<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 November 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File number 1-13626
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2293354
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(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
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(Address of principal executive offices, including zip code)
(972) 420-8200
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(Registrant's telephone number, including area code)
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 January 5, 1997 was 3,650,677 shares.
<PAGE> 2
INDEX
HORIZON MENTAL HEALTH MANAGEMENT, INC.
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 3
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
Consolidated Balance Sheets as of August 31, 1996,
and November 30, 1996 (unaudited) . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months ended
November 30, 1995 and 1996 (each unaudited) . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the three months ended
November 30, 1995 and 1996 (each unaudited) . . . . . . . . . . . 6
Notes to Consolidated Financial Statements (unaudited) . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 14
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PART II - OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 22
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Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 22
--------------------------------
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, November 30,
1996 1996
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 7,940,232 $ 7,618,007
Accounts receivable less allowance for uncollectible
accounts of $627,142 at August 31, 1996 and
$757,543 at November 30, 1996 7,096,964 9,479,873
Receivable from employees 89,126 78,585
Prepaid expenses and supplies 234,028 352,533
Other receivables 29,426 54,993
Other current assets 71,940 206,147
Current deferred taxes 1,018,602 1,108,425
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TOTAL CURRENT ASSETS 16,480,318 18,898,563
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PROPERTY AND EQUIPMENT:
Equipment 2,325,320 2,955,314
Buildings and improvements 109,467 13,659
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2,434,787 2,968,973
Less accumulated depreciation 1,552,975 1,655,987
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881,812 1,312,986
Goodwill, net of accumulated amortization of
$1,525,015 at August 31, 1996 and $1,618,226
at November 30, 1996 13,388,738 13,295,527
Management contracts, net of accumulated
amortization of $1,475,375 at August 31, 1996
and $1,596,818 at November 30, 1996 1,925,029 1,803,586
Other assets 195,630 321,239
----------- -----------
TOTAL ASSETS $32,871,527 $35,631,901
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31, November 30,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,193,048 $ 627,581
Employee compensation and benefits 4,018,951 3,698,059
Accrued third party payor liabilities 142,918 142,918
Income taxes payable 9,598 962,030
Accrued expenses 4,981,386 6,365,286
Payable to health insurance program 661,248 --
----------- -----------
TOTAL CURRENT LIABILITIES 11,007,149 11,795,874
Deferred income taxes 1,496,214 1,519,329
----------- -----------
TOTAL LIABILITIES 12,503,363 13,315,203
Commitments and contingencies - (Note 7) -- --
Minority interest 8,755 32,828
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, 1996 and
November 30, 1996; 3,650,677 shares issued
and outstanding at August 31, 1996 and
November 30, 1996 36,507 36,507
Additional paid-in capital 13,867,661 14,002,071
Retained earnings 6,455,241 8,245,292
-----------
TOTAL EQUITY 20,359,409 22,283,870
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $32,871,527 $35,631,901
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended November 30,
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1995 1996
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<S> <C> <C>
Net revenues $ 14,612,868 $ 18,906,782
Expenses:
Salaries and benefits 7,973,303 10,069,996
Purchased services 2,198,835 2,514,512
Provision for bad debts 3,060 187,282
Depreciation and amortization 317,845 432,251
Other 2,117,734 2,839,176
------------ ------------
Total operating expenses 12,610,777 16,043,217
Other income (expense):
Interest expense - related party (24,298) --
Interest expense - other (139) (352)
Interest and other income 67,850 143,540
Loss on sale of fixed assets -- (2,515)
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Income before income taxes and minority interest 2,045,504 3,004,238
Income tax expense (Note 6) 796,675 1,190,113
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Income before minority interest 1,248,829 1,814,125
Minority interest (Note 3) -- 24,074
------------ ------------
Net income $ 1,248,829 $ 1,790,051
============ ============
Earnings per common share:
Net income $ 0.29 $ 0.41
============ ============
Weighted average shares outstanding 4,306,229 4,417,862
============ ============
</TABLE>
See notes to consolidated financial statements.
