<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending: March 31, 1998
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 May 7, 1998, there were 3,525,848 shares of Common Stock, par
value $.01 per share outstanding.
<PAGE> 2
MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three and Six
Months Ended March 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Balance Sheets - March 31, 1998 (Unaudited)
and September 30, 1997 5
Condensed Consolidated Statements of Cash Flows - Six Months Ended
March 31, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated Financial 7-11
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition 12-16
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 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>
<PAGE> 3
MHM SERVICES, INC.
AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE> 4
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Revenues $ 7,560,000 $ 4,136,000 $ 16,023,000 $ 7,865,000
Costs and Expenses
Operating 5,932,000 3,289,000 12,502,000 6,119,000
General and Administrative 1,334,000 1,161,000 2,610,000 2,358,000
Provision for Bad Debts 439,000 305,000 1,217,000 680,000
Depreciation and Amortization 109,000 89,000 241,000 158,000
Other (credits) charges
Interest Expense - MEDIQ 262,000 254,000 524,000 513,000
Interest Expense - Other 49,000 11,000 115,000 16,000
Other 14,000 (62,000) (6,000) (145,000)
----------- ----------- ------------ ------------
Net Loss $ (579,000) $ (911,000) $ (1,180,000) $ (1,834,000)
=========== =========== ============ ============
Loss per Share: $ (0.16) $ (0.28) $ (0.33) $ (0.55)
=========== =========== ============ ============
Weighted Average Shares Outstanding 3,525,000 3,312,000 3,523,000 3,311,000
=========== =========== ============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1998 SEPTEMBER 30, 1997
-------------- ------------------
UNAUDITED (SEE NOTE)
<S> <C> <C>
Assets
------
Current Assets:
Cash and Cash Equivalents $ - $ 195,000
Accounts Receivable, Net 5,384,000 4,491,000
Prepaid Expenses 110,000 103,000
Estimated Third Party Settlements 2,106,000 1,910,000
Other Current Assets 335,000 352,000
---------------- --------------
Total Current Assets 7,935,000 7,051,000
Property, Plant and Equipment, Net 432,000 531,000
Notes Receivable, Net 1,171,000 1,039,000
Restricted Cash 425,000 450,000
Deferred Rent 447,000 416,000
Other Assets 318,000 288,000
Goodwill, Net 737,000 766,000
Other Intangibles, Net 735,000 873,000
---------------- --------------
Total Assets $ 12,200,000 $ 11,414,000
================ ==============
Liabilities and Stockholders' Deficit
-------------------------------------
Current Liabilities
Cash Overdraft $ 191,000 $ -
Accounts Payable 1,262,000 975,000
Accrued Expenses 3,905,000 3,308,000
Accrued Expenses - MEDIQ Interest 1,543,000 1,019,000
Estimated Third Party Payor Settlements 2,005,000 2,187,000
Current Maturities of Long Term Debt 11,193,000 10,720,000
---------------- --------------
Total Current Liabilities 20,099,000 18,209,000
Long Term Debt, Less Current Maturities 1,545,000 1,456,000
Other Liabilities - 19,000
Stockholders' Deficit (9,444,000) (8,270,000)
---------------- --------------
Total Liabilities and Stockholders' Deficit $ 12,200,000 $ 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
5
<PAGE> 6
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31
-------------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
Cash Flows from Operating Activities
- ------------------------------------
Net Loss $ (1,180,000) $ (1,834,000)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities 234,000 360,000
-------------------- -------------------
Net Cash Used in Operating Activities (946,000) (1,474,000)
Cash Flows from Investing Activities
- ------------------------------------
Capital Expenditures (3,000) (73,000)
Acquisitions - (250,000)
Other (5,000) (237,000)
-------------------- -------------------
Net Cash Used in Investing Activities (8,000) (560,000)
Cash Flows from Financing Activities
- ------------------------------------
Borrowings, Net 641,000 300,000
Cash Overdraft 191,000 -
Proceeds from exercise of stock options 6,000
Debt Repayments (79,000) (334,000)
-------------------- -------------------
Net Cash (Provided by) Used in Financing Activities 759,000 (34,000)
Decrease in Cash (195,000) (2,068,000)
Cash and Cash Equivalents
Beginning Balance 195,000 3,611,000
-------------------- -------------------
Ending Balance $ - $ 1,543,000
==================== ===================
Supplemental Disclosure of Cash Flow Information
Interest Paid (Refunded), Net $ 115,000 $ 443,000
==================== ===================
Income Taxes Paid $ - $ (653,000)
