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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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________
Commission File number 1-13626
HORIZON HEALTH CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2293354
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
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(Address of principal executive offices, including zip code)
(972) 420-8200
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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
-------------------
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 8, 2002 there were 5,251,622 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 $67,035,542. 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 30, 2003.
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 ........................................................................23
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 ....27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...............................41
Item 8. Financial Statements and Supplementary Data ..............................................42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .....42
PART III
Item 10. Directors and Executive Officers of the Registrant .......................................42
Item 11. Executive Compensation ...................................................................42
Item 12. Security Ownership of Certain Beneficial Owners and Management ...........................42
Item 13. Certain Relationships and Related Transactions ...........................................42
Item 14. Controls and Procedures ..................................................................42
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .........................43
2
PART 1
ITEM 1. BUSINESS
Unless the context otherwise requires, whenever used herein the terms
"Company", "Horizon" and "Registrant" refer to Horizon Health Corporation and
its subsidiaries.
GENERAL
The Company is a diversified provider of health care services. It provides
(a) employee assistance programs and managed behavioral health services to
employers, health maintenance organizations and insurance companies, (b)
contract management of psychiatric and physical rehabilitation clinical
programs, (c) outcome measurement and clinical research services and (d) by
virtue of its acquisition of ProCare One Nurses, LLC, effective June 13, 2002,
specialized nurse staffing services to hospitals. 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, 2002, the Company had 688 contracts to provide EAP and managed mental health
services covering approximately 2.4 million lives. The Company is a leading
provider of contract management services of clinical programs offered by general
acute care hospitals in the United States. As of August 31, 2002, the Company
had 142 management contracts with contract locations in 34 states and the
District of Columbia. Of those management contracts, 117 related to mental
health treatment programs and 25 related to physical rehabilitation programs.
The Company has a proprietary mental health outcomes measurement system known as
CQI+ and also provides other outcomes and Phase IV clinical research services
known as "PsychScope". At August 31, 2002, the Company had contracts to provide
outcome measurement services at 158 contract locations as well as 6 PsychScope
contracts. As of August 31, 2002, the Company's nurse staffing subsidiary
provided, on a monthly average, in excess of 500 nurses to over 100 different
general acute care hospitals.
The Company's primary strategies, which are being pursued through both
internal growth as well as accretive acquisitions, are (1) to maintain and
further enhance its position as the leader in the contract management of mental
health treatment programs offered by general acute care hospitals, (2) to
increase its market position as a contract manager of physical rehabilitation
clinical programs, (3) to expand the range of other clinical and related
services it offers to client hospitals, (4) to grow its employee assistance
programs and managed behavioral care services, and (5) to expand its specialized
nurse staffing services into new geographic locations.
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
contract management and other services. The Company considers itself well
positioned to overcome the reservations of certain hospital administrators to
outsourcing clinical services. The Company also believes it has opportunities to
cross-sell contract management services of mental health and physical
rehabilitation programs to client hospitals. The Company has successfully
expanded the breadth of services it offers to include the contract management of
a full continuum of mental health services, outcome measurement services, and
contract management of an expanding array of physical rehabilitation 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 still providing local or individualized
service to customers and their respective employees or members and a full range
of products and services on an individual or integrated basis tailored to meet
the needs of small, medium, or large employers or managed care organizations.
Through the recent acquisition of ProCare One Nurses, the Company has again
further diversified into another related area within the healthcare services
industry. The Company is actively pursuing the expansion of its nurse staffing
services, both within and beyond its current California and Michigan geographic
markets.
3
The Company considers that it has five identifiable business segments as
follows: (1) mental health contract management services, (2) physical
rehabilitation contract management services, (3) employee assistance programs
and managed care behavioral health services, (4) outcomes measurement and
psychiatric database services and (5) specialized nurse staffing services. For
the year ended August 31, 2002, the revenues of such business segments
constituted 55.0%, 10.5%, 28.3%, 2.4%, and 3.7%, respectively, of the total
revenues of the Company. The revenues of the specialized nurse staffing services
consisted of only 2.6 months of operations after the ProCare acquisition. See
Note 14 to the Consolidated Financial Statements of the Company included herein
for financial information regarding business segments of the Company.
MENTAL HEALTH SERVICES
The Company believes that there continues to be a viable market in
providing mental health contract management services to general acute care
hospitals in the United States. General acute care hospitals are 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 referral
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 for pre-approval for review
and payment of 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 changing demands of governmental payors, managed care
companies and other third-party payors. The Company also believes that it
generally 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 shared support services and excess capacity. General acute care
hospitals are also able to provide their mental health patients with needed
medical and surgical 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 and growing needs in the medical marketplace reinforced
by demographic trends, 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 administrative functions.
The Company has the expertise to manage a broad range of clinical mental
health programs, including geropsychiatric, general adult, substance abuse and
child 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 117 of the Company's 142 management contracts at August 31,
2002.
4
Elements of the Continuum of Care
The mental health treatment programs managed by the Company are designed
to provide a continuum of mental health services, consisting of inpatient,
partial hospitalization (or day treatment), outpatient and home health services.
Inpatient Services. Inpatient services are generally provided to patients
needing the most intensive mental health treatment and who frequently have
accompanying medical care needs. The patient is admitted to the client hospital
and remains there on a 24-hour per day basis throughout the course of the
inpatient treatment, which is continued until the patient can be stabilized and
moved to another level in the continuum of mental health services.
Partial Hospitalization. Partial hospitalization services are provided for
limited periods per day at established intervals with the patient returning home
at the conclusion of each day's treatment. Partial hospitalization services are
designed to be both an alternative to inpatient hospitalization services and a
key component of care following inpatient hospitalization.
Outpatient Services. Outpatient services consist generally of consultative
sessions 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 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
policies and procedures development, Medicare billing and coding assistance,
comprehensive clinical audits, outcomes measurement and reporting, professional
marketing and community relations.
The Company intends to continue to emphasize the area of mental health
programs for the elderly ("geropsychiatric programs"). At August 31, 2002, 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
regulatory maximum limitations 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 also allows reimbursement for partial
hospitalization on a specified fee for service basis that facilitates the
ability to treat patients 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") to
qualify for reimbursement 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.
5
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 from
insurers, self-funded benefit plans or other third-party payors for the 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 whether to offer
mental health 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 $212.27 per day, which when implemented 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 $4.8 million, or 5.1%
of total contract management revenues for the year ended August 31, 2002, down
approximately $2.6 million, or 34.9% from the prior fiscal year. Of the 41
contracts including partial hospitalization services in effect on August 31,
2002, 31 program locations had partial hospitalization services in operation, 9
program locations were in operation but the partial hospitalization services
were not in operation, and 1 program location was not yet in operation for any
services.
On August 1, 2002 the Centers for Medicare and Medicaid Services or "CMS"
(formerly Health Care Financing Administration or "HCFA") issued final
amendments to the provider based regulations, which in addition to requirements
applicable to all provider based facilities, provide specific requirements for
provider based status of "off-campus" locations and additional specific
requirements applicable to "off-campus" locations operational under a management
contract. The Company estimates that the revised regulations, while still
subject to clarification as to specific applicability, may have an effect on 6
of its management contracts. In addition, CMS delayed from October 1, 2002 to
July 1, 2003, the implementation date of the new regulations for facilities and
organizations treated as provider based prior to October 1, 2000. The Company
believes that the final amendments will not have a significant impact on its
current operations of inpatient psychiatric units located within general
hospitals.
The Balanced Budget Refinement Act of 1999 mandates that a prospective
payment system for inpatient psychiatric services be developed. The system is to
include an adequate patient classification system that reflects the differences
in patient resource use and costs, i.e. acuity. In addition, the law states that
the payment system must be budget neutral and be a per diem system. However a
per case rate system alternative is being considered.
The law outlined that the Secretary shall submit to the appropriate
committees of Congress a report that includes a description of the system no
later than October 1, 2001, and that the system must be implemented by October
1, 2002. Not withstanding these deadlines, both dates have passed and no
description of the system has been presented as yet. In early 2002, Tom Scully,
Administrator for CMS, gave a speech in which he predicted that a proposed
prospective payment system for inpatient psychiatric services would be released
in March 2003, subjected to a comment period, and then implemented in January
2004.
A prospective payment system with reimbursement based on a patient
classification system may raise or lower Medicare reimbursement levels to
hospitals for inpatient psychiatric services. To the extent client hospital
reimbursement decreases, this could adversely affect the ability of the Company
to maintain and obtain management contracts for inpatient psychiatric services
and the amount of fees paid to the Company under such contracts.
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. 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
6
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 skilled nursing services and 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.
The Company provides contract management for a broad range of physical
rehabilitation programs including acute rehabilitation units, as well as skilled
nursing units, and outpatient rehabilitation programs. Physical rehabilitation
services represented 25 of the Company's 142 management contracts at August 31,
2002.
Acute rehabilitation units are specialized programs that incorporate a
variety of treatments and services aimed at improving an individual's functional
level following a disabling illness or traumatic injury. The treatment program
is led by a physician and provided by an interdisciplinary team of health care
professionals including physical, speech, occupational and recreational
therapists, rehabilitation nurses and social workers. The Company tailors an
acute rehabilitation program for a health care facility to satisfy unmet
community and medical staff needs, while maximizing utilization of the facility.
Outpatient rehabilitation serves as an adjunct to inpatient physical
therapy and rehabilitation programs. 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.
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, which began 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 raise or lower Medicare per patient and/or overall
reimbursement levels to hospitals for physical rehabilitation services, subject
to the subsequent relative changes in per patient costs and patient volumes.
Where lower, this could adversely affect the ability of the Company to maintain
and/or obtain management contracts for physical rehabilitation services and the
amount of fees paid to the Company under such contracts. The Company believes
its hospital based service delivery system is a cost efficient model in general
terms as compared to alternative structures in the marketplace. While the
Company is generally not experiencing adverse consequences as a result of this
change in reimbursement, at this time, the Company cannot meaningfully predict
the ultimate impact prospective payment will have on the programs it currently
manages or on its opportunities for obtaining new programs. In February 2002, it
was announced by CMS that inpatient rehabilitation units do not have to meet
provider-based status to bill Medicare for services rendered to patients.
CQI+ OUTCOMES MEASUREMENT AND PSYCHSCOPE SERVICES
The Company began offering its proprietary 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. The CQI+ Outcomes Measurement 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, freestanding psychiatric hospitals, community mental health centers,
residential treatment centers and outpatient clinics. The Company's CQI+ System
has met the criteria for inclusion in the Joint Commission on Accreditation of
Healthcare Organizations ("JACHO") ORYX Initiative and is included on JCAHO's
list of acceptable outcome measurement systems. The Company is committed to
meeting the requirements as established by JCAHO. As of August 31, 2002, 46 of
the Company's mental health management contracts included the CQI+ System and in
addition 112 contracts were with stand-alone
7
facilities. Since offering the CQI+ System, the Company has compiled a
proprietary database containing non-identifiable patient outcome measurement
data on approximately 107,000 patients. Sample data is typically 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. With
the continued emphasis on accountability and the JCAHO accreditation
requirement, the Company believes that its CQI+ System is an important component
of the mental health services it provides.
The Company developed and began to market in fiscal 1999 its proprietary
PsychScope Research Services, which are based on non-identifiable patient
outcomes measurement data collected from approximately 107,000 patients that
have participated in the CQI+ Outcomes Measurement System since 1994 and on
research relationships established with behavioral healthcare providers. The
PsychScope Research Services allow pharmaceutical product marketers and
researchers to access "real world" information on the use of key drugs within
the antipsychotic, antidepressant, and mood stabilizer classes, specifically
within behavioral healthcare. The services can be accessed in two ways. First,
pharmaceutical customers can receive retrospective drug usage reports and
studies based on the 107,000 patient database begun in 1994. This service allows
marketers and outcomes researchers to access, track and trend drug usage
information over time for use in a wide range of marketing, publication and
research strategies. Second, pharmaceutical customers can purchase customized
prospective outcomes and Phase IV research studies, which MHO implements within
its network of behavioral healthcare research sites. These outcomes and research
studies become a key component of product development, marketing programs,
and/or the clinical publication strategy for the pharmaceutical customer. The
healthcare market for database, outcomes and PHASE IV clinical research services
is an established and growing market that is fueled by the highly competitive
pharmaceutical marketplace. As of August 31, 2002 the Company had 6 contracts to
provide outcomes and research services.
MANAGED BEHAVIORAL HEALTH CARE SERVICES AND EMPLOYEE ASSISTANCE PROGRAMS
As of August 31, 2002, the Company had 688 contracts to provided EAP and
managed behavioral health care services for approximately 2.4 million lives
covered by various health plans and companies with which it had contracted. The
Company contracts with insurance companies, HMOs and self-insured employers 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, however, a portion of the contracts are structured on a stipulated
fee-for-service basis. The behavioral health care services are provided by
mental health care professionals that are employed by the Company or through a
network of approximately 17,000 independent providers under contract with the
Company. 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., in August
1996, and continuing with the acquisitions of Acorn Behavioral Health Care
Management Corporation in October 1997, and FPM Behavioral Health, Inc. in June
1998, the Company expanded its services to include the provision of full risk,
capitated managed behavioral health care services for insurance companies and
health maintenance organizations 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.,
in October 1998, Resources in Employee Assistance and Corporate Health, Inc., in
April 1999 and Occupational Health Consultants of America ("OHCA"), in August 1,
2001. Subsequent to the year ended August 31, 2002, the Company acquired all of
the outstanding capital stock of Employee Assistance Programs International,
Inc. ("EAP International") on November 4, 2002, with an effective date of
October 31, 2002. EAP International, headquartered in Denver, Colorado, had
approximately 170 contracts covering approximately 475,000 lives at September
30, 2002.
The behavioral health care services are provided by mental health care
professionals that are employed by the Company or through a network of
approximately 17,000 independent providers that are under contract with the
Company. 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 negotiated fee-for-service basis. 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,
8
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.
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. Proactive use of Critical
Incident Stress Debriefing for employers and their employees as a defensive
measure has been increasingly utilized in the past year. In the Company's
HorizonCareLink models, they focus on providing consultation and resource
services to assist employees and families in achieving personal success and
emotional wellbeing. The Company also offers a comprehensive array of work life
information and referral sources. Modes of access to services include
traditional face-to-face sessions as well as HorizOnline, an internet based EAP
program, and HorizonCareLink, a telephonic based EAP program, all of which focus
on providing consultation and resource services to assist employees and their
families in achieving personal and professional success and emotional wellbeing.
The Company is paid a specified fee per month per employee for its services,
which amount varies depending on the range of services provided.
Recent 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. The Company
also intends to continue its acquisition strategy in this area.
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. 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
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. Modes of access to services
include traditional face-to-face sessions as well as HorizOnline, an internet
based EAP program, and HorizonCareLink, a telephonic based EAP program, all of
which focus on providing consultation and resource services to assist employees
and their families in achieving personal and professional success and emotional
wellbeing. As with its other products, the Company intends to cross market such
programs as additional services it can offer new and existing client hospitals.
In March 2002, the Company's EAP/Employer division received its fourth
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.
9
PROFESSIONAL NURSE STAFFING SERVICES
The Company's acquisition of ProCare, in June 2002, expanded the Company's
operations by entering into the specialized (neo-natal, emergency room and
critical care) nurse staffing industry. The Company provides an on-call,
twenty-four hour per day, seven days a week, specialized nurse staffing service
to hospitals. In a typical month the Company provides more than 500 nurses to
over 100 client hospitals through per diem, short-term and traveling nurse
contracts with acute care hospitals. The per diem contracts provide short-term
staffing solutions to hospitals resulting from increases in the number of
patients or the patient acuity and the availability of their own staff. The
temporary nurse staffing industry is enjoying strong growth due to a chronic
staffing shortage. The staffing shortfall is primarily caused by an aging
workforce, a declining number of new entrants into the profession, and an
increasing demand for healthcare professionals as well as by regulatory mandated
nurse staffing levels in certain locals. A key driver for the Company to be
successful in this industry is its ability to continue to attract and retain a
large supply of highly qualified and experienced nurses. The staffing shortage
and an increased demand by hospitals is causing both hourly rates charged to
hospitals and the hourly rates paid to nurses to rise and is increasing the
costs of recruiting an adequate supply of nurses. As an industry practice, when
a hospital experiences a staffing shortage, it may call on one of many staffing
companies to fill the position. Typically the first staffing company to call the
hospital back with a qualified, available nurse will have the opportunity to
fill the open position. Although hospitals are sensitive to a nurse's hourly
rate, often this concern is secondary to availability.
