-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LjnMMdCkh7ZozaMdvOMHzPebwA+px5ibxOsNnWE/dUEHz5p9en8Kp9LAIRXqpdNA 7xFp25l8HGbqTI+rjrD+VA== 0000950134-97-005299.txt : 19970715 0000950134-97-005299.hdr.sgml : 19970715 ACCESSION NUMBER: 0000950134-97-005299 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970714 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORIZON MENTAL HEALTH MANAGEMENT INC CENTRAL INDEX KEY: 0000935007 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 752293354 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13626 FILM NUMBER: 97640080 BUSINESS ADDRESS: STREET 1: 1500 WATERS RIDGE DR STREET 2: STE 320 CITY: LEWISVILLE STATE: TX ZIP: 75057 BUSINESS PHONE: 8173874775 MAIL ADDRESS: STREET 1: 2220 SAN JACINTO BLVD STREET 2: STE 320 CITY: DENTON STATE: TX ZIP: 76205 10-Q 1 FORM 10-Q FOR QUARTER ENDED MAY 31, 1997 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 quarter ended May 31, 1997 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 MENTAL HEALTH MANAGEMENT, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 75-2293354 - ------------------------------- --------------------------------------- (State or other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 1500 Waters Ridge Drive Lewisville, Texas 75057-6011 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (972) 420-8200 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] The number of shares outstanding of the registrant's Common Stock, $0.01 Par Value, as of July 11, 1997 was 5,566,762 shares. 2 INDEX HORIZON MENTAL HEALTH MANAGEMENT, INC. PART I - FINANCIAL INFORMATION Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 HORIZON MENTAL HEALTH MANAGEMENT, INC. Consolidated Balance Sheets as of August 31, 1996, and May 31, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Operations for the three months ended May 31, 1996 and May 31, 1997 (each unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Consolidated Statements of Operations for the nine months ended May 31, 1996 and May 31, 1997 (each unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Consolidated Statements of Cash Flows for the nine months ended May 31, 1996 and May 31, 1997 (each unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
-2- 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HORIZON MENTAL HEALTH MANAGEMENT, INC. CONSOLIDATED BALANCE SHEETS ASSETS
August 31, May 31, 1996 1997 ----------- ----------- (Unaudited) CURRENT ASSETS: Cash and short-term investments $ 7,940,232 $ 3,894,900 Accounts receivable less allowance for uncollectible accounts of $627,142 at August 31, 1996 and $1,270,804 at May 31, 1997 7,096,964 10,754,948 Receivable from employees 89,126 70,743 Prepaid expenses and supplies 234,028 207,014 Other receivables 29,426 329,149 Other current assets 71,940 98,483 Current deferred taxes 1,018,602 1,562,725 ----------- ----------- TOTAL CURRENT ASSETS 16,480,318 16,917,962 ----------- ----------- PROPERTY AND EQUIPMENT: Equipment 2,325,320 3,321,681 Buildings and improvements 109,467 68,402 ----------- ----------- 2,434,787 3,390,083 Less accumulated depreciation 1,552,975 1,963,949 ----------- ----------- 881,812 1,426,134 Goodwill, net of accumulated amortization of $1,525,015 at August 31, 1996 and $1,854,751 at May 31, 1997 13,388,738 19,471,713 Management contracts, net of accumulated amortization of $1,475,375 at August 31, 1996 and $1,960,976 at May 31, 1997 1,925,029 2,227,442 Other assets 195,630 510,595 ----------- ----------- TOTAL ASSETS $32,871,527 $40,553,846 =========== ===========
See notes to consolidated financial statements. -3- 4 HORIZON MENTAL HEALTH MANAGEMENT, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
August 31, May 31, 1996 1997 ----------- ----------- (Unaudited) CURRENT LIABILITIES: Accounts payable $ 1,193,048 $ 463,202 Employee compensation and benefits 4,018,951 4,791,507 Accrued third party payor liabilities 142,918 142,918 Income taxes payable 9,598 26,883 Accrued expenses 4,981,386 7,389,066 Payable to health insurance program 661,248 --- ----------- ----------- TOTAL CURRENT LIABILITIES 11,007,149 12,813,576 Deferred income taxes 1,496,214 1,249,526 ----------- ----------- TOTAL LIABILITIES 12,503,363 14,063,102 Commitments and contingencies - (Note 7) --- --- Minority interest 8,755 83,845 STOCKHOLDERS' EQUITY: Preferred stock, $.10 par value, authorized 500,000 shares; none issued or outstanding --- --- Common stock, $.01 par value, 10,000,000 and 40,000,000 shares authorized at August 31, 1996 and May 31, 1997, respectively; 5,476,027 and 5,566,762 shares issued and outstanding at August 31, 1996 and May 31, 1997, respectively 54,760 55,668 Additional paid-in capital 13,849,408 14,413,073 Retained earnings 6,455,241 11,938,158 ----------- ----------- TOTAL EQUITY 20,359,409 26,406,899 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,871,527 $40,553,846 =========== ===========
See notes to consolidated financial statements. -4- 5 HORIZON MENTAL HEALTH MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended May 31 ---------------------------------- 1996 1997 ----------- ----------- Revenues: Contract management $15,683,782 $18,952,845 Patient services 129,336 1,547,560 Other 6,747 34,782 ----------- ----------- Total revenues 15,819,865 20,535,187 Expenses: Salaries and benefits 8,688,352 10,970,634 Purchased services 2,182,160 3,305,851 Provision for bad debts 39,329 277,519 Depreciation and amortization 332,085 402,746 Other 2,259,108 2,504,154 ----------- ----------- Total operating expenses 13,501,034 17,460,904 Other income (expense): Interest expense --- (450) Interest and other income 86,968 121,802 Gain on sale of fixed assets --- 1,173 ----------- ----------- Income before income taxes and minority interest 2,405,799 3,196,808 Income tax expense (Note 6) 960,948 1,273,444 ----------- ----------- Income before minority interest 1,444,851 1,923,364 Minority interest (Note 3) --- 23,531 ----------- ----------- Net income $ 1,444,851 $ 1,899,833 =========== =========== Earnings per common share: Net income $ .22 $ .29 =========== =========== Weighted average shares outstanding 6,560,729 6,629,675 =========== ===========
See notes to consolidated financial statements. -5- 6 HORIZON MENTAL HEALTH MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended May 31 ------------------------------------ 1996 1997 ----------- ----------- Revenues: Contract management $45,167,746 $52,736,576 Patient services 315,539 4,353,685 Other 20,882 803,397 ----------- ----------- Total revenues 45,504,167 57,893,658 Expenses: Salaries and benefits 25,087,954 31,087,736 Purchased services 6,524,349 8,552,753 Provision for bad debts 42,389 742,969 Depreciation and amortization 974,124 1,201,652 Other 6,395,236 7,533,088 ----------- ----------- Total operating expenses 39,024,052 49,118,198 Other income (expense): Interest expense - related party (24,298) --- Interest expense - other (4,944) (802) Interest and other income 226,638 426,483 Loss on sale of fixed assets --- (1,888) ----------- ----------- Income before income taxes and minority interest 6,677,511 9,199,253 Income tax expense (Note 6) 2,648,126 3,641,245 ----------- ----------- Income before minority interest 4,029,385 5,558,008 Minority interest (Note 3) --- 75,091 ----------- ----------- Net income $ 4,029,385 $ 5,482,917 =========== =========== Earnings per common share: Net income $ .62 $ .83 =========== =========== Weighted average shares outstanding 6,505,147 6,637,785 =========== ===========
See notes to consolidated financial statements. -6- 7 HORIZON MENTAL HEALTH MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended Nine Months Ended May 31, May 31, 1996 1997 ----------------- ---------------- Operating activities: Net income $ 4,029,385 5,482,917 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 974,124 1,201,652 Loss on sale of equipment --- 1,888 Minority interest --- 75,091 Changes in net assets and liabilities: Increase in accounts receivable (1,810,775) (2,990,741) Decrease (increase) in other receivables 154,225 (281,340) Decrease (increase) in prepaid expenses and supplies (254,027) 36,633 Increase in other assets (415,432) (465,067) Increase in accounts payable, accrued expenses and other liabilities 1,205,353 709,513 Decrease in payable to health insurance program --- (661,248) ----------- ----------- Net cash provided by operating activities 3,882,853 3,109,298 Investing activities: Purchase of property and equipment (344,438) (1,073,090) Proceeds from sale of equipment --- 13,485 Payment for Purchase of Professional Psychological Services, Inc. --- (1,099,000) Payment for Purchase of Clay Care, Inc., net of cash acquired --- (913,634) Payment for Geriatric Medical Care, Inc., net of cash acquired --- (4,577,970) ----------- ----------- Net cash used in investing activities (344,438) (7,650,209) Financing activities: Payments of long-term debt (3,807,248) (68,994) Proceeds from line of credit 1,300,000 --- Net proceeds from issuance of common stock 92,386 164,239 Tax benefit related to stock option exercise 27,769 400,334 ----------- ----------- Net cash provided by (used in) financing activities (2,387,093) 495,579 ----------- ----------- Net increase (decrease) in cash and short term investments 1,151,322 (4,045,332) ----------- ----------- Cash and short-term investments at beginning of period 3,167,036 7,940,232 ----------- ----------- Cash and short-term investments at end of period $ 4,318,358 $ 3,894,900 =========== =========== Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 29,242 $ 802 =========== =========== Income taxes $ 3,067,779 $ 3,540,963 =========== =========== Supplemental disclosure of non-cash investing activities: - --------------------------------------------------------- Payment for Professional Psychological Services, Inc. Fair value of assets acquired $ 1,099,000 Cash paid (1,099,000) ----------- Liabilities assumed $ 0 =========== Purchase of Geriatric Medical Care, Inc. Fair value of assets acquired $ 6,048,669 Cash paid (4,626,738) ----------- Liabilities assumed $ 1,421,931 =========== Purchase of Clay Care, Inc. Fair value of assets acquired $ 1,057,532 Cash paid through June 1997 (1,000,000) ----------- Liabilities assumed $ 57,532 ===========
