<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 quarterly period ended May 31, 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
incorporation or organization) Identification No.)
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 July 10, 1998 was 7,231,812.
<PAGE> 2
INDEX
HORIZON HEALTH CORPORATION
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS........................................................................................3
HORIZON HEALTH CORPORATION
<S> <C> <C>
Consolidated Balance Sheets as of August 31, 1997
and May 31, 1998(unaudited).....................................................................................3
Consolidated Statements of Operations for the three months
ended May 31, 1997 and May 31, 1998 (each unaudited)............................................................5
Consolidated Statements of Operations for the nine months
ended May 31, 1997 and May 31, 1998 (each unaudited)............................................................6
Consolidated Statements of Cash Flows for the nine months
ended May 31, 1997 and May 31, 1998 (each unaudited)............................................................7
Notes to Consolidated Financial Statements (unaudited).........................................................10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................................................................16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................................................27
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 MAY 31, 1998
--------------- ------------
(UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and short-term investments $ 5,516,575 $ 1,533,489
Accounts receivable less allowance for uncollectible
accounts of $1,357,423 at August 31, 1997 and
$1,574,861 at May 31, 1998 11,995,254 15,938,617
Receivable from employees 63,303 100,872
Prepaid expenses and supplies 182,208 271,459
Income taxes receivable 951,256 ---
Other receivables 51,877 408,889
Other current assets 170,154 848,410
Current deferred taxes 1,687,512 2,032,615
----------- -----------
TOTAL CURRENT ASSETS 20,618,139 21,134,351
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 3,694,717 4,215,344
Building improvements 255,406 340,768
----------- -----------
3,950,123 4,556,112
Less accumulated depreciation 2,208,083 2,613,479
----------- -----------
1,742,040 1,942,633
Goodwill, net of accumulated amortization
of $2,078,177 at August 31, 1997, and
$2,661,916 at May 31, 1998 21,553,594 30,929,993
Service contracts, net of accumulated
amortization of $2,744,666 at August 31, 1997
and $3,696,109 at May 31, 1998 4,451,426 7,125,837
Other assets 363,208 699,121
----------- -----------
TOTAL ASSETS $ 48,728,407 $ 61,831,935
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1997 MAY 31, 1998
--------------- ------------
(UNAUDITED)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 1,747,393 $ 627,990
Employee compensation and benefits 6,233,477 5,908,617
Accrued expenses 7,572,929 5,413,411
Current debt maturities --- 18,470
------------- -----------
TOTAL CURRENT LIABILITIES 15,553,799 11,968,488
Other liabilities 355,803 196,224
Long-term debt, net of current debt maturities (Note 4) --- 8,013,951
Deferred income taxes 987,704 1,090,567
----------- -------------
TOTAL LIABILITIES 16,897,306 21,269,230
----------- ---------------
Commitments and contingencies (Note 6) --- ---
Minority interest 148,648 ---
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 7,231,812
shares issued and outstanding at May 31, 1998 69,668 72,318
Additional paid-in capital 16,739,425 17,810,811
Retained earnings 14,873,360 22,679,576
----------- ------------
31,682,453 40,562,705
----------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 48,728,407 $ 61,831,935
============= ================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
----------------------------
1997 1998
------------ ------------
Revenues:
<S> <C> <C>
Contract Management $ 26,354,304 $ 24,840,481
Patient Services 1,547,560 3,923,748
Other 34,782 63,377
------------ ------------
Total Revenues 27,936,646 28,827,606
Expenses:
Salaries And Benefits 15,186,147 15,759,483
Purchased Services 4,532,269 4,848,716
Provision For Bad Debts 1,396,020 (196,195)
Depreciation And Amortization 554,929 757,477
Other 2,982,931 3,576,897
------------ ------------
Total Operating Expenses 24,652,296 24,746,378
Other Income (Expense):
Interest Expense (101,649) (141,567)
Interest And Other Income 121,800 585,304
Gain On Sale Of Fixed Assets 1,173 --
----------- ------------