==================== ===================
Supplemental Disclosure of Non-cash Investing and Financing
Activities
Acquisitions - Portion Financed with Long Term Debt $ - $ 275,000
==================== ===================
Acquisitions - Portion Financed by Issuance of common
stock
$ - $ 100,000
==================== ===================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
MHM SERVICES, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 1998, the
condensed consolidated statements of operations for the three and six month
periods ended March 31, 1998 and 1997 and the condensed consolidated statements
of cash flows for the six month periods ended March 31, 1998 and 1997 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 March 31, 1998, 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 March 31, 1998, 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 $24,369,000 for
the three years and six months ended March 31, 1998, and had a stockholders'
deficit of $9,444,000 as of March 31, 1998. The Company is experiencing
difficulty in generating sufficient cash flows to meet its obligations and
sustain its operations. At March 31, 1998, current liabilities exceeded
current assets by $12,164,000 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 completed this process when on April 17, 1998, it
purchased and then sold the assets comprising its last free standing
psychiatric hospital operation, Mountain Crest Behavioral Healthcare System,
located in Fort Collins, Colorado. These transactions are further discussed in
Note 7.
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 March 31, 1998, the Company
had utilized substantially all of its borrowing capacity on this credit
facility based on qualified accounts receivable. The Company has a $500,000
line of credit with NationsBank N.A., guaranteed by certain officers and
directors of the Company. At March 31, 1998, $460,000 was drawn against this
line of credit which was repaid from the net proceeds from the sale of the
Mountain Crest facility.
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. On a full year basis, assuming revenues
continue at the rate earned to date under the
7
<PAGE> 8
MHM SERVICES, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
contracts, these are expected to generate approximately $10.4 million of
revenues per year. The Company is pursuing additional correctional services
contract opportunities.
In April 1998, the Company completed its planned transition out of
inpatient psychiatric care with the sale of its last psychiatric hospital
operation (see Note 7). The Company has retained the investment banking firm
of Shattuck Hammond Partners, Inc. to review and analyze the Company's
operations. This review will allow Shattuck Hammond to assist the Company in
its strategic planning, particularly with regard to the lines of business on
which its efforts should be focused. It is anticipated that the review will
include analyses of synergistic lines of business which the Company might add
to its existing activities, as well as the desirability and feasibility of
restructuring or divesting portions of the Company's current business. In
connection with this retention, the Company has agreed to retain Shattuck
Hammond to serve as its advisor, on mutually agreeable terms, in connection
with any transaction that results from this analysis.
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
As previously reported, on February 10, 1997, the Company had filed suit in New
Jersey Superior Court against MEDIQ Inc., its former corporate parent, to void
a promissory note in the principal amount of $11.5 million which MEDIQ required
the Company to sign at the time the Company was spun off by MEDIQ. Payments
have not been made on the note since February 1997. On November 21, 1997, the
Court entered summary judgment in MEDIQ's favor on the Note, resulting in a
final judgment against the Company for $11,783,423 which was entered on April
17, 1998. The judgment was filed as a domestic judgment in Virginia on May 6,
1998. The Company has collateralized a portion of the MEDIQ note with a $1.1
million note receivable. As previously noted, the Company does not have
sufficient assets to pay the judgment, and could be compelled to seek protection
under the bankruptcy laws were MEDIQ to take steps to enforce the judgment. On
April 28, 1998, the Company filed its appeal in the Appellate Division of the
Superior Court, together with a motion seeking summary reversal of the judgment
on the ground that the court below was patently in error in its ruling. That
appeal remains pending, and the Company is engaged in ongoing settlement
discussions with MEDIQ.