OPERATIONS
MANAGEMENT CONTRACTS
The Company operates its mental health management contract business
through a regional structure that includes 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 maintain key operating
employees of the Company in direct contact with clients. Each of the regional
offices is staffed at a 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 twelve 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. The Company's physical rehabilitation management contracts are
operated in the same organizational manner out of its NSC with plans to develop
a comparable regional office structure as it expands its operations. At August
31, 2002, of the Company's 939 contract management employees, there were 880
program employees at its contract locations and 59 employees at its regional and
NSC offices.
The Company provides its management services under contracts with its
client hospitals. Each contract is tailored to address the differing needs of
the client hospital and its community. The Company and the client hospital
determine the programs and services to be offered by the hospital and managed by
the Company, which may consist of one or more treatment programs offering
inpatient, partial hospitalization, outpatient services, and or other 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, with the Company providing operating and clinical
expertise through its onsite management staff.
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 certain non-compete and confidentiality provisions. In
addition, the Company's management contracts typically prohibit the client
hospital from soliciting the employment of the Company's employees during the
contract term and for a specified period thereafter.
Contracts are frequently renewed or amended prior to or at their stated
expiration dates. Some contracts are terminated prior to their stated expiration
dates pursuant to agreement of the parties or to early termination provisions
included in the contracts. As of August 31, 2002, 2001 and 2000, the Company had
successfully retained 83%, 86%, and 79%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company's
experience is that 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
10
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 a relevant
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, 2002, the Company refunded $8,839 of its
fees in relation to such 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 clinical, operating,
and administrative 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
areas including recruiting, finance, reimbursement, referral development,
marketing, quality assurance and regulatory 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 and other program management
personnel, an annual leadership conference for all program directors and other
program personnel, and an on-going comprehensive ethics compliance plan.
Program Staffing
Mental health programs typically have an independent psychiatric medical
director, a program director who is usually a psychologist, advance degreed
nurse or a social worker, a clinical assessment coordinator and additional
social workers or therapists as needed. Many programs also include a nurse
manager or a community education coordinator. Physical rehabilitation programs
generally have an independent medical director, a program director, and
additional clinical staff tailored to meet the needs of the program and the
client hospital, which may include physical and occupational therapists, a
speech pathologist, a social worker and other appropriate supporting personnel.
Medical directors generally have a contract with the Company under which on-site
administrative services needed to administer the program are provided. These
contracts generally include nondisclosure, nonsolicitation and noncompetition
covenants pursuant to which the medical director agrees not to solicit the
Company employees for specified periods, disclose confidential information of
the Company or render certain administrative or management services within
specified time periods and geographic areas to any enterprise in competition
with the Company or the programs it manages. Except for the nursing staff, which
is typically provided by the hospital, the other program personnel are usually
employees of the Company. At August 31, 2002, the Company had an average of 7 on
site employees per contract location.
11
Program Education and Referral Development
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 referral development committee consisting of the 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, to which they can direct patients. 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 and physical rehabilitation 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, state and Company standards. The Company also has a
staff of internal clinical auditors, who make at minimum, annual visits to
contract locations as well as conduct periodic "surprise visits". The auditor
typically reviews medical records and marketing programs, and conducts
interviews with physicians, referral sources and client hospital staff members
and frequently patients and/or their families. 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, 2002, the Company had a total of 142 mental health and
physical rehabilitation management contracts with general acute care hospitals
located in 34 states and the District of Columbia, as shown below:
NUMBER OF
STATE CONTRACTS
- ----- ---------
Alabama .......................... 1
Arkansas ......................... 12
California ....................... 18
Colorado .......................... 1
Connecticut ....................... 2
District of Columbia .............. 1
Florida ........................... 2
Georgia ........................... 1
Idaho ............................. 1
Illinois .......................... 4
Indiana ........................... 1
Iowa .............................. 1
Kansas ............................ 1
Kentucky .......................... 6
Louisiana ......................... 5
Maryland .......................... 1
Massachusetts...................... 3
Michigan ..........................10
Mississippi ....................... 7
Missouri .......................... 4
Nebraska .......................... 1
Nevada ............................ 2
New Jersey ........................ 2
New York .......................... 6
North Carolina .................... 6
Ohio .............................. 7
Oklahoma .......................... 2
Oregon ............................ 1
Pennsylvania ......................13
South Carolina .................... 2
South Dakota ...................... 1
Tennessee ......................... 7
Texas ............................. 6
Washington ........................ 2
Wisconsin ......................... 2
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, 2002, 22.5% of the Company's management contracts were with
proprietary hospitals. The remaining contracts are primarily with community
not-for-profit hospitals.
12
CQI+ OUTCOMES MEASUREMENT AND PSYCHSCOPE SERVICES
The Company develops and operates its outcomes measurement system with a
staff of 26 employees 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.
MANAGED CARE AND EMPLOYEE ASSISTANCE CONTRACTS
During fiscal year 1998, the Company combined its three managed care
subsidiaries (Florida PPS, Acorn, and FPM Behavioral Health) into Horizon
Behavioral Services ("HBS") to promote a national integrated organization, a
stronger market identification, and to achieve operating efficiencies. The
Company's managed care business operations center is located in suburban
Orlando, Florida, its EAP/Employer business operations center is located in
suburban Philadelphia, Pennsylvania and the OHCA EAP subsidiary is headquartered
in Nashville, Tennessee, with small regional and satellite offices located in
various cities.
The Company's HBS subsidiary has a total network of approximately 17,000
independent providers, many of whom contract with more than one of the Company's
three behavioral health operating units. The Company's managed care business has
27 licensed clinicians providing services in its four clinic locations in
Florida, an additional 140 employees working in clinical management and
administrative positions at its operations center, and has a provider network
consisting of contracts with approximately 5,300 providers and facilities. The
Company's EAP/Employer division, at its various locations, has 57 employees and
has contracts with approximately 15,000 individual providers located in all 50
states. The Company's OHCA EAP subsidiary, at its various locations, has 43
employees and has contracts with approximately 1,500 individual providers. The
Company's managed care and EAP operations also have 21 employees composed of
sales, marketing and administrative services based at the NSC and its various
operating locations.
The Company delivers its EAP and managed care services to customers with
locations throughout the U.S. through provider networks and through employees in
the Philadelphia, Orlando and Nashville metropolitan areas, as well as eight
regional offices. Additionally, the Company operates four clinics in the Orlando
area. Claims are currently processed primarily at the Orlando location, with
certain claims processed at the Philadelphia and Nashville locations.
PROFESSIONAL NURSE STAFFING SERVICES
On average, the Company provides specialized nurse staffing services on a
monthly basis to in excess of 100 hospitals through per diem, short-term and
traveling nurse contracts with acute care hospitals. The per diem contracts
provide short-term staffing solutions to hospitals resulting from increases in
the number of patients or the patient acuity and the availability of their own
staff. Hospitals typically have contracts with multiple staffing agencies.
Usually, the first staffing company with an available, qualified nurse will have
the opportunity to fill the position. The per diem contracts meet incidental
needs and are not exclusive agreements and do not guarantee the number of health
professionals that will be provided to the hospital. The short-term and
traveling nurse contracts normally assist the hospital in filling an expected
vacancy of five to thirteen weeks. Under some agreements the hospital may charge
the Company a fee if the Company staff does not "show" for an assigned shift.
Contracts are usually renewed if the hospital is satisfied with the quality and
the availability of the Company's nurses.
The Company provides services from two offices, with Santa Ana, California
being the major location and the second located in West Bloomfield, Michigan.
The Company has a total of 21 employees in Santa Ana, California and 10
employees in Detroit, Michigan.
ADMINISTRATION
The Company has an additional 92 employees at its NSC who provided
company-wide support in finance, human resources, information technology,
marketing recruitment, clinical standards, and other administrative and
executive services.
13
SALES AND MARKETING
At August 31, 2002, the Company employed in direct sales activities for
its mental health and physical rehabilitation contract management businesses
seven full-time Vice Presidents of Development, a Senior Vice President 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 or
other programs as well as hospitals with existing programs of which the Company
could assume management. A select list of candidates, which number approximately
1300, is systematically and regularly updated based on criteria indicating which
hospitals are the most likely potential clients. Once identified, an internal
telemarketing system is in place to contact and qualify the potential clients. A
Vice President of Development, who typically acts as the point person on the
sales team then 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. Operations and clinical management also
participate in and support the sales process. 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 Company's subsidiary Mental Health Outcomes ("MHO") markets the CQI+
Outcomes Measurement System to approximately 1,200 medical/surgical hospitals
with psychiatric inpatient units and 300 free-standing psychiatric hospitals
nationwide and PsychScope Research Services to 11 pharmaceutical companies. MHO
employs a full-time Director of Market Development who markets the CQI+ System
to hospitals by developing an understanding of psychiatric program outcomes
measurement needs and determining the most suitable CQI+ System Module. MHO also
employs a full time Coordinator of Market Development for telemarketing to
support initial telemarketing calls to prospective CQI+ customers. In addition,
CQI+ is marketed as an "add-on" service to the contract managed psychiatric
programs provided by the Company's Horizon Mental Health Management subsidiary
through efforts of the Vice Presidents of Development. MHO also employs a
full-time Vice President of Market Development who markets PsychScope services
by assessing research needs and opportunities within the commercial and clinical
functions of targeted pharmaceutical companies. MHO seeks to build awareness of
its market outcomes and Phase IV research services within brand drug teams,
through focused central nervous system therapeutic expertise, excellent service
and a history of successful projects.
The Company's subsidiary Horizon Behavioral Services ("HBS") markets
employee assistance programs and managed behavioral health programs to
employers, insurance companies and HMO's nationwide. HBS employs a full-time
Vice President of EAP Sales, and four Regional Vice Presidents of Sales to
market its traditional EAP products, three Regional Sales Representatives to
market its emerging business EAP products and OHCA EAP products, and a Vice
President to market its behavioral health managed care services to insurers,
HMO's and self-insured employers who outsource management of the behavioral
health benefit to an experienced provider. The HBS sales staff markets EAP
products 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 subsidiary ProCare One Nurses ("ProCare") markets specialized
nurse-staffing services to acute care hospitals primarily in California and
Michigan. The operations management in each office is responsible for marketing
hospitals in their area to obtain contracts. The short-term and travel
placements are marketed by recruiters who match each opportunity with a
qualified nurse from the Company's portfolio of nurses who is available and
meets the hospital's required qualifications.
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 or 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, operational and clinical 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 strengthened the need to manage the appropriateness of mental
health and physical rehabilitation services provided to patients. As a result,
competitors without substantive 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 competes with hospitals, nursing homes, clinics, physicians'
offices and other staffing companies for the services of registered and other
nurses. Registered nurses, especially those with specialized skills, 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
Company has direct competition from local, regional and national staffing
companies when recruiting nurses. Nurses may have special training, or a
preference to work in a specific service area of the hospital that may narrow
their general availability to work assignments.
Competition among nurse staffing companies is generally based on the
quality of the nurses provided, availability to fill shifts, responsiveness and
price. Hospitals require qualified nurses to fill staff vacancies and to allow
for flexibility and efficiency due to change in the number of patients being
treated and their acuity. A hospital's success is predicated, in part, on the
ability to staff quality nurses.
The behavioral health care marketplace includes three large national
providers who control over half of the market. The balance of the market is
highly fragmented and for EAP business consists of organizations from medium
size and regional operations to small local providers. The primary factor
affecting competition in the EAP business is the range of services provided and
price. In addition, quality of service and the mode of access are also of
importance to EAP customers. Price is the primary factor in obtaining additional
managed care customers. Companies involved in behavioral health care must meet
heightened requirements related to increased customer and government scrutiny,
particularly the new HIPPA regulations. Customers frequently require
sophisticated data that provides information regarding clinical outcomes,
patient and provider satisfaction, administrative performance, and other
performance related information.
On October 20, 2000, HBS's 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 credential 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. HBS's EAP operations in
Philadelphia, PA has full URAC accreditation.
15
The Company has no individual customer comprising of 10% or more of its
revenue or on which its overall operations or financial results are
substantially dependent.
GOVERNMENT REGULATION
The Company's business is affected by federal, state and local laws and
regulations concerning, among other matters, mental health and physical
rehabilitation facilities and reimbursement for mental health and physical
rehabilitation services. These regulations impact the development and operation
of mental health and physical rehabilitation programs managed by the Company for
its client hospitals. Licensing, certification, reimbursement and other
applicable government regulations vary by jurisdiction and are subject to
periodic revision. The Company is not able to predict the content or impact of
future changes in laws or regulations affecting the mental health or physical
rehabilitation sectors.
Facility Use and Certification
Hospital facilities are subject to various federal, state and local
regulations, including facilities use, licensure and inspection requirements,
and licensing or certification requirements of federal, state and local health
agencies. Many states also have certificate of need laws intended to avoid the
proliferation of unnecessary or under-utilized health care services and
facilities. The mental health and physical rehabilitation programs which the
Company manages are also subject to licensure and certification requirements.
The Company assists its client hospitals in obtaining required approvals for new
programs. Some approval processes may lengthen the time required for programs to
commence operations. In granting and renewing a facility's licenses,
governmental agencies generally consider, among other factors, community needs,
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, 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 applicable 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
general and ambiguous in nature and subject to interpretation, sometimes
differently by different Medicare financial intermediaries who administer the
programs on behalf of the federal government. In addition, 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.
16
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
reimbursement 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
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 that 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 areas 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, 2002, of the 154 mental
17
health treatment programs managed by the Company at its 117 mental health
management contract locations, 106 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 established 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 subsequent annual adjustment. Per the regulations, a
nationwide maximum cap was established limiting the reimbursement target amount
on a per case basis for mental health and physical rehabilitation service, for
Medicare fiscal years beginning on or after October 1, 1997, subject to annual
adjustment. Pursuant to subsequent revisions, currently the range of target
amounts on a per case basis for mental health services, for Medicare fiscal
years beginning October 1, 2002, and later, are $6,658 to $16,575. The
variability within a range primarily represents the difference in wage levels
across the country. Currently physical rehabilitation services are being
transitioned to a prospective payment system, which began January 1, 2002.
Therefore, the current range of target amounts for physical rehabilitation
services is not of material significance. Per the mandatory fiscal year
conversion schedule, or by voluntary election, some physical rehabilitation
programs have completely made the transition. All programs must have made the
full transition within the federal fiscal year 2003, but no later than September
1, 2003. The target maximums and the prospective payment system limitations have
resulted, or may result, in some cases, in decreased amounts reimbursed to the
Company's client hospitals. This decrease in reimbursement has led, or may lead,
in some cases, to the renegotiation of a lower contract management fee structure
for the Company and in other cases has resulted, or may result, in 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 $212 per day, which lowered 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
("PPS"), 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
transitional cost-based reimbursement system. As of August 31, 2002, all of the
Company's managed physical rehabilitation programs in operation were exempt from
PPS.
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.
18
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, 2002, the Company refunded $8,839 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 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. On August 1, 2002 the Centers for Medicare
and Medicaid Services or "CMS" (formerly Health Care Financing Administration or
"HCFA") issued final amendments to the provider based regulations, which in
addition to requirements applicable to all provider based facilities, provide
specific requirements for provider based status of "off-campus" locations and
additional specific requirements applicable to "off-campus" locations
operational under a management contract. The Company estimates that the revised
regulations, while still subject to clarification as to specific applicability,
may have an effect on 6 of its management contracts. In addition, CMS delayed
from October 1, 2002 to July 1, 2003, the implementation date of the new
regulations for facilities and organizations treated as provider based prior to
October 1, 2000. The Company believes that the final amendments will not have a
significant impact on its current operations of inpatient psychiatric units
located within general hospitals. In February 2002, it was announced by CMS that
inpatient rehabilitation units do not have to meet provider-based status to bill
Medicare for services rendered to patients. This announcement was supported by
the August 1, 2002 Federal Register.
The Balanced Budget Refinement Act of 1999 mandates that a prospective
payment system for inpatient psychiatric services be developed. The system shall
include an adequate patient classification system that reflects the differences
in patient resource use and costs, i.e. acuity. In addition, the law states that
the payment system must be budget neutral and be a per diem system, however, a
per case rate system alternative is being considered.
The law outlined that the Secretary shall submit to the appropriate
committees of Congress a report that includes a description of the system no
later than October 1, 2001, and that the system must be implemented by October
1, 2002. Not withstanding these deadlines, both dates have passed and no
description of the system has
19
been presented as yet. In early 2002, Tom Scully, Administrator for CMS, gave a
speech in which he predicted that a proposed prospective payment system for
inpatient psychiatric services would be released in March 2003, subjected to a
comment period, and then implemented in January 2004.
