<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1996
Commission File Number: 1-12238
MENTAL HEALTH MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1223048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7601 LEWINSVILLE ROAD, SUITE 200
MCLEAN, VIRGINIA 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 749-4600
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
--- ---
As of May 9, 1996, there were 3,310,448 shares of Common Stock, par value $.01
per share, outstanding.
<PAGE>
MENTAL HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 1996
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Statements of Operations-
Three and Six Months Ended March 31, 1996 and 1995
(Unaudited) 4
Condensed Consolidated Balance Sheets-
March 31, 1996 (Unaudited) and September 30, 1995 5
Condensed Consolidated Statements of Cash Flows-
Six Months Ended March 31, 1996 and 1995
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 9-13
PART II. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
2
<PAGE>
MENTAL HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 1996
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE>
MENTAL HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $11,321,000 $10,390,000 $22,502,000 $20,331,000
Costs and expenses:
Operating 8,108,000 7,416,000 15,919,000 14,442,000
General and administrative 2,867,000 2,712,000 5,631,000 4,994,000
Provision for bad debts 1,531,000 968,000 2,846,000 1,470,000
Depreciation and amortization 311,000 404,000 714,000 822,000
Other (credits) charges:
Equity in earnings of Joint Venture -- (382,000) -- (835,000)
Gain on sale of investment
in Joint Venture -- (3,529,000) -- (3,529,000)
Loss on sale of facilities 4,352,000 -- 4,352,000 --
Interest expense - MEDIQ 279,000 297,000 572,000 574,000
Interest expense - other 98,000 131,000 194,000 295,000
Other (17,000) (89,000) (54,000) (80,000)
----------- ----------- ----------- ----------
Income (loss) before income taxes (6,208,000) 2,462,000 (7,672,000) 2,178,000
Income tax expense (benefit) -- 2,611,000 (175,000) 2,543,000
----------- ----------- ----------- ----------
Net loss $(6,208,000) $ (149,000) $(7,497,000) $ (365,000)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Net loss per share $ (1.88) $ (.04) $ (2.27) $ (.11)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Weighted average shares outstanding 3,310,000 3,310,000 3,310,000 3,310,000
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
MENTAL HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, September 30,
1996 1995
----------- ------------
(Unaudited) (See Note)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,116,000 $ 3,084,000
Accounts receivable, net 7,616,000 7,618,000
Prepaid expenses 245,000 397,000
Other current assets 611,000 976,000
----------- -----------
Total current assets 9,588,000 12,075,000
Assets held for sale, net 10,147,000 --
Property, plant and equipment, net 621,000 12,581,000
Goodwill, net 1,596,000 4,519,000
Notes receivable 1,480,000 --
Other assets 1,802,000 1,108,000
----------- -----------
Total assets $25,234,000 $30,283,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,407,000 $ 1,672,000
Accrued expenses 3,128,000 2,342,000
Accrued expenses - sale of facilities 1,520,000 --
Accrued payroll 551,000 542,000
Accrued expenses - MEDIQ 386,000 377,000
Current maturities of long-term debt 1,269,000 1,219,000
----------- -----------
Total current liabilities 9,261,000 6,152,000
Long-term debt, less current maturities:
MEDIQ 10,350,000 10,733,000
Other 2,298,000 2,422,000
Other liabilities 27,000 181,000
Stockholders' equity 3,298,000 10,795,000
----------- -----------
Total liabilities and stockholders' equity $25,234,000 $30,283,000
----------- -----------
----------- -----------
Note: The balance sheet at September 30, 1995 has been condensed from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
MENTAL HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,497,000) $ (365,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities 6,849,000 (372,000)
----------- -----------
Net cash used in operating activities (648,000) (737,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property,plant and equipment (150,000) (340,000)
Proceeds from sale of Joint Venture -- 9,609,000
Distributions from Joint Venture -- 1,000,000
Acquisition of clinic operations (150,000) --
Other (223,000) (42,000)
----------- -----------
Net cash provided by (used in) investing activities (523,000) 10,227,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayments (797,000) (6,171,000)
----------- ------------
Net cash provided by (used in)
financing activities (797,000) (6,171,000)
----------- -----------
Increase (decrease) in cash (1,968,000) 3,319,000
Cash and cash equivalents:
Beginning balance 3,084,000 735,000
----------- -----------
Ending balance $ 1,116,000 $ 4,054,000
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Interest paid $ 766,000 $ 910,000
----------- -----------
----------- -----------
Income taxes (refunded) paid $ (752,000) $ (842,000)
----------- -----------
----------- -----------
Supplemental disclosure of non-cash investing and
financing activities:
Acquisition financed with long-term debt $ 338,000 --
----------- -----------
----------- -----------
Equipment financed with debt and capital leases $ 63,000 --
----------- -----------
----------- -----------
Notes received from sale of fixed assets $1,400,000 --
----------- -----------
----------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
MENTAL HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 1996, the condensed
consolidated statements of operations for the three and six month periods ended
March 31, 1996 and 1995 and the condensed consolidated statements of cash flows
for the six month periods then ended have been prepared by the Company, without
audit. In the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows as of
March 31, 1996, and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's September 30, 1995 Annual
Report on Form 10-K. The results of operations for the period ended March 31,
1996 are not necessarily indicative of the operating results for the full year.
RECLASSIFICATIONS - Certain items in the consolidated statement of operations
for the prior quarter have been reclassified to conform to current period
presentation.
NOTE 2 - LIQUIDITY
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary course
of business. As a result of the Company's continued negative operating
results, as well as reduced collections of accounts receivable, the Company
has been experiencing difficulty generating sufficient cash flows to meet its
obligations and sustain its operations. The report of the Company's independent
auditors on the Company's financial statements for the fiscal year ended
September 30, 1995 includes an explanatory paragraph which states that such
conditions raise substantial doubt as to the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result should the Company be unable to continue as a going concern.
Based upon the adverse impact on the Company's operating results of cost-
reduction pressures on inpatient care and the Company's belief that such
pressures would likely continue to have an adverse impact on future results, the
Company has focused its strategy on pursuing opportunities to grow its Extended
Care Services Division. As a result, the Company is pursuing opportunities to
sell its freestanding behavioral health facilities. The operations of the
freestanding facilities represented 74% and 87% of net revenues for the first
six months of 1996 and fiscal year 1995, respectively. The Company is also
taking steps to reduce operating expenses, attempting to raise additional
capital, and working to improve cash flows. See Note 3.
7
<PAGE>
MENTAL HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - SALE OF FREESTANDING FACILITIES
On April 5, 1996, the Company sold Oakview Treatment Center to a non-profit
corporation affiliated with a privately-owned operator of two psychiatric
hospitals for $50,000 in cash and $2,150,000, evidenced by two promissory notes
payable to the Company. For financial statement purposes, the notes were
recorded at an estimated net realizable value of $1,400,000. The notes are
payable in monthly installments of principal and interest (at prime) based on 15
year amortization, with the remaining principal due in five years (or earlier
under certain circumstances). In connection with obtaining consent to the sale
of Oakview Treatment Center as required under the terms of the Company's
revolving credit facility, the Company pledged both of the notes receivable
relating to the sale of Oakview Treatment Center as collateral for the Company's
obligations under the revolving credit facility. In connection with obtaining a
waiver from MEDIQ of an event of default provision of the MEDIQ Note relating to
the sale of the assets of a significant subsidiary, the Company pledged one of
the notes receivable (with a principal balance of $ 1,875,000) as collateral for
the Company's obligations under the MEDIQ Note. Upon completion of the Proposed
Sale and repayment of the revolving credit facility, the pledges under the
revolving credit facility will terminate, but the pledge under the MEDIQ Note
will continue.
