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UNITED STATES
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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File number 1-13626
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HORIZON HEALTH CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-2293354
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(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
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(Address of principal executive offices, including zip code)
(972) 420-8200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of November 5, 2001 there were 5,322,639 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 $52,711,364. 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 16, 2002.
Page 1
TABLE OF CONTENTS
HORIZON HEALTH CORPORATION
PAGE
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PART I
Item 1 Business ....................................................... 3
Item 2 Properties ..................................................... 22
Item 3 Legal Proceedings .............................................. 22
Item 4 Submission of Matters to a Vote of Security Holders ............ 23
PART II
Item 5 Market for the Company's Common Equity
and Related Stockholder Matters ................................ 25
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 ..... 38
Item 8 Financial Statements and Supplementary Data .................... 38
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................ 38
PART III
Item 10 Directors and Executive Officers of the Registrant ............. 39
Item 11 Executive Compensation ......................................... 39
Item 12 Security Ownership of Certain Beneficial Owners and
Management ..................................................... 39
Item 13 Certain Relationships and Related Transactions ................. 39
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................... 40
Page 2
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 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. As of August 31, 2001, the Company had 646 contracts to provide EAP
and managed mental health services covering approximately 2.3 million lives. The
Company had 138 management contracts as of August 31, 2001, with contract
locations in 36 states and the District of Columbia. Of its management
contracts, 112 relate to mental health treatment programs and 26 relate to
physical rehabilitation programs. The Company has also developed a proprietary
mental health outcomes measurement system known as CQI+. At August 31, 2001 the
Company had contracts to provide outcome measurement services at 160 contract
locations as well as 8 database project contracts. The Company was incorporated
in 1989 and is the successor to Horizon Health Management Company, which began
the development and contract management of mental health treatment programs for
general acute care hospitals in 1981.
The Company's strategies are (1) to further enhance its position as the
leader in the contract management of mental health treatment programs, (2) to
expand the range of services which it offers to its client hospitals to include
other clinical and related services and programs, and (3) to grow its employee
assistance programs and managed behavioral care services. 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 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 has capitalized 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 such services on a national basis, while providing local,
individualized service to both employers and health plans and to their
respective employees or members.
The Company considers that it has four identifiable business segments
generating 99.8% of its revenues as follows: (1) Employee assistance programs
and managed care, (2) mental health contract management services, (3) physical
rehabilitation contract management services, (4) outcomes measurement and
psychiatric database services. Of the total revenues of the Company for the year
ended August 31, 2001, such business segments constituted 25.1%, 62.1%, 10.5%,
and 2.1% respectively. See Note 13 to the Consolidated Financial Statements of
the Company included herein for certain financial information regarding industry
segments of the Company.
Page 3
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. 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.
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, and short-term crisis intervention as
alternatives and compliments 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, 2001, 69%
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 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, which are subject to change, impacts the decisions of
general acute care hospitals regarding
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whether to offer mental health and physical rehabilitation services pursuant to
management contracts with the Company, as well as the decisions whether to renew
such contracts and the amount of fees to be paid thereunder.
The Balanced Budget Act of 1997 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 $206.82 per day, which lowered Medicare reimbursement
levels to many hospitals for partial hospitalization services. This change
adversely affected the ability of the Company to maintain and obtain management
contracts for partial hospitalization services and the amount of fees paid to
the Company under such contracts.
Revenues from partial hospitalization services were $7.4 million, or 7.9%
of total contract management revenues for the year ended August 31, 2001, down
approximately $7.8 million, or 51.3% from the prior fiscal year. Of the 54
contracts including partial hospitalization services in effect on August 31,
2001, 40 program locations had partial hospitalization services in operation, 12
program locations were in operation but the partial hospitalization services
were not in operation, and 2 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 $2.5 million or more
annually.
In April 2000, HCFA (renamed in June 2001 to the Centers for Medicare and
Medicaid Services, or "CMS") adopted new rules requiring a CMS 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 CMS to
apply to inpatient mental health and rehabilitation units. The rules contain
numerous requirements, some specifically applicable to facilities operated under
management contracts, which must be satisfied in order to receive a CMS
determination of provider-based status. The rules are applicable to a provider
for new programs at the beginning of its first Medicare cost reporting year that
commences after January 10, 2001. Existing programs at October 1, 2000 are
"grand-fathered", unless they elect early adoption, until October 1, 2002. The
particular application of the rules to inpatient units managed by the Company is
currently unclear in several respects. CMS 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 modifications to the contracts which may be
unfavorable to the Company or cause termination or non-renewal of management
contracts if, under the new rules, it is not possible for the hospital provider
to obtain a determination of provider-based status of an inpatient unit operated
under a management contract.
In addition, recent amendments to the Medicare statutes provide for a
phase-out of cost-based reimbursement of physical rehabilitation services over a
two-year period beginning no earlier than January 1, 2002. The phase in of a
prospective payment system with reimbursement based on a functional patient
classification may raise in some cases and lower in others the Medicare
reimbursement levels to hospitals for physical rehabilitation services. To the
extent that client reimbursement decreases, this could adversely affect the
ability of the Company to maintain and obtain management contracts for physical
rehabilitation services and the amount of fees paid to the Company under such
contracts.
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
effectiveness of care provided, and to demonstrate the benefits of its programs
to patients and providers. The CQI+ system provides the Company with a valuable
tool for demonstrating clinical results of the mental health programs managed by
the Company and in marketing such management services to other hospitals. The
Company provides outcome measurement services to acute care hospital-based
programs,
Page 5
freestanding 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. 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 seven years ago, the
Company has compiled a database containing outcome measurement data on
approximately 75,000 patients. With the growth of managed care and the JCAHO
accreditation requirement, the Company believes that its CQI+ System is becoming
an important component of the mental health services it provides.
PSYCHSCOPE DATABASE SERVICES
The Company developed and began to market in fiscal 1999 PsychScope
Database Services, which are based on outcomes measurement data collected from
approximately 75,000 patients that have participated in the CQI+ Outcomes
Measurement System since 1994. The PsychScope Services allow pharmaceutical
product marketers and researchers to access information on the clinical
treatment of patients in 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 pharmaceutical market.
PHYSICAL REHABILITATION SERVICES
The Company has successfully expanded the types of programs that it
manages for its client hospitals to include physical rehabilitation 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 for contract management of mental
health programs are also driving significant demand for contract management of
physical rehabilitation programs. The Company provides contract management for a
full range of physical rehabilitation services. In addition to acute physical
therapy and rehabilitation services, the Company also provides contract
management for outpatient rehabilitation 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 linear phase-out
of cost-based reimbursement of physical rehabilitation, which is currently
expected to begin on January 1, 2002. Reimbursement for physical rehabilitation
services on a prospective payment system basis will be phased-in over two years.
Under the prospective payment rates recently announced, it appears that the
majority of the Company's clients will experience increased reimbursement,
although several clients expect reduced reimbursement including one that could
suffer losses on the services being provided without additional volume.
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
Page 6
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 provision of employee assistance programs for employers. The Company
further expanded its services in this area with the acquisitions of
ChoiceHealth, Inc., Resources in Employee Assistance and Corporate Health, Inc.,
and Occupational Health Consultants of America (OHCA), effective October 5,
1998, April 1, 1999 and August 1, 2001, 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.
Corporate development initiatives undertaken by the Company to expand its
behavioral service businesses include the pursuit of a Knox-Keene license to
conduct "at-risk" business in the state of California. In January 2001, the
Company redirected the development of a corporate integrated EAP and managed
care computer software system in favor of locally developed, subsidiary level,
individual EAP and managed care solutions. Accordingly, separate initiatives for
EAP and managed care have been undertaken by the EAP and managed care divisions
of Horizon Behavioral Services, Inc., which involve enhancements to current
software applications and/or purchasing commercially available software. The
expenses associated with these two initiatives are reflected in the "other"
(i.e., corporate) category in the Company's segment information included
elsewhere herein.
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 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 EAP also provides consultative services
for the supervisors, managers and human resource departments of companies
purchasing services. Critical Incident Debriefing programs and specialized
training are elements of the program. The Company also offers a comprehensive
array of work life information and referral sources as well as 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.
Page 7
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 112 of the Company's 138 management contracts at August 31,
2001.
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 recent CMS rules requiring a CMS 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 that can be rendered in a variety of individual or group settings at
various locations, including hospitals, clinics or the offices of the service
provider. Outpatient service providers can also serve as gatekeepers for persons
being evaluated for treatment. Once an individual is assessed for treatment in
an outpatient environment, the individual is provided the appropriate level of
service in relation to the diagnosis.
Home Health Services. Home health services are provided in the patient's
home. Typically, these services are provided on a periodic basis by an
experienced psychiatric nurse working under the direct supervision of a
psychiatrist. The nurse may provide medication management, vital sign
monitoring, individual and family therapy, and other related clinical services.
Patients utilizing home health services include individuals whose clinical
conditions make it difficult or impossible to leave their homes due to
psychiatric illness or a combination of psychiatric and medical illness. Home
health service patients also include patients without access to transportation.
Patients over the age of 65 often use psychiatric home health services.
Consulting Services
In late 1999 the Company made a commitment to expand its services by
offering its considerable expertise in the mental health industry to hospital
clients on a consulting basis. Over the past twenty 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 allow clients to take advantage of
the Company's considerable expertise without a contract management relationship.
The Company has 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 such as clinical
Page 8
policies and procedures development, Medicare billing and coding assistance,
comprehensive clinical audits, outcomes measurement and reporting, 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 demonstrating the benefits of its programs 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. 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. As
of August 31, 2001, 56 of the Company's management contracts included the CQI+
System and there were 104 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 the CQI+ System, the Company has compiled a database
containing outcome measurement data on approximately 75,000 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 DATABASE SERVICES
The Company developed and began to market in fiscal 1999 PsychScope
Database Services, which are based on outcomes measurement data collected from
approximately 75,000 patients that have participated in the CQI+ Outcomes
Measurement System since 1994. The PsychScope Services allow pharmaceutical
product marketers and researchers to access information on the clinical
treatment of patients in 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 services
allow 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 U.S. launches of several new psychiatric drugs, the
psychiatric database services market is expected to grow significantly. As of
August 31, 2001 the Company had 8 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 26 of
the Company's 138 management contracts at August 31, 2001.