A prospective payment system with reimbursement based on a patient
classification system may raise or lower Medicare reimbursement levels to
hospitals for inpatient psychiatric services. To the extent client hospital
reimbursement decreases, this could adversely affect the ability of the Company
to maintain and obtain management contracts for inpatient psychiatric services
and the amount of fees paid to the Company under such contracts.
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 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 or
number of admissions or discharges in a given period for 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, while not challenged thus far, will not be
challenged by regulatory authorities in the future.
20
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 HIPPA Act to any federal
health care program (other than the Federal Employees Health Benefits Program).
In addition, federal and some state laws impose restrictions on referrals
for certain designated health services by physicians and, in a few states,
psychologists and other mental health care professionals to entities with which
they have financial relationships. The Company believes that its operations
comply with these restrictions to the extent applicable, although no assurance
can be given regarding compliance in any particular factual situation. Federal
legislation has been considered to expand current law from its application to
Medicare and Medicaid business to all payors and to additional health services.
Certain states are considering adopting similar restrictions or expanding the
scope of existing restrictions. There can be no assurance that the federal
government or other states in which the Company operates will not enact similar
or more restrictive legislation or restrictions that could, under certain
circumstances, 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.
21
Licensing Requirements
Certain of the managed behavioral services provided by the Company may be
subject to certain licensing requirements in some states. The Company currently
holds various licenses in 12 states. If such business operations are determined
to require licenses in other states, then the time and expense of obtaining such
licenses or the inability to obtain such licenses could adversely affect such
business operations. 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, 2002, the Company had approximately 1,876 employees, of whom
1,073 were full-time employees, 280 were part-time employees, 23 were temporary
employees and on average 500 were specialized nurses placed in temporary nurse
staffing positions with client hospitals. 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, 2002, the Company had
administrative services contracts with 153 physicians to serve as medical
directors providing administrative services for hospital clinical programs
managed by the Company.
INSURANCE
The Company's liability and property risk management program involves a
cost-effective balance of insured risks and self-insured retentions. 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 liability judgement against the Company in excess of its insurance coverage or
several liability judgements for which the Company's aggregate self-insurance
retention amount is significant could have a material adverse effect on the
Company.
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 May 31, 2007, subject to certain purchase and
renewal options. In addition, for its contract management businesses, the
Company leases an aggregate of 3,411 square feet of space for two regional
offices in the Chicago and Tampa metropolitan areas, with lease terms expiring
from April 2006 to December 2006. 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 service and employee assistance
program businesses, the Company leases approximately 93,939 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 September 2002 to April 2008. In January 2001, the Company
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 11,328 square feet in various locations throughout
central Florida with lease terms expiring from March 2003 to April 2006 for its
managed behavioral health care clinical operations.
For its professional nurse staffing service business, the Company leases
approximately 7,168 square feet of office space primarily in the Los Angeles,
Santa Ana and Detroit metropolitan areas under lease terms expiring from
December 2002 to December 2005.
22
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 U.S. Department of Justice had
previously declined to intervene in the lawsuit. 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 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 furnished documents in response to the subpoena in
January 2001 and there has been no further activity in relation to the subpoena
since that time. On October 30, 2002, the Company received a letter from the
Civil Division of the U.S. Department of Justice proposing a preliminary meeting
to discuss settlement of certain False Claim Act violations alleged in a qui tam
suit and also to discuss the findings of the U.S. Department of Justice after
its review of certain records. The qui tam suit remains under seal and the U.S.
Government has not decided whether or not it will intervene in the suit. The
Company has not been served in the suit. The allegations and the records
reviewed relate to the same matters that were the subject of the 2000 U.S.
Department of Justice subpoena. The Company expects that the proposed meeting
will be held in December 2002. At this time, the Company cannot predict the
ultimate scope or any particular future outcome of the qui tam suit or the
investigation. It is possible that eventually allegations could be asserted
against the Company involving claims anywhere from minor to significant in
amount.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
James W. McAtee 57 President and Chief Executive Officer,
Secretary and Director
Ronald C. Drabik 56 Senior Vice President - Finance and
Administration, Chief Financial Officer
and Treasurer
Frank J. Baumann 43 Senior Vice President - Operations
James K. Don 66 Senior Vice President - Business and
Contract Development
Linda A. Laitner 54 Senior Vice President - Operations
David S. Tingue 47 Senior Vice President - Marketing
David K. White, Ph.D 46 Senior Vice President - Operations
23
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, Chief Financial Officer 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 - ProCare One Nurses since June 13, 2002. 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 (1) 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(2) 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 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. Effective September 28, 2002, he was appointed President -
Horizon Mental Health Management. 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.
(1) James Don has indicated his intention to retire effective December 31, 2002,
and again serve as an acquisitions consultant for the Company.
(2) Linda Laitner has resigned, but agreed to remain until the Company retains
her successor.
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, 2002:
June 1, 2002 - August 31, 2002 ............... $20.10 $13.89
March 1, 2002 - May 31, 2002 ................. 20.90 12.82
December 1, 2001 -- February 28, 2002 ........ 16.26 12.19
September 1, 2001 -- November 30, 2001 ....... 15.21 11.36
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
As of October 29, 2002, there were 160 stockholders of record of the
Common Stock of the Company. As of October 24, 2002 (the most recent date that
data was available to the Company) there were approximately 396 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 based on 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, 2002, 2001 and 2000, and at August 31, 2002
and August 31, 2001, 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, 1999 and 1998, and at August 31, 2000, 1999 and 1998, are
derived from the audited consolidated financial statements of the Company not
included herein. 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.
25
FISCAL YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues .......................................... $ 143,721 $ 127,660 $ 133,682 $ 146,001 $ 123,818
Cost of Services .................................. 110,300 92,920 100,478 113,789 89,695
---------- ---------- ---------- ---------- ----------
Gross Profit ...................................... 33,421 34,740 33,204 32,212 34,123
Selling, general and administrative ............... 15,681 16,775 14,442 14,524 13,990
Provision for doubtful accounts ................... 294 1,764 878 589 760
Depreciation and amortization ..................... 2,778 4,510 5,101 4,460 3,166
---------- ---------- ---------- ---------- ----------
Income from operations ............................ 14,668 11,691 12,783 12,639 16,207
Interest expense (net of interest and other income) 110 371 959 1,176 (74)
---------- ---------- ---------- ---------- ----------
Income before income taxes ........................ 14,558 11,320 11,824 11,463 16,281
Income tax provision .............................. 5,634 4,529 4,757 4,562 6,515
---------- ---------- ---------- ---------- ----------
Income before minority interest ................... 8,924 6,791 7,067 6,901 9,766
Minority interest ................................. -- -- -- -- (34)
---------- ---------- ---------- ---------- ----------
Net income ........................................ $ 8,924 $ 6,791 $ 7,067 $ 6,901 $ 9,732
========== ========== ========== ========== ==========
Basic earnings per share .......................... $ 1.66 $ 1.21 $ 1.11 $ 1.00 $ 1.37
========== ========== ========== ========== ==========
Weighted average shares outstanding ............... 5,386 5,615 6,370 6,875 7,120
========== ========== ========== ========== ==========
Diluted earnings per share ........................ $ 1.52 $ 1.16 $ 1.07 $ 0.96 $ 1.26
========== ========== ========== ========== ==========
Weighted average shares and dilutive
potential common shares outstanding ............. 5,889 5,876 6,605 7,200 7,754
========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments ................... $ 4,036 $ 1,981 $ 8,517 $ 5,439 $ 6,204
Working capital ................................... 2,899 615 3,687 581 6,498
Intangible assets (net)(1) ........................ 68,666 57,260 56,924 60,065 59,538
Total assets ...................................... 92,585 77,180 83,631 86,536 86,672
Total debt ........................................ 10,000 6,900 14,900 20,036 26,029
Stockholders' equity .............................. 60,733 50,998 49,692 45,806 42,662
AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31,
2002 2002 2002 2001 2001 2001 2001 2000 2000
------ ------ ------ ------ ------ ------ ------ ------ ------
STATISTICAL DATA:
COVERED LIVES (000'S) ................ 2,407 2,489 2,236 2,311 2,269 1,767 1,736 1,723 1,736
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation ...... 130 129 135 138 124 127 129 122 128
Contract locations signed and unopened 12 9 11 11 14 10 10 14 10
------ ------ ------ ------ ------ ------ ------ ------ ------
Total contract locations ............. 142 138 146 149 138 137 139 136 138
====== ====== ====== ====== ====== ====== ====== ====== ======
SERVICES COVERED BY CONTRACTS:
Inpatient ............................ 127 130 134 136 123 127 128 121 123
Partial hospitalization .............. 31 30 34 38 40 41 45 50 61
Outpatient ........................... 21 19 20 20 17 18 19 19 20
Home health .......................... 3 3 3 3 3 4 3 4 5
Consulting ........................... 3 2 2 1 0 0 0 0 0
CQI+ & PsychScope .................... 164 168 172 172 168 128 125 113 115
TYPES OF TREATMENT PROGRAMS:
Geropsychiatric ...................... 106 107 113 121 109 113 116 121 137
Adult psychiatric .................... 44 43 45 46 45 47 48 46 47
Substance abuse ...................... 2 2 2 1 1 1 2 2 3
Physical rehabilitation .............. 28 27 27 25 24 25 27 23 24
Other mental health .................. 2 3 4 4 4 4 2 2 3
(1) Intangible assets consist of goodwill, as well as service contracts,
non-compete agreements and trademarks related to various acquisitions of the
Company.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a diversified health care services provider. It offers
employee assistance programs ("EAP") and managed behavioral health services to
employers, HMO's, and insurance companies. Through its acquisition of ProCare
One Nurses, LLC ("ProCare"), effective June 13, 2002, the Company provides
specialized nurse staffing services to hospitals. In addition it is 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, 2002, the Company had 688 contracts to provide EAP and managed mental
health services covering approximately 2.4 million lives. The Company had 142
management contracts as of August 31, 2002, with contract locations in 34 states
and the District of Columbia. Of its management contracts, 117 relate to mental
health treatment programs and 25 relate to physical rehabilitation programs. The
Company has also developed a proprietary mental health outcomes measurement
system known as CQI+ as well as outcomes and Phase IV clinical research services
known as "PsychScope". At August 31, 2002 the Company had contracts to provide
outcome measurement services at 158 contract locations as well as 6 PsychScope
outcomes and Phase IV clinical research project contracts. As of August 31,
2002, the Company's nurse staffing subsidiary provided, on a monthly average, in
excess of 500 nurses to over 100 different general acute care hospitals
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 managed care organizations and
employers. 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 includes continued growth in this segment 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 expanded the breadth of services it offers to
hospitals to include the full continuum of mental health services, including
outcome measurement services, as well as physical rehabilitation services.
Through the recent acquisition of ProCare One Nurses, the Company has
diversified into another related area within the healthcare services industry.
It is actively pursuing the geographic expansion of the specialized nurse
staffing services beyond ProCare's current California and Michigan markets.
REVENUES
Contract Management Services (Horizon Mental Health Management and
Specialty Rehabilitation Management)
The fees received by the Company for its services under management
contracts are paid directly by its client hospitals. Generally, contract fees
are paid on a monthly basis. 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 whether to offer mental health and physical rehabilitation services
pursuant to management contracts with the Company, as well as whether to
continue such contracts (subject to contract termination provisions) and the
amount of fees to be paid thereunder.
27
The primary factors affecting revenues in a period are the number of
management contracts with treatment programs in operation in the period and the
scope 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. 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 operation of its programs with the Company providing
clinical, operating and compliance management staff and expertise. As the
Company has expanded the breadth of treatment programs it offers to hospitals,
it has increased the number of contracts managing multiple treatment programs
under such contracts.
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, 2002, 2001 and 2000, the Company had
successfully retained 83%, 86% and 79%, 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 and programs
have 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, reimbursement for
specified direct program costs plus a fixed fee or a combination thereof. The
management fee is frequently subject to periodic adjustments as a result of
changes a relevant price index or other economic factors. Payors, including
Medicare and Medicaid, are striving 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 may increase in
the future. However, additional changes in Medicare reimbursement may also
unfavorably impact these groups and the Company's management contract business
as a result.
Over the past five years, the Company has increased revenues through
acquisitions (discussed below) and through internal growth, by adding services,
price escalators and increasing volumes at existing contract locations. The
increases have primarily been due to the increased range of services offered per
contract and for the Company's mental health segment the increased demand for
geropsychiatric services as general hospitals have sought to enter this market.
An additional factor favorably affecting revenues has been the Company's policy
of establishing a minimum direct margin threshold for its management contracts.
For the Company's mental health segment, the mix of programs has changed
over the last seven years reflecting the increased interest in geropsychiatric
programs by general hospitals. Geropsychiatric programs, as a percentage of the
Company's total mental health contract programs, have increased from
approximately 57% to 69% during that period.
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
28
amount per patient day. The current base reimbursement rate, which was effective
April 1, 2002, is a wage-adjusted rate of $212 per day. This change in
reimbursement methodology 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 $4.8 million or 5.1%
of total contract management revenues for the year ended August 31, 2002, down
approximately $2.6 million, or 35.1% from the prior fiscal year. Of the
Company's 117 management contracts at August 31, 2002, 41 or 35.0% of the
contracts include partial hospitalization services. Of the 41 contracts
including partial hospitalization services, 31 program locations had partial
hospitalization services in operation, 9 program locations were in operation but
the partial hospitalization services were not in operation, and 1 program
location was not yet in operation for any services
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. On August 1, 2002 the Centers for Medicare
and Medicaid Services or "CMS" (formerly Health Care Financing Administration or
"HCFA") issued final amendments to the provider based regulations, which in
addition to requirements applicable to all provider based facilities, provide
specific requirements for provider based status of "off-campus" locations and
additional specific requirements applicable to "off-campus" locations
operational under a management contract. The Company estimates that the revised
regulations, while still subject to clarification as to specific applicability,
may have an effect on 6 of its management contracts. In addition, CMS delayed
from October 1, 2002 to July 1, 2003, the implementation date of the new
regulations for facilities and organizations treated as provider based prior to
October 1, 2000. The Company believes that the final amendments will not have a
significant impact on its current operations of inpatient psychiatric units
located within general hospitals. In February 2002, it was announced by CMS that
inpatient rehabilitation units do not have to meet provider-based status to bill
Medicare for services rendered to patients. This announcement was supported by
the August 1, 2002 Federal Register.
The Balanced Budget Refinement Act of 1999 mandates that a prospective
payment system for inpatient psychiatric services be developed. The system shall
include an adequate patient classification system that reflects the differences
in patient resource use and costs, i.e. acuity. In addition, the law states that
the payment system must be budget neutral and be a per diem system, however a
per case rate system alternative is being considered.
The law outlined that the Secretary shall submit to the appropriate
committees of Congress a report that includes a description of the system no
later than October 1, 2001, and that the system must be implemented by October
1, 2002. Not withstanding these deadlines, both dates have passed and no
description of the system has been presented as yet. In early 2002, Tom Scully,
Administrator for CMS, gave a speech in which he predicted that a proposed
prospective payment system for inpatient psychiatric services would be released
in March 2003, subjected to a comment period, and then implemented in January
2004.
A prospective payment system with reimbursement based on a patient
classification system may raise or lower Medicare reimbursement levels to
hospitals for inpatient psychiatric services. To the extent client hospital
reimbursement decreases, this could adversely affect the ability of the Company
to maintain and obtain management contracts for inpatient psychiatric services
and the amount of fees paid to the Company under such contracts.
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, which began 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 raise or lower Medicare per patient and/or overall
reimbursement levels to hospitals for physical rehabilitation services, subject
to the subsequent relative changes in per patient costs and patient volumes.
Where lower, this could adversely affect the ability of the Company to maintain
and/or obtain management contracts for physical rehabilitation services and the
amount of fees paid to the Company under such contracts. The Company believes
its hospital based service delivery system is a cost efficient model in general
terms as compared to alternative structures in the marketplace. While the
Company is generally not experiencing adverse consequences as a result of this
change in reimbursement, at this time, the Company cannot meaningfully predict
the ultimate impact prospective payment will have on the programs it
29
currently manages or on its opportunities for obtaining new programs.
Managed Behavioral Health Care Services and Employee Assistance Programs
Through its subsidiary Horizon Behavioral Services, Inc. ("HBS"), the
Company offers an array of behavioral health care products to corporate clients,
self-funded employer groups, insurance companies, commercial HMO and PPO plans,
government agencies, and third-party payors. Revenues are derived from employee
assistance program services ("EAP"), administrative services only contracts, and
at risk managed behavioral health services. Generally fees are paid on a monthly
basis.
