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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997 Commission File Number: 1-12238
MHM SERVICES, 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.)
8000 Towers Crescent Drive, Suite 810 22182
Vienna, Virginia (Zip Code)
(Address of principal executive offices)
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 N
--- ---
As of July 31, 1997 there were 3,510,448 shares of Common Stock, par value
$.01 per share outstanding.
1
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MHM SERVICES, INC.
AND SUBSIDIARIES
Quarter Ended June 30, 1997
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations-Three and
Nine Months Ended June 30, 1997 and 1996 (Unaudited)............ 4
Condensed Consolidated Balance Sheets-
June 30, 1997 (Unaudited) and September 30, 1996................ 5
Condensed Consolidated Statements of Cash Flows-Nine
Months Ended June 30, 1997 and 1996 (Unaudited)................. 6
Notes to Condensed Consolidated Financial Statements
(Unaudited)..................................................... 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 13-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 3. Defaults Upon Senior Securities................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............. 16-17
Item 5. Other Information............................................... 18
Item 6. Exhibits and Reports on Form 8-K................................ 18
2
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MHM SERVICES, INC.
AND SUBSIDIARIES
Quarter Ended June 30, 1997
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 NINE MONTHS ENDED JUNE 30
-------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net Revenues........................................... $ 5,543,000 $ 9,487,000 $ 13,408,000 $ 31,989,000
Costs and Expenses
Operating............................................ 4,245,000 6,655,000 10,364,000 22,574,000
General and Administrative........................... 1,398,000 2,605,000 3,756,000 8,236,000
Provision for Bad Debts.............................. 562,000 1,877,000 1,242,000 4,723,000
Depreciation and Amortization........................ 102,000 226,000 260,000 940,000
Loss on Sale of Facilities........................... -- 33,000 -- 4,385,000
Other (credits) charges
Interest Expense--MEDIQ.............................. 263,000 262,000 776,000 834,000
Interest Expense--Other.............................. 35,000 73,000 51,000 267,000
Other................................................ (517,000) (54,000) (662,000) (108,000)
------------ ------------ ------------- -------------
Loss before Income Tax Benefit and Extraordinary
Item................................................. (545,000) (2,190,000) (2,379,000) (9,862,000)
Income Tax Benefit..................................... -- -- -- (175,000)
------------ ------------ ------------- -------------
Net Loss before Extraordinary Item..................... (545,000) (2,190,000) (2,379,000) (9,687,000)
Extraordinary Item--Loss on Early Extinguishment of
Debt................................................. -- (463,000) -- (463,000)
------------ ------------ ------------- -------------
Net Loss............................................... (545,000) (2,653,000) (2,379,000) (10,150,000)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Loss per Share:
Loss before Extraordinary Item......................... $ (0.16) $ (0.66) $ (0.70) $ (2.93)
Extraordinary Item..................................... (0.14)
------------ ------------ ------------- -------------
Net Loss Per Share..................................... $ (0.16) $ (0.80) $ (0.70) $ (3.07)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Weighted Average Shares Outstanding.................... 3,510,000 3,310,000 3,377,399 3,310,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 SEPTEMBER 30, 1996
------------- ------------------
UNAUDITED (SEE NOTE)
<S> <C> <C>
Assets
Current Assets:
Cash and Cash Equivalents.................................................... $ 866,000 $ 3,611,000
Accounts Receivable, Net..................................................... 2,463,000 1,680,000
Prepaid Expenses............................................................. 117,000 237,000
Income Taxes Refundable...................................................... -- 662,000
Other Receivable............................................................. 660,000 660,000
Other Current Assets......................................................... 565,000 258,000
------------- ------------------
Total Current Assets....................................................... 4,671,000 7,108,000
Property, Plant and Equipment, Net............................................. 525,000 538,000
Notes Receivable, Net.......................................................... 1,113,000 1,229,000
Other Assets................................................................... 1,078,000 578,000
Goodwill, Net.................................................................. 1,864,000 1,375,000
------------- ------------------
Total Assets................................................................... $ 9,251,000 $ 10,828,000
------------- ------------------
