<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 1996
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 MENTAL HEALTH MANAGEMENT, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2293354
-------------------------------- -------------------------------------
State or other Jurisdiction of I.R.S. Employer Identification Number
Incorporation or Organization
2220 San Jacinto Blvd., Suite 320
Denton, Texas 76205
---------------------------------------------------------------
(Address of principal executive offices, including zip code)
(817) 387-4775
---------------------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ]
The number of shares outstanding of the registrant's Common Stock, $0.01 Par
Value, as of June 27, 1996 was 3,650,677 shares.
<PAGE> 2
INDEX
HORIZON MENTAL HEALTH MANAGEMENT, INC.
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
--------------------
HORIZON MENTAL HEALTH MANAGEMENT, INC.
Consolidated Balance Sheets as of August 31, 1995,
and May 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months ended
May 31, 1995 and 1996 and Pro Forma for the three months
ended May 31, 1995 (each unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Operations for the nine months ended
May 31, 1995 and 1996, and Pro Forma for the
nine months ended May 31, 1995 (each unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the nine months ended
May 31, 1995 and 1996 (each unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
---------------------
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
--------------------------------
</TABLE>
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, May 31,
1995 1996
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 3,167,036 $ 4,318,358
Accounts receivable less allowance for uncollectible
accounts of $1,223,027 at August 31, 1995 and
$545,680 at May 31, 1996 5,723,858 7,534,633
Receivable from employees 173,206 90,049
Prepaid expenses and supplies 124,587 378,614
Other receivables 100,397 29,329
Other current assets 30,680 276,110
Current deferred taxes 704,276 1,051,548
------------ ------------
TOTAL CURRENT ASSETS 10,024,040 13,678,641
------------ ------------
PROPERTY AND EQUIPMENT:
Equipment 1,801,508 2,136,234
Buildings and improvements 106,784 109,467
------------ ------------
1,908,292 2,245,701
Less accumulated depreciation (966,561) (1,318,261)
------------ ------------
941,731 927,440
Goodwill, net of accumulated amortization of
$1,188,130 at August 31, 1995 and $1,439,198
at May 31, 1996 11,574,409 11,699,980
Management contracts, net of accumulated
amortization of $989,603 at August 31, 1995
and $1,353,932 at May 31, 1996 2,410,801 2,046,472
Other assets 400,534 223,264
------------ ------------
TOTAL ASSETS $ 25,351,515 $ 28,575,797
============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 4
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31, May 31,
1995 1996
------------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,070,955 $ 349,839
Employee compensation and benefits 3,188,684 3,577,884
Accrued third party payor liabilities 469,061 142,918
Income taxes payable 535,244 --
Accrued expenses 1,623,681 3,785,563
Payable to health insurance program 661,248 661,248
Current debt maturities 7,248 --
------------ ------------
TOTAL CURRENT LIABILITIES 7,556,121 8,517,452
Long-term debt - Note 4 2,500,000 --
Deferred income taxes and other long term 643,351 1,256,762
------------ ------------
TOTAL LIABILITIES 10,699,472 9,774,214
Commitments and contingencies - Note 7 -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, authorized 500,000
shares; none issued or outstanding -- --
Common stock, $.01 par value, 10,000,000
shares authorized at August 31, 1995 and
May 31, 1996; 3,561,050 shares issued
and outstanding at August 31, 1995 and
3,640,000 at May 31, 1996 35,610 36,400
Additional paid-in capital 13,725,432 13,844,797
Retained earnings 891,001 4,920,386
------------ ------------
TOTAL EQUITY 14,652,043 18,801,583
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 25,351,515 $ 28,575,797
============ ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 5
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended May 31,
--------------------------------------------
Pro Forma
1995 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Net revenues $14,637,710 $14,637,710 $ 15,819,865
Expenses:
Salaries and benefits 7,737,525 7,737,525 8,688,352
Purchased services 2,428,256 2,428,256 2,182,160
Provision for bad debts 107,826 107,826 39,329
Depreciation and amortization 296,121 296,121 332,085
Other 2,087,972 2,087,972 2,259,108
----------- ----------- -----------
Total operating expenses 12,657,700 12,657,700 13,501,034
Other income (expense):
Interest expense - related party (305,653) (305,653) --
Interest expense - other (300) (300) --
Interest income and other 130,256 130,256 86,968
----------- ----------- -----------
Income before income taxes 1,804,313 1,804,313 2,405,799
Income tax expense (Note 6) 269,372 721,725 960,948
----------- ----------- -----------
Net income $ 1,534,941 $ 1,082,588 $ 1,444,851
=========== =========== ===========
Earnings per common share:
Net income $ 0.39 $ 0.26 $ 0.33
=========== =========== ===========
Weighted average shares outstanding 3,931,375 4,239,593 $ 4,373,819
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 6
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended May 31,
-------------------------------------------
Pro Forma
1995 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $14,923,444 $41,651,279 $45,504,167
Expenses:
Salaries and benefits 7,737,525 22,272,803 25,087,954
Purchased services 2,559,203 6,938,241 6,524,349
Provision for bad debts 77,807 770,549 42,389
Depreciation and amortization 597,485 861,035 974,124
Other 2,081,947 5,860,539 6,395,236
----------- ----------- -----------
Total operating expenses 13,053,967 36,703,167 39,024,052
Other income (expense):
Interest expense - related party (909,907) (909,907) (24,298)
Interest expense - other (1,130) (1,130) (4,944)
Interest income and other 261,237 305,744 226,638
----------- ----------- -----------
Income before income taxes 1,219,677 4,342,819 6,677,511
Income tax expense (Note 6) 425,750 1,737,128 2,648,126
----------- ----------- -----------
Income before equity in net
earnings of Horizon LLC 793,927 2,605,691 4,029,385
Equity in net earnings of
Horizon LLC (Note 3) 1,567,720 -- --
----------- ----------- -----------
Net income $ 2,361,647 $ 2,605,691 $ 4,029,385
=========== =========== ===========
Earnings per common share:
Net income $ 0.74 $ 0.62 $ 0.93
=========== =========== ===========
Weighted average shares outstanding 3,173,369 4,210,142 4,336,765
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE> 7
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
May 31, May 31,
1995 1996
------------------------ ----------------------
<S> <C> <C>
Operating activities:
Net income $ 2,361,647 $ 4,029,385
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 597,485 974,124
Equity in Net Earnings of Horizon LLC (1,567,720) --
Changes in net assets and liabilities:
Decrease (increase) in accounts receivable 3,370,937 (1,810,775)
Decrease in other receivables 324,362 154,225
Decrease (increase) in prepaid expenses and supplies 186,686 (254,027)
Increase in other assets (327,605) (415,432)
(Decrease) increase in accounts payable, accrued expenses and
other liabilities (139,692) 1,205,353
Decrease in payable to health insurance program (620,900) --
----------- -----------
Net cash provided by (used in) operating activities 4,185,200 3,882,853
Investing activities:
Purchase of property and equipment (132,508) (344,438)
Payment for purchase of minority interest in Horizon LLC,
net of cash acquired (9,196,249) --
Cash contributions to Horizon LLC (620,000) --
----------- -----------
Net cash used in investing activities (9,948,757) (344,438)
Financing activities:
Payments of long-term debt (2,207,577) (3,807,248)
Proceeds from line of credit -- 1,300,000
Net proceeds from issuance of common stock 12,139,026 120,155
----------- -----------
Net cash provided by (used in) financing activities 9,931,449 (2,387,093)
----------- -----------
Net increase in cash and short term investments 4,167,892 1,151,322
----------- -----------
Cash and short-term investments at beginning of period 2,143,726 3,167,036
----------- -----------
Cash and short-term investments at end of period $ 6,311,618 $ 4,318,358
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 911,037 $ 29,242
=========== ===========
Income taxes $ 288,838 $ 3,067,779
=========== ===========
Supplemental schedule of non-cash investing activities:
Purchase of minority interest in Horizon LLC
Fair value of assets acquired $17,283,061
Cash paid (9,683,467)
Conversion of equity investment (4,351,737)
-----------
Liabilities assumed $ 3,247,857
===========
</TABLE>
See notes to consolidated financial statements.
