<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 29, 2000
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 31, 2000, was 6,286,228.
<PAGE> 2
INDEX
HORIZON HEALTH CORPORATION
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS........................................................................3
HORIZON HEALTH CORPORATION
Consolidated Balance Sheets as of February 29, 2000 (unaudited)
and August 31, 1999............................................................................ 3
Consolidated Statements of Operations for the three months ended
February 29, 2000 and February 28, 1999 (each unaudited)....................................... 5
Consolidated Statements of Operations for the six months ended
February 29, 2000 and February 28, 1999 (each unaudited)........................................6
Consolidated Statements of Cash Flows for the six months ended
February 29, 2000 and February 28, 1999 (each unaudited)....................................... 7
Notes to Consolidated Financial Statements (unaudited)......................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................................21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29, 2000 AUGUST 31, 1999
-------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 3,488,486 $ 5,438,510
Accounts receivable less allowance for uncollectible
accounts of $3,166,616 at February 29, 2000 and
$2,980,849 at August 31, 1999 13,551,958 12,885,399
Prepaid expenses and supplies 714,224 842,701
Other receivables 198,012 200,394
Other current assets 377,148 459,256
Income taxes receivable 323,259 363,920
Current deferred taxes 2,461,464 2,485,296
-------------------- ---------------------
TOTAL CURRENT ASSETS 21,114,551 22,675,476
-------------------- ---------------------
PROPERTY AND EQUIPMENT:
Equipment 6,067,975 7,028,809
Building improvements 454,902 454,902
-------------------- ---------------------
6,522,877 7,483,711
Less accumulated depreciation 3,625,478 4,192,437
-------------------- ---------------------
2,897,399 3,291,274
Goodwill, net of accumulated amortization of $5,107,647
at February 29, 2000, and $4,389,113 at August 31, 1999 52,290,959 53,036,992
Contracts, net of accumulated amortization of $6,588,020
at February 29, 2000, and $5,749,991 at August 31, 1999 6,189,747 7,027,775
Other assets 431,891 504,228
-------------------- ---------------------
$ 82,924,547 $ 86,535,745
==================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29, 2000 AUGUST 31, 1999
-------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,253,722 $ 1,254,577
Employee compensation and benefits 6,803,241 6,929,722
Medical claims payable 4,135,484 4,558,823
Accrued expenses 6,269,920 5,977,704
Note payable 11,037 35,706
Current portion of long term debt 3,520,000 3,338,000
-------------------- ----------------------
TOTAL CURRENT LIABILITIES 21,993,404 22,094,532
Other noncurrent liabilities 351,021 355,191
Long-term debt, net of current portion (Note 4) 13,180,000 16,662,000
Deferred income taxes 1,491,619 1,618,169
-------------------- ----------------------
TOTAL LIABILITIES 37,016,044 40,729,892
-------------------- ----------------------
Commitments and contingencies (Note 5) -- --
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; 7,267,750 shares issued and 6,286,228 shares
outstanding at February 29, 2000 and 7,267,750 shares
issued and 6,664,428 shares outstanding at August 31, 1999 72,678 72,678
Additional paid-in capital 18,225,364 18,641,228
Retained earnings 35,029,534 31,506,116
Treasury stock, at cost (981,522 shares at February 29,
2000 and 603,322 shares at August 31, 1999) (Note 6) (7,419,073) (4,414,169)
-------------------- ----------------------
45,908,503 45,805,853
-------------------- ----------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 82,924,547 $ 86,535,745
==================== ======================
</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
---------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
Revenues:
Contract management $ 23,238,220 $ 24,442,823
Premiums and fees 10,068,894 11,985,605
Other 257,779 216,216
----------------- ----------------
Total revenues 33,564,893 36,644,644
Expenses:
Salaries and benefits 18,465,535 19,260,179
Medical claims 3,745,095 5,300,966
Purchased services 3,174,309 3,482,256
Provision for bad debts 99,814 348,309
Depreciation and amortization 1,188,958 1,095,803
Other 3,730,823 4,152,245
----------------- ----------------
Total operating expenses 30,404,534 33,639,758
----------------- ----------------
Operating income 3,160,359 3,004,886
Other income (expense):
Interest expense (316,230) (364,231)
Interest and other income 78,946 82,979
Loss on disposal of fixed assets (938) --
----------------- ----------------
Income before income taxes 2,922,137 2,723,634
Income tax expense 1,183,852 1,084,664
----------------- ----------------
Net Income $ 1,738,285 $ 1,638,970
================= ================
Earnings per common share:
Basic $ .28 $ .24
================= ================
Diluted $ .27 $ .23
================= ================
Weighted average shares outstanding:
Basic 6,257,547 6,779,213
================= ================
Diluted 6,546,405 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
----------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Revenues:
Contract management $ 46,499,598 $ 48,522,695
Premiums and fees 21,779,900 23,577,790
Other 571,373 392,720
----------------- -----------------
Total revenues 68,850,871 72,493,205
Expenses:
Salaries and benefits 36,377,185 37,606,869
Medical claims 8,151,760 11,283,596
Purchased services 6,420,725 6,989,998
Provision for (recovery of) bad debts 874,798 (344,573)
Depreciation and amortization 2,382,422 2,185,745
Other 8,189,183 8,501,887
----------------- -----------------
Total operating expenses 62,396,073 66,223,522
----------------- -----------------
Operating income 6,454,798 6,269,683
Other income (expense):
Interest expense (644,085) (772,875)
Interest and other income 186,848 144,499
Gain (loss) on disposal of fixed assets (100,201) 800
----------------- -----------------
Income before income taxes 5,897,360 5,642,107
Income tax expense 2,373,942 2,236,710
----------------- -----------------
Net income $ 3,523,418 $ 3,405,397
================= =================
