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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, 1999
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
(Exact name of registrant as specified in its charter)
Delaware 75-2293354
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
(Address of principal executive offices, including zip code)
(972) 420-8200
(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
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 4, 1999 there were 6,658,828 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 $30,641,895. 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 21, 2000.
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TABLE OF CONTENTS
HORIZON HEALTH CORPORATION
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PART I PAGE
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 ........................................... 23
Item 6. Selected Financial Data ................................................... 24
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 provider of employee assistance plans ("EAP") and
behavioral health services to business and managed care organizations, and a
leading contract manager of clinical programs offered by general acute care
hospitals in the United States. The Company has grown through acquisitions, as
well as internally, increasing both the variety of its treatment programs and
services and the number of its contracts. As of August 31, 1999, the Company had
272 contracts to provide EAP and managed mental health services covering over
2.4 million lives. Over the last seven years, the Company has increased its
management contracts from 43 to a total of 153 as of August 31, 1999 and
currently has contract locations in 34 states. Of its management contracts, 128
relate to mental health treatment programs and 25 relate to physical
rehabilitation programs. The Company has also developed a proprietary mental
health outcomes measurement system known as CQI+. At August 31, 1999 the Company
provided outcome measurement services at 106 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 treatment 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 treatment programs and to further expand
the range of services which it offers to its client hospitals to include other
clinical and related services and programs. A significant challenge in obtaining
clinical management contracts 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 hospital contractual relationships provide it
with a significant advantage in marketing new contracts. The Company also
believes it has opportunities to cross-sell management services of mental health
and physical rehabilitation programs to client hospitals by marketing its mental
health services to client hospitals for which the Company currently manages only
physical rehabilitation programs, and by marketing 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. Its management contracts increasingly cover 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
employers and health plans and to their respective employees or members.
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.
See Note 12 to the Consolidated Financial Statements of the Company
included herein for certain financial information regarding industry segments of
the Company.
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MENTAL HEALTH SERVICES
The Company believes that there continues 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 manages to include 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, 1999, 72.4%
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 significant 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.
Amendments to the Medicare regulations in 1997, established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. The regulations established a nationwide cap
limiting the reimbursement amount on a per case basis for mental health and
physical rehabilitation services, for Medicare fiscal years beginning October 1,
1997, and later, to $10,534 and $19,104, respectively, subject to adjustments
based on market indices. The reimbursement amounts were raised to $11,100 and
$20,129 respectively for Medicare fiscal years beginning October 1, 1999 and
later. In addition, these amendments
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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 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 1997
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 and in other cases
has resulted in the termination or nonrenewal of the management contract. Seven
fewer contracts were signed by the Company and the direct operating margin of
the Company's mental health contracts has decreased approximately six percentage
points for the fiscal year ended August 31, 1999 as compared to the fiscal year
ended August 31, 1998.
Recent amendments to the Medicare statutes also provide for the
elimination of cost based reimbursement of partial hospitalization services
effective upon 90 days notice from Medicare. Thereafter, reimbursement for
partial hospitalization services will be based on the Medicare outpatient
prospective payment system and will utilize a fixed reimbursement amount per
patient day. The currently proposed reimbursement rate per patient day is a
wage-adjusted rate of $206.71, which will lower Medicare reimbursement levels to
many hospitals for partial hospitalization services and therefore cause lower
fees to be paid to the Company under contracts for partial hospitalization
services.
Revenues from partial hospitalization services were $20.5 million or
20.9% of total contract management revenue for the year ended August 31, 1999.
Of the Company's 153 management contracts at August 31, 1999, 103 or 67.3% of
the contracts include partial hospitalization services. The termination of all
partial hospitalization contracts, while unlikely and not expected, could reduce
operating income by $5 million or more annually.
CQI+ OUTCOMES MEASUREMENT SYSTEM
The Company has developed and markets a proprietary mental health
outcome measurement system. The CQI+ Outcomes Measurement System, (the "CQI+
System") 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, to refine its clinical treatment programs
to improve the care provided, and to market such programs to patients and
providers. When included with contract management services, 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. In addition, the Company provides outcome measurement
services to acute care hospital based programs, free-standing psychiatric
hospitals, community mental health centers, residential treatment centers and
outpatient clinics. 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 multiple
clinical performance (outcome) measures. Each year, the requirements for the
number of measures 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 the requirements
as established by JCAHO. Since developing the CQI+ System over four years ago,
the Company has compiled a database containing outcome measurement data on over
32,000 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.
PSYCHSCOPE OUTCOMES DATABASE SERVICES
The Company developed and began to market in fiscal 1999 PsychScope
Outcomes Database Services, which are based on outcomes measurement data
collected from over 32,000 patients that have participated in the CQI+ Outcomes
Measurement System since 1994. The PsychScope Services allow pharmaceutical
product marketers and researchers, contract research organizations, and research
based teaching universities to access information on the clinical treatment of
patients in hospital based behavioral health programs across the U.S. PsychScope
Services can be accessed by customers as either standard quarterly reports by
diagnosis which track and trend key variables such as drug usage, patient health
status, severity of illness, patient functioning, and symptoms, or as custom
research studies which are completely customer driven. PsychScope Services
support pharmaceutical company drug marketing strategies, the creation of
diagnosis based patient and treatment profiles, the development
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of drug research protocols, and assessment of competitive drug positioning and
usage. The healthcare market for database services is an established and growing
market that is fueled by the highly competitive pharmaceutical market.
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 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.
MANAGED BEHAVIORAL HEALTH CARE SERVICES AND EMPLOYEE ASSISTANCE
PROGRAMS
The Company is a provider of mental health managed care, utilization
management and employee assistance programs (EAP). 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 mental
health services under employer plans and commercial programs. Beginning with the
acquisition of Florida Professional Psychological Services, Inc. ("Florida
PPS"), in August 1996, and continuing with the acquisitions of Acorn Behavioral
Health Care Management Corporation ("Acorn"), Inc. in October 1997, and FPM
Behavioral Health, Inc. ("FPM") in June 1998, 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 ChoiceHealth, Inc.
and Resources in Employee Assistance and Corporate Health, Inc., effective
October 5, 1998 and April 1, 1999, respectively.
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.
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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 128 of the Company's 153 management contracts at August 31,
1999.
Elements of the Continuum of Care
The mental health treatment programs managed by the Company are
designed to provide a continuum of mental health services, consisting of
inpatient, partial hospitalization (or day treatment), outpatient and home
health services.
Inpatient Services. Inpatient services are generally provided to
patients needing the most intensive mental health treatment and who frequently
have accompanying medical care needs. The patient is admitted to the client
hospital and remains there on a 24-hour per day basis throughout the course of
the inpatient treatment, which is continued until the patient can be stabilized
and moved to another level in the continuum of mental health services.
Partial Hospitalization. Partial hospitalization services are provided
for limited periods per day at established intervals with the patient returning
home at the conclusion of each day's treatment. Partial hospitalization services
are designed to be both an alternative to inpatient hospitalization services and
a key component of care following inpatient hospitalization.
Outpatient Services. Outpatient services consist generally of
consultative sessions which can be rendered in a variety of individual or group
settings at various locations, including hospitals, clinics or the offices of
the 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
multiple clinical performance (outcome) measures. 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
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JCAHO's list of acceptable systems. The Company is committed to meeting future
requirements as established by JCAHO. At August 31, 1999, 69 of the Company's
management contracts included the CQI+ System and there were 37 stand-alone CQI+
contracts. 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 32,000 patients. Sample data is
collected from randomly selected patients at admission, discharge and 90 to 180
days after discharge. Quarterly outcome reports include a summary of patient
characteristics and outcome measures. 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.
PSYCHSCOPE OUTCOMES DATABASE SERVICES
The Company developed and began to market in fiscal 1999 PsychScope
Outcomes Database Services, which are based on outcomes measurement data
collected from over 32,000 patients that have participated in the CQI+ Outcomes
Measurement System since 1994. The PsychScope Services allow pharmaceutical
product marketers and researchers, contract research organizations, and research
based teaching universities to access information on the clinical treatment of
patients in hospital based behavioral health programs across the U.S. PsychScope
services are sold to customers in two different service package offerings. The
first offering allows customers to purchase standard quarterly reports which
report key variables such as drug usage, patient health status, severity of
illness, patient functioning, and symptoms by either diagnosis or drug class.
This service allows customers the opportunity to track and trend the data over
time for use in marketing projects and clinical research. The second PsychScope
offering allows customers to design retrospective and prospective research
studies using the PsychScope database. This offering is used to support
pharmaceutical company drug marketing strategies, the creation of diagnosis
based patient and treatment profiles, the development of drug research
protocols, and assessment of competitive drug positioning and usage. The
healthcare market for database services is an established and growing market
that is fueled by the highly competitive pharmaceutical market. Due to the U.S.
launches of several new psychiatric drugs, the psychiatric database services
market is expected to grow significantly.
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)
outpatient rehabilitation. Physical rehabilitation services represented 25 of
the Company's 153 management contracts at August 31, 1999.
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.
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Outpatient Rehabilitation. Outpatient rehabilitation 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.
Cardiac Rehabilitation. The Company manages cardiac rehabilitation
programs for general hospitals. Today, an aging population and increased
incidence of heart disease in both men and women combine to make cardiac
services an essential part of the health care continuum. The Company's Cardiac
Rehabilitation program is based on a comprehensive approach to helping
individuals with heart disease reach their optimum level of functioning through
a program of monitored progressive physical activity, risk factor modification,
education, and psychological support. The programs with congenital heart
disease, as well as individuals who are recovering from a heart attack, angina
pectoris, heart transplant, angioplasty, pacemaker implantation, and
cardiovascular, coronary bypass, or valve surgery.
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 and continuing with the acquisitions of Acorn in October 1997 and
FPM in June 1998. During fiscal year 1999, the Company expanded its services in
this area by acquiring ChoiceHealth and REACH on October 5, 1998 and April 1,
1999, respectively. As of August 31, 1999, the Company provided EAP and managed
mental health care services for approximately 2,420,174 total members of various
health plans with which it had contracted. 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.
The Company utilizes a specialized network of contract providers 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.
OPERATIONS
GENERAL
The Company operates its mental health management contract business
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.
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At August 31, 1999, the Company had approximately 1,007 program
employees at its contract locations and approximately 170 employees at its
regional and national support center offices.
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 23 employees.
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, the Company's managed care business is centered in Orlando,
Florida, and the EAP/Employer business is centered in the Philadelphia
metropolitan area.
The Company's managed care operations have 57 licensed clinicians
providing services in the nine clinic locations in Florida, an additional 193
employees working in administrative and clinical management positions, and has
provider network contracts with approximately 5,160 providers and facilities.
There are 49 employees located in the Philadelphia office. The EAP
network has contracts with approximately 11,500 individual providers located in
all 50 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 or amended 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, 1997, 1998 and 1999, the Company had
successfully retained 78%, 73% and 78%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes that among the most frequent reasons 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, 1999, the Company refunded approximately
$295,718 of its fees in relation to these denials.
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Program Development
The Company assists in the development of each clinical program as
requested by the client hospital, including such matters as licensing,
accreditation, certificate of need approvals and Medicare certification. The
Company also develops and implements a marketing plan for the clinical programs
to be offered by the hospital. Each program is marketed locally with an emphasis
on the hospital addressing the needs of the local community. The Company markets
the clinical programs in the community in the name of the client hospital. The
Company's name is not used and its role is not publicly emphasized in the
operation of the clinical programs offered by its client hospitals. Each patient
is admitted by the medical staff of the client hospital, and all charges for
clinical services provided to the patient accrue directly to the client hospital
or treating physician.
The Company also develops and maintains standardized policy and
procedure manuals, initial and ongoing staff training and education, and
comprehensive quality assurance procedures. Each local program director receives
ongoing support from the National Support Center and regional support staff in
all areas including recruiting, finance, reimbursement, development, marketing
and quality assurance.
Each operating region is responsible for training new employees,
including formalized instruction and on-the-job training. Continuing education
programs are also provided to employees. In addition, the Company has a
centralized orientation program for new program directors and an annual
conference for all program directors.
Program Staffing
Each mental health program has a psychiatric medical director, a
program director who is usually a psychologist or a social worker, a clinical
assessment coordinator and additional social workers or therapists as needed.
Each physical rehabilitation program generally 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 generally 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 usually employees of the
Company. At August 31, 1999, the Company had an average of seven 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 a community relations
coordinator who works with a development committee consisting of Company and
hospital personnel to educate 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 community relations 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, 1999, the Company had a total of 153 management contracts
with general acute care hospitals located in 34 states, as shown below:
<TABLE>
<CAPTION>
NUMBER OF
STATE CONTRACTS
----- ---------
<S> <C>
Alabama................... 2
Arizona................... 4
Arkansas.................. 11
California................ 18
Colorado.................. 1
Connecticut............... 2
Florida................... 8
Georgia................... 6
Illinois.................. 6
Indiana................... 2
Iowa...................... 2
Kansas.................... 1
Kentucky.................. 4
Louisiana................. 1
Maryland.................. 1
Massachusetts............. 7
Michigan.................. 6
Mississippi............... 2
Missouri.................. 5
Nebraska.................. 1
Nevada.................... 2
New Jersey................ 5
New York.................. 5
North Carolina............ 4
Ohio...................... 7
Oklahoma.................. 3
Oregon.................... 1
Pennsylvania.............. 10
South Carolina............ 2
South Dakota ............. 1
Tennessee................. 9
Texas..................... 8
Washington................ 4
Wisconsin................. 2
</TABLE>
Client Hospitals
The Company's clients are primarily small to medium sized hospitals and
include some large tertiary care hospitals. At August 31, 1999, 40.5% of the
Company's management contracts were with proprietary hospitals. The remainder
are with primarily community not-for-profit hospitals.
MANAGED CARE AND EMPLOYEE ASSISTANCE CONTRACTS
The Company delivers its EAP and managed care services through provider
networks as well as through employees and clinics in the Jacksonville, Orlando
and Tampa/St. Petersburg areas. Claims processing is currently done at the
Philadelphia and Orlando locations. The Company intends to consolidate all
claims processing to the Orlando location during fiscal year 2000.
SALES AND MARKETING
At August 31, 1999, the Company's subsidiary Horizon Mental Health
Management employed six full-time Vice Presidents of Development and two Senior
Vice Presidents of Development for mental health 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 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 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
a Senior Vice President of Development will assist the Vice President of
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Development and will sometimes assume the role of point person for the sales
effort and, in addition, 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 and
PsychScope Outcomes Database Services to pharmaceutical companies contract
research organizations, and research based teaching universities. MHO employs a
full-time Director of Market Development and Manager 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. MHO also employs a full-time Director of Market Development who
markets PsychScope services by providing decision support expertise to
researchers and pharmaceutical marketers.
The subsidiary Horizon Behavioral Services markets employee assistance
programs and managed behavioral health programs to employers and HMO's
nationwide. HBS employs a full-time Vice President of Sales and five 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, EAP services are marketed by
the eight 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.
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 limited supply and
there can be no assurance that the Company will be able to attract a sufficient
number of therapists for its growing needs.
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The behavioral health care marketplace includes two large national
providers (Magellan Health Services and Value Options) who control a dominant
share 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 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
("NCQA") accreditation is also becoming a necessary element for behavioral
health care companies and is essential in competing with large national
providers. The Company is actively pursuing NCQA accreditation in fiscal year
2000.
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 sectors.
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 its fee if the fee paid to the Company is
denied by Medicare as a reimbursable cost. Since a substantial portion of the
patients of the programs managed by the Company are covered by Medicare, any
changes which limit or reduce Medicare reimbursement levels could have a
material adverse effect on the Company's client hospitals and, in turn, on the
Company.
The Company is not a provider reimbursed by Medicare or Medicaid but
provides contract management services to such providers. As such, the Company
could be considered subject to such federal and state laws. While the Company
believes that its relationships with its client hospitals, medical directors and
other providers and the fee arrangements with its client hospitals are
consistent with Medicare and Medicaid criteria, those criteria are often
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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. u 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. u 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 1997 Balanced Budget Act added 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 Distinct Part Units ("DPUs") and
are not included in the DRG system. Services provided by DPUs are reimbursed on
an actual cost
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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, 1999,
of the 228 mental health treatment programs managed by the Company, 165 were
geropsychiatric programs for which a substantial majority of the patients are
covered by Medicare. 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 regulations established a nationwide cap
limiting the reimbursement target amount on a per case basis for mental health
and physical rehabilitation service, for Medicare fiscal years beginning October
1, 1997, and later, to $10,534 and $19,104, respectively, subject to adjustments
based on market indices and on costs for other similar units. The reimbursement
amounts were raised to $11,100 and $20,129, respectively for Medicare fiscal
years beginning October 1, 1999, and later. 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. As a result of
these limitations, seven fewer contracts were signed by the Company and the
direct operating margin of the Company's mental health contracts has decreased
approximately six percentage points for the fiscal year ended August 31, 1999 as
compared to the fiscal year ended August 31, 1998.
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, 1999, 21 of the Company's managed
physical rehabilitation programs were exempt from the Prospective Payment
System. The remaining four 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 its fee if the fee paid to the
Company is disallowed as a reimbursable cost. During the fiscal year ended
August 31, 1999, the Company refunded approximately $295,718 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
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repayment obligation could adversely affect the Company. In addition, there can
be no assurance that hospitals which offer mental health or physical
rehabilitation programs now or hereafter managed by the Company will satisfy the
requirements for participation in the Medicare or Medicaid programs.
Payors, including Medicare and Medicaid, are attempting to manage
costs, resulting in declining amounts paid or reimbursed to hospitals for the
services provided. As a result, the Company anticipates that the number of
patients served by general acute care hospitals on a per diem, episodic or
capitated basis will increase in the future. There can be no assurance that if
amounts paid or reimbursed to hospitals decline, it will not adversely affect
the Company.
Medicare regulations limit reimbursement for mental health, physical
rehabilitation and other health care charges paid to related parties. A party is
considered "related" to a provider if it is deemed to be controlled by the
provider. One test for determining control for this purpose is whether the
percentage of the total revenues of the party received from services rendered to
the provider is so high that it effectively constitutes control. Although the
Company believes that it does not receive sufficient revenues from any customer
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 a
particular 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. Section
1320a-7b, prohibits the knowing and willful solicitation or receipt of any
remuneration "in return for" referring an individual, or for recommending or
arranging for the purchase, lease, or ordering, of any item or service for which
payment may be made under Medicare or a state health care program. In addition,
the statute prohibits the offer or payment of remuneration "to induce" a person
to refer an individual, or to recommend or arrange for the purchase, lease, or
ordering of any item or service for which payment may be made under the Medicare
or state health care programs. The statute contains exceptions for certain
discounts, group purchasing organizations, employment relationships, waivers of
coinsurance by community health centers, health plans, and practices defined in
regulatory safe harbors.
Under a significant number of its management contracts, the Company
receives a variable fee related in part to average daily patient census of the
mental health or physical rehabilitation program. In addition, the Company has
entered into agreements with physicians to serve as medical directors at the
mental health and physical rehabilitation programs and facilities managed by the
Company, which generally provide for payments to such persons by the Company as
compensation for their administrative services. These medical directors also
generally provide professional services at such programs and facilities. In
1991, regulations were issued under federal fraud and abuse laws creating
certain "safe harbors" for relationships between health care providers and
referral sources. Any relationship that satisfies the terms of the safe harbor
is considered permitted. Failure to satisfy a safe harbor,
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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 1997 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.