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. 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.
8
<PAGE> 9
MHM SERVICES, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
9
<PAGE> 10
MHM SERVICES, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Management), certain assets and contractual rights from Liberty Bay which
constituted Liberty Bay's geropsychiatric management services operations in
Massachusetts. 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 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. Due to the losses from the acquired operations, the Company
does not believe any additional consideration is currently due.
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. Due to the losses
from the acquired operations, the Company does not believe any additional
consideration is currently due.
NOTE 5 - AMERICAN STOCK EXCHANGE
On March 25, 1997, the Staff of the American Stock Exchange initiated
a review of the Company's continued eligibility for listing on the Exchange.
On May 8, 1997, representatives of the Company met with Exchange staff, and the
Staff decided to continue the Company's listing pending review of the Company's
June 30, 1997 Form 10-Q. After the June 1997 filing, the listing was continued
pending the Form 10-Q to be filed December 31, 1997. However, on November 26,
1997, two days after being informed that summary judgment had been entered in
favor of MEDIQ in the litigation described in Note 3 of the financial
statements, the Exchange notified the Company it again had determined to delist
the Company's stock. After meeting with Company officials on January 8, 1998,
the Exchange once more continued the Company's listing , until January 30,
1998, pending possible settlement of the MEDIQ lawsuit. On February 3, 1998,
noting that the MEDIQ lawsuit still had not been settled, the Exchange staff
notified the Company of its intent to remove the Company's stock from the
Exchange. The Company appealed that decision to the Securities Committee of
the Exchange. A hearing was held on April 30, 1998, and a decision is pending.
The Exchange Staff has stated that in the event a final decision is made to
delist the Company's stock, the staff will assist the Company in arranging for
an alternate means for trading of its stock so as to not adversely impact the
shareholders' ability to purchase and sell the Company's stock. Failure to be
listed on the AMEX may materially 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.
10
<PAGE> 11
MHM SERVICES, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - CONTINGENCY
The Company has become aware that a claim for a refund of certain
Medicare payments is being made against a mental health practice group to which
a subsidiary of the Company previously provided management services. The claim
is being asserted by the Medicare fiscal intermediary which was responsible for
processing and paying the practice group's bills for Medicare payments, and
apparently arises from post-payment review by the Intermediary of Medicare
reimbursement previously paid to the group. The claim, which seeks
approximately $1.7 million in refunds, relates to Medicare reimbursement paid
to the group prior to any involvement of the Company's subsidiary as well as
during the period in which management services were provided to the group. No
claim has been asserted against the Company or its subsidiary, and the Company
does not believe that it has any liability with respect to the claims made
against the practice group.
NOTE 7 - SUBSEQUENT EVENT
On April 17, 1998, the Company sold its last inpatient psychiatric
hospital operation, Mountain Crest Hospital in Fort Collins, Colorado. The
sale was the culmination of the Company's decision to withdraw from the
provision of inpatient services. The hospital operations, together with
certain assets previously leased by the Hospital, were sold to Poudre Valley
Hospital, a general hospital in Fort Collins, for a cash purchase price of
$5.2 million. As part of the transaction Poudre Valley also purchased the
hospital's patient accounts receivable for an additional $738,000 and agreed to
pay $50,000 per month to the Company for twelve months in return for the
Company's agreement to provide consulting services. Prior to the transaction,
the Company had subleased the hospital real estate and certain personal
property from a third party. In connection with the sale to Poudre Valley
Hospital, the Company acquired these assets for a purchase price of $2.7
million in cash and made additional payments totaling $373,000 to the
sublessor and the prime lessor for accrued rent and as lease termination
payments. As a result of the transaction, the Company expects to report a one
time gain of approximately $1.9 million in its third quarter.