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
November 30, November 30,
1995 1996
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<S> <C> <C>
Operating activities:
Net income $ 1,248,829 $ 1,790,051
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 317,845 432,251
Loss on sale of equipment -- 2,515
Minority interest -- 24,074
Changes in net assets and liabilities:
Increase in accounts receivable (2,183,284) (2,382,909)
Increase in other receivables (32,496) (15,026)
Increase in prepaid expenses and supplies (201,338) (118,505)
Increase in other assets (91,168) (349,639)
Increase in accounts payable, accrued expenses and
other liabilities 586,643 1,473,089
Decrease in payable to health insurance program -- (661,248)
--------------- ---------------
Net cash provided by (used in) operating activities (354,969) 194,653
Investing activities:
Purchase of property and equipment (200,185) (656,638)
Proceeds from sale of equipment -- 5,350
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Net cash used in investing activities (200,185) (651,288)
Financing activities:
Payments of long-term debt (2,503,583) --
Proceeds from line of credit 1,300,000 --
Net proceeds from issuance of common stock 3,750 --
Tax benefit related to stock option exercise 5,458 134,410
--------------- ---------------
Net cash provided by (used in) financing activities (1,194,375) 134,410
--------------- ---------------
Net increase (decrease) in cash and short term investments (1,749,529) (322,225)
--------------- ---------------
Cash and short-term investments at beginning of period 3,167,036 7,940,232
--------------- ---------------
Cash and short-term investments at end of period $ 1,417,507 $ 7,618,007
=============== ===============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 24,437 $ 352
=============== ===============
Income taxes $ 663,601 $ 73,017
=============== ===============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
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 the Dallas, Texas;
San Francisco, California; Chicago, Illinois; Tampa, Florida; and
Boston, Massachusetts metropolitan areas.
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. Horizon sold the freestanding
psychiatric hospital in 1992.
A subsidiary of Horizon leased and began operating Mountain Crest
Hospital ("MCH") in December 1990. In July 1994, Horizon
subleased MCH to Mental Health Management, Inc. ("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 November 30, 1996,
Horizon has received $663,686 of the $1,200,000 resulting in
future receipts of $536,314 to be received on or before February
1, 1999 assuming minimum monthly payments of $20,000.
On August 1, 1994 Horizon signed a contract with Horizon Mental
Health Management, L.L.C. (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
MHM which signed a contract with the Horizon LLC to have it
manage all of MHM's then existing management contract
obligations. 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. Effective September 1, 1995, the Horizon
LLC was dissolved and its operations combined with Horizon.
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<PAGE> 8
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological
Services, Inc., also known as Professional Psychological
Services, Inc. ("PPS"). Based in Clearwater, Florida, PPS
specializes in full risk, capitated managed behavioral health
programs and employee assistance programs. (See Note 3)
BASIS OF PRESENTATION
The accompanying consolidated balance sheet at November 30, 1996,
the consolidated statements of operations for the three months
ended November 30, 1995 and 1996, and the consolidated statements
of cash flows for the three months ended November 30, 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, 1996. In the opinion of Company
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
November 30, 1996, and the results of operations and cash flows
for the three months ended November 30, 1995 and 1996.
Operating results for the three month period 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. The useful life
of furniture and fixtures and computer equipment are estimated to
be five years and three years, respectively. 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.
-8-
<PAGE> 9
At November 30, 1996, Horizon had management contracts with 33
hospitals directly or indirectly owned by Columbia/HCA Healthcare
Corporation ("Columbia/HCA"), of which 29 had programs in
operation. These 29 contracts accounted for 24.1% of the
Company's net revenues for the three months ended November 30,
1996. In the aggregate, including terminated contracts, revenues
generated by hospitals directly or indirectly owned by
Columbia/HCA accounted for 24.9% of the Company's net revenues
for the three months ended November 30, 1996. Of the 33
Columbia/HCA contracts at November 30, 1996, 19 contracts contain
a provision limiting the number of contracts which Columbia/HCA
can cancel without cause to 33.3% during any calendar year. The
termination or non-renewal of all or a substantial part of the
management contracts with hospitals owned by Columbia/HCA could
have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, at
November 30, 1996, Horizon had eight management contracts with
hospitals owned by Community Health Systems, of which seven had
programs in operation and accounted for 5.4% of the Company's net
revenues for the three months ended November 30, 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.
