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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, 2000
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
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(Address of principal executive offices, including zip code)
(972) 420-8200
(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 9, 2000 there were 6,368,837 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 $22,061,638. 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 24, 2001.
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TABLE OF CONTENTS
HORIZON HEALTH CORPORATION
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PART I PAGE
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Item 1. Business ............................................................... 3
Item 2. Properties ............................................................. 21
Item 3. Legal Proceedings ...................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders .................... 22
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters ....................................... 24
Item 6. Selected Financial Data ................................................ 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 28
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 and its subsidiaries.
GENERAL
The Company is a leading contract manager of psychiatric and physical
rehabilitation clinical programs offered by general acute care hospitals in the
United States, and a provider of employee assistance plans ("EAP") and
behavioral health services to business and managed care organizations. The
Company has grown both internally and through acquisitions, increasing both the
variety of its treatment programs and services, and the number of its contracts.
As of August 31, 2000, the Company had 254 contracts to provide EAP and managed
mental health services covering nearly 1.8 million lives. Over the last eight
years, the Company has increased its management contracts from 43 to a total of
138 as of August 31, 2000 and currently has contract locations in 34 states and
the District of Columbia. Of its management contracts, 114 relate to mental
health treatment programs and 24 relate to physical rehabilitation programs. The
Company has also developed a proprietary mental health outcomes measurement
system known as CQI+. At August 31, 2000 the Company provided outcome
measurement services at 107 contract locations as well as 8 database project
contracts under various arrangements. 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 13 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, 2000, 72.1%
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 hospitals. 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 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. In some
cases, the reimbursement limitations have resulted in decreased amounts
reimbursed to the Company's client hospitals and have led to the renegotiation
of a lower contract management fee structure for the Company. In other cases the
reimbursement limitations have resulted in the termination or non-renewal of the
management contract.
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Amendments to the Medicare statutes provided for the elimination of
cost based reimbursement of partial hospitalization services and implementation
of the outpatient prospective payment system (PPS) effective August 1, 2000.
Reimbursement for partial hospitalization now utilizes a fixed reimbursement
amount per patient day. The reimbursement rate per patient day is a
wage-adjusted rate from a base of $202.19, which has lowered Medicare
reimbursement levels to many hospitals for partial hospitalization services. In
an effort to lessen the potentially significant decrease in reimbursement,
legislation was enacted to allow some hospitals to receive transitional relief
effective August 1, 2000, which will be phased out over three years. However,
the general decrease in reimbursement has, in some cases, led to the
renegotiation of a lower contract management fee structure for the Company and
in other cases has resulted in the termination or non-renewal of the management
contract.
Revenues from partial hospitalization services were $15.2 million or
16.2% of total contract management revenues for the year ended August 31, 2000.
Of the Company's 138 management contracts at August 31, 2000, 78 or 56.5% of the
contracts include partial hospitalization services. Of the 78 contracts
including partial hospitalization services, 61 program locations had partial
hospitalization services in operation, 12 program locations were in operation
but the partial hospitalization services were not in operation, and five program
locations were not yet in operation for any 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 Oryx Initiative, 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 criteria for
inclusion in the Oryx Initiative 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 six years ago, the Company has
compiled a database containing outcome measurement data on approximately 60,000
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 approximately 60,000 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 which track and trend key drug usage variables and
associated patient health status, severity of illness, patient functioning, and
symptoms, or as custom research studies which are completely customer specified.
PsychScope Services 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 and rapidly growing
pharmaceutical market.
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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 comprehensive outpatient
rehabilitation facility programs. 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 currently scheduled to begin April 1, 2001. 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 managed behavioral health care,
utilization management and employee assistance programs (EAP). The Company
provides its clients with quality, cost-effective programs for administration
and management of behavioral health, substance abuse and psychiatric disability
management 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
the provision of full risk, capitated managed behavioral health care services
for health maintenance organizations ("HMOs") and self-insured employers, as
well as 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 behavioral 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.
In October 2000, Horizon Behavioral Services, Inc. was awarded a three
year, Full Accreditation from the National Committee for Quality Assurance
(NCQA) under its 2000 standards for managed behavioral health care organizations
(MBHOs). NCQA is an independent, not-for-profit organization dedicated to
assessing and reporting on the quality of managed behavioral health care
organizations, physician organizations, managed care organizations and
credentials verification organizations. The NCQA accreditation process is a
voluntary review that evaluates how well a managed behavioral health care
organization manages all parts of its delivery system in order to continuously
improve health care for its members. The NCQA standards for the accreditation of
a MBHOs are intended to help organizations achieve the highest level of
performance possible, reduce patient risk for untoward outcomes, and
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create an environment of continuous improvement. Accreditation decisions include
Full Accreditation (the highest level), One-year Accreditation, Provisional
Accreditation and Denial.
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 also offers a comprehensive
array of work life information and referral sources as well HorizOnline, an
internet based EAP program, which is available exclusively to its clients. As
with its other products, the Company intends to market such programs as an
additional service it can offer new and existing client hospitals. In March
2000, the Company's EAP/Employer division received its third successive full,
two-year accreditation for utilization management from the American
Accreditation HealthCare/Commission (URAC), a non-profit charitable organization
founded in 1990 to establish standards for the health care industry.
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 114 of the Company's 138 management contracts at August 31,
2000.
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. Please
refer to the Medicare and Medicaid; Reimbursement for Services section below for
a discussion of new HCFA rules requiring a HCFA determination that a facility
has provider-based status.
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
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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.
Consulting Services
In late 1999 the Company made a commitment to expand its management
contracting capabilities by offering its considerable expertise in the mental
health industry to its clients on a consulting basis. Over the past nineteen
years, the Company has been involved in the management of every facet of the
mental health delivery system: inpatient, partial hospitalization, outpatient,
home health and practice management. The Company's consulting services will
allow its clients to take advantage of the Company's considerable expertise
without a contract management relationship. The Company has also developed three
standard consulting modules that it refers to as its Avenues(TM) service
modules. The Company's Avenues(TM) service modules provide assessment and
ongoing support in key areas from clinical policies and procedures development,
to Medicare billing and coding assistance, to comprehensive clinical audits, to
outcomes measurement and reporting, to professional marketing and community
relations.
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 mental
health programs to evaluate the clinical effectiveness of treatment 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 under the Oryx Initiative. Each year, the
requirements for the number of measures will increase. The Company's CQI+ System
has met the criteria for inclusion in the Oryx Initiative and is included on
JCAHO's list of acceptable systems. The Company is committed to meeting future
requirements as established by JCAHO. At August 31, 2000, 49 of the Company's
management contracts included the CQI+ System and there were 58 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 approximately 60,000 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.
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 approximately 60,000 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 for drug usage by
diagnosis as well as patient health status, severity of illness, patient
functioning, and symptoms. 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 customized
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 and
rapidly growing pharmaceutical market. Due to the
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U.S. launches of several new psychiatric drugs, the psychiatric database
services market is expected to grow significantly. As of August 31, 2000 the
Company had eight contracts to provide outcomes database services.
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 24 of
the Company's 138 management contracts at August 31, 2000.
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.
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.
Please refer to the Medicare and Medicaid; Reimbursement for Services
section below for a discussion of new HCFA rules requiring a HCFA determination
that a facility has provider-based status.
MANAGED BEHAVIORAL HEALTH CARE SERVICES AND EMPLOYEE ASSISTANCE
PROGRAMS
The Company began offering behavioral health care services to HMOs and
self-insured employers, and employee assistance programs to employers, with the
acquisition of Florida PPS in 1996, and continuing with the acquisitions of
Acorn in October 1997, FPM in June 1998, ChoiceHealth in October 1998, and REACH
in April 1999. As of August 31, 2000, the Company provided EAP and managed
behavioral health care services for nearly 1.8 million lives covered by various
health plans and companies 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 primarily 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 behavioral 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 four 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
three 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. The Company frequently
provides training to employer personnel for identifying troubled employees.
Often an employer will refer an employee for consultation after observing a
change in work performance. The Company believes that such early identification,
consultation
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and treatment can frequently minimize the likelihood that the problem will
develop into a serious debilitating event requiring extensive treatment. The
Company also offers a comprehensive array of work life information and referral
sources as well HorizOnline, an internet based EAP program, which is available
exclusively to its clients. 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 and Tampa
metropolitan areas and a national support center ("NSC") in Lewisville (Dallas),
Texas. The structure is designed to keep key operating employees of the Company
in direct contact with clients. Each of the three 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 NSC with plans to develop a comparable
regional structure as it expands that area of its operations.
At August 31, 2000, the Company had 939 program employees at its
contract locations and 146 employees at its regional and NSC offices.
The Company develops and operates its outcomes measurement system
primarily out of its NSC. 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 using automated technologies from which reports
are developed, reviewed and analyzed by the CQI+ System staff of 23 employees,
which are also located at the NSC.
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, a stronger
market identification and achieve operating efficiencies. Under the new
operating structure, the Company's managed care business is located in suburban
Orlando, Florida, and its EAP/Employer business is located in suburban
Philadelphia, PA.
The Company's managed care operations have 28 licensed clinicians
providing services in the four clinic locations in Florida, an additional 147
employees working in clinical management and administrative positions, and has
provider network contracts with approximately 5,000 providers and facilities.
The Company's EAP/Employer operation has 57 employees and has contracts
with approximately 14,700 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.
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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, 2000, 1999 and 1998, the Company had
successfully retained 79%, 78%, and 73%, 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, 2000, the Company refunded $64,260 of its fees
in relation to these denials.
Program Development
The Company assists in the development of each clinical program as
requested by the client hospital, including such matters as licensing,
accreditation, certificate of need approvals and Medicare certification. The
Company also develops and implements a marketing plan for the clinical programs
to be offered by the hospital. Each program is marketed locally with an emphasis
on the hospital addressing the needs of the local community. The Company markets
the clinical programs in the community in the name of the client hospital. The
Company's name is not used and its role is not publicly emphasized in the
operation of the clinical programs offered by its client hospitals. Each patient
is admitted by the medical staff of the client hospital, and all charges for
clinical services provided to the patient accrue directly to the client hospital
or treating physician.
The Company also develops and maintains standardized policy and
procedure manuals, initial and ongoing staff training and education, and
comprehensive quality assurance procedures. Each local program director receives
ongoing support from the Company's 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
Mental health programs typically have an independent 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. Some programs also include a nurse manager or a community
education coordinator. Physical rehabilitation programs generally have 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. Medical directors generally
have 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, 2000, the Company had an average of seven employees per
contract location.