See notes to consolidated financial statements. -7- 8 HORIZON MENTAL HEALTH MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION Horizon Mental Health Management, Inc. ("Horizon" or the "Company") is a contract manager of mental health programs offered by general acute care hospitals in the United States. These management contracts are generally for terms ranging from three to five years, the majority of which have automatic renewal provisions. Horizon currently has regional operations offices in the metropolitan areas of Dallas, Texas; Chicago, Illinois; Tampa, Florida; Boston, Massachusetts; and San Francisco, California which will move to Los Angeles, California on or about September 1, 1997. Horizon's National Support Center is in Lewisville, Texas. Horizon was formed in July 1989 for the purpose of acquiring all the assets of two companies. One of the companies, known as Horizon Health Management Company, had been formed in 1981 and since that time had been engaged in the mental health contract management business. The other company owned and operated a freestanding psychiatric hospital in California. Effective March 1, 1990, the assets constituting the contract management business and the psychiatric hospital were transferred to Horizon. Horizon sold the freestanding psychiatric hospital in 1992. A subsidiary of Horizon leased and began operating Mountain Crest Hospital ("MCH") in December 1990. In July 1994, Horizon subleased MCH to Mental Health Management, Inc. ("MHM") for a period commencing July 31, 1994 through December 31, 2000. Horizon, which had previously guaranteed the obligations under the primary lease, has provided the substitute guaranty of MHM to the lessor. Management believes it has satisfied the conditions in the primary lease for release of Horizon's guaranty. The sublease requires monthly rental payments to Horizon of 50% of operating cash flow, as defined, subject to a minimum monthly payment of $20,000, not to exceed $1,200,000 in the aggregate over the sublease life which expires upon expiration of the primary lease on December 31, 2000. As of May 31, 1997, Horizon has received $783,686 of the $1,200,000 resulting in future receipts of $416,314 to be received on or before February 1, 1999 assuming minimum monthly payments of $20,000. On August 1, 1994 Horizon signed a contract with Horizon Mental Health Management, L.L.C. (the "Horizon LLC") to have it manage all of Horizon's then existing management contract obligations for a 72.5% interest in the Horizon LLC. Prior to March 20, 1995, the remaining 27.5% interest in the Horizon LLC was held by MHM which signed a contract with the Horizon LLC to have it manage all of MHM's then existing management contract obligations. Upon completion of its initial public offering of common stock, Horizon became contractually obligated to acquire the minority interest of MHM in the Horizon LLC. March 13, 1995 was the effective date of the initial public offering. The acquisition of the minority interest of MHM was effective March 20, 1995. As such, the Horizon LLC became a wholly-owned subsidiary of Horizon. Effective September 1, 1995, the Horizon LLC was dissolved and its operations combined with Horizon. -8- 9 On July 31, 1996, Horizon acquired eighty percent (80%) of the outstanding common stock of Florida Professional Psychological Services, Inc., also known as Professional Psychological Services, Inc. ("PPS") for an amount yet to be determined which Horizon estimates will be between $2,500,000 and $2,900,000. Based in Clearwater, Florida, PPS specializes in full risk, capitated managed behavioral health programs and employee assistance programs. (See Note 3) Effective March 15, 1997, the Company purchased all of the outstanding capital stock of Geriatric Medical Care, Inc., a Tennessee corporation ("Geriatric"), and Geriatric has been consolidated with Horizon as of March 15, 1997. Horizon accounted for the acquisition of Geriatric by the purchase method as required by generally accepted accounting principles. Geriatric is a contract manager of mental health services for acute care hospitals. Geriatric had total revenues of approximately $5.7 million in 1996 and, at March 15, 1997, had 18 management contract locations, of which three were not yet in operation. The purchase price of approximately $4.6 million, of which approximately $4.3 million was paid at closing from existing cash of Horizon, included retiring essentially all of Geriatric's outstanding debt. The final purchase price payment of $270,000 was made on April 16, 1997. The purchase price exceeded the fair value of Geriatric's tangible net assets by $5,005,986, of which $4,498,038 is recorded as goodwill and $507,948 as contract valuation. Tangible assets acquired and liabilities assumed totaled $1,042,683 and $1,421,931, respectively. Also effective March 15, 1997, the Company purchased all of the outstanding capital stock of Clay Care, Inc., a Texas corporation ("CCI"), and CCI has been consolidated with Horizon as of March 15, 1997. Horizon accounted for the acquisition of CCI by the purchase method as required by generally accepted accounting principles. CCI is a contract manager of mental health services for acute care hospitals. At March 15, 1997, CCI had management contracts with five hospitals of which four were in operation and one of which opened in April 1997. CCI had total revenues of approximately $1.3 million in 1996. A total of $475,000 of the $1,000,000 purchase price was paid at the closing from existing cash of the Company. The remaining $525,000 of the total purchase price was paid by Horizon in April 1997 and June 1997. The purchase price exceeded the fair value of CCI's tangible net assets by $855,738, of which $714,672 is recorded as goodwill and $141,066 as contract valuation. Tangible assets acquired and liabilities assumed totaled $201,794 and $57,532, respectively. BASIS OF PRESENTATION The accompanying consolidated balance sheet at May 31, 1997, the consolidated statements of operations for the three and nine month periods ended May 31, 1996 and 1997, and the consolidated statements of cash flows for the nine months ended May 31, 1996 and 1997 are unaudited. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended August 31, 1996. In the opinion of Company management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position of the Company as of May 31, 1997, and the results of operations for the three months and nine months ended May 31, 1996 and 1997. Operating results for the three and nine month periods are not necessarily indicative of the results that may be expected for a full year or any portion thereof. -9- 10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments include securities with original maturities of three months or less when purchased. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation expense is provided on the straight-line basis over the assets' estimated useful lives. The useful life of furniture and fixtures and computer equipment are estimated to be five years and three years, respectively. Routine maintenance and repair items are charged to current operations. REVENUE: Contract management revenue is reported at the estimated net realizable amounts from contracted hospitals for contract management services rendered. Adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlement is determined. Contract management revenue is based on a per diem calculation using patients per day, a fixed fee, admissions, discharges, direct expenses, or any combination of the preceding depending on a specific contract. Some management contracts include a clause which states that Horizon will indemnify the hospital for any third- party payor denials, including Medicare. At the time the charges are denied, an allowance for 100% of the disputed amount is recorded by Horizon. Management believes it has adequately provided for any potential adjustments that may result from final settlement of these denials. At May 31, 1997, Horizon had management contracts with 39 hospitals directly or indirectly owned by Columbia/HCA Healthcare Corporation ("Columbia/HCA"), of which 35 had programs in operation. These 35 contracts accounted for 22.4 % of the Company's net revenues for the nine months ended May 31, 1997. In the aggregate, including terminated contracts, revenues generated by hospitals directly or indirectly owned by Columbia/HCA accounted for 23.6% of the Company's net revenues for the nine months ended May 31, 1997. Of the 39 Columbia/HCA contracts at May 31, 1997, 18 contracts contain a provision limiting the number of contracts which Columbia/HCA can cancel without cause to 33.3% during any calendar year. The termination or non-renewal of all or a substantial part of the