<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 February 28, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________
Commission File number 1-13626
-------
HORIZON HEALTH CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2293354
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
----------------------------
(Address of principal executive offices, including zip code)
(972) 420-8200
--------------
(Registrant's telephone number, including area code)
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 March 31, 1998 was 7,227,512 shares.
<PAGE> 2
INDEX
HORIZON HEALTH CORPORATION
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.......................................................................................3
HORIZON HEALTH CORPORATION
Consolidated Balance Sheets as of August 31, 1997
and February 28, 1998 (unaudited).................................................................3
Consolidated Statements of Operations for the three months
ended February 28, 1997 and February 28, 1998 (each unaudited)....................................5
Consolidated Statements of Operations for the six months ended
February 28, 1997 and February 28, 1998 (each unaudited)..........................................6
Consolidated Statements of Cash Flows for the six months ended
February 28, 1997 and February 28, 1998 (each unaudited)..........................................7
Notes to Consolidated Financial Statements (unaudited)............................................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................................15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS...................................................................................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................................25
</TABLE>
2
<PAGE> 3
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1997 FEBRUARY 28, 1998
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 5,516,575 $ 2,567,038
Accounts receivable less allowance for uncollectible
accounts of $1,357,423 at August 31, 1997 and
$1,683,632 at February 28, 1998 11,995,254 15,821,911
Receivable from employees 63,303 58,232
Prepaid expenses and supplies 182,208 270,289
Income taxes receivable 951,256 ---
Other receivables 51,877 526,670
Other current assets 170,154 599,014
Current deferred taxes 1,687,512 2,035,441
----------- -----------
TOTAL CURRENT ASSETS 20,618,139 21,878,595
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 3,694,717 4,255,138
Building improvements 255,406 328,040
----------- -----------
3,950,123 4,583,178
Less accumulated depreciation 2,208,083 2,584,248
----------- -----------
1,742,040 1,998,930
Goodwill, net of accumulated amortization
of $2,078,177 at August 31, 1997, and
$2,451,943 at February 28, 1998 21,553,594 30,998,656
Service contracts, net of accumulated
amortization of $2,744,666 at August 31, 1997
and $3,346,947 at February 28, 1998 4,451,426 7,423,980
Other assets 363,208 746,111
----------- -----------
TOTAL ASSETS $48,728,407 $63,046,272
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1997 FEBRUARY 28, 1998
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,747,393 $ 757,108
Employee compensation and benefits 6,233,477 6,050,959
Accrued expenses 7,572,929 6,114,872
Current debt maturities --- 18,470
----------- -----------
TOTAL CURRENT LIABILITIES 15,553,799 12,941,409
Other liabilities 355,803 613,125
Long-term debt, net of current debt maturities (Note 4) --- 11,018,451
Deferred income taxes 987,704 1,085,492
----------- -----------
TOTAL LIABILITIES 16,897,306 25,658,477
----------- -----------
Commitments and contingencies (Note 6) --- ---
Minority interest 148,648 35,536
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 500,000 shares
authorized; none issued or outstanding --- ---
Common stock, $.01 par value, 40,000,000 shares
authorized; 6,966,762 shares issued
outstanding at August 31, 1997 and 7,082,012
shares issued and outstanding at February 28, 1998 69,668 70,820
Additional paid-in capital 16,739,425 17,328,198
Retained earnings 14,873,360 19,953,241
----------- -----------
31,682,453 37,352,259
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $48,728,407 $63,046,272
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
-------------------------------
1997 1998
------------ -------------
<S> <C> <C>
Revenues:
Contract management $ 24,948,720 $ 25,197,604
Patient services 1,391,099 4,137,325
Other 23,798 65,542
------------ ------------
Total revenues 26,363,617 29,400,471
Expenses:
Salaries and benefits 14,751,087 16,347,702
Purchased services 3,900,419 4,910,917
Provision for bad debts 1,134,948 (74,124)
Depreciation and amortization 499,508 740,314
Other 2,777,588 3,058,587
------------ ------------
Total operating expenses 23,063,550 24,983,396
Other income (expense):
Interest expense (115,027) (169,198)
Interest and other income 161,142 107,582
Loss on sale of fixed assets (546) ---
------------ ------------
Income before income taxes and minority interest 3,345,636 4,355,459
Income tax expense 1,313,531 1,771,801
------------ ------------
Income before minority interest 2,032,105 2,583,658
Minority interest (Note 3) 27,486 27,772
------------ ------------
Net income $ 2,004,619 $ 2,555,886
============ ============
Earnings per common share:
Basic $ .29 $ .36
============ ============
Diluted $ .26 $ .33
============ ============
Weighted average shares outstanding:
Basic 6,908,158 7,070,265
============ ============
Diluted 7,680,541 7,742,168
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenues:
Contract management $ 49,668,829 $ 51,796,507
Patient services 2,806,125 6,807,763
Other 768,617 118,613
------------ ------------
Total revenues 53,243,571 58,722,883
Expenses:
Salaries and benefits 29,593,156 32,076,271
Purchased services 7,579,651 9,769,596
Provision for bad debts 1,442,692 280,903
Depreciation and amortization 1,096,961 1,352,211
Other 6,172,331 6,633,508
------------ ------------
Total operating expenses 45,884,791 50,112,489
Other income (expense):
Interest expense (221,330) (230,753)
Interest and other income 304,682 213,195
Loss on sale of fixed assets (3,061) ---
------------ ------------
Income before income taxes and minority interest 7,439,071 8,592,836
Income tax expense 2,999,913 3,478,995
------------ ------------
Income before minority interest 4,439,158 5,113,841
Minority interest (Note 3) 51,560 33,960
------------ ------------
Net income $ 4,387,598 $ 5,079,881
============ ============
Earnings per common share:
Basic $ .64 $ .72
============ ============
Diluted
.57 .66
============ ============
Average shares outstanding:
Basic 6,892,088 7,025,176
============ ============
Diluted 7,663,425 7,751,705
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1997 1998
---------------- ----------------
<S> <C> <C>
Operating Activities:
Net income $ 4,387,598 $ 5,079,881
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,096,961 1,352,211
Minority interest 51,560 33,960
Deferred income taxes (787,708) 18,195
Loss on sale of equipment 3,061 ---
Deferred compensation 4,167 ---
Changes in net assets and liabilities:
Increase in restricted cash (325,279) ---
Increase in accounts receivable (2,813,158) (3,650,506)
Increase in notes and other receivables (145,181) (469,322)
Decrease in income taxes receivable 522,451 951,256
Increase in prepaid expenses and supplies (91,867) (75,166)
Increase in other assets (234,500) (1,158,366)
Decrease in accounts payable and accrued expenses (108,684) (2,557,756)
Decrease in income taxes payable (183,972) ---
Decrease in payable to health insurance program (661,248) ---
Increase in other liabilities 137,208 257,322
------------ ------------
Net cash provided by (used in) operating activities 851,409 (218,291)
------------ ------------
Investing activities:
Purchase of property and equipment (937,330) (549,154)
Proceeds from sale of equipment 10,370 ---
Payment for 16% purchase of Professional Psychological
Services, Inc., net of cash acquired --- (831,879)
Final payment for 80% purchase of Professional
Psychological Services, Inc., net of cash acquired --- (200,985)
Payment for purchase of Acorn Behavioral HealthCare
Management Corporation, net of cash acquired --- (12,726,120)
------------ ------------
Net cash used in investing activities (926,960) (14,308,138)
------------ ------------
Financing activities:
Payments on long-term debt (13,033)
Proceeds from long term borrowings 116,820 11,000,000
Net proceeds from issuance of common stock 145,698 203,687
Tax benefit related to stock option exercise 244,105 386,238
------------ ------------
Net cash provided by financing activities 506,623 11,576,892
------------ ------------
Net increase (decrease) in cash and short term investments 431,072 (2,949,537)
Cash and short-term investments at beginning of period 8,369,838 5,516,575
------------ ------------
Cash and short-term investments at end of period $ 8,800,910 $ 2,567,038
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 221,330 $ 230,753
============ ============
Income taxes $ 3,006,774 $ 2,809,944
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1997 1998
---------------- ----------------
<S> <C> <C>
Supplemental disclosure of non-cash investing
activities:
Payment for 16% purchase of Professional
Psychological Services, Inc.