Income Before Income Taxes And Minority Interest 3,305,674 4,524,965
Income Tax Expense 1,316,011 1,798,630
----------- ------------
Income Before Minority Interest 1,989,663 2,726,335
Minority Interest (Note 3) 23,531 --
------------ ------------
Net Income $ 1,966,132 $ 2,726,335
============ ============
Earnings Per Common Share:
Basic $ .28 $ .38
============ ============
Diluted $ .26 $ .35
============ ============
Weighted Average Shares Outstanding:
Basic 6,964,371 7,199,047
============ ============
Diluted 7,665,758 7,797,400
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended May 31,
-------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenues:
Contract management $ 76,023,133 $ 76,636,988
Patient services 4,353,685 10,731,511
Other 803,399 181,990
------------ ------------
Total revenues 81,180,217 87,550,489
Expenses:
Salaries and benefits 44,779,303 47,835,754
Purchased services 12,111,920 14,618,312
Provision for bad debts 2,838,712 84,708
Depreciation and amortization 1,651,889 2,109,688
Other 9,155,264 10,210,405
------------ ------------
Total operating expenses 70,537,088 74,858,867
Other income (expense):
Interest expense (322,978) (372,320)
Interest and other income 426,483 798,499
Loss on sale of fixed assets (1,888) ---
------------ ----------
Income before income taxes and minority interest 10,744,746 13,117,801
Income tax expense 4,315,924 5,277,625
------------ ------------
Income before minority interest 6,428,822 7,840,176
Minority interest (Note 3) 75,091 33,960
------------ ------------
Net income $ 6,353,731 $ 7,806,216
============ ============
Earnings per common share:
Basic $ .92 $ 1.10
============ ============
Diluted $ .83 $ 1.01
============ ============
Average shares outstanding:
Basic 6,916,182 7,083,133
============ ============
Diluted 7,664,202 7,766,937
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Operating Activities:
Net income $ 6,353,731 $ 7,806,216
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,651,889 2,109,688
Minority interest 75,091 33,960
Deferred income taxes (1,079,749) 3,372
Loss on sale of equipment 1,888 --
Deferred compensation 25,000 --
Changes in net assets and liabilities:
Increase in restricted cash (359,896) --
Increase in accounts receivable (1,896,590) (3,767,212)
Increase in other receivables (387,803) (387,930)
Decrease in income taxes receivable 287,371 951,256
Decrease (increase) in prepaid expenses and supplies 22,930 (76,336)
Decrease (increase) in other assets 79,056 (1,357,947)
Increase (decrease) in accounts payable and accrued 236,533 (3,530,676)
expenses
Decrease in income taxes payable (51,758) --
Decrease in payable to health insurance program (661,248) --
Decrease in other liabilities (436,617) (159,579)
----------- ------------
Net cash provided by operating activities 3,859,828 1,624,812
----------- ------------
Investing activities:
Purchase of property and equipment (1,095,428) (697,447)
Proceeds from sale of equipment 13,485 --
Payment for purchase of Clay Care, Inc., net of
cash (913,634) --
acquired
Payment for purchase of Geriatric Medical Care, Inc.,
net (4,577,970) --
of cash acquired
Payment for 16% purchase of Professional
Psychological -- (831,879)
Services, Inc., net of cash acquired
Payment for 4% purchase of Professional Psychological
Services, Inc., net of cash acquired -- (207,970)
Payment for 80% purchase of Professional Psychological
Services, Inc., net of cash acquired (1,099,000) --
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 (7,672,547) (14,664,401)
------------ -------------
</TABLE>
7
<PAGE> 8
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
---------------------------
1997 1998
----------- ------------
Financing activities:
<S> <C> <C>
Payments on long-term debt (892,242) (5,517,533)
Proceeds from long term borrowings -- 13,500,000
Net proceeds from issuance of common stock 189,239 474,632
Tax benefit related to stock option exercise 400,334 599,404
----------- ------------
Net cash provided by (used in) financing activities (302,669) 9,056,503
Net decrease in cash and short term investments (4,115,388) (3,983,086)
Cash and short-term investments at beginning of period 8,369,838 5,516,575
----------- ------------
Cash and short-term investments at end of period $ 4,254,450 $ 1,533,489
=========== ============
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 322,978 $ 372,320
=========== ============
Income taxes $ 4,478,463 $ 4,458,688
=========== ============
Supplemental disclosure of non-cash investing activities:
Payment for purchase of Professional Psychological
Services, Inc.