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
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<PAGE> 19
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, 1999, the Company employed 1,491 people, including 1,152
full-time employees, 301 part-time employees, and 38 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, 1999, the Company had administrative services contracts with 202 physicians
to serve as medical directors for 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.
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ITEM 2. PROPERTIES
The Company leases 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, for its contract management
business the Company leases 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 2000 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.
For its managed behavioral health care services and employee assistance
programs, the Company leases approximately 53,549 square feet of office space
primarily in the Orlando, Philadelphia, and Denver metropolitan areas, with
small offices in Phoenix, AZ, Morgantown, WV, and Stow, MA, under lease terms
expiring from April 2000 to October 2004. In addition, the Company leases
approximately 29,393 square feet in various locations throughout the state of
Florida with lease terms expiring from November 1999 to May 2003 for its managed
behavioral health care clinical operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is, and may be in the future, party to litigation arising
in the ordinary 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 substantially cover 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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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........... 54 President, Chief Executive Officer, Secretary and Director
Ronald C. Drabik.......... 53 Senior Vice President - Finance and Administration and Treasurer
Linda A. Laitner.......... 51 Senior Vice President - Operations
David S. Tingue........... 44 Senior Vice President - Marketing
David K. White, Ph.D. .... 43 Senior Vice President - Operations
Frank J. Baumann.......... 40 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 Secretary of the Company since
September 1990 and has been a director of the Company since July 1995. He
formerly served as Chief Financial Officer and Treasurer from September 1990 to
July 1999. He was Executive Vice President - Finance & Administration of the
Company from February 1992 to October 1998 and was a Senior Vice President of
the Company from September 1990 to February 1992.
Ronald C. Drabik has been Senior Vice President - Finance and
Administration and Treasurer since July 12, 1999. He was previously Senior Vice
President, Chief Financial Officer, Secretary and Treasurer of Cuno, Inc., a
multinational manufacturer of filtration products, from 1996 to 1999. He was
previously Vice President Finance for Acme Cleveland, a multinational
manufacturer of telecommunications and electronic products, from 1995 to 1996.
He also served as President and CEO of Met-Coil Systems Corp., a machine tool
manufacturer, from 1993 to 1995.
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, a national managed behavioral healthcare organization, 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 1994.
David S. Tingue 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, a
consulting and service company focusing on disease and population management in
the managed healthcare marketplace, 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, a
United Kingdom based healthcare company, 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., a contract management company
focusing on the public and private sector, from December 1990 to November 1994.
Frank J. Baumann has been Senior Vice President - Operations since
March 22, 1999. He has been President - Specialty Rehab Management since March
1999. He formerly served as a Regional Vice President from March 1997 to March
1999. He was also a Regional Director of Operations from November 1996 to March
1997. He was Chief Executive Officer of Mountain Crest Behavioral Healthcare
Systems, a free-standing psychiatric hospital, from August 1994 to November
1996.
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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.
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<PAGE> 23
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "HORC".
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, 1999:
June 1, 1999 - August 31, 1999 ......................................... $ 7.75 $ 6.38
March 1, 1999 - May 31, 1999 ........................................... 8.00 6.00
December 1, 1998 -- February 28, 1998 .................................. 8.19 5.16
September 1, 1998 -- November 30, 1998 ................................. 9.13 5.63
FISCAL YEAR ENDED AUGUST 31, 1998:
June 1, 1998 -- August 31, 1999 ........................................ 19.00 4.50
March 1, 1998 -- May 31, 1999 .......................................... 24.63 17.25
December 1, 1997 -- February 28, 1998 .................................. 23.75 19.00
September 1, 1997 -- November 30, 1997 ................................. 29.13 20.50
</TABLE>
As of November 3, 1999, there were 40 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 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
opportunities and 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> 24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND STATISTICAL DATA
The selected historical consolidated financial data presented below for
the fiscal years ended August 31, 1999, 1998 and 1997, and at August 31, 1999
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, 1996 and 1995, and at August 31, 1997, 1996 and 1995, 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, 1996 and 1995 with the financial statements of Specialty
for the years ended December 31, 1996 and 1995 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, 1997 and the year ended August 31, 1996. 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.
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<PAGE> 25
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract management revenues $ 97,837 $ 102,156 $ 102,263
Premiums and fees 47,452 21,383 6,154
Other(2) 712 279 850
--------- --------- ---------
Total revenues 146,001 123,818 109,267
Operating expenses:
Salaries and benefits 75,741 65,725 60,048
Medical claims 20,960 9,081 1,830
Purchased services 13,735 14,124 14,636
Provision for bad debts 589 760 3,034
Other 17,877 14,755 12,796
Depreciation and amortization 4,460 3,166 2,201
Merger expenses -- -- 3,528
--------- --------- ---------
Operating income 12,639 16,207 11,194
Interest and other income (expense), net (1,176) 74 120
--------- --------- ---------
Income before income taxes 11,463 16,281 11,314
Income tax expense 4,562 6,515 4,518
--------- --------- ---------
Income before equity in net earnings of
Horizon LLC and minority interest 6,901 9,766 6,796
Equity in net earnings of Horizon LLC -- -- --
Minority interest -- (34) (140)
--------- --------- ---------
Net income $ 6,901 $ 9,732 $ 6,656
========= ========= =========
Basic earnings per share (3) $ 1.00 $ 1.37 $ 0.96
========= ========= =========
Weighted average shares outstanding (3) 6,875 7,120 6,929 (4)
========= ========= =========
Diluted earnings per share (3) $ 0.96 $ 1.26 $ 0.87
========= ========= =========
Weighted average shares and dilutive
potential common shares outstanding (3) 7,200 7,754 7,681 (4)
========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments $ 5,439 $ 6,204 $ 5,517
Working capital 581 6,498 5,064
Intangible assets (net) (5) 60,065 59,538 26,005
Total assets 86,536 86,672 48,728
Total debt 20,036 26,029 --
Stockholders' equity 45,806 42,662 31,682
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
-------------------------------
1996 1995(1)
--------- ---------
(in thousands, except per share data)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract management revenues $ 95,244 $ 68,721
Premiums and fees 437 --
Other(2) 558 634
--------- ---------
Total revenues 96,239 69,355
Operating expenses:
Salaries and benefits 55,810 40,083
Medical claims 147 --
Purchased services 13,733 10,794
Provision for bad debts 1,435 1,680
Other 11,848 9,189
Depreciation and amortization 1,812 1,133
Merger expenses -- --
--------- ---------
Operating income 11,454 6,476
Interest and other income (expense), net (67) (1,003)
--------- ---------
Income before income taxes 11,387 5,473
Income tax expense 4,609 1,695
--------- ---------
Income before equity in net earnings of
Horizon LLC and minority interest 6,778 3,778
Equity in net earnings of Horizon LLC -- 1,568
Minority interest (2) --
--------- ---------
Net income $ 6,776 $ 5,346
========= =========
Basic earnings per share (3) $ 1.03 $ 1.05
========= =========
Weighted average shares outstanding (3) 6,561 (4) 5,111 (4)
========= =========
Diluted earnings per share (3) $ 0.90 $ 0.89
========= =========
Weighted average shares and dilutive
potential common shares outstanding (3) 7,510 (4) 5,997 (4)
========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments $ 8,346 $ 3,249
Working capital 8,751 4,394
Intangible assets (net) (5) 19,887 14,998
Total assets 45,214 33,587
Total debt 3,576 3,216
Stockholders' equity 25,149 17,225
</TABLE>
<TABLE>
<CAPTION>
AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31, MAY 31, FEB. 28,
1999 1999 1999 1998 1998 1998 1998
--------- --------- --------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Covered lives ............................... 2,420,174 2,432,250 2,249,939 2,356,664 1,874,323 762,414 783,560
NUMBER OF CONTRACT LOCATIONS (6):
Contract locations in operation ............. 147 155 156 155 161 166 172
Contract locations signed and unopened ...... 6 9 8 10 11 16 12
--------- --------- --------- --------- --------- ------- -------
Total contract locations .................... 153 164 164 165 172 182 184
========= ========= ========= ========= ========= ======= =======
SERVICES COVERED BY CONTRACTS (6):
Inpatient ................................... 133 144 142 139 149 152 159
Partial hospitalization ..................... 86 95 98 98 102 109 107
Outpatient .................................. 27 27 28 29 32 33 30
Home health ................................. 7 8 10 11 10 13 12
CQI+ ........................................ 106 111 97 83 82 83 88
TYPES OF TREATMENT PROGRAMS (6):
Geropsychiatric ............................. 165 184 180 179 189 193 195
Adult psychiatric ........................... 54 59 63 62 67 75 72
Substance abuse ............................. 4 4 6 8 8 12 12
Physical rehabilitation ..................... 25 23 23 20 20 19 20
Other mental health ......................... 5 4 6 8 9 8 9
<CAPTION>
NOV. 30, AUG. 31,
1997 1997
-------- --------
<S> <C> <C>
STATISTICAL DATA:
Covered lives ............................... 744,103 288,519
NUMBER OF CONTRACT LOCATIONS (6):
Contract locations in operation ............. 179 181
Contract locations signed and unopened ...... 15 14
------- -------
Total contract locations .................... 194 195
======= =======
SERVICES COVERED BY CONTRACTS (6):
Inpatient ................................... 165 166
Partial hospitalization ..................... 103 104
Outpatient .................................. 27 24
Home health ................................. 13 17
CQI+ ........................................ 87 86
TYPES OF TREATMENT PROGRAMS (6):
Geropsychiatric ............................. 193 197
Adult psychiatric ........................... 70 75
Substance abuse ............................. 12 10
Physical rehabilitation ..................... 21 20
Other mental health ......................... 12 9
</TABLE>
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<PAGE> 26
(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 $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, 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, 1998 and 1997 consist primarily of physician contract
management fees and a favorable cost report adjustment. Other revenues for
the year ended August 31, 1999 consist primarily of physician contract
management fees and revenues related to the Company's Mental Health
Outcomes business.
(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) Intangible assets consist of goodwill and service contracts related to
various acquisitions of the Company.
(6) Represents combined information for both Horizon and Specialty.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a provider of employee assistance plans ("EAP") and
behavioral health services to business and managed care organizations, as well
as a leading contract manager of psychiatric and physical rehabilitation
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, 1999, the Company had 272 contracts to
provide EAP and managed behavioral health services covering over 2.4 million
lives. Over the last seven years, the Company has increased its management
contracts from 43 to a total of 153 as of August 31, 1999 and currently has
contract locations in 34 states. Of its management contracts, 128 relate to
mental health treatment programs and 25 relate to physical rehabilitation
programs. The Company has also developed a proprietary mental health outcomes
measurement system known as CQI+. At August 31, 1999, the Company provided
outcome measurement services at 106 contract locations as well as data services
under various arrangements.
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
employers and health plans and to their respective employees or members. 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 client hospitals to include other clinical and related
services and programs. A significant challenge in marketing clinical management
contracts 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 hospital contractual relationships provide it with a
significant advantage in marketing new contracts. The Company also believes it
has opportunities to cross-sell management services of mental health and
physical rehabilitation programs to client hospitals by marketing its mental
health services to client hospitals for which the Company currently manages only
physical rehabilitation programs, and by marketing 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. Its management contracts increasingly cover multiple
services.
REVENUES
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 services, administrative
services only contracts, and at risk managed behavioral health services.
Revenues from employee assistance programs, are typically based on 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 contracts relate to the
management of behavioral health benefits and 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, as well
as the Company's expertise in clinical case management.
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The primary factors affecting revenues derived from managed care
services are the behavioral health benefits provided and the number of members
covered. Fees are based on a per employee per month capitated fee. 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 company owned clinics operated in the state of Florida derive
income from counseling and therapy services rendered. They also provide services
to patients who are employees of customers under various EAP or managed care
contracts.
Mental Health Services
The primary factors affecting revenues in a 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 began to move from
managing one treatment program under a single contract with a hospital to
managing multiple treatment programs under such contract.
Contracts are frequently renewed or amended 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, 1999, 1998 and 1997, the Company had
successfully retained 78%, 73% and 78%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes the most frequent reason its client hospitals do not renew their
contracts with the Company is that the hospitals decide to manage such programs
themselves. In addition, a number of contracts have not renewed since passage of
the 1997 Balanced Budget Act due to a decline in profitability, resulting from
unfavorable changes in Medicare reimbursement.
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. However, additional
changes in Medicare reimbursement may also unfavorably impact these groups as
well.
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.
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The Company's mix of programs has changed over the last four 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 72% 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, 1999 and 1998, the Company refunded approximately $295,718 and
$207,801, respectively, of its fees as a result of these denials.
Amendments to the Medicare regulations in 1997 as part of the Balanced
Budget Act, established maximum reimbursement amounts on a per case basis for
both inpatient mental health and physical rehabilitation services. The
regulations established a nationwide cap limiting the reimbursement amount on a
per case basis for mental health and physical rehabilitation services for
Medicare fiscal years beginning October 1, 1997, and later, to $10,534 and
$19,104, respectively, subject to adjustments based on market indices. The
reimbursement amounts were raised to $11,100 and $20,129 respectively for
Medicare fiscal years beginning October 1, 1999 and later. 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 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 and in other cases
has resulted in the termination or nonrenewal of the management contract.
Primarily as a result of these limitations, seven fewer contracts were signed by
the Company and the direct operating margin of the Company's mental health
contracts has decreased approximately six percentage points for the fiscal year
ended August 31, 1999 as compared to the fiscal year ended August 31, 1998. The
impact of the renegotiation, termination, or nonrenewal of management contracts
was reduced by an increase in same store sales, that is contracts in operation
for the entire year in both the current fiscal year and prior fiscal year, of
3.2% for the fiscal year ended August 31, 1999. In addition, revenues per
average number of contract locations in operation increased 6.2% for fiscal year
1999 as compared to the prior fiscal year.
Recent amendments to the Medicare statutes also provide for the
elimination of cost based reimbursement of partial hospitalization services
effective upon 90 days notice from Medicare. Thereafter, reimbursement for
partial hospitalization services based on the Medicare outpatient prospective
payment system ("PPS") will utilize a fixed reimbursement amount per patient
day. The currently proposed reimbursement rate per patient day is a
wage-adjusted rate of $206.71, which will lower Medicare reimbursement levels to
many hospitals for partial hospitalization services and therefore cause lower
fees to be paid to the Company under contracts for partial hospitalization
services.
Revenues from partial hospitalization services were $20.5 million or
20.9% of total contract management revenue for the year ended August 31, 1999.
Of the Company's 153 management contracts at August 31, 1999, 103 or 67.3% of
the contracts include partial hospitalization services. The termination of all
partial hospitalization contracts, while unlikely and not expected, could reduce
operating income approximately by $5 million annually.
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 could
have a material adverse effect on the business, operations and financial results
of the Company.
OPERATING EXPENSES
The primary factor affecting operating expenses for the Company's
contract management business in any period is the number of programs in
operation in the period. Operating expenses consist primarily of salaries and
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benefits paid to its therapists and supporting personnel. Each mental health
program managed by the Company generally 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 generally 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 program personnel are generally
employees of the Company. At August 31, 1999, the Company had an average of
seven employees per contract location.
Operating expenses for the Company's managed behavioral health care
services and employee assistance programs are comprised of approximately 35%
salaries and benefits and approximately 48% medical claims from network
providers. Medical claims includes payments to independent health care
professionals providing services under the capitated mental health services
contracts and employee assistance programs offered by the Company. Other costs
and expenses include items such as marketing costs and expenses, accounting and
legal fees and expenses, employee relocation expenses, rent, utility and
property taxes.
ACQUISITIONS
Acquisitions during the last four years have significantly affected the
Company's results of operation and financial condition. Details of these
acquisitions are included in Note 3 to Consolidated Financial Statements
included elsewhere herein this Form 10-K.
On April 1, 1999, the Company acquired all of the outstanding capital
stock of REACH for approximately $2.0 million. REACH provides employee
assistance programs and other related behavioral services to self-insured
employers.
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, 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. During the fiscal year ending 1999,
the Company received post closing adjustments, net of tax effects, of $1,222,193
and $1,201,337.
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, 1997, 1996 and
1995. Included in the Company's financial statements for the fiscal years ended
August 31, 1996 and 1995 are the financial results of Specialty for the years
ended December 31, 1996 and 1995, 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. 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.
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,
1999, 1998 and 1997, the percentage relationship to total revenues of certain
costs, expenses and income, and the number of management contracts in operation
and covered lives at the end of each fiscal year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
--------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Contract management revenues .................................. 67.0% 82.5% 93.6%
Premiums and fees ............................................. 32.5 17.3 5.6
Other ......................................................... 0.5 0.2 0.8
--------- -------- -------
Total revenues .................................................. 100.0 100.0 100.0
Operating expenses
Salaries and benefits ......................................... 51.9 53.1 55.0
Medical claims ................................................ 14.4 7.3 1.7
Purchased services ............................................ 9.4 11.4 13.4
Provision for bad debts ....................................... 0.4 0.6 2.8
Other ......................................................... 12.2 11.9 11.7
Depreciation and amortization ................................. 3.0 2.6 2.0
Merger expenses ............................................... -- -- 3.2
--------- -------- -------
Total operating expenses ........................................ 91.3 86.9 89.8
--------- -------- -------
Operating income ................................................ 8.7 13.1 10.2
--------- -------- -------
Interest and other income (expense), net ........................ (0.8) 0.1 0.1
--------- -------- -------
Income before taxes ............................................. 7.9 13.2 10.3
Income tax expense .............................................. 3.2 5.3 4.1
--------- -------- -------
Income before minority interest ................................. 4.7 7.9 6.2
Minority interest ............................................... -- -- 0.1
--------- -------- -------
Net income ...................................................... 4.7% 7.9% 6.1%
========= ========= =======
Number of management contracts in operation, end of year ........ 153 161 181
Covered lives ................................................... 2,420,174 1,874,323 288,519
</TABLE>
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FISCAL YEAR ENDED AUGUST 31, 1999
COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1998
Revenue. Revenues for the fiscal year ended August 31, 1999 were $146.0
million representing an increase of $22.2 million, or 17.9%, as compared to
revenues of $123.8 million for the prior fiscal year. Premiums and fees
increased $26.1 million primarily as a result of revenue recorded for FPM,
ChoiceHealth, and REACH. Horizon acquired 100% of the voting stock of FPM,
ChoiceHealth, and REACH effective June 1, 1998, October 5, 1998, and April 1,
1999, respectively. The increase in premiums and fees were offset by a $3.8
million decrease in contract management and other revenue as compared to fiscal
year 1998. This decrease is due to the average number of contract locations in
operation decreasing from 172.8 for fiscal year 1998 to 155.8 for fiscal year
1999, a decrease of 9.8%. However, same store sales for contract management
revenues, that is contracts in operation for the entire year in both the current
fiscal year and prior fiscal year, increased by $2.2 million or 3.2% for fiscal
year 1999.