The Company executed an agreement, dated as of January 24, 1996, and amended as
of April 11, 1996, (the "Agreement") to sell (the "Proposed Sale") five of the
Company's freestanding facilities (Aspen Hill Hospital, Pacific Shores Hospital,
Pinon Hills Residential Treatment Center and Windsor Hospital) (the "Hospitals")
to a privately-owned operator of nine psychiatric facilities for $10,000,000
(plus an amount representing the value at closing of certain inventory and
prepaid expenses, which was approximately $232,000 as of March 31, 1996),
consisting of approximately $8,910,000 in cash and the assumption of certain
specified liabilities of the Hospitals in the aggregate amount of approximately
$1,322,000 (estimated based upon the Company's financial condition as of March
31, 1996), as determined pursuant to the Agreement. The actual amount of cash
to be received by the Company will be calculated upon closing based upon the
value of certain specified assets and the amount of certain specified
liabilities, as determined in accordance with the terms of the Agreement. The
completion of the transaction is subject to several contingencies. At a
special meeting of the stockholders held on May 13, 1996, the Proposed Sale was
approved by the holders of a majority of the Company's outstanding shares of
common stock. The closing on the Proposed Sale has been scheduled for May 31,
1996.
The pretax loss on the sale of facilities consists of the write off of
intangibles related to the Hospitals of $3,184,000, a loss on the sale of
certain property, plant equipment aggregating $221,000, transaction expenses
of $515,000, severance expenses of $330,000 and other expenses of
$736,000 and additional expenses incurred in connection with the sale of
Oakview Treatment Center of $26,000, offset by estimated Medicare
depreciation recapture income. Assets being sold have been reclassified as
assets held for sale on the balance sheet as of March 31, 1996.
NOTE 4 - ACQUISITION OF CLINIC OPERATIONS
8
<PAGE>
In December 1995, the Company's Extended Care Services Division acquired the
behavioral healthcare clinic operations of National Mentor, Inc. located in
Charlestown, Taunton and New Bedford, Massachusetts. The purchase price
included cash of $150,000 and $338,000 payable in 36 monthly installments.
MENTAL HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - JOINT VENTURE
Effective August 1, 1994, the Company formed a joint venture ("Joint Venture")
to combine its contract management business with that of Horizon Mental Health
Services, Inc. ("Horizon") of Denton, Texas. The Joint Venture, which was owned
27.5% by the Company and 72.5% by Horizon, managed both companies' hospital
behavioral health care contracts. The operating results of the contract
management business were included in the Company's results of operations through
the commencement of the Joint Venture on August 1, 1994.
On March 20, 1995, Horizon completed its initial public offering, and, in
accordance with the terms of the Joint Venture Agreement, acquired the Company's
interest in the Joint Venture for approximately $9,600,000 (net of related
expenses). The sale resulted in a gain of approximately $500,000 (net of income
taxes of $3,000,000). In connection with the sale, the Company assigned to
Horizon all of its rights and interests in its management contracts.
NOTE 6 - LONG-TERM DEBT
In March 1995, the Company utilized a portion of the proceeds from the sale of
its investment in the Joint Venture to repay the $5,102,000 outstanding
principal balance of a revolving credit facility, which was scheduled to mature
on March 31, 1995. This facility was not renewed.
On August 14, 1995, the Company entered into a $5,000,000 revolving credit
facility with a commercial lender. The facility bears interest at the prime
rate plus 2% (10.25% at March 31, 1996), is secured by accounts receivable
from the freestanding facilities and property, plant and equipment at two of
the freestanding facilities, and expires in August 1997. At March 31, 1996,
$1,436,000 was outstanding under this facility. The amount of available
credit fluctuates based upon the amount of qualified accounts receivable.
Based upon management's analysis of accounts receivable, approximately
$1,950,000 of credit was available at March 31, 1996. Under the terms of
this facility, the Company is not permitted to declare or pay any dividends.
As of March 31, 1996, the Company did not comply with certain financial
ratios required by the facility, particularly the minimum net worth
requirement and working capital ratio. Subsequent to March 31, 1996, the
Company obtained the necessary amendment from the lender. Under the terms of
the revolving credit facility, the Company will be required to repay the
outstanding balance, and the facility will terminate, in connection with the
sale of the freestanding facilities.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the Company
as of March 31, 1996 and the Company's results of operations for the three and
six month periods then ended, compared with the same period last year. This
discussion should be read in conjunction with the Management's Discussion and
Analysis section (pages 17-27) for the fiscal year ended September 30, 1995
included in the Company's Annual Report on Form 10-K.
GENERAL
In response to continuing changes in the behavioral healthcare industry,
the Company made significant changes in its operations in 1994 and 1995,
including the divestiture of the Company's contract management business, so that
the Company could focus on its two remaining businesses -- its freestanding
behavioral healthcare facilities and its Extended Care Services Division (which
commenced operations in the fall of 1993). The Extended Care Services Division
has experienced growth through internal development (principally from a contract
with the State of Georgia) and acquisitions in July and December 1995.
However, continued pressures from managed care providers and other third
party payors to decrease the utilization and cost of behavioral healthcare
services have adversely affected the operations of the Company's freestanding
facilities, resulting in decreased revenues and significant operating losses.
As a result, the Company determined in the fourth quarter of fiscal 1995, based
upon historical operating losses and the Company's analysis of future estimated
operating results and undiscounted cash flows, that the recoverability of
certain assets, including property, plant and equipment and goodwill, related to
one of the freestanding facilities was impaired, other than temporarily.
Accordingly, the carrying value of such assets was reduced to estimated fair
value, resulting in a charge of $2,228,000.
As a result of the Company's continued negative operating results, as
well as reduced collections of accounts receivable, the Company has been
experiencing difficulty generating sufficient cash flows to meet its
obligations and sustain its operations. The report of the Company's
independent auditors on the Company's financial statements for the fiscal
year ended September 30, 1995 includes an explanatory paragraph which states
that such conditions raise substantial doubt as to the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
RECENT DEVELOPMENTS
Based upon the adverse impact on the Company's operating results of
cost-reduction pressures on in-patient care and the Company's belief that
such pressures would likely continue to have an adverse impact on future
results, the Company has decided to pursue a strategy focused on growing its
Extended Care Services Division. As a result, the Company is pursuing
opportunities to sell its freestanding behavioral health facilities. In 1995
and the first six months of fiscal 1996, the operations of the freestanding
facilities represented 87% and 74% of net revenues, respectively.
