<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
JANUARY 31, 1997
Date of Report (Date of earliest event reported)
HORIZON MENTAL HEALTH MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-13626 75-2293354
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1500 WATERS RIDGE DRIVE
LEWISVILLE, TEXAS 75057-6011
(Address of principal executive offices and zip code)
(972) 420-8200
(Registrant's telephone number,
including area code)
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS
(a) RESTATED FINANCIAL STATEMENTS. The Board of Directors of
Horizon Mental Health Management, Inc., a Delaware corporation ("Horizon" or
the "Company"), approved a three-for-two stock split effected in the form of a
50% stock dividend, pursuant to which one additional share of Common Stock,
$.01 par value ("Common Stock"), of Horizon was issued on January 31, 1997 for
every two shares of Common Stock of Horizon held by stockholders of record at
the close of business on January 22, 1997. The audited consolidated financial
statements of Horizon previously filed with the Securities and Exchange
Commission (the "Commission") as part of the Annual Report on Form 10-K of the
Company for its fiscal year ended August 31, 1996 have been retroactively
restated to reflect such stock split/dividend. Such restated consolidated
financial statements of Horizon are included herein at pages F-1 through F-18
of this Report and incorporated by reference into this Item 5.
(b) SUMMARY OF RIGHTS AGREEMENT. On January 29, 1997, the Board
of Directors of the Company declared a dividend distribution of one Common
Stock purchase right (a "Right") for each outstanding share of Common Stock of
the Company at the close of business on February 19, 1997 (the "Record Date").
Each Right entitles the registered holder to purchase from the Company one
share of Common Stock at an initial exercise price of $83.33 per share (the
"Exercise Price"), subject to adjustment. The description and the terms of the
Rights are set forth in a Rights Agreement dated as of February 6, 1997 (the
"Rights Agreement"), between the Company and American Stock Transfer & Trust
Company, as rights agent (the "Rights Agent").
Pursuant to such declaration, each holder of shares of Common
Stock as of the Record Date is entitled to receive a distribution of one Right
per share of Common Stock in accordance with and pursuant to the Rights
Agreement. Such distribution was made on March 4, 1997. A Right will also
accompany each share of Common Stock issued following the Record Date.
Initially, the Rights will not be exercisable or transferable
apart from the shares of Common Stock with respect to which they were
distributed, and will be evidenced only by the certificates representing such
shares. The Rights will become exercisable and transferable apart from the
Common Stock on a date (the "Exercisability Date") that is the earlier of (i)
the close of business on the tenth business day after the Stock Acquisition
Date, defined as the first date of a public announcement that a person or group
of affiliated or associated persons has become an Acquiring Person (as defined
below) or (ii) the close of business on such date as a majority of the Board of
Directors shall determine, which date shall follow the commencement of a tender
or exchange offer that, if consummated, would result in a person or group
becoming an Acquiring Person. The Rights will be exercisable from the
Exercisability Date until the Expiration Date, which is the earlier of the
close of business on March 4, 2007 (the "Final Expiration Date"), the date the
Rights are redeemed by the Company, or the date the Rights are exchanged by the
Company, at which time they will expire.
-2-
<PAGE> 3
A person or group becomes an Acquiring Person when such person
or group acquires or obtains the right to acquire beneficial ownership of 15%
or more of the then outstanding shares of Common Stock, with certain exceptions
described in the Rights Agreement (including exceptions for shares owned by the
Company or a subsidiary or employee benefit plan of the Company, and for shares
owned by any person who the Board of Directors determines inadvertently reached
such 15% beneficial ownership level and who promptly divests sufficient shares
such that 15% or greater beneficial ownership ceases).
Prior to the Exercisability Date, the Rights will not be
transferable apart from the shares of Common Stock to which they are attached.
Thus, the surrender or transfer of any Common Stock certificate prior to that
date will also constitute the transfer of the Rights associated with the shares
represented by such certificate. Until the Exercisability Date (or earlier
redemption, exchange or expiration of the Rights), new Common Stock
certificates issued after the Record Date, upon transfer or new issuance of
shares of Common Stock, will contain a notation incorporating the Rights
Agreement by reference. Until the Exercisability Date (or earlier redemption,
exchange or expiration of the Rights), the surrender for transfer of any
certificates for shares of Common Stock, outstanding as of the Record Date,
even without such notation or a copy of a Summary of Rights being attached
thereto, will also constitute the transfer of the Rights associated with the
shares of Common Stock represented by such certificate. As soon as practicable
after the Exercisability Date, separate certificates evidencing the Rights
("Rights Certificates") will be mailed to each record holder of shares of
Common Stock as of the close of business on the Exercisability Date and, in
certain circumstances, holders of certain shares issued after the
Exercisability Date. Until exercised, the holders will not have any rights of
holders of Common Stock, including any rights to vote or receive dividends on
the Common Stock.
