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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the quarterly period ended: DECEMBER 31, 1996 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
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As of February 10, 1997, there were 3,310,448 shares of Common Stock, par
value $.01 per share outstanding.
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MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 1996
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
Months Ended December 31, 1996 and 1995 (Unaudited) 4
Condensed Consolidated Balance Sheets-
December 31, 1996 (Unaudited) and September 30, 1996 5
Condensed Consolidated Statements of Cash Flows- Three 6
Months Ended December 31, 1996 and 1995 (Unaudited)
Notes to Condensed Consolidated Financial Statements 7-10
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-18
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
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MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 1996
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 December 31,
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1996 1995
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Net revenues $ 3,729,000 $ 11,181,000
Costs and expenses
Operating 2,830,000 7,811,000
General and administrative 1,197,000 2,764,000
Provision for bad debts 375,000 1,315,000
Depreciation and amortization 69,000 403,000
Other (credits) charges:
Interest expense - MEDIQ 259,000 293,000
Interest expense - other 5,000 96,000
Other (83,000) (37,000)
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Loss before income tax benefit (923,000) (1,464,000)
Income tax benefit -- (175,000)
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Net loss $ (923,000) $ (1,289,000)
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Net loss per share $ (.28) $ (.39)
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Weighted average shares outstanding 3,310,000 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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<CAPTION>
December 31, September 30,
1996 1996
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(Unaudited) (See Note)
Assets
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Current assets:
Cash and cash equivalents $ 2,117,000 $ 3,611,000
Accounts receivable, net 1,656,000 1,680,000
Prepaid expenses 151,000 237,000
Income taxes refundable 662,000 662,000
Other receivable 660,000 660,000
Other current assets 278,000 258,000
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Total current assets 5,524,000 7,108,000
Property, plant and equipment, net 542,000 538,000
Goodwill, net 1,648,000 1,375,000
Notes receivable 1,193,000 1,229,000
Other assets 659,000 578,000
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Total assets $ 9,566,000 $10,828,000
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Liabilities and Stockholders' Deficit
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Current Liabilities:
Accounts payable $ 797,000 $ 805,000
Accrued expenses 1,826,000 2,075,000
Accrued expenses - MEDIQ 321,000 321,000
MEDIQ 10,542,000 766,000
Current maturities of long-term debt 195,000 194,000
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Total current liabilities 13,681,000 4,161,000
Long-term debt, less current maturities:
MEDIQ -- 9,967,000
Other 366,000 257,000
Other liabilities 24,000 25,000
Stockholders' deficit (4,505,000) (3,582,000)
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Total liabilities and stockholders' deficit $ 9,566,000 $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>
Three Months Ended December 31,
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1996 1995
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Cash flows from operating activities:
- -------------------------------------
Net Loss $ (923,000) $(1,289,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities (60,000) 84,000
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Net cash used in operating activities (983,000) (1,205,000)
Cash flows from investing activities:
- ------------------------------------
Capital expenditures (42,000) (96,000)
Acquisitions (150,000) (150,000)
Other (88,000) (129,000)
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Net cash used in investing activities (280,000) (375,000)
Cash flows from financing activities:
Borrowings -- 1,075,000
Debt repayments (231,000) (202,000)
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Net cash (used in) provided by financing activities (231,000) 873,000
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Decrease in Cash (1,494,000) (707,000)
Cash and cash equivalents:
Beginning balance 3,611,000 3,084,000
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Ending balance $ 2,117,000 $ 2,377,000
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Supplemental disclosure of cash flow information:
Interest paid $ 266,000 $ 391,000
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Income taxes paid $ 4,000 $ 65,000
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Supplemental disclosure on non-cash investing and
financing activities:
Acquisitions-portion financed with long-term debt $ 150,000 $ 338,000
=========== ===========
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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 December 31, 1996 and the
condensed consolidated statements of operations and cash flows for the three
months ended December 31, 1996 and 1995 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
December 31, 1996, and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's September 30, 1996
Annual Report on Form 10-K. The results of operations for the period ended
December 31, 1996 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 $21,371,000 for
the three years and three months ended December 31, 1996, and has a
stockholders' deficiency of $4,505,000 as of December 31, 1996. 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 that the MEDIQ Note was immediately due and payable as a result of not
making the required February installment. See Note 6. Consequently, the
Company had negative working capital as of December 31, 1996. 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 its
seven owned and/or operated freestanding behavioral health facilities which
represented 51% of net revenues in 1996. 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. Nevertheless, there can be no assurance that the Company's efforts will
result in positive effects on the Company's financial condition.