Salaries and Benefits. Salaries and benefits for the fiscal year ended
August 31, 1999 were $75.7 million representing an increase of $10.0 million, or
15.2%, as compared to salaries and benefits of $65.7 million for the prior
fiscal year. Salaries and benefits increased by $8.9 million, $2.0 million, and
$110,000 as a result of the acquisitions of FPM, ChoiceHealth, and REACH,
respectively. Salary and benefits cost per full time equivalent for fiscal year
1999 was $58,594 representing an increase of $1,304 per full time equivalent, or
2.3%, as compared to salary and benefits cost of $57,290 per full time
equivalent for the prior fiscal year. These increases are offset by a decrease
of 29.2 full time equivalents resulting from the 9.8% decrease in the average
number of contract locations in operation.
Depreciation and Amortization. Depreciation and amortization expenses
for fiscal year 1999 were $4.5 million representing an increase of $1.3 million
or 40.9%, as compared to depreciation and amortization expenses of $3.2 million
for the prior fiscal year. An increase of $416,000 is due to the amortization of
goodwill of $18.8 million, $2.9 million, and $2.1 million resulting from
acquisitions of FPM, ChoiceHealth, and REACH, respectively. Amortization expense
also increased $201,000 in relation to the value placed on the contracts of FPM,
ChoiceHealth, and REACH. The remaining increase results from the depreciation
expense of additional equipment acquired by acquisition or purchased for the
operation of the Company's contract manangement and managed care businesses.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for fiscal year 1999 were
$53.2 million representing an increase of $14.4 million or 37.5%, as compared to
other operating expenses of $38.7 million for the prior fiscal year. The major
components of the variances between the periods reported are:
Medical claims included an $11.9 million increase for fiscal year 1999
resulting from the acquisitions of FPM on June 1, 1998, ChoiceHealth on October
5, 1998, and REACH on April 1, 1999.
Purchased Services for the fiscal year ended August 31, 1999 were $13.7
million representing a decrease of $389,000, or 2.8%, as compared to $14.1
million for the prior fiscal year.
Bad Debt expense, excluding the recovery of $1.75 million related to
one former Specialty Healthcare Management, Inc. contract, was $2.3 million for
fiscal year 1999, as compared to $759,000 for fiscal year 1998. Bad debt expense
increased $337,000 as a result of the acquisition of FPM, ChoiceHealth, and
Reach. In addition, bad debt expense increased $334,000 due to the declaration
of bankruptcy of one client hospital and $334,000 relating to the contract
termination of two other client hospitals. The remaining increase resulted from
an increase in reserves related to the untimely payments of client hospitals.
Other operating expense was $17.9 million for fiscal year 1999, an
increase of $3.1 million or 20.9% as compared to $14.8 million for fiscal year
1998. Other operating expenses increased $3.1 million, $450,000, and $68,000 as
a result of the acquisitions of FPM, ChoiceHealth, and Reach, respectively. This
increase was offset by a decline of $490,000 in other operating expenses
resulting from the 9.8% decrease in the average number of contract locations in
operation.
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Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for fiscal year 1999 was a net expense of $1.2 million
as compared to $74,000 in net income for the prior fiscal year. This change
results from an increase in interest expense of $664,000 related to amounts
borrowed under the credit facility primarily for acquisitions. In addition,
other income for the prior year 1998 include $623,000 due to the dissolution of
Mountain Crest Hospital in the prior fiscal year.
Income Tax Expense. Income tax expense for fiscal year 1999 was $4.6
million representing a decrease of $1.9 million, or 29.2%, as compared to income
tax expense of $6.5 million for the prior fiscal year. The decrease in income
tax expense was largely due to a corresponding decrease in pre-tax earnings. The
effective tax rates for fiscal years 1999 and 1998 were 39.8% and 40.0%
respectively.
FISCAL YEAR ENDED AUGUST 31, 1998
COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1997
Revenue. Revenues for fiscal year 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
primarily 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, a favorable cost report adjustment for Mountain
Crest Hospital, the prior fiscal year having included.
Salaries and Benefits. Salaries and benefits for fiscal year 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 fiscal 1998 was $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 fiscal year 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, and 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 fiscal year 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 Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for fiscal year 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. The
following components identify the variances between the periods reported.
Medical claims included a $7.3 million increase for the fiscal year
ended August 31, 1998, as compared to the prior fiscal year. This increase is
the result of the acquisitions of Acorn and FPM.
Purchased services for the fiscal year ended August 31, 1998 were $14.1
million representing a decrease of $511,000, or 3.5%, as compared to $14.6
million for the prior fiscal year.
Bad debt expense was $759,000, for the fiscal year ended August 31,
1998, as compared to $3.0 million for the fiscal year ended August 31, 1997. Bad
debt expense of $2.1 million, related to one Specialty contract which terminated
April 30, 1997, was recognized in the fiscal year ended August 31, 1997.
Other operating expense was $14.8 million for the fiscal year ended
August 31, 1998, an increase of $2.0 million, or 15.6%, as compared to $12.8
million for the fiscal year ended August 31, 1997. Other operating expenses
increased $1.3 million resulting from the acquisitions of Acorn and FPM.
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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 fiscal
year ended August 31, 1998.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for fiscal year 1998 was $74,000 in net income, as
compared to $120,000 in net income for the prior fiscal year. This change
primarily results from an increase in interest expense of $405,000 related to
amounts borrowed under the Company's new credit facility primarily 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.
Income Tax Expense. Income tax expense for fiscal year 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. The effective tax rates for fiscal years 1998 and 1997 were 40.0% and
39.9% respectively.
LIQUIDITY AND CAPITAL RESOURCES
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with 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 "Credit Facility"). The Credit Facility consisted of a $10.0 million
revolving credit facility to fund ongoing working capital requirements (the
"Revolving Credit Facility") and an initial $40.0 million term loan facility to
refinance certain existing debt and to finance future acquisitions by the
Company (the "Advance Term Loan Facility"). The Credit Facility replaced the
Company's existing $14.0 million revolving credit facility. At August 31, 1999,
the Company had $20.0 million outstanding against the now $29.0 million term
loan facility.
The following summary of certain material provisions of the Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Credit Agreement, a copy of which was filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter
ended November 30, 1997, as filed with the Securities and Exchange Commission
(the "Commission") on December 19, 1997, which is herein incorporated by
reference thereto.
The Company is the borrower under the Credit Facility which is
unconditionally guaranteed by all material subsidiaries of the Company. The
Revolving Credit Facility terminates November 30, 2000 and the Term Loan
Facility has a term of five years, with drawdowns available until November 30,
1999. Once a drawdown is made under the Term Loan Facility, the commitment
thereunder will be reduced by the amount funded. Amounts outstanding under the
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 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,
unless advance approval or waivers are obtained, 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) declaring, ordering or
paying any sum for any dividend or other distribution (v) certain management
vacancies at the Company, and (vi) material change in the nature of business
conducted. In addition,
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the terms of the Credit Facility require the Company to satisfy certain ongoing
financial covenants. The 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 is also subject to a provision requiring a prepayment of a
portion of the outstanding advance term loan balance. If the aggregate
outstanding principal amount of the term loans equals or exceeds $15 million as
of the date ninety days after the end of a fiscal year, the Company is required
to prepay the term loans in an amount equal to 50% of the excess cash flow (as
defined in the credit agreement) calculated for the fiscal year then most
recently ended based on the audited financial statements of the Company. The
Company was subject to an excess cash flow prepayment requirement of
approximately $4.5 million for fiscal year 1999, all of which had been paid as
of August 31, 1999.
As of September 30, 1998, the Credit Facility was amended to allow the
Company to finance, under the Term Loan Facility, the redemption or repurchase
of its capital stock up to $9.0 million. As of August 31, 1999, the Company had
repurchased 766,100 shares of common stock, for approximately $5.6 million (of
which 162,778 shares have been reissued pursuant to the exercise of certain
stock options). As a result of this amendment, a limit of $10.0 million for
cumulative acquisitions was imposed for the period of September 30, 1998,
through August 31, 1999, which limit has now expired.
Effective September 1996, the Company entered into a lease agreement
with a term of five years for a building which had been constructed to the
Company's specifications for its National Support Center. In connection with the
lease transaction, the Company guaranteed a loan of approximately $900,000. The
loan was by a financial institution to the owner. The Company also agreed to
purchase the leased building for approximately $4.5 million at the end of the
lease term in September 2001 if either the building is not sold to a third party
or the Company does not extend its lease. The Company's current intention is to
extend the lease.
The Company believes that its future cash flow from operations,
(subject to the potential unfavorable impacts of additional changes in Medicare
reimbursement discussed previously under "Revenues") cash of $5.4 million at
August 31, 1999 and the $10.0 million currently available under the revolving
credit facility will be sufficient to cover cash requirements over the next
twelve months, including estimated capital expenditures of $800,000 and
scheduled repayments of term loan debt of approximately $4.0 million. The
Company generated $11.5 million in net cash from operations during the year
ended August 31, 1999. The Company may require additional capital to fund any
further acquisitions, $9.0 million of which is available under the current
acquisition line.
Effective April 1, 1999, the Company acquired all of the outstanding
capital stock of REACH for approximately $2.0 million. The acquisition was
funded by incurring debt of $2.0 million under the term loan facility.
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 of 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. In the Specialty
transaction, 1,400,000 shares of Horizon common stock were issued and exchanged
for all outstanding shares of Specialty capital stock. Upon the acquisition, the
Specialty outstanding bank indebtedness of approximately $3.2 million was paid
in full.
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Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric. 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. 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 for approximately $3.3 million. In February and March 1998, the
Company acquired the remaining outstanding common stock of PPS for approximately
$1,030,000.
The Company acquired the assets of National Medical Management Services
effective January 1, 1995. In the transaction, Specialty paid approximately
$3.95 million in cash and a note of approximately $731,000 payable to NME as
payment for the assets. The Company also issued to NME a warrant to acquire
common stock of Specialty, which warrant was subsequently exercised as part of
Horizon's acquisition of Specialty in August 1997. The NME promissory note was
paid in January 1996. In April, 1996 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.
CERTAIN EARNINGS DATA
The following table sets forth for the fiscal years ended August 31,
1999 and 1998, diluted earnings per share based on net income plus amortization
expense related to goodwill, net of tax, and operating cash flow per share based
on net income plus depreciation and amortization expense, less capital
expenditures.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Earnings per share
(Net income plus amortization related to goodwill, net of tax) $1.09 $1.34
Operating cash flow per share
(Net income plus depreciation and amortization, less capital expenditures) $1.44 $1.55
</TABLE>
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. 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 August 31, 1999 it had
completed approximately 95% 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 5% of the
initiatives are in process and are expected to be completed by December 31,
1999.
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<TABLE>
<CAPTION>
PERCENT
YEAR 2000 INITIATIVE TIME PERIOD COMPLETE
-------------------- ----------- --------
<S> <C> <C>
Initial IT systems identification and assessment April 1998 to September 1999 100%
Remediation and testing of IT systems July 1998 to November 1999 95%
Identification and assessment of non-IT systems September 1998 to October 1999 100%
Remediation and testing of non-IT systems April 1999 to December 1999 95%
</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 November 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 November
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 $150,000, which expenditures will be funded from the operating cash
flows. The $150,000 relates to analysis, repair or replacement of existing
software, upgrades of existing software or evaluation of information received
from significant suppliers or customers. Such an amount would represent an
immaterial percentage of the Company's total actual and anticipated IT
expenditures for fiscal 1999 and 1998. As of October 20, 1999, the Company had
incurred costs of approximately $110,000 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. 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 completed an 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 been developed for dealing with the most reasonably likely worse case
scenario.
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
Page 37
<PAGE> 38
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.
INFLATION
The Company's management contracts and employee assistance 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 no significant effects 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, 1999, the Company had approximately $20.0 million of debt
obligations outstanding with an interest rate of 6.50%. A hypothetical 10%
change in the effective interest rate for these borrowings, assuming debt levels
as of August 31, 1999, would change annual interest expense by approximately
$130,000.
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 21, 2000 (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.
Mr. Howard B. Finkel, who had served as a director since August 1997,
resigned effective October 27, 1999.
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
None.
Page 40
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - Reference is made to the Index to
Consolidated Financial Statements appearing at page F-1 of
this report.
(2) Financial Statement Schedules - 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).
10.1 - Agreement dated August 31, 1999 between Horizon Health
Corporation, Inc. and Ronald C. Drabik regarding severance
arrangements (filed herewith).
10.2 - 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").
10.3 - 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.)
Page 41
<PAGE> 42
10.4 - Second Amendment to Credit Agreement and Third Amendment to
Letter Loan Agreement dated as of September 30, 1998, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1998).
10.5 - Third Amendment to Credit Agreement and Fourth Amendment to
Letter Loan Agreement dated as of November 6, 1998, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (filed herewith).
10.6 - Fourth Amendment to Credit Agreement and Fifth Amendment to
Letter Loan Agreement dated as of October 12,, 1999, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (filed herewith).
10.7 - 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).
10.8 - 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).
10.9 - Horizon Mental Health Management, Inc. 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.11 to the
November 1995 Form 10-Q).
10.10 - 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).
10.11 - 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).
10.12 - 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).
10.13 - Amendment to 1995 Amended and Restated Stock Option Plan for
Eligible Outside Directors (filed herewith).
10.14 - Horizon Health Corporation 1998 Stock Option Plan (filed
herewith).
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 1999 (incorporated
herein by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1998).
10.17 - Horizon Health Corporation Bonus Plan Fiscal 2000 (filed
herewith).
10.18 - 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).
Page 42
<PAGE> 43
10.19 - 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).
10.20 - 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).
10.21 - 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 - Statement Regarding Computation of Per Share Earnings (filed
herewith).
21 - List of Subsidiaries of the Company (filed herewith).
23 - Consent of PricewaterhouseCoopers LLP (filed herewith).
27 - Financial Data Schedule (filed herewith).
