Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________
Commission File number 1-13626
HORIZON HEALTH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2293354
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
(Address of principal executive offices, including zip code)
(972) 420-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of November 4, 1999 there were 6,658,828 shares of the registrant's Common
Stock, $.01 par value, outstanding and the aggregate market value of the shares
of such stock held by non-affiliates of the registrant was $30,641,895. Solely
for purposes of computing such aggregate market value of the outstanding Common
Stock, shares owned by directors and executive officers of the registrant have
been excluded.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on Form
10-K portions of the information contained in the registrant's proxy statement
for its annual meeting of stockholders to be held on January 21, 2000.
2
TABLE OF CONTENTS
HORIZON HEALTH CORPORATION
PART I PAGE
Item 1. Business .................................................................. 3
Item 2. Properties ................................................................ 20
Item 3. Legal Proceedings ......................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ....................... 21
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters ........................................... 23
Item 6. Selected Financial Data ................................................... 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................ 39
Item 8. Financial Statements and Supplementary Data ............................... 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ....................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant ........................ 40
Item 11. Executive Compensation .................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 40
Item 13. Certain Relationships and Related Transactions ............................ 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 41
3
PART 1
ITEM 1. BUSINESS
Unless the context otherwise requires, when used herein the term
"Company" refers to Horizon Health Corporation, formerly known as Horizon Mental
Health Management, Inc., and its subsidiaries.
GENERAL
The Company is a provider of employee assistance plans ("EAP") and
behavioral health services to business and managed care organizations, and a
leading contract manager of clinical programs offered by general acute care
hospitals in the United States. The Company has grown through acquisitions, as
well as internally, increasing both the variety of its treatment programs and
services and the number of its contracts. As of August 31, 1999, the Company had
272 contracts to provide EAP and managed mental health services covering over
2.4 million lives. Over the last seven years, the Company has increased its
management contracts from 43 to a total of 153 as of August 31, 1999 and
currently has contract locations in 34 states. Of its management contracts, 128
relate to mental health treatment programs and 25 relate to physical
rehabilitation programs. The Company has also developed a proprietary mental
health outcomes measurement system known as CQI+. At August 31, 1999 the Company
provided outcome measurement services at 106 contract locations. The Company was
incorporated in 1989 and is the successor to Horizon Health Management Company,
which began the development and management of mental health treatment programs
for general acute care hospitals in 1981.
The Company's strategy is to enhance its position as the leader in the
contract management of mental health treatment programs and to further expand
the range of services which it offers to its client hospitals to include other
clinical and related services and programs. A significant challenge in obtaining
clinical management contracts is overcoming the initial reservations that many
hospital administrators have with outsourcing key clinical services. The Company
believes its expertise in working with hospital administrators, its reputation
in the industry and its existing hospital contractual relationships provide it
with a significant advantage in marketing new contracts. The Company also
believes it has opportunities to cross-sell management services of mental health
and physical rehabilitation programs to client hospitals by marketing its mental
health services to client hospitals for which the Company currently manages only
physical rehabilitation programs, and by marketing its physical rehabilitation
services to client hospitals for which the Company currently manages only mental
health programs. The Company is pursuing the development of such opportunities
as a primary part of its business strategy. The Company has successfully
expanded the breadth of services it offers to include the full continuum of
mental health services, including outcome measurement services, and physical
rehabilitation services. Its management contracts increasingly cover multiple
services. In addition, the Company capitalizes on its expertise in managing the
delivery of mental health services by directly offering managed behavioral
health care services and employee assistance programs to businesses and managed
care organizations. The Company believes it is strategically-sized to deliver
national programs, while providing local, individualized service to both
employers and health plans and to their respective employees or members.
General acute care hospitals are increasingly outsourcing key clinical
departments to independent contract management companies for several reasons,
including: (i) the expertise necessary for the development, management and
operation of specialized clinical programs differs from that for traditional
medical/surgical services, (ii) hospitals often lack access to skilled
professionals and the support staff needed to operate specialized clinical
programs, (iii) hospitals often lack expertise in the marketing and development
activities required to support specialized clinical programs, and (iv) hospitals
often lack expertise necessary to design and operate specialized clinical
programs that satisfy regulatory, licensing, accreditation and reimbursement
requirements.
See Note 12 to the Consolidated Financial Statements of the Company
included herein for certain financial information regarding industry segments of
the Company.
Page 3
4
MENTAL HEALTH SERVICES
The Company believes that there continues to be substantial
opportunities to provide mental health contract management services to general
acute care hospitals in the United States. A major shift in the delivery of
mental health services is occurring as payors are increasingly using managed
care methods to review and require pre-approval for mental health treatment and
to evaluate alternatives to inpatient hospitalization in order to ensure that
each patient's treatment regimen utilizes clinical resources effectively. The
Company believes that general acute care hospitals need to be able to offer a
broad array of mental health care services in order to develop or participate in
integrated delivery systems responsive to the demands of managed care companies
and other third-party payors. The Company also believes that it costs general
acute care hospitals less to provide inpatient and partial hospitalization
mental health services than it costs freestanding psychiatric hospitals in part
due to the ability of acute care hospitals to utilize excess capacity. General
acute care hospitals are also able to provide their mental health patients with
needed medical care on-site and in a more cost effective manner than
freestanding psychiatric hospitals. Furthermore, general acute care hospitals
are eligible to receive reimbursement under the Medicaid program for mental
health care provided to Medicaid-eligible adults, unlike freestanding
psychiatric hospitals which are not presently eligible.
The Company believes that, due to the increasing emphasis on
cost-effective treatment, significant demand exists for a complete continuum of
mental health services. In response to this demand, it has expanded the mental
health programs it manages to include partial hospitalization (or day
treatment), outpatient treatment, short-term crisis intervention and residential
treatment as alternatives and complements to inpatient care. The Company
believes it is uniquely positioned to capitalize on the increased demand for
mental health contract management services as a result of its ability to provide
a full continuum of mental health services, its proprietary quality and outcomes
measurement system and its demonstrated industry expertise. In addition, the
Company believes its position as the leading contract manager of mental health
programs provides the Company with a significant advantage in attracting and
retaining employees and yields several economies of scale such as the ability to
consolidate accounting and administrative functions.
The Company intends to continue to emphasize the area of mental health
programs for the elderly ("geropsychiatric programs"). At August 31, 1999, 72.4%
of the mental health treatment programs managed by the Company were
geropsychiatric programs. Many elderly patients with short-term mental illness
also have physical problems that make the general acute care hospital
environment the most appropriate site for their care. Subject to certain
recently enacted caps on reimbursement amounts, the Medicare program reimburses
general acute care hospitals for their cost of providing these services, which
includes the Company's management fee as well as allocated overhead costs to the
facility, and allows reimbursement for partial hospitalization and home health
services that permit the patient to be treated in the most cost-effective
environment. The Company has developed particular expertise in developing
specialized psychiatric programs for the elderly, in operating such programs,
and in assisting hospitals to receive approval for inpatient programs as
distinct part units ("DPUs") under Medicare. Approval of an inpatient program as
a DPU is significant to client hospitals because services provided in DPUs are
exempt from predetermined reimbursement rates and are reimbursed by Medicare on
an actual cost basis, subject to certain significant limitations described
below.
The fees received by the Company for its services under management
contracts are paid directly by its client hospital. The client hospitals receive
reimbursement under either the Medicare or Medicaid programs or payments from
insurers, self-funded benefit plans or other third-party payors for the mental
health and physical rehabilitation services provided to patients of the programs
managed by the Company. As a result, the availability and amount of such
reimbursement impacts the decisions of general acute care hospitals regarding
whether to offer mental health and physical rehabilitation services pursuant to
management contracts with the Company.
Amendments to the Medicare regulations in 1997, established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. The regulations established a nationwide cap
limiting the reimbursement amount on a per case basis for mental health and
physical rehabilitation services, for Medicare fiscal years beginning October 1,
1997, and later, to $10,534 and $19,104, respectively, subject to adjustments
based on market indices. The reimbursement amounts were raised to $11,100 and
$20,129 respectively for Medicare fiscal years beginning October 1, 1999 and
later. In addition, these amendments
Page 4
5
established a new ceiling on the rate of increase in operating costs per case
for mental health and physical rehabilitation services furnished to Medicare
beneficiaries. Prior to these amendments, the reimbursement limits were tied to
the hospital's mental health or physical rehabilitation unit cost during the
unit's first year of operations, subject to certain adjustments. The 1997
limitations have resulted, in some cases, in decreased amounts reimbursed to the
Company's client hospitals. This decrease in reimbursement has, in some cases,
led to the renegotiation of a lower contract management fee and in other cases
has resulted in the termination or nonrenewal of the management contract. Seven
fewer contracts were signed by the Company and the direct operating margin of
the Company's mental health contracts has decreased approximately six percentage
points for the fiscal year ended August 31, 1999 as compared to the fiscal year
ended August 31, 1998.
Recent amendments to the Medicare statutes also provide for the
elimination of cost based reimbursement of partial hospitalization services
effective upon 90 days notice from Medicare. Thereafter, reimbursement for
partial hospitalization services will be based on the Medicare outpatient
prospective payment system and will utilize a fixed reimbursement amount per
patient day. The currently proposed reimbursement rate per patient day is a
wage-adjusted rate of $206.71, which will lower Medicare reimbursement levels to
many hospitals for partial hospitalization services and therefore cause lower
fees to be paid to the Company under contracts for partial hospitalization
services.
Revenues from partial hospitalization services were $20.5 million or
20.9% of total contract management revenue for the year ended August 31, 1999.
Of the Company's 153 management contracts at August 31, 1999, 103 or 67.3% of
the contracts include partial hospitalization services. The termination of all
partial hospitalization contracts, while unlikely and not expected, could reduce
operating income by $5 million or more annually.
CQI+ OUTCOMES MEASUREMENT SYSTEM
The Company has developed and markets a proprietary mental health
outcome measurement system. The CQI+ Outcomes Measurement System, (the "CQI+
System") provides outcome information regarding the effectiveness of a
hospital's mental health programs. The availability of such information enables
a hospital to demonstrate to third-party payors whether patients are improving
as a result of the treatment provided, to refine its clinical treatment programs
to improve the care provided, and to market such programs to patients and
providers. When included with contract management services, it provides the
Company with a valuable tool in demonstrating clinical results of the mental
health programs managed by the Company and in marketing such management services
to other hospitals. In addition, the Company provides outcome measurement
services to acute care hospital based programs, free-standing psychiatric
hospitals, community mental health centers, residential treatment centers and
outpatient clinics. The Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"), as part of its hospital accreditation process, requires
each hospital to select at least one acceptable measurement system and multiple
clinical performance (outcome) measures. Each year, the requirements for the
number of measures will increase. The Company's CQI+ System has met the initial
criteria for inclusion in the accreditation process and is included on JCAHO's
list of acceptable systems. The Company is committed to meeting the requirements
as established by JCAHO. Since developing the CQI+ System over four years ago,
the Company has compiled a database containing outcome measurement data on over
32,000 patients. With the growth of managed care and the JCAHO accreditation
requirement, the Company believes that its CQI+ System will become an important
component of the mental health services it provides.
PSYCHSCOPE OUTCOMES DATABASE SERVICES
The Company developed and began to market in fiscal 1999 PsychScope
Outcomes Database Services, which are based on outcomes measurement data
collected from over 32,000 patients that have participated in the CQI+ Outcomes
Measurement System since 1994. The PsychScope Services allow pharmaceutical
product marketers and researchers, contract research organizations, and research
based teaching universities to access information on the clinical treatment of
patients in hospital based behavioral health programs across the U.S. PsychScope
Services can be accessed by customers as either standard quarterly reports by
diagnosis which track and trend key variables such as drug usage, patient health
status, severity of illness, patient functioning, and symptoms, or as custom
research studies which are completely customer driven. PsychScope Services
support pharmaceutical company drug marketing strategies, the creation of
diagnosis based patient and treatment profiles, the development
Page 5
6
of drug research protocols, and assessment of competitive drug positioning and
usage. The healthcare market for database services is an established and growing
market that is fueled by the highly competitive pharmaceutical market.
PHYSICAL REHABILITATION SERVICES
The Company has successfully expanded the types of programs that it
manages for its client hospitals to include other related clinical services. The
Company's acquisition of Specialty Healthcare Management, Inc. ("Specialty"), in
August 1997, expanded the Company's operations to include the contract
management of physical rehabilitation programs. The Company believes that many
of the same factors driving demand in mental health programs are also driving
significant demand for physical rehabilitation programs. The Company provides
contract management for a full range of physical rehabilitation services. In
addition to acute and sub-acute physical therapy and rehabilitation services,
the Company also provides contract management for a comprehensive outpatient
rehabilitation facility program. Outpatient rehabilitation services are
dominated by the treatment of sports and work related injuries, but also provide
the continuum of rehabilitative care necessary to meet the medical needs of a
post-acute care patient following a disabling illness or traumatic injury.
Pressure from payors to move inpatients to the lowest-cost appropriate treatment
setting has helped fuel growth in these outpatient services.
Recent amendments to the Medicare statutes provide for a phase-out of
cost-based reimbursement of physical rehabilitation services over a three-year
period beginning October 1, 2000. The resulting phase-in of reimbursement for
physical rehabilitation services based on the Medicare prospective payment
system utilizing a fixed reimbursement amount for specified diagnoses could
lower Medicare reimbursement levels to hospitals for physical rehabilitation
services. This could adversely affect the ability of the Company to obtain
management contracts for physical rehabilitation services and the amount of fees
paid to the Company under such contracts.
MANAGED BEHAVIORAL HEALTH CARE SERVICES AND EMPLOYEE ASSISTANCE
PROGRAMS
The Company is a provider of mental health managed care, utilization
management and employee assistance programs (EAP). The Company provides a client
employer with quality, cost-effective programs for administration and management
of behavioral health and substance abuse services. The Company also maintains
extensive involvement on a national level in the at-risk management of mental
health services under employer plans and commercial programs. Beginning with the
acquisition of Florida Professional Psychological Services, Inc. ("Florida
PPS"), in August 1996, and continuing with the acquisitions of Acorn Behavioral
Health Care Management Corporation ("Acorn"), Inc. in October 1997, and FPM
Behavioral Health, Inc. ("FPM") in June 1998, the Company expanded its services
to include provision of full risk, capitated managed care mental health services
for health maintenance organizations ("HMOs") and self-insured employers and the
operation of employee assistance programs for employers. The Company further
expanded its services in this area with the acquisitions of ChoiceHealth, Inc.
and Resources in Employee Assistance and Corporate Health, Inc., effective
October 5, 1998 and April 1, 1999, respectively.
The mental health care services are provided by mental health care
professionals that are employed by the Company or are under contract with the
Company as independent providers. The clinical staff represents a broad range of
treatment and case management specialties and is qualified to respond to the
complete continuum of behavioral health concerns, pediatric to geriatric. The
staff includes psychiatrists, nurses, psychologists, social workers, and other
related mental health personnel. The Company believes that its existing
relationships with health care providers and its expertise in the provision of
mental health care services provide it with the capability to establish, operate
and manage the network of health care professionals necessary to economically
furnish such services.
Employee assistance programs, which are usually provided by employers
as a benefit at no cost to employees, give employees the opportunity to have
consultations with a health care provider to identify and discuss problems that
may be affecting the work performance of the employee and a course of action or
treatment to address such problems. The Company believes that an opportunity
exists for the contract management of employee assistance programs offered by
community-based general acute care hospitals. As with its other products, the
Company intends to market such programs as an additional service it can offer
new and existing client hospitals.
Page 6
7
SERVICES
MENTAL HEALTH SERVICES
The Company has the expertise to manage a broad range of clinical
mental health programs, including geropsychiatric, general adult, substance
abuse and adolescent programs. The programs use a treatment team concept, with
the admitting physician, team psychologist, social workers, nurses, therapists
and counselors coordinating each phase of therapy. The programs include crisis
intervention, individual therapy, group and family therapy, recreational
therapy, occupational therapy, lifestyle education, social services and
substance abuse counseling. Family involvement is encouraged. Each treatment
program is individually tailored as much as practicable to meet the needs of the
patients, the client hospital, physicians and payor groups. Mental health
services represented 128 of the Company's 153 management contracts at August 31,
1999.
Elements of the Continuum of Care
The mental health treatment programs managed by the Company are
designed to provide a continuum of mental health services, consisting of
inpatient, partial hospitalization (or day treatment), outpatient and home
health services.
Inpatient Services. Inpatient services are generally provided to
patients needing the most intensive mental health treatment and who frequently
have accompanying medical care needs. The patient is admitted to the client
hospital and remains there on a 24-hour per day basis throughout the course of
the inpatient treatment, which is continued until the patient can be stabilized
and moved to another level in the continuum of mental health services.
Partial Hospitalization. Partial hospitalization services are provided
for limited periods per day at established intervals with the patient returning
home at the conclusion of each day's treatment. Partial hospitalization services
are designed to be both an alternative to inpatient hospitalization services and
a key component of care following inpatient hospitalization.
Outpatient Services. Outpatient services consist generally of
consultative sessions which can be rendered in a variety of individual or group
settings at various locations, including hospitals, clinics or the offices of
the service provider. Outpatient service providers can also serve as gatekeepers
for persons being evaluated for treatment. Once an individual is assessed for
treatment in an outpatient environment, the individual is provided the
appropriate level of service in relation to the diagnosis.
Home Health Services. Home health services are provided in the
patient's home. Typically, these services are provided on a periodic basis by an
experienced psychiatric nurse working under the direct supervision of a
psychiatrist. The nurse may provide medication management, vital sign
monitoring, individual and family therapy, and other related clinical services.
Patients utilizing home health services include individuals whose clinical
conditions make it difficult or impossible to leave their homes due to
psychiatric illness or a combination of psychiatric and medical illness. Home
health service patients also include patients without access to transportation.
Patients over the age of 65 often use psychiatric home health services.
CQI+ OUTCOMES MEASUREMENT SYSTEM
The Company began offering its CQI+ Outcomes Measurement System in
1994. The CQI+ System provides a qualitative and quantitative tool for the
clinical staff to evaluate the clinical effectiveness of treatment programs and
to make adjustments in the programs in order to improve quality and
appropriateness of care. In addition, the CQI+ System enables client hospitals
to demonstrate to third-party payors the effectiveness of the treatment programs
and provides a valuable tool to the hospital in marketing to patients and
providers. The CQI+ System also assists the hospitals in complying with the
increasing demands of regulatory and accrediting bodies for quality assessment
of their mental health programs. JCAHO, as part of its accreditation process,
requires each hospital to select at least one acceptable measurement system and
multiple clinical performance (outcome) measures. Each year, the requirements
for the number of measures and the percentage of the population will increase.
The Company's CQI+ System has met the initial criteria for inclusion in the
accreditation process and is included on
Page 7
8
JCAHO's list of acceptable systems. The Company is committed to meeting future
requirements as established by JCAHO. At August 31, 1999, 69 of the Company's
management contracts included the CQI+ System and there were 37 stand-alone CQI+
contracts. The CQI+ System provides the Company with a valuable tool in
demonstrating clinical results of the mental health programs managed by the
Company and in marketing such management services to other hospitals.
Since offering CQI+ System, the Company has compiled a database
containing outcome measurement data on over 32,000 patients. Sample data is
collected from randomly selected patients at admission, discharge and 90 to 180
days after discharge. Quarterly outcome reports include a summary of patient
characteristics and outcome measures. The Company trains and supervises on-site
personnel to ensure the collection of accurate outcome measurement data.
PricewaterhouseCoopers LLP provides a periodic written examination of the CQI+
System to insure that stated data sampling and analytical procedures are
followed and that the data collection process adheres to the Company's
procedures and patient and client confidentiality policies. Each client is
provided a copy of the attestation report.
PSYCHSCOPE OUTCOMES DATABASE SERVICES
The Company developed and began to market in fiscal 1999 PsychScope
Outcomes Database Services, which are based on outcomes measurement data
collected from over 32,000 patients that have participated in the CQI+ Outcomes
Measurement System since 1994. The PsychScope Services allow pharmaceutical
product marketers and researchers, contract research organizations, and research
based teaching universities to access information on the clinical treatment of
patients in hospital based behavioral health programs across the U.S. PsychScope
services are sold to customers in two different service package offerings. The
first offering allows customers to purchase standard quarterly reports which
report key variables such as drug usage, patient health status, severity of
illness, patient functioning, and symptoms by either diagnosis or drug class.
This service allows customers the opportunity to track and trend the data over
time for use in marketing projects and clinical research. The second PsychScope
offering allows customers to design retrospective and prospective research
studies using the PsychScope database. This offering is used to support
pharmaceutical company drug marketing strategies, the creation of diagnosis
based patient and treatment profiles, the development of drug research
protocols, and assessment of competitive drug positioning and usage. The
healthcare market for database services is an established and growing market
that is fueled by the highly competitive pharmaceutical market. Due to the U.S.
launches of several new psychiatric drugs, the psychiatric database services
market is expected to grow significantly.
PHYSICAL REHABILITATION SERVICES
The Company provides contract management for a broad range of physical
rehabilitation programs including (i) acute physical medicine and
rehabilitation, (ii) subacute physical therapy and rehabilitation, and (iii)
outpatient rehabilitation. Physical rehabilitation services represented 25 of
the Company's 153 management contracts at August 31, 1999.
Acute Physical Therapy and Rehabilitation. The physical therapy and
rehabilitation program incorporates a variety of treatments and services aimed
at maximizing an individual's capabilities following a disabling illness or
traumatic injury. The treatment program is provided by an interdisciplinary team
of health care professionals including physicians, physical, recreational,
occupational and speech therapists, rehabilitation nurses, social workers and
psychologists. The Company attempts to tailor an acute physical therapy and
rehabilitation program for a health care facility to satisfy unmet community and
medical staff needs, while maximizing utilization of the facility.
Sub-acute Physical Therapy and Rehabilitation. Rapidly changing
reimbursement issues have challenged health care providers to seek alternative
services to meet the needs of their patient population requiring lower cost and
intensity physical medicine and rehabilitation services. Comprehensive physical
medicine and rehabilitation services at the subacute level offer an attractive
alternative for acute care hospitals and skilled nursing facilities to meet
these needs. The Company evaluates the feasibility of a health care facility
providing rehabilitation services at the sub-acute level by analyzing a
facility's discharge data, conducting a market analysis of services offered in a
facility's community, assessing medical staff needs and evaluating financial
viability.