Fair value of assets acquired $ 1,099,000 --
----------- --
Cash paid (1,099,000) --
-----------
Liabilities assumed $ -- --
===========
Purchase of Clay Care, Inc.
Fair value of assets acquired $ 1,057,532 --
-----------
Cash paid (1,000,000) --
-----------
Liabilities assumed $ 57,532 --
===========
Purchase of Geriatric Medical Care, Inc.
Fair value of assets acquired $ 6,048,669 --
-----------
Cash paid (4,626,738) --
-----------
Liabilities assumed $ 1,421,931 --
===========
</TABLE>
8
<PAGE> 9
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
-----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Payment for 4% purchase of Professional
Psychological Services, Inc.
Fair value of assets acquired -- $ 227,868
------------
Cash paid -- (207,970)
------------
Liabilities assumed -- $ 19,898
============
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.
9
<PAGE> 10
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 as well as
a provider of employee assistance programs ("EAP") and mental health
services to business and managed care organizations. 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 Philadelphia, Pennsylvania
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. 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 cash and
incurring debt of $1.0 million under the term loan facility with Texas
Commerce Bank, N.A. (now known as Chase Bank of Texas, National
Association). (See Note 3)
Basis of Presentation:
The accompanying consolidated balance sheet at May 31, 1998, the
consolidated statements of operations for the three and nine month
periods ended May 31, 1997 and 1998, and the consolidated statements of
cash flows for the nine months ended May 31, 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 May 31,
1998, and the results of operations for the three and nine months ended
May 31, 1997 and 1998.
Operating results for the three month and nine month periods are not
necessarily indicative of the results that may be expected for a full
year or any portion thereof.
10
<PAGE> 11
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 nine months ended May 31, 1997 and 1998 after giving
effect to certain pro forma adjustments are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
May 31, 1997 May 31, 1998
------------ ------------
<S> <C> <C>
Revenue $86,291,886 $88,935,469
=========== ===========
Net income $ 6,584,108 $ 7,959,975
=========== ===========
Net income per common share:
Basic $ .95 $ 1.12
=========== ===========
Diluted $ .86 $ 1.02
=========== ===========
</TABLE>
11
<PAGE> 12
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 May 31, 1997
financial statements presented have been restated to include the results
of Specialty. Specialty's results of operations for the three and nine
months ended May 31, 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.
12
<PAGE> 13
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
$207,970. The purchase price exceeded the fair value of PPS's tangible
net assets acquired by $192,332 of which $141,311 is recorded as
goodwill and $51,021 as service contracts. Tangible assets acquired and
liabilities assumed totaled $35,536 and $19,898 respectively. The
acquisitions were funded by incurring debt of approximately $1.0 million
under the term loan facility.
For the nine months ended May 31, 1998, PPS generated $5,720,138 in
gross revenues, and net income of $138,025.
4. LONG-TERM DEBT
At August 31, 1997 and May 31, 1998, the Company had the following
long-term debt:
<TABLE>
<CAPTION>
August May
31, 31,
1997 1998
----------- -----------
<S> <C> <C>
SANWA Leasing Corporation -- $ 32,421
----------- -----------
Chase Bank of Texas, National Association -
Revolving Credit Facility -- 5,000,000
Chase Bank of Texas, National Association-Advance
Term Loan Facility -- 3,000,000
----------- -----------
-- 8,032,421
----------- -----------
Less current maturities -- 18,470
----------- -----------
-- $ 8,013,951
----------- -----------
</TABLE>
13
<PAGE> 14
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 Texas Commerce Bank (now known as Chase Bank of Texas,
National Association) 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 May 31, 1998, the Company has
borrowings of $5.0 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>
<CAPTION>
<S> <C>
Three months ending August 31, 1998 $ 327,844
For the year ending August 31, 1999 1,040,301
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
-----------
$ 2,784,478
</TABLE>
14
<PAGE> 15
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Rent expense for the nine months ended May 31, 1997, and 1998 totaled
$708,789 and $872,443, 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.