management contracts with hospitals owned by Columbia/HCA could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, at May 31, 1997, Horizon had eight management contracts with hospitals owned by Community Health Systems, which accounted for 5.5 % of the Company's net revenues for the nine months ended May 31, 1997. In addition, Horizon had six management contracts with hospitals affiliated with Tenet, which accounted for 4.4% of the Company's net revenues for the nine months ended May, 31, 1997. Patient service revenue is recorded on an accrual basis at the established rates. Provisions recognizing contractual adjustments and other adjustments are recorded on an accrual basis and deducted from gross revenue to determine net patient service revenue. The customers of Horizon are not concentrated in any specific geographic region, but are concentrated in the health care industry. Horizon generally does not require collateral to support outstanding accounts receivable. -10- 11 HEALTH INSURANCE PROGRAM REIMBURSEMENT: Services were provided under Horizon's management to patients who are eligible for coverage under Title XVIII (Medicare) Health Insurance Programs. Amounts received are generally less than the standard billing rates of the hospital and receivables are recorded in the consolidated balance sheet at the estimated amount to be reimbursed. Amounts due to/from Health Insurance Programs under Medicare are subject to final determination through an audit by a fiscal intermediary. Any difference between the final determination and estimated amounts accrued is accounted for as an adjustment to patient service revenue in the year of final determination. Management believes it has adequately provided for any potential adjustments resulting from an audit. LONG-LIVED AND INTANGIBLE ASSETS: The Company has adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121), effective September 1, 1994. Under SFAS 121, the Company recognizes impairment losses on property and equipment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets, on an individual property basis, may not be recoverable through undiscounted future cash flows. Such losses are determined by comparing the sum of the expected future discounted net cash flows to the carrying amount of the asset. Impairment losses are recognized in operating income as they are determined. As of May 31, 1997, no impairment losses have been incurred. INCOME TAXES: Horizon has adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109 generally requires an asset and liability approach and requires recognition of deferred tax assets and liabilities resulting from differing book and tax bases of assets and liabilities. It requires that deferred tax assets and liabilities be determined using the tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Under this method, future financial results will be impacted by the effect of changes in income tax rates on cumulative deferred income tax balances. NET INCOME PER SHARE: Net income per common share is calculated using the weighted average number of common and common equivalent shares outstanding during the respective periods. Dilutive common equivalents consist of stock options calculated using the treasury stock method. All shares and per share data, except par value per share, have been retroactively adjusted to reflect a three-for-two stock split effected as a 50% stock dividend by the Company (see Note 8). USE OF ESTIMATES: The Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 3. INVESTMENT IN PPS On July 31, 1996, Horizon acquired eighty percent (80%) of the outstanding common stock of Florida Professional Psychological Services, Inc., also known as Professional Psychological Services, Inc. ("PPS"), and PPS has been consolidated with Horizon as of August 1, 1996. Horizon accounted for the acquisition of PPS by the purchase method as required by generally -11- 12 accepted accounting principles. Based in Clearwater, Florida, PPS specializes in full risk, capitated managed behavioral health programs and employee assistance programs. The purchase price is based primarily on a multiple of the 1996 pre-tax income of PPS. Horizon currently estimates the purchase price will be between $2,500,000 and $2,900,000, of which interim payments of $1,225,000 and $1,099,000 were paid on July 31, 1996 and April 9, 1997, respectively. The purchase price exceeded the fair value of PPS' net assets by $2,974,575 which is recorded as goodwill. Assets acquired and liabilities assumed totaled $541,000 and $515,000. The final reconciliation statement of income of PPS for the twelve months ended December 31, 1996 is to be delivered on or before July 15, 1997 or the earliest practical date thereafter, and any remaining purchase price is to be paid on or before August 14, 1997. In addition, Horizon also obtained an option to acquire the remaining twenty percent (20%) of the outstanding PPS common stock at a future date. The sellers, constituting all the shareholders of PPS, also obtained the right to put to Horizon such shares on certain dates. The option and put prices for the remaining PPS shares are based on a multiple of the pre-tax income of PPS in future years. The following table presents the revenue of PPS for fiscal years 1995 and 1996. PPS's effect on Horizon's net income and earnings per share has been deemed negligible for the periods and not presented. Historical Revenue Summary (unaudited)
1995 1996 ---- ---- $4,475,000 $5,050,000
For the three and nine months ended May 31, 1997, PPS generated $1,432,937 and $3,978,120 in gross revenues, respectively, and net income of $117,651 and $375,451, respectively. 4. LONG-TERM DEBT Effective September 29, 1995, the Company entered into a loan agreement with Texas Commerce Bank (TCB) for a revolving line of credit with a maximum advance commitment of $11,000,000. On December 12, 1995, the Company paid TCB the outstanding balance of $1,300,000 originally advanced to the Company during the quarter ended November 30, 1995, plus accrued interest. As of May 31, 1997, the Company has borrowed $0 against the available line of credit, and has $10.1 million available for advances under the revolving credit facility. The line of credit bears interest at (1) the lesser of the Floating Base Rate or the maximum non-usurious interest rate permitted by law and/or (2) the lesser of the LIBOR Rate plus LIBOR Margin or the maximum nonusurious interest rate permitted by law. Floating Base Rate means the greater of (i) TCB's prime rate of interest or (ii) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers plus one-half of one percent (.5%). LIBOR Rate means the quotient of (i) the Interbank Offered Rate divided by (ii) the remainder of 1.0 minus the LIBOR reserve requirement. LIBOR Margin is 1.25% to 1.75% depending on the debt coverage ratio. -12- 13 The original maturity date of this line of credit is December 15, 1998; however, it may be extended to December 15, 2000 if certain debt coverage ratios are met. 5. STOCK OPTIONS In accordance with Horizon's 1989 and 1995 Stock Option Plans, there are 1,931,843 shares of common stock reserved for grant to key employees, of which 256,016 were granted and previously exercised as of August 31, 1996. In addition, 1,411,268 options and 1,461,327 options were issued and outstanding at August 31, 1995 and 1996, respectively. During fiscal 1995 nonstatutory stock options to purchase 168,000 shares of common stock were granted with an exercise price of $4.00, $6.6667, $7.4167 or $8.9167 per share, respectively. On September 1, 1995, the Company granted an additional 127,500 options under the 1995 Stock Option Plan at $9.75 per share subject to shareholder approval which was received on January 11, 1996. An additional 128,250 shares with an exercise price of $14.1667 were granted on August 15, 1996. An additional 22,500 shares with exercise prices of $16.3333, $15.375, and $19.000 were granted during the first nine months of fiscal year 1997. Management believes the exercise prices of the options approximated or exceeded the market value of the common stock at the date of grant. As such, no expense is recognized in the accompanying statements of income as a result of such issuance. The options are generally exercisable in cumulative installments over a four or five year period and terminate 10 years from the date of grant. During fiscal 1995 and 1996, 39,000 and 11,250 options granted to former officers were canceled respectively. An additional 27,937 options were canceled during the first nine months of fiscal year 1997. During fiscal 1995, vested options of 101,250 and 17,325 have been exercised by certain officers at exercise prices of $0.8333 and $2.1417, respectively. During fiscal 1996, vested options of 42,000 at $0.50, and 38,816 at $0.8333 and 53,625 at $1.00 have been exercised. During fiscal 1997, vested options of 22,500 at $1.00, 18,750 at $3.6157, 3,750 at $4.00, 750 at $6.6667, 42,485 at $0.8333, and 2,500 at $7.4167 have been exercised. At May 31, 1997 there were 1,931,843 shares reserved, of which 346,750 shares were issued and exercised, 1,365,156 shares were issued and unexercised and 219,937 shares remain unissued. Of the 1,365,156 shares issued and unexercised, 577,665 shares were exercisable. On April 28, 1995 the board of directors created a stock option plan for outside directors owning less than 5% of the stock of the Company. 