Revenues from EAP contracts are typically based on a per employee per
month capitated rate applied to the number of eligible employees. The rate for
EAP plans is dependent upon the type and scope of 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 applied to the number of eligible members. The client is
able to benefit from the Company's expertise in clinical case management, the
mental health professionals employed by the Company and the independent health
care providers contracted by the Company at favorably discounted rates.
The primary factors affecting revenues derived from managed care services
are the scope of 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 actuarially determined
anticipated utilization of the customer's covered employees and is set forth in
the contract, usually as a per member per month capitated rate, which is applied
to 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 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 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, including providing
services to patients who are employees of customers under various EAP or managed
care contracts.
Mental Health Outcomes
MHO provides outcomes measurement services to acute care hospital-based
programs, free standing psychiatric hospitals, community mental health centers,
residential centers and outpatient clinics. The contracts for outcomes
measurement services are generally for one to two years with an automatic
renewal provision. The rates for the outcomes measurement services are
negotiated based on the module selected and the number of patients and are
generally paid on a monthly basis. In 1999, MHO developed and began marketing
PsychScope research services, which allow pharmaceutical marketers and
researchers to access non-identifiable information on the clinical treatment of
patients in behavioral health programs across the U.S. In addition, PsychScope
research services allow pharmaceutical companies to implement customized
outcomes and Phase IV clinical research within the behavioral
30
health research network MHO continues to build. The PsychScope contracts are
negotiated based on the number of patients and depth of analysis, and in
addition, Phase IV contracts are based on the number of participating clinical
sites. Revenues are recognized in the month in which services are rendered, at
the estimated net realizable amounts. Contract payments are usually made on a
schedule based on completion stages of the project.
Specialized Nurse Staffing Services
The Company's acquisition of ProCare, in June 2002, expanded the Company's
operations in healthcare services by entering into the specialized nurse
staffing industry. The Company provides an on-call, twenty-four hour per day,
seven days a week, specialized nurse staffing service to hospitals. The fees
received by the Company for its services related to specialized nurse staffing
services are paid directly by its client hospitals. Generally, nurse-staffing
fees are determined by the number of hours worked. Fees are billed and paid on a
weekly basis. These hourly rates vary based on the specialty of nurse required,
day of the week, and time of shift to be filled. Fees are generally billed based
on a predetermined rate for each specialty and shift as specified in a fee
schedule with the client hospital. The Company typically provides more than 500
nurses to more than 100 client hospitals monthly. Revenues are recognized in the
month in which services are rendered, at the estimated net realizable amounts.
OPERATING EXPENSE
Contract Management Services
The primary factors affecting operating expenses for the Company's
contract management business in any period is the number of programs in
operation in the period and the volume of patients at those locations. Operating
expenses consist primarily of salaries and benefits paid to program management,
clinicians, therapists and supporting personnel. Mental health programs managed
by the Company generally have an independent 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, 2002, the Company had an average of 7
employees per contract location.
Managed Behavioral Health Care and Employee Assistance Programs
Operating expenses for the Company's managed behavioral health care
services and employee assistance programs are comprised of approximately 39%
salaries and benefits for its clinical, operations and supporting personnel and
approximately 44% medical claims from clinical 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
credentialing services, marketing costs and expenses, consulting, accounting and
legal fees and expenses, employee recruitment and relocation expenses, rent,
utilities, telecommunications costs, and property taxes.
Mental Health Outcomes
The primary factors affecting operating expenses for the outcome
measurement services and PsychScope services are the number of patients covered
and the number of clinical sites participating in the studies, with the primary
expense being salary and benefit costs for the personnel involved in the
research. In addition, operating costs related to conducting Phase IV studies
are also comprised of direct costs such as patient participation fees, location
fees, and hospital and/or physician coordination and implementation fees.
31
Specialized Nurse Staffing Services
The primary factor affecting operating expenses for the Company's
specialized nurse staffing business in any period is the number of shifts filled
in the period and the mix of wage rates, including overtime, for the placed
nurses. Operating expenses consist primarily of salaries and benefits paid to
the Company's nursing pool.
ACQUISITIONS
Subsequent to the year ended August 31, 2002, the Company acquired all of
the outstanding capital stock of Employee Assistance Programs International,
Inc. ("EAP International") on November 4, 2002, with an effective date of
October 31, 2002 for approximately $3.4 million. "EAP International",
headquartered in Denver, Colorado, had approximately 170 contracts covering
approximately 475,000 lives at September 30, 2002.
Effective June 13, 2002, the Company purchased all of the membership
interests of ProCare One Nurses, LLC ("ProCare"). ProCare, headquartered in
Santa Ana, California, provides specialized nurse staffing services to hospitals
primarily in California and Michigan. ProCare currently has annual revenues of
approximately $24.4 million (unaudited) and in a typical month provides more
than 500 nurses to over 100 client hospitals. The Company accounted for the
acquisition by the purchase method as required by generally accepted accounting
principles. Of the purchase price of approximately $12.5 million, $11.5 million
was funded by the Company's revolving credit facility and $1.0 million from
existing cash. The acquisition is expected to be accretive to earnings.
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 covered 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.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal years ended August 31, 2002,
2001 and 2000, the percentage relationship to total revenues of certain costs,
expenses and income, and the number of management contracts and covered lives at
the end of each fiscal year.
FISCAL YEAR ENDED AUGUST 31,
----------------------------
2002 2001 2000
------ ------ ------
Revenues .................................. 100.0 100.0 100.0
Cost of Services .......................... 76.7 72.8 75.2
------ ------ ------
Gross Profit .............................. 23.3 27.2 24.8
Selling, general and administrative ....... 10.9 13.2 10.8
Provision for doubtful accounts ........... 0.2 1.3 0.7
Depreciation and amortization ............. 2.0 3.5 3.8
------ ------ ------
Income from operations .................... 10.2 9.2 9.5
Interest and other income (expense), net .. (0.1) (0.3) (0.7)
------ ------ ------
Income before income taxes ................ 10.1 8.9 8.8
Income tax provision ...................... 3.9 3.6 3.5
------ ------ ------
Net income ................................ 6.2% 5.3% 5.3%
====== ====== ======
Number of management contracts, end of year 142 138 138
Covered lives (000's) ..................... 2,407 2,269 1,736
32
FISCAL YEAR ENDED AUGUST 31, 2002 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 2001
REVENUE. Total revenue increased $16.0 million, or 12.5%, to $143.7
million for the year ended August 31, 2002, as compared to $127.7 million for
the year ended August 31, 2001.
Revenue associated with contract management of mental health programs was
essentially level, on a net basis, at $79.3 million for the year ended August
31, 2002 and 2001. Included was an increase of $3.9 million for the year ended
August 31, 2002, as compared to the year ended August 31, 2001, primarily due to
the acquisition of the contracts of PHM effective October 1, 2001. This increase
was offset by a decrease in revenue primarily attributable to the decline in the
number of average inpatient psychiatric locations in operation (exclusive of
acquired PHM contracts) from 107 for the fiscal year ended August 31, 2001 to
103 for the fiscal year ended August 31, 2002, as well as a decrease in
psychiatric partial hospitalization programs in operation from 40 for the fiscal
year ended August 31, 2001 to 31 for the fiscal year ended August 31, 2002.
Revenue associated with the contract management of physical rehabilitation
services increased by $1.6 million, or 11.9%, to $15.1 million for the year
ended August 31, 2002, as compared to $13.5 million for the year ended August
31, 2001. This increase was primarily attributable to the increase in the
average revenue per location from $681,000 for the year ended August 31, 2001,
to $729,000 for the year ended August 31, 2002, as well as an increase in the
average locations in operation from 20 for the year ended August 31, 2001 to 21
for the year ended August 31, 2002.
Revenue associated with managed behavioral health care and employee
assistance program services increased by $8.6 million, or 26.8%, to $40.7
million for the year ended August 31, 2002, as compared to $32.1 million for the
year ended August 31, 2001. Of this increase, $3.7 million was attributable to
the commencement of a significant managed care contract on April 1, 2002, $3.8
million was attributable to the acquisition of OHCA on August 1, 2001 and $1.1
million was attributable to an increase of 26,000 covered lives under an
existing managed care contract.
Revenue associated with outcomes measurement and PsychScope services
increased by $721,000, or 26.7%, to $3.4 million for the year ended August 31,
2002, as compared to $2.7 million for the year ended August 31, 2001. This
increase is primarily attributable to the commencement of two significant
PsychScope Phase IV projects during the year ended August 31, 2002, as well as a
full year for a significant PsychScope Phase IV project which commenced in
August 2001.
Revenue associated with the specialized nurse staffing services was $5.3
million for the year ended August 31, 2002 representing 2.6 months of operation.
The Company entered into this business segment with the acquisition of ProCare
One Nurses, LLC on June 13, 2002.
COST OF SERVICES. Total costs of services provided increased $17.4
million, or 18.7%, to $110.3 million for the year ended August 31, 2002,
compared to $92.9 million for the year ended August 31, 2002. As a percent of
revenue, gross profits decreased to 23.3% for the year ended August 31, 2002
from 27.2% for the year ended August 31, 2001, primarily attributable to the mix
of revenues, i.e. a higher percentage of total revenues attributable to the
Company's lower margin HBS and ProCare subsidiaries.
Costs of services provided associated with contract management of mental
health programs increased by $1.3 million, or 2.4%, to $54.5 million for the
year ended August 31, 2002, compared to $53.2 million for the year ended August
31, 2001. $3.0 million of this increase was attributable to the contracts
acquired from PHM effective October 1, 2001. This $3.0 million increase was
partially offset by a decrease of $1.7 million associated with the decrease in
the existing average inpatient psychiatric locations in operation from 107 to
103 and a decrease in partial hospitalization programs from 40 to 31 for the
periods ended August 31, 2001 and 2002, respectively. As a percent of revenue,
gross profits of this business segment decreased to 31.4% for the year ended
August 31, 2002 from 33.0% for the year ended August 31, 2001.
33
Costs of services provided associated with contract management of physical
rehabilitation services increased by $1.5 million, or 15.5%, to $11.2 million
for the year ended August 31, 2002, compared to $9.7 million for the year ended
August 31, 2001. Salaries and benefits for the fiscal year ended August 31, 2002
were $8.2 million representing an increase of $1.0 million or 13.9%, as compared
to salaries and benefits of $7.2 million for the fiscal year ended August 31,
2001. This increase is primarily due to the contract openings during fiscal year
2002 with higher staffing levels than previous contracts. In addition, increased
travel, meals and consulting contributed to the overall increase in cost of
services. As a percent of revenue, gross profits decreased to 26.1% for the year
ended August 31, 2002 from 27.7% for the year ended August 31, 2001.
Costs of services provided associated with managed behavioral health care
and employee assistance program services increased by $8.8 million, or 31.3%, to
$36.9 million for the year ended August 31, 2002, compared to $28.1 million for
the year ended August 31, 2001. An increase of $3.3 million was primarily
attributable to the additional OHCA business acquired effective August 1, 2001
and $4.2 million from the commencement of a significant managed care contract,
which had greater than expected utilization. An additional $1.0 million increase
was the result of an increase in existing client claims due to a 16.6% increase
in the average cost per inpatient day and a 7.9% increase in inpatient days. As
a percent of revenue, gross profits decreased to 9.2% for the year ended August
31, 2002 from 12.5% for the year ended August 31, 2001.
Costs of services provided associated with outcomes measurement and
PsychScope services increased by $1.2 million, or 60.0%, to $3.2 million for the
year ended August 31, 2002, compared to $2.0 million for the year ended August
31, 2001. This increase was primarily attributable to the commencement of two
significant PsychScope Phase IV projects during the year ended August 31, 2002,
as well as a full year for a significant PsychScope Phase IV project which
commenced in August 2001. Due to higher than expected costs associated with the
initial Phase IV project start up, gross profits as a percent of revenue,
decreased to 4.8% for the year ended August 31, 2002 from 24.0% for the year
ended August 31, 2001.
Costs of services provided associated with the specialized nurse staffing
services was $4.7 million for the year ended August 31, 2002. The Company
entered into this business segment with the acquisition of ProCare One Nurses,
LLC effective June 13, 2002. As a percent of revenue, gross profits were 11.0%
for the 2.6 months included in the year ended August 31, 2002.
SELLING, GENERAL AND ADMINISTRATIVE. Total selling, general, and
administrative expenses, on a net basis, decreased $1.1 million, or 6.5%, to
$15.7 million for the year ended August 31, 2002, compared to $16.8 million for
the year ended August 31, 2001, in spite of an approximate $500,000 or 5.3%
increase in salaries and benefits. A decrease of $1.7 million or 27.9% in other
expenses between fiscal years was primarily attributable to three components.
Legal settlement expenses decreased $760,000 due to a decrease in expenses
incurred and for estimates for actual and projected legal claims and settlements
and related expenses that were incurred or anticipated versus the prior fiscal
year. Other operating expenses decreased $450,000 primarily due to the
termination of a computer software development project that occurred in fiscal
year 2001. Printing decreased $330,000 for the fiscal year 2002, as compared to
fiscal year 2001, due to sourcing materials at lower costs as well as to lower
usage.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
expense for the fiscal year ended August 31, 2002 was $294,000, representing a
lower expense amount of $1.5 as compared to $1.8 million for the prior fiscal
year. This higher expenses in fiscal year 2001 were primarily the result of
accruals recorded in the prior period for the outstanding balances related to
several contract management agreements in which the contract had terminated,
litigation was being pursued and/or the hospital had failed or was expected to
fail soon. In addition, recoveries totaling $373,000 related to balances
reserved in prior fiscal years for 4 terminated management contracts were
received during the year ended August 31, 2002.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
fiscal year 2002 were $2.8 million representing a decrease of $1.7 million or
37.8% as compared to depreciation and amortization expense of $4.5 million for
fiscal year 2001. $1.4 million of this decrease is due to the Company's adoption
of SFAS 141 and SFAS 142 which addresses the initial recognition and measurement
and the subsequent accounting and reporting for goodwill and other intangible
assets. As a result of the implementation of these new standards, the Company
discontinued the amortization of goodwill as of September 1, 2001. A decrease in
amortization expense of $263,000
34
resulted from the completion of contract valuation amortization for contracts
that are now fully amortized. This decrease was reduced by an increase of
$134,000 due to contract valuation amortization for contracts that were acquired
late in fiscal year 2001 and fiscal year 2002. 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.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense, interest
income and other income for fiscal year 2002 was a net expense of $110,000 as
compared to $372,000 in net expense for fiscal year 2001. This change is
primarily a result of a decrease in interest expense of $414,000 related to a
reduction in the weighted average outstanding credit facility balance between
periods, as well as to lower interest rates. The weighted average outstanding
credit facility balance for fiscal year 2002 was $5.1 million with an ending
balance of $10.0 million. The weighted average outstanding credit facility
balance for fiscal year 2001 was $8.2 million with an ending balance of $6.9
million. The decrease in interest expense is offset by a decrease in interest
income of approximately $91,000 due to lower interest rates.
INCOME TAX EXPENSE. Income tax expense for fiscal year 2002 was $5.6
million representing an increase of $1.1 million or 24.4%, as compared to income
tax expense of $4.5 million for the prior fiscal year. The increase in income
tax expense was largely due to a corresponding increase in pre-tax earnings. The
effective tax rates for fiscal years 2002 and 2001 were 38.7% and 40.0%
respectively.
FISCAL YEAR ENDED AUGUST 31, 2001 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 2000
REVENUE. Total revenue decreased $6.0 million, or 4.5%, to $127.7 million
for the year ended August 31, 2001, as compared to $133.7 million for the year
ended August 31, 2000.
Revenue associated with contract management of mental health programs
decreased by $2.5 million, or 3.1%, to $79.3 million for the year ended August
31, 2001, as compared to $81.8 million for the year ended August 31, 2000.
Partial hospitalization program revenues decreased $7.8 million due to the
decline in partial hospitalization programs in operation from 61, as of August
31, 2000, to 40, as of August 31, 2001. This decline was primarily the result of
unfavorable changes to Medicare reimbursement for partial hospitalization
programs. This decrease was offset by a $5.3 million increase resulting from a
6.6% increase in revenue per average psychiatric location in operation and a
$1.0 million contract termination fee.