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Program Education
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. Many contract locations have a community education
coordinator (CEC) who works with a development committee consisting of Company
and hospital personnel to educate physicians, other health professionals and
nursing homes in the community of the treatment programs that are available at
the client hospital. The CEC 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 independently reported directly to the senior management of the
Company, rather than through the operating organization.
Contract Locations
At August 31, 2000, the Company had a total of 138 management contracts
with general acute care hospitals located in 34 states and the District of
Columbia, as shown below:
<TABLE>
<CAPTION>
STATE NUMBER OF STATE NUMBER OF
CONTRACTS CONTRACTS
<S> <C> <C> <C>
Alabama.................... 2 Mississippi...................... 2
Arizona.................... 2 Missouri......................... 3
Arkansas................... 11 Nebraska......................... 1
California................. 17 Nevada........................... 2
Colorado................... 1 New Jersey....................... 2
Connecticut................ 2 New York......................... 4
District of Columbia....... 1 North Carolina................... 5
Florida.................... 3 Ohio............................. 9
Georgia.................... 4 Oklahoma......................... 3
Illinois................... 5 Oregon........................... 1
Indiana.................... 3 Pennsylvania..................... 12
Iowa....................... 3 South Carolina................... 2
Kansas...................... 2 South Dakota..................... 1
Kentucky.................... 3 Tennessee........................ 5
Louisiana................... 1 Texas............................ 8
Maryland.................... 1 Washington....................... 4
Massachusetts............... 5 Wisconsin........................ 2
Michigan.................... 6
</TABLE>
Client Hospitals
The Company's clients are primarily small to medium sized hospitals,
but do include some large tertiary care hospitals. At August 31, 2000, 23.9% of
the Company's management contracts were with proprietary hospitals. The
remaining contracts are primarily with community not-for-profit hospitals.
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MANAGED CARE AND EMPLOYEE ASSISTANCE CONTRACTS
The Company delivers its EAP and managed care services through provider
networks as well as through employees in the Philadelphia and Orlando
metropolitan areas. Additionally, the Company operates four clinics in the
Orlando area. During the fiscal year ended August 31, 2000, the company closed
five clinic locations in the Tampa and Jacksonville, Florida areas. These
closures were due to declining membership in these 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
2001.
SALES AND MARKETING
At August 31, 2000, the Company employed seven full-time Vice
Presidents of Development and two Senior Vice Presidents of Development for
mental health and physical rehabilitation management contracts. In addition, the
company has one Vice President of Development for consulting services. As of
June 16, 2000 a Senior Vice President of Business and Contract Development was
appointed to manage and direct the Company's overall development effort. The
Company compiles information from numerous databases, as well as other sources
and referrals, 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 Development and, will generally
become involved at the later stages 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 Manager of Market Development who markets 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 and a Senior Vice President who market
PsychScope services by providing decision support expertise to researchers and
pharmaceutical marketers.
The subsidiary Horizon Behavioral Services ("HBS") 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 Vice Presidents of Sales to market its traditional EAP products, two
Regional Sales Representatives to market its emerging business EAP products and
a Vice President to market its managed behavioral health care 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 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 and self-insured employers who wish to outsource management of
the behavioral health benefit to an experienced provider.
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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.
The behavioral health care marketplace includes three large national
providers who control over half of the market. The rest of the market is highly
fragmented and 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.
On October 20, 2000, Horizon Behavioral Services, Inc., managed care
operations in Orlando, Florida received a three-year, Full Accreditation from
the National Committee for Quality Assurance ("NCQA"). NCQA is an independent,
not-for-profit organization dedicated to assessing and reporting on the quality
of managed behavioral healthcare organizations, physician organizations, managed
care organizations and credentials verification organizations. A Full
Accreditation is granted for a period of three years to those plans that have
excellent programs for continuous quality improvement and meet NCQA's rigorous
standards.
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.
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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 vague
and subject to interpretation. The federal government has been actively
investigating health care providers for potential abuses. There can be no
assurance that aggressive anti-fraud enforcement actions will not adversely
affect the business of the Company.
The Medicare program was enacted in 1965 to provide a nationwide,
federally funded health insurance program for the elderly. The program is
divided in Part A and Part B, each of which has separate rules and requirements
and separate funding sources. Medicare Part A, the Hospital Insurance Program
(42 U.S.C. (delta) 1395c et seq.) is financed primarily through mandatory taxes
on workers' wages. Part A pays for hospital, skilled nursing, home health
agency, hospice, and dialysis services determined to be medically necessary for
the individual patient. Medicare Part B, the Supplementary Medical Insurance
program (42 U.S.C. (delta) 1395j et seq.), is a voluntary medical benefits plan
in which eligible individuals can enroll to receive benefits in addition to
those available under Part A. Under Part B, each beneficiary must pay a monthly
premium, meet a deductible towards the cost of covered items and services
determined to be medically necessary, and generally 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
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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 ("PPS") 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 and physical rehabilitation
services provided by acute care hospitals which qualify for an exemption are
deemed to be Distinct Part Units ("DPUs") and are not included in the DRG
system. Services provided by DPUs are reimbursed on an actual cost basis,
subject to certain limitations. The mental health and physical rehabilitation
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 as has recently occurred for physical rehabilitation services as
discussed below. At August 31, 2000, of the 190 mental health treatment programs
managed by the Company at its 138 management contract locations, 137 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 have been raised to a wage adjusted rate of $11,364 and $21,393,
respectively for Medicare fiscal years beginning October 1, 2000, 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.
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In addition, amendments to the Medicare statutes provided for the
elimination of cost based reimbursement of partial hospitalization services and
implementation of the outpatient prospective payment system (PPS) effective
August 1, 2000. Reimbursement for partial hospitalization now utilizes a fixed
reimbursement amount per patient day. The reimbursement rate per patient day is
a wage-adjusted rate from a base of $202.19, which has lowered Medicare
reimbursement levels to many hospitals for partial hospitalization services. In
an effort to lessen the potentially significant decrease in reimbursement,
legislation was enacted to allow some hospitals to receive transitional relief
effective August 1, 2000, which will be phased out over three years. However,
the general decrease in reimbursement has, in some cases, led to the
renegotiation of a lower contract management fee structure for the Company and
in other cases has resulted in the termination or non-renewal of the management
contract.
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, 2000, 19 of the Company's 24 managed
physical rehabilitation programs were exempt from the Prospective Payment
System. The remaining five programs will apply for exemption as soon as they are
eligible. A recently enacted amendment to the Medicare statutes provides for a
gradual phase-out of cost-based reimbursement for physical rehabilitation
services over a three-year period commencing on April 1, 2001. 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, 2000, the Company refunded $64,260 of its fees in relation to these
denials. Also, Medicare retrospectively audits cost reports of client hospitals
upon which Medicare reimbursement for services rendered in the programs managed
by the Company is based. Accordingly, at any time, the Company could be subject
to refund obligations to client hospitals for prior year cost reports that have
not been audited and settled at the date hereof. Any significant decrease in
Medicare reimbursement levels, the imposition of significant restrictions on
participation in the Medicare program, or the disallowance by Medicare of any
significant portion of the client hospital's costs, including the fee to the
Company, where the Company has a reimbursement denial repayment obligation,
could adversely affect the Company. 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 for inpatient services. As a result, the number of patients
served by general acute care hospitals on a per diem, episodic or capitated
basis may 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
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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.
In April 2000, HCFA adopted new rules requiring a HCFA determination
that a facility has provider-based status before a provider can bill for the
services rendered at the facility. The new rules have been construed by HCFA to
apply to inpatient mental health and rehabilitation units. The rules contain
numerous requirements, some specifically applicable to facilities operated under
management contracts, that must be satisfied in order to receive a HCFA
determination of provider-based status. The rules are applicable to a provider
at the beginning of its first Medicare cost reporting year that commences after
January 10, 2001. The particular application of the rules to inpatient units
managed by the Company is currently unclear in several respects. HCFA has
indicated that it intends to issue guidelines under the new rules, which may
provide clarification. At the current time, there is uncertainty with respect to
both precisely how the new rules are to be applied to inpatient units managed by
the Company and uncertainty as to whether the current structure of the
management contracts of the Company will satisfy the requirements under the new
rules. The Company is unable at this time to definitively determine the effect
of the new provider-based rules on its business operations, but it is possible
that the new provider-based rules could result in termination or non-renewal of
management contracts if, under the new rules, it is not possible for a provider
to obtain a determination of provider-based status of an inpatient unit operated
under a management contract.
Federal law contains certain provisions designed to ensure that
services rendered by hospitals to Medicare and Medicaid patients are medically
necessary and meet professionally recognized standards. These provisions include
a requirement that admissions of Medicare and Medicaid patients to hospitals
must be reviewed in a timely manner to determine the medical necessity of the
admissions. In addition, these provisions state that a hospital may be required
by the federal government to reimburse the government for the cost of
Medicare-reimbursed services that are determined by a peer review organization
to have been medically unnecessary. The Company and its client hospitals have
developed and implemented quality assurance programs and procedures for
utilization review and retrospective patient care evaluation intended to meet
these requirements.
PATIENT REFERRAL LAWS
Various state and federal laws regulate the relationships between
health care providers and referral sources, including federal and state fraud
and abuse laws prohibiting individuals and entities from knowingly and willfully
offering, paying, soliciting or receiving remuneration in order to induce
referrals for the furnishing of health care services or items. These federal
laws generally apply only to referrals for items or services reimbursed under
the Medicare or Medicaid programs or any state health care program. The
objective of these laws is generally to ensure that the purpose of a referral is
quality of care and not monetary gain by the referring party. Violations of such
laws can result in felony criminal penalties, civil sanctions and exclusion from
participation in the Medicare and Medicaid programs.
The Medicare and Medicaid anti-kickback statute, 42 U.S.C. (delta)
1320a-7b, prohibits the knowing and willful solicitation or receipt of any
remuneration "in return for" referring an individual, or for recommending or
arranging for the purchase, lease, or ordering, of any item or service for which
payment may be made under Medicare or a state health care program. In addition,
the statute prohibits the offer or payment of remuneration "to induce" a person
to refer an individual, or to recommend or arrange for the purchase, lease, or
ordering of any item or service for which payment may be made under the Medicare
or state health care programs. The statute contains exceptions for certain
discounts, group purchasing organizations, employment relationships, waivers of
coinsurance by community health centers, health plans, and practices defined in
regulatory safe harbors.