HEALTH INSURANCE PROGRAM REIMBURSEMENT: Services were provided
under Horizon's management to patients who are eligible for
coverage under Title XVIII (Medicare) Health Insurance Programs.
Amounts received are generally less than the standard billing
rates of the hospital and receivables are recorded in the
consolidated balance sheet at the estimated amount to be
reimbursed.
Amounts due to/from Health Insurance Programs under Medicare are
subject to final determination through an audit by a fiscal
intermediary. Any difference between the final determination and
estimated amounts accrued is accounted for as an adjustment to
patient service revenue in the year of final determination.
Management believes it has adequately provided for any potential
adjustments resulting from an audit.
LONG-LIVED AND INTANGIBLE ASSETS: 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 November 30, 1996, no impairment losses have been incurred.
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<PAGE> 10
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 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.
NET INCOME PER SHARE: Net income 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.
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.
3. INVESTMENT IN PPS
On July 31, 1996, Horizon 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
Horizon as of August 1, 1996. Horizon accounted for the
acquisition of PPS by the purchase method as required by
generally accepted accounting principles. Based in Clearwater,
Florida, PPS specializes in full risk, capitated managed
behavioral health programs and employee assistance programs. The
purchase price is based primarily on a multiple of the 1996
pre-tax income of PPS to be determined in the first quarter of
1997. Horizon currently estimates the purchase price will be
approximately $2,250,000 of which $1,225,000 was paid on July 31,
1996.
In addition, Horizon also obtained an option to acquire the
remaining twenty percent (20%) of the outstanding PPS common
stock at a future date. The sellers, constituting all the
shareholders of PPS, also obtained the right to put to Horizon
such shares on certain dates. The option and put prices for the
remaining PPS shares are based on a multiple of the pre-tax
income of PPS in future years.
For the three months ended November 30, 1996, PPS generated
$1,263,696 in gross revenues and net income of $120,368.
4. LONG-TERM DEBT
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
November 30, 1996, the Company has borrowed $0 against the
available line of credit, and has $9.2 million available for
advances under the revolving credit facility.
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<PAGE> 11
The line of credit 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 line of credit is December 15,
1998; however, it may be extended to December 15, 2000 if certain
debt coverage ratios are met.
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, 940,845 options and 974,218
options were issued and outstanding at August 31, 1995 and 1996,
respectively. During fiscal 1995 nonstatutory stock options to
purchase 112,000 shares of common stock were granted with an
exercise price of $6.00, $10.00, $11.125 or $13.175 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. An additional 85,500 shares with
an exercise price of $21.25 were granted on August 15, 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.
The options are generally exercisable in cumulative installments
over a four-year period and terminate 10 years from the date of
grant. During fiscal 1995 and 1996, 26,000 and 7,500 options
granted to former officers were canceled respectively. An
additional 4,000 options were canceled during the first quarter
of fiscal year 1997. During fiscal 1995, vested options of
67,500 and 11,550 have been exercised by certain officers at
exercise prices of $1.25 and $3.2125, respectively. During
fiscal 1996, vested options of 28,000 at $0.75, and 25,877 at
$1.25 and 35,750 at $1.50 have been exercised by certain key
employees.
At November 30, 1996 there were 1,287,895 shares reserved, of
which 170,677 shares were issued and exercised, 970,218 shares
were issued and unexercised and 147,000 shares remain unissued.
Of the 970,218 shares issued and unexercised, 425,300 shares were
exercisable.
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. This plan has been amended and
restated to also provide for 2,000 option grants to each eligible
director each time they are re-elected to the board after having
served as a director for at least one year since their initial
grant under the plan. At November 30, 1996 there were 100,000
shares reserved under this plan, of which no shares were issued
and exercised, 40,000 shares were issued and unexercised and
60,000 shares remain unissued. Of the 40,000 shares issued and
unexercised, 8,000 shares were exercisable.