NOTE 8 - NEW FINANCIAL ACCOUNTING STANDARDS
The Company adopted Statement 128, Earnings Per Share, in 1998. The
1997 loss per share amounts are also presented in accordance with Statement
128. Loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion addresses the financial condition of the
Company as of March 31, 1998 and the Company's results of operations for the
three and six month periods then ended, compared with the same periods last
year. This discussion should be read in conjunction with Management's
Discussion and Analysis section (pages 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
the present, including the sale of all 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
despite recent changes designed to improve its profitability and cash flow is
uncertain as to the future of this division. 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 April 1998, the Company retained the investment banking firm of
Shattuck Hammond Partners, Inc. to review and analyze the Company's operations.
This review will allow Shattuck Hammond to assist the Company in its strategic
planning, particularly with regard to the lines of business on which its
efforts should be focused. It is anticipated that the review will include
analyses of synergistic lines of business which the Company might add to its
existing activities, as well as the desirability and feasibility of
restructuring or divesting portions of the Company's current business. In
connection with this retention, the Company agreed to retain Shattuck Hammond
to serve as its advisor, on mutually agreeable terms, in connection with any
transaction that results from this analysis.
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 March 31, 1998, the
Company's current liabilities exceeded its current assets by $12,164,000. The
Company's working capital deficit is primarily due to the classification of the
MEDIQ Note as a current liability.
As previously reported, on February 10, 1997, the Company had filed
suit in New Jersey Superior Court against MEDIQ Inc., its former corporate
parent, to void a promissory note in the principal amount of $11.5 million
which MEDIQ required the Company to sign at the time the Company was spun off
by MEDIQ. Payments have not been made on the note since February, 1997. On
November 21, 1997, the Court entered summary judgment in MEDIQ's favor on the
Note, resulting in a final judgment against the Company for $11,783,423 which
was entered on April 17, 1998. The judgment was filed as a domestic judgment in
Virginia on May 6, 1998. The Company has collateralized a portion of the MEDIQ
note with a $1.1 million note receivable. As previously noted, the Company does
not have sufficient assets to pay the judgment, and could be compelled to seek
protection under the bankruptcy laws were MEDIQ to take steps to enforce the
judgment. On April 28, 1998, the Company filed its appeal in the Appellate
Division of the Superior Court, together with a motion seeking summary reversal
of the judgment on the ground that the court below was patently in error in its
ruling. That appeal remains pending, and the Company is engaged in ongoing
settlement discussions with MEDIQ.
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
12
<PAGE> 13
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 - MARCH 31, 1998 COMPARED TO SEPTEMBER 30, 1997
The Company's stockholders' deficit increased to $9,444,000 at March
31, 1998 from $8,270,000 at September 30, 1997 as a result of the losses for
the six months ended March 31, 1998, of $1,180,000, 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 $191,000 at March 31, 1998. The Company had a deficit in working capital at
March 31, 1998, of $12,164,000 which represents an increase of $1,006,000 from
the deficit at September 30, 1997 of $11,158,000. This increased deficit is
primarily attributable to borrowings of $460,000 on a line of credit with
NationsBank N.A., the Company's decrease in cash and increases in accounts
payable and accrued expenses. Also, the Company accrued, but did not pay,
interest on the MEDIQ note of $524,000 for the six months ended March 31, 1998.
As a result, amounts due to MEDIQ (included in current liabilities) increased
to $12,021,000 at March 31, 1998, from $11,497,000 at September 30, 1997. The
Company's accounts receivable increased by $893,000 due primarily to delays in
the collection of accounts receivable in the Company's Extended Care Services
Division. Notes receivable increased by $132,000 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 $182,000 as a result of payments made by the Company during the quarter in
settlement of prior cost reports. Estimated third party settlements
receivable increased by $196,000 due primarily to accrued cost reimbursement
for the Company's Mountain Crest facility for the six month period ended March
31, 1998.
