<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 February 28, 1999
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 March 29, 1999, was 6,830,878.
<PAGE> 2
INDEX
HORIZON HEALTH CORPORATION
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS......................................................3
HORIZON HEALTH CORPORATION
Consolidated Balance Sheets as of August 31, 1998
and February 28, 1999 (unaudited).............................................3
Consolidated Statements of Operations for the three months ended
February 28, 1998 and 1999 (each unaudited)...................................5
Consolidated Statements of Operations for the six months ended
February 28, 1998 and 1999 (each unaudited)...................................6
Consolidated Statements of Cash Flows for the six months ended
February 28, 1998 and 1999 (each unaudited)...................................7
Notes to Consolidated Financial Statements (unaudited)........................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................25
ITEM 5. OTHER INFORMATION.....................................................................25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................25
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1998 FEBRUARY 28, 1999
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 6,204,297 $ 1,796,536
Accounts receivable less allowance for uncollectible
accounts of $1,902,112 at August 31, 1998 and
$2,621,950 at February 28, 1999 13,464,705 16,567,130
Receivable from employees 91,715 70,187
Prepaid expenses and supplies 211,288 696,938
Income taxes receivable 317,197 55,583
Other receivables 166,714 222,766
Other current assets 469,540 608,065
Current deferred taxes 2,006,880 2,326,444
----------- -----------
TOTAL CURRENT ASSETS 22,932,336 22,343,649
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 5,874,100 6,376,360
Building improvements 421,331 462,311
----------- -----------
6,295,431 6,838,671
Less accumulated depreciation 2,868,062 3,510,344
----------- -----------
3,427,369 3,328,327
Goodwill, net of accumulated amortization
of $3,002,194 at August 31, 1998, and
$3,690,570 at February 28, 1999 51,310,574 52,239,845
Contracts, net of accumulated
amortization of $4,099,012 at August 31, 1998
and $4,915,203 at February 28, 1999 8,227,689 7,590,509
Other assets 774,100 706,735
----------- -----------
TOTAL ASSETS $86,672,068 $86,209,065
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1998 FEBRUARY 28, 1999
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,314,404 $ 1,383,988
Employee compensation and benefits 6,166,226 6,597,785
Accrued expenses 7,934,916 11,050,367
Current debt maturities 18,470 1,235,919
----------- -----------
TOTAL CURRENT LIABILITIES 16,434,016 20,268,059
Other liabilities 237,308 260,226
Long-term debt, net of current debt maturities (Note 4) 26,010,901 21,893,750
Deferred income taxes 1,327,532 1,403,935
----------- -----------
TOTAL LIABILITIES 44,009,757 43,825,970
----------- -----------
Commitments and contingencies (Note 6) -- --
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; 7,231,812 shares issued and outstanding
at August 31, 1998 and 7,267,750 shares issued and
6,693,150 shares outstanding at February 28, 1999 72,318 72,678
Additional paid-in capital 17,984,638 18,554,840
Retained earnings 24,605,355 28,010,752
----------- -----------
42,662,311 46,638,270
Less: Treasury Stock - at Cost (574,600 shares) (Note 7) -- 4,255,175
----------- -----------
42,662,311 42,383,095
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $86,672,068 $86,209,065
=========== ===========
</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,
-------------------------------
1998 1999
------------ -------------
<S> <C> <C>
Revenues:
Contract management $ 25,197,604 $ 24,442,823
Premiums and fees 4,137,325 11,985,605
Other 65,542 216,216
------------ ------------
Total revenues 29,400,471 36,644,644
Expenses:
Salaries and benefits 16,347,702 19,260,179
Purchased services 4,910,917 8,783,222
Provision for (recovery of) bad debts (74,124) 348,309
Depreciation and amortization 740,314 1,095,803
Other 3,058,587 4,152,245
------------ ------------
Total operating expenses 24,983,396 33,639,758
Other income (expense):
Interest expense (169,198) (364,231)
Interest and other income 107,582 82,979
------------ ------------
Income before income taxes and minority interest 4,355,459 2,723,634
Income tax expense 1,771,801 1,084,664
------------ ------------
Income before minority interest 2,583,658 1,638,970
Minority interest (Note 3) 27,772 --
------------ ------------
Net income $ 2,555,886 $ 1,638,970
============ ============
Earnings per common share:
Basic $ .36 $ .24
============ ============
Diluted $ .33 $ .23
============ ============
Weighted average shares outstanding:
Basic 7,070,265 6,779,213
============ ============
Diluted 7,742,168 7,115,345
============ ============
</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,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues:
Contract management $ 51,796,507 $ 48,522,695
Premiums and fees 6,807,763 23,577,790
Other 118,613 392,720
------------ ------------
Total revenues 58,722,883 72,493,205
Expenses:
Salaries and benefits 32,076,271 37,606,869
Purchased services 9,769,596 18,273,594
Provision for (recovery of) bad debts 280,903 (344,573)
Depreciation and amortization 1,352,211 2,185,745
Other 6,633,508 8,501,887
------------ ------------
Total operating expenses 50,112,489 66,223,522
Other income (expense):
Interest expense (230,753) (772,875)
Interest and other income 213,195 144,499
Gain on sale of fixed assets -- 800
------------ ------------
Income before income taxes and minority interest 8,592,836 5,642,107
Income tax expense 3,478,995 2,236,710
------------ ------------
Income before minority interest 5,113,841 3,405,397
Minority interest (Note 3) 33,960 --