Revenue associated with contract management of physical rehabilitation
services increased $1.6 million, or 13.4%, to $13.5 million for the year ended
August 31, 2001, as compared to $11.9 million for the year ended August 31,
2000. This increase was primarily attributable the increase in the average
rehabilitation revenue per location from $573,000 to $681,000 for the year ended
August 31, 2000 to August 31, 2001 which was partially offset by a decrease in
the average rehabilitation locations in operation from 21 for a the year ended
August 31, 2000 to 20 for the year ended August 31, 2001.
Revenue associated with managed behavioral health care and employee
assistance program services decreased by $6.6 million, or 17.1%, to $32.1
million for the year ended August 31, 2001, as compared to $38.7 million for the
year ended August 31, 2000. This was primarily due to the continued effects of
the termination of six managed care contracts whose revenues for fiscal year
2001 were $634,000 versus $6.8 million for the previous year.
Revenue associated with outcomes measurement and PsychScope services
increased by $181,000, or 7.2%, to $2.7 million for the year ended August 31,
2001, as compared to $2.5 million for the year ended August 31, 2000. PsychScope
revenue increased $345,000 due to an increase in the number of PsychScope
projects completed from 7 for the year ended August 31, 2000 versus 19 for the
year ended August 31, 2001. Outcomes revenue decreased $263,000 due to a
decrease in the average number of contract management CQI+ locations in
operation from 59 for the year ended August 31, 2000 to 47 for the year ended
August 31, 2001. Outcomes revenue increased $98,000 due to an increase in the
average number of stand-alone CQI+ locations in operation from 44 for the year
ended August 31, 2000 to 57 for the year ended August 31, 2001.
35
COST OF SERVICES. Total costs of services provided decreased $7.6 million,
or 7.6%, to $92.9 million for the year ended August 31, 2001, compared to $100.5
million for the year ended August 31, 2000. As a percent of revenue, gross
profits increased to 27.2% for the year ended August 31, 2001 from 24.8% for the
year ended August 31, 2000, primarily attributable to the lower percentage in
the mix of total revenues for the Company's lower margin HBS subsidiary.
Costs of services provided associated with contract management of mental
health programs decreased by $4.1 million, or 7.2%, to $53.2 million for the
year ended August 31, 2001, compared to $57.3 million for the year ended August
31, 2000. This decrease was primarily attributable to the decline in the average
number of psychiatric locations in operation from 118 for the fiscal year ended
August 31, 2000 to 107 for the fiscal year ended August 31, 2001. As a percent
of revenue, gross profits increased to 33.0% for the year ended August 31, 2001
from 30.0% for the year ended August 31, 2000.
Costs of services provided associated with contract management of physical
rehabilitation services increased by $451,000 or 4.8%, to $9.7 million for the
year ended August 31, 2001, compared to $9.3 million for the year ended August
31, 2000. This increase includes the expensing of a capital contribution of
$100,000 required by the contract with one client hospital and an increase in
agency nurse expense of $106,000 at one client hospital location due to
increased volume. As a percent of revenue, gross profits increased to 27.7% for
the year ended August 31, 2001 from 22.2% for the year ended August 31, 2000.
Costs of services provided associated with managed behavioral health care
and employee assistance program services decreased by $5.4 million, or 16.1%, to
$28.1 million for the year ended August 31, 2001, compared to $33.5 million for
the year ended August 31, 2000. This decrease was primarily attributable to the
termination of six significant managed care contracts. The cost savings
associated with these contracts were primarily derived by the resulting decrease
in medical claims expense and the closure of five clinic locations in the third
quarter of fiscal year 2000, as well as by a reduction in staff. As a percent of
revenue, gross profits decreased to 12.5% for the year ended August 31, 2001
from 13.5% for the year ended August 31, 2000.
Costs of services provided associated with outcomes measurement and
PsychScope services increased by $145,000, or 7.6%, to $2.0 million for the year
ended August 31, 2001, compared to $1.9 million for the year ended August 31,
2000. As a percent of revenue, gross profits decreased to 24.0% for the year
ended August 31, 2001 from 24.3% for the year ended August 31, 2000.
SELLING, GENERAL AND ADMINISTRATIVE. Total selling, general and
administrative expenses increased $2.4 million, or 16.7%, to $16.8 million for
the year ended August 31, 2001, compared to $14.4 million for the year ended
August 31, 2000. This increase is primarily due to a $1.3 million increase in
salaries and benefits and a $1.2 million increase in other expenses.
Salaries and benefits for the fiscal year ended August 31, 2001 were $9.5
million representing an increase of $1.3 million, or 15.5%, as compared to
salaries and benefits of $8.2 million for the fiscal year ended August 31, 2000.
This increase was primarily attributable to the growth in employee healthcare
benefit costs and expansion in the internal sales departments in the Company
across all subsidiaries.
Other expenses for fiscal year 2001 were $6.1 million, an increase of $1.2
million or 25.0%, as compared to $4.8 million for the prior fiscal year. Legal
settlement expense increased $675,000 due to an increase in estimates for actual
and projected legal claims and settlements and related expenses that were
incurred or anticipated in fiscal year 2001. Repairs and Maintenance expense
increased $102,000 in fiscal year 2001, as compared to fiscal year 2000. This
increase is due to service agreements associated with the acquisition of office
equipment in fiscal year 2001. Other operating expenses increased $420,000
primarily due to expensing amounts related to HBS III, a software development
project that was terminated in January 2001.
36
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
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 accruals 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
was expected to fail.
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 attributable to assets acquired during the period being
less than the depreciation associated with fully depreciated items.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its future cash flow from operations (which was
$14.0 million for the year ended August 31, 2002), along with cash of $4.0
million at August 31, 2002, and the $30 million revolving credit facility (of
which $18.6 million was available at August 31, 2002), will be sufficient to
cover operating cash requirements over the next 12 months, including estimated
capital expenditures of $700,000. The Company may require additional capital to
fund acquisitions.
Effective May 23, 2002, the Company entered into a Second Amended and
Restated Credit Agreement with JPMorgan Chase Bank, as Agent, and Bank of
America, NA to refinance the loans outstanding under the existing credit
agreement and to provide expanded credit availability. The Credit Agreement is a
five year $30.0 million facility consisting of a three-year revolving/two year
term credit facility with provisions to allow for its expansion to a $50.0
million facility.) As of August 31, 2002, the Company had borrowings of $10.0
million outstanding against the revolving credit facility.
The following summary of certain material provisions of the Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Second Amended Credit Agreement, a copy of
which was previously filed as Exhibit 10.1 in the May 2002 Form 10-Q.
The Company and one of its subsidiaries are the borrowers under the Credit
Agreement, which is unconditionally guaranteed by all material subsidiaries of
the Company. Loans outstanding under the 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% to 1.25% (depending on the Company's Indebtedness to EBITDA
Ratio), or the "Eurodollar Rate" plus 2.00% to 2.75% (depending on the Company's
Indebtedness to EBITDA Ratio), as selected by the Company. The Company pays
interest quarterly and incurs quarterly commitment fees of .5% per annum 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
37
in excess of $25.0 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. 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 material subsidiaries of the Company. As of August 31,
2002, the Company was in compliance with all covenants of the agreement.
As of October 4, 2002, the Credit Agreement was amended to allow the
Company to finance the redemption or repurchase of its capital stock subject to
certain conditions. The amendment allows the Company to expend up to $7.5
million for the repurchasing of shares. As of October 31, 2002, the Company has
repurchased 227,200 shares with a total purchase price of $2.6 million.
Effective September 1996, the Company entered into a lease arrangement
with an unconsolidated, unaffiliated special purpose entity. The lease
agreement, which had an initial term of five years that has been extended to May
2007, is for a building constructed to the Company's specifications for use as
its National Support Center. In connection with the transaction, a financial
institution loaned to the special purpose entity approximately $4.4 million. The
Company guaranteed on a limited basis approximately $900,000 of the loan. The
loan is payable on an interest only basis with all principal due at the end of
the lease term. The Company also agreed to purchase the building for
approximately $4.4 million at the end of the lease term, currently May 2007, if
either the building is not sold to a third party or the Company does not extend
its lease. A recent independent appraisal indicated the fair market value of the
building is at least equal to the loan amount and purchase price.
Effective June 13, 2002, the Company acquired all of the membership
interests of ProCare One Nurses, LLC for approximately $12.5 million. The
acquisition was funded by incurring debt of $11.5 million under the revolving
credit facility, and $1.0 million from existing cash.
Effective October 1, 2001, the Company acquired all of the mental health
management contracts of Perspectives Health Management for approximately $2.9
million in an asset purchase transaction. The acquisition was funded by
incurring debt of $2.9 million under the then existing revolving credit
facility.
Effective August 1, 2001, the Company acquired all of the outstanding
capital stock of Occupational Health Consultants of America, Inc. for
approximately $3.5 million. The acquisition was funded by incurring debt of $3.5
million under the then existing revolving credit facility.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements and accompanying notes have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis, with the exception of the Company's adoption of FAS 141 and
FAS 142 effective September 1, 2001. The preparation of these financial
statements requires the use of estimates, judgements and assumptions that affect
the reported amounts 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 periods.
The Company continually evaluates its accounting policies and the
estimates it uses to prepare the consolidated financial statements. In general,
the estimates are based on historical experience, on information from third
party professionals and on various other assumptions that are believed to be
reasonable under the facts and circumstances. In the Company's opinion, the
significant accounting policies most important to aid in understanding its
financial results are the following:
38
ALLOWANCES FOR DOUBTFUL ACCOUNTS: The Company maintains allowances for
doubtful accounts for estimated losses which may result from the inability of
its customers to make required payments. Allowances are based on the likelihood
of recoverability of accounts receivable considering such factors as past
experience and taking into account current collection trends that are expected
to continue. Factors taken into consideration in estimating the reserve are
amounts past due, in dispute, or a client which the Company believes might be
having financial difficulties. If economic, industry, or specific customer
business trends worsen beyond earlier estimates, the Company increases the
allowances for doubtful accounts by recording additional expense.
ACCOUNTING FOR INTANGIBLE ASSETS AND GOODWILL: The cost of acquired
companies is allocated first to their identifiable assets based on estimated
fair values. Costs allocated to identifiable intangible assets are generally
amortized on a straight-line basis over the remaining estimated useful lives of
the assets. The excess of the purchase price over the fair value of identifiable
assets acquired, net of liabilities assumed, is recorded as goodwill. At August
31, 2002 and 2001, respectively, other identifiable intangible assets, net,
consist of contracts (approximately $3,145,605 and $4,014,753), non-competes
(approximately $186,112 and $0) and trade name (approximately ($93,055 and $0).
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 acquisitions. These standards require all future business
combinations be accounted for using the purchase method of accounting and
goodwill not to be amortized, but instead to be subject to impairment tests at
least annually. The Company elected to adopt SFAS 141 and SFAS 142 on a
prospective basis as of September 1, 2001. As a result of implementing these new
standards, the Company discontinued the amortization of goodwill as of August
31, 2001.
Accounting for these types of assets require significant estimates and
judgement, especially as to: a) the valuation in connection with the initial
purchase price allocation and b) the ongoing evaluation for impairment. For each
acquisition, a valuation was completed to determine a reasonable purchase price
allocation. Upon completion of the allocation process an amount was assigned to
various identified assets including intangible assets and the remainder was
assigned to goodwill. The purchase price allocation process requires estimates
and judgements as to expectations for the various businesses and business
strategies. For example, certain growth rates were assumed for each business.
Additionally, different operating margins for each type of service offering were
included in the estimates. If actual growth rates or operating margins, among
other assumptions, differ significantly from the estimate and judgements used in
the purchase price allocation, a possible impairment of the intangible assets
and/or goodwill or an acceleration in amortization expense may result.
In addition, SFAS 142 generally requires that goodwill be tested annually
using a two-step process. The first step is to identify a potential impairment.
The second step measures the amount of the impairment loss, if any. However,
intangible assets with indefinite lives are to be tested for impairment using a
one-step process that compares the fair value to the carrying amount of the
asset. Because of the significance of the identified intangible assets and
goodwill to the Company's consolidated balance sheet, annual or interim
impairment analyses are important. Changes in key assumptions about the business
and its prospects, or changes in market conditions or other external factors,
could result in an impairment charge and such a charge could have a material
adverse effect on the Company's financial condition and results of operations.
Contracts represent the fair value of management contracts and service
contracts purchased and are being amortized using the straight-line method over
seven years. Other intangibles primarily includes the fair value of trade names
and non-compete agreements, which are being amortized over their expected useful
lives.
MEDICAL CLAIMS: Medical claims payable represent the liability for
healthcare claims reported but not yet paid and claims incurred but not yet
reported ("IBNR") related to the Company's managed healthcare business. The IBNR
portion of medical claims payable is estimated based upon authorized healthcare
services, past claims payment experience for member groups, enrollment data,
utilization statistics and other factors. Although variability is inherent in
such estimates, management believes the recorded liability for medical claims
payable is adequate.
39
Medical claim payable balances are continually monitored and reviewed. Changes
in assumptions for care costs caused by changes in actual or expected experience
could cause these estimates to change significantly.
RESERVES FOR EMPLOYEE HEALTH BENEFITS: The Company retains a significant
amount of self-insurance risk for its employee health benefits. The Company
maintains stop-loss insurance such that the Company's liability for health
insurance is subject to certain individual and aggregate limits. Each month end
the Company records an accrued expense for estimated health benefit claims
incurred but unpaid or not reported at the end of such period. The Company
estimates this accrual based on a number of factors including historical
experience, industry trends and recent claims history. This accrual estimate is
subject to ongoing revision as conditions might change and as new data may be
presented. Adjustments to estimated liabilities are recorded in the accounting
period in which the change in estimate occurs.
REVENUE RECOGNITION: Service revenue is generated by the Company's five
business segments and recognized in the following three categories:
(1) Contract management revenue, generated by Horizon Mental Health
Management and Specialty Rehabilitation Management, is reported in
the period they are provided at the estimated net realizable amounts
from contracted hospitals for contract management services rendered.
Adjustments are accrued on an estimated basis in the period they
become known and are adjusted in future periods, as final settlement
is determined.
The fees received by the Company for its services under management
contracts are paid directly by its client hospitals. Contract
management revenue is based on various criteria such as a fixed fee
and/or variable components including per diem calculation based on
patients per day, the number of admissions or discharges, direct
expenses, or any combination of the preceding, depending on the
specific contract. Generally, contract fees are paid on a monthly
basis.
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 or
anticipated to be denied, the Company records an allowance for 100%
of the potential amount. The Company believes it has adequately
provided for potential adjustments that may result from final
settlement of potential denials.
Client hospitals receive reimbursement under 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 the patients of the programs
managed by the Company. As a result, the availability and amount of
such reimbursements, which are subject to change, may impact the
decision of general acute care hospitals regarding whether to offer
mental health and physical rehabilitation services pursuant to
management contract with the Company, as well as whether to continue
such contracts (subject to contract termination provisions) and the
amount of fees to be paid thereunder.
(2) Premium and fees revenue, generated by Horizon Behavioral Services,
is reported in the period services are provided at the estimated net
realizable amounts as defined by client contracts for services
rendered. Adjustments are accrued on an estimated basis in the
period they become known and are adjusted in future periods if and
when necessary.
Revenues are derived from EAP services, administrative service only
contracts, and at risk managed behavioral health services. This
revenue consists primarily of capitation payments, which are
calculated on the basis of a per-member/per-month fee, and also
include fee for service payments. For certain capitated managed care
contracts the Company is `at risk' and bears the economic risk as to
the adequacy of capitated revenue versus the actual cost of
behavioral health care services provided to covered members. At
August 31, 2002, overall capitated revenue was more than sufficient
to meet these costs.
40
(3) Service revenues, generated by Mental Health Outcomes and ProCare
One Nurses, are recognized in the month in which services are
rendered, at the estimated net realizable amounts. These revenues
are generated through services provided by the Company's nurse
staffing services, and its outcomes measurement, research services,
and Phase IV clinical trial businesses.
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 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 or nursing; adverse
changes to other regulatory requirements relating to the provision of mental
health or physical rehabilitation or nursing 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; the ability of the Company to successfully integrate
acquired businesses on a cost effective basis; 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; 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, 2002, the Company had $10.0 million of debt obligations
outstanding with a weighted average interest rate of 4.00%. A hypothetical 10%
change in the effective interest rate for these borrowings, assuming debt levels
as of August 31, 2002, would change interest expense by approximately $40,000
annually. This would be funded out of cash flows from operations, which were
approximately $14.0 million for the twelve months ended August 31, 2002.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements of the Company
and the Notes thereto appearing at page F-1 to F-25 attached hereto, all of
which information is incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 30, 2003 (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.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company's
Chief Executive Officer and the Company's Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's "disclosure controls
and procedures". Based on that evaluation, the Company's Chief Executive Officer
and the Company's Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that it files and submits
under the Exchange Act is recorded, processed, summarized and reported as and
when required, and are effective to ensure that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and its Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Subsequent to the date of evaluation,
there have been no significant changes in the internal controls or in other
factors that would significantly affect the internal controls, and no corrective
actions were considered necessary or taken with regard to significant
deficiencies and material weaknesses in the internal controls.