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, speech,
occupational and recreational therapists, rehabilitation nurses and social
Page 9
workers. 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 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 CMS rules requiring a CMS 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, REACH in
April 1999, and Occupational Health Consultants of America (OHCA) in August
2001. As of August 31, 2001, the Company had 646 contracts to provided EAP and
managed behavioral health care services for nearly 2.3 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, as well
as staff clinicians and CEAP professionals, 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 and treatment can
frequently minimize the likelihood that the problem will develop into a serious
debilitating event requiring extensive treatment. Critical Incident Stress
Debriefing for employers and their employees has been increasingly utilized in
the past year. The Company also offers a comprehensive array of work life
information and referral sources as well as HorizOnline, an internet based EAP
program, which is available exclusively to its clients. The Company is paid a
specified fee per month per employee for its services, which amount varies
depending on the range of services provided.
Page 10
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 the Dallas suburb of
Lewisville, 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, 2001, the Company had 905 program employees at its contract
locations and 171 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 staff of 34 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, its EAP/Employer business is located in suburban Philadelphia,
PA and the newly acquired OHCA EAP subsidiary is headquartered in Nashville,
Tennessee, with regional and satellite offices in various cities.
The Company's managed care operations have 28 licensed clinicians
providing services in the four clinic locations in Florida, an additional 127
employees working in clinical management and administrative positions, and has
provider network contracts with approximately 5,400 providers and facilities.
The Company's EAP/Employer operation has 49 employees and has contracts
with approximately 12,000 individual providers located in all 50 states.
The Company's OHCA EAP subsidiary has 55 employees and has contracts with
approximately 2,873 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, or outpatient 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), support services (such as billing, dietary and
housekeeping), and generally its own nursing staff 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.
Page 11
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, 2001, 2000 and 1999, the Company had
successfully retained 86%, 79%, and 78%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes that among the most frequent reasons why the client hospitals do not
renew a contract is that they desire to manage such programs themselves, the
economic viability of the programs have changed resulting in their closing the
programs, or a change in hospital administration results in a change in
philosophy regarding the use of contract managers.
Under each contract, the Company receives a fee for its management
services from the client hospital. Management fees may be either a variable fee
related in part to patient census at the program or a fixed fee with
reimbursement for specified 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, 2001, the Company refunded $5,811
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 and ethical and regulatory compliance 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, quality assurance and compliance.
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, an annual conference for all
program directors, and an on-going ethics compliance plan.
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
Page 12
usually employees of the Company. At August 31, 2001, the Company had an average
of 7 employees per contract location.
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, 2001, the Company had a total of 138 management contracts
with general acute care hospitals located in 36 states and the District of
Columbia, as shown below:
NUMBER OF NUMBER OF
STATE CONTRACTS STATE CONTRACTS
Alabama ................... 2 Mississippi ............... 2
Arizona ................... 1 Missouri .................. 4
Arkansas .................. 11 Montana ................... 1
California ................ 18 Nebraska .................. 1
Colorado .................. 1 Nevada .................... 2
Connecticut ............... 1 New Jersey ................ 3
District of Columbia ...... 1 New York .................. 6
Florida ................... 2 North Carolina ............ 5
Georgia ................... 1 Ohio ...................... 8
Idaho ..................... 1 Oklahoma .................. 3
Illinois .................. 4 Oregon .................... 1
Indiana ................... 1 Pennsylvania .............. 11
Iowa ...................... 1 South Carolina ............ 3
Kansas .................... 2 South Dakota .............. 1
Kentucky .................. 4 Tennessee ................. 6
Louisiana ................. 2 Texas ..................... 8
Maryland .................. 1 Washington ................ 4
Massachusetts ............. 5 Wisconsin ................. 2
Michigan .................. 8
Client Hospitals
The Company's clients are primarily small to medium sized hospitals often
located in rural areas, but do include some large tertiary care hospitals. At
August 31, 2001, 22.5% of the Company's management contracts were with
proprietary hospitals. The remaining contracts are primarily with community
not-for-profit hospitals.
Page 13
MANAGED CARE AND EMPLOYEE ASSISTANCE CONTRACTS
The Company delivers its EAP and managed care services through provider
networks and through employees in the Philadelphia, Orlando and Nashville
metropolitan areas, as well as ten regional offices located in the Southeastern
United States. 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.
SALES AND MARKETING
At August 31, 2001, the Company employed in direct sales activities for
its mental health and physical rehabilitation management business seven
full-time Vice Presidents of Development, two Senior Vice Presidents of
Development and a Senior Vice President of Business and Contract Development. In
addition, the company has one Vice President of Development for consulting
services. 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 5,000 hospitals in the United States, with numerous
financial and operating characteristics for each hospital. Potential clients
include hospitals without existing mental health, physical rehabilitation,
employee assistance 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 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 1,200 medical/surgical hospitals with psychiatric
inpatient units and 300 free-standing psychiatric hospitals nationwide and
PsychScope Database Services to 18 pharmaceutical companies. MHO employs a
full-time Director of Market Development who markets the CQI+ System to
hospitals based on an understanding of psychiatric program outcomes measurement
needs and determining the most compatible CQI+ System Module. MHO also employs a
full time Coordinator of Market Development for telemarketing 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 Vice Presidents of
Development. MHO also employs a full-time Director of Market Development and a
clinical liaison who market PsychScope services by providing market insight and
secondary data services 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 EAP 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
three Regional Marketing Directors for the newly acquired OHCA EAP product, and
a Vice President to market its behavioral health managed 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 may be marketed by the Horizon Mental
Health Management Vice Presidents of Development to hospitals as a benefit for
their employees. The HBS sales Vice President markets the behavioral health
managed care services to HMOs and self-insured employers who wish to outsource
management of the behavioral health benefit to an experienced provider.
Page 14
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 nursing companies for the services of
registered nurses. Registered nurses are in limited supply and there can be no
assurance that the Company will be able to attract a sufficient number of
registered nurses 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, particularly the HIPPA
regulations. 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.
Page 15
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. Section 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. Section 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 Centers for Medicare and
Medicaid Services, or "CMS" (formerly the Health Care Financing Administration
or "HCFA") of the U.S. Department of Health and Human Services ("HHS"). CMS
adopts regulations and issues interpretive memoranda and program manuals
providing detailed explanation of the Medicare program. The payment operations
of the Medicare program are handled by intermediaries (under Part A) and
carriers (under Part B) who are insurance companies and Blue Cross/ Blue Shield
Page 16
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, CMS regulations, CMS 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 CMS, 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
has a comprehensive ethics and regulatory compliance program and 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, 2001, of the 159 mental health treatment programs managed by the
Company at its 112 management contract locations, 109 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 variable
adjustments up to the market indices. Various factors have changed since October
1, 1997. Currently the range of target amounts on a per case basis for mental
health and physical rehabilitation services, for Medicare fiscal years beginning
October, 2001, and later, are $6,658.08 to $16,015.09 and $13,037.61 to
$29,849.96 respectively. The variability within a range, is the difference in
wages across the country. The limitations have resulted, in some cases,
Page 17
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, or closure of
the program.
The Balanced Budget Act of 1997 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 $206.82 per day, which may lower Medicare reimbursement
levels to many hospitals for partial hospitalization services. This change has
adversely affected 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.
Acute rehabilitation units within acute-care hospitals which were
previously eligible, are currently eligible on a transitional basis (see PPS
discussion below), 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, 2001, all of the Company's managed
physical rehabilitation programs in operation were exempt from the Prospective
Payment System.
Recent amendments to the Medicare statutes provide for a transitional
phase-out of cost-based reimbursement of physical rehabilitation services over a
two-year period beginning no earlier than January 1, 2002. Depending on a
hospital's Medicare fiscal year, the phase in period could be from 12 to 24
months. The phase in of a prospective payment system with reimbursement based on
a functional patient classification may raise in some cases and lower in others
the Medicare reimbursement levels to hospitals for physical rehabilitation
services. To the extent that client reimbursement decreases, this could
adversely affect the ability of the Company to maintain and/or obtain management
contracts for physical rehabilitation services and the amount of fees paid to
the Company under such contracts.
The 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, 2001, the Company refunded $5,811 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. The cost reports are prepared
by the client hospitals independent of the Company which does not participate
in, nor offer advice on, their preparation. 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
Page 18
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 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, CMS adopted new rules requiring a CMS determination that a
facility has provider-based status before a provider can bill Medicare for the
services rendered at the facility. The new rules have been construed by CMS 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 CMS
determination of provider-based status. The rules are applicable to a provider
for new programs at the beginning of its first Medicare cost reporting year that
commences after January 10, 2001. Existing programs at October 1, 2000 are
"grand-fathered", unless they elect early adoption, until October 1, 2002. The
particular application of the rules to inpatient units managed by the Company is
currently unclear in several respects. CMS 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. As part of its on-going regulatory and
regulatory compliance program initiatives, the Company and its client hospitals
have developed and implemented quality assurance programs and procedures for
utilization review and retrospective patient care evaluation intended to meet
these requirements.
PATIENT REFERRAL LAWS
Various state and federal laws regulate the relationships between health
care providers and referral sources, including federal and state fraud and abuse
laws prohibiting individuals and entities from knowingly and willfully offering,
paying, soliciting or receiving remuneration in order to induce referrals for
the furnishing of health care services or items. These federal laws generally
apply only to referrals for items or services reimbursed under the Medicare or
Medicaid programs or any state health care program. The objective of these laws
is generally to ensure that the purpose of a referral is quality of care and not
monetary gain by the referring party. Violations of such laws can result in
felony criminal penalties, civil sanctions and exclusion from participation in
the Medicare and Medicaid programs.
