<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, 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 July 7, 1999, was 6,796,028.
<PAGE> 2
INDEX
HORIZON HEALTH CORPORATION
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS......................................................3
HORIZON HEALTH CORPORATION
Consolidated Balance Sheets as of August 31, 1998
and May 31, 1999 (unaudited)..................................................3
Consolidated Statements of Operations for the three months ended
May 31, 1998 and 1999 (each unaudited)........................................5
Consolidated Statements of Operations for the nine months ended
May 31, 1998 and 1999 (each unaudited)........................................6
Consolidated Statements of Cash Flows for the nine months
ended May 31, 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............................25
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.....................................................................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................26
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1998 MAY 31, 1999
--------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 6,204,297 $ 1,307,464
Accounts receivable less allowance for uncollectible
accounts of $1,902,112 at August 31, 1998 and
$3,171,046 at May 31, 1999 13,464,705 15,736,066
Receivable from employees 91,715 55,537
Prepaid expenses and supplies 211,288 763,880
Income taxes receivable 317,197 96,946
Other receivables 166,714 209,566
Other current assets 469,540 513,247
Current deferred taxes 2,006,880 2,616,136
----------- -----------
TOTAL CURRENT ASSETS 22,932,336 21,298,842
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 5,874,100 6,479,831
Building improvements 421,331 462,311
----------- -----------
6,295,431 6,942,142
Less accumulated depreciation 2,868,062 3,860,960
----------- -----------
3,427,369 3,081,182
Goodwill, net of accumulated amortization of $3,002,194
at August 31, 1998, and $4,046,078 at May 31, 1999 51,310,574 53,837,163
Contracts, net of accumulated amortization of $4,099,012
at August 31, 1998, and $5,330,978 at May 31, 1999 8,227,689 7,446,789
Other assets 774,100 701,193
----------- -----------
TOTAL ASSETS $86,672,068 $86,365,169
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1998 MAY 31, 1999
--------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,314,404 $ 1,116,647
Employee compensation and benefits 6,166,226 7,162,868
Accrued expenses 7,934,916 9,761,314
Current debt maturities 18,470 4,070,928
----------- -----------
TOTAL CURRENT LIABILITIES 16,434,016 22,111,757
Other liabilities 237,308 312,486
Long-term debt, net of current debt maturities (Note 4) 26,010,901 17,549,891
Deferred income taxes 1,327,532 1,569,619
----------- -----------
TOTAL LIABILITIES 44,009,757 41,543,753
----------- -----------
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
6,827,528 shares outstanding at May 31, 1999 72,318 72,678
Additional paid-in capital 17,984,638 18,286,500
Retained earnings 24,605,355 29,721,166
----------- -----------
42,662,311 48,080,344
Less: Treasury Stock - at Cost (440,222 shares) (Note 7) -- 3,258,928
----------- -----------
42,662,311 44,821,416
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $86,672,068 $86,365,169
=========== ===========
</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,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues:
Contract management $ 24,840,481 $ 24,526,051
Premiums and fees 3,923,748 11,713,000
Other 63,377 161,636
------------ ------------
Total revenues 28,827,606 36,400,687
Expenses:
Salaries and benefits 15,759,483 19,118,917
Purchased services 4,848,716 8,241,335
Provision for (recovery of) bad debts (196,195) 559,730
Depreciation and amortization 757,477 1,124,206
Other 3,576,897 4,228,665
------------ ------------
Total operating expenses 24,746,378 33,272,853
Other income (expense):
Interest expense (141,567) (341,793)
Interest and other income 585,304 55,007
------------ ------------
Income before income taxes 4,524,965 2,841,048
Income tax expense 1,798,630 1,130,634
------------ ------------
Net income $ 2,726,335 $ 1,710,414
============ ============
Earnings per common share:
Basic $ .38 $ .25
============ ============
Diluted $ .35 $ .24
============ ============
Weighted average shares outstanding:
Basic 7,199,047 6,810,529
============ ============
Diluted 7,797,400 7,120,857
============ ============
</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,
---------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenues:
Contract management $ 76,636,988 $ 73,048,746
Premiums and fees 10,731,511 35,290,790