------------ ------------
Net income $ 5,079,881 $ 3,405,397
============ ============
Earnings per common share:
Basic $ .72 $ .49
============ ============
Diluted $ .66 $ .47
============ ============
Weighted average shares outstanding:
Basic 7,025,176 6,966,408
============ ============
Diluted 7,751,705 7,314,310
============ ============
</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 FEBRUARY 28,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Operating Activities:
Net income $ 5,079,881 $ 3,405,397
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,352,211 2,185,745
Minority interest 33,960 --
Deferred income taxes 18,195 76,403
Gain on sale of fixed assets -- (800)
Changes in assets and liabilities:
Increase in accounts receivable (3,650,506) (2,898,194)
Increase in other receivables (469,322) (34,525)
Decrease in income taxes receivable 951,256 261,614
Increase in prepaid expenses and supplies (75,166) (459,421)
Increase in other assets (1,158,366) (378,542)
(Decrease) increase in accounts payable and accrued expenses (2,557,756) 969,323
Increase in other liabilities 257,322 22,918
------------ ------------
Net cash provided by (used in) operating activities (218,291) 3,149,918
------------ ------------
Investing activities:
Purchase of property and fixed assets (549,154) (302,728)
Proceeds from sale of fixed assets -- 800
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) --
Payment for purchase of ChoiceHealth, Inc., net of cash acquired -- (1,797,692)
Proceeds from purchase price adjustment of FPM Behavioral Health Inc. -- 1,222,193
------------ ------------
Net cash used in investing activities (14,308,138) (877,427)
------------ ------------
Financing activities:
Payments on long term debt (13,033) (15,495,639)
Proceeds from long term borrowings 11,000,000 12,500,000
Net proceeds from issuance of common stock 203,687 102,253
Tax benefit related to stock option exercise 386,238 468,309
Cash used in purchase of treasury stock -- (4,255,175)
------------ ------------
Net cash provided by (used in) financing activities 11,576,892 (6,680,252)
------------ ------------
</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 FEBRUARY 28,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net decrease in cash and short term investments (2,949,537) (4,407,761)
Cash and short-term investments at beginning of period 5,516,575 6,204,297
------------ ------------
Cash and short-term investments at end of period 2,567,038 1,796,536
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 230,753 $ 456,530
------------ ------------
Income taxes $ 2,809,944 $ 1,749,949
============ ============
Supplemental disclosure of non-cash investing activities:
Payment for ChoiceHealth
Fair value of assets acquired $ -- $ 3,594,732
------------ ------------
Cash paid -- (2,000,000)
------------ ------------
Liabilities assumed $ -- $ 1,594,732
============ ============
Proceeds form purchase price adjustment of FPM Behavioral
Health, Inc.
Adjustment to fair value of assets acquired $ -- $ (1,073,710)
------------ ------------
Cash received $ -- $ 1,222,193
------------ ------------
Liabilities assumed $ -- $ 148,483
============ ============
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 provider of employee
assistance programs ("EAP") and mental health services to business and
managed care organizations as well as a contract manager of clinical and
related services, primarily of mental health programs, offered by general
acute care hospitals in the United States. The 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; Denver, Colorado; and Philadelphia, Pennsylvania
metropolitan areas. The Company's National Support Center is in
Lewisville, Texas.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. ("ChoiceHealth") of Westminster,
Colorado. The Company accounted for the acquisition of ChoiceHealth by
the purchase method as required by generally accepted accounting
principles. ChoiceHealth provides managed behavioral health care
services, employee assistance programs and other related behavioral
health care services to health maintenance organizations and self-insured
employers. ChoiceHealth had annualized revenues of approximately $7.6
million (unaudited) based on actual revenues for the eight months ended
August 31, 1998. The purchase price of approximately $2.0 million in cash
was funded by $2.0 million from an advance under the Company's existing
term loan credit facility with Chase Bank of Texas, National Association.
(See Note 3)
BASIS OF PRESENTATION:
The accompanying consolidated balance sheet at February 28, 1999, the
consolidated statements of operations for the three and six month periods
ended February 28, 1998 and 1999, and the consolidated statements of cash
flows for the six months ended February 28, 1998 and 1999 are unaudited.
These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended August 31,
1998. 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,
1999, and the results of operations for the three and six months ended
February 28, 1998 and 1999.
Operating results for the three 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 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.
The following is a reconciliation of the numerators and the denominators
of the basic and diluted earnings per share computations for net income.
<TABLE>
<CAPTION>
1998 1999
------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended February 28.
Net Income.................. $2,555,886 $1,638,970
Basic EPS................... 2,555,886 7,070,265 $.36 1,638,970 6,779,213 $.24
---- ----
Effect of Dilutive Securities
Warrants and options........ 671,903 336,132
--------- ---------
Diluted EPS................. $2,555,886 7,742,168 $.33 $1,638,970 7,115,345 $.23
========== ========= ==== ========== ========= ====
For the six months ended February 28.