Earnings per common share:
Basic $ .55 $ .49
================= =================
Diluted $ .53 $ .47
================= =================
Weighted average shares outstanding:
Basic 6,432,641 6,966,408
================= =================
Diluted 6,711,132 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
---------------------------
2000 1999
------------ -----------
<S> <C> <C>
Operating Activities:
Net income $ 3,523,418 $ 3,405,397
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,382,421 2,185,745
Deferred income taxes (126,550) 76,403
(Gain) loss on disposal of fixed assets 100,201 (800)
Changes in assets and liabilities:
(Increase) in accounts receivable (666,559) (2,898,194)
Decrease (increase) in other receivables 29,882 (34,525)
Decrease in income taxes receivables 40,661 261,614
Decrease (increase) in prepaid expenses and supplies 128,477 (459,421)
Decrease (increase) in other assets 178,277 (378,542)
(Decrease) increase in accounts payable, employee compensation
and benefits, medical claims payable, and accrued expenses (220,955) 969,323
(Decrease) increase in other liabilities (4,170) 22,918
------------ ------------
Net cash provided by operating activities 5,365,103 3,149,918
------------ ------------
Investing activities:
Purchase of property and fixed assets (532,836) (302,728)
Proceeds from sale of fixed assets 650 800
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 (532,186) (877,427)
------------ ------------
Financing Activities:
Payments on long term debt (3,324,669) (15,495,639)
Proceeds from long term borrowings -- 12,500,000
Net proceeds from issuance of common stock -- 102,253
Tax benefit related to stock options exercise 114,866 468,309
Cash used in purchase of treasury stock (3,363,138) (4,255,175)
Cash used in stock option exercise (210,000) --
------------ ------------
Net cash used in financing activities (6,782,941) (6,680,252)
------------ ------------
Net decrease in cash and short term investments (1,950,024) (4,407,761)
Cash and short-term investments at beginning period 5,438,510 6,204,297
------------ ------------
Cash and short-term investments at end of period $ 3,488,486 $ 1,796,536
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 646,603 $ 456,530
============ ============
Income taxes $ 2,314,997 $ 1,749,949
============ ============
Supplemental disclosure on 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
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
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 businesses and
managed care organizations as well as a contract manager of clinical and
related services, primarily of mental health and physical rehabilitation
programs, offered by general acute care hospitals in the United States.
The management contracts are generally for initial 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;
Orlando, Florida; and Philadelphia, Pennsylvania metropolitan areas. The
Company's National Support Center is in Lewisville, Texas.
Information regarding the Company's recent acquisitions are included in
Note 3 hereof.
BASIS OF PRESENTATION:
The accompanying consolidated balance sheet at February 29, 2000, the
consolidated statements of operations for the three and six months ended
February 2000 and 1999, and the consolidated statements of cash flows for
the six months ended February 2000 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, 1999. 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 29, 2000, and the
results of operations for the three and six months ended February 2000
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
portions thereof.
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 potential dilutive 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.
<TABLE>
<CAPTION>
2000 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
February,
Basic EPS................ $ 1,738,285 6,257,547 $ .28 $ 1,638,970 6,779,213 $ .24
----------- ----------
Effect of Dilutive
Securities
Options............. 288,858 336,132
--------- -----------
Diluted EPS.............. $ 1,738,285 6,546,405 $ .27 $1,638,970 7,115,345 $ .23
----------- --------- ----------- ----------- ----------- ----------
For the six months ended
February,
Basic EPS................ $ 3,523,418 6,432,641 $ .55 $ 3,405,397 6,966,408 $ .49
----------- ----------
Effect of Dilutive
Securities
Options............. 278,491 347,902
----------- ----------
Diluted EPS......... $ 3,523,418 6,711,132 $ .53 $ 3,405,397 7,314,310 $ .47
----------- ----------- ----------- ----------- ----------- ----------
</TABLE>
8
<PAGE> 9
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During fiscal year 2000 and 1999, certain shares subject to 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 for the quarter. The computation for the
quarter ended February 28, 1999 excluded 707,036 shares subject to
options, with exercise prices ranging from $6.91 to $23.75. The
computation for the quarter ended February 29, 2000 excluded 176,700
shares subject to options, with exercise prices ranging from $7.42 to
$23.75. The computation for the six months ended February 28, 1999
excluded an average of 435,213 shares subject to options, with exercise
prices ranging from $6.91 to $23.75. The computation for the six months
ended February 29, 2000 excluded an average of 474,805 shares subject to
options, with exercise prices ranging from $6.91 to $23.75.
3. ACQUISITIONS
REACH
Effective April 1, 1999, the Company acquired all of the outstanding
capital stock of Resources in Employee Assistance and Corporate Health,
Inc. ("REACH") of Murray Hill, New Jersey, and REACH has been
consolidated with the Company as of April 1, 1999. The Company accounted
for the acquisition of REACH by the purchase method. REACH provides
employee assistance programs and other related behavioral health care
services to self-insured employers. REACH had total revenues of
approximately $1.4 million (unaudited) 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. As of February 29, 2000, the preliminary allocation of
the purchase price exceeded the fair value of REACH's tangible net assets
by $2,326,846, of which $2,054,791 is recorded as goodwill and $272,055
as service contracts. Tangible assets acquired and liabilities assumed
totaled $150,496 and $477,342, respectively.
