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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended: MARCH 31, 1997 Commission File Number: 1-12238
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MHM SERVICES, INC.
(Exact name of registrant as specified in its charter)
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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)
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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 May 12, 1997, there were 3,510,448 shares of Common Stock, par
value $.01 per share outstanding.
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MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED MARCH, 31, 1997
INDEX
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Page
Number
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations-Three and 4
Six Months Ended March 31, 1997 and 1996 (Unaudited)
Condensed Consolidated Balance Sheets- 5
March 31, 1997 (Unaudited) and September 30, 1996
Condensed Consolidated Statements of Cash Flows-Six 6
Months Ended March 31, 1997 and 1996 (Unaudited)
Notes to Condensed Consolidated Financial Statements 7-11
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 12-22
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
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MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 1997
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended March 31, Six Months Ended March 31,
-------------------------------- ------------------------------
1997 1996 1997 1996
-------------- ---------------- --------------- --------------
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Net Revenues $4,136,000 $11,321,000 $ 7,865,000 $22,502,000
Costs and expenses:
Operating 3,289,000 8,108,000 6,119,000 15,919,000
General and administrative 1,161,000 2,867,000 2,358,000 5,631,000
Provision for bad debts 305,000 1,531,000 680,000 2,846,000
Depreciation and amortization 89,000 311,000 158,000 714,000
Loss on sale of facilities -- 4,352,000 -- 4,352,000
Other (credits) charges:
Interest expense - MEDIQ 254,000 279,000 513,000 572,000
Interest expense - other 11,000 98,000 16,000 194,000
Other (62,000) (17,000) (145,000) (54,000)
-------------- ---------------- --------------- --------------
Loss before income tax benefit (911,000) (6,208,000) (1,834,000) (7,672,000)
Income tax benefit -- -- -- (175,000)
-------------- ---------------- --------------- --------------
Net loss $ (911,000) $(6,208,000) $(1,834,000) $(7,497,000)
============== ================ =============== ==============
Net loss per share $ (0.28) $ (1.88) $ (0.55) $ (2.27)
============== ================ =============== ==============
Weighted average shares outstanding 3,312,000 3,310,000 3,311,000 3,310,000
============== ================ =============== ==============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, 1997 September 30, 1996
-------------- ------------------
(Unaudited) (See Note)
Assets
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Current assets:
Cash and cash equivalents $ 1,543,000 $ 3,611,000
Accounts receivable, net 1,865,000 1,680,000
Prepaid expenses 133,000 237,000
Income taxes refundable -- 662,000
Other receivable 660,000 660,000
Other current assets 304,000 258,000
--------------------- ----------------------
Total current assets 4,505,000 7,108,000
Property, plant and equipment, net 525,000 538,000
Goodwill, net 1,895,000 1,375,000
Notes receivable 1,137,000 1,229,000
Other assets 843,000 578,000
--------------------- ----------------------
Total assets $ 8,905,000 $10,828,000
===================== ======================
Liabilities and Stockholders' Deficit
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Current Liabilities:
Accounts payable $ 650,000 $ 805,000
Accrued expenses 1,634,000 2,075,000
Accrued expenses - MEDIQ 490,000 321,000
MEDIQ 10,478,000 766,000
Current maturities of long-term debt 238,000 194,000
--------------------- ----------------------
Total current liabilities 13,490,000 4,161,000
Long-term debt, less current maturities:
MEDIQ -- 9,967,000
Other 709,000 257,000
Other liabilities 22,000 25,000
Stockholders' deficit (5,316,000) (3,582,000)
--------------------- ----------------------
Total liabilities and stockholders' deficit $ 8,905,000 $10,828,000
===================== ======================
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NOTE: THE BALANCE SHEET 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)
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<CAPTION>
Six Months Ended March 31,
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1997 1996
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Cash flows from operating activities:
- -------------------------------------
Net loss $(1,834,000) $(7,497,000)
Adjustments to reconcile net loss to net cash
used in operating activities 360,000 6,849,000
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Net cash used in operating activities (1,474,000) (648,000)
Cash flows from investing activities:
- -------------------------------------
Capital expenditures (73,000) (150,000)
Acquisitions (250,000) (150,000)
Other (237,000) (223,000)
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Net cash used in investing activities (560,000) (523,000)
Cash flows from financing activities:
- -------------------------------------
Borrowings - net 300,000 --
Debt repayments (334,000) (797,000)
----------------- -------------
Net cash used in financing activities (34,000) (797,000)
Decrease in cash (2,068,000) (1,968,000)
Cash and cash equivalents:
Beginning balance 3,611,000 3,084,000
----------------- -------------
Ending balance $ 1,543,000 $1,116,000
================= =============
Supplemental disclosure of cash flow information:
Interest paid $ 443,000 $ 766,000
================= =============
Income taxes refunded $ (653,000) $ (752,000)
================= =============
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
================= =============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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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 March 31, 1997, the condensed
consolidated statements of operations for the three and six month periods then
ended March 31, 1997 and 1996, and condensed consolidated statements of cash
flows for the six month periods then ended March 31, 1997 and 1996 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, 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
March 31, 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 $22,282,000 for the
three years and six months ended March 31, 1997, and has a stockholders'
deficiency of $5,316,000 as of March 31, 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 March 31, 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.
