<PAGE> 1
UNITED STATES
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 November 30, 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 December 22, 2000, was 5,626,487.
<PAGE> 2
INDEX
HORIZON HEALTH CORPORATION
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ......................................................... 3
HORIZON HEALTH CORPORATION
Consolidated Balance Sheets as of November 30, 2000 (unaudited)
and August 31, 2000 .............................................................. 3
Consolidated Statements of Income for the three months ended
November 30, 2000 and 1999 (each unaudited) ...................................... 5
Consolidated Statements of Cash Flows for the three months ended
November 30, 2000 and 1999 (each unaudited) ...................................... 6
Notes to Consolidated Financial Statements (unaudited) ........................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................ 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ......................................................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................................................... 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, 2000 AUGUST 31, 2000
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,920,768 $ 8,516,869
Accounts receivable less allowance for doubtful
accounts of $ 3,055,228 at November 30, 2000 and
$ 2,547,774 at August 31, 2000 12,409,421 11,513,860
Prepaid expenses and supplies 807,384 1,240,359
Income taxes receivable 143,705 613,678
Other receivables 88,296 139,307
Other current assets 250,039 346,137
Current deferred taxes 1,890,820 1,835,721
------------ ------------
TOTAL CURRENT ASSETS 23,510,433 24,205,931
------------ ------------
Property and Equipment, net (Note 3) 2,515,181 2,109,921
------------ ------------
Goodwill, net of accumulated amortization of $ 6,185,323
at November 30, 2000, and $5,826,098 at August 31, 2000 51,213,280 51,572,505
Contracts, net of accumulated amortization of $ 7,845,063
at November 30, 2000, and $ 7,426,048 at August 31, 2000 4,932,703 5,351,718
Other assets 449,921 390,969
------------ ------------
TOTAL ASSETS $ 82,621,518 $ 83,631,044
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, 2000 AUGUST 31, 2000
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,191,007 $ 682,088
Employee compensation and benefits 5,058,784 6,439,857
Medical claims payable 3,899,299 3,724,854
Accrued expenses 6,114,976 6,071,673
Current portion long term debt -- 3,600,000
------------ ------------
TOTAL CURRENT LIABILITIES 16,264,066 20,518,472
Other noncurrent liabilities 2,301,398 966,818
Long-term debt, net of current portion (Note 4) 14,000,000 11,300,000
Deferred income taxes 1,143,062 1,154,111
------------ ------------
TOTAL LIABILITIES 33,708,526 33,939,401
------------ ------------
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 5,823,537 shares
outstanding at November 30, 2000 and 7,267,750 shares
issued and 6,323,595 shares outstanding at August 31, 2000 72,678 72,678
Additional paid-in capital 17,741,776 18,136,353
Retained earnings 40,239,425 38,573,364
Treasury stock, at cost (1,444,213 shares at November
30, 2000 and 944,155 shares at August 31, 2000) (Note 6) (9,140,887) (7,090,752)
------------ ------------
48,912,992 49,691,643
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 82,621,518 $ 83,631,044
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Contract management revenue $ 22,434,461 $ 23,261,378
Premiums and fees 7,810,942 11,711,006
Other 575,555 313,594
------------ ------------
Total revenues 30,820,958 35,285,978
Expenses:
Salaries and benefits 16,557,711 17,911,650
Medical claims 2,980,547 4,406,665
Purchased services 2,912,002 3,246,416
Provision for doubtful accounts 359,024 774,984
Other 3,979,070 4,458,360
Depreciation and amortization 1,133,864 1,193,464
------------ ------------
Operating expenses 27,922,218 31,991,539
Operating income 2,898,740 3,294,439
Other income (expense):
Interest expense (285,103) (327,855)
Interest and other income 153,918 107,902
Gain (loss) on disposal of fixed assets -- (99,263)
------------ ------------
Income before income taxes 2,767,555 2,975,223
Income tax provision 1,101,494 1,190,090
------------ ------------
Net income $ 1,666,061 $ 1,785,133
============ ============
Earnings per common share:
Basic $ .27 $ .27
============ ============
Diluted $ .26 $ .26
============ ============
Weighted average shares outstanding:
Basic 6,254,598 6,607,736
============ ============
Diluted 6,408,033 6,875,860