Upon the acquisition of 15% of the Common Stock by an
Acquiring Person (a "Flip-In Event"), each holder of a Right will thereafter
have the right (the "Flip-In Right") to receive, upon exercise and payment of
the Exercise Price, the number of shares of Common Stock having a market value
immediately prior to the Flip-In Event equal to two times the then current
Exercise Price of the Right, except that any Right that is (or, in certain
circumstances specified in the Rights Agreement, was) beneficially owned by an
Acquiring Person (or any of its affiliates or associates, as defined) will
become null and void upon the occurrence of the Flip-In Event. Cash will be
paid in lieu of fractional shares.
For example, at the Exercise Price of $83.33 per Right, if any
person becomes the beneficial owner of 15% or more of the outstanding Common
Stock of the Company, ten business days thereafter each Right (other than
Rights owned by such 15% beneficial owner or any of its affiliates or
associates, which will have become void) would entitle its holder to purchase
$166.66 worth of Common Stock for $83.33. Assuming that the Common Stock had a
per share value of $16.66 at such time, each Right would effectively entitle
its holder to purchase ten shares of Common Stock for $83.33.
-3-
<PAGE> 4
If, at any time following an Exercisability Date, either (i)
the Company is acquired in a merger or other business combination transaction
or (ii) the Company sells or otherwise transfers more than 50% of its aggregate
assets or earning power, each holder of a Right (except Rights previously
voided as described above) will thereafter have the right (the "Flip-Over
Right") to receive, upon exercise, shares of common stock of the Acquiring
Person having a value equal to two times the then current Exercise Price of the
Right. The Flip-Over Right will be exercisable apart from, and regardless of
the exercise or surrender of, the Flip-In Right.
At any time prior to the close of business on the tenth
business day following a public announcement that a party is an Acquiring
Person, the Board of Directors may redeem the Rights in whole but not in part
at a Redemption Price of $.01 per Right. Under some circumstances, the
redemption must also be approved by a majority of the members of the Board of
Directors in office at the time of the adoption of the Rights Agreement or
members whose nominations were approved by members then in office. Immediately
upon any redemption of the Rights, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.
At any time after any person becomes an Acquiring Person, the
Board of Directors of the Company may exchange the Rights (other than Rights
owned by such Acquiring Person or any of its affiliates or associates which
have become void), in whole or in part, for Common Stock at an exchange ratio
of one share of Common Stock per Right. Under some circumstances, the exchange
must also be approved by a majority of the members of the Board of Directors in
office at the time of the adoption of the Rights Agreement or members whose
nominations were approved by members then in office.
The Exercise Price payable, and the number of shares of Common
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Common Stock, (ii) upon the grant to holders of the Common Stock of certain
rights, options or warrants to subscribe for or purchase Common Stock at a
price, or securities convertible into Common Stock with a conversion price,
less than the then current market price of the Common Stock or (iii) upon the
distribution to holders of the Common Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in shares of Common Stock) or of
subscription rights or warrants (other than those referred to above).
The Rights Agreement contemplates that the Company will
reserve a sufficient number of authorized but unissued shares of Common Stock
to permit the exercise in full of the Rights should the Rights become
exercisable. However, the Board of Directors may (and under certain
circumstances is obligated to) issue other equity securities or assets upon the
exercise of the Rights if sufficient shares of Common Stock are not available
for issuance. The Board of Directors may make adequate provision to substitute
for the shares of Common Stock which are not available for issuance upon
exercise of such Rights either cash, other equity securities of the Company
(including, without limitation, shares of Preferred Stock of the Company), debt
-4-
<PAGE> 5
securities of the Company, other assets, or a combination of the foregoing,
having an aggregate value (as determined by a majority of the Board of
Directors after receiving advice from a nationally recognized investment
banking firm) equal to the value of the shares of Common Stock unavailable for
issuance upon exercise of the Rights. In addition, the Board of Directors,
subject to certain limitations, may amend the Rights Agreement to change the
Exercise Price and therefore the number of shares of Common Stock issuable upon
exercise of the Rights. If the Company does not take such action within 30
days following the later of a Flip-In Event or the date on which the Company's
right of redemption with respect to the Rights expires, then the Company will
be required to deliver cash as the substitute for the unavailable authorized
shares of Common Stock.
At any time prior to the Exercisability Date, the Board of
Directors may amend any provision of the Rights Agreement in any manner,
including to change the Exercise Price, without the approval of the holders of
the Common Stock. Thereafter, subject to certain limitations, the Board of
Directors may amend the Rights Agreement without the approval of the holders of
the Common Stock so long as the interests of the holders of the Rights are not
adversely affected, including generally (i) to shorten or lengthen any time
period under the Rights Agreement or (ii) in any manner that the Board deems
necessary or desirable, so long as such amendment is consistent with and for
the purpose of fulfilling the objectives of the Board of Directors in
originally adopting the Rights Agreement.
The Rights have certain anti-takeover effects. The Rights
will cause substantial dilution to a person or group that attempts to acquire
the Company without conditioning the offer on a substantial number of Rights
being acquired. The Rights should not interfere with any merger or other
business combination approved by the Board of Directors since the Board of
Directors may, at its option, at any time prior to the close of business on the
tenth business day after the Stock Acquisition Date, redeem all but not less
than all the then outstanding Rights at the Redemption Price.