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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). In connection with obtaining a waiver
from MEDIQ of an event of default provision of the MEDIQ Note relating to the
sale of the assets of a significant subsidiary, the Company pledged one of the
notes receivable (with a principal balance of $1,875,000) as collateral for the
Company's obligations under the MEDIQ Note.
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
$134,000 remains in escrow).
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. 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."
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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 will operate under the name
"MHM/Bay Colony Counseling Services", and, as a result of the acquisition, will
serve approximately 80 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 will be 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.
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.
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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 estimates that it will take three to four months to
process SCC's outstanding accounts receivable, including the appeals for
previously denied claims, at a cost approximating $100,000. 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 (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% (9.75% at December 31, 1996), 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 $192,000 have
been made as of December 31, 1996), 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 obligations to the Company 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 Company has asked the Court to declare it
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 did not make 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 failure to make the February installment under the MEDIQ Note,
MEDIQ accelerated all principal and interest due under the MEDIQ Note.
Consequently, the outstanding amounts owed by the Company under the MEDIQ Note
($10,542,000) have been classified as a current liability.
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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 December 31, 1996 and the Company's results of operations for the three
month period then ended, compared with the same period 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 obligations to the Company 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 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
did not make 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
failure to make the February installment under the MEDIQ Note, MEDIQ
accelerated all principal and interest
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due under the MEDIQ Note. Consequently, the outstanding amounts owed by the
Company under the MEDIQ Note ($10,542,000) have been classified as a current
liability. See "Note 6 to Notes to Condensed Consolidated Financial Statements."
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 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 $1,875,000) 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
$1,270,000 of which the Company recorded approximately 50% 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
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$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 $134,000
remains in escrow). 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 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 completed two acquisitions in 1996 and one to date in 1997,
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. For example, the Company may continue to use the remainder of
the proceeds of the BHC Sale to fund its continued operating losses or to use
such funds to repay the amounts outstanding under the MEDIQ Note in the event
its suit against MEDIQ to declare the MEDIQ Note invalid is unsuccessful. 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."
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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 "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 will operate under the name "MHM/Bay Colony Counseling
Services," and, as a result of the acquisition, will serve approximately 80
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.
14
<PAGE> 15
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
December 31,
--------------------
1996 1995
----------- ------------
<S> <C> <C>
Net revenues 100.0% 100.0%
Costs and expenses:
Operating 75.9 69.9
General and administrative 32.1 24.7
Provision for bad debts 10.1 11.8
Depreciation and amortization 1.9 3.6
Other (credits) charges:
Interest expense - MEDIQ 6.9 2.6
Interest expense - other .1 .8
Other (2.2) (0.3)
----------- ------------
Loss before income tax benefit (24.8) (13.1)
Income tax benefit -- (1.6)
----------- ------------
Net Loss (24.8)% (11.5)%
=========== ============
</TABLE>
First Quarter 1997 Compared to First Quarter 1996
Net revenues for the first quarter of 1997 were $3,729,000 as compared to
$11,181,000 for the prior year quarter, a decrease of $7,452,000 or 67%,
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 $7,014,000, or 82%, 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 $1,497,000 for the first quarter of 1997 as compared to
$1,463,000 for the prior year quarter. Net revenues from the Extended Care
Services Division were $2,232,000 for the first quarter of 1997 as compared to
$2,670,000 in the prior year quarter, a decrease of $438,000 or 16%. This
decrease is the result of net revenues of $39,000 from SCC (as compared to
$1,411,000 for the prior year period) offset by increased revenues from MHM/Bay
Colony Counseling Services ($806,000 for the first quarter of 1997 as compared
to $48,000 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 as well as increased revenues at the
Company's Atlanta-based operations (HCI Services) also helped to offset the
net revenue decrease at SCC. SCC operations were discontinued in early
December 1996 (see note 5).