7. SUBSEQUENT EVENT
Acquisition Of FPM Behavioral Health, Inc.
Effective June 1, 1998, the Company acquired from Ramsay Health Care,
Inc. all the outstanding capital stock of FPM Behavioral Health Care,
Inc,("FPM") of Winter Park, Florida. The purchase price was $20.0 million
in cash, subject to certain post-closing adjustments. FPM provides
managed behavioral health care services, employee assistance programs
(EAP) and other related behavioral health care services to health
maintenance organizations and self insured employers. At February 28,
1998, FPM had 46 contracts covering approximately 1,135,000 lives in nine
states. FPM provides its services both through health care professionals
employed by FPM and through independent health care professionals that
have contracted with FPM on a fee-for-service basis. At April 1998, the
FPM provider network was composed of over 2,000 providers. For the nine
months ended March 31, 1998, FPM revenues were approximately $19.0
million and pretax income was approximately $2.0 million. The acquisition
was funded by incurring debt of $20.0 million under the term loan
facility. The Company will consolidate the financial results of FPM with
the Company as of June 1, 1998.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is the leading contract manager of clinical programs offered
by general acute care hospitals in the United States as well as a growing
provider of EAP and mental health services to business and managed care
organizations. 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 182 as of May 31,
1998, and currently operates in 37 states. Of those management contracts, 163
related to mental health programs and 19 related to physical rehabilitation
programs. The 182 management contracts cover 307 various treatment programs.
The Company has also developed a proprietary mental health outcomes measurement
system known as CQI+ and at May 31, 1998 provided outcome measurement services
at 83 hospital locations.
The fees received by the Company for its services under management
contracts are paid directly by its client hospital. The client hospitals
receive reimbursement under either the Medicare or Medicaid programs or
payments from insurers, self-funded benefit plans or other third-party payors
for the mental health and physical rehabilitation services provided to patients
of the programs managed by the Company. As a result, the availability and
amount of such reimbursement impacts the decisions of general acute care
hospitals regarding whether to offer mental health and physical rehabilitation
services pursuant to management contracts with the Company.
Recent amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. The new regulations establish a nationwide cap
limiting the reimbursement amount on a per case basis for mental health and
physical rehabilitation services to $10,534 and $19,104, respectively, subject
to adjustments based on market indices. In addition, these amendments
established a new ceiling on the rate of increase in operating costs per case
for mental health and physical rehabilitation services furnished to Medicare
beneficiaries. Prior to these amendments, the reimbursement limits were tied to
the hospital's mental health or physical rehabilitation unit cost during the
unit's first year of operations, subject to certain adjustments. The limitations
have resulted, in some cases, in decreased amounts reimbursed to the Company's
client hospitals. This decrease in reimbursement has, in some cases, led to the
renegotiation of a lower contract management fee structure for the Company and
in other cases has resulted in the termination or nonrenewal of the management
contract. The new reimbursement limitations become applicable to the client
hospitals at the beginning of their respective Medicare fiscal years. The number
of client hospitals that will become subject to the new reimbursement system
fall within the following Horizon fiscal quarters:
<TABLE>
<S> <C> <C> <C> <C>
1st. Qtr. 1998 2nd. Qtr. 1998 3rd. Qtr. 1998 4th. Qtr. 1998 1st. Qtr. 1999
29 63 13 63 8
</TABLE>
The trend of renegotiated fees and canceled contracts, resulting in reduced
contract management fees due to these reimbursement changes, which Horizon
first encountered in its fiscal 1998 second quarter, can be expected to
continue on into the first or second quarter of fiscal 1999. However, due to the
individual nature of each such renegotiation, the overall effect on the
Company's future operating results is currently unclear, although the potential
for a significantly negative result exists.
16
<PAGE> 17
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 $207,970. The purchase price exceeded the fair value of PPS's tangible
net assets acquired by $192,332 of which $141,311 is recorded as goodwill and
$51,021 as service contracts. Tangible assets acquired and liabilities assumed
totaled $35,536 and $19,898 respectively. These acquisitions were funded by
cash and incurring debt of $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 nine months ended May 31, 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 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
17
<PAGE> 18
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.