Page 8
9
Outpatient Rehabilitation. Outpatient rehabilitation serves as an
adjunct to inpatient physical therapy and rehabilitation programs at the acute
and/or sub-acute levels. The program provides the continuum of rehabilitative
care necessary to meet the medical needs of a post-acute care patient following
a disabling illness or traumatic injury.
Cardiac Rehabilitation. The Company manages cardiac rehabilitation
programs for general hospitals. Today, an aging population and increased
incidence of heart disease in both men and women combine to make cardiac
services an essential part of the health care continuum. The Company's Cardiac
Rehabilitation program is based on a comprehensive approach to helping
individuals with heart disease reach their optimum level of functioning through
a program of monitored progressive physical activity, risk factor modification,
education, and psychological support. The programs with congenital heart
disease, as well as individuals who are recovering from a heart attack, angina
pectoris, heart transplant, angioplasty, pacemaker implantation, and
cardiovascular, coronary bypass, or valve surgery.
MANAGED BEHAVIORAL HEALTH CARE SERVICES AND EMPLOYEE ASSISTANCE
PROGRAMS
The Company began offering mental health care services to HMOs and employee
assistance programs to self-insured employers with the acquisition of Florida
PPS in 1996 and continuing with the acquisitions of Acorn in October 1997 and
FPM in June 1998. During fiscal year 1999, the Company expanded its services in
this area by acquiring ChoiceHealth and REACH on October 5, 1998 and April 1,
1999, respectively. As of August 31, 1999, the Company provided EAP and managed
mental health care services for approximately 2,420,174 total members of various
health plans with which it had contracted. The Company contracts with HMOs to
provide the mental health care component of the general health plans offered by
such entities. The contracts are on a full risk, capitated basis under which the
Company is paid a set fee per month for each member of the respective health
plan. The mental health care services are provided by mental health care
professionals that are employed by the Company or are under contract with the
Company as independent providers. In addition, the Company operates nine clinics
within the state of Florida which perform related services. The Company
reimburses the independent professionals and institutions on a discounted
fee-for-service basis.
The Company utilizes a specialized network of contract providers to
operate employee assistance programs for employers. Many of the providers in the
managed care network also participate in the EAP network. Employee assistance
programs, which are usually provided by employers as a benefit at no cost to
employees, generally give employees and their dependents the opportunity to have
four to six consultations annually with a health care provider to discuss
problems that may be affecting their ability to work. Such problems frequently
relate to matters unrelated to mental health care. The purpose of the
consultation is to help the employee identify the problem and to recommend a
course of action or treatment to address the problem. Often the employee is
referred by the employer after observing a change in work performance. The
Company frequently provides training to employer personnel for identifying
troubled employees. The Company believes that such early identification,
consultation and treatment can frequently minimize the likelihood that the
problem will develop into a serious debilitating event requiring extensive
treatment. The Company is paid a set fee per month per employee for its
services.
OPERATIONS
GENERAL
The Company operates its mental health management contract business
through a regional structure with offices in the Chicago, Dallas, Los Angeles
and Tampa metropolitan areas. The structure is designed to keep key operating
employees of the Company in direct contact with clients. Each of the four
regional offices is staffed to have the capacity to supervise up to 40 mental
health management contract locations. Each regional office is under the
supervision of a vice president who in turn supervises regional directors, each
of whom has direct responsibility over eight to ten mental health management
contract locations. Other regional office personnel include clinical and other
specialists, who are available to provide assistance to the local programs and
client hospital personnel. Presently, the Company's physical rehabilitation
management contracts are operated in the same manner out of its Dallas office
with plans to develop a comparable regional structure as it expands that area of
its operations.
Page 9
10
At August 31, 1999, the Company had approximately 1,007 program
employees at its contract locations and approximately 170 employees at its
regional and national support center offices.
The Company develops and operates its outcomes measurement system
primarily out of its Dallas office. Program personnel are responsible for the
completion of the data input forms concerning the various treatment programs.
The data is input into the national database from which reports are developed,
reviewed and analyzed by the CQI+ System staff of 23 employees.
During fiscal year 1998, the Company combined its three managed care
subsidiaries (Florida PPS, Acorn, and FPM Behavioral Health) into Horizon
Behavioral Services to promote a national integrated organization. Under the new
operating structure, the Company's managed care business is centered in Orlando,
Florida, and the EAP/Employer business is centered in the Philadelphia
metropolitan area.
The Company's managed care operations have 57 licensed clinicians
providing services in the nine clinic locations in Florida, an additional 193
employees working in administrative and clinical management positions, and has
provider network contracts with approximately 5,160 providers and facilities.
There are 49 employees located in the Philadelphia office. The EAP
network has contracts with approximately 11,500 individual providers located in
all 50 states.
MANAGEMENT CONTRACTS
The Company provides its management services under contracts with its
client hospitals. Each contract is tailored to address the differing needs of
the client hospital and its community. The Company and the client hospital
determine the programs and services to be offered by the hospital and managed by
the Company, which may consist of one or more treatment programs offering
inpatient, partial hospitalization, outpatient or home health services. Under
the contracts, the hospital is the actual provider of the mental health or
physical rehabilitation services and utilizes its own facilities (including beds
for inpatient programs), nursing staff and support services (such as billing,
dietary and housekeeping) in connection with the operation of its programs.
While each of the Company's management contracts is tailored to the
specific needs of the client hospital, substantially all of the Company's
contracts contain non-compete and confidentiality provisions. In addition, the
Company's management contracts typically prohibit the client hospital from
soliciting the employment of the Company employees during the contract term and
for a specified period thereafter.
Contracts are frequently renewed or amended prior to or at their stated
expiration dates. Some contracts are terminated prior to their stated expiration
dates pursuant to agreement of the parties or early termination provisions
included in the contracts. As of August 31, 1997, 1998 and 1999, the Company had
successfully retained 78%, 73% and 78%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes that among the most frequent reasons why the client hospitals do not
renew a contract is that they desire to manage such programs themselves, the
economic viability of the programs have changed resulting in their closing the
programs, or a change in hospital administration results in a change in
philosophy regarding the use of contract managers.
Under each contract, the Company receives a fee for its management
services from the client hospital. Management fees may be either a variable fee
related in part to patient census at the program or a fixed fee with
reimbursement for direct program costs. The management fee is frequently subject
to periodic adjustments as a result of changes in the consumer price index or
other economic factors. A significant number of the Company's management
contracts require the Company to refund some or all of its fee if either
Medicare reimbursement for services provided to patients of the programs is
denied or the fee paid to the Company is denied as a reimbursable cost. During
the fiscal year ended August 31, 1999, the Company refunded approximately
$295,718 of its fees in relation to these denials.
Page 10
11
Program Development
The Company assists in the development of each clinical program as
requested by the client hospital, including such matters as licensing,
accreditation, certificate of need approvals and Medicare certification. The
Company also develops and implements a marketing plan for the clinical programs
to be offered by the hospital. Each program is marketed locally with an emphasis
on the hospital addressing the needs of the local community. The Company markets
the clinical programs in the community in the name of the client hospital. The
Company's name is not used and its role is not publicly emphasized in the
operation of the clinical programs offered by its client hospitals. Each patient
is admitted by the medical staff of the client hospital, and all charges for
clinical services provided to the patient accrue directly to the client hospital
or treating physician.
The Company also develops and maintains standardized policy and
procedure manuals, initial and ongoing staff training and education, and
comprehensive quality assurance procedures. Each local program director receives
ongoing support from the National Support Center and regional support staff in
all areas including recruiting, finance, reimbursement, development, marketing
and quality assurance.
Each operating region is responsible for training new employees,
including formalized instruction and on-the-job training. Continuing education
programs are also provided to employees. In addition, the Company has a
centralized orientation program for new program directors and an annual
conference for all program directors.
Program Staffing
Each mental health program has a psychiatric medical director, a
program director who is usually a psychologist or a social worker, a clinical
assessment coordinator and additional social workers or therapists as needed.
Each physical rehabilitation program generally has an independent medical
director, a program director, and additional clinical staff tailored to meet the
needs of the program and the client hospital, which may include physical and
occupational therapists, a speech pathologist, a social worker and other
appropriate supporting personnel. Each medical director generally has a contract
with the Company under which on-site administrative services needed to
administer the program are provided. These contracts generally include
nondisclosure, nonsolicitation and noncompetition covenants pursuant to which
the medical director agrees not to solicit the Company employees for specified
periods, disclose confidential information of the Company or render certain
administrative or management services within specified time periods and
geographic areas to any enterprise in competition with the Company or the
programs it manages. Except for the nursing staff, which is typically provided
by the hospital, the other program personnel are usually employees of the
Company. At August 31, 1999, the Company had an average of seven employees per
contract location.
Program Marketing
Because the treatment programs managed by the Company are offered by
general acute care hospitals, most patients are referred by the client
hospital's medical staff or result from relationships that the client hospital
has in the community. Each contract location has a community relations
coordinator who works with a development committee consisting of Company and
hospital personnel to educate prospective referral sources. The outreach
coordinator informs physicians and other health professionals and nursing homes
in the community of the treatment programs that are available at the client
hospital. The community relations coordinator also designs and offers community
educational programs regarding various health issues.
Internal Clinical Audits
The Company has established a comprehensive internal clinical audit
process for its mental health programs. The Company's regional mental health
clinical specialists review the services and clinical documentation of the
treatment programs to ensure compliance with client hospital, federal and state
standards. The Company also has an internal clinical auditor who makes
unannounced visits to contract locations on a periodic basis. The auditor
reviews medical records and marketing programs, and conducts interviews with
physicians, referral sources and client hospital staff members. Results of the
audits are reported directly to the senior management of the Company, rather
than through the normal operating organization.
Page 11
12
Contract Locations
At August 31, 1999, the Company had a total of 153 management contracts
with general acute care hospitals located in 34 states, as shown below:
NUMBER OF
STATE CONTRACTS
----- ---------
Alabama................... 2
Arizona................... 4
Arkansas.................. 11
California................ 18
Colorado.................. 1
Connecticut............... 2
Florida................... 8
Georgia................... 6
Illinois.................. 6
Indiana................... 2
Iowa...................... 2
Kansas.................... 1
Kentucky.................. 4
Louisiana................. 1
Maryland.................. 1
Massachusetts............. 7
Michigan.................. 6
Mississippi............... 2
Missouri.................. 5
Nebraska.................. 1
Nevada.................... 2
New Jersey................ 5
New York.................. 5
North Carolina............ 4
Ohio...................... 7
Oklahoma.................. 3
Oregon.................... 1
Pennsylvania.............. 10
South Carolina............ 2
South Dakota ............. 1
Tennessee................. 9
Texas..................... 8
Washington................ 4
Wisconsin................. 2
Client Hospitals
The Company's clients are primarily small to medium sized hospitals and
include some large tertiary care hospitals. At August 31, 1999, 40.5% of the
Company's management contracts were with proprietary hospitals. The remainder
are with primarily community not-for-profit hospitals.
MANAGED CARE AND EMPLOYEE ASSISTANCE CONTRACTS
The Company delivers its EAP and managed care services through provider
networks as well as through employees and clinics in the Jacksonville, Orlando
and Tampa/St. Petersburg areas. Claims processing is currently done at the
Philadelphia and Orlando locations. The Company intends to consolidate all
claims processing to the Orlando location during fiscal year 2000.
SALES AND MARKETING
At August 31, 1999, the Company's subsidiary Horizon Mental Health
Management employed six full-time Vice Presidents of Development and two Senior
Vice Presidents of Development for mental health and physical rehabilitation
management contracts. The Company compiles information from numerous databases
to identify prospective clients. The Company has developed profiles of over
6,500 hospitals in the United States, with numerous financial and operating
characteristics for each hospital. Potential clients include hospitals without
existing mental health, physical rehabilitation, employee assistance or other
programs as well as hospitals with existing programs of which the Company could
assume management. A select list of candidates is systematically and regularly
updated based on criteria indicating which hospitals are the most likely
potential clients. A vice president of development, who typically acts as the
point person on the sales team for such region, directly contacts the
prospective clients and, where appropriate, presents a detailed proposal to key
decision-makers. The proposal often contains detailed financial projections of
the proposed programs. The Company works with the potential client to develop
contract terms responsive to the client's specific needs. The typical sales
cycle for a management contract is approximately nine months, during which time
a Senior Vice President of Development will assist the Vice President of
Page 12
13
Development and will sometimes assume the role of point person for the sales
effort and, in addition, will generally become involved at the end of the sales
process and negotiate the final terms of the management contract. The Company
believes it can increase sales of rehabilitation management contracts by
applying its expertise in winning mental health management contracts to the
solicitation of rehabilitation management contracts. In addition, the Company
believes it has substantial opportunity to cross-sell a broad range of services
to client hospitals and is pursuing the development of such opportunities as a
primary part of its business strategy.
The subsidiary Mental Health Outcomes ("MHO") markets the CQI+ Outcomes
Measurement System to 1,700 medical/surgical hospitals with psychiatric
inpatient units and 300 free-standing psychiatric hospitals nationwide and
PsychScope Outcomes Database Services to pharmaceutical companies contract
research organizations, and research based teaching universities. MHO employs a
full-time Director of Market Development and Manager of Market Development who
market the CQI+ System to hospitals through understanding psychiatric unit
outcomes measurement needs and application of the most compatible CQI+ System
module. MHO also contracts for telemarketing assistance to support initial
"cold" calling to prospective customers. In addition, CQI+ is marketed as an
"add-on" service to the contract managed psychiatric programs provided by
Horizon Mental Health Management through efforts of the seven Vice Presidents of
Development. MHO also employs a full-time Director of Market Development who
markets PsychScope services by providing decision support expertise to
researchers and pharmaceutical marketers.
The subsidiary Horizon Behavioral Services markets employee assistance
programs and managed behavioral health programs to employers and HMO's
nationwide. HBS employs a full-time Vice President of Sales and five Regional
Directors of Sales and Development to market both the EAP and managed behavioral
health services. The HBS sales staff markets the EAP to employers by assessing
the individualized behavioral health benefit needs of their employees and
providing the appropriate EAP model. In addition, EAP services are marketed by
the eight Horizon Mental Health Management Vice Presidents of Development to
hospitals as a benefit for their employees. The HBS sales staff markets the
managed behavioral health care services to HMOs who wish to outsource management
of the behavioral health benefit to an experienced provider.
COMPETITION
The health care industry is highly competitive and subject to continual
changes in the method in which services are provided and the types of companies
providing such services. The Company competes with several national competitors
and many regional and local competitors, some of which have greater resources
than the Company. In addition, hospitals could elect to manage their own mental
health and physical rehabilitation programs.
Competition among contract managers for hospital-based mental health
and physical rehabilitation programs is generally based upon reputation for
quality, price, the ability to provide financial and other benefits for the
hospital, and the management expertise necessary to enable the hospital to offer
mental health and physical rehabilitation programs that provide the full
continuum of mental health and physical rehabilitation services in a quality and
cost-effective manner. The pressure to reduce health care expenditures has
emphasized the need to manage the appropriateness of mental health and physical
rehabilitation services provided to patients. As a result, competitors without
management experience covering the various levels of the continuum of mental
health and physical rehabilitation services may not be able to compete
successfully. The Company believes that its reputation and management expertise
will enable it to compete successfully in this rapidly changing market.
In addition, general acute care hospitals offering mental health and
physical rehabilitation programs managed by the Company compete for patients
with other providers of mental health care services, including other general
acute care hospitals, freestanding psychiatric hospitals, independent
psychiatrists and psychologists, and with other providers of physical
rehabilitation services, including other general acute care hospitals,
freestanding rehabilitation facilities and outpatient facilities.
The Company also competes with hospitals, nursing homes, clinics,
physicians' offices and contract therapy companies for the services of physical,
occupational and speech therapists. These specialists are in limited supply and
there can be no assurance that the Company will be able to attract a sufficient
number of therapists for its growing needs.
Page 13
14
The behavioral health care marketplace includes two large national
providers (Magellan Health Services and Value Options) who control a dominant
share of the market. The rest of the market consists of other organizations from
medium size regional operations to very small local providers in the EAP
business. The primary factor affecting competition in the EAP business is the
range of services provided. In addition, quality of service and price are also
of importance to EAP customers. Price is the primary factor in obtaining
additional managed care customers. All companies involved in behavioral health
care must plan to overcome obstacles related to increased customer and
government scrutiny. Customers require sophisticated data that provides
information regarding clinical outcomes, patient and provider satisfaction, and
administrative performance information. National Committee for Quality Assurance
("NCQA") accreditation is also becoming a necessary element for behavioral
health care companies and is essential in competing with large national
providers. The Company is actively pursuing NCQA accreditation in fiscal year
2000.
GOVERNMENT REGULATION
The Company's business is affected by federal, state and local laws and
regulations concerning, among other matters, mental health and physical
rehabilitation facilities and reimbursement for mental health and physical
rehabilitation services. These regulations impact the development and operation
of mental health and physical rehabilitation programs managed by the Company for
its client hospitals. Licensing, certification, reimbursement and other
applicable government regulations vary by jurisdiction and are subject to
periodic revision. The Company is not able to predict the content or impact of
future changes in laws or regulations affecting the mental health or physical
rehabilitation sectors.
FACILITY USE AND CERTIFICATION
Hospital facilities are subject to various federal, state and local
regulations, including facilities use, licensure and inspection requirements,
and licensing or certification requirements of federal, state and local health
agencies. Many states also have certificate of need laws intended to avoid the
proliferation of unnecessary or under-utilized health care services and
facilities. The mental health and physical rehabilitation programs which the
Company manages are also subject to licensure and certification requirements.
The Company assists its client hospitals in obtaining required approvals for new
programs. Some approval processes may lengthen the time required for programs to
commence operations. In granting and renewing a facility's licenses,
governmental agencies generally consider, among other factors, the physical
condition of the facility, the qualifications of administrative and professional
staff, the quality of professional and other services, and the continuing
compliance of such facility with the laws and regulations applicable to its
operations. The Company believes that the mental health and physical
rehabilitation programs it manages and the facilities of the client hospitals
used in the operation of such programs comply in all material respects with
applicable licensing and certification requirements.
MEDICARE AND MEDICAID; REIMBURSEMENT FOR SERVICES
Most of the Company's client hospitals receive reimbursement under one
or more of the Medicare or Medicaid programs for mental health and physical
rehabilitation services provided in programs managed by the Company. The Company
is paid directly by its client hospitals for the management services it
provides. While fees paid to the Company by its client hospitals are not subject
to or based upon reimbursement under the Medicare or Medicaid programs or from
any other third-party payor, under many of its management contracts the Company
is obligated to refund a portion of its fee if Medicare denies reimbursement for
an individual patient treatment, or its fee if the fee paid to the Company is
denied by Medicare as a reimbursable cost. Since a substantial portion of the
patients of the programs managed by the Company are covered by Medicare, any
changes which limit or reduce Medicare reimbursement levels could have a
material adverse effect on the Company's client hospitals and, in turn, on the
Company.
The Company is not a provider reimbursed by Medicare or Medicaid but
provides contract management services to such providers. As such, the Company
could be considered subject to such federal and state laws. While the Company
believes that its relationships with its client hospitals, medical directors and
other providers and the fee arrangements with its client hospitals are
consistent with Medicare and Medicaid criteria, those criteria are often
Page 14
15
vague and subject to interpretation. The federal government has been actively
investigating health care providers for potential abuses. There can be no
assurance that aggressive anti-fraud enforcement actions will not adversely
affect the business of the Company.
The Medicare program was enacted in 1965 to provide a nationwide,
federally funded health insurance program for the elderly. The program is
divided in Part A and Part B, each of which has separate rules and requirements
and separate funding sources. Medicare Part A, the Hospital Insurance Program
(42 U.S.C. u 1395c et seq.) is financed primarily through mandatory taxes on
workers' wages. Part A pays for hospital, skilled nursing, home health agency,
hospice, and dialysis services determined to be medically necessary for the
individual patient. Medicare Part B, the Supplementary Medical Insurance program
(42 U.S.C. u 1395j et seq.), is a voluntary medical benefits plan in which
eligible individuals can enroll to receive benefits in addition to those
available under Part A. Under Part B, each beneficiary must pay a monthly
premium, meet a deductible towards the cost of covered items and services
determined to be medically necessary, and pay 20 percent of the Medicare
allowable charge as coinsurance on most covered items. Non-institutional
services, including physician services, outpatient hospital services, durable
medical equipment, and laboratory services, among others, are paid under
Medicare Part B. In addition, the 1997 Balanced Budget Act added a new Medicare
Part C, which provides Medicare beneficiaries with additional health plan
choices, such as managed care plans and medical savings accounts.
The Medicare program is administered by the Health Care Financing
Administration ("HCFA") of the U.S. Department of Health and Human Services
("HHS"). HCFA adopts regulations and issues interpretive memoranda and program
manuals providing detailed explanation of the Medicare program. The payment
operations of the Medicare program are handled by intermediaries (under Part A)
and carriers (under Part B) who are insurance companies and Blue Cross/ Blue
Shield plans which contract with the Secretary of HHS (the "Secretary") to make
Medicare payments to providers in a particular geographic region. Individual
intermediaries and carriers issue transmittals, bulletins, notices, and general
instructions to providers and suppliers in their respective areas to facilitate
the administration of the Medicare program, but are required to follow the
Medicare statute, HCFA regulations, HCFA transmittals, and the program manuals.
Within these requirements, intermediaries and carriers are granted broad
discretion to establish particular guidelines and procedures for making Medicare
coverage determinations and payments, including prior approval, utilization
limits, and specific documentation.
The Medicaid program is a joint federal-state cooperative arrangement
established for the purpose of enabling states to furnish medical assistance on
behalf of aged, blind, or disabled individuals, or members of families with
dependent children, whose income and resources are insufficient to meet the
costs of necessary medical services. The federal and state governments share the
costs of such aid pursuant to statutory formulae. The Secretary has primary
federal responsibility for administering the Medicaid program. The
responsibility has been delegated to HCFA, whose Medicaid Bureau carries out
this delegation. States are not required to participate in the Medicaid program.