Fair value of assets acquired $ 911,472
------------
Cash paid (831,879)
------------
Liabilities assumed $ 79,593
============
Final payment for 80% purchase of Professional
Psychological Services, Inc.
Fair value of assets acquired $ 200,985
------------
Cash paid (200,985)
------------
Liabilities assumed $ ---
============
Payment for Acorn Behavioral HealthCare Management
Corporation
Fair value of assets acquired $ 12,904,189
------------
Cash paid $(12,726,357)
------------
Liabilities assumed $ 177,832
============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Horizon Health Corporation (the "Company" or "Horizon"), formerly known
as Horizon Mental Health Management, Inc., is a contract manager of
clinical and related services, primarily 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. The
Company currently has offices in the Dallas, Texas; Los Angeles,
California; Chicago, Illinois; Tampa, Florida; and Boston, Massachusetts
metropolitan areas. The Company's National Support Center is in
Lewisville, Texas.
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn Behavioral HealthCare Management Corporation
("Acorn"), a Pennsylvania corporation. The Company accounted for the
acquisition of Acorn by the purchase method as required by generally
accepted accounting principles. Acorn provides employee assistance
programs and other related services to self-insured employers. Acorn had
total revenues of approximately $7.0 million for the year ended August
31, 1997. The purchase price of approximately $12.7 million in cash was
funded from $1.7 million of working capital and $11.0 million from an
advance under the Company's existing revolving credit facility with Texas
Commerce Bank, N.A. (now known as Chase Bank of Texas, National
Association). (See Note 3)
Effective February 27, 1998, the Company acquired sixteen percent (16%)
of the outstanding common stock of Florida Professional Psychological
Services, Inc., also known as Professional Psychological Services, Inc.
("PPS"). The purchase price of approximately $831,000 was based primarily
on a 5.0 multiple of the 1997 pre-tax income of PPS and was funded by
incurring debt on the advance term loan facility with Texas Commerce Bank
(now known as Chase Bank of Texas, National Association). (See Note 3)
BASIS OF PRESENTATION:
The accompanying consolidated balance sheet at February 28, 1998, the
consolidated statements of operations for the three and six month periods
ended February 28, 1997 and 1998, and the consolidated statements of cash
flows for the six months ended February 28, 1997 and 1998 are unaudited.
These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended August 31,
1997. 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 February 28,
1998, and the results of operations for the three and six months ended
February 28, 1997 and 1998.
Operating results for the three month and six month periods are not
necessarily indicative of the results that may be expected for a full
year or any portion thereof.
9
<PAGE> 10
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. EARNINGS PER SHARE
Earnings per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128").
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if the Company's stock options and
warrants were exercised. Such dilutive potential common shares are
calculated using the treasury stock method. All prior-period earnings per
share data presented has been restated in accordance with SFAS 128.
3. ACQUISITIONS
ACORN
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn. The Company accounted for the acquisition of
Acorn by the purchase method as required by generally accepted accounting
principles. Acorn provides employee assistance programs and other related
services to self-insured employers. Acorn had total revenues of
approximately $7.0 million for the year ended August 31, 1997. The
purchase price of approximately $12.7 million in cash was funded from
$1.7 million of working capital and $11.0 million from an advance under
the Company's existing revolving credit facility with Texas Commerce
Bank, N.A. The purchase price exceeded the fair value of Acorn's tangible
net assets by $12,629,261, of which $9,258,513 is recorded as goodwill
and $3,370,748 as contracts.
The unaudited pro forma combined results of operations of the Company and
Acorn for the six months ended February 28, 1997 and 1998 after giving
effect to certain pro forma adjustments are as follows:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
February 28, 1997 February 28, 1998
-------------- --------------
<S> <C> <C>
Revenue $ 54,920,296 $ 60,107,863
============== ==============
Net income $ 4,475,039 $ 5,233,639
============== ==============
Net income per common share:
Basic $ .65 $ .74
============== ==============
Diluted $ .58 $ .68
============== ==============
</TABLE>
10
<PAGE> 11
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SPECIALTY HEALTHCARE MANAGEMENT, INC.
On August 11, 1997, the Company exchanged 1,400,000 shares of its common
stock for all of the outstanding common stock of Specialty Healthcare
Management, Inc., ("Specialty") The exchange has been accounted for under
the pooling of interests method. Accordingly, the February 28, 1997
financial statements presented have been restated to include the results
of Specialty. Specialty's results of operations for the three and six
months ended February 28, 1997 have been combined with Horizon's results
of operations for the same period. Prior to the exchange Specialty
prepared its financial statements on a December 31 calendar year end
which has subsequently been changed to conform to the Company's fiscal
year end.
GERIATRIC MEDICAL CARE, INC.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc. ("Geriatric") and Geriatric
has been consolidated with the Company as of March 15, 1997. The Company
accounted for the acquisition of Geriatric by the purchase method as
required by generally accepted accounting principles. Geriatric is a
contract manager of mental health services for acute care hospitals. At
March 15, 1997, Geriatric had 18 management contract locations, of which
three were not yet in operation. The purchase price of approximately $4.6
million, of which approximately $4.3 million was paid at closing from
existing cash of the Company, included retiring essentially all of
Geriatric's outstanding debt. The final purchase price payment of
$270,000 was made on April 16, 1997. The purchase price exceeded the fair
value of Geriatric's tangible net assets by $5,005,986, of which
$4,498,038 is recorded as goodwill and $507,948 as service contracts.
Tangible assets acquired and liabilities assumed totaled $1,042,683 and
$1,421,931, respectively. Pro forma financial data is not presented
because the impact of this acquisition is not material to the Company's
results of operations for any period presented.
CLAY CARE, INC.
Also effective March 15, 1997, the Company purchased all of the
outstanding capital stock of Clay Care, Inc., ("CCI") a Texas
corporation, and CCI has been consolidated with the Company as of March
15, 1997. The Company accounted for the acquisition of CCI by the
purchase method as required by generally accepted accounting principles.
CCI is a contract manager of mental health services for acute care
hospitals. At March 15, 1997, CCI had management contracts with five
hospitals of which four were in operation and one of which opened in
April 1997. A total of $475,000 of the $1,000,000 purchase price was paid
at the closing from existing cash of the Company. The remaining $525,000
of the total purchase price was paid by the Company in April 1997 and
June 1997. The purchase price exceeded the fair value of CCI's tangible
net assets by $855,738, of which $714,672 is recorded as goodwill and
$141,066 as service contracts. Tangible assets acquired and liabilities
assumed totaled $201,794 and $57,532, respectively. Pro forma financial
data is not presented because the impact of this acquisition is not
material to the Company's results of operations for any period presented.