The Medicare and Medicaid anti-kickback statute, 42 U.S.C. Section
1320a-7b, prohibits the knowing and willful solicitation or receipt of any
remuneration "in return for" referring an individual, or for recommending or
arranging for the purchase, lease, or ordering, of any item or service for which
payment may be made under Medicare or a state health care program. In addition,
the statute prohibits the offer or payment of remuneration "to induce" a person
to refer an individual, or to recommend or arrange for the purchase, lease, or
ordering of any item or service for which
Page 19
payment may be made under the Medicare or state health care programs. The
statute contains exceptions for certain discounts, group purchasing
organizations, employment relationships, waivers of coinsurance by community
health centers, health plans, and practices defined in regulatory safe harbors.
Under a significant number of its management contracts, the Company
receives a variable fee related in part to average daily patient census of the
mental health or physical rehabilitation program. In addition, the Company has
entered into agreements with physicians to serve as medical directors at the
mental health and physical rehabilitation programs and facilities managed by the
Company, which generally provide for payments to such persons by the Company as
compensation for their administrative services. These medical directors also
generally provide professional services at such programs and facilities. In
1991, regulations were issued under federal fraud and abuse laws creating
certain "safe harbors" for relationships between health care providers and
referral sources. Any relationship that satisfies the terms of the safe harbor
is considered permitted. Failure to satisfy a safe harbor, 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 ("HIPPA") 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
Page 20
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 adversely impact the
Company's operations.
MENTAL HEALTH CARE PATIENT RIGHTS
Many states have adopted "patient bill of rights" regulations, which set
forth standards for least restrictive treatment, patient confidentiality,
patient access to mail and telephones, patient access to legal counsel and
requirements that patients be treated with dignity. There are also laws and
regulations relating to the civil commitment of patients to mental health
programs, disclosure of information concerning patient treatments and related
matters. The Company believes that its operations comply with the laws and
regulations, although no assurance can be given regarding compliance in any
particular factual situation.
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 13 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, 2001, the Company employed 1,369 people, of which 1,038 were
full-time employees, 287 were part-time employees, and 44 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, 2001, the Company had administrative services contracts
with 160 physicians to serve as medical directors for clinical programs managed
by the Company.
INSURANCE
The Company carries general liability, malpractice and professional
liability, comprehensive property damage, workers' compensation, directors and
officers and other insurance coverages that management considers reasonable and
adequate for the protection of the Company's assets, operations and employees.
There can be no assurance, however, that the coverage limits of such policies
will be adequate. A successful claim against the Company in excess of its
insurance coverage could have a material adverse effect on the Company.
Page 21
ITEM 2. PROPERTIES
The Company leases a building consisting of approximately 40,000 square
feet for its National Support Center in the Dallas suburb of Lewisville, Texas
under a lease term expiring on November 15, 2003, subject to certain purchase
and renewal options. In addition, for its contract management business the
Company leases an aggregate of 4,626 square feet of space for two regional
offices in the Chicago and Tampa metropolitan areas, with lease terms expiring
from January 2002 to April 2006. Except for one partial hospitalization program
operating in approximately 3,150 square feet of space leased by the Company, 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 91,300 square feet of office space
primarily in the Orlando, Philadelphia, and Nashville metropolitan areas, with
smaller offices in various parts of the country, under lease terms expiring from
November 2001 to April 2008. In January 2001, Horizon Behavioral Services, Inc.
relocated its managed care operations to a single location in Lake Mary, Florida
from three separate locations in metropolitan Orlando, Florida. In addition, the
Company leases approximately 21,925 square feet in various locations throughout
central Florida with lease terms expiring from December 2001 to April 2006 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 coverages 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 one of the defendants
therein. In March 2001, the relators served the complaint in the lawsuit brought
under the Federal False Claims Act. The complaint alleges that certain on-site
Company personnel acted in concert with other non-Company personnel to
improperly inflate certain Medicare reimbursable costs associated with
psychiatric services rendered 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 additional defendants. The U.S. Department of Justice had
previously declined to intervene in the lawsuit. The Company has filed a motion
to dismiss and discovery proceedings have been deferred until the court rules on
the motion. The Company does not believe the claims asserted in the lawsuit,
based on present allegations, represent a material liability to the Company.
In early December 2000, the Company was served with a U.S. Department of
Justice subpoena issued by the U.S. Attorney's Office for the Northern District
of California. The subpoena requested the production of documents related to
certain matters such as patient admissions, patient care, patient charting, and
marketing materials, pertaining to hospital gero-psychatric programs managed by
the Company. The Company believes the subpoena originated as a result of a
sealed qui tam suit and has furnished documents in response to the subpoena. No
allegations or claims have been made against the Company. At this time, the
Company cannot predict the ultimate scope or any particular future outcome of
the investigation.
In March 2001, Horizon Behavioral Services, Inc., a subsidiary of Horizon,
was served with a lawsuit filed in a New Jersey district court seeking damages
for the unauthorized release of treatment records of a member of an employee
assistance program operated by a predecessor of Horizon Behavioral Services,
Inc. The lawsuit asserts similar, but separate claims against two unaffiliated
co-defendants. The damages in the lawsuit are unspecified. Horizon's insurance
carrier has provided the Company a preliminary indication that some of the
claims asserted in the lawsuit may not be covered by insurance. The lawsuit is
in the initial stage of discovery proceedings.
Page 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
James W. McAtee ............... 56 President, Chief Executive Officer, Secretary and Director
Ronald C. Drabik .............. 55 Senior Vice President - Finance and Administration and Treasurer
Frank J. Baumann .............. 42 Senior Vice President - Operations
James K. Don .................. 65 Senior Vice President - Business and Contract Development
Linda A. Laitner .............. 53 Senior Vice President - Operations
David S. Tingue ............... 46 Senior Vice President - Marketing
David K. White, Ph.D .......... 45 Senior Vice President - Operations
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 freestanding 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 January 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
Page 23
SDMS from March 1996 to December 1996 and Vice President, Marketing from July
1994 to March 1996. Prior to this, he was a Regional Business Director for
Zeneca Pharmaceuticals, a United Kingdom based healthcare company, from
September 1992 to June 1994.
David K. White, Ph.D. has been Senior Vice President - Operations since
November 1, 1998. He formerly served as Executive Vice President - Operations
from February 1998 to October 1998. He was a Regional Vice President from
September 1996 to January 1998. He also served as a Regional Director of
Operations from April 1995 to August 1996. He was President and Chief Executive
Officer of Charles River Health Management, Inc., a contract management company
focusing on the public and private sector, from December 1990 to November 1994.
Officers of the Company are elected by the Board of Directors of the
Company and serve at the pleasure of the Board of Directors until their
respective successors are elected and qualified.
Page 24
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:
High Low
---- ---
FISCAL YEAR ENDED AUGUST 31, 2001:
June 1, 2001 - August 31, 2001.................. $ 14.74 $ 8.66
March 1, 2001 - May 31, 2001.................... 9.25 7.00
December 1, 2000 -- February 28, 2001........... 7.63 4.16
September 1, 2000 -- November 30, 2000.......... 6.63 3.63
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
As of October 31, 2001, there were 127 stockholders of record of the
Common Stock of the Company. As of September 1, 2001 (the most recent date that
data was available to the Company) there were approximately 417 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. 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."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND
STATISTICAL DATA
The selected historical consolidated financial data presented below for
the fiscal years ended August 31, 2001, 2000 and 1999, and at August 31, 2001
and August 31, 2000, 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, 1998 and 1997, and at August 31, 1999, 1998 and 1997, 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 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, on a pooling of interests basis. The
selected financial information presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Consolidated Financial Statements of the Company and
Notes thereto included elsewhere in this Report.
Page 25
FISCAL YEAR ENDED AUGUST 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract management revenues ........ $ 93,520 $ 93,908 $ 97,837 $ 102,156 $ 102,263
Premiums and fees ................... 31,830 38,274 47,452 21,383 6,154
Other(1) ............................ 2,310 1,500 712 279 850
--------- --------- --------- --------- ---------
Total revenues ........... 127,660 133,682 146,001 123,818 109,267
Operating expenses:
Salaries and benefits ............... 69,914 71,554 75,741 65,725 60,048
Medical claims ...................... 11,477 14,279 20,960 9,081 1,830
Purchased services .................. 11,849 12,288 13,735 14,124 14,636
Provision for bad debts ............. 1,764 878 589 760 3,034
Other ............................... 16,455 16,799 17,877 14,755 12,796
Depreciation and amortization ....... 4,510 5,101 4,460 3,166 2,201
Merger expenses ..................... -- -- -- -- 3,528
--------- --------- --------- --------- ---------
Operating income ....................... 11,691 12,783 12,639 16,207 11,194
Interest and other income (expense), net (371) (959) (1,176) 74 120
--------- --------- --------- --------- ---------
Income before income taxes ............. 11,320 11,824 11,463 16,281 11,314
Income tax expense ..................... 4,529 4,757 4,562 6,515 4,518
--------- --------- --------- --------- ---------
Income before minority interest ........ 6,791 7,067 6,901 9,766 6,796
Minority interest ...................... -- -- -- (34) (140)
--------- --------- --------- --------- ---------
Net income ............................. $ 6,791 $ 7,067 $ 6,901 $ 9,732 $ 6,656
========= ========= ========= ========= =========
Basic earnings per share ............... $ 1.21 $ 1.11 $ 1.00 $ 1.37 $ 0.96
========= ========= ========= ========= =========
Weighted average shares outstanding .... 5,615 6,370 6,875 7,120 6,929(2)
========= ========= ========= ========= =========
Diluted earnings per share ............. $ 1.16 $ 1.07 $ 0.96 $ 1.26 $ 0.87
========= ========= ========= ========= =========
Weighted average shares and dilutive
potential common shares outstanding .. 5,876 6,605 7,200 7,754 7,681(2)
========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments ........ $ 1,981 $ 8,517 $ 5,439 $ 6,204 $ 5,517
Working capital ........................ 615 3,687 581 6,498 5,064
Intangible assets (net)(3) ............. 57,260 56,924 60,065 59,538 26,005
Total assets ........................... 77,180 83,631 86,536 86,672 48,728
Total debt ............................. 6,900 14,900 20,036 26,029 --
Stockholders' equity ................... 50,998 49,692 45,806 42,662 31,682
AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31,
2001 2001 2001 2000 2000 2000 2000 1999 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
STATISTICAL DATA:
Covered lives (000's) ........ 2,271 1,767 1,737 1,725 1,736 1,758 1,986 2,322 2,416
NUMBER OF CONTRACT LOCATIONS:
Contract locations in
operation ................... 124 127 129 122 128 134 140 141 147
Contract locations signed
and unopened ................ 14 10 10 14 10 11 12 10 6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total contract locations ..... 138 137 139 136 138 145 152 151 153
======== ======== ======== ======== ======== ======== ======== ======== ========
SERVICES COVERED BY CONTRACTS:
Inpatient .................... 123 127 128 121 123 126 129 128 133
Partial hospitalization ...... 40 41 45 50 65 75 81 81 86
Outpatient ................... 17 18 19 19 20 26 26 26 27
Home health .................. 3 4 3 4 5 8 8 8 7
CQI+ & PsychScope ............ 168 128 125 113 115 115 114 110 106
TYPES OF TREATMENT PROGRAMS:
Geropsychiatric .............. 109 113 116 121 137 154 164 158 165
Adult psychiatric ............ 45 47 48 46 47 46 45 50 54
Substance abuse .............. 1 1 2 2 3 3 3 4 4
Physical rehabilitation ...... 24 25 27 23 24 25 25 25 25
Other mental health .......... 4 4 2 2 3 7 7 6 5
Page 26
(1) 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. Other revenues
for the year ended August 31, 2001 consist primarily of physician contract
management fees, revenues related to the Company's Mental Health Outcomes
business, and consulting revenue.