CHOICEHEALTH, INC.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. ("ChoiceHealth") of Westminster,
Colorado, and ChoiceHealth has been consolidated with the Company as of
October 5, 1998. The Company accounted for the acquisition of
ChoiceHealth by the purchase method. 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 total revenues
of approximately $7.6 million (unaudited) 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. The allocation of the purchase price exceeded the
fair value of ChoiceHealth's tangible net assets by $3,086,936, of which
$2,907,927 is recorded as goodwill and $179,009 as service contracts.
Tangible assets acquired and liabilities assumed totaled $809,848 and
$1,877,069, respectively.
4. LONG-TERM DEBT
At February 29, 2000 and August 31, 1999, the Company had the following
long-term debt:
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Term Loan Facility $ 16,700,000 $ 20,000,000
Revolving Credit Facility -- --
---------------- ---------------
16,700,000 20,000,000
Less current maturities 3,520,000 3,338,000
---------------- ---------------
$ 13,180,000 $ 16,662,000
================ ===============
</TABLE>
9
<PAGE> 10
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 "Credit Facility"). The 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.
As of February 29, 2000, the Company had borrowings of $16.7 million
outstanding against the term loan facility against which it can no longer
draw, and $10.0 million available under the revolving credit facility.
The 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. At February 29, 2000, the interest rate on outstanding
indebtedness under the credit facility was 6.88%. 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. The
advance term loan facility requires quarterly payments of principal of
$880,000 beginning February 29, 2000 and continuing through maturity on
November 30, 2002.
5. 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, 2000 $ 893,317
For the year ending August 31, 2001 1,460,756
For the year ending August 31, 2002 927,517
For the year ending August 31, 2003 627,199
For the years ending August 31, 2004 and thereafter 377,798
------------------
$ 4,286,587
==================
</TABLE>
Rent expense for the six months ended February 2000 and 1999 totaled
$1,236,967 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's
current intention is to extend the 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,
net of any applicable insurance, would not be significantly in excess of
any reserves or have a material adverse effect on the Company's financial
position or results of operations.
10
<PAGE> 11
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. STOCK REPURCHASES
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 and on
November 19, 1999 authorized the repurchase of an additional 200,000
shares of its common stock. The stock repurchase plan authorized the
Company to make purchases of its outstanding common stock from time to
time in the open market or through privately negotiated transactions,
depending on market conditions and applicable securities regulations. The
repurchased shares were added to the treasury shares of the Company and
may be used for employee stock plans and for other corporate purposes.
The shares were repurchased utilizing available cash and borrowings under
the Company's credit facility. The Company had repurchased 1,189,300
shares of its common stock as of February 29, 2000, of which 207,778
shares have been reissued pursuant to the exercise of certain stock
options as of February 29, 2000. The Company completed the stock
repurchase plan in November 1999. In accordance with certain provisions
of its current term loan facility agreement, no further purchases can be
made.
11
<PAGE> 12
7. SEGMENT INFORMATION
The following schedule represents revenues and operating results for the
three months and six months ended February 29, 2000 and February 28, 1999
by operating subsidiary:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health Intercompany
Services Management Management Outcomes Other Eliminations Consolidated
------------ ------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED:
FEBRUARY 29, 2000
Revenues $ 10,093,738 $ 20,395,368 $ 2,779,686 $ 232,883 $ 63,218 $ -- $ 33,564,893
Inter Company Revenues 17,889 -- -- 365,586 -- (383,475) --
Earnings before
interest, taxes,
depreciation and
Amortization (EBITDA) 955,657 5,502,413 287,443 (53,769) (2,342,427) -- 4,349,317
Total Assets 43,109,711 61,469,336 5,514,827 327,035 26,403,041 (53,899,403) 82,924,547
FEBRUARY 28, 1999
Revenues $ 11,888,595 $ 22,013,460 $ 2,529,408 $ 144,175 $ 69,006 $ -- $ 36,644,644
Inter Company Revenue 6,835 -- -- 429,504 -- (436,339) --
Earnings before
interest, Taxes,
depreciation, and
Amortization (EBITDA) 777,896 5,155,573 178,363 58,547 (2,069,690) -- 4,100,689
Total Assets 45,765,682 54,889,847 4,286,708 498,190 40,868,811 (60,100,173) 86,209,065
</TABLE>
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health Intercompany
Services Management Management Outcomes Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED:
FEBRUARY 29, 2000
Revenues $ 21,823,266 $ 40,731,018 $ 5,657,167 $ 528,330 $ 111,090 $ -- $ 68,850,871
Inter Company Revenues 36,294 -- -- 748,162 -- (784,456) --
Earnings before
interest, taxes,
depreciation and
amortization (EBITDA) 2,487,261 10,596,201 607,610 (23,435) (4,830,417) -- 8,837,220
Total Assets 43,109,711 61,469,336 5,514,827 327,035 26,403,041 (53,899,403) 82,924,547
FEBRUARY 28, 1999
Revenues $ 23,405,640 $ 43,947,433 $ 4,808,010 $ 236,161 $ 95,961 $ -- $ 72,493,205
Inter Company Revenue 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
Total Assets 45,765,682 54,889,847 4,286,708 498,190 40,868,811 (60,100,173) 86,209,065
</TABLE>
(A) Horizon Behavioral Services provides managed behavioral care and employee
assistance programs.
(B) Horizon Mental Health Management provides mental
health contract management services to general acute care hospitals.
(C) Specialty Rehab Management provides physical rehabilitation contract
management services to general acute care hospitals.
(D) Mental Health Outcomes provides outcome measurement information regarding
the effectiveness of mental health treatment programs and data base
services.
