires an asset and liability
approach and requires recognition of deferred tax assets and liabilities
resulting from differing book and tax bases of assets and liabilities. It
requires that deferred tax assets and liabilities be determined using the
tax rate expected to apply to taxable income in the periods in which the
deferred tax asset or liability is expected to be realized or settled.
Under this method, future financial results will be impacted by the
effect of changes in income tax rates on cumulative deferred income tax
balances.
EARNING PER SHARE: Earnings per share has been computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). Basic earnings per share is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if the Company's stock
options and warrants were exercised. Such dilutive potential common
shares are calculated using the treasury stock method. All prior-period
earnings per share data presented has been restated in accordance with
SFAS 128. All shares and per share data, except par value per share, have
been retroactively adjusted to reflect a three for two stock split
effected as a 50% stock dividend by the Company on January 31, 1997.
FINANCIAL INSTRUMENTS: Financial instruments consist of cash and
short-term investments, accounts receivable, current liabilities and
long-term debt obligations. The carrying amounts reported in the balance
sheets for these financial instruments approximate fair value.
USE OF ESTIMATES: The Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
F-11
<PAGE> 57
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
NEW ACCOUNTING STANDARDS: In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components. SFAS
No. 130 is effective for the Company for fiscal years beginning after
December 15, 1997, and requires reclassification of financial statements
in earlier periods for comparative purposes. Adoption of this Statement
is not expected to have a material impact on the presentation of the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
the way that public business enterprises report information about
operating segments in interim and annual financial statements. SFAS No.
131 is effective for the Company for fiscal years beginning after
December 15, 1997, and requires comparative information for earlier years
to be restated. Management has not yet completed its assessment of how
this Statement will impact segment disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Adoption
of this Statement is not expected to have a material impact on the
presentation of the Company's financial statements
3. ACQUISITIONS
FPM BEHAVIORAL HEALTH, INC.
Effective June 1, 1998, the Company acquired all of the outstanding
capital stock of FPM Behavioral Health, Inc. of Winter Park, Florida, and
FPM has been consolidated with the Company as of June 1, 1998. The
Company accounted for the acquisition of FPM by the purchase method as
required by generally accepted accounting principles. FPM provides
managed behavioral health care services, employee assistance programs and
other related health care services to health maintenance organizations
and self-insured employers. FPM had total revenues of approximately $19.9
million for the nine months ended March 31, 1998 and, at February 28,
1998, FPM had 46 contracts covering 1,135,000 lives in nine states. FPM
provides its services both through health care professionals employed by
FPM and through independent health care professionals that have been
contracted with FPM on a fee-for-service basis. At April 1998, the FPM
provider network was composed of over 2,000 providers. The purchase price
was $20.0 million in cash, subject to certain post closing adjustments,
and was funded by incurring debt of $20.0 million under the term loan
facility. The preliminary allocation of the purchase price exceeded the
fair value of FPM's tangible net assets by $22,170,668, of which
$20,665,912 is recorded as goodwill and $1,504,756 as service contracts.
Tangible assets acquired and liabilities assumed totaled $3,301,876 and
$5,472,544, respectively.
The unaudited pro forma combined results of the Company and FPM for the
years ended August 31, 1997 and 1998 after giving effect to certain pro
forma adjustments are presented at the end of this footnote.
F-12
<PAGE> 58
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACORN
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn. The Company accounted for the acquisition of
Acorn by the purchase method as required by generally accepted accounting
principles. Acorn provides employee assistance programs and other related
services to self-insured employers. Acorn had total revenues of
approximately $7.0 million for the year ended August 31, 1997. The
purchase price of approximately $12.7 million in cash was funded from
$1.7 million of working capital and $11.0 million from an advance under
the Company's existing revolving credit facility with Texas Commerce
Bank, N.A., (now known as Chase Bank of Texas, National Association). The
purchase price exceeded the fair value of Acorn's tangible net assets by
$12,629,261, of which $9,258,513 is recorded as goodwill and $3,370,748
as service contracts. Tangible assets acquired and liabilities assumed
totaled $274,929 and $177,832 respectively.
The unaudited pro forma combined results of operations of the Company and
Acorn for the years ended August 31, 1997 and 1998 after giving effect to
certain pro forma adjustments are presented at the end of this footnote.
SPECIALTY HEALTHCARE MANAGEMENT, INC.
On August 11, 1997, the Company exchanged 1,400,000 shares of its common
stock for all of the outstanding common stock of Specialty Healthcare
Management, Inc. The exchange has been accounted for under the pooling of
interests method. Accordingly, all financial statements presented have
been restated to include the results of Specialty. Prior to the exchange
Specialty prepared its financial statements on a December 31 calendar
year end which has subsequently been changed to conform to the Company's
fiscal year end.
For purposes of recording the pooling of interests combination,
Specialty's financial statements for the twelve months ended December 31,
1996 were combined with Horizon Health Corporation's ("Horizon")
financial statements for the twelve months ended August 31, 1996.
Specialty's results of operations for the twelve months ended August 31,
1997 have been combined with Horizon's results of operations for the same
period. The operations of Specialty for the four months ended December
31, 1996, resulting in net revenues and net income of $10.8 million and
$849,055, respectively, have been included in the statement of income for
both the year ended August 31, 1996 and 1997. As a result, an adjustment
was made to stockholders' equity in the consolidated financial statements
of the Company to eliminate the effect of including Specialty's net
income for the four months in both periods. Additionally, the
consolidated statement of cash flows was adjusted to reflect the cash
flows of Specialty for the four months ended December 31, 1996.
