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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending: December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ____________________
Commission File Number: 1-12238
MHM SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1223048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 TOWERS CRESCENT DRIVE, SUITE 810 22182
VIENNA, VA
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 749-4600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
-- --
As of February 16, 1998, there were 3,525,848 shares of Common
Stock, par value $.01 per share outstanding.
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MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations 4
Three Months Ended December 31, 1997 and 1996 (Unaudited)
Condensed Consolidated Balance Sheets 5
December 31, 1997 (Unaudited) and September 30, 1997
Condensed Consolidated Statements of Cash Flows 6
Three Months Ended December 31, 1997 and 1996 (Unaudited)
Notes to Condensed Consolidated Financial 7-10
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition 11-15
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16-17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Net Revenues $ 8,463,000 $ 3,729,000
Costs and Expenses
Operating 6,570,000 2,830,000
General and Administrative 1,276,000 1,197,000
Provision for Bad Debts 778,000 375,000
Depreciation and Amortization 132,000 69,000
Other (credits) charges
Interest Expense - MEDIQ 262,000 259,000
Interest Expense - Other 66,000 5,000
Other (20,000) (83,000)
----------- -----------
Loss before Income Tax Benefit (601,000) (923,000)
Income Tax Benefit - -
----------- -----------
Net Loss (601,000) (923,000)
=========== ===========
Loss per Share: $ (0.17) $ (0.28)
=========== ===========
Weighted Average Shares Outstanding 3,521,000 3,310,000
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
UNAUDITED (SEE NOTE)
<S> <C> <C>
Assets
------
Current Assets:
Cash and Cash Equivalents $ - $ 195,000
Accounts Receivable, Net 5,075,000 4,491,000
Prepaid Expenses 184,000 103,000
Estimated Third Party Settlements 1,954,000 1,910,000
Other Current Assets 188,000 352,000
------------ ------------
Total Current Assets 7,401,000 7,051,000
Property, Plant and Equipment, Net 479,000 531,000
Notes Receivable, Net 1,130,000 1,039,000
Restricted Cash 441,000 450,000
Deferred Rent 448,000 416,000
Other Assets 252,000 288,000
Goodwill, Net 741,000 766,000
Other Intangibles, Net 808,000 873,000
------------ ------------
Total Assets $ 11,700,000 $ 11,414,000
============ ============
Liabilities and Stockholders' Deficit
-------------------------------------
Current Liabilities
Cash Overdraft $ 327,000
Accounts Payable 979,000 975,000
Accrued Expenses 3,576,000 3,308,000
Accrued Expenses - MEDIQ Interest 1,281,000 1,019,000
Estimated Third Party Payor Settlements 2,026,000 2,187,000
Current Maturities of Long Term Debt 11,214,000 10,720,000
------------ ------------
Total Current Liabilities 19,403,000 18,209,000
Long Term Debt, Less Current Maturities 1,163,000 1,456,000
Other Liabilities - 19,000
Stockholders' Deficit (8,866,000) (8,270,000)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 11,700,000 $ 11,414,000
============ ============
</TABLE>
Note: The balance sheet at September 30, 1997 has been condensed from the
audited financial statements at that date.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31
1997 1996
------------ -------------
<S> <C> <C>
Cash Flows from Operating Activities
- ------------------------------------
Net Loss $ (601,000) $ (923,000)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities (156,000) (60,000)
----------- -----------
Net Cash Used in Operating Activities (757,000) (983,000)
Cash Flows from Investing Activities
- ------------------------------------
Capital Expenditures (3,000) (42,000)
Acquisitions - (150,000)
Other 9,000 (88,000)
----------- -----------
Net Cash Provided by (Used in) Investing Activities 6,000 (280,000)
Cash Flows from Financing Activities
- ------------------------------------
Borrowings, Net 827,000
Debt Repayments (271,000) (231,000)
----------- -----------
Net Cash Provided by (Used in) Financing Activities 556,000 (231,000)
Increase (Decrease) in Cash (195,000) (1,494,000)
Cash and Cash Equivalents
Beginning Balance 195,000 3,611,000
=========== ===========
Ending Balance $ - $ 2,117,000
=========== ===========
Supplemental Disclosure of Cash Flow Information
Interest Paid $ 66,000 $ 266,000
=========== ===========
Income Taxes Paid $ - $ 4,000
=========== ===========
Supplemental Disclosure of Non-cash Investing and Financing
Activities
Acquisitions - Portion Financed with Long Term Debt $ 150,000
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
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MHM SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of December 31, 1997, the condensed
consolidated statements of operations for the three month periods ended December
31, 1997 and 1996, and the condensed consolidated statements of cash flows for
the three month periods ended December 31, 1997 and 1996 have been prepared by
the Company, without audit. In the opinion of management, all material
adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the condensed consolidated financial position, results of
operations and cash flows as of December 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 Annual Report on Form
10-K for the year ended September 30, 1997. The results of operations for the
period ended December 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 had incurred aggregated net losses of $23,790,000 for the three years
and three months ended December 31, 1997, and had a stockholders' deficit of
$8,866,000 as of December 31, 1997. The Company is experiencing difficulty in
generating sufficient cash flows to meet its obligations and sustain its
operations. At December 31, 1997, current liabilities exceeded current assets
by $12,002,000 primarily due to the MEDIQ litigation as discussed in note 3. As
further discussed in note 3, on November 21, 1997, the New Jersey Superior Court
entered judgment against the Company in favor of MEDIQ. 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.