(2) 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.
(3) Intangible assets consist of goodwill and service contracts related to
various acquisitions of the Company.
Page 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a provider of employee assistance plans ("EAP") and
behavioral health services to business and managed care organizations, as well
as a leading contract manager of psychiatric and physical rehabilitation
clinical programs offered by general acute care hospitals in the United States.
The Company has grown both internally and through acquisitions, increasing both
the variety of its treatment programs and services and the number of its
management contracts, which totaled 952 as of August 31, 2001. At that date the
Company had 646 contracts to provide EAP and managed behavioral health services
covering approximately 2.3 million lives. Over the last nine years, the Company
has increased its management contracts from 43 to a total of 138 as of August
31, 2001 and currently has contract locations in 36 states and the District of
Columbia. Of its management contracts, 112 relate to mental health treatment
programs and 26 relate to physical rehabilitation programs. The Company has also
developed a proprietary mental health outcomes measurement system known as CQI+.
At August 31, 2001, the Company had contracts to provide outcome measurement
services at 160 contract locations as well as 8 database project contracts.
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 strategic plan contemplates continued growth in this area of its
business. In addition, the Company plans 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 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
Page 28
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 under a multi-year transitional phase out arrangement, with a
majority of the impact in the first year. The effects of the sixth termination
occurred gradually over the fiscal year ended August 31, 2001. 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, 2000 the six significant contracts
provided annual revenues of approximately $6.8 million, or about 5% of the
company's total annual revenues. In the fiscal year ended August 31, 2001 the
remaining contract provided revenues of $634,000. The full financial impact of
the terminations was realized during fiscal year 2001. The Company has initiated
a number of expense reduction measures to mitigate the financial impact of these
terminations, which included reductions in staffing and the 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, and from providing
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 type of 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, 2001, 2000 and 1999, the Company had
successfully retained 86%, 79% and 78%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes the most frequent reason its client hospitals do not renew their
contracts with the Company is that the hospitals decide to manage such programs
themselves. In addition, a number of contracts have not renewed or been closed
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
specified 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
Page 29
Medicare and Medicaid, are attempting to manage costs, resulting in declining
amounts paid or reimbursed to hospitals for the services provided. As a result,
the Company anticipates that the number of patients served by general acute care
hospitals on an inpatient basis 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 and the Company's management contract business
as well.
Over the past four 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 affecting
revenues 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 six years
reflecting the increased interest in geropsychiatric programs by general
hospitals. Geropsychiatric programs as a percentage of the Company's total
mental health programs have increased from approximately 57% to 69% during that
period.
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, or closure of the program.
The Balanced Budget Act of 1997 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 $206.82 per day, which lowered Medicare reimbursement
levels to many hospitals for partial hospitalization services. This change
adversely affected 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.
Revenues from partial hospitalization services were $7.4 million or 7.9%
of total contract management revenues for the year ended August 31, 2001, down
approximately $7.8 million, or 51.3% from the prior fiscal year. Of the
Company's 138 management contracts at August 31, 2001, 54 or 39.1% of the
contracts include partial hospitalization services. Of the 54 contracts
including partial hospitalization services, 40 program locations had partial
hospitalization services in operation, 12 program locations were in operation
but the partial hospitalization services were not in operation, and 2 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 $2.5 million or more annually.
In April 2000, CMS adopted new rules requiring a CMS 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 CMS 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 CMS
determination of provider-based status. The rules are applicable to a provider
for new programs at the beginning of its first Medicare cost reporting year that
commences after January 10, 2001. Existing programs at October 1, 2000 are
"grand-fathered", unless they elect early adoption, until October 1, 2002. The
particular application of the rules
Page 30
to inpatient units managed by the Company is currently unclear in several
respects. CMS 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.
Recent amendments to the Medicare statutes also provide for a phase-out of
cost-based reimbursement of physical rehabilitation services over a two-year
period beginning no earlier than January 1, 2002. Depending on a hospital's
Medicare fiscal year, the phase out period could be from 12 to 24 months. 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.
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 clinicians, therapists and supporting personnel. Mental health programs
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, 2001, the Company had an average of 7 employees per
contract location.
Operating expenses for the Company's managed behavioral health care
services and employee assistance programs are comprised of approximately 42%
salaries and benefits and approximately 38% 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, telecommunications costs, and property taxes.
ACQUISITIONS
Effective October 1, 2001, the Company acquired all the mental health
management contracts of Perspectives Health Management Corporation in an asset
purchase transaction for approximately $2.9 million. The contracts cover 12
mental health management contract locations.
Acquisitions during the last three years have 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.
Page 31
RESULTS OF OPERATIONS
The following table sets forth for the fiscal years ended August 31, 2001,
2000 and 1999, 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.
FISCAL YEAR ENDED AUGUST 31,
-----------------------------------
2001 2000 1999
------- ------- -------
Revenues:
Contract management revenues ................. 73.3% 70.3% 67.0%
Premiums and fees ............................ 24.9 28.6 32.5
Other ........................................ 1.8 1.1 0.5
------- ------- -------
Total revenues ................................. 100.0 100.0 100.0
Operating expenses
Salaries and benefits ........................ 54.8 53.6 51.9
Medical claims ............................... 9.0 10.7 14.4
Purchased services ........................... 9.3 9.2 9.4
Provision for bad debts ...................... 1.3 0.7 0.4
Other ........................................ 12.9 12.5 12.2
Depreciation and amortization ................ 3.5 3.8 3.0
------- ------- -------
Total operating expenses ....................... 90.8 90.5 91.3
------- ------- -------
Operating income ............................... 9.2 9.5 8.7
------- ------- -------
Interest and other income (expense), net ....... (0.3) (0.7) (0.8)
------- ------- -------
Income before income taxes ..................... 8.9 8.8 7.9
Income tax provision ........................... 3.6 3.5 3.2
------- ------- -------
Net income ..................................... 5.3% 5.3% 4.7%
======= ======= =======
Number of management contracts, end of year .... 138 138 153
Covered lives (000's) .......................... 2,271 1,736 2,416
Page 32
FISCAL YEAR ENDED AUGUST 31, 2001 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 2000
Revenue. Revenues for the fiscal year ended August 31, 2001 were $127.7
million representing a decrease of $6.0 million, or 4.5%, as compared to
revenues of $133.7 million for the prior fiscal year. Contract management
revenue decreased a net $390,000 as a result of a decrease in partial
hospitalization program revenue of $7.8 million resulting from the unfavorable
decline due to the Medicare reimbursement change in partial hospitalization
programs in operation from 61, as of August 31, 2000, to 40, as of August 31,
2001. This decrease was substantially offset by a $6.4 million increase due to
both a 6.6% increase in revenue per average psychiatric location in operation
and a 18.0% increase in revenue per average rehab location in operation, as well
as a $1.0 million contract termination fee. Premiums and fees decreased $6.4
million, or 16.7% primarily due to the continued effect, i.e. the annualization
of the termination of managed care contracts whose revenues for fiscal year 2001
were $634,000 versus $6.8 million for the previous year.
Salaries and Benefits. Salaries and benefits for the fiscal year ended
August 31, 2001 were $69.9 million representing a decrease of $1.6 million, or
2.2%, as compared to salaries and benefits of $71.5 million for the prior fiscal
year. Average full time equivalents for the fiscal year ended August 31, 2001
were 1,093 representing a decrease of 96, or 8.1%, as compared to average full
time equivalents of 1,189 for the fiscal year ended August 31, 2000. A decrease
of 31 or 2.6% is attributable to the termination of the managed care contracts
and the associated closure of five clinic locations during the third quarter of
fiscal year 2000. Also contributing to the decrease is the decline in the
average number of locations in operation from 138.3 for the fiscal year ended
August 31, 2000 to 126.7 for the fiscal year ended August 31, 2001, as well as
cost control initiatives taken by the Company in response to the reduction in
revenues. Salary and benefit cost per full time equivalent for the fiscal year
ended August 31, 2001 was $63,952 representing an increase of $3,817 per full
time equivalent or 6.3% as compared to salary and benefit cost of $60,135 per
full time equivalent for the fiscal year ended August 31, 2000. Circumstances
contributing to the nationwide increases in employee compensation costs were
competitive market conditions, rising healthcare costs and, specifically for the
Company, the shift in the mix of its employee base.
Depreciation and Amortization. Depreciation and amortization expenses for
fiscal year 2001 were $4.5 million representing a decrease of $600,000 or 11.8%,
as compared to depreciation and amortization expenses of $5.1 million for the
prior fiscal year. A decrease of $355,000 is due to the accelerated depreciation
expense of certain capitalized software in fiscal year 2000. The remaining
decrease is due to the Company's limited capital expenditure requirements, which
resulted in depreciation generated from assets acquired during the period being
less than a reduction in depreciation associated with items becoming fully
depreciated.