On April 5, 1996, the Company sold Oakview Treatment Center to a non-profit
corporation affiliated with a privately-owned operator of two psychiatric
hospitals for $50,000 in cash and $2,150,000, evidenced by two promissory notes
payable to the Company. For financial statement purposes, the notes were
recorded at an estimated net realizable value of $1,400,000. The notes are
payable in monthly installments of principal and interest (at prime) based on a
15 year amortization, with the remaining principal due in five years (or earlier
under certain circumstances). In connection with obtaining consent to the sale
of Oakview Treatment Center as required under the terms of the Company's
revolving credit facility, the Company pledged both of the notes receivable
relating to the sale of Oakview Treatment Center as collateral for the Company's
obligations under the revolving credit facility. In connection with obtaining a
waiver from MEDIQ of an event of default provision of the MEDIQ Note relating to
the sale of the assets of a significant subsidiary, the Company pledged one of
the notes receivable (with a principal balance of $1,875,000) as collateral for
the Company's obligations under the MEDIQ Note. Upon completion of the Proposed
Sale and repayment of the revolving credit facility, the pledges under the
revolving credit facility will terminate, but the pledge under the MEDIQ Note
will continue. See "Liquidity and Capital Resources."
The Company executed an agreement, dated as of January 24, 1996, (the
"Agreement") to sell (the "Proposed Sale") five of the Company's freestanding
facilities (Aspen Hill Hospital, Pacific Shores Hospital, Pinon Hills Hospital,
Pinon Hills Residential Treatment Center and Windsor Hospital) (the "Hospitals")
to a privately-owned operator of nine psychiatric facilities for $10,000,000,
plus an amount representing substantially all of the Company's working capital
investment in these facilities on the
10
<PAGE>
closing of the transaction, in cash at closing. On April 11, 1996, the Company
executed an amendment to the Agreement. As amended, the Agreement provides for
the following changes in the structure: (i) the Company will retain all of the
accounts receivables related to the Hospitals and (ii) the cash to be paid to
the Company at Closing is to be determined by subtracting from the sum of (a)
$10,000,000 (b) the value of certain inventory and the value of certain prepaid
expenses (which was approximately $232,000 as of March 31, 1996) an amount equal
to (a) the Company's liability for paid days off accrued for employees of the
freestanding facilities who become employees of the purchaser, and (b) the value
of certain other current liabilities, accounts payable, salaries payable and
payroll taxes payable (which aggregated approximately $1,322,000 as of March 31,
1996), to be determined as of March 31, 1996, subject to adjustment following
the closing. Based on March 31, 1996 financial information, the Company
estimates that it will receive approximately $8,910,000 in cash at closing. The
Agreement, as amended, also provides for certain Medicare depreciation recapture
amounts to be allocated between the Company (85%) and the purchaser (15%). Such
recapture amounts relate to potential adjustments for prior years to reflect the
loss on the sale of the Hospitals as a retroactive increase in the Company's
depreciation expense for purposes of cost-based reimbursements. The Company
estimates that its share of the amounts to be collected pursuant to such
Medicare recapture will be approximately $1,320,000 and that it will receive
such payments beginning in two to three years after the closing. The Agreement,
as amended, also provides for the creation of an escrow of approximately
$300,000 of the cash proceeds received by the Company for the purpose of funding
the Company's obligation to complete certain repairs to two of the Hospitals.
The completion of the transaction is subject to several contingencies. At a
special meeting of the stockholders held on May 13, 1996, the Proposed Sale was
approved by the holders of a majority of the Company's outstanding shares of
common stock. The closing on the Proposed Sale has been scheduled for May 31,
1996. See "Liquidity and Capital Resources."
The Company has not entered into any definitive agreement to sell its other
freestanding facility. Also, the Company has not yet satisfied certain
conditions to the consummation of the Proposed Sale. Accordingly, there can be
no assurance that the Company will be successful in selling any of such
facilities.
11
<PAGE>
The Company's freestanding facilities represent the majority of the
Company's historical business. Overall, the freestanding facilities generated
87% and 74% of the Company's net revenues in the fiscal year ended September 30,
1995 and the first six months of fiscal year 1996, respectively. The Company's
freestanding facilities have contributed significantly to the Company's cash
flows. In addition, the freestanding facilities helped to absorb certain
corporate-related expenses that, following the sale of the Company's
freestanding facilities, will have to be borne fully by the Extended Care
Services Division. Since its founding in October 1993, the Extended Care
Services Division has generated 13% and 3% of net revenues for the years ended
September 30, 1995 and 1994, respectively, and 26% of net revenues for the first
six months of fiscal 1996. The rapid expansion of the Extended Care Services
Division has also resulted in increased costs, and thus, with the allocation of
corporate overhead related to the operations of the Extended Care Services
Division, the Extended Care Services Division has not yet achieved profitable
results. No assurances can be given that the Company will be successful in
generating profits from the Extended Care Services Division, or that the
strategy of focusing on growing the Extended Care Services Division through
internal expansion and acquisition will not result in further increased costs.
In furtherance of such strategy, the Company completed two acquisitions in 1995
(described below), routinely reviews potential acquisition candidates, and is
negotiating letters of intent with respect to several additional acquisitions
and pursuing other acquisition and management opportunities. The Company plans
to continue its expansion into the practice management business, which is the
thrust of the Company's long-term growth strategy, by acquiring additional
practices and/or securing long-term management agreements with additional
practices. To date, however, the Company has not entered into definitive
agreements with respect to other acquisitions, and there can be no assurances
that any acquisitions will be completed or management opportunities will be
secured. In addition, based upon the Company's limited liquidity and capital
resources, there can be no assurance that the Company will have sufficient
resources to pursue and/or complete any other acquisitions. In the event the
Company needs to use the remainder of the proceeds to repay the amounts
outstanding under the MEDIQ Note as described below, the Company's plans to
expand the Extended Care Services Division would be extremely restricted, and
the Company's results of operations and financial condition may be adversely
affected.
ACQUISITION OF SUPPORTIVE COUNSELING CARE
In July 1995, the Company's Extended Care Services Division acquired
certain assets of Supportive Counseling Care ("SCC") of Manhattan Beach,
California, a provider of behavioral healthcare services to extended care
facilities, and entered into a 40-year management contract to provide
administrative services to SCC. The operating results related to these assets
are included in the Company's consolidated results of operations from the date
of acquisition.
ACQUISITION OF CLINIC OPERATIONS
In December 1995, the Company's Extended Care Services Division acquired
the behavioral healthcare clinic operations of National Mentor, Inc. located in
Charlestown, Taunton, and New Bedford, Massachusetts. The operating results of
the acquired business are included in the Company's consolidated results of
operations from the date of acquisition.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationship that items in the Company's Statements of Operations bear to net
revenues.
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
Net revenues 100% 100% 100% 100%
Costs and expenses:
Operating 72 71 71 71
General and administrative 25 26 25 25
Provision for bad debts 14 9 13 7
Depreciation and amortization 3 4 3 4
Other (credits) charges:
Equity in earnings of Joint Venture -- (4) -- (4)
Gain on Sale of Joint Venture -- (34) -- (17)
Loss on sale of facilities 38 -- 19 --
Interest expense - MEDIQ 2 3 2 3
Interest expense - other 1 1 1 1
Other -- -- -- --
--- --- --- ---
Income (loss) before income taxes (55%) 24 (34) 11
Income tax expense (benefit) -- 25 (1) 13
--- --- --- ---
Net loss (55%) (1)% (33)% (2)%
--- --- --- ---
--- --- --- ---
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995
Net revenues for the second quarter of 1996 were $11,321,000, as compared
to $10,390,000 for the prior year quarter, an increase of $1,102,000, or 11%,
reflecting an increase in revenues from the Extended Care Services Division,
partially offset by decreased revenues from the freestanding facilities. Net
revenues from freestanding facilities were $8,159,000 in the second quarter of
1996, a decrease of $1,014,000, or 11%, as compared to the prior year quarter.