------------- ------------------
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts Payable............................................................. 571,000 805,000
Accrued Expenses............................................................. 2,178,000 2,075,000
Accrued Expenses--MEDIQ Interest............................................. 753,000 321,000
MEDIQ........................................................................ 10,478,000 766,000
Current Maturities of Long Term Debt......................................... 238,000 194,000
------------- ------------------
Total Current Liabilities.................................................. 14,218,000 4,161,000
Long Term Debt, Less Current Maturities
MEDIQ........................................................................ -- 9,967,000
Other........................................................................ 874,000 257,000
Other Liabilities.............................................................. 20,000 25,000
Stockholders' Deficit.......................................................... (5,861,000) (3,582,000)
------------- ------------------
Total Liabilities and Stockholders' Deficit.................................... $ 9,251,000 $ 10,828,000
------------- ------------------
------------- ------------------
</TABLE>
- ------------------------
Note: The balance sheeet at September 30, 1996 has been condensed from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss........................................................................... $ (2,379,000) $ (10,150,000)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities......... 185,000 7,190,000
------------- --------------
Net Cash Used in Operating Activities.............................................. (2,194,000) (2,960,000)
Cash Flows from Investing Activities
Proceeds from Sale of Facilities................................................... -- 8,865,000
Capital Expenditures............................................................... (117,000) (226,000)
Acquisitions....................................................................... (250,000) (150,000)
Other.............................................................................. (283,000) (20,000)
------------- --------------
Net Cash Provided by (Used in) Investing Activities................................ (650,000) 8,469,000
Cash Flows from Financing Activities
Borrowings, Net.................................................................... 473,000 --
Debt Repayments.................................................................... (374,000) (3,049,000)
------------- --------------
Net Cash Provided by (Used in) Financing Activities................................ 99,000 (3,049,000)
Increase (Decrease) in Cash........................................................ (2,745,000) 2,460,000
Cash and Cash Equivalents
Beginning Balance................................................................ 3,611,000 3,084,000
------------- --------------
Ending Balance................................................................... $ 866,000 $ 5,544,000
------------- --------------
------------- --------------
Supplemental Disclosure of Cash Flow Information
Interest Paid.................................................................... $ 395,000 $ 1,108,000
------------- --------------
------------- --------------
Income Taxes Refunded............................................................ $ (569,000) $ (92,000)
------------- --------------
------------- --------------
Supplemental Disclosure of Non-cash Investing and Financing
Activities
Acquisitions--Portion Financed with Long Term Debt............................... $ 275,000 $ 338,000
------------- --------------
------------- --------------
Acquisitions--Portion Financed by Issuance of Common Stock....................... $ 100,000 $ --
------------- --------------
------------- --------------
Equipment Financed with Debt and Capital Leases.................................. $ -- $ 63,000
------------- --------------
------------- --------------
Notes Received from Sale of Fixed Assets......................................... $ -- $ 1,400,000
------------- --------------
------------- --------------
Liabilities Assumed by BHC....................................................... $ -- $ 1,358,000
------------- --------------
------------- --------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
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MHM SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1997, the condensed
consolidated statements of operations for the three and nine month periods then
ended June 30, 1997 and 1996, and condensed consolidated statements of cash
flows for the nine month periods then ended June 30, 1997 and 1996 have been
prepared by the Company, without audit. In the opinion of management, all
material adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly the condensed consolidated financial position,
results of operations and cash flows as of June 30, 1997, 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, 1996 Annual
Report on Form 10-K. The results of operations for the period ended June 30,
1997 are not necessarily indicative of the operating results for the full year.