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<PAGE> 12
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
months ended November 30, 1996, in the amount of $1,190,000,
resulting in a combined tax rate of 39.6%. The benefit from
utilization of available net operating loss carryforwards was
reflected through a change in deferred taxes rather than a
benefit to income tax expense.
7. COMMITMENTS AND CONTINGENCIES
Horizon leases various office facilities and equipment under
operating leases. The following is a schedule, as of November
30, 1996, of minimum rental payments under these leases which
expire at various dates:
<TABLE>
<S> <C>
Nine months ending August 31, 1997 $ 526,804
For the year ending August 31, 1998 585,843
For the year ending August 31, 1999 432,499
For the year ending August 31, 2000 396,891
For the years ending August 31, 2001 and thereafter 369,594
-------------
$ 2,311,631
=============
</TABLE>
On December 20, 1995 the Company entered into a lease agreement
with a term of approximately five years for a building to be
constructed in Lewisville, Texas to the Company's specifications.
On September 27, 1996, a certificate of occupancy was issued and
the Company occupied the building as its executive offices and
National Support Center. Rental payments commenced the same
date. In connection with the lease transaction, the Company has
guaranteed a loan of approximately $900,000. The loan was 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 if it is not sold to a third
party, or the Company does not extend its lease.
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological
Services, Inc. ("PPS"). The purchase price is to be based on a
multiple of the 1996 pre-tax income of PPS. Horizon currently
estimates the purchase price will be approximately $2,250,000, of
which $1,225,000 was paid on July 31, 1996. Horizon expects to
pay the remaining $1,025,000 on or about February 15, 1997.
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.
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<PAGE> 13
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.
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<PAGE> 14
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 MHM formed the Horizon LLC.
Horizon signed a contract with the Horizon LLC to have it manage all of
Horizon's then existing management contracts for a 72.5% interest. Prior to
March 20, 1995, the remaining 27.5% interest in the Horizon LLC was held by MHM
which signed a contract with the Horizon LLC to have it manage all of MHM's
then existing 39 management contracts. 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 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.
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.
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services, Inc.,
also known as Professional Psychological Services, Inc. ("PPS"). PPS has been
consolidated with Horizon as of August 1, 1996. Horizon accounted for the
acquisition of PPS by the purchase method as required by generally accepted
accounting principles. Based on Clearwater, Florida, PPS specializes in full
risk, capitated managed behavioral health programs and employee assistance
programs. The purchase price is based primarily on a multiple of the 1996
pre-tax income of PPS to be determined in the first quarter of 1997. Horizon
currently estimates the purchase price will be approximately $2,250,000 of
which $1,225,000 was paid on July 31, 1996. In addition, Horizon also obtained
an option to acquire the remaining twenty percent (20%) of the outstanding PPS
common stock at a future date. The sellers, constituting all the shareholders
of PPS, also obtained the right to put to Horizon such shares on certain dates.
The option and put prices for the remaining PPS shares are based on a multiple
of the pre-tax income of PPS in future years.
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 November 30, 1996, the Company had management contracts with 123
general acute care hospitals located in 36 states, providing for the operation
of a total of 190 various treatment programs.
-14-
<PAGE> 15
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
August 31,
-------------------- November 30,
1994* 1995 1996 1996
-------------------- ------------
<S> <C> <C> <C> <C>
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 99 100 107 104
Contract locations signed
and unopened 9 12 16 19
---- ---- ---- ----
Total contract locations 108 112 123 123
==== ==== ==== ====
SERVICES COVERED BY CONTRACTS
IN OPERATION:
Inpatient (A) 89 91 97 94
Partial hospitalization (A) 45 55 71 73
Outpatient 7 8 11 10
Home health 1 1 12 13
CQI Plus (under contract) 20 45 64 66
TYPES OF TREATMENT PROGRAMS
IN OPERATION:
Geropsychiatric (A) 75 92 130 127
Adult psychiatric (A) 60 57 51 53
Substance abuse (A) 4 3 7 6
Other (A) 3 2 3 4
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------- Three Months Ended
1994* 1995 1996 November 30, 1996
--------------------- ------------------
<S> <C> <C> <C> <C>
CHANGES IN NUMBER OF CONTRACTS:
Beginning number of contracts 51 108 112 123
Contracts added 66* 28 30 8
Contracts ended 9 24 19 8
--- --- --- ---
Ending number of contracts 108 112 123 123
=== === === ===
</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 two (2) periods have been restated
as estimates based on the new reporting definition.