Under a significant number of its management contracts, the Company
receives a variable fee related in part to average daily patient census of the
mental health or physical rehabilitation program. In addition, the Company has
entered into agreements with physicians to serve as medical directors at the
mental health and physical rehabilitation programs and facilities managed by the
Company, which generally provide for payments to such persons by the Company as
compensation for their administrative services. These medical directors also
generally provide professional services at such programs and facilities. In
1991, regulations were issued under federal fraud and abuse
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laws creating certain "safe harbors" for relationships between health care
providers and referral sources. Any relationship that satisfies the terms of the
safe harbor is considered permitted. Failure to satisfy a safe harbor, however,
does not mean that the relationship is prohibited. Although the contracts and
relationships between the Company and its client hospitals and medical directors
are not within the safe harbors, the Company believes that such contracts and
relationships comply with applicable laws. There can be no assurance, however,
that the Company's activities will not be challenged by regulatory authorities.
The Omnibus Budget Reconciliation Act of 1993 contains provisions
("Stark II") prohibiting physicians from referring Medicare and Medicaid
patients to an entity with which the physician has a "financial relationship"
for the furnishing of a list of "designated health services" including physical
therapy, occupational therapy, home health services, and others. If a financial
relationship exists, the entity is generally prohibited from claiming payment
for such services under the Medicare or Medicaid programs. Compensation
arrangements are generally exempted from the Stark provisions if, among other
things, the compensation to be paid is set in advance, does not exceed fair
market value and is not determined in a manner that takes into account the
volume or value of any referrals or other business generated between the
parties.
Other provisions in the Social Security Act authorize other penalties,
including exclusion from participation in Medicare and Medicaid, for various
billing-related offenses. HHS can also initiate permissive exclusion actions for
such improper billing practices as submitting claims "substantially in excess"
of the provider's usual costs or charges, failure to disclose ownership and
officers, or failure to disclose subcontractors and suppliers. Executive Order
12549 prohibits any corporation or facility from participating in federal
contracts if it or its principals have been disbarred, suspended or are
ineligible, or have been voluntarily excluded, from participating in federal
contracts. A principal has been defined as an officer, director, owner, partner,
key employee or other person with primary management or supervisory
responsibilities.
Additionally, the Health Insurance Portability and Accountability Act
of 1996 granted expanded enforcement authority to HHS and the U.S. Department of
Justice ("DOJ"), and provided enhanced resources to support the activities and
responsibilities of the Office of Inspector General ("OIG") of HHS and DOJ by
authorizing large increases in funding for investigating fraud and abuse
violations relating to health care delivery and payment. On January 24, 1997,
the OIG issued guidelines for the Fraud and Abuse Control Program as mandated by
the Act, and on February 19, 1997 issued an interim final rule establishing
procedures for seeking advisory opinions on the application on the anti-kickback
statute and certain other fraud and abuse laws. The 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.
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MENTAL HEALTH CARE PATIENT RIGHTS
Many states have adopted "patient bill of rights" regulations, which
set forth standards for least restrictive treatment, patient confidentiality,
patient access to mail and telephones, patient access to legal counsel and
requirements that patients be treated with dignity. There are also laws and
regulations relating to the civil commitment of patients to mental health
programs, disclosure of information concerning patient treatments and related
matters.
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 various licenses in 12 states. 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, 2000, the Company employed 1,340 people, of which 1,009
were full-time employees, 293 were part-time employees, and 38 were 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, 2000, the Company had administrative services contracts
with 159 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 (Dallas), Texas under a lease
term expiring on September 26, 2001. In addition, for its contract management
business the Company leases an aggregate of 4,573 square feet of space for two
regional offices in the Chicago and Tampa metropolitan areas, with lease terms
expiring from January 2001 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 54,000 square feet of office space
primarily in the Orlando and Philadelphia metropolitan areas, with smaller sales
offices in various parts of the country, under lease terms expiring from January
2001 to October 2004. The Company has signed an additional lease for
approximately 22,000 square feet in the Orlando area, which is to commence in
February 2001 and expires in January 2006. The Orlando area managed care
operations will be consolidated into this new space beginning in February 2001.
In addition, the Company leases approximately 29,000 square feet in various
locations throughout the state of Florida with lease terms expiring from October
2000 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 such 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.
In late 1999, the Company became aware that a civil qui tam lawsuit had
been filed under seal naming the Company's psychiatric contract management
subsidiary, Horizon Mental Health Management (Horizon), as a defendant therein.
The lawsuit is currently pending in the United States District Court for the
District of Columbia. The U.S. Government has not made a decision whether to
intervene in the lawsuit which is still under seal. Horizon has not been served
and therefore, is not presently a party to the lawsuit.
The lawsuit was brought under the Federal False Claims Act by three
individuals. The complaint alleges that certain on-site Horizon employees acted
in concert with other non-Horizon personnel to improperly inflate certain
Medicare reimbursable costs associated with psychiatric services provided at a
Tennessee hospital prior to August 1997. The lawsuit names the hospital, the
parent corporation of the hospital and a home health agency as defendants in
addition to Horizon.
The lawsuit seeks to recover an unspecified amount of damages relating
to allegedly improper Medicare claims submitted by the hospital. If the lawsuit
is served on Horizon, the Company will dispute the allegations in the complaint
and intends to vigorously defend itself. The Company does not believe that the
claims asserted in the lawsuit, based upon present allegations, represent a
material liability to the Company.
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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............... 55 President, Chief Executive Officer, Secretary and Director
Ronald C. Drabik.............. 54 Senior Vice President - Finance and Administration and Treasurer
Frank J. Baumann.............. 41 Senior Vice President - Operations
James K. Don.................. 64 Senior Vice President - Business and Contract Development
Linda A. Laitner.............. 52 Senior Vice President - Operations
David S. Tingue............... 45 Senior Vice President - Marketing
David K. White, Ph.D.......... 44 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.
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.
James K. Don has been Senior Vice President - Business and Contract
Development since June 2000. He formerly served as Senior Vice President,
Acquisitions and Business Development from April 1997 to May 2000. During the
period from October 1996 through March 1997, he served as an acquisitions
consultant for Horizon. From May 1990 through September 1996 he was President,
CEO and Founder of American Day Treatment Centers, a national company
specializing in freestanding partial hospitalization facilities that provide
behavioral health care services. American Day Treatment Centers filed a
voluntary bankruptcy petition under Chapter 11 of the United States Bankruptcy
Code in April 1997.
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
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<PAGE> 23
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.
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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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, 2000:
June 1, 2000 - August 31, 2000 ........... $ 6.50 $ 4.31
March 1, 2000 - May 31, 2000 ............. 7.00 5.00
December 1, 1999 -- February 29, 2000 .... 8.00 6.75
September 1, 1999 -- November 30, 1999 ... 8.25 5.25
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, 1999 .... 8.19 5.16
September 1, 1998 -- November 30, 1998 ... 9.13 5.63
</TABLE>
As of October 31, 2000, there were 98 stockholders of record of the
Common Stock of the Company. As of September 1, 2000 (the most recent date that
data was available to the Company) there were approximately 493 beneficial
owners of 100 or more shares of 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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ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND
STATISTICAL DATA
The selected historical consolidated financial data presented below for
the fiscal years ended August 31, 2000, 1999 and 1998, and at August 31, 2000
and August 31, 1999, 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, 1997 and 1996, and at August 31, 1998, 1997 and 1996, are
derived from the audited consolidated financial statements of the Company not
included herein. Effective August 11, 1997, Horizon acquired Specialty
Healthcare Management, Inc. ("Specialty") in a share exchange transaction with
the stockholders of Specialty which was accounted for as a pooling of interests.
The Consolidated Financial Statements of the Company give effect to the
Specialty exchange by combining (a) the financial statements of Horizon for the
year ended August 31, 1996 with the financial statements of Specialty for the
year ended December 31, 1996 and (b) the results of operations of Horizon for
the year ended August 31, 1997 with the results of operations of Specialty for
the twelve month period ended August 31, 1997, in each case on a pooling of
interests basis. Specialty was a division of National Medical Enterprises, Inc.