(b) The Company filed no reports on Form 8-K during the last quarter
of the period covered by this report:
Page 43
<PAGE> 44
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 5, 1999
HORIZON HEALTH CORPORATION
BY: /S/ Ronald C. Drabik
---------------------------------
RONALD C. DRABIK
SENIOR VICE PRESIDENT - FINANCE
AND ADMINISTRATION AND TREASURER
(PRINCIPAL FINANCIAL AND
ACCOUNTING 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 5, 1999
- ------------------------------------- Officer and Secretary
James W. McAtee (Principal Executive Officer)
/s/ RONALD C. DRABIK Senior Vice President - Finance and November 5, 1999
- ------------------------------------- Administration and Treasurer
Ronald C. Drabik (Principal Financial and Accounting
Officer)
/s/ JAMES KEN NEWMAN Director and Chairman of the Board November 5, 1999
- -------------------------------------
James Ken Newman
/s/ JACK R. ANDERSON Director November 5, 1999
- -------------------------------------
Jack R. Anderson
/s/ GEORGE E. BELLO Director November 5, 1999
- -------------------------------------
George E. Bello
/s/ WILLIAM H. LONGFIELD Director November 5, 1999
- -------------------------------------
William H. Longfield
/s/ JAMES E. BUNCHER Director November 5, 1999
- -------------------------------------
James E. Buncher
/s/ DONALD E. STEEN Director November 5, 1999
- -------------------------------------
Donald E. Steen
</TABLE>
Page 44
<PAGE> 45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................................................2
Consolidated Balance Sheets at August 31, 1999 and 1998...........................................................3
Consolidated Statements of Income
For the Years Ended August 31, 1999, 1998, and 1997...............................................................5
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended August 31, 1999, 1998, and 1997...............................................................6
Consolidated Statements of Cash Flows
For the Years Ended August 31, 1999, 1998, and 1997...............................................................7
Notes to Consolidated Financial Statements........................................................................9
</TABLE>
F-1
<PAGE> 46
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, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended August 31, 1999, 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 14, 1999
F-2
<PAGE> 47
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,438,510 $ 6,204,297
Accounts receivable less allowance for doubtful
accounts of $2,980,849 and $1,902,112 at August 31,
1999 and 1998, respectively 12,885,399 13,464,705
Prepaid expenses and supplies 842,701 211,288
Income taxes receivable 363,920 317,197
Other receivables 200,394 258,429
Other current assets 459,256 469,540
Current deferred taxes 2,485,296 2,006,880
----------- -----------
TOTAL CURRENT ASSETS 22,675,476 22,932,336
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 7,028,809 5,874,100
Building improvements 454,902 421,331
----------- -----------
7,483,711 6,295,431
Less accumulated depreciation 4,192,437 2,868,062
----------- -----------
TOTAL PROPERTY AND EQUIPMENT 3,291,274 3,427,369
Goodwill, net of accumulated amortization of $4,389,113
and $3,002,194 at August 31, 1999 and 1998, respectively 53,036,992 51,310,574
Contracts, net of accumulated amortization of $5,749,991
and $4,099,012 at August 31, 1999 and 1998, respectively 7,027,775 8,227,689
Other noncurrent assets 504,228 774,100
----------- -----------
TOTAL ASSETS $86,535,745 $86,672,068
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 48
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,254,577 $ 2,314,404
Employee compensation and benefits 6,929,722 6,166,226
Medical claims payable 4,558,823 3,002,345
Accrued expenses (Note 4) 5,977,704 4,932,571
Current debt 35,706 18,470
Current portion long-term debt 3,338,000 --
------------ ------------
TOTAL CURRENT LIABILITIES 22,094,532 16,434,016
Other noncurrent liabilities 355,191 237,308
Long-term debt, net of current portion 16,662,000 26,010,901
Deferred income taxes 1,618,169 1,327,532
------------ ------------
TOTAL LIABILITIES 40,729,892 44,009,757
------------ ------------
Commitments and contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 500,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par value, 40,000,000 shares authorized;
7,267,750 shares issued and 6,664,428 shares outstanding
at August 31, 1999, and 7,231,812 shares issued and
outstanding at August 31, 1998 72,678 72,318
Additional paid-in capital 18,641,228 17,984,638
Retained earnings 31,506,116 24,605,355
Treasury stock (4,414,169) --
------------ ------------
45,805,853 42,662,311
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 86,535,745 $ 86,672,068
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 49
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended August 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Contract management revenue $ 97,836,682 $ 102,156,150 $ 102,263,283
Premiums and fees 47,451,923 21,383,040 6,153,540
Other 711,744 278,659 849,972
------------- ------------- -------------
Total revenues 146,000,349 123,817,849 109,266,795
------------- ------------- -------------
EXPENSES:
Salaries and benefits 75,741,311 65,725,221 60,048,345
Medical claims 20,959,797 9,080,825 1,830,360
Purchased services 13,735,058 14,124,386 14,635,755
Provision for doubtful accounts 588,705 759,467 3,033,693
Other 17,877,120 14,754,707 12,795,910
Depreciation and amortization 4,459,600 3,166,073 2,201,450
Merger expenses (Note 3) -- -- 3,527,671
------------- ------------- -------------
Operating expenses 133,361,591 107,610,679 98,073,184
------------- ------------- -------------
Operating income 12,638,758 16,207,170 11,193,611
------------- ------------- -------------
Other income (expense):
Interest expense (1,430,985) (799,347) (402,003)
Interest income and other 255,285 872,944 521,989
------------- ------------- -------------
Income before income taxes 11,463,058 16,280,767 11,313,597
Income tax provision 4,562,297 6,514,812 4,517,688
------------- ------------- -------------
Income before minority interest 6,900,761 9,765,955 6,795,909
Minority interest -- (33,960) (139,893)
------------- ------------- -------------
Net income $ 6,900,761 $ 9,731,995 $ 6,656,016
============= ============= =============
Earnings per common share:
Basic $ 1.00 $ 1.37 $ 0.96
============= ============= =============
Diluted $ 0.96 $ 1.26 $ 0.87
============= ============= =============
Weighted average shares outstanding:
Basic 6,874,646 7,120,303 6,928,827
============= ============= =============
Diluted 7,199,677 7,754,467 7,681,269
============= ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE> 50
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional
Stock Paid-in Retained Deferred Treasury
Shares Amount Capital Earnings Compensation Shares
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996 6,696,849 $ 67,023 $ 16,046,163 $ 9,066,399 $ (25,000) --
Net income -- -- -- 6,656,016 -- --
Adjustment applicable to
transition period (Note 3) -- -- -- (849,055) -- --
Amortization of deferred
compensation -- -- -- -- 25,000 --
Retirement of treasury shares -- (55) (5,226) -- -- --
Payment on note receivable -- -- 25,000 -- -- --
Exercise of warrants 179,178 1,793 (1,793) -- -- --
Tax benefit associated with
stock options exercised -- -- 511,949 -- -- --
Exercise of stock options 90,735 907 163,332 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1997 6,966,762 69,668 16,739,425 14,873,360 -- --
Net income -- -- -- 9,731,995 -- --
Tax benefit associated with
stock options exercised -- -- 773,229 -- -- --
Exercise of stock options 265,050 2,650 471,984 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1998 7,231,812 72,318 17,984,638 24,605,355 -- --
Net income -- -- -- 6,900,761 -- --
Purchase of treasury stock -- -- -- -- -- 766,100
Tax benefit associated with
stock options exercised -- -- 1,236,320 -- -- --
Exercise of stock options:
Issuance of treasury stock -- -- (681,623) -- -- (162,778)
Newly issued shares 35,938 360 101,893 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1999 7,267,750 $ 72,678 $ 18,641,228 $ 31,506,116 $ -- 603,322
============ ============ ============ ============ ============ ============
<CAPTION>
Treasury
Stock,
at Cost Total
------------ ------------
<S> <C> <C>
Balance at August 31, 1996 $ (5,281) $ 25,149,304
Net income -- 6,656,016
Adjustment applicable to
transition period (Note 3) -- (849,055)
Amortization of deferred
compensation -- 25,000
Retirement of treasury shares 5,281 --
Payment on note receivable -- 25,000
Exercise of warrants -- --
Tax benefit associated with
stock options exercised -- 511,949
Exercise of stock options -- 164,239
------------ ------------
Balance at August 31, 1997 -- 31,682,453
Net income -- 9,731,995
Tax benefit associated with
stock options exercised -- 773,229
Exercise of stock options -- 474,634
------------ ------------
Balance at August 31, 1998 -- 42,662,311
Net income -- 6,900,761
Purchase of treasury stock (5,617,400) (5,617,400)
Tax benefit associated with
stock options exercised -- 1,236,320
Exercise of stock options:
Issuance of treasury stock 1,203,231 521,608
Newly issued shares -- 102,253
------------ ------------
Balance at August 31, 1999 $ (4,414,169) $ 45,805,853
============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 51
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended August 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 6,900,761 $ 9,731,995 $ 6,656,016
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,459,600 3,166,073 2,201,450
Minority interest -- 33,960 139,893
Deferred income taxes 198,586 240,337 94,139
Non-cash expenses (1,247) 2,324 26,888
Changes in operating assets and liabilities:
Decrease in restricted cash -- -- 218,606
Decrease (increase) in accounts receivable 887,387 (294,089) 1,143,322
Decrease (increase) in income taxes receivable (46,723) 951,256 --
Decrease (increase) in other receivables 58,035 (460,046) 264,589
Decrease (increase) in prepaid expenses and supplies (605,183) 80,066 (599,553)
(Increase) in other assets (497,920) (1,009,400) (144,101)
Increase (decrease) in accounts payable, employee compensation and
benefits, medical claims payable, and accrued expenses 17,274 (4,592,617) 758,732
(Decrease) in payable to health insurance program -- -- (661,248)
Increase (decrease) in other noncurrent liabilities 117,883 (118,495) (749,532)
------------ ------------ ------------
Net cash provided by operating activities 11,488,453 7,731,364 9,349,201
------------ ------------ ------------
Investing activities:
Purchase of property and equipment (985,057) (864,049) (1,412,441)
Proceeds from sale of equipment 5,275 9,569 13,485
Payment for purchase of Professional Psychological Services, Inc., net of cash
acquired -- (1,240,834) (1,898,230)
Payment for purchase of Clay Care, Inc., net of cash acquired -- -- (913,634)
Payment for purchase of Geriatric Medical Care Inc., net of cash acquired -- -- (4,577,970)
Payment for purchase of Acorn Behavioral HealthCare Management Corporation
net of cash acquired -- (12,726,120) --
Payment for purchase of Resources in Employee Assistance and Corporate Health,
Inc., net of cash acquired (1,936,352) -- --
Payment for purchase of ChoiceHealth, Inc. net of cash acquired (1,847,390) -- --
Payment for purchase of FPM Behavioral Health, Inc., net of cash acquired -- (19,449,488) --
Proceeds from purchase price adjustment of FPM Behavioral Health, Inc. 2,423,531 -- --
------------ ------------ ------------
Net cash used in investing activities (2,339,993) (34,270,922) (8,788,790)
------------ ------------ ------------
Financing activities:
Payments on long-term debt (20,605,531) (6,520,583) (4,114,862)
Borrowing under lines of credit 14,500,000 32,500,000 --
Payment on notes receivable for purchase of common stock -- -- 25,000
Net proceeds from stock options exercised 102,253 474,634 164,239
Tax benefit associated with stock options exercised 1,236,320 773,229 511,949
Purchase of treasury stock (5,617,400) -- --
Issuance of treasury stock 470,111 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (9,914,247) 27,227,280 (3,413,674)
------------ ------------ ------------
Change in cash during transition period -- -- 23,465
Net (decrease) increase in cash and cash equivalents (765,787) 687,722 (2,829,798)
Cash and cash equivalents at beginning of year 6,204,297 5,516,575 8,346,373
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,438,510 $ 6,204,297 $ 5,516,575
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 1,450,459 $ 778,962 $ 402,003
============ ============ ============
Income taxes $ 3,616,830 $ 5,212,080 $ 4,584,015
============ ============ ============
</TABLE>
F-7
<PAGE> 52
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 (A) 1998 (B) 1997 (C)
------------ ------------ ------------
<S> <C> <C> <C>
Non-cash investing activities:
Fair value of assets acquired $ 4,527,904 $ 39,717,058 $ 9,004,431
Cash paid (1,626,167) (33,967,191) (7,524,968)
------------ ------------ ------------
Liabilities assumed $ 2,901,737 $ 5,749,867 $ 1,479,463
============ ============ ============
</TABLE>
(A) Acquisition of ChoiceHealth, Inc., Resource in Employee Assistance and
Corporate Health, Inc., and the purchase price adjustments of FPM
Behavioral Health, Inc. during fiscal year 1999.
(B) 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.
(C) Acquisition of Geriatric Medical Care, Inc., Clay Care, Inc., and payment
for the acquisition of 80% of the common stock of Professional
Psychological Services, Inc., during fiscal year 1997.
See accompanying notes.
F-8
<PAGE> 53
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1999 AND 1998
1. ORGANIZATION
Horizon Health Corporation ("the Company"), formerly known as Horizon
Mental Health Management, Inc., is a provider of employee assistance
programs ("EAP") and mental health services to businesses and managed
care organizations, as well as a contract manager of clinical and
related services, primarily of mental health and physical
rehabilitation programs, offered by general acute care hospitals in the
United States. 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; Denver, Colorado; 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 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.
On 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,
the 1997 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 Health Care 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 of 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 Orlando, Florida. FPM has been
consolidated with the Company as of June 1, 1998 (see Note 3).
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. ("ChoiceHealth") of Westminster,
Colorado. ChoiceHealth has been consolidated with the Company as of
October 5, 1998 (see Note 3). Effective April 1, 1999, the Company
acquired all of the outstanding capital stock of Resources in Employee
Assistance and Corporate Health, Inc. ("REACH"). REACH has been
consolidated with the Company as of April 1, 1999 (see Note 3).
F-9
<PAGE> 54
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. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly
liquid investments 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 net
cash flows to the carrying amount of the asset. Impairment losses are
recognized in operating income, as they are determined.
COMMON STOCK REPURCHASE PROGRAM: 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 are to be added to the treasury shares of the Company and may be
used for employee stock plans and for other corporate purposes. The
stock repurchases utilize available cash and borrowings under the
Company's bank facilities. The Company repurchased 766,100 shares of
its common stock as of August 31, 1999, of which 162,778 has been
reissued pursuant to the exercise of certain stock options. The Company
accounts for the treasury stock using the cost method.
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 various criteria such as a per diem calculation using
patients per day, a fixed fee, numbers of admissions or discharges,
direct expenses, or any combination of the preceding depending on the
specific contract.
F-10
<PAGE> 55
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Premium and fees revenue includes capitated patient services revenues,
which are defined by contract and are calculated on a
per-member/per-month fee, a fixed fee, and/or a fee for service basis.
Capitated revenue is accrued in a similar manner as contract management
revenue. For certain contracts 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, 1999,
capitated revenue was more than 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, the Company
records an allowance for 100% of the potential amount to be repaid.
Management believes it has adequately provided for potential
adjustments that may result from final settlement of these denials.
Except for the state of Florida, where the Company derives
approximately 18.9% of its revenues, the customers of the Company are
not concentrated in any specific geographic region. The customers of
the Company's contract management services are concentrated in the
health care industry.
ADVERTISING COSTS: The Company expenses advertising costs as incurred.
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 estimates 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 are computed by dividing
income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share
reflect 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 have 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.
SEGMENT INFORMATION: In fiscal year 1999, the Company adopted Statement
of Financial Accounting Standards (SFAS) 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS 131 supersedes
SFAS 14, Financial Reporting for Segments of a Business Enterprise,
replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal structure
that is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS
131 also requires certain disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not
affect results of operations or financial position of the Company but
did result in changes in the disclosure of segment information (see
Note 12).
F-11
<PAGE> 56
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS: Financial instruments consist of cash and cash
equivalents, 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 certain 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 in order to prepare the financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
3. ACQUISITIONS
REACH, INC.
Effective April 1, 1999, the Company acquired all of the outstanding
capital stock of Resources in Employee Assistance and Corporate Health,
Inc. ("REACH") of Murray Hill, New Jersey, and REACH has been
consolidated with the Company as of April 1, 1999. The Company
accounted for the acquisition of REACH by the purchase method. REACH
provides employee assistance programs and other related behavioral
health care services to self-insured employers. REACH had total
revenues of approximately $1.4 million (unaudited) for the ten months
ending March 31, 1999. As of August 31, 1999, the preliminary
allocation of the purchase price exceeded the fair value of REACH's
tangible net assets by $2,326,846, of which $2,054,791 is recorded as
goodwill and $272,055 as service contracts. Tangible assets acquired
and liabilities assumed totaled $150,496 and $477,342, 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.
CHOICEHEALTH, INC.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. ("ChoiceHealth") of Westminster,
Colorado, and ChoiceHealth has been consolidated with the Company as of
October 5, 1998. The company accounted for the acquisition of
ChoiceHealth by the purchase method. 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 total
revenues of approximately $7.6 million (unaudited) for the eight months
ended August 31, 1998. As of August 31, 1999, the preliminary
allocation of the purchase price exceeded the fair value of
ChoiceHealth's tangible net assets by $3,114,436, of which $2,935,427
is recorded as goodwill and $179,009 as service contracts. Tangible
assets acquired and liabilities assumed totaled $834,928 and
$1,899,666, 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.
FPM BEHAVIORAL HEALTH, INC.
Effective June 1, 1998, the Company acquired all of the outstanding
capital stock of FPM Behavioral Health, Inc. of Orlando, 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.
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
F-12
<PAGE> 57
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
During the fiscal year ending August 31, 1999, the Company received
post-closing adjustments, net of tax effects, of $1,222,193 and
$1,201,337. After the adjustments, the purchase price exceeded the fair
value of FPM's tangible net assets by $20,293,784 of which $18,789,028
is recorded as goodwill and $1,504,756 as service contracts. Tangible
assets acquired and liabilities assumed totaled $3,279,957 and
$5,997,271, 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.
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. 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. (see Note 10). The exchange has been
accounted for under the pooling of interests method. Accordingly, the
1997 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.
F-13
<PAGE> 58
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Combined and separate results of Horizon and Specialty during the
period preceding the exchange were as follows (in thousands):
<TABLE>
<CAPTION>
Nine months
ended
May 31, 1997
(unaudited)
------------
<S> <C>
Revenues:
Horizon $57,894
Specialty 23,286
Combined 81,180
Net Income:
Horizon $5,483
Specialty 871
Combined 6,354
</TABLE>
The Company incurred merger expenses of $3,527,671, before a related
tax benefit of $1,340,515, for 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. 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 Geriatrics'
outstanding debt. The final purchase price payment of $270,000 was made
on April 16, 1997. The purchase price exceeded the fair value of
Geriatrics' 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.
PPS
Cash payments for the purchase of eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological
Services, Inc., also known as Professional Psychological Services,
Inc., and 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. 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.
F-14
<PAGE> 59
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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.
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,
---------------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Revenue $145,063,467 $ 139,688,095
============ =============
Net Income $ 9,245,713 $ 6,286,235
============ =============
Net Income per common share:
Basic $ 1.30 $ 0.91
============ =============
Diluted $ 1.19 $ 0.82
============ =============
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consisted of the following at August 31, 1999 and 1998:
<TABLE>
<CAPTION>
August 31,
---------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Reserve for contract adjustments $ 1,191,758 $ 920,295
Health insurance 852,669 853,561
Other 3,933,277 3,158,715
------------ ------------
$ 5,977,704 $ 4,932,571
============ ============
</TABLE>
F-15
<PAGE> 60
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
At August 31, 1999 and 1998 long-term debt consisted of:
<TABLE>
<CAPTION>
August 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Chase Bank of Texas, National Association - Advance Term Loan
Facility $20,000,000 $23,000,000
Chase Bank of Texas, National Association - Revolving Credit
Facility - 3,000,000
SANWA Leasing Corporation - 29,371
Borealis Note 35,706 -
----------- -----------
20,035,706 26,029,371
----------- -----------
Less current maturities 3,373,706 18,470
----------- -----------
$16,662,000 $26,010,901
=========== ===========
</TABLE>
The aggregate maturities of long-term debt during the next five fiscal
years are $3,373,706 in 2000; $4,000,000 in 2001; $4,000,000 in 2002;
$8,662,000 in 2003; and $0 in 2004.
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 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 consisted
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. As of August 31, 1999, the
Company has borrowings of $20.0 million outstanding against the now
$29.0 million term loan facility and no borrowing outstanding against
the $10.0 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 Company's
interest rate under the New Credit Facility was 6.5% at August 31,
1999.
F-16
<PAGE> 61
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 $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. 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
statements 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 was subject to an excess cash
flow prepayment requirement of approximately $4.5 million for fiscal
year 1999, all of which had been paid as of August 31, 1999.
The Company acquired a custom software system upon the acquisition of
ChoiceHealth (see Note 3). The software system is financed by a note to
Borealis Software Systems, Inc., the company who designed the system.
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-17
<PAGE> 62
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 1, 1998, the Company canceled 351,250 options with
exercise prices ranging from $14.167 to $26.00, and granted 141,040
options with an exercise price of $7.00, the fair market value at the
date of grant. In addition, the Company granted 424,000 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. The following table
summarizes the status of the Plans:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
----------- -------------- ----------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 1,361,293 7.69 1,451,843 $ 4.62 1,521,328 $ 4.04
Granted 680,040 7.05 186,500 23.37 49,500 20.15
Exercised 198,716 3.14 265,050 1.79 90,735 1.81
Expired or canceled 489,777 16.22 12,000 10.31 28,250 9.72
Outstanding at end of year 1,352,840 4.95 1,361,293 $ 7.69 1,451,843 $ 4.62
Exercisable at end of year 710,310 2.80 781,113 $ 2.96 728,166 $ 1.98
Available for grant at end
of year 418,487 - 608,750 - 283,250 -
</TABLE>
The following table summarizes information about options outstanding
under the Plans at August 31, 1999:
<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 - $ 4.00 638,875 3.94 $ 2.11 627,087 $ 2.07
$ 7.42 - $ 9.75 709,965 8.55 7.40 83,223 8.32
$ 14.17 - $ 26.00 4,000 8.01 23.75 - -
</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 1999, 1998 and 1997 net earnings and
earnings per share would have been:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Earnings
As reported $ 6,900,761 $ 9,731,995 $ 6,656,016
Pro forma (unaudited) $ 6,175,069 $ 9,438,256 $ 6,549,799
Earnings per share
Basic
As reported $ 1.00 $ 1.37 $ 0.96
Pro forma (unaudited) $ 0.90 $ 1.33 $ 0.95
Diluted
As reported $ 0.96 $ 1.26 $ 0.87
Pro forma (unaudited) $ 0.86 $ 1.22 $ 0.85
</TABLE>
F-18
<PAGE> 63
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>
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Risk free interest rate 5.1% 6.1% 6.3%
Expected life (years) 6.4 6.6 6.6
Expected volatility 53.1% 30.4% 30.3%
Expected dividend yield 0.0% 0.0% 0.0%
</TABLE>
In accordance with SFAS 123, the weighted average fair value of options
granted during 1999, 1998 and 1997 was $4.07, $10.59, and $7.28
respectively.
7. 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, 1999,
1998 and 1997 the Company made matching contributions of approximately
$466,000, $254,000, and $534,000 respectively.
8. 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, 1999
Current $ 3,967,561 $ 835,410 $ 4,802,971
Deferred (215,987) (24,687) (240,674)
------------ ----------- ------------
$ 3,751,574 $ 810,723 $ 4,562,297
------------ ----------- ------------
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
------------ ----------- ------------
Year ended August 31, 1997
Current $ 3,957,913 $ 465,636 $ 4,423,549
Deferred 84,230 9,909 94,139
------------ ----------- ------------
$ 4,042,143 $ 475,545 $ 4,517,688
============ =========== ============
</TABLE>
F-19
<PAGE> 64
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred tax asset at August 31, 1999 and
1998 were obtained using the liability method in accordance with SFAS
No. 109 and are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Contracts $ (1,252,205) $ (1,165,792)
Goodwill (995,620) (768,671)
------------ ------------
Deferred tax liabilities (2,247,825) (1,934,463)
------------ ------------
Accounts receivable 1,365,896 708,064
Vacation accruals 611,819 638,918
Fixed assets/intangibles 271,781 171,757
Miscellaneous accruals 167,111 659,898
Net operating loss carryforward 698,345 435,174
------------ ------------
Deferred tax assets 3,114,952 2,613,811
------------ ------------
Net deferred tax asset $ 867,127 $ 679,348
============ ============
</TABLE>
At August 31, 1999, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately
$1,800,000. These carryforwards, subject to annual utilization limits,
may be utilized to offset future years' income and will begin to expire
during 2006 if unused prior to that date.