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating Activities:
Net income $ 1,666,061 $ 1,785,133
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,133,864 1,193,464
Deferred income taxes (11,049) (56,397)
Loss on disposal of fixed assets -- 99,263
Changes in assets and liabilities:
(Increase) in accounts receivable (895,561) (1,614,771)
Decrease in income taxes receivables 469,973 363,920
Decrease in other receivables 51,011 39,212
Decrease in prepaid expenses and supplies 432,975 35,645
(Increase) in other assets (17,953) (125,511)
(Decrease) increase in accounts payable, employee compensation
and benefits, medical claims payable, and accrued expenses (579,004) 1,309,936
Increase (decrease) in other non-current liabilities 1,334,580 (4,170)
------------ ------------
Net cash provided by operating activities 3,584,897 3,025,724
------------ ------------
Investing activities:
Purchase of property and fixed assets (760,883) (176,877)
Proceeds from sale of fixed assets -- 325
------------ ------------
Net cash used in investing activities (760,883) (176,552)
------------ ------------
Financing Activities:
Payments on long term debt (900,000) (2,412,335)
Tax benefit associated with stock options exercised 96,318 54,238
Purchase of treasury stock (2,492,015) (3,363,134)
Surrenders of treasury stock (124,418) --
------------ ------------
Net cash used in financing activities (3,420,115) (5,721,231)
------------ ------------
Net decrease in cash and cash equivalents (596,101) (2,872,059)
Cash and cash equivalents at beginning period 8,516,869 5,438,510
------------ ------------
Cash and cash equivalents at end of period $ 7,920,768 $ 2,566,451
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 235,724 $ 325,138
============ ============
Income taxes $ 7,037 $ 78,429
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Horizon Health Corporation (the "Company" or "Horizon") 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; Chicago, Illinois; Tampa, Florida; Denver, Colorado; Orlando,
Florida; and Philadelphia, Pennsylvania metropolitan areas. The Company's
National Support Center is in Lewisville, Texas.
BASIS OF PRESENTATION:
The accompanying consolidated balance sheet at November 30, 2000, the
consolidated statements of operations for the three months ended November
30, 2000 and 1999, and the consolidated statements of cash flows for the
three months ended November 30, 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, 2000. 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 November 30, 2000, and the
results of operations for the three months ended November 30, 2000 and
1999.
Operating results for the three 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>
For the three months ended November 30,
-------------------------------------------------------------------------------------
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>
BASIC EPS .................... $1,666,061 6,254,598 $ 27 $1,785,133 6,607,736 $ .27
---------- ----------
DILUTIVE SECURITIES
Options .................... 153,435 268,124
---------- ----------
DILUTED EPS .................. $1,666,061 6,408,033 $ .26 $1,785,133 6,875,860 $ .26
========== ========== ========== ========== ========== ==========
</TABLE>
For the three months ended November 30, 2000 and 1999, respectively,
certain shares subject to options were not included in the computation of
EPS because the option exercise price was greater than the average market
price of the common shares for the quarter. The computation for the three
months ended November 30, 2000 excluded 805,859 shares subject to options
with exercise prices ranging from $5.50 to $23.75. The computation for
the three months ended November 30, 1999 excluded 772,910 shares subject
to options with exercise prices ranging from $6.90 to $23.75.
7
<PAGE> 8
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at November 30, 2000 and
August 31, 2000:
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
2000 2000
------------ ------------
<S> <C> <C>
Computer Hardware $ 2,405,906 $ 2,216,818
Computer Software 1,110,493 1,105,458
Furniture and Fixtures, and Office Equipment 2,951,185 2,941,203
Transportation (Vehicles) 25,093 25,093
Work in Progress 556,780 --
Leasehold Improvements 454,380 454,380
------------ ------------
7,503,837 6,742,952
Less Accumulated Depreciation 4,988,656 4,633,031
------------ ------------
$ 2,515,181 $ 2,109,921
============ ============
</TABLE>
Depreciation expense for the three months ended November 30, 2000, and
1999 totaled $355,625 and $415,144, respectively.