In 1996, the Company sold six of its seven freestanding behavioral health
facilities due to the expectation of more profitable opportunities to grow the
Extended Care Services Division and other specialty on-site healthcare services.
The Company continues to own one freestanding behavioral health facility
(Mountain Crest). The Company currently leases the Mountain Crest real estate
on which the facility is located.
The Company has made several acquisitions in its Extended Care Services
Division. However, to date, this division has operated unprofitably overall.
The Company is in the process of closing or selling extended care operations in
states where revenues have not been sufficient to operate profitably, and has
made selective reductions in operating and general and administrative costs and
consolidated or outsourced billing and payroll functions. The Company
believes that these changes will improve the profitability of the Extended Care
Services Division.
Effective March 11, 1997, MHM Extended Care Services, Inc., a wholly owned
subsidiary of MHM Services, Inc., obtained a $4,000,000 revolving credit
facility to finance its receivables. Borrowings on the credit facility are
limited to qualified accounts receivable. As of December 31, 1997, the Company
had utilized substantially all of its borrowing capacity on this credit facility
based on qualified accounts receivable. The Company borrowed $500,000 in
October 1997 on a line of credit with NationsBank N.A. which was guaranteed by
certain officers and directors of the Company.
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The Company has been awarded capitated contracts with the States of
Tennessee and Georgia to provide mental health services to the inmates in their
state correctional facilities. These contracts began on July 1, 1997 and
October 1, 1997, respectively, and are expected to generate approximately $10.4
million of revenues per year and operate profitably, however profitability of
these contracts cannot be assured. The Company is pursuing additional
correctional services contract opportunities.
In a continuing effort to improve the Company's financial condition
for both the immediate future and the long term, the Company is continuing its
efforts to reduce operating expenses, seek more profitable business
opportunities, finance its working capital requirements, restructure the MEDIQ
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 or that the unfavorable decisions against
the Company in the MEDIQ litigation will not result in the Company's filing for
reorganization under Chapter 11 of the bankruptcy laws or liquidation.
NOTE 3 - MEDIQ DEBT
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 $11.5
million 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 Company made the required payments under the note through January
1997. On February 10, 1997, the Company filed a complaint 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 Company 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. The Company remained current in its
payments under the MEDIQ Note until filing the lawsuit at which time it
withheld payments commencing with the payment due for February 1997 and all
subsequent payments. The Company received notice from MEDIQ by letter dated
February 11, 1997, stating that as a result of the Company's withholding of the
February installment due under the MEDIQ Note, MEDIQ claims to have accelerated
all principal and interest due under the MEDIQ note.
On November 21, 1997, the New Jersey Superior Court, Law Division,
Camden County, entered a summary judgment against the Company and in favor of
MEDIQ. The adverse decision dismissed the Company's suit against MEDIQ. The
Court's Order did not set forth a sum certain to which MEDIQ is entitled,
although the Company anticipates that the amount is in the range of $11 to
$11.5 million, based on a principal balance of $10,478,000 and accrued and
unpaid interest on the Mediq Note of $931,000 and approximately $350,000
claimed by MEDIQ to be shown on its books as owed by MHM. The Court also
denied the Company's request for a stay in the entry or execution of judgment.