The decrease in revenues resulted from lower average reimbursement rates and
decreases in inpatient average lengths of stay. Revenues from the Extended Care
Services Division were $3,162,000 for the second quarter of 1996, as compared to
$1,046,000 in the prior year quarter. This increase is the result of revenues
under a contract with the state of Georgia to provide mental health services to
Medicaid patients in nursing homes and revenues of $1,774,000 attributable to
acquisitions [in July and December 1975.]
Operating expenses for the second quarter of 1996 were $8,108,000 as
compared to $7,416,000 in the prior year quarter. This increase was primarily
attributable to increased costs associated with growth of the Extended Care
Services Division. As a percentage of net revenues, operating expenses were
comparable to the prior year quarter.
13
<PAGE>
General and administrative expenses were $2,867,000, or 25% of net
revenues, as compared to $2,712,000, or 26% of net revenues, in the prior year
quarter. This increase was attributable to increased costs associated with
growth of the Extended Care Services Division offset by decreased costs
related to the freestanding facilities.
The provision for bad debts increased to $1,531,000 as compared to $968,000
in the prior year quarter. As a percentage of net revenues, bad debt expense
was 14%, as compared to 9% in the prior year quarter. The increase in the
provision for bad debts resulted primarily from the operations of SCC (acquired
in July 1995) which are subject to Medicare reimbursement limits, with the
remaining charges billed to the patients or other third party payors.
Depreciation and amortization expense was $311,000 as compared to $404,000
in the prior year quarter. The decrease in depreciation expense was
attributable to the sale of Oakview Treatment Center.
The pretax loss on the sale of facilities consists of the write off of
intangibles related to the Hospitals of $3,184,000, a loss on the sale of
certain property, plant equipment aggregating $221,000, transaction expenses
of $515,000, severance expenses of $330,000 and other expenses of
$736,000 and additional expenses incurred in connection with the sale of Oakview
Treatment Center of $26,000, offset by estimated Medicare depreciation
recapture income.
Interest expense was $377,000, as compared to $428,000 in the prior year
quarter, primarily attributable to decreases in outstanding borrowings.
Pretax loss for the second quarter of 1996 was $6,208,000, as compared
to pretax income of $2,462,000 in the prior year quarter. The prior period
included significant non-recurring income related to the Joint Venture,
including equity in the earnings of $382,000 and a pretax gain on the sale of
$3,529,000. Operating results from the Company's primary business were
adversely affected in the current period by lower average reimbursement rates
and decreases in inpatient average lengths of stay for the freestanding
facilities as a result of managed care and other market forces. Management
expects operating results to continue to be adversely affected by these
market forces.
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
Net revenues were $22,502,000, as compared to $20,331,000 for the prior
year period, an increase of $2,951,000, or 15%. Net revenues from freestanding
facilities decreased $1,024,000 or 6% to $16,670,000. The decrease in revenues
resulted from lower average reimbursement rates and decreases in inpatient
average lengths of stay. Revenues from the Extended Care Services Division were
$5,832,000 for the first six months of 1996, as compared to $1,857,000 in the
prior year period. This increase is the result of revenues under a contract
with the state of Georgia to provide mental health services to Medicaid patients
in nursing homes and revenues of $3,233,000 attributable to acquisitions
in July and December 1995.
Operating expenses were $15,919,000, as compared to $14,442,000 in the
prior year period. This increase was primarily attributable to increased costs
associated with growth of the Extended Care
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Services Division. As a percentage of net revenues, operating expenses were
comparable to the prior year period.
General and administrative expenses were $5,631,000, as compared to
$4,994,000 in the prior year period. This increase was attributable to
increased costs associated with growth of the Extended Care Services
Division, offset by decreased costs related to the freestanding facilities.
The provision for bad debts was $2,846,000. As a percentage of net
revenues, bad debt expense was 13%, as compared to 7% in the prior year period.
The increase in the provision for bad debts resulted primarily from the
operations of SCC (acquired in July 1995) which are subject to Medicare
reimbursement limits, with the remaining charges billed to the patients or other
third party payors.
Depreciation and amortization expense was $714,000, as compared to $822,000
in the prior year period. The decrease in depreciation expense was attributable
to the sale of Oakview Treatment Center.
The pretax loss on the sale of facilities consists of the write off of
intangibles related to the Hospitals of $3,184,000, a loss on the sale of
certain property, plant equipment aggregating $221,000, transaction expenses
of $515,000, severance expenses of $330,000 and other expenses of
$736,000 and additional expenses incurred in connection with the sale of Oakview
Treatment Center of $26,000, offset by estimated Medicare depreciation
recapture income.
Interest expense was $766,000, a decrease of $103,000 from the prior year
period, primarily attributable to decreases in outstanding borrowings.
Pretax loss for the six month period ended March 31, 1996 increased to
$7,672,000, as compared to pre-tax income of $2,178,000 in 1995. The prior
period included significant non-recurring income related to the Joint
Venture, including equity in the earnings of $382,000 and a pretax gain on
the sale of $3,529,000. Operating results from the Company's primary
business were adversely affected in the current period by lower average
reimbursement rates and decreases in inpatient average lengths of stay for
the freestanding facilities as a result of managed care and other market
forces. Management expects operating results to continue to be adversely
affected by these market forces.
INCOME TAXES
The Company's effective tax rates for the three and six month periods ended
March 31, 1995 were disproportionate to the statutory tax rate primarily as a
result of permanent differences related to the disposition of the Company's
interest in the Joint Venture. The tax benefit for 1996 was adversely impacted
by limitations on the amount of net operating losses which can be carried back
to prior years.
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LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $648,000 for the second quarter of
1996, as compared to $737,000 for the prior year quarter.
Cash used in investing activities for the second quarter of 1996
included $150,000 for capital expenditures and $150,000 for the acquisition
of clinic operations in Massachusetts. The Company anticipates capital
expenditures of approximately $650,000 during the remainder of 1996. In the
event the proposed sales of the Company's freestanding facilities are
consummated, and the remaining freestanding facility is sold, capital
expenditures with respect to the freestanding facilities would be
significantly reduced. The Company plans to use a portion of the proceeds
from the proposed sales to continue its expansion of the Extended Care
Services Division. However, based upon the Company's liquidity and capital
resources, there can be no assurance the Company will have sufficient
resources to expand this division. See "Recent Developments." Non-cash
investing activities also included notes received in connection with the sale
of Oakview Treatment Center recorded at net estimated realizable value of
$1,400,000.
Net cash used by financing activities for the second quarter of 1996
consisted of debt repayments of $797,000. Non-cash financing activities
included a $338,000 term loan incurred in connection with the acquisition of
clinic operations in Massachusetts, payable in 36 monthly installments.
As of March 31, 1996, the Company had $1,436,000 outstanding under a
$5,000,000 revolving credit facility. This facility bears interest at prime
plus 2%, is secured by accounts receivable from the freestanding facilities and
property, plant and equipment of two of the freestanding facilities and expires
in August 1997. The amount of available credit fluctuates based upon the amount
of qualified accounts receivable. As of May 9, 1996, $2,810,000 was outstanding
under this facility. Based upon management's analysis of accounts receivable,
approximately $50,000 of credit was available at May 9, 1996. Under the terms
of the revolving credit facility, the Company will be required to repay the
outstanding balance, and the facility will terminate, in connection with the
sale of the freestanding facilities.