4. LONG-TERM DEBT
At November 30, 2000 and August 31, 2000, the Company had the following
long-term debt:
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
2000 2000
------------ ------------
<S> <C> <C>
Term Loan Facility $ -- $ 14,900,000
Revolving Credit Facility 14,000,000 --
------------ ------------
14,000,000 14,900,000
Less current maturities -- 3,600,000
------------ ------------
$ 14,000,000 $ 11,300,000
============ ============
</TABLE>
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 consisted of a $10.0
million revolving credit facility (terminated June 30, 2000) and an
initial $40.0 million term loan facility which expired November 30, 1999,
with the amount outstanding converting to an amortizing term loan with
quarterly principal payments of $900,000.
On November 16, 2000, the Company entered into an Amended and Restated
Credit Agreement, effective November 15, 2000 (the "Amended Credit
Agreement"), with The Chase Manhattan Bank, as Agent, to refinance the
term loan outstanding under the existing credit agreement. The Amended
Credit Agreement consists of a $15.0 million revolving credit facility to
fund ongoing working capital requirements, refinance existing debt,
dividends or share repurchases (subject to certain limits) and to finance
future acquisitions by the Company. As of November 30, 2000, the Company
had borrowings of $14.0 million outstanding against the revolving credit
facility.
8
<PAGE> 9
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The revolving credit facility bears interest at (1) the Base Rate plus
the Base Rate Margin, as defined or (2) the Adjusted Eurodollar Rate,
plus the Eurodollar Margin, as defined. At November 30, 2000, the
weighted average interest rate on outstanding indebtedness under the
credit facility was 9.014%. The Eurodollar Margin varies depending on the
debt coverage ratio of the Company. The revolving credit facility matures
on November 15, 2003.
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>
Nine months ending August 31, 2001 $ 1,566,769
For the year ending August 31, 2002 1,514,198
For the year ending August 31, 2003 1,204,467
For the year ending August 31, 2004 965,933
For the years ending August 31, 2005 and thereafter 630,665
------------
$ 5,882,032
============
</TABLE>
Rent expense for the three months ended November 30, 2000 and 1999
totaled $520,730 and $630,726 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, if it is not sold to a third party,
or the Company does not extend its lease. The Company has extended the
lease through November 2003.
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.
In early December 2000, the Company was served with a U.S. Department of
Justice subpoena issued by the U.S. Attorney's office for the Northern
District of California requesting the production of documents relating to
certain matters, such as patient admissions, patient care, patient
charting and marketing materials, pertaining to hospital gero-psychiatric
programs managed by the Company. The Company believes the subpoena
originated as a result of a sealed qui tam suit. No allegations or claims
have been made against the Company. The Company is not currently aware of
any reason to believe it will become the target of the investigation. At
this time, the Company has insufficient information to predict any
particular future outcome of the investigation.
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.
9
<PAGE> 10
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 the Board of Directors authorized the repurchase of an
additional 200,000 shares of its common stock. Pursuant to such
authorizations, the Company repurchased 1,189,300 shares through November
30, 1999. On October 12, 2000 the Board of Directors authorized the
repurchase of up to an additional 1,000,000 shares of its common stock
effective upon the closing of the new Amended Credit Agreement. The new
agreement became effective November 15, 2000 following the closing on
November 16, 2000. As of November 30, 2000, the Company had repurchased
an additional 545,300 shares of its common stock (1,734,600 total shares
repurchased). 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
are added to the treasury shares of the Company and may be used for
employee stock plans and for other corporate purposes. Of the shares
repurchased, a total of 290,387 and 245,145 shares have been reissued
pursuant to the exercise of certain stock options and in connection with
the Employee Stock Purchase Plan as of November 30, 2000 and August 31,
2000, respectively. The shares were and will be repurchased utilizing
available cash and borrowings under the Company's credit facility. The
Company accounts for the treasury stock using the cost method.