F-13
<PAGE> 59
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Combined and separate results of Horizon and Specialty during periods
preceding the exchange were as follows (in thousands):
<TABLE>
<CAPTION>
Nine months
Twelve months ended
ended May 31, 1997
August 31, 1996 (unaudited)
------------------ -------------------
<S> <C> <C>
Revenues:
Horizon $ 62,445 $ 57,894
Specialty 33,794 (a) 23,286
Combined 96,239 81,180
Net Income:
Horizon $ 5,564 $ 5,483
Specialty 1,212 (a) 871
Combined 6,776 6,354
</TABLE>
(a) For the fiscal year ended December 31, 1996.
Merger expenses of $3,527,671, before a related tax benefit of
$1,340,515, include legal, investment banking and accounting fees.
GERIATRIC MEDICAL CARE, INC.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation,
and Geriatric has been consolidated with the Company as of March 15,
1997. The Company accounted for the acquisition of Geriatric by the
purchase method as required by generally accepted accounting principles.
Geriatric is a contract manager of mental health services for acute care
hospitals. Geriatric had total revenues of approximately $5.7 million in
1996 and, at March 15, 1997, had 18 management contract locations, of
which three were not yet in operation. The purchase price of
approximately $4.6 million, of which approximately $4.3 million was paid
at closing from existing cash of the Company, included retiring
essentially all of Geriatric's outstanding debt. The final purchase price
payment of $270,000 was made on April 16, 1997. The purchase price
exceeded the fair value of Geriatric's tangible net assets by $5,005,986,
of which $4,498,038 is recorded as goodwill and $507,948 as management
contracts. Tangible assets acquired and liabilities assumed totaled
$1,042,683 and $1,421,931, respectively. Pro forma financial data is not
presented because the impact of this acquisition is not material to the
Company's results of operations for any period presented.
F-14
<PAGE> 60
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CLAY CARE, INC.
Also effective March 15, 1997, the Company purchased all of the
outstanding capital stock of Clay Care, Inc., a Texas corporation, and
CCI has been consolidated with the Company as of March 15, 1997. The
Company accounted for the acquisition of CCI by the purchase method as
required by generally accepted accounting principles. CCI was a contract
manager of mental health services for acute care hospitals. At March 15,
1997, CCI had management contracts with five hospitals of which four were
in operation and one of which opened in April 1997. CCI had total
revenues of approximately $1.3 million in 1996. A total of $475,000 of
the $1,000,000 purchase price was paid at the closing from existing cash
of the Company. The remaining $525,000 of the total purchase price was
paid by the Company in April 1997 and June 1997. The purchase price
exceeded the fair value of CCI's tangible net assets by $855,738, of
which $714,672 is recorded as goodwill and $141,066 as management
contracts. Tangible assets acquired and liabilities assumed totaled
$201,794 and $57,532, respectively. Pro forma financial data is not
presented because the impact of this acquisition is not material to the
Company's results of operations for any period presented.
PPS
On July 31, 1996, the Company acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services,
Inc., also known as Professional Psychological Services, Inc., and PPS
has been consolidated with the Company as of August 1, 1996. The Company
accounted for the acquisition of PPS by the purchase method as required
by generally accepted accounting principles. Based in Clearwater,
Florida, PPS specializes in full risk, capitated managed behavioral
health programs and employee assistance programs. The final purchase
price of $3,324,310 was based primarily on a multiple of the 1996 pre-tax
income of PPS. The purchase price exceeded the fair value of PPS' net
assets by $3,298,885 which is recorded as goodwill. Assets acquired and
liabilities assumed totaled $540,960 and $515,535, respectively. Cash
payments for the purchase of PPS, net of cash acquired, were $786,767 and
$1,898,230 during 1996 and 1997, respectively. The final payment of
$200,985 was made on September 30, 1997.
On February 27, 1998, the Company acquired an additional sixteen percent
(16%) of the outstanding common stock of PPS. The Company accounted for
the acquisition of PPS by the purchase method as required by generally
accepted accounting principles. The purchase price of $831,879 was based
primarily on a multiple of the 1997 pre-tax income of PPS. The purchase
price exceeded the fair market value of PPS's tangible net assets
acquired by $764,400 of which $560,315 is recorded as goodwill and
$204,085 as service contracts. Tangible assets acquired and liabilities
assumed totaled $147,072 and $79,593, respectively. On March 10, 1998,
the Company acquired the remaining four percent (4%) of the outstanding
common stock of PPS, under similar terms, for a purchase price of
$207,970. The Company accounted for the acquisition by the purchase
method as required by generally accepted accounting principles. The
purchase price exceeded the fair value of PPS's tangible assets acquired
by $192,332 of which $141,311 is recorded as goodwill and $51,021 as
service contracts. Tangible assets acquired and liabilities assumed
totaled $35,536 and $19,898 respectively. The acquisitions were funded by
incurring debt of approximately $1.0 million under the term loan
facility. Pro forma financial data is not presented because the impact of
this acquisition is not material to the Company's results of operations
for any period presented.
F-15
<PAGE> 61
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PARKSIDE COMPANY
Effective April 1, 1996, the Company purchased all of the outstanding
capital stock of the Parkside Company, and Parkside has been consolidated
with the Company as of April 1, 1996. The Company accounted for the
acquisition of Parkside by the purchase method as required by generally
accepted accounting principles. Parkside is a contract manager of mental
health services for acute care hospitals. The purchase price of $3.5
million included approximately $2,600,000 in cash and 192,437 shares of
the Company's common stock. The purchase price exceeded the fair value of
Parkside's tangible net assets by $3,500,000, of which $1,400,000 is
recorded as goodwill and $2,100,000 as management contracts.
NATIONAL MEDICAL MANAGEMENT SERVICES
Effective January 3, 1995, the Company acquired the net assets and
operations of National Medical Management Services, a division of
National Medical Enterprises, Inc. (the "Division") and the Division has
been consolidated with the Company as of January 3, 1995 (see Note 9).