(E) "Other" represents the Company's corporate offices and National Support
Center located in Lewisville, Texas which provides management, financial,
human resource, and information system support for the Company and its
subsidiaries.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a provider of employee assistance plans ("EAP") and
behavioral health services to businesses and managed care organizations, as well
as a leading contract manager of psychiatric and physical rehabilitation
clinical programs offered by general acute care hospitals in the United States.
The Company has grown both internally and through acquisitions, increasing both
the variety of its treatment programs and services and the number of its
management contracts. Over the last seven years, the Company has increased its
management contracts from 43 to a total of 152 as of February 29, 2000 and
currently has contract locations in 34 states. Of its management contracts, 126
relate to mental health treatment programs and 26 relate to physical
rehabilitation programs. The Company has also developed a proprietary mental
health outcomes measurement system known as CQI+. At February 29, 2000, the
Company provided outcome measurement services as well as data services under 114
contracts.
Through its subsidiary Horizon Behavioral Services, Inc., at February
29, 2000, the Company had 268 contracts to provide EAP and managed behavioral
health services covering over 2.0 million lives. The Company offers an array of
managed care products to corporate clients, self-funded employer groups,
commercial HMO and PPO plans, government agencies, and third party payors.
Revenues are derived from EAP services, administrative only services, and at
risk managed behavioral health services.
During the quarter the Company continued experiencing the effects of
the termination of four significant managed care contracts, one of which
occurred in the quarter ended November 30, 1999 and the other three terminated
during the quarter ending February 29, 2000. Three of the four terminations, the
"applicable contracts", impacted the results of the three months ended February
29, 2000, and as the fourth termination occurred on February 29, 2000, it did
not impact the results for the quarter. The four contracts provided annual
revenues of approximately $11 million, or about 8% of the company's total annual
revenues. One of the four contract terminations resulted from a client
insolvency which resulted in a $288,000 charge to bad debt during the three
months ended November 30, 1999. Additionally, during the quarter ended February
29, 2000, the Company was notified that two additional managed care contracts
will be terminating during the remainder of the fiscal year. These two contracts
provide annual revenues of approximately $4 million, or about 3% of the
Company's total annual revenues. The Company has initiated a number of expense
reduction measures to lessen the financial impact of these terminations. Because
of the timing of the actual termination dates, the full financial impact of the
terminations will not be realized until the first quarter of the next fiscal
year.
The fees received by the Company for its services under management
contracts are paid directly by its client hospitals. 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 as part of the Balanced
Budget Act, established maximum reimbursement amounts on a per case basis for
both inpatient mental health and physical rehabilitation services. The
reimbursement amounts were raised to $11,100 and $20,129, from $10,787 and
$19,562 respectively, for Medicare fiscal years beginning October 1, 1999 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
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.
Recent amendments to the Medicare statutes also provide for the
elimination of cost based reimbursement of partial hospitalization services
effective upon approximately 90 days notice from Medicare. Thereafter,
reimbursement for partial hospitalization services based on the Medicare
outpatient prospective payment system ("PPS") will utilize a fixed reimbursement
amount per patient day. The currently proposed reimbursement rate per patient
day, which is currently scheduled for a July 1, 2000 implementation, is a
wage-adjusted rate of $206.71, which will lower Medicare
13
<PAGE> 14
reimbursement levels to many hospitals for partial hospitalization services and
therefore cause lower fees to be paid to the Company under contracts for partial
hospitalization services. In an effort to lessen the potentially significant
decrease in reimbursement amounts to hospitals, additional legislation has been
passed that may allow, in certain cases, for supplemental reimbursement to the
per patient day amount of $206.71. The additional reimbursement will be on a
tiered system and is structured to be phased out over three years.
Revenues from partial hospitalization services were $4.0 million, or
17.2% of total contract management revenues for the quarter ended February 29,
2000. Of the 152 management contracts at February 29, 2000, 96 contracts or
63.1% of the contracts include partial hospitalization services. Of the 96
partial contracts, 81 program locations were in operation and had a partial
hospitalization program in operation, 10 program locations were in operation,
but the partial hospitalization programs were not yet in operation, and 5
program locations were not yet in operation for any of the programs. The
termination of all partial hospitalization contracts, while unlikely and not
expected, would reduce operating income by $4.3 million or more annually.
A recently enacted amendment to the Medicare statutes provides for a
gradual phase-out of cost-based reimbursement of physical rehabilitation
services over a three-year period and is currently scheduled to begin October 1,
2000. The resulting phase-in of reimbursement for physical rehabilitation
services based on PPS could significantly lower Medicare reimbursements to
hospitals and thus could have a material adverse effect on the business,
operations and financial results of the Company.
A number of the Company's client hospitals and managed care customers
are experiencing cash flow problems, increasing the Company's exposure to bad
debts. The Company is being more vigorous in its collection efforts. As a
result, pursuant to the Company's general policy of reserving for accounts
receivable balances greater than 90 days outstanding, bad debt expense in the
quarter is $100,000 and for the fiscal year to date bad debt expense is
$875,000. The ending reserve for bad debt is $3.1 million or 19% of accounts
receivable.
Information regarding the Company's recent acquisitions are included
in Note 3 of the Notes to Consolidated Financial Statements (unaudited).