States which choose to participate, however, must administer their Medicaid
programs in accordance with federal law, the implementing regulations and
policies of the Secretary and their approved state plans. A state becomes
eligible to receive federal funds by submitting to the Secretary a state plan
for medical assistance. The federal Medicaid statute establishes minimum
standards for state plans in such area as administration, eligibility, coverage
of services, quality and provision of services, and payment for services. States
have significant latitude, within these standards, to determine the mix of
services and structure of their state Medicaid programs. The state plan must be
amended by appropriate submission to the Secretary whenever necessary to reflect
changes in federal statutes, regulations, policies, court decisions, or material
changes in any phase of state law, policy, or operations.
In order to receive reimbursement under the Medicare or Medicaid
programs, each client hospital or facility must meet applicable requirements
promulgated by HHS relating to the type of facility, personnel, standards of
patient care and compliance with all state and local laws, rules and
regulations. The Company believes that the programs it manages comply in all
material respects with applicable Medicare and Medicaid requirements.
In the mid-1980's, changes in reimbursement rates and procedures
included the creation of the Prospective Payment System using predetermined
reimbursement rates for diagnosis related groups ("DRGs"). The DRG system
established fixed payment amounts per discharge for diagnoses generally provided
by acute care hospitals. Mental health services provided by acute care hospitals
which qualify for an exemption are deemed to be Distinct Part Units ("DPUs") and
are not included in the DRG system. Services provided by DPUs are reimbursed on
an actual cost
Page 15
16
basis, subject to certain limitations. The mental health programs managed by the
Company which are eligible for reimbursement by the Medicare program currently
meet the applicable requirements for designation as DPUs and are exempt from the
DRG system. In the future, however, it is possible that Medicare reimbursement
for mental health services, including those provided by programs managed by the
Company, could be under the DRG system or otherwise altered. At August 31, 1999,
of the 228 mental health treatment programs managed by the Company, 165 were
geropsychiatric programs for which a substantial majority of the patients are
covered by Medicare. Amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. Effective as of October 1, 1997, regulations
promulgated pursuant to these amendments establish a ceiling on the rate of
increase in operating costs per case for mental health and physical
rehabilitation services furnished to Medicare beneficiaries. Prior to these
amendments, the reimbursement amounts were tied to each hospital's mental health
or physical rehabilitation unit cost during such unit's first year of
operations, subject to adjustment. The regulations established a nationwide cap
limiting the reimbursement target amount on a per case basis for mental health
and physical rehabilitation service, for Medicare fiscal years beginning October
1, 1997, and later, to $10,534 and $19,104, respectively, subject to adjustments
based on market indices and on costs for other similar units. The reimbursement
amounts were raised to $11,100 and $20,129, respectively for Medicare fiscal
years beginning October 1, 1999, and later. The limitations have resulted, in
some cases, in decreased amounts reimbursed to the Company's client hospitals.
This decrease in reimbursement has, in some cases, led to the renegotiation of a
lower contract management fee structure for the Company and in other cases has
resulted in termination or nonrenewal of the management contract. As a result of
these limitations, seven fewer contracts were signed by the Company and the
direct operating margin of the Company's mental health contracts has decreased
approximately six percentage points for the fiscal year ended August 31, 1999 as
compared to the fiscal year ended August 31, 1998.
Qualified outpatient rehabilitation services are exempt from the
Prospective Payment System. Acute rehabilitation units within acute-care
hospitals are eligible to obtain an exemption from the Prospective Payment
System, generally after the first year of operation, upon satisfaction of
specified federal criteria. Such criteria include the operation for a full 12
months under the Prospective Payment System and the completion of an initial
exemption survey. The exemption survey measures compliance with certain criteria
applicable to exempt units generally, including approval to participate as a
Medicare provider, admission standards, record keeping, compliance with state
licensure laws, segregation of beds, accounting standards and certain specific
standards applicable to rehabilitation units, including staffing, medical care
and patient mix. Upon successful completion of the survey, Medicare payments for
rehabilitation services provided in inpatient units are made under a cost-based
reimbursement system. As of August 31, 1999, 21 of the Company's managed
physical rehabilitation programs were exempt from the Prospective Payment
System. The remaining four programs will apply for exemption as soon as they are
eligible. A recently enacted amendment to the Medicare statutes provides for a
gradual phase-out of cost-based reimbursement for physical rehabilitation
services over a three-year period commencing on October 1, 2000. The resulting
phase-in of reimbursement for physical rehabilitation services based on the
Prospective Payment System could significantly lower Medicare reimbursements to
hospitals and thus have a material adverse effect on the business, operations
and financial results of the Company.
The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings and funding restrictions, any of which could have the effect of limiting
or reducing reimbursement levels to general acute care hospitals for mental
health and physical rehabilitation services provided by programs managed by the
Company. The Company cannot predict whether any changes to such government
programs will be adopted or, if adopted, the effect, if any, such changes will
have on the Company. In addition, a significant number of the Company's
management contracts require the Company to refund a portion of its fee if
Medicare reimbursement to the client hospital is disallowed for a patient
treated in a program managed by the Company or its fee if the fee paid to the
Company is disallowed as a reimbursable cost. During the fiscal year ended
August 31, 1999, the Company refunded approximately $295,718 of its fees in
relation to these denials. Also, Medicare retrospectively audits cost reports of
client hospitals upon which Medicare reimbursement for services rendered in the
programs managed by the Company is based. Accordingly, at any time, the Company
could be subject to refund obligations to client hospitals for prior year cost
reports that have not been audited and settled at the date hereof. Any
significant decrease in Medicare reimbursement levels, the imposition of
significant restrictions on participation in the Medicare program, or the
disallowance by Medicare of any significant portion of the client hospital's
costs, including the fee to the Company, where the Company has a reimbursement
denial
Page 16
17
repayment obligation could adversely affect the Company. In addition, there can
be no assurance that hospitals which offer mental health or physical
rehabilitation programs now or hereafter managed by the Company will satisfy the
requirements for participation in the Medicare or Medicaid programs.
Payors, including Medicare and Medicaid, are attempting to manage
costs, resulting in declining amounts paid or reimbursed to hospitals for the
services provided. As a result, the Company anticipates that the number of
patients served by general acute care hospitals on a per diem, episodic or
capitated basis will increase in the future. There can be no assurance that if
amounts paid or reimbursed to hospitals decline, it will not adversely affect
the Company.
Medicare regulations limit reimbursement for mental health, physical
rehabilitation and other health care charges paid to related parties. A party is
considered "related" to a provider if it is deemed to be controlled by the
provider. One test for determining control for this purpose is whether the
percentage of the total revenues of the party received from services rendered to
the provider is so high that it effectively constitutes control. Although the
Company believes that it does not receive sufficient revenues from any customer
that would make it a related party, it is possible that such regulations could
limit the number of management contracts that the Company could have with a
particular client.
Federal law contains certain provisions designed to ensure that
services rendered by hospitals to Medicare and Medicaid patients are medically
necessary and meet professionally recognized standards. These provisions include
a requirement that admissions of Medicare and Medicaid patients to hospitals
must be reviewed in a timely manner to determine the medical necessity of the
admissions. In addition, these provisions state that a hospital may be required
by the federal government to reimburse the government for the cost of
Medicare-reimbursed services that are determined by a peer review organization
to have been medically unnecessary. The Company and its client hospitals have
developed and implemented quality assurance programs and procedures for
utilization review and retrospective patient care evaluation intended to meet
these requirements.
PATIENT REFERRAL LAWS
Various state and federal laws regulate the relationships between
health care providers and referral sources, including federal and state fraud
and abuse laws prohibiting individuals and entities from knowingly and willfully
offering, paying, soliciting or receiving remuneration in order to induce
referrals for the furnishing of health care services or items. These federal
laws generally apply only to referrals for items or services reimbursed under
the Medicare or Medicaid programs or any state health care program. The
objective of these laws is generally to ensure that the purpose of a referral is
quality of care and not monetary gain by the referring party. Violations of such
laws can result in felony criminal penalties, civil sanctions and exclusion from
participation in the Medicare and Medicaid programs.
The Medicare and Medicaid anti-kickback statute, 42 U.S.C. Section
1320a-7b, prohibits the knowing and willful solicitation or receipt of any
remuneration "in return for" referring an individual, or for recommending or
arranging for the purchase, lease, or ordering, of any item or service for which
payment may be made under Medicare or a state health care program. In addition,
the statute prohibits the offer or payment of remuneration "to induce" a person
to refer an individual, or to recommend or arrange for the purchase, lease, or
ordering of any item or service for which payment may be made under the Medicare
or state health care programs. The statute contains exceptions for certain
discounts, group purchasing organizations, employment relationships, waivers of
coinsurance by community health centers, health plans, and practices defined in
regulatory safe harbors.
Under a significant number of its management contracts, the Company
receives a variable fee related in part to average daily patient census of the
mental health or physical rehabilitation program. In addition, the Company has
entered into agreements with physicians to serve as medical directors at the
mental health and physical rehabilitation programs and facilities managed by the
Company, which generally provide for payments to such persons by the Company as
compensation for their administrative services. These medical directors also
generally provide professional services at such programs and facilities. In
1991, regulations were issued under federal fraud and abuse laws creating
certain "safe harbors" for relationships between health care providers and
referral sources. Any relationship that satisfies the terms of the safe harbor
is considered permitted. Failure to satisfy a safe harbor,
Page 17
18
however, does not mean that the relationship is prohibited. Although the
contracts and relationships between the Company and its client hospitals and
medical directors are not within the safe harbors, the Company believes that
such contracts and relationships comply with applicable laws. There can be no
assurance, however, that the Company's activities will not be challenged by
regulatory authorities.
The Omnibus Budget Reconciliation Act of 1993 contains provisions
("Stark II") prohibiting physicians from referring Medicare and Medicaid
patients to an entity with which the physician has a "financial relationship"
for the furnishing of a list of "designated health services" including physical
therapy, occupational therapy, home health services, and others. If a financial
relationship exists, the entity is generally prohibited from claiming payment
for such services under the Medicare or Medicaid programs. Compensation
arrangements are generally exempted from the Stark provisions if, among other
things, the compensation to be paid is set in advance, does not exceed fair
market value and is not determined in a manner that takes into account the
volume or value of any referrals or other business generated between the
parties.
Other provisions in the Social Security Act authorize other penalties,
including exclusion from participation in Medicare and Medicaid, for various
billing-related offenses. HHS can also initiate permissive exclusion actions for
such improper billing practices as submitting claims "substantially in excess"
of the provider's usual costs or charges, failure to disclose ownership and
officers, or failure to disclose subcontractors and suppliers. Executive Order
12549 prohibits any corporation or facility from participating in federal
contracts if it or its principals have been disbarred, suspended or are
ineligible, or have been voluntarily excluded, from participating in federal
contracts. A principal has been defined as an officer, director, owner, partner,
key employee or other person with primary management or supervisory
responsibilities.
Additionally, the Health Insurance Portability and Accountability Act
of 1996 granted expanded enforcement authority to HHS and the U.S. Department of
Justice ("DOJ"), and provided enhanced resources to support the activities and
responsibilities of the Office of Inspector General ("OIG") of HHS and DOJ by
authorizing large increases in funding for investigating fraud and abuse
violations relating to health care delivery and payment. On January 24, 1997,
the OIG issued guidelines for the Fraud and Abuse Control Program as mandated by
the Act, and on February 19, 1997 issued an interim final rule establishing
procedures for seeking advisory opinions on the application on the anti-kickback
statute and certain other fraud and abuse laws. The 1997 Balanced Budget Act
also includes numerous health fraud provisions, including: new exclusion
authority for the transfer of ownership or control interest in an entity to an
immediate family or household member in anticipation of, or following, a
conviction, assessment, or exclusion; increased mandatory exclusion periods for
multiple health fraud convictions, including permanent exclusion for those
convicted of three health care-related crimes; authority of the Secretary to
refuse to enter into Medicare agreements with convicted felons; new civil money
penalties for contracting with an excluded provider or violating the Medicare
and Medicaid antikickback statute; new surety bond and information disclosure
requirements for certain providers and suppliers; and an expansion of the
mandatory and permissive exclusions added by the Health Insurance Portability
and Accountability Act of 1996 to any federal health care program (other than
the Federal Employees Health Benefits Program).
In addition, federal and some state laws impose restrictions on
referrals for certain designated health services by physicians and, in a few
states, psychologists and other mental health care professionals to entities
with which they have financial relationships. The Company believes that its
operations comply with these restrictions to the extent applicable, although no
assurance can be given regarding compliance in any particular factual situation.
Federal legislation has been considered to expand current law from its
application to Medicare and Medicaid business to all payors and to additional
health services. Certain states are considering adopting similar restrictions or
expanding the scope of existing restrictions. There can be no assurance that the
federal government or other states in which the Company operates will not enact
similar or more restrictive legislation or restrictions that could under certain
circumstances impact the Company's operations.
MENTAL HEALTH CARE PATIENT RIGHTS
Many states have adopted "patient bill of rights" regulations which set
forth standards for least restrictive treatment, patient confidentiality,
patient access to mail and telephones, patient access to legal counsel and
requirements that patients be treated with dignity. There are also laws and
regulations relating to the civil
Page 18
19
commitment of patients to mental health programs, disclosure of information
concerning patient treatments and related matters.
HEALTH CARE REFORM
The Clinton Administration and various federal legislators have
considered health care reform proposals intended to control health care costs
and to improve access to medical services for uninsured individuals. These
proposals included proposed cutbacks to the Medicare and Medicaid programs and
steps to permit greater flexibility in the administration of Medicaid. In
addition, some states in which the Company operates are considering various
health care reform proposals. It is uncertain at this time what legislation on
health care reform may ultimately be enacted or whether other changes in the
administration or interpretation of governmental health care programs will
occur. There can be no assurance that future health care legislation or other
changes in the administration or interpretation of governmental health care
programs will not have a material adverse effect on the Company's business,
financial condition or results of operations.
LICENSING REQUIREMENTS
Certain of the services provided by the Company's managed behavioral
services subsidiaries may be subject to certain licensing requirements in some
states. The Company currently holds licenses in Colorado, Florida, and
Pennsylvania. If the business operations of such entities are determined to
require licenses in other states, then obtaining such licenses or the inability
to obtain such licenses could adversely affect the business operations of such
entities. In addition, several states have laws that prohibit business
corporations from providing, or holding themselves out as providers of, medical
care. While the Company has no reason to believe that it is in violation or has
violated such statutes, these laws vary from state to state and have seldom been
interpreted by the courts or regulatory agencies.
EMPLOYEES
At August 31, 1999, the Company employed 1,491 people, including 1,152
full-time employees, 301 part-time employees, and 38 temporary employees. The
Company has no collective bargaining agreements with any unions and believes
that its overall relations with its employees are good. In addition, at August
31, 1999, the Company had administrative services contracts with 202 physicians
to serve as medical directors for clinical programs managed by the Company.
INSURANCE
The Company carries general liability, comprehensive property damage,
malpractice, workers' compensation and other insurance coverages that management
considers adequate for the protection of the Company's assets and operations.
There can be no assurance, however, that the coverage limits of such policies
will be adequate. A successful claim against the Company in excess of its
insurance coverage could have a material adverse effect on the Company.
Page 19
20
ITEM 2. PROPERTIES
The Company leases a building consisting of approximately 40,000 square
feet for its National Support Center in Lewisville, Texas under a lease term
expiring on September 26, 2001. In addition, for its contract management
business the Company leases an aggregate of 7,211 square feet of space for three
regional offices in the Chicago, Los Angeles and Tampa metropolitan areas, with
lease terms expiring from January 2000 to April 2001. Except for one partial
hospitalization program operating in approximately 3,150 square feet of space,
the space required for the clinical programs managed by the Company is provided
by the client hospitals either within their existing facilities or at other
locations owned or leased by the hospitals.
For its managed behavioral health care services and employee assistance
programs, the Company leases approximately 53,549 square feet of office space
primarily in the Orlando, Philadelphia, and Denver metropolitan areas, with
small offices in Phoenix, AZ, Morgantown, WV, and Stow, MA, under lease terms
expiring from April 2000 to October 2004. In addition, the Company leases
approximately 29,393 square feet in various locations throughout the state of
Florida with lease terms expiring from November 1999 to May 2003 for its managed
behavioral health care clinical operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is, and may be in the future, party to litigation arising
in the ordinary course of its business. While the Company has no reason to
believe that any pending claims are material, there can be no assurance that the
Company's insurance coverage will be adequate to substantially cover liabilities
arising out of such claims or that any such claims will be covered by the
Company's insurance. Any material claim which is not covered by insurance may
have an adverse effect on the Company's business. Claims against the Company,
regardless of their merit or outcome, may also have an adverse effect on the
Company's reputation and business.
Page 20
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
James W. McAtee........... 54 President, Chief Executive Officer, Secretary and Director
Ronald C. Drabik.......... 53 Senior Vice President - Finance and Administration and Treasurer
Linda A. Laitner.......... 51 Senior Vice President - Operations
David S. Tingue........... 44 Senior Vice President - Marketing
David K. White, Ph.D. .... 43 Senior Vice President - Operations
Frank J. Baumann.......... 40 Senior Vice President - Operations
James W. McAtee has been President and Chief Executive Officer of the
Company since November 1, 1998. He has been Secretary of the Company since
September 1990 and has been a director of the Company since July 1995. He
formerly served as Chief Financial Officer and Treasurer from September 1990 to
July 1999. He was Executive Vice President - Finance & Administration of the
Company from February 1992 to October 1998 and was a Senior Vice President of
the Company from September 1990 to February 1992.
Ronald C. Drabik has been Senior Vice President - Finance and
Administration and Treasurer since July 12, 1999. He was previously Senior Vice
President, Chief Financial Officer, Secretary and Treasurer of Cuno, Inc., a
multinational manufacturer of filtration products, from 1996 to 1999. He was
previously Vice President Finance for Acme Cleveland, a multinational
manufacturer of telecommunications and electronic products, from 1995 to 1996.
He also served as President and CEO of Met-Coil Systems Corp., a machine tool
manufacturer, from 1993 to 1995.
Linda A. Laitner has been Senior Vice President - Operations since
November 1, 1998. She has been President - Horizon Behavioral Services since
February 1998. She was previously Vice President Operations Government Programs
for CMG Health, a national managed behavioral healthcare organization, from
January 1997 to January 1998. She also served as Vice President Operations -
Implementation for CMG Health from January 1994 to January 1997 and as a
Regional Vice President from January 1993 to 1994.
David S. Tingue has been Senior Vice President - Marketing since
November 1, 1998. He has been President - Mental Health Outcomes since October
1997. He formerly served as Executive Vice President, Marketing from July 1998
to October 1998. He was previously Vice President Operations for SDMS Inc, a
consulting and service company focusing on disease and population management in
the managed healthcare marketplace, from January 1997 to September 1997. He also
served as Vice President, Strategic Planning for SDMS from March 1996 to
December 1996 and Vice President, Marketing from July 1994 to March 1996. Prior
to this, he was a Regional Business Director for Zeneca Pharmaceuticals, a
United Kingdom based healthcare company, from September 1992 to June 1994.
David K. White, Ph.D. has been Senior Vice President - Operations since
November 1, 1998. He formerly served as Executive Vice President - Operations
from February 1998 to October 1998. He was a Regional Vice President from
September 1996 to January 1998. He also served as a Regional Director of
Operations from April 1995 to August 1996. He was President and Chief Executive
Officer of Charles River Health Management, Inc., a contract management company
focusing on the public and private sector, from December 1990 to November 1994.
Frank J. Baumann has been Senior Vice President - Operations since
March 22, 1999. He has been President - Specialty Rehab Management since March
1999. He formerly served as a Regional Vice President from March 1997 to March
1999. He was also a Regional Director of Operations from November 1996 to March
1997. He was Chief Executive Officer of Mountain Crest Behavioral Healthcare
Systems, a free-standing psychiatric hospital, from August 1994 to November
1996.
Page 21
22
Officers of the Company are elected by the Board of Directors of the
Company and serve at the pleasure of the Board of Directors until their
respective successors are elected and qualified.
Page 22
23
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "HORC".
The following table sets forth the high and low sale prices per share
for the Common Stock of the Company as reported by the Nasdaq National Market
for the periods indicated:
High Low
---- ---
FISCAL YEAR ENDED AUGUST 31, 1999:
June 1, 1999 - August 31, 1999 ......................................... $ 7.75 $ 6.38
March 1, 1999 - May 31, 1999 ........................................... 8.00 6.00
December 1, 1998 -- February 28, 1998 .................................. 8.19 5.16
September 1, 1998 -- November 30, 1998 ................................. 9.13 5.63
FISCAL YEAR ENDED AUGUST 31, 1998:
June 1, 1998 -- August 31, 1999 ........................................ 19.00 4.50
March 1, 1998 -- May 31, 1999 .......................................... 24.63 17.25
December 1, 1997 -- February 28, 1998 .................................. 23.75 19.00
September 1, 1997 -- November 30, 1997 ................................. 29.13 20.50
As of November 3, 1999, there were 40 stockholders of record of the
Common Stock of the Company.
The Company has not paid or declared any cash dividends on its capital
stock since its inception. The Company currently intends to retain future
earnings for use in the expansion and operation of its business. Future
borrowings may limit the Company's ability to pay dividends. The payment of any
future cash dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, financial condition
and capital requirements, restrictions in financing agreements, business
opportunities and conditions and other factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Page 23
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND STATISTICAL DATA
The selected historical consolidated financial data presented below for
the fiscal years ended August 31, 1999, 1998 and 1997, and at August 31, 1999
and August 31, 1998, are derived from the audited Consolidated Financial
Statements of the Company included elsewhere in this Report. The selected
historical consolidated financial data presented below for the fiscal years
ended August 31, 1996 and 1995, and at August 31, 1997, 1996 and 1995, are
derived from the audited consolidated financial statements of the Company not
included herein. Effective August 11, 1997, Horizon acquired Specialty
Healthcare Management, Inc. ("Specialty") in a share exchange transaction with
the stockholders of Specialty which was accounted for as a pooling of interests.
The Consolidated Financial Statements of the Company give effect to the
Specialty exchange by combining (a) the financial statements of Horizon for the
years ended August 31, 1996 and 1995 with the financial statements of Specialty
for the years ended December 31, 1996 and 1995 and (b) the results of operations
of Horizon for the year ended August 31, 1997 with the results of operations of
Specialty for the twelve month period ended August 31, 1997, in each case on a
pooling of interests basis. Specialty was a division of National Medical
Enterprises, Inc. during the year ended December 31, 1994. The operations of
Specialty for the four month period ended December 31, 1996 resulting in net
revenues and net income of $10.8 million and $849,000, respectively, have been
included in the restated statement of operations for both the year ended August
31, 1997 and the year ended August 31, 1996. The effect of including Specialty's
net income for the four months in both periods is eliminated in stockholders'
equity in the Consolidated Financial Statements of the Company. The selected
financial information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Consolidated Financial Statements of the Company and
Notes thereto included elsewhere in this Report.