42
PART IV
ITEM 15. 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 - Second Amended and Restated Credit Agreement dated May 23, 2002,
between Horizon Health Corporation and Horizon Mental Health
Management, Inc., as Borrowers, and J.P. Morgan Chase Bank, as
Agent and the banks named therein (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 2002).
10.2 - First Amendment to Second Amended and Restated Credit Agreement
dated as of September 25, 2002 between Horizon Health
Corporation and Horizon Mental Health Management, Inc., J.P.
Morgan Chase Bank as Agent, and the banks named therein (filed
herewith).
10.3 - Second Amendment to Second Amended and Restated Credit
Agreement, dated as of October 4, 2002 between Horizon Health
Corporation and Horizon Mental Health Management, Inc., J.P.
Morgan Chase Bank as Agent and the banks named therein (filed
herewith).
10.4 - Letter Loan Agreement dated December 20, 1995 among North
Central Development Corporation, Horizon Health Corporation,
Horizon Mental Health Management and Mental Health Outcomes
(incorporated by reference to Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended November 30,
1995).
43
10.5 - Seventh Amendment to Letter Loan Agreement dated May 23, 2002,
between North Central Development Corporation, as Borrower,
Horizon Health Corporation and subsidiaries as limited
guarantors, and J.P. Morgan Chase 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
May 31, 2002).
10.6 - 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).
10.7 - Second Amendment to Lease Agreement dated May 23, 2002 between
North Central Development Corporation and Horizon Health
Corporation (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
May 31, 2002).
10.8 - Horizon Health Group, Inc. 1989 Stock Option Plan, as amended
(filed herewith).
10.9 - Horizon Mental Health Management, Inc. 1995 Stock Option Plan as
amended (filed herewith).
10.10 - Horizon Mental Health Management, Inc. Amended and Restated 1995
Stock Option Plan for Eligible Outside Directors as amended
(filed herewith).
10.11 - Horizon Health Corporation 1998 Stock Option Plan as amended
(filed herewith).
10.12 - 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).
10.13 - Horizon Health Corporation Bonus Plan Fiscal 2002 (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, 2001).
10.14 - Horizon Health Corporation Bonus Plan Fiscal 2003 (filed
herewith).
10.15 - 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).
10.16 - 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).
10.17 - Employment Agreement, dated November 1, 2001 between Horizon
Health Corporation and James W. McAtee (incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 2001).
10.18 - Member Interests Purchase Agreement, dated June 13, 2002,
between Horizon Health Corporation, as buyer, and Lara Mac,
Steve MacEachern, Vicki Lotz and Obstetrical Nurses, Inc. as
sellers (Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 13, 2002.
11 - Statement Regarding Computation of Per Share Earnings (filed
herewith).
44
21 - List of Subsidiaries of the Company (filed herewith).
23 - Consent of PricewaterhouseCoopers LLP (filed herewith).
99.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, signed by James W. McAtee, President and Chief
Executive Officer, dated November 22,, 2002.
99.2 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, signed by Ronald C. Drabik, Senior Vice President,
Finance and Administration, dated November 22, 2002, 2002
(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 June 13,
2002. The item reported was under Item 2, regarding the
acquisition of ProCare One Nurses, LLC effective June 13, 2002.
Current report on Form 8-K filed with the Commission on
September 30, 2002. 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 18, 2002.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: NOVEMBER 22, 2002
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 22, 2002
- ------------------------ Officer and Secretary
James W. McAtee (Principal Executive Officer)
/s/ RONALD C. DRABIK Senior Vice President - Finance and November 22, 2002
- ------------------------ Administration and Treasurer
Ronald C. Drabik (Principal Financial and Accounting
Officer)
/s/ JAMES KEN NEWMAN Director and Chairman of the Board November 22, 2002
- ------------------------
James Ken Newman
/s/ JACK R. ANDERSON Director November 22, 2002
- ------------------------
Jack R. Anderson
/s/ GEORGE E. BELLO Director November 22, 2002
- ------------------------
George E. Bello
/s/ WILLIAM H. LONGFIELD Director November 22, 2002
- ------------------------
William H. Longfield
/s/ JAMES E. BUNCHER Director November 22, 2002
- ------------------------
James E. Buncher
/s/ DONALD E. STEEN Director November 22, 2002
- ------------------------
Donald E. Steen
46
CERTIFICATION
I, James W. McAtee, certify that:
1. I have reviewed this annual report on Form 10-K of Horizon Health
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November, 22, 2002 /s/ JAMES W. MCATEE
-------------------------------------
James W. McAtee
President and Chief Executive Officer
47
CERTIFICATION
I, Ronald C. Drabik, certify that:
1. I have reviewed this annual report on Form 10-K of Horizon Health
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent functions):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November, 22, 2002 /s/ RONALD C. DRABIK
------------------------------
Ronald C. Drabik
Chief Financial Officer
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets at August 31, 2002 and 2001.................... F-3
Consolidated Statements of Operations
For the Years Ended August 31, 2002, 2001, and 2000........................ F-5
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended August 31, 2002, 2001, and 2000........................ F-6
Consolidated Statements of Cash Flows
For the Years Ended August 31, 2002, 2001, and 2000........................ 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 consolidated financial statements listed in the accompanying
index on page F-1 of this Form 10-K present fairly, in all material respects,
the financial position of Horizon Health Corporation and its subsidiaries at
August 31, 2002 and 2001, and the results of their operations and their cash
flows for the three years in the period ended August 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index on page S-1 of this Form 10-K presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audit. We conducted
our audit 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 audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for intangible assets and goodwill as of
September 1, 2001.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Dallas, Texas
October 11, 2002 (except with respect to the matter
discussed in paragraph two of Note 16, as to which
the date is November 4, 2002).
F-2
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
August 31,
-----------------------------
2002 2001
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,035,560 $ 1,980,635
Accounts receivable less allowance for doubtful accounts 13,376,983 12,289,274
of $2,463,690 and $2,439,216 at August 31, 2002 and
2001, respectively
Prepaid expenses and supplies 509,601 567,216
Income taxes receivable 301,288 59,024
Other receivables 210,907 52,384
Other assets 695,344 285,072
Deferred taxes 2,521,521 2,158,885
------------ ------------
TOTAL CURRENT ASSETS 21,651,204 17,392,490
Property and Equipment, net (Note 4) 1,772,879 2,232,363
Goodwill, net of accumulated amortization of $7,263,001
at August 31, 2002 and 2001 65,241,477 53,245,225
Contracts, net of accumulated amortization of
$10,657,098 and $9,106,190 at August 31, 2002 and 3,145,605 4,014,753
2001, respectively
Other intangibles, net of accumulated amortization of 279,167 --
$20,833 at August 31, 2002
Other noncurrent assets 495,043 294,852
------------ ------------
TOTAL ASSETS $ 92,585,375 $ 77,179,683
============ ============
See accompanying notes.
F-3
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
August 31,
-------------------------------
2002 2001
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 1,476,635 $ 1,369,180
Employee compensation and benefits 6,768,203 6,087,793
Medical claims payable 3,298,773 3,229,415
Accrued expenses (Note 5) 7,208,906 6,090,621
------------ ------------
TOTAL CURRENT LIABILITIES 18,752,517 16,777,009
Other noncurrent liabilities 1,115,628 1,780,385
Long-term debt 10,000,000 6,900,000
Deferred income taxes 1,983,743 723,911
------------ ------------
TOTAL LIABILITIES 31,851,888 26,181,305
------------ ------------
Commitments and contingencies (Note 11)
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 5,468,547 shares outstanding
at August 31, 2002, and 7,267,750 shares issued and
5,322,439 outstanding at August 31, 2001 72,678 72,678
Additional paid-in capital 17,868,291 17,990,859
Retained earnings 54,288,155 45,364,006
Treasury stock (11,495,637) (12,429,165)
------------ ------------
60,733,487 50,998,378
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,585,375 $ 77,179,683
============ ============
See accompanying notes.
F-4
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended August 31,
------------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Revenue $ 143,721,100 $ 127,659,827 $ 133,682,500
Cost of services 110,299,948 92,919,642 100,478,867
-------------- -------------- --------------
Gross profit 33,421,152 34,740,185 33,203,633
Selling, general and administrative 15,680,619 16,774,954 14,441,691
Provision for doubtful accounts 293,718 1,763,984 877,376
Depreciation and Amortization 2,778,445 4,510,424 5,101,355
-------------- -------------- --------------
Operating income 14,668,370 11,690,823 12,783,211
Other income (expense):
Interest expense (233,645) (638,398) (1,261,970)
Interest income and other 123,430 266,727 302,384
============== ============== ==============
Income before income taxes 14,558,155 11,319,152 11,823,625
Income tax provision 5,634,006 4,528,510 4,756,377
============== ============== ==============
Net income $ 8,924,149 $ 6,790,642 $ 7,067,248
============== ============== ==============
Earnings per common share:
Basic $ 1.66 $ 1.21 $ 1.11
============== ============== ==============
Diluted $ 1.52 $ 1.16 $ 1.07
============== ============== ==============
Weighted average shares outstanding:
Basic 5,385,777 5,614,566 6,369,846
============== ============== ==============
Diluted 5,889,432 5,876,490 6,604,903
============== ============== ==============
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, 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
Net Income -- -- -- 8,924,149 -- -- 8,924,149
Tax benefit associated with
stock options exercised -- -- 183,310 -- -- -- 183,310
Employee stock purchases -- -- 67,586 -- (12,023) 76,819 144,405
Exercise of stock options:
Issuance of treasury stock -- -- (373,464) -- (134,085) 856,709 483,245
------------ ------------ ------------ ------------ --------- ------------ ------------
Balance at August 31, 2002 7,267,750 $ 72,678 $ 17,868,291 $ 54,288,155 1,799,203 $(11,495,637) $ 60,733,487
============ ============ ============ ============ ========= ============ ============
See accompanying notes.
F-6
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended August 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
Operating activities:
Net income $ 8,924,149 $ 6,790,642 $ 7,067,248
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,778,445 4,510,424 5,101,355
Deferred income taxes 1,265,611 (435,979) (464,058)
Non-cash expenses 5,668 (20,180) 119,226
Changes in operating assets and liabilities:
Decrease in accounts receivable 2,063,015 43,215 1,371,539
(Increase) decrease in income taxes receivable (238,543) 554,654 (249,758)
(Increase) decrease in other receivables (160,038) 86,923 88,587
Decrease (increase) in prepaid expenses and supplies 94,791 680,722 (397,658)
(Increase) decrease in other assets (1,000,368) (127,757) 875,953
Increase (decrease) in accounts payable, employee
compensation and benefits, medical claims
payable, and accrued expenses 886,343 (912,245) (1,690,429)
(Decrease) increase in other noncurrent liabilities (664,757) 813,567 611,627
------------ ------------ ------------
Net cash provided by operating activities 13,954,316 11,983,986 12,433,632
------------ ------------ ------------
Investing activities:
Purchase of property and equipment (726,857) (1,494,511) (928,884)
Proceeds from sale of equipment 3,791 32,601 2,700
Payment for purchase of OHCA, net of cash acquired -- (3,499,000) --
Payment for OHCA price adjustment (38,047) -- --
Payment for purchase of contract management business (2,900,000) -- --
Payment for purchase of ProCare One Nurses, net of cash acquired (12,149,238) -- --
------------ ------------ ------------
Net cash used in investing activities (15,810,351) (4,960,910) (926,184)
------------ ------------ ------------
Financing activities:
Payments on long-term debt (69,500,000) (51,600,000) (5,135,706)
Borrowing under lines of credit 72,600,000 43,600,000 --
Tax benefit associated with stock options exercised 183,310 414,558 357,841
Purchase of treasury stock -- (6,143,533) (3,363,138)
Issuance (surrenders) of treasury stock 627,650 169,665 (288,086)
------------ ------------ ------------
Net cash provided by (used in) financing activities 3,910,960 (13,559,310) (8,429,089)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,054,925 (6,536,234) 3,078,359
Cash and cash equivalents at beginning of year 1,980,635 8,516,869 5,438,510
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,035,560 $ 1,980,635 $ 8,516,869
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 155,713 $ 614,723 $ 1,275,870
============ ============ ============
Income taxes $ 4,817,165 $ 4,397,100 $ 4,462,776
============ ============ ============
F-7
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
2002 (a) 2001 (b) 2000
------------ ------------ ------------
Non-cash investing activities:
Fair value of assets acquired $ 16,563,593 $ 4,351,970 -
Cash paid (15,438,047) (3,500,000) -
--------------------------------------------
Liabilities assumed $ 1,125,546 $ 851,970 -
============================================
(a) Consists of the purchase of management contracts of Perspectives Health
Management Corporation effective October 1, 2001, an adjustment to the
purchase price of Occupational Health Consultants of America, Inc. and the
purchase of ProCare One Nurses, LLC effective June 13, 2002. See Note 3.
(b) Acquisition of Occupational Health Consultants of America, Inc. effective
August 1, 2001.
See accompanying notes.
F-8
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2002, 2001 AND 2000
1. ORGANIZATION
Horizon Health Corporation ("the Company") is a diversified health care
services provider. It offers employee assistance programs ("EAP") and
behavioral health services to businesses and managed care organizations.
Through its acquisition of ProCare One Nurses, LLC effective June 13,
2002, the Company provides specialized nurse staffing services to
hospitals. In addition, it is 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; Nashville, Tennessee; Santa Ana, California; and Detroit,
Michigan 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.
Since its formation, the Company has completed 12 acquisitions, including
the following three consummated in the last three fiscal years. 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).
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 (see Note 3). Effective
June 13, 2002, the Company purchased all of the membership interests of
ProCare One Nurses, LLC ("ProCare"). ProCare has been consolidated with
the Company as of June 13, 2002 (see Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements and accompanying notes have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis. The preparation of these financial
statements requires the use of estimates, judgements and assumptions that
affect the reported amounts 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 periods.
The Company continually evaluates its accounting policies and the
estimates it uses to prepare the consolidated financial statements. In
general, the estimates are based on historical experience, on information
from third party professionals and on various other assumptions that are
believed to be reasonable under the facts and circumstances. In the
Company's opinion, the significant accounting policies most important to
aid in understanding its financial results are the following:
CONSOLIDATION: The consolidated financial statements include those of the
Company and its wholly-owned and majority owned subsidiaries. Investments
in unconsolidated affiliated companies are accounted for on the equity
method. All significant intercompany accounts and transactions are
eliminated in consolidation
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly liquid
investments with original maturities of three months or less when
purchased. The carrying amount approximates fair value due to the short
maturity of these instruments.
F-9
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALLOWANCES FOR DOUBTFUL ACCOUNTS: The Company maintains allowances for
doubtful accounts for estimated losses which may result from the inability
of its customers to make required payments. Allowances are based on the
likelihood of recoverability of accounts receivable considering such
factors as past experience and taking into account current collection
trends that are expected to continue. Factors taken into consideration in
estimating the reserve are amounts past due, in dispute, or a client which
the Company believes might be having financial difficulties. If economic,
industry, or specific customer business trends worsen beyond earlier
estimates, the Company increases the allowances for doubtful accounts by
recording additional expense.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation expense is recorded on the straight-line basis over 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.
ACCOUNTING FOR INTANGIBLE ASSETS AND GOODWILL: The cost of acquired
companies is allocated first to their identifiable assets based on
estimated fair values. Costs allocated to identifiable intangible assets
are generally amortized on a straight-line basis over the remaining
estimated useful lives of the assets. The excess of the purchase price
over the fair value of identifiable assets acquired, net of liabilities
assumed, is recorded as goodwill. At August 31, 2002 and 2001,
respectively, other identifiable intangible assets, net, consist of
contracts (approximately $3,145,605 and $4,014,753), non-competes
(approximately $186,112 and $0) and trade name (approximately ($93,055 and
$0). 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
acquisitions. These standards require all future business combinations be
accounted for using the purchase method of accounting and goodwill not to
be amortized, but instead to be subject to impairment tests at least
annually. The Company elected to adopt SFAS 141 and SFAS 142 on a
prospective basis as of September 1, 2001. As a result of implementing
these new standards, the Company discontinued the amortization of goodwill
as of August 31, 2001.