The Company accounted for the acquisition by the purchase method as
required by generally accepted accounting principles. The purchase price
exceeded the fair value of the net assets acquired by $1,120,350, of
which $120,350 is recorded as goodwill and $1,000,000 as management
contacts. Tangible assets acquired and liabilities assumed totaled
$6,755,415 and $2,808,566, respectively.
The following unaudited pro forma financial information gives effect to
the acquisitions by the Company of Acorn and FPM as if the acquisitions
occurred on September 1, 1996.
<TABLE>
<CAPTION>
Year Ended
August 31,
-----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Revenue $ 139,688,095 $ 145,063,467
=============== ===============
Net Income $ 6,286,235 $ 9,245,713
=============== ===============
Net Income per common share:
Basic $ 0.91 $ 1.30
=============== ===============
Diluted $ 0.82 $ 1.19
=============== ===============
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consisted of the following at August 31, 1997 and 1998:
<TABLE>
<CAPTION>
August 31,
-----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Reserve for contract adjustments $ 1,287,664 $ 920,295
Health insurance 936,639 853,561
Outstanding medical claims 416,522 3,002,345
Other 4,932,104 3,158,715
--------------- ---------------
$ 7,572,929 $ 7,934,916
--------------- ---------------
</TABLE>
F-16
<PAGE> 62
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
At August 31, 1997 and 1998, the Company had the following long-term
debt:
<TABLE>
<CAPTION>
August 31,
-----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Chase Bank of Texas, National Association - Advance Term
Loan Facility $ -- $ 23,000,000
---------------
Chase Bank of Texas, National Association - Revolving Credit
Facility -- 3,000,000
SANWA Leasing Corporation -- 29,371
--------------- ---------------
-- 26,029,371
--------------- ---------------
Less current maturities -- 18,470
=============== ===============
$ -- $ 26,010,901
=============== ===============
</TABLE>
The aggregate maturities of long-term debt during the next five fiscal
years are $0 in 1999, $3,460,901 in 2000, $7,600,000 in 2001, $4,600,000
in 2002, and $10,350,000 in 2003.
Effective September 29, 1995, the Company entered into a loan agreement
with Texas Commerce Bank (now known as Chase Bank of Texas, National
Association) for a revolving line of credit with maximum advance
commitment of $11,000,000. On October 16, 1997, the Company increased its
existing revolving line of credit from $11.0 million to $14.0 million.
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Texas Commerce Bank, National Association (now
known as Chase Bank of Texas, National Association), as Agent for itself
and other lenders party to the Credit Agreement for a senior secured
credit facility in an aggregate amount of up to $50.0 million (the "New
Credit Facility"). The New Credit Facility consists of a $10.0 million
revolving credit facility to fund ongoing working capital requirements
and a $40.0 million advance term loan facility to refinance certain
existing debt and to finance future acquisitions by the Company. The New
Credit Facility replaced the Company's existing $14.0 million revolving
credit facility.
The Revolving Credit Facility terminates November 30, 2000 and the
Advance Term Loan Facility has a term of five years, with drawdowns
available until November 30, 1999. Amounts outstanding under the Advance
Term Loan Facility on November 30, 1999 are to be repaid in twelve
quarterly principal payments, beginning February 28, 2000, based upon a
five year amortization schedule with the first eleven principal payments
being 1/20th of the outstanding balance on November 30, 1999, and the
twelfth being the remaining unpaid principal balance. Principal
outstanding under the New Credit Facility bears interest at the "Base
Rate" (the greater of the Agent's "prime rate" or the federal funds rate
plus .5%) plus 0% to .5% (depending on the Company's Indebtedness to
EBITDA Ratio as defined in the Credit Agreement) or the "Eurodollar Rate"
plus .75% to 1.5% (depending on the Indebtedness to EBITDA Ratio), as
selected by the Company. The Company incurs quarterly commitment fees
ranging from .25% to .375% per annum (depending on the Indebtedness to
EBITDA Ratio) on the unused portion of the Revolving Credit Facility
(until November 30, 2000) and unused portion of the Advance Term Loan
Facility (until November 30, 1999). The weighted average interest rate of
the New Credit Facility debt was 6.4375% at August 31, 1998.
F-17
<PAGE> 63
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is subject to certain covenants which include prohibitions
against (i) incurring additional debt or liens, except specified
permitted debt or permitted liens, (ii) certain material acquisitions,
other than specified permitted acquisitions (including any single
acquisition not greater than $10.0 million or cumulative acquisitions not
in excess of $20.0 million during any twelve consecutive monthly
periods), (iii) certain mergers, consolidations or asset dispositions by
the Company or changes of control of the Company, (iv) certain management
vacancies at the Company, and (v) material change in the nature of
business conducted. If the aggregate outstanding principal amount of the
Advance Term Loan Facility equals or exceeds Fifteen Million Dollars
($15,000,000) as of the date ninety (90) days after the end of a Fiscal
year (the "Excess Cash Flow Payment Date") beginning with the fiscal year
ending August 31, 1998, then Borrower shall repay the Advance Term Loan
Facility on or before the Excess Cash Flow Date relating to such fiscal
year in an amount equal to fifty percent (50%) of the Excess Cash Flow,
as defined, calculated for the fiscal year then most recently ended on
the basis of the audited financial statement for such fiscal year. In
addition, the terms of the New Credit Facility require the Company to
satisfy certain ongoing financial covenants. The New Credit Facility is
secured by a first lien or first priority security interest in and/or
pledge of substantially all of the assets of the Company and of all
present and future subsidiaries of the Company.
The Company currently has a capitalized lease for computer equipment with
SANWA Leasing Corporation. The lease contains a bargain purchase option.