The following is a reconciliation of income taxes between the U.S.
federal income tax rate and the Company's effective income tax rate:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes based on 35% of book income
(34% in 1997) $ 4,012,071 $ 5,698,268 $ 3,846,623
Meals and entertainment, goodwill amortization
and other permanent adjustments 280,854 252,838 198,464
State income taxes and other adjustments 269,372 563,706 472,601
----------- ----------- -----------
$ 4,562,297 $ 6,514,812 $ 4,517,688
=========== =========== ===========
Effective Income Tax Rate 40% 40% 40%
=========== =========== ===========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under
operating leases. The following is a schedule of minimum rental
payments under these leases, which expire at various dates:
<TABLE>
<S> <C>
Years ended August 31,
2000 $ 1,914,641
2001 1,636,377
2002 1,075,189
2003 619,380
2004 392,590
------------
$ 5,638,177
============
</TABLE>
F-20
<PAGE> 65
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rent expense for the years ended August 31, 1999, 1998, and 1997 was
$2,325,321, $1,385,301 and $980,573, respectively.
The Company leases a building occupied by its executive offices and
National Support Center in Lewisville, Texas. In connection with the
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, September 2001, if it is not sold
to a third party, or the Company does not extend its lease. The
Company's current intention is to extend the lease.
The Company is insured for professional and general liability on a
claims-made policy basis, with additional tail coverage being obtained
when necessary. Management is not aware of claims against the Company
that would cause the final expenses for professional and general
liability to vary materially from amounts provided.
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 being reimbursed to the
Company's client hospitals. This decrease in reimbursement has, in some
cases, resulted in a negotiated reduction in the Company's 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.
Recent amendments to the Medicare statutes provide for the elimination
of cost based reimbursement of mental health partial hospitalization
services effective upon 90 days notice from Medicare, but not earlier
than January 1, 2000. The resulting reimbursement for partial
hospitalization services based on the Medicare outpatient prospective
payment system will utilize a fixed reimbursement amount per patient
day. The currently proposed reimbursement rate per patient day is a
wage-adjusted rate of $206.71, which will lower Medicare reimbursement
levels to many hospitals for partial hospitalization services. This
change may adversely affect the ability of the Company to maintain
and/or obtain management contracts for partial hospitalization services
and the amount of fees paid to the Company under such contracts.
In addition, recent amendments to the Medicare statutes 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 maintain
and/or obtain management contracts for physical rehabilitation services
and the amount of fees paid to the Company under such contracts.
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,
net of any applicable insurance coverage, would not be in excess of
recorded reserves and would not have a material adverse effect on the
Company's financial position or results of operations.
F-21
<PAGE> 66
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK AND WARRANTS
As part of the purchase of National Medical Management Services,
effective January 3, 1995 (see Note 1), 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 stockholders' equity in the accompanying
Statements of 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 herein. Upon effecting
the stock split/dividend, the stock options and their related exercise
prices were adjusted proportionately.
11. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." All prior
earnings per share data presented have 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,
-----------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income ............. $6,900,761 $9,731,995
Basic EPS .............. 6,900,761 6,874,646 $ 1.00 9,731,995 7,120,303 $ 1.37
======= =======
Effect of Dilutive
Securities
Warrants and options ... 325,031 634,164
--------- ---------
Diluted EPS ............ $6,900,761 7,199,677 $ 0.96 $9,731,995 7,754,467 $ 1.26
========== ========= ======= ========== ========= =======
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------
1997
-----------------------------------
Income Shares Per Share
Numerator Denominator Amount
--------- ----------- ---------
<S> <C> <C> <C>
Net Income ............. $6,656,016
Basic EPS .............. 6,656,016 6,928,827 $ 0.96
=======
Effect of Dilutive
Securities
Warrants and options ... 752,442
---------
Diluted EPS ............ $6,656,016 7,681,269 $ 0.87
========== ========= =======
</TABLE>
F-22
<PAGE> 67
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1999, 1998, and 1997 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 options excluded by quarter are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED OPTIONS EXCLUDED OPTION PRICE RANGE
----------------------------- ---------------------------- --------------------------
<S> <C> <C>
August 31, 1999 176,700 $ 7.42 - $23.75
May 31, 1999 152,971 $ 7.42 - $23.75
February 28, 1999 707,036 $ 6.91 - $23.75
November 30, 1998 163,390 $ 7.42 - $23.75
August 31, 1998 355,250 $ 14.17 - $26.00
May 31, 1998 182,500 $ 23.75 - $26.00
February 28, 1998 183,222 $ 22.00 - $26.00
November 30, 1997 15,000 $26.00
August 31, 1997 5,054 $26.00
</TABLE>
F-23
<PAGE> 68
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION
The Company has determined that its reportable segments are
appropriately based on its method of internal reporting, which
disaggregates its business by services category in a manner consistent
with the Company's Consolidated Statements of Income format. The
Company's reportable segments are Horizon Behavioral Services, Horizon
Mental Health Management, Specialty Rehab Management, and Mental Health
Outcomes. See (A) through (E) below for a description of the services
provided by each of the identified segments. The Company's business is
conducted solely in the United States.
The following schedule represents revenues and operating results for
the twelve months ended August 31, 1999, 1998, and 1997, respectively,
by operating division/segment:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health Intercompany
1999 Services Management Management Outcomes Other** Eliminations** Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 47,009,295 $ 87,980,741 $ 10,350,225 $ 450,228 $ 209,860 $ -- $146,000,349
Intercompany Revenues 66,152 -- -- 1,723,471 -- (1,789,623) --
EBITDA * 3,090,340 21,429,316 894,764 134,466 (8,450,528) -- 17,098,358
Total Assets 44,309,775 57,879,903 4,822,588 366,276 25,248,087 (46,090,884) 86,535,745
1998
Revenues $ 20,984,877 $ 93,935,470 $ 8,770,758 $ 29,290 $ 97,454 $ -- $123,817,849
Intercompany Revenues 17,379 -- -- 1,665,223 -- (1,682,602) --
EBITDA * 2,284,340 24,413,451 853,424 (89,310) (8,088,662) -- 19,373,243
Total Assets 43,586,048 50,264,641 3,845,744 315,144 43,347,967 (54,687,476) 86,672,068
1997
Revenues $ 5,682,323 $ 93,875,872 $ 8,980,549 $ -- $ 728,051 $ -- $109,266,795
Intercompany Revenues -- -- -- 1,316,940 -- (1,316,940) --
EBITDA * 998,367 20,407,925 161,331 432,014 (8,604,576) -- 13,395,061
Total Assets 1,491,202 47,304,233 2,182,475 438,717 10,670,465 (13,358,685) 48,728,407
</TABLE>
* Earnings before interest, taxes, depreciation and amortization (divisional
operating profit).
** Changes in the reporting relationships of subsidiaries cause fluctuations
between periods.
(A) Horizon Behavioral provides managed care and employee assistance
programs.
(B) Horizon Mental Health Management provides mental health contract
management services to general acute care hospitals.
(C) Specialty Rehab Management provides physical rehabilitation contract
management services to general acute care hospitals.
(D) Mental Health Outcomes provides outcomes information regarding the
effectiveness of mental health programs.
(E) "Other" represents the Company's corporate offices and National Support
Center located in Lewisville, Texas which provides management,
financial, human resource, and information system support for the
Company and its subsidiaries. FY1997 includes revenues of $728,000 for
Mt. Crest hospital related to an audited cost report adjustment.
F-24
<PAGE> 69
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for
fiscal 1999 and 1998:
<TABLE>
<CAPTION>
Operating Net Earnings Per Share
Revenues Income Income Basic Diluted
------------- ------------ ----------- -------------------------
<S> <C> <C> <C> <C> <C>
Quarter Ended:
August 31, 1999 $ 37,106,456 $ 3,241,240 $ 1,784,950 $ 0.26 $ 0.25
May 31, 1999 36,400,687 3,127,834 1,710,414 0.25 0.24
February 28, 1999 36,644,644 3,004,886 1,638,970 0.24 0.23
November 30, 1998 35,848,562 3,264,798 1,766,427 0.25 0.24
------------- ------------ ----------- ------- -------
Total Year $ 146,000,349 $ 12,638,758 $ 6,900,761 $ 1.00 $ 0.96
August 31, 1998 $ 36,267,360 $ 3,515,548 $ 1,925,779 $ 0.27 $ 0.25
May 31, 1998 28,827,606 4,081,228 2,726,335 0.38 0.35
February 28, 1998 29,400,471 4,417,075 2,555,886 0.36 0.33
November 30, 1997 29,322,412 4,193,319 2,523,995 0.36 0.33
------------- ------------ ----------- ------- -------
Total Year $ 123,817,849 $ 16,207,170 $ 9,731,995 $ 1.37 $ 1.26
</TABLE>
F-25
<PAGE> 70
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> 71
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 14, 1999 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 14, 1999
S-2
<PAGE> 72
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, 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
Year ended August 31, 1999:
Allowance for doubtful accounts $ 1,902,112 588,705 (1,109,363) 1,599,425 (3,4) $ 2,980,849
</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.
(4) Adjustment includes a recovery of $1.75 million related to one former
Specialty contract.
S-3
<PAGE> 73
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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 - Agreement dated August 31, 1999 between Horizon Health
Corporation, Inc. and Ronald C. Drabik regarding severance
arrangements (filed herewith).
10.2 - 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").
10.3 - 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.)
10.4 - Second Amendment to Credit Agreement and Third Amendment to
Letter Loan Agreement dated as of September 30, 1998, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1998).
10.5 - Third Amendment to Credit Agreement and Fourth Amendment to
Letter Loan Agreement dated as of November 6, 1998, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (filed herewith).
10.6 - Fourth Amendment to Credit Agreement and Fifth Amendment to
Letter Loan Agreement dated as of October 12,, 1999, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (filed herewith).
</TABLE>
<PAGE> 74
<TABLE>
<S> <C>
10.7 - 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).
10.8 - 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).
10.9 - Horizon Mental Health Management, Inc. 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.11 to the
November 1995 Form 10-Q).
10.10 - 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).
10.11 - 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).
10.12 - 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).
10.13 - Amendment to 1995 Amended and Restated Stock Option Plan for
Eligible Outside Directors (filed herewith).
10.14 - Horizon Health Corporation 1998 Stock Option Plan (filed
herewith).
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 1999 (incorporated
herein by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1998).
10.17 - Horizon Health Corporation Bonus Plan Fiscal 2000 (filed
herewith).
10.18 - 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).
10.19 - 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).
10.20 - 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).
</TABLE>
<PAGE> 75
<TABLE>
<S> <C>
10.21 - 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 - Statement Regarding Computation of Per Share Earnings (filed
herewith).
21 - List of Subsidiaries of the Company (filed herewith).
23 - Consent of PricewaterhouseCoopers LLP (filed herewith).
27 - Financial Data Schedule (filed herewith).
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EXECUTIVE AGREEMENT
(SEVERANCE/NON-COMPETITION)
This Executive Agreement (the "Agreement") is made as of August 31,
1999, by and between Horizon Health Corporation, a Delaware corporation
(hereinafter referred to as "Horizon"), and Ronald C. Drabik (hereinafter
referred to as "Executive").
WHEREAS, the Executive is employed as a Senior Vice President and Chief
Financial Officer of Horizon; and
WHEREAS, the Executive and Horizon have agreed to enter into a
severance agreement, in part, for and in consideration of the agreement of the
Executive to a non-competition agreement on the terms and conditions hereinafter
set forth;
In consideration of the premises and the mutual terms and conditions
hereinafter set forth, Horizon and the Executive hereby agree as follows:
1. SEVERANCE AGREEMENT. In the event of the termination of the
employment of the Executive without Cause (as defined in Section 2 hereof) by
Horizon, Executive shall be entitled to severance pay in an amount equal to the
Executive's annual base salary then in effect on the date of termination of
employment (exclusive of any earned or unearned bonus.) Such severance pay shall
be payable in twelve (12) equal monthly installments payable on the first
regular payroll payment date of Horizon in each calendar month of Horizon
commencing on such date in the month after the month in which termination of
employment occurs. No severance pay shall be payable to the Executive in the
event of (a) the voluntary termination of employment by the Executive, (b) the
termination of employment of the Executive by Horizon with Cause or (c) the
termination of employment of the Executive due to death, disability or
retirement.
2. DEFINITION OF CAUSE. For purposes of this Agreement, the term
"Cause" shall mean: (i) conviction of a crime punishable by imprisonment under
state or federal law; (ii) commission of any act of dishonesty against Horizon;
(iii) willful and material failure to perform the employment duties by the
Executive and the continuation of such failure for at least ten days after
Horizon provides written notice to the Executive specifying in reasonable detail
the nature of such failure, (iv) failure by the Executive to devote
substantially all his working, time and ability exclusively to the attention of
Horizon; or (v) the failure of the Executive to exercise diligence to protect
the trade secrets and confidential and proprietary information of Horizon.
3. NON-COMPETITION AND CONFIDENTIALITY.
a. NON-COMPETITION. Executive recognizes and understands that
in performing the responsibilities of his employment, he will occupy a position
of fiduciary trust and confidence, pursuant to which he will develop and acquire
experience and knowledge with respect to the business of Horizon and its
confidential proprietary information. It is the express intent and agreement of
Executive and Horizon that such knowledge and experience shall be used
exclusively in the furtherance of the interests of Horizon and not in any manner
which would be detrimental to Horizon's interests. Executive further understands
and agrees that Horizon conducts its business within a specialized market
segment throughout the United States and that it would be detrimental to the
interests of Horizon if Executive used the knowledge and experience which he
acquires pursuant to his employment and position with
<PAGE> 2
Horizon for the purpose of directly or indirectly competing with Horizon, or for
the purpose of aiding other persons or entities in so competing with Horizon,
anywhere in the United States.
Executive therefore agrees that so long as he is employed by
Horizon and for a period of one (1) year from the date of termination of
employment for any reason whatsoever, with or without Cause, (unless Executive
first secures the written consent of Horizon)
i. Executive shall not, directly or indirectly,
as an employee, employer, consultant, agent, principal, partner, shareholder,
corporate officer, director or through any kind of ownership or investment
(other than ownership of securities of publically held corporations of which
Executive owns less than four percent (4%) of any class of outstanding
securities), engage in any business or render any services to any business that
is in competition with the business conducted by Horizon on the date of
termination of employment; and
ii. Executive shall not encourage, solicit or
induce, directly or indirectly, any manager, supervisor, officer, director or
employee of Horizon to terminate his or her employment with Horizon or hire any
such individual.
The foregoing non-competition provisions are not to be
construed to prohibit Executive from being employed in the health care industry,
but rather to permit him to be so employed so long as such employment does not
involve Executive's direct or indirect participation in a business which is the
same or similar to Horizon's business.
b. CONFIDENTIALITY. Executive acknowledges that, in rendering
his services, he shall have access to and contact with the trade secrets and
confidential and proprietary business information of Horizon. Both during the
term of this Agreement and thereafter, Executive covenants and agrees as
follows:
i. That he shall use his best efforts and
exercise utmost diligence to protect and safeguard the trade secrets and
confidential and proprietary information of the Company;
ii. That he shall not disclose any of such trade
secrets and confidential and proprietary information, except as may be required
in the course of performing his services under this Agreement; and
iii. That he shall not use, directly or
indirectly, for his own benefit or for the benefit of another, any of such trade
secrets and confidential and proprietary information.
All files, records, documents, memoranda, notes or other documents
relating to the business of the Company, whether prepared by the Executive or
otherwise coming into his possession, shall be the exclusive property of Horizon
and shall be delivered to Horizon and not retained by the Executive upon
termination of employment for any reason whatsoever.
It is expressly understood, however, that the foregoing shall not apply
to any information that was generally available to the public in a
non-confidential basis prior to the date of this Agreement or was or becomes
generally available to the public on a non-confidential basis from a third-party
who is not bound to keep such information confidential.
c. REMEDIES. Executive acknowledges that the restrictions
contained in Section 3 are reasonable and necessary to protect the legitimate
interests of Horizon in view of the nature of the
<PAGE> 3
business in which Horizon is engaged. Executive understands that the remedies at
law for his violations of any of the covenants of provisions of Section 3 will
be inadequate, that such violation will cause irreparable injury within a short
period of time, and that Horizon shall be entitled to preliminary injunctive
relief against such violation and specific performance of such covenants. Such
injunctive relief and specific performances shall be in addition to, and in no
way in limitation of, any and all other remedies Horizon shall have in law and
equity for the enforcement of those covenants and provisions.
4. GENERAL PROVISIONS.
a. NOTICES. Any notice to be given hereunder by either party
to the other may be effected in writing by personal delivery or by mail,
registered or certified, postage prepaid with return receipt requested. Mailed
notices shall be addressed to the parties at the addresses set forth below, but
each party may change his or its address by written notice in accordance with
this Section 4(a). Notice delivered personally shall be deemed communicated as
of the date of the actual receipt; mailed notices shall be deemed communicated
as of three days after the date of mailing.
If to Executive: Ronald C. Drabik
-------------------------------
-------------------------------
If to Horizon: 1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
Attention: President
b. PARTIAL INVALIDITY. If any provision in this Agreement is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
such provision shall be fully severable and the remaining provisions shall,
nevertheless, continue in full force and without being impaired or invalidated
in any way. Furthermore, in lieu of such invalid, void or unenforceable
provision there shall be added automatically as a part of this Agreement, a
provision as similar in terms to such invalid, void or unenforceable provision
as may be possible and still be legal, valid and enforceable.
c. GOVERNING AGREEMENT. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas.
d. ENTIRE AGREEMENT. This Agreement constitutes the sole and
complete agreement of the parties, and supersedes all other agreements and
understandings, whether oral or written, between parties hereto with respect to
the subject matter hereof. Each party to this Agreement acknowledges that no
representations, inducements or agreements, oral or otherwise, not contained in
this Agreement, and no other agreement, statement or promise not contained in
this Agreement shall be valid or binding. Any modification of this Agreement
will be effective only if it is in writing signed by the parties hereto.
e. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but which together
shall constitute one and the same agreement.
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Executive Agreement
as of the date first written above.
HORIZON HEALTH CORPORATION
By: /s/ James W. McAtee
---------------------------------
James W. McAtee, President
EXECUTIVE
/s/ Ronald C. Drabik
---------------------------------
Ronald C. Drabik
<PAGE> 1
EXHIBIT 10.5
THIRD AMENDMENT TO CREDIT AGREEMENT
and
FOURTH AMENDMENT TO LETTER LOAN AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT and FOURTH AMENDMENT TO LETTER
LOAN AGREEMENT (the "Amendment"), dated as of November 6, 1998, is among HORIZON
HEALTH CORPORATION, a corporation duly organized and validly existing under the
laws of the State of Delaware (the "Borrower"), each of the banks or other
lending institutions which is a signatory hereto (individually, a "Bank" and,
collectively, the "Banks"), CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, formerly
known as Texas Commerce Bank National Association, individually as a Bank and as
agent for itself and the other Banks under the hereinafter defined Credit
Agreement (in its capacity as agent, together with its successors in such
capacity, the "Agent") and in its individual capacity as a lender under the
hereinafter defined Term Loan Agreement (in such capacity, "Chase"), NORTH
CENTRAL DEVELOPMENT AUTHORITY ("North Central") and the other Obligated Parties
(as defined in the Credit Agreement).