-7-
<PAGE> 8
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Horizon Mental Health Management, Inc. ("Horizon" or the "Company") is a
contract manager of mental health programs offered by general acute care
hospitals in the United States. These management contracts are
generally for terms ranging from three to five years, the majority of
which have automatic renewal provisions. Horizon currently has offices
in Denton, Texas; Dallas, Texas; San Francisco, California; Chicago,
Illinois; Tampa, Florida; and Boston, Massachusetts. On August 1, 1994
Horizon signed a contract with Horizon Mental Health Management, LLC
(the "Horizon LLC") to have it manage all of Horizon's then existing
management contract obligations for a 72.5% interest in the Horizon LLC.
Prior to March 20, 1995, the remaining 27.5% interest in the Horizon LLC
was held by Mental Health Management, Inc. ("MHM"), which signed a
contract with the Horizon LLC on August 1, 1994 to have it manage all of
MHM's then existing management contract obligations. Prior to the
Company's acquisition of the minority interest of MHM in the Horizon
LLC, as discussed below, certain provisions of the limited liability
company agreement of the Horizon LLC which required the consent of MHM
for certain transactions prevented Horizon from having the ability to
control the Horizon LLC under generally accepted accounting principles,
and therefore the Horizon LLC was not consolidated with Horizon and
Horizon accounted for its investment in the Horizon LLC by the equity
method for the two quarters ending February 28, 1995. Prior to
formation of the Horizon LLC, Horizon's contracts were managed through a
wholly-owned subsidiary. The Horizon LLC contract stipulated that MHM,
as a member in the Horizon LLC, would be allocated the first $1,750,000
of the Horizon LLC income for each of the two fiscal years ending August
31, 1995 and 1996. During the six months ended February 28, 1995, MHM
was allocated a total of $1,750,000 of the Horizon LLC's income while
Horizon was allocated $1,567,720 all in the second quarter.
Upon completion of its initial public offering of common stock, Horizon
became contractually obligated to acquire the minority interest of MHM
in the Horizon LLC. March 13, 1995 was the effective date of the
initial public offering. The acquisition of the minority interest of
MHM was effective March 20, 1995. As such, the Horizon LLC became a
wholly-owned subsidiary of Horizon. The Horizon LLC has been
consolidated with the Company effective March 1, 1995 through August 31,
1995. Effective September 1, 1995, the Horizon LLC was dissolved and
its operations combined with Horizon. (See Note 3)
Horizon was formed in July 1989 for the purpose of acquiring all the
assets of two companies. One of the 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 and operated 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 Horizon.
-8-
<PAGE> 9
A subsidiary of Horizon leased and began operating Mountain Crest
Hospital ("MCH") in December 1990. Just prior to the Horizon LLC
formation, Horizon subleased MCH to MHM for a period commencing July
31, 1994 through December 31, 2000. Horizon, which had previously
guaranteed the obligations under the primary lease, has provided the
substitute guaranty of MHM to the lessor. Management believes it has
satisfied the conditions in the primary lease for release of Horizon's
guaranty. The sublease requires monthly rental payments to Horizon of
50% of operating cash flow, as defined, subject to a minimum monthly
payment of $20,000, not to exceed $1,200,000 in the aggregate over the
sublease life which expires upon expiration of the primary lease on
December 31, 2000. As of May 31, 1996, Horizon has received $543,686
of the $1,200,000 resulting in future receipts of $656,314 to be
received on or before February 1, 1999 assuming minimum monthly
payments of $20,000.
INITIAL PUBLIC OFFERING
On March 13, 1995, the Company's initial public offering of 2,080,000
shares of common stock at an offering price to the public of $10.00 per
share was declared effective by the Securities and Exchange Commission.
Of the 2,080,000 shares of common stock offered, 1,321,233 shares were
offered by Horizon and 758,767 shares were offered by a stockholder of
the Company. On March 20, 1995, the Company completed the initial
public offering, issued the common stock and received net proceeds of
$11,324,141 (after deducting underwriting discounts and IPO costs of
$1,888,189).
On April 11, 1995, the Company sold an additional 78,767 shares of
common stock at the initial offering price of $10.00 per share pursuant
to the exercise of the overallotment option granted to the underwriters
in the initial public offering. Net proceeds of $675,387 (after
deducting underwriting discounts and IPO costs of $112,283) were
received by the Company.
PURCHASE OF MINORITY INTEREST
On March 20, 1995, $9,683,467 of the $11,324,141 in net proceeds to the
Company from its initial public offering were used to purchase MHM's
minority interest in the Horizon LLC. The purchase transaction
eliminated MHM's equity interest in the Horizon LLC ($2,794,715) and
recognized an increase in intangible assets based upon the value of the
Horizon LLC management contracts ($2,355,000). The remaining purchase
price was recorded as goodwill ($4,533,752). The increase in contract
value will be amortized over seven years and the goodwill over forty
years. As a result of this transaction, the Horizon LLC was
consolidated with the Company effective March 1, 1995. Effective
September 1, 1995, the Horizon LLC was dissolved and its operations
combined with Horizon's. (See Note 3)
BASIS OF PRESENTATION (HISTORICAL AND PRO FORMA)
The accompanying consolidated balance sheet at May 31, 1996, the
consolidated statements of operations for the three and nine month
periods ended May 31, 1995 and 1996, and the consolidated statements of
cash flows for the nine months ended May 31, 1995 and 1996 are
unaudited. These financial statements should be read in conjunction
with the Company's audited financial statements for the year ended
August 31, 1995. In the opinion of Company
-9-
<PAGE> 10
management, the unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, which the
Company considers necessary for a fair presentation of the financial
position of the Company as of May 31, 1996, and the results of
operations for the three months and nine months ended May 31, 1995 and
1996.
The Pro Forma Consolidated Statement of Operations for the nine months
ended May 31, 1995 give effect to the acquisition of the 27.5% interest
in the Horizon LLC as if it had occurred at the beginning of the
reported period. In addition, the assumption was made that the Company
was taxed at a rate of 40% for both the three and nine month periods,
the rate which would have been in effect if the Company had not had a
net operating loss carryforward.
Operating results for the three and nine month periods are not
necessarily indicative of the results that may be expected for a full
year or any portion thereof.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments
include securities with original maturities of three months or less
when purchased.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation expense is provided on the straight-line basis over the
assets' estimated useful lives. Routine maintenance and repair items
are charged to current operations.