The Company filed an appeal with the Appellate Division of the New
Jersey Supreme Court. The Company also filed a motion in the Appellate
Division seeking summary reversal of the Court's action. On January 29, 1998,
the Appellate Division denied the Company's request for summary disposition and
dismissed the Company's appeal on the grounds that because the trial court's
Order did not set forth a sum certain, the judgment was not final and not
appealable. No action yet has been taken to make the judgment final and until
then it cannot be enforced. If the judgment is made final, the Company intends
to renew its appeal and motion for summary disposition. If necessary, the
Company will renew with the Appellate Division its request for a stay pending
the appeal. The Company has had communications with MEDIQ concerning
settlement, which communications are ongoing. If the judgment is made final
and the Company is unable to obtain a stay on appeal, MEDIQ will be free to
commence collection efforts under the judgment. The Company has collateralized
a portion of the MEDIQ note with a 1.1 million note receivable. The Company
does not have sufficient funds to pay the MEDIQ judgment or to collateralize
the judgment on appeal. Further, the Company does not have any readily
available source of financing
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that will permit it to make such payment, if required to do so. Accordingly,
if the MEDIQ judgment is sustained and MEDIQ seeks to recover its judgment, the
Company will be forced to seek additional sources of debt or equity financing,
which are not likely to be available given the Company's financial condition,
or will be required to file for reorganization under Chapter 11 of the
bankruptcy laws or liquidate.
On December 24, 1997, MEDIQ filed a lawsuit in the Superior Court for
the State of Delaware against Michael Pinkert, the Chief Executive Officer and
Chairman of the Board of the Company, alleging, among other things, breach of
fiduciary duty to MEDIQ and demanding judgment in an unspecified amount in
excess of $100,000, plus prejudgment interest, attorneys' fees and costs.
Pending settlement discussions, MEDIQ has agreed to postpone the time within
which Mr. Pinkert must reply to the suit. Mr. Pinkert denies the allegations
and intends to vigorously defend the action. The Company's Certificate of
Incorporation provides directors and officers of the Company with certain
rights of indemnification for amounts paid in connection with pending or
threatened actions filed against such persons by reason of acting in such
capacities. Such indemnification is payable upon a determination by the
Company's Board of Directors that such person has met the standard for
indemnification. The Company's Board of Directors has not yet considered
whether Mr. Pinkert is entitled to indemnification in connection with the MEDIQ
lawsuit filed in Delaware and accordingly, it is not possible to predict
whether the Company will be obligated to incur expenses as a result of the
lawsuit.
NOTE 4 - ACQUISITIONS
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.
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 purchase price was primarily allocated to intangible assets.
The note provides for quarterly interest payments at an annual rate of 9
percent 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 percent 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.
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. The operating
results are included in the Company's consolidated results of operations from
the date of acquisition. As consideration for the purchase, the Company paid
$100,000 in cash, issued a three year promissory note in the principal amount
of $125,000, and issued 200,000 shares of common stock of MHM Services, Inc. at
$.50 per share. The purchase price was primarily allocated to intangible
assets. The note provides for interest payments six months after the closing
date for the first two quarters and quarterly thereafter at an annual interest
rate of 7 percent and annual principal payments. The Company also agreed to
pay Apogee additional consideration consisting of 20 percent of "net cash
collected" (as such term is defined in the Apogee Agreement) from the acquired
operations over a five year period commencing March 31, 1997.
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NOTE 5 - AMERICAN STOCK EXCHANGE
On November 25, 1997, the Company received notification from the
American Stock Exchange (AMEX) that the Company's shares will be delisted due
to the Company's continuing failure to meet their listing guidelines and the
adverse judgment concerning the MEDIQ note. The Company has appealed this
decision to the AMEX. Failure to be listed on the AMEX may adversely affect
the price of the Company's common stock and will adversely impact the ability
of the Company's stockholders to sell their shares.
NOTE 6 - NEW FINANCIAL ACCOUNTING STANDARDS
The Company adopted Statement 128, Earnings Per Share, in 1998. The
1997 earnings per share are also presented in accordance with Statement 128.
Earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding.
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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, 1997 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 21-33) for the fiscal year ended September 30, 1997
included in the Company's Annual Report on Form 10-K
GENERAL
The Company made significant changes in its operations from 1994 to
1997, including the sale of six of the Company's seven freestanding behavioral
healthcare facilities (and the divestiture of the Company's contract management
business), so that the Company could focus on its Extended Care Services
Division and Correctional Services Division. The Extended Care Services
Division, which commenced operations in the Fall of 1993 has experienced growth
through internal development, principally from one contract with the State of
Georgia, and acquisitions. However, the Company has experienced continuing
losses in the Extended Care Services Division and has made recent changes
designed to improve its profitability and cash flow. The Company formed a
Correctional Services Division in 1997 and in the fourth quarter of 1997
secured contracts with the Tennessee and Georgia Departments of Correction to
provide mental health services on a capitated basis to the inmates of those
states' correctional systems. The Company is currently seeking additional
contract awards in this growing industry. In fiscal 1997 and continuing into
fiscal 1998, the Company further refined its strategy to achieve profitability.