Net Income.................. $5,079,881 $3,405,397
Basic EPS................... 5,079,881 7,025,176 $.72 3,405,397 6,966,408 $.49
---- ----
Effect of Dilutive Securities
Warrants and options........ 726,529 347,902
--------- ---------
Diluted EPS................. $5,079,881 7,751,705 $.66 $3,405,397 7,314,310 $.47
========== ========= ==== ========== ========= ====
</TABLE>
3. ACQUISITIONS
CHOICEHEALTH
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth. The Company accounted for the acquisition
of ChoiceHealth by the purchase method as required by generally accepted
accounting principles. ChoiceHealth provides managed behavioral health
care services, employee assistance programs and other related behavioral
health care services to health maintenance organizations and self-insured
employers. ChoiceHealth had annualized revenues of approximately $7.6
million (unaudited) based on actual revenues for the eight months ended
August 31, 1998. The purchase price of approximately $2.0 million in cash
was funded by a $2.0 million advance under the Company's existing term
loan credit facility with Chase Bank of Texas, National Association. The
purchase price exceeded the fair value of ChoiceHealth's tangible net
assets by $2,870,363, of which $2,691,354 is recorded as goodwill and
$179,009 as service contracts. Tangible assets acquired and liabilities
assumed totaled $724,369 and $1,594,732, respectively.
FPM BEHAVIORAL HEALTH, INC.
Effective June 1, 1998, the Company acquired all of the outstanding
capital stock of FPM Behavioral Health, Inc. ("FPM") of Winter Park,
Florida, and FPM has been consolidated with the Company as of June 1,
1998. The Company accounted for the acquisition of FPM by the purchase
method as required by generally accepted accounting principles. FPM
provides managed behavioral health care services, employee assistance
programs and other related health care services to health maintenance
organizations and self-insured employers. FPM had total revenues of
approximately $19.9 million for the nine months ended March 31, 1998 and,
at February 28, 1998, FPM had 46 contracts covering 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 been contracted with FPM on a fee-for-service
basis. At April 1998, the FPM provider network was composed of over 2,000
providers. The purchase price was $20.0 million in cash, subject to
certain post closing adjustments, and was funded by incurring debt of
$20.0 million under the term loan facility. The preliminary allocation of
the purchase price exceeded the fair value of FPM's tangible net assets
by $22,170,668, of which $20,665,912 was recorded as goodwill and
$1,504,756 as service contracts. Tangible assets acquired and liabilities
assumed totaled $3,301,876 and $5,472,544, respectively. During the
quarter ended February 28, 1999, the Company was awarded a post closing
adjustment, net of tax effects, of $1,222,193. After the adjustment, the
purchase price exceeded the fair value of FPM's tangible net assets by
$21,096,948 of which $19,592,202 is recorded as goodwill and $1,504,756
as service contracts. Tangible assets acquired and liabilities assumed
totaled $3,301,876 and $5,621,027, respectively.
ACORN
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn Behavioral Health Care Management Corporation
("Acorn"). The Company accounted for the acquisition of Acorn by the
purchase method as required by generally accepted accounting principles.
Acorn provides employee
10
<PAGE> 11
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Chase Bank of Texas, National Association. 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.
INVESTMENT IN PPS
On July 31, 1996, the Company acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services,
Inc., also known as Professional Psychological Services, Inc. ("PPS"),
and PPS has been consolidated with 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's 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.
4. LONG-TERM DEBT
At August 31, 1998 and February 28, 1999, the Company had the following
long-term debt:
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1998 1999
----------- -----------
<S> <C> <C>
Chase Bank of Texas, National Association - Advance Term Loan
Facility $23,000,000 $23,000,000
Chase Bank of Texas, National Association - Revolving Credit
Facility 3,000,000 --
Equipment Leases 29,371 75,139
Borealis Note -- 54,530
----------- -----------
26,029,371 23,129,669
Less current maturities 18,470 1,235,919
----------- -----------
$26,010,901 $21,893,750
=========== ===========
</TABLE>
11
<PAGE> 12
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On October 16, 1997, the Company increased its existing revolving line of
credit from 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 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, 1999, the Company has
borrowings of $23.0 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.
The Company currently has various capitalized leases for computer and
other equipment. The leases contain bargain purchase options. The Company
acquired a custom software system upon the acquisition of ChoiceHealth.
The system is financed by a note to Borealis Software Systems, Inc., the
company who designed the system.
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 over six
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, 1999 $ 937,895
For the year ending August 31, 2000 1,466,250
For the year ending August 31, 2001 1,155,557
For the year ending August 31, 2002 643,046
For the years ending August 31, 2003 and thereafter 231,194
------------
$ 4,433,942
=============
</TABLE>
12
<PAGE> 13
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Rent expense for the six months ended February 28, 1998, and 1999 totaled
$550,867 and $1,084,160, 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. STOCK REPURCHASE
On September 21, 1998, the Board of Directors of the Company authorized
the repurchase of up to 1,000,000 shares of its common stock. The stock
repurchase plan authorized the Company to make purchases from time to
time in the open market or through privately negotiated transactions,
depending on market conditions and applicable securities regulations. The
repurchased shares will be added to the treasury shares of the Company
and may be used for employee stock plans and for other corporate
purposes. The stock will be repurchased utilizing available cash and
borrowings under the Company's term bank facility. The Company had
repurchased 574,600 shares of its common stock as of February 28, 1999,
and 589,900 shares of its common stock as of March 31, 1999, of which
153,028 has been reissued pursuant to the exercise of certain stock
options.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a growing provider of EAP and mental health services to
business and managed care organizations, as well as the leading contract manager
of clinical 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 six years, the Company has increased
its management contracts from 43 to a total of 164 as of February 28, 1999, and
currently operates in 38 states. Of those management contracts, 141 related to
mental health programs and 23 related to physical rehabilitation programs. The
164 management contracts cover 268 various treatment programs. As of February
28, 1999, the Company had 223 contracts to provide EAP and mental health
services covering approximately 2,250,000 lives. The Company has also developed
a proprietary mental health outcomes measurement system known as CQI+ and at
February 28, 1999 provided outcome measurement services at 97 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 first respective Medicare fiscal years
following enactment of the amendments.