150,000 shares of common stock are reserved for issuance under this plan. This plan has been amended and restated to also provide for 3,000 option grants to each eligible director each time they are re-elected to the board after having served as a director for at least one year since their initial grant under the plan. At February 28, 1997 there were 150,000 shares reserved under this plan, of which no shares were issued and exercised, 72,000 shares were issued and unexercised and 78,000 shares remain unissued. Of the 72,000 shares issued and unexercised, 21,000 shares were exercisable. 12,000 options were issued to outside directors during the first nine months of fiscal year 1997 due to re-election at the January 29, 1997 Annual Meeting of Stockholders. On April 1, 1996 the Company filed an S-8 registration statement which registered 2,054,549 shares granted to or eligible for granting to employees and directors under the 1989 and 1995 Stock Option Plans, as amended, and the outside director stock option plan. This registration includes a separate reoffer prospectus to allow any shares issued in the future and most previously exercised shares under the 1989 and 1995 Stock Option Plans to be traded at any time without any holding period or volume restrictions. -13- 14 In October 1995, the Financial Accounting Standards Board issued statement No. 123 "Accounting for Stock-Based Compensation." FASB statement No. 123 contains recognition provisions and mandatory disclosure provisions. Companies electing to adopt the recognition provisions would be required to measure and recognize compensation cost based on a fair value based method of accounting. The disclosure provisions apply to all companies regardless of the method used to account for stock compensation arrangements and must be adopted for fiscal years beginning after December 15, 1995. Horizon will continue to measure and recognize compensation cost based on the accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees", and will adopt the disclosure provisions of FASB statement No. 123 during fiscal year 1997. 6. PROVISION FOR INCOME TAXES The Company recorded federal and state income taxes for the three and nine months ended May 31, 1997, in the amount of $1,273,444 and $3,641,245, respectively, resulting in a combined tax rate of 39.8% and 39.6%, respectively. 7. COMMITMENTS AND CONTINGENCIES Horizon leases various office facilities and equipment under operating leases. In addition, Horizon leases space for one partial hospitalization program in association with one management contract. The following is a schedule, as of May 31, 1997, of minimum rental payments under these leases which expire at various dates: Three months ending August 31, 1997 $ 202,420 For the year ending August 31, 1998 708,436 For the year ending August 31, 1999 539,761 For the year ending August 31, 2000 494,048 For the years ending August 31, 2001 and thereafter 449,586 ------------ $ 2,394,251 ============
On December 20, 1995 the Company entered into a lease agreement expiring September 26, 2001 for a building to be constructed in Lewisville, Texas to the Company's specifications. On September 27, 1996, a certificate of occupancy was issued and the Company occupied the building as its executive offices and National Support Center. Rental payments commenced the same date. In connection with the lease transaction, the Company has guaranteed a loan of approximately $900,000. The loan was 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. On July 31, 1996, Horizon acquired eighty percent (80%) of the outstanding common stock of Florida Professional Psychological Services, Inc. ("PPS"). The purchase price is based primarily on a multiple of the 1996 pre-tax income of PPS. Horizon currently estimates the purchase price will be between $2,500,000 and $2,900,000, of which interim payments of $1,225,000 and $1,099,000 were paid on July 31, 1996 and April 9, 1997, respectively. The final reconciliation statement of income of PPS for the twelve months ended December 31, 1996 is to be delivered on or before July 15, 1997 or the earliest practical date thereafter, and any remaining purchase price is to be paid on or before August 14, 1997. -14- 15 On April 25, 1997 Horizon signed a definitive agreement to acquire privately held Specialty Healthcare Management, Inc. (Specialty) of Englewood, Colorado. The definitive agreement contemplates a transaction to be accounted for as a pooling of interests in which Specialty would become a wholly owned subsidiary of Horizon. Specialty is a contract manager of mental health, physical rehabilitation and chemical dependency treatment programs for general acute care hospitals and other health care entities. For the year ended December 31, 1996, Specialty reported revenues of $33.8 million and net income of $1.2 million. The issuance of 1,400,000 shares of Horizon common stock to shareholders of Specialty in the transaction is subject to the approval of Horizon's stockholders at a special stockholders' meeting which is expected to be held in August 1997. Horizon is insured for professional and general liability on a claims-made policy, with additional tail coverage being obtained when necessary. Management does not believe that any material, estimable, and probable claims exist against the Company that would cause the final expenses for professional and general liability to vary materially from amounts provided. Horizon is involved in litigation arising in the ordinary course of business, including matters involving professional liability. It is the opinion of management that the ultimate disposition of such litigation would not be in excess of any reserves or have a material adverse effect on Horizon's financial position or results of operations. 8. COMMON STOCK The Board of Directors of the Company approved a three-for-two stock split effected in the form of a 50% stock dividend, pursuant to which one additional share of Common Stock of the Company was issued on January 31, 1997 for every two shares of Common Stock held by stockholders of record at the close of business on January 22, 1997. As a result of such stock split/dividend, a total of $18,253 originally recorded as additional paid in capital was reclassified as common stock. Such stock split/dividend has been retroactively reflected in the consolidated financial statements included in this report. Upon effecting the stock split/dividend, the stock options and their related exercise prices were adjusted proportionately. In February 1997, the Certificate of Incorporation, as amended, of the Company was amended to increase the number of authorized shares of Common Stock, $.01 par value per share, of the Company from 10,000,000 shares to 40,000,000 shares. In February 1997, the Company entered into a Rights Agreement pursuant to which it approved the distribution of one Common Stock purchase right for each outstanding share of Common Stock of the Company. The Rights Agreement and the amendment to the Certificate of Incorporation referred to above were approved by the stockholders of the Company at the Annual Meeting of Stockholders held on January 29, 1997. -15- 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was formed in July 1989 for the purpose of acquiring all the assets of two companies. One company, known as Horizon Health Management Company, had been formed in 1981 and since that time had been engaged in the mental health contract management business. The other company owned and operated a freestanding psychiatric hospital in California. Although Horizon owned, leased or managed a few freestanding psychiatric or substance abuse facilities beginning March 1, 1990, the mental health contract management business formed by Horizon's predecessor in 1981 has been Horizon's primary business since subleasing its last remaining freestanding psychiatric hospital on July 31, 1994. Effective August 1, 1994, Horizon and MHM formed the Horizon LLC. Horizon signed a contract with the Horizon LLC to have it manage all of Horizon's then existing management contracts for a 72.5% interest in the Horizon LLC. Prior to March 20, 1995, the remaining 27.5% interest in the Horizon LLC was held by MHM which signed a contract with the Horizon LLC to have it manage all of MHM's then existing 39 management contracts. Upon completion of its initial public offering of common stock, Horizon became contractually obligated to acquire the minority interest of MHM in the Horizon LLC. March 13, 1995 was the effective date of the initial public offering. The acquisition of the minority interest of MHM was effective March 20, 1995. As such, the Horizon LLC became a wholly-owned subsidiary of Horizon. The Horizon LLC was consolidated with the Company effective March 1, 1995. Effective September 1, 1995, the Horizon LLC was dissolved and its operations combined with Horizon's. Mental Health Outcomes, Inc. ("MHO, Inc."), a Delaware corporation, was formed on August 10, 1995 and is engaged in the design and operation of outcome measurement systems for psychiatric and chemical dependency providers under the trade name "CQI+". MHO, Inc. is a wholly owned subsidiary of Horizon. On July 31, 1996, Horizon acquired eighty percent (80%) of the outstanding common stock of Florida Professional Psychological Services, Inc., also known as Professional Psychological Services, Inc. ("PPS"). PPS has been consolidated with Horizon as of August 1, 1996. Horizon accounted for the acquisition of PPS by the purchase method as required by generally accepted accounting principles. Based in Clearwater, Florida, PPS