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.
18
<PAGE> 19
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
August 31, November 30, February 28, May 31,
1995 1996 1997 1997 1998 1998
--------------------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 146 163 181 179 172 166
Contract locations signed
and unopened 15 16 14 15 12 16
--- --- --- --- --- ---
Total contract locations 161 179 195 194 184 182
=== === === === === ===
SERVICES COVERED BY CONTRACTS
IN OPERATION:
Inpatient (A) 138 156 166 165 159 152
Partial Hospitalization (A) 64 84 104 103 107 109
Outpatient 15 20 24 27 30 33
Home health 1 13 17 13 12 13
CQI Plus (under contract) 46 64 86 87 88 83
TYPES OF TREATMENT PROGRAMS
IN OPERATION:
Geropsychiatric (A) 102 144 197 193 195 193
Adult psychiatric (A) 81 82 75 70 72 75
Substance abuse (A) 9 20 10 12 12 12
Physical Rehabilitation 23 22 20 21 20 19
Other (A) 2 5 9 12 9 8
</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.
19
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth for the three and nine months ended May 31,
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 NINE MONTHS
ENDED MAY 31, ENDED MAY 31,
----------------- -----------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 94.3% 86.2% 93.6% 87.5%
Patient services 5.6 13.6 5.4 12.3
Other 0.1 0.2 1.0 0.2
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Salaries and benefits 54.4 54.7 55.2 54.6
Purchased services 16.2 16.8 14.9 16.7
Provision for bad debts 5.0 (0.7) 3.5 0.1
Depreciation and amortization 2.0 2.6 2.0 2.4
Other 10.7 12.4 11.3 11.7
----- ----- ----- -----
Total operating expenses 88.3 85.8 86.9 85.5
----- ----- ----- -----
Operating income 11.7 14.2 13.1 14.5
----- ----- ----- -----
Interest and other income
(expense), net 0.1 1.5 0.1 0.5
----- ----- ----- -----
Income before taxes 11.8 15.7 13.2 15.0
Income tax expense 4.7 6.2 5.3 6.0
----- ----- ----- -----
Income before minority interest 7.1 9.5 7.9 9.0
Minority interest 0.1 -- 0.1 --
----- ----- ----- -----
Net income 7.0% 9.5% 7.8% 9.0%
===== ===== ===== =====
Number of contracts in operation,
end of period 176 166 176 166
</TABLE>
20
<PAGE> 21
THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1997
Revenue. Revenues for the three months ended May 31, 1998 were $28.8
million representing an increase of $900,000, or 3.2%, as compared to revenues
of $27.9 million for the corresponding period in the prior fiscal year. Contract
management revenues decreased by $1.5 million as compared to the corresponding
period in the prior fiscal year. Same store sales for contract management
revenues, that is contracts in operation for the entire quarter ended May 31,
1997 and May 31, 1998, accounted for $1.2 million of the $1.5 million decrease.
This decrease in same store sales was attributable to the effect of the
renegotiation of contracts, resulting in reduced fees during the 1998 fiscal
period. In addition, the average number of contract locations in operation
decreased from 176.3 for the three months ended May 31, 1997, to 169.8 for the
three months ended May 31, 1998, a decrease of 3.8%. Patient service revenues
increased by $2.4 million. $2.0 million of the $2.4 million increase in patient
service revenues 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
May 31, 1998 were $15.8 million representing an increase of $600,000, or 3.9%,
as compared to salaries and benefits of $15.2 million for the corresponding
period in the prior fiscal year. Salary and benefits cost per full time
equivalent for the three months ended May 31, 1998 were $14,525 representing an
increase of $400, or 2.8%, as compared to salary and benefits cost of $14,125
per full time equivalent for the prior fiscal year. The number of full time
equivalents for the three months ended May 31, 1998 was approximately 1,085,
representing an increase of 10, or 0.9%, as compared to approximately 1,075
full time equivalents in the prior fiscal year. FTE's increased by 51 as a
result of 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, from 176.3 for the three months ended May
31, 1997, to 169.8 for the three months ended May 31, 1998, a decrease of 3.8%.