The number of client hospitals with accounts receivable balances
greater than 90 days outstanding has increased from 18 to 26 over the last four
quarters. These hospitals have contributed to a larger bad debt expense in the
current fiscal year and may represent additional exposure to the Company.
Recent amendments to the Medicare statutes also provide for the
elimination of cost based reimbursement of partial hospitalization services
effective upon 90 days notice from Medicare, but not earlier than January 1,
2000. The resulting reimbursement for partial hospitalization services based on
the Medicare outpatient prospective payment system will utilize a fixed
reimbursement amount per patient day. The currently proposed reimbursement rate
per patient day is a wage adjusted rate of $208.25, which could lower Medicare
reimbursement levels to hospitals for partial hospitalization services. This
could adversely affect the ability of the company to obtain management contracts
for partial hospitalization services and the amount of fees paid to the company
under such contracts.
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.
14
<PAGE> 15
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. of Westminster, Colorado. The Company
accounted for the acquisition of ChoiceHealth by the purchase method as required
by generally accepted accounting principles. ChoiceHealth provides managed
behavioral health care services, employee assistance programs and other related
behavioral health care services to health maintenance organizations and
self-insured employers. ChoiceHealth had annualized revenues of approximately
$7.6 million (unaudited) based on actual revenues for the eight months ended
August 31, 1998. The purchase price of approximately $2.0 million in cash was
funded by $2.0 million from an advance under the Company's existing term loan
credit facility with Chase Bank of Texas, National Association. The purchase
price exceeded the fair value of ChoiceHealth's tangible net assets by
$2,870,363, of which $2,691,354 is recorded as goodwill and $179,009 as service
contracts. Tangible assets acquired and liabilities assumed totaled $724,369 and
$1,594,732, respectively.
Effective June 1, 1998, the Company acquired all of the outstanding
capital stock of FPM Behavioral Health, Inc. of Winter Park, Florida, and FPM
has been consolidated with the Company as of June 1, 1998. The Company accounted
for the acquisition of FPM by the purchase method as required by generally
accepted accounting principles. FPM provides managed behavioral health care
services, employee assistance programs and other related health care services to
health maintenance organizations and self-insured employers. FPM had total
revenues of approximately $19.9 million for the nine months ended March 31, 1998
and, at February 28, 1998, FPM had 46 contracts covering 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 been
contracted with FPM on a fee-for-service basis. At April 1998, the FPM provider
network was composed of over 2,000 providers. The purchase price was $20.0
million in cash, subject to certain post closing adjustments, and was funded by
incurring debt of $20.0 million under the term loan facility. The preliminary
allocation of the purchase price exceeded the fair value of FPM's tangible net
assets by $22,170,668, of which $20,665,912 was recorded as goodwill and
$1,504,756 as service contracts. Tangible assets acquired and liabilities
assumed totaled $3,301,876 and $5,472,544, respectively. During the quarter
ended February 28, 1999, the Company was awarded a post closing adjustment, net
of tax effects, of $1,222,193. After the adjustment, the purchase price exceeded
the fair value of FPM's tangible net assets by $21,096,948 of which $19,592,202
is recorded as goodwill and $1,504,756 as service contracts. Tangible assets
acquired and liabilities assumed totaled $3,301,876 and $5,621,027,
respectively.
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.
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 Chase Bank of Texas, National Association. 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.
15
<PAGE> 16
The following schedule represents revenues and operating results for the six
months ended February 28, 1999 by operating subsidiary:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon Mental
Horizon Mental Specialty Health
Behavioral Health Rehab Outcomes, Support Intercompany
Services Management Management Inc. Services Eliminations Consolidated
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $23,405,640 $43,947,433 $ 4,808,010 $ 236,161 $ 95,961 $ -- $72,493,205
Inter Company Revenues 19,763 -- -- 856,998 -- (876,761) --
Earnings before
interest,
taxes, depreciation
and amortization (EBITDA) 1,283,245 9,870,542 537,131 236,568 (3,472,058) -- 8,455,428
</TABLE>
(A) Horizon Behavioral Services consist of two divisions, Managed Care, located
in the Orlando metropolitan area and the EAP/Employer Division located in
the Philadelphia metropolitan area.
(B) Horizon Mental Health Management provides mental health contract management
services to general acute care hospitals in the United States.
(C) Specialty Rehab Management provides physical rehabilitation contract
management services to general acute care hospitals in the United States.
(D) Mental Health Outcomes, Inc. provides outcome information regarding the
effectiveness of a provider's mental health programs.
(E) Support Services represents the National Support Center located in
Lewisville, Texas which provides management, financial, human resource, and
information system support for the Company.