The Company has closed extended care operations in certain states because
revenues have not been sufficient to achieve profitability, reduced operating
and general and administrative costs and consolidated or outsourced billing and
payroll functions. Further efforts are currently being analyzed to improve the
cash flow from these operations which may include changes in the compensation
of providers based on collections. The Company's strategic growth efforts are
currently focused on its Correctional Services Division. The Company does not
anticipate additional acquisitions in its Extended Care Services Division for
the foreseeable future.
As a result of the Company's continuing negative operating results,
increases in accounts receivable and other factors, the Company has continued
to experience difficulty generating sufficient cash flows from operations to
meet its obligations and sustain its operations. At December 31, 1997, the
Company's current liabilities exceeded its current assets by $12,002,000. The
Company's working capital deficit is primarily due to the classification of the
MEDIQ Note as a current liability. On November 21, 1997, the New Jersey
Superior Court entered a judgment against the Company and in favor of MEDIQ
dismissing the Company's suit against MEDIQ. The Court's Order did not set
forth a sum certain to which MEDIQ is entitled, although the Company
anticipates that the amount is in the range of $11 to $11.5 million, based on a
principal balance of $10,478,000 and accrued and unpaid interest on the Note of
$931,000 and approximately $350,000 claimed by MEDIQ to be shown on its books
as owed by MHM. The Court also denied the Company's request for a stay in the
entry or execution of judgment.
The Company filed an appeal with the Appellate Division of the New
Jersey Supreme Court. The Company also filed a motion in the Appellate
Division seeking summary reversal of the Court's action. On January 29, 1998,
the Appellate Division denied the Company's request for summary disposition and
dismissed the Company's appeal on the grounds that because the trial court's
Order did not set forth a sum certain, the judgment was not final and not
appealable. No action yet has been taken to make the judgment final and until
then it cannot be enforced. If the judgment is made final, the Company intends
to renew its appeal and motion for summary disposition. If necessary, the
Company will renew with the Appellate Division its request for a stay pending
the appeal. The Company has had communications with MEDIQ concerning
settlement, which communications are ongoing. If the Company is unable to
obtain a stay on appeal, MEDIQ will be free to commence collection efforts
under the judgment. The Company does not have sufficient funds to pay the
MEDIQ judgment or to collateralize the judgment on appeal. Further, the
Company does not have any readily available source of financing that will
permit it to make such payment, if required to do so. Accordingly, if the
MEDIQ judgment is sustained and MEDIQ seeks to recover its judgment, the
Company will be forced to seek additional sources of debt or equity
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financing, which are not likely to be available given the Company's financial
condition, or will be required to fill for reorganization under Chapter 11 of
the bankruptcy laws or liquidate.
The report of the Company's independent auditors on the Company's
audited consolidated financial statements for the fiscal year ended September
30, 1997, includes an explanatory paragraph which states that such conditions
raise substantial doubt as to the Company's ability to continue as a going
concern. In a continuing effort to improve this situation for both the
immediate future and the long-term, the Company is continuing its efforts to
reduce operating expenses, seek more profitable business opportunities, finance
its working 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 or that the unfavorable judgment decisions
against the Company in the MEDIQ litigation will not result in the Company's
filing for reorganization under Chapter 11 of the bankruptcy laws or
liquidation.
FINANCIAL POSITION - DECEMBER 31, 1997 COMPARED TO SEPTEMBER 30, 1997
The Company's stockholders' deficit increased to $8,866,000 at
December 31, 1997 from $8,270,000 at September 30, 1997 as a result of the
losses for the three months ended December 31, 1997, of $601,000, offset
partially by proceeds from the exercise of certain stock options. As presented
in the accompanying Condensed Consolidated Statement of Cash Flows, the
Company's cash balance declined from $195,000 at September 30, 1997 to a cash
overdraft of $327,000 at December 31, 1997. The Company has a deficit in
working capital at December 31, 1997, of $12,002,000 which represents an
increase of $844,000 from the deficit at September 30, 1997 of $11,158,000.
This increase is primarily attributable to borrowings of $500,000 on a line of
credit with NationsBank N.A. and the Company's decrease in cash for the
quarter. Also, the Company accrued, but did not pay, interest on the MEDIQ
note of $262,000 for the quarter ended December 31, 1997. As a result, amounts
due to MEDIQ (included in current liabilities) increased to $11,759,000 at
December 31, 1997, from $11,497,000 at September 30, 1997. The Company's
accounts receivable increased by $584,000 for the quarter due primarily to
delays in the collection of accounts receivable in the Company's Extended Care
Services Division. Notes receivable increased by $91,000 due to the
reclassification of the entire principal balance of a note receivable which
secures the MEDIQ debt as a long term asset. Estimated third party settlements
payable decreased by $161,000 as a result of payments made by the Company
during the quarter in settlement of prior cost reports.