RECITALS:
WHEREAS, Borrower, the Banks and Agent have entered into that certain
Credit Agreement dated as of December 9, 1997 (as amended by that certain letter
agreement dated as of June 30, 1998 and that certain Second Amendment to Credit
Agreement and Third Amendment to Letter Loan Agreement (the "Second Amendment")
dated as of September 30, 1998, herein the "Credit Agreement").
WHEREAS, Borrower, certain Subsidiaries of Borrower, North Central and
Chase have entered into that certain Letter Loan Agreement dated as of December
20, 1995 (as amended by that certain First Amendment to Letter Loan Agreement
and Note Modification Agreement dated as of December 9, 1997, that certain
letter agreement dated as of June 30, 1998 and the Second Amendment, herein the
"Term Loan Agreement")
WHEREAS, Borrower, the Obligated Parties, North Central, the Banks,
Agent and Chase now desire to further amend the Credit Agreement and the Term
Loan Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.1 Definitions. Capitalized terms used in this Amendment, to
the extent not otherwise defined herein, shall have the same meanings as in the
Credit Agreement and Term Loan Agreement, as amended hereby.
ARTICLE 2
Amendments
Section 1.2 Amendment to Section 10.5. Effective as of the date hereof,
Section 10.5 of the Credit Agreement and the similar provision incorporated into
the Term Loan Agreement pursuant to Section 6.01 of the Term Loan Agreement are
amended in their entirety to read follows:
<PAGE> 2
Section 10.5 Investments. The Borrower will not, and will not
permit any Subsidiary to, make or permit to remain outstanding any
advance, loan, other extension of credit, or capital contribution to or
investment in any Person, or purchase or own any stock, bonds, notes,
debentures, or other securities of any Person, or be or become a joint
venturer with or partner of any Person, except:
(a) Borrower may acquire shares, other equity
securities or other evidence of beneficial ownership of a
Person or, for purposes of Section 10.3, Borrower or any
wholly owned Subsidiary directly owned by Borrower may acquire
all or substantially all of a Person's assets or the assets
of a division or branch of such Person, if, with respect to
each such acquisition:
(i) Default. No Default exists or would
result therefrom;
(ii) Bank Approval. Borrower shall have
obtained the prior written consent of the Required
Banks if (A) the Purchase Price for the acquisition
is greater than Ten Million Dollars ($10,000,000) or
(B) if after giving effect to such acquisition, the
aggregate Purchase Price of all Permitted
Acquisitions that have occurred (1) from September
30, 1998 through and including August 31, 1999, is
greater than Ten Million Dollars ($10,000,000) and
(2) at any time thereafter, during the twelve (12)
month period then most recently ending, Thirty
Million Dollars ($30,000,000). As used above, the
phrase "Purchase Price" means, as of any date of
determination and with respect to a proposed
acquisition, the purchase price to be paid for the
Target or its assets, including all cash
consideration paid (whether classified as purchase
price, noncompete, consulting or postclosing
performance based payments or otherwise) or to be
paid (based on the estimated amount thereof), the
value of all other assets to be transferred by the
purchaser in connection with such acquisition to the
seller (but specifically excluding any stock of
Borrower issued to the seller which shall not be part
of the Purchase Price for purposes of this clause
(ii)) all valued in accordance with the applicable
purchase agreement and the outstanding principal
amount of all Debt of the Target or the seller
assumed or acquired in connection with such
acquisition.
(iii) Delivery and Notice Requirements.
Borrower shall provide the Agent fifteen (15) days
prior to the consummation of the acquisition the
following: (A) notice of the acquisition, (B) the
most recent financial statements of the Target that
Borrower has available, (C) such other documentation
and information relating to the Target and the
acquisition as the Agent may reasonably request, and
(D) evidence certified by the chief executive or
chief financial officer of Borrower that Borrower
shall be in compliance with the covenants contained
in Article 11 on a pro forma basis for the four (4)
Fiscal Quarter period then most recently ending
(assuming (1) the consummation of the acquisition in
question; (2) that the incurrence or assumption of
any Debt in connection therewith occurred on the
first day of such period; (3) to the extent such Debt
bears interest at a floating rate, the rate in effect
for the entire period of calculation was the rate in
effect at the time of calculation; and (4) any sale
of Subsidiaries or lines of business which occurred
during such period occurred on the first day of such
period). Within sixty (60) days of such acquisition
the obligations under subsections 9.10(b) and (c)
shall be fulfilled.
(iv) Diligence. Borrower has completed due
diligence on the Target or the assets to be acquired;
<PAGE> 3
(v) U.S. Acquisitions. The Target is
organized under the laws of a state in the United
States of America and is involved in the same general
type of business activities as the Subsidiaries; and
(vi) Structure. If the proposed acquisition
is an acquisition of the stock of a Target, the
acquisition will be structured so that the Target
will become a wholly owned Subsidiary directly owned
by Borrower. If the proposed acquisition is an
acquisition of assets, the acquisition will be
structured so that Borrower or a whole owned
Subsidiary directly owned by Borrower shall acquire
the assets; and
(b) readily marketable direct obligations of the
United States of America or any agency thereof with maturities
of one year or less from the date of acquisition;
(c) fully insured certificates of deposit with
maturities of one year or less from the date of acquisition
issued by any commercial bank operating in the United States
of America having capital and surplus in excess of
$250,000,000;
(d) commercial paper or bonds of a domestic issuer if
at the time of purchase such paper or bonds are rated in one
of the two highest rating categories of Standard and Poor's
Corporation or Moody's Investors Service, Inc.;
(e) current trade and customer accounts receivable
for services rendered in the ordinary course of business;
(f) shares of any mutual fund registered under the
Investment Company Act of 1940, as amended, which invests
solely in investment of the type described in clauses (b)
through (d) of this Section 10.5;
(g) loans to physicians; provided that (i) at the
time of such loan no Default shall exist or result therefrom;
(ii) the aggregate amount of such loans made by Borrower and
the Subsidiaries and outstanding at any one time shall not
exceed Two Hundred Fifty Thousand Dollars ($250,000),
calculated net of any bad debt reserves;
(h) advances to employees for business expenses
incurred in the ordinary course of business including, without
limitation, loans in connection with employee relocations and
changes in the Borrower's and the Subsidiaries' payroll
payment dates;
(i) existing investments described on Schedule 10.5
hereto;
(j) the purchase by Horizon Mental Health Management,
Inc. of shares of capital stock of Florida Professional
Psychological Services, Inc. not owned by Horizon Mental
Health Management, Inc. on the Closing Date;
(k) loans, advances and other extensions of credit to
Subsidiaries made in accordance with the restrictions set
forth in subsection 10.1 (b); provided that, at the time any
such loan, advance or other extension of credit is made, no
Default exists or would result therefrom;
(l) Guarantees permitted by Section 10.1; and
(m) if no Default exists, Borrower and the
Subsidiaries may make additional capital contributions to and
or investments in or purchase any stocks, bonds, or other
equity securities authorized to be issued under Section 10.6
of a wholly owned Subsidiary or a newly created Person
organized by Borrower or a Subsidiary that, immediately after
such investment or purchase, will be a wholly owned Subsidiary
if the obligations under Section 9.10 shall be fulfilled and
the amount of such contributions and investments made
<PAGE> 4
under the permissions of this clause (m) does not, during the
entire term of this Agreement, exceed (i) One Million Dollars
($1,000,000) in the aggregate with respect to contributions to
and or investments in Choice Health, Inc. by Borrower and (ii)
One Hundred Thousand Dollars ($100,000) in the aggregate with
respect to contributions to and or investments in all other
Persons.
ARTICLE 3
Miscellaneous
Section 1.3 Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and Term Loan Agreement and except as expressly
modified and superseded by this Amendment, the terms and provisions of the
Credit Agreement and Term Loan Agreement and the other Transaction Documents are
ratified and confirmed and shall continue in full force and effect. The Loan
Parties and the Lenders agree that the Credit Agreement and Term Loan Agreement
as amended hereby and the other Transaction Documents shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
Section 1.4 Reference to Credit Agreement and Term Loan Agreement. Each
of the Transaction Documents, including the Credit Agreement and Term Loan
Agreement and any and all other agreements, documents, or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Credit Agreement or Term Loan Agreement as amended hereby, are
hereby amended so that any reference in such Transaction Documents to the Credit
Agreement or Term Loan Agreement shall mean a reference to the Credit Agreement
and Term Loan Agreement as amended hereby.
Section 1.5 Expenses of Agent. As provided in the Credit Agreement and
the Term Loan Agreement, Borrower agrees to pay on demand all costs and expenses
incurred by the Agent in connection with the preparation, negotiation, and
execution of this Amendment.
Section 1.6 Severability. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 1.7 Applicable Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 1.8 Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of the Loan Parties, the Lenders and their respective
successors and assigns, except the Loan Parties may not assign or transfer any
of their rights or obligations hereunder without the prior written consent of
the Lenders.
Section 1.9 Counterparts. This Amendment may be executed in one or more
counterparts and on telecopy counterparts, each of which when so executed shall
be deemed to be an original, but all of which when taken together shall
constitute one and the same agreement.
<PAGE> 5
Section 1.10 Effect of Waiver. No consent or waiver, express or
implied, by any Lender to or for any breach of or deviation from any covenant,
condition or duty by Borrower or any other Loan Party shall be deemed a consent
or waiver to or of any other breach of the same or any other covenant, condition
or duty.
Section 1.11 Headings. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 1.12 ENTIRE AGREEMENT. THIS AMENDMENT EMBODIES THE FINAL,
ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS
OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
Executed as of the date first written above.
LENDERS:
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
as Agent and in its individual capacity as a
Lender under the Credit Agreement and the
Term Loan Agreement
By:
----------------------------------------
Joanne Bramanti, Vice President
<PAGE> 6
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
COMERICA BANK-TEXAS
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND," NEW YORK BRANCH
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
BANQUE PARIBAS, HOUSTON AGENCY
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
<PAGE> 7
LOAN PARTIES
HORIZON HEALTH CORPORATION
HORIZON MENTAL HEALTH MANAGEMENT, INC.
MENTAL HEALTH OUTCOMES, INC.
HHG COLORADO, INC.
GERIATRIC MEDICAL CARE, INC.
SPECIALTY REHAB MANAGEMENT, INC.
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
HHMC PARTNERS, INC.
HORIZON BEHAVIORAL SERVICES, INC.
FLORIDA PSYCHIATRIC ASSOCIATES, INC.
FLORIDA PSYCHIATRIC MANAGEMENT, INC.
FPMBH OF ARIZONA, INC.
FPMBH OF TEXAS, INC.
CHOICEHEALTH, INC.
By:
------------------------------------------------------------
James W. McAtee, Executive Vice President and Secretary
of each of the above listed Loan Parties
NORTH CENTRAL DEVELOPMENT COMPANY
By:
--------------------------------
John T. Amend, President
<PAGE> 1
EXHIBIT 10.6
FOURTH AMENDMENT TO CREDIT AGREEMENT
and
FIFTH AMENDMENT TO LETTER LOAN AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT and FIFTH AMENDMENT TO LETTER
LOAN AGREEMENT (the "Amendment"), dated as of October 12, 1999, is among HORIZON
HEALTH CORPORATION, a corporation duly organized and validly existing under the
laws of the State of Delaware (the "Borrower"), each of the banks or other
lending institutions which is a signatory hereto (individually, a "Bank" and,
collectively, the "Banks"), CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, formerly
known as Texas Commerce Bank National Association, individually as a Bank and as
agent for itself and the other Banks under the hereinafter defined Credit
Agreement (in its capacity as agent, together with its successors in such
capacity, the "Agent") and in its individual capacity as a lender under the
hereinafter defined Term Loan Agreement (in such capacity, "Chase"), NORTH
CENTRAL DEVELOPMENT AUTHORITY ("North Central") and the other Obligated Parties
(as defined in the Credit Agreement).
RECITALS:
WHEREAS, Borrower, the Banks and Agent have entered into that certain
Credit Agreement dated as of December 9, 1997 (as amended by that certain letter
agreement dated as of June 30, 1998, that certain Second Amendment to Credit
Agreement and Third Amendment to Letter Loan Agreement (the "Second Amendment")
dated as of September 30, 1998 and that certain Third Amendment to Credit
Agreement and Fourth Amendment to Letter Loan Agreement (the "Third Amendment")
dated as of November 6, 1998 herein the "Credit Agreement").
WHEREAS, Borrower, certain Subsidiaries of Borrower, North Central and
Chase have entered into that certain Letter Loan Agreement dated as of
December 20, 1995 (as amended by that certain First Amendment to Letter Loan
Agreement and Note Modification Agreement dated as of December 9, 1997, that
certain letter agreement dated as of June 30, 1998, the Second Amendment and the
Third Amendment, herein the "Term Loan Agreement")
WHEREAS, Borrower, the Obligated Parties, North Central, the Banks,
Agent and Chase now desire to further amend the Credit Agreement and the Term
Loan Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.13 Definitions. Capitalized terms used in this Amendment, to
the extent not otherwise defined herein, shall have the same meanings as in the
Credit Agreement and Term Loan Agreement, as amended hereby.
ARTICLE 2
Amendments
Section 1.14 Amendment to Section 10.4. Effective as of the date
hereof, Section 10.4 of the Credit Agreement and the similar provision
incorporated into the Term Loan
<PAGE> 2
Agreement pursuant to Section 6.01 of the Term Loan Agreement are amended in
their entirety as follows:
Section 10.4 Restrictions on Dividends and other
Distributions. The Borrower will not and will not permit any Subsidiary
to directly or indirectly declare, order, pay, make or set apart any
sum for (a) any dividend or other distribution, direct or indirect, on
account of any shares of any class of stock (or other equity interest)
of the Borrower or any Subsidiary now or hereafter outstanding; (b) any
redemption, conversion, exchange, retirement, sinking fund or similar
payment, purchase or other acquisition for value, direct or indirect,
of any shares of any class of stock (or other equity interest) of the
Borrower or any Subsidiary now or hereafter outstanding; or (c) any
payment made to retire, or to obtain the surrender of, any outstanding
warrants, options, or other rights to acquire shares of any class of
stock (or other equity interest) of the Borrower or any Subsidiary now
or hereafter outstanding; except that (i) Subsidiaries (other than
Borrower) may make, declare and pay dividends and make other
distributions with respect to their capital stock (or other equity
interest) to Borrower or the other Subsidiaries, (ii) the Borrower may
redeem or repurchase shares of its stock issued to employees and
directors in connection with the exercise by such Person of stock
options granted to such Person under the Borrower?s stock option plans;
provided that no Default exists or would result therefrom and the
Dollar amount of such repurchases in any individual case shall not
exceed an amount equal to the exercise price pay by such Person to
exercise the option in question plus all United States federal
withholding taxes arising as a result of such exercise, (iii) this
Section 10.4 shall not prohibit the transactions permitted by clauses
(a), (j) or (m) of Section 10.5, and (iv) from September 30, 1998
through and including November 30, 1999, the Borrower may redeem or
repurchase shares of its capital stock; provided that the aggregate
amount paid by Borrower in connection with such redemptions and
repurchases during such period does not exceed Nine Million Dollars
($9,000,000) and no Default exists or would result therefrom.
ARTICLE 3
Miscellaneous
Section 1.15 Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and Term Loan Agreement and except as expressly
modified and superseded by this Amendment, the terms and provisions of the
Credit Agreement and Term Loan Agreement and the other Transaction Documents are
ratified and confirmed and shall continue in full force and effect. The Loan
Parties and the Lenders agree that the Credit Agreement and Term Loan Agreement
as amended hereby and the other Transaction Documents shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
Section 1.16 Reference to Credit Agreement and Term Loan Agreement.
Each of the Transaction Documents, including the Credit Agreement and Term Loan
Agreement and any and all other agreements, documents, or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Credit Agreement or Term Loan Agreement as amended hereby, are
hereby amended so that any reference in such Transaction Documents to the Credit
Agreement or Term Loan Agreement shall mean a reference to the Credit Agreement
and Term Loan Agreement as amended hereby.
<PAGE> 3
Section 1.17 Expenses of Agent. As provided in the Credit Agreement and
the Term Loan Agreement, Borrower agrees to pay on demand all costs and expenses
incurred by the Agent in connection with the preparation, negotiation, and
execution of this Amendment.
Section 1.18 Severability. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 1.19 Applicable Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 1.20 Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of the Loan Parties, the Lenders and their respective
successors and assigns, except the Loan Parties may not assign or transfer any
of their rights or obligations hereunder without the prior written consent of
the Lenders.
Section 1.21 Counterparts. This Amendment may be executed in one or
more counterparts and on telecopy counterparts, each of which when so executed
shall be deemed to be an original, but all of which when taken together shall
constitute one and the same agreement.
Section 1.22 Effect of Waiver. No consent or waiver, express or
implied, by any Lender to or for any breach of or deviation from any covenant,
condition or duty by Borrower or any other Loan Party shall be deemed a consent
or waiver to or of any other breach of the same or any other covenant, condition
or duty.
Section 1.23 Headings. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 1.24 ENTIRE AGREEMENT. THIS AMENDMENT EMBODIES THE FINAL,
ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS
OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
Executed as of the date first written above.
LENDERS:
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
as Agent and in its individual capacity as a
Lender under the Credit Agreement and the
Term Loan Agreement
By:
----------------------------------------
Joanne Bramanti, Vice President
<PAGE> 4
BANK OF AMERICA, N.A.
By:
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Name:
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Title:
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COMERICA BANK-TEXAS
By:
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Name:
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Title:
-------------------------------------
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND," NEW YORK BRANCH
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
BANQUE PARIBAS, HOUSTON AGENCY
By:
----------------------------------------
Name:
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Title:
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By:
----------------------------------------
Name:
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Title:
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LOAN PARTIES
HORIZON HEALTH CORPORATION
HORIZON MENTAL HEALTH MANAGEMENT, INC.
MENTAL HEALTH OUTCOMES, INC.
GERIATRIC MEDICAL CARE, INC.
SPECIALTY REHAB MANAGEMENT, INC.
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
HHMC PARTNERS, INC.
HORIZON BEHAVIORAL SERVICES, INC.
FLORIDA PSYCHIATRIC ASSOCIATES, INC.
FLORIDA PSYCHIATRIC MANAGEMENT, INC.
FPMBH OF TEXAS, INC.
CHOICEHEALTH, INC.
RESOURCES IN EMPLOYEE ASSISTANCE AND CORPORATE HEALTH, INC.