14
<PAGE> 15
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
FEBRUARY 29, NOVEMBER 30, AUGUST 31, AUGUST 31, AUGUST 31,
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
EAP AND MENTAL HEALTH SERVICES
Covered Lives 2,057,243 2,357,564 2,472,791 1,894,015 288,519
CONTRACT MANAGEMENT
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 140 141 147 161 181
Contract locations signed and unopened 12 10 6 11 14
------------ ------------ ------------ ------------ ------------
Total contract locations 152 151 153 172 195
============ ============ ============ ============ ============
SERVICES COVERED BY CONTRACTS IN OPERATION:
Inpatient 129 128 133 149 166
Partial Hospitalization 81 81 86 102 104
Outpatient 26 26 27 32 24
Home health 8 8 7 10 17
CQI + and data systems (under contract) 114 110 106 82 86
TYPES OF TREATMENT PROGRAMS IN OPERATION:
Geropsychiatric 164 158 165 189 197
Adult psychiatric 45 50 54 67 75
Substance abuse 3 4 4 8 10
Physical Rehabilitation 25 25 25 20 20
Other 7 6 5 9 9
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth for the three and six months ended February 2000
and 1999, the percentage relationship to total revenues of certain costs,
expenses and income.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED FEBRUARY ENDED FEBRUARY
------------------------- --------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 69.2 % 66.7 % 67.6 % 66.9 %
Premiums and fees 30.0 32.7 31.6 32.5
Other .8 .6 .8 .6
---------- ----------- ----------- -----------
Total revenues 100.0 100.0 100.0 100.0
Operating revenues
Salaries and benefits 55.0 52.5 52.8 51.9
Medical claims 11.2 14.5 11.8 15.6
Purchased services 9.5 9.5 9.3 9.6
Provision for (recovery of) bad debts .3 1.0 1.3 (.5)
Depreciation and amortization 3.5 3.0 3.5 3.0
Other 11.1 11.3 11.9 11.8
---------- ----------- ----------- -----------
Total operating expenses 90.6 91.8 90.6 91.4
---------- ----------- ----------- -----------
Operating income 9.4 8.2 9.4 8.6
---------- ----------- ----------- -----------
Interest and other income(expenses), net (.7) (.8) (.8) (.9)
---------- ----------- ----------- -----------
Income before taxes 8.7 7.4 8.6 7.7
Income tax expense 3.5 3.0 3.5 3.0
---------- ----------- ----------- -----------
Net income 5.2 % 4.4 % 5.1 % 4.7 %
========== =========== =========== ===========
</TABLE>
15
<PAGE> 16
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 28, 1999
Revenue. Revenues for the three months ended February 29, 2000 were
$33.6 million representing a decrease of $3.0 million or 8.2%, as compared to
revenues of $36.6 million for the corresponding period in the prior fiscal year.
Contract management revenue decreased $1.2 million, or 4.9%, due to a decline in
the average number of contract locations in operation from 157.2 for the three
months ended February 28, 1999, to 140.5 for the three months ended February 29,
2000. The decrease of $1.2 million was partially offset by an increase in same
store sales, that is management contracts in operation for both the entire
quarters ended February 28, 1999 and February 29, 2000, of $213,000. Premiums
and fees decreased $1.9 million primarily as a result of the termination of the
three applicable managed care contracts, as previously discussed, whose revenues
in the three months ended February 29, 2000 were $400,000 versus $2.3 million
for the same period in the previous fiscal year.
Salaries and Benefits. Salaries and benefits for the three months ended
February 29, 2000 were $18.5 million representing a decrease of $800,000, or
4.1%, as compared to salaries and benefits of $19.3 million for the three months
ended February 28, 1999. Average full time equivalents for the three months
ended February 29, 2000 were 1,222 representing a decrease of 76, as compared to
average full time equivalents of 1,298 for the three months ended February 28,
1999, resulting from initiatives taken by the Company in response to the
reduction in revenues. Salary and benefit cost per full time equivalent for the
three months ended February 29, 2000, were $15,111 representing an increase of
$275 per full time equivalent, or 1.9% as compared to salary and benefits costs
of $14,836 per full time equivalent for the three months ended February 28,
1999.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended February 29, 2000 were $1.2 million representing an
increase of $100,000, or 9.1%, as compared to depreciation and amortization
expenses of $1.1 million for the corresponding period in the prior fiscal year.
An increase of $23,000 is due to the amortization of goodwill and contract
valuations resulting from the acquisition of REACH. The remaining increase
results from the depreciation expense of additional equipment acquired by
acquisition or purchased by the Company.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for the three months
ended February 29, 2000 were $10.8 million representing a decrease of $2.5
million or 18.8%, as compared to other operating expenses of $13.3 million for
the corresponding period in the prior fiscal year. The following components
identify the primary variances between the periods reported.
Medical claims expense for the three months ended February 29, 2000 was
$3.7 million representing a decrease of $1.6 million or 30.2%, as compared to
medical claims expense of $5.3 million for the corresponding period in the prior
fiscal year. This is primarily the result of the termination of the three
applicable managed care contracts as discussed above, as well as improved
utilization management and review of patients seeking authorization for
treatment. The improved utilization management resulted in a decrease in
inpatient cost, attained primarily by directing patient care toward lower cost
inpatient facilities and the use of outpatient treatment options. Inpatient days
per year per one thousand members decreased from an average of 18.6 for the
three months ended February 28, 1999 to 17.2 for the three months ended February
29, 2000.
Purchased services for the three months ended February 29, 2000 were
$3.2 million representing a decrease of $300,000 or 8.6%, as compared to
purchased services of $3.5 million for the corresponding period in the prior
fiscal year. Medical director stipends decreased $182,000 for the three months
ended February 29, 2000 as compared to the corresponding period in the prior
fiscal year. This decrease is a result of the decrease in the average number of
contract locations in operation as discussed above. In addition, fees paid to
temporary physicians decreased due to the recruitment of permanent physicians at
certain contract locations.