7. SEGMENT INFORMATION
The following schedule represents revenues and operating results for the
three months ended November 30, 2000 and 1999 by operating subsidiary:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health
Services Management Management Outcomes Other
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NOVEMBER 30, 2000
Revenues $ 7,847,475 $ 19,081,346 $ 3,110,159 $ 738,889 $ 43,089
Inter Company Revenues 19,204 -- -- (12,287) --
Earnings before interest,
taxes, depreciation and
Amortization (EBITDA) 351,625 5,270,580 390,059 105,698 (2,085,358)
Total Assets 41,374,769 67,453,383 6,954,496 373,591 27,046,431
NOVEMBER 30, 1999
Revenues $ 11,729,528 $ 20,335,650 $ 2,877,481 $ 295,447 $ 47,873
Inter Company Revenue 18,405 -- -- 382,576 --
Earnings before interest,
taxes, depreciation, and
Amortization (EBITDA) 1,531,604 5,093,790 320,164 30,334 (2,487,989)
Total Assets 43,318,800 60,336,089 5,379,557 376,296 25,176,334
<CAPTION>
Intercompany
Eliminations Consolidated
------------ ------------
<S> <C> <C>
NOVEMBER 30, 2000
Revenues -- $ 30,820,958
Inter Company Revenues (6,917) --
Earnings before interest,
taxes, depreciation and
Amortization (EBITDA) -- 4,032,604
Total Assets (60,581,152) 82,621,518
NOVEMBER 30, 1999
Revenues $ -- $ 35,285,978
Inter Company Revenue (400,981) --
Earnings before interest,
taxes, depreciation, and
Amortization (EBITDA) -- 4,487,903
Total Assets (50,738,060) 83,849,016
</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.
10
<PAGE> 11
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. The Company had 136 management contracts as of November
30, 2000 with contract locations in 34 states and the District of Columbia. Of
its management contracts, 112 relate to mental health treatment programs and 24
relate to physical rehabilitation programs. The Company has also developed a
proprietary mental health outcomes measurement system known as CQI+. At November
30, 2000, the Company provided outcome measurement services at 111 contract
locations and had 3 database project contracts.
Through its subsidiary Horizon Behavioral Services, Inc., at November
30, 2000, the Company had 259 contracts to provide EAP and managed behavioral
health services covering over 1.7 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 Employee Assistance Program ("EAP") services,
administrative service only contracts, and at risk managed behavioral health
services.
In October 2000, Horizon Behavioral Services, Inc. was awarded a three
year, Full Accreditation from the National Committee for Quality Assurance
(NCQA) under its 2000 standards for managed behavioral health care organizations
(MBHOs). NCQA is an independent, not-for-profit organization dedicated to
assessing and reporting on the quality of managed behavioral health care
organizations, physician organizations, managed care organizations and
credentials verification organizations. The NCQA accreditation process is a
voluntary review that evaluates how well a managed behavioral health care
organization manages all parts of its delivery system in order to continuously
improve health care for its members. The NCQA standards for the accreditation of
a MBHOs are intended to help organizations achieve the highest level of
performance possible, reduce patient risk for untoward outcomes, and create an
environment of continuous improvement. Accreditation decisions include Full
Accreditation (the highest level), One-year Accreditation, Provisional
Accreditation and Denial.
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. In some
cases, the reimbursement limitations have resulted in decreased amounts
reimbursed to the Company's client hospitals and have led to the renegotiation
of a lower contract management fee structure for the Company. In other cases the
decreased reimbursement amounts have resulted in the termination or non-renewal
of the management contract.
Amendments to the Medicare statutes provided for the elimination of
cost based reimbursement of partial hospitalization services and implementation
of the outpatient prospective payment system (PPS) effective August 1, 2000. The
reimbursement rate per patient day is a wage-adjusted rate from a base of
$202.19, which has lowered Medicare reimbursement levels to many hospitals for
partial hospitalization services. The general 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
non-renewal of the management contract. For the quarter ended November 30, 2000,
the number of partial programs in operation decreased by 15, from 65 to 50.