Operating expenses for the first quarter of 1997 were $2,830,000 as
compared to $7,811,000, a decrease of $4,981,000 or 64%. 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
15
<PAGE> 16
costs of corporate overhead and general and administrative expenses of both,
have had an adverse impact on operating results.
General and administrative expenses were $1,197,000 as compared to
$2,764,000 a decrease of $1,567,000, or 57%. 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 $375,000, as compared to
$1,315,000 in the prior year quarter. As a percentage of net revenues, bad
debt expense was 10% as compared to 12% 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 $69,000, as compared to
$403,000 in the prior year quarter, as a result of the sale of six of the
Company's seven freestanding facilities.
Interest expense was $264,000 as compared to $389,000 in the prior year
quarter, a decrease of $125,000, or 32%. 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents of
$2,117,000. At that date, the majority of such funds were currently invested
in short-term interest bearing securities.
Cash used in operating activities was $983,000 for the first quarter of
1997 as compared to $1,205,000 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 first quarter of 1997 included
$42,000 for capital expenditures and $150,000 for the acquisition of Liberty
Bay. The Company anticipates capital expenditures of approximately $25,000
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.
16
<PAGE> 17
Net cash used in financing activities for the first quarter of 1997
included debt repayments of $231,000. Non-cash financing activities included a
note 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.
As of December 31, 1996, the Company had $10,542,000 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 $1,875,000) 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 MEDIQ challenging the validity of the MEDIQ Note. A portion of the net
proceeds from the BHC Sale has been used, and is expected to continue to be
available to the Company to fund the monthly obligations and a portion of the
principal obligations upon maturity, if necessary, of the MEDIQ Note. MEDIQ
has pledged the MEDIQ Note as collateral for certain of its indebtedness to a
third party unaffiliated with MEDIQ or the Company. In the event of default by
MEDIQ on such indebtedness, such third party would obtain all of MEDIQ's rights
under the MEDIQ Note, including the right to the payment of principal and
interest as and when due in accordance with the terms of the MEDIQ Note.
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 renegotiate the
17
<PAGE> 18
terms of its financial obligations, significantly curtail its level of
operations or otherwise significantly reduce operating expenses.
As of December 31, 1996, the Company had a liability to third party payors
of approximately $2,300,000 of which approximately $1,500,000 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 $1,492,000 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 $1,270,000, of which
the Company has recorded approximately 50%, and that it will receive final
settlements on these claims within one to three years from the date of filing.
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 estimates that it will take three to four months
to process SCC's outstanding accounts receivable, including the appeals for
previously denied claims, at a cost approximating $100,000. 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.
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 5. Other Information.
On February 10, 1997 the Company issued a Press Release announcing
that it had filed a suit against MEDIQ, Inc. 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 suit
charged, among other things, that MEDIQ breached its obligations to
the Company 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 the payment
due for February 1997. The Company also announced in that Press
Release that it had been awarded a contract worth $425,000 a year to
provide on-site dental services to all inmates of the Delaware State
Prison Systems.
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.
<TABLE>
<S> <C> <C>
(a) Exhibits Page
----
27 Financial Data Schedule 21
99 Press Release of the Registrant dated February 10, 1997 22
(b) Reports on Form 8-K
</TABLE>
The Company filed during its first quarter a Current Report on Form
8-K dated November 7, 1996 disclosing a press release of the same
date announcing the Company's agreement to purchase the
geropsychiatric management services business of Liberty Bay Colony
Health Services, Inc.