NET REVENUES: Net 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.
Some management contracts include a clause which states that Horizon
will indemnify the hospital for any third- party payor denials,
including Medicare. At the time the charges are denied, an allowance
for 100% of the disputed amount is recorded by Horizon. Management
believes it has adequately provided for any potential adjustments that
may result from final settlement of these denials.
At May 31, 1996, Horizon had management contracts with 34 acute care
hospitals directly owned or affiliated with Columbia/HCA Healthcare
Corporation. These hospitals collectively accounted for approximately
26.1% of net revenues for the nine months ended May 31, 1996.
The customers of Horizon are not concentrated in any specific
geographic region, but are concentrated in the health care industry.
Horizon generally does not require collateral to support outstanding
accounts receivable.
LONG-LIVED AND INTANGIBLE ASSETS: Assets and liabilities acquired in
connection with business combinations accounted for under the purchase
method are recorded at their respective fair values. Deferred taxes
have been recorded to the extent of differences between the fair value
and the tax basis of the assets acquired and liabilities assumed. The
excess of the purchase price over the fair value of the net assets
acquired is amortized on a
-10-
<PAGE> 11
straight-line basis over 40 years. Other intangible assets include
management contracts and are amortized on a straight-line basis over
seven years. The Company has adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of" (SFAS No. 121), effective
September 1, 1994. Under SFAS 121, the Company recognizes impairment
losses on property and equipment 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 by
comparing the sum of the expected future discounted net cash flows to
the carrying amount of the asset. Impairment losses are recognized in
operating income as they are determined. As of May 31, 1996, no
impairment losses have been incurred.
INCOME TAXES: Horizon has adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109
generally requires an asset and liability approach and requires
recognition of deferred tax assets and liabilities resulting from
differing book and tax basis 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.
NET INCOME (LOSS) PER SHARE: Net income (loss) per common share is
calculated using the weighted average number of common and common
equivalent shares outstanding during the respective periods. Dilutive
common equivalents consist of stock options calculated using the
treasury stock method. Pursuant to the requirements of the Securities
and Exchange Commission, common shares and common equivalent shares
issued at prices below the public offering price during the twelve
months immediately preceding the date of the initial filing of the
Registration Statement in the Company's initial public offering have
been included in the calculation of common shares and common equivalent
shares, using the treasury stock method, as if they were outstanding
for all periods presented. All shares and per share data, except par
value per share, have been retroactively adjusted to reflect the
2-for-1stock split of the Company's common stock (see Note 8).
USE OF ESTIMATES: The Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
-11-
<PAGE> 12
3. INVESTMENT IN HORIZON LLC
Certain provisions of the limited liability company agreement of the
Horizon LLC which required the consent of MHM for certain transactions
prevented the Company from having the ability to control the Horizon
LLC under generally accepted accounting principles and therefore the
Horizon LLC was not consolidated with the Company for accounting
purposes prior to March 1, 1995. As a result of Horizon's March 20,
1995 acquisition of the minority interest of MHM in the Horizon LLC,
the Horizon LLC became a wholly-owned subsidiary of Horizon and has
been consolidated with the Company effective March 1, 1995.
Summarized financial information for the Horizon LLC is as follows:
<TABLE>
<CAPTION>
Six Months
Ended
February 28, 1995
(unaudited)
-----------------
<S> <C>
Net revenues $ 26,869,535
Operating expenses 23,566,009
Other income 44,507
----------------
Income before income taxes 3,348,033
Income tax expense 30,298
----------------
Net income $ 3,317,735
================
</TABLE>
<TABLE>
<CAPTION>
February 28, 1995
(unaudited)
-----------------
<S> <C>
Current assets $ 9,688,529
Noncurrent assets 848,136
----------------
Total assets $ 10,536,665
================
Current liabilities $ 3,247,846
Noncurrent liabilities --
----------------
Total liabilities 3,247,846
----------------
Members' equity 7,288,819
----------------
$ 10,536,665
================
</TABLE>
As of February 28, 1995, Horizon recognized its capital contributions
and its share of net earnings of the Horizon LLC as an increase in its
investment and recognized Horizon LLC distributions as a decrease in
its investment. Horizon capital contributions totaled $3,420,000
through February 28, 1995. Distributions received by the Company from
the Horizon LLC totaled $1,000,000 through February 28, 1995. The
Company's share of the Horizon LLC's net earnings was $1,567,720 for
the six months ended February 28, 1995. The Horizon LLC contract
stipulated that MHM be allocated the first $1,750,000 of Horizon LLC
net earnings in the fiscal year ended August 31, 1995. $1,750,000 was
allocated to MHM during the six months ended February 28, 1995. On
September 1, 1995, the Horizon LLC was dissolved and its operations
combined with Horizon.
-12-
<PAGE> 13
4. LONG-TERM DEBT
At August 31, 1995 and May 31, 1996, Horizon had the following
long-term debt:
<TABLE>
<CAPTION>
August 31, May 31,
1995 1996
------------- ----------
<S> <C> <C>
Texas Commerce Bank -
Revolving credit facility $ -- $ --
Promissory Note to OrNda HealthCorp,
Due on November 30, 1999, interest
Payable quarterly at prime plus 2%.
Principal of $48,000 payable quarterly. 2,500,000 --
Other 7,248 --
------------- ----------
2,507,248 --
------------- ----------
Less current maturities (7,248) --
------------- ----------
$ 2,500,000 $ --
============= ==========
</TABLE>
Horizon believes the fair market value of the Promissory Note was not
in excess of the book value at August 31, 1995. On October 3, 1995,
the Company paid OrNda $2,524,298 for the outstanding balance of the
note plus accrued interest.
Effective September 29, 1995, the Company entered into a loan agreement
with Texas Commerce Bank (TCB) for a revolving line of credit with a
maximum advance commitment of $11,000,000. On December 12, 1995, the
Company paid TCB the outstanding balance of $1,300,000 originally
advanced to the Company during the quarter ended November 30, 1995,
plus accrued interest. As of May 31, 1996, the Company has borrowed $0
against the available line of credit, and has $7.9 million available
for advances under the revolving credit facility.
This note bears interest at (1) the lesser of the Floating Base Rate or
the maximum non-usurious interest rate permitted by law and/or (2) the
lesser of the LIBOR Rate plus LIBOR Margin or the maximum nonusurious
interest rate permitted by law.
Floating Base Rate means the greater of (i) TCB's prime rate of
interest or (ii) the weighted average of the rates on overnight federal
funds transactions with members of the Federal Reserve System arranged
by federal funds brokers plus one-half of one percent (.5%). LIBOR
Rate means the quotient of (i) the Interbank Offered Rate divided by
(ii) the remainder of 1.0 minus the LIBOR reserve requirement. LIBOR
Margin is 1.25% to 1.75% depending on the debt coverage ratio.
The original maturity date of this note is December 15, 1998; however,
it may be extended to December 15, 2000 if certain debt coverage ratios
are met.