11
<PAGE> 12
Revenues from partial hospitalization services were $2.3 million, or
10.4% of total contract management revenues for the quarter ended November 30,
2000. Of the Company's 136 management contracts at November 30, 2000, 65
contracts or 47.7% of the contracts include partial hospitalization services. Of
the 65 partial contracts, 50 program locations were in operation and had a
partial hospitalization program in operation, 12 program locations were in
operation, but the partial hospitalization programs were not yet in operation,
and 3 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 $2.6 million or more annually.
In April 2000, HCFA adopted new rules requiring a HCFA determination
that a facility has provider-based status before a provider can bill for the
services rendered at the facility. The new rules have been construed by HCFA to
apply to inpatient mental health and rehabilitation units. The rules contain
numerous requirements, some specifically applicable to facilities operated under
management contracts, that must be satisfied in order to receive a HCFA
determination of provider-based status. The rules are applicable to a provider
for new programs at the beginning of its first Medicare cost reporting year that
commences after January 10, 2001. Existing programs at October 1, 2000 are
"grand-fathered", unless they elect early adoption, until October 1, 2002. The
particular application of the rules to inpatient units managed by the Company is
currently unclear in several respects. HCFA has indicated that it intends to
issue guidelines under the new rules, which may provide clarification. At the
current time, there is uncertainty with respect to both precisely how the new
rules are to be applied to inpatient units managed by the Company and
uncertainty as to whether the current structure of the management contracts of
the Company will satisfy the requirements under the new rules. The Company is
unable at this time to definitively determine the effect of the new
provider-based rules on its business operations, but it is possible that the new
provider-based rules could result in termination or non-renewal of management
contracts if, under the new rules, it is not possible for a provider to obtain a
determination of provider-based status of an inpatient unit operated under a
management contract.
Recent amendments to the Medicare statutes provide for a linear
phase-out of cost-based reimbursement of physical rehabilitation beginning on
April 1, 2001. Reimbursement for physical rehabilitation services on a
prospective payment system basis will be phased-in over the next two years.
Under the prospective payment rates recently announced, it appears that the
majority of the Company's clients will experience increased reimbursement,
although several clients expect reduced reimbursement including one that could
suffer losses on the services being provided without additional volume.
12
<PAGE> 13
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31, AUGUST 31, AUGUST 31,
2000 2000 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
EAP & MANAGED CARE BEHAVORIAL HEALTH
SERVICES
Covered Lives (000's) 1,740 1,753 2,416 1,874
CONTRACT MANAGEMENT
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 122 128 147 161
Contract locations signed and unopened 14 10 6 11
------------ ------------ ------------ ------------
Total contract locations 136 138 153 172
============ ============ ============ ============
SERVICES COVERED BY CONTRACTS IN OPERATION:
Inpatient 121 123 133 149
Partial Hospitalization 50 65 86 102
Outpatient 19 20 27 32
Home health 4 5 7 10
CQI + and Psychscope 114 115 106 82
TYPES OF TREATMENT PROGRAMS IN OPERATION:
Geropsychiatric 121 137 165 189
Adult psychiatric 46 47 54 67
Substance abuse 2 3 4 8
Physical Rehabilitation 23 24 25 20
Other mental health 2 3 5 9
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth for the three months ended November 30, 2000 and
1999, the percentage relationship to total revenues of certain costs, expenses
and income.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NOVEMBER 30,
2000 1999
---------- ----------
<S> <C> <C>
Revenues:
Contract management revenues 72.8% 65.9%
Premiums and fees 25.3 33.2
Other 1.9 .9
---------- ----------
Total revenues 100.0 100.0
Operating expenses
Salaries and benefits 53.7 50.8
Medical claims 9.7 12.5
Purchased services 9.4 9.2
Provision for bad debts 1.2 2.2
Other 12.9 12.6
Depreciation and amortization 3.7 3.4
---------- ----------
Total operating expenses 90.6 90.7
---------- ----------
Operating income 9.4 9.3
---------- ----------
Interest and other income (expense), net (.4) (.9)
---------- ----------
Income before taxes 9.0 8.4
Income tax expense 3.6 3.3
---------- ----------
Net income 5.4% 5.1%
========== ==========
</TABLE>
14
<PAGE> 15
THREE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1999
Revenue. Revenues for the three months ended November 30, 2000 were
$30.8 million representing a decrease of $4.5 million or 12.7%, as compared to
revenues of $35.3 million for the corresponding period in the prior fiscal year.