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Net revenues for the six months ended March 31, 1998 were $16,023,000
an increase of 104% over the same period of 1997. This increased revenue 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 six months ended March 31, 1998 of $8,013,000 as compared to $5,077,000 for
the six months ended March 31, 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
certain states in the fourth quarter of 1997. The Correctional Services
Division generated revenues of $5,424,000 for the six months ended March 31,
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 (subsequently sold), generated revenues
of $2,585,000 for the six months ended March 31, 1998 as compared to $2,788,000
for the six months ended March 31, 1997. This decrease was attributable to
lower census in the facility, changes in Medicare reimbursement and cost
pressures from managed care.
Operating expenses for the six months ended March 31, 1998 were
$12,502,000, as compared to $6,119,000 for the six months ended March 31, 1997.
This significant increase was 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. General and administrative expenses during the six months
ended March 31, 1998 were $2,610,000 or 16% of net revenues, as compared to
$2,358,000 or 30% of net revenues during the six months ended March 31, 1997.
The percentage decrease is attributable to general and administrative costs
remaining relatively fixed while Company net revenues increased by 104% over the
six months ended March 31, 1997.
The provision for bad debts increased to $1,217,000 for the first
six months of 1998, as compared to $680,000 in the six months ended March 31,
1997. The increase in the provision for bad debts was primarily attributable
to
13
<PAGE> 14
increased bad debts relating to the operations acquired in the Company's
Extended Care Services division in 1997. As a percentage of net revenues, bad
debt expense was 8%, compared to 9% in the prior year period.
Depreciation and amortization expenses were $241,000 for the six
months ended March 31, 1998, compared to $158,000 for the six months ended
March 31, 1997. 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 six months ended March 31, 1998 totaled
$639,000, compared to $529,000 for the six months ended March 31, 1997. Of
such expense, $524,000 related to the MEDIQ Note for the six months ended March
31, 1998, compared to $513,000 for the six months ended March 31, 1997. The
remaining $115,000 in interest expense incurred in the six months ended March
31, 1998 relates primarily to interest on the Company's accounts receivable
line of credit and indebtedness relating to Extended Care Services Division
acquisitions. The line of credit did not exist in the 1997 period and the level
of acquisition debt was significantly lower.
The Company recognized other credits of $6,000 in the six months ended
March 31, 1998, compared to other credits of $145,000 in the six months ended
March 31, 1997. The higher credits in the 1997 period are due to the fact
that for fiscal 1998, the Company ceased the recognition of further interest
income on its note receivable.
As a result of the foregoing, the Company recognized a net loss of
$1,180,000 during the six months ended March 31, 1998, compared to a net loss
of $1,834,000 for the comparable prior year period.
SECOND QUARTER, 1998 COMPARED TO SECOND QUARTER 1997
Net revenues for the second quarter of fiscal 1998 were $7,560,000 an
increase of 83% over the same period of 1997. This increased revenue 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 second quarter of fiscal 1998 of $3,641,000 as compared to $2,640,000 for
the second quarter of fiscal 1997. This increase is attributable primarily to
the Apogee acquisition, offset in part by reduced revenues as a result of the
shutdown of Extended Care Services operations in certain states in the fourth
quarter of 1997. The Correctional Services Division generated revenues of
$2,691,000 for the second quarter of fiscal 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
(subsequently sold), generated revenues of $1,228,000 for the second quarter of
fiscal 1998 as compared to $1,496,000 for the second quarter of fiscal 1997.
This decrease was attributable to lower census in the facility, changes in
Medicare reimbursement and cost pressures from managed care.
Operating expenses for the second quarter of fiscal 1998 were
$5,932,000, as compared to $3,289,000 for the second quarter of fiscal 1997.
This significant increase was attributable to the higher costs in the Company's
Extended Care 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. General and administrative expenses during the second
quarter of fiscal 1998 