-13-
<PAGE> 14
5. STOCK OPTIONS
In accordance with Horizon's 1989 and 1995 Stock Option Plans, as
amended, 1,287,895 shares of common stock have been reserved for grant
to key employees. Of these, 663,070 options, 933,895 options, 940,845
options, and 939,395 options were issued and outstanding at August 31,
1993, 1994, 1995 and May 31, 1996 respectively. During fiscal 1993,
1994, and 1995 nonstatutory stock options to purchase 382,670 and
270,825 and 112,000 shares of common stock were granted with an
exercise price of $1.50, $5.42, $6.00, $10.00, $11.125 or $13.375 per
share, respectively. On September 1, 1995, the Company granted an
additional 85,000 options under the 1995 Stock Option Plan at $14.625
per share subject to shareholder approval which was received on January
11, 1996. Management believes the exercise prices of the options
approximated or exceeded the market value of the common stock at the
date of grant. As such, no expense is recognized in the accompanying
statements of income as a result of such issuance. No options were
canceled or expired during 1993 and 1994. However, during 1995 and
1996, 26,000 and 7,500 options granted to former officers were canceled
respectively. During fiscal 1995, vested options of 67,500 and 11,550
were exercised by certain officers at exercise prices of $1.25 and
$3.2125, respectively. The options are generally exercisable in
cumulative installments over a four-year period and terminate 10 years
from the date of grant; 270,170 options were exercisable at August 31,
1995. During fiscal 1996, vested options of 28,000 at $0.75, 15,200 at
$1.25 and 37,750 at $1.50 have been exercised by certain officers.
Exercisable options total 265,102 at May 31, 1996.
On April 28, 1995 the board of directors created a stock option plan
for outside directors owning less than 5% of the stock of the Company.
100,000 shares of common stock are reserved for issuance under this
plan. As of May 31, 1996 a total of 40,000 options are issued and
outstanding. This plan has been amended and restated to also provide
for 2,000 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.
On April 1, 1996 the Company filed an S-8 registration statement which
registered 1,369,699 shares granted to or eligible for granting to
employees and directors under the 1989 and 1995 stock option plans, as
amended, and the outside director stock option plan. This registration
includes a separate reoffer prospectus to allow any shares issued in
the future and most previously exercised shares under the 1989 and 1995
stock option plans to be traded at any time without any holding period
or volume restrictions.
6. PROVISION FOR INCOME TAXES
The Company recorded federal and state income taxes for the three and
nine months ended May 31, 1996, in the amount of $960,948 and
$2,648,126, respectively, resulting in a combined tax rate of 39.9% and
39.7%, respectively. Although the company is utilizing its Section 382
net operating loss carryforwards, the benefit from utilization is
reflected through a change in deferred taxes rather than a benefit to
income tax expense.
-14-
<PAGE> 15
7. COMMITMENTS AND CONTINGENCIES
Horizon leases various office facilities and equipment under operating
leases. The following is a schedule, as of May 31, 1996, of minimum
rental payments under these leases which expire at various dates:
<TABLE>
<S> <C>
Three months ending August 31, 1996 $ 143,218
For the year ending August 31, 1997 544,706
For the year ending August 31, 1998 470,787
For the year ending August 31, 1999 332,113
For the year ending August 31, 2000 290,211
For the years ending August 31, 2001 and thereafter 301,849
------------
$ 2,082,884
============
</TABLE>
Horizon is insured for professional and general liability on a
claims-made policy, with additional tail coverage being obtained when
necessary. Management is unaware of any claims against the Company
that would cause the final expenses for professional and general
liability to vary materially from amounts provided.
Horizon 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 would not be in excess of any reserves or have a material
adverse effect on Horizon's financial position or results of
operations.
8. COMMON STOCK
On March 30, 1994, Horizon effected a two-for-one common stock split,
increasing the number of authorized common shares from 2,000,000 to
4,000,000. The par value of such stock remained at $0.01 per share,
thereby causing $10,410 originally recorded as additional paid-in
capital to be reclassified as common stock. Upon effecting the stock
split, the stock options and their related exercise prices were doubled
and halved, respectively.
On February 1, 1995, Horizon increased the number of its authorized
common shares to 10,000,000.
-15-
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company was formed in July 1989 for the purpose of acquiring all the
assets of two companies. One company, 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 and
operated a freestanding psychiatric hospital in California. Although Horizon
owned, leased or managed a few freestanding psychiatric or substance abuse
facilities beginning March 1, 1990, the mental health contract management
business formed by Horizon's predecessor in 1981 has been Horizon's primary
business since subleasing its last remaining freestanding psychiatric hospital
on July 31, 1994.
Effective August 1, 1994, Horizon and Mental Health Management ("MHM")
formed the Horizon LLC. Horizon and MHM owned 72.5% and 27.5% of the Horizon
LLC, respectively as of February 28, 1995. The Horizon LLC assumed
responsibility for the performance of 39 MHM management contracts (37 of which
had commenced operations) and all management contracts of the Company. Prior
to Horizon's purchase of the minority interest of MHM in the Horizon LLC as
discussed below, certain provisions of the limited liability company agreement
of the Horizon LLC which required the consent of MHM for certain transactions
prevented Horizon from having the ability to control the Horizon LLC under
generally accepted accounting principles and therefore the Horizon LLC was not
consolidated with Horizon for accounting purposes for the two quarters ending
February 28, 1995. On March 20, 1995, Horizon acquired the 27.5% interest in
the Horizon LLC held by MHM, thus effective March 1, 1995, all of the mental
health contract management business has been accounted for on a consolidated
basis in the financial statements of the Company. Therefore, the operating
results of the Company for the nine months ended May 31, 1996, have changed
materially due to this event as compared to the corresponding period in the
prior fiscal year.
Mental Health Outcomes, Inc. ("MHO, Inc."), a Delaware corporation, was
formed on August 10, 1995 and is engaged in the design and operation of outcome
measurement systems for psychiatric and chemical dependency providers. MHO,
Inc. is a wholly owned subsidiary of Horizon.
Horizon, which had previously traded on the American Stock Exchange under
the symbol "HMH", began trading on the Nasdaq National Market on May 7, 1996,
under the symbol "HMHM".
At May 31, 1996, the Company had management contracts with 122 general
acute care hospitals located in 36 states, providing for the operation of a
total 178 various treatment programs.
-16-
<PAGE> 17
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
August 31,
------------------------------- November 30, February 29, May 31,
1993 1994* 1995 1995 1996 1996
------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 43 99 100 102 103 104
Contract locations signed
and unopened 8 9 12 12 12 18
--- --- --- --- --- ---
Total contract locations 51 108 112 114 115 122
=== === === === === ===
SERVICES COVERED BY CONTRACTS
IN OPERATION:
Inpatient (A) 44 89 91 92 92 94
Partial hospitalization (A) 18 45 55 59 61 64
Outpatient 4 7 8 10 12 14
Home health -- 1 1 3 6 6
CQI Plus -- 20 45 50 54 60
TYPES OF TREATMENT PROGRAMS
IN OPERATION:
Geropsychiatric (A) 31 75 92 98 106 112
Adult psychiatric (A) 29 60 57 60 58 56
Substance abuse (A) 5 4 3 4 5 6
Other (A) 1 3 2 2 2 4
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended August 31, -----------------------------------
--------------------------- November 30, February 29, May 31,
1993 1994* 1995 1995 1996 1996
--------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN NUMBER OF CONTRACTS:
Beginning number of contracts 45 51 108 112 114 115
Contracts added 17 66* 28 6 4 12
Contracts ended 11 9 24 4 3 5
---- ----- ---- ---- --- ---
Ending number of contracts 51 108 112 114 115 122
==== ===== ==== ==== === ===
</TABLE>
* Reflects the assumption by the Horizon LLC of management responsibility under
the 39 MHM contracts effective August 1, 1994, of which 37 contracts had
commenced operations at that date.