As of March 31, 1996 the Company had $11,117,000 outstanding under its
note payable to MEDIQ (the "MEDIQ Note"). The note bears interest at prime
plus 1.5% per annum, with monthly payments of principal and interest, based
on a fifteen year amortization period, with the remaining balance due in
August 1998. The MEDIQ Note may be prepaid in whole or in part without
penalty. The Company does not anticipate that cash flows from operations
will be sufficient to repay such debt upon maturity in 1998. In addition, as
reflected in the financial statements of the Company, and the report of the
Company's independent auditors for the fiscal year ended September 30, 1995,
the Company has been experiencing difficulty generating sufficient cash flows
to meet its obligations and sustain its operations and, as a result, may not
be able to meet the monthly principal and interest obligations under the
MEDIQ Note. Following the completion of the Proposed Sale, the remaining net
proceeds therefrom would be available to the Company to fund the monthly
obligations and a portion of the principal obligations upon maturity, if
necessary, of the MEDIQ Note. MEDIQ has pledged the MEDIQ Note as collateral
for certain of its indebtedness to a third party unaffiliated with MEDIQ or
the Company. In the event of default by MEDIQ on such indebtedness, such
third party would obtain all of MEDIQ's rights under the MEDIQ Note,
including the right to the payment of principal and interest as and when due
in accordance with the terms of the MEDIQ Note.
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The MEDIQ Note also provides for certain events of default, including:
"The . . . sale of all or substantially all of the assets of [the Company] .
. ." In an attempt to preclude the possibility of a dispute as to whether the
Proposed Sale constitutes the sale of all or substantially all of the assets
of the Company for purposes of the MEDIQ Note on January 5, 1996, the Company
sent MEDIQ a letter requesting a waiver of this provision in connection with
the Proposed Sale. MEDIQ sent the Company a letter, dated January 15, 1996 in
which MEDIQ declined to grant such a waiver. Nevertheless, in the event MEDIQ
attempts to accelerate the MEDIQ Note on this basis upon completion of the
Proposed Sale, the Company intends to aggressively defend its position in any
legal proceeding. There can be no assurances that the Company would be able
to obtain a favorable decision in such a legal proceeding. In the event the
Company were to receive an adverse decision on this matter, the outstanding
principal balance on the MEDIQ Note would become immediately due and payable
in full. In that event, the Company may be required to apply the remainder of
the net proceeds of the Proposed Sale toward the repayment of the outstanding
principal of the MEDIQ Note, obtain alternative sources of cash with which to
satisfy such obligation or obtain from MEDIQ a modification to the MEDIQ
Note. After the repayment of the revolving credit facility, the remaining net
proceeds may not be sufficient to repay the entire outstanding principal
balance of the MEDIQ Note at that time, and the Company may not have
sufficient cash to repay the outstanding principal balance of the MEDIQ Note.
Further, if such an adverse decision were to be rendered after the Company
has used the proceeds, or any portion thereof, for the expansion of the
Extended Care Services Division or other purposes, the Company may not have
sufficient cash to repay the outstanding principal balance of the MEDIQ Note.
There can be no assurance that any other sources of cash will be available to
the Company. In such event, the Company may be unable to fulfill its debt
obligations and also sustain operations at a level at which the Company could
continue as a going concern. In addition, in the event the Company needs to
use the remainder of the proceeds to repay the amounts outstanding under the
MEDIQ Note, the Company's plans to expand the Extended Care Services Division
would be extremely restricted, and the Company's results of operations and
financial condition may be adversely affected.
As a result of the Company's continued negative operating results and
reduced collections of accounts receivable from certain government-funded
payors, as well as other administrative delays by third-party payors, the
Company has been experiencing difficulty generating sufficient cash flows to
meet its obligations and sustain its operations. In an effort to improve
this situation, the Company is pursuing opportunities to sell its
freestanding facilities, taking steps to reduce operating expenses,
attempting to raise additional capital, and working to improve its cash
flows. With regard to its efforts to sell its freestanding facilities, the
Company has sold Oakview Treatment Center and entered into the Agreement, as
amended, for the Proposed Sale. To date, however, certain conditions to the
consummation of the Proposed Sale have not been satisfied and the Company has
not entered into any definitive agreement to sell its other freestanding
facility. Accordingly, there can be no assurance that the Company will be
successful in selling such facilities. See "Recent Developments." With
respect to its efforts to reduce operating expenses, the Company is
implementing reductions in office lease expense by reducing its leased space
and reductions in personnel expense by reducing staff of the Extended Care
Services Division. In addition, the Company has begun experiencing
improvement in the collection of accounts receivable. The Company's liquidity
could also be improved by: (i) the collection of additional outstanding
receivables; (ii) significant reductions in the operating losses of the
Company's remaining businesses; (iii) significant additional reductions in
overhead; and (iv) obtaining additional capital and/or financing sources.
However, there can be no assurance that any of such events will occur or, if
they do occur, that the impact on cash flows will be sufficient to enable the
Company to continue its operations.
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In the event that the Company is unable to enhance its liquidity, the Company
may be required to renegotiate the terms of its debt agreements and other
financial obligations, significantly curtail its level of operation or otherwise
significantly reduce operating expenses.
This report includes forward-looking statements based on management's
current plans and expectations, relating to, among other matters, the
anticipated use of proceeds from the sale of freestanding facilities, the
proposed business activities of the Company, estimates of amounts that are not
yet determinable and the proposed activities of the Company relating to
improving its liquidity. Such statements involve risks and uncertainties which
may cause actual future activities and results of operations to be materially
different from that suggested in this report, including, among others, risks
associated with industry consolidation and acquisitions, the need to manage
growth, the possible need to use the net cash proceeds from the sale of
freestanding facilities for the retirement of certain indebtedness and
competition. For additional information, please refer to the Company's Annual
Report on Form 10-K and other reports filed by the Company with the Securities
and Exchange Commission.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.15 Amendment to Asset Purchase Agreement, dated as of April 11,
1996, by and among the Registrant, MHM of Ohio, Inc. and
Behavioral Healthcare Corporation (Filed herewith).
(b) Reports on Form 8-K
A report on Form 8-K dated February 9, 1996 was filed to announce
that the Registrant had signed a definitive agreement for the sale of
five of its freestanding facilities. See Item 2.
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SIGNATURE
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.
Dated: May 9, 1996 Mental Health Management, Inc.
/s/ Vicki S. Hammond
------------------------------
Vicki S. Hammond
Senior Vice President, Finance
and Chief Financial Officer
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AMENDMENT TO ASSET PURCHASE AGREEMENT
THIS AMENDMENT TO ASSET PURCHASE AGREEMENT (the "Amendment"), dated as of
April 11, 1996, is by and among MENTAL HEALTH MANAGEMENT, INC., a Delaware
corporation ("MHM"), and MHM OF OHIO, INC., an Ohio corporation ("MHM-Ohio"),
(MHM and MHM-Ohio are referred to herein individually and, as the context
requires, collectively as the "Seller"), and BEHAVIORAL HEALTHCARE CORPORATION,
a Delaware corporation (the "Parent"), individually and on behalf of various
wholly-owned subsidiaries of the Parent (collectively, the "BHC Subs"), (the BHC
Subs and the Parent, collectively and individually when the context so requires,
the "Purchaser").