A copy of the Rights Agreement has been filed as an exhibit to
the Registration Statement on Form 8-A filed by Horizon with the Commission on
February 7, 1997, and incorporated by reference as Exhibit 4.1 to this Report.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
EXISTING ANTI-TAKEOVER PROVISIONS
Portions of the Company's Certificate of Incorporation and
Bylaws may make more difficult the acquisition of control of the Company.
These provisions may also encourage persons seeking to acquire control of the
Company to consult first with the Company's Board of Directors to negotiate the
terms of any proposed business combination or offer. The provisions are
designed to reduce the vulnerability of the Company to an unsolicited proposal
for a takeover that does not contemplate the acquisition of all outstanding
shares of the Company or which is otherwise unfair to stockholders of the
Company.
-5-
<PAGE> 6
The Company's authorized capital stock currently includes
500,000 shares of Preferred Stock, $.10 par value per share. No such Preferred
Stock is currently outstanding. The Board of Directors of the Company has the
authority to authorize the issuance of the Preferred Stock in one or more
series and to fix the rights (including the voting rights, if any),
preferences, privileges and restrictions granted to or imposed upon any such
series, without any further vote or action by stockholders. Any future
issuance of Common Stock will be subject to the rights of holders of any
outstanding shares of Preferred Stock which the Company may issue in the
future.
The Company believes that the Preferred Stock provides the
Company with increased flexibility in structuring possible future financings
and acquisitions, and in meeting other corporate needs that might arise.
Having such authorized shares available for issuance will allow the Company to
issue shares of Preferred Stock without further action by stockholders, unless
such action is required by applicable laws or the rules of any stock exchange
or market on which the Company's securities may be listed. Although the Board
of Directors has no intention at the present time of doing so, it could issue a
series of Preferred Stock, the terms of which could impede the completion of a
merger, tender offer or other takeover attempt and may adversely affect the
voting and other rights of the holders of Common Stock. The Board of Directors
will make any determination to issue such shares based on its judgment as to
the best interests of the Company and its stockholders at the time of issuance.
The Board of Directors, in so acting, could issue Preferred Stock having terms
which could discourage an acquisition attempt or other transaction that some,
or a majority, of the stockholders might believe to be in their best interests
or in which stockholders might receive a premium for their stock over the then
market price of such stock.
The Bylaws of the Company provide that the number of directors
may be fixed from time to time by the Company's Board of Directors. In
addition, the Bylaws provide that subject to any rights of the holders of any
outstanding Preferred Stock of the Company, a majority of the Board of
Directors then in office will have the authority to fill any vacancies on the
Board of Directors. Accordingly, the Board of Directors could temporarily
prevent any stockholder from obtaining majority representation on the Board of
Directors by enlarging the Board of Directors and filling the new directorships
with its own nominees.
-6-
<PAGE> 7
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
See page F of this Report for a list of financial statements filed as
part of this Report.
(c) Exhibits
3.1 Certificate of Incorporation of the Company, as
amended (incorporated herein by reference to Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q as
filed with the Commission on March 31, 1997).
3.2 Amended and Restated Bylaws of the Company, as
amended (incorporated herein by reference to Exhibit
3.2 to the Company's Registration Statement on Form
S-1 (Registration Number 33-88314) as filed with the
Commission on February 16, 1995).
4.1 Rights Agreement dated February 6, 1997, between
Horizon Mental Health Management, Inc. and American
Stock Transfer & Trust Company, as Rights Agent,
which includes as exhibits the form of Rights
Certificate and the Summary of Rights Agreement
(incorporated herein by reference to Exhibit 4.1 to
the Company's Registration Statement on Form 8-A
(Registration Number 000-22123) as filed with the
Commission on February 7, 1997).