Other 181,990 554,356
------------- -------------
Total revenues 87,550,489 108,893,892
Expenses:
Salaries and benefits 47,835,754 56,725,786
Purchased services 14,618,312 26,514,929
Provision for bad debts 84,708 215,157
Depreciation and amortization 2,109,688 3,309,951
Other 10,210,405 12,730,552
------------- -------------
Total operating expenses 74,858,867 99,496,375
Other income (expense):
Interest expense (372,320) (1,114,668)
Interest and other income 798,499 199,506
Gain on sale of fixed assets -- 800
------------- -------------
Income before income taxes and minority interest 13,117,801 8,483,155
Income tax expense 5,277,625 3,367,344
------------- -------------
Income before minority interest 7,840,176 5,115,811
Minority interest (Note 3) 33,960 --
------------- -------------
Net income $ 7,806,216 $ 5,115,811
============= =============
Earnings per common share:
Basic $ 1.10 $ .74
============= =============
Diluted $ 1.01 $ .71
============= =============
Weighted average shares outstanding:
Basic 7,083,133 6,914,448
============= =============
Diluted 7,766,937 7,249,825
============= =============
</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,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Operating Activities:
Net income $ 7,806,216 $ 5,115,811
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,109,688 3,309,951
Minority interest 33,960 --
Deferred income taxes 3,372 135,985
Gain on sale of fixed assets -- (800)
Changes in assets and liabilities:
Increase in accounts receivable (3,767,212) (1,913,862)
Increase in other receivables (387,930) (6,674)
Decrease in income taxes receivable 951,256 220,251
Increase in prepaid expenses and supplies (76,336) (526,363)
Increase in other assets (1,357,947) (539,998)
Decrease in accounts payable and accrued expenses (3,530,676) (293,579)
Increase in other liabilities (159,579) 75,178
------------ ------------
Net cash provided by operating activities 1,624,812 5,575,900
------------ ------------
Investing activities:
Purchase of property and fixed assets (697,447) (385,863)
Proceeds from sale of fixed assets -- 3,300
Payment for 16% purchase of Professional Psychological
Services, Inc., net of cash acquired (831,879) --
Payment for 4% purchase of Professional Psychological
Services, Inc., net of cash acquired (207,970) --
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 -- (1,847,390)
Proceeds from purchase price adjustment of FPM Behavioral Health -- 1,222,193
Inc.
Payment for purchase of Resources in Employee Assistance and
Corporate Health, Inc., net of cash acquired -- (1,936,352)
------------ ------------
Net cash used in investing activities (14,664,401) (2,944,112)
------------ ------------
Financing activities:
Payments on long term debt (5,517,533) (19,020,417)
Proceeds from long term borrowings 13,500,000 14,500,000
Net proceeds from issuance of common stock 474,632 102,252
Tax benefit related to stock option exercise 599,404 881,592
Cash used in purchase of treasury stock -- (4,462,159)
Cash provided by issuance of treasury stock -- 470,111
------------ ------------
Net cash provided by (used in) financing activities 9,056,503 (7,528,621)
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net decrease in cash and short term investments (3,983,086) (4,896,833)
Cash and short-term investments at beginning of period 5,516,575 6,204,297
------------ ------------
Cash and short-term investments at end of period 1,533,489 1,307,464
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 372,320 $ 1,104,841
============ ============
Income taxes $ 4,458,688 $ 2,678,164
============ ============
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 from 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 Resource in Employee Assistance and
Corporate Health, Inc.
Fair value of assets acquired $ -- $ 2,434,311
------------ ------------
Cash paid -- (2,000,000)
------------ ------------
Liabilities assumed $ -- $ 434,311
============ ============
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.
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 April 1, 1999, the Company acquired all of the outstanding
capital stock of Resources in Employee Assistance and Corporate Health,
Inc. ("REACH"). The Company accounted for the acquisition of REACH by
the purchase method as required by generally accepted accounting
principals. REACH provides employee assistance programs and other
related behavioral health care services to self-insured employers. REACH
had annualized revenues of approximately $1.4 million (unaudited) based
on actual revenues for the ten months ending March 31, 1999. 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.