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 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 sold six of
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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, 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. (See Note 6)
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 current payments due as of April and May, 1997, currently
unpaid. 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 $1,771,000 as of March 31, 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).
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 $71,000
remains in escrow as of April 16, 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
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$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. Fixed assets of
approximately $12,000 will either be sold or redeployed elsewhere in the
Company. All other SCC assets have been written off as of September 30, 1996.
See "Liquidity and Capital Resources."
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 $338,000 in 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 commenced integrating these operations with MHM
Counseling Services 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
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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.
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. 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. Fixed assets of approximately $12,000 will either be
sold or redeployed elsewhere in the Company. 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 believes that the loss of SCC's reduced revenues
following increased delays in claims processing by the Medicare financial
intermediary will be offset by reduced personnel and overhead costs. The
Company will continue to employ administrative personnel to pursue SCC claims
and will redeploy two employees with employment contracts through July 1998
elsewhere within the Company.
In addition, 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 March 31, 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 principal payments of $256,000 have
been made as of March 31, 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 has remained current in its
payments under the MEDIQ Note until filing the lawsuit at which time it
withheld the payment due 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.
Consequently, the outstanding amounts owed by the Company under the MEDIQ Note
($10,478,000) have been classified as a current liability. 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 March 31,
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 fluctuates based on the amount of
qualified accounts receivable. As of March 31, 1997 the Company had $300,000
outstanding under this facility. Based on management's analysis of accounts
receivable, approximately $470,000 of credit was available at March 31, 1997
under this facility.
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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, 1997 and the Company's results of operations for the
three and six 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.
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.
SUIT AGAINST MEDIQ
The Company's financial condition will be affected by the complaint
the Company filed 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 has remained current in its payments
under the MEDIQ Note until filing the lawsuit at which time it
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withheld the payment due 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.
Consequently, the outstanding amounts owed by the Company under the MEDIQ Note
($10,478,000) have been classified as a current liability. 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.
See "Note 6 to Notes to Condensed Consolidated Financial Statements."
CONTINUED AMEX LISTING
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. The Company did not receive any indication as to the Exchange's position
with regard to its continued listing. 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.
SALE OF FREESTANDING FACILITIES
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 decided to pursue a strategy focused on growing its Extended Care
Services Division. As a result, the Company sold six of its seven freestanding
behavioral health facilities. In fiscal 1995, the operations of the
freestanding facilities represented 86% of net revenues and had comprised 77%
of the Company's total assets at the end of fiscal 1995. As a result of the
sale of six facilities in 1996, the freestanding facilities represented only
67% of net revenues for fiscal 1996.
On April 5, 1996, the Company sold Oakview Treatment Center (the
"Oakview Sale") 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 Oakview Sale as required
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under the terms of the Company's revolving credit facility, the Company pledged
both of the notes receivable relating to the Oakview Sale 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
$1,771,000 as of March 31, 1997) as collateral for the Company's obligations
under the MEDIQ Note. In connection with the BHC Sale (discussed below) the
revolving credit facility has been repaid and the pledges under the revolving
credit facility have been terminated, but the pledge under the MEDIQ Note
continues. See "Liquidity and Capital Resources."