Other Operating Expenses (Including Medical Claims, Purchased Services and
Provision for Bad Debts) Other operating expenses for the fiscal year ended
August 31, 2001 were $41.5 million representing a decrease of $2.8 million or
6.1%, as compared to other operating expenses of $44.3 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, 2001 was $11.5
million, representing a decrease of $2.8 million or 19.6%, as compared to
medical claims expense of $14.3 million for the prior fiscal year. This is
primarily the result of the termination of the six managed care contracts
discussed earlier. Inpatient days per year per one thousand members decreased
from an average of 16.8 for fiscal year 2000 to 15.3 for fiscal year 2001, due
to continued utilization management as well as to a more favorable mix of
contracts.
Purchased services for the fiscal year ended August 31, 2001 were $11.8
million, representing a decrease of $440,000 or 3.6%, as compared to purchased
services of $12.3 million for the prior fiscal year. Medical specialist fees
decreased $839,000 in fiscal year 2001, compared to fiscal year 2000. This
decrease is primarily a result of the decrease in the average number of contract
locations in operation, from 138.3 in fiscal 2000 to 126.7 in fiscal 2001.
Consulting fees also decreased by $259,000, in fiscal year 2001, as compared to
fiscal year 2000. This decrease was primarily due to the reclassifications of
development expenses for software and Knox Keene California licensing in 2001 by
the Company's HBS subsidiary. These decreases were partially offset by an
increase in the recognition of corporate development expenses for physician
reference services of $330,000, resulting primarily from the costs related to
establishing a provider network in California in conjunction with obtaining the
Knox Keene license. Legal fees also increased in fiscal year 2001 by $248,000,
compared to fiscal year 2000. This increase was primarily due
Page 33
to the expenses associated with the Knox-Keene licensing process in California,
as well as for the Department of Justice inquiry in California related to the
Company's HMHM subsidiary.
Bad debt expense for the fiscal year ended August 31, 2001 was $1.8
million, representing an $887,000 increase as compared to $877,000 for the prior
fiscal year. This increase is primarily the result of reserves recorded for the
outstanding balances related to several contract management agreements in which
the contract has terminated, litigation is being pursued and/or the hospital has
failed or is expected to fail soon.
Other operating expenses for fiscal year 2001 were $16.5 million, a
decrease of $300,000 or 1.8%, as compared to other operating expense of $16.8
million for the prior fiscal year. Rent expense decreased $890,000 primarily due
to one-time charges, in fiscal 2000, related to the closing of five managed care
clinic locations in Florida and to rent acceleration caused by the abandonment
of lease property to consolidate Florida operations. Legal settlement expense
increased $710,000 due to an increase in estimates for actual and projected
legal claims and settlements and related expenses that were and/or may be
incurred related to the current fiscal year. The remaining decrease of $120,000
is primarily the result of several Company initiated expense reduction measures,
which have significantly reduced expenses.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for fiscal year 2001 was a net expense of $372,000 as
compared to $960,000 in net expense for fiscal year 2000. This change is
primarily a result of a decrease in interest expense of $621,000 related to a
reduction in the outstanding credit facility balances between the periods, as
well as to lower interest rates. The weighted average outstanding balance for
fiscal year 2001 was $8.2 million with an ending balance of $6.9 million. The
weighted average outstanding balance for fiscal year 2000 was $17.3 million with
an ending balance of $14.9 million.
Income Tax Expense. Income tax expense for fiscal year 2001 was $4.5
million representing a decrease of $300,000, or 6.3%, as compared to income tax
expense of $4.8 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 2001 and 2000 were 40.0% and 40.2%
respectively.
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
Page 34
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
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 decrease in pre-tax earnings. The
effective tax rates for fiscal years 2000 and 1999 were 40.2% and 39.8%
respectively.
Page 35
LIQUIDITY AND CAPITAL RESOURCES
Effective November 15, 2000, the Company entered into an Amended and
Restated Credit Agreement (the "Amended Credit Agreement"), with the Chase
Manhattan Bank (now known as JP Morgan Chase), as Agent, to refinance the term
loans outstanding under the then existing credit agreement. The Amended Credit
Agreement consists of a $15.0 million revolving credit facility to fund ongoing
working capital requirements, repurchase shares (subject to certain limits), and
finance future acquisitions by the Company. As of August 31, 2001, the Company
had borrowings of $6.9 million outstanding against the revolving credit
facility.
The following summary of certain material provisions of the Amended Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Amended Credit Agreement, a copy of which was
previously filed as Exhibit 10.1 to a 10-Q report.
The Company is the borrower under the Amended Credit Agreement, which is
unconditionally guaranteed by all material subsidiaries of the Company.
Principal outstanding under the Amended Credit Agreement bears interest at the
"Base Rate" (the greater of the Agent's "prime rate" or the federal funds rate
plus .5%) plus .5% or the "Eurodollar Rate" plus 1.75% to 2.25% (depending on
the Company's Indebtedness to EBITDA Ratio), as selected by the Company. The
Company pays interest quarterly and incurs quarterly commitment fees ranging
from .375% to .5% per annum (depending on the Indebtedness to EBITDA Ratio) on
the unused portion of the revolving credit facility.
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 $15.0 million) during any
twelve consecutive monthly periods without prior bank approval, (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. The Amended Credit
Agreement allows the Company to redeem or repurchase up to $10.0 million of its
capital stock (subject to certain limitations) of which $6.1 million was
purchased as of August 31, 2001. In addition, the terms of the revolving credit
facility require the Company to satisfy certain ongoing financial covenants. The
revolving credit facility is secured by a first lien or first priority security
interest in and/or pledge of substantially all of the assets of the Company and
of all present and future subsidiaries of the Company.
Effective September 1996, the Company entered into a lease agreement with
a term of five years, which was subsequently extended to November 2003, 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 has also agreed to purchase the building
for approximately $4.5 million at the end of the extended lease term, if either
the building is not sold to a third party or the Company does not further extend
its lease.
The Company believes that its future cash flow from operations (which were
$12.0 million for the year ended August 31, 2001) and cash of $2.0 million at
August 31, 2001 will be sufficient to cover cash requirements over the next
twelve months, including estimated capital expenditures of $1.0 million, other
than financing that may be required and entered into for acquisitions.
Effective October 1, 2001, the Company acquired all of the mental health
management contracts of Perspectives Health Management ("PHM") for approximately
$2.9 million in an asset purchase transaction. The acquisition was funded by
incurring debt of $2.9 million under the revolving credit facility.
Effective August 1, 2001, the Company acquired all of the outstanding
capital stock of Occupational Health Consultants of America, Inc. ("OHCA") for
approximately $3.5 million. The acquisition was funded by incurring debt of $3.5
million under the revolving credit facility.
Page 36
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 then existing 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 then existing term loan
facility.
Effective June 1, 1998, the Company acquired from Ramsay Health Care, Inc.
all the outstanding capital stock of FPM for $20.0 million, subject to certain
post-closing adjustments. The acquisition was funded by incurring debt of $20.0
million under the then existing 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 then existing 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.
CERTAIN EARNINGS DATA
The following table sets forth for the fiscal years ended August 31, 2001
and 2000, diluted earnings per share based on net income plus amortization
expense related to goodwill, net of tax.
2001 2000
---- ----
Adjusted earnings per share
(Net income plus amortization related to goodwill, net of tax) $1.33 $1.23
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," "anticipate,"
"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
Page 37
Company with the Commission, including Forms 8-K, 10-Q, and 10-K, and include,
among others, the following: general economic and business conditions which are
less favorable than expected; unanticipated changes in industry trends;
decreased demand by general hospitals for the Company's services; the Company's
inability to retain existing management contracts or to obtain additional
contracts; adverse changes in reimbursement to general hospitals by Medicare or
other third-party payers for costs of providing mental health or physical
rehabilitation services; adverse changes to other regulatory requirements
relating to the provision of mental health or physical rehabilitation services;
adverse consequences of investigations by governmental regulatory agencies;
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.
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 variable rate debt and fixed rate debt
of short duration with maturities ranging from 30 to 180 days. The Company has
estimated its market risk exposure using sensitivity analyses assuming a 10%
change in market rates.
At August 31, 2001, the Company had approximately $6.9 million of debt
obligations outstanding with a weighted average interest rate of 6.65%. A
hypothetical 10% change in the effective interest rate for these borrowings,
assuming debt levels as of August 31, 2001, would change interest expense by
approximately $46,000 annually. This would be funded out of cash flows from
Operations, which were $12.0 million for the twelve months ended August 31,
2001.
At August 31, 2000, the Company had approximately $14.9 million of debt
obligations outstanding with a weighted average 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 interest expense by
approximately $114,000 annually.
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-22 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 38
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 16, 2002 (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 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 39
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 - Amended and Restated Credit Agreement dated November 15, 2000,
between Horizon Health Corporation and Horizon Mental Health
Management, Inc., as Borrowers, and the Chase Manhattan Bank, as
Agent and Individually as a Bank (incorporated herein by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 2000).
10.2 - Sixth Amendment to Letter Loan Agreement dated November 15, 2000,
between North Central Development Corporation, as Borrower, Horizon
Health Corporation and subsidiaries as limited guarantors, and the
Chase Manhattan Bank, as the Lender (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended November 30, 2000).
10.3 - 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).
10.4 - 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).
Page 40
10.5 - Horizon Mental Health Management, Inc. 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.11 to the November
1995 Form 10-Q).
10.6 - 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 Nov 1995 Form 10-Q)
10.7 - 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).
10.8 - 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).
10.9 - 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).
10.10 - 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).
10.11 - 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).
10.12 - Horizon Health Corporation Bonus Plan Fiscal 2001 (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, 2000).
10.13 - Horizon Health Corporation Bonus Plan Fiscal 2002 (filed herewith).
10.14 - 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).
10.15 - 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).
10.16 - Employment Agreement, dated November 1, 2001 between Horizon Health
Corporation and James W. McAtee (filed herewith).
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).