Accounting for these types of assets require significant estimates and
judgement, especially as to: a) the valuation in connection with the
initial purchase price allocation and b) the ongoing evaluation for
impairment. For each acquisition, a valuation was completed to determine a
reasonable purchase price allocation. Upon completion of the allocation
process an amount was assigned to various identified assets including
intangible assets and the remainder was assigned to goodwill. The purchase
price allocation process requires estimates and judgements as to
expectations for the various businesses and business strategies. For
example, certain growth rates were assumed for each business.
Additionally, different operating margins for each type of service
offering were included in the estimates. If actual growth rates or
operating margins, among other assumptions, differ significantly from the
estimate and judgements used in the purchase price allocation, a possible
impairment of the intangible assets and/or goodwill or an acceleration in
amortization expense may result.
In addition, SFAS 142 generally requires that goodwill be tested annually
using a two-step process. The first step is to identify a potential
impairment. The second step measures the amount of the impairment loss, if
any. However, intangible assets with indefinite lives are to be tested for
impairment using a one-step process that compares the fair value to the
carrying amount of the asset. Because of the significance of the
identified
F-10
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
intangible assets and goodwill to the Company's consolidated balance
sheet, annual or interim impairment analyses are important. Changes in key
assumptions about the business and its prospects, or changes in market
conditions or other external factors, could result in an impairment charge
and such a charge could have a material adverse effect on the Company's
financial condition and results of operations.
Contracts represent the fair value of management contracts and service
contracts purchased and are being amortized using the straight-line method
over seven years. Other intangibles primarily includes the fair value of
trade names and non-compete agreements, which are being amortized over
their expected useful lives.
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 completed its repurchase program having
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 493,660 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, 2002. 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.
MEDICAL CLAIMS: Medical claims payable represent the liability for
healthcare claims reported but not yet paid and claims incurred but not
yet reported ("IBNR") related to the Company's managed healthcare
business. The IBNR portion of medical claims payable is estimated based
upon authorized healthcare services, past claims payment experience for
member groups, enrollment data, utilization statistics and other factors.
Although variability is inherent in such estimates, management believes
the recorded liability for medical claims payable is adequate. Medical
claim payable balances are continually monitored and reviewed. Changes in
assumptions for care costs caused by changes in actual or expected
experience could cause these estimates to change significantly.
RESERVES FOR EMPLOYEE HEALTH BENEFITS: The Company retains a significant
amount of self-insurance risk for its employee health benefits. The
Company maintains stop-loss insurance such that the Company's liability
for health insurance is subject to certain individual and aggregate
limits. Each month end the Company records an accrued expense for
estimated health benefit claims incurred but unpaid or not reported at the
end of such period. The Company estimates this accrual based on a number
of factors including historical experience, industry trends and recent
claims history. This accrual estimate is subject to ongoing revision as
conditions might change and as new data may be presented. Adjustments to
estimated liabilities are recorded in the accounting period in which the
change in estimate occurs.
F-11
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION: Service revenue is generated by the Company's five business
segments and recognized in the following three categories:
(1) Contract management revenue, generated by Horizon Mental Health Management
and Specialty Rehabilitation Management, is reported in the period they
are provided at the estimated net realizable amounts from contracted
hospitals for contract management services rendered. Adjustments are
accrued on an estimated basis in the period they become known and are
adjusted in future periods, as final settlement is determined.
The fees received by the Company for its services under management
contracts are paid directly by its client hospitals. Contract management
revenue is based on various criteria such as a fixed fee and/or variable
components including per diem calculation based on patients per day, the
number of admissions or discharges, direct expenses, or any combination of
the preceding, depending on the specific contract. Generally, contract
fees are paid on a monthly basis.
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 or anticipated to be denied,
the Company records an allowance for 100% of the potential amount. The
Company believes it has adequately provided for potential adjustments that
may result from final settlement of potential denials.
Client hospitals receive reimbursement under 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 the patients of the programs managed by the Company. As a result, the
availability and amount of such reimbursements, which are subject to
change, may impact the decision of general acute care hospitals regarding
whether to offer mental health and physical rehabilitation services
pursuant to management contract with the Company, as well as whether to
continue such contracts (subject to contract termination provisions) and
the amount of fees to be paid thereunder.
(2) Premium and fees revenue, generated by Horizon Behavioral Services, is
reported in the period services are provided at the estimated net
realizable amounts as defined by client contracts for services rendered.
Adjustments are accrued on an estimated basis in the period they become
known and are adjusted in future periods if and when necessary.
Revenues are derived from EAP services, administrative service only
contracts, and at risk managed behavioral health services. This revenue
consists primarily of capitation payments, which are calculated on the
basis of a per-member/per-month fee, and also include fee for service
payments. For certain capitated managed care contracts the Company is `at
risk' and bears the economic risk as to the adequacy of capitated revenue
versus the actual cost of behavioral health care services provided to
covered members. At August 31, 2002, overall capitated revenue was more
than sufficient to meet these costs.
(3) Service revenues, generated by Mental Health Outcomes and ProCare One
Nurses, are recognized in the month in which services are rendered, at the
estimated net realizable amounts. These revenues are generated through
services provided by and the Company's nurse staffing services, and its
outcomes measurement, database services, and Phase IV clinical trial
businesses.
F-12
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 may occur if the Company's in the money stock
options were exercised. Such dilutive potential common shares are
calculated using the treasury stock method.
ACCOUNTING FOR INCOME TAXES: The Company accounts for income taxes in
accordance with FAS No. 109, "Accounting for Income Taxes", which requires
that deferred tax assets and liabilities be recognized using enacted tax
rates for the effect of temporary differences between the book and tax
bases of recorded assets and liabilities. FAS No. 109 also requires that
deferred tax assets be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax assets will
not be realized (see Note 10).
At August 31, 2002, the Company had deferred tax assets in excess of
deferred tax liabilities of $537,778. Based upon the Company's estimates
of the sources, nature, and amount of expected future taxable income it
determined that it is more likely than not that its deferred tax assets
will be realized, resulting in no valuation allowance.
The Company evaluates quarterly the realizability of its deferred tax
assets and accordingly adjusts its valuation allowance, if any as
necessary. The factors used to assess the likelihood of realization
include the Company's estimates of future taxable income and available tax
initiatives that could be reasonably implemented to assure realization of
the net deferred tax assets. The Company has used various appropriate tax
initiatives and alternative tax treatments to realize or to renew net
deferred tax assets in order to avoid the potential loss of tax benefits.
Failure to achieve forecasted taxable income amounts might affect the
ultimate realization of all or portions of net deferred tax assets.
Factors that may affect the Company's ability to achieve sufficient
forecasted taxable income include general business conditions, increased
competition, a change in Medicare or Medicare reimbursement, an increase
in medical services utilization, etc., resulting in a decline in sales or
margins.
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 amounts of revenues and expenses recorded for the reporting period
in order to prepare the financial statements in conformity with generally
accepted accounting principles. Future actual results could differ from
those estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
3. ACQUISITIONS
EMPLOYEE ASSISTANCE PROGRAMS INTERNATIONAL, INC.
Subsequent to the year ended August 31, 2002, the Company acquired all of
the outstanding capital stock of Employee Assistance Programs
International, Inc. ("EAP International") on November 4, 2002, with an
effective date of October 31, 2002 for approximately $3.4 million. "EAP
International", headquartered in Denver, Colorado, had approximately 170
contracts covering approximately 475,000 lives at September 30, 2002.
F-13
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROCARE ONE NURSES, LLC
Effective June 13, 2002, the Company purchased all of the membership
interests of ProCare One Nurses, LLC ("ProCare"). ProCare, headquartered
in Santa Ana, California, provides specialized nurse staffing services to
hospitals primarily in California and Michigan. ProCare currently has
annual revenues of approximately $24.4 million (unaudited) and on a
monthly average provides in excess of 500 nurses to over 100 client
hospitals. The Company accounted for the acquisition by the purchase
method as required by generally accepted accounting principles. Of the
purchase price of approximately $12.5 million, $11.5 million was funded by
the Company's revolving credit facility and $1.0 million from existing
cash. Of the $12.5 million purchase price, the amounts preliminarily
recorded as intangible assets were $9.7 million as goodwill, $200,000 as
non-compete contracts and $100,000 as trade name value. Proforma financial
data is not presented because the impact of this acquisition is not
material to the Company's results of operations for the periods presented.
CONTRACTS OF PERSPECTIVES HEALTH MANAGEMENT CORPORATION
Effective October 1, 2001, the Company acquired in an asset purchase the
mental health management contracts comprising the contract mental health
business of Perspectives Health Corporation ("PHM"), a wholly owned
subsidiary of Legal Access Technologies, Inc. ("LAT"). 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 covered 12
inpatient mental health programs, one partial hospitalization mental
health program and three intensive outpatient mental health programs. The
management contracts constituted all of the business operations of PHM.
The purchased price of approximately $2.9 million in cash was funded by
the Company's revolving credit facility. Of the $2.9 purchase price,
$2,234,449 is recorded as goodwill and $681,760 as contract valuation.
Proforma financial data is not presented because the impact of this
acquisition is not material to the Company's results of operations for the
periods presented.
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. As of
August 31, 2002, the allocation of the purchase price exceeded the fair
value of OHCA's tangible net assets by $3,469,708, of which $3,126,532 is
recorded as goodwill and $343,176 as service contract valuation. Tangible
assets acquired and liabilities assumed totaled $917,244 and $848,906,
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 the periods presented.
F-14
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at August 31:
2002 2001
------------ ------------
Computer hardware $ 2,847,200 $ 2,588,003
Computer software 1,471,185 1,449,041
Furniture and fixtures 2,225,413 2,268,985
Office equipment 1,368,092 944,993
Transportation (vehicles) 65,539 65,539
Leasehold improvements 579,683 571,734
------------ ------------
8,557,112 7,888,295
Less accumulated depreciation 6,784,233 5,655,932
------------ ------------
$ 1,772,879 $ 2,232,363
============ ============
Depreciation expense was $1,206,704, $1,393,380 and $1,988,315 for the
years ended August 31, 2002, 2001, and 2000, respectively.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at August 31:
2002 2001
------------ ------------
Reserve for deferred revenue and contract adjustments $ 235,983 $ 812,334
Health insurance benefits 1,117,550 987,784
Other employee benefits 1,617,191 809,677
Unearned revenue 1,259,646 712,169
Other 2,978,536 2,768,657
------------ ------------
$ 7,208,906 $ 6,090,621
============ ============
6. LONG-TERM DEBT
At August 31, 2002 and 2001, the Company had long-term debt comprised of a
revolving credit facility with outstanding balances of $10.0 million and
$6.9 million, respectively. On May 23, 2002, the Company entered into a
Second Amended and Restated Credit Agreement (the "Second Amended Credit
Agreement"), with JPMorgan Chase Bank, as Agent, and Bank of America, NA
which refinanced the loans then outstanding under the existing credit
agreement. The Second Amended Credit Agreement is a five year facility
which consists of a $30 million, three year revolving/two year term credit
facility (which has provisions to allow for its expansion to a $50 million
facility) to fund ongoing working capital requirements, refinance existing
debt, finance future acquisitions by the Company, and for other general
corporate purposes.
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, 2002, the weighted average
interest rate on outstanding indebtedness under the credit facility was
4.0%. The Eurodollar Margin varies depending on the debt coverage ratio of
the Company. The revolving credit facility matures on May 31, 2005.
F-15
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is subject to certain covenants which include prohibitions
against (i) incurring additional debt or liens, except specified permitted
debt or permitted liens, (ii) certain material acquisitions, other than
specified permitted acquisitions (including any single acquisition not
greater than $10.0 million or cumulative acquisitions not in excess of
$25.0 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. 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 material
subsidiaries of the Company. As of August 31, 2002, the Company was in
compliance with all covenants of the agreement.
7. STOCK OPTIONS
The 1989, 1995 and 1998 Stock Option Plans for employees and the 1995
Stock Option Plan for Eligible Outside Directors are collectively referred
to as the "Plans." In accordance with the Plans, as amended, 2,981,843
shares of common stock have been reserved for grant to key employees,
directors and consultants. 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
7.15% of the stock of the Company. 250,000 shares of common stock are
reserved for issuance under this plan. This plan has been amended and
restated to provide for 15,000 option grants upon initial election as a
director. In addition, the 1995 Director Plan provides for successive
annual grants, as of the day of each annual meeting of stockholders of the
Company, of options to purchase the number of shares of Common Stock
determined by dividing $50,000 by the fair market value per share of the
Common Stock on the date of grant. Fair market value is defined as the
closing price per share on the NASDAQ National Market. With respect to
each such successive annual grant, an Eligible Outside Director has the
right to elect to receive stock options for only 50% of such shares as so
determined in consideration of the receipt of a fee in the amount of
$2,500 for each of the first four meetings of the Board of Directors
actually attended by such Eligible Outside Director in the year following
the Annual Meeting. Options vest ratably over five years from the date of
grant.
The following table summarizes the status of the Plans:
2002 2001 2000
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding at beginning of year 1,283,634 $ 5.61 1,322,143 $ 5.40 1,352,840 $ 4.95
Granted 319,275 13.41 90,285 4.97 142,054 6.49
Exercised 134,085 3.61 108,610 2.36 123,481 0.91
Expired or canceled 15,275 7.91 20,184 6.32 49,270 7.34
Outstanding at end of year 1,453,549 $ 7.49 1,283,634 $ 5.61 1,322,143 $ 5.40
Exercisable at end of year 828,502 $ 5.59 777,796 $ 4.88 730,486 $ 3.98
Available for grant at end of year 351,602 - 255,602 - 325,703 -
F-16
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding under
the Plans at August 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Price Outstanding Life Price Outstanding Price
----------------------- ----------- ----------- -------- ----------- --------
$ 1.00 - 5.50 456,790 3.27 $ 3.52 $ 370,490 $ 3.19
6.75 - 9.75 676,984 5.84 7.30 453,272 7.41
12.70 - 23.75 319,775 9.31 13.54 4,740 19.10
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 then current stock price. Had
compensation cost been determined under the terms of SFAS 123, the
Company's pro forma 2002, 2001 and 2000 net earnings and earnings per
share would have been:
2002 2001 2000
-------------- -------------- --------------
Net earnings
As reported $ 8,924,149 $ 6,790,642 $ 7,067,248
Pro forma (unaudited) $ 8,460,125 $ 6,430,307 $ 6,746,588
Earnings per share
Basic
As reported $ 1.66 $ 1.21 $ 1.11
Pro forma (unaudited) $ 1.57 $ 1.15 $ 1.06
Diluted
As reported $ 1.52 $ 1.16 $ 1.07
Pro forma (unaudited) $ 1.44 $ 1.09 $ 1.02
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:
2002 2001 2000
------ ------ ------
Risk free interest rate 4.2% 5.8% 6.4%
Expected life (years) 6.4 6.4 6.4
Expected volatility 47.5% 48.6% 45.8%
Expected dividend yield 0.0% 0.0% 0.0%
In accordance with SFAS 123, the weighted average fair value of options
granted during 2002, 2001 and 2000 was $7.04, $2.77, and $3.53
respectively.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
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
F-17
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and goodwill not to be amortized,
but instead to be subject to impairment tests at least annually. The
Company 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 discontinued the
amortization of goodwill as of August 31, 2001. In addition, goodwill
acquired in the acquisition of OHCA effective August 1, 2001 is not being
amortized.
The costs of certain management contracts acquired by the Company remain
subject to amortization. Amortization of recorded values for contracts,
non-compete agreements, and trade names for the twelve months ended August
31, 2002 was $1,571,741. The following table sets forth the estimated
amortization expense for intangibles subject to amortization for the four
succeeding fiscal years.
For the year ended August 31: 2003 $ 1,315,411
2004 1,093,731
2005 621,687
2006 387,874
The following table sets forth by business segment of the Company the
amount of goodwill as of August 31, 2002 that is subject to impairment
tests rather than amortization and the adjustments, if any, to the amount
of such goodwill in the twelve months ended August 31, 2002. No impairment
adjustments were deemed necessary.
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental ProCare
Behavioral Health Rehab Health One
Services Management Management Outcomes Nurses Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Balance as of August 31, 2001 $ 36,934,839 $ 14,606,721 $ 1,703,665 -- -- $ 53,245,225
Goodwill acquired during the period 16,911 2,234,450 -- -- 9,744,891 11,996,252
Balance as of August 31, 2002 $ 36,951,750 $ 16,841,171 $ 1,703,665 -- $ 9,744,891 $ 65,241,477
(A) Horizon Behavioral Services provides managed behavioral care and employee
assistance programs. Goodwill acquired during the period relates to the
purchase price adjustment of OHCA.