11
<PAGE> 12
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INVESTMENT IN PPS
On July 31, 1996, the Company acquired eighty percent (80%) of the
outstanding common stock of PPS, and PPS has been consolidated with the
Company as of August 1, 1996. The Company 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 final purchase price of $3,324,310 was based
primarily on a multiple of the 1996 pre-tax income of PPS. The purchase
price exceeded the fair value of PPS' net assets by $3,298,885 which is
recorded as goodwill. Assets acquired and liabilities assumed totaled
$540,960 and $515,535, respectively. Cash payments for the purchase of
PPS, net of cash acquired, were $786,767 and $1,898,230 during 1996 and
1997, respectively. The final payment of $200,985 was made on September
30, 1997.
On February 27, 1998, the Company acquired an additional sixteen percent
(16%) of the outstanding common stock of PPS. The purchase price of
$831,879 was based primarily on a 5.0 multiple of the 1997 pre-tax income
of PPS. The purchase price exceeded the fair value of PPS's tangible net
assets acquired by $764,400 of which $560,315 is recorded as goodwill and
$204,085 as service contracts. Tangible assets acquired and liabilities
assumed totaled $147,072 and $79,593, respectively. On March 10, 1998,
the Company acquired the remaining 4% of the outstanding common stock of
PPS, under similar terms, for a purchase price of approximately $208,000.
The acquisitions were funded by incurring debt of approximately $1.0
million under the term loan facility.
For the six months ended February 28, 1998, PPS generated $3,884,425 in
gross revenues, and net income of $208,210.
4. LONG-TERM DEBT
At August 31, 1997 and February 28, 1998, the Company had the following
long-term debt:
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1997 1998
----------- ------------
<S> <C> <C>
SANWA Leasing Corporation --- $ 36,921
Chase Bank of Texas, National Association -
Revolving Credit Facility --- 8,000,000
Chase Bank of Texas, National Association-
Advance --- 3,000,000
----------- -----------
--- 11,036,921
----------- -----------
Less current maturities --- 18,470
----------- -----------
--- $11,018,451
=========== ===========
</TABLE>
12
<PAGE> 13
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company currently has a capitalized lease for computer equipment with
SANWA Leasing Corporation. The lease contains a bargain purchase option
at the term of the Agreement.
On October 16, 1997, the Company increased its existing revolving line of
credit from TCB from $11.0 million to $14.0 million.
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Texas Commerce Bank National Association, (now
known as Chase Bank of Texas, National Association) as Agent, for itself
and other lenders party to the Credit Agreement for a senior secured
credit facility in an aggregate amount of up to $50.0 million (the "New
Credit Facility"). The New Credit Facility consists of a $10.0 million
revolving credit facility to fund ongoing working capital requirements
and a $40.0 million advance term loan facility to refinance certain
existing debt and to finance future acquisitions by the Company. The New
Credit Facility replaced the Company's existing $14.0 million revolving
credit facility. As of February 28, 1998, the Company has borrowings of
$8.0 million outstanding against the revolving credit facility and $3.0
million outstanding against the advance term loan facility.
The New Credit Facility bears interest at (1) the Base Rate plus the Base
Rate Margin, as defined or (2) the LIBOR Rate plus the LIBOR Margin, as
defined. The Base Rate Margin and LIBOR Margins vary depending on the
debt coverage ratio of the Company.
The revolving credit facility matures on November 30, 2000 and the
advance term loan facility matures on November 30, 2002.
5. STOCK OPTIONS
On October 17, 1997, the board of directors adopted the 1998 Stock Option
Plan and such plan was approved by the stockholders of the Company on
January 23, 1998. The 1998 Stock Option Plan authorizes the granting of
nonqualified stock options to purchase up to 500,000 shares of common
stock, which have been reserved for issuance under this plan, to such
directors, officers, employees, and consultants of the Company and its
subsidiaries as may be designated by the Compensation and Option
Committee of the board of directors. The options generally vest ratably
over five years from the date of grant and terminate 10 years from the
date of grant.
6. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under
operating leases. The following is a schedule of minimum rental payments
under these leases which expire at various dates:
<TABLE>
<S> <C>
Six months ending August 31, 1998 $ 677,520
For the year ending August 31, 1999 1,043,087
For the year ending August 31, 2000 674,339
For the year ending August 31, 2001 559,063
For the years ending August 31, 2002 and thereafter 182,931
-----------
$ 3,136,940
</TABLE>
13
<PAGE> 14
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Rent expense for the six months ended February 28, 1997, and 1998 totaled
$467,486 and $550,867, respectively.
The Company leases a building it occupies as its executive offices and
National Support Center in Lewisville, Texas. In connection with this
lease transaction, the Company guaranteed a loan of approximately
$900,000 by a financial institution to the building owner. The Company
also agreed to purchase the leased building for approximately $4.5
million at the end of the lease term in September 2001, if it is not sold
to a third party, or the Company does not extend its lease.
The Company 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.
The Company is involved in litigation arising in the ordinary course of
business, including matters involving professional liability. It is the
opinion of management that the ultimate disposition of such litigation
would not be in excess of any reserves or have a material adverse effect
on the Company's financial position or results of operations.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company provides contract management of clinical and related
services for general acute care hospitals and is currently the leading manager
of mental health programs offered by general acute care hospitals in the United
States. The Company has grown both internally and through acquisitions,
increasing both the number of its management contracts and the variety of its
treatment programs and services. The Company was formed in July 1989 as the
successor to Horizon Health Management Company, which had been engaged in the
mental health contract management business since 1981. During the period from
1989 to 1994, the Company grew primarily from its internal sales efforts as it
focused its business operations entirely on the contract management of mental
health programs. In 1995, the Company began to pursue acquisitions as an
additional source of growth. Over the last five years, the Company has increased
its management contracts from 43 to a total of 184 as of February 28, 1998, and
currently operates in 37 states. Of those management contracts, 166 related to
mental health programs and 18 related to physical rehabilitation programs. The
184 management contracts cover 287 various treatment programs. The Company has
also developed a proprietary mental health outcomes measurement system known as
CQI+ and at February 28, 1998 provided outcome measurement services at 88
hospital locations.
On February 27, 1998, the Company acquired sixteen percent (16%) of the
outstanding common stock of PPS. The purchase price of $831,879 was based
primarily on a 5.0 multiple of the 1997 pre-tax income of PPS. The purchase
price exceeded the fair value of PPS's tangible net assets acquired by $764,400
of which $560,315 is recorded as goodwill and $204,085 as service contracts.
Tangible assets acquired and liabilities assumed totaled $147,072 and $79,593,
respectively. Effective March 10, 1998, the Company acquired the remaining 4% of
the outstanding common stock of PPS, under similar terms, for a purchase price
of approximately $208,000. These acquisitions were funded by incurring debt of
approximately $1.0 million under the term loan facility. The Company had
previously acquired eighty percent (80%) of the outstanding common stock of PPS
in July 1996, further described below.
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn. The Company accounted for the acquisition of Acorn by
the purchase method as required by generally accepted accounting principles.