Page 24
25
FISCAL YEAR ENDED AUGUST 31,
------------------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract management revenues $ 97,837 $ 102,156 $ 102,263
Premiums and fees 47,452 21,383 6,154
Other(2) 712 279 850
--------- --------- ---------
Total revenues 146,001 123,818 109,267
Operating expenses:
Salaries and benefits 75,741 65,725 60,048
Medical claims 20,960 9,081 1,830
Purchased services 13,735 14,124 14,636
Provision for bad debts 589 760 3,034
Other 17,877 14,755 12,796
Depreciation and amortization 4,460 3,166 2,201
Merger expenses -- -- 3,528
--------- --------- ---------
Operating income 12,639 16,207 11,194
Interest and other income (expense), net (1,176) 74 120
--------- --------- ---------
Income before income taxes 11,463 16,281 11,314
Income tax expense 4,562 6,515 4,518
--------- --------- ---------
Income before equity in net earnings of
Horizon LLC and minority interest 6,901 9,766 6,796
Equity in net earnings of Horizon LLC -- -- --
Minority interest -- (34) (140)
--------- --------- ---------
Net income $ 6,901 $ 9,732 $ 6,656
========= ========= =========
Basic earnings per share (3) $ 1.00 $ 1.37 $ 0.96
========= ========= =========
Weighted average shares outstanding (3) 6,875 7,120 6,929 (4)
========= ========= =========
Diluted earnings per share (3) $ 0.96 $ 1.26 $ 0.87
========= ========= =========
Weighted average shares and dilutive
potential common shares outstanding (3) 7,200 7,754 7,681 (4)
========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments $ 5,439 $ 6,204 $ 5,517
Working capital 581 6,498 5,064
Intangible assets (net) (5) 60,065 59,538 26,005
Total assets 86,536 86,672 48,728
Total debt 20,036 26,029 --
Stockholders' equity 45,806 42,662 31,682
FISCAL YEAR ENDED AUGUST 31,
-------------------------------
1996 1995(1)
--------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract management revenues $ 95,244 $ 68,721
Premiums and fees 437 --
Other(2) 558 634
--------- ---------
Total revenues 96,239 69,355
Operating expenses:
Salaries and benefits 55,810 40,083
Medical claims 147 --
Purchased services 13,733 10,794
Provision for bad debts 1,435 1,680
Other 11,848 9,189
Depreciation and amortization 1,812 1,133
Merger expenses -- --
--------- ---------
Operating income 11,454 6,476
Interest and other income (expense), net (67) (1,003)
--------- ---------
Income before income taxes 11,387 5,473
Income tax expense 4,609 1,695
--------- ---------
Income before equity in net earnings of
Horizon LLC and minority interest 6,778 3,778
Equity in net earnings of Horizon LLC -- 1,568
Minority interest (2) --
--------- ---------
Net income $ 6,776 $ 5,346
========= =========
Basic earnings per share (3) $ 1.03 $ 1.05
========= =========
Weighted average shares outstanding (3) 6,561 (4) 5,111 (4)
========= =========
Diluted earnings per share (3) $ 0.90 $ 0.89
========= =========
Weighted average shares and dilutive
potential common shares outstanding (3) 7,510 (4) 5,997 (4)
========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments $ 8,346 $ 3,249
Working capital 8,751 4,394
Intangible assets (net) (5) 19,887 14,998
Total assets 45,214 33,587
Total debt 3,576 3,216
Stockholders' equity 25,149 17,225
AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31, MAY 31, FEB. 28,
1999 1999 1999 1998 1998 1998 1998
--------- --------- --------- --------- --------- ------- -------
STATISTICAL DATA:
Covered lives ............................... 2,420,174 2,432,250 2,249,939 2,356,664 1,874,323 762,414 783,560
NUMBER OF CONTRACT LOCATIONS (6):
Contract locations in operation ............. 147 155 156 155 161 166 172
Contract locations signed and unopened ...... 6 9 8 10 11 16 12
--------- --------- --------- --------- --------- ------- -------
Total contract locations .................... 153 164 164 165 172 182 184
========= ========= ========= ========= ========= ======= =======
SERVICES COVERED BY CONTRACTS (6):
Inpatient ................................... 133 144 142 139 149 152 159
Partial hospitalization ..................... 86 95 98 98 102 109 107
Outpatient .................................. 27 27 28 29 32 33 30
Home health ................................. 7 8 10 11 10 13 12
CQI+ ........................................ 106 111 97 83 82 83 88
TYPES OF TREATMENT PROGRAMS (6):
Geropsychiatric ............................. 165 184 180 179 189 193 195
Adult psychiatric ........................... 54 59 63 62 67 75 72
Substance abuse ............................. 4 4 6 8 8 12 12
Physical rehabilitation ..................... 25 23 23 20 20 19 20
Other mental health ......................... 5 4 6 8 9 8 9
NOV. 30, AUG. 31,
1997 1997
-------- --------
STATISTICAL DATA:
Covered lives ............................... 744,103 288,519
NUMBER OF CONTRACT LOCATIONS (6):
Contract locations in operation ............. 179 181
Contract locations signed and unopened ...... 15 14
------- -------
Total contract locations .................... 194 195
======= =======
SERVICES COVERED BY CONTRACTS (6):
Inpatient ................................... 165 166
Partial hospitalization ..................... 103 104
Outpatient .................................. 27 24
Home health ................................. 13 17
CQI+ ........................................ 87 86
TYPES OF TREATMENT PROGRAMS (6):
Geropsychiatric ............................. 193 197
Adult psychiatric ........................... 70 75
Substance abuse ............................. 12 10
Physical rehabilitation ..................... 21 20
Other mental health ......................... 12 9
Page 25
26
(1) Effective August 1, 1994, the Company and Mental Health Management, Inc.
("MHM") formed Horizon Mental Health Management Company, L.L.C., a Delaware
limited liability company ("Horizon LLC"). Horizon LLC assumed management
responsibility for all of the then existing management contracts of the
Company and MHM. Certain provisions of the limited liability company
agreement which required the consent of MHM for certain transactions
prevented the Company from having the ability to control Horizon LLC under
generally accepted accounting principles and therefore Horizon LLC was not
consolidated with Horizon for accounting purposes through February 28,
1995. As a result, the revenues and expenses of Horizon LLC for the period
August 1, 1994 through February 28, 1995 are not included in the revenues
and expenses of the Company; instead, for such periods the Company
accounted for its investment in Horizon LLC by the equity method and
reflected its share of Horizon LLC's net income for the period in question
as "Equity in Earnings of Horizon LLC." Effective with the acquisition of
the minority interest in Horizon LLC of MHM on March 20, 1995, the MHM
contracts were assigned to the Company and Horizon LLC became a wholly
owned subsidiary of Horizon. Horizon LLC was consolidated with the Company
effective March 1, 1995. The Company's share of Horizon LLC's net earnings
was $1,567,720 from September 1, 1994 through February 28, 1995. The
Horizon LLC agreement stipulated that MHM, as a member of Horizon LLC,
would be allocated the first $1,750,000 of Horizon LLC net earnings in each
of the fiscal years ending August 31, 1995 and 1996. $1,750,000 was
allocated to MHM during the six months ended February 28, 1995.
(2) Other revenues for the fiscal years ended August 31, 1995 and 1996 consist
primarily of revenues earned from a psychiatric hospital formerly operated
by the Company, patient services and physician contract management fees, or
subsequent adjustments for Medicare settlements recognized during the
respective period. The Company subleased the operations of the hospital to
a third party effective July 31, 1994. Other revenues for the fiscal years
ended August 31, 1998 and 1997 consist primarily of physician contract
management fees and a favorable cost report adjustment. Other revenues for
the year ended August 31, 1999 consist primarily of physician contract
management fees and revenues related to the Company's Mental Health
Outcomes business.
(3) Adjusted to reflect a three-for-two stock split effected by the Company as
a 50% stock dividend on January 31, 1997.
(4) Adjusted for the Specialty transaction based on historical share amounts,
converting each outstanding share of Specialty Common Stock into 147.4616
shares of Horizon Common Stock.
(5) Intangible assets consist of goodwill and service contracts related to
various acquisitions of the Company.
(6) Represents combined information for both Horizon and Specialty.
Page 26
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a provider of employee assistance plans ("EAP") and
behavioral health services to business and managed care organizations, as well
as a leading contract manager of psychiatric and physical rehabilitation
clinical programs offered by general acute care hospitals in the United States.
The Company has grown both internally and through acquisitions, increasing both
the variety of its treatment programs and services and the number of its
management contracts. As of August 31, 1999, the Company had 272 contracts to
provide EAP and managed behavioral health services covering over 2.4 million
lives. Over the last seven years, the Company has increased its management
contracts from 43 to a total of 153 as of August 31, 1999 and currently has
contract locations in 34 states. Of its management contracts, 128 relate to
mental health treatment programs and 25 relate to physical rehabilitation
programs. The Company has also developed a proprietary mental health outcomes
measurement system known as CQI+. At August 31, 1999, the Company provided
outcome measurement services at 106 contract locations as well as data services
under various arrangements.
The Company capitalizes on its expertise in managing the delivery of
mental health services by directly offering managed behavioral health care
services and employee assistance programs to businesses and managed care
organizations. The Company believes it is strategically-sized to deliver
national programs, while providing local, individualized service to both
employers and health plans and to their respective employees or members. The
Company's strategy is to enhance its position as the leader in the contract
management of mental health programs and to further expand the range of services
which it offers to its client hospitals to include other clinical and related
services and programs. A significant challenge in marketing clinical management
contracts is overcoming the initial reservations that many hospital
administrators have with outsourcing key clinical services. The Company believes
its expertise in working with hospital administrators, its reputation in the
industry and its existing hospital contractual relationships provide it with a
significant advantage in marketing new contracts. The Company also believes it
has opportunities to cross-sell management services of mental health and
physical rehabilitation programs to client hospitals by marketing its mental
health services to client hospitals for which the Company currently manages only
physical rehabilitation programs, and by marketing its physical rehabilitation
services to client hospitals for which the Company currently manages only mental
health programs. The Company is pursuing the development of such opportunities
as a primary part of its business strategy. The Company has successfully
expanded the breadth of services it offers to include the full continuum of
mental health services, including outcome measurement services, and physical
rehabilitation services. Its management contracts increasingly cover multiple
services.
REVENUES
Managed Behavioral Health Care Services and Employee Assistance
Programs
Through its subsidiary Horizon Behavioral Services, Inc., the Company
offers an array of managed care products to corporate clients, self-funded
employer groups, commercial HMO and PPO plans, government agencies, and
third-party payors. Revenues are derived from EAP services, administrative
services only contracts, and at risk managed behavioral health services.
Revenues from employee assistance programs, are typically based on a
per employee per month capitated rate multiplied by the number of eligible
employees. The rate for EAP plans is dependent upon services provided under the
contract terms. Each plan is specifically written to fulfill the clients' needs
and can offer different numbers of counseling sessions and other benefits, such
as child care and elder care consultation, referral resources and critical
incident debriefing and intervention.
Revenues for administrative services only contracts relate to the
management of behavioral health benefits and are dependent upon the number of
contracts and the services provided. Fees are usually a case rate or a per
employee per month fee multiplied by the number of eligible members. The client
is able to benefit from the mental health professionals employed or
independently contracted by the Company at favorably discounted rates, as well
as the Company's expertise in clinical case management.
Page 27
28
The primary factors affecting revenues derived from managed care
services are the behavioral health benefits provided and the number of members
covered. Fees are based on a per employee per month capitated fee. The capitated
rate is dependent upon the benefit designs of the customer and is set forth in
the contract, usually as a per member per month capitated rate, which is
multiplied by the number of eligible members to determine a monthly fee.
The nine company owned clinics operated in the state of Florida derive
income from counseling and therapy services rendered. They also provide services
to patients who are employees of customers under various EAP or managed care
contracts.
Mental Health Services
The primary factors affecting revenues in a period are the number of
management contracts with treatment programs in operation in the period and the
number of services covered by each such management contract. The Company
provides its management services under contracts with terms generally ranging
from three to five years. Each contract is tailored to address the differing
needs of each client hospital and its community and increasingly cover multiple
treatment programs and services. The Company and the client hospital determine
the programs and services to be offered by the hospital and managed by the
Company, which may consist of one or more mental health or physical
rehabilitation treatment programs offering inpatient, partial hospitalization,
outpatient or home health services. Under the contracts, the hospital is the
actual provider of the mental health or physical rehabilitation services and
utilizes its own facilities (including beds for inpatient programs), nursing
staff and support services (such as billing, dietary and housekeeping) in
connection with the operations of its programs. As the Company has expanded the
breadth of treatment programs it offers to hospitals, it began to move from
managing one treatment program under a single contract with a hospital to
managing multiple treatment programs under such contract.
Contracts are frequently renewed or amended prior to or at their stated
expiration dates. Some contracts are terminated prior to their stated expiration
dates pursuant to agreement of the parties or early termination provisions
included in the contracts. As of August 31, 1999, 1998 and 1997, the Company had
successfully retained 78%, 73% and 78%, respectively, of the management
contracts in existence at the beginning of such fiscal years. The Company
believes the most frequent reason its client hospitals do not renew their
contracts with the Company is that the hospitals decide to manage such programs
themselves. In addition, a number of contracts have not renewed since passage of
the 1997 Balanced Budget Act due to a decline in profitability, resulting from
unfavorable changes in Medicare reimbursement.
Under each contract, the Company receives a fee for its management
services from the client hospital. Management fees may be either a variable fee
related in part to patient volume, a fixed monthly fee or reimbursement for
direct program costs plus a fixed fee. The management fee is frequently subject
to periodic adjustments as a result of changes in the consumer price index or
other economic factors. Payors, including Medicare and Medicaid, are attempting
to manage costs, resulting in declining amounts paid or reimbursed to hospitals
for the services provided. As a result, the Company anticipates that the number
of patients served by general acute care hospitals on an inpatient basis will
decrease and, as an alternative, the number of patients served on a per diem,
episodic or capitated basis will increase in the future. However, additional
changes in Medicare reimbursement may also unfavorably impact these groups as
well.
Over the past three years, the Company has increased revenues through
acquisitions (discussed below) and through internal growth by adding services,
price escalators and volume increases at existing contract locations. The
increases have primarily been due to the increased range of services offered per
contract and the increased demand for geropsychiatric services as general
hospitals have sought to enter this market. An additional factor in the pricing
strategy has been the Company's policy of establishing a minimum direct margin
threshold for its management contracts. Because the pooling with Specialty
occurred on August 11, 1997, fiscal 1997 margins do not reflect the integration
or the elimination of Specialty's executive, administrative, accounting and
personnel functions and information systems, the closing of two Specialty office
facilities and other synergies.
Page 28
29
The Company's mix of programs has changed over the last four years
reflecting the increased interest in geropsychiatric programs by general
hospitals. Geropsychiatric programs as a percentage of the Company's total
mental health programs have increased from approximately 57% to 72% during that
period.
Most of the Company's client hospitals receive reimbursement under one
or more of the Medicare or Medicaid programs for mental health and physical
rehabilitation services provided in programs managed by the Company. The Company
is paid directly by its client hospitals for the management services it
provides. Under many of its management contracts the Company is obligated to
refund all or a portion of its fee if either Medicare denies reimbursement to
the client hospital for individual patient treatment or if the fee paid to the
Company is denied by Medicare as a reimbursable cost. During the fiscal years
ended August 31, 1999 and 1998, the Company refunded approximately $295,718 and
$207,801, respectively, of its fees as a result of these denials.
Amendments to the Medicare regulations in 1997 as part of the Balanced
Budget Act, established maximum reimbursement amounts on a per case basis for
both inpatient mental health and physical rehabilitation services. The
regulations established a nationwide cap limiting the reimbursement amount on a
per case basis for mental health and physical rehabilitation services for
Medicare fiscal years beginning October 1, 1997, and later, to $10,534 and
$19,104, respectively, subject to adjustments based on market indices. The
reimbursement amounts were raised to $11,100 and $20,129 respectively for
Medicare fiscal years beginning October 1, 1999 and later. In addition, these
amendments established a new ceiling on the rate of increase in operating costs
per case for mental health and physical rehabilitation services furnished to
Medicare beneficiaries. Prior to these amendments, the reimbursement limits were
tied to the hospital's mental health or physical rehabilitation unit cost during
the unit's first year of operations, subject to certain adjustments. The
limitations have resulted, in some cases, in decreased amounts reimbursed to the
Company's client hospitals. This decrease in reimbursement has, in some cases,
led to the renegotiation of a lower contract management fee and in other cases
has resulted in the termination or nonrenewal of the management contract.
Primarily as a result of these limitations, seven fewer contracts were signed by
the Company and the direct operating margin of the Company's mental health
contracts has decreased approximately six percentage points for the fiscal year
ended August 31, 1999 as compared to the fiscal year ended August 31, 1998. The
impact of the renegotiation, termination, or nonrenewal of management contracts
was reduced by an increase in same store sales, that is contracts in operation
for the entire year in both the current fiscal year and prior fiscal year, of
3.2% for the fiscal year ended August 31, 1999. In addition, revenues per
average number of contract locations in operation increased 6.2% for fiscal year
1999 as compared to the prior fiscal year.
Recent amendments to the Medicare statutes also provide for the
elimination of cost based reimbursement of partial hospitalization services
effective upon 90 days notice from Medicare. Thereafter, reimbursement for
partial hospitalization services based on the Medicare outpatient prospective
payment system ("PPS") will utilize a fixed reimbursement amount per patient
day. The currently proposed reimbursement rate per patient day is a
wage-adjusted rate of $206.71, which will lower Medicare reimbursement levels to
many hospitals for partial hospitalization services and therefore cause lower
fees to be paid to the Company under contracts for partial hospitalization
services.
Revenues from partial hospitalization services were $20.5 million or
20.9% of total contract management revenue for the year ended August 31, 1999.
Of the Company's 153 management contracts at August 31, 1999, 103 or 67.3% of
the contracts include partial hospitalization services. The termination of all
partial hospitalization contracts, while unlikely and not expected, could reduce
operating income approximately by $5 million annually.
A recently enacted amendment to the Medicare statutes provides for a
gradual phase-out of cost-based reimbursement for physical rehabilitation
services over a three-year period commencing on October 1, 2000. The resulting
phase-in of reimbursement for physical rehabilitation services based on PPS
could significantly lower Medicare reimbursements to hospitals and thus could
have a material adverse effect on the business, operations and financial results
of the Company.
OPERATING EXPENSES
The primary factor affecting operating expenses for the Company's
contract management business in any period is the number of programs in
operation in the period. Operating expenses consist primarily of salaries and
Page 29
30
benefits paid to its therapists and supporting personnel. Each mental health
program managed by the Company generally has a psychiatric medical director, a
program director who is usually a psychologist or a social worker, a community
relations coordinator and additional social workers or therapists as needed.
Each physical rehabilitation program managed by the Company generally has an
independent medical director, a program director, and additional clinical staff
tailored to meet the needs of the program and the client hospital, which may
include physical and occupational therapists, a speech pathologist, a social
worker and other appropriate supporting personnel. Each medical director has a
contract with the Company under which on-site administrative services needed to
administer the program are provided. Except for the nursing staff, which is
typically provided by the hospital, the other program personnel are generally
employees of the Company. At August 31, 1999, the Company had an average of
seven employees per contract location.
Operating expenses for the Company's managed behavioral health care
services and employee assistance programs are comprised of approximately 35%
salaries and benefits and approximately 48% medical claims from network
providers. Medical claims includes payments to independent health care
professionals providing services under the capitated mental health services
contracts and employee assistance programs offered by the Company. Other costs
and expenses include items such as marketing costs and expenses, accounting and
legal fees and expenses, employee relocation expenses, rent, utility and
property taxes.
ACQUISITIONS
Acquisitions during the last four years have significantly affected the
Company's results of operation and financial condition. Details of these
acquisitions are included in Note 3 to Consolidated Financial Statements
included elsewhere herein this Form 10-K.
On April 1, 1999, the Company acquired all of the outstanding capital
stock of REACH for approximately $2.0 million. REACH provides employee
assistance programs and other related behavioral services to self-insured
employers.
On October 5, 1998, the Company acquired all of the outstanding capital
stock of ChoiceHealth for approximately $2.0 million. ChoiceHealth provides
managed behavioral health care services, employee assistance programs and other
related health care services to health maintenance organizations and self
insured employers.
On June 1, 1998, the Company acquired all of the outstanding capital
stock of FPM for approximately $20.0 million, subject to certain post closing
adjustments. FPM provides managed behavioral health care services, employee
assistance programs and other related health care services to health maintenance
organizations and self insured employers. During the fiscal year ending 1999,
the Company received post closing adjustments, net of tax effects, of $1,222,193
and $1,201,337.
On October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn for approximately $12.7 million in cash. Acorn provides
employee assistance programs and other related services to self-insured
employers.
On August 11, 1997, Horizon acquired Specialty in a transaction
accounted for as a pooling of interests, resulting in a restatement of the
Company's financial results for the fiscal years ended August 31, 1997, 1996 and
1995. Included in the Company's financial statements for the fiscal years ended
August 31, 1996 and 1995 are the financial results of Specialty for the years
ended December 31, 1996 and 1995, respectively. Included in the Company's
financial statements for the fiscal year ended August 31, 1997 are the financial
results of Specialty for the twelve months ended August 31, 1997. The treatment
of the Specialty acquisition as a pooling of interests resulted in the Company
recognizing merger-related expenses of approximately $3,528,000 and an
offsetting tax benefit of approximately $1,340,000.
The Company acquired 39 management contracts from Mental Health
Management, Inc. ("MHM") on March 20, 1995, 19 management contracts from
Parkside on April 1, 1996 and 23 management contracts with the acquisition of
Geriatric and Clay Care on March 15, 1997. In addition, on August 1, 1996 the
Company acquired Florida PPS, a company specializing in providing mental health
services under capitated contracts.