Contract management revenue decreased a net of $800,000, or 3.6%, due to a
decline in the average number of contract locations in operation from 143.0 for
the three months ended November 30, 1999, to 125.9 for the three months ended
November 30, 2000. This decrease of 12.0% was offset by an 8.6% increase in
revenue per average location between the periods. Premiums and fees decreased
$3.9 million primarily as a result of the termination of six significant managed
care contracts, whose revenues in the three months ended November 30, 2000 were
$200,000 versus $3.9 million for the same period in the prior fiscal year. The
effects of the sixth termination will occur gradually, with membership being
transitioned over the course of fiscal year 2001. Other revenue increased
$260,000 as a result of increased revenue from data base services and
consulting.
Salaries and Benefits. Salaries and benefits for the three months ended
November 30, 2000 were $16.6 million representing a decrease of $1.3 million, or
7.2%, as compared to salaries and benefits of $17.9 million for the three months
ended November 30, 1999. Average full time equivalents for the three months
ended November 30, 2000 were 1,094 representing a decrease of 132 or 10.7%, as
compared to average full time equivalents of 1,226 for the three months ended
November 30, 1999. A decrease of 63 full time equivalents or 5.1% is
attributable to the termination of the six managed care contracts, noted above,
and the associated closure of five clinic locations during fiscal year 2000.
Also contributing to the decrease is the decline in the average number of
locations, as well as cost control initiatives taken by the company. Salary and
benefit cost per full time equivalent for the three months ended November 30,
2000, were $15,174, representing an increase of $563 per full time equivalent,
or 3.9%, as compared to $14,611 per full time equivalent for the three months
ended November 30, 1999.
Depreciation and Amortization. Depreciation and amortization expense
for the three months ended November 30, 2000 was $1.1 million. This amount
represents a decrease of $60,000 or 5%, as compared to the depreciation and
amortization expense of $1.2 million for the corresponding period in the prior
fiscal year. Due to the Company's limited capital expenditure requirements,
depreciation generated from assets acquired during the period did not exceed a
reduction in depreciation associated with items becoming fully depreciated.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for the three months
ended November 30, 2000 were $10.2 million representing a decrease of $2.7
million or 20.9%, as compared to other operating expenses of $12.9 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 three months ended November 30, 2000 was
$3.0 million representing a decrease of $1.4 million or 31.8%, as compared to
medical claims expense of $4.4 million for the corresponding period in the prior
fiscal year. This is primarily the result of the effect of the termination of
the six significant managed care contracts, as discussed above. Inpatient days
per year per one thousand members decreased from an average of 16.8 for the
three months ended November 30, 1999 to 15.0 for the three months ended November
30, 2000.
Purchased services for the three months ended November 30, 2000 were
$2.9 million, representing a decrease of $334,000 or 10.3%, as compared to
purchased services of $3.2 million for the corresponding period in the prior
fiscal year. Medical director fees decreased $96,000 for the three months ended
November 30, 2000, as compared to the corresponding period in the prior fiscal
year. This decrease is primarily a result of the decrease in the average number
of contract locations, from 143.0 for the three months ended November 30, 1999
to 125.9 for the three months ended November 30, 2000. Also, fees paid to
temporary physicians decreased $73,000 due to the recruitment of permanent
physicians at certain contract locations. In addition, legal fees and other
purchased services decreased $80,000 and $106,000 respectively, for the three
months ended November, 2000, as compared to the corresponding period in the
prior fiscal year as a result of cost control initiatives taken by the Company.