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. The Company has incurred aggregated net losses of $22,827,000 for the
three years and nine months ended June 30, 1997, and has a stockholders'
deficiency of $5,861,000 as of June 30, 1997. The Company is experiencing
difficulty in generating sufficient cash flows to meet its obligations and
sustain its operations. On February 10, 1997, the Company was informed by MEDIQ
that the MEDIQ Note was immediately due and payable as a result of withholding
the required February installment. See Note 6. Consequently, the Company had
negative working capital as of June 30, 1997. Such conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
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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 be likely to continue having an adverse impact on future
results, the Company has focused its strategy on pursuing opportunities to grow
its Extended Care and Correctional Services Divisions. As a result, the Company
sold six of its seven owned and/or operated freestanding behavioral health
facilities which represented 51% of net revenues in fiscal 1996. Effective March
11, 1997, the Company's subsidiary, MHM Extended Care Services, Inc., entered
into a $4,000,000 revolving credit facility with an affiliate of Bethesda,
Maryland-based commercial lender Healthcare Financial Partners. In a continuing
effort to improve this situation for both the immediate future and the
long-term, the Company is attempting to take steps to reduce operating expenses,
seek more profitable new business opportunities, finance its working capital
requirements, restructure debt, raise additional capital and improve its cash
flows. Nevertheless, there can be no assurance that the Company's efforts will
result in positive effects on the Company's financial condition.
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 a
15 year amortization, with the remaining principal due in five years (or
earlier under certain circumstances). Payments with respect to these notes
have been irregular with two monthly payments in arrears as of July 31, 1997.
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 $1,735,000 as of June 30, 1997) as collateral for the
Company's obligations under the MEDIQ Note. In connection with the Company
filing suit to challenge the MEDIQ Note, MEDIQ has sought to enforce its lien
against this collateral. The Company disputes this action and is evaluating
appropriate steps in response.
On May 31, 1996, the Company sold certain assets, consisting principally of
five of its freestanding behavioral healthcare facilities, to Behavioral
Healthcare Corporation, pursuant to an Asset Purchase Agreement (the BHC
Agreement ), dated as of January 24, 1996, and amended as of April 11, 1996, by
and between the Company and BHC (the BHC Sale ). The facilities were sold to BHC
for approximately $10,209,000, consisting of $9,049,000 in cash and $1,160,000
in assumed liabilities of the freestanding facilities (reflecting post-closing
adjustments by both parties).
8
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The Company used a portion of the proceeds from the BHC Sale for (i) the
repayment of the principal amount outstanding under the Company's revolving
credit facility ($2,515,000, including related early termination fees of
$174,000); (ii) the extinguishment of a portion of the indebtedness not assumed
by BHC at the closing of the sale ($692,000, including early termination fees of
$139,000), which consisted primarily of indebtedness secured by certain of the
assets (particularly a facility and certain equipment) acquired by BHC; and
(iii) the funding of the Company's obligation to complete repairs to two of the
freestanding facilities sold to BHC in the amount of $284,000 (of which $35,000
remains in escrow as of July 31, 1997).
The pretax loss on the sale of six of its seven freestanding behavioral
health facilities in 1996 was $4,440,000 consisting primarily of the write-off
of intangibles related to the facilities of $3,184,000, loss on the sale of
certain property, plant, and equipment aggregating $319,000, transaction
expenses of $568,000, severance expenses of $349,000, and other expenses of
$680,000, offset by estimated Medicare depreciation recapture income of
approximately $660,000.
NOTE 4--ACQUISITIONS
Acquisition of Supportive Counseling Care/Recent Determination to
Discontinue Operations. 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. As consideration for the acquired
assets, the Company paid $500,000 in cash and notes. The Company's Extended Care
Services Division also 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. In November 1996, the Company decided to discontinue the
operations of SCC based upon SCC's continued operating losses and negative cash
flow, resulting in part from significant delays in Medicare reimbursement. The
Company shut down SCC's operations in early December 1996.
Acquisition of Clinic Operations in Massachusetts (MHM Counseling Services).
In December 1995, the Company's Extended Care Services Division acquired the
behavioral healthcare clinic operations of National Mentor, Inc. located in
Charlestown and Taunton, Massachusetts. As consideration for the acquired
assets, the Company paid $150,000 in cash and agreed to pay an aggregate of
$338,000 over 36 equal monthly installments. The Company renamed the operations
MHM Counseling Services . The operating results of the acquired business are
included in the Company's consolidated results of operations from the date of
acquisition.
Acquisition of Extended Care Operations in Massachusetts (Liberty Bay).