RECITALS
WHEREAS, the Seller and the Purchaser are parties to that certain Asset
Purchase Agreement, dated as of January 24, 1996 (the "Agreement"); and
WHEREAS, the Seller and the Purchaser desire to amend certain provisions of
the Agreement with respect to the receivables of the Hospital Businesses and
certain other matters.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements of the parties hereinafter
set forth, the parties hereby agree as follows:
1. AMENDMENTS TO THE AGREEMENT. The Agreement is hereby amended as
follows:
(a) Section 1.1 of the Agreement is hereby deleted in its entirety
and replaced with the following:
1.1. SALE OF ASSETS. At the Closing (as hereinafter defined), the
Seller shall sell, transfer, convey, assign and deliver to the Purchaser,
and the Purchaser shall purchase from the Seller, the following assets and
properties:
(a) all real property or leasehold interests in real property
used in connection with the operation of the Hospital Businesses, as
described in SCHEDULE 1.1(a), together with all buildings, improvements and
fixtures located thereupon and all construction in progress (the "Real
Property"), such Schedule to include a metes and bounds description for
each such parcel of Real Property owned by the Seller;
<PAGE>
(b) all tangible personal property (excluding cash) owned by the
Seller and used in connection with the Hospital Businesses (but excluding
any such property not located at the Hospitals unless such equipment is
necessary for operation of the Hospital Businesses), including, without
limitation, all equipment, furniture, fixtures, machinery, vehicles, office
furnishings, instruments, leasehold improvements, spare parts, and, to the
extent assignable or transferable by the Seller, all rights in all
warranties of any manufacturer or vendor with respect thereto (the
"Personal Property"), which Personal Property is more specifically
described in SCHEDULE 1.1(b);
(c) all rights, to the extent assignable or transferable, to all
licenses, certificates of need, certificates of exemption, franchises,
accreditations and registrations and other licenses or permits issued in
connection with the Hospital Businesses (the "Licenses"), including,
without limitation, the Licenses described in SCHEDULE 1.1(c);
(d) all of its interest, to the extent assignable or
transferable by it, in and to those real property and personal property
leases relating to the Hospital Businesses described in SCHEDULE 1.1(d)
(collectively, the "Leases");
(e) all of its interest, to the extent assignable or
transferable by it, in and to those contracts and agreements (including,
without limitation, purchase orders) relating to the Hospital Businesses
set forth in SCHEDULE 1.1(e) (the "Contracts");
(f) any deposits, escrows, prepaid taxes or other advance
payments relating to any expenses of the Hospital Businesses described in
SCHEDULE 1.1(f) (the "Prepaid Expenses");
(g) all inventories of supplies, drugs, food, janitorial and
office supplies and other disposables and consumables existing on the
Closing Date (as hereinafter defined) and located at the Hospitals or
purchased by Seller for use in connection with the Hospital Businesses
described in SCHEDULE 1.1(g) (the "Inventory");
(h) all documents, records, operating manuals and files, and
computer software owned by Seller or its affiliates, pertaining to or used
in connection with the Hospital Businesses (the "Software"), including,
without limitation, all patient records (but only to the extent
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transferable), medical records (but only to the extent transferable),
financial records, equipment records, construction plans and
specifications, and medical and administrative libraries, but excluding
Seller's corporate record books, minute books and tax records and any
Software not located at the Hospitals unless it is necessary for the
operation of the Hospital Businesses;
(i) all of its rights, if any, to the names and symbols used in
connection with the Hospital Businesses other than the name of Seller;
(j) all insurance proceeds arising in connection with damage to
the Assets (as hereinafter defined) occurring after December 31, 1995 and
prior to the Closing to the extent not expended on the repair or
restoration of such Assets; and
(k) except as expressly excluded below, all other property owned
by the Seller, whether tangible or intangible, located at the Hospitals or
necessary for the operation of the Hospital Businesses whether or not
reflected on the balance sheet of the Seller (including, without
limitation, any claims, other than those presently being pursued by the
Seller, against third parties by the Seller relating to the Assets whether
known or unknown, contingent or otherwise).
The foregoing, which (except for the Excluded Assets, as hereinafter
defined) are hereafter referred to, collectively, as the "Assets", comprise
substantially all of the property and assets (other than accounts
receivable) used in the conduct and operation of the Hospital Businesses as
of the date of this Agreement, including, without limitation, those assets
of the Hospital Businesses reflected on the Seller's balance sheet dated as
of December 31, 1995 (the "December 31, 1995 Balance Sheet"), and will
include all assets located at the Hospitals or necessary for the operation
of the Hospital Businesses and acquired by the Seller between December 31,
1995 and the Closing.
(b) Section 1.2 of the Agreement is hereby deleted in its entirety
and replaced with the following:
Section 1.2. EXCLUDED ASSETS. The following assets, which are or
might be considered to be related to the Assets, are not intended by the
parties to be a part of the sale and purchase contemplated hereunder and
are excluded from the Assets (collectively, the "Excluded Assets"): (i) all
cash and cash equivalents; (ii) all
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accounts receivable, including, without limitation, cost-based and non-
cost-based accounts receivable, of the Hospital Businesses (the
"Receivables"); (iii) except as otherwise set forth in Section 10.2,
assets, claims and other rights, including, without limitation, any
reimbursement from Medicare or Medicaid as a result of the loss by the
Seller on the disposal of the Assets for purposes of Medicare and Medicaid
reimbursement for all periods ended on or prior to the Closing Date,
including the terminating cost reports (the "Special Loss Reimbursement");
(iv) assets (including, without limitation, real property) necessary for
the operation of Oak View Treatment Center, Mountain Crest Hospital and
Mountain Crest Behavioral Healthcare System; (v) all rights and privileges
under contracts, agreements and leases listed on SCHEDULE 1.2(a); (vi) all
supplies, drugs, food and other disposables and consumables disposed of in
the ordinary course of business prior to the Closing; and (vii) all
documents, records and operating manuals pertaining to the Hospital
Businesses deemed proprietary to the Seller and described in SECTION 5.4 or
which the Seller is required by law to retain.
(c) Section 1.4 of the Agreement is hereby deleted in its entirety
and replaced with the following:
Section 1.4. PURCHASE PRICE: VALUE OF CERTAIN ASSETS. (a) The
purchase price of the Assets (the "Purchase Price") shall be:
(i) cash, certified or cashier's check, wire transfer or other
immediately available funds in the amount of $10,000,000;
PLUS
(ii) the Value of the Inventory (as defined below); PLUS
(iii) the Value of the Prepaid Expenses (as defined below); LESS
(iv) an amount equal to the Seller's liabilities for accrued
"Paid Days Off" ("PDO") and any other vested benefits set
forth on SCHEDULE 1.4 (vi) due to the Hired Employees (as
defined in Section 5.4); LESS
(v) the Value of the Other Current Liabilities, Accounts
Payable, Salaries
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Payable and Payroll Taxes Payable (as hereinafter defined).
(b) As used herein, the term "Value of the Inventory" shall mean the
aggregate book value of the Hospitals' Inventory as of the Closing Date, as
initially determined at the Closing by using the amounts set forth on the
Interim Balance Sheet (as hereinafter defined) and as finally determined by
using the amounts set forth on the Closing Balance Sheet (as hereinafter
defined).