Bad debt expense was $100,000 for the three months ended February 29,
2000, as compared to $348,000 for the three months ended February 28, 1999, a
decrease of $248,000. This decrease is primarily due to more timely collections
in the Managed Care and EAP divisions.
Other operating expense was $3.7 million for the three months ended
February 29, 2000, a decrease of $421,000, or 10.0%, as compared to $4.2 million
for the three months ended February 28, 1999. This decrease is a result of
certain Company initiated expense reduction measures which significantly
decreased travel and entertainment expenses and other expense categories, e.g.
express mail cost. In addition, legal settlement expense decreased between the
periods.
16
<PAGE> 17
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the three months ended February 29, 2000 was a net
expense of $238,000, as compared to $281,000 for the corresponding period in the
prior fiscal year. This change results from a decrease in interest expense of
approximately $43,000 related to a reduction in the average outstanding credit
facility balances between the periods, partially reduced by the effect of higher
interest rates.
Income Tax Expense. For the three-month period ended February 29, 2000,
the Company recorded federal and state income taxes of $1.2 million resulting in
a combined tax rate of 40.5%. 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%.
SIX MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE SIX MONTHS ENDED
FEBRUARY 28, 1999
Revenue. Revenues for the six months ended February 29, 2000 were $68.9
million representing a decrease of $3.6 million or 5.0%, as compared to revenues
of $72.5 million for the corresponding period in the prior fiscal year. Contract
management revenue decreased $2.0 million due to a decline in the average number
of contract locations in operation from 156.9 for the six months ended February
28, 1999, to 141.7 for the six months ended February 29, 2000. The decrease of
$2.0 million was partially offset by an increase in same store sales, that is
management contracts in operation for both the entire periods ended February 28,
1999 and February 29, 2000, of $227,000. Premiums and fees decreased $1.8
million primarily as a result of the termination of the three applicable managed
care contracts, as previously discussed, whose revenues for the six months ended
February 29, 2000 were $2.5 million versus $4.2 million for the same period in
the previous fiscal year.
Salaries and Benefits. Salaries and benefits for the six months ended
February 29, 2000 were $36.4 million representing a decrease of $1.2 million, or
3.2%, as compared to salaries and benefits of $37.6 million for the six months
ended February 28, 1999. Average full time equivalents for the six months ended
February 29, 2000 were 1,224 representing a decrease of 53, as compared to
average full time equivalents of 1,277 for the six months ended February 28,
1999. Salary and benefit cost per full time equivalent for the six months ended
February 29, 2000, were $29,722 representing an increase of $270 per full time
equivalent, or 1.0% as compared to salary and benefits costs of $29,452 per full
time equivalent for the six months ended February 28, 1999.
Depreciation and Amortization. Depreciation and amortization expenses
for the six months ended February 29, 2000 were $2.4 million representing an
increase of $200,000, or 9.1%, as compared to depreciation and amortization
expenses of $2.2 million for the corresponding periods in the prior fiscal year.
An increase of $45,000 is due to the amortization of goodwill and contract
valuations resulting from the acquisition of REACH. The remaining increase
results from the depreciation expense of additional equipment acquired by
acquisition or purchased by the Company.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for the six months ended
February 29, 2000 were $23.6 million representing a decrease of $2.8 million, or
10.6%, as compared to other operating expenses of $26.4 million for the
corresponding period in the prior fiscal year. The following components identify
the variances between the periods reported.
Medical claims expense for the six months ended February 29, 2000 was
$8.2 million representing a decrease of $3.1 million or 27.4%, as compared to
medical claims expense of $11.3 million for the corresponding period in the
prior fiscal year. This is primarily the result of the termination of the three
applicable managed care contracts as discussed above, as well as improved
utilization management and review of patients seeking authorization for
treatment. The improved utilization management resulted in a decrease in
inpatient cost, attained primarily by directing patient care toward lower cost
inpatient facilities and the use of outpatient treatment options. Inpatient days
per year per one thousand members decreased from an average of 21.0 for the six
months ended February 28, 1999 to 17.0 for the six months ended February 29,
2000.
Purchased services for the six months ended February 29, 2000 were $6.4
million representing a decrease of $600,000 or 8.6%, as compared to purchased
services of $7.0 million for the corresponding period in the prior fiscal year.
Medical director stipends decreased $514,000 for the six months ended February
29, 2000 as compared to the corresponding period in the prior fiscal year. This
decrease is a result of the decrease in the average number of contract
17
<PAGE> 18
locations in operation, from 156.9 for the six months ended February 28, 1999 to
141.7 for the six months ended February 29, 2000.
Bad debt expense for the six months ended February 29, 2000 was
$875,000 representing an increase of $1.2 million as compared to a net recovery
of bad debt expense of $345,000 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. Excluding the $1,750,000 recovery, bad debt
expense decreased $331,000 due to the collection of past due amounts from five
contract management locations that terminated prior to the current fiscal
quarter. The remainder of the decrease is due to more timely collections in the
Managed Care and EAP divisions.