6. STOCK OPTIONS
The 1989, 1995 and 1998 Stock Option Plans and the 1995 Stock Option Plan
for Eligible Outside Directors are collectively referred to as "The
Plans."
In accordance with the Plans, as amended, 2,581,843 shares of common
stock have been reserved for grant to key employees, directors and
consultants. Management believes the exercise prices of the options
granted approximated or exceeded the market value of the common stock at
the date of the grant. The options generally vest ratably over five years
from the date of grant and terminate 10 years from the date of grant.
On April 28, 1995 the board of directors created the 1995 Stock Option
Plan for Eligible Outside Directors for outside directors owning less
than 5% of the stock of the Company. 150,000 shares of common stock are
reserved for issuance under this plan. This plan has been amended and
restated to provide for 3,000 option grants to each eligible director
each time he is re-elected to the board after having served as a director
for at least one year since his initial grant under the plan. Options
vest ratably over five years from the date of grant.
On January 23, 1998, the Stockholders of the Company approved the 1998
Stock Option Plan. The purpose of the Plan is to give the Company a
competitive advantage in attracting, retaining and motivating directors,
officers, key employees and consultants and to provide the Company and
its subsidiaries with a stock option plan providing incentives directly
linked to the profitability of the Company's businesses and increases in
shareholder value. Under this plan, 500,000 shares of common stock are
reserved for issuance.
F-18
<PAGE> 64
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the status of the Plans:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- ------------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning 1,411,268 $ 2.33 $ 1,521,328 $ 4.04 $ 1,451,843 $ 4.62
of year
Granted 255,750 11.96 49,500 20.15 186,500 23.37
Exercised 130,690 .79 90,735 1.81 265,050 1.79
Expired or canceled 15,000 6.40 28,250 9.72 12,000 10.31
Outstanding at end of year 1,521,328 $ 4.04 $ 1,451,843 $ 4.62 $ 1,361,293 7.69
Exercisable at end of year 532,452 $ 1.62 $ 728,166 $ 1.98 $ 781,113 2.96
Available for grant at end 304,500 -- 283,250 -- 608,750 --
of year
</TABLE>
The following table summarizes information about options outstanding
under the Plans at August 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Price Outstanding Life Price Outstanding Price
------------------------ -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.50 - $ 4.00 844,593 5.08 $ 2.33 $ 704,037 2.05
$ 7.42 - $ 9.75 161,450 6.91 9.12 47,826 8.58
$14.17 - $26.00 355,250 8.62 19.79 29,250 15.68
</TABLE>
The Company applies APB 25 in accounting for the Plans and recognizes no
compensation cost in net earnings from the grant of options as options
are granted at exercise prices equal to the current stock price. Had
compensation cost been determined under the terms of SFAS 123, the
Company's pro forma 1996, 1997 and 1998 net earnings and earnings per
share would have been:
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ---------------- ---------------
<S> <C> <C> <C>
Net Earnings
As reported $ 6,775,756 $ 6,656,016 $ 9,731,995
Pro forma (unaudited) $ 6,705,592 $ 6,549,799 $ 9,438,256
Earnings per share
Basic
As reported $ 1.03 $ 0.96 $ 1.37
Pro forma (unaudited) $ 1.02 $ 0.95 $ 1.33
Diluted
As reported $ 0.90 $ 0.87 $ 1.26
Pro forma (unaudited) $ 0.89 $ 0.85 $ 1.22
</TABLE>
F-19
<PAGE> 65
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with SFAS 123, the fair value of options at date of grant
was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Risk free interest rate 6.2% 6.3% 6.1%
Expected life (years) 6.6 6.6 6.6
Expected volatility 33.2% 30.3% 30.4%
Expected dividend yield 0.0% 0.0% 0.0%
</TABLE>
In accordance with SFAS 123, the weighted average fair value of options
granted during 1996, 1997 and 1998 was $4.43, $7.28 and $10.59,
respectively.
On April 1, 1996, the Company filed an S-8 registration statement which
registered 2,054,549 shares granted or eligible for granting to employees
and directors under the 1989 and 1995 stock option plans, as amended, and
the outside director stock option plan. This registration includes a
separate reoffer prospectus to allow any shares issued in the future and
most previously exercised shares under the 1989 and 1995 stock options to
be traded at any time without holding period or volume restrictions.
7. INCOME TAXES
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. Income tax expense is
comprised of the following components:
<TABLE>
<CAPTION>
Federal State Total
------------ ------------ ------------
<S> <C> <C> <C>
Year ended August 31, 1996
Current $ 3,835,706 $ 770,743 $ 4,606,449
Deferred 2,606 305 2,911
------------ ------------ ------------
$ 3,838,312 $ 771,048 $ 4,609,360
------------ ------------ ------------
Year ended August 31, 1997
Current $ 3,957,913 $ 465,636 $ 4,423,549
Deferred 84,230 9,909 94,139
------------ ------------ ------------
$ 4,042,143 $ 475,545 $ 4,517,688
------------ ------------ ------------
Year ended August 31, 1998
Current $ 5,526,322 $ 968,030 $ 6,494,352
Deferred 16,471 3,989 20,460
------------ ------------ ------------
$ 5,542,793 $ 972,019 $ 6,514,812
------------ ------------ ------------
</TABLE>
F-20
<PAGE> 66
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred tax asset at August 31, 1997 and 1998
were obtained using the liability method in accordance with SFAS No. 109
and are as follows:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Contracts $ (1,377,276) $ (1,165,792)
Goodwill (463,159) (768,671)
--------------- ---------------
Deferred tax liabilities (1,840,435) (1,934,463)
--------------- ---------------
Accounts receivable 693,562 708,064
Vacation accruals 595,947 638,918
Miscellaneous accruals 398,004 659,898
Fixed assets/intangibles 332,015 171,757
Net operating loss carryforward 520,715 435,174
--------------- ---------------
Deferred tax assets 2,540,243 2,613,811
--------------- ---------------
Net deferred tax asset $ 699,808 $ 679,348
=============== ===============
</TABLE>
At August 31, 1998, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately
$1,100,000. These carryforwards may be utilized to offset future years'
income and will begin to expire during 2006 if unused prior to that date.