(A) Beginning with the quarter ended February 29, 1996 a new methodology which
redefined the statistical definition of an operating service or program was
implemented. To avoid duplicity, multiple services/treatment programs within
each category at one location are now being reported as a single
service/treatment program where the predominant treatment defines the
appropriate categories. As a result of this reporting change, the prior four
(4) periods have been restated as estimates based on the new reporting
definition.
-17-
<PAGE> 18
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MAY 31, 1995 (ACTUAL) AND MAY 31, 1996 (ACTUAL)
The following table sets forth for the three month and nine month periods ended
May 31, 1995 and May 31, 1996, the percentage relationship to total net
revenues of certain costs, expenses and income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ -----------------
1995 1996 1995 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 98.6% 99.1% 96.7% 99.3%
Other revenues 1.4 .9% 3.3 .7%
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating costs and expenses
Salaries and benefits 52.9% 54.9% 51.8% 55.1%
Purchased services 16.6% 13.8% 17.1% 14.3%
Provision for bad debts .7% .2% .5% .1%
Depreciation and amortization 2.0% 2.1% 4.0% 2.1%
Other 14.3% 14.3% 14.0% 14.1%
----- ----- ----- -----
Total operating costs and expenses 86.5% 85.3% 87.4% 85.7%
----- ----- ----- -----
Income from operations 13.5% 14.7% 12.6% 14.3%
Interest and other income (expense), net (1.2)% .5% (4.4)% .4%
----- ----- ----- -----
Income before income taxes 12.3% 15.2% 8.2% 14.7%
Income taxes 1.8% 6.1% 2.9% 5.8%
Equity in net earnings of Horizon LLC -- -- 10.5% --
Net income 10.5% 9.1% 15.8% 8.9%
===== ===== ===== =====
Number of contracts in operation, end of
period 100 104 100 104
</TABLE>
-18-
<PAGE> 19
THREE MONTHS ENDED MAY 31, 1996 COMPARED TO THE THREE MONTHS
ENDED MAY 31, 1995 (HISTORICAL)
Net Revenues. Net revenues for the three months ended May 31, 1996
were $15.8 million, representing an increase of $1.2 million, or 8.2%, as
compared to net revenues of $14.6 million for the corresponding period in the
prior fiscal year. Revenues for the period increased $165,000, or 1.1%, as a
result of lower revenue generating contracts having been replaced with higher
revenue generating contracts. In addition, revenues increased $1.0 million, or
7.0%, at locations that have been under Horizon management during all periods
being reported. This was the result of an average price increase of 3.1% and
the addition of new programs, the most significant of which was a 52.9%
increase in partial program management fees and secondly, a 37.4% increase in
CQI Plus fees. In addition, although patient volumes decreased by 3.1% between
the periods, this decline was offset by increased patient volumes at certain
significant programs and favorable changes in existing fee structures.
Salaries and Benefits. Salaries and benefits for the three months
ended May 31, 1996 were $8.7 million, representing an increase of $1.0 million,
or 13.0%, as compared to salaries and benefits of $7.7 million for the
corresponding period in the prior fiscal year. This increase resulted from an
increase in the full time equivalents from 565.2 for the three months ended May
31, 1995, to 607.2 for the three months ended May 31, 1996, an increase of
7.4%. Full time equivalents increased between the periods as follows:
<TABLE>
<CAPTION>
May 31, May 31,
1995 1996 Increase % Increase
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
General Office 57.7 72.9 15.2 26.3%
Regional Offices 37.8 42.4 4.6 12.2%
Contract Locations 469.7 491.9 22.2 4.7%
------ ------
565.2 607.2
</TABLE>
The increase in general office full time equivalents of 26.3% results
from the development of the Company's Provider Billing Services Department and
its expansion of Mental Health Outcomes, Inc. The increase in regional office
full time equivalents of 12.2% results from the opening of a fifth regional
office in Tampa, Florida in March 1995. The increase in contract location full
time equivalents of 4.7% results from an increase in the number of operational
programs between periods. Annualized salaries and benefits per full time
equivalent for the three months ended May 31, 1996 were $57,236, representing
an increase of $2,486, or 4.5%, as compared to annualized salaries and benefits
per full time equivalent of $54,750 for the three months ended May 31, 1995.
In addition, benefits increased due to an increase in the health insurance
allocation from $289,000 for the three months ended May 31, 1995, to $448,000
for the three months ended May 31, 1996, representing an increase of $159,000,
or 54.9%. This increase resulted primarily from an increase in the amount of
claims paid from $303,000 for the three months ended May 31, 1995, to $418,000
for the three months ended May 31, 1996, an increase of $115,000, or 38.0%.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended May 31, 1996 were $332,000, representing an increase
of $36,000, or 12.2%, as compared to depreciation and amortization expenses of
$296,000 for the corresponding period in the prior fiscal year. This increase
results from the depreciation expenses of additional equipment purchased for
the operation of its contract management business, offset by a decrease in
depreciation expense related to those items that no longer have a depreciable
basis during the three months ended May 31, 1996.
-19-
<PAGE> 20
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the three months ended May 31,
1996, were $4.5 million, representing a decrease of $100,000, or 2.2%, as
compared to other operating expenses of $4.6 million for the corresponding
period in the prior fiscal year. The change is primarily due to fluctuations
in other purchased services and other operating expenses. Other purchased
services decreased $160,000 due to non-recurring contracted service fees
incurred during the three months ended May 31, 1995. Other operating expenses
increased due to $485,000 in new contract capital contributions (facility
renovations) for the three months ended May 31, 1996, as compared to $75,000
for the three months ended May 31, 1995. In addition, a decrease occurred in
other operating expenses due to a reduction of $326,000 in a potential working
capital settlement related to the freestanding psychiatric hospital in
California, formerly owned by the Company.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for the three months ended May 31, 1996 was $87,000,
as compared to ($176,000) in net interest expense for the corresponding period
in the prior fiscal year. This change results primarily from a decrease in
interest expense for the quarter of $306,000 resulting from a reduction in the
principal balance of related party debt from $9.9 million at May 31, 1995 to $0
during the current quarter. Additionally, interest income decreased $43,000 or
33.1% which is primarily the result of a decrease in cash of $2.0 million or
32.0% when compared to the same period last year.
Income Tax Expense. For the three month period ended May 31, 1996,
the Company recorded federal and state income taxes of $961,000 resulting in a
combined tax rate of 39.9%. For this period, the benefit from the utilization
of net operating loss carryforwards was reflected through a change in deferred
taxes rather than a benefit to income tax expense. For the three month period
ended May 31, 1995, the Company recorded federal and state income taxes of
$269,000, resulting in a combined tax rate of 14.9%. For this period, the
Company utilized (with limitation) available net operating loss carryforwards
which reduced both federal and state income tax expense.