Other operating expense was $8.2 million for the six months ended
February 29, 2000, a decrease of $313,000, or 3.7%, as compared to $8.5 million
for the six months ended February 28, 1999. This decrease is a result of certain
Company initiated expense reduction measures which decreased various expenses,
such as promotional costs, telephone expense, recruiting expense and express
mail cost. In addition, legal settlement expense decreased between the periods.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the six months ended February 29, 2000 was a net
expense of $557,000, as compared to $628,000 for the corresponding period in the
prior fiscal year. Interest income increased $90,000 due to a higher balance of
average cash on hand during the period, and decreased $42,000 due to the receipt
of interest in February 1999 related to the post closing purchase price
adjustment for FPM Behavioral Health, Inc. Interest expense decreased $121,000
related to a reduction in the average outstanding credit facility balances
between the periods partially offset by higher interest rates. Other expense
increased $99,000 due to a loss on disposal of assets related to the write-off
of obsolete computer equipment and software.
Income Tax Expense. For the six month period ended February 29, 2000,
the Company recorded federal and state income taxes of $2.4 million resulting in
a combined tax rate of $40.3%. 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%.
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 Agreement consisted 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 "Term Loan Facility"). At February 29, 2000, the Term Loan Facility
had $16.7 million outstanding, against which it can no longer draw, and $10.0
million was available under the revolving credit 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 Agreement which is
unconditionally guaranteed by all material domestic subsidiaries of the Company.
The Revolving Credit Facility terminates November 30, 2000 and the Term Loan
Facility has a term of five years, with availability no longer existent as of
November 30, 1999. Amounts outstanding under the Term Loan Facility on November
30, 1999 are to be repaid in twelve quarterly principal payments, which began
February 29, 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. Based on
the November 30, 1999 term loan balance of $17.6 million, each quarterly
repayment will be $880,000. Principal outstanding under the Credit Agreement
bears interest at either 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).
18
<PAGE> 19
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), (iii) certain mergers, consolidations or
asset dispositions by the Company or changes of control of the Company, (iv)
declaring, ordering or paying any sum for any dividend or other distribution,
(v) certain management vacancies at the Company, and (vi) material change in the
nature of business conducted. In addition, the terms of the 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 certain
prepayments 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 loan 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 upon the February 29, 2000 term loan balance of $16.7
million and the projected repayments of approximately $880,000 per quarter, the
term loan balance will not exceed $15 million as of the date ninety days after
the end of the Company's current fiscal year.
As of September 30, 1998, the Credit Facility was amended to allow the
Company to utilize advances, under the Term Loan Facility, to repurchase its
capital stock through November 30, 1999. As of November 30, 1999, the Company
had repurchased 1,189,300 shares of its common stock, of which 162,778 and
207,778 shares had been reissued pursuant to the exercise of certain stock
options as of November 30, 1999 and February 29, 2000 respectively. Through
November 30, 1999, advances of $4.0 under the term loan had been used for stock
repurchases.
Effective September 1996, the Company entered into a lease agreement
with a term of five years for a building, which had been constructed, to the
Company's specifications for its National Support Center. In connection with the
lease transaction, the Company guaranteed a loan of approximately $900,000. The
loan was by a financial institution to the owner. The Company also agreed to
purchase the leased building for approximately $4.5 million at the end of the
lease term in September 2001 if either the building is not sold to a third party
or the Company does not extend its lease. The Company's current intention is to
extend the lease.
As of February 29, 2000, the Company had $3.5 million of cash on hand
and is required to pay $3.5 million in principal amortization over the next year
and expects approximately $800,000 in capital expenditures. Therefore, in order
to meet its obligations, the Company needs positive cash flow of approximately
$800,000 over the next year. The Company believes that its cash flow will be in
excess of this amount. For the six months just ended, the Company had operating
cash flow of $5.4 million. However, four significant managed care contracts
terminated during the six months ended February 29, 2000 which provided annual
revenues of approximately $11 million, or about 8% of the Company's total annual
revenues. For the six months just ended, the Company had $533,000 in capital
expenditures related to establishing the new EAP Operations Center near
Philadelphia, PA as well as upgrading computer and network equipment. In
addition, the Company has spent approximately $175,000 over the past two years
related to its Year 2000 initiatives, for which no further expenditures are
anticipated. The Company has $10 million available under the revolving credit
facility, which expires November 30, 2000.
Recent amendments to the Medicare statutes provide for the elimination
of cost based reimbursement of partial hospitalization services effective upon
approximately 90 days notice from Medicare. 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. However, additional legislation has been
passed which may provide, in certain cases, additional reimbursement for a
percentage of the difference in reimbursement, as a result of the new
methodology. This change may 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 $4.0 million, or
17.2% of total contract management revenues for the quarter ended February 29,
2000. Of the 152 management contracts at February 29, 2000, 96 contracts or
63.1% of the contracts include partial hospitalization services. Of the 96
partial contracts, 81 program locations were in operation and had a partial
hospitalization program in operation, 10 program locations were in operation,
but the partial
19
<PAGE> 20
hospitalization programs were not yet in operation, and 5 program locations were
not yet in operation for any of the programs. The termination of all partial
hospitalization contracts, while unlikely and not expected, would reduce
operating income by $4.3 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.
CERTAIN ADJUSTED EARNINGS DATA
The following table sets forth for the three months ended February 2000
and 1999, diluted earnings per share based on net income plus amortization
expense related to goodwill, net of tax, and operating cash flow per share based
on net income plus depreciation and amortization expense, net of tax, less
capital expenditures.
<TABLE>
<CAPTION>
Three Months ended February Six Months Ended February
--------------------------- -------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Adjusted earnings per share
(Net income plus amortization related to goodwill,
net of tax) $.30 $.26 $.60 $.53
Operating cash flow per share
(Net income plus depreciation and amortization,
net of tax, less capital expenditures) $.39 $.37 $.80 $.72
</TABLE>
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.