during the year ended December 31, 1994. The operations of Specialty for the
four month period ended December 31, 1996 resulting in net revenues and net
income of $10.8 million and $849,000, respectively, have been included in the
restated statement of operations for both the year ended August 31, 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> 26
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract management revenues ............. $ 93,908 $ 97,837 $ 102,156 $ 102,263 $ 95,244
Premiums and fees ........................ 38,274 47,452 21,383 6,154 437
Other(1) ................................. 1,500 712 279 850 558
--------- --------- --------- --------- ---------
Total revenues ........................ 133,682 146,001 123,818 109,267 96,239
Operating expenses:
Salaries and benefits .................... 71,554 75,741 65,725 60,048 55,810
Medical claims ........................... 14,279 20,960 9,081 1,830 147
Purchased services ....................... 12,288 13,735 14,124 14,636 13,733
Provision for bad debts................... 878 589 760 3,034 1,435
Other 16,799 17,877 14,755 12,796 11,848
Depreciation and amortization ............ 5,101 4,460 3,166 2,201 1,812
Merger expenses .......................... -- -- -- 3,528 --
--------- --------- --------- --------- ---------
Operating income ............................ 12,783 12,639 16,207 11,194 11,454
Interest and other income (expense), net .... (959) (1,176) 74 120 (67)
--------- --------- --------- --------- ---------
Income before income taxes................... 11,824 11,463 16,281 11,314 11,387
Income tax expense .......................... 4,757 4,562 6,515 4,518 4,609
--------- --------- --------- --------- ---------
Income before minority interest ............. 7,067 6,901 9,766 6,796 6,778
Minority interest ........................... -- -- (34) (140) (2)
--------- --------- --------- --------- ---------
Net income .................................. $ 7,067 $ 6,901 $ 9,732 $ 6,656 $ 6,776
========= ========= ========= ========= =========
Basic earnings per share(2) ................. $ 1.11 $ 1.00 $ 1.37 $ 0.96 $ 1.03
========= ========= ========= ========= =========
Weighted average shares outstanding(2) ...... 6,370 6,875 7,120 6,929(3) 6,561(3)
========= ========= ========= ========= =========
Diluted earnings per share(2) ............... $ 1.07 $ 0.96 $ 1.26 $ 0.87 $ 0.90
========= ========= ========= ========= =========
Weighted average shares and dilutive
potential common shares outstanding(2) .... 6,605 7,200 7,754 7,681(3) 7,510(3)
========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments ............. $ 8,517 $ 5,439 $ 6,204 $ 5,517 $ 8,346
Working capital ............................. 3,687 581 6,498 5,064 8,751
Intangible assets (net)(4) .................. 56,924 60,065 59,538 26,005 19,887
Total assets ................................ 83,631 86,536 86,672 48,728 45,214
Total debt .................................. 14,900 20,036 26,029 -- 3,576
Stockholders' equity ........................ 49,692 45,806 42,662 31,682 25,149
</TABLE>
<TABLE>
<CAPTION>
AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31,
2000 2000 2000 1999 1999 1999 1999 1998 1998
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Covered lives (000's) .................. 1,756 1,768 1,975 2,309 2,420 2,432 2,250 2,357 1,874
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation ........ 128 134 140 141 147 155 156 155 161
Contract locations signed and unopened . 10 11 12 10 6 9 8 10 11
------- ------- ------- ------- ------- ------- ------- ------- -------
Total contract locations ............... 138 145 152 151 153 164 164 165 172
======= ======= ======= ======= ======= ======= ======= ======= =======
SERVICES COVERED BY CONTRACTS:
Inpatient .............................. 123 126 129 128 133 144 142 139 149
Partial hospitalization ................ 65 75 81 81 86 95 98 98 102
Outpatient ............................. 20 26 26 26 27 27 28 29 32
Home health ............................ 5 8 8 8 7 8 10 11 10
CQI+ & PsychScope ...................... 115 115 114 110 106 111 97 83 82
TYPES OF TREATMENT PROGRAMS:
Geropsychiatric ........................ 137 154 164 158 165 184 180 179 189
Adult psychiatric ...................... 47 46 45 50 54 59 63 62 67
Substance abuse ........................ 3 3 3 4 4 4 6 8 8
Physical rehabilitation ................ 24 25 25 25 25 23 23 20 20
Other mental health .................... 3 7 7 6 5 4 6 8 9
</TABLE>
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<PAGE> 27
(1) Other revenues for the fiscal year ended August 31, 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 years ended August 31,
2000 and 1999 consist primarily of physician contract management fees
and revenues related to the Company's Mental Health Outcomes business.
(2) Adjusted to reflect a three-for-two stock split effected by the Company
as a 50% stock dividend on January 31, 1997.
(3) 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.
(4) Intangible assets consist of goodwill and service contracts related to
various acquisitions of the Company.
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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
contracts, which totaled 507 as of August 31, 2000. At that date the Company had
254 contracts to provide EAP and managed behavioral health services covering
nearly 1.8 million lives. Over the last eight years, the Company has increased
its management contracts from 43 to a total of 138 as of August 31, 2000 and
currently has contract locations in 34 states and the District of Columbia. Of
its management contracts, 114 relate to mental health treatment programs and 24
relate to physical rehabilitation programs. The Company has also developed a
proprietary mental health outcomes measurement system known as CQI+. At August
31, 2000, the Company provided outcome measurement services at 107 contract
locations as well as 8 database project contracts 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. ("HBS"), 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 employee assistance program
("EAP") services, administrative services only contracts, and at risk managed
behavioral health services.
Revenues from EAP contracts 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 work life
services (including 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
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health professionals employed or independently contracted by the Company at
favorably discounted rates, as well as the Company's expertise in clinical case
management.
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 and anticipated utilization 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.
During the fiscal year ended August 31, 2000, the Company experienced
the termination of six significant managed care contracts, one of which occurred
in the quarter ended November 30, 1999, three of which terminated during the
quarter ending February 29, 2000, and one of which terminated during the quarter
ended May 31, 2000. The effects of the sixth termination will occur gradually,
with membership being transitioned away over the course of the subsequent year.
One of the six contract terminations arose from a client insolvency, which
resulted in a $288,000 charge to bad debt during the three months ended November
30, 1999. In the prior fiscal year ended August 31, 1999 the six significant
contracts provided annual revenues of approximately $15.4 million, or about 11%
of the company's total annual revenues. In the fiscal year ended August 31, 2000
the same six contracts provided revenues of $6.8 million. Because of the timing
of the actual termination dates, the full financial impact of the terminations
will not be realized until fiscal year 2001. The Company has initiated a number
of expense reduction measures to mitigate the financial impact of these
terminations. One of the expense reduction measures included closing five of the
Company's nine clinic locations.
The four remaining 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, 2000, 1999 and 1998, the Company had
successfully retained 79%, 78% and 73%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes the most frequent reason its client hospitals do not renew their
contracts with the Company is that the hospitals decide to manage such programs
themselves. 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
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services provided. As a result, the Company anticipates that the number of
patients served by general acute care hospitals on an inpatient basis may
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.
The Company's mix of programs has changed over the last five 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.
The fees received by the Company for its services under management
contracts are paid directly by its client hospitals. 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 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. In some
cases, the reimbursement limitations have resulted in decreased amounts
reimbursed to the Company's client hospitals and have led to the renegotiation
of a lower contract management fee structure for the Company. In other cases the
reimbursement limitations have resulted in the termination or non-renewal of the
management contract.
Amendments to the Medicare statutes provided for the elimination of
cost based reimbursement of partial hospitalization services and implementation
of the outpatient prospective payment system (PPS) effective August 1, 2000.
Reimbursement for partial hospitalization now utilizes a fixed reimbursement
amount per patient day. The reimbursement rate per patient day is a
wage-adjusted rate from a base of $202.19, which has lowered Medicare
reimbursement levels to many hospitals for partial hospitalization services. In
an effort to lessen the potentially significant decrease in reimbursement,
legislation was enacted to allow some hospitals to receive transitional relief
effective August 1, 2000, which will be phased out over three years. However,
the general decrease in reimbursement has, in some cases, led to the
renegotiation of a lower contract management fee structure for the Company and
in other cases has resulted in the termination or non-renewal of the management
contract.
In April 2000, HCFA adopted new rules requiring a HCFA determination
that a facility has provider-based status before a provider can bill for the
services rendered at the facility. The new rules have been construed by HCFA to
apply to inpatient mental health and rehabilitation units. The rules contain
numerous requirements, some specifically applicable to facilities operated under
management contracts, that must be satisfied in order to receive a HCFA
determination of provider-based status. The rules are applicable to a provider
at the beginning of its first Medicare cost reporting year that commences after
January 10, 2001. The particular application of the rules to inpatient units
managed by the Company is currently unclear in several respects. HCFA has
indicated that it intends to issue guidelines under the new rules, which may
provide clarification. At the current time, there is uncertainty with respect to
both precisely how the new rules are to be applied to inpatient units managed by
the Company and uncertainty as to whether the current structure of the
management contracts of the Company will satisfy the requirements under the new
rules. The Company is unable at this time to definitively determine the effect
of the new provider-based rules on its business operations, but it is possible
that the new provider-based rules could result in termination or non-renewal of
management contracts if, under the new rules, it is not possible for a provider
to obtain a determination of provider-based status of an inpatient unit operated
under a management contract.
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Revenues from partial hospitalization services were $15.2 million or
16.2% of total contract management revenues for the year ended August 31, 2000.
Of the Company's 138 management contracts at August 31, 2000, 78 or 56.5% of the
contracts include partial hospitalization services. Of the 78 contracts
including partial hospitalization services, 61 program locations had partial
hospitalization services in operation, 12 program locations were in operation
but the partial hospitalization services were not in operation, and five program
locations were not yet in operation for any of the services. The termination of
all partial hospitalization contracts, while unlikely and not expected, could
reduce operating income by $5 million or more annually.
Recent amendments to the Medicare statutes provides for a linear
phase-out of cost-based reimbursement of physical rehabilitation services over a
three-year period, the start of which was previously delayed and has been
rescheduled for cost reporting periods beginning on or after April 1, 2001. The
resulting phase-in of reimbursement for physical rehabilitation services based
on PPS could significantly lower Medicare reimbursements to hospitals and could
adversely affect the business operations and financial results of the Company.
Regulations specifying the rules and amounts of reimbursement have not as yet
been released.
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
benefits paid to its therapists and supporting personnel. Mental health program
managed by the Company generally have a psychiatric medical director, a program
director who is usually a psychologist or a social worker, a community education
coordinator and additional social workers or therapists as needed. Physical
rehabilitation programs managed by the Company generally have 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. Medical directors have 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, 2000, 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 39%
salaries and benefits and approximately 40% medical claims from 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, consulting, accounting and
legal fees and expenses, employee recruitment and relocation expenses, rent,
utilities and property taxes.
ACQUISITIONS
Acquisitions during the last five 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.
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RESULTS OF OPERATIONS
The following table sets forth for the fiscal years ended August 31,
2000, 1999 and 1998, 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,
----------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Contract management revenues ........................ 70.3% 67.0% 82.5%
Premiums and fees ................................... 28.6 32.5 17.3
Other ............................................... 1.1 0.5 0.2
---------- ---------- ----------
Total revenues ........................................ 100.0 100.0 100.0
Operating expenses
Salaries and benefits ............................... 53.6 51.9 53.1
Medical claims ...................................... 10.7 14.4 7.3
Purchased services .................................. 9.2 9.4 11.4
Provision for bad debts ............................. 0.7 0.4 0.6
Other ............................................... 12.5 12.2 11.9
Depreciation and amortization ....................... 3.8 3.0 2.6
---------- ---------- ----------
Total operating expenses .............................. 90.5 91.3 86.9
---------- ---------- ----------
Operating income ...................................... 9.5 8.7 13.1
---------- ---------- ----------
Interest and other income (expense), net .............. (0.7) (0.8) 0.1
---------- ---------- ----------
Income before taxes ................................... 8.8 7.9 13.2
Income tax expense .................................... 3.5 3.2 5.3
---------- ---------- ----------
Net income ............................................ 5.3% 4.7% 7.9%
========== ========== ==========
Number of management contracts, end of year ........... 138 153 161
Covered lives (000's) ................................. 1,756 2,420 1,874
</TABLE>
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FISCAL YEAR ENDED AUGUST 31, 2000 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1999
Revenue. Revenues for the fiscal year ended August 31, 2000 were $133.7
million representing a decrease of $12.3 million, or 8.4%, as compared to
revenues of $146.0 million for the prior fiscal year. Contract management
revenue decreased $3.9 million, or 4.0%, due to a decline in the average number
of contract locations in operation from 155.8 for fiscal year 1999 to 138.3 for
fiscal year 2000, a decrease of 11.2%. However, same store sales, defined as
contracts in operation for the entire year in both the current and prior fiscal
year, increased by $1.7 million, or 2.6% for fiscal year 2000. Premiums and fees
decreased $9.2 million primarily as a result of the termination of the six
significant managed care contracts previously discussed. The revenues related to
the significant terminated contracts for the fiscal year ended August 31, 2000
were $6.8 million representing a decrease of $8.6 million, as compared to
revenues of $15.4 million for the fiscal year ended August 31, 1999.