specializes in full risk, capitated managed behavioral health programs and employee assistance programs. The purchase price is based primarily on a multiple of the 1996 pre-tax income of PPS. Horizon currently estimates the purchase price will be between $2,500,000 and $2,900,000, of which interim payments of $1,225,000 and $1,099,000 were paid on July 31, 1996 and April 9, 1997, respectively. The final reconciliation statement of income of PPS for the twelve months ended December 31, 1996 is to be delivered on or before July 15, 1997 or the earliest practical date thereafter, and any remaining purchase price is to be paid on or before August 14, 1997. In addition, Horizon also obtained an option to acquire the remaining twenty percent (20%) of the outstanding PPS common stock at a future date. The sellers, constituting all the shareholders of PPS, also obtained the right to put to Horizon such shares on certain dates. The option and put prices for the remaining PPS shares are based on a multiple of the pre-tax income of PPS in future years. -16- 17 Effective March 15, 1997, the Company purchased all of the outstanding capital stock of Geriatric Medical Care, Inc., a Tennessee corporation ("Geriatric"). Geriatric is a contract manager of mental health services for acute care hospitals. Geriatric had total revenues of approximately $5.7 million in 1996, and at March 15, 1997, had 18 management contract locations, of which three were not yet in operation. The purchase price of approximately $4.6 million, of which approximately $4.3 million was paid at closing from existing cash of Horizon, included retiring essentially all of Geriatric's outstanding debt. The final purchase price payment of $270,000 was made on April 16, 1997. Also effective March 15, 1997, the Company purchased all of the outstanding capital stock of Clay Care, Inc., a Texas corporation ("CCI"). CCI is a contract manager of mental health services for acute care hospitals. At March 15, 1997, CCI had management contracts with five hospitals of which four were in operation and one of which opened in April 1997. CCI had total revenues of approximately $1.3 million in 1996. A total of $475,000 of the $1,000,000 purchase price was paid at the closing from existing cash of Horizon. The remaining $525,000 of the total purchase price was paid by Horizon in April 1997 and June 1997. On April 25, 1997 Horizon signed a definitive agreement to acquire privately held Specialty Healthcare Management, Inc. (Specialty) of Englewood, Colorado. The definitive agreement contemplates a transaction to be accounted for as a pooling of interests in which Specialty would become a wholly owned subsidiary of Horizon. Specialty is a contract manager of mental health, physical rehabilitation and chemical dependency treatment programs for general acute care hospitals and other health care entities. For the year ended December 31, 1996, Specialty reported revenues of $33.8 million and net income of $1.2 million. The issuance of 1,4000,000 shares of Horizon common stock to shareholders of Specialty in the transaction is subject to the approval of Horizon's stockholders at a special stockholders' meeting which is expected to be held in August 1997. In addition, at the meeting Horizon stockholders will be asked to approve an amendment to the Certificate of Incorporation of Horizon to change its corporate name to "Horizon Health Corporation". Horizon, which had previously traded on the American Stock Exchange under the symbol "HMH", began trading on the Nasdaq National Market on May 7, 1996, under the symbol "HMHM". At May 31, 1997, the Company had management contracts with 146 general acute care hospitals located in 36 states, providing for the operation of a total of 223 various treatment programs. -17- 18 SUMMARY STATISTICAL DATA
August 31, ----------------------------- November 30, February 28, May 31, 1994 1995 1996 1996 1997 1997 ----------------------------- ------------ ------------ ------- NUMBER OF CONTRACT LOCATIONS: Contract locations in operation 99 100 107 104 109 128 Contract locations signed and unopened 9 12 16 19 10 18 --- --- --- --- --- --- Total contract locations 108 112 123 123 119 146 === === === === === === SERVICES COVERED BY CONTRACTS IN OPERATION: Inpatient (A) 89 91 97 94 97 107 Partial hospitalization (A) 45 55 71 73 73 90 Outpatient 7 8 11 10 12 12 Home health 1 1 12 13 13 14 CQI Plus (under contract) 20 45 64 66 75 83 TYPES OF TREATMENT PROGRAMS IN OPERATION: Geropsychiatric (A) 75 92 130 127 132 160 Adult psychiatric (A) 60 57 51 53 54 55 Substance abuse (A) 4 3 7 6 6 5 Other (A) 3 2 3 4 3 3
(A) Beginning with the quarter ended February 29, 1996 a new methodology which redefined the statistical definition of an operating service or program was implemented. To avoid duplicity, multiple services/treatment programs within each category at one location are now being reported as a single service/treatment program where the predominant treatment defines the appropriate categories. As a result of this reporting change, prior periods have been restated as estimates based on the new reporting definition. -18- 19 RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED MAY 31, 1996 AND 1997 The following table sets forth for the three month and nine month periods ended May 31, 1996 and 1997, the percentage relationship to total net revenues of certain costs, expenses and income.
Three Months Ended Nine Months Ended May 31, May 31, ------------------------ ----------------------- 1996 1997 1996 1997 ----- ----- ----- ----- Revenues: Contract management revenues 99.1% 92.3% 99.3% 91.1% Other revenues 0.9% 7.7% 0.7% 8.9% ----- ----- ----- ----- Net revenues 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Operating costs and expenses Salaries and benefits 54.9% 53.4% 55.1% 53.7% Purchased services 13.8% 16.1% 14.3% 14.8% Provision for bad debts 0.2% 1.4% 0.1% 1.3% Depreciation and amortization 2.1% 2.0% 2.1% 2.1% Other 14.3% 12.1% 14.1% 12.9% ----- ----- ----- ----- Total operating costs and expenses 85.3% 85.0% 85.7% 84.8% ----- ----- ----- ----- Income from operations 14.7% 15.0% 14.3% 15.2% Interest (net of other income), and other losses 0.5% 0.6% 0.4% 0.7% ----- ----- ----- ----- Income before income taxes and minority interest 15.2% 15.6% 14.7% 15.9% Income tax expense 6.1% 6.2% 5.8% 6.3% Minority interest 0.0% 0.1% 0.0% 0.1% Net income 9.1% 9.3% 8.9% 9.5% ===== ===== ===== ===== Number of contracts in operation, end of period 104 128 104 128
-19- 20 THREE MONTHS ENDED MAY 31, 1997 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1996 Revenue. Revenues for the three months ended May 31, 1997 were $20.5 million, representing an increase of $4.7 million, or 29.7%, as compared to revenues of $15.8 million for the corresponding period in the prior fiscal year. An increase in contract management revenues accounted for $3.3 million of the $4.7 million increase in revenues. $1.5 million of the $3.3 million increase in contract management revenues results from revenue recorded for Geriatric Medical Care, Inc. ("Geriatric") and Clay Care, Inc. ("CCI"). Horizon acquired 100% of the outstanding voting stock of Geriatric and CCI effective March 15, 1997 and consolidated Geriatric and CCI with Horizon as of the effective date of acquisition. Contract management revenues also increased $1.3 million at locations that have been under Horizon management during all periods being reported. This was the result of an average rate increase of 2.2% and the addition of new programs including a 29.4% increase in CQI Plus revenues, a 102% increase in Home Health revenues and a 35% increase in Outpatient revenues between the periods. The remaining increase in contract management revenues results from an increase in the average number of contract locations in operation for non-acquired units from 103.8 for the three months ended May 31, 1996 to 108.5 for the three months ended May 31, 1997. An increase in patient service revenue accounted for $1.4 million of the $4.7 million increase in revenues. The $1.4 million increase in patient service revenue results from revenue recorded for Florida Psychological Services, Inc. ("PPS"). Horizon acquired 80% of the outstanding common stock of PPS on July 31, 1996, and consolidated PPS with Horizon as of August 1, 1996. Salaries and Benefits. Salaries and benefits for the three months ended May 31, 1997 were $11.0 million, representing an increase of $2.3 million, or 26.4%, as compared to salaries and benefits of $8.7 million for the three months ended May 31, 1996. This increase resulted from the increase in full time equivalents from 607.2 for the three months ended May 31, 1996, to 761.4 for the three months ended May 31, 1997, an increase of 25.4%. Full time equivalents increased between the periods as follows:
May 31, May 31, 1996 1997 Increase % Increase ------- -------- -------- ---------- National Support 72.9 85.7 12.8 17.6% Regional Offices 42.4 42.4 0.0 0.0 PPS 0.0 48.3 48.3 N/A Contract Locations 491.9 585.0 93.1 19.0% ----- ----- ----- 607.2 761.4 154.2 25.4%