RECENT CHANGES IN THE EXTENDED CARE SERVICES DIVISION
During the fourth quarter of 1997 and the first quarter of 1998, the
Company completed the closure of Extended Care operations in the State of
Florida and in certain other states where there was minimal revenue. As a
result, the Company was able to effect selected reductions in regional overhead
expenses. Currently, Extended Care revenues are concentrated in the States of
Massachusetts, Tennessee, Georgia and Pennslyvania. To further increase
efficiency of operations, the Company has consolidated its payroll functions so
that all payroll is processed directly from the corporate offices and has
outsourced its billing and collection functions. In order to improve cash
flows, the Company is analyzing the merits of changing its provider
compensation system so that a fixed portion of each payment will be made at the
time the service is rendered, and the balance will be paid at time of
collection. There can be no assurance that any of the changes already made to
date, or contemplated, will actually improve the cash flows of its division, or
that they will not have a significant adverse impact on net revenues.
AMERICAN STOCK EXCHANGE
On November 25, 1997, the Company received notification from the
American Stock Exchange (AMEX) that the Company's shares will be delisted due
to the Company's continuing failure to meet their listing guidelines and the
adverse judgment concerning the MEDIQ note. The Company has appealed this
decision to the AMEX. Failure to be listed on the AMEX may adversely affect
the price of the Company's common stock and will adversely impact the ability
of the Company's stockholders to sell their shares.
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
Net revenues for the first quarter of 1998 were $8,463,000, an increase
of 127% over the first quarter of 1997. This increased revenue base is the
result of growth in the Company's Extended Care Services and Correctional
Services Divisions. The Extended Care Services Division generated revenues for
the first quarter of 1998 of $4,373,000 as compared to $2,232,000 for the first
quarter of 1997. This increase is attributable primarily to the Apogee and
Liberty Bay Colony acquisitions, offset in part by reduced revenues as a result
of the shutdown of Extended Care Services operations in Florida in the fourth
quarter of 1997. The Correctional Services Division generated revenues of
$2,732,000 for the first quarter of 1998 due to the contracts with the States
of Tennessee and Georgia which began in July 1997 and October 1997,
respectively. The Company's one remaining freestanding facility, Mountain
Crest, generated revenues of $1,358,000 for the first quarter of 1998 as
compared to $1,497,000 for the first quarter of 1997. This decrease was
attributable to fewer patients in the facility.
Operating expenses for the first quarter of 1998 were $6,570,000, as
compared to $2,830,000 in the prior year quarter. This significant increase
was primarily attributable to the higher costs in the Company's Extended
Services Division and the costs associated with the Company's Correctional
Services Division, through which the Company began performing contracts for the
States of Tennessee and Georgia in July 1997 and October 1997, respectively. In
the Company's Extended Services Division, costs increased to $3,020,000 from
$1,648,000 in the prior year quarter, principally as a result of the expenses
associated with the operations of Apogee and Liberty Bay which were acquired in
December 1996 and March 1997, respectively.
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General and administrative expenses during the first quarter of 1998
were $1,276,000, or 15% of net revenues, as compared to $1,197,000, or 32% of
net revenues in the prior year quarter. The decrease is attributable to
general and administrative costs remaining relatively fixed while Company net
revenues increased by 127% over the first quarter of fiscal 1997.
The provision for bad debts increased to $778,000 for the first quarter
of 1998, as compared to $375,000 in the prior year quarter. As a percentage of
net revenues, bad debt expense was 9%, compared to 10% in the prior year
period. The increase in the provision for bad debts was primarily attributable
to the operations acquired in the Company's Extended Care Services division in
1997.
Depreciation and amortization expenses were $132,000 in the first
quarter of 1998, compared to $69,000 in the first quarter of the prior year.
The increase is attributable to higher amortization costs for goodwill and
other intangible costs relating to the acquired operations in the Extended Care
Services Division.
Interest expense for the first quarter of 1998 totaled $328,000,
compared to $264,000 in the prior year quarter. Of such expense, $262,000
related to the MEDIQ Note in the 1998 period, compared to $259,000 in the prior
year. The remaining $66,000 in interest expense incurred in the first quarter
of 1998 relates to interest on the Company's accounts receivable line of
credit. No comparable interest was incurred during the 1997 period.