23.1 Consent of Price Waterhouse LLP (filed herewith).
27.1 Financial Data Schedule (filed herewith).
-7-
<PAGE> 8
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: May 8, 1997 By: /s/ James W. McAtee
----------------------------------
James W. McAtee
Executive Vice
President,Finance &
Administration (Principal
Financial and Chief Accounting
Officer)
-8-
<PAGE> 9
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets at August 31, 1995 and 1996 . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income
For the Years Ended August 31, 1994, 1995, Pro Forma 1995, and 1996 . . . . .. . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Years Ended August 31, 1994, 1995 and 1996 . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows
For the Years Ended August 31, 1994, 1995 and 1996 . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Horizon Mental Health Management, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Horizon Mental Health Management, Inc. and its
subsidiaries at August 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion of these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
October 7, 1996, except as to Note 13, which is as of April 29, 1997
F-1
<PAGE> 11
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
AUGUST 31,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 3,167,036 $ 7,940,232
Accounts receivable less allowance for uncollectible
accounts of $1,223,027 and $627,142
at August 31, 1995 and 1996, respectively 5,723,858 7,096,964
Receivable from employees 173,206 89,126
Prepaid expenses and supplies 124,587 234,028
Other receivables 100,397 29,426
Other current assets 30,680 71,940
Current deferred taxes 704,276 1,018,602
------------ -------------
TOTAL CURRENT ASSETS 10,024,040 $ 16,480,318
------------ -------------
PROPERTY AND EQUIPMENT:
Equipment 1,801,508 2,325,320
Buildings and improvements 106,784 109,467
------------ -------------
1,908,292 2,434,787
Less accumulated depreciation 966,561 1,552,975
------------ -------------
941,731 881,812
Goodwill, net of accumulated amortization of $1,188,130
and $1,525,015 at August 31, 1995 and 1996,
respectively 11,574,409 13,388,738
Management contracts, net of accumulated amortization
of $989,603 and $1,475,375 at August 31, 1995
and 1996, respectively 2,410,801 1,925,029
Other assets 400,534 195,630
------------ -------------
TOTAL ASSETS $ 25,351,515 $ 32,871,527
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 12
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AUGUST 31,
1995 1996
---------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,070,955 $ 1,193,048
Employee compensation and benefits 3,188,684 4,018,951
Accrued third party payor liabilities 469,061 142,918
Income taxes payable 535,244 9,598
Accrued expenses 1,623,681 4,981,386
Payable to Health Insurance Program 661,248 661,248
Current debt maturities 7,248 -
---------------- ----------------
TOTAL CURRENT LIABILITIES 7,556,121 11,007,149
Long-term debt-related party - Note 6 2,500,000 -
Deferred income taxes 643,351 1,496,214
---------------- ----------------
TOTAL LIABILITIES 10,699,472 12,503,363
Commitments and contingencies - Note 9 - -
Minority interest - 8,755
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 1996;
5,341,575 and 5,476,027 shares issued
and outstanding at August 31, 1995 and 1996 53,416 54,760
Additional paid-in capital 13,707,626 13,849,408
Retained earnings 891,001 6,455,241
---------------- ----------------
14,652,043 20,359,409
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 25,351,515 $ 32,871,527
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 13
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------
1994 1995 1995 1996
----------- ------------ ----------- ----------
PRO FORMA
(UNAUDITED)
(Note 3)
<S> <C> <C> <C> <C>
REVENUES:
Net patient and service revenue $30,258,927 $29,349,764 $56,077,599 $62,444,755
EXPENSES:
Salaries and benefits 16,813,613 15,389,780 29,925,058 34,705,889
Purchased services 4,730,775 4,644,645 9,023,683 8,635,117
Provision for bad debts 312,176 208,946 901,688 73,948
Depreciation and amortization 560,417 903,184 1,166,734 1,307,688
Other 5,745,092 4,267,212 8,045,786 8,805,581
----------- ----------- ----------- -----------
Operating expenses 28,162,073 25,413,767 49,062,949 53,528,223
----------- ----------- ----------- -----------
Other income (expense)
Interest expense - related party (1,091,442) (1,161,440) (1,161,440) (24,298)
Interest expense - other (2,545) (1,350) (1,350) (5,073)
Interest income and other 92,572 409,047 453,554 353,231
Loss on sale of fixed assets (3,467) - - -
----------- ----------- ----------- -----------
Income before income taxes 1,091,972 3,182,254 6,305,414 9,240,392
Income tax expense (benefit) (20,380) 803,754 2,522,166 3,673,755
----------- ----------- ----------- -----------
Income before equity in net earnings
of Horizon LLC and minority interest 1,112,352 2,378,500 3,783,248 5,566,637
Equity in net earnings of Horizon LLC 364,000 1,567,720 - -
Minority interest - - (2,397)
----------- ----------- ----------- -----------
Net income $ 1,476,352 $ 3,946,220 $ 3,783,248 $ 5,564,240
=========== =========== =========== ===========
Earnings per common share:
Net income per common share $ 0.35 $ 0.76 $ 0.60 $ 0.85
=========== =========== =========== ===========
Weighted average shares outstanding 4,183,747 5,162,889 6,329,258 6,525,042
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 14
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON SHARES PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------------- ----------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at
August 31, 1993 3,123,000 $ 31,230 $ 1,564,786 $ (4,531,571) $ (2,935,555)
Net income - - - 1,476,352 1,476,352
Sale of rights to
purchase options - - 25,000 - 25,000
--------- ---------- -------------- --------------- --------------
Balance at
August 31, 1994 3,123,000 $ 31,230 $ 1,589,786 $ (3,055,219) $ (1,434,203)
Net income - - - 3,946,220 3,946,220
Initial public
offering 2,100,000 21,000 11,978,528 - 11,999,528
Exercise of stock
options 118,575 1,186 122,562 - 123,748
Sale of rights to
purchase options - - 16,750 - 16,750