These carryforwards are subject to annual utilization limits in
accordance with IRC Section 382.
The following is a reconciliation of income taxes at the U.S. federal
income tax rate to the income taxes reflected in the Consolidated
Statements of Income:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Federal income taxes based on 35% (34% in 1996,
1997) of book income $ 3,871,753 $ 3,846,623 $ 5,698,268
Meals and entertainment, goodwill amortization
and other permanent adjustments 249,236 198,464 252,838
State income taxes and other adjustments 488,371 472,601 563,706
------------ ------------ ------------
$ 4,609,360 $ 4,517,688 $ 6,514,812
------------ ------------ ------------
</TABLE>
F-21
<PAGE> 67
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under
operating leases. The following is a schedule of minimum rental payments
under these leases which expire at various dates:
<TABLE>
<CAPTION>
Year ended August 31,
<S> <C>
1999 $ 1,614,520
2000 1,209,654
2001 964,954
2002 432,157
2003 238,752
----------------
$ 4,460,037
================
</TABLE>
Rent expense for the years ended August 31, 1996, 1997, and 1998 totaled
$864,931, $980,573, and $1,385,301, respectively.
The Company leases a building it occupies as its executive offices and
National Support Center in Lewisville, Texas. In connection with this
lease transaction, the Company guaranteed a loan of approximately
$900,000 by a financial institution to the building owner. The Company
also agreed to purchase the leased building for approximately $4.5
million at the end of the lease term if it is not sold to a third party,
or the Company does not extend its lease.
The Company is insured for professional and general liability on a
claims-made policy, with additional tail coverage being obtained when
necessary. Management is unaware of any claims against the Company that
would cause the final expenses for professional and general liability to
vary materially from amounts provided.
Effective June 1, 1998, the Company acquired all of the outstanding
capital stock of FPM. The purchase price was $20.0 million in cash
subject to certain post-closing adjustments. The post-closing
adjustments, which have not yet been finalized, are limited to
$2,000,000.
Recent amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental
health and physical rehabilitation services. The limitations have
resulted, in some cases, in decreased amounts reimbursed to the Company's
client hospitals. This decrease in reimbursement has, in some cases, led
to the renegotiation of lower contract management fees and in other cases
has resulted in the termination or nonrenewal of the management contract.
Certain of the Company's existing contracts may be similarly
renegotiated.
The Company is involved in litigation arising in the ordinary course of
business, including matters involving professional liability. It is the
opinion of management that the ultimate disposition of such litigation
would not be in excess of any reserves or have a material adverse effect
on the Company's financial position or results of operations.
F-22
<PAGE> 68
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMON STOCK AND WARRANTS
As part of the purchase of National Medical Management Services,
effective January 3, 1995, the Company issued warrants to National
Medical Enterprises, Inc. to purchase 171,793 shares of common stock at
an exercise price of $0.000558 per share. The warrants were exercisable
at any time subsequent to January 3, 1997 and the exercise price and
number of shares were adjustable to maintain proportional ownership of
the Company. The value of the warrants at the date of issuance was
determined to be $389,350. The remaining warrants of 179,178 at August
11, 1997 were exercised in connection with the Specialty exchange (see
Note 3). In conjunction with the purchase transaction the Company issued
additional shares to existing management shareholders, other senior
management and an outside shareholder. The proceeds from the sale of
these shares were used in the purchase transaction. Certain management
acquired shares through note receivable arrangements and the outstanding
balance on these notes has been reflected as a reduction of shareholders'
equity in the statement of changes in stockholders' equity. These notes
were paid in full as of August 31, 1997.
The Board of Directors of the Company approved a three-for-two stock
split effected in the form of a 50% stock dividend, pursuant to which one
additional share of Common Stock of the Company was issued on January 31,
1997 for every two shares of Common Stock held by stockholders of record
at the close of business on January 22, 1997. As a result of such stock
split/dividend, a total of $18,253 originally recorded as additional paid
in capital was reclassified as common stock. Such stock split/dividend
has been retroactively reflected in the consolidated financial statements
included in this report. Upon effecting the stock split/dividend, the
stock options and their related exercise prices were adjusted
proportionately.
In February 1997, the Certificate of Incorporation, as amended, of the
Company was amended to increase the number of authorized shares of Common
Stock, $.01 par value per share, of the Company from 10,000,000 shares to
40,000,000 shares.
In February 1997, the Company entered into a Rights Agreement pursuant to
which it approved the distribution of one Common Stock purchase right,
exercisable under certain conditions, for each outstanding share of
Common Stock of the Company.
10. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." All prior earnings
per share data presented has been restated in accordance with SFAS 128.