Bad debt expense for the three months ended November 30, 2000 was
$359,000 representing a decrease of $416,000 as compared to bad debt expense of
$775,000 for the three months ended November 30, 1999. The Company is continuing
to vigorously pursue collections in an effort to minimize bad debt expense.
15
<PAGE> 16
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the three months ended November 30, 2000 was a net
expense of $131,000, as compared to $319,000 for the corresponding period in the
prior fiscal year. Over the four most recent quarters, the Company has generated
cash flows from operations of $13.0 million. As a result, outstanding debt has
been reduced creating a net decrease of $43,000 in interest expense after the
impact of higher interest rates. In conjunction with the generation of the
aforementioned cash flow, cash balances have increased resulting in an increase
in interest income of $46,000 as compared to the prior period.
Income Tax Expense. For the three-month period ended November 30, 2000,
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 November 30,
1999, the Company recorded federal and state income taxes of $1.2 million
resulting in a combined tax rate of 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its future cash flow from operations of $13.0
million for the last 12 months and $3.6 million for the quarter ended November
30, 2000, along with cash of $7.9 million at November 30, 2000 and the $15.0
million revolving credit facility (of which $1.0 million was available at
November 30, 2000), will be sufficient to cover operating cash requirements over
the next 12 months, including estimated capital expenditures of $1.8 million.
The Company may require additional capital to fund further share repurchases or
acquisitions.
Effective November 15, 2000, the Company entered into an Amended and
Restated Credit Agreement (the "Amended Credit Agreement"), with The Chase
Manhattan Bank, as Agent, to refinance the term loans outstanding under the
existing credit agreement. The Amended Credit Agreement consists of a $15.0
million revolving credit facility to fund ongoing working capital requirements,
refinance existing debt, pay dividends or repurchase shares (subject to certain
limits) and to finance future acquisitions by the Company. As of November 30,
2000, the Company had borrowings of $14.0 million outstanding against the
revolving credit facility.
The following summary of certain material provisions of the Amended
Credit Agreement does not purport to be complete, and is subject to, and
qualified in its entirety by reference to, the Amended Credit Agreement, a copy
of which is filed as Exhibit 10.1 to this report.
The Company is the borrower under the Amended Credit Agreement, which
is unconditionally guaranteed by all material subsidiaries of the Company.
Principal outstanding under the Amended Credit Agreement bears interest at the
"Base Rate" (the greater of the Agent's "prime rate" or the federal funds rate
plus .5%) plus .5% or the "Eurodollar Rate" plus 1.75% to 2.25% (depending on
the Company's Indebtedness to EBITDA Ratio), as selected by the Company. The
Company pays interest quarterly and 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.
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 $15.0 million during any
twelve consecutive monthly periods without prior bank approval, (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. The Amended Credit
Agreement allows the Company to redeem or repurchase up to $10.0 million of its
capital stock (subject to certain limitations) of which $2.5 million was
purchased as of November 30, 2000. In addition, the terms of the revolving
credit facility require the Company to satisfy certain ongoing financial
covenants. The revolving credit facility is secured by a first lien or first
priority security interest in and/or pledge of substantially all of the assets
of the Company and of all present and future subsidiaries of the Company.
Effective September 1996, the Company entered into a lease agreement
with a term of five years, which was subsequently extended to November 2003, 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, if either
the building is not sold to a third party or the Company does not further extend
its lease.
16
<PAGE> 17
CERTAIN ADJUSTED EARNINGS DATA
The following table sets forth for the three months ended November 30,
2000 and 1999, diluted earnings per share based on net income plus amortization
expense related to goodwill, net of tax.
<TABLE>
<CAPTION>
Three Months ended November 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Adjusted earnings per share
(Net income plus amortization related to goodwill, net of tax) $ .30 $ .30
</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. Such risks, uncertainties and other
important factors are detailed in this report and will be detailed from time to
time in reports filed by the Company with the Commission, including Forms 8-K,
10-Q, and 10-K, and include, among others, the following: general economic and
business conditions which are less favorable than expected; unanticipated
changes in industry trends; decreased demand by general hospitals for the
Company's services; the Company's inability to retain existing management
contracts or to obtain additional contracts; adverse changes in reimbursement to
general hospitals by Medicare or other third-party payers for costs of providing
mental health or physical rehabilitation services; adverse changes to other
regulatory requirements relating to the provision of 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, 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.