--------- ---------- -------------- --------------- --------------
Balance at
August 31, 1995 5,341,575 $ 53,416 $ 13,707,626 $ 891,001 $ 14,652,043
Net income - - - 5,564,240 5,564,240
Exercise of stock
options 134,440 1,344 141,782 - 143,126
--------- ---------- -------------- --------------- --------------
Balance at
August 31, 1996 5,476,015 $ 54,760 $ 13,849,408 $ 6,455,241 $ 20,359,409
========= ========== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 15
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,476,352 $ 3,946,220 $ 5,564,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 560,417 903,184 1,307,688
Loss on sale of equipment 3,467 - -
Horizon LLC investment income (364,000) (1,567,720) -
Minority interest - - 2,397
Changes in net assets and liabilities:
(Increase) decrease in accounts receivable 1,342,206 4,901,665 (1,347,073)
(Increase) decrease in other receivables (1,054) 69,177 158,091
(Increase) decrease in prepaid expenses and supplies 340,383 263,777 (105,405)
(Increase) decrease in other assets (85,884) 171,329 (127,188)
Increase in accounts payable and accrued expenses 254,717 1,043,854 2,850,323
(Decrease) increase in payable to health insurance program 718,000 (1,126,208)
---------- ------------ ------------
Cash flows provided by operating activities 4,244,604 8,605,278 8,303,073
---------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (347,881) (292,209) (378,988)
Payment for purchase of minority interest in
Horizon LLC, net of cash acquired - (9,196,249) -
Cash contributed to Horizon LLC (1,800,000) (620,000) -
Payment for purchase of PPS, net of cash acquired - - (786,767)
Cash flows used in investing activities (2,147,881) (10,108,458) (1,165,755)
---------- ------------ ------------
Cash flows from financing activities:
Payments on long-term debt (1,610,942) (9,613,536) (2,507,248)
Sale of rights to purchase options 25,000 16,750 -
Net proceeds from issuance of stock - 12,123,276 143,126
---------- ------------ ------------
Cash flows provided by (used in) financing activities (1,585,942) 2,526,490 (2,364,122)
---------- ------------ ------------
Net increase in cash and short-term investments 510,781 1,023,310 4,773,196
---------- ------------ ------------
Cash and short-term investments at beginning of year 1,632,945 2,143,726 3,167,036
---------- ------------ -----------
Cash and short-term investments at end of year $2,143,726 $ 3,167,036 $ 7,940,232
========== ============ ===========
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid during the year for:
Interest $1,091,442 $ 1,162,790 $ 29,371
========== ============ ============
Income taxes $ 15,971 $ 374,438 $ 3,721,824
========== ============ ============
Supplemental disclosure of noncash investing activities:
- -------------------------------------------------------
Purchase of minority interest in Horizon LLC during fiscal year
1995 and the acquisition of 80% of the common stock of
Professional Psychological Services during the fiscal year 1996:
Fair value of assets acquired $ - $ 17,283,061 $ 2,315,535
Cash paid - (9,683,467) (1,225,000)
Conversion of equity investment - (4,351,737) -
------------- ------------ ------------
Liabilities assumed $ - $ 3,247,857 $ 1,090,535
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 16
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On August 1, 1994 Horizon signed a contract with the 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 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 through the six
months ended 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 4)
Horizon was formed in July 1989 for the purpose of acquiring all the
assets of two companies. One of these companies, known as Horizon Health
Management Company, had been formed in 1981 and since that time had been
engaged in the mental health contract management business. The other
company owned a freestanding psychiatric hospital in California.
Effective March 1, 1990, the assets constituting the contract management
business and the psychiatric hospital of the two companies were
transferred to Horizon.
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 its 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 August 31,
1996, Horizon has received $603,686 of the $1,200,000 resulting in future
receipts of $596,314 to be received on or before February 1, 1999 assuming
minimum monthly payments of $20,000. Horizon retained the July 31, 1994
balances of accounts receivable and the liabilities for
F-7
<PAGE> 17
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the MCH operations, the remaining balances of which are included in the
consolidated financial statements at August 31, 1995 and 1996. In
addition, the results of the MCH operations through July 31, 1994 are also
included in the consolidated financial statements.
INITIAL PUBLIC OFFERING
On March 13, 1995, the Company's initial public offering of 3,120,000
shares of common stock at an offering price to the public of $6.67 per
share was declared effective by the Securities and Exchange Commission.
Of the 3,120,000 shares of common stock offered, 1,981,849 shares were
offered by Horizon and 1,138,151 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 118,150 shares of common
stock at the initial offering price of $6.67 per share pursuant to the
exercise of the over allotment 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. (See Note 4)
2. SUBLEASE OF MOUNTAIN CREST HOSPITAL OPERATIONS
As discussed in Note 1, Horizon subleased the operations of MCH to MHM
effective July 31, 1994. The operating results of MCH for the eleven
months ended July 31, 1994 have been consolidated with the operating
results of Horizon for the year ended August 31, 1994. The net revenues
and operating income of MCH as of the eleven months ended July 31, 1994
which are included in the consolidated financial statements are:
<TABLE>
<CAPTION>
For the eleven
months ended
July 31, 1994
--------------
<S> <C>
Net revenues $ 5,297,174
============
Operating income $ 623,023
============
</TABLE>
F-8
<PAGE> 18
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. 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 recorded 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.