On May 31, 1996, the Company sold certain assets, consisting
principally of five of its freestanding behavioral healthcare facilities (Aspen
Hill Hospital, Pacific Shores Hospital, Pinon Hills Hospital, Pinon Hills
Residential Treatment Center and Windsor Hospital) (the "Hospitals"), to BHC
pursuant to the BHC Agreement. The Hospitals were sold 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). The BHC 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
$925,000 of which the Company recorded approximately 72% and that it will
receive final settlements within one to three years from the filing date of
October 31, 1996. See "Liquidity and Capital Resources."
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 and paid by the Company 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 $71,000 remains in escrow as of April 16, 1997).
The Company expects to continue to use the proceeds from the BHC Sale for
general working capital, which the Company anticipates will include expansion
of the Extended Care Services Division. See "Liquidity and Capital Resources."
The Company's freestanding facilities represented the majority of the
Company's historical business and have contributed significantly to the
Company's cash flows. In addition, the freestanding facilities helped to absorb
certain corporate-related expenses that now have to be borne primarily by the
Extended Care Services Division. Since its founding in October 1993, the
Extended Care Services Division has generated 33%, 14% and 3% of net revenues
for the years ended September 30, 1996, 1995, and 1994, respectively. Going
forward, the Extended Care Services Division will account for a substantial
portion of the Company's revenues. The 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
14
<PAGE> 15
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.
The Company has completed several acquisitions, described below, routinely
reviews potential acquisition candidates, and is 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. In addition, since the
Company's liquidity and capital resources may be limited by certain future
events, there can be no assurance that the Company will have sufficient
resources to pursue and/or complete any other acquisitions. See "Suit Against
MEDIQ." Consequently, the Company's results of operations and financial
condition may be adversely affected.
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. Fixed assets of
approximately $12,000 will either be sold or redeployed elsewhere in the
Company. All other SCC assets have been written off as of September 30, 1996.
See "Liquidity and Capital Resources."
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 (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.
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 $338,000 in
36 equal monthly installments. The Company renamed the operations
15
<PAGE> 16
"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. Liberty Bay, a wholly-owned subsidiary of Liberty Management,
provided behavioral healthcare services on a contract basis to residents of
approximately 60 extended care facilities in Massachusetts. The Company has
commenced integrating these operations with MHM Counseling Services 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 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. 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.
16
<PAGE> 17
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.
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
------------------------------- ----------------------------
1997 1996 1997 1996
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Revenues 100% 100% 100% 100%
Costs and expenses:
Operating 80 72 78 71
General and administrative 28 25 30 25
Provision for bad debts 7 14 9 13
Depreciation and amortization 2 3 2 3
Loss on sale of facilities -- 38 -- 19
Other charges:
Interest expense - MEDIQ 6 2 6 2
Interest expense - other -- 1 -- 1
Other (1) -- (2) --
-------------- --------------- ------------- -------------
Loss before income taxes (22%) (55%) (23%) (34%)
Income tax benefit -- -- -- (1)
-------------- --------------- ------------- -------------
Net loss (22%) (55%) (23%) (33%)
============== =============== ============= =============
</TABLE>
Second Quarter 1997 Compared to Second Quarter 1996
Net revenues for the second quarter of 1997 were $4,136,000 as
compared to $11,321,000 for the prior year quarter, a decrease of $7,185,000 or
63%, reflecting decreases from the sale of six of the Company's freestanding
facilities and decreases in revenues from the Extended Care Services Division.
Net revenues from freestanding facilities decreased $6,868,000, or 84%, as a
result of the sale of six of the Company's seven freestanding facilities. Net
revenues from Mountain Crest Hospital, the Company's remaining freestanding
facility were $1,291,000 for the second quarter of 1997 as compared to
$1,414,000 for the prior year quarter. Net revenues from the Extended Care
Services Division were $2,773,000 for the second quarter of 1997 as compared to
$3,162,000 in the prior year quarter, a decrease of $389,000 or 12%. This
decrease is the result of net revenues of $4,000 from SCC and $347,000 from HCI
Services (as compared to $1,351,000 and $580,000, respectively, for the prior
year quarter) offset by increased revenues from MHM/Bay Colony Counseling
Services ($1,550,000 for the second quarter of 1997 as compared to $423,000 in
the prior year quarter), primarily resulting from the acquisition of Liberty
Bay in December 1996 and additional revenues from MHM Counseling which was
acquired in mid-December 1995 (see note 4). Increased net revenues under a
contract with the State of Georgia to provide mental health services to
Medicaid patients in nursing homes also helped to offset the net revenue
decrease at SCC. SCC operations were discontinued in early December 1996 (see
note 5).