The increase in the National Support Center full time equivalents of 17.6% results from the expansion of the General and Administrative Department, as well as the expansion of Mental Health Outcomes, Inc. The increase in contract location full time equivalents of 19.0% results from an increase in the average number of contract locations in operation from 103.8 for the three months ended May 31, 1996, to 125.9 for the three months ended May 31, 1997, an increase of 21.4%. The increase in average number of locations in operation results from new location openings and the purchase of Geriatric and CCI effective March 15, 1997. Additionally, Horizon acquired eighty percent (80%) of the outstanding common stock of PPS on July 31, 1996. PPS's FTE's averaged 48.3, with associated salary of $534,000, for the quarter ended May 31, 1997. The Company's average annualized salaries per full time equivalent for the three months ended May 31, 1997 were $57,634, representing an increase of $398, or 0.7%, as compared to average annualized salaries per full time equivalent of $57,236 for the three months ended May 31, 1996. Benefits for the three months ended May 31, 1997 were $1.4 million, representing an increase of $200,000, or 16.6%, as compared to benefits of $1.2 million for the three months ended May 31, 1996. This increase included an increase of $33,000 between the periods in relation to the acquisition of PPS on July 31, 1996. In addition, benefits increased $79,000 and $8,000, respectively, between the periods in relation to the acquisitions of Geriatric and CCI effective March 15, 1997. -20- 21 Depreciation and Amortization. Depreciation and amortization expenses for the three months ended May 31, 1997 were $403,000, representing an increase of $71,000, or 21.4%, as compared to depreciation and amortization expenses of $332,000 for the corresponding period in the prior fiscal year. $61,000 of this increase is due to the amortization of goodwill of $3.0 million, $4.5 million, and $700,000 resulting from the acquisition of PPS, Geriatric and CCI, respectively. Amortization expense also increased $20,000 in relation to the value placed on the contracts of Geriatric and CCI. These increases were offset by a decrease in amortization expense of $37,000 associated with contracts acquired in 1990 which were fully amortized at February 1997. The remainder of the increase results from the depreciation expense of additional equipment acquired by acquisition or purchased for the operation of Horizon's contract management business. Other Operating Expenses (Including Purchased Services and Provision for Bad Debts). Other operating expenses for the three months ended May 31, 1997, were $6.1 million, representing an increase of $1.6 million, or 35.6%, as compared to other operating expenses of $4.5 million for the corresponding period in the prior fiscal year. The following components identify the variances between the periods reported. Purchased services included a $185,000 increase in Medical Directors' administrative fees for the three months ended May 31, 1997 as compared to the same period in the prior fiscal year primarily as a result of the acquisitions of Geriatric and CCI effective March 15, 1997. Medical Directors' administrative fees associated with Geriatric and CCI for the three months ended May 31, 1997 were $103,000 and $52,000, respectively. In addition, an increase occurred in purchased services due to an increase of $529,000 in direct service fees related to PPS, which was acquired by the Company on July 31, 1996. Consulting expense increased $319,000 for the three months ended May 31, 1997 as compared to the three months ended May 31, 1996. $24,000 of this increase is related to a software upgrade for the regional offices and the National Support Center, and $100,000 is related to fees for a marketing survey. Bad debt expense was $278,000 for the three months ended May 31, 1997 as compared to $39,000 bad debt expense for the three months ended May 31, 1996. This increase was primarily due to the non-timely payment by contracted hospitals. $64,000 of the increase in other operating expenses was due to rent expense related to PPS, which was acquired by the Company on July 31, 1996. Interest and Other Income (Expense), Net. Interest income, net of interest expense, and other income for the three months ended May 31, 1997 was $123,000, as compared to $87,000 in net interest income for the corresponding period in the prior fiscal year. This change results primarily from an increase in interest income of $35,000. Income Tax Expense. For the three month period ended May 31, 1997, the Company recorded federal and state income taxes of $1,273,000 resulting in a combined tax rate of 39.8%. For the three month period ended May 31, 1996, the Company recorded federal and state income taxes of $961,000 resulting in a combined tax rate of 39.9%. -21- 22 NINE MONTHS ENDED MAY 31, 1997 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1996 Revenue. Revenues for the nine months ended May 31, 1997 were $57.9 million, representing an increase of $12.4 million, or 27.3%, as compared to revenues of $45.5 million for the corresponding period in the prior fiscal year. An increase in contract management revenues accounted for $7.6 million of the $12.4 million increase in revenues. In part, this increase resulted from an increase in the average number of contract locations in operation from 102.5 for the nine months ended May 31, 1996, to 114.3 for the nine months ended May 31, 1997, an increase of 11.6%. Contract management revenue also increased $3.8 million at locations that have been under Horizon management during all periods being reported. This was primarily the result of an average rate increase of 2.5% and the addition of new programs including a 226.3% increase in Home Health revenues and a 46.3% increase in Outpatient revenues between the periods. In addition, patient volumes for inpatient and partial programs increased 1.6% and 4.1% between the periods. An increase in patient service revenue accounted for $4.0 million of the $12.4 million increase in revenues. The $4.0 million increase in patient service revenue results from revenue recorded for Florida Professional Psychological Services, Inc. ("PPS"). Horizon acquired 80% of the outstanding common stock of PPS on July 31, 1996, and consolidated PPS with Horizon as of August 1, 1996. Salaries and Benefits. Salaries and benefits for the nine months ended May 31, 1997 were $31.1 million, representing an increase of $6.0 million, or 23.9%, as compared to salaries and benefits of $25.1 million for the nine months ended May 31, 1996. This increase resulted from the increase in full time equivalents from 599.4 for the nine months ended May 31, 1996, to 710.6 for the nine months ended May 31, 1997, an increase of 18.6%. Full time equivalents increased between the periods as follows:
May 31, May 31, 1996 1997 Increase % Increase ------- ------- -------- ---------- National Support 69.2 81.2 12.0 17.3% Regional Offices 43.6 41.4 (2.2) (5.0)% PPS 0.0 47.2 47.2 N/A Contract Locations 486.6 540.8 54.2 11.1% ----- ----- ----- 599.4 710.6 111.2 18.6%
The increase in the National Support Center full time equivalents of 17.3% results from the expansion of the General and Administrative Department, as well as the expansion of Mental Health Outcomes, Inc. The increase in contract location full time equivalents of 11.1% results from an increase in the average number of contract locations in operation from 102.5 for the nine months ended May 31, 1996, to 114.3 for the nine months ended May 31, 1997, an increase of 11.6%. Additionally, Horizon acquired eighty percent (80%) of the outstanding common stock of PPS on July 31, 1996. PPS's FTE's averaged 47.2, with associated salary of $1.5 million, for the nine months ended May 31, 1997. The Company's average annualized salaries per full time equivalent for the nine months ended May 31, 1997 were $50,195, representing an increase of $2,189, or 4.6%, as compared to average annualized salaries per full time equivalent of $48,006 for the nine months ended May 31, 1996. Benefits for the nine months ended May 31, 1997 were $4.3 million, representing an increase of $826,000, or 23.6%, as compared to benefits of $3.5 million for the nine months ended May 31, 1996. This increase included an increase of $266,000 in medical insurance premiums and employer payroll taxes paid between the periods. In addition, benefits also increased due to an increase in the amount accrued for the Company's 401K match from $131,000 for the nine months ended May 31, 1996, to $443,000 for the nine months ended May 31, 1997, representing an increase of $312,000, or 238.2%. This is primarily attributable to a retroactive increase to January 1, 1996, of the Company's 401K match as a result of an additional accrual of the potential employer match totaling $237,000 based on employee 401K contributions for calendar 1996. Benefits also increased $161,000, $79,000, and $8,000 between the periods in relation to the acquisitions of PPS on July 31, 1996, and Geriatric and CCI on March 15, 1997. -22- 23 Depreciation and Amortization. Depreciation and amortization expenses for the nine months ended May 31, 1997 were $1.2 million, representing an increase of $226,000, or 23.2%, as compared to depreciation and amortization expenses of $974,000 for the corresponding period in the prior fiscal year. $83,000 of this increase is due to the amortization of goodwill of $3.0 million, $4.5 million, and $700,000 resulting from the acquisition of PPS, Geriatric and CCI, respectively. Amortization expense also increased $20,000 in relation to the value placed on the contracts of Geriatric and CCI. In addition, the Company recorded $73,000 of additional depreciation expense due to a change in the Company's definition of a capital expenditure. The remainder of this increase results from the depreciation expense of additional