SALE OF RIGHTS TO PURCHASE OPTIONS: During the years ended August 31, 1995
and 1994, Horizon issued nonstatutory stock options to purchase 168,000
and 406,237 shares of common stock, respectively - see Note 7. Certain of
these options required payment of $0.67 per option by the recipient prior
to issuance of the option. Horizon recognized these payments as an
addition to Additional Paid-in Capital.
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 August 31, 1996, Horizon had management contracts with 32 hospitals
directly or indirectly owned by Columbia/HCA Healthcare Corporation
("Columbia/HCA") of which, 27 had programs in operation. These 27
contracts accounted for 23.0% of the net revenues for the year ended
August 31, 1996. In the aggregate, including terminated contracts,
revenues generated by hospitals directly or indirectly owned by
Columbia/HCA accounted for 26.1% of the net revenues for the year ended
August 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.
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.
F-9
<PAGE> 19
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Assets to be Disposed of" ("SFAS 121"). 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 August 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 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. 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 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-1 stock split of the Company's common stock
(see Note 10).
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.
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.
4. 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 for the
six months ended February 28, 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.
F-10
<PAGE> 20
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for the Horizon LLC is as follows:
<TABLE>
<CAPTION>
August 1, 1994 Six
(inception) to months ended
August 31, 1994 February 28, 1995
--------------- -----------------
(Unaudited)
<S> <C> <C>
Net revenues $ 4,427,053 $ 26,869,535
Operating expenses 3,926,904 23,566,024
Other income 1,912 44,507
--------------- -----------------
Income before income taxes 502,061 3,348,018
Income tax expense - 30,298
--------------- -----------------
Net income $ 502,061 $ 3,317,720
=============== =================
August 31, 1994 February 28, 1995
--------------- -----------------
(Unaudited)
Current assets $ 5,139,363 $ 9,688,529
Noncurrent assets 65,997 848,136
--------------- ---------------
Total assets $ 5,205,360 $ 10,536,665
=============== ===============
Current liabilities $ 1,703,269 $ 3,247,846
=============== ===============
Noncurrent liabilities - -
=============== ===============
Total liabilities 1,703,269 3,247,846
Members' equity 3,502,091 7,288,819
--------------- ---------------
$ 5,205,360 $ 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 stipulates that MHM is
allocated the first $1,750,000 of Horizon LLC net earnings in the fiscal
year ending August 31, 1995. On September 1, 1995, the Horizon LLC was
dissolved and its operations combined with Horizon.
5. 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
6.25 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 $1,800,000 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
F-11
<PAGE> 21
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following presents the revenue of PPS for fiscal years 1995 and 1996.
PPS's effect on Horizon's net income and earnings per share has been
deemed negligible for these periods and not presented.
Historical Revenue Summary (unaudited)
1995 1996
---------- ----------
$4,475,000 $5,050,000
6. LONG-TERM DEBT AND RELATED PARTY TRANSACTIONS
At August 31, 1995 and 1996, Horizon had the following long-term debt:
<TABLE>
<CAPTION>
August 31, August 31,
1995 1996
--------------- --------------
<S> <C> <C>
Texas Commerce Bank -
Revolving Credit Facility - -
Promissory Note to OrNda,
due on November 30, 1999, interest is
payable quarterly at prime plus 2%.
Principal of $48,000 is 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 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 August 31, 1996, the Company has borrowed $0 against the available
line of credit and has $7.4 million available for advances under the
revolving credit facility.
The line of credit will bear interest at (1) the lesser of the Floating
Base Rate or the maximum nonusurious 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.
F-12
<PAGE> 22
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
7. STOCK OPTIONS
In accordance with Horizon's 1989 and 1995 Stock Option Plans, as amended,
1,931,843 shares of common stock have been reserved for grant to key
employees. Of these, 1,400,842 options, 1,411,268 options, and 1,461,327
options were issued and outstanding at August 31, 1994, 1995, and 1996,
respectively. During fiscal 1994 and 1995, nonstatutory stock options to
purchase 406,237, and 168,000 shares of common stock were granted with an
exercise price of $3.61 or $4.00, and $6.6667, $7.4167 or $8.9167 per
share, respectively. On September 1, 1995, the Company granted an
additional 127,500 options under the 1995 Stock Option Plan at $9.75 per
share subject to shareholder approval which was received on January 11,
1996. An additional 128,250 shares with an exercise price of $14.16667
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. No
options were canceled or expired during fiscal 1994. However, during
fiscal 1995 and 1996, 39,000 and 11,250 options granted to former officers
were canceled respectively. During fiscal 1995, vested options of 101,250
and 17,325 have been exercised by certain officers at exercise prices of
$0.83333 and $2.14167, respectively. During fiscal 1996, vested options
of 42,000 at $0.50, and 38,816 at $0.83333 and 53,625 at $1.00 have been
exercised by certain key employees.
At August 31, 1996 there were 1,931,843 shares reserved, of which 256,015
shares were issued and exercised, 1,461,327 shares were issued and
unexercised and 214,500 shares remain unissued. Of the 1,461,327 shares
issued and unexercised, 520,452 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.