Salaries and Benefits. Salaries and benefits for the fiscal year ended
August 31, 2000 were $71.5 million representing a decrease of $4.2 million, or
5.5%, as compared to salaries and benefits of $75.7 million for the prior fiscal
year. Average full time equivalents for the fiscal year ended August 31, 2000
were 1,189 representing a decrease of 104, or 8.0%, as compared to average full
time equivalents of 1,293 for the fiscal year ended August 31, 1999. This
decrease is a result of cost control initiatives taken by the Company in
response to the reduction in revenues. Salary and benefits costs per full time
equivalent for fiscal year 2000 were $60,180 representing an increase of $1,602
per full time equivalent, or 2.7%, as compared to salary and benefits cost of
$58,578 per full time equivalent for the prior fiscal year.
Depreciation and Amortization. Depreciation and amortization expenses
for fiscal year 2000 were $5.1 million representing an increase of $600,000 or
13.3%, as compared to depreciation and amortization expenses of $4.5 million for
the prior fiscal year. An increase of $355,000 is due to the accelerated
depreciation expense of certain capitalized software that will become obsolete
in Fiscal 2001. The remaining increase primarily results from the depreciation
expense of additional equipment purchased for the operation of the Company's
contract management and managed care businesses.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for fiscal year 2000 were
$44.3 million representing a decrease of $8.9 million or 16.7%, as compared to
other operating expenses of $53.2 million for the prior fiscal year. The
following components identify the primary variances between the periods
reported.
Medical claims expense for the fiscal year ended August 31, 2000 was
$14.3 million, representing a decrease of $6.7 million or 31.9%, as compared to
medical claims expense of $21.0 million for the prior fiscal year. This is
primarily the result of the termination of the six significant managed care
contracts, discussed previously, as well as improved utilization management and
review of patients seeking authorization for treatment. The improved utilization
management resulted in a decrease in inpatient cost, attained primarily by
directing patient care toward lower cost inpatient facilities and the use of
outpatient options. Inpatient days per year per one thousand members decreased
from an average of 20.2 for the fiscal year ended August 31, 1999 to 16.8 for
the fiscal year ended August 31, 2000.
Purchased services for the fiscal year ended August 31, 2000 was $12.3
million, representing a decrease of $1.4 million or 10.2%, as compared to
purchased services of $13.7 million for the prior fiscal year. Medical director
fees decreased $874,000 for the fiscal year ended August 31, 2000, as compared
to the prior fiscal year. This decrease is a result of the decrease in the
average number of contract locations in operation as discussed in the revenue
section above as well as the expense controls initiated by the Company. Also,
fees paid to temporary physicians decreased $320,000 due to the recruitment of
permanent physicians at certain contract locations.
Bad debt expense for the fiscal year ended August 31, 2000 was $877,000,
representing an increase of $288,000 or 48.9%, as compared to bad debt expense
of $589,000 for the prior fiscal year. Bad debt expense, excluding the recovery
of $1,750,000 related to one former Specialty Healthcare Management, Inc.
contract, was $2.3 million for the prior fiscal year. Excluding the $1,750,000
recovery, bad debt expense decreased $1.4 million for the fiscal year ended
August 31, 2000 versus August 31, 1999. This decrease in bad debt expense can be
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attributed to the decrease in the reserves related to untimely payments by
client hospitals, which resulted from more vigorous collection efforts.
Other operating expense for the fiscal year ended August 31, 2000 was
$16.8 million, representing a decrease of $1.1 million or 6.1%, as compared to
other operating expense of $17.9 million for the prior fiscal year. Rent expense
increased $860,000 primarily due to a one-time charge related to the closing of
the five clinic locations, previously discussed, and a one-time charge
associated with the acceleration of rent expense for office space in Florida
that will be vacated when the managed care operations are consolidated into new
leased space. Line of credit loan fees decreased $330,000 due to the full
amortization of these fees in the prior fiscal year. Legal settlement expense
decreased $490,000 due to a significant decrease in actual and projected legal
settlements that were and will be incurred related to fiscal year 2000. Capital
contribution expense decreased $272,000 due to the decrease in the number of new
capital contributions required per contract with client hospitals. The remaining
decrease of $950,000 is a result of certain Company initiated expense reduction
measures, which significantly decreased various expense categories, including
recruiting expenses, express mail cost and telephone expense.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for fiscal year 2000 was a net expense of $1.0 million
as compared to $1.2 million in net expense for fiscal year 1999. This change
results from a decrease in interest expense of $169,000 due to lower outstanding
debt and more cash on hand.
Income Tax Expense. Income tax expense for fiscal year 2000 was $4.8
million representing an increase of $200,000, or 0.4%, as compared to income tax
expense of $4.6 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 2000 and 1999 were 40.2% and 39.8%
respectively.
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 management and managed care businesses.
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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.
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.
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 "Term Loan Facility"). At August 31, 2000, the Company had $14.9
million outstanding against the Term Loan Facility, from which it can no longer
draw. The Revolving Credit Facility was terminated by the Company on June 30,
2000.
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 Agreement which is
unconditionally guaranteed by all material subsidiaries of the Company. The
Revolving Credit Facility was terminated on June 30, 2000 and the Term Loan
Facility has a term of five years, with no further draws available after
November 30, 1999. Amounts that were
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outstanding under the Term Loan Facility on November 30, 1999 are to be repaid
in twelve quarterly principal payments, which began February 29, 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. Based on the November 30, 1999
term loan balance of $17.6 million, the minimum quarterly payment will be
$880,000. 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 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 or purchasing of the
Company's own shares (v) certain management vacancies at the Company, and (vi)
material change in the nature of business conducted. In addition, 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.
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 through November 30, 1999. As of November 30, 1999, the
Company had repurchased 1,189,300 shares of its common stock, of which 162,778
and 245,145 shares have been reissued pursuant to the exercise of certain stock
options as of November 30, 1999 and August 31, 2000, respectively.
On October 4, 2000, the Company received from Chase Bank of Texas,
National Association, a letter of intent to provide the Company with a $15
million three year revolving line of credit. If the pending agreement is
finalized, the revolving facility could be used for general corporate purposes,
share repurchases, dividends, acquisitions, and to refinance the remaining
balance on the existing term loan facility.
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
(including the potential unfavorable impacts of additional changes in Medicare
reimbursement discussed previously under "Revenues") and cash of $8.5 million at
August 31, 2000 will be sufficient to cover cash requirements over the next
twelve months, including estimated capital expenditures of $1.8 million and
scheduled repayments of term loan debt of approximately $3.6 million the latter
subject to the refinancing described above. The Company generated $12.4 million
in net cash from operations during the year ended August 31, 2000. The Company
may require additional capital to fund any further share repurchases or
acquisitions.
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.
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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.
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.
CERTAIN EARNINGS DATA
The following table sets forth for the fiscal years ended August 31,
2000 and 1999, 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>
2000 1999
------- ------
<S> <C> <C>
Adjusted earnings per share
(Net income plus amortization related to goodwill, net of tax) $ 1.23 $ 1.09
Operating cash flow per share
(Net income plus depreciation and amortization, less capital expenditures) $ 1.70 $ 1.44
</TABLE>
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\
YEAR 2000 ISSUE
The Company has executed a plan designed to make its information
technology systems and equipment Year 2000 compliant, the direct costs of which
were not material. To date, no significant problems, business interruptions or
material adverse effects from the Year 2000 issue have been experienced.
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.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this report, other
reports, filings with the Commission, press releases, conferences, or otherwise,
are "forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements include, without limitation, any
statement that may predict, forecast indicate, or imply future results,
performance or achievements, and may contain the words "believe", "expect",
"estimate", "project", "will be", "will continue", "will likely result", or
words or phrases of similar meaning. Such statements involve risks,
uncertainties or other factors which may cause actual results to differ
materially from the future results, performance or achievements expressed or
implied by such forward looking statements. Certain risks, uncertainties and
other important factors are detailed in this report and will be detailed from
time to time in reports filed by the Company with the Commission, including
Forms 8-K, 10-Q, and 10-K, and include, among others, the following: general
economic and business conditions which are less favorable than expected;
unanticipated changes in industry trends; decreased demand by general hospitals
for the Company's services; the Company's inability to retain existing
management contracts or to obtain additional contracts; adverse changes in
reimbursement to general hospitals by Medicare or other third-party payors for
costs of providing mental health or physical rehabilitation services; adverse
changes to other regulatory provisions relating to mental health or physical
rehabilitation services; fluctuations and difficulty in forecasting operating
results; the ability of the Company to sustain, manage or forecast its growth;
heightened competition, including specifically the intensification of price
competition; the entry of new competitors and the development of new products
or services by new and existing competitors; changes in business strategy or
development plans; inability to carry out marketing and sales plans; business
disruptions; liability and other claims asserted against the Company; loss of
key executives; the ability to attract and retain qualified personnel; customer
services; adverse publicity; demographic changes; and other factors referenced
or incorporated by reference in this report and other reports or filings with
the Commission. Moreover, the Company operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on the Company's business or the
extent to which any factor, may cause actual results to differ materially from
those contained in any forward looking statements. These forward looking
statements represent the estimates and assumptions of management only as of the
date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward looking
statement contained herein to reflect any change in its expectations with
regard thereto or any change in events, conditions or circumstances on which
any statement is based. Given these risks and uncertainties, investors should
not place undue reliance on forward looking statements as a prediction of
actual results.
Page 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, 2000, the Company had approximately $14.9 million of debt
obligations outstanding with an interest rate of 7.625%. A hypothetical 10%
change in the effective interest rate for these borrowings, assuming debt levels
as of August 31, 2000, would change annual interest expense by approximately
$114,000.