17
<PAGE> 18
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 November 30, 2000, the Company had approximately $14.0 million of
debt obligations outstanding with a weighted average interest rate of 9.014%. A
hypothetical 10% change in the effective interest rate for these borrowings,
assuming debt levels as of November 30, 2000, would change interest expense by
approximately $126,000 annually. This would be funded out of cash flows from
operations, which were $3.6 million for the three months ended November 30,
2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments concerning the pending
litigation described in Part I of the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 2000. Columbia/HCA Healthcare Corporation, a
co-defendant in the qui tam suit involving the Company, and the U.S. Department
of Justice have announced a settlement of various claims but the Company does
not know what effect, if any, that settlement will have on the proceedings in
which the Company is named as a defendant.
In early December 2000, the Company was served with a U.S. Department
of Justice subpoena issued by the U.S. Attorney's office for Northern District
of California requesting the production of documents relating to certain
matters, such as patient admissions, patient care, patient charting and
marketing materials, pertaining to hospital gero-psychiatric programs managed by
the Company. The Company believes the subpoena originated as a result of a
sealed qui tam suit. No allegations or claims have been made against the
Company. The Company is not currently aware of any reason to believe it will
become the target of the investigation. At this time, the Company has
insufficient information to predict any particular future outcome of the
investigation.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
NUMBER EXHIBIT
3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment
No. 2 as filed with the Commission on February 16, 1995 to the
Company's Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-88314)).
4.1 Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K dated August 11,
1997).
4.2 Rights Agreement, dated February 6, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, Registration No.
000-22123, as filed with the Commission on February 7, 1997).
10.1 Amended and Restated Credit Agreement, dated November 15,
2000, between Horizon Health Corporation and Horizon Mental
Health Management, Inc. as Borrowers, and The Chase Manhattan
Bank, as Agent and individually as a Bank (filed herewith).
10.2 Sixth Amendment to Letter Loan Agreement, dated November 15,
2000, between North Central Development Corporation, as
Borrower, Horizon Health Corporation and subsidiaries, as
limited guarantors, and The Chase Manhattan Bank, as the
Lender (filed herewith).
10.3 First Amendment to Lease Agreement dated November 15, 2000
between North Central Development Corporation, as Lessor and
Horizon Health Corporation as Lessee (filed herewith).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Three Months Ended November
30, 2000 (filed herewith).
(b) The Company filed the following reports on Form 8-K during the
quarter covered by this report:
Current report on Form 8-K filed with the Commission on
December 5, 2000. The item reported was Item 5, Other Events,
announcing a conference call regarding the first quarter
financial results on December 14, 2000.
Current report on Form 8-K filed with the Commission on
December 14, 2000. The item reported was Item 5, Other Events,
relating to a subpoena served to the Company by the U.S.
Attorney's Office for the Northern District of California
requesting the production of documents relating to certain
matters pertaining to hospital gero-psychiatric program
managed by the Company. See Part II, Item 1 of this report.
19
<PAGE> 20
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: DECEMBER 27, 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)
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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).
10.1 Amended and Restated Credit Agreement, dated November 15,
2000, between Horizon Health Corporation and Horizon Mental
Health Management, Inc. as Borrowers, and The Chase Manhattan
Bank, as Agent and individually as a Bank (filed herewith).
10.2 Sixth Amendment to Letter Loan Agreement, dated November 15,
2000, between North Central Development Corporation, as
Borrower, Horizon Health Corporation and subsidiaries, as
limited guarantors, and The Chase Manhattan Bank, as the
Lender (filed herewith).
10.3 First Amendment to Lease Agreement dated November 15, 2000
between North Central Development Corporation, as Lessor and
Horizon Health Corporation as Lessee (filed herewith).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Three Months Ended November
30, 2000 (filed herewith).
</TABLE>