The following is a reconciliation of the numerators and the denominators
of the basic and diluted earnings per share computations for net income.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
----------------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------- ---------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount Numerator Denominator Amount
---------- ------------ -------- ----------- ----------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income............ $6,775,756 $ 6,656,016 $ 9,731,995
BASIC EPS ............ 6,775,756 6,561,481 $ 1.03 6,656,016 6,928,827 $ 0.96 9,731,995 7,120,303 $ 1.37
======== ======== =========
EFFECT OF DILUTIVE
SECURITIES
Warrants and
options.......... 948,567 752,442 634,164
----------- ----------- ---------
DILUTED
EPS....................$6,775,756 7,510,048 $ 0.90 $ 6,656,016 7,681,269 $ 0.87 $ 9,731,995 7,754,467 $ 1.26
---------- ----------- -------- ----------- ----------- -------- ----------- ---------- ---------
</TABLE>
F-23
<PAGE> 69
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997 and 1998 certain options to acquire common stock were not
included in certain computations of EPS because the options exercise
price was greater than the average market price of the common shares. The
computation of the quarter ended August 31, 1997 excluded 5,054 options
with an option price of $26.00 The computation of the quarter ended
November 30, 1997 excluded 15,000 options with an option price of $26.00.
The computations of the quarter ended February 28, 1998 excluded 183,222
options with option prices ranging from $22.00 to $26.00. The computation
of the quarter ended May 31, 1998 excluded 182,500 options with option
prices ranging from $23.75 to $26.00. The computation of the quarter
ended August 31, 1998 excluded 355,250 options with option prices ranging
from $14.167 to $26.00. The year end calculations incorporate the above
referenced exclusions within the applicable quarters.
On September 1, 1998, the Company canceled 346,750 options with exercise
prices ranging from $14.167 to $26.00, and granted 141,580 options with
an exercise price of $7.00, the fair market value at the date of grant.
In addition, the Company granted 428,000 options to employees and
directors on September 1, 1998, with an exercise price of $7.00, the fair
market value at the date of grant.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for
fiscal 1997 and 1998:
<TABLE>
<CAPTION>
Operating Net Earnings Per Share
Revenues Income Income Basic Diluted
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Quarter Ended:
November 30, 1996 $ 26,879,954 $ 4,058,712 $ 2,382,979 $ 0.35 $ 0.31
February 28, 1997 26,363,617 3,300,063 2,004,618 0.29 0.26
May 31, 1997 27,936,645 3,284,349 1,966,131 0.28 0.26
August 31, 1997 28,086,580 550,487 302,288 0.04 0.04
Quarter Ended:
November 30, 1997 $ 29,322,412 $ 4,193,319 $ 2,523,995 $ 0.36 $ 0.23
February 28, 1998 29,400,471 4,417,075 2,555,886 0.36 0.33
May 31, 1998 28,827,606 4,081,228 2,726,335 0.38 0.35
August 31, 1998 36,267,360 3,515,548 1,925,779 0.27 0.25
</TABLE>
12. RETIREMENT PLAN
The Company sponsors a 401(k) plan that covers substantially all eligible
employees. The Company can elect to make matching contributions at its
discretion. For the years ended August 31, 1996, 1997 and 1998 the
Company recognized matching contributions of approximately $350,000,
$534,000, and $254,000 respectively.
13. SUBSEQUENT EVENT
ACQUISITION OF CHOICEHEALTH, INC.: Effective October 5, 1998, the Company
acquired all of the outstanding capital stock of ChoiceHealth, Inc.
("ChoiceHealth") of Westminster, Colorado. The Company accounted for the
acquisition of ChoiceHealth by the purchase method as required by
generally accepted accounting principles. ChoiceHealth provides managed
behavioral health care services, employee assistance programs and other
related behavioral health care services to health maintenance
organizations and self-insured employers. ChoiceHealth had annualized
revenues of approximately $7.6 million (unaudited) based on actual
revenues for the eight months ended August 31, 1998. The purchase price
of approximately $2.0 million in cash was funded by $2.0 million from an
advance under the Company's advance term loan facility.
F-24
<PAGE> 70
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED)
STOCK REPURCHASE: On September 21, 1998, the Board of Directors of the
Company authorized the repurchase of up to 1,000,000 shares of its common
stock. The stock repurchase plan authorized the Company to make purchases
from time to time in the open market or through privately negotiated
transactions, depending on market conditions and applicable securities
regulations. The repurchased shares will be added to the treasury shares
of the Company and may be used for employee stock plans and for other
corporate purposes. The stock will be repurchased utilizing available
cash and borrowings under the Company's term bank facility.
F-25
<PAGE> 71
INDEX TO FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Report of Independent Accountants on Financial Statement Schedule.................................................... S-2
Schedule VIII Valuation and Qualifying Accounts...................................................................... S-3
</TABLE>
S - 1
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Horizon Health Corporation
Our audits of the consolidated financial statements referred to in our report
dated October 12, 1998 appearing on page F-2 of this Annual Report on Form 10-K
also included an audit of the Financial Statement Schedule as listed in Item
14(a) of the Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth herein when
read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
October 12, 1998
S-2
<PAGE> 73
================================================================================
HORIZON HEALTH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to Uncollectible Balance
Beginning Costs and Accounts at End
of Period Expenses Written Off Adjustments of Period
------------ ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
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 1,680,396 (1,331,434) 249,099(1,2) 1,355,037
Year ended August 31, 1996:
Allowance for doubtful accounts 1,355,037 1,435,049 (343,990) (58,474)(2) 2,387,622
Year ended August 31, 1997:
Allowance for doubtful accounts 2,387,622 3,033,693 (4,023,355) (40,537)(2) 1,357,423
Year ended August 31, 1998:
Allowance for doubtful accounts $ 1,357,423 759,467 (401,910) 187,132(3) $ 1,902,112
</TABLE>
(1) 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.
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 accrued as a liability.
(3) 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 accrued as a liability. In addition, adjustment reflects
items reserved as other receivables, therefore their reserve is not
included in the allowance for receivables.
S-3
<PAGE> 74
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
<S> <C>
3.1 - Certificate of Incorporation of the Company, as amended (incorporated
herein by reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K dated August 11, 1997).
3.2 - Amended and Restated Bylaws of the Company, as amended (incorporated
herein by reference to Exhibit 3.2 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").