(c) As used herein, the term "Value of the Prepaid Expenses" shall
mean the sum of (i) aggregate book value of the Hospitals' Prepaid Expenses
as of the Closing Date, as initially determined at the Closing by using the
amounts set forth on the Interim Balance Sheet (as hereinafter defined) and
as finally determined by using the amounts set forth on the Closing Balance
Sheet; and (ii) $36,798, which is the amount expended by Seller to have a
new fire alarm system installed at the request of Purchaser at Pacific
Shores Hospital.
(d) As used herein, the term "Value of the Other Current Liabilities,
Accounts Payable, Salaries Payable and Payroll Taxes Payable" shall mean
the aggregate book value of the Hospital's Other Current Liabilities,
Accounts Payable, Salaries Payable and Payroll Taxes Payable, excluding
therefrom liabilities for (i) accrued pension expenses, (ii) amounts
accrued under the Seller's Employee Stock Purchase Plan or similar benefit
plans and (iii) amounts prorated at the Closing pursuant to Section 1.8 as
of the Closing Date. Such amount shall initially be determined at the
Closing by using the amounts set forth in the Interim Balance Sheet and
finally determined by using the amounts set forth on the Closing Balance
Sheet.
(e) Pursuant to the terms of an Escrow Agreement to be agreed upon
by the parties, the Purchaser shall escrow a portion of the Purchase Price
(not to exceed $300,000) until the Purchaser is satisfied in its reasonable
discretion of the satisfactory completion of the work at Windsor Hospital
and Pinon Hills Residential Treatment Center more fully described in
Exhibit A attached hereto; provided, however, that the Escrow Agreement
shall allow disbursement of funds to make progress or final payments to
contractors carrying out such work and the Escrow Agreement shall reflect
the principles described in Exhibit A.
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(d) Section 1.5 of the Agreement is hereby amended by changing the
date "April 30, 1996" to "May 31, 1996."
(e) Section 1.7(b) of the Agreement is hereby deleted in its entirety
and replaced with the following:
Section 1.7. ADJUSTMENTS TO PURCHASE PRICE.
(b) Subject to the provisions of Section 1.7(d) below, within
ninety (90) days after the Closing Date (or as soon thereafter as
possible), the parties shall make final adjustments to the Purchase Price
(the "Post Closing Adjustments"). The Seller shall furnish to the
Purchaser, within forty-five (45) days after the Closing, a balance sheet
of the Seller with respect to the Hospital Businesses as of the close of
business on the Closing Date (the "Closing Balance Sheet"). The Closing
Balance Sheet will be used to determine any final adjustments to the
Purchase Price relating to (i) the Purchaser's assumption of the Seller's
liabilities, and (ii) prorations contemplated hereby.
(f) Section 4.4 of the Agreement is hereby deleted in its entirety
and replaced with the following:
Section 4.4 TITLE COMMITMENTS AND SURVEYS. The Seller will, prior to
the Closing, deliver to Purchaser the Title Commitments for owner's title
insurance from the Seller's issuing agents of Lawyer's Title (collectively,
the "Title Company"). Additionally, the Seller will, prior to the Closing,
deliver to the Purchaser ALTA/ACSM as-built surveys of the Real Property
(the "Surveys") showing the perimeter boundaries of the Real Property and
all improvements thereon. Notwithstanding the foregoing sentence, the
Survey relating to the Real Property at Windsor Hospital shall be a
recertification of a survey prepared August 4, 1986 (the "1986 Survey"), as
recertified on April 10, 1991, as recertified on March 28, 1995. The 1986
Survey was prepared to accuracy standards in effect on August 4, 1986,
which is an accurate field survey. The Title Commitments are, and at the
Closing the Surveys will be, set forth on SCHEDULE 2.7.
(g) The following sentence is hereby added to the end of Section 5.2
of the Agreement:
Upon the Seller's written request, the Purchaser will, at the expense
of the Seller based on the Purchaser's actual copying and labor costs,
provide to the Seller and its representatives (including, without
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<PAGE>
limitation, its attorneys and accountants) copies of the records
transferred to the Purchaser at the Closing (including, without limitation,
records of patients treated by the Seller at the Hospitals) after the
Closing Date.
(h) Section 7.4 of the Agreement is hereby deleted in its entirety
and replaced with the following:
Section 7.4. CONSENTS, APPROVALS AND LICENSES. The Purchaser shall
have received and been issued (either on a contingent or permanent basis)
all licenses and approvals (except for Controlled Substance Registration
Certificates) required under the provisions of state and federal law
necessary for the Purchaser to legally conduct all relevant operations of
the Hospitals being conducted by the Seller on the Closing Date, and the
Purchaser or the Seller shall have obtained all non-governmental third
party consents reasonably necessary for the legal and authorized transfer
of all material Assets, including, without limitation, (i) the Scheduled
Contracts and Scheduled Leases, (ii) consent to the assignment of the lease
for Aspen Hill Hospital, (iii) the release by Copelco Capital, Inc. of its
liens on the Seller's property, and (iv) the release by Congress Financial
Corporation of its liens to the extent that such liens encumber the Assets.
(g) Section 8.2 of the Agreement is hereby amended by changing the
date "April 30, 1996" to "May 31, 1996."
(h) Section 10.2 of the Agreement is hereby deleted in its entirety
and replaced with the following:
Section 10.2. MEDICARE AND MEDICAID, ETC. RECEIVABLES AND PAYABLES.
(a) With respect to Medicare, Medicaid, CHAMPUS, and cost-based Blue Cross
cost reports for periods beginning after the Effective Time (as defined in
Section 11.4), the Purchaser and the Seller agree that the Purchaser shall
be (i) responsible for filing Medicare, Medicaid, CHAMPUS, and cost-based
Blue Cross provider cost reports or forms associated with said periods for
the Hospitals, (ii) entitled to any receivables relating to said cost
reports, and (iii) responsible for any liabilities relating to said cost
reports.
(b) With respect to Medicare, Medicaid, CHAMPUS, and cost-based Blue
Cross cost reports for periods ending prior to the Effective Time, the
Purchaser and the Seller agree that the Seller shall be (i) responsible for
filing
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Medicare, Medicaid, CHAMPUS, and cost-based Blue Cross provider cost
reports or forms associated with said periods for the Hospital, (ii)
entitled to any receivables relating to said cost reports, and (iii)
responsible for any liabilities relating to said cost reports.
(c) With respect to Medicare, Medicaid, CHAMPUS, and cost-based Blue
Cross terminating cost reports due as a result of the transactions
contemplated herein, the Purchaser and the Seller agree that the Seller
shall be responsible for filing, subsequent to the Purchaser's review of
such filing, provider cost reports or forms associated with said
terminating periods for the Hospitals, and the Seller shall be entitled to
any receivables relating to said cost reports (except for any Special Loss
Reimbursement as set forth below) and be responsible for any liabilities
relating to said cost reports. The Purchaser and the Seller agree that the
Seller and the Purchaser shall be entitled to eighty-five percent (85%) and
fifteen percent (15%), respectively, of the aggregate Special Loss
Reimbursement contained on the terminating cost reports for the Hospitals.
This provision shall apply regardless of whether the new settlement on a
given cost report is a receivable or a liability. For example, if a given
cost report is settled with a liability of $50,000 owing to the Medicare
Program, and includes a Special Loss Reimbursement in the amount of
$100,000 due the provider, the Seller would remit $15,000 of the Special
Loss Reimbursement to the Purchaser, even though the cost report settlement
in total is a $50,000 amount due the Medicare Program, which amount shall
be paid by Seller.