Page 30
31
RESULTS OF OPERATIONS
The following table sets forth for the fiscal years ended August 31,
1999, 1998 and 1997, the percentage relationship to total revenues of certain
costs, expenses and income, and the number of management contracts in operation
and covered lives at the end of each fiscal year.
FISCAL YEAR ENDED AUGUST 31,
--------------------------------------------
1999 1998 1997
------------ ------------ -----------
Revenues:
Contract management revenues .................................. 67.0% 82.5% 93.6%
Premiums and fees ............................................. 32.5 17.3 5.6
Other ......................................................... 0.5 0.2 0.8
--------- -------- -------
Total revenues .................................................. 100.0 100.0 100.0
Operating expenses
Salaries and benefits ......................................... 51.9 53.1 55.0
Medical claims ................................................ 14.4 7.3 1.7
Purchased services ............................................ 9.4 11.4 13.4
Provision for bad debts ....................................... 0.4 0.6 2.8
Other ......................................................... 12.2 11.9 11.7
Depreciation and amortization ................................. 3.0 2.6 2.0
Merger expenses ............................................... -- -- 3.2
--------- -------- -------
Total operating expenses ........................................ 91.3 86.9 89.8
--------- -------- -------
Operating income ................................................ 8.7 13.1 10.2
--------- -------- -------
Interest and other income (expense), net ........................ (0.8) 0.1 0.1
--------- -------- -------
Income before taxes ............................................. 7.9 13.2 10.3
Income tax expense .............................................. 3.2 5.3 4.1
--------- -------- -------
Income before minority interest ................................. 4.7 7.9 6.2
Minority interest ............................................... -- -- 0.1
--------- -------- -------
Net income ...................................................... 4.7% 7.9% 6.1%
========= ========= =======
Number of management contracts in operation, end of year ........ 153 161 181
Covered lives ................................................... 2,420,174 1,874,323 288,519
Page 31
32
FISCAL YEAR ENDED AUGUST 31, 1999
COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1998
Revenue. Revenues for the fiscal year ended August 31, 1999 were $146.0
million representing an increase of $22.2 million, or 17.9%, as compared to
revenues of $123.8 million for the prior fiscal year. Premiums and fees
increased $26.1 million primarily as a result of revenue recorded for FPM,
ChoiceHealth, and REACH. Horizon acquired 100% of the voting stock of FPM,
ChoiceHealth, and REACH effective June 1, 1998, October 5, 1998, and April 1,
1999, respectively. The increase in premiums and fees were offset by a $3.8
million decrease in contract management and other revenue as compared to fiscal
year 1998. This decrease is due to the average number of contract locations in
operation decreasing from 172.8 for fiscal year 1998 to 155.8 for fiscal year
1999, a decrease of 9.8%. However, same store sales for contract management
revenues, that is contracts in operation for the entire year in both the current
fiscal year and prior fiscal year, increased by $2.2 million or 3.2% for fiscal
year 1999.
Salaries and Benefits. Salaries and benefits for the fiscal year ended
August 31, 1999 were $75.7 million representing an increase of $10.0 million, or
15.2%, as compared to salaries and benefits of $65.7 million for the prior
fiscal year. Salaries and benefits increased by $8.9 million, $2.0 million, and
$110,000 as a result of the acquisitions of FPM, ChoiceHealth, and REACH,
respectively. Salary and benefits cost per full time equivalent for fiscal year
1999 was $58,594 representing an increase of $1,304 per full time equivalent, or
2.3%, as compared to salary and benefits cost of $57,290 per full time
equivalent for the prior fiscal year. These increases are offset by a decrease
of 29.2 full time equivalents resulting from the 9.8% decrease in the average
number of contract locations in operation.
Depreciation and Amortization. Depreciation and amortization expenses
for fiscal year 1999 were $4.5 million representing an increase of $1.3 million
or 40.9%, as compared to depreciation and amortization expenses of $3.2 million
for the prior fiscal year. An increase of $416,000 is due to the amortization of
goodwill of $18.8 million, $2.9 million, and $2.1 million resulting from
acquisitions of FPM, ChoiceHealth, and REACH, respectively. Amortization expense
also increased $201,000 in relation to the value placed on the contracts of FPM,
ChoiceHealth, and REACH. The remaining increase results from the depreciation
expense of additional equipment acquired by acquisition or purchased for the
operation of the Company's contract manangement and managed care businesses.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for fiscal year 1999 were
$53.2 million representing an increase of $14.4 million or 37.5%, as compared to
other operating expenses of $38.7 million for the prior fiscal year. The major
components of the variances between the periods reported are:
Medical claims included an $11.9 million increase for fiscal year 1999
resulting from the acquisitions of FPM on June 1, 1998, ChoiceHealth on October
5, 1998, and REACH on April 1, 1999.
Purchased Services for the fiscal year ended August 31, 1999 were $13.7
million representing a decrease of $389,000, or 2.8%, as compared to $14.1
million for the prior fiscal year.
Bad Debt expense, excluding the recovery of $1.75 million related to
one former Specialty Healthcare Management, Inc. contract, was $2.3 million for
fiscal year 1999, as compared to $759,000 for fiscal year 1998. Bad debt expense
increased $337,000 as a result of the acquisition of FPM, ChoiceHealth, and
Reach. In addition, bad debt expense increased $334,000 due to the declaration
of bankruptcy of one client hospital and $334,000 relating to the contract
termination of two other client hospitals. The remaining increase resulted from
an increase in reserves related to the untimely payments of client hospitals.
Other operating expense was $17.9 million for fiscal year 1999, an
increase of $3.1 million or 20.9% as compared to $14.8 million for fiscal year
1998. Other operating expenses increased $3.1 million, $450,000, and $68,000 as
a result of the acquisitions of FPM, ChoiceHealth, and Reach, respectively. This
increase was offset by a decline of $490,000 in other operating expenses
resulting from the 9.8% decrease in the average number of contract locations in
operation.
Page 32
33
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for fiscal year 1999 was a net expense of $1.2 million
as compared to $74,000 in net income for the prior fiscal year. This change
results from an increase in interest expense of $664,000 related to amounts
borrowed under the credit facility primarily for acquisitions. In addition,
other income for the prior year 1998 include $623,000 due to the dissolution of
Mountain Crest Hospital in the prior fiscal year.
Income Tax Expense. Income tax expense for fiscal year 1999 was $4.6
million representing a decrease of $1.9 million, or 29.2%, as compared to income
tax expense of $6.5 million for the prior fiscal year. The decrease in income
tax expense was largely due to a corresponding decrease in pre-tax earnings. The
effective tax rates for fiscal years 1999 and 1998 were 39.8% and 40.0%
respectively.
FISCAL YEAR ENDED AUGUST 31, 1998
COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1997
Revenue. Revenues for fiscal year 1998 were $123.8 million representing
an increase of $14.5 million, or 13.2%, as compared to revenues of $109.3
million for the prior fiscal year. Premiums and fees increased $15.2 million
primarily as a result of revenue recorded for Acorn and FPM. Horizon acquired
100% of the voting stock of Acorn and FPM effective October 31, 1997 and June 1,
1998, respectively. The increase in premiums and fees was offset by a decrease
in other revenues of $571,000, a favorable cost report adjustment for Mountain
Crest Hospital, the prior fiscal year having included.
Salaries and Benefits. Salaries and benefits for fiscal year 1998 were
$65.7 million representing an increase of $5.6 million, or 9.3%, as compared to
salaries and benefits of $60.1 million for the prior fiscal year. Salary and
benefits cost per full time equivalent for fiscal 1998 was $57,290 representing
an increase of $404 per full time equivalent, or 0.7%, as compared to salary and
benefits cost of $56,821 per full time equivalent for the prior fiscal year. The
number of full time equivalents for fiscal year 1998 was approximately 1,147,
representing an increase of 90, or 8.6%, as compared to approximately 1,057 full
time equivalents in the prior fiscal year. FTE's increased by 52 as a result of
the acquisition of Acorn, and by 160 as a result of the acquisition of FPM.
These increases are offset by a decline in FTE's resulting from a decrease in
the number of contract locations in operation, from 181 at August 31, 1997 to
161 at August 31, 1998, a decrease of 11%.
Depreciation and Amortization. Depreciation and amortization expenses
for fiscal year 1998 were $3.2 million representing an increase of $965,000, or
43.8%, as compared to depreciation and amortization expenses of $2.2 million for
the prior fiscal year. $928,000 of the increase resulted from additional
depreciation and amortization arising from the acquisitions of Acorn and FPM.
The remainder of the increase resulted from the depreciation expense associated
with additional capital expenditures during the fiscal year.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for fiscal year 1998 were
$38.7 million representing an increase of $6.4 million, or 19.8%, as compared to
other operating expenses of $32.3 million for the previous fiscal year. The
following components identify the variances between the periods reported.
Medical claims included a $7.3 million increase for the fiscal year
ended August 31, 1998, as compared to the prior fiscal year. This increase is
the result of the acquisitions of Acorn and FPM.
Purchased services for the fiscal year ended August 31, 1998 were $14.1
million representing a decrease of $511,000, or 3.5%, as compared to $14.6
million for the prior fiscal year.
Bad debt expense was $759,000, for the fiscal year ended August 31,
1998, as compared to $3.0 million for the fiscal year ended August 31, 1997. Bad
debt expense of $2.1 million, related to one Specialty contract which terminated
April 30, 1997, was recognized in the fiscal year ended August 31, 1997.
Other operating expense was $14.8 million for the fiscal year ended
August 31, 1998, an increase of $2.0 million, or 15.6%, as compared to $12.8
million for the fiscal year ended August 31, 1997. Other operating expenses
increased $1.3 million resulting from the acquisitions of Acorn and FPM.
Page 33
34
Merger Expenses. Merger expenses were $3.5 million for the fiscal year
ended August 31, 1997. The Company did not have merger expenses for the fiscal
year ended August 31, 1998.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for fiscal year 1998 was $74,000 in net income, as
compared to $120,000 in net income for the prior fiscal year. This change
primarily results from an increase in interest expense of $405,000 related to
amounts borrowed under the Company's new credit facility primarily for
acquisitions. This decrease is offset by an increase in other income of $514,000
due to the final receipt of the rent obligation for Mountain Crest Hospital. In
addition, interest income decreased by $126,000 when compared to the
corresponding period in the prior fiscal year due to the use of cash for
acquisitions.
Income Tax Expense. Income tax expense for fiscal year 1998 was $6.5
million representing an increase of $2.0 million, or 44.4%, as compared to
income tax expense of $4.5 million for the prior fiscal year. The increase in
income tax expense was largely due to a corresponding increase in pre-tax
earnings. The effective tax rates for fiscal years 1998 and 1997 were 40.0% and
39.9% respectively.
LIQUIDITY AND CAPITAL RESOURCES
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Chase Bank of Texas, National Association as Agent (the
"Agent") for itself and other lenders party to the Credit Agreement, for a
senior secured credit facility in an aggregate amount of up to $50.0 million
(the "Credit Facility"). The Credit Facility consisted of a $10.0 million
revolving credit facility to fund ongoing working capital requirements (the
"Revolving Credit Facility") and an initial $40.0 million term loan facility to
refinance certain existing debt and to finance future acquisitions by the
Company (the "Advance Term Loan Facility"). The Credit Facility replaced the
Company's existing $14.0 million revolving credit facility. At August 31, 1999,
the Company had $20.0 million outstanding against the now $29.0 million term
loan facility.
The following summary of certain material provisions of the Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Credit Agreement, a copy of which was filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter
ended November 30, 1997, as filed with the Securities and Exchange Commission
(the "Commission") on December 19, 1997, which is herein incorporated by
reference thereto.
The Company is the borrower under the Credit Facility which is
unconditionally guaranteed by all material subsidiaries of the Company. The
Revolving Credit Facility terminates November 30, 2000 and the Term Loan
Facility has a term of five years, with drawdowns available until November 30,
1999. Once a drawdown is made under the Term Loan Facility, the commitment
thereunder will be reduced by the amount funded. Amounts outstanding under the
Term Loan Facility on November 30, 1999 are to be repaid in twelve quarterly
principal payments, beginning February 28, 2000, based upon a five year
amortization schedule with the first eleven principal payments being 1/20th of
the outstanding balance on November 30, 1999, and the twelfth being the
remaining unpaid principal balance. Principal outstanding under the Credit
Facility bears interest at the "Base Rate" (the greater of the Agent's "prime
rate" or the federal funds rate plus .5%) plus 0% to .5% (depending on the
Company's Indebtedness to EBITDA Ratio as defined in the Credit Agreement) or
the "Eurodollar Rate" plus .75% to 1.5% (depending on the Indebtedness to EBITDA
Ratio), as selected by the Company. The Company incurs quarterly commitment fees
ranging from .25% to .375% per annum (depending on the Indebtedness to EBITDA
Ratio) on the unused portion of the Revolving Credit Facility (until November
30, 2000) and unused portion of the Advance Term Loan Facility (until November
30, 1999).
The Company is subject to certain covenants which include prohibitions,
unless advance approval or waivers are obtained, against (i) incurring
additional debt or liens, except specified permitted debt or permitted liens,
(ii) certain material acquisitions, other than specified permitted acquisitions
(including any single acquisition not greater than $10.0 million or cumulative
acquisitions not in excess of $30.0 million during any twelve consecutive
monthly periods), (iii) certain mergers, consolidations or asset dispositions by
the Company or changes of control of the Company, (iv) declaring, ordering or
paying any sum for any dividend or other distribution (v) certain management
vacancies at the Company, and (vi) material change in the nature of business
conducted. In addition,
Page 34
35
the terms of the Credit Facility require the Company to satisfy certain ongoing
financial covenants. The Credit Facility is secured by a first lien or first
priority security interest in and/or pledge of substantially all of the assets
of the Company and of all present and future subsidiaries of the Company.
The Company is also subject to a provision requiring a prepayment of a
portion of the outstanding advance term loan balance. If the aggregate
outstanding principal amount of the term loans equals or exceeds $15 million as
of the date ninety days after the end of a fiscal year, the Company is required
to prepay the term loans in an amount equal to 50% of the excess cash flow (as
defined in the credit agreement) calculated for the fiscal year then most
recently ended based on the audited financial statements of the Company. The
Company was subject to an excess cash flow prepayment requirement of
approximately $4.5 million for fiscal year 1999, all of which had been paid as
of August 31, 1999.
As of September 30, 1998, the Credit Facility was amended to allow the
Company to finance, under the Term Loan Facility, the redemption or repurchase
of its capital stock up to $9.0 million. As of August 31, 1999, the Company had
repurchased 766,100 shares of common stock, for approximately $5.6 million (of
which 162,778 shares have been reissued pursuant to the exercise of certain
stock options). As a result of this amendment, a limit of $10.0 million for
cumulative acquisitions was imposed for the period of September 30, 1998,
through August 31, 1999, which limit has now expired.
Effective September 1996, the Company entered into a lease agreement
with a term of five years for a building which had been constructed to the
Company's specifications for its National Support Center. In connection with the
lease transaction, the Company guaranteed a loan of approximately $900,000. The
loan was by a financial institution to the owner. The Company also agreed to
purchase the leased building for approximately $4.5 million at the end of the
lease term in September 2001 if either the building is not sold to a third party
or the Company does not extend its lease. The Company's current intention is to
extend the lease.
The Company believes that its future cash flow from operations,
(subject to the potential unfavorable impacts of additional changes in Medicare
reimbursement discussed previously under "Revenues") cash of $5.4 million at
August 31, 1999 and the $10.0 million currently available under the revolving
credit facility will be sufficient to cover cash requirements over the next
twelve months, including estimated capital expenditures of $800,000 and
scheduled repayments of term loan debt of approximately $4.0 million. The
Company generated $11.5 million in net cash from operations during the year
ended August 31, 1999. The Company may require additional capital to fund any
further acquisitions, $9.0 million of which is available under the current
acquisition line.
Effective April 1, 1999, the Company acquired all of the outstanding
capital stock of REACH for approximately $2.0 million. The acquisition was
funded by incurring debt of $2.0 million under the term loan facility.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth for approximately $2.0 million. The acquisition
was funded by incurring debt of $2.0 million under the term loan facility.
Effective June 1, 1998, the Company acquired from Ramsay Health Care,
Inc. all the outstanding capital stock of FPM for $20.0 million, subject to
certain post-closing adjustments. The acquisition was funded by incurring debt
of $20.0 million under the term loan facility.
On October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn for approximately $12.7 million. To fund the acquisition,
the Company utilized approximately $1.7 million of existing cash and incurred
debt of approximately $11.0 million under the revolving credit facility.
Horizon acquired Specialty on August 11, 1997. In the Specialty
transaction, 1,400,000 shares of Horizon common stock were issued and exchanged
for all outstanding shares of Specialty capital stock. Upon the acquisition, the
Specialty outstanding bank indebtedness of approximately $3.2 million was paid
in full.
Page 35
36
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric. The purchase price was approximately $4.6 million,
and was paid from existing cash.
Also effective March 15, 1997, the Company purchased all of the
outstanding capital stock of Clay Care. The purchase price was $1.0 million, and
was paid from existing cash.
In July 1996, the Company acquired 80% of the outstanding common stock
of Florida PPS for approximately $3.3 million. In February and March 1998, the
Company acquired the remaining outstanding common stock of PPS for approximately
$1,030,000.
The Company acquired the assets of National Medical Management Services
effective January 1, 1995. In the transaction, Specialty paid approximately
$3.95 million in cash and a note of approximately $731,000 payable to NME as
payment for the assets. The Company also issued to NME a warrant to acquire
common stock of Specialty, which warrant was subsequently exercised as part of
Horizon's acquisition of Specialty in August 1997. The NME promissory note was
paid in January 1996. In April, 1996 the Company acquired The Parkside Company,
a contract manager of mental health programs, in a merger in which common stock
was issued and approximately $2.6 million was paid in cash which was financed
under a bank credit facility.
CERTAIN EARNINGS DATA
The following table sets forth for the fiscal years ended August 31,
1999 and 1998, diluted earnings per share based on net income plus amortization
expense related to goodwill, net of tax, and operating cash flow per share based
on net income plus depreciation and amortization expense, less capital
expenditures.
1999 1998
---- ----
Earnings per share
(Net income plus amortization related to goodwill, net of tax) $1.09 $1.34
Operating cash flow per share
(Net income plus depreciation and amortization, less capital expenditures) $1.44 $1.55
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Computer
equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations, causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
The Company has undertaken various initiatives intended to ensure that
the computer equipment and software used by the Company will function properly
with respect to dates in the Year 2000 and thereafter. For this purpose, the
term "computer equipment and software" includes systems thought of as
information technology ("IT") systems, including accounting, data processing and
telephone/PBX systems and other miscellaneous systems that may contain embedded
technology, as well as systems that are not commonly thought of as IT systems,
such as alarm systems, fax machines or other miscellaneous systems that may
contain embedded technology. Based upon its identification and assessment
efforts to date, the Company believes that certain of the computer equipment and
software systems it currently uses will require replacement or modification. In
addition, in the ordinary course of replacing computer equipment and software,
the Company attempts to obtain replacements that are Year 2000 compliant.
Utilizing both internal and external resources to identify and assess needed
Year 2000 remediation, the Company currently anticipates that its Year 2000
identification, assessment, remediation and testing efforts, which began in
April 1998, will be completed by December 31, 1999, and that such efforts will
be completed prior to any currently anticipated impact on its computer equipment
and software systems. The Company estimates that as of August 31, 1999 it had
completed approximately 95% of the initiatives that it believes will be
necessary to fully address potential Year 2000 issues related to its computer
equipment and software. The projects comprising the remaining 5% of the
initiatives are in process and are expected to be completed by December 31,
1999.
Page 36
37
PERCENT
YEAR 2000 INITIATIVE TIME PERIOD COMPLETE
-------------------- ----------- --------
Initial IT systems identification and assessment April 1998 to September 1999 100%
Remediation and testing of IT systems July 1998 to November 1999 95%
Identification and assessment of non-IT systems September 1998 to October 1999 100%
Remediation and testing of non-IT systems April 1999 to December 1999 95%
The Company is beginning assessment of the Year 2000 readiness of its
suppliers. Such assessment will include hardware, software and service
suppliers. The Company expects to complete its assessment of suppliers' Year
2000 readiness by November 1999. The Company is beginning assessment of the Year
2000 readiness of its customers. Such assessment will include contacting
significant customers regarding their state of Year 2000 readiness. The Company
expects to complete its assessment of customers' Year 2000 readiness by November
1999.
The Company believes that the costs to modify its computer equipment
and software systems to be Year 2000 compliant, as well as the currently
anticipated costs with respect to Year 2000 issues of third parties, will not
exceed $150,000, which expenditures will be funded from the operating cash
flows. The $150,000 relates to analysis, repair or replacement of existing
software, upgrades of existing software or evaluation of information received
from significant suppliers or customers. Such an amount would represent an
immaterial percentage of the Company's total actual and anticipated IT
expenditures for fiscal 1999 and 1998. As of October 20, 1999, the Company had
incurred costs of approximately $110,000 related to its Year 2000
identification, assessment, remediation and testing efforts. Other non-Year 2000
IT efforts have not been materially delayed or impacted by Year 2000
initiatives. However, if all Year 2000 issues are not properly identified, or
assessment, remediation and testing are not effected timely, there can be no
assurance that the Year 2000 issue will not have a material adverse effect on
the Company's result of operations, or adversely affect the Company's
relationships with customers, suppliers or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse effect on the Company's systems or results or operations.
The Company has completed an analysis of the operational problems and
costs (including loss of revenues) that would be reasonably likely to result
from the failure by the Company and certain third parties to complete efforts
necessary to achieve Year 2000 compliance on a timely basis. A contingency plan
has been developed for dealing with the most reasonably likely worse case
scenario.