150,000 shares of common stock are reserved for issuance under this plan.
This plan has been amended and restated to also provide for 3,000 option
grants to each eligible director each time he is re- elected to the board
after having served as a director for at least one year since his initial
grant under the plan.
At August 31, 1996 there were 150,000 shares reserved, of which no shares
were issued and exercised, 60,000 shares were issued and unexercised and
90,000 shares remain unissued. Of the 60,000 shares issued and
unexercised, 12,000 shares were exercisable.
F-13
<PAGE> 23
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 1, 1996 the Company filed an S-8 registration statement which
registered 2,054,549 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.
8. INCOME TAXES
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. Income tax (benefit)
expense comprised the following components:
<TABLE>
<CAPTION>
Federal State Total
------------ ------------ -------------
<S> <C> <C> <C>
Year Ended August 31, 1994
Current $ 7,200 $ (27,580) $ (20,380)
Deferred - - -
------------ ----------- ------------
$ 7,200 $ (27,580) $ (20,380)
============ =========== ============
Year Ended August 31, 1995
Current $ 548,260 $ 316,419 $ 864,679
Deferred (54,512) (6,413) (60,925)
------------ ------------ ------------
$ 493,748 $ 310,006 $ 803,754
============ ============ ============
Year Ended August 31, 1996
Current $ 1,599,122 $ 536,097 $ 3,135,219
Deferred 481,849 56,687 538,536
------------ ------------ ------------
$ 3,080,971 $ 592,784 $ 3,673,755
============ ============ ============
</TABLE>
The components of the net deferred tax (liabilities) assets at August 31,
1994, 1995 and 1996 were obtained using the liability method in
accordance with SFAS No. 109 and are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------ -------------
<S> <C> <C>
Management contracts $ (1,581,643 ) $ (1,717,189) $ (1,613,132)
Goodwill - - (198,761)
-------------- ------------- -------------
Gross deferred tax liabilities $ (1,581,643 ) $ (1,717,189) $ (1,811,893)
============== ============= =============
Accounts receivable $ 307,446 $ 410,719 $ 368,078
Vacation accruals 104,340 293,557 375,532
Misc accruals - - 274,991
Fixed assets/intangibles - 45,515 73,923
Net operating loss carryforward 2,559,156 1,028,323 241,757
Deferred tax asset valuation allowance (1,389,299 ) - -
-------------- ------------- -------------
Deferred tax assets $ 1,581,643 $ 1,778,114 $ 1,334,281
============== ============= =============
Net deferred tax asset (liability) $ - $ 60,925 $ (477,612)
============== ============= =============
</TABLE>
At August 31, 1996, the Company had available estimated, unused net
operating loss carryforwards for tax purposes of approximately $600,000.
These carryforwards may be utilized to offset future years' income and
will expire during 2008 if unused prior to that date.
F-14
<PAGE> 24
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of income taxes at the U.S. federal
income tax rate to the income taxes reflected in the Consolidated
Statement of Operations:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Federal income taxes based on 34% of book
income (including equity in net earnings
of Horizon LLC) $ 495,030 $ 1,614,991 $ 3,141,732
Meals and entertainment, goodwill
amortization and other permanent adjustments 48,279 135,441 142,136
Change in valuation allowance (510,877) (1,389,299) -
State income taxes and other adjustments (52,812) 442,621 389,887
-------------- ------------- -------------
$ (20,380) $ 803,754 $ 3,673,755
============== ============= ============
</TABLE>
The change in the deferred tax asset valuation allowance is primarily due
to the utilization of net operating loss carryforwards in the years ended
August 31, 1994 and 1995.
9. COMMITMENTS AND CONTINGENCIES
Horizon leases various office facilities and equipment under operating
leases. The following is a schedule of minimum rental payments under
these leases which expire at various dates:
<TABLE>
<CAPTION>
Year ended August 31:
<S> <C>
1997 $ 569,586
1998 501,768
1999 360,741
2000 315,578
2001 315,000
--------------
$ 2,062,673
==============
</TABLE>
Rent expense for the years ended August 31, 1994, 1995, and 1996 totaled
$1,049,828, $315,105 and $644,931, respectively.
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.
F-15
<PAGE> 25
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
10. 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.
11. UNAUDITED PRO FORMA SUPPLEMENTAL INFORMATION
The following unaudited pro forma information for the years ended August
31, 1994 and 1995, has been prepared as if the issuance of 1,981,849
shares of the common stock from the initial public offering, and the
purchase of the minority interest in the Horizon LLC at a price equal to
1,041,233 times the initial public offering price per share had occurred
on September 1, 1993. In addition, the operating results of the Mountain
Crest Hospital for the eleven months ended July 31, 1994 have been
removed, as such operations were subleased by the Company effective July
31, 1994.
<TABLE>
<CAPTION>
For the year For the year
August 31, August 31,
1994 1995
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenue $ 44,805 $ 56,078
=================== ===================
Net income $ 1,026 $ 3,783
=================== ===================
Share data:
Pro Forma earnings per share $ 0.17 $ 0.60
=================== ===================
Weighted average shares outstanding 6,165 6,329
=================== ===================
</TABLE>
F-16
<PAGE> 26
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for
fiscal 1995 and 1996:
<TABLE>
<CAPTION>
Net Earnings
Gross Income (Loss)
Revenues Profit (Loss) Per Share
--------------- -----------------------------------------------
<S> <C> <C> <C> <C>
Quarter Ended:
November 30, 1994 $ 232,457 $ (80,007) $ (294,282) (0.09)
February 28, 1995 53,277 (30,526) 1,120,988 0.27
May 31, 1995 14,637,710 1,980,010 1,534,941 0.26
August 31, 1995 14,426,320 2,066,538 1,584,951 0.25
Quarter Ended:
November 30, 1995 14,612,868 2,002,091 1,248,829 0.19
February 29, 1996 15,071,434 2,159,193 1,335,705 0.21
May 31, 1996 15,819,865 2,318,831 1,444,851 0.22
August 31, 1996 16,940,588 2,436,417 1,534,855 0.23
</TABLE>
The net income in the quarters ended November 30, 1994 and February 28,
1995, included equity in net earnings of the Horizon LLC of $0 and
$1,567,720, respectively. No equity earnings from Horizon LLC were
recorded in the quarter ended November 30, 1994, as all earnings were
contractually allocated to MHM. On March 20, 1995, Horizon acquired
MHM's minority interest in the Horizon, LLC. Accordingly, the Horizon
LLC has been consolidated with the Company effective March 1, 1995 as a
wholly-owned subsidiary.
13. SUBSEQUENT EVENTS
On January 31, 1997, Horizon effected a three-for-two stock split. The
par value of such common stock remained at $0.01, thereby causing $18,253
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 increased by 50% and decreased by
33.33%, respectively. These consolidated financial statements have been
restated to present the effects of this stock split.
In February 1997, Horizon increased the number of its authorized common
shares from 10,000,000 to 40,000,000 shares.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation
("Geriatric"), from the stockholders of Geriatric. Geriatric is a
contract manager of mental health services for acute care hospitals.
Geriatric had total revenues of approximately $5.7 million in 1996. The
cash purchase price of approximately $4.3 million, which was paid at
closing from existing cash of the Company, included retiring essentially
all of Geriatric's outstanding debt. On April 16, 1997, the Company paid
an additional $270,000 related to this purchase.
F-17
<PAGE> 27
HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Clay Care, Inc., a Texas corporation ("CCI"). CCI is a
contract manager of mental health services for acute care hospitals. CCI
had total revenues of approximately $1.3 million in 1996. The $1,000,000
cash purchase price was determined based on negotiations between the
seller and the Company. A total of $475,000 of the purchase price was
paid at the closing from existing cash of the Company. The remaining
$525,000 of the total purchase price, which the Company also expects to
pay from available cash, is due in two payments, both of which are to be
paid within ninety (90) days from the closing date, subject to reduction
under certain circumstances specified in the stock purchase agreement.
F-18
<PAGE> 28
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
- ----------- -------
3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q as filed with the
Commission on March 31, 1997).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration
Number 33-88314) as filed with the Commission on February 16,
1995).
4.1 Rights Agreement dated February 6, 1997, between Horizon
Mental Health Management, Inc. and American Stock Transfer &
Trust Company, as Rights Agent, which includes as exhibits the
form of Rights Certificate and the Summary of Rights Agreement
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A (Registration
Number 000-22123) as filed with the Commission on February 7,
1997).
23.1 Consent of Price Waterhouse LLP (filed herewith
27.1 Financial Data Schedule (filed herewith).
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-2938) of Horizon Mental Health Management, Inc.
of our report dated October 7, 1996, except as to Note 13, which is as of April
29, 1997, appearing on page F-1 of this Form 8-K.
PRICE WATERHOUSE LLP
Dallas, Texas
May 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE YEAR
ENDED AUGUST 31, 1996 FINANCIAL STATEMENTS INCLUDED IN THIS REPORT ON FORM 8-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCLUDED IN SUCH REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 7,940,232
<SECURITIES> 0
<RECEIVABLES> 7,724,106
<ALLOWANCES> 627,142
<INVENTORY> 0
<CURRENT-ASSETS> 16,480,318
<PP&E> 2,434,787
<DEPRECIATION> 1,552,975
<TOTAL-ASSETS> 32,871,527
<CURRENT-LIABILITIES> 11,007,149
<BONDS> 0
0
0
<COMMON> 36,507
<OTHER-SE> 20,322,902
<TOTAL-LIABILITY-AND-EQUITY> 32,871,527
<SALES> 0
<TOTAL-REVENUES> 62,444,755
<CGS> 0
<TOTAL-COSTS> 53,528,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 73,948
<INTEREST-EXPENSE> 29,371
<INCOME-PRETAX> 9,240,392
<INCOME-TAX> 3,673,755
<INCOME-CONTINUING> 5,564,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,564,240
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