(d) The Purchaser agrees that it shall not file or cause to be filed
any amended cost reports in the Seller's name for periods ending prior to
the Effective Time, for any reason, without the prior written consent of
the Seller, the Seller having sole discretion as to the filing of said
amended cost reports. With regard to cost reports which have been audited
and/or settled, the Purchaser agrees that it shall not request a reopening
of, or otherwise cause a reopening of any cost reports which have been
settled for periods ending prior to the Effective Time, for any reason,
without the prior written consent of the Seller, the Seller having sole
discretion as to any provider-initiated reopenings of said settled cost
reports. With regard to cost reports which have been filed, but not audited
and/or not settled for periods ending prior to the Effective Time, the
Purchaser agrees that it shall not negotiate the settlement of said
8
<PAGE>
cost reports without the prior written consent of the Seller. Additionally,
the Purchaser agrees to notify the Seller immediately upon receiving
notification of any settlement or audit action (e.g., notification of desk
audit, field audit, proposed audit adjustments, issuance of a notice of
intent to reopen, or issuance of a Notice of Program Reimbursement) to be
taken by a fiscal intermediary with regard to unaudited and/or unsettled
cost reports for periods ending prior to the Effective Time, and the
Purchaser shall not file or cause to be filed any amended cost reports in
the Seller's name for the terminating cost reporting period, in respect of
any home office and intercompany transaction group appeals, without the
prior written consent of the Seller, the Seller having sole discretion as
to the filing of such amended cost reports.
(e) Following the Closing, the parties shall cooperate with each
other and, except as limited by Section 10.2(a) above, shall make available
to each other, as reasonably requested, and to any Medicare/Medicaid,
CHAMPUS or cost-based Blue Cross authority, all information, records or
documents relating to the Medicare, Medicaid, CHAMPUS and cost-based Blue
Cross receivables and payables of the Hospitals and shall preserve all such
information, records and documents until the expiration of any applicable
statute of limitations or extensions thereof. The parties shall also make
available to each other as is reasonably required, and at the cost of the
requesting party, personnel responsible for preparing or maintaining
information, records and documents in connection with such matters.
(f) Any funds received by the Seller, on the one hand, or the
Purchaser, on the other hand, due to the other under this Agreement shall
be paid to such party within two (2) days after receipt thereof. Any
liabilities associated with cost reports for periods ending prior to the
Effective Time, including, without limitation, the terminating cost report,
must be paid by the Seller no later than the date required by the fiscal
intermediary.
(g) The Seller and the Purchaser agree that the values determined as
set forth on SCHEDULE 1.6 represent fair market values of the Assets and
that these same values will be used for Medicare, Medicaid, CHAMPUS and
cost-based Blue Cross cost reporting purposes.
9
<PAGE>
(h) The parties represent to each other that the transactions set
forth herein reflect an arm's length transaction between the Seller and the
Purchaser, that neither party to a significant extent is associated or
affiliated with, or has control of, or is controlled by, the other party,
and, as a result, the parties intend that on and after the date hereof the
Purchaser shall not be deemed to be a "related party" to the Seller under
the Medicare and Medicaid regulations.
2. CAPITALIZED TERMS: CROSS-REFERENCES. All capitalized terms used herein
shall have the same meaning as when used in the Agreement. Cross-references,
unless otherwise indicated, are to the Agreement.
3. EFFECT OF AMENDMENT. As hereby amended, the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as
of the day and year first above written.
MENTAL HEALTH MANAGEMENT, INC.
By: /s/Michael S. Pinkert
---------------------------------------
Michael S. Pinkert,
President and Chief Executive Officer
MHM OF OHIO, INC.
By: /s/Michael S. Pinkert
---------------------------------------
Michael S. Pinkert,
President and Chief Executive Officer
PARENT
BEHAVIORAL HEALTHCARE CORPORATION
By: /s/ Michael E. Davis
---------------------------------------
Michael E. Davis,
Chief Financial Officer
10
<PAGE>
EXHIBIT A
WORK AT WINDSOR HOSPITAL ("WINDSOR"). The work to be carried out at
Windsor is described in the memorandum from Bruce Waldo to Mike Pinkert, dated
April 5, 1996. The work needed regarding asbestos is described on the page
entitled "PSI Findings" and "Sample FHA 29" is encompassed in the first
description on that page (i.e., the reference to "721 square feet of asbestos").
Removal of asbestos may not be required in every case; encapsulation may be
appropriate in one or more areas.
WORK AT PINON HILLS RESIDENTIAL TREATMENT CENTER ("PINON"). Construction
work to enclose two porches and thereby increase the physical capacity to the
full number of licensed beds (53) will be completed. In addition, the Seller
will be responsible for the engineering costs of planning and designing, and the
construction costs of constructing, a new sewage system capable of handling
5,000 gallons per day. (Any additional costs arising from the planning, design,
and construction of a system capable of handling 7,000 gallons per day shall be
at the expense of the Purchaser, not the Seller).
The Escrow Agreement will include the following terms:
(1) No more than $150,000 will be allocated for the work at Windsor and no
more than $150,000 will be allocated for the work at Pinon.
(2) Any amounts paid by the Seller for the work at either Windsor or Pinon
prior to Closing will reduce, dollar-for-dollar, the amount put in escrow at
Closing for the work at Windsor or Pinon, as the case may be.
(3) The funds in escrow may be used to make payment after Closing for the
work.
(4) Any contract not entered into prior to Closing that is needed to
complete any work described herein shall be entered into by the Purchaser after
the Purchaser obtains the Seller's approval, which approval shall not be
unreasonably withheld or delayed.
(5) If, at any time in the reasonable determination of the Purchaser and
the Seller, the funds in escrow are insufficient to pay for work described
herein, then the Seller shall promptly deposit an agreed upon amount of funds
into the escrow account.
(6) Upon satisfactory completion of all of the work at Windsor or Pinon,
any unspent amounts in escrow allocated for the work at such facility shall be
promptly paid to the Seller.
A-1
<PAGE>
(7) The amount allocated to the escrow will bear interest at the rate of
interest customarily paid upon escrowed funds by the escrow agent.
Satisfactory completion of the work described above shall be deemed to
satisfy any objections that Purchaser has with respect to the physical and
environmental condition of the Hospitals resulting from the Seller's disclosures
to the Purchaser or the engineering and environmental studies conducted on
behalf of the Purchaser.
A-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,116,000
<SECURITIES> 0
<RECEIVABLES> 9,641,000
<ALLOWANCES> 2,025,000
<INVENTORY> 94,000
<CURRENT-ASSETS> 9,588,000
<PP&E> 16,828,000
<DEPRECIATION> 6,060,000
<TOTAL-ASSETS> 25,234,000
<CURRENT-LIABILITIES> 9,261,000
<BONDS> 0
0
0
<COMMON> 33,000
<OTHER-SE> 3,265,000
<TOTAL-LIABILITY-AND-EQUITY> 25,234,000
<SALES> 0
<TOTAL-REVENUES> 22,502,000
<CGS> 0
<TOTAL-COSTS> 15,919,000
<OTHER-EXPENSES> 10,643,000
<LOSS-PROVISION> 2,846,000
<INTEREST-EXPENSE> 766,000
<INCOME-PRETAX> (7,672,000)
<INCOME-TAX> (175,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,497,000)
<EPS-PRIMARY> (2.27)
<EPS-DILUTED> 0
</TABLE>