The costs of the Company's Year 2000 identification, assessment,
remediation and testing efforts and the date by which the Company believes it
will complete such efforts are based upon management's best estimates, which are
derived utilizing numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. However, there can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that might cause such material
differences include but are not limited to the availability and cost of
personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, and
similar uncertainties.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this report, other
reports, filings with the Commission, press releases, conferences, or otherwise,
are "forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements include, without limitation, any
statement that may predict, forecast indicate, or imply future results,
performance or achievements, and may contain the words "believe", "expect",
"estimate", "project", "will be", "will
Page 37
38
continue", "will likely result", or words or phrases of similar meaning. Such
statements involve risks, uncertainties or other factors which may cause actual
results to differ materially from the future results, performance or
achievements expressed or implied by such forward looking statements. Certain
risks, uncertainties and other important factors are detailed in this report and
will be detailed from time to time in reports filed by the Company with the
Commission, including Forms 8-K, 10-Q, and 10-K, and include, among others, the
following: general economic and business conditions which are less favorable
than expected; unanticipated changes in industry trends; decreased demand by
general hospitals for the Company's services; the Company's inability to retain
existing management contracts or to obtain additional contracts; adverse changes
in reimbursement to general hospitals by Medicare or other third-party payers
for costs of providing mental health services; adverse changes to other
regulatory provisions relating to mental health services; fluctuations and
difficulty in forecasting operating results; the ability of the Company to
sustain, manage or forecast its growth; heightened competition, including
specifically the intensification of price competition; the entry of new
competitors and the development of new products or services by new and existing
competitors; changes in business strategy or development plans; inability to
carry out marketing and sales plans; business disruptions; liability and other
claims asserted against the Company; loss of key executives; the ability to
attract and retain qualified personnel; customer services; adverse publicity;
demographic changes; and other factors referenced or incorporated by reference
in this report and other reports or filings with the Commission. Moreover, the
Company operates in a very competitive and rapidly changing environment. New
risk factors emerge from time to time and it is not possible for management to
predict all such risk factors, nor can it assess the impact of all such risk
factors on the Company's business or the extent to which any factor, may cause
actual results to differ materially from those contained in any forward looking
statements. These forward looking statements represent the estimates and
assumptions of management only as of the date of this report. The Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward looking statement contained herein to reflect any
change in its expectations with regard thereto or any change in events,
conditions or circumstances on which any statement is based. Given these risks
and uncertainties, investors should not place undue reliance on forward looking
statements as a prediction of actual results.
INFLATION
The Company's management contracts and employee assistance contracts
generally provide for annual adjustments in the Company's fees based upon
various inflation indexes, thus mitigating the effect of inflation. During the
last three years, inflation has had no significant effects on the Company's
business.
Page 38
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In its normal operations, the Company has market risk exposure to
interest rates due to its interest bearing debt obligations, which were entered
into for purposes other than trading purposes. To manage its exposure to changes
in interest rates, the Company uses both fixed and variable rate debt. The
Company has estimated its market risk exposure using sensitivity analyses
assuming a 10% change in market rates.
At August 31, 1999, the Company had approximately $20.0 million of debt
obligations outstanding with an interest rate of 6.50%. A hypothetical 10%
change in the effective interest rate for these borrowings, assuming debt levels
as of August 31, 1999, would change annual interest expense by approximately
$130,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements of the
Company and the Notes thereto appearing at page F-1 to F-25 attached hereto, all
of which information is incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 39
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will file with the Commission a definitive proxy statement
with respect to the annual meeting of stockholders of the Company to be held on
January 21, 2000 (the "Proxy Statement"). The Company hereby incorporates into
this Item 10 by reference to the Proxy Statement the information required by
this Item 10 that will appear in the Proxy Statement under the caption ELECTION
OF DIRECTORS.
The information called for by this Item 10 and Item 401 of Regulation
S-K with respect to executive officers of the Company appears under the caption
EXECUTIVE OFFICERS OF THE REGISTRANT following Item 4 of Part I of this Report,
and is incorporated by reference into this Item 10.
Mr. Howard B. Finkel, who had served as a director since August 1997,
resigned effective October 27, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates into this Item 11 by reference to the
Proxy Statement the information required by this Item 11 that will appear in the
Proxy Statement under the caption EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates into this Item 12 by reference to the
Proxy Statement the information required by this Item 12 that will appear in the
Proxy Statement under the caption SECURITY OWNERSHIP BY MANAGEMENT AND PRINCIPAL
STOCKHOLDERS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Page 40
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - Reference is made to the Index to
Consolidated Financial Statements appearing at page F-1 of
this report.
(2) Financial Statement Schedules - Reference is made to the
Index to Financial Statement Schedules appearing at page S-1
of this report.
(3) Exhibits.
NUMBER EXHIBIT
3.1 - Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K dated August 11, 1997).
3.2 - Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment No.
2 as filed with the Commission on February 16, 1995 ("Amendment
No. 2") to the Company's Registration Statement on Form S-1 filed
with the Commission on January 6, 1995 (Registration No.
33-88314) (the "Form S-1").
4.1 - Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated August 11, 1997).
4.2 - Rights Agreement, dated February 6, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A, Registration No. 000-22123,
as filed with the Commission on February 7, 1997).
10.1 - Agreement dated August 31, 1999 between Horizon Health
Corporation, Inc. and Ronald C. Drabik regarding severance
arrangements (filed herewith).
10.2 - Letter Loan Agreement dated December 20, 1995 among North
Central Development Company, as borrower, Texas Commerce Bank,
National Association, ("TCB") as lender, and Horizon Mental
Health Management, Inc., a Delaware corporation, Horizon Mental
Health Management, Inc., a Texas corporation, and Mental Health
Outcomes, Inc., a Delaware corporation, as guarantors
(incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1995 (the "November 1995 Form 10-Q").
10.3 - First Amendment to Letter Loan Agreement and Note Modification
Agreement dated December 9, 1997 among North Central Development
Company and its subsidiaries and TCB (incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1997.)
Page 41
42
10.4 - Second Amendment to Credit Agreement and Third Amendment to
Letter Loan Agreement dated as of September 30, 1998, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1998).
10.5 - Third Amendment to Credit Agreement and Fourth Amendment to
Letter Loan Agreement dated as of November 6, 1998, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (filed herewith).
10.6 - Fourth Amendment to Credit Agreement and Fifth Amendment to
Letter Loan Agreement dated as of October 12,, 1999, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (filed herewith).
10.7 - Lease Agreement dated as of December 20, 1995 between North
Central Development Company and Horizon Mental Health Management,
Inc., a Delaware corporation (incorporated herein by reference to
Exhibit 10.8 to the November 1995 Form 10-Q).
10.8 - Horizon Health Group, Inc. 1989 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.52 of Amendment
No. 2 to the Company's Form S-1).
10.9 - Horizon Mental Health Management, Inc. 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.11 to the
November 1995 Form 10-Q).
10.10 - Horizon Mental Health Management, Inc. Amended and Restated
1995 Stock Option Plan for Eligible Outside Directors
(incorporated herein by reference to Exhibit 10.12 to the
November 1995 Form 10-Q).
10.11 - Amendments to 1989 Stock Option Plan and 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K dated September 1, 1997).
10.12 - Amendments to 1995 Stock Option Plan and 1995 First Amended and
Restated Stock Option Plan for Eligible Outside Directors
(incorporated herein by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K dated September 1, 1997).
10.13 - Amendment to 1995 Amended and Restated Stock Option Plan for
Eligible Outside Directors (filed herewith).
10.14 - Horizon Health Corporation 1998 Stock Option Plan (filed
herewith).
10.15 - Horizon Mental Health Management Contingent Bonus Plan
(incorporated herein by reference to Exhibit 10.37 to the
Company's 1996 Form 10-K/A).
10.16 - Horizon Health Corporation Bonus Plan Fiscal 1999 (incorporated
herein by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1998).
10.17 - Horizon Health Corporation Bonus Plan Fiscal 2000 (filed
herewith).
10.18 - Executive Retention Agreement effective September 1, 1997,
between the Company and James Ken Newman (incorporated herein by
reference to Exhibit 10.4 to the Company's Current Report on Form
8-K dated September 1, 1997).
Page 42
43
10.19 - Stock Purchase Agreement, dated October 20, 1997, among the
Company, Dr. Melvyn S. Goldsmith, Ph.D., Barbara C. Goldsmith and
Acorn Behavioral HealthCare Management Corporation (incorporated
herein by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated September 1, 1997).
10.20 - Credit Agreement dated December 9, 1997 among the Company,
Texas Commerce Bank National Association, as Agent, and the banks
named therein (incorporated herein by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1997).
10.21 - Stock Purchase Agreement dated as of May 1, 1998, by and among
Ramsay Managed Care, Inc., Ramsay Health Care, Inc., and the
Company (incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 2, 1998).
11 - Statement Regarding Computation of Per Share Earnings (filed
herewith).
21 - List of Subsidiaries of the Company (filed herewith).
23 - Consent of PricewaterhouseCoopers LLP (filed herewith).
27 - Financial Data Schedule (filed herewith).
(b) The Company filed no reports on Form 8-K during the last quarter
of the period covered by this report:
Page 43
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: NOVEMBER 5, 1999
HORIZON HEALTH CORPORATION
BY: /S/ Ronald C. Drabik
---------------------------------
RONALD C. DRABIK
SENIOR VICE PRESIDENT - FINANCE
AND ADMINISTRATION AND TREASURER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ JAMES W. MCATEE Director, President, Chief Executive November 5, 1999
- ------------------------------------- Officer and Secretary
James W. McAtee (Principal Executive Officer)
/s/ RONALD C. DRABIK Senior Vice President - Finance and November 5, 1999
- ------------------------------------- Administration and Treasurer
Ronald C. Drabik (Principal Financial and Accounting
Officer)
/s/ JAMES KEN NEWMAN Director and Chairman of the Board November 5, 1999
- -------------------------------------
James Ken Newman
/s/ JACK R. ANDERSON Director November 5, 1999
- -------------------------------------
Jack R. Anderson
/s/ GEORGE E. BELLO Director November 5, 1999
- -------------------------------------
George E. Bello
/s/ WILLIAM H. LONGFIELD Director November 5, 1999
- -------------------------------------
William H. Longfield
/s/ JAMES E. BUNCHER Director November 5, 1999
- -------------------------------------
James E. Buncher
/s/ DONALD E. STEEN Director November 5, 1999
- -------------------------------------
Donald E. Steen
Page 44
45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.................................................................................2
Consolidated Balance Sheets at August 31, 1999 and 1998...........................................................3
Consolidated Statements of Income
For the Years Ended August 31, 1999, 1998, and 1997...............................................................5
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended August 31, 1999, 1998, and 1997...............................................................6
Consolidated Statements of Cash Flows
For the Years Ended August 31, 1999, 1998, and 1997...............................................................7
Notes to Consolidated Financial Statements........................................................................9
F-1
46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Horizon Health Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Horizon Health Corporation and its subsidiaries at August 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended August 31, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
October 14, 1999
F-2
47
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
August 31,
-------------------------
1999 1998
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 5,438,510 $ 6,204,297
Accounts receivable less allowance for doubtful
accounts of $2,980,849 and $1,902,112 at August 31,
1999 and 1998, respectively 12,885,399 13,464,705
Prepaid expenses and supplies 842,701 211,288
Income taxes receivable 363,920 317,197
Other receivables 200,394 258,429
Other current assets 459,256 469,540
Current deferred taxes 2,485,296 2,006,880
----------- -----------
TOTAL CURRENT ASSETS 22,675,476 22,932,336
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 7,028,809 5,874,100
Building improvements 454,902 421,331
----------- -----------
7,483,711 6,295,431
Less accumulated depreciation 4,192,437 2,868,062
----------- -----------
TOTAL PROPERTY AND EQUIPMENT 3,291,274 3,427,369
Goodwill, net of accumulated amortization of $4,389,113
and $3,002,194 at August 31, 1999 and 1998, respectively 53,036,992 51,310,574
Contracts, net of accumulated amortization of $5,749,991
and $4,099,012 at August 31, 1999 and 1998, respectively 7,027,775 8,227,689
Other noncurrent assets 504,228 774,100
----------- -----------
TOTAL ASSETS $86,535,745 $86,672,068
=========== ===========
See accompanying notes.
F-3
48
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
August 31,
----------------------------
1999 1998
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 1,254,577 $ 2,314,404
Employee compensation and benefits 6,929,722 6,166,226
Medical claims payable 4,558,823 3,002,345
Accrued expenses (Note 4) 5,977,704 4,932,571
Current debt 35,706 18,470
Current portion long-term debt 3,338,000 --
------------ ------------
TOTAL CURRENT LIABILITIES 22,094,532 16,434,016
Other noncurrent liabilities 355,191 237,308
Long-term debt, net of current portion 16,662,000 26,010,901
Deferred income taxes 1,618,169 1,327,532
------------ ------------
TOTAL LIABILITIES 40,729,892 44,009,757
------------ ------------
Commitments and contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 500,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par value, 40,000,000 shares authorized;
7,267,750 shares issued and 6,664,428 shares outstanding
at August 31, 1999, and 7,231,812 shares issued and
outstanding at August 31, 1998 72,678 72,318
Additional paid-in capital 18,641,228 17,984,638
Retained earnings 31,506,116 24,605,355
Treasury stock (4,414,169) --
------------ ------------
45,805,853 42,662,311
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 86,535,745 $ 86,672,068
============ ============
See accompanying notes.
F-4
49
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended August 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
REVENUES:
Contract management revenue $ 97,836,682 $ 102,156,150 $ 102,263,283
Premiums and fees 47,451,923 21,383,040 6,153,540
Other 711,744 278,659 849,972
------------- ------------- -------------
Total revenues 146,000,349 123,817,849 109,266,795
------------- ------------- -------------
EXPENSES:
Salaries and benefits 75,741,311 65,725,221 60,048,345
Medical claims 20,959,797 9,080,825 1,830,360
Purchased services 13,735,058 14,124,386 14,635,755
Provision for doubtful accounts 588,705 759,467 3,033,693
Other 17,877,120 14,754,707 12,795,910
Depreciation and amortization 4,459,600 3,166,073 2,201,450
Merger expenses (Note 3) -- -- 3,527,671
------------- ------------- -------------
Operating expenses 133,361,591 107,610,679 98,073,184
------------- ------------- -------------
Operating income 12,638,758 16,207,170 11,193,611
------------- ------------- -------------
Other income (expense):
Interest expense (1,430,985) (799,347) (402,003)
Interest income and other 255,285 872,944 521,989
------------- ------------- -------------
Income before income taxes 11,463,058 16,280,767 11,313,597
Income tax provision 4,562,297 6,514,812 4,517,688
------------- ------------- -------------
Income before minority interest 6,900,761 9,765,955 6,795,909
Minority interest -- (33,960) (139,893)
------------- ------------- -------------
Net income $ 6,900,761 $ 9,731,995 $ 6,656,016
============= ============= =============
Earnings per common share:
Basic $ 1.00 $ 1.37 $ 0.96
============= ============= =============
Diluted $ 0.96 $ 1.26 $ 0.87
============= ============= =============
Weighted average shares outstanding:
Basic 6,874,646 7,120,303 6,928,827
============= ============= =============
Diluted 7,199,677 7,754,467 7,681,269
============= ============= =============
See accompanying notes.
F-5
50
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional
Stock Paid-in Retained Deferred Treasury
Shares Amount Capital Earnings Compensation Shares
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1996 6,696,849 $ 67,023 $ 16,046,163 $ 9,066,399 $ (25,000) --
Net income -- -- -- 6,656,016 -- --
Adjustment applicable to
transition period (Note 3) -- -- -- (849,055) -- --
Amortization of deferred
compensation -- -- -- -- 25,000 --
Retirement of treasury shares -- (55) (5,226) -- -- --
Payment on note receivable -- -- 25,000 -- -- --
Exercise of warrants 179,178 1,793 (1,793) -- -- --
Tax benefit associated with
stock options exercised -- -- 511,949 -- -- --
Exercise of stock options 90,735 907 163,332 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1997 6,966,762 69,668 16,739,425 14,873,360 -- --
Net income -- -- -- 9,731,995 -- --
Tax benefit associated with
stock options exercised -- -- 773,229 -- -- --
Exercise of stock options 265,050 2,650 471,984 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1998 7,231,812 72,318 17,984,638 24,605,355 -- --
Net income -- -- -- 6,900,761 -- --
Purchase of treasury stock -- -- -- -- -- 766,100
Tax benefit associated with
stock options exercised -- -- 1,236,320 -- -- --
Exercise of stock options:
Issuance of treasury stock -- -- (681,623) -- -- (162,778)
Newly issued shares 35,938 360 101,893 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 1999 7,267,750 $ 72,678 $ 18,641,228 $ 31,506,116 $ -- 603,322
============ ============ ============ ============ ============ ============
Treasury
Stock,
at Cost Total
------------ ------------
Balance at August 31, 1996 $ (5,281) $ 25,149,304
Net income -- 6,656,016
Adjustment applicable to
transition period (Note 3) -- (849,055)
Amortization of deferred
compensation -- 25,000
Retirement of treasury shares 5,281 --
Payment on note receivable -- 25,000
Exercise of warrants -- --
Tax benefit associated with
stock options exercised -- 511,949
Exercise of stock options -- 164,239
------------ ------------
Balance at August 31, 1997 -- 31,682,453
Net income -- 9,731,995
Tax benefit associated with
stock options exercised -- 773,229
Exercise of stock options -- 474,634
------------ ------------
Balance at August 31, 1998 -- 42,662,311
Net income -- 6,900,761
Purchase of treasury stock (5,617,400) (5,617,400)
Tax benefit associated with
stock options exercised -- 1,236,320
Exercise of stock options:
Issuance of treasury stock 1,203,231 521,608
Newly issued shares -- 102,253
------------ ------------
Balance at August 31, 1999 $ (4,414,169) $ 45,805,853
============ ============
See accompanying notes.
F-6
51
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended August 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Operating activities:
Net income $ 6,900,761 $ 9,731,995 $ 6,656,016
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,459,600 3,166,073 2,201,450
Minority interest -- 33,960 139,893
Deferred income taxes 198,586 240,337 94,139
Non-cash expenses (1,247) 2,324 26,888
Changes in operating assets and liabilities:
Decrease in restricted cash -- -- 218,606
Decrease (increase) in accounts receivable 887,387 (294,089) 1,143,322
Decrease (increase) in income taxes receivable (46,723) 951,256 --
Decrease (increase) in other receivables 58,035 (460,046) 264,589
Decrease (increase) in prepaid expenses and supplies (605,183) 80,066 (599,553)
(Increase) in other assets (497,920) (1,009,400) (144,101)
Increase (decrease) in accounts payable, employee compensation and
benefits, medical claims payable, and accrued expenses 17,274 (4,592,617) 758,732
(Decrease) in payable to health insurance program -- -- (661,248)
Increase (decrease) in other noncurrent liabilities 117,883 (118,495) (749,532)
------------ ------------ ------------
Net cash provided by operating activities 11,488,453 7,731,364 9,349,201
------------ ------------ ------------
Investing activities:
Purchase of property and equipment (985,057) (864,049) (1,412,441)
Proceeds from sale of equipment 5,275 9,569 13,485
Payment for purchase of Professional Psychological Services, Inc., net of cash
acquired -- (1,240,834) (1,898,230)
Payment for purchase of Clay Care, Inc., net of cash acquired -- -- (913,634)
Payment for purchase of Geriatric Medical Care Inc., net of cash acquired -- -- (4,577,970)
Payment for purchase of Acorn Behavioral HealthCare Management Corporation
net of cash acquired -- (12,726,120) --
Payment for purchase of Resources in Employee Assistance and Corporate Health,
Inc., net of cash acquired (1,936,352) -- --
Payment for purchase of ChoiceHealth, Inc. net of cash acquired (1,847,390) -- --
Payment for purchase of FPM Behavioral Health, Inc., net of cash acquired -- (19,449,488) --
Proceeds from purchase price adjustment of FPM Behavioral Health, Inc. 2,423,531 -- --
------------ ------------ ------------
Net cash used in investing activities (2,339,993) (34,270,922) (8,788,790)
------------ ------------ ------------
Financing activities:
Payments on long-term debt (20,605,531) (6,520,583) (4,114,862)
Borrowing under lines of credit 14,500,000 32,500,000 --
Payment on notes receivable for purchase of common stock -- -- 25,000
Net proceeds from stock options exercised 102,253 474,634 164,239
Tax benefit associated with stock options exercised 1,236,320 773,229 511,949
Purchase of treasury stock (5,617,400) -- --
Issuance of treasury stock 470,111 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (9,914,247) 27,227,280 (3,413,674)
------------ ------------ ------------
Change in cash during transition period -- -- 23,465
Net (decrease) increase in cash and cash equivalents (765,787) 687,722 (2,829,798)
Cash and cash equivalents at beginning of year 6,204,297 5,516,575 8,346,373
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,438,510 $ 6,204,297 $ 5,516,575
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 1,450,459 $ 778,962 $ 402,003
============ ============ ============
Income taxes $ 3,616,830 $ 5,212,080 $ 4,584,015
============ ============ ============
F-7
52
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
1999 (A) 1998 (B) 1997 (C)
------------ ------------ ------------
Non-cash investing activities:
Fair value of assets acquired $ 4,527,904 $ 39,717,058 $ 9,004,431
Cash paid (1,626,167) (33,967,191) (7,524,968)
------------ ------------ ------------
Liabilities assumed $ 2,901,737 $ 5,749,867 $ 1,479,463
============ ============ ============
(A) Acquisition of ChoiceHealth, Inc., Resource in Employee Assistance and
Corporate Health, Inc., and the purchase price adjustments of FPM
Behavioral Health, Inc. during fiscal year 1999.
(B) Acquisition of Acorn Behavioral Health Care Management Corporation, FPM
Behavioral Health, Inc., and additional payments for the acquisition of the
remaining 20% of the common stock of Professional Psychological Services,
Inc., during fiscal year 1998.
(C) Acquisition of Geriatric Medical Care, Inc., Clay Care, Inc., and payment
for the acquisition of 80% of the common stock of Professional
Psychological Services, Inc., during fiscal year 1997.
See accompanying notes.
F-8
53
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1999 AND 1998
1. ORGANIZATION
Horizon Health Corporation ("the Company"), formerly known as Horizon
Mental Health Management, Inc., is a provider of employee assistance
programs ("EAP") and mental health services to businesses and managed
care organizations, as well as a contract manager of clinical and
related services, primarily of mental health and physical
rehabilitation programs, offered by general acute care hospitals in the
United States. The management contracts are generally for terms ranging
from three to five years, the majority of which have automatic renewal
provisions. The Company currently has offices in the Dallas, Texas; Los
Angeles, California; Chicago, Illinois; Tampa, Florida; Orlando,
Florida; Denver, Colorado; and Philadelphia, Pennsylvania metropolitan
areas. The Company's National Support Center is in Lewisville, Texas.