-20-
<PAGE> 21
NINE MONTHS ENDED MAY 31, 1996 COMPARED TO THE NINE MONTHS ENDED
MAY 31, 1995 (HISTORICAL)
Effective August 1, 1994, the Horizon LLC assumed management
responsibility for all of the contract management business of the Company in
return for all of the economic benefits accruing thereafter from the management
contracts of the Company. Certain provisions of the limited liability company
agreement of the Horizon LLC which required the consent of MHM for certain
transactions prevented the Company from having the ability to control the
Horizon LLC under generally accepted accounting principles and therefore the
Horizon LLC was not consolidated with the Company for accounting purposes for
the six months ended February 28, 1995, and Horizon accounted for its
investment in the Horizon LLC by the equity method through such date. Under
the equity method, the revenues and expenses of the Horizon LLC for the period
in question are excluded from Horizon's revenues and expenses, but Horizon's
share of the Horizon LLC's net income for such period is included in Horizon's
net income as "Net Earnings from Equity Investment in Horizon LLC." As a
result of Horizon's acquisition of the 27.5% minority interest in the Horizon
LLC effective March 20, 1995, the Horizon LLC was consolidated with Horizon for
accounting purposes as of March 1, 1995. Effective September 1, 1995, the
Horizon LLC was dissolved and its operations combined with Horizon. Therefore,
the operating results of the Company for the nine months ended May 31, 1996,
have changed materially due to this event as compared to the corresponding
period in the prior fiscal year.
Net Revenues. Net revenues for the nine months ended May 31, 1996,
were $45.5 million, representing an increase of $30.6 million, or 205.4%, as
compared to net revenues of $14.9 million for the corresponding period in the
prior fiscal year.
Salaries and Benefits. Salaries and benefits expenses for the nine
months ended May 31, 1996 were $25.1 million, representing an increase of $17.4
million, or 226.0% as compared to salaries and benefits of $7.7 million for the
corresponding period in the prior fiscal year.
Depreciation and Amortization. Depreciation and amortization expenses
for the nine months ended May 31, 1996, were $974,000, representing an increase
of $376,000, or 62.9%, as compared to depreciation and amortization expenses of
$598,000 for the corresponding period in the prior fiscal year. $237,000 of
this increase is due to the amortization of additional goodwill of $4.9 million
and contract valuation of $2.4 million resulting from the acquisition of MHM's
27.5% minority interest in the Horizon LLC. The remainder of this increase
results from the depreciation expense of additional equipment purchased for the
operation of its contract management business, offset by a decrease in
depreciation expense related to those items that no longer have a depreciable
basis during the nine months ended May 31, 1996.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the nine months ended May 31,
1996, were $13.0 million, representing an increase of $8.3 million, or 176.6%,
as compared to other operating expenses of $4.7 million for the corresponding
period in the prior fiscal year.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for the nine months ended May 31, 1996 was $197,000,
as compared to net interest expense of ($650,000) for the corresponding period
in the prior fiscal year. This change results primarily from a decrease in
interest expense associated with the reduction in the amount of principal
outstanding on the Company's related party long term debt from $9.9 million at
May 31, 1995 to $0 at May 31, 1996.
Income Tax Expense. For the nine month period ended May 31, 1996, the
Company recorded federal and state income taxes of $2,648,000, resulting in a
combined tax rate of 39.7%. For this period, the benefit from utilization of
net operating loss carryforwards was reflected through a change in deferred
taxes rather than a benefit to income tax expense. For the nine month period
ended May 31, 1995, the Company recorded federal and state income taxes of
$426,000, resulting in a combined tax rate of 15.3%. For this period, the
Company utilized (with limitation) available net operating loss carryforwards
which reduced both federal and state income tax expense.
-21-
<PAGE> 22
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MAY 31, 1995 (PRO FORMA) AND MAY 31, 1996 (ACTUAL)
The Pro Forma Consolidated Statements of Operations give effect to the
acquisition of the 27.5% interest of MHM in the Horizon LLC as if it had
occurred at September 1, 1994. In addition, the assumption was made that the
Company was taxed at a rate of 40%, the rate which would be in effect if the
Company had not had a net operating loss carryforward during fiscal 1995.
The following table sets forth for the three and nine months ended May 31, 1995
(Pro Forma) and May 31, 1996 (Actual), the percentage relationship to total net
revenues of certain costs, expenses, and income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
-------------------------- -----------------------
1995 1996 1995 1996
---------- ---------- --------- ----------
Pro Forma Pro Forma
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 98.6% 99.1% 99.5% 99.3
Other revenues 1.4 .9% .5 .7
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0
----- ----- ----- -----
Operating costs and expenses
Salaries and benefits 52.9% 54.9% 53.4% 55.1
Purchased services 16.6% 13.8% 16.7% 14.3
Provision for bad debts .7% .2% 1.9% .1
Depreciation and amortization 2.0% 2.1% 2.0% 2.1
Other 14.3% 14.3% 14.0% 14.1
----- ----- ----- -----
Total operating costs and expenses 86.5% 85.3% 88.0% 85.7
----- ----- ----- -----
Income from operations 13.5% 14.7% 12.0% 14.3
Interest and other income (expense), net (1.2)% .5% (1.5)% .4
----- ----- ----- -----
Income before income taxes 12.3% 15.2% 10.5% 14.7
Income taxes 4.9% 6.1% 4.2% 5.8
Net income 7.4% 9.1% 6.3% 8.9
===== ===== ===== =====
Number of contracts in operation, end of
period 100 104 100 104
</TABLE>
-22-
<PAGE> 23
THREE MONTHS ENDED MAY 31, 1996 (ACTUAL) COMPARED
TO THE THREE MONTHS ENDED MAY 31, 1995 (PRO FORMA)
As a result of the acquisition of the minority interest of MHM
(effective March 20, 1995), the Horizon LLC became a wholly-owned subsidiary of
Horizon and the Horizon LLC has been consolidated with the Company effective
March 1, 1995. Therefore, with the exception of income tax expense, the
operating results for the three months ended May 31, 1995 do not require Pro
Forma presentation and are reflected at actual. See pages 19 and 20 for the
applicable discussion. Pro Forma income tax expense is reflected under the
assumption that the Company was taxed at a rate of 40%, the rate which would be
in effect if the Company had not had a net operating loss carryforward during
fiscal 1995.
Income Tax Expense. For the three month period ended May 31, 1996,
the Company recorded federal and state income taxes of $961,000 (Actual)
resulting in a combined tax rate of 39.9%. For this period, the benefit from
the utilization of net operating loss carryforwards was reflected through a
change in deferred taxes rather than a benefit to income tax expense. For the
three month period ended May 31, 1995, the Company recorded federal and state
income taxes of $722,000 (Pro Forma), based upon an assumption of a 40%
effective tax rate. The increase corresponds to an increase in income before
taxes between the periods of $601,000.
-23-
<PAGE> 24
NINE MONTHS ENDED MAY 31, 1996 (ACTUAL) COMPARED
TO THE NINE MONTHS ENDED MAY 31, 1995 (PRO FORMA)
The Pro Forma operating results give effect to the acquisition of the
27.5% interest of MHM in the Horizon LLC as if it had occurred at September 1,
1994. In addition, the assumption was made that the Company was taxed at a
rate of 40%, the rate which would be in effect if the Company had not had a net
operating loss carryforward during fiscal 1995.