Acorn provides employee assistance programs and other related services to
self-insured employers. Acorn had total revenues of approximately $7.0 million
for the year ended August 31, 1997. The purchase price of approximately $12.7
million in cash was funded from $1.7 million of working capital and $11.0
million from an advance under the Company's existing revolving credit facility
with Texas Commerce Bank, N.A. The purchase price exceeded the fair value of
Acorn's tangible net assets by $12,629,261, of which $9,258,513 is recorded as
goodwill and $3,370,748 as service contracts.
On August 11, 1997, Horizon acquired Specialty in a transaction
accounted for as a pooling of interests, resulting in a restatement of the
Company's financial results for the fiscal years ended August 31, 1995, 1996 and
1997. Specialty was a contract manager of mental health and physical
rehabilitation treatment programs for general acute care hospitals. At August
11, 1997, Specialty had 44 management contracts. In the Specialty transaction,
1,400,000 shares of Horizon common stock were issued and exchanged for all
outstanding shares of Specialty capital stock. The 1,400,000 shares represented
approximately 20.1% of the Company's common stock outstanding after the
acquisition. Upon the acquisition, the Specialty outstanding bank indebtedness
of approximately $3.2 million was paid in full. Included in the Company's
financial statements for the three and six months ended February 28, 1997 are
the financial results of Specialty for the same period.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric, and Geriatric has been consolidated with the Company
as of March 15, 1997. The Company accounted for the acquisition of Geriatric by
the purchase method as required by generally accepted accounting principles.
Geriatric is a contract manager of mental health services for acute care
hospitals. At March 15, 1997, Geriatric had 18 management contract locations, of
which three were not yet in operation. The purchase price of approximately $4.6
million, of which approximately $4.3 million was paid at closing from existing
cash of the Company, included
15
<PAGE> 16
retiring essentially all of Geriatric's outstanding debt. The final purchase
price payment of $270,000 was made on April 16, 1997. The purchase price
exceeded the fair value of Geriatric's tangible net assets by $5,005,986, of
which $4,498,038 is recorded as goodwill and $507,948 as service contracts.
Tangible assets acquired and liabilities assumed totaled $1,042,683 and
$1,421,931, respectively.
Also effective March 15, 1997, the Company purchased all of the
outstanding capital stock of CCI and CCI has been consolidated with the Company
as of March 15, 1997. The Company accounted for the acquisition of CCI by the
purchase method as required by generally accepted accounting principles. CCI is
a contract manager of mental health services for acute care hospitals. At March
15, 1997, CCI had management contracts with five hospitals of which four were in
operation and one of which opened in April 1997. A total of $475,000 of the
$1,000,000 purchase price was paid at the closing from existing cash of the
Company. The remaining $525,000 of the total purchase price was paid by the
Company in April 1997 and June 1997. The purchase price exceeded the fair value
of CCI's tangible net assets of $855,738, of which $714,672 is recorded as
goodwill and $141,066 as service contracts. Tangible assets acquired and
liabilities assumed totaled $201,794 and $57,532, respectively.
In July 1996, the Company acquired 80% of the outstanding common stock
of PPS. The Company accounted for the acquisition of PPS by the purchase method
as required by generally accepted accounting principles. PPS has been
consolidated with the Company as of August 1, 1996. Based in Clearwater,
Florida, PPS specializes in full risk, capitated managed mental health programs
and employee assistance programs. The purchase price for 80% of the outstanding
capital stock was approximately $3.3 million, based primarily on a 6.25 multiple
of the 1996 pre-tax income of PPS, and was paid from existing cash. In addition,
the Company obtained an option to acquire the remaining 20% of the outstanding
PPS common stock at a future date, which the Company has exercised as described
above.
16
<PAGE> 17
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30, FEBRUARY 28,
- ----------------------------------------------------------------------------- ---------------- ------------
1995 1996 1997 1997 1998
- ----------------------------------------------------------------------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 146 163 181 179 172
Contract locations signed
and unopened 15 16 14 15 12
--- --- --- --- ---
Total contract locations 161 179 195 194 184
=== === === === ===
SERVICES COVERED BY CONTRACTS
IN OPERATION:
Inpatient (A) 138 156 166 165 150
Partial Hospitalization (A) 64 84 104 103 98
Outpatient 15 20 24 27 28
Home health 1 13 17 13 13
CQI Plus (under contract) 46 64 86 87 88
TYPES OF TREATMENT PROGRAMS
IN OPERATION:
Geropsychiatric (A) 102 144 197 193 189
Adult psychiatric (A) 81 82 75 70 60
Substance abuse (A) 9 20 10 12 12
Physical Rehabilitation 23 22 20 21 20
Other (A) 2 5 9 12 6
</TABLE>
(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, prior periods
have been restated as estimates based on the new reporting
definition.
Note: The above table does not include managed care services.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth for the three and six months ended
February 28, 1997 and 1998, the percentage relationship to total net revenues of
certain costs, expenses and income and the number of management contracts in
operation at the end of each period.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED FEBRUARY 28, ENDED FEBRUARY 28,
------------------- ---------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 94.6% 85.7% 93.3% 88.2%
Patient services 5.3 14.1 5.3 11.6
Other 0.1 0.2 1.4 0.2
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Salaries and benefits 56.0 55.7 55.6 54.6
Purchased services 14.8 16.7 14.2 16.6
Provision for bad debts 4.3 (0.3) 2.7 0.5
Depreciation and amortization 1.9 2.5 2.1 2.3
Other 10.5 10.4 11.6 11.3
----- ----- ----- -----
Total operating expenses 87.5 85.0 86.2 85.3
----- ----- ----- -----
Operating income 12.5 15.0 13.8 14.7
----- ----- ----- -----
Interest and other income
(expense), net 0.2 (0.2) 0.2 (0.1)
----- ----- ----- -----
Income before taxes 12.7 14.8 14.0 14.6
Income tax expense 5.0 6.0 5.7 5.9
----- ----- ----- -----
Income before minority interest 7.7 8.8 8.3 8.7
Minority interest 0.1 0.1 0.1 ---
----- ----- ----- -----
Net income 7.6% 8.7% 8.2% 8.7%
===== ===== ===== =====
Number of contracts in operation,
end of period 162 172 162 172
</TABLE>
18
<PAGE> 19
THREE MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO THE
THREE MONTHS ENDED FEBRUARY 28, 1997
Revenue. Revenues for the three months ended February 28, 1998 were
$29.4 million representing an increase of $3.0 million, or 11.4%, as compared to
revenues of $26.4 million for the corresponding period in the prior fiscal year.
An increase in contract management revenues accounted for $249,000 of the $3.0
million increase in revenues. Contract management revenues increased $1.7
million as a result of revenue recorded for Geriatric and CCI. Horizon acquired
100% of the outstanding voting stock of Geriatric and CCI effective March 15,
1997 and consolidated Geriatric and CCI with Horizon as of the effective date of
acquisition. The $1.7 million increase is offset, in part, by a decrease in
contract management revenues of $868,000 at locations that have been under
Horizon management during all periods reported. In addition, the average number
of contract locations in operation, excluding contracts acquired from Geriatric
and CCI, decreased from 162.9 for the three months ended February 28, 1997, to
153.8 for the three months ended February 28, 1998, a decrease of 5.6%. An
increase in patient service revenue accounted for $2.7 million of the $3.0
million increase in revenues. $2.1 million of the $2.7 million increase in
patient service revenue results from revenue recorded for Acorn. Horizon
acquired 100% of the outstanding voting stock of Acorn effective October 31,
1997 and consolidated Acorn with Horizon as of the effective date of
acquisition. The remaining increase in patient service revenue results from the
expansion of provider services at PPS.