The Company was formed in July 1989 for the purpose of acquiring all
the assets of two companies. One of these companies, known as Horizon
Health Management Company, had been formed in 1981 and since that time
had been engaged in the mental health contract management business. The
other company owned a freestanding psychiatric hospital in California.
Effective March 1, 1990, the assets constituting the contract
management business and the psychiatric hospital of the two companies
were transferred to the Company. On January 3, 1995, the Company
acquired the net assets and operations of National Medical Management
Services, a division of National Medical Enterprises, Inc.
On July 31, 1996, the Company acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological
Services, Inc., also known as Professional Psychological Services, Inc.
("PPS") and PPS has been consolidated with the Company as of August 1,
1996.
On March 15, 1997, the Company purchased all of the outstanding capital
stock of Geriatric Medical Care, Inc., a Tennessee corporation
("Geriatric"), and Clay Care, Inc., a Texas corporation ("CCI"), and
they have been consolidated with the Company as of March 15, 1997 (see
Note 3).
On August 11, 1997, the Company exchanged 1,400,000 shares of its
common stock for all of the outstanding common stock of Specialty
Healthcare Management, Inc. ("Specialty"). Specialty was a privately
held contract manager of mental health and physical rehabilitation
treatment programs for general acute care hospitals. The exchange has
been accounted for under the pooling of interests method. Accordingly,
the 1997 financial statements presented have been restated to include
the results of Specialty (see Note 3).
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn Behavioral Health Care Management Corporation
("Acorn"), a Pennsylvania corporation, and Acorn has been consolidated
with the Company as of October 31, 1997. Effective February 27, 1998,
the Company acquired an additional sixteen percent (16%) of the
outstanding common stock of PPS. On March 10, 1998, the Company
acquired the remaining four percent (4%) of the outstanding common
stock of PPS. These acquisitions have been consolidated with the
Company as of their respective effective dates. Effective June 1, 1998,
the Company acquired all of the outstanding capital stock of FPM
Behavioral Health, Inc. ("FPM") of Orlando, Florida. FPM has been
consolidated with the Company as of June 1, 1998 (see Note 3).
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. ("ChoiceHealth") of Westminster,
Colorado. ChoiceHealth has been consolidated with the Company as of
October 5, 1998 (see Note 3). Effective April 1, 1999, the Company
acquired all of the outstanding capital stock of Resources in Employee
Assistance and Corporate Health, Inc. ("REACH"). REACH has been
consolidated with the Company as of April 1, 1999 (see Note 3).
F-9
54
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements include those of
the Company and its wholly-owned and majority owned subsidiaries.
Investments in unconsolidated affiliated companies are accounted for on
the equity method. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly
liquid investments with original maturities of three months or less
when purchased.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation expense is recorded on the straight-line basis over the
assets' estimated useful lives. The useful lives of furniture and
fixtures and computer equipment are estimated to be five years and
three years, respectively. Building improvements are recorded at cost
and amortized over the estimated useful lives of the improvements or
the terms of the underlying lease whichever is shorter. Routine
maintenance, repair items, and customer facility and site improvements
are charged to current operations.
CONTRACTS: Contracts represent the fair value of management contracts
and service contracts purchased and are being amortized using the
straight-line method over seven years.
GOODWILL: Goodwill represents the excess of cost over fair value of net
assets acquired and is being amortized using the straight-line method
over 40 years.
LONG-LIVED AND INTANGIBLE ASSETS: The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-lived Assets and Assets to be Disposed of." Under
SFAS 121, the Company recognizes impairment losses on property and
equipment and intangible assets whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets,
on an individual property basis, may not be recoverable through
undiscounted future cash flows. Such losses are determined using
estimated fair value or by comparing the sum of the expected future net
cash flows to the carrying amount of the asset. Impairment losses are
recognized in operating income, as they are determined.
COMMON STOCK REPURCHASE PROGRAM: On September 21, 1998, the Board of
Directors of the Company authorized the repurchase of up to 1,000,000
shares of its common stock. The stock repurchase plan authorized the
Company to make purchases from time to time in the open market or
through privately negotiated transactions, depending on market
conditions and applicable securities regulations. The repurchased
shares are to be added to the treasury shares of the Company and may be
used for employee stock plans and for other corporate purposes. The
stock repurchases utilize available cash and borrowings under the
Company's bank facilities. The Company repurchased 766,100 shares of
its common stock as of August 31, 1999, of which 162,778 has been
reissued pursuant to the exercise of certain stock options. The Company
accounts for the treasury stock using the cost method.
REVENUE: Contract management revenue is reported at the estimated net
realizable amounts from contracted hospitals for contract management
services rendered. Adjustments are accrued on an estimated basis in the
period the related services are rendered and adjusted in future
periods, as final settlement is determined. Contract management revenue
is based on various criteria such as a per diem calculation using
patients per day, a fixed fee, numbers of admissions or discharges,
direct expenses, or any combination of the preceding depending on the
specific contract.
F-10
55
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Premium and fees revenue includes capitated patient services revenues,
which are defined by contract and are calculated on a
per-member/per-month fee, a fixed fee, and/or a fee for service basis.
Capitated revenue is accrued in a similar manner as contract management
revenue. For certain contracts the Company bears the economic risk if
capitated revenue is insufficient to meet the cost of behavioral health
care services incurred by covered members. At August 31, 1999,
capitated revenue was more than sufficient to meet these costs.
Some management contracts include a clause, which states that the
Company will indemnify the hospital for any third-party payor denials,
including Medicare. At the time the charges are denied, the Company
records an allowance for 100% of the potential amount to be repaid.
Management believes it has adequately provided for potential
adjustments that may result from final settlement of these denials.
Except for the state of Florida, where the Company derives
approximately 18.9% of its revenues, the customers of the Company are
not concentrated in any specific geographic region. The customers of
the Company's contract management services are concentrated in the
health care industry.
ADVERTISING COSTS: The Company expenses advertising costs as incurred.
MEDICAL CLAIMS: Outstanding claims include medical claims and related
expenses reported but not paid and an estimate of costs incurred but
not reported (IBNR) to the Company by health care providers. Management
of the Company estimates IBNR costs utilizing the Company's historical
experience and current factors.
INCOME TAXES: The Company has adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS 109 generally requires an asset and liability
approach and requires recognition of deferred tax assets and
liabilities resulting from differing book and tax bases of assets and
liabilities. It requires that deferred tax assets and liabilities be
determined using the tax rate expected to apply to taxable income in
the periods in which the deferred tax asset or liability is expected to
be realized or settled. Under this method, future financial results
will be impacted by the effect of changes in income tax rates on
cumulative deferred income tax balances.
EARNING PER SHARE: Earnings per share has been computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). Basic earnings per share are computed by dividing
income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if the Company's stock
options and warrants were exercised. Such dilutive potential common
shares are calculated using the treasury stock method. All prior-period
earnings per share data presented have been restated in accordance with
SFAS 128. All shares and per share data, except par value per share,
have been retroactively adjusted to reflect a three for two stock split
effected as a 50% stock dividend by the Company on January 31, 1997.
SEGMENT INFORMATION: In fiscal year 1999, the Company adopted Statement
of Financial Accounting Standards (SFAS) 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS 131 supersedes
SFAS 14, Financial Reporting for Segments of a Business Enterprise,
replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal structure
that is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS
131 also requires certain disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not
affect results of operations or financial position of the Company but
did result in changes in the disclosure of segment information (see
Note 12).
F-11
56
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS: Financial instruments consist of cash and cash
equivalents, accounts receivable, current liabilities and long-term
debt obligations. The carrying amounts reported in the balance sheets
for these financial instruments approximate fair value.
USE OF ESTIMATES: The Company has made certain estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period in order to prepare the financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
3. ACQUISITIONS
REACH, INC.
Effective April 1, 1999, the Company acquired all of the outstanding
capital stock of Resources in Employee Assistance and Corporate Health,
Inc. ("REACH") of Murray Hill, New Jersey, and REACH has been
consolidated with the Company as of April 1, 1999. The Company
accounted for the acquisition of REACH by the purchase method. REACH
provides employee assistance programs and other related behavioral
health care services to self-insured employers. REACH had total
revenues of approximately $1.4 million (unaudited) for the ten months
ending March 31, 1999. As of August 31, 1999, the preliminary
allocation of the purchase price exceeded the fair value of REACH's
tangible net assets by $2,326,846, of which $2,054,791 is recorded as
goodwill and $272,055 as service contracts. Tangible assets acquired
and liabilities assumed totaled $150,496 and $477,342, respectively.
Pro forma financial data is not presented because the impact of this
acquisition is not material to the Company's results of operations for
any period presented.
CHOICEHEALTH, INC.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. ("ChoiceHealth") of Westminster,
Colorado, and ChoiceHealth has been consolidated with the Company as of
October 5, 1998. The company accounted for the acquisition of
ChoiceHealth by the purchase method. ChoiceHealth provides managed
behavioral health care services, employee assistance programs and other
related behavioral health care services to health maintenance
organizations and self-insured employers. ChoiceHealth had total
revenues of approximately $7.6 million (unaudited) for the eight months
ended August 31, 1998. As of August 31, 1999, the preliminary
allocation of the purchase price exceeded the fair value of
ChoiceHealth's tangible net assets by $3,114,436, of which $2,935,427
is recorded as goodwill and $179,009 as service contracts. Tangible
assets acquired and liabilities assumed totaled $834,928 and
$1,899,666, respectively. Pro forma financial data is not presented
because the impact of this acquisition is not material to the Company's
results of operations for any period presented.
FPM BEHAVIORAL HEALTH, INC.
Effective June 1, 1998, the Company acquired all of the outstanding
capital stock of FPM Behavioral Health, Inc. of Orlando, Florida, and
FPM has been consolidated with the Company as of June 1, 1998. The
Company accounted for the acquisition of FPM by the purchase method.
FPM provides managed behavioral health care services, employee
assistance programs and other related health care services to health
maintenance organizations and self-insured employers. FPM had total
revenues of approximately $19.9
F-12
57
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million for the nine months ended March 31, 1998 and, at February 28,
1998, FPM had 46 contracts covering 1,135,000 lives in nine states. FPM
provides its services both through health care professionals employed
by FPM and through independent health care professionals that have been
contracted with FPM on a fee-for-service basis. At April 1998, the FPM
provider network was composed of over 2,000 providers. The purchase
price was $20.0 million in cash, subject to certain post closing
adjustments, and was funded by incurring debt of $20.0 million under
the term loan facility. The preliminary allocation of the purchase
price exceeded the fair value of FPM's tangible net assets by
$22,170,668, of which $20,665,912 is recorded as goodwill and
$1,504,756 as service contracts. Tangible assets acquired and
liabilities assumed totaled $3,301,876 and $5,472,544, respectively.
During the fiscal year ending August 31, 1999, the Company received
post-closing adjustments, net of tax effects, of $1,222,193 and
$1,201,337. After the adjustments, the purchase price exceeded the fair
value of FPM's tangible net assets by $20,293,784 of which $18,789,028
is recorded as goodwill and $1,504,756 as service contracts. Tangible
assets acquired and liabilities assumed totaled $3,279,957 and
$5,997,271, respectively.
The unaudited pro forma combined results of the Company and FPM for the
years ended August 31, 1997 and 1998 after giving effect to certain pro
forma adjustments are presented at the end of this footnote.
ACORN
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn. The Company accounted for the acquisition of
Acorn by the purchase method. Acorn provides employee assistance
programs and other related services to self-insured employers. Acorn
had total revenues of approximately $7.0 million for the year ended
August 31, 1997. The purchase price of approximately $12.7 million in
cash was funded from $1.7 million of working capital and $11.0 million
from an advance under the Company's existing revolving credit facility
with Texas Commerce Bank, N.A., (now known as Chase Bank of Texas,
National Association). The purchase price exceeded the fair value of
Acorn's tangible net assets by $12,629,261, of which $9,258,513 is
recorded as goodwill and $3,370,748 as service contracts. Tangible
assets acquired and liabilities assumed totaled $274,929 and $177,832
respectively.
The unaudited pro forma combined results of operations of the Company
and Acorn for the years ended August 31, 1997 and 1998 after giving
effect to certain pro forma adjustments are presented at the end of
this footnote.
SPECIALTY HEALTHCARE MANAGEMENT, INC.
On August 11, 1997, the Company exchanged 1,400,000 shares of its
common stock for all of the outstanding common stock of Specialty
Healthcare Management, Inc. (see Note 10). The exchange has been
accounted for under the pooling of interests method. Accordingly, the
1997 financial statements presented have been restated to include the
results of Specialty. Prior to the exchange Specialty prepared its
financial statements on a December 31 calendar year end which has
subsequently been changed to conform to the Company's fiscal year end.
F-13
58
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Combined and separate results of Horizon and Specialty during the
period preceding the exchange were as follows (in thousands):
Nine months
ended
May 31, 1997
(unaudited)
------------
Revenues:
Horizon $57,894
Specialty 23,286
Combined 81,180
Net Income:
Horizon $5,483
Specialty 871
Combined 6,354
The Company incurred merger expenses of $3,527,671, before a related
tax benefit of $1,340,515, for legal, investment banking and accounting
fees.
GERIATRIC MEDICAL CARE, INC.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation,
and Geriatric has been consolidated with the Company as of March 15,
1997. The Company accounted for the acquisition of Geriatric by the
purchase method. Geriatric is a contract manager of mental health
services for acute care hospitals. Geriatric had total revenues of
approximately $5.7 million in 1996 and, at March 15, 1997, had 18
management contract locations, of which three were not yet in
operation. The purchase price of approximately $4.6 million, of which
approximately $4.3 million was paid, at closing from existing cash of
the Company, included retiring essentially all of Geriatrics'
outstanding debt. The final purchase price payment of $270,000 was made
on April 16, 1997. The purchase price exceeded the fair value of
Geriatrics' tangible net assets by $5,005,986, of which $4,498,038 is
recorded as goodwill and $507,948 as management contracts. Tangible
assets acquired and liabilities assumed totaled $1,042,683 and
$1,421,931, respectively. Pro forma financial data is not presented
because the impact of this acquisition is not material to the Company's
results of operations for any period presented.
PPS
Cash payments for the purchase of eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological
Services, Inc., also known as Professional Psychological Services,
Inc., and PPS net of cash acquired, were $786,767 and $1,898,230 during
1996 and 1997, respectively. The final payment of $200,985 was made on
September 30, 1997. On February 27, 1998, the Company acquired an
additional sixteen percent (16%) of the outstanding common stock of
PPS. The Company accounted for the acquisition of PPS by the purchase
method. The purchase price of $831,879 was based primarily on a
multiple of the 1997 pre-tax income of PPS. The purchase price exceeded
the fair market value of PPS's tangible net assets acquired by $764,400
of which $560,315 is recorded as goodwill and $204,085 as service
contracts. Tangible assets acquired and liabilities assumed totaled
$147,072 and $79,593, respectively.
F-14
59
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 10, 1998, the Company acquired the remaining four percent (4%)
of the outstanding common stock of PPS, under similar terms, for a
purchase price of $207,970. The Company accounted for the acquisition
by the purchase method. The purchase price exceeded the fair value of
PPS's tangible assets acquired by
$192,332 of which $141,311 is recorded as goodwill and $51,021 as
service contracts. Tangible assets acquired and liabilities assumed
totaled $35,536 and $19,898 respectively. The acquisitions were funded
by incurring debt of approximately $1.0 million under the term loan
facility. Pro forma financial data is not presented because the impact
of this acquisition is not material to the Company's results of
operations for any period presented.
The following unaudited pro forma financial information gives effect to
the acquisitions by the Company of Acorn and FPM as if the acquisitions
occurred on September 1, 1996.
Year Ended August 31,
---------------------------------------
1998 1997
------------ -------------
Revenue $145,063,467 $ 139,688,095
============ =============
Net Income $ 9,245,713 $ 6,286,235
============ =============
Net Income per common share:
Basic $ 1.30 $ 0.91
============ =============
Diluted $ 1.19 $ 0.82
============ =============
4. ACCRUED EXPENSES
Accrued expenses consisted of the following at August 31, 1999 and 1998:
August 31,
---------------------------------------
1999 1998
------------ ------------
Reserve for contract adjustments $ 1,191,758 $ 920,295
Health insurance 852,669 853,561
Other 3,933,277 3,158,715
------------ ------------
$ 5,977,704 $ 4,932,571
============ ============
F-15
60
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
At August 31, 1999 and 1998 long-term debt consisted of:
August 31,
--------------------------------
1999 1998
----------- -----------
Chase Bank of Texas, National Association - Advance Term Loan
Facility $20,000,000 $23,000,000
Chase Bank of Texas, National Association - Revolving Credit
Facility - 3,000,000
SANWA Leasing Corporation - 29,371
Borealis Note 35,706 -
----------- -----------
20,035,706 26,029,371
----------- -----------
Less current maturities 3,373,706 18,470
----------- -----------
$16,662,000 $26,010,901
=========== ===========
The aggregate maturities of long-term debt during the next five fiscal
years are $3,373,706 in 2000; $4,000,000 in 2001; $4,000,000 in 2002;
$8,662,000 in 2003; and $0 in 2004.
Effective September 29, 1995, the Company entered into a loan agreement
with Texas Commerce Bank (now known as Chase Bank of Texas, National
Association) for a revolving line of credit with maximum advance
commitment of $11,000,000. On October 16, 1997, the Company increased
its existing revolving line of credit from $11.0 million to $14.0
million.
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Chase Bank of Texas, National Association, as
Agent for itself and other lenders party to the Credit Agreement for a
senior secured credit facility in an aggregate amount of up to $50.0
million (the "New Credit Facility"). The New Credit Facility consisted
of a $10.0 million revolving credit facility to fund ongoing working
capital requirements and a $40.0 million advance term loan facility to
refinance certain existing debt and to finance future acquisitions by
the Company. The New Credit Facility replaced the Company's existing
$14.0 million revolving credit facility. As of August 31, 1999, the
Company has borrowings of $20.0 million outstanding against the now
$29.0 million term loan facility and no borrowing outstanding against
the $10.0 million revolving credit facility.
The Revolving Credit Facility terminates November 30, 2000 and the
Advance Term Loan Facility has a term of five years, with drawdowns
available until November 30, 1999. Amounts outstanding under the
Advance Term Loan Facility on November 30, 1999 are to be repaid in
twelve quarterly principal payments, beginning February 28, 2000, based
upon a five year amortization schedule with the first eleven principal
payments being 1/20th of the outstanding balance on November 30, 1999,
and the twelfth being the remaining unpaid principal balance. Principal
outstanding under the New Credit Facility bears interest at the "Base
Rate" (the greater of the Agent's "prime rate" or the federal funds
rate plus .5%) plus 0% to .5% (depending on the Company's Indebtedness
to EBITDA Ratio as defined in the Credit Agreement) or the "Eurodollar
Rate" plus .75% to 1.5% (depending on the Indebtedness to EBITDA
Ratio), as selected by the Company. The Company incurs quarterly
commitment fees ranging from .25% to .375% per annum (depending on the
Indebtedness to EBITDA Ratio) on the unused portion of the Revolving
Credit Facility (until November 30, 2000) and unused portion of the
Advance Term Loan Facility (until November 30, 1999). The Company's
interest rate under the New Credit Facility was 6.5% at August 31,
1999.
F-16
61
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is subject to certain covenants which include prohibitions
against (i) incurring additional debt or liens, except specified
permitted debt or permitted liens, (ii) certain material acquisitions,
other than specified permitted acquisitions (including any single
acquisition not greater than $10.0 million or cumulative acquisitions
not in excess of $30.0 million during any twelve consecutive monthly
periods), (iii) certain mergers, consolidations or asset dispositions
by the Company or changes of control of the Company, (iv) certain
management vacancies at the Company, and (v) material change in the
nature of business conducted. If the aggregate outstanding principal
amount of the Advance Term Loan Facility equals or exceeds Fifteen
Million Dollars ($15,000,000) as of the date ninety (90) days after the
end of a Fiscal year (the "Excess Cash Flow Payment Date") beginning
with the fiscal year ending August 31, 1998, then Borrower shall repay
the Advance Term Loan Facility on or before the Excess Cash Flow Date
relating to such fiscal year in an amount equal to fifty percent (50%)
of the Excess Cash Flow, as defined, calculated for the fiscal year
then most recently ended on the basis of the audited financial
statements for such fiscal year. In addition, the terms of the New
Credit Facility require the Company to satisfy certain ongoing
financial covenants. The New Credit Facility is secured by a first lien
or first priority security interest in and/or pledge of substantially
all of the assets of the Company and of all present and future
subsidiaries of the Company. The Company was subject to an excess cash
flow prepayment requirement of approximately $4.5 million for fiscal
year 1999, all of which had been paid as of August 31, 1999.
The Company acquired a custom software system upon the acquisition of
ChoiceHealth (see Note 3). The software system is financed by a note to
Borealis Software Systems, Inc., the company who designed the system.
6. STOCK OPTIONS
The 1989, 1995 and 1998 Stock Option Plans and the 1995 Stock Option
Plan for Eligible Outside Directors are collectively referred to as
"The Plans."
In accordance with the Plans, as amended, 2,581,843 shares of common
stock have been reserved for grant to key employees, directors and
consultants. Management believes the exercise prices of the options
granted approximated or exceeded the market value of the common stock
at the date of the grant. The options generally vest ratably over five
years from the date of grant and terminate 10 years from the date of
grant.
On April 28, 1995 the board of directors created the 1995 Stock Option
Plan for Eligible Outside Directors for outside directors owning less
than 5% of the stock of the Company. 150,000 shares of common stock are
reserved for issuance under this plan. This plan has been amended and
restated to provide for 3,000 option grants to each eligible director
each time he is re-elected to the board after having served as a
director for at least one year since his initial grant under the plan.
Options vest ratably over five years from the date of grant.
On January 23, 1998, the Stockholders of the Company approved the 1998
Stock Option Plan. The purpose of the Plan is to give the Company a
competitive advantage in attracting, retaining and motivating
directors, officers, key employees and consultants and to provide the
Company and its subsidiaries with a stock option plan providing
incentives directly linked to the profitability of the Company's
businesses and increases in shareholder value. Under this plan, 500,000
shares of common stock are reserved for issuance.