(b) The Company filed the following reports on Form 8-K during the last
quarter of the period covered by this report.
Page 41
Current report on Form 8-K filed with the Commission on
October 2, 2001. The item reported was Item 5, Other
Events, announcing a publicly available conference call
regarding the 4th quarter and year end financial results
on October 16, 2001.
Page 42
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 15, 2001
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.
SIGNATURE CAPACITY DATE
/s/ JAMES W. MCATEE Director, President, Chief Executive November 15, 2001
__________________________ Officer and Secretary
James W. McAtee (Principal Executive Officer)
/s/ RONALD C. DRABIK Senior Vice President - Finance and November 15, 2001
__________________________ Administration and Treasurer
Ronald C. Drabik (Principal Financial and Accounting
Officer)
/s/ JAMES KEN NEWMAN Director and Chairman of the Board November 15, 2001
__________________________
James Ken Newman
/s/ JACK R. ANDERSON Director November 15, 2001
__________________________
Jack R. Anderson
/s/ GEORGE E. BELLO Director November 15, 2001
__________________________
George E. Bello
/s/ WILLIAM H. LONGFIELD Director November 15, 2001
__________________________
William H. Longfield
/s/ JAMES E. BUNCHER Director November 15, 2001
__________________________
James E. Buncher
/s/ DONALD E. STEEN Director November 15, 2001
__________________________
Donald E. Steen
Page 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants....................................F-2
Consolidated Balance Sheets at August 31, 2001 and 2000..............F-3
Consolidated Statements of Operations
For the Years Ended August 31, 2001, 2000, and 1999..................F-5
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended August 31, 2001, 2000, and 1999..................F-6
Consolidated Statements of Cash Flows
For the Years Ended August 31, 2001, 2000, and 1999..................F-7
Notes to Consolidated Financial Statements...........................F-9
F-1
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 operations, 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended August 31, 2001, 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 our opinion.
/s/ PRICEWATERHOUSE COOPERS LLP
Pricewaterhouse Coopers LLP
October 8, 2001
Dallas, Texas
F-2
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
August 31,
------------------------------
2001 2000
---------- ------------
CURRENT ASSETS:
Cash and cash equivalents $1,980,635 $8,516,869
Accounts receivable less allowance for doubtful accounts of
$2,439,216 and $2,547,774 at August 31, 2001 and 2000, 12,289,274 11,513,860
respectively
Prepaid expenses and supplies 567,216 1,240,359
Income taxes receivable 59,024 613,678
Other receivables 52,384 139,307
Other assets 285,072 346,137
Deferred taxes 2,158,885 1,835,721
--------- ---------
TOTAL CURRENT ASSETS 17,392,490 24,205,931
Property and Equipment, net (Note 4) 2,232,363 2,109,921
Goodwill, net of accumulated amortization of $7,263,001
and $5,826,098 at August 31, 2001 and 2000, 53,245,225 51,572,505
respectively
Contracts, net of accumulated amortization of $9,106,190
and $7,426,048 at August 31, 2001 and 2000, 4,014,753 5,351,718
respectively
Other noncurrent assets 294,852 390,969
--------- ---------
TOTAL ASSETS $77,179,683 $83,631,044
=========== ===========
See accompanying notes.
F-3
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
August 31,
-----------------------------
2001 2000
------------ -----------
CURRENT LIABILITIES:
Accounts payable $ 1,369,180 $ 62,088
Employee compensation and benefits 6,087,793 6,439,857
Medical claims payable 3,229,415 3,724,854
Accrued expenses (Note 5) 6,090,621 6,071,673
Current portion long term debt -- 3,600,000
------------ ------------
TOTAL CURRENT LIABILITIES 16,777,009 20,518,472
Other noncurrent liabilities 1,780,385 966,818
Long-term debt, net of current portion 6,900,000 11,300,000
Deferred income taxes 723,911 1,154,111
------------ ------------
TOTAL LIABILITIES 26,181,305 33,939,401
------------ ------------
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 5,322,439 shares outstanding
at August 31, 2001, and 7,267,750 shares issued and
6,323,595 outstanding at August 31, 2000 72,678 72,678
Additional paid-in capital 17,990,859 18,136,353
Retained earnings 45,364,006 38,573,364
Treasury stock (12,429,165) (7,090,752)
------------ ------------
50,998,378 49,691,643
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 77,179,683 $ 83,631,044
============ ============
See accompanying notes.
F-4
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended August 31,
--------------------------------------------------
2001 2000 1999
------------- ------------- --------------
REVENUES:
Contract management revenue $ 93,519,556 $ 93,908,317 $ 97,836,682
Premiums and fees 31,830,085 38,273,739 47,451,923
Other 2,310,186 1,500,444 711,744
------------- ------------- --------------
Total revenues 127,659,827 133,682,500 146,000,349
------------- ------------- --------------
EXPENSES:
Salaries and benefits 69,914,266 71,554,387 75,741,311
Medical claims 11,476,617 14,278,995 20,959,797
Purchased services 11,848,652 12,288,079 13,735,058
Provision for doubtful accounts 1,763,984 877,376 588,705
Other 16,455,061 16,799,097 17,877,120
Depreciation and amortization 4,510,424 5,101,355 4,459,600
------------- ------------- --------------
Operating expenses 115,969,004 120,899,289 133,361,591
------------- ------------- --------------
Operating income 11,690,823 12,783,211 12,638,758
------------- ------------- --------------
Other income (expense):
Interest expense (638,398) (1,261,970) (1,430,985)
Interest income and other 266,727 302,384 255,285
------------- ------------- --------------
Income before income taxes 11,319,152 11,823,625 11,463,058
Income tax provision 4,528,510 4,756,377 4,562,297
------------- ------------- --------------
Net income $ 6,790,642 $ 7,067,248 $ 6,900,761
------------- ------------- --------------
Earnings per common share:
Basic $ 1.21 $ 1.11 $ 1.00
------------- ------------- --------------
Diluted $ 1.16 $ 1.07 $ 0.96
------------- ------------- --------------
Weighted average shares outstanding:
Basic 5,614,566 6,369,846 6,874,646
------------- ------------- --------------
Diluted 5,876,490 6,604,903 7,199,677
------------- ------------- --------------
See accompanying notes.
F-5
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Additional Treasury
Stock Paid-in Retained Treasury Stock,
Shares Amount Capital Earnings Shares at Cost Total
--------- -------- ------------ ------------ --------- ------------ ------------
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
Net Income -- -- -- 6,790,642 -- -- 6,790,642
Purchase of treasury stock -- -- -- -- 1,103,563 (6,143,533) (6,143,533)
Tax benefit associated with
stock options exercised -- -- 414,558 -- -- -- 414,558
Employee stock purchases -- -- (37,832) -- (23,959) 151,076 113,244
Exercise of stock options:
Issuance of treasury stock -- -- (522,220) -- (108,610) 778,462 256,242
Employee surrenders for
tax payments -- -- -- -- 30,162 (124,418) (124,418)
--------- -------- ------------ ------------ --------- ------------ ------------
Balance at August 31, 2001 7,267,750 $ 72,678 $ 17,990,859 $ 45,364,006 1,945,311 ($12,429,165) $ 50,998,378
========= ======== ============ ============ ========= ============ ============
See accompanying notes.
F-6
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended August 31,
----------------------------------------------
2001 2000 1999
------------- ------------ ------------
Operating activities:
Net income $ 6,790,642 $ 7,067,248 $ 6,900,761
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,510,424 5,101,355 4,459,600
Deferred income taxes (435,979) (464,058) 198,586
Non-cash expenses (20,180) 119,226 (1,247)
Changes in operating assets and liabilities:
Decrease in accounts receivable 43,215 1,371,539 887,387
Decrease (increase) in income taxes receivable 554,654 (249,758) (46,723)
Decrease in other receivables 86,923 88,587 58,035
Decrease (increase) in prepaid expenses and supplies 680,722 (397,658) (605,183)
(Increase) decrease in other assets (127,757) 875,953 (497,920)
(Decrease) increase in accounts payable, employee compensation
and benefits, medical claims payable, and accrued expenses (912,245) (1,690,429) 17,274
Increase in other noncurrent liabilities 813,567 611,627 117,883
------------ ------------ ------------
Net cash provided by operating activities 11,983,986 12,433,632 11,488,453
------------- ------------ ------------
Investing activities:
Purchase of property and equipment (1,494,511) (928,884) (985,057)
Proceeds from sale of equipment 32,601 2,700 5,275
Payment for purchase of Occupational Health Consultants of America,
Inc., net of cash acquired (3,499,000) -- --
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)
Proceeds from purchase price adjustment of FPM Behavioral Health, Inc. -- -- 2,423,531
------------- ------------ ------------
Net cash used in investing activities (4,960,910) (926,184) (2,339,993)
------------ ------------ ------------
Financing activities:
Payments on long-term debt (51,600,000) (5,135,706) (20,605,531)
Borrowing under lines of credit 43,600,000 -- 14,500,000
Net proceeds from stock options exercised -- -- 102,253
Tax benefit associated with stock options exercised 414,558 357,841 1,236,320
Purchase of treasury stock (6,143,533) (3,363,138) (5,617,400)
Issuance (surrenders) of treasury stock 169,665 (288,086) 470,111
------------- ------------ ------------
Net cash used in financing activities (13,559,310) (8,429,089) (9,914,247)
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (6,536,234) 3,078,359 (765,787)
Cash and cash equivalents at beginning of year 8,516,869 5,438,510 6,204,297
------------- ------------ ------------
Cash and cash equivalents at end of year $ 1,980,635 $ 8,516,869 $ 5,438,510
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 614,723 $ 1,275,870 $ 1,450,459
============ ============ ============
Income taxes $ 4,397,100 $ 4,462,776 $ 3,616,830
============ ============ ============
F-7
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
2001(A) 2000 1999(B)
---------- ---------- -----------
Non-cash investing activities:
Fair value of assets acquired $ 4,351,970 -- $ 4,527,904
Cash paid (3,500,000) -- (1,626,167)
---------- ---------- -----------
Liabilities assumed $ 851,970 -- $ 2,901,737
=========== ========== ===========
(A) Acquisition of Occupational Health Consultants of America, Inc. effective
August 1, 2001.