Net Revenues. Net revenues for the nine months ended May 31, 1996
were $45.5 million (Actual), representing an increase of $3.8 million, or 9.1%,
as compared to net revenues of $41.7 million (Pro Forma) for the corresponding
period in the prior fiscal year. Revenues for the period increased $1.4
million, or 3.3%, as a result of lower revenue generating contracts having been
replaced with higher revenue generating contracts. In addition, revenues
increased $2.5 million, or 5.9%, at locations that have been under Horizon
management during all periods being reported. This was the result of an
average price increase of 3.1% and the addition of new programs, the most
significant of which was a 86.0% increase in CQI Plus fees between the periods.
In addition, although patient volumes decreased by 3.9% between the periods,
this decline was offset by increased patient volumes at certain significant
programs and favorable changes in existing fee structures.
Salaries and Benefits. Salaries and benefits for the nine months
ended May 31, 1996 were $25.1 million (Actual), representing an increase of
$2.8 million, or 12.6%, as compared to salaries and benefits of $22.3 million
(Pro Forma) for the corresponding period in the prior fiscal year. This
increase resulted from the increase in the full time equivalents from 545.9 for
the nine months ended May 31, 1995, to 599.4 for the nine months ended May 31,
1996, an increase of 9.8%. Full time equivalents increased between the periods
as follows:
<TABLE>
<CAPTION>
May 31, May 31,
1995 1996 Increase % Increase
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
General Office 52.4 69.2 16.8 32.1%
Regional Offices 36.5 43.6 7.1 19.5%
Contract Locations 457.0 486.6 29.6 6.5%
----- -----
545.9 599.4
</TABLE>
The increase in general office full time equivalents of 32.1% results
from the development of the Company's Provider Billing Services Department and
its expansion of Mental Health Outcomes, Inc. The increase in regional office
full time equivalents of 19.5% results from the opening of a fifth regional
office in Tampa, Florida in March 1995. The increase in contract location full
time equivalents of 6.5% results from an increase in the number of operational
programs between periods. Annualized salaries and benefits per full time
equivalent for the nine months ended May 31, 1996 were $55,816 representing an
increase of $1,416, or 2.6%, as compared to annualized salaries and benefits
per average full time equivalent of $54,400 for the nine months ended May 31,
1995.
Depreciation and Amortization. Depreciation and amortization expenses
for the nine months ended May 31, 1996 were $974,000 (Actual), representing an
increase of $113,000, or 13.1%, as compared to depreciation and amortization
expenses of $861,000 (Pro Forma) for the corresponding period in the prior
fiscal year. This increase results from the depreciation expenses of
additional equipment purchased for the operation of its contract management
business, offset by a decrease in depreciation expense related to those items
that no longer have a depreciable basis during the nine months ended May 31,
1996.
-24-
<PAGE> 25
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the nine months ended May 31,
1996, were $13.0 million (Actual), representing a decrease of $600,000, or
4.4%, as compared to other operating expenses of $13.6 million (Pro Forma) for
the corresponding period in the prior fiscal year. The following components
identify the variances between the periods reported.
Purchased services included a $404,000 decrease in Medical Directors'
administrative fees as compared to the same period in the prior year primarily
as a result of successful contract negotiations with physicians on a permanent
basis to provide administrative services which has minimized the usage of Locum
Tenens Physicians (ie., contracting with physicians/physician placement
services to provide qualified individuals to perform administrative duties on a
temporary basis). Additionally, certain physician contracts have been
renegotiated resulting in a general lowering of compensatory fees.
Bad debt expense decreased $728,000 as the nine months ended May 31,
1995 expense of $771,000 was inordinately high due to the non-timely payment by
contracted hospitals, reserves for possible partial program denials by Medicare
and an increase in reserves relating to physician loans. Conversely, bad debt
expense for the nine months ended May 31, 1996 was lower due to timely payment
by contracted hospitals, favorable settlements of past due balances and the
favorable outcome of the appeals process relating to Medicare partial program
denials.
Other operating expenses increased due to $485,000 in new contract
capital contributions (facility renovations) for the nine months ended May 31,
1996, as compared to $75,000 for the nine months ended May 31, 1995. The
expense for travel and entertainment increased $571,000 due to the expansion of
the national sales force, clinical audit function and regional supervisory
personnel, including the creation of the Tampa, Florida regional office. This
new regional office and the expansion of the corporate facilities resulted in a
$64,000 increase in rent expense. In addition, a decrease occurred in other
operating expenses due to a reduction of $326,000 in a potential working
capital settlement related to the freestanding psychiatric hospital in
California, formerly owned by the Company. The Company's recruiting expenses
decreased $266,000 primarily due to effectively reducing the cost of
advertising for new personnel.
Interest and Other Income (Expense), Net. Interest income, interest
expense and other income for the nine months ended May 31, 1996 was $197,000
(Actual), as compared to net interest expense of ($605,000) (Pro Forma) for the
corresponding period in the prior fiscal year. This change results primarily
from a decrease in interest expense associated with the reduction in the amount
of principal outstanding on the Company's related party long term debt from
$9.9 million at May 31, 1995, to $0 at May 31, 1996.
Income Tax Expense. For the nine month period ended May 31, 1996, the
Company recorded federal and state income taxes of $2.7 million (Actual)
resulting in a combined tax rate of 39.7%. For this period, the benefit from
utilization of net operating loss carryforwards was reflected through a change
in deferred taxes rather than a benefit to income tax expense. For the nine
month period ended May 31, 1995, the Company recorded federal and state income
taxes $1.7 million (Pro Forma), based upon an assumption of a 40% effective tax
rate. The increase corresponds to an increase in income before taxes between
the periods of $2.3 million.
-25-
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
On March 13, 1995, the Company's initial public offering of 2,080,000
shares of common stock at an offering price to the public of $10.00 per share
was declared effective by the Securities and Exchange Commission. Of the
2,080,000 shares of common stock offered, 1,321,233 shares were offered by
Horizon and 758,767 shares were offered by a stockholder of the Company. On
March 20, 1995, the Company completed the initial public offering, issued the
common stock and received net proceeds of $11,324,141 (after deducting
underwriting discounts and IPO costs of $1,888,189).
On April 11, 1995, the Company sold an additional 78,767 shares of
common stock at the initial offering price of $10.00 per share pursuant to the
exercise of the overallotment option granted to the underwriters in the initial
public offering. Net proceeds of $675,387 (after deducting underwriting
discounts and IPO costs of $112,283) were received by the Company.