17
<PAGE> 18
Operating expenses for the second quarter of 1997 were $3,289,000 as
compared to $8,108,000, a decrease of $4,819,000 or 59%. This decrease was
attributed to the sale of six of the Company's seven freestanding facilities,
offset by increases in costs associated with the expansion of the Extended Care
Services Division. The level of operating costs of the Extended Care Services
Division, together with operating costs of corporate overhead and general and
administrative expenses of both, have had an adverse impact on operating
results.
General and administrative expenses were $1,161,000 as compared to
$2,867,000, a decrease of $1,706,000, or 60%. This decrease was attributed to
the sale of six of the Company's seven freestanding facilities. The level of
operating costs of the Extended Care Services Division, together with operating
costs of corporate overhead and general and administrative expenses of both,
have had an adverse impact on operating results.
The provision for bad debts decreased to $305,000, as compared to
$1,531,000 in the prior year quarter. As a percentage of net revenues, bad debt
expense was 7% as compared to 14% in the prior year period. These decreases
were attributable to the sale of six of the Company's seven freestanding
facilities and discontinuing the operations of SCC.
Depreciation and amortization expense decreased to $89,000, as
compared to $311,000 in the prior year quarter, as a result of the sale of six
of the Company's seven freestanding facilities.
Interest expense was $265,000 as compared to $377,000 in the prior
year quarter, a decrease of $112,000, or 30%. This decrease was primarily
attributable to the extinguishment of the working capital line of credit and
paydown on the MEDIQ Note.
Six Months Ended March 31, 1997 Compared to Six Months Ended March 31, 1996
Net revenues were $7,865,000, as compared to $22,502,000 for the prior
year period, a decrease of $14,637,000, or 65%, reflecting decreases from the
sale of six of the company's freestanding facilities and decreases in revenues
from the Extended Care Services Division. Net revenues from freestanding
facilities decreased $13,882,000, or 83%, as a result of the sale of six of the
Company's seven freestanding facilities. Net revenues from Mountain Crest
Hospital, the Company's remaining freestanding facility were $2,788,000 as
compared to $2,877,000 for the prior year period. Net revenues from the
Extended Care Services Division were $5,005,000, as compared to $5,832,000 for
the prior year period, a decrease of $827,000, or 14%. This decrease is the
result of net revenues of $43,000 from SCC and $863,000 from HCI Services (as
compared to $2,762,000 and $1,013,000, respectively, for the prior year period)
offset by increased revenues from MHM/Bay Colony Counseling Services
($2,356,000 as compared to $471,000 for the prior year period), primarily
resulting from the acquisition of Liberty Bay in December 1996 and additional
revenues from MHM Counseling which was acquired in mid-December 1995 (see note
4). Increased net revenues under a contract with the State of Georgia to
provide mental health services to Medicaid patients in nursing homes also
helped to offset the net revenue decrease at SCC and HCI Services. SCC
operations were discontinued in early December 1996 (see note 5).
18
<PAGE> 19
Operating expenses were $6,119,000, as compared to $15,919,000 in the
prior year period, a decrease of $9,800,000 or 62%. This decrease was
attributed to the sale of six of the Company's seven freestanding facilities,
offset by increases in costs associated with the expansion of the Extended Care
Services Division. The level of operating costs of the Extended Care Services
Division, together with operating costs of corporate overhead and general and
administrative expenses of both, have had an adverse impact on operating
results.
General and administrative expenses were $2,358,000, as compared to
$5,631,000 in the prior year period, a decrease of $3,273,000 or 58%. This
decrease was attributed to the sale of six of the Company's seven freestanding
facilities. The level of operating costs of the Extended Care Services
Division, together with operating costs of corporate overhead and general and
administrative expenses of both, have had an adverse impact on operating
results.
The provision for bad debts decreased to $680,000, as compared to
$2,846,000 in the prior year period. As a percentage of net revenues, bad debt
expense was 9%, as compared to 13% in the prior year period. These decreases
were attributable to the sale of six of the Company's seven freestanding
facilities and discontinuing the operations of SCC.
Depreciation and amortization expense decreased to $158,000, as
compared to $714,000 in the prior year period, as a result of the sale of six
of the Company's seven freestanding facilities.
Interest expense was $529,000, as compared to $766,000 in the prior
year period, a decrease of $237,000, or 31%. This decrease was primarily
attributable to the extinguishment of the working capital line of credit and
paydown on the MEDIQ Note.