-15-
<PAGE> 16
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1996
The following table sets forth for the three month periods ended November 30,
1995 and November 30, 1996, the percentage relationship to total net revenues
of certain costs, expenses and income.
<TABLE>
<CAPTION>
Three Months Ended
November 30,
----------------
1995 1996
------ ------
<S> <C> <C>
Revenues:
Contract management revenues 99.3% 88.6%
Other revenues 0.7% 11.4%
------ ------
Net revenues 100.0% 100.0%
------ ------
Operating costs and expenses
Salaries and benefits 54.6% 53.3%
Purchased services 15.0% 13.3%
Provision for bad debts 0.0% 1.0%
Depreciation and amortization 2.2% 2.3%
Other 14.5% 15.0%
------ ------
Total operating costs and expenses 86.3% 84.9%
------ ------
Income from operations 13.7% 15.1%
Interest and other income (expense), net 0.3% .7%
------ ------
Income before income taxes 14.0% 15.8%
Income taxes 5.5% 6.3%
Net income 8.5% 9.5%
====== ======
Number of contracts in operation, end of period 102 104
</TABLE>
-16-
<PAGE> 17
THREE MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1995
Net Revenues. Net revenues for the three months ended November 30, 1996
were $18.9 million, representing an increase of $4.3 million, or 29.5%, as
compared to net revenues of $14.6 million for the corresponding period in the
prior fiscal year. Revenues for the period increased $600,000, or 4.1%, as a
result of lower revenue generating contracts having been replaced with higher
revenue generating contracts. In addition, revenues increased $1.3 million, or
8.9%, due to revenue recorded for Florida Professional Psychological Services,
Inc. ("PPS"). Horizon acquired 80% of the outstanding common stock of PPS on
July 31, 1996, and consolidated PPS with Horizon as of August 1, 1996.
Revenues increased $700,000, or 4.8%, due to a cost report adjustment for
Mountain Crest recorded in November 1996. In addition, revenues increased $1.7
million, or 11.6%, at locations that have been under Horizon management during
all periods being reported. This was primarily the result of an average rate
increase of 2.9% and the addition of new programs including a 40.0% increase in
CQI Plus fees between the periods.
Salaries and Benefits. Salaries and benefits for the three months ended
November 30, 1996 were $10.1 million, representing an increase of $2.1 million,
or 26.3%, as compared to salaries and benefits of $8.0 million for the three
months ended November 30, 1995. This increase resulted from the increase in
the full time equivalents from 584.9 for the three months ended November 30,
1995, to 681.4 for the three months ended November 30, 1996, an increase of
16.5%. Full time equivalents increased between the periods as follows:
<TABLE>
<CAPTION>
November 30, November 30,
1995 1996 Increase % Increase
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
National Support 65.6 77.8 12.2 18.6%
Regional Offices 44.1 42.0 (2.1) (4.8)%
PPS 0.0 45.6 45.6 N/A
Contract Locations 475.2 516.0 40.8 8.6%
---------- ---------- ---------- ----------
584.9 681.4 96.5 16.5%
</TABLE>
The increase in the National Support Center full time equivalents of
18.6% results from the expansion of the General and Administrative Department,
as well as the expansion of Mental Health Outcomes, Inc. The increase in
contract location full time equivalents of 8.6% results from an increase in the
number of operational programs between the periods. Additionally, Horizon
acquired eighty percent (80%) of the outstanding common stock of PPS on July
31, 1996. PPS's FTE's averaged 45.6, with associated salary of $480,000 for
the quarter ended November 30, 1996. The Company's average annualized salaries
per full time equivalent for the three months ended November 30, 1996 were
$50,310 representing an increase of $2,371, or 4.9%, as compared to average
annualized salaries per full time equivalent of $47,939 for the three months
ended November 30, 1995. Benefits for the three months ended November 30, 1996
were $1.5 million, representing an increase of $537,000, or 55.8%, as compared
to benefits of $963,000 for the three months ended November 30, 1995. This
increase resulted primarily from an increase in medical insurance premiums and
employer payroll taxes paid between the periods of $233,000. In addition,
benefits also increased due to an increase in the amount accrued for the
Company's 401K match from $48,000 for the three months ended November 30, 1995,
to $301,000 for the three months ended November 30, 1996, representing an
increase of $253,000, or 527%. This is primarily attributable to a retroactive
increase to January 1, 1996, of the Company's 401K match as a result of an
additional accrual of the potential employer match totaling $237,000 based on
employee 401K contributions for calendar 1996. Benefits also increased $51,000
between the periods in relation to the acquisition of PPS on July 31, 1996.