Effective as of December 1, 1996, the Company's Extended Care Services Division
acquired, pursuant to an Agreement (the Liberty Bay Agreement ) by and among the
Company, MHM Extended Care Services, Inc., Liberty Bay Colony Health Services,
Inc. ( Liberty Bay ) and Liberty Management Group, Inc. ( Liberty Management ),
certain assets and contractual rights from Liberty Bay which constituted Liberty
Bay's geropsychiatric management services operations in Massachusetts. The
Company has integrated these operations with MHM Counseling Services
9
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and the combined operations operate under the name MHM/Bay Colony Counseling
Services, and, as a result of the acquisition and continued development,
serve approximately 90 extended care facilities.
As consideration for the purchase, the Company paid Liberty Bay $150,000 in
cash and issued a promissory note in the principal amount of $150,000 (the
Liberty Bay Note ). The purchase price was primarily allocated to intangible
assets. The Liberty Bay Note provides for quarterly interest payments at an
annual rate of 9% and the payment of the principal amount in one installment on
December 1, 1999. The Company also agreed to pay Liberty Bay additional
consideration consisting of 20% of cash flow (as such term is defined in the
Liberty Bay Agreement) from the acquired contracts over the five year period
commencing December 1, 1996. Such additional consideration is payable annually
by the Company and is calculated on a contract-by-contract basis.
Acquisition of Long-Term Care Operations in Pennsylvania and Tennessee
(Apogee). Effective as of March 31, 1997, the Company's Extended Care Services
Division acquired certain assets and contractual rights related to the long-term
care operations of Apogee, Inc. in Pennsylvania and Tennessee, consisting of
contracts with approximately 275 facilities.
As consideration for the purchase, the Company paid $100,000 in cash, issued
a three year promissory note in the principal amount of $125,000, and issued
200,000 shares of common stock of MHM Services, Inc at $.50 per share. The
purchase price was primarily allocated to intangible assets. The note provides
for interest payments six months after the closing date for the first two
quarters and quarterly thereafter at an annual interest rate of 7% and annual
principal payments. The Company also agreed to pay, as additional consideration,
20% of "cash flow" (as such term is defined in the agreement) from the acquired
operations over a five year period. Such additional consideration is payable
annually.
NOTE 5--WRITEDOWN OF LONG-TERM ASSETS--DISCONTINUANCE OF SCC OPERATIONS
In November 1996, the Company decided that its SCC operation was to be
discontinued because of its continuing losses. The Company shut down
operations in early December 1996. As a result, the carrying value of all
other assets related to SCC, primarily intangibles, have been written off
resulting in a charge of $461,000 in the year ended September 30, 1996. The
Company expects the costs associated with discontinuing the operations of SCC
to be nominal. The Company is unable to estimate the time necessary to
process SCC's outstanding accounts receivable, including the appeals for
previously denied claims. There can be no assurance that the appeal process
will result in a significant percentage of reversals, additional denials will
not be received by SCC, actual bad debt experience will not exceed the
Company's estimates or the review of SCC's claims will not result in
potential liability for the Company.
The Company issued a purchase warrant in connection with the SCC
acquisition. Such warrant provides the holder thereof, upon the occurrence of
certain events (such as an initial public offering of such subsidiary, MHM
Extended Care Services, Inc.), the right (subject to certain vesting conditions)
until July 1998 to acquire 9,000 shares (subject to adjustment under certain
circumstances) of the common stock of such subsidiary at a purchase price of
$1.00 per share
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(subject to adjustment under certain circumstances). Such subsidiary
currently has 1,000,000 and 100,000 shares of its common stock, par value
$.01 per share, authorized and issued, respectively.
NOTE 6--LONG-TERM DEBT
MEDIQ NOTE. In connection with the spin-off of the Company by MEDIQ, its
former corporate parent, on August 31,1993, the Company executed a five-year
note (the MEDIQ Note ) for the balance of unpaid payment obligations imposed on
the Company by MEDIQ and described by MEDIQ as management fees and intercompany
interest. The original principal amount of the MEDIQ Note was $11,500,000 which
bears interest at a rate of prime plus 1.5% (10% at June 30, 1997), with monthly
payments of interest only through September 1995 and then monthly principal and
interest payments for the following three years (principal payments of $767,000
were made in 1996, and additional principal payments of $256,000 representing
the contractually required principal payments for October 1996 through January
1997, have been made as of June 30, 1997), based on a fifteen year amortization
period, with the balance due on August 31, 1998.