INCOME TAXES
The Company's effective tax rates were disproportionate to the
statutory tax rates primarily as a result of operating losses on which no prior
year income taxes can be recovered for 1997.
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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash and cash equivalents of
$1,543,000. At that date, the majority of such funds were currently invested in
short-term interest bearing securities.
19
<PAGE> 20
Cash used in operating activities was $1,474,000 for the first quarter
of 1997 as compared to $648,000 for the prior year quarter. In a continuing
effort to improve this situation for both the immediate future and the
long-term, the Company is taking steps to reduce operating expenses, finance
its working capital requirements, restructure debt, raise additional capital
and improve its cash flows.
Cash used in investing activities for the second quarter of 1997
included $73,000 for capital expenditures, $150,000 for the acquisition of
Liberty Bay and $100,000 for the acquisition of the Pennsylvania and Tennessee
operations of Apogee. The Company anticipates capital expenditures of
approximately $50,000 during the remainder of 1997. The Company has used and
anticipates using a portion of its cash and cash equivalents 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 that the
Company will have sufficient resources to expand this division.
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. Net cash
provided by financing activities included a balance outstanding of $300,000 at
March 31, 1997 from the Company's new credit facility. Net cash used included
debt repayments of $334,000. Non-cash financing activities included notes
payable in the amount of $150,000 incurred in connection with the acquisition
of Liberty Bay in December 1996, payable in one installment due on December 1,
1999. In addition, non-cash financing included a notes payable of $125,000
(payable in three annual installments) and a common stock issuance of $100,000
in connection with the acquisition of the Pennsylvania and Tennessee operations
of Apogee on March 31, 1997.
As of March 31, 1997, the Company had $10,478,000 outstanding on its
note payable to MEDIQ Incorporated ("MEDIQ") (original principal amount of
$11,500,000) that was executed in connection with the distribution of the
Company's stock to MEDIQ stockholders (the "MEDIQ Note"). See "Suit Against
MEDIQ" and "Note 6 to Notes to Condensed Consolidated Financial Statements."
The MEDIQ Note bears interest at prime plus 1.5% per annum, with monthly
payments of interest only through September 1995, and then monthly principal
and interest payments for the following three years, 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 MEDIQ Note is
collateralized by a note receivable (in the amount of $1,771,000 as of March
31, 1997) obtained by the Company as partial consideration for the sale of the
Oakview Treatment Center, one of the Company's former freestanding facilities.
The Company pledged the note receivable to MEDIQ 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 in connection with such
sale.
As reflected in the financial statements of the Company for the fiscal
year ended September 30, 1996, and the report of the Company's independent
auditors therein, 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 should the Company be unsuccessful in its suit
against
20
<PAGE> 21
MEDIQ challenging the validity of the MEDIQ Note and such payment obligations
be reinstated. Moreover, if MEDIQ is successful in seeking to accelerate all
payments of interest and principal with respect to the MEDIQ Note, the Company
will not have the financial resources to make such payments. 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.
As a result of the Company's continued negative operating results and
reduced collections of accounts receivable from certain government-funded
payers, as well as other administrative delays by third party payers (including
reimbursement review of certain Medicare claims in Southern California, as
described above), 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. In an effort to improve this
situation, the Company is taking steps to reduce operating expenses, attempting
to raise additional capital, and working to improve its cash flows. With
respect to its effort to reduce operating expenses, the Company reduced
personnel expenses by leasing its employees and eliminating staff. The
Company's liquidity could also be improved by: (i) the collection of additional
outstanding receivables; (ii) increasing profits through acquisitions; (iii)
significant reductions in the operating losses of the Company's remaining
businesses; (iv) significant additional reductions in overhead, (v) obtaining
additional capital and/or financing sources; and (vi) challenging the validity
of the MEDIQ Note (see above). 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. In the
event that the Company is unable to enhance its liquidity, the Company may be
required to attempt to renegotiate the terms of its financial obligations,
significantly curtail its level of operations or, possibly, file for
reorganization under the U.S.
Bankruptcy Code.
As of March 31, 1997, the Company had a liability to third party
payors of approximately $2,300,000 of which approximately $1,600,000 relates to
sold facilities. This liability relates to outstanding Medicare cost report
settlements from fiscal years 1995 and 1996 (and for Mountain Crest Hospital
for fiscal 1997 as well) and outstanding Medicaid cost reports from fiscal
years 1992 through 1996 at two closed facilities.