At August 31, 1999, the Company had approximately $20.0 million of debt
obligations outstanding with an interest rate of 6.500%. 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 24, 2001 (the "Proxy Statement"). The Company hereby incorporates into
this Item 10 by reference to the Proxy Statement the information required by
this Item 10 that will appear in the Proxy Statement under the caption ELECTION
OF DIRECTORS.
The information called for by this Item 10 and Item 401 of Regulation
S-K with respect to executive officers of the Company appears under the caption
EXECUTIVE OFFICERS OF THE REGISTRANT following Item 4 of Part I of this Report,
and is incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates into this Item 11 by reference to the
Proxy Statement the information required by this Item 11 that will appear in the
Proxy Statement under the caption EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates into this Item 12 by reference to the
Proxy Statement the information required by this Item 12 that will appear in the
Proxy Statement under the caption SECURITY OWNERSHIP BY MANAGEMENT AND PRINCIPAL
STOCKHOLDERS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 Schedule - Reference is made to the
Index to Financial Statement Schedule 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 - 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).
10.2 - 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 (incorporated herein by reference
to Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended August 31, 1999).
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 (incorporated herein by reference
to Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended August 31, 1999).
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 Company's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1995).
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 (incorporated herein by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended August 31, 1999).
10.14 - Horizon Health Corporation 1998 Stock Option Plan
(incorporated herein by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1999).
10.15 - Horizon Health Corporation Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-8 filed with the
Commission on November 30, 1999, Registration No. 333-91761).
10.16 - Horizon Mental Health Management Contingent Bonus Plan
(incorporated herein by reference to Exhibit 10.37 to the
Company's 1996 Form 10-K/A).
Page 42
<PAGE> 43
10.17 - Horizon Health Corporation Bonus Plan Fiscal 2000
(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, 1999).
10.18 - Horizon Health Corporation Bonus Plan Fiscal 2001 (filed
herewith).
10.19 - 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).
10.20 - Agreement dated August 31, 1999 between Horizon Health
Corporation, Inc. and Ronald C. Drabik regarding severance
arrangements (incorporated herein by reference to exhibit 10.1
to the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1999).
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 13, 2000
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 13, 2000
------------------------------------- Officer and Secretary
James W. McAtee (Principal Executive Officer)
/s/ RONALD C. DRABIK Senior Vice President - Finance and November 13, 2000
------------------------------------- Administration and Treasurer
Ronald C. Drabik (Principal Financial and Accounting
Officer)
/s/ JAMES KEN NEWMAN Director and Chairman of the Board November 13, 2000
-------------------------------------
James Ken Newman
/s/ JACK R. ANDERSON Director November 13, 2000
-------------------------------------
Jack R. Anderson
/s/ GEORGE E. BELLO Director November 13, 2000
-------------------------------------
George E. Bello
/s/ WILLIAM H. LONGFIELD Director November 13, 2000
-------------------------------------
William H. Longfield
/s/ JAMES E. BUNCHER Director November 13, 2000
-------------------------------------
James E. Buncher
/s/ DONALD E. STEEN Director November 13, 2000
-------------------------------------
Donald E. Steen
</TABLE>
Page 44
<PAGE> 45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants...............................................................................F-2
Consolidated Balance Sheets at August 31, 2000 and 1999.........................................................F-3
Consolidated Statements of Income
For the Years Ended August 31, 2000, 1999, and 1998.............................................................F-5
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended August 31, 2000, 1999, and 1998.............................................................F-6
Consolidated Statements of Cash Flows
For the Years Ended August 31, 2000, 1999, and 1998.............................................................F-7
Notes to Consolidated Financial Statements......................................................................F-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, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended August 31, 2000, in conformity with auditing standards
generally accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Dallas, Texas
October 12, 2000
F-2
<PAGE> 47
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,516,869 $ 5,438,510
Accounts receivable less allowance for doubtful
accounts of $2,547,774 and $2,980,849 at August 31,
2000 and 1999, respectively 11,513,860 12,885,399
Prepaid expenses and supplies 1,240,359 842,701
Income taxes receivable 613,678 363,920
Other receivables 139,307 200,394
Other current assets 346,137 459,256
Current deferred taxes 1,835,721 2,485,296
------------- -------------
TOTAL CURRENT ASSETS 24,205,931 22,675,476
------------- -------------
Property and Equipment, net (Note 4) 2,109,921 3,291,274
Goodwill, net of accumulated amortization of $5,826,098
and $4,389,113 at August 31, 2000 and 1999, respectively 51,572,505 53,036,992
Contracts, net of accumulated amortization of $7,426,048
and $5,749,991 at August 31, 2000 and 1999, respectively 5,351,718 7,027,775
Other noncurrent assets 390,969 504,228
------------- -------------
TOTAL ASSETS $ 83,631,044 $ 86,535,745
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 48
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 682,088 $ 1,254,577
Employee compensation and benefits 6,439,857 6,929,722
Medical claims payable 3,724,854 4,558,823
Accrued expenses (Note 5) 6,071,673 5,977,704
Current debt -- 35,706
Current portion long term debt 3,600,000 3,338,000
------------- -------------
TOTAL CURRENT LIABILITIES 20,518,472 22,094,532
Other noncurrent liabilities 966,818 355,191
Long-term debt, net of current portion 11,300,000 16,662,000
Deferred income taxes 1,154,111 1,618,169
------------- -------------
TOTAL LIABILITIES 33,939,401 40,729,892
------------- -------------
Commitments and contingencies (Note 10)
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 6,323,595 shares outstanding
at August 31, 2000, and 7,267,750 shares issued and
6,664,428 shares outstanding at August 31, 1999 72,678 72,678
Additional paid-in capital 18,136,353 18,641,228
Retained earnings 38,573,364 31,506,116
Treasury stock (7,090,752) (4,414,169)
------------- -------------
49,691,643 45,805,853
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 83,631,044 $ 86,535,745
============= =============
</TABLE>
See accompanying notes.
F-4
<PAGE> 49
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended August 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Contract management revenue $ 93,908,317 $ 97,836,682 $ 102,156,150
Premiums and fees 38,273,739 47,451,923 21,383,040
Other 1,500,444 711,744 278,659
------------- ------------- -------------
Total revenues 133,682,500 146,000,349 123,817,849
------------- ------------- -------------
EXPENSES:
Salaries and benefits 71,554,387 75,741,311 65,725,221
Medical claims 14,278,995 20,959,797 9,080,825
Purchased services 12,288,079 13,735,058 14,124,386
Provision for doubtful accounts 877,376 588,705 759,467
Other 16,799,097 17,877,120 14,754,707
Depreciation and amortization 5,101,355 4,459,600 3,166,073
------------- ------------- -------------
Operating expenses 120,899,289 133,361,591 107,610,679
------------- ------------- -------------
Operating income 12,783,211 12,638,758 16,207,170
------------- ------------- -------------
Other income (expense):
Interest expense (1,261,970) (1,430,985) (799,347)
Interest income and other 302,384 255,285 872,944
------------- ------------- -------------
Income before income taxes 11,823,625 11,463,058 16,280,767
Income tax provision 4,756,377 4,562,297 6,514,812
------------- ------------- -------------
Income before minority interest 7,067,248 6,900,761 9,765,955
Minority interest -- -- (33,960)
------------- ------------- -------------
Net income $ 7,067,248 $ 6,900,761 $ 9,731,995
============= ============= =============
Earnings per common share:
Basic $ 1.11 $ 1.00 $ 1.37
============= ============= =============
Diluted $ 1.07 $ 0.96 $ 1.26
============= ============= =============
Weighted average shares outstanding:
Basic 6,369,846 6,874,646 7,120,303
============= ============= =============
Diluted 6,604,903 7,199,677 7,754,467
============= ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE> 50
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional Treasury
Stock Paid-in Retained Treasury Stock,
Shares Amount Capital Earnings Shares at Cost Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1997 6,966,762 $ 69,668 $16,739,425 $ 14,873,360 -- -- $ 31,682,453
Net income -- -- -- 9,731,995 -- -- 9,731,995
Tax benefit associated with
stock options exercised -- -- 773,229 -- -- -- 773,229
Exercise of stock options 265,050 2,650 471,984 -- -- -- 474,634
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1998 7,231,812 72,318 17,984,638 24,605,355 -- -- 42,662,311
Net income -- -- -- 6,900,761 -- -- 6,900,761
Purchase of treasury stock -- -- -- -- 766,100 (5,617,400) (5,617,400)
Tax benefit associated with
stock options exercised -- -- 1,236,320 -- -- -- 1,236,320
Exercise of stock options:
Issuance of treasury stock -- -- (681,623) -- (162,778) 1,203,231 521,608
Newly issued shares 35,938 360 101,893 -- -- -- 102,253
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1999 7,267,750 72,678 18,641,228 31,506,116 603,322 (4,414,169) 45,805,853
Net Income -- -- -- 7,067,248 -- -- 7,067,248
Purchase of treasury stock -- -- -- -- 423,200 (3,363,138) (3,363,138)
Tax benefit associated with
stock options exercised -- -- 357,841 -- -- -- 357,841
Employee stock purchases -- -- (39,957) -- (14,642) 109,968 70,011
Exercise of stock options:
Issuance of treasury stock -- -- (822,759) -- (123,481) 934,684 111,925
Employee surrenders for
tax payments -- -- -- -- 55,756 (358,097) (358,097)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 2000 7,267,750 $ 72,678 $ 18,136,353 $ 38,573,364 944,155 $ (7,090,752) $ 49,691,643
============ ============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 51
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended August 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 7,067,248 $ 6,900,761 $ 9,731,995
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,101,355 4,459,600 3,166,073
Minority interest -- -- 33,960
Deferred income taxes (464,058) 198,586 240,337
Non-cash expenses 119,226 (1,247) 2,324
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,371,539 887,387 (294,089)
Decrease (increase) in income taxes receivable (249,758) (46,723) 951,256
Decrease (increase) in other receivables 88,587 58,035 (460,046)
Decrease (increase) in prepaid expenses and supplies (397,658) (605,183) 80,066
Decrease (increase) in other assets 875,953 (497,920) (1,009,400)
Increase (decrease) in accounts payable, employee compensation
and benefits, medical claims payable, and accrued expenses (1,690,429) 17,274 (4,592,617)
Increase (decrease) in other noncurrent liabilities 611,627 117,883 (118,495)
------------ ------------ ------------
Net cash provided by operating activities 12,433,632 11,488,453 7,731,364
------------ ------------ ------------
Investing activities:
Purchase of property and equipment (928,884) (985,057) (864,049)
Proceeds from sale of equipment 2,700 5,275 9,569
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 --
Payment for purchase of Professional Psychological Services, Inc.,
net of cash acquired -- -- (1,240,834)
Payment for purchase of Acorn Behavioral HealthCare Management Corporation
net of cash acquired -- -- (12,726,120)
------------ ------------ ------------
Net cash used in investing activities (926,184) (2,339,993) (34,270,922)
------------ ------------ ------------
Financing activities:
Payments on long-term debt (5,135,706) (20,605,531) (6,520,583)
Borrowing under lines of credit -- 14,500,000 32,500,000
Net proceeds from stock options exercised -- 102,253 474,634
Tax benefit associated with stock options exercised 357,841 1,236,320 773,229
Purchase of treasury stock (3,363,138) (5,617,400) --
(Surrenders) Issuance of treasury stock (288,086) 470,111 --
------------ ------------ ------------
Net cash provided by (used in) financing activities (8,429,089) (9,914,247) 27,227,280
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,078,359 (765,787) 687,722
Cash and cash equivalents at beginning of year 5,438,510 6,204,297 5,516,575
------------ ------------ ------------
Cash and cash equivalents at end of year $ 8,516,869 $ 5,438,510 $ 6,204,297
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 1,275,870 $ 1,450,459 $ 778,962
============ ============ ============
Income taxes $ 4,462,776 $ 3,616,830 $ 5,212,080
============ ============ ============
</TABLE>
F-7
<PAGE> 52
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
2000 1999 (A) 1998 (B)
------------ ------------ ------------
<S> <C> <C> <C>
Non-cash investing activities:
Fair value of assets acquired -- $ 4,527,904 $ 39,717,058
Cash paid -- (1,626,167) (33,967,191)
------------ ------------ ------------
Liabilities assumed -- $ 2,901,737 $ 5,749,867
============ ============ ============
</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.