(B) Horizon Mental Health Management provides mental health contract
management services to general acute care hospitals. Goodwill acquired
during the period relates to the purchase of the contracts of Perspectives
Health Management Corporation.
(C) Specialty Rehab Management provides physical rehabilitation contract
management services to general acute care hospitals.
(D) Mental Health Outcomes provides outcome measurement information regarding
the effectiveness of mental health treatment programs, data base services
and Phase IV Clinical Research services.
(E) ProCare One Nurses provides specialized nurse staffing services to
hospitals primarily in California and Michigan.
F-18
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth comparative net income and earnings per
share data based on net income plus amortization expense related to
goodwill, net of tax.
YEAR ENDED AUGUST 31,
----------------------------
2002 2001
------------ ------------
Reported net income $ 8,924,149 $ 6,790,642
Goodwill amortization, net of tax --- 1,040,100
------------ ------------
Adjusted net income $ 8,924,149 $ 7,830,742
============ ============
Basic earnings per share:
Reported net income $ 1.66 $ 1.21
------------ ------------
Goodwill amortization, net of tax (a) --- 0.19
------------ ------------
Adjusted net income $ 1.66 $ 1.39
============ ============
Diluted earnings per share:
Reported net income $ 1.52 $ 1.16
------------ ------------
Goodwill amortization, net of tax (a) --- 0.18
------------ ------------
Adjusted net income $ 1.52 $ 1.33
============ ============
(a) Amounts may not total due to rounding or independent calculation.
9. RETIREMENT PLAN
The Company sponsors a 401(k) plan that covers substantially all employees
subject to certain eligibility requirements. The Company can elect to make
matching fund contributions at its discretion. For the years ended August
31, 2002, 2001 and 2000 the Company's contributions were approximately
$623,000, $550,000, and $471,000 respectively.
F-19
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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
------------ ------------ ------------
2002
Current $ 4,166,875 $ 591,186 $ 4,758,061
Deferred 786,105 89,840 875,945
------------ ------------ ------------
$ 4,952,980 $ 681,026 $ 5,634,006
============ ============ ============
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 166,254 19,263 185,517
------------ ------------ ------------
$ 4,074,390 $ 681,987 $ 4,756,377
============ ============ ============
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:
2002 2001
------------ ------------
Contracts $ 509,236 $ (64,046)
Goodwill (3,819,812) (2,457,714)
------------ ------------
Deferred tax liabilities (3,310,576) (2,521,760)
------------ ------------
Accounts receivable 1,418,321 1,237,944
Vacation accruals 552,536 561,936
Fixed assets/intangibles 566,082 666,335
Miscellaneous accruals 1,020,246 1,047,740
Net operating loss carryforward 291,169 421,546
------------ ------------
Deferred tax assets 3,848,354 3,935,501
------------ ------------
Net deferred tax asset $ 537,778 $ 1,413,741
============ ============
F-20
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At August 31, 2002, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately $750,000.
These carryforwards, subject to annual utilization limits, may be utilized
to offset future years' taxable income and will begin to expire during
2011 if unused prior to that date.
The following is a reconciliation of income taxes at the U.S. federal
income tax rate to the Company's effective income tax rate:
Tax Rate 2002 2002 2001 2000
------------- ------------ ------------ ------------
Federal income taxes based on 35% of book income 35.0% $ 5,095,354 $ 3,961,709 $ 4,138,268
Permanent adjustments:
Meals and entertainment, goodwill 0.8% 117,269 264,356 274,973
and other permanent adjustments
State income taxes and other adjustments 2.9% 421,383 302,445 343,136
------------- ------------ ------------ ------------
38.7% $ 5,634,006 $ 4,528,510 $ 4,756,377
============= ============ ============ ============
11. 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:
For the year ending August 31: 2003 $ 2,118,499
2004 1,796,555
2005 1,396,179
2006 825,132
2007 and thereafter 429,130
------------
$ 6,565,495
============
Rent expense for the years ended August 31, 2002, 2001, and 2000 was
$2,507,277, $2,282,279 and $3,174,094, respectively.
Effective September 1996, the Company entered into a lease arrangement
with an unconsolidated special purpose entity. The lease agreement, which
had an initial term of five years that has been extended to May 2007, is
for a building that had been constructed for an office building as
designed by the Company for use as its National Support Center. In
connection with the transaction, a financial institution loaned to the
special purpose entity approximately $4.4 million. The Company guaranteed
on a limited basis approximately $900,000 of the loan. The loan is due at
the end of the lease term. The Company also agreed to purchase the
building for approximately $4.4 million at the end of the lease term,
currently May 2007, if either the building is not sold to a third party or
the Company does not further extend its lease. A recent independent
appraisal indicated the fair market value of the building is at least
equal to the loan amount and purchase price.
The Company's liability and property risk management program involves a
cost-effective balance of insured risks and self-insured retentions. 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 or several claims
for
F-21
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which the Company's self-insurance components are significant in the
aggregate could have a material adverse effect on the Company.
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 U.S.
Department of Justice had previously declined to intervene in the lawsuit.
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 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 furnished
documents in response to the subpoena in January 2001 and there has been
no further activity in relation to the subpoena since that time. On
October 30, 2002, the Company received a letter from the Civil Division of
the U.S. Department of Justice proposing a preliminary meeting to discuss
settlement of certain False Claim Act violations alleged in a qui tam suit
and also to discuss the findings of the U.S. Department of Justice after
its review of certain records. The qui tam suit remains under seal and the
U.S. Government has not decided whether or not it will intervene in the
suit. The Company has not been served in the suit. The allegations and the
records reviewed relate to the same matters that were the subject of the
2000 U.S. Department of Justice subpoena. The Company expects that the
proposed meeting will be held in December 2002. At this time, the Company
cannot predict the ultimate scope or any particular future outcome of the
qui tam suit or the investigation. It is possible that eventually
allegations could be asserted against the Company involving claims
anywhere from minor to significant in amount.
The Company is, and may be in the future, party to litigation arising in
the ordinary course of its business. While the Company has no reason to
believe that any such pending claims are material, there can be no
assurance that the Company's insurance coverage will be adequate to
substantially cover liabilities arising out of such claims or that any
such claims will be covered by the Company's insurance. Any material claim
that 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.
12. 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. Pursuant to the Plan the Company issued
12,023, 23,959, and 14,642 shares of Common Stock from treasury for the
fiscal years ended August 31, 2002, 2001, and 2000, respectively.
F-22
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share, ("SFAS 128"). 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:
2002 2001 2000
---------------------------------- ---------------------------------- ----------------------------------
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............. $8,924,149 5,385,777 $ 1.66 $6,790,642 5,614,566 $ 1.21 $7,067,248 6,369,846 $ 1.11
========= ========= =========
Effect of dilutive
securities warrants
and options........... 503,655 261,924 235,057
----------- ----------- -----------
Diluted EPS........... $8,924,149 5,889,432 $ 1.52 $6,790,642 5,876,490 $ 1.16 $7,067,248 6,604,903 $ 1.07
========== =========== ========= ========== =========== ========= ========== =========== =========
During 2002, 2001, and 2000 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, 2002 4,870 $14.80 - $23.75
May 31, 2002 4,000 $23.75
February 28, 2002 4,000 $23.75
November 30, 2001 4,670 $13.50 - $23.75
August 31, 2001 4,000 $23.75
May 31, 2001 87,250 $ 8.92 - $23.75
February 29, 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
14. 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, Mental Health Outcomes, and
ProCare One Nurses. 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.
F-23
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following schedule represents revenues and operating results for the
twelve months ended August 31 by operating division/segment:
(A) (B) (C) (D) (E) (F)
Horizon
Mental Specialty Horizon Mental ProCare
Health Rehab Behavioral Health One
2002 Management Management Services Outcomes Nurses Other Eliminations Consolidated
------------------------------------------------------------------------------------------------------------
Revenues $79,319,429 $15,117,485 $40,449,170 $ 3,380,709 $ 5,318,722 $ 135,585 $ -- $143,721,100
Intercompany revenues -- -- 213,305 -- -- -- (213,305) --
Cost of services 54,451,850 11,175,757 36,931,237 3,219,176 4,735,233 -- (213,305) 110,299,948
EBITDA (G) 21,721,899 3,388,846 1,913,791 (343,101) 583,491 (9,818,111) -- 17,446,815
Total assets 91,417,625 10,673,441 40,986,293 597,742 26,085,151 25,736,513 (102,911,390) 92,585,375
2001
Revenues $79,312,050 $13,455,317 $32,033,007 $ 2,664,220 $ -- $ 195,233 $ -- $127,659,827
Intercompany revenues -- -- 104,711 (4,371) -- (100,340) --
Cost of services 53,155,225 9,723,507 28,120,599 2,020,651 -- -- (100,340) 92,919,642
EBITDA (G) 23,282,254 2,378,587 2,442,495 (116,042) -- (11,786,047) -- 16,201,247
Total assets 80,883,068 8,245,106 42,680,807 199,313 -- 27,259,279 (82,087,890) 77,179,683
2000
Revenues $81,836,862 $11,923,946 $38,602,113 $ 1,100,485 $ -- $ 219,094 $ -- $133,682,500
Intercompany revenues -- -- 74,670 1,378,352 -- -- (1,453,022) --
Cost of services 57,310,549 9,272,902 33,472,697 1,875,741 -- -- (1,453,022) 100,478,867
EBITDA (G) 22,511,620 1,929,476 3,242,700 13,903 -- (9,813,133) -- 17,884,566
Total assets 65,779,473 6,385,289 41,546,397 300,823 -- 24,621,800 (55,002,738) 83,631,044
(A) Horizon Mental Health Management provides mental health contract
management services to general acute care hospitals.
(B) Specialty Rehab Management provides physical rehabilitation contract
management services to general acute care hospitals.
(C) Horizon Behavioral Services provides managed behavioral care and employee
assistance programs.
(D) Mental Health Outcomes provides outcomes information regarding the
effectiveness of mental health programs, psychiatric data- base services,
and Phase IV clinical trial services. Beginning in fiscal year 2001 Mental
Health Outcomes began recording third party revenue directly for the
Horizon Mental Health Management contracts that include outcomes services.
(E) ProCare One Nurses provides specialized nurse staffing services to
hospitals primarily in California and Michigan.
(F) "Other" represents the Company's primary general and administrative costs,
i.e., expenses associated with the corporate offices and National Support
Center located in the Dallas suburb of Lewisville, Texas which provides
management, financial, human resources, and information system support for
the Company and its subsidiaries.
(G) EBITDA is a presentation of "earnings before interest, taxes,
depreciation, and amortization." EBITDA is the unit of measure reviewed by
the chief operating decision makers in determining segment operating
performance. EBITDA may not be comparable to similarly titled measures
reported by other companies. In addition, EBITDA is a non-GAAP measure and
should not be considered an alternative to operating or net income in
measuring company results. For the year ended August 31, 2002, 2001 and
2000, consolidated EBITDA is derived by adding depreciation and
amortization of $2,778,445, $4,510,424 and $5,101,355, respectively, to
the Company's operating income for the same periods of $14,668,370,
$11,690,823 and $12,783,211, respectively. Consolidated cash flows from
operating, investing, and financing activities for the period ended August
31, 2002 were $13,954,316, ($15,810,351), and ($3,910,960), respectively,
for the period ended August 31, 2001 were $11,983,986, ($4,960,910), and
($13,559,310), respectively, and for the period ended August 31, 2000 were
$12,433,632, ($926,184) and ($8,429,089), respectively, and are
represented on the Statement of Cash Flows elsewhere herein.
F-24
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for
fiscal 2002 and 2001:
Operating Net Earnings Per Share *
Revenues Income Income Basic Diluted
------------- ----------- ----------- --------------------
Quarter Ended:
August 31, 2002 $ 40,767,732 $ 3,843,597 $ 2,315,563 $ 0.42 $ 0.39
May 31, 2002 35,221,325 3,696,172 2,270,468 0.42 0.38
February 28, 2002 33,941,704 3,595,599 2,199,139 0.41 0.38
November 30, 2001 33,790,339 3,533,002 2,138,979 0.40 0.37
------------- ----------- ----------- ------- -------
Total Year $ 143,721,100 $14,668,370 $ 8,924,149 $ 1.66 $ 1.52
============= =========== =========== ======= =======
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
============= =========== =========== ======= =======
* Amounts may not add due to rounding or independent calculation.
16. SUBSEQUENT EVENT
STOCK REPURCHASE: On October 7, 2002, the Board of Directors of the
Company authorized the repurchase of up to 800,000 shares of its common
stock. The stock repurchase program authorizes the Company to make
purchases from time to time in the open market or through privately
negotiated transactions depending on market conditions and applicable
securities regulations. The repurchased shares will be added to the
treasury shares of the Company and may be used for employee stock plans or
for other corporate purposes. The stock will be repurchased utilizing
available cash and borrowings under the Company's bank facility.
ACQUISITION: Subsequent to the year ended August 31, 2002, the Company
acquired all of the outstanding capital stock of Employee Assistance
Programs International, Inc. ("EAP International") on November 4, 2002,
with an effective date of October 31, 2002 for approximately $3.4 million.
"EAP International", headquartered in Denver, Colorado, had approximately
170 contracts covering approximately 475,000 lives at September 30, 2002.
F-25
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule VIII Valuation and Qualifying Accounts.......................... S - 2
S-1
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, 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
Year ended August 31, 2002:
Allowance for doubtful accounts $ 2,439,216 $ 293,716 $ (581,177) $ 311,935 (1,2) $ 2,463,690
(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-2
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 - Second Amended and Restated Credit Agreement dated May 23, 2002,
between Horizon Health Corporation and Horizon Mental Health
Management, Inc., as Borrowers, and J.P. Morgan Chase Bank, as
Agent and the banks named therein (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 2002).
10.2 - First Amendment to Second Amended and Restated Credit Agreement
dated as of September 25, 2002 between Horizon Health Corporation
and Horizon Mental Health Management, Inc., J.P. Morgan Chase
Bank as Agent, and the banks named therein (filed herewith).
10.3 - Second Amendment to Second Amended and Restated Credit Agreement,
dated as of October 4, 2002 between Horizon Health Corporation
and Horizon Mental Health Management, Inc., J.P. Morgan Chase
Bank as Agent and the banks named therein (filed herewith).
10.4 - Letter Loan Agreement dated December 20, 1995 among North Central
Development Corporation, Horizon Health Corporation, Horizon
Mental Health Management and Mental Health Outcomes (incorporated
by reference to Exhibit 10.7 to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1995).
10.5 - Seventh Amendment to Letter Loan Agreement dated May 23, 2002,
between North Central Development Corporation, as Borrower,
Horizon Health Corporation and subsidiaries as limited
guarantors, and J.P. Morgan Chase 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 May
31, 2002).
10.6 - 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).
10.7 - Second Amendment to Lease Agreement dated May 23, 2002 between
North Central Development Corporation and Horizon Health
Corporation (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended May
31, 2002).
10.8 - Horizon Health Group, Inc. 1989 Stock Option Plan, as amended
(filed herewith).
10.9 - Horizon Mental Health Management, Inc. 1995 Stock Option Plan as
amended (filed herewith).
10.10 - Horizon Mental Health Management, Inc. Amended and Restated 1995
Stock Option Plan for Eligible Outside Directors as amended
(filed herewith).
10.11 - Horizon Health Corporation 1998 Stock Option Plan as amended
(filed herewith).
10.12 - 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).
10.13 - Horizon Health Corporation Bonus Plan Fiscal 2002 (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, 2001).
10.14 - Horizon Health Corporation Bonus Plan Fiscal 2003 (filed
herewith).
10.15 - 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).
10.16 - 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).
10.17 - Employment Agreement, dated November 1, 2001 between Horizon
Health Corporation and James W. McAtee (incorporated by reference
to Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 2001).
10.18 - Member Interests Purchase Agreement, dated June 13, 2002, between
Horizon Health Corporation, as buyer, and Lara Mac, Steve
MacEachern, Vicki Lotz and Obstetrical Nurses, Inc. as sellers
(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 13, 2002.
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).
99.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, signed by James W. McAtee, President and Chief Executive
Officer, dated November 22, 2002.
99.2 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, signed by Ronald C. Drabik, Senior Vice President,
Finance and Administration, dated November 22, 2002.