(See Note 3)
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 May 31, 1999, the
consolidated statements of operations for the three and nine month
periods ended May 31, 1998 and 1999, and the consolidated statements of
cash flows for the nine months ended May 31, 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 May 31,
1999, and the results of operations for the three and nine months ended
May 31, 1998 and 1999.
Operating results for the three and nine 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 are 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.
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
---------------------------------------- ---------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended May 31,
BASIC EPS ......................... $2,726,335 7,199,047 $ .38 $1,710,414 6,810,529 $ .25
-------- -------
EFFECT OF DILUTIVE SECURITIES
OPTIONS .......................... 598,353 310,328
---------- ----------
DILUTED EPS ...................... $2,726,335 7,797,400 $ .35 $1,710,414 7,120,857 $ .24
========== ========== ======== ========== ========== =======
For the nine months ended May 31,
BASIC EPS .................. $7,806,216 7,083,133 $ 1.10 $5,115,811 6,914,448 $ .74
-------- -------
EFFECT OF DILUTIVE SECURITIES
OPTIONS ........................... 683,804 335,377
---------- ----------
DILUTED EPS ....................... $7,806,216 7,766,937 $ 1.01 $5,115,811 7,249,825 $ .71
========== ========== ======== ========== ========== =======
</TABLE>
3. ACQUISITIONS
REACH
Effective April 1, 1999, the Company acquired all of the outstanding
capital stock of REACH. The Company accounted for the acquisition of
REACH by the purchase method as required by generally accepted
accounting principals. REACH provides employee assistance programs and
other related behavioral health care services to self-insured employers.
REACH had annualized revenues of approximately $1.4 million (unaudited)
based on actual revenues for the ten months ending March 31, 1999. 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 REACH's tangible net assets by
$2,263,241, of which $1,991,186 is recorded as goodwill and $272,055 as
service contracts. Tangible assets acquired and liabilities assumed
totaled $171,070 and $434,311, respectively.
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
10
<PAGE> 11
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
preliminary allocation of 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 May 31, 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 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.
11
<PAGE> 12
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 May 31, 1999, the Company had the following
long-term debt:
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1998 1999
----------- -----------
<S> <C> <C>
Chase Bank of Texas, National Association - Advance Term Loan
Facility $23,000,000 $21,500,000
Chase Bank of Texas, National Association - Revolving Credit
Facility 3,000,000 --
Equipment Leases 29,371 77,499
Borealis Note -- 43,320
----------- -----------
26,029,371 21,620,819
Less current maturities 18,470 4,070,928
----------- -----------
$26,010,901 $17,549,891
=========== ===========
</TABLE>
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 an initial $40.0 million 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, 1999, the Company
has borrowings of $21.5 million outstanding against the now $30.5
million 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.
12
<PAGE> 13
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
four to five years from the date of grant and terminate 10 years from
the date of grant.
6. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under
operating leases. The following is a schedule of minimum rental payments
under these leases, which expire at various dates:
<TABLE>
<S> <C>
Three months ending August 31, 1999 $ 488,772
For the year ending August 31, 2000 1,516,966
For the year ending August 31, 2001 1,186,927
For the year ending August 31, 2002 657,936
For the years ending August 31, 2003 and thereafter 237,841
----------
$4,088,442
==========
</TABLE>
Rent expense for the nine months ended May 31, 1998 and 1999 totaled
$708,789 and $1,674,651 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 603,000 shares of its common stock as of May 31, 1999, of
which 162,778 has been reissued pursuant to the exercise of certain
stock options, and had repurchased 634,500 shares of its common stock as
of July 7, 1999.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a 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 May 31, 1999, and
currently operates in 35 states. Of those management contracts, 139 related to
mental health programs and 25 related to physical rehabilitation programs. The
management contracts cover 274 various treatment programs. As of May 31, 1999,
the Company had 277 contracts to provide EAP and mental health services covering
approximately 2,400,000 lives. The Company has also developed a proprietary
mental health outcomes measurement system known as CQI+ and at May 31, 1999 had
contracts to provide outcome measurement services at 111 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.