Depreciation and Amortization. Depreciation and amortization expenses for
the three months ended May 31, 1998 were $757,000, representing an increase of
$202,000, or 36.4%, as compared to depreciation and amortization expenses of
$555,000 for the corresponding period in the prior fiscal year. An increase of
$58,000 is due to the amortization of goodwill of $9.3 million resulting from
the acquisition of Acorn. Amortization expense also increased $120,000 in
relation to the value placed on the contracts of Acorn. 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 May 31, 1998
were $8.2 million representing a decrease of $682,000, or 7.7%, as compared to
other operating expenses of $8.9 million for the corresponding period in the
prior fiscal year. The following components identify the variances between the
periods reported.
Purchased services included a $902,000 increase in direct service fees for
the three months ended May 31, 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
$297,000 at PPS and $605,000 in relation to Acorn. In addition, a decrease
occurred in purchased services due to a decrease of $162,000 in consulting
fees. $27,000 of the decrease is related to a software upgrade for the regional
offices and the National Support Center, and $78,000 is related to a software
upgrade for Horizon Plus which occurred in the prior fiscal year. Purchased
services also includes a $492,000 decrease in Medical Directors' administrative
fees for the three months ended May 31, 1998 as compared to the three months
ended May 31, 1997. This decrease results primarily from certain physician
contracts having been renegotiated resulting in a general lowering of
compensatory fees.
Bad debt expense decreased $1.6 million for the three months ended May 31,
1998 as compared to the three months ended May 31, 1997. $1.4 million of the
decrease related to one Specialty contract which terminated April
21
<PAGE> 22
30, 1997. The remaining decrease was primarily due to payments received for
amounts previously reserved.
Other operating expense was $3.6 million for the three months ended May
31, 1998 as compared to $3.0 million for the three months ended May 31, 1997.
$219,000 of this increase results from the acquisition of Acorn effective
October 31, 1997. The remaining increase is related to a $351,000 increase in
travel expenses as compared to the corresponding period in the prior fiscal
year.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the three months ended May 31, 1998 was $444,000,
as compared to net interest income and other income of $21,000 for the
corresponding period in the prior fiscal year. This change results primarily
from an increase in other income of $514,000 which relates to the final receipt
of the rent obligation and the rent abatement for Mountain Crest Hospital. This
increase is offset by an increase in interest expense of $39,000 related to
amounts borrowed under the new credit facility. At May 31, 1998, the Company
had $8.0 million outstanding under the new credit facility as compared to $3.2
million outstanding at May 31, 1997 under a prior credit facility. In addition,
interest income decreased by $27,000 when compared to the corresponding period
in the prior fiscal year.
Income Tax Expense. For the three month period ended May 31, 1998, the
Company recorded federal and state income taxes of $1.8 million resulting in a
combined tax rate of 39.7%. For the three month period ended May 31, 1997, the
Company recorded federal and state income taxes of $1.3 million resulting in a
combined tax rate of 39.8%.
NINE MONTHS ENDED MAY 31, 1998 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1997
Revenue. Revenues for the nine months ended May 31, 1998 were $87.6
million representing an increase of $6.4 million, or 7.9%, as compared to
revenues of $81.2 million for the corresponding period in the prior fiscal
year. An increase in patient services revenue accounted for the $6.4 million
increase in revenues. $4.7 million of the $6.4 million increase in patient
services 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 nine months ended May
31, 1998 were $47.8 million representing an increase of $3.0 million, or 6.7%,
as compared to salaries and benefits of $44.8 million for the corresponding
period in the prior fiscal year. Salary and benefits cost per full time
equivalent for the nine months ended May 31, 1998 were $43,267 representing an
increase of $567, or 1.3%, as compared to salary and benefits cost of $42,700
per full time equivalent for the prior fiscal year. The number of full time
equivalents for the nine months ended May 31, 1998 was approximately 1,106,
representing an increase of 57, or 5.4%, as compared to approximately 1,049
full time equivalents in the prior fiscal year. FTE's increased by 52 as a
result of the acquisition of Acorn. FTE's also increased as a result of the
acquisitions of Geriatric and CCI. These increases are 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 161.3 for
the nine months ended May 31, 1997, to 154.1 for the nine months ended May 31,
1998, a decrease of 4.5%
Depreciation and Amortization. Depreciation and amortization expenses for
the nine months ended May 31, 1998 were $2.1 million representing an increase
of $458,000, or 27.7%, as compared to depreciation and amortization expenses of
$1.7 million for the corresponding period in the prior fiscal year. An increase
of $205,000 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 expenses also increased $331,000 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
22
<PAGE> 23
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 nine months ended May 31, 1998 were
$24.9 million representing an increase of $800,000, or 3.3%, as compared to
other operating expenses of $24.1 million for the corresponding period in the
prior fiscal year. The following components identify the variances between the
periods reported.