At August 31, 1995, the Company had $2.5 million in long-term debt
payable to OrNda which it paid in full on October 3, 1995. In addition,
effective September 29, 1995, the Company completed a transaction with Texas
Commerce Bank, N.A. for an $11 million revolving credit facility. The purpose
of the facility is to provide funds to be used for working capital needs and
future acquisitions. The facility is for a three year term with extension
provisions. As of May 31, 1996, the Company had $7.9 million available under
the revolving credit facility, of which the Company had borrowed $0 as of May
31, 1996. Under the terms of the facility, the principal outstanding
thereunder to the Company from time to time cannot exceed the lesser of (i)
$11.0 million and (ii) the sum of 80% of the Company's consolidated eligible
accounts receivable, as defined, plus additional amounts up to $3,372,450 based
on specified time periods and the Company's debt coverage ratio, as defined,
less certain reserves. Principal outstanding under the facility will bear
interest at a "Floating Base Rate" and/or the "LIBOR Rate plus Applicable LIBOR
Margin", as selected by the Company in accordance with the terms of the
facility. See Note 4 to the Company's Consolidated Financial Statements
included herein. Accrued interest will be payable monthly during the primary
term of the facility, and quarterly thereafter if the term of the facility is
extended. Depending upon the Company's debt coverage ratio at December 15,
1998 principal borrowed under the facility will either be due in full on such
date, or a portion of such principal will be due on such date and the remainder
will be due in eight equal quarterly installments thereafter ending December
15, 2000.
The Company is subject to certain covenants under the agreements
governing the new facility, including prohibitions against (i) incurring
additional debt or liens, except permitted debt (defined to include purchase
money debt of $1.0 million in the aggregate) or specified permitted liens, (ii)
certain material acquisitions, other than permitted acquisitions as defined
(including acquisitions not exceeding $7.0 million per transaction), (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) entering into any lines of business other than that in which
the Company is presently engaged. In addition, the terms of the facility
require the Company to satisfy certain ongoing financial covenants. The
facility is secured by all of the capital stock of the subsidiaries of the
Company and substantially all other assets of the Company.
On December 20, 1995 the Company entered into a lease agreement with a
term of approximately five years for a building to be constructed to the
Company's specifications. Rent payments will commence under the lease upon
completion of the building and issuance of a certificate of occupancy. In
connection with the lease transaction, the Company has guaranteed a loan of
$863,000. The loan was to the landlord. The Company also agreed to purchase
the leased building at the end of the lease term if it is not sold to a third
party, or the Company does not extend its lease.
-26-
<PAGE> 27
The Company believes that its net working capital of $5.2 million
including cash of $4.3 million and the funds available under the revolving
credit facility of $7.9 million will be sufficient to cover all cash
requirements over the next twelve months including estimated capital
expenditures of $1.5 million. The Company generated $4.3 million in net cash
from operations during the nine months ended May 31, 1996.
Statements contained herein and in various public presentations that
are based on future expectations rather than on historical facts are
forward-looking statements as defined under The Private Securities Litigation
Reform Act of 1995 that involve a number of risks and uncertainties. Factors
that could cause actual results to differ materially from those in any such
forward-looking statement include but are not limited to demand by general
hospitals for our services, our ability to retain existing management contracts
and to sell additional contracts, changes in reimbursement to general hospitals
by Medicare or other third-party payors for costs of providing mental health
services, changes to other regulatory provisions relating to mental health
services, overall economic conditions and various other risks as outlined in
the Company's Securities and Exchange Commission filings.
-27-
<PAGE> 28
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following documents are filed as part of this report:
3.1 Certificate of Incorporation of the Company as
amended (incorporated herein by reference to Exhibit
3.1 to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (Registration Number 33-88314))
as filed with the Commission on February 16, 1995.
3.2 Amended and Restated Bylaws of the Company as
amended (incorporated herein by reference to
Exhibit 3.2 to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Registration
Number 33-88314)) as filed with the Commission on
February 16, 1995.
11.1 Statement Regarding Computation of Per Share
Earnings (filed herewith).
27.1 Financial Data Schedule (filed herewith).
(b) Reports
No reports of Form 8-K were filed by the Company during
the quarter ended May 31, 1996.
-28-
<PAGE> 29
SIGNATURES
Pursuant to the requirements 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.
HORIZON MENTAL HEALTH MANAGEMENT, INC.
Date:
----------------------- ----------------------------------------------
By: James W. McAtee
Executive Vice President, Finance &
Administration (Principal Financial
and Chief Accounting Officer)
-29-
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. NUMBERED PAGES
----------- --------------
<S> <C>
3.1 Certificate of Incorporation of the Company as amended
(incorporated herein by reference to Exhibit 3.1 to
Amendment No. 2 to the Company's Registration Statement
on Form S-1 (Registration Number 33-88314)) as filed with
the Commission on February 16, 1995.
3.2 Amended and Restated Bylaws of the Company as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment
No. 2 to the Company's Registration Statement on Form S-1
(Registration Number 33-88314)) as filed with the Commission
on February 16, 1995.
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule (filed herewith).
</TABLE>
-30-
<PAGE> 1
Exhibit 11.1
HORIZON MENTAL HEALTH MANAGEMENT, INC.
COMPUTATIONS OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
------------------------ -----------------------
1995 1996 1995 1996
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
SIMPLE
Net income $ 1,535 $ 1,445 $ 2,362 $ 4,030
Average outstanding shares 3,250 3,606 2,495 3,578
------- ------- ------- -------
Simple net income per share $ 0.47 $ 0.40 $ 0.95 $ 1.13
======= ======= ======= =======
PRIMARY
Net income $ 1,535 $ 1,445 $ 2,362 $ 4,030
Average outstanding shares 3,250 3,606 2,495 3,578
Common stock equivalents assuming
exercise of stock options 681 768(A) 678 759(A)
------- ------- ------- -------
Shares for primary 3,931 4,374 3,173 4,337
======= ====== ====== =======
Primary net income per share (1) $ 0.39 $ 0.33 $ 0.74 $ 0.93
======= ======= ======= =======
FULLY DILUTED
Net income $ 1,535 $ 1,445 $ 2,362 $ 4,030
Average outstanding shares 3,250 3,606 2,495 3,578
Common stock equivalents assuming
exercise of stock options 681 773(A) 678 778(A)
------- ------- ------- -------
Shares for fully diluted 3,931 4,379 3,173 4,356
======= ======= ======= =======
Fully diluted net income per share (1) $ 0.39 $ 0.33 $ 0.74 $ 0.93
======= ======= ======= =======
</TABLE>
(A) The computational difference in the 1996 primary and fully diluted EPS
is the result of using the average price in the primary computation
and the ending price (which was higher) in the fully diluted
computation.
(1) The calculations for primary and fully diluted net income per share
are submitted in accordance with Regulation S-K Item 601(b)(11).
-31-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the nine
months ended May 31, 1996 Financial Statements and is qualified in its entirety
by reference to such 3rd Quarter 10-Q Filing dated May 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 4,318,358
<SECURITIES> 0
<RECEIVABLES> 8,080,313
<ALLOWANCES> 545,680
<INVENTORY> 0
<CURRENT-ASSETS> 13,678,641
<PP&E> 2,245,701
<DEPRECIATION> 1,318,261
<TOTAL-ASSETS> 28,575,797
<CURRENT-LIABILITIES> 8,517,452
<BONDS> 0
<COMMON> 36,400
0
0
<OTHER-SE> 18,765,183
<TOTAL-LIABILITY-AND-EQUITY> 28,575,797
<SALES> 0
<TOTAL-REVENUES> 45,504,167
<CGS> 0
<TOTAL-COSTS> 39,024,052
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 42,389
<INTEREST-EXPENSE> 29,242
<INCOME-PRETAX> 6,677,511
<INCOME-TAX> 2,648,126
<INCOME-CONTINUING> 4,029,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,029,385
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