Amendments to the Medicare regulations in 1997, established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. The regulations established a nationwide cap
limiting the reimbursement amount on a per case basis for mental health and
physical rehabilitation services, for Medicare fiscal years beginning October 1,
1997, and later, to $10,534 and $19,104, respectively, subject to adjustments
based on market indices. The reimbursement amounts were raised to $10,787 and
$20,071, respectively, for Medicare fiscal years beginning October 1, 1998 and
later. 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
under a cost based system, 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
renegotiations 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. As a result of these limitations, six fewer contracts were signed by
the Company and the direct operating margin of the Company's mental health
contracts has decreased approximately six percentage points for the nine months
ended May 31, 1999 as compared to the nine months ended May 31, 1998.
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 $206.71, which will lower Medicare
reimbursement levels to many hospitals for partial hospitalization services.
This change will 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.
Revenues from partial hospitalization services were $15.6 million, or
21.4% of total contract management revenue for the nine months ended May 31,
1999. Of the Company's 164 management contracts at May 31, 1999, 115 or 70.1%
of the contracts include partial hospitalization services. The termination of
all partial hospitalization contracts, while unlikely and not expected, would
reduce operating income by $4.0 million or more annually.
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
14
<PAGE> 15
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.
Effective April 1, 1999, the Company acquired all of the outstanding
capital stock of Resources in Employee Assistance and Corporate Health, Inc.
("REACH"). The Company accounted for the acquisition of REACH by the purchase
method as required by generally accepted accounting principals. REACH provides
employee assistance programs and other related behavioral health care services
to self-insured employers. REACH had annualized revenues of approximately $1.4
million (unaudited) based on actual revenues for the ten months ending March
31, 1999. 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 REACH's tangible net assets by $2,263,241, of which
$1,991,186 is recorded as goodwill and $272,055 as service contracts. Tangible
assets acquired and liabilities assumed totaled $171,070 and $434,311,
respectively.
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. The preliminary allocation of 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 May 31, 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 May 31, 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.
15
<PAGE> 16
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.
The following schedule represents revenues and operating results for the nine
months ended May 31, 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 $ 35,067,372 $ 65,829,586 $ 7,555,000 $ 304,456 $ 137,478 $ -- $108,893,892
Inter Company Revenues 47,937 -- -- 1,317,321 -- (1,365,258) --
Earnings before interest,
taxes, depreciation and
amortization (EBITDA) 2,204,632 15,424,698 584,873 166,247 (5,672,982) -- 12,707,468
</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 and its subsidiaries.
16
<PAGE> 17
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, AUGUST 31, NOVEMBER 30, FEBRUARY 28, MAY 31,
1996 1997 1998 1998 1999 1999
---------- ---------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
EAP AND MENTAL HEALTH SERVICES
Covered Lives 204,291 288,519 1,874,323 2,356,664 2,249,939 2,432,250
CONTRACT MANAGEMENT
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 163 181 161 155 156 155
Contract locations signed and unopened 16 14 11 10 8 9
--------- --------- --------- --------- --------- ---------
Total contract locations 179 195 172 165 164 164
========= ========= ========= ========= ========= =========
SERVICES COVERED BY CONTRACTS IN OPERATION:
Inpatient 156 166 149 139 142 144
Partial Hospitalization 84 104 102 98 98 95
Outpatient 20 24 32 29 28 27
Home health 13 17 10 11 10 8
CQI + (under contract) 64 86 82 83 97 111
TYPES OF TREATMENT PROGRAMS IN OPERATION:
Geropsychiatric 144 197 189 179 180 182
Adult psychiatric 82 75 67 62 63 60
Substance abuse 20 10 8 8 6 5