Purchased services included a $2.5 million increase in direct service fees
for the nine months ended May 31, 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
$1.2 million at PPS and $1.3 million in relation to Acorn, respectively. In
addition, an increase occurred in purchased services due to an increase of
$343,000 in consulting fees. Consulting fees increased as a result of software
upgrades at the regional offices and National Support Center. The use of
consultants also increased as a result of the acquisition of Geriatric and CCI
effective March 15, 1997 and as a result of the acquisition of Acorn effective
October 31,1997. Purchased services also includes a $678,000 decrease in
Medical Directors' administrative fees for the nine months ended May 31, 1998
as compared to the nine months ended May 31, 1997. Medical Directors'
administrative fees increased $299,000 and $70,000 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 $2.8 million for the nine months ended May 31,
1998 as compared to the nine months ended May 31, 1997. $2.1 million of this
decrease related to one Specialty contract which terminated April 30, 1997. Any
amounts of bad debt expense have been offset by payments received for amounts
previously reserved.
Other operating expense was $10.2 million for the nine months ended May
31, 1998 as compared to $9.2 million for the nine months ended May 31, 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 income, interest
expense, and other income for the nine months ended May 31, 1998 was $426,000,
as compared to $102,000 in net interest income and other income for the
corresponding period in the prior fiscal year. This change results primarily
from an increase in other income of $514,000 due to the final receipt of the
rent obligation and the rent abatement for Mountain Crest Hospital. This
increase is offset by an increase in interest expense of $49,000 related to
amounts borrowed under the new credit facility. At May 31, 1998, the Company
had $8 million outstanding under the new credit facility as compared to $3.2
million outstanding at May 31, 1997, under a prior credit facility. In
addition, interest income decreased by $127,000 when compared to the
corresponding period in the prior fiscal year due to the use of cash for
acquisitions.
Income Tax Expense. For the nine month period ended May 31, 1998, the
Company recorded federal and state income taxes of $5.3 million resulting in a
combined tax rate of 40.2%. For the nine month period ended May 31, 1997, the
Company recorded federal and state income taxes of $4.3 million resulting in a
combined tax rate of 40.2%. Thus the increase in tax expense is due to the
increase in pretax income.
23
<PAGE> 24
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 May 31, 1998, the
revolving credit facility and advance term loan facility had $5 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's operating activities provided net cash of $1.6 million
during the nine months ended May 31,
24
<PAGE> 25
1998, compared to cash provided of $3.9 million for the nine months ended May
31, 1997. The decrease in cash provided by operating activities for the nine
months ended May 31, 1998, as compared to the nine months ended May 31, 1997,
was primarily attributable to a decrease in accounts payable and an increase in
accounts receivable.
The Company believes that its cash flow from operations which for the nine
months ended May 31, 1998 was $1.6 million, cash of $1.5 million at May 31,
1998 and $5.0 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 acquisition, $17 million of
which is available under the current acquisition line.
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 $11.0 million under the revolving credit facility.
Effective June 1, 1998, the Company acquired from Ramsay Health Care, Inc.
all the outstanding capital stock of FPM for $20.0 million, subject to certain
post-closing adjustments. The acquisition was funded by incurring debt of $20.0
million under the term loan facility.
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.