19
<PAGE> 20
MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 1996
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: February 13, 1997 MHM SERVICES, INC.
/s/Carolyn Zimmerman
---------------------------
Carolyn Zimmerman
Vice President, Finance
and Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,117,000
<SECURITIES> 0
<RECEIVABLES> 6,314,000
<ALLOWANCES> 4,658,000
<INVENTORY> 51,000
<CURRENT-ASSETS> 5,524,000
<PP&E> 1,207,000
<DEPRECIATION> 665,000
<TOTAL-ASSETS> 9,566,000
<CURRENT-LIABILITIES> 13,681,000
<BONDS> 0
0
0
<COMMON> 33,000
<OTHER-SE> (4,538,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,566,000
<SALES> 0
<TOTAL-REVENUES> 3,729,000
<CGS> 0
<TOTAL-COSTS> 2,830,000
<OTHER-EXPENSES> 1,183,000
<LOSS-PROVISION> 375,000
<INTEREST-EXPENSE> 264,000
<INCOME-PRETAX> (923,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (923,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (923,000)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
<PAGE> 1
[MHM SERVICES, INC. LETTERHEAD]
FOR IMMEDIATE RELEASE
Contact: Michael S. Pinkert
President and Chief Executive Officer
(703) 749-4610
MHM SERVICES SUES MEDIQ TO INVALIDATE $11.5 MILLION NOTE AND TO RECOVER $4.5
MILLION PREVIOUSLY PAID UNDER THE NOTE; WINS $425,00 A YEAR CONTRACT TO PROVIDE
DENTAL SERVICES TO DELAWARE STATE PRISONS.
Vienna, Virginia, February 10, 1997 -- MHM Services, Inc. (AMEX:MHM) filed suit
in the Superior Court of New Jersey -- Essex County Law Division against MEDIQ,
Inc. (NASDAQ:MED) to void a five year $11.5 million Note that MEDIQ required
MHM to sign in connection with MEDIQ's August 31, 1993, spin-off of MHM, to
recover $4.5 million that MHM already has paid to MEDIQ under the Note; and to
recover damages.
The suit charges, among other things, that MHM received no consideration for
the Note, that MEDIQ breached its obligations to MHM in forcing MHM to execute
the Note and that the Note unjustly enriches MEDIQ at MHM's expense.
MHM's suit asks the Court to declare the Note null and void, require that MEDIQ
return to MHM all payments that MEDIQ has received under the Note and award MHM
compensatory, consequential and punitive damages.
The Note represents part of some $21 million of payment obligations MEDIQ
sought to impose on MHM from 1986 through 1993 while MHM was a subsidiary of
MEDIQ.
Separately, MHM announced it has been awarded a contract worth $425,000 a year
to provide on-site dental services to all inmates of the Delaware State Prison
System. In this assignment, MHM is serving as a sub-contractor to ASG/Prison
Health Services, a national provider of managed healthcare in prisons.
Under this contract, MHM in conjunction with Washington, D.C.-based
Institutional Dental Care, Inc., a Delaware corporation, will be managing the
services of dentists and dental technicians.
"This new Delaware contract adds prisons to the line-up of institutions that we
serve," said MHM president Michael S. Pinkert. "We currently manage
non-medical and behavioral health programs in nursing homes, dialysis centers
and schools. Prison inmates represent a growing population in need of quality,
cost-effective clinical services."
<PAGE> 2
MHM will begin providing services under the Delaware contract immediately.
MHM Services, Inc., based in Vienna, Virginia, provides sub-acute medical and
behavioral health services via practice management of non-physician medical
specialties. The Company serves 655 extended care facilities, nursing homes,
assisted living centers, other adult community living institutions and schools
in 10 states and is a leader in the privatization of programs to underserved
populations and beneficiaries of public funds. Services provided include
behavioral healthcare, podiatry, optometry and dentistry.
# # #
2