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, AUGUST 31, NOVEMBER 30, FEBRUARY 28,
1996 1997 1998 1998 1999
--------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
EAP AND MENTAL HEALTH SERVICES
Covered Lives 204,291 288,519 1,874,323 2,330,553 2,251,765
CONTRACT MANAGEMENT
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 163 181 161 155 156
Contract locations signed and unopened 16 14 11 10 8
--------- --------- --------- --------- ---------
Total contract locations 179 195 172 165 164
========= ========= ========= ========= =========
SERVICES COVERED BY CONTRACTS IN OPERATION:
Inpatient 156 166 149 139 142
Partial Hospitalization 84 104 102 98 98
Outpatient 20 24 32 29 28
Home health 13 17 10 11 10
CQI +(under contract) 64 86 82 83 97
TYPES OF TREATMENT PROGRAMS IN OPERATION:
Geropsychiatric 144 197 189 179 180
Adult psychiatric 82 75 67 62 63
Substance abuse 20 10 8 8 6
Physical Rehabilitation 22 20 20 20 23
Other 5 9 9 8 6
</TABLE>
16
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth for the three and six months ended February
28, 1998 and 1999, 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,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 85.7 % 66.7 % 88.2 % 66.9 %
Premiums and fees 14.1 32.7 11.6 32.5
Other .2 .6 .2 .6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating revenues
Salaries and benefits 55.7 52.5 54.6 51.9
Purchased services 16.7 24.0 16.6 25.2
Provision for (recovery of) bad debts (.3) 1.0 .5 (.5)
Depreciation and amortization 2.5 3.0 2.3 3.0
Other 10.4 11.3 11.3 11.8
----- ----- ----- -----
Total operating expenses 85.0 91.8 85.3 91.4
----- ----- ----- -----
Operating income 15.0 8.2 14.7 8.6
----- ----- ----- -----
Interest and other income(expenses), net (.2) (.8) -- (.9)
----- ----- ----- -----
Income before taxes 14.8 7.4 14.7 7.7
Income tax expense 6.0 3.0 5.9 3.0
----- ----- ----- -----
Income before minority interest 8.8 4.4 8.8 4.7
Minority interest .1 -- .1 --
----- ----- ----- -----
Net income 8.7 % 4.4 % 8.7 % 4.7 %
===== ===== ===== =====
Number of contracts in operation, end of period 172 156 172 156
</TABLE>
17
<PAGE> 18
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 28, 1998
Revenue. Revenues for the three months ended February 28, 1999, were
$36.6 million representing an increase of $7.2 million, or 24.6%, as compared to
revenues of $29.4 million for the corresponding period in the prior fiscal year.
Premiums and Fees increased by $7.8 million as a result of the revenue recorded
for FPM and ChoiceHealth. Horizon acquired 100% of the outstanding voting stock
of FPM and ChoiceHealth effective June 1, 1998 and October 5, 1998,
respectively. This increase in premiums and fees was offset by a $755,000
decrease in contract management revenue as compared to the corresponding period
in the prior fiscal year. This decrease is due to the average number of contract
locations in operation decreasing from 174.9 for the three months ended February
28, 1998, to 157.2 for the three months ended February 28, 1999, a decrease of
10.1%. However, same store sales for contract management revenues, that is
contracts in operation for the entire quarter ended February 28, 1998 and
February 28, 1999 increased $804,000 or 4.1%
Salaries and Benefits. Salaries and benefits for the three months ended
February 28, 1999 were $19.3 million representing an increase of $3.0 million,
or 17.8%, as compared to salaries and benefits of $16.3 million for the three
months ended February 28, 1998. Salaries and benefits increased by $2.3 million
and $602,000 as a result of the acquisitions of FPM and ChoiceHealth,
respectively. Salary and benefits cost per full time equivalent for the three
months ended February 28, 1999, were $14,836 representing an increase of $473
per full time equivalent, or 3.0% as compared to salary and benefits cost of
$14,363 per full time equivalent for the three months ended February 28, 1998.
These increases are offset by a decline in full time equivalents resulting from
the 10.1% decrease in the average number of contract locations in operation.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended February 28, 1999 were $1.1 million representing an
increase of $355,000, or 48.0%, as compared to depreciation and amortization
expenses of $740,000 for the corresponding period in the prior fiscal year. An
increase of $128,000 is due to the amortization of goodwill of $19.6 million and
$2.7 million resulting from the acquisitions of FPM and ChoiceHealth,
respectively. Amortization expense also increased $60,000 in relation to the
value placed on the contracts of FPM and ChoiceHealth. The remaining increase
results from the depreciation expense of additional equipment acquired by
acquisition or purchased for the operation of the Company's contract management
and managed care business.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the three months ended February 28,
1999 were $13.3 million representing an increase of $5.4 million or 68.2%, as
compared to other operating expenses of $7.9 million for the corresponding
period in the prior fiscal year. The following components identify the variances
between the periods reported.
Purchased services included a $3.9 million increase in medical claims
for behavioral managed care services for the three months ended February 28,
1999 as compared to the same period in the prior fiscal year as a result of the
acquisition of FPM on June 1, 1998 and ChoiceHealth on October 5, 1998. Medical
director stipends decreased $329,000 in the three months ended February 28,
1999. This decrease is a result of the decrease in the average number of
contract locations in operation, from 174.9 for the three months ended February
28, 1998 to 157.2 for the three months ended February 28, 1999.
Bad debt expense was $348,000 for the three months ended February 28,
1999, as compared to a recovery of bad debt expense of $74,000 for the three
months ended February 28, 1998, an increase of $422,000. Of this increase,
$334,000 is related to the declaration of bankruptcy of one client hospital and
$202,000 is related to the contract termination of another client hospital.
These increases were offset by debt payments by two contract locations.
Other operating expense was $4.2 million for the three months ended
February 28, 1999 an increase of $1.1 million or 35.8% as compared to $3.1
million for the three months ended February 28, 1998. Other operating expenses
increased $955,000 and $133,000 as a result of the acquisition of FPM and
ChoiceHealth, respectively.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the three months ended February 28, 1999 was a net
expense of $281,000, as compared to net expense of $62,000 for the
18
<PAGE> 19
corresponding period in the prior fiscal year. This change results primarily
from an increase in interest expense of $192,000 related to amounts borrowed
under the credit facility for the acquisitions of FPM and ChoiceHealth.