See accompanying notes.
F-8
<PAGE> 53
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000, 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; 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.
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 Winter Park, 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).
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 computer hardware and
software are estimated to be three years. The useful lives of furniture
and fixtures, office equipment, and transportation are estimated to be
five years. 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.
F-9
<PAGE> 54
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, and on November 19, 1999 authorized the
repurchase of an additional 200,000 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 were added to the treasury shares of the Company and
may be used for employee stock plans and for other corporate purposes.
The stock repurchases utilized available cash and borrowings under the
Company's bank facilities. The Company repurchased 1,189,300 shares of
its common stock as of August 31, 2000, of which 245,145 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.
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, 2000, 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
14.5% 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.
F-10
<PAGE> 55
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109
generally requires an asset and liability approach and requires
recognition of deferred tax assets and liabilities resulting from
differing book and tax bases of assets and liabilities. It requires that
deferred tax assets and liabilities be determined using the tax rate
expected to apply to taxable income in the periods in which the deferred
tax asset or liability is expected to be realized or settled. Under this
method, future financial results will be impacted by the effect of
changes in income tax rates on cumulative deferred income tax balances.
EARNING PER SHARE: Earnings per share has been computed in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". 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.
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 13).
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.
F-11
<PAGE> 56
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-12
<PAGE> 57
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
PPS
Cash payments for the purchase of eighty percent (80%) of the outstanding
common stock of Florida Professional Psychological Services, Inc.
("PPS"), also known as Professional Psychological Services, Inc., 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.
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 company's term loan facility. Pro forma financial data is not
presented because the impact of this acquisition is not material to the
Company's results of operations for any period presented.
F-13
<PAGE> 58
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma financial information gives effect to
the acquisition of Acorn and FPM as if the acquisitions occurred on
September 1, 1997.
<TABLE>
<CAPTION>
Year Ended
August 31,
------------------
1998
------------------
<S> <C>
Revenue $ 145,063,467
==================
Net Income $ 9,245,713
==================
Net Income per common share:
Basic $ 1.30
==================
Diluted $ 1.19
==================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at August 31:
<TABLE>
<CAPTION>
2000 1999
---------------- ----------------
<S> <C> <C>
Computer Hardware $ 2,216,818 $ 1,851,678
Computer Software 1,105,458 1,146,668
Furniture and Fixtures, and Office Equipment 2,941,203 4,005,371
Transportation (Vehicles) 25,093 25,093
Leasehold Improvements 454,380 454,901
---------------- ----------------
6,742,952 7,483,711
Less accumulated depreciation 4,633,031 4,192,437
---------------- ----------------
$ 2,109,921 $ 3,291,274
================ ================
</TABLE>
Depreciation expense was $1,988,315, $1,420,704 and $887,706 for the
years ended August 31, 2000, 1999, and 1998, respectively.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at August 31:
<TABLE>
<CAPTION>
2000 1999
---------------- ----------------
<S> <C> <C>
Reserve for contract adjustments $ 1,075,459 $ 1,191,758
Health insurance 900,293 852,669
Other 4,095,921 3,933,277
---------------- ----------------
$ 6,071,673 $ 5,977,704
================ ================
</TABLE>
F-14
<PAGE> 59
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consisted of the following at August 31:
<TABLE>
<CAPTION>
2000 1999
---------------- -----------------
<S> <C> <C>
Chase Bank of Texas, National Association - Advance Term Loan
Facility $ 14,900,000 $20,000,000
Borealis Note -- 35,706
---------------- -----------------
14,900,000 20,035,706
---------------- -----------------
Less current maturities 3,600,000 3,373,706
---------------- -----------------
$ 11,300,000 $ 16,662,000
================ =================
</TABLE>
The aggregate maturities of long-term debt during the next five fiscal
years are $3,600,000 in 2001 and 2002; $7,700,000 in 2003; and $0 in 2004
and 2005. 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. As of August 31, 2000, the Company had
borrowings of $14.9 million outstanding against the term loan facility
against which it can no longer draw. The Revolving Credit Facility was
terminated by the Company on June 30, 2000. Amounts that were outstanding
under the Advance Term Loan Facility as of November 30, 1999 are to be
repaid in twelve quarterly principal payments that began 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 bore 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 incurred 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
(terminated June 30, 2000) and the unused portion of the Advance Term
Loan Facility (expired November 30, 1999). The Company's interest rate
under the New Credit Facility was 7.625% at August 31, 2000.
The Company is subject to certain covenants which include prohibitions
against (i) incurring additional debt or liens, except specified
permitted debt or permitted liens, (ii) certain material acquisitions,
other than specified permitted acquisitions (including any single
acquisition not greater than $10.0 million or cumulative acquisitions not
in excess of $30.0 million during any twelve consecutive monthly
periods), (iii) certain mergers, consolidations or asset dispositions by
the Company or changes of control of the Company, (iv) certain management
vacancies at the Company, and (v) material change in the nature of
business conducted. In addition, the terms of the New Credit Facility
require the Company to satisfy certain ongoing financial covenants. The
New Credit Facility is collateralized 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.
F-15
<PAGE> 60
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 4, 2000, the Company was advised that Chase Bank of Texas,
National Association, had committed to provide the company with a $15.0
million three year revolving line of credit. If the pending agreement is
finalized, the revolving facility would be used to repay the remaining
outstanding balances on the existing term loan facility.
The Company acquired a custom software system upon the acquisition of
ChoiceHealth (see Note 3). The software system was financed by a note to
Borealis Software Systems, Inc., the company who designed the system. The
note was paid in full during fiscal year 2000.
7. 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.
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.
The following table summarizes the status of the Plans:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------- ---------------------------- -----------------------------
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 1,352,840 $ 4.95 1,361,293 $ 7.69 1,451,843 $ 4.62
Granted 142,054 6.49 680,040 7.05 186,500 23.37
Exercised 123,481 0.91 198,716 3.14 265,050 1.79
Expired or canceled 49,270 7.34 489,777 16.22 12,000 10.31
Outstanding at end of year 1,322,143 $ 5.40 1,352,840 $ 4.95 1,361,293 $ 7.69
Exercisable at end of year 730,486 $ 3.98 710,310 $ 2.80 781,113 $ 2.96
Available for grant at end of year 325,703 -- 418,487 -- 608,750 --
</TABLE>
F-16
<PAGE> 61
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding
under the Plans at August 31, 2000:
<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>
$ 1.00 - 5.50 567,894 4.07 $2.68 515,394 $2.40
6.91 - 9.75 750,249 7.72 7.36 214,292 7.72
23.75 4,000 7.01 23.75 800 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 2000, 1999 and 1998 net earnings and earnings per
share would have been:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net Earnings
As reported $ 7,067,248 $ 6,900,761 $ 9,731,995
Pro forma (unaudited) $ 6,531,026 $ 6,175,069 $ 9,438,256
Earnings per share
Basic
As reported $ 1.11 $ 1.00 $ 1.37
Pro forma (unaudited) $ 1.03 $ 0.90 $ 1.33
Diluted
As reported $ 1.07 $ 0.96 $ 1.26
Pro forma (unaudited) $ 0.99 $ 0.86 $ 1.22
</TABLE>
In accordance with SFAS 123, the fair value of options at date of grant
was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ---------
<S> <C> <C> <C>
Risk free interest rate 6.4% 5.1% 6.1%
Expected life (years) 6.4 6.4 6.6
Expected volatility 45.8% 53.1% 30.4%
Expected dividend yield 0.0% 0.0% 0.0%
</TABLE>
In accordance with SFAS 123, the weighted average fair value of options
granted during 2000, 1999 and 1998 was $3.53, $4.07, and $10.59
respectively.
F-17
<PAGE> 62
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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, 2000, 1999 and 1998 the
Company recognized matching contributions of approximately $471,000,
$466,000, and $254,000 respectively.