The Company filed a complaint on February 10, 1997 in Superior Court of New
Jersey, Law Division--Essex County against MEDIQ alleging that the MEDIQ Note is
invalid on the grounds that MEDIQ breached its fiduciary obligations in
connection with forcing the Company to execute the MEDIQ Note, the MEDIQ Note
lacks consideration, the MEDIQ Note is unconscionable and it unjustly enriches
MEDIQ at the Company's expense. The case has been transferred by the Court to
Camden, New Jersey. The Company has asked the Court to declare the MEDIQ Note
null and void, require MEDIQ to return to the Company all payments MEDIQ has
received under the MEDIQ Note and award the Company compensatory, consequential
and punitive damages. There can be no assurance that the Company will be
successful in its suit against MEDIQ. The Company remained current in its
payments under the MEDIQ Note until filing the lawsuit at which time it withheld
payments commencing with the payment due for February 1997 and all subsequent
payments. The Company received notice from MEDIQ by letter dated February 11,
1997, that as a result of the Company's withholding of the February installment
under the MEDIQ Note, MEDIQ claims to have accelerated all principal and
interest due under the MEDIQ Note. Consequently, the outstanding amounts owed by
the Company under the MEDIQ Note ($10,478,000) have been classified as a current
liability. Additionally, the Company has accrued interest payable under the
terms of the note through June 30, 1997 of $753,000. An adverse decision with
regard to the Company's complaint against MEDIQ could force the Company to file
for reorganization under the U.S. Bankruptcy Code since the Company does not
have financial resources sufficient to repay the accelerated MEDIQ Note.
OTHER. Effective March 11, 1997, MHM Extended Care Services, Inc. entered
into a $4,000,000 revolving credit facility with an affiliate of Bethesda,
Maryland-based commercial lender Healthcare Financial Partners.
The facility, which bears interest at prime plus 2.25% (10.75% at June 30,
1997), is secured by accounts receivable and expires in March 1999. The loan is
also secured by the stock of the Company's subsidiary, MHM Extended Care
Services, Inc. The amount of credit available
11
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fluctuates based on the amount of qualified accounts receivable. As of June
30, 1997 the Company had $506,000 outstanding under this facility.
NOTE 7--OTHER INCOME
Other income for the quarter ended June 30, 1997 includes a gain from a
judgement in May, 1997 which awarded the Company $457,000 representing certain
assets owed to it by a former joint venture partner.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion addresses changes in the financial condition of the
Company as of June 30, 1997 and the Company's results of operations for the
three and nine month periods then ended, compared with the same periods last
year. This discussion should be read in conjunction with Management's Discussion
and Analysis section (pages 19-33) for the fiscal year ended September 30, 1996
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, 1995 and 1996,
including the divestiture of the Company's contract management business and
substantially all of its freestanding behavioral healthcare facilities so that
the company could focus on its principal remaining business--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.
Additionally, the Company was recently awarded a contract with the Tennessee
Department of Corrections to provide mental health services on a capitated basis
to inmates in the majority of their prison facilities and plans to develop new
business opportunities in this market.
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 from operations to meet its
obligations and sustain its operations without the use of available cash
resources. The report of the Company's independent auditors on the Company's
financial statements for the fiscal year ended September 30, 1996 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. In a continuing effort to improve this situation for both the
immediate future and the long-term, the Company sold certain assets relating
to its Hospital Division, and is taking steps to reduce operating expenses,
finance its working capital requirements, restructure debt, raise additional
capital and improve its cash flows. Nevertheless, there can be no assurance
that the Company's efforts will result in positive effects on the Company's
financial condition.