Income Tax Expense. For the three month period ended February 28, 1999,
the Company recorded federal and state income taxes of $1.1 million resulting in
a combined tax rate of 39.8%. 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%.
SIX MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THE SIX MONTHS ENDED
FEBRUARY 28, 1998
Revenue. Revenues for the six months ended February 28, 1999 were $72.5
million representing an increase of $13.8 million, or 23.5%, as compared to
revenues of $58.7 million for the corresponding period in the prior fiscal year.
Premiums and fees increased by $16.8 million as a result of the revenue recorded
for Acorn, FPM and ChoiceHealth. Horizon acquired 100% of the outstanding voting
stock of Acorn, FPM and ChoiceHealth effective November 1, 1997, June 1, 1998
and October 5, 1998, respectively. The increase in premiums and fees was offset
by a $3.3 million decrease in contract management revenue as compared to the
corresponding period in the prior fiscal year. This decrease is due to the
average number of contract locations in operation decreasing from 178.2 for the
six months ended February 28, 1998, to 156.8 for the six months ended February
28, 1999, a decrease of 12.0%. However, same store sales for contract management
revenues, that is contracts in operation for an entire quarter in both the
current fiscal year and prior fiscal year, increased for the six months ended
February 28, 1999. The average quarterly increase for the quarters ended
November 30, 1998 and February 28, 1999 was $542,000 or 3.0%.
Salaries and Benefits. Salaries and benefits for the six months ended
February 28, 1999 were $37.6 million representing an increase of $5.5 million,
or 17.2%, as compared to salaries and benefits of $32.1 million for the six
months ended February 28, 1998. Salaries and benefits increased by $4.3 million,
$950,000 and $167,000 as a result of the acquisitions of FPM, ChoiceHealth and
Acorn, respectively. Salary and benefits cost per full time equivalent for the
six months ended February 28, 1999, were $29,452 representing an increase of
$710 per full time equivalent, or 2.5% as compared to salary and benefits cost
of $28,742 per full time equivalent for the six months ended February 28, 1998.
These increases are offset by a decline in full time equivalents resulting from
the 12.0% decrease in the average number of contract locations in operation.
Depreciation and Amortization. Depreciation and amortization expenses
for the six months ended February 28, 1999 were $2.2 million representing an
increase of $834,000, or 61.6%, as compared to depreciation and amortization
expenses of $1.4 million for the corresponding period in the prior fiscal year.
An increase of $315,000 is due to the amortization of goodwill of $19.6 million,
$9.3 million, $2.7 million and $702,000 resulting from the acquisitions of FPM,
Acorn, ChoiceHealth and PPS, respectively. Amortization expense also increased
$214,000 in relation to the value placed on the contracts of Acorn, PPS, FPM and
ChoiceHealth, respectively. The remaining increase results from the depreciation
expense of additional equipment acquired by acquisition or purchased for the
operation of the Company's contract management and managed care business.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the six months ended February 28,
1999 were $26.4 million representing a increase of $9.7 million or 58.4%, as
compared to other operating expenses of $16.7 million for the corresponding
period in the prior fiscal year. The following components identify the variances
between the periods reported.
Purchased services included a $8.9 million increase in medical claims
for behavioral managed care services for the six months ended February 28, 1999
as compared to the same period in the prior fiscal year as a result of the
acquisition of Acorn, FPM, and ChoiceHealth effective November 1, 1997, June 1,
1998 and October 5, 1998. Medical director stipends decreased $563,000 in the
six months ended February 28, 1999. This decrease is a result of the decrease in
the average number of contract locations in operation, from 178.2 for the six
months ended February 28, 1998 to 156.8 for the six months ended February 28,
1999.
Bad debt expense, excluding the recovery of $1,750,000 related to one
former Specialty Healthcare Management, Inc. contract, was $1.4 million, for the
six months ended February 28, 1999, as compared to $281,000 for the six months
ended February 28, 1998, an increase of $1.1 million. Of this increase, $334,000
is related to the declaration of bankruptcy of one client hospital and $202,000
is related to the contract termination of another client hospital. The remaining
increase resulted from the non-timely payments by client hospitals.
19
<PAGE> 20
Other operating expense was $8.5 million for the six months ended
February 28, 1999, an increase of $1.9 million or 28.2% as compared to $6.6
million for the six months ended February 28, 1998. Other operating expenses
increased $1.8 million and $225,000 as a result of the acquisition of FPM and
ChoiceHealth, respectively.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the six months ended February 28, 1999 was a net
expense of $628,000, as compared to net expense of $18,000 for the corresponding
period in the prior fiscal year. This change results primarily from an increase
in interest expense of $536,000 related to amounts borrowed under the credit
facility for the acquisitions of FPM and ChoiceHealth.
Income Tax Expense. For the six month period ended February 28, 1999,
the Company recorded federal and state income taxes of $2.2 million resulting in
a combined tax rate of 39.6%. 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%.
LIQUIDITY AND CAPITAL RESOURCES
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with 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 "Credit Facility"). The 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 Credit Facility replaced the
Company's existing $14.0 million revolving credit facility. At February 28,
1999, the advance term loan facility had $23.0 million outstanding.