As a result of the sale by the Company of five of its hospitals to BHC
on May 31, 1996, the Company filed terminating Medicare and Medicaid cost
reports with each hospital's fiscal intermediary on October 31, 1996.
The terminating cost reports filed by the Company included claims for
approximately $1,090,000 in Medicare depreciation recapture. The BHC Agreement
provided that this recapture amount be allocated between the Company (85%) and
the purchaser (15%). The Company estimates that its share of the Medicare
recapture amounts to be collected will be approximately $925,000, of which the
Company has recorded approximately 72%, and that it will receive final
settlements on these claims within one to three years from the date of filing.
21
<PAGE> 22
The Company expects the costs associated with discontinuing the
operations of SCC to be nominal. The Company believes that the loss of SCC's
reduced revenues following increased delays in claims processing by the
Medicare fiscal intermediary will be offset by reduced personnel and overhead
costs. The company will continue to employ administrative personnel to pursue
SCC claims and will redeploy elsewhere within the Company two employees with
employment contracts through July 1998.
In addition, 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 that the review of SCC's claims will not result in
potential liability of the Company.
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, including, among others, the use of
available cash resources to fund continued operating losses, the amount and
timing of receipt of government reimbursement and the results of the review of
SCC's claims by the Medicare fiscal intermediary, 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.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 10, 1997 the Company issued a Press Release announcing
that it had filed a suit against MEDIQ, Inc. in the Superior Court
of New Jersey, Chancery Division - Essex County alleging that the
$11.5 million note, incurred by the Company when it was a
subsidiary of MEDIQ as part of intercompany payment obligations of
approximately $21 million that MEDIQ imposed on the Company from
1986-1993 while the Company was a subsidiary of MEDIQ ("Note"), was
invalid. The case has been transferred by the court to Camden, New
Jersey. The suit charged, among other things, 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 asked 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 the payment due 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 2. CHANGES IN SECURITIES.
Effective as of March 31, 1997, the Company's Extended Care
Services Division acquired the long-term care operations of Apogee,
Inc. in Pennsylvania and Tennessee. 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. 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. The issuance was deemed by the
Company to be exempt from registration under the Securities Act in
reliance on Section 4(2). Appropriate restrictive legends were
affixed to all shares of common stock issued in the transaction and
the recipients of shares of common stock represented their
intentions to acquire securities for investment only and not with a
view to or for sale in connection with any distribution thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
In connection with the dispute with MEDIQ described in Item 1
above, the Company withheld the payment to MEDIQ that was allegedly
due in February 1997. MEDIQ has claimed that it has accelerated all
principal and interest due under the MEDIQ Note.
23
<PAGE> 24
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 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 Page
----
27 Financial Data Schedule 26
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated January
10, 1997 announcing the resignation without explanation of H.
Scott Miller and Michael F. Sandler from the Company's Board
of Directors. The Form 8-K stated that the Company believes
that its decision to review with counsel the validity of the
MEDIQ Note due in 1998 may have prompted the resignation of
these two Directors.
The Company filed a Current Report on Form 8-K dated March
21, 1997 announcing that the Company's subsidiary, MHM
Extended Care Services, Inc., secured $4.0 million line of
credit to fund its growing practice management business. The
availability of the advances under the line of credit is
based on the Company's receivables. The Form 8-K also
announced the acquisition of Apogee's long-term care
operations.
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.
24
<PAGE> 25
MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 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: May 14, 1997 MHM SERVICES, INC.
/s/ Carolyn Zimmerman
Carolyn Zimmerman
Vice President, Finance
and Chief Financial Officer
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,543,000
<SECURITIES> 0
<RECEIVABLES> 6,376,000
<ALLOWANCES> 4,511,000
<INVENTORY> 51,000
<CURRENT-ASSETS> 4,505,000
<PP&E> 1,239,000
<DEPRECIATION> 714,000
<TOTAL-ASSETS> 8,905,000
<CURRENT-LIABILITIES> 13,490,000
<BONDS> 0
0
0
<COMMON> 35,000
<OTHER-SE> (5,351,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,905,000
<SALES> 0
<TOTAL-REVENUES> 7,865,000
<CGS> 0
<TOTAL-COSTS> 6,119,000
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</TABLE>