By:
----------------------------------------
Name:
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Title:
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NORTH CENTRAL DEVELOPMENT COMPANY
By:
----------------------------------------
John T. Amend, President
<PAGE> 1
EXHIBIT 10.13
AMENDED SECTION 4 TO 1995 STOCK OPTION PLAN
FOR ELIGIBLE OUTSIDE DIRECTORS
4. Formula Plan.
(a) Automatic Grants. Grants of Options under this Section 4
shall be automatic. This Section 4 is intended to be a "formula plan" as
recognized by Rule 16b-3(d) promulgated under the Securities Exchange Act of
1934, as amended (the "Act"), or any successor provisions thereto, and shall be
interpreted accordingly.
(b) Grant on Initial Eligibility Date. To the extent Options
are available under this Plan, each Eligible Outside Director who first becomes
a director of the Company at any time on or after November 1, 1999 (the date
applicable to a director, the "Initial Eligibility Date"), is hereby granted as
of the Initial Eligibility Date an Option to purchase 15,000 shares of Common
Stock, subject to adjustment pursuant to Section 13 of the Plan.
(c) Subsequent Annual Grants. To the extent Options are
available under this Plan, as of the day (each a "Subsequent Eligibility Date")
of each Annual Meeting of Stockholders of the Company, each Eligible Outside
Director who is re-elected as a director at such Annual Meeting and serving in
such capacity immediately after such annual meeting shall be granted an Option
to purchase a number of shares of Common Stock, subject to adjustment pursuant
to Section 13 of the Plan, determined by dividing (i) $50,000 by (ii) the Fair
Market Value (defined below) per share of the Common Stock of the Company on the
date of the grant and rounding such number as so determined to the nearest
hundred; provided, however, that no Eligible Outside Director shall be entitled
to receive an Option grant under this Section 4(c) on a Subsequent Eligibility
Date unless, as of such date, at least one year has passed since the Initial
Eligibility Date of such Eligible Outside Director.
Notwithstanding the foregoing, each Eligible Outside Director
eligible to receive an Option grant under this Section 4(c) may elect to receive
an Option grant under this Section 4(c) for an amount equal to fifty percent
(50%) of the shares of Common Stock which would otherwise have been subject to
an Option grant under the Section 4(c) and, in the event of such election, the
Eligible Outside Director shall be entitled to receive a fee in the amount of
$2,500 for each of the first four (4) meetings of the Board of Directors
actually attended by such Eligible Outside Director during the period from the
date of the Annual Meeting of Stockholders of the Company at which the Eligible
Outside Director was re-elected and became eligible for the Option grant under
this Section 4(c), including the Board of Directors meeting immediately
following such Annual Meeting of Stockholders, to the date of the next Annual
Meeting of Stockholders, excluding the Board of Directors meeting immediately
following such next Annual Meeting of Stockholders.
(d) Eligible Outside Director. As used in the Plan, "Eligible
Outside Director" means each member of the Board of Directors of the Company
who, as of the Initial Eligibility Date (with respect to an Option grant to be
made under Section 4(b) hereof) or as of the applicable Subsequent Eligibility
Date (with respect to an Option grant to be made under Section 4(c) hereof), as
applicable, (i) is not an officer or employee of the Company or any of its
direct or indirect majority owned subsidiaries ("Subsidiaries") and (ii) does
not beneficially own, and is not a representative or affiliate (as defined in
Rule 12b-2 under the Act) of any person or entity that beneficially owns, five
percent (5%) or more of the Common Stock outstanding on
<PAGE> 2
such Initial Eligibility Date or Subsequent Eligibility Date. For the purposes
of determining the beneficial ownership of Common Stock of the Company by a
Director, all shares of Common Stock subject to stock options held by the
Director (and any person or entity represented by or affiliated with such
Director) shall be deemed beneficially owned by the Director, irrespective of
any vesting or exercisability provisions of such stock options, and shall be
deemed outstanding for the purposes of calculating the percentage of all
outstanding shares of Common Stock of the Company beneficially owned by the
Director.
(e) Fair Market Value. Subject to adjustment as provided in
Section 13 of the Plan, the exercise or purchase price for each share of Common
Stock subject to on Option granted under the Plan shall be the Fair Market Value
(as defined below) per share on the date of grant of the Option. If the Common
Stock is listed on a national securities exchange or on the Nasdaq National
Market, "Fair Market Value" means the closing price per share of the Common
Stock on such national securities exchange or on the Nasdaq National Market, as
applicable, on the day for which such value is to be determined or, if no shares
were traded on such day, on the most recent preceding day on which shares were
traded, as reported by National Quotation Bureau, Inc. or other national
quotation service. If the Common Stock is not so listed on a national securities
exchange or on the Nasdaq National Market, "Fair Market Value" means the closing
"asked" price per share of the Common Stock in the over-the-counter market on
the day for which such value is to be determined or, if such "asked" price is
not available, the last sales price on such day or, if no shares were traded on
such day, on the most recent preceding day on which the shares were traded, as
reported by the Nasdaq or other national quotation service. If the Common Stock
is not listed on any national securities exchange or the Nasdaq National Market
or traded in the over-the-counter market, "Fair Market Value" shall mean the
price per share determined in good faith by the Committee.
(f) Vesting. Each Option granted to an Eligible Outside
Director under Section 4(b) and 4(c) above shall vest and become exercisable as
follows:
i) An installment equal to twenty percent (20%) of
the total number of shares subject to the Option shall vest and be
exercisable on the date of grant; and
ii) An installment equal to twenty percent (20%) of
the total number of shares subject to the Option shall vest and be
exercisable over the four year period after the date of grant on each
occasion thereafter when the following conditions are satisfied: (i)
the Eligible Outside Director has been re-elected to the Board of
Directors at an Annual Meeting of Stockholders of the Company, (ii) the
Eligible Outside Director has continuously served as a Director since
the Initial Eligibility Date of the Director, and (iii) the period of
one year has elapsed since the most recent vesting date of an
installment of this Option, including the initial installment that
vested on the date of grant.
Each installment shall be cumulative and may be exercisable in whole or
in part at any time during the term of the Option. Each Option may become
exercisable on an accelerated basis under the circumstances described in the
Plan. In addition, the vesting and exercisability of all or any portion of an
Option granted under this Section 4 may be accelerated at the discretion of the
Committee in the event an Eligible Outside Director is required to discontinue
service as a director of the Company due to (i) a mandatory retirement age
adopted by the Company applicable to directors, (ii) health or (iii) a conflict
of interest.
<PAGE> 3
Each such Option shall expire ten (10) years from the date of grant (or
at the time otherwise specified in the Plan, if earlier) and shall otherwise be
subject to the Plan and such terms and conditions not inconsistent with this
Section 4 as may be included in the Option Agreement for such Option.
(g) Optionees; Grant Date. "Grant Date" for options under this
Section 4 shall refer to any Initial Eligibility Date or Subsequent Eligibility
Date on which Options are granted.
(h) Insufficient Shares. Subject to the last paragraph of this
Section 4(h), if on any Grant Date sufficient shares are not available to grant
to each Eligible Outside Director the aggregate number of Options which each
such Eligible Outside Director would otherwise then be entitled to receive under
Section 4(b) or Section 4(c) hereof, then each such Eligible Outside Director
entitled to receive an Option grant on such date shall instead receive an Option
(a "Reduced Grant") to purchase his pro rata portion of the number of shares of
Common Stock then available for grant hereunder.
Subject to the last paragraph of this Section 4(h), (i) if at
any time after a Reduced Grant has been made pursuant to this Section 4(h),
additional shares of Common Stock become available hereunder, then each person
who received a Reduced Grant who still meets the Eligible Outside Director
requirements on the date additional shares become available shall automatically
receive an additional Option at an exercise price per share equal to the Fair
Market Value on the date such additional Option is granted, and (ii) the number
of available shares shall be divided among the Options then to be granted to all
such Eligible Outside Directors who received Reduced Grants.
If, at the time additional shares of Common Stock are
available hereunder, more than one Reduced Grant has been or is to be made
pursuant to this Section 4(h), available Options shall be granted sequentially
starting with Eligible Outside Directors with the earliest Grant Date in respect
of which a Reduced Grant was or is to be made, but pro rata (based on the
aggregate number of Options that such Eligible Outside Director would have been
entitled to receive under Section 4(b) or 4(c) hereof, as applicable, on the
Grant Date in respect of which the Reduced Grant in question was or is to be
made) among Eligible Outside Directors with the same Grant Date in respect of
which a Reduced Grant was or is to be made. Fractional shares shall be ignored
and not granted. In no event shall the number of Options granted to any Eligible
Outside Director on any Grant Date pursuant to Section 4(b) or 4(c) hereof, plus
any Options granted pursuant to this Section 4(h) in respect of any such Grant
Date for which a Reduced Grant was made, exceed the aggregate number of options
such Eligible Outside Director would have been entitled to receive on such Grant
Date under Section 4(b) or 4(c) hereof, as applicable, if sufficient shares had
been available on such Grant Date to permit the grants called for by Sections
4(b) and 4(c).
<PAGE> 1
EXHIBIT 10.14
(APPROVED BY STOCKHOLDERS AT
JANUARY 23, 1998 ANNUAL MEETING)
HORIZON HEALTH CORPORATION
1998 STOCK OPTION PLAN
Horizon Health Corporation, a Delaware corporation (the "Corporation"),
hereby establishes this Horizon Health Corporation 1998 Stock Option Plan (the
"Plan").
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the Plan is to give the Corporation a competitive
advantage in attracting, retaining and motivating directors, officers, key
employees and consultants and to provide the Corporation and its Subsidiaries
with a stock option plan providing incentives directly linked to the
profitability of the Corporation's businesses and increases in shareholder
value.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "Board" means the Board of Directors of the Corporation.
b. "Cause" means (except as otherwise provided by the Committee in the
option agreement relating to any Stock Option) (i) the willful and continued
failure of the optionee to perform substantially the optionee's duties with the
Corporation or one of its Subsidiaries (other than any such failure resulting
from incapacity due to physical or mental illness), after a written demand for
substantial performance is delivered to the optionee by the optionee's immediate
supervisor or the Chief Executive Officer of the Corporation (or, in the case of
the Chief Executive Officer of the Corporation as the optionee, the Board of
Directors) which specifically identifies the manner in which the optionee's
immediate supervisor or the Chief Executive Officer of the Corporation (or, in
the case of the Chief Executive Officer of the Corporation as the optionee, the
Board of Directors) believes the optionee has not substantially performed the
optionee's duties, or (ii) the willful engaging by the optionee in illegal
conduct or gross misconduct which is materially and demonstrably injurious to
the Corporation. Notwithstanding the foregoing, if an optionee is a party to an
employment or consulting agreement with the Corporation or any Subsidiary that
contains a definition of "Cause," such definition shall apply to such optionee
for purposes of the Plan except to the extent otherwise provided by the
Committee in the option agreement relating to any Stock Option. Except as may
otherwise be provided in any such employment or consulting agreement, if
applicable, the existence of Cause shall be determined by the Board of Directors
of the Corporation in its sole discretion and in good faith.
c. "Change of Control means (a) the acquisition by any individual,
entity or group (within the meaning of Section 13(d)(e) or 14(d)(2) of the
Exchange Act) (an "Acquiring Person") of
<PAGE> 2
beneficial ownership (within the meaning of Rule 13d-e promulgated under the
Exchange Act) of 50% or more of either (i) the then outstanding shares of Common
Stock of the Corporation (the "Outstanding Corporation common stock") or (ii)
the combined voting power of the then outstanding voting securities of the
Corporation entitled to vote generally in the election of directors (the
"Outstanding Corporation Voting Securities"); provided, however, that for
purposes of this subsection (a), the following acquisitions shall not constitute
a Change of Control: (i) any acquisition directly from the Corporation, (ii) any
acquisition by the Corporation, (iii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation controlled by the Corporation; (b) individuals who, as of the date
hereof, constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Corporation's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of an Acquiring
Person other than the Board; or (c) approval by the shareholders of the
Corporation of a complete liquidation or dissolution of the Corporation.
d. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
e. "Commission" means the Securities and Exchange Commission or any
successor agency.
f. "Committee" means the Committee referred to in Section 2.
g. "Common Stock" means common stock, par value $0.01 per share, of the
Corporation.
h. "Constructive Termination" means the assignment to the optionee of
any duties inconsistent in any material respect with the optionee's position
(including status, offices, titles and reporting requirements), authority,
duties or responsibilities as exists at the time of a Change of Control, or any
other action by the Corporation which results in material diminution in such
position, authority, duties or responsibilities.
i. "Corporation" means Horizon Health Corporation, a Delaware
corporation.
j. "Disability" means permanent and total disability as determined
under procedures established by the Committee for purposes of the Plan.
k. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
l. "Fair Market Value" means, as of any given date, the closing price
per share of the Common Stock on that date on the Nasdaq National Market or on
such national securities
<PAGE> 3
exchange on which the Common Stock is then listed, as applicable, or, if no
shares of Common Stock were traded on that date, on the most recent day on which
shares were traded, as reported by the National Quotation Bureau, Inc. or other
national quotation service.
m. "Non-Employee Director" means a member of the Board who qualifies as
a Non-Employee Director as defined in Rule 16b-3(b)(3), as promulgated by the
Commission under Section 16(b) of the Exchange Act, or any successor definition
adopted by the Commission.
n. "Plan" means the Horizon Health Corporation 1998 Stock Option Plan,
as set forth herein and as hereafter amended from time to time.
o. "Retirement" means retirement from active employment with the
Corporation or a Subsidiary under the retirement policies of the Corporation
applicable to it and its Subsidiaries.
p. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission
under Section 16(b) of the Exchange Act, as amended from time to time.
q. "Section 162(m) Exemption" means the exemption from the limitation
on deductibility imposed by Section 162(m) of the Code that is set forth in
Section 162(m)(4)(c) of the Code.
r. "Stock Option" means a Stock Option granted under the Plan.
s. "Subsidiary" means a corporation or other entity controlled by, or
under common control with the Corporation.
t. "Termination of Employment" means, with respect to any optionee
under the Plan, the termination of such optionee's employment with the
Corporation and its Subsidiaries. An optionee employed by a Subsidiary shall
also be deemed to incur a Termination of Employment if such Subsidiary ceases to
be a Subsidiary and such optionee does not immediately thereafter become an
employee of the Corporation or another Subsidiary. Temporary absences from
employment because of illness, vacation or leave of absence and transfers among
the Corporation and its Subsidiaries shall not be considered Terminations of
Employment.
In addition, certain other capitalized terms used herein have
definitions specified for them elsewhere herein.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Compensation and Option Committee
or such other committee of the Board as the Board may from time to time
designate (the "Committee"), which shall be composed of two or more Non-Employee
Directors, each of whom shall be an "outside director" for purposes of Section
162(m)(4)(c)(i) of the Code, and who shall be appointed by and serve at the
pleasure of the Board.
<PAGE> 4
The Committee shall have plenary authority to grant Stock Options upon
such terms (not inconsistent with the terms of the Plan) as are determined by
the Committee to directors, officers and key employees of the Corporation and
its Subsidiaries.
Among other things, the Committee shall have the authority, subject to
the terms of the Plan:
(a) To select the directors, officers, employees and consultants to
whom Stock Optionsmay from time to time be granted;
(b) To determine the number of shares of Common Stock to be covered by
each Stock Option granted hereunder; and
(c) To determine the terms and conditions of any Stock Option granted
hereunder and the terms of any agreement relating thereto (including, but not
limited to, the option price (subject to Section 5(a) hereof), any vesting
condition, restriction or limitation (which may be related to the performance of
the optionee, the Corporation or any Subsidiary) and any vesting modification,
acceleration or forfeiture waiver regarding any Stock Option and the shares of
Common Stock relating thereto, based on such factors as the Committee shall
determine.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Stock Option granted under the Plan (and any agreement relating
thereto) and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the members thereof may authorize any one or more of their number or
any officer of the Corporation to execute and deliver documents on behalf of the
Committee.
Any determination made by the Committee or pursuant to delegated
authority pursuant to the provisions of the Plan with respect to any Stock
Option shall be made in the sole discretion of the Committee or such delegate at
the time of the grant of the Stock Option or, unless in contravention of any
express term of the Plan, at any time thereafter. All decisions made by the
Committee or any appropriately delegated officer pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Corporation
and optionees under the Plan.
Any authority granted to the Committee may also be exercised by the
full Board, except to the extent that the grant or exercise of such authority
would cause any Stock Option or transaction to become subject to (or lose an
exemption under) the short-swing profit recovery provisions of Section 16 of the
Exchange Act or to lose the Section 162(m) Exemption with respect thereto. To
the extent that any permitted action taken by the Board conflicts with action
taken by the Committee, the Board action shall control.
<PAGE> 5
SECTION 3. COMMON STOCK SUBJECT TO PLAN
Subject to adjustment as provided in the last paragraph of this Section
3, (i) the total number of shares of Common Stock reserved and available for
grant under the Plan shall be five hundred thousand (500,000), and (ii) during
any fiscal year of the Corporation, no person may be granted Stock Options under
the Plan covering in excess of one hundred fifty thousand (150,000) shares of
Common Stock. Shares subject to a Stock Option under the Plan may be authorized
and unissued shares or may be treasury shares.
If any Stock Option terminates without being exercised, shares of
Common Stock subject to such Stock Option shall again be available for
distribution in connection with Stock Options under the Plan.
In the event of any change in corporate capitalization of the
Corporation, such as a stock split or a corporate transaction, or any merger,
consolidation, separation, including a spin-off, or other distribution of stock
or property of the Corporation, any reorganization (whether or not such
reorganization comes within the definition of such term in Section 368 of the
Code) or any partial or complete liquidation of the Corporation, the Committee
or Board may make such substitution or adjustments in the aggregate number and
kind of shares reserved for issuance under the Plan, in the number, kind and
option price of shares subject to outstanding Stock Options and/or such other
equitable substitution or adjustments as it may determine to be appropriate in
its sole discretion; provided, however, that the number of shares subject to any
Stock Option shall always be a whole number.
SECTION 4. ELIGIBILITY
Directors, officers, employees and consultants of the Corporation and
its Subsidiaries who are responsible for or contribute to the management, growth
or profitability of the business of the Corporation and its Subsidiaries are
eligible to be granted Stock Options under the Plan.
SECTION 5. STOCK OPTIONS
Stock Options may only be non-qualified Stock Options that do not
qualify as "incentive stock options" within the meaning of Section 422 of the
Code.
The Committee shall have the authority to grant Stock Options to any
eligible person at any time. Stock Options shall be evidenced by option
agreements, the terms and provisions of which may differ. An option agreement
shall indicate on its face that it is intended to be an agreement for a
non-qualified Stock Option. The grant of a Stock Option shall occur on the date
the Committee by resolution grants an individual a Stock Option (or on the date
otherwise specified as the effective date of the grant by the Committee) and
specifies the terms and provisions of the Stock Option. The Corporation shall
notify an optionee of any grant of a Stock Option, and a written option
agreement or agreements shall be duly executed and delivered by
<PAGE> 6
the Corporation to the optionee. Such agreement or agreements shall become
effective upon execution by the Corporation.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee and set
forth in the option agreement, and shall not be less than the Fair Market Value
of the Common Stock subject to the Stock Option on the date of grant.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten (10) years
after the date the Stock Option is granted.