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 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 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 $30.0 million during any
twelve consecutive monthly periods, with the exception of the restriction
referenced below), (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 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.
20
<PAGE> 21
The Company is also subject to a provision requiring a prepayment of a
portion of the outstanding advance term loan balance. If the aggregate
outstanding principal amount of the term loans equals or exceeds $15 million as
of the date ninety days after the end of a fiscal year, then the Company is
required to prepay the term loans in an amount equal to 50% of the excess cash
flow (as defined in the credit agreement) calculated for the fiscal year then
most recently ended based on the audited financial statements of the Company.
The Company will either make voluntary prepayments of more than $8 million prior
to November 30, 1999 or will be subject to the excess cash flow prepayment
requirement of approximately $4.0 million.
As of September 30, 1998, the Credit Facility was amended to allow the
Company to finance, under the Term Loan Facility, the redemption or repurchase
of its capital stock. As of February 28, 1999, the Company had repurchased
574,600 shares of its common stock. As a result of this amendment a limit of $10
million for cumulative acquisitions was imposed for the period of September 30,
1998 through August 31, 1999.
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 future cash flows from operations, cash
of $1.8 million at February 28, 1999, and $10.0 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 $800,000. The Company is likely to require additional capital to
fund any further acquisitions, $8.0 million of which is available under the
current acquisition line through August 31, 1999, and $17.0 million which will
be available thereafter.
Effective October 5, 1998, The Company acquired all the outstanding
capital stock of ChoiceHealth for approximately $2.0 million. The acquisition
was funded by incurring debt of $2.0 million under the term loan facility.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. The
Company's computer equipment and software and devices with embedded technology
that are time-sensitive may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failure or miscalculations,
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company has undertaken various initiatives intended to ensure that
the computer equipment and software used by the Company will function properly
with respect to dates in the Year 2000 and thereafter. For this purpose, the
term "computer equipment and software" includes systems thought of as
information technology ("IT") systems, including accounting, data processing and
telephone/PBX systems and other miscellaneous systems that may contain embedded
technology, as well as systems that are not commonly thought of as IT systems,
such as alarm systems, fax machines or other miscellaneous systems that may
contain embedded technology. Based upon its identification and assessment
efforts to date, the Company believes that certain of the computer equipment and
software systems it currently uses will require replacement or modification. In
addition, in the ordinary course of replacing computer equipment and software,
the Company attempts to obtain replacements that are Year 2000 compliant.
Utilizing both internal and external resources to identify and assess needed
Year 2000 remediation, the Company currently anticipates that its Year 2000
identification, assessment, remediation and testing efforts, which began in
April 1998, will be completed by December 31, 1999, and that such efforts will
be completed prior to any currently anticipated impact on its computer equipment
and software systems. The Company estimates that as of February 28, 1999, it had
completed approximately 55% of the initiatives that it believes will be
necessary to fully address potential Year 2000 issues related to its computer
equipment and software. The projects comprising the remaining 45% of the
initiatives are in process and are expected to be completed by December 31,
1999.
21
<PAGE> 22
<TABLE>
<CAPTION>
YEAR 2000 INITIATIVE TIME PERIOD PERCENT COMPLETE
<S> <C> <C>
Initial IT systems identification and assessment April 1998 to June 1999 90%
Remediation and testing of IT systems July 1998 to September 1999 25%
Identification and assessment of non-IT systems September 1998 to August 1999 30%
Remediation and testing of non-IT systems April 1999 to December 1999 0%
</TABLE>
The Company is beginning assessment of the Year 2000 readiness of its
suppliers. Such assessment will include hardware, software and service
suppliers. The Company expects to complete its assessment of suppliers' Year
2000 readiness by March 1999. The Company is beginning assessment of the Year
2000 readiness of its customers. Such assessment will include contacting
significant customers regarding their state of Year 2000 readiness. The Company
expects to complete its assessment of customers' Year 2000 readiness by June
1999.
The Company believes that the costs to modify its computer equipment
and software systems to be Year 2000 compliant, as well as the currently
anticipated costs with respect to Year 2000 issues of third parties, will not
exceed $150,000, which expenditures will be funded from operating cash flows.
All of the $150,000 relates to analysis, repair or replacement of existing
software, upgrades of existing software or evaluation of information received
from significant suppliers or customers. Such an amount would represent an
immaterial percentage of the Company's total actual and anticipated IT
expenditures for fiscal 1998 and 1999. As of February 28, 1999, the Company had
incurred costs of approximately $55,000 related to its Year 2000 identification,
assessment, remediation and testing efforts. Other non-Year 2000 IT efforts have
not been materially delayed or impacted by Year 2000 initiatives. However, if
all Year 2000 issues are not properly identified, or assessment, remediation and
testing are not effected timely, there can be no assurance that the Year 2000
issue will not have a material adverse effect on the Company's results of
operations, or adversely affect the Company's relationships with customers,
suppliers or others. Additionally, there can be no assurance that the Year 2000
issues of other entities will not have a material adverse effect on the
Company's systems or results or operations.
The Company has begun, but not yet completed, a comprehensive analysis
of the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worse case scenario, and such scenario has not yet been
clearly identified. The Company plans to complete such cost analysis and
contingency planning by June 1999.
The costs of the Company's Year 2000 identification, assessment,
remediation and testing efforts and the date by which the Company believes it
will complete such efforts are based upon management's best estimates, which are
derived utilizing numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. However, there can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that might cause such material
differences include but are not limited to the availability and cost of
personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, and
similar uncertainties.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
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
22
<PAGE> 23
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, EAP or managed care 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 or physical
rehabilitation services; adverse changes to other regulatory provisions relating
to mental health or physical rehabilitation 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.