Physical Rehabilitation 22 20 20 20 23 23
Other 5 9 9 8 6 4
</TABLE>
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth for the three and nine months ended May 31, 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 NINE MONTHS
ENDED MAY 31, ENDED MAY 31,
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 86.2% 67.4% 87.5% 67.1%
Premiums and fees 13.6 32.2 12.3 32.4
Other .2 .4 .2 .5
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating revenues
Salaries and benefits 54.7 52.5 54.6 52.1
Purchased services 16.8 22.7 16.7 24.4
Provision for (recovery of) bad debts (.7) 1.5 .1 .2
Depreciation and amortization 2.6 3.1 2.4 3.0
Other 12.4 11.6 11.7 11.7
----- ----- ----- -----
Total operating expenses 85.8 91.4 85.5 91.4
----- ----- ----- -----
Operating income 14.2 8.6 14.5 8.6
----- ----- ----- -----
Interest and other income(expenses), net 1.5 (.8) .5 (.8)
----- ----- ----- -----
Income before taxes 15.7 7.8 15.0 7.8
Income tax expense 6.2 3.1 6.0 3.1
----- ----- ----- -----
Income before minority interest 9.5 4.7 9.0 4.7
Minority interest -- -- -- --
----- ----- ----- -----
Net income 9.5% 4.7% 9.0% 4.7%
===== ===== ===== =====
Number of contracts in operation, end of period 166 155 166 155
</TABLE>
18
<PAGE> 19
THREE MONTHS ENDED MAY 31, 1999 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1998
Revenue. Revenues for the three months ended May 31, 1999, were $36.4
million representing an increase of $7.6 million, or 26.3%, as compared to
revenues of $28.8 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, ChoiceHealth and REACH. Horizon acquired 100% of the
outstanding voting stock of FPM, ChoiceHealth and REACH effective June 1, 1998,
October 5, 1998, and April 1, 1999, respectively. This increase in premiums and
fees was offset by a $314,000 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
169.8 for the three months ended May 31, 1998, to 155.5 for the three months
ended May 31, 1999, a decrease of 8.4%. However, same store sales for contract
management revenues, that is contracts in operation for the entire quarter
ended May 31, 1998 and May 31, 1999 increased $1,100,000 or 5.8%
Salaries and Benefits. Salaries and benefits for the three months
ended May 31, 1999 were $19.1 million representing an increase of $3.3 million,
or 20.9%, as compared to salaries and benefits of $15.8 million for the three
months ended May 31, 1998. Salaries and benefits increased by $2.7 million,
$577,000, and $102,000 as a result of the acquisitions of FPM, ChoiceHealth,
and REACH, respectively. Salary and benefits cost per full time equivalent for
the three months ended May 31, 1999, were $14,720, representing an increase of
$195 per full time equivalent, or 1.3% as compared to salary and benefits cost
of $14,525 per full time equivalent for the three months ended May 31, 1998.
This increase is offset by a decline in full time equivalents resulting from
the 8.4% decrease in the average number of contract locations in operation.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended May 31, 1999 were $1.1 million representing an
increase of $367,000, or 48.5%, as compared to depreciation and amortization
expenses of $757,000 for the corresponding period in the prior fiscal year. An
increase of $145,000 is due to the amortization of goodwill of $19.6 million,
$2.6 million, and $2.0 million resulting from the acquisitions of FPM,
ChoiceHealth, and REACH, respectively. Amortization expense also increased
$66,000 in relation to the value placed on the contracts of FPM, ChoiceHealth,
and REACH. 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 May 31,
1999 were $13.0 million representing an increase of $4.8 million or 58.5%, as
compared to other operating expenses of $8.2 million for the corresponding
period in the prior fiscal year. The following components identify the
variances between the periods reported.
Purchased services included a $3.4 million increase in medical claims
for behavioral managed care services for the three months ended May 31, 1999 as
compared to the same period in the prior fiscal year as a result of the
acquisition of FPM on June 1, 1998, ChoiceHealth on October 5, 1998, and REACH
on April 1, 1999. Medical director stipends decreased $399,000 in the three
months ended May 31, 1999. This decrease is a result of the decrease in the
average number of contract locations in operation, from 169.8 for the three
months ended May 31, 1998 to 155.5 for the three months ended May 31, 1999.