(B) 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.
See accompanying notes.
F-8
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001, 2000 AND 1999
1. ORGANIZATION
Horizon Health Corporation ("the Company") is a provider of employee
assistance programs ("EAP") and behavioral 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 initial 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; Philadelphia, Pennsylvania; and Nashville, Tennessee
metropolitan areas. The Company's National Support Center is in the
Dallas suburb of 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.
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). Effective
August 1, 2001, the Company acquired all of the outstanding capital stock
of Occupational Health Consultants of America, Inc. ("OHCA"). OHCA has
been consolidated with the Company as of August 1, 2001 (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements include those of the
Company and it's 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, and transportation equipment are estimated to be five
years. The useful life of office equipment is estimated to be three
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.
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.
F-9
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 141, Business
Combinations ("SFAS 141") and SFAS 142, Goodwill and Other Intangible
Assets ("SFAS 142"). SFAS 141 addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a
business combination. SFAS 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business
combination, whether acquired individually or with a group of other
assets, and the accounting and reporting for goodwill and other
intangibles subsequent to their acquisition. These standards require all
future business combinations to be accounted for using the purchase
method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. The Company has
elected to adopt SFAS 141 and SFAS 142 on a prospective basis as of
September 1, 2001; however, certain provisions of these new standards
also apply to any acquisitions concluded subsequent to June 30, 2001. As
a result of implementing these new standards, the Company will
discontinue the amortization of goodwill as of August 31, 2001. In
addition, per the certain provisions in SFAS 141 and SFAS 142, goodwill
acquired in the acquisition of OHCA effective August 1, 2001 has not been
amortized.
Management believes the adoption of this standard will have a material
impact on its financial statements in that its income before taxes will
be increased by an amount equal to the amortization expenses that would
have otherwise been charged to earnings under current accounting
standards, approximately $1.4 million annually. Additionally, the
Company's future earnings may periodically be affected in a materially
adverse manner should particular segments of its goodwill balances become
impaired pursuant to the valuation methodology.
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 the Board of
Directors authorized the repurchase of an additional 200,000 shares of
its common stock. Pursuant to such authorizations, the Company
repurchased 1,189,300 shares through November 30, 1999. On October 12,
2000 the Board of Directors authorized the repurchase of up to an
additional 1,000,000 shares of its common stock effective upon the
closing of the new Amended Credit Agreement. On February 15, 2001 the
Board of Directors authorized the repurchase of an additional 325,000
shares of its common stock. As of August 31, 2001, the Company had
repurchased an additional 1,103,563 shares of its common stock (2,292,863
total shares repurchased since September 1998). The stock repurchase
plan, as approved by the Board of Directors, authorized the Company to
make purchases of its outstanding common stock from time to time in the
open market or through privately negotiated transactions, depending on
market conditions and applicable securities regulations. The repurchased
shares are added to the treasury shares of the Company and may be used
for employee stock plans and for other corporate purposes. Of the shares
repurchased, a total of 347,552 shares have been reissued pursuant to the
exercise of certain stock options and in connection with the Employee
Stock Purchase Plan as of August 31, 2001. The shares were repurchased
utilizing available cash and borrowings under the Company's credit
facility. The Company accounts for the treasury stock using the cost
method.
F-10
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2001, 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.
ADVERTISING COSTS: The Company expenses advertising costs as incurred.
MEDICAL CLAIMS: Outstanding claims include medical claims and related
expenses reported but not paid and an estimate of costs incurred but not
reported (IBNR) to the Company by health care providers. Management of
the Company estimates IBNR costs utilizing the Company's historical
experience and current factors.
INCOME TAXES: The Company has adopted 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
F-11
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
3. ACQUISITIONS
OHCA, INC.
Effective August 1, 2001, the Company acquired all of the outstanding
capital stock of Occupational Health Consultants of America, Inc.
("OHCA") of Nashville, Tennessee, and OHCA has been consolidated with the
company as of August 1, 2001. The Company accounted for the acquisition
of OHCA by the purchase method. OHCA provides employee assistance
programs and other related behavioral health care services to
self-insured employers. OHCA had total revenues of approximately $2.4
million (unaudited) for the seven months ended July 31, 2001. As of
August 31, 2001, the preliminary allocation of the purchase price
exceeded the fair value of OHCA's tangible net assets by $3,452,797, of
which $3,109,621 is recorded as goodwill and $343,176 as service
contracts. Tangible assets acquired and liabilities assumed totaled
$899,173 and $851,970, 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.
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
F-12
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at August 31:
2001 2000
---------- -----------
Computer Hardware $2,588,003 $2,216,818
Computer Software 1,449,041 1,105,458
Furniture and Fixtures 2,268,985 2,080,498
Office Equipment 944,993 860,705
Transportation (Vehicles) 65,539 25,093
Leasehold Improvements 571,734 454,380
---------- -----------
7,888,295 6,742,952
Less accumulated depreciation 5,655,932 4,633,031
---------- -----------
$2,232,363 $2,109,921
========== ==========
Depreciation expense was $1,393,380, $1,988,315 and $1,420,704 for the
years ended August 31, 2001, 2000, and 1999, respectively.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at August 31:
2001 2000
------------ ----------
Reserve for contract adjustments $ 812,334 $1,075,459
Health insurance 987,784 900,293
Other 4,290,503 4,095,921
------------ ----------
$ 6,090,621 $6,071,673
=========== ==========
F-13
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consisted of the following at August 31:
2001 2000
----------- -----------
Chase Bank of Texas, National Association - Advance Term Loan
Facility -- $14,900,000
Revolving Credit Facility $6,900,000 --
----------- -----------
6,900,000 14,900,000
----------- -----------
Less current maturities -- 3,600,000
----------- -----------
$6,900,000 $11,300,000
========== ===========
The aggregate maturities of long-term debt during the next five fiscal
years are $0 in 2002, $6,900,000 in 2003; and $0 in 2004, 2005 and 2006.
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 "Credit Facility"). The Credit Facility consisted of a $10.0
million revolving credit facility (terminated June 30, 2000) and an
initial $40.0 million term loan facility which expired November 30, 1999.
On November 16, 2000, the Company entered into an Amended and Restated
Credit Agreement, effective November 15, 2000 (the "Amended Credit
Agreement"), with The Chase Manhattan Bank (now known as JP Morgan
Chase), as Agent, to refinance the term loan outstanding under the
existing credit agreement. The Amended Credit Agreement consists of a
$15.0 million revolving credit facility to fund ongoing working capital
requirements, refinance existing debt, pay dividends, repurchase shares
(subject to certain limits) and finance future acquisitions by the
Company. As of August 31, 2001 the Company had borrowings of $6.9 million
outstanding against the revolving credit facility.
The revolving credit facility bears interest at (1) the Base Rate plus
the Base Rate Margin, as defined or (2) the Adjusted Eurodollar Rate,
plus the Eurodollar Margin, as defined. At August 31, 2001, the weighted
average interest rate on outstanding indebtedness under the credit
facility was 6.65%. The Eurodollar Margin varies depending on the debt
coverage ratio of the Company. The revolving credit facility matures on
November 15, 2003.
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 $15.0 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 Amended Credit Facility
require the Company to satisfy certain ongoing financial covenants. The
Amended 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-14
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 provides for 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:
2001 2000 1999
----------------------------- --------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
----------- ---------------- ----------- -------------- ------------- -------------
Outstanding at beginning of 1,322,143 $ 5.40 $ 4.95 1,361,293 $ 7.69
year 1,352,840
Granted 90,285 4.97 142,054 6.49 680,040 7.05
Exercised 108,610 2.36 123,481 0.91 198,716 3.14
Expired or canceled 20,184 6.32 49,270 7.34 489,777 16.22
Outstanding at end of year 1,283,634 $ 5.61 1,322,143 $ 5.40 1,352,840 $ 4.95
Exercisable at end of year 777,796 $ 4.88 730,486 $ 3.98 710,310 $ 2.80
Available for grant at end of 255,602 -- 325,703 -- 418,487 --
year
The following table summarizes information about options outstanding
under the Plans at August 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Price Exercisable Life Price Outstanding Price
---------------------- ----------- ------------ ----------- ----------- -------------
$ 1.00 - 5.50 546,490 3.98 $ 3.16 431,240 $ 2.68
6.75 - 9.75 733,144 6.97 7.35 344,956 7.54
23.75 4,000 6.01 23.75 1,600 23.75
F-15
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company applies APB 25 in accounting for the Plans and recognizes no
compensation cost in net earnings from the grant of options as options
are granted at exercise prices equal to the current stock price. Had
compensation cost been determined under the terms of SFAS 123, the
Company's pro forma 2001, 2000 and 1999 net earnings and earnings per
share would have been:
2001 2000 1999
----------- ----------- -----------
Net Earnings
As reported $ 6,790,642 $ 7,067,248 $ 6,900,761
Pro forma (unaudited) $ 6,190,083 $ 6,531,026 $ 6,175,069
Earnings per share
Basic
As reported $ 1.21 $ 1.11 $ 1.00
Pro forma (unaudited) $ 1.10 $ 1.03 $ 0.90
Diluted
As reported $ 1.16 $ 1.07 $ 0.96
Pro forma (unaudited) $ 1.05 $ 0.99 $ 0.86
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:
2001 2000 1999
-------- -------- --------
Risk free interest rate 5.8% 6.4% 5.1%
Expected life (years) 6.4 6.4 6.4
Expected volatility 48.6% 45.8% 53.1%
Expected dividend yield 0.0% 0.0% 0.0%
In accordance with SFAS 123, the weighted average fair value of options
granted during 2001, 2000 and 1999 was $2.77, $3.53, and $4.07
respectively.
8. RETIREMENT PLAN
The Company sponsors a 401(k) plan that covers substantially all eligible
employees. The Company can elect to make contributions at its discretion.
For the years ended August 31, 2001, 2000 and 1999 the Company made
contributions of approximately $550,000, $471,000, and $466,000
respectively.