The Company recognized other credits of $20,000 in the first quarter of
1998 as a result of interest income on invested cash balances (when available)
and other miscellaneous income compared to other credits of $83,000 in the
prior year period. This decrease is attributable to the fact that the Company
did not recognize any income the first quarter of 1998 relating to its note
receivable collateralizing the MEDIQ debt and also the greater availability of
available cash in the first quarter of 1997.
As a result of the foregoing, the Company recognized a net loss of
$601,000 during the first quarter ended December 31, 1998, compared to a net
loss of $923,000 in the prior year period. Operating results in the 1998
period were adversely affected by increased costs in the Company's Extended
Care Services Division, which continued to operate unprofitably during the
period. In addition, the Company's results were adversely affected by the
initial costs associated with the Company's Correctional Services Division,
which commenced operations in mid-1997. The Company is taking steps to lower
costs overall in the Extended Care Services Division, which steps included
closing extended care operations in the fourth quarter of 1997 in the States of
Florida and certain other states with minimal revenues. The Company believes
that it will be able to reduce costs in the Correctional Services Division by
attracting additional contracts in that division, effecting contract
modifications relating to pricing medication costs as well as reducing or
eliminating the initial start-up costs associated with the division. However,
there can be no assurance that the Company will be successful in its efforts to
secure additional contracts in its Correctional Services Division or lower
expenses in its Correctional Services and Extended Care Services Divisions or
to operate profitably in either division.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had a cash overdraft of $327,000,
compared to cash and cash equivalents of $195,000 at September 30, 1997. The
significant decrease in available cash is the result of the Company using cash
to fund continued operating losses.
13
<PAGE> 14
Cash used in operating activities was $757,000 for the first quarter
of 1998, as compared to $983,000 for the prior year period. Cash was primarily
used in the 1998 period to fund operating expenses and to fund a significant
increase of $584,000 in accounts receivable. The Company has continued to
experience significant operating losses, and is continuing to seek
opportunities to restructure its business to more profitable lines and to
reduce operating expenses.
Net cash provided by investing activities in the first quarter of 1998
of $6,000 consisted of reductions in other assets of $9,000 offset by
acquisitions of new equipment of $3,000. Net cash from financing activities
totaled $556,000, representing borrowings of $500,000 under the line of credit
extended to the Company by NationsBank, N.A., and the bank overdraft of
$327,000 offset in part by debt repayments primarily under the line of credit
to Healthcare Financial Partners of $229,000. The Company anticipates limited
capital expenditures for the remainder of 1998, consisting of minor purchases
of office equipment as required to replace or old obsolete equipment. However,
based upon the Company's financial condition and lack of liquidity and capital
resources, there can be no assurance that the Company will have sufficient
resources for these capital expenditures.
As of December 31, 1997, the Company had a cash overdraft of $327,000.
The Company has continued to experience significant negative cash flow from
operations. The Company continues to seek additional sources of debt and
equity financing. However, given the Company's financial condition it is
unlikely that the Company's efforts will be successful unless the Company is
able to significantly reduce its obligations to MEDIQ. On February 10, 1997,
the Company filed a complaint in Superior Court of New Jersey - Law Division
against MEDIQ Incorporated ("MEDIQ") alleging that the note that was executed
in connection with the distribution of the Company's stock to MEDIQ's
stockholders (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 asked the Court to declare the MEDIQ 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. By letter
dated February 11, 1997, the Company received notice from MEDIQ 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.
On November 21, 1997, the New Jersey Superior Court, Law Division,
Camden County, entered a summary judgment against the Company and in favor of
MEDIQ. The adverse decision dismissed the Company suit against MEDIQ. The
Court's Order did not set forth a sum certain to which MEDIQ is entitled,
although the Company anticipates that the amount is in the range of $11 to
$11.5 million, based on a principal balance of $10,478,000 and accrued and
unpaid interest on the Note of $931,000 and approximately $350,000 claimed by
MEDIQ to be shown on its books as owed by MHM. The Court also denied the
Company's request for a stay in the entry or execution of judgment.
The Company filed an appeal with the Appellate Division of the New
Jersey Supreme Court. The Company also filed a motion in the Appellate
Division seeking summary reversal of the Court's action. On January 29, 1998,
the Appellate Division denied the Company's request for summary disposition and
dismissed the Company's appeal on the grounds that because the trial court's
Order did not set forth a sum certain, the judgment was not final and not
appealable. No action yet has been taken to make the judgment final and until
then it cannot be enforced. If the judgment is made final, the Company intends
to renew its appeal and motion for summary disposition. If necessary, the
Company will renew with the Appellate Division its request for a stay pending
the appeal. The Company has had communications with MEDIQ concerning
settlement, which communications are ongoing. If the judgment is made final
and Company is unable to obtain a stay on appeal, MEDIQ will be free to
commence collection efforts under the judgment. The Company does not have
sufficient funds to pay the MEDIQ judgment or to collateralize the judgment on
appeal. Further, the Company does not have any readily available source of
financing that will permit it to make such payment, if required to do so.