Bad debt expense was $560,000 for the three months ended May 31, 1999,
as compared to a recovery of bad debt expense of $196,000 for the three months
ended May 31, 1998, an increase of $756,000. Bad debt expense increased
$256,000 as a result of the untimely payment of claims against insurance
carriers. In addition, bad debt expense increased $132,000 due to the contract
termination of one client hospital. The remaining increase resulted from the
untimely payments by client hospitals.
Other operating expense was $4.2 million for the three months ended
May 31, 1999 an increase of $600,000 or 16.7% as compared to $3.6 million for
the three months ended May 31, 1998. Other operating expenses increased
$993,000, $141,000, and $31,000 as a result of the acquisition of FPM,
ChoiceHealth, and REACH, respectively.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the three months ended May 31, 1999 was a net
expense of $287,000, as compared to interest income, interest expense and other
19
<PAGE> 20
income of $444,000 for the corresponding period in the prior fiscal year. This
change results primarily from other income of $514,000, which relates to the
final receipt of the rent obligation and the rent abatement for Mountain Crest
Hospital during the prior fiscal year. The change also resulted from an
increase in interest expense of $198,000 related to amounts borrowed under the
credit facility for the acquisitions of FPM, ChoiceHealth, and REACH.
Income Tax Expense. For the three month period ended May 31, 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 May 31, 1998, the
Company recorded federal and state income taxes of $1.8 million resulting in a
combined tax rate of 39.7%.
NINE MONTHS ENDED MAY 31, 1999 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1998
Revenue. Revenues for the nine months ended May 31, 1999 were $108.9
million representing an increase of $21.3 million, or 24.4%, as compared to
revenues of $87.6 million for the corresponding period in the prior fiscal
year. Premiums and fees increased by $24.6 million as a result of the revenue
recorded for Acorn, FPM, ChoiceHealth, and REACH. Horizon acquired 100% of the
outstanding voting stock of Acorn, FPM, ChoiceHealth, and REACH effective
November 1, 1997, June 1, 1998, October 5, 1998, and April 1, 1999,
respectively. The increase in premiums and fees was offset by a $3.6 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 175.5 for the nine months ended
May 31, 1998, to 156.4 for the nine months ended May 31, 1999, a decrease of
10.9%. 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 nine months ended May 31, 1999. The
average quarterly increase for the quarters ended November 30, 1998, February
28, 1999, and May 31, 1999 was $774,000 or 4.0%.
Salaries and Benefits. Salaries and benefits for the nine months ended
May 31, 1999 were $56.7 million representing an increase of $8.9 million, or
18.6%, as compared to salaries and benefits of $47.8 million for the nine
months ended May 31, 1998. Salaries and benefits increased by $8.2 million,
$1.5 million, and $102,000, as a result of the acquisitions of FPM,
ChoiceHealth, and REACH, respectively. Salary and benefits cost per full time
equivalent for the nine months ended May 31, 1999, were $44,118 representing an
increase of $900 per full time equivalent, or 2.1% as compared to salary and
benefits cost of $43,218 per full time equivalent for the nine months ended May
31, 1998. These increases are offset by a decline in full time equivalents
resulting from the 10.9% decrease in the average number of contract locations
in operation.
Depreciation and Amortization. Depreciation and amortization expenses
for the nine months ended May 31, 1999 were $3.3 million representing an
increase of $1.2 million, or 56.9%, as compared to depreciation and
amortization expenses of $2.1 million for the corresponding period in the prior
fiscal year. An increase of $460,000 is due to the amortization of goodwill of
$19.6 million, $9.3 million, $2.6 million, $702,000, and $2.0 million resulting
from the acquisitions of FPM, Acorn, ChoiceHealth, PPS, and REACH respectively.
Amortization expense also increased $281,000 in relation to the value placed on
the contracts of Acorn, PPS, FPM, ChoiceHealth, and REACH. 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 nine months ended May 31, 1999
were $39.4 million representing an increase of $14.5 million or 68.2%, as
compared to other operating expenses of $24.9 million for the corresponding
period in the prior fiscal year. The following components identify the
variances between the periods reported.