(c) Exercisability. Except as otherwise provided herein, Stock Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. If the Committee provides
that any Stock Option vests or is exercisable only in installments, the
Committee may at any time waive or modify such installment vesting or exercise
provisions, in whole or in part, based on such factors as the Committee may
determine. In addition, the Committee may at any time accelerate the vesting
and/or exercisability of any Stock Option.
(d) Method of Exercise. Subject to the vesting provisions applicable to
a Stock Option and to the provisions of this Section 5, Stock Options may be
exercised, in whole or in part, at any time during the option term by giving
written notice of exercise to the Corporation specifying the number of shares of
Common Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price by certified or bank check or such other instrument as the Committee may
accept. If approved by the Committee, payment, in full or in part, may also be
made in the form of Common Stock already owned by the optionee of the same class
as the Common Stock subject to the Stock Option (based on the Fair Market Value
of the Common Stock on the date the Stock Option is exercised).
In the discretion of the Committee, payment for any shares subject to a
Stock Option may also be made by delivering a properly executed exercise notice
to the Corporation, together with a copy of irrevocable instructions to a broker
to deliver promptly to the Corporation the amount of sale or loan proceeds
necessary to pay the purchase price, and, if requested by the Corporation, the
amount of any federal, state, local or foreign withholding taxes. To facilitate
the foregoing, the Corporation may enter into agreements for coordinated
procedures with one or more brokerage firms.
<PAGE> 7
In addition, at the discretion of the Committee, payment for any shares
subject to a Stock Option may also be made by instructing the Committee to
withhold a number of such shares being issued on the exercise of such Stock
Option having a Fair Market Value on the date of exercise equal to the aggregate
exercise price of the exercised Stock Option.
No shares of Common Stock shall be issued until full payment therefor
has been made. An optionee shall only have the rights of a stockholder of the
Corporation holding the class or series of Common Stock that is subject to such
Stock Option (including, if applicable, the right to vote the shares and the
right to receive dividends), after the optionee has given written notice of
exercise, paid in full for such shares and, if requested, given the
representation described in Section 8(a).
(e) Transferability of Stock Options. Stock Options shall be
transferable by the optionee only pursuant to the following methods: (i) by will
or the laws of descent and distribution; or (ii) as a gift to family members of
the optionee or trusts for the benefit of family members of the optionee. Except
to the extent provided in this Section 5(e) or in Section 5(f), (g) and (h)
below, Stock Options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise), shall not be
subject to execution, attachment or similar process, and may be exercised during
the lifetime of the holder thereof only by such holder.
(f) Termination Upon Disability or Death.
(1) Unless otherwise determined by the Committee and expressly
provided otherwise in the option agreement, if a Termination of
Employment of an optionee occurs by reason of Disability of such
optionee, any Stock Option held by such optionee may thereafter be
exercised to the extent it was exercisable at the date of such
Termination of Employment, for a period of ninety (90) days (or such
other period as the Committee may specify in the option agreement) from
such date or until the expiration of the stated term of such Stock
Option, whichever period is shorter (but no further installments of
such Stock Option shall vest during such ninety (90) day period and all
portions of such Stock Option not exercisable on the date of such
Termination of Employment shall terminate immediately on such date),
and thereafter such Stock Option shall terminate in its entirety.
(2) Unless otherwise determined by the Committee and expressly
provided otherwise in the option agreement, upon the death of an
optionee, any Stock Option held by such optionee may thereafter be
exercised to the extent it was exercisable at the date of death, for a
period of ninety (90) days (or such other period as the Committee may
specify in the option agreement) following the date of death or until
the expiration of the stated term of such Stock Option, whichever
period is shorter, by the optionee's legal representatives or
distributees having the valid authority to exercise such right (but no
further installments of such Stock Option shall vest during such ninety
(90) day period and all portions of such Stock Option not exercisable
on the date of death shall terminate
<PAGE> 8
immediately on such date), and thereafter such Stock Option shall
terminate in its entirety.
(g) Termination Upon Retirement. Unless otherwise determined by the
Committee, if a Termination of Employment of an optionee occurs by reason of
Retirement of such optionee, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable at the
date of such Retirement, for a period of ninety (90) days (or such other period
as the Committee may specify in the option agreement) from the date of such
Retirement or until the expiration of the stated term of such Stock Option,
whichever period is shorter (but no further installments of such Stock Option
shall vest during such ninety (90) day period and all portions of such Stock
Option not exercisable on the date of such Retirement shall terminate
immediately on such date), and thereafter such Stock Option shall terminate in
its entirety; provided, however, that if the optionee dies within such ninety
(90) day period any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such period, continue to be exercisable to the
extent to which it was exercisable at the date of death for a period of ninety
(90) days from the date of death or until the expiration of the stated term of
such Stock Option, whichever period is shorter.
(h) Other Terminations. Unless otherwise determined by the Committee
and expressly provided otherwise in the option agreement, (1) if an optionee
voluntarily effects his or her Termination of Employment, then each Stock Option
held by such optionee to the extent unexercised shall terminate in its entirety
on the date of such Termination of Employment, (2) if the Termination of
Employment of an optionee is effected by the Corporation or a Subsidiary for
Cause, then each Stock Option held by such optionee to the extent unexercised
shall terminate in its entirety on the date of such Termination of Employment,
and (3) if the Termination of Employment of an optionee is effected by the
Corporation or a Subsidiary without Cause, then each Stock Option held by such
optionee to the extent exercisable on the date of such Termination of Employment
shall terminate thirty (30) days after such date (but no further installments of
such Stock Option shall vest during such thirty (30) day period and all portions
of such Stock Option not exercisable on the date of such Termination of
Employment shall terminate immediately on such date) and thereafter such Stock
Option shall terminate in its entirety.
(i) Consultant or Director Status. Notwithstanding the foregoing
provisions of Sections 5(f), 5(g) and 5(h), a Stock Option held by an optionee
shall not terminate upon the Termination of Employment of such optionee if such
optionee continues to serve as a consultant or director to the Corporation or
any of its Subsidiaries, in which case such Stock Option shall continue in
effect, including future vesting of installments, until the status of such
optionee as a consultant or director terminates at which time the Stock Option
shall terminate on the date of such termination of consultant or director status
on the same basis as provided above in this Section 5 with respect to
Termination of Employment status.
(j) Acceleration Upon Change of Control. Unless otherwise determined by
the Committee and expressly provided otherwise in the option agreement, Stock
Options granted under the Plan with a vesting date no more than three years from
the date of the optionee's
<PAGE> 9
Termination of Employment or termination of consultant or director status with
the Corporation will accelerate as to vesting upon the termination by the
Corporation of such employment or consulting or director status (including
Constructive Termination), except when such termination is for Cause, and only
when such termination follows a Change of Control.
SECTION 6. TAX OFFSET BONUSES
At the time a Stock Option is granted hereunder or at any time
thereafter, the Committee in its sole discretion may grant to the optionee
receiving such Stock Option the right to receive a cash payment in an amount
specified by the Committee, to be paid at such time or times (if ever) as the
Stock Option results in compensation income to the optionee, for the purpose of
assisting the optionee to pay the resulting taxes, all as determined by the
Committee and on such other terms and conditions as the Committee shall
determine.
SECTION 7. TERM, AMENDMENT AND TERMINATION
The Plan will terminate ten (10) years after the effective date of the
Plan. Under the Plan, Stock Options outstanding as of such date shall not be
affected or impaired by the termination of the Plan.
The Board may amend, alter, or discontinue the Plan in any respect
whatsoever, but no amendment, alteration or discontinuation shall be made which
would impair the rights of an optionee under a Stock Option theretofore granted
without the optionee's consent, except such an amendment made to cause the Plan
to qualify for any exemption provided by Rule 16b-3. In addition, no such
amendment shall be made without the approval of the Corporation's stockholders
to the extent, if at all, such approval is required by applicable law, stock
market or exchange rule, or agreement.
The Committee may amend in any respect whatsoever the terms of any
Stock Option theretofore granted, but no amendment may impair the rights of any
holder of such Stock Option without such holder's consent except an amendment
made to cause the Plan or Stock Option to qualify for any exemption provided by
Rule 16b-3.
Subject to the above provisions, the Board shall have the authority to
amend the Plan to take into account changes in law and tax and accounting rules
as well as other developments, and to grant Stock Options which qualify for
beneficial treatment under such rules without stockholder approval.
SECTION 8. GENERAL PROVISIONS
(a) The Committee may require each person purchasing or receiving
shares pursuant to a Stock Option to represent to and agree with the Corporation
in writing that such person is
<PAGE> 10
acquiring the shares without a view to the distribution thereof. The
certificates for such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on transfer. Notwithstanding any other
provisions of the Plan or agreements made pursuant thereto, the Corporation
shall not be required to issue or deliver any certificate or certificates for
shares of Common Stock under the Plan prior to fulfillment of all of the
following conditions:
(1) Listing or approval for listing upon notice of issuance,
of such shares on the Nasdaq National Market or such other securities
exchange as may at the time be the principal market for the Common
Stock;
(2) Any registration or other qualification of such shares of
the Corporation under any state or federal law or regulation, or the
maintaining in effect of any such registration or other qualification
which the Committee shall, in its absolute discretion upon the advice
of counsel, deem necessary or advisable; and
(3) Obtaining any other consent, approval, or permit from any
state or federal governmental agency which the Committee shall, in its
absolute discretion after receiving the advice of counsel, determine to
be necessary or advisable.
(b) Nothing contained in the Plan shall prevent the Corporation or any
Subsidiary from adopting other or additional compensation arrangements for its
employees.
(c) Adoption of the Plan shall not confer upon any employee any right
to continue employment, nor shall it interfere in any way with the right of the
Corporation or any Subsidiary to terminate the employment of any employee at any
time.
(d) No later than the date as of which an amount first become
includible in the gross income of the optionee for federal income tax purposes
with respect to any Stock Option under the Plan, the optionee shall pay to the
Corporation, or make arrangements satisfactory to the Corporation regarding the
payment of, any federal, state, local or foreign taxes of any kind required by
law to be withheld with respect to such amount. Unless otherwise determined by
the Corporation, withholding obligations may be settled with Common Stock,
including Common Stock that is part of the Stock Option that gives rise to the
withholding requirement. The obligations of the Corporation under the Plan and
the Stock Option shall be conditional on such payment or arrangements, and the
Corporation and its Subsidiaries shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment otherwise due to the optionee.
The Committee may establish such procedures as it deems appropriate, including
making irrevocable elections, for the settlement of withholding obligations with
Common Stock.
(e) The Committee shall establish such procedures as it deems
appropriate for an optionee to designate a beneficiary by whom any rights of the
optionee, after the optionee's death, may be exercised.
<PAGE> 11
(f) In the case of a grant of a Stock Option to any employee of a
Subsidiary of the Corporation, the Corporation may, if the Committee so directs,
issue or transfer the shares of Common Stock, if any, covered by the Stock
Option to the Subsidiary, for such lawful consideration as the Committee may
specify, upon the condition or understanding that the Subsidiary will transfer
the shares of Common Stock to the employee in accordance with the terms of the
Stock Option specified by the Committee pursuant to the provisions of the Plan.
(g) The Plan and all Stock Options made and actions taken hereunder
shall be governed by and construed in accordance with the laws of the State of
Delaware, without reference to principles of conflict of laws.
(h) Anything in this Plan to the contrary notwithstanding, the Board
may, without further approval by the stockholders, substitute new options for,
or assume, prior options of any corporation which engages with the Corporation
or any of its Subsidiaries in a transaction to which Section 424(a) of the Code
applies (or would apply if the option assumed or substituted were an incentive
stock option), or any parent or any subsidiary of such corporation.
(i) With respect to optionees subject to Section 16 of the Exchange
Act, transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or action by the Committee fails to so comply, the
Stock Option or action shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee.
SECTION 9. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date it is approved by at least a
majority of the shares of Common Stock of the Corporation represented by proxy
or in person and entitled to vote at a meeting of the stockholders of the
Corporation having as one of its purposes voting on approval of the adoption of
the Plan by the Corporation.
SECTION 10. INDEMNIFICATION OF COMMITTEE
In addition to such other rights of indemnification as they may have as
directors of the Corporation or as members of the Committee, the members of the
Committee shall be indemnified by the Corporation against the reasonable
expenses, including attorneys' fees actually and reasonably incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan or
any Stock Option granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by a majority of the
disinterested directors of the Corporation or by independent legal counsel
selected by the Corporation)
<PAGE> 12
or paid by them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that a member of the Committee is liable for
gross negligence or intentional and willful misconduct in the performance of his
duties; provided that within sixty (60) days after institution of any such
action, suit or proceeding, such member of the Committee shall in writing offer
the Corporation the opportunity, at its own expense, to handle and defend the
same.
<PAGE> 13
AMENDMENT NO. 1 TO 1998 STOCK OPTION PLAN
Resolved, that pursuant to authority granted to the Board of Directors
in Section 7 of the 1998 Stock Option Plan of the Company (the "1998 Plan"),
stock options outstanding under the 1998 Plan are authorized to be amended (with
the written consent of the holders thereof) and the 1998 Plan shall be amended
to provide that such stock options shall be transferable by the optionee only
pursuant to the following methods: (i) by will or the laws of descent and
distribution; or (ii) as a gift to family members of the optionee or to trusts
for the benefit of family members of the optionee or to charities or other
not-for-profit organizations; or (iii) to an entity (other than a public
company) controlled or owned by, or for the benefit of, family members of the
optionee.
<PAGE> 1
EXHIBIT 10.17
HORIZON HEALTH CORPORATION
BONUS PLAN -- FISCAL 2000
1. Based upon an approved fiscal 2000 budget for EPS, the following plan would
apply.
Jim McAtee: Up to one hundred percent (100%) of Annual Base
Salary based on performance of the Company, earned on
a prorated basis commencing at zero percent (0%) of
Annual Base Salary in the event the Company achieves
eighty-five percent (85%) or less of budgeted
earnings per share for the fiscal year and graduated
up to one hundred percent (100%) of Annual Base
Salary in the event the Company achieves one hundred
percent (100%) or more of budgeted earnings per share
for the fiscal year (i.e. in the event that the
company achieves 92.5% of budgeted earnings per share
for the fiscal year, then the bonus would be equal to
fifty percent (50%) of Annual Base Salary).
Ronald C. Drabik: Up to thirty percent (30%) of Annual Base Salary
based on performance of the Company, earned on a
prorated basis commencing at zero percent (0%) of
Annual Base Salary in the event the Company achieves
eighty-five percent (85%) or less of budgeted
earnings per share for the fiscal year and graduated
up to thirty percent (30%) of Annual Base Salary in
the event the Company achieves one hundred percent
(100%) or more of budgeted earnings per share for the
fiscal year (i.e. in the event that the company
achieves 92.5% of budgeted earnings per share for the
fiscal year, then the bonus would be equal to fifteen
percent (15%) of Annual Base Salary).
2. The bonuses will be earned starting at 80% of target achievement with
prorata amounts due up to 120% of the target. The two contract management
operators may have up to 50% of their bonus upon the achievement of
specific contracts retained as set by the President and CEO of the Company.
Linda Laitner: Up to fifty percent (50%) of average base salary for
fiscal year 2000 based upon the achievement of
operating cash flow targets consistent with fiscal
2000 budgets.
David Tingue: Up to fifty percent (50%) of average base salary for
fiscal year 2000 based upon the achievement of
operating cash flow targets consistent with fiscal
2000 budgets.
Frank Baumann: Up to sixty percent (60%) of average base salary for
fiscal year 2000 based upon achieving a combination
of operating cash flow targets and contract
retention.
Dave White: Up to sixty percent (60%) of average base salary for
fiscal year 2000 based upon achieving a combination
of operating cash flow targets and contract
retention.
<PAGE> 1
EXHIBIT 11
HORIZON HEALTH CORPORATION
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
BASIC
Net income $ 6,901 $ 9,732 $ 6,656
Weighted average shares outstanding (basic) (1) 6,875 7,120 6,929
--------- --------- ---------
Basic earnings per share $ 1.00 $ 1.37 $ 0.96
========= ========= =========
DILUTED
Net income $ 6,901 $ 9,732 $ 6,656
Weighted average shares outstanding (basic) (1) 6,875 7,120 6,929
Effect of dilutive securities (warrants and options) 325 (2) 634 (2) 752 (2)
Weighted average shares outstanding (diluted) (1) 7,200 7,754 7,681
--------- --------- ---------
Diluted earnings per share $ 0.96 $ 1.26 $ .87
========= ========= =========
</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 1999, 1998, and 1997 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
options excluded by quarter are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED OPTIONS EXCLUDED OPTION PRICE RANGE
------------- ---------------- ------------------
<S> <C> <C>
August 31, 1999 176,700 $ 7.42 - $23.75
May 31, 1999 152,971 $ 7.42 - $23.75
February 28, 1999 707,036 $ 6.91 - $23.75
November 30, 1998 163,390 $ 7.42 - $23.75
August 31, 1998 355,250 $ 14.17 - $26.00
May 31, 1998 182,500 $ 23.75 - $26.00
February 28, 1998 183,222 $ 22.00 - $26.00
November 30, 1997 15,000 $26.00
August 31, 1997 5,054 $26.00
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
1. Mental Health Outcomes, Inc., a Delaware corporation.
2. Horizon Mental Health Management, Inc., a Texas corporation.
3. HHMC Partners, Inc., a Delaware corporation.
4. Geriatric Medical Care, Inc., a Tennessee corporation.
5. Specialty Rehab Management, Inc., a Delaware corporation.
6. Acorn Behavioral HealthCare Management Corporation, a Pennsylvania
corporation.
7. Horizon Behavioral Services, Inc., a Delaware Corporation.
8. FPMBH of Texas, Inc., a Delaware Corporation.
9. Florida Psychiatric Associates, Inc., a Florida Corporation.
10. Florida Psychiatric Management, Inc., a Florida Corporation.
11. ChoiceHealth, Inc., a Colorado Corporation.
12. Horizon Behavioral Services - Colorado, Inc., a Colorado Corporation.
<PAGE> 1
EXHIBIT 23
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 14, 1999 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 4, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE YEAR ENDED AUGUST
31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH ANNUAL 10-K FILING DATED AUGUST 31, 1999. EPS AMOUNTS ARE IN ACCORDANCE
WITH SFAS 128.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 5,438,510
<SECURITIES> 0
<RECEIVABLES> 15,866,248
<ALLOWANCES> 2,980,849
<INVENTORY> 0
<CURRENT-ASSETS> 22,675,476
<PP&E> 7,483,711
<DEPRECIATION> 4,192,437
<TOTAL-ASSETS> 86,535,745
<CURRENT-LIABILITIES> 22,094,532
<BONDS> 0
0
0
<COMMON> 72,678
<OTHER-SE> 45,733,175
<TOTAL-LIABILITY-AND-EQUITY> 86,535,745
<SALES> 0
<TOTAL-REVENUES> 146,000,349
<CGS> 0
<TOTAL-COSTS> 132,772,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 588,705
<INTEREST-EXPENSE> 1,430,985
<INCOME-PRETAX> 11,463,058
<INCOME-TAX> 4,562,297
<INCOME-CONTINUING> 6,900,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,900,761
<EPS-BASIC> 1.00
<EPS-DILUTED> 0.96
</TABLE>