Accordingly, if the MEDIQ judgment is sustained and MEDIQ seeks to recover its
judgment, the Company will be forced to seek additional
14
<PAGE> 15
sources of debt or equity financing, which are not likely to be available given
the Company's financial condition, or will be required to file for
reorganization under Chapter 11 of the bankruptcy laws or liquidate.
Cash flows from operations are not sufficient to permit payment of the
MEDIQ judgment or repayment of the MEDIQ Note. As of December 31, 1998, the
Company's current liabilities exceeded its current assets by $12,002,000. At
such date, current liabilities include $11,759, 000 due to MEDIQ,
representing the MEDIQ Note, accrued interest thereon and other accrued
expenses related to the obligation. In addition, as reflected in the financial
statements of the Company for the fiscal year ended September 30, 1997, and the
report of the Company's independent auditors thereon, 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 its other obligations. As a result of the Company's continued negative
operating results and delays in collections of accounts receivable,
the Company has been experiencing difficulty generating sufficient cash
flows from operations to meet its obligations and sustain its operations.
With respect to its efforts to reduce operating expenses, the Company closed
extended care services provided in the State of Florida and certain other
states with limited revenue. The Company may close or sell additional
operations in its Extended Care Services Operations or may change the method of
reimbursement for providers to payment based on cash collections. The
Company's liquidity could be improved by accelerated collection of outstanding
receivables, significant reductions in the operating losses of the Company's
remaining businesses and reductions in overhead and obtaining additional
capital and/or financing sources. However, to date the Company's efforts to
improve liquidity through these means have not been successful. 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. The Company believes that it will be unable to raise additional
capital without obtaining modifications to its financial obligations to MEDIQ.
As discussed above, the Company intends to continue to pursue
opportunities to reduce operating expenses, increase profitability, and obtain
additional financing in an effort to improve its liquidity, financial condition
and to continue its operations. However, there can be no assurance that the
Company will be able to implement all or any of these strategies or, if
implemented, that such strategies will be successful. The Company does not
believe that it will be able to secure additional financing unless it is
successful in obtaining significant modifications to its obligations to MEDIQ.
If the Company is not able to pay the MEDIQ judgment, obtain modification of
its obligations to MEDIQ, or to secure additional financing, the Company
currently anticipates that it will be forced to file for reorganization or
liquidation under the bankruptcy laws.
This report includes forward-looking statements based on managements'
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 continuing operating losses, the amount and
timing of government reimbursement of third party payor claims, the ability of
the Company to resolve its MEDIQ obligation and related matters. For additional
information, please refer to the Company Annual Report on Form 10-K and other
reports filed by the Company with the Securities and Exchange Commission.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 31, 1997, the Registrant did not have any market risk
exposure categories, as defined in Item 305 of Regulation S-K and, therefore,
no related market risks.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 $11.5
million 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 Company made the required payments under the note through January
1997. On February 10, 1997, the Company filed a complaint in Superior Court of
New Jersey, Law Division 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 Company 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. The Company remained current in its payments under the
MEDIQ Note until filing the lawsuit at which time it withheld payments
commencing with the payment due for February 1997 and all subsequent payments.
The Company received notice from MEDIQ by letter dated February 11, 1997,
stating that as a result of the Company's withholding of the February
installment due under the MEDIQ Note, MEDIQ claims to have accelerated all
principal and interest due under the MEDIQ Note.
On November 21, 1997, the New Jersey Superior Court, Law Division,
Camden County, entered a summary judgment against the Company and in favor of
MEDIQ. The adverse decision dismissed the Company suit against MEDIQ. The
Court's Order did not set forth a sum certain to which MEDIQ is entitled,
although the Company anticipates that the amount is in the range of $11 to
$11.5 million, based on a principal balance of $10,478,000 and accrued and
unpaid interest on the Note of $931,000 and approximately $350,000 claimed by
MEDIQ to be shown on its books as owed by MHM. The Court also denied the
Company's request for a stay in the entry or execution of judgment.