F-16
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
Federal State Total
----------- ----------- -----------
2001
Current $ 4,597,323 $ 663,303 $ 5,260,626
Deferred (657,027) (75,089) (732,116)
----------- ----------- -----------
$ 3,940,296 $ 588,214 $ 4,528,510
=========== =========== ===========
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
=========== =========== ===========
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:
2001 2000
----------- -------------
Contracts $ (64,046) $(1,058,593)
Goodwill (2,457,714) (1,325,080)
----------- -----------
Deferred tax liabilities (2,521,760) (2,383,673)
----------- -----------
Accounts receivable 1,237,944 1,075,299
Vacation accruals 561,936 614,381
Fixed assets/intangibles 666,335 537,108
Miscellaneous accruals 1,047,740 278,564
Net operating loss carryforward 421,546 559,946
----------- -----------
Deferred tax assets 3,935,501 3,065,298
----------- -----------
Net deferred tax asset $ 1,413,741 $ 681,625
=========== ===========
At August 31, 2001, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately
$1,100,000. These carryforwards, subject to annual utilization limits,
may be utilized to offset future years' income and will begin to expire
during 2011 if unused prior to that date.
F-17
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of income taxes at the U.S. federal
income tax rate to the Company's effective income tax rate:
Tax Rate 2001 2001 2000 1999
----------------- ----------- ------------ ------------
Federal income taxes based on 35% of
book income 35.0% $3,961,709 $4,138,268 $4,012,071
Permanent adjustments:
Meals and entertainment,
goodwill and other permanent
adjustments 2.3% 264,356 274,973 280,854
State income taxes and other
adjustments 2.7% 302,445 343,120 269,372
----------------- ----------- ------------ ------------
40.0% $4,528,510 $4,756,361 $4,562,297
----------------- ----------- ------------ ------------
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:
Years ended August 31,
2002 $2,358,262
2003 1,911,211
2004 1,386,336
2005 956,251
2006 483,246
-----------
$7,095,306
===========
Rent expense for the years ended August 31, 2001, 2000, and 1999 was
$2,282,279, $3,174,094 and $2,325,321, respectively.
The Company leases a building it occupies as its executive offices and
National Support Center in the Dallas suburb of Lewisville, Texas. The
Company has extended the lease through November 15, 2003. 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 has also agreed to purchase the building for approximately
$4.5 million at the end of the extended lease term, if it is not sold to
a third party, or the Company does not further extend its 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.
The Balanced Budget Act of 1997 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
$206.82 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
F-18
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 two-year period beginning no earlier than January 1, 2002. 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 one
of the defendants therein. In March 2001, the realtors served the
complaint in the lawsuit brought under the Federal False Claims Act. The
U.S. Department of Justice had previously declined to intervene in the
lawsuit. The Company has filed a motion to dismiss and discovery
proceedings have been deferred until the court rules on the motion. The
Company does not believe the claims asserted in the lawsuit, based on
present allegations, represent a material liability to the Company.
In early December 2000, the Company was served with a U.S. Department of
Justice subpoena issued by the U.S. Attorney's Office for the Northern
District of California. The subpoena requested the production of
documents related to certain matters such as patient admissions, patient
care, patient charting, and marketing materials, pertaining to hospital
gero-psychiatric programs managed by the Company. The Company believes
the subpoena originated as a result of a sealed qui tam suit and has
furnished documents in response to the subpoena. No allegations or claims
have been made against the Company. At this time, the Company cannot
predict the ultimate scope or any particular future outcome of the
investigation.
In March 2001, Horizon Behavioral Services, Inc., a subsidiary of
Horizon, was served with a lawsuit seeking damages for the unauthorized
release of treatment records of a member of an employee assistance
program operated by a predecessor of Horizon Behavioral Services, Inc.
The lawsuit asserts similar but separate claims against two unaffiliated
co-defendants. The damages in the lawsuit are unspecified. Horizon's
insurance carrier has provided the Company a preliminary indication that
some of the claims asserted in the lawsuit may not be covered by
insurance. To date, Horizon does not have sufficient information to fully
evaluate the claim or any particular future outcome of this lawsuit.
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. Related
to the Plan the Company issued 23,959 shares of Common Stock from
treasury for the fiscal year ended August 31, 2001, and 14,642 shares
from treasury for the fiscal year ended August 31, 2000.
F-19
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:
2001 2000 1999
--------------------------------- --------------------------------- ----------------------------------
Net Income Shares Per Share Net Income Shares Per Share Net Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- --------- ---------- ----------- -------- --------- ----------- --------
Basic EPS 6,790,642 5,614,566 $1.21 7,067,248 6,369,846 $1.11 6,900,761 6,874,646 $ 1.00
========= ======== ========
Effect of dilutive
securities
warrants and options 261,924 235,097 325,031
---------- ----------- ----------
Diluted EPS 6,790,642 5,876,490 $ 1.16 7,067,248 6,604,943 $ 1.07 $6,900,761 7,199,677 $ 0.96
========= ========= ======= ========= ========= ======= ========== ========= =======
During 2001, 2000, and 1999 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:
QUARTER ENDED OPTIONS EXCLUDED OPTION PRICE RANGE
-------------------- ------------------ ---------------------
August 31, 2001 4,000 $23.75
May 31, 2001 87,250 $ 8.92 - $23.75
February 28, 2001 757,657 $ 6.91 - $23.75
November 30, 2000 805,859 $ 5.50 - $23.75
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
F-20
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:
(A) (B) (C) (D) [E]
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health Intercompany
2001 Services Management Management Outcomes Other** Eliminations** Consolidated
- ---- ----------- ------------ ------------ ----------- ---------- -------------- ------------
Revenues $ 32,033,007 $ 79,312,050 $ 13,455,317 $ 2,664,220 $ 195,233 $ -- $127,659,827
Intercompany
Revenues 104,711 -- -- (4,371) -- (100,340) --
EBITDA * 2,328,287 23,147,486 2,362,926 (176,198) (11,461,254) -- 16,201,247
Total Assets 42,680,807 80,883,068 8,245,106 199,313 27,259,279 (82,087,890) 77,179,683
2000
- ----
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 66,152 -- -- 1,723,471 -- (1,789,623) --
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
* Earnings before interest, taxes, depreciation and amortization (division
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. Beginning in Fiscal Year 2001 Mental Health Outcomes began
recording revenue directly for the Horizon Mental Health Management
contracts that provide CQI+.
(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-21
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 2001 and 2000:
Operating Net Earnings Per Share
Revenues Income Income Basic Diluted
-------------- ------------- -------------- --------------------------
Quarter Ended:
August 31, 2001 $ 32,608,181 $3,007,744 $ 1,731,043 $ 0.33 $ 0.30
May 31, 2001 32,359,252 2,854,174 1,670,898 0.31 0.30
February 28, 2001 31,871,436 2,930,165 1,722,640 0.31 0.30
November 30, 2000 30,820,958 2,898,740 1,666,061 0.27 0.26
---------- --------- --------- ---- ----
Total Year $127,659,827 $11,690,823 $ 6,790,642 $ 1.21 $ 1.16
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
15. SUBSEQUENT EVENT
ACQUISITION OF PERSPECTIVES HEALTH MANAGEMENT: Effective October 1,
2001, the Company purchased all the mental health management contracts
of Perspectives Health Management ("PHM"), a wholly owned subsidiary of
Legal Access Technologies, Inc. The Company accounted for the
acquisition by the purchase method as required by generally accepted
accounting principles. PHM had 12 mental health management contract
locations. The management contracts cover 12 inpatient mental health
programs, one partial hospitalization mental health program and three
intensive outpatient mental health programs. Currently, annualized
revenues for the contracts approximate $4.7 million (unaudited). The
management contracts constituted all of the business operations of PHM.
The purchase price of approximately $2.9 million in cash was funded by
the Company's revolving credit facility.
F-22
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
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 8, 2001 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.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Dallas, Texas
October 8, 2001
S - 2
HORIZON HEALTH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Uncollectible Balance
Beginning Costs and Accounts at end
Of Period Expenses Written off Adjustments of Period
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(1,2) 1,902,112
Year ended August 31, 1999:
Allowance for doubtful
accounts 1,902,112 588,705 (1,109,393) 1,599,425(1,2,3) 2,980,849
Year ended August 31, 2000:
Allowance for doubtful
accounts 2,980,849 877,376 (1,447,187) 136,736(1,2) 2,547,774
Year ended August 31, 2001:
Allowance for doubtful
accounts $ 2,547,774 $ 1,763,984 $ (1,375,682) $ (496,861)(1,2) $ 2,439,216
(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 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
INDEX TO 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 - Amended and Restated Credit Agreement dated November 16,
2000, between Horizon health Corporation and Horizon Mental
Health Management, Inc., as Borrowers, and the Chase
Manhattan Bank, as Agent and Individually as a Bank
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended November 30, 2000).
10.2 - Sixth Amendment to Letter Loan Agreement dated November 15,
2000, between North Central Development Corporation, as
Borrower, Horizon Health Corporation and subsidiaries as
limited guarantors, and the Chase Manhattan Bank, as the
Lender (incorporated herein by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended November 30, 2000).
10.3 - 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).
10.4 - 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).
10.5 - Horizon Mental Health Management, Inc. 1995 Stock Option
Plan (incorporated herein by reference to Exhibit 10.11 to
the November 1995 Form 10-Q).
10.6 - 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)
10.7 - 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).
10.8 - 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).
10.9 - 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).
10.10 - 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).
10.11 - 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).
10.12 - Horizon Health Corporation Bonus Plan Fiscal 2001
(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, 2000).
10.13 - Horizon Health Corporation Bonus Plan Fiscal 2002 (filed
herewith).
10.14 - 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).
10.15 - 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).
10.16 - Employment Agreement, dated November 1, 2001 between
Horizon Health Corporation and James W. McAtee (filed
herewith).
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).
(b) The Company filed the following reports on Form 8-K during
the last quarter of the period covered by this report.
Current report on Form 8-K filed with the Commission on
October 2, 2001. The item reported was Item 5, Other
Events, announcing a publicly available conference call
regarding the 4th quarter and year end financial results on
October 16, 2001.