equipment acquired through acquisitions or purchased for the operation of Horizon's contract management business. Cash expenditures used for the purchase of property and equipment were $1.1 million for the nine months ended May 31, 1997, an increase of $756,000, as compared to $344,000 for the nine months ended May 31, 1996. Other Operating Expenses (Including Purchased Services and Provision for Bad Debts). Other operating expenses for the nine months ended May 31, 1997, were $16.8 million, representing an increase of $3.8 million, or 29.2%, as compared to other operating expenses of $13.0 million for the corresponding period in the prior fiscal year. The following components identify the variances between the periods reported. Purchased services included a $1.3 million increase in direct service fees related to PPS, which was acquired by the Company on July 31, 1996. Consulting expense increased $459,000 for the nine months ended May 31, 1997 as compared to the nine months ended May 31, 1996. $98,000 of this increase is related to a software upgrade for the regional offices and the National Support Center, and $174,000 is related to fees for a marketing survey. The change in Medical Directors' administrative fees from the previous period was nominal due to several offsetting factors. First, Medical Director administrative fees have decreased from successful contract negotiations with physicians on a permanent basis to provide administrative services which minimized the usage of locum tenens physicians (i.e., contracting with physicians/physician placement services to provide qualified individuals to perform administrative duties on a temporary basis). Additionally, certain physician contracts have been renegotiated resulting in a general lowering of compensatory fees. Also, the Company has acquired new contract management businesses which have increased Medical Directors' administrative fees. Bad debt expense increased $700,000 for the nine months ended May 31, 1997 as compared to the nine months ended May 31, 1996. This increase was primarily due to the non-timely payment by contracted hospitals. Other operating expenses increased due to an increase of $386,000 in telephone and rent expense for the nine months ended May 31, 1997 as compared to the nine months ended May 31, 1996. $191,000 of this increase is related to rent for PPS, which was acquired by the Company on July 31, 1996. The remaining amount is primarily related to the increased capabilities of the telephone systems installed in both the regional offices and the newly expanded National Support Center, which includes the use of video teleconferencing in each of these locations. The newly expanded National Support Center and the addition of two outpatient practices resulted in the increase in rent expense. Other operating expenses experienced an increase of $256,000 due to an increase in legal settlements for the nine months ended May 31, 1997, as compared to the corresponding nine months of the prior fiscal year. Interest and Other Income (Expense), Net. Interest income, net of interest expense, and other income for the nine months ended May 31, 1997 was $424,000, as compared to $197,000 in net interest income for the corresponding period in the prior fiscal year. This change results primarily from a decrease in interest expense of $24,000 resulting from the retirement of long-term debt on October 3, 1995 and an increase in interest income of $200,000. Income Tax Expense. For the nine month period ended May 31, 1997, the Company recorded federal and state income taxes of $3,641,000, resulting in a combined tax rate of 39.6%. For the nine month period ended May 31, 1996, the Company recorded federal and state income taxes of $2,648,000, resulting in a combined tax rate of 39.7%. -23- 24 LIQUIDITY AND CAPITAL RESOURCES Effective September 29, 1995, the Company completed a transaction with Texas Commerce Bank, N.A. for an $11 million revolving credit facility. The purpose of the facility is to provide funds to be used for working capital needs and future acquisitions. The facility is for a three year term with extension provisions. As of May 31, 1997, the Company had $10.1 million available under the revolving credit facility, of which the Company had borrowed $0 as of May 31, 1997. Under the terms of the facility, the principal outstanding thereunder to the Company from time to time cannot exceed the lesser of (i) $11.0 million and (ii) the sum of 80% of the Company's consolidated eligible accounts receivable, as defined, plus additional amounts up to $3,372,450 based on specified time periods and the Company's debt coverage ratio, as defined, less certain reserves. Principal outstanding under the facility will bear interest at a "Floating Base Rate" and/or the "LIBOR Rate plus Applicable LIBOR Margin", as selected by the Company in accordance with the terms of the facility. See Note 4 to the Company's Consolidated Financial Statements included herein. Accrued interest will be payable monthly during the primary term of the facility, and quarterly thereafter if the term of the facility is extended. Depending upon the Company's debt coverage ratio at December 15, 1998, principal borrowed under the facility will either be due in full on such date, or a portion of such principal will be due on such date, and the remainder will be due in eight equal quarterly installments thereafter ending December 15, 2000. The Company is subject to certain covenants under the agreements governing the credit facility, including prohibitions against (i) incurring additional debt or liens, except permitted debt (defined to include purchase money debt of $1.0 million in the aggregate) or specified permitted liens, (ii) certain material acquisitions, other than permitted acquisitions as defined (including acquisitions not exceeding $7.0 million per transaction), (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) entering into any lines of business other than that in which the Company is presently engaged. In addition, the terms of the facility require the Company to satisfy certain ongoing financial covenants. The facility is secured by all of the capital stock of the subsidiaries of the Company and substantially all other assets of the Company. The Company has agreed to purchase a leased building for approximately $4.5 million at September 26, 2001 if it is not sold to a third party, or the Company does not extend its lease. (See Note 7 to the Company's Consolidated Financial Statements included herein). On July 31, 1996, Horizon acquired eighty percent (80%) of the outstanding common stock of Florida Professional Psychological Services, Inc. ("PPS"). The purchase price is based primarily on a multiple of the 1996 pre-tax income of PPS. Horizon currently estimates the purchase price will be between $2,500,000 and $2,900,000, of which interim payments of $1,225,000 and $1,099,000 were paid on July 31, 1996 and April 9, 1997, respectively. The final reconciliation statement of income of PPS for the twelve months ended December 31, 1996 is to be delivered on or before July 15, 1997, or the earliest practical date thereafter, and any remaining purchase price is to be paid on or before August 14, 1997. Effective March 15, 1997, the Company purchased all of the outstanding capital stock of Geriatric Medical Care, Inc., a Tennessee corporation ("Geriatric"). Geriatric is a contract manager of mental health services for acute care hospitals. Geriatric had total revenues of approximately $5.7 million in 1996 and, at March 15, 1997, had 18 management contract locations, of which three were not yet in operation. The purchase price of approximately $4.6 million, of which $4.3 million was paid at closing from existing cash of Horizon, included retiring essentially all of Geriatric's outstanding debt. The final purchase price payment of $270,000 was made on April 16, 1997. -24- 25 Also effective March 15, 1997, the Company purchased all of the outstanding capital stock of Clay Care, Inc., a Texas corporation ("CCI"). CCI is a contract manager of mental health services for acute care hospitals. At March 15, 1997, CCI had management contracts with five hospitals of which four were in operation and one of which opened in April 1997. CCI had total revenues of approximately $1.3 million in 1996. A total of $475,000 of the $1,000,000 purchase price was paid at the closing from existing cash of Horizon. The remaining $525,000 of the total purchase price was paid by Horizon in April 1997 and June 1997. On April 25, 1997 Horizon signed a definitive agreement to acquire privately held Specialty Healthcare Management, Inc. (Specialty) of Englewood, Colorado. The definitive agreement contemplates a transaction to be accounted for as a pooling of interests in which Specialty would become a wholly owned subsidiary of Horizon. Specialty is a contract manager of mental health, physical rehabilitation and chemical dependency treatment programs for general acute care hospitals and other health care entities. For the year ended December 31, 1996, Specialty reported revenues of $33.8 million and net income of $1.2 million. The transaction is subject to the approval of Horizon's stockholders at a special stockholders meeting which is expected to be held in August 1997. At the special meeting, Horizon stockholders will be asked to approve the issuance of up to 1,400,000 shares of Horizon common stock in exchange for all of the outstanding shares of common stock of Specialty. In addition Horizon stockholders will be asked to approve an amendment to the Certificate of Incorporation of Horizon to change its corporate name to "Horizon Health Corporation". It is the Company's intent to pay all the outstanding debt of Specialty on the date of closing of the acquisition of Specialty, which at May 31, 1997, was $3.2 million, from existing cash of the Company if available. In addition, the Company anticipates incurring the following estimated charges associated with the transaction: Severance and related benefits $2,177,050 Lease abandonment 98,764 Non-compatible technology 100,000 Brokerage fees 650,000 Professional fees 200,000 Relocation costs 25,000 ---------- Total costs $3,250,814 ==========