Purchased services included a $12.1 million increase in medical claims
for behavioral managed care services for the nine months ended May 31, 1999 as
compared to the same period in the prior fiscal year as a result of the
acquisition of Acorn, FPM, ChoiceHealth and REACH, on November 1, 1997, June 1,
1998, October 5, 1998, and April 1, 1999, respectively. Medical director
stipends decreased $826,000 in the nine months ended May 31, 1999. This
decrease is a result of the decrease in the average number of contract
locations in operation, from 175.5 for the nine months ended May 31, 1998 to
156.4 for the nine months ended May 31, 1999.
Bad debt expense, excluding the recovery of $1,750,000 related to one
former Specialty Healthcare Management, Inc. contract, was $1.9 million, for
the nine months ended May 31, 1999, as compared to $85,000 for the
20
<PAGE> 21
nine months ended May 31, 1998, an increase of $1.8 million. Bad debt expense
increased $596,000 as a result of the acquisition of FPM, ChoiceHealth, REACH,
and Acorn, on June 1, 1998, October 5, 1998, April 1, 1999, and November 1,
1997. Of this increase $368,000 resulted from the untimely payment of claims
against insurance carriers. In addition, bad debt expense increased $334,000
due to the declaration of bankruptcy of one client hospital and $334,000 due to
the contract termination of two other client hospitals. The remaining increase
resulted from the untimely payments of client hospitals.
Other operating expense was $12.7 million for the nine months ended
May 31, 1999, an increase of $2.5 million or 24.5% as compared to $10.2 million
for the nine months ended May 31, 1998. Other operating expenses increased $2.3
million, $366,000, and $31,000 as a result of the acquisition of FPM,
ChoiceHealth, and REACH, respectively.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the nine months ended May 31, 1999 was a net
expense of $914,000, as compared to interest income, interest expense and other
income of $426,000 for the corresponding period in the prior fiscal year. This
change results primarily from other income of $514,000, which relates to the
final receipt of the rent obligation and the rent abatement for Mountain Crest
Hospital during the prior fiscal year. The change also resulted from an
increase in interest expense of $734,000 related to amounts borrowed under the
credit facility for the acquisitions of FPM, ChoiceHealth, and REACH.
Income Tax Expense. For the nine month period ended May 31, 1999, the
Company recorded federal and state income taxes of $3.4 million resulting in a
combined tax rate of 39.7%. 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%.
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 an initial $40.0 million 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 May 31, 1999,
the term loan facility had $21.5 million outstanding against the now $30.5
million term loan facility.
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
21
<PAGE> 22
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.
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 be subject to an excess cash flow prepayment requirement of
approximately $4.6 million for fiscal year 1999, of which all but approximately
$500,000 has been paid as of June 7, 1999.
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 May 31, 1999, the Company had repurchased 603,000
shares of its common stock, of which 162,778 has been reissued pursuant to the
exercise of certain stock options. 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 $1.3 million at May 31, 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, and scheduled repayments of term loan debt of approximately $4.0
million. The Company is likely to require additional capital to fund any
further acquisitions, $6.0 million of which is available under the current
acquisition line through August 31, 1999, and $9.0 million which will be
available thereafter.
Recent amendments to the Medicare statutes 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 $206.71, which will lower Medicare
reimbursement levels to many hospitals for partial hospitalization services.
This change will 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.
Revenues from partial hospitalization services were $15.6 million, or
21.4% of total contract management revenues for the nine months ended May 31,
1999. Of the Company's 164 management contracts at May 31, 1999, 115 contracts
or 70.1% of the contracts include partial hospitalization services. The
termination of all partial hospitalization contracts, while unlikely and not
expected, would reduce operating income by $4.0 million or more annually.
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.
Effective April 1, 1999, the Company acquired all the outstanding
capital stock of REACH for approximately $2.0 million. The acquisition was
funded by incurring debt of $2.0 million under the term loan facility.
22
<PAGE> 23
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 May
31, 1999, it had completed approximately 75% 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
25% of the initiatives are in process and are expected to be completed by
December 31, 1999.