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the end of the 1999 fiscal year, no material changes have
occurred that would affect the disclosures regarding market risk contained in
the Annual Report on Form 10-K of the Company for the fiscal year ended August
31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In late 1999, the Company became aware that a civil qui tam lawsuit had
been filed under seal naming the Company's psychiatric contract management
subsidiary, Horizon Mental Health Management (Horizon), as a defendant therein.
The lawsuit is currently pending in the United States District Court for the
District of Columbia. The U.S. Government has not made a decision whether to
intervene in the lawsuit which is still under seal. Horizon has not been served
and therefore, is not presently a party to the lawsuit.
The lawsuit was brought under the Federal False Claims Act by three
individuals. The complaint alleges that certain on-site Horizon employees acted
in concert with other non-Horizon personnel to improperly inflate certain
Medicare reimbursable costs associated with psychiatric services provided at a
Tennessee hospital prior to August 1997. The lawsuit names the hospital, the
parent corporation of the hospital and a home health agency as defendants in
addition to Horizon.
The lawsuit seeks to recover an unspecified amount of damages relating
to allegedly improper Medicare claims submitted by the hospital. If the lawsuit
is served on Horizon, the Company will dispute the allegations in the complaint
and intends to vigorously defend itself. The Company does not believe that the
claims asserted in the lawsuit, based upon present allegations, represent a
material liability to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on January
21, 2000. At the meeting, James Ken Newman, James W. McAtee, Jack R. Anderson,
George E. Bello, William H. Longfield, Donald E. Steen and James E. Buncher were
re-elected to the Board of Directors. A total of 5,048,029 votes were cast for
each nominee and a total of 450,917 votes were withheld.
At the annual meeting of stockholders, the stockholders approved the
Horizon Health Corporation Employee Stock Purchase Plan. A total of 2,456,891
votes were cast for this proposal, a total of 1,309,462 votes were cast against
this proposal, and a total of 9,195 shares abstained.
Also 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, 2000. At the
meeting, a total of 5,488,296 votes were cast for this proposal, a total of
1,395 votes were cast against this proposal, and a total of 9,255 shares
abstained.
21
<PAGE> 22
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 Three Months Ended February 29,
2000 (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.
22
<PAGE> 23
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 31, 2000
HORIZON HEALTH CORPORATION
BY: /s/ RONALD C. DRABIK
--------------------------------------------------------------
RONALD C. DRABIK
SENIOR VICE PRESIDENT-FINANCE AND ADMINISTRATION AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
23
<PAGE> 24
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, 199 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 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 Three Months Ended February 29, 2000 (filed herewith).
</TABLE>
<PAGE> 1
EXHIBIT 11.1
HORIZON HEALTH CORPORATION
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED FEBRUARY ENDED FEBRUARY
-------------- --------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC
Net income $ 1,738,285 $ 1,638,970 $ 3,523,418 $ 3,405,397
------------ ------------ ------------ ------------
Weighted average shares outstanding (basic) 6,257,547 6,779,213 6,432,641 6,966,408
------------ ------------ ------------ ------------
Basic earnings per share $ .28 $ .24 $ .55 $ .49
============ ============ ============ ============
DILUTED
Net income $ 1,738,285 $ 1,638,970 $ 3,523,418 $ 3,405,397
------------ ------------ ------------ ------------
Weighted average shares outstanding (basic) 6,257,547 6,779,213 6,432,641 6,966,408
Effect of dilutive securities 288,858 (1) 336,132 (1) 278,491 (1) 347,902 (1)
------------ ------------ ------------ ------------
Weighted average shares outstanding (diluted) 6,546,405 7,115,345 6,711,132 7,314,310
------------ ------------ ------------ ------------
Diluted earnings per share $ .27 $ .23 $ .53 $ .47
============ ============ ============ ============
</TABLE>
(1) During fiscal year 2000 and 1999, certain shares subject to 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 for the quarter. The computation for the quarter
ended February 28, 1999 excluded 707,036 shares subject to options, with
exercise prices ranging from $6.91 to $23.75. The computation for the
quarter ended February 29, 2000 excluded 176,700 shares subject to options,
with exercise prices ranging from $7.42 to $23.75. The computation for the
six months ended February 28, 1999 excluded an average of 435,213 shares
subject to options, with exercise prices ranging from $6.91 to $23.75. The
computation for the six months ended February 29, 2000 excluded an average
of 474,805 shares subject to options, with exercise prices ranging from
$6.91 to $23.75.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the three
months ended February 29, 2000 financial statements and is qualified in its
entirety by reference to such year to date 10-Q filing for the applicable
period.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> DEC-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 3,488,486
<SECURITIES> 0
<RECEIVABLES> 16,718,574
<ALLOWANCES> 3,166,616
<INVENTORY> 0
<CURRENT-ASSETS> 21,114,551
<PP&E> 6,522,877
<DEPRECIATION> 3,625,478
<TOTAL-ASSETS> 82,924,547
<CURRENT-LIABILITIES> 21,993,404
<BONDS> 0
0
0
<COMMON> 72,678
<OTHER-SE> 45,835,825
<TOTAL-LIABILITY-AND-EQUITY> 82,924,547
<SALES> 0
<TOTAL-REVENUES> 33,564,893
<CGS> 0
<TOTAL-COSTS> 30,304,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 99,814
<INTEREST-EXPENSE> 316,230
<INCOME-PRETAX> 2,922,137
<INCOME-TAX> 1,183,852
<INCOME-CONTINUING> 1,738,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,738,285
<EPS-BASIC> .28
<EPS-DILUTED> .27
</TABLE>