-17-
<PAGE> 18
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended November 30, 1996 were $432,000, representing an
increase of $114,000, or 35.8%, as compared to depreciation and amortization
expenses of $318,000 for the corresponding period in the prior fiscal year.
$11,000 of this increase is due to the amortization of goodwill of $1.8 million
resulting from the acquisition of Florida Professional Psychological Services,
Inc. In addition, the Company recorded $73,000 of additional depreciation
expense due to a change in the Company's definition of a capital expenditure.
The remainder of this increase results from the depreciation expense of
additional equipment purchased for the operation of its contract management
business. Cash expenditures used for the purchase of property and equipment
were $657,000 for the three months ended November 30, 1996, an increase of
$457,000, as compared to $200,000 for the three months ended November 30, 1995.
Other Operating Expenses (Including Purchased Services and Provision for
Bad Debts). Other operating expenses for the three months ended November 30,
1996, were $5.5 million, representing an increase of $1.2 million or 27.9%, as
compared to other operating expenses of $4.3 million for the corresponding
period in the prior fiscal year. The following components identify the
variances between the periods reported.
Purchased services included a $120,000 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 minimized the usage of Locum
Tenens Physicians (i.e., 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. In
addition, an increase occurred in purchased services due to an increase of
$426,000 in direct service fees related to PPS, which was acquired by the
Company on July 31, 1996.
Bad debt expense increased $184,000 for the three months ended November
30, 1996 as compared to the three months ended November 30, 1995. This
increase was due mainly to the non-timely payment by contracted hospitals.
Other operating expenses increased due to an increase of $152,000 in
telephone and rent expense for the three months ended November 30, 1996 as
compared to the three months ended November 30, 1995. This increase was
related to the increased capabilities of the telephone systems installed in
both the regional offices and the newly expanded National Support Center, which
includes the use of video teleconferencing in each of these locations. The
newly expanded National Support Center and the addition of two outpatient
practices resulted in the increase in rent expense. Other operating expenses
experienced an increase of $138,000 due to an increase in legal settlements for
the three months ended November 30, 1996, as compared to the corresponding
three months of the prior year. Additionally, other operating expenses
increased due to $380,000 in contract capital contributions (facility
renovations) for the three months ended November 30, 1996, as compared to no
contract capital contributions for the three months ended November 30, 1995.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the three months ended November 30, 1996 was
$141,000, as compared to $43,000 in net interest income for the corresponding
period in the prior fiscal year. This change results primarily from a decrease
in interest expense of $24,000 resulting from the retirement of long-term debt
on October 3, 1995 and an increase in interest income of $75,000 due to the
increase in cash from $1.4 million to $7.6 million, when compared to the same
period in the prior fiscal year.