<TABLE>
<CAPTION>
YEAR 2000 INITIATIVE TIME PERIOD PERCENT COMPLETE
<S> <C> <C>
Initial IT systems identification and assessment April 1998 to July 1999 99%
Remediation and testing of IT systems July 1998 to September 1999 75%
Identification and assessment of non-IT systems September 1998 to August 1999 65%
Remediation and testing of non-IT systems April 1999 to December 1999 5%
</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 September 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
September 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 May 31, 1999, the Company had
incurred costs of approximately $75,000 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.
23
<PAGE> 24
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 August 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 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.
24
<PAGE> 25
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 May 31, 1999, the Company had approximately $21.5 million of debt
obligations outstanding with variable interest rates with a weighted average
interest rate of 6.047%. A hypothetical 10% change in the effective interest
rate for these borrowings, assuming debt levels as of May 31, 1999, would
change interest expense by approximately $130,000 annually. This would be
funded out of cash flows from operations, which were $5.6 million for the nine
months ended May 31, 1999.
25
<PAGE> 26
PART II - OTHER INFORMATION
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 Nine Months Ended May 31, 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.
26
<PAGE> 27
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 8, 1999
HORIZON HEALTH CORPORATION
BY: /S/ JAMES W. MCATEE
----------------------------------------
JAMES W. MCATEE
PRESIDENT, CHIEF EXECUTIVE OFFICER, AND
PRINCIPAL FINANCIAL OFFICER
27
<PAGE> 28
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 Nine Months Ended May 31, 1999 (filed
herewith).
</TABLE>
<PAGE> 1
EXHIBIT 11.1
HORIZON HEALTH CORPORATION
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------- -------------
ENDED MAY 31, ENDED MAY 31,
------------- -------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
Net income $2,726,335 $1,710,414 $7,806,216 $5,115,811
Weighted average shares outstanding (basic) 7,199,047 6,810,529 7,083,133 6,914,448
---------- ---------- ---------- ----------
Basic earnings per share $ .38 $ .25 $ 1.10 $ .74
========== ========== ========== ==========
DILUTED
Net income $2,726,335 $1,710,414 $7,806,216 $5,115,811
Weighted average shares outstanding (basic) 7,199,047 6,810,529 7,083,133 6,914,448
Effect of dilutive securities 598,353(1) 310,328(1) 683,804(1) 335,377(1)
---------- ---------- ---------- ----------
Weighted average shares outstanding (diluted) 7,797,400 7,120,857 7,766,937 7,249,825
---------- ---------- ---------- ----------
Diluted earnings per share $ .35 $ .24 $ 1.01 $ .71
========== ========== ========== ==========
</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 $7.4167 to $23.75. The
computation of the quarter ended May 31, 1998, excluded 182,500
options with option prices ranging from $23.75 to $26.00. The
computation of the quarter ended May 31, 1999, excluded 138,816
options with option prices ranging from $7.4617 to $23.75. The nine
month calculations incorporate the above referenced exclusions within
the applicable periods.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the nine
months ended May 31, 1999 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,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 1,307,464
<SECURITIES> 0
<RECEIVABLES> 18,907,112
<ALLOWANCES> 3,171,046
<INVENTORY> 0
<CURRENT-ASSETS> 21,298,842
<PP&E> 6,942,142
<DEPRECIATION> 3,860,960
<TOTAL-ASSETS> 86,365,169
<CURRENT-LIABILITIES> 22,111,757
<BONDS> 0
0
0
<COMMON> 72,678
<OTHER-SE> 44,748,738
<TOTAL-LIABILITY-AND-EQUITY> 86,365,169
<SALES> 0
<TOTAL-REVENUES> 108,893,892
<CGS> 0
<TOTAL-COSTS> 99,281,218
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 215,157
<INTEREST-EXPENSE> 1,114,668
<INCOME-PRETAX> 8,483,155
<INCOME-TAX> 3,367,344
<INCOME-CONTINUING> 5,115,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,115,811
<EPS-BASIC> .74
<EPS-DILUTED> .71
</TABLE>