Salaries and Benefits. Salaries and benefits for the three months ended
February 28, 1998 were $16.3 million representing an increase of $1.5 million,
or 10.1%, as compared to salaries and benefits of $14.8 million for the prior
fiscal year. Salary and benefits cost per full time equivalent for the three
months ended February 28, 1998 were $14,403 representing an increase of $33 per
full time equivalent, or 0.2%, as compared to salary and benefits cost of
$14,363 per full time equivalent for the prior fiscal year. The number of full
time equivalents for the three months ended February 28, 1998 was approximately
1,135, representing an increase of 108, or 10.5%, as compared to approximately
1,027 full time equivalents in the prior fiscal year. FTE's increased 71, 8, and
33 as a result of the acquisitions of Geriatric and CCI, effective March 15,
1997, and the acquisition of Acorn, effective October 31, 1997. This increase is
offset by a decline in FTE's resulting from a decrease in the average number of
contract locations in operation, excluding contracts acquired from Geriatric and
CCI, from 162.9 for the three months ended February 28, 1997, to 153.8 for the
three months ended February 28, 1998, a decrease of 5.6%.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended February 28, 1998 were $740,000 representing an
increase of $240,000, or 48.0%, as compared to depreciation and amortization
expenses of $500,000 for the corresponding period in the prior fiscal year. An
increase of $90,000 is due to the amortization of goodwill of $9.3 million, $4.5
million, and $700,000 resulting from the acquisition of Acorn, Geriatric and
CCI, respectively. Amortization expense also increased $144,000 in relation to
the value placed on the contracts of Acorn, Geriatric and CCI. The remaining
increase results from the depreciation expense of additional equipment acquired
by acquisition or purchased for the operation of Horizon's contract management
business.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the three months ended February 28,
1998 were $7.9 million representing an increase of $82,000, or 1.1%, as compared
to other operating expenses of $7.8 million for the corresponding period in the
prior fiscal year. The following components identify the variances between the
periods reported.
Purchased services included a $999,000 increase in direct service fees
for the three months ended February 28, 1998 as compared to the same period in
the prior fiscal year as a result of the expansion of provider services at PPS
and the acquisition of Acorn on October 31, 1997. Direct service fees increased
$439,000 at PPS and $560,000 in relation to Acorn, respectively. In addition, an
increase occurred in purchased services due to an increase of $108,000 in
consulting fees. Consulting fees increased $51,000 resulting from the
acquisition of Geriatric and CCI effective March 15, 1997, $23,000 is related to
recruiting consultation, and $13,000 is related to the annual Program Directors
Conference. Purchased services also includes a $209,000 decrease in Medical
Directors' administrative fees for the three months ended February 28, 1998 as
compared to the three months ended February 28, 1997. Medical Directors'
administrative fees increased $114,000 and $37,000 as a result of the
acquisitions of Geriatric and CCI effective March 15, 1997. This increase was
offset by a decline in Medical
19
<PAGE> 20
Directors' administrative fees between the periods resulting from certain
physician contracts having been renegotiated resulting in a general lowering of
compensatory fees.
Bad debt expense decreased $1.2 million for the three months ended
February 28, 1998 as compared to the three months ended February 28, 1997.
$707,000 of the decrease related to one Specialty contract which terminated
April 30, 1997. The remaining decrease was primarily due to payments received
for amounts previously reserved.
Other operating expense was $3.1 million for the three months ended
February 28, 1998 as compared to $2.8 million for the three months ended
February 28, 1997. This increase primarily results from the acquisitions of
Geriatric and CCI, effective March 15, 1997, and the acquisition of Acorn
effective October 31, 1997.
Interest and Other Income (Expense), Net. Interest expense, net of
interest income, and other income for the three months ended February 28, 1998
was $62,000, as compared to net interest income and other income of $46,000 for
the corresponding period in the prior fiscal year. This change results from an
increase in interest expense of $52,000 due to an increase in outstanding credit
facilities, and a decrease in interest income of $55,000 due to a decrease in
cash from $8.8 million at February 28, 1997 to $2.6 million at February 28,
1998.
Income Tax Expense. For the three month period ended February 28, 1998,
the Company recorded federal and state income taxes of $1.8 million resulting in
a combined tax rate of 40.7%. For the three month period ended February 28,
1998, the Company recorded federal and state income taxes of $1.3 million
resulting in a combined tax rate of 39.3%.
SIX MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO THE
SIX MONTHS ENDED FEBRUARY 28, 1997
Revenue. Revenues for the six months ended February 28, 1998 were $58.7
million representing an increase of $5.5 million, or 10.3%, as compared to
revenues of $53.2 million for the corresponding period in the prior fiscal year.
An increase in contract management revenues accounted for $2.1 million of the
$5.5 million increase in revenues. Contract management revenues increased $3.6
million as a result of revenue recorded for Geriatric and CCI. Horizon acquired
100% of the outstanding voting stock of Geriatric and CCI effective March 15,
1997 and consolidated Geriatric and CCI with Horizon as of the effective date of
acquisition. The $3.6 million increase is offset, in part, by a decrease in
contract management revenues of $991,000 at locations that have been under
Horizon management during all periods reported. In addition, the average number
of contract locations in operation, excluding contracts acquired from Geriatric
and CCI, decreased from 162.3 for the six months ended February 28, 1997, to
156.3 for the six months ended February 28, 1998, a decrease of 3.7%. An
increase in patient service revenue accounted for $4.0 million of the $5.5
million increase in revenues. $2.7 million of the $4.0 million increase in
patient service revenue results from revenue recorded for Acorn. Horizon
acquired 100% of the outstanding voting stock of Acorn effective October 31,
1997 and consolidated Acorn with Horizon as of the effective date of
acquisition. The remaining increase in patient service revenue results from the
expansion of provider services at PPS. Other revenues decreased $700,000 due to
a favorable cost report adjustment for Mountain Crest recorded in November 1996.
Salaries and Benefits. Salaries and benefits for the six months ended
February 28, 1998 were $32.1 million representing an increase of $2.5 million,
or 8.4%, as compared to salaries and benefits of $29.6 million for the prior
fiscal year. Salary and benefits cost per full time equivalent for the six
months ended February 28, 1998 were $28,742 representing an increase of $166 per
full time equivalent, or 0.6%, as compared to salary and benefits cost of
$28,565 per full time equivalent for the prior fiscal year. The number of full
time equivalents for the six months ended February 28, 1998 was approximately
1,116, representing an increase of 80, or 7.7%, as compared to approximately
1,036 full time equivalents in the prior fiscal year. FTE's increased 73,8, and
50 as a result of the acquisitions of Geriatric and CCI, effective March 15,
1997, and the acquisition of Acorn effective October 31, 1997. This increase is
offset by a decline in FTE's, resulting from a decrease in the average number of
contract locations in operation, excluding contracts acquired from Geriatric and
CCI from 162.3 for the six months ended February 28, 1997, to 156.3 for the six
months ended February 28, 1998, a decrease of 3.7%.
20
<PAGE> 21
Depreciation and Amortization. Depreciation and amortization expenses
for the six months ended February 28, 1998 were $1.4 million representing an
increase of $255,000, or 23.2%, as compared to depreciation and amortization
expenses of $1.1 million for the corresponding period in the prior fiscal year.