Financial Position--June 30, 1997 Compared to September 30, 1996
The Company's stockholder deficit increased to $5,861,000 as of June 30,
1997, from $3,582,000 at September 30, 1996, primarily as a result of losses
incurred by the Company for the first three quarters. Net working capital
decreased from $2,947,000 to a deficit of $9,547,000. This decrease is primarily
due to the classification of MEDIQ debt and related accrued interest payable of
$11,231,000 as a current liability during the current fiscal year. Cash and cash
equivalents decreased from $3,611,000 as of September 30, 1996 to $866,000 as of
June 30, 1997. This decline is due to providing funds to cover ongoing losses
and acquistions in the Company's Extended Care Services Division. The Company's
Goodwill increased by
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$489,000 as a result of acquisitions. Other Assets increased by $500,000 due
to a deposit with the Company's insurer to back a letter of credit, deposits
and other costs related to acquisitions, and increase in deferred rent cost
at the Company's remaining free standing facility.
Nine Months Ended June 30, 1997 Compared to Nine Months Ended June 30, 1996
Net Revenues for the nine month period ended June 30, 1997 decreased to
$13,408,000 from net revenues of $31,989,000 for the prior year period, a
decline of approximately 58%. Operating costs and general and administrative
expenses were $14,120,000 as compared to $30,810,000 for the prior year period.
These decreases in net revenues and costs and expenses are primarily due to the
sale of six of the Company's freestanding facilities during 1996. Additionally,
bad debt expenses and depreciation and amortization have decreased significantly
due to the sale. Interest expense decreased as a result of lower overall debt
levels due to the fact that debt was retired relating to the sale of the
freestanding facilities. Other income for the 1997 period includes a gain from a
judgement in May, 1997 which awarded the Company $457,000 representing revenues
owed to it by a former joint venture partner.
Third Quarter, 1997 Compared to Third Quarter, 1996
Net Revenues for the third quarter of 1997 decreased to $5,543,000 from
$9,487,000 for the corresponding quarter of 1996, or a decrease of approximately
41%. Substantially all costs and expenses also declined significantly.
Similarly, these decreases in net revenue and costs and expenses are primarily
due to the sale of six of the Company's freestanding facilities during 1996.
Other income includes the aforementioned gain of $457,000 on the judgement
awarded the Company in May, 1997.
AMERICAN STOCK EXCHANGE
The American Stock Exchange (the "Exchange") advised the Company by letter
dated March 25, 1997, that the Company had fallen below certain of the
Exchange's continued listing guidelines and that as a result the Exchange was
reviewing the Company's listing eligibility. In particular the Exchange
indicated that the Company's net losses for the past three fiscal years and in
the first three months ended December 31, 1996 had caused the Company to fall
below the financial standards for continued listing on the Exchange. The
Exchange, among other reasons, also cited the acceleration of the MEDIQ Note.
The Company met with the Exchange to discuss their concerns on May 8, 1997.
After consideration of various factors, the Exchange decided to continue the
Company's listing until review of the Company's Form 10-Q for the quarter ended
June 30, 1997. The Company must make a written report to the Exchange by August
22, 1997, providing detailed information to the Exchange to allow AMEX to
reevaluate the Company's progress. It is uncertain what course of action the
AMEX will take at that time. While the AMEX has discretion to consider a variety
of factors in making a decision to suspend or delist a security, there can be no
assurance that the Company will continue to be listed on the AMEX or satisfy the
standards for listing on another exchange or NASDAQ. Failure to be listed on an
exchange or NASDAQ may adversely affect the price of the Company's common stock
and the ability of the Company's stockholders to sell their shares.
14
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PER SHARE CALCULATIONS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings per Share ("Statement 128").
Statement 128 replaces the presentation of primary EPS with a presentation of
basic EPS and requires the dual presentation of basic and diluted EPS on the
face of the income statement of all entities with complex capital structures.
Statement 128 also requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. Due to the Company's continuing operating losses, there will be no
effect of Statement 128 in the presentation of EPS.
This report includes forward-looking statements based on management's
current plans and expectations, relating to, among other matters, 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 .