The Company filed an appeal with the Appellate Division of the New
Jersey Supreme Court. The Company also filed a motion in the Appellate
Division seeking summary reversal of the Court's action. On January 29, 1998,
the Appellate Division denied the Company's request for summary disposition and
dismissed the Company's appeal on the grounds that because the trial court's
Order did not set forth a sum certain, the judgment was not final and not
appealable. No action yet has been taken to make the judgment final and until
then it cannot be enforced. If the judgment is made final, the Company intends
to renew its appeal and motion for summary disposition. If necessary, the
Company will renew with the Appellate Division its request for a stay pending
the appeal. The Company has had communications with MEDIQ concerning
settlement, which communications are ongoing. If the judgment is made final
and Company is unable to obtain a stay on appeal, MEDIQ will be free to
commence collection efforts under the judgment. The Company does not have
sufficient funds to pay the MEDIQ judgment or to collateralize the judgment on
appeal. Further, the Company does not have any readily available source of
financing that will permit it to make such payment, if required to do so.
Accordingly, if the MEDIQ judgment is sustained and MEDIQ seeks to recover its
judgment, the Company will be forced to seek additional sources of debt or
equity financing, which are not likely to be available given the Company's
financial condition, or will be required to file for reorganization under
Chapter 11 of the bankruptcy laws or liquidate.
On December 24, 1997, MEDIQ, filed a lawsuit in the Superior Court for
the State of Delaware against Michael Pinkert, the Chief Executive Officer and
Chairman of the Board of the Company, alleging, among other things, breach of
fiduciary duty to MEDIQ and demanding judgment in an unspecified amount in
excess of
16
<PAGE> 17
$100,000, plus prejudgment interest, attorneys' fees and costs. Pending
settlement discussions, MEDIQ has agreed to postpone the time within which Mr.
Pinkert must reply to the suit. Mr. Pinkert denies the allegations and intends
to vigorously defend the action. The Company's Certificate of Incorporation
provides directors and officers of the Company with certain rights of
indemnification for amounts paid in connection with pending or threatened
actions filed against such persons by reason of acting in such capacities.
Such indemnification is payable upon a determination by the Company's Board of
Directors that such person has met the standard for indemnification. The
Company's Board of Directors has not yet considered whether Mr. Pinkert is
entitled to indemnification in connection with the MEDIQ lawsuit filed in
Delaware and accordingly, it is not possible to predict whether the Company
will be obligated to incur expenses as a result of the lawsuit.
In December 1997, the former President and majority stockholder of
Supportive Counseling Care ("SCC") filed a lawsuit against the Company
alleging, among other things, breach of employment contract, employment
discrimination, discrimination under the American With Disabilities Act and
wrongful termination, and seeking unspecified general and compensatory damages,
interest, unspecified punitive damages, attorneys' fees and costs and a
declaratory judgment. The Company continues to evaluate the merits of this
lawsuit, and has retained counsel for its defense.
The Company is involved in various other legal proceedings incidental
to its business, some of which may be covered by insurance. The Company knows
of no litigation other than described above, either pending or threatened,
which is likely to have a material adverse effect on the Company's consolidated
financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
In connection with the dispute with MEDIQ described in Item 1 above,
on filing the lawsuit, the Company began withholding payments to MEDIQ,
commencing with the February 1997 installment. As a result of the ensuing
litigation on November 21, 1997, the New Jersey Superior Court, Law Division,
Camden County, entered a summary judgment against the Company and in favor of
MEDIQ. See Item 1.
17
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
Not applicable.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exhange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated February 27, 1998 MHM SERVICES, INC.
/s/ MICHAEL PINKERT
---------------------------------
Michael Pinkert
Principal Executive and Financial
Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1997 AND THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE
QUARTER ENDED DECEMBER 31, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> (327,000)
<SECURITIES> 0
<RECEIVABLES> 11,323,000
<ALLOWANCES> (6,248,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,401,000
<PP&E> 1,348,000
<DEPRECIATION> 869,000
<TOTAL-ASSETS> 11,700,000
<CURRENT-LIABILITIES> 19,403,000
<BONDS> 12,377,000
0
0
<COMMON> 35,000
<OTHER-SE> (8,901,000)
<TOTAL-LIABILITY-AND-EQUITY> 11,700,000
<SALES> 0
<TOTAL-REVENUES> 8,463,000
<CGS> 0
<TOTAL-COSTS> 7,978,000
<OTHER-EXPENSES> (20,000)
<LOSS-PROVISION> 778,000
<INTEREST-EXPENSE> 328,000
<INCOME-PRETAX> (601,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (601,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (601,000)
<EPS-PRIMARY> .017
<EPS-DILUTED> .017
</TABLE>