4.1 - Specimen certificate for the Common Stock, $.01 par value of the
Company (incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
4.2 - Rights Agreement, dated February 6, 1997, between the Company and
American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A, Registration No. 000-22123, as
filed with the Commission on February 7, 1997).
10.1 - 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).
10.2 - Sublease Agreement dated as of July 31, 1997 between HHG Colorado,
Inc. and MHM of Colorado, Inc. (incorporated herein by reference to
Exhibit 10.13 to the Company's Form S-1).
10.3 - 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).
10.4 - 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).
10.5 - 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).
10.6 - Letter Loan Agreement dated December 20, 1995 among North Central
Development Company, as borrower, Texas Commerce Bank, National
Association, ("TCB") 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 Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1995 (the "November 1995 Form 10-Q").
10.7 - First Amendment to Letter Loan Agreement and Note Modification
Agreement dated December 9, 1997 among North Central Development
Company and its subsidiaries and TCB (incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended November 30, 1997.)
</TABLE>
<PAGE> 75
<TABLE>
<S> <C>
10.8 - 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).
10.9 - 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).
10.10 - Horizon Mental Health Management, Inc. 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.11 to the November
1995 Form 10-Q).
10.11 - 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).
10.12 - Amendments to 1989 Stock Option Plan and 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.5 to the Company's
Current Report on Form 8-K dated September 1, 1997).
10.13 - Amendments to 1995 Stock Option Plan and 1995 First Amended and
Restated Stock Option Plan for Eligible Outside Directors
(incorporated herein by reference to Exhibit 10.6 to the Company's
Current Report on Form 8-K dated September 1, 1997).
10.14 - Horizon Mental Health Management Bonus Plan Fiscal 1997 (incorporated
herein by reference to Exhibit 10.36 to Amendment No. 1 to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
August 31, 1996 (the "1996 Form 10-K/A")).
10.15 - Horizon Mental Health Management Contingent Bonus Plan (incorporated
herein by reference to Exhibit 10.37 to the Company's 1996 Form
10-K/A).
10.16 - Horizon Health Corporation Bonus Plan Fiscal 1998 (incorporated
herein by reference to Exhibit 10.21 to the Company's Annual Report
on Form 10-K for the fiscal year ended August 31, 1997).
10.17 - Horizon Health Corporation Bonus Plan Fiscal 1999 (filed herewith).
10.18 - Amendment dated February 10, 1997 between the Company and the
stockholders of Florida Professional Psychological Services, Inc.
(incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended February 28, 1997, as filed with
the Commission on March 31, 1997 (the "February 1997 Form 10-Q)).
10.19 - Stock Purchase Agreement dated as of February 24, 1997, among the
Company and Geriatric Medical Care, Inc. and its stockholders, as
amended (incorporated herein by reference to Exhibit 10.1 to the
Company's February 1997 Form 10-Q).
10.20 - Share Exchange Reorganization Agreement dated as of April 25, 1997,
among the Company, Howard B. Finkel, John Harrison, Larry Reiff,
Argentum Capital Partners, L.P., Denise Dailey, Ken Dorman, G.
Phillip Woellner, and Michael S. McCarthy, and Specialty Healthcare
Management, Inc., as amended by a First Amendment to Share Exchange
Reorganization Agreement dated as of July 2, 1997 (incorporated
herein by reference to Appendix A to the definitive Proxy Statement
filed with the Commission by the Company on July 11, 1997, relating
to a Special Meeting of Stockholders of the Company to be held on
August 11, 1997).
</TABLE>
<PAGE> 76
<TABLE>
<S> <C>
10.21 - Post-Closing Escrow Agreement dated August 11, 1997 between the
Company and Howard B. Finkel, as Agent (incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
dated August 11, 1997).
10.22 - Registration Rights Agreement dated August 11, 1997, between the
Company and Howard B. Finkel, et al. (incorporated herein by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K
dated August 11, 1997).
10.23 - Executive Retention Agreement effective September 1, 1997,
between the Company and James Ken Newman (incorporated herein by
reference to Exhibit 10.4 to the Company's Current Report on Form 8-K
dated September 1, 1997).
10.24 - Stock Purchase Agreement, dated October 20, 1997, among the Company,
Dr. Melvyn S. Goldsmith, Ph.D., Barbara C. Goldsmith and Acorn
Behavioral HealthCare Management Corporation (incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated September 1, 1997).
10.25 - Credit Agreement dated December 9, 1997 among the Company, Texas
Commerce Bank National Association, as Agent, and the banks named
therein (incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1997).
10.26 - Stock Purchase Agreement dated as of May 1, 1998, by and among
Ramsay Managed Care, Inc., Ramsay Health Care, Inc., and the Company
(incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 2, 1998).
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 PricewaterhouseCoopers LLP (filed herewith).
27.1 - Financial Data Schedule (filed herewith).
(b) The Company filed the following report on Form 8-K during the last
quarter of the period covered by this report:
</TABLE>
<PAGE> 1
EXHIBIT 10.17
HORIZON HEALTH CORPORATION
BONUS PLAN -- FISCAL 1999
Jim McAtee: $10,000 in cash bonus for each $.01 of earnings per share in
excess of $0.85 that Horizon reports during fiscal 1998. The
maximum bonus to be no more than 60% of his average base salary
for fiscal 1999.
Bob Lefton: $12,000 in cash bonus for each $.01 of earnings per share in
excess of $0.85 that Horizon reports during fiscal 1999. The
maximum bonus to be no more than 75% of his average base salary
for fiscal 1999.
All bonuses to be paid on the first regular payroll date
following the receipt of Horizon audited financials for fiscal
1999.