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 10, 1997 the Company filed suit against MEDIQ, Inc.,
its former corporate parent, in the New Jersey state court. The suit
challenges as invalid the $11.5 million Note created in MEDIQ s favor
at the time the Company was spun-off as a MEDIQ subsidiary. The Note
reflected part of intercompany charges of approximately $21 million
that MEDIQ imposed on the Company from 1986-1993 while the Company
was a subsidiary of MEDIQ. The suit alleges, among other things, that
the Note lacks consideration, that MEDIQ breached its fiduciary
obligations in forcing the Company to execute the Note and that the
Note unjustly enriched MEDIQ at the Company s expense. The company
asks the court to declare the Note null and void, require that MEDIQ
return to the Company all payments that MEDIQ has received under the
Note and award it compensatory, consequential and punitive damages.
The Company was current in its payments on the Note until filing the
lawsuit at which time it withheld payments, commencing with the
installment for February 1997. The Company received notice from MEDIQ
by letter dated February 11, 1997, that as a result of the Company s
withholding of the February installment under the MEDIQ Note, MEDIQ
claims to have accelerated all principal and interest due under the
MEDIQ Note.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
In connection with the dispute with MEDIQ described in Item 1
above, on filing the lawsuit, the Company began withholding payments
to MEDIQ, commencing with the February, 1997 installment. MEDIQ has
claimed that it has accelerated all principal and interest due under
the MEDIQ Note.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At an Annual Meeting of stockholders of the Company held on June
17, 1997, at which holders of at least 2,027,799 shares of Common
Stock of the Company (out of a total of 3,510,448 shrares outstanding
and entitled to vote at such Annual Meeting) were present in person
or represented by proxy (representing a quorum for the transaction of
business), Messrs. Michael S. Pinkert, Steven H. Wheeler, William P
Ferretti, Kenneth A. Kessler and Ms. Carolyn Zimmerman were elected
to serve as directors of the Company to serve until the next Annual
Meeting and until the election and qualification of their successors.
(See attached Rider A)
16
<PAGE>
RIDER A
Set forth below is information regarding the 2,027,799 shares of Common
Stock voted for the election of directors of the Company:
Director--nominee: Michael Pinkert
Votes FOR: 1,777,494
Votes WITHELD 250,305
Director--nominee: Steven H. Wheeler
Votes FOR: 1,793,480
Votes WITHELD 234,319
Director--nominee: William P. Ferretti
Votes FOR: 1,793,480
Votes WITHELD 234,319
Director--nominee: Carolyn Zimmerman
Votes FOR: 1,793,355
Votes WITHELD 234,444
Director--nominee: Kenneth A. Kessler, M.D.
Votes FOR: 1,793,396
Votes WITHELD 234,403
17
<PAGE>
ITEM 5. OTHER INFORMATION.
At a Board of Directors meeting on February 10, 1997, Carolyn
Zimmerman and Steven H. Wheeler, now Vice President-Finance and Vice
President-Operations, respectively, of the Company, were elected to
fill the vacancies on the Board created by the resignations of H.
Scott Miller and Michael F. Sandler effective January 10, 1997. In
July, 1997, Carolyn Zimmerman resigned her director position as a
result of accepting a new position in the industry. Management is
currently recruiting a new Director for the vacancy. In addition, at
that Board meeting Lee Calligaro was appointed Vice President and
General Counsel of the Company and Nancy Neal, an employee of the
Company, was appointed Secretary.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated May 6, 1997
announcing the dismissal of Deloitte & Touche LLP as the Company's
independent accountant to audit the Company's consolidated financial
statements. As part of such Form 8-K, the Company also announced the
engagement of KPMG Peat Marwick LLP as the company's new independent
accountants.
The Company filed a Current Report on Form 8-K dated July 22,
1997, announcing and describing the reorganization of its Finance and
Accounting Department including the resignation of Carolyn Zimmerman
as Vice President of Finance, Treasurer and Chief Financial Officer
and a Member of the Board of Directors.
18
<PAGE>
MHM SERVICES, INC.
AND SUBSIDIARIES
Quarter Ended June 30, 1997
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: August 14, 1997 MHM SERVICES, INC.
/S/ MICHAEL PINKERT
PRESIDENT AND CEO
19
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