9. INCOME TAXES
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. Income tax expense for
the years ended August 31 is comprised of the following components:
<TABLE>
<CAPTION>
Federal State Total
------------- ------------- -------------
<S> <C> <C> <C>
2000
Current $ 3,908,136 $ 662,724 $ 4,570,860
Deferred 166,238 19,263 185,501
------------- ------------- -------------
$ 4,074,374 $ 681,987 $ 4,756,361
============= ============= =============
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
============= ============= =============
1998
Current $ 5,526,322 $ 968,030 $ 6,494,352
Deferred 16,471 3,989 20,460
------------- ------------- -------------
$ 5,542,793 $ 972,019 $ 6,514,812
============= ============= =============
</TABLE>
The components of the net deferred tax asset at August 31 were obtained
using the liability method in accordance with SFAS No. 109 and are as
follows:
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Contracts $ (1,058,593) $ (1,252,205)
Goodwill (1,325,080) (995,620)
------------- -------------
Deferred tax liabilities (2,383,673) (2,247,825)
------------- -------------
Accounts receivable 1,075,299 1,365,896
Vacation accruals 614,381 611,819
Fixed assets/intangibles 537,108 271,781
Miscellaneous accruals 278,564 167,111
Net operating loss carryforward 559,946 698,345
------------- -------------
Deferred tax assets 3,065,298 3,114,952
------------- -------------
Net deferred tax asset $ 681,625 $ 867,127
============= =============
</TABLE>
F-18
<PAGE> 63
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At August 31, 2000, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately
$1,400,000. 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 at the U.S. federal
income tax rate to the Company's effective income tax rate:
<TABLE>
<CAPTION>
Tax Rate 2000 2000 1999 1998
-------------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Federal income taxes based on 35%
of book income 35.0% $4,138,268 $4,012,071 $5,698,268
Permanent adjustments:
Meals and entertainment, 2.3% 274,973 280,854 252,838
goodwill and other permanent
adjustments
State income taxes and other 2.9% 343,120 269,372 563,706
adjustments
-------------------- --------------- ---------------- ----------------
40.2% $4,756,361 $4,562,297 $6,514,812
-------------------- --------------- ---------------- ----------------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under
operating leases. The following is a schedule of minimum rental payments
under these leases, which expire at various dates:
<TABLE>
<CAPTION>
Years ended August 31,
<S> <C>
2001 1,883,417
2002 1,513,161
2003 1,204,350
2004 965,933
2005 630,665
-----------------
$6,197,526
=================
</TABLE>
Rent expense for the years ended August 31, 2000, 1999, and 1998 was
$3,174,094, $2,325,321 and $1,385,301, respectively.
The Company leases a building it occupies as its executive offices and
National Support Center in Lewisville, Texas. In connection with this
lease transaction, the Company guaranteed a loan of approximately
$900,000 by a financial institution to the building owner. The Company
also agreed to purchase the leased building for approximately $4.5
million at the end of the lease term in 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 basis, with additional tail coverage being obtained when
necessary. Management is unaware of any claims against the Company that
would cause the final expenses for professional and general liability to
vary materially from amounts provided.
F-19
<PAGE> 64
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recently the Balanced Budget Refinement Act of 1999 mandated the
elimination of cost-based reimbursement of mental health partial
hospitalization services. Implementation began August 1, 2000. The
resulting reimbursement for partial hospitalization services based on the
Medicare outpatient prospective payment system utilizes a fixed
reimbursement amount per patient day. The base reimbursement rate is a
wage-adjusted rate of $202.19 per day, which may 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 no earlier than April 1, 2001. The
phase in of a prospective payment system with reimbursement based on a
functional patient classification may 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.
In late 1999, the Company became aware that a civil qui tam lawsuit had
been filed under seal naming the Company's psychiatric contract
management subsidiary, Horizon Mental Health Management (Horizon), as a
defendant therein. The lawsuit is currently pending in the United States
District Court for the District of Columbia. The U.S. Government has not
made a decision whether to intervene in the lawsuit which is still under
seal. Horizon has not been served and therefore, is not presently a party
to the lawsuit. The Company does not believe that the claims asserted in
the lawsuit, based upon present allegations, represent a material
liability to the Company.
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, would not be significantly in excess of
any reserves or have a material adverse effect on the Company's financial
position or results of operations.
11. COMMON STOCK
The Board of Directors adopted in October 1999 the Horizon Health
Corporation Employee Stock Purchase Plan ("the Plan"). The purpose of the
Plan, which became effective January 1, 2000, is to provide employees of
the Company and its subsidiaries the opportunity to acquire an ownership
interest in the Company through the purchase of Common Stock at a price
below current market prices. The Plan offers eligible employees the
ability to purchase company stock at a price 15% below the current market
price at designated periods. Eligible employees are able to contribute 1
to 10% of their base salary pursuant to two six-month offering periods
which are defined as January 1 - June 30 or July 1 - December 31. The
Company issued from treasury 14,642 shares of Common Stock for the first
offering period ending June 30, 2000.
F-20
<PAGE> 65
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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
for the years ended August 31:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------- ---------------------------------- -----------------------------------
Net Per Net Per Net Per
Income Shares Share Income Shares Share Income Share
Numerator Denominator Amount Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- ---------- ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS........... $7,067,248 6,369,846 $ 1.11 6,900,761 $ 6,874,646 $ 1.00 $ 9,731,995 7,120,303 $ 1.37
========== ========= =========
Effect of dilutive
securities warrants
and options......... 235,097 325,031 634,164
----------- ----------- -----------
Diluted EPS......... $7,067,248 6,604,943 $ 1.07 $ 6,900,761 7,199,677 $ 0.96 $ 9,731,995 7,754,467 $ 1.26
========== =========== ========== =========== =========== ========= =========== =========== =========
</TABLE>
During 2000, 1999, and 1998 certain options to acquire common stock were
not included in certain computations of EPS because the options exercise
price was greater than the average market price of the common shares. The
options excluded by quarter are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED OPTIONS EXCLUDED OPTION PRICE RANGE
----------------------------- ---------------------------- --------------------------
<S> <C> <C>
August 31, 2000 770,432 $ 6.91 - $23.75
----------------------------- ---------------------------- --------------------------
May 31, 2000 775,337 $ 6.91 - $23.75
----------------------------- ---------------------------- --------------------------
February 29, 2000 176,700 $ 7.42 - $23.75
----------------------------- ---------------------------- --------------------------
November 30, 1999 772,910 $ 6.91 - $23.75
----------------------------- ---------------------------- --------------------------
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
----------------------------- ---------------------------- --------------------------
</TABLE>
F-21
<PAGE> 66
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. 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
notes (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 by operating division/segment:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health Intercompany
2000 Services Management Management Outcomes Other** Eliminations** Consolidated
---- ----------- ----------- ----------- ----------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $38,602,113 $81,836,862 $11,923,946 $ 1,100,485 $ 219,094 $ -- $133,682,500
Intercompany Revenues 74,670 -- -- 1,378,352 -- (1,453,022) --
EBITDA * 3,064,968 22,440,675 1,877,450 (41,513) (9,457,014) -- 17,884,566
Total Assets 41,546,397 65,779,473 6,385,289 300,823 24,621,800 (55,002,738) 83,631,044
1999
----
Revenues $47,009,295 $88,055,266 $10,406,230 $ 450,228 $ 79,330 $ -- $146,000,349
Intercompany Revenues -- -- 1,723,471 -- (1,789,623) -- 66,152
EBITDA * 3,090,340 21,503,841 950,769 134,466 (8,581,058) -- 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
</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 and psychiatric data- base
services.
(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.
F-22
<PAGE> 67
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for
fiscal 2000 and 1999:
<TABLE>
<CAPTION>
Operating Net Earnings Per Share
Revenues Income Income Basic Diluted
------------------ ---------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Quarter Ended:
August 31, 2000 $ 32,440,639 $ 3,068,399 $ 1,719,319 $ 0.27 $ 0.26
May 31, 2000 32,390,990 3,260,014 1,824,511 0.29 0.28
February 29, 2000 33,564,893 3,160,359 1,738,285 0.28 0.27
November 30, 1999 35,285,978 3,294,439 1,785,133 0.27 0.26
------------------ ---------------- ---------------- ------------ -----------
Total Year $ 133,682,500 $ 12,783,211 $ 7,067,248 $ 1.11 $ 1.07
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
</TABLE>
F-23
<PAGE> 68
INDEX TO FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants on Financial Statement Schedule..........S-2
Schedule VIII Valuation and Qualifying Accounts............................S-3
S-1
<PAGE> 69
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Horizon Health Corporation
Our audits of the consolidated financial statements referred to in our report
dated October 12, 2000 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)(2) of this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
herein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Dallas, Texas
October 12, 2000
S-2
<PAGE> 70
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, 1996:
Allowance for doubtful $ 1,355,037 $ 1,435,049 $ (343,990) $ (58,474)(1) $ 2,387,622
Year ended August 31, 1997:
Allowance for doubtful accounts 2,387,622 3,033,693 (4,023,355) (40,537)(1) 1,357,423
Year ended August 31, 1998:
Allowance for doubtful accounts 1,357,423 759,467 (401,910) 187,132(2) 1,902,112
Year ended August 31, 1999:
Allowance for doubtful accounts 1,902,112 588,705 (1,109,393) 1,599,425(2,3) 2,980,849
Year ended August 31, 2000:
Allowance for doubtful accounts $ 2,980,849 877,376 (1,447,187) 136,736(2) $ 2,547,774
</TABLE>
(1) 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.
(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. In addition, adjustment reflects items
reserved as other receivables, therefore their reserve is not included in
the allowance for receivables.
(3) Adjustment includes a recovery of $1.75 million related to one former
Specialty contract.
S-3
<PAGE> 71
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 - 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).
10.2 - 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 (incorporated herein by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1999).
</TABLE>
<PAGE> 72
<TABLE>
<S> <C>
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 (incorporated herein by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1999).
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 Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1995).
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 (incorporated herein by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1999).
10.14 - Horizon Health Corporation 1998 Stock Option Plan (incorporated
herein by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1999).
10.15 - Horizon Health Corporation Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 filed with the Commission on
November 30, 1999, Registration No. 333-91761).
10.16 - Horizon Mental Health Management Contingent Bonus Plan
(incorporated herein by reference to Exhibit 10.37 to the
Company's 1996 Form 10-K/A).
10.17 - Horizon Health Corporation Bonus Plan Fiscal 2000 (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, 1999).
10.18 - Horizon Health Corporation Bonus Plan Fiscal 2001 (filed
herewith).
10.19 - 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).
</TABLE>
<PAGE> 73
<TABLE>
<S> <C>
10.20 - Agreement dated August 31, 1999 between Horizon Health
Corporation, Inc. and Ronald C. Drabik regarding severance
arrangements (incorporated herein by reference to exhibit 10.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1999).
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>