Gary Kagan: $10,000 for each new mental health and rehabilitation
management contract signed during fiscal 1999 in excess of
twenty. Bonus to be paid upon the opening of the contract
locations.
<PAGE> 1
EXHIBIT 11.1
HORIZON HEALTH CORPORATION
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1997 1998
------------- ------------- ---------------
<S> <C> <C> <C>
BASIC
Net income $ 6,776 $ 6,656 $ 9,732
Weighted Average shares outstanding (basic) (1) 6,561 6,929 7,120
============= ============= ===============
Basic earnings per share $ 1.03 $ 0.96 $ 1.37
============= ============= ===============
DILUTED
Net income $ 6,776 $ 6,656 $ 9,732
Weighted Average shares outstanding (basic) (1) 6,561 6,929 7,120
Effect of dilutive securities (warrants and 949 752(2) 634(2)
options)
Weighted Average shares outstanding (diluted) 7,510 7,681 7,754
------------- ------------- ---------------
Diluted earnings per share $ .90 $ .87 $ 1.26
</TABLE>
(1) The Board of Directors of the Company approved a three-for-two stock
split effected in the form of a 50% stock dividend, pursuant to which
one additional share of Common Stock of the Company was issued on
January 31, 1997 for every two shares of Common Stock held by
stockholders of record at the close of business on January 22, 1997.
Upon effecting the stock split/dividend, the stock options and their
related exercise prices were adjusted proportionately. Such stock
split/dividend has been reflected herein.
(2) During 1997 and 1998 certain options to acquire common stock were not
included in certain computations of EPS because the options exercise
price was greater than the average market price of the common shares.
The computation of the quarter ended August 31, 1997 excluded 5,054
options with an option price of $26.00. The computation of the quarter
ended November 30, 1997, excluded 15,000 options with an option price
of $26.00. The computations of the quarter ended February 28, 1998
excluded 183,222 options with option prices ranging from $22.00 to
$26.00. The computation of the quarter ended May 31, 1998 excluded
182,500 options with option prices ranging from $23.75 to $26.00. The
computation of the quarter ended August 31, 1998 excluded 355,250
options with option prices ranging from $14.167 to $26.00. The year end
calculations incorporate the above referenced exclusions within the
applicable quarters.
<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. Geriatric Medical Care, Inc., a Tennessee corporation.
6. Specialty Rehab Management, Inc., a Delaware corporation.
7. Acorn Behavioral HealthCare Management Corporation, a Pennsylvania
corporation. Purchase date 10/31/97.
8. Horizon Behavioral Services, Inc., a Delaware Corporation formerly known as
FPM Behavioral Health, Inc.
9. FPMBH of Texas, inc., a Delaware Corporation.
10. Florida Psychiatric Associates, Inc., a Florida Corporation.
11. Florida Psychiatric Management, Inc., a Florida Corporation.
12. FPM/Hawaii, Inc., a Delaware Corporation (Merged into Horizon Behavioral
Services, Inc., effective September 1, 1998).
13. FPM Management, Inc., a Florida Corporation (Merged into Horizon Behavioral
Services, Inc., effective September 1, 1998).
14. FPM of Louisiana, Inc., a Delaware Corporation (Merged into Horizon
Behavioral Services, Inc., effective September 1, 1998).
15. FPM of Ohio, Inc., a Delaware Corporation (Merged into Horizon Behavioral
Services, Inc., effective September 1, 1998).
16. FPM of Utah, Inc., a Delaware Corporation (Merged into Horizon Behavioral
Services, Inc., effective September 1, 1998).
17. FPM of West Virginia, Inc., a Delaware Corporation (Merged into Horizon
Behavioral Services, Inc., effective September 1, 1998).
18. FPM Southeast, Inc., a Delaware Corporation (Merged into Horizon Behavioral
Services, Inc., effective September 1, 1998).
19. Arizona Psychiatric Affiliates, Inc., a Delaware Corporation (Merged into
Florida Psychiatric Associates, Inc., effective September 24, 1998).
20. FPMBH Clinical Services, Inc., a Delaware Corporation (Merged into Florida
Psychiatric Associates, Inc., effective September 10, 1998).
21. FPMBH of Arizona, Inc., a Delaware Corporation.
22. ChoiceHealth, Inc., a Colorado Corporation. Purchase date October 5, 1998.
<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 Health Corporation and the
Registration Statement on Form S-8 (No. 333-36953) of Horizon Health Corporation
of our report on Horizon Health Corporation dated October 12, 1998 appearing on
Page F - 2 of this Form 10-K. We also consent to the incorporation by reference
of our report on the Financial Statement Schedule, which appears on page S - 2
of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
November 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE YEAR ENDED AUGUST
31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH ANNUAL 10-K FILING DATED AUGUST 31, 1998. EPS AMOUNTS ARE IN ACCORDANCE
WITH SFAS 128.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 6,204,297
<SECURITIES> 0
<RECEIVABLES> 15,366,817
<ALLOWANCES> 1,902,112
<INVENTORY> 0
<CURRENT-ASSETS> 22,932,336
<PP&E> 6,295,431
<DEPRECIATION> 2,868,062
<TOTAL-ASSETS> 86,672,068
<CURRENT-LIABILITIES> 16,434,016
<BONDS> 0
0
0
<COMMON> 72,318
<OTHER-SE> 42,589,993
<TOTAL-LIABILITY-AND-EQUITY> 86,672,068
<SALES> 0
<TOTAL-REVENUES> 123,817,849
<CGS> 0
<TOTAL-COSTS> 106,851,212
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 759,467
<INTEREST-EXPENSE> 799,347
<INCOME-PRETAX> 16,280,767
<INCOME-TAX> 6,514,812
<INCOME-CONTINUING> 9,731,995
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,731,995
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.26
</TABLE>