23
<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In its normal operations, the Company has market risk exposure to
interest rates due to its interest bearing debt obligations, which were entered
into for purposes other than trading purposes. To manage its exposure to changes
in interest rates, the Company uses both fixed and variable rate debt. The
Company has estimated its market risk exposure using sensitivity analyses
assuming a 10% change in market rates.
At February 28, 1999, the Company had approximately $23.0 million of
debt obligations outstanding with variable interest rates with a weighted
average interest rate of 5.8833%. A hypothetical 10% change in the effective
interest rate for these borrowings, assuming debt levels as of February 28,
1999, would change interest expense by approximately $230,000 annually.
24
<PAGE> 25
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
28,1999. 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. A total of 6,175,617
votes were cast for each nominee, other than Mr. Anderson, Mr. Steen, and Mr.
Finkel, and a total of 12,664 votes were withheld. A total of 6,175,417 votes
were cast for Mr. Anderson, and a total of 12,864 votes were withheld. A total
of 6,175,467 votes were cast for Mr. Steen, and a total of 12,814 votes were
withheld. A total of 5,735,360 votes were cast for Mr. Finkel and a total of
452,921 votes were withheld.
At the annual meeting of stockholders, the stockholders also ratified
the appointment of PricewaterhouseCoopers, LLP as the independent accountants
for the Company for the fiscal year ending August 31, 1999. At the meeting, a
total of 6,184,575 votes were cast for this proposal, a total of 796 votes were
cast against this proposal, a total of 2,909 shares abstained and 1 share was
unvoted. There were no broker non-votes with respect to this proposal.
ITEM 5. OTHER INFORMATION
Effective March 22, 1999, the Company appointed Frank Baumann to the
Position of President of Specialty Rehab Management, Inc. ("Specialty"), the
Company's physical rehabilitation contract management operating subsidiary. The
appointment follows the resignations of Robert Lefton as President of Specialty
and Gary Kagan as Executive Vice President of Development. Mr. Lefton and Mr.
Kagan left to pursue other unrelated business pursuits.
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).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Six Months Ended February 28,
1999 (filed herewith).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for
which this report is filed.
25
<PAGE> 26
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: March 30, 1999
HORIZON HEALTH CORPORATION
BY: /s/ James W. McAtee
--------------------------------
JAMES W. MCATEE
PRESIDENT, CHIEF EXECUTIVE OFFICER,
AND CHIEF FINANCIAL OFFICER
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
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).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Six Months Ended February 28,
1999 (filed herewith).
</TABLE>
<PAGE> 1
EXHIBIT 11.1
HORIZON HEALTH CORPORATION
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED FEBRUARY 28, ENDED FEBRUARY 28,
---------------------------- ----------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
Net income $2,555,886 $1,638,970 $5,079,881 $3,405,397
Weighted average shares outstanding (basic) 7,070,265 6,779,213 7,025,176 6,966,408
---------- ---------- ---------- ----------
Basic earnings per share $ .36 $ .24 $ .72 $ .49
========== ========== ========== ==========
DILUTED
Net income $2,555,886 $1,638,970 $5,079,881 $3,405,397
Weighted average shares outstanding (basic) 7,070,265 6,779,213 7,025,176 6,966,408
Effect of dilutive securities 671,903 (1) 336,132 (1) 726,529 (1) 347,902 (1)
---------- ---------- ---------- ----------
Weighted average shares outstanding (diluted) 7,742,168 7,115,345 7,751,705 7,314,310
---------- ---------- ---------- ----------
Diluted earnings per share $ .33 $ .23 $ .66 $ .47
========== ========== ========== ==========
</TABLE>
(1) During fiscal year 1998 and 1999, certain options to acquire common
stock 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 15,000 options with an option price of $26.00. The computation
of the quarter ended November 30, 1998 excluded 157,950 options with
option prices ranging from $7.4167 to $23.75. The computation of the
quarter ended February 28, 1998 excluded 183,222 options with option
prices ranging from $22.00 to $26.00. The computation of the quarter
ended February 28, 1999 excluded 707,036 options with option prices
ranging from $6.9063 to $23.75. The six month calculations incorporate
the above referenced exclusions within the applicable periods.
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the six
months ended February 28, 1999 financial statements and is qualified in its
entirety by reference to such year to date 10Q filing for the six months ended
February 28, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 1,796,536
<SECURITIES> 0
<RECEIVABLES> 19,189,080
<ALLOWANCES> 2,621,950
<INVENTORY> 0
<CURRENT-ASSETS> 22,343,649
<PP&E> 6,838,671
<DEPRECIATION> 3,510,344
<TOTAL-ASSETS> 86,209,065
<CURRENT-LIABILITIES> 20,268,059
<BONDS> 0
0
0
<COMMON> 72,678
<OTHER-SE> 42,455,773
<TOTAL-LIABILITY-AND-EQUITY> 86,209,065
<SALES> 0
<TOTAL-REVENUES> 72,493,205
<CGS> 0
<TOTAL-COSTS> 66,568,095
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (344,573)
<INTEREST-EXPENSE> 722,875
<INCOME-PRETAX> 5,642,107
<INCOME-TAX> 2,236,710
<INCOME-CONTINUING> 3,405,397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,405,397
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
</TABLE>