-18-
<PAGE> 19
Income Tax Expense. For the three month period ended November 30, 1996,
the Company recorded federal and state income taxes of $1,190,000 resulting in
a combined tax rate of 39.6%. For the three month period ended November 30,
1995, the Company recorded federal and state income taxes of $797,000 resulting
in a combined tax rate of 38.9%. The benefit from utilization of available net
operating loss carryforwards was reflected through a change in deferred taxes
rather than a benefit to income tax expense for both periods.
-19-
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
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 November 30, 1996, the Company had $9.2 million available
under the revolving credit facility, of which the Company had borrowed $0 as of
November 30, 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 credit 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.
The Company has agreed to purchase a leased building for approximately
$4.5 million at the end of the lease term if it is not sold to a third party,
or the Company does not extend its lease. (See Note 7 to the Company's
consolidated financial statements included herein)
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services, Inc.
("PPS"). The purchase price is to be based on a multiple of the 1996 pre-tax
income of PPS. Horizon currently estimates the purchase price will be
approximately $2,250,000, of which $1,225,000 was paid on July 31, 1996.
Horizon expects to pay the remaining $1,025,000 on or about February 15, 1997.
The Company believes that its net working capital of $7.1 million at
November 30, 1996 (including cash of $7.6 million) and the $9.2 million
available under the revolving credit facility at that date will be sufficient
to cover all cash requirements over the next twelve months including estimated
capital expenditures of $750,000. The Company generated approximately $200,000
in net cash from operations during the three months ended November 30, 1996.
-20-
<PAGE> 21
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 the Company's services, the Company's ability to retain existing
management contracts and to obtain 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.
-21-
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The common stock of the Company is included and traded on the
Nasdaq National Market under the symbol "HMHM". Reports, proxy
statements and other information concerning the Company can be
inspected at the offices of the National Association of
Securities Dealers and Nasdaq Stock Market, Inc., 1735 K Street,
N.W., Washington, D.C. 20006-1500.
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 November 30, 1996.
-22-
<PAGE> 23
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: January 8, 1997 /s/ JAMES W. MCATEE
---------------------- -------------------------------------
By: James W. McAtee
Executive Vice President, Finance &
Administration
(Principal Financial and Chief Accounting
Officer)
-23-
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<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>
-24-
<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
November 30,
----------------------
1995 1996
-------- --------
<S> <C> <C>
SIMPLE
Net income $ 1,249 $ 1,790
Average outstanding shares 3,564 3,651
-------- --------
Simple net income per share $ 0.35 $ 0.49
======== ========
PRIMARY
Net income $ 1,249 $ 1,790
Average outstanding shares 3,564 3,651
Common stock equivalents assuming
exercise of stock options 742(A) 767
-------- --------
Shares for primary 4,306 4,418
======== ========
Primary net income per share (1) $ 0.29 $ 0.41
======== ========
FULLY DILUTED
Net income $ 1,249 $ 1,790
Average outstanding shares 3,564 3,651
Common stock equivalents assuming
exercise of stock options 777(A) 767
-------- --------
Shares for fully diluted 4,341 4,418
======== ========
Fully diluted net income per share (1) $ 0.29 $ 0.41
======== ========
</TABLE>
(A) The computational difference in the 1995 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).
-25-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THREE
MONTHS ENDED NOVEMBER 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FIRST QUARTER 10-Q FILING DATED NOVEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 7,618,007
<SECURITIES> 0
<RECEIVABLES> 10,237,416
<ALLOWANCES> 757,543
<INVENTORY> 0
<CURRENT-ASSETS> 18,898,563
<PP&E> 2,968,973
<DEPRECIATION> 1,655,987
<TOTAL-ASSETS> 35,631,901
<CURRENT-LIABILITIES> 11,795,874
<BONDS> 0
0
0
<COMMON> 36,507
<OTHER-SE> 22,247,363
<TOTAL-LIABILITY-AND-EQUITY> 35,631,901
<SALES> 0
<TOTAL-REVENUES> 18,906,782
<CGS> 0
<TOTAL-COSTS> 16,043,217
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 187,282
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> 3,004,238
<INCOME-TAX> 1,190,113
<INCOME-CONTINUING> 1,790,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,790,051
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