An increase of $142,000 is due to the amortization of goodwill of $9.3 million,
$4.5 million, and $700,000 resulting from the acquisition of Acorn, Geriatric
and CCI, respectively. Amortization expense also increased $207,000 in relation
to the value placed on the contracts of Acorn, Geriatric and CCI. These
increases were offset by a decrease in amortization expense of $75,000
associated with contracts acquired in 1990 which were fully amortized in
February 1997. These increases were also offset by the recording of an
additional $73,000 of depreciation expense in November 1996 due to the change in
the Company's definition of a capital expenditure. The remaining increase
results from the depreciation expense of additional equipment acquired by
acquisition or purchased for the operation of Horizon's contract management
business.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the six months ended February 28,
1998 were $16.7 million representing an increase of $1.5 million, or 9.9%, as
compared to other operating expenses of $15.2 million for the corresponding
period in the prior fiscal year. The following components identify the variances
between the periods reported.
Purchased services included a $1.6 million increase in direct service
fees for the six months ended February 28, 1998 as compared to the same period
in the prior fiscal year as a result of the expansion of provider services at
PPS and the acquisition of Acorn on October 31, 1997. Direct service fees
increased $888,000 at PPS and $727,000 in relation to Acorn, respectively. In
addition, an increase occurred in purchased services due to an increase of
$505,000 in consulting fees. Consulting fees increased $164,000 as a result of
software upgrades at the regional offices and National Support Center, $100,000
resulting from the acquisition of Geriatric and CCI effective March 15, 1997,
$11,000 in relation to Acorn, $66,000 is related to the annual Program Directors
conference, and $32,000 is related to a Mental Health Outcomes assessment study.
Purchased services also includes a $186,000 decrease in Medical Directors'
administrative fees for the six months ended February 28, 1998 as compared to
the six months ended February 28, 1997. Medical Directors' administrative fees
increased $277,000 and $86,000 as a result of the acquisitions of Geriatric and
CCI effective March 15, 1997. This increase was offset by a decline in Medical
Directors' administrative fees between the periods resulting from certain
physician contracts having been renegotiated resulting in a general lowering of
compensatory fees.
Bad debt expense decreased $1.2 million for the six months ended
February 28, 1998 as compared to the six months ended February 28, 1997.
$707,000 of this decrease related to one Specialty contract which terminated
April 30, 1997. The remaining decrease was primarily due to payments received
for amounts previously reserved.
Other operating expense was $6.6 million for the six months ended
February 28, 1998 as compared to $6.2 million for the six months ended February
28, 1997. This increase primarily results from the acquisitions of Geriatric and
CCI, effective March 15, 1997, and the acquisition of Acorn effective October
31, 1997.
Interest and Other Income (Expense), Net. Interest expense, net of
interest income, and other income for the six months ended February 28, 1998 was
$18,000, as compared to net interest income and other income of $80,000 for the
corresponding period in the prior fiscal year. This change results primarily
from a decrease in interest income of $99,000 due to a decrease in cash from
$5.5 million at February 28, 1997 to $2.6 million at February 27, 1998.
Income Tax Expense. For the six month period ended February 28, 1998,
the Company recorded federal and state income taxes of $3.5 million resulting in
a combined tax rate of 40.5%. For the six month period ended February 28, 1997,
the Company recorded federal and state income taxes of $3.0 million resulting in
a combined tax rate of 40.5%.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Texas Commerce Bank National Association (now known as
Chase Bank of Texas, National Association) as Agent (the "Agent") for itself and
other lenders party to the Credit Agreement, for a senior secured credit
facility in an aggregate amount of up to $50.0 million (the "New Credit
Facility"). The New Credit Facility consists of a $10.0 million revolving credit
facility to fund ongoing working capital requirements (the "Revolving Credit
Facility") and a $40.0 million advance term loan facility to refinance certain
existing debt and to finance future acquisitions by the Company (the "Advance
Term Loan Facility"). The New Credit Facility replaced the Company's existing
$14.0 million revolving credit facility. At February 28, 1998, the revolving
credit facility and advance term loan facility had $8 million and $3 million
outstanding, respectively.
The following summary of certain material provisions of the Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Credit Agreement, a copy of which was filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter
ended November 30, 1997, as filed with the Securities and Exchange Commission
(the "Commission") on December 19, 1997.
The Company is the borrower under the New Credit Facility which is
unconditionally guaranteed by all material domestic subsidiaries of the Company.
The Revolving Credit Facility terminates November 30, 2000 and the Advance Term
Loan Facility has a term of five years, with drawdowns available until November
30, 1999. Once a drawdown is made under the Advance Term Loan Facility, the
commitment thereunder will be reduced by the amount funded. Amounts outstanding
under the Advance Term Loan Facility on November 30, 1999 are to be repaid in
twelve quarterly principal payments, beginning February 28, 2000, based upon a
five year amortization schedule with the first eleven principal payments being
1/20th of the outstanding balance on November 30, 1999, and the twelfth being
the remaining unpaid principal balance. Principal outstanding under the New
Credit Facility bears interest at the "Base Rate" (the greater of the Agent's
"prime rate" or the federal funds rate plus .5%) plus 0% to .5% (depending on
the Company's Indebtedness to EBITDA Ratio as defined in the Credit Agreement)
or the "Eurodollar Rate" plus .75% to 1.5% (depending on the Indebtedness to
EBITDA Ratio), as selected by the Company. The Company incurs quarterly
commitment fees ranging from .25% to .375% per annum (depending on the
Indebtedness to EBITDA Ratio) on the unused portion of the Revolving Credit
Facility (until November 30, 2000) and unused portion of the Advance Term Loan
Facility (until November 30, 1999).
The Company is subject to certain covenants which include prohibitions
against (i) incurring additional debt or liens, except specified permitted debt
or permitted liens, (ii) certain material acquisitions, other than specified
permitted acquisitions (including any single acquisition not greater than $10.0
million or cumulative acquisitions not in excess of $20.0 million during any
twelve consecutive monthly periods), (iii) certain mergers, consolidations or
asset dispositions by the Company or changes of control of the Company, (iv)
certain management vacancies at the Company, and (v) material change in the
nature of business conducted. In addition, the terms of the New Credit Facility
require the Company to satisfy certain ongoing financial covenants. The New
Credit Facility is secured by a first lien or first priority security interest
in and/or pledge of substantially all of the assets of the Company and of all
present and future subsidiaries of the Company.
Effective September 1996, the Company entered into a lease agreement
with a term of five years for a building which had been constructed to the
Company's specifications for its National Support Center. In connection with the
lease transaction, the Company guaranteed a loan of approximately $900,000. The
loan was by a financial institution to the owner. The Company also agreed to
purchase the leased building for approximately $4.5 million at the end of the
lease term in September 2001 if either the building is not sold to a third party
or the Company does not extend its lease.
The Company believes that its cash flow from operations, cash of $2.6
million at February 28, 1998 and $2.0 million currently available under the
revolving credit facility will be sufficient to cover all cash requirements over
the next twelve months, including estimated capital expenditures of $1.2
million. The Company is likely to require additional capital to fund any further
acquisitions.
22
<PAGE> 23
The Company's operating activities used net cash of $218,000 during the
six months ended February 28, 1998, compared to cash provided of $851,000 for
the six months ended February 28, 1997. The cash used by operating activities
for the six months ended February 28, 1998 was primarily attributable to an
increase in amounts due the Company from client hospitals. In addition, the
Company used existing cash to reduce liabilities to vendors.