Recent amendments to the Medicare statutes also provide for a phase-out
of cost-based reimbursement of physical rehabilitation services over a
three-year period beginning October 1, 2000. The resulting phase-in of
reimbursement for physical rehabilitation services based on the Medicare
prospective payment system utilizing a fixed reimbursement amount for specified
diagnoses could lower Medicare reimbursement levels to hospitals for physical
rehabilitation services. This could adversely affect the ability of the Company
to obtain management contracts for physical rehabilitation services and the
amount of fees paid to the Company under such contracts.
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;
25
<PAGE> 26
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.
26
<PAGE> 27
PART II - OTHER INFORMATION
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 Stock Purchase Agreement dated as of May 1, 1998 by and among
Ramsay Managed Care, Inc., Ramsay Health Care, Inc., and the
Company (incorporated herein by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K dated June 2, 1998).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Nine Months Ended May 31, 1998
(filed herewith).
(b) The Company did not file any reports on Form 8-K during the
quarter covered by this report.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 13, 1998
HORIZON HEALTH CORPORATION
By: /s/ JAMES W. MCATEE
------------------------------------------------
James W. McAtee
Executive Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
28
<PAGE> 29
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 Stock Purchase Agreement dated as of May 1, 1998 by and among
Ramsay Managed Care, Inc., Ramsay Health Care, Inc., and the
Company (incorporated herein by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K dated June 2, 1998).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Nine Months Ended May 31, 1998
(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 NINE MONTHS
ENDED MAY 31, ENDED MAY 31,
------------- -------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Net income $ 1,966,132 $ 2,726,335 $ 6,353,731 $ 7,806,216
Weighted average shares outstanding
(basic) (1) 6,964,371 7,199,047 6,916,182 7,083,133
----------- ----------- ----------- -----------
Basic earnings per share
$ .28 $ .38 $ .92 $ 1.10
=========== =========== =========== ===========
DILUTED
Net income $ 1,966,132 $ 2,726,335 $ 6,353,731 $ 7,806,216
Weighted average shares outstanding
(basic) (1) 6,964,371 7,199,047 6,916,182 7,083,133
Effect of dilutive securities
(warrants and options) 701,387 598,353 (2) 748,020 683,804 (2)
----------- ----------- ----------- -----------
Weighted average shares outstanding
(diluted) 7,665,758 7,797,400 7,664,202 7,766,937
----------- ----------- ----------- -----------
Diluted earnings per share
$ .26 $ .35 $ .83 $ 1.01
=========== =========== =========== ===========
</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 not included in certain
computations of EPS because the options exercise price was greater
than the average market price of the common shares. The computation of
the quarter ended November 30, 1997 excluded the 15,000 shares. The
computation of the quarter ended February 28, 1998 excluded 167,500,
15,000 and 722 shares. The computation of the quarter ended May 31,
1998 excluded 167,500 and 15,000 shares. The nine month end
calculation incorporates the above referenced exclusions within the
applicable quarters.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the nine
months ended May 31, 1998 financial statements and is qualified in its entirety
by reference to such year to date 10-Q filing for the nine months ended May 31,
1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-1-1997
<PERIOD-END> MAY-31-1998
<CASH> 1,553,489
<SECURITIES> 0
<RECEIVABLES> 17,513,478
<ALLOWANCES> 1,574,861
<INVENTORY> 0
<CURRENT-ASSETS> 21,134,351
<PP&E> 4,556,112
<DEPRECIATION> 2,613,479
<TOTAL-ASSETS> 61,831,935
<CURRENT-LIABILITIES> 11,968,488
<BONDS> 0
0
0
<COMMON> 72,318
<OTHER-SE> 40,490,387
<TOTAL-LIABILITY-AND-EQUITY> 61,831,935
<SALES> 0
<TOTAL-REVENUES> 87,550,489
<CGS> 0
<TOTAL-COSTS> 74,774,159
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 84,708
<INTEREST-EXPENSE> 372,320
<INCOME-PRETAX> 13,117,801
<INCOME-TAX> 5,277,625
<INCOME-CONTINUING> 7,806,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,806,216
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.01
</TABLE>