F-17
62
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 1, 1998, the Company canceled 351,250 options with
exercise prices ranging from $14.167 to $26.00, and granted 141,040
options with an exercise price of $7.00, the fair market value at the
date of grant. In addition, the Company granted 424,000 options to
employees and directors on September 1, 1998, with an exercise price of
$7.00, the fair market value at the date of grant. The following table
summarizes the status of the Plans:
1999 1998 1997
--------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
----------- -------------- ----------- -------------- ---------- --------------
Outstanding at beginning of
year 1,361,293 7.69 1,451,843 $ 4.62 1,521,328 $ 4.04
Granted 680,040 7.05 186,500 23.37 49,500 20.15
Exercised 198,716 3.14 265,050 1.79 90,735 1.81
Expired or canceled 489,777 16.22 12,000 10.31 28,250 9.72
Outstanding at end of year 1,352,840 4.95 1,361,293 $ 7.69 1,451,843 $ 4.62
Exercisable at end of year 710,310 2.80 781,113 $ 2.96 728,166 $ 1.98
Available for grant at end
of year 418,487 - 608,750 - 283,250 -
The following table summarizes information about options outstanding
under the Plans at August 31, 1999:
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
------------------------- ----------------- -------------- ------------------ -------------- -------------------
$ 0.50 - $ 4.00 638,875 3.94 $ 2.11 627,087 $ 2.07
$ 7.42 - $ 9.75 709,965 8.55 7.40 83,223 8.32
$ 14.17 - $ 26.00 4,000 8.01 23.75 - -
The Company applies APB 25 in accounting for the Plans and recognizes
no compensation cost in net earnings from the grant of options as
options are granted at exercise prices equal to the current stock
price. Had compensation cost been determined under the terms of SFAS
123, the Company's pro forma 1999, 1998 and 1997 net earnings and
earnings per share would have been:
1999 1998 1997
----------- ----------- -----------
Net Earnings
As reported $ 6,900,761 $ 9,731,995 $ 6,656,016
Pro forma (unaudited) $ 6,175,069 $ 9,438,256 $ 6,549,799
Earnings per share
Basic
As reported $ 1.00 $ 1.37 $ 0.96
Pro forma (unaudited) $ 0.90 $ 1.33 $ 0.95
Diluted
As reported $ 0.96 $ 1.26 $ 0.87
Pro forma (unaudited) $ 0.86 $ 1.22 $ 0.85
F-18
63
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with SFAS 123, the fair value of options at date of grant
was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions:
1999 1998 1997
---------------- --------------- ----------------
Risk free interest rate 5.1% 6.1% 6.3%
Expected life (years) 6.4 6.6 6.6
Expected volatility 53.1% 30.4% 30.3%
Expected dividend yield 0.0% 0.0% 0.0%
In accordance with SFAS 123, the weighted average fair value of options
granted during 1999, 1998 and 1997 was $4.07, $10.59, and $7.28
respectively.
7. RETIREMENT PLAN
The Company sponsors a 401(k) plan that covers substantially all
eligible employees. The Company can elect to make matching
contributions at its discretion. For the years ended August 31, 1999,
1998 and 1997 the Company made matching contributions of approximately
$466,000, $254,000, and $534,000 respectively.
8. INCOME TAXES
Deferred taxes are provided for those items reported in different
periods for income tax and financial reporting purposes. Income tax
expense is comprised of the following components:
Federal State Total
------------ ----------- ------------
Year ended August 31, 1999
Current $ 3,967,561 $ 835,410 $ 4,802,971
Deferred (215,987) (24,687) (240,674)
------------ ----------- ------------
$ 3,751,574 $ 810,723 $ 4,562,297
------------ ----------- ------------
Year ended August 31, 1998
Current $ 5,526,322 $ 968,030 $ 6,494,352
Deferred 16,471 3,989 20,460
------------ ----------- ------------
$ 5,542,793 $ 972,019 $ 6,514,812
------------ ----------- ------------
Year ended August 31, 1997
Current $ 3,957,913 $ 465,636 $ 4,423,549
Deferred 84,230 9,909 94,139
------------ ----------- ------------
$ 4,042,143 $ 475,545 $ 4,517,688
============ =========== ============
F-19
64
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred tax asset at August 31, 1999 and
1998 were obtained using the liability method in accordance with SFAS
No. 109 and are as follows:
1999 1998
------------ ------------
Contracts $ (1,252,205) $ (1,165,792)
Goodwill (995,620) (768,671)
------------ ------------
Deferred tax liabilities (2,247,825) (1,934,463)
------------ ------------
Accounts receivable 1,365,896 708,064
Vacation accruals 611,819 638,918
Fixed assets/intangibles 271,781 171,757
Miscellaneous accruals 167,111 659,898
Net operating loss carryforward 698,345 435,174
------------ ------------
Deferred tax assets 3,114,952 2,613,811
------------ ------------
Net deferred tax asset $ 867,127 $ 679,348
============ ============
At August 31, 1999, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately
$1,800,000. These carryforwards, subject to annual utilization limits,
may be utilized to offset future years' income and will begin to expire
during 2006 if unused prior to that date.
The following is a reconciliation of income taxes between the U.S.
federal income tax rate and the Company's effective income tax rate:
1999 1998 1997
----------- ----------- -----------
Federal income taxes based on 35% of book income
(34% in 1997) $ 4,012,071 $ 5,698,268 $ 3,846,623
Meals and entertainment, goodwill amortization
and other permanent adjustments 280,854 252,838 198,464
State income taxes and other adjustments 269,372 563,706 472,601
----------- ----------- -----------
$ 4,562,297 $ 6,514,812 $ 4,517,688
=========== =========== ===========
Effective Income Tax Rate 40% 40% 40%
=========== =========== ===========
9. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under
operating leases. The following is a schedule of minimum rental
payments under these leases, which expire at various dates:
Years ended August 31,
2000 $ 1,914,641
2001 1,636,377
2002 1,075,189
2003 619,380
2004 392,590
------------
$ 5,638,177
============
F-20
65
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rent expense for the years ended August 31, 1999, 1998, and 1997 was
$2,325,321, $1,385,301 and $980,573, respectively.
The Company leases a building occupied by its executive offices and
National Support Center in Lewisville, Texas. In connection with the
lease transaction, the Company guaranteed a loan of approximately
$900,000 by a financial institution to the building owner. The Company
also agreed to purchase the leased building for approximately $4.5
million at the end of the lease term, September 2001, if it is not sold
to a third party, or the Company does not extend its lease. The
Company's current intention is to extend the lease.
The Company is insured for professional and general liability on a
claims-made policy basis, with additional tail coverage being obtained
when necessary. Management is not aware of claims against the Company
that would cause the final expenses for professional and general
liability to vary materially from amounts provided.
Amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental
health and physical rehabilitation services. The limitations have
resulted, in some cases, in decreased amounts being reimbursed to the
Company's client hospitals. This decrease in reimbursement has, in some
cases, resulted in a negotiated reduction in the Company's contract
management fees and in other cases has resulted in the termination or
nonrenewal of the management contract. Certain of the Company's
existing contracts may be similarly renegotiated.
Recent amendments to the Medicare statutes provide for the elimination
of cost based reimbursement of mental health partial hospitalization
services effective upon 90 days notice from Medicare, but not earlier
than January 1, 2000. The resulting reimbursement for partial
hospitalization services based on the Medicare outpatient prospective
payment system will utilize a fixed reimbursement amount per patient
day. The currently proposed reimbursement rate per patient day is a
wage-adjusted rate of $206.71, which will lower Medicare reimbursement
levels to many hospitals for partial hospitalization services. This
change may adversely affect the ability of the Company to maintain
and/or obtain management contracts for partial hospitalization services
and the amount of fees paid to the Company under such contracts.
In addition, recent amendments to the Medicare statutes provide for a
phase-out of cost-based reimbursement of physical rehabilitation
services over a three-year period beginning October 1, 2000. The
resulting phase-in of reimbursement for physical rehabilitation
services based on the Medicare prospective payment system utilizing a
fixed reimbursement amount for specified diagnoses could lower Medicare
reimbursement levels to hospitals for physical rehabilitation services.
This could adversely affect the ability of the Company to maintain
and/or obtain management contracts for physical rehabilitation services
and the amount of fees paid to the Company under such contracts.
The Company is involved in litigation arising in the ordinary course of
business, including matters involving professional liability. It is the
opinion of management that the ultimate disposition of such litigation,
net of any applicable insurance coverage, would not be in excess of
recorded reserves and would not have a material adverse effect on the
Company's financial position or results of operations.
F-21
66
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK AND WARRANTS
As part of the purchase of National Medical Management Services,
effective January 3, 1995 (see Note 1), the Company issued warrants to
National Medical Enterprises, Inc. to purchase 171,793 shares of common
stock at an exercise price of $0.000558 per share. The warrants were
exercisable at any time subsequent to January 3, 1997 and the exercise
price and number of shares were adjustable to maintain proportional
ownership of the Company. The value of the warrants at the date of
issuance was determined to be $389,350. The remaining warrants of
179,178 at August 11, 1997 were exercised in connection with the
Specialty exchange (see Note 3). In conjunction with the purchase
transaction the Company issued additional shares to existing management
shareholders, other senior management and an outside shareholder. The
proceeds from the sale of these shares were used in the purchase
transaction. Certain management acquired shares through note receivable
arrangements and the outstanding balance on these notes has been
reflected as a reduction of stockholders' equity in the accompanying
Statements of Stockholders' Equity. These notes were paid in full as of
August 31, 1997.
The Board of Directors of the Company approved a three-for-two stock
split effected in the form of a 50% stock dividend, pursuant to which
one additional share of common stock of the Company was issued on
January 31, 1997 for every two shares of common stock held by
stockholders of record at the close of business on January 22, 1997. As
a result of such stock split/dividend, a total of $18,253 originally
recorded as additional paid in capital was reclassified as common
stock. Such stock split/dividend has been retroactively reflected in
the consolidated financial statements included herein. Upon effecting
the stock split/dividend, the stock options and their related exercise
prices were adjusted proportionately.
11. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." All prior
earnings per share data presented have been restated in accordance with
SFAS 128.
The following is a reconciliation of the numerators and the
denominators of the basic and diluted earnings per share computations
for net income.
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- --------- ----------- ---------
Net Income ............. $6,900,761 $9,731,995
Basic EPS .............. 6,900,761 6,874,646 $ 1.00 9,731,995 7,120,303 $ 1.37
======= =======
Effect of Dilutive
Securities
Warrants and options ... 325,031 634,164
--------- ---------
Diluted EPS ............ $6,900,761 7,199,677 $ 0.96 $9,731,995 7,754,467 $ 1.26
========== ========= ======= ========== ========= =======
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------
1997
-----------------------------------
Income Shares Per Share
Numerator Denominator Amount
--------- ----------- ---------
Net Income ............. $6,656,016
Basic EPS .............. 6,656,016 6,928,827 $ 0.96
=======
Effect of Dilutive
Securities
Warrants and options ... 752,442
---------
Diluted EPS ............ $6,656,016 7,681,269 $ 0.87
========== ========= =======
F-22
67
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1999, 1998, and 1997 certain options to acquire common stock
were not included in certain computations of EPS because the options
exercise price was greater than the average market price of the common
shares. The options excluded by quarter are as follows:
QUARTER ENDED OPTIONS EXCLUDED OPTION PRICE RANGE
----------------------------- ---------------------------- --------------------------
August 31, 1999 176,700 $ 7.42 - $23.75
May 31, 1999 152,971 $ 7.42 - $23.75
February 28, 1999 707,036 $ 6.91 - $23.75
November 30, 1998 163,390 $ 7.42 - $23.75
August 31, 1998 355,250 $ 14.17 - $26.00
May 31, 1998 182,500 $ 23.75 - $26.00
February 28, 1998 183,222 $ 22.00 - $26.00
November 30, 1997 15,000 $26.00
August 31, 1997 5,054 $26.00
F-23
68
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION
The Company has determined that its reportable segments are
appropriately based on its method of internal reporting, which
disaggregates its business by services category in a manner consistent
with the Company's Consolidated Statements of Income format. The
Company's reportable segments are Horizon Behavioral Services, Horizon
Mental Health Management, Specialty Rehab Management, and Mental Health
Outcomes. See (A) through (E) below for a description of the services
provided by each of the identified segments. The Company's business is
conducted solely in the United States.
The following schedule represents revenues and operating results for
the twelve months ended August 31, 1999, 1998, and 1997, respectively,
by operating division/segment:
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health Intercompany
1999 Services Management Management Outcomes Other** Eliminations** Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues $ 47,009,295 $ 87,980,741 $ 10,350,225 $ 450,228 $ 209,860 $ -- $146,000,349
Intercompany Revenues 66,152 -- -- 1,723,471 -- (1,789,623) --
EBITDA * 3,090,340 21,429,316 894,764 134,466 (8,450,528) -- 17,098,358
Total Assets 44,309,775 57,879,903 4,822,588 366,276 25,248,087 (46,090,884) 86,535,745
1998
Revenues $ 20,984,877 $ 93,935,470 $ 8,770,758 $ 29,290 $ 97,454 $ -- $123,817,849
Intercompany Revenues 17,379 -- -- 1,665,223 -- (1,682,602) --
EBITDA * 2,284,340 24,413,451 853,424 (89,310) (8,088,662) -- 19,373,243
Total Assets 43,586,048 50,264,641 3,845,744 315,144 43,347,967 (54,687,476) 86,672,068
1997
Revenues $ 5,682,323 $ 93,875,872 $ 8,980,549 $ -- $ 728,051 $ -- $109,266,795
Intercompany Revenues -- -- -- 1,316,940 -- (1,316,940) --
EBITDA * 998,367 20,407,925 161,331 432,014 (8,604,576) -- 13,395,061
Total Assets 1,491,202 47,304,233 2,182,475 438,717 10,670,465 (13,358,685) 48,728,407
* Earnings before interest, taxes, depreciation and amortization (divisional
operating profit).
** Changes in the reporting relationships of subsidiaries cause fluctuations
between periods.
(A) Horizon Behavioral provides managed care and employee assistance
programs.
(B) Horizon Mental Health Management provides mental health contract
management services to general acute care hospitals.
(C) Specialty Rehab Management provides physical rehabilitation contract
management services to general acute care hospitals.
(D) Mental Health Outcomes provides outcomes information regarding the
effectiveness of mental health programs.
(E) "Other" represents the Company's corporate offices and National Support
Center located in Lewisville, Texas which provides management,
financial, human resource, and information system support for the
Company and its subsidiaries. FY1997 includes revenues of $728,000 for
Mt. Crest hospital related to an audited cost report adjustment.
F-24
69
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for
fiscal 1999 and 1998:
Operating Net Earnings Per Share
Revenues Income Income Basic Diluted
------------- ------------ ----------- -------------------------
Quarter Ended:
August 31, 1999 $ 37,106,456 $ 3,241,240 $ 1,784,950 $ 0.26 $ 0.25
May 31, 1999 36,400,687 3,127,834 1,710,414 0.25 0.24
February 28, 1999 36,644,644 3,004,886 1,638,970 0.24 0.23
November 30, 1998 35,848,562 3,264,798 1,766,427 0.25 0.24
------------- ------------ ----------- ------- -------
Total Year $ 146,000,349 $ 12,638,758 $ 6,900,761 $ 1.00 $ 0.96
August 31, 1998 $ 36,267,360 $ 3,515,548 $ 1,925,779 $ 0.27 $ 0.25
May 31, 1998 28,827,606 4,081,228 2,726,335 0.38 0.35
February 28, 1998 29,400,471 4,417,075 2,555,886 0.36 0.33
November 30, 1997 29,322,412 4,193,319 2,523,995 0.36 0.33
------------- ------------ ----------- ------- -------
Total Year $ 123,817,849 $ 16,207,170 $ 9,731,995 $ 1.37 $ 1.26
F-25
70
INDEX TO FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants on Financial Statement Schedule...................................................S-2
Schedule VIII Valuation and Qualifying Accounts.....................................................................S-3
S-1
71
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Horizon Health Corporation
Our audits of the consolidated financial statements referred to in our report
dated October 14, 1999 appearing on page F - 2 of this Annual Report on Form
10-K also included an audit of the Financial Statement Schedule as listed in
Item 14(a) of the Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth herein when
read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
October 14, 1999
S-2
72
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, 1995:
Allowance for doubtful accounts $ 756,976 $ 1,680,396 $ (1,331,434) $ 249,099 (1,2) $ 1,355,037
Year ended August 31, 1996:
Allowance for doubtful accounts 1,355,037 1,435,049 (343,990) (58,474) (2) 2,387,622
Year ended August 31, 1997:
Allowance for doubtful accounts 2,387,622 3,033,693 (4,023,355) (40,537) (2) 1,357,423
Year ended August 31, 1998:
Allowance for doubtful accounts 1,357,423 759,467 (401,910) 187,132 (3) 1,902,112
Year ended August 31, 1999:
Allowance for doubtful accounts $ 1,902,112 588,705 (1,109,363) 1,599,425 (3,4) $ 2,980,849
(1) As a result of Horizon's acquisition of the 27.5% minority interest of MHM
in the Horizon LLC effective March 20, 1995, the Horizon LLC was
consolidated with Horizon for accounting purposes as of March 1, 1995.
Amounts represent bad debt expenses of the Horizon LLC which were accounted
for as "Equity in Net Earnings of Horizon LLC" through February 28, 1995.
(2) Adjustment reflects reserves in which Horizon is aware that specific
hospitals have experienced treatment day denials and to which a
corresponding accounts receivable balance does not exist. These amounts are
accrued as a liability.
(3) Adjustment reflects reserves in which Horizon is aware that specific
hospitals have experienced treatment day denials and to which a
corresponding accounts receivable balance does not exist. These amounts are
accrued as a liability. In addition, adjustment reflects items reserved as
other receivables, therefore their reserve is not included in the allowance
for receivables.
(4) Adjustment includes a recovery of $1.75 million related to one former
Specialty contract.
S-3
73
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 - Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K dated August 11, 1997).
3.2 - Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment No.
2 as filed with the Commission on February 16, 1995 ("Amendment
No. 2") to the Company's Registration Statement on Form S-1 filed
with the Commission on January 6, 1995 (Registration No.
33-88314) (the "Form S-1").
4.1 - Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated August 11, 1997).
4.2 - Rights Agreement, dated February 6, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A, Registration No. 000-22123,
as filed with the Commission on February 7, 1997).
10.1 - Agreement dated August 31, 1999 between Horizon Health
Corporation, Inc. and Ronald C. Drabik regarding severance
arrangements (filed herewith).
10.2 - Letter Loan Agreement dated December 20, 1995 among North
Central Development Company, as borrower, Texas Commerce Bank,
National Association, ("TCB") as lender, and Horizon Mental
Health Management, Inc., a Delaware corporation, Horizon Mental
Health Management, Inc., a Texas corporation, and Mental Health
Outcomes, Inc., a Delaware corporation, as guarantors
(incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1995 (the "November 1995 Form 10-Q").
10.3 - First Amendment to Letter Loan Agreement and Note Modification
Agreement dated December 9, 1997 among North Central Development
Company and its subsidiaries and TCB (incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1997.)
10.4 - Second Amendment to Credit Agreement and Third Amendment to
Letter Loan Agreement dated as of September 30, 1998, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1998).
10.5 - Third Amendment to Credit Agreement and Fourth Amendment to
Letter Loan Agreement dated as of November 6, 1998, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (filed herewith).
10.6 - Fourth Amendment to Credit Agreement and Fifth Amendment to
Letter Loan Agreement dated as of October 12,, 1999, among the
Company, Chase Bank of Texas, National Association, as Agent, and
the banks named therein (filed herewith).
74
10.7 - Lease Agreement dated as of December 20, 1995 between North
Central Development Company and Horizon Mental Health Management,
Inc., a Delaware corporation (incorporated herein by reference to
Exhibit 10.8 to the November 1995 Form 10-Q).
10.8 - Horizon Health Group, Inc. 1989 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.52 of Amendment
No. 2 to the Company's Form S-1).
10.9 - Horizon Mental Health Management, Inc. 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.11 to the
November 1995 Form 10-Q).
10.10 - Horizon Mental Health Management, Inc. Amended and Restated
1995 Stock Option Plan for Eligible Outside Directors
(incorporated herein by reference to Exhibit 10.12 to the
November 1995 Form 10-Q).
10.11 - Amendments to 1989 Stock Option Plan and 1995 Stock Option Plan
(incorporated herein by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K dated September 1, 1997).
10.12 - Amendments to 1995 Stock Option Plan and 1995 First Amended and
Restated Stock Option Plan for Eligible Outside Directors
(incorporated herein by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K dated September 1, 1997).
10.13 - Amendment to 1995 Amended and Restated Stock Option Plan for
Eligible Outside Directors (filed herewith).
10.14 - Horizon Health Corporation 1998 Stock Option Plan (filed
herewith).
10.15 - Horizon Mental Health Management Contingent Bonus Plan
(incorporated herein by reference to Exhibit 10.37 to the
Company's 1996 Form 10-K/A).
10.16 - Horizon Health Corporation Bonus Plan Fiscal 1999 (incorporated
herein by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1998).
10.17 - Horizon Health Corporation Bonus Plan Fiscal 2000 (filed
herewith).
10.18 - Executive Retention Agreement effective September 1, 1997,
between the Company and James Ken Newman (incorporated herein by
reference to Exhibit 10.4 to the Company's Current Report on Form
8-K dated September 1, 1997).
10.19 - Stock Purchase Agreement, dated October 20, 1997, among the
Company, Dr. Melvyn S. Goldsmith, Ph.D., Barbara C. Goldsmith and
Acorn Behavioral HealthCare Management Corporation (incorporated
herein by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated September 1, 1997).
10.20 - Credit Agreement dated December 9, 1997 among the Company,
Texas Commerce Bank National Association, as Agent, and the banks
named therein (incorporated herein by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1997).
75
10.21 - Stock Purchase Agreement dated as of May 1, 1998, by and among
Ramsay Managed Care, Inc., Ramsay Health Care, Inc., and the
Company (incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 2, 1998).
11 - Statement Regarding Computation of Per Share Earnings (filed
herewith).
21 - List of Subsidiaries of the Company (filed herewith).
23 - Consent of PricewaterhouseCoopers LLP (filed herewith).
27 - Financial Data Schedule (filed herewith).