On October 31, 1997, the Company acquired all the outstanding capital
stock of Acorn for approximately $12.7 million. To fund the acquisition, the
Company utilized approximately $1.7 million of existing cash and incurred debt
of approximately $11.0 million under the revolving credit facility.
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this report, other
reports, filings with the Commission, press releases, conferences, or otherwise,
are "forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements include, without limitation, any
statement that may predict, forecast indicate, or imply future results,
performance or achievements, and may contain the words "believe." "anticipate,"
"expect," "estimate," "project," "will be," "will continue," "will likely
result," or words or phrases of similar meaning. Such statements involve risks,
uncertainties or other factors which may cause actual results to differ
materially from the future results, performance or achievements expressed or
implied by such forward looking statements. Certain risks, uncertainties and
other important factors are detailed in this report and will be detailed from
time to time in reports filed by the Company with the Commission, including
Forms 8-K, 10-Q, and 10-K, and include, among others, the following: general
economic and business conditions which are less favorable than expected;
unanticipated changes in industry trends; decreased demand by general hospitals
for the Company's services; the Company's inability to retain existing
management contracts or to obtain additional contracts; adverse changes in
reimbursement to general hospitals by Medicare or other third-party payers for
costs of providing mental health services; adverse changes to other regulatory
provisions relating to mental health services; fluctuations and difficulty in
forecasting operating results; the ability of the Company to sustain, manage or
forecast its growth; heightened competition, including specifically the
intensification of price competition; the entry of new competitors and the
development of new products or services by new and existing competitors; changes
in business strategy or development plans; inability to carry out marketing and
sales plans; business disruptions; liability and other claims asserted against
the Company; loss of key executives; the ability to attract and retain qualified
personnel; customer services; adverse publicity; demographic changes; and other
factors referenced or incorporated by reference in this report and other reports
or filings with the Commission. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the Company's business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward looking
statements. These forward looking statements represent the estimates and
assumptions of management only as of the date of this report. The Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward looking statement contained herein to reflect any
change in its expectations with regard thereto or any change in events,
conditions or circumstances on which any statement is based. Given these risks
and uncertainties, investors should not place undue reliance on forward looking
statements as a prediction of actual results.
The Company has conducted an internal review of its computer systems to
identify systems that could be affected by the "Year 2000" issue. The Year 2000
issue is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in a major system failure or
miscalculations. Based upon its internal review, the Company presently believes
that the Year 2000 issue will not pose significant operational problems for the
Company's computer systems. However, the Company intends to utilize outside
consultants during the second half of 1998, at an estimated cost of $50,000, to
test its computer systems for Year 2000 compliance and to assess whether the
Year 2000 noncompliance of the computer systems of entities with which the
Company's computer systems interact, including suppliers, customers and
financial services organizations, could have an adverse impact on the Company.
The Company expects its Year 2000 compliance program to be completed on a timely
basis. However, there can be no assurance that the computer systems of other
entities on which the Company's computer systems rely also will be Year 2000
compliant on a timely basis or that any such failure to be Year 2000 compliant
would not have an adverse impact on the Company.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on January
23, 1998. At the meeting, James Ken Newman, James W. McAtee, Jack R. Anderson,
George E. Bello, William H. Longfield, Donald E. Steen, James E. Buncher and
Howard B. Finkel were re-elected to the Board of Directors of the Company. A
total of 6,322,210 votes were cast for each director nominee, and a total of
1,606 votes were withheld with respect to each of the director nominees.
At the Annual Meeting of Stockholders, the stockholders also approved
the Horizon Health Corporation 1998 Stock Option Plan (the "Plan"), which
authorized the grant to selected directors, officers, employees and consultants
of the Company of nonqualified stock options to purchase up to an aggregate of
500,000 shares of Common Stock of the Company, subject to adjustment as provided
in the Plan. At the meeting, a total of 4,272,020 votes were cast for adoption
of the Plan, a total of 1,096,977 votes were cast against adoption of the Plan,
a total of 2,791 shares abstained from voting on the Plan, and there were a
total of 952,028 broker non-votes with respect to the Plan.
At the Annual Meeting of Stockholders, the stockholders also ratified
the appointment of Price Waterhouse LLP as the independent accountants for the
Company for the fiscal year ending August 31, 1998. At the meeting, a total of
6,320,203 votes were cast for this proposal, a total of 1,656 votes were cast
against this proposal, and a total of 1,957 shares abstained from voting on this
proposal. There were no broker non-votes with respect to this proposal.
24
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
NUMBER EXHIBIT
3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment
No. 2 as filed with the Commission on February 16, 1995 to the
Company's Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-88314)).
4.1 Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated August 11,
1997).
4.2 Rights Agreement, dated February 6, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, Registration No.
000-22123, as filed with the Commission on February 7, 1997).
10.1 Credit Agreement dated December 9, 1997 among the Company,
Texas Commerce Bank National Association, ("TCB") as Agent, and
the banks named therein (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1997).
10.2 First Amendment to Letter Loan Agreement and Note Modification
Agreement dated December 9, 1997 among North Central
Development Company, the Company and its subsidiaries and TCB
(incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1997).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Six Months Ended February
28, 1998 (filed herewith).
27.2 Amended Financial Data Schedule for the Nine Months Ended May
31, 1996 (filed herewith).
27.3 Amended Financial Data Schedule for the Six Months Ended
February 28, 1997 (filed herewith).
27.4 Amended Financial Data Schedule for the Nine Months Ended May
31, 1997 (filed herewith).
25
<PAGE> 26
(b) The Company filed the following report on Form 8-K during the
quarter covered by this report:
Current Report on Form 8-K dated December 31, 1997 and filed
with the Commission on January 21, 1998. The item reported was
the Company's financial results for the month of December 1997
and its adoption of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." The financial statements filed
as part of such Current Report on Form 8-K included: (i)
Unaudited Consolidated Statement of Income of the Company for
the month ended December 31, 1997; (ii) Consolidated Balance
Sheets as of August 31, 1996 and 1997 and November 30, 1997
(unaudited); (iii) Consolidated Statements of Income for the
years ended August 31, 1995, 1996, and 1997 and for the three
months ended November 30, 1996 (unaudited) and November 30,
1997 (unaudited); (iv) Consolidated Statements of Changes in
Stockholders' Equity (Deficit) for the years ended August 31,
1995, 1996 and 1997 and for the three months ended November 30,
1997 (unaudited); and (v) Consolidated Statements of Cash Flows
for the years ended August 31, 1995, 1996, and 1997 and for the
three months ended November 30, 1996 (unaudited) and November
30, 1997 (unaudited).
26
<PAGE> 27
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.
DATE: APRIL 1, 1998
HORIZON HEALTH CORPORATION
BY: /s/ JAMES W. MCATEE
---------------------------------------------
JAMES W. MCATEE
EXECUTIVE VICE PRESIDENT, FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER, TREASURER AND SECRETARY
<PAGE> 28
INDEX TO EXHIBITS
NUMBER EXHIBIT
3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment
No. 2 as filed with the Commission on February 16, 1995 to the
Company's Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-88314)).
4.1 Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated August 11,
1997).
4.2 Rights Agreement, dated February 6, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, Registration No.
000-22123, as filed with the Commission on February 7, 1997).
10.1 Credit Agreement dated December 9, 1997 among the Company,
Texas Commerce Bank National Association, ("TCB") as Agent, and
the banks named therein (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1997).
10.2 First Amendment to Letter Loan Agreement and Note Modification
Agreement dated December 9, 1997 among North Central
Development Company, the Company and its subsidiaries and TCB
(incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1997).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Six Months Ended February
28, 1998 (filed herewith).
27.2 Amended Financial Data Schedule for the Nine Months Ended May
31, 1996 (filed herewith).
27.3 Amended Financial Data Schedule for the Six Months Ended
February 28, 1997 (filed herewith).
27.4 Amended Financial Data Schedule for the Nine Months Ended May
31, 1997 (filed herewith).
<PAGE> 1
EXHIBIT 11.1
HORIZON HEALTH CORPORATION
COMPUTATIONS OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED FEBRUARY 28, ENDED FEBRUARY 28,
----------------------- -----------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BASIC
Net income 2,004,619 2,555,886 4,387,598 5,079,881
Weighted average shares outstanding
(basic) (1) 6,908,158 7,070,265 6,892,088 7,025,176
--------- --------- --------- ---------
Basic earnings per share .29 .36 .64 .72
========= ========= ========= =========
DILUTED
Net income 2,004,619 2,555,886 4,387,598 5,079,881
Weighted average shares outstanding
(basic) (1) 6,908,158 7,070,265 6,892,088 7,025,176
Effect of dilutive securities
(warrants and options) 772,383 671,903(2) 771,337 726,529(2)
--------- --------- --------- ---------
Weighted average shares outstanding
(diluted) 7,680,541 7,742,168 7,663,425 7,751,705
--------- --------- --------- ---------
Diluted earnings per share .26 .33 .57 .66
========= ========= ========= =========
</TABLE>
(1) The Board of Directors of the Company approved a three-for-two stock
split effected in the form of a 50% stock dividend, pursuant to which
one additional share of Common Stock of the Company was issued on
January 31, 1997 for every two shares of Common Stock held by
stockholders of record at the close of business on January 22, 1997.
Upon effecting the stock split/dividend, the stock options and their
related exercise prices were adjusted proportionately. Such stock
split/dividend has been reflected herein.
(2) Options to acquire 167,500, 15,000 and 722 shares of common stock at
$23.75, $26.00, and $22.00, respectively, were outstanding during the
three months ended February 28, 1998 and options to acquire 15,000
shares of common stock at $26.00 were outstanding during the six months
ended February 28, 1998, but were not included in the computations of
EPS because the options exercise price was greater than the average
market price of the common shares. The options, which expire on August
1, 2007 and October 6, 2007 were still outstanding at February 28,
1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the six months ended
February 28, 1998 financial statements and is qualified in its entirety by
reference to the 10-Q filing for the six months ended February 28, 1998. EPS
amounts are in accordance with SFAS 128.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 2,567,038
<SECURITIES> 0
<RECEIVABLES> 17,505,543
<ALLOWANCES> 1,683,632
<INVENTORY> 0
<CURRENT-ASSETS> 21,878,595
<PP&E> 4,583,178
<DEPRECIATION> 2,584,248
<TOTAL-ASSETS> 63,046,272
<CURRENT-LIABILITIES> 12,941,409
<BONDS> 0
0
0
<COMMON> 70,820
<OTHER-SE> 37,281,439
<TOTAL-LIABILITY-AND-EQUITY> 63,046,272
<SALES> 0
<TOTAL-REVENUES> 58,722,883
<CGS> 0
<TOTAL-COSTS> 49,831,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 280,903
<INTEREST-EXPENSE> 230,753
<INCOME-PRETAX> 8,592,836
<INCOME-TAX> 3,478,995
<INCOME-CONTINUING> 5,079,881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,079,881
<EPS-PRIMARY> .72
<EPS-DILUTED> .66
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This amended schedule contains summary financial information from the nine
months ended May 31, 1996, financial statements and is qualified in its entirety
by reference to the 10-Q filing for the nine months ended May 31, 1996. EPS
amounts are in accordance with SFAS 128.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 4,318,358
<SECURITIES> 0
<RECEIVABLES> 15,424,759
<ALLOWANCES> 1,998,552
<INVENTORY> 0
<CURRENT-ASSETS> 20,817,032
<PP&E> 2,609,891
<DEPRECIATION> 1,334,604
<TOTAL-ASSETS> 40,871,678
<CURRENT-LIABILITIES> 12,878,504
<BONDS> 0
0
0
<COMMON> 66,863
<OTHER-SE> 22,960,223
<TOTAL-LIABILITY-AND-EQUITY> 40,871,086
<SALES> 0
<TOTAL-REVENUES> 71,235,209
<CGS> 0
<TOTAL-COSTS> 61,881,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,027,083
<INTEREST-EXPENSE> 306,007
<INCOME-PRETAX> 8,247,569
<INCOME-TAX> 3,332,277
<INCOME-CONTINUING> 4,915,292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,915,292
<EPS-PRIMARY> .76
<EPS-DILUTED> .66
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This amended schedule contains summary financial information from the six months
ended February 28, 1997, financial statements and is qualified in its entirety
by reference to the 10-Q filing for the six months ended February 28, 1997. EPS
amounts are in accordance with SFAS 128.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 8,800,909
<SECURITIES> 0
<RECEIVABLES> 18,891,352
<ALLOWANCES> 3,606,862
<INVENTORY> 0
<CURRENT-ASSETS> 27,253,708
<PP&E> 3,603,774
<DEPRECIATION> 1,989,999
<TOTAL-ASSETS> 49,164,000
<CURRENT-LIABILITIES> 14,372,137
<BONDS> 0
0
0
<COMMON> 67,906
<OTHER-SE> 29,013,902
<TOTAL-LIABILITY-AND-EQUITY> 49,164,000
<SALES> 0
<TOTAL-REVENUES> 53,243,571
<CGS> 0
<TOTAL-COSTS> 44,442,101
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,442,693
<INTEREST-EXPENSE> 221,329
<INCOME-PRETAX> 7,439,070
<INCOME-TAX> 2,999,913
<INCOME-CONTINUING> 4,387,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,387,597
<EPS-PRIMARY> .64
<EPS-DILUTED> .57
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This amended schedule contains summary financial information from the nine
months ended May 31, 1997 financial statements and is qualified in its entirety
by reference to the 10-Q filing for the nine months ended May 31, 1997. EPS
amounts are in accordance with SFAS 128.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 4,254,449
<SECURITIES> 0
<RECEIVABLES> 19,333,547
<ALLOWANCES> 4,289,606
<INVENTORY> 0
<CURRENT-ASSETS> 23,120,431
<PP&E> 3,769,988
<DEPRECIATION> 2,180,832
<TOTAL-ASSETS> 51,849,270
<CURRENT-LIABILITIES> 16,356,771
<BONDS> 0
0
0
<COMMON> 67,931
<OTHER-SE> 31,200,613
<TOTAL-LIABILITY-AND-EQUITY> 51,849,270
<SALES> 0
<TOTAL-REVENUES> 81,180,216
<CGS> 0
<TOTAL-COSTS> 67,698,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,838,713
<INTEREST-EXPENSE> 322,978
<INCOME-PRETAX> 10,744,743
<INCOME-TAX> 4,315,924
<INCOME-CONTINUING> 6,353,728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,353,728
<EPS-PRIMARY> .92
<EPS-DILUTED> .83
</TABLE>