As of May 31, 1997, the Company has paid but not yet expensed $257,000 of the above cost. Effective April 30, 1997 Horizon's subsidiary, Florida Professional Psychological Services, Inc., entered into a specialty provider agreement with Well Care HMO, Inc. to provide behavioral health care services to Florida Medicaid as well as commercially insured members. The agreement will initially cover approximately 62,000 Florida Medicaid and commercial lives and calls for PPS to provide for a full range of inpatient and outpatient mental health services. It is currently estimated that annual revenues to PPS under the contract will approximate $2.1 million with services to be provided beginning May 1, 1997. The Company believes that its net working capital of $4.1 million at May 31, 1997 (including cash of $3.9 million at that date) and the $10.1 million available under the revolving credit facility at that date will be sufficient to cover all cash requirements over the next twelve months including estimated capital expenditures of $750,000. The Company generated approximately $3.1 million in net cash from operations during the nine months ended May 31, 1997. -25- 26 Statements contained herein and in various public presentations that are based on future expectations rather than on historical facts are forward-looking statements as defined under The Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from those in any such forward-looking statement include but are not limited to demand by general hospitals for the Company's services, the Company's ability to retain existing management contracts and to obtain additional contracts, changes in reimbursement to general hospitals by Medicare or other third-party payors for costs of providing mental health services, changes to other regulatory provisions relating to mental health services, overall economic conditions and various other risks as outlined in the Company's Securities and Exchange Commission filings. -26- 27 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following documents are filed as part of this report: 3.1 Certificate of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q as filed with the Commission on March 31, 1997). 3.2 Amended and Restated Bylaws of the Company, as amended (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration Number 33-88314) as filed with the Commission on February 16, 1995). 4.1 Rights Agreement dated February 6, 1997, between Horizon Mental Health Management, Inc. 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 Number 000-22123) as filed with the Commission on February 7, 1997). 10.1 Share Exchange Reorganization Agreement dated as of April 25, 1997, among the Company, Howard B. Finkel, John Harrison, Larry Reiff, Argentum Capital Partners, L.P., Denise Dailey, Ken Dorman, G. Phillip Woellner, and Michael S. McCarthy, and Specialty Healthcare Management, Inc., as amended by a First Amendment to Share Exchange Reorganization Agreement dated as of July 2, 1997 (incorporated herein by reference to Appendix A to the definitive Proxy Statement filed with the Commission by the Company on July 11, 1997, relating to a Special Meeting of Stockholders of the Company to be held on August 11, 1997). 11.1 Statement Regarding Computation of Per Share Earnings (filed herewith). 27.1 Financial Data Schedule (filed herewith).
-27- 28 (b) Reports on Form 8-K On May 8, 1997, the Company filed with the Commission a Current Report on Form 8-K. The items reported were (i) a three-for-two stock split effected by the Company in the form of a 50% stock dividend, pursuant to which one additional share of Common Stock of the Company was issued on January 31, 1997 for every two shares of Common Stock of the Company held by stockholders of record at the close of business on January 22, 1997 and (ii) the adoption, and a summary of the terms, of a Rights Agreement dated February 6, 1997 between the Company and American Stock Transfer & Trust Company, as Rights Agent, and the distribution of certain Rights thereunder. The audited consolidated financial statements of the Company previously filed with the Commission as part of the Annual Report on Form 10-K of the Company for its fiscal year ended August 31, 1996 were retroactively restated to reflect such stock split/dividend, and such restated consolidated financial statements were filed as part of such Current Report on Form 8-K (see also the Form 10-K/A filed with the Commission by the Company on July 2, 1997). -28- 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORIZON MENTAL HEALTH MANAGEMENT, INC. Date: July 14, 1997 /s/ JAMES W. MCATEE ------------------- --------------------------------------- By: James W. McAtee Executive Vice President, Finance & Administration (Principal Financial and Chief Accounting Officer) -29- 30 INDEX TO EXHIBITS
EXHIBIT NO. - ----------- 3.1 Certificate of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q as filed with the Commission on March 31, 1997). 3.2 Amended and Restated Bylaws of the Company, as amended (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration Number 33-88314) as filed with the Commission on February 16, 1995). 4.1 Rights Agreement dated February 6, 1997, between Horizon Mental Health Management, Inc. 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 Number 000-22123) as filed with the Commission on February 7, 1997). 10.1 Share Exchange Reorganization Agreement dated as of April 25, 1997, among the Company, Howard B. Finkel, John Harrison, Larry Reiff, Argentum Capital Partners, L.P., Denise Dailey, Ken Dorman, G. Phillip Woellner, and Michael S. McCarthy, and Specialty Healthcare Management, Inc., as amended by a First Amendment to Share Exchange Reorganization Agreement dated as of July 2, 1997 (incorporated herein by reference to Appendix A to the definitive Proxy Statement filed with the Commission by the Company on July 11, 1997, relating to a Special Meeting of Stockholders of the Company to be held on August 11, 1997). 11.1 Statement Regarding Computation of Per Share Earnings (filed herewith). 27.1 Financial Data Schedule (filed herewith).
-30- EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.1 HORIZON MENTAL HEALTH MANAGEMENT, INC. COMPUTATIONS OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended May May ------------------- ---------------------- 1996 1997 1996 1997 ------- ------- ------- ------- SIMPLE Net income $ 1,445 $ 1,900 4,030 5,483 Average outstanding shares (2) 5,410 5,564 5,367 5,516 ------- ------- ------- ------- Simple net income per share $ 0.27 $ 0.34 $ 0.75 $ 0.99 ======= ======= ======= ======= PRIMARY Net income $ 1,445 $ 1,900 4,030 5,483 Average outstanding shares (2) 5,410 5,564 5,367 5,516 Common stock equivalents assuming exercise of stock options (A) (2) 1,151 1,066 1,138 1,122 ------- ------- ------- ------- Shares for primary 6,561 6,630 6,505 6,638 ======= ======= ======= ======= Primary net income per share (1) $ 0.22 $ 0.29 $ 0.62 $ 0.83 ======= ======= ======= ======= FULLY DILUTED Net income $ 1,445 $ 1,900 4,030 5,483 Average outstanding shares (2) 5,410 5,564 5,367 5,516 Common stock equivalents assuming exercise of stock options (A) (2) 1,159 1,088 1,166 1,130 ------- ------- ------- ------- Shares for fully diluted 6,569 6,652 6,533 6,646 ======= ======= ======= ======= Fully diluted net income per share (1) $ 0.22 $ 0.29 $ 0.62 $ 0.83 ======= ======= ======= =======
(A) Any computational differences between the primary and fully diluted EPS are the result of using the average price in the primary computation and the ending price (which was higher) in the fully diluted computation. (1) The calculations for primary and fully diluted net income per share are submitted in accordance with Regulation S-K Item 601(b)(11). (2) The Board of Directors of the Company approved a three-for-two stock split effected in the form of a 50% stock dividend, pursuant to which one additional share of Common Stock of the Company was issued on January 31, 1997 for every two shares of Common Stock held by stockholders of record at the close of business on January 22, 1997. Upon effecting the stock split/dividend, the stock options and their related exercise prices were adjusted proportionately. Such stock split/dividend has been retroactively reflected herein. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE NINE MONTHS ENDED MAY 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH YEAR TO DATE 10-Q FILING FOR THE NINE MONTHS ENDED MAY 31, 1997. 9-MOS AUG-31-1997 SEP-01-1996 MAY-31-1997 3,894,900 0 12,025,752 1,270,804 0 16,917,962 3,390,083 1,963,949 40,553,846 12,813,576 0 0 0 55,668 26,351,231 40,553,846 0 57,893,658 0 49,118,198 0 742,969 802 9,199,253 3,641,245 5,482,917 0 0 0 5,482,917 .83 .83
-----END PRIVACY-ENHANCED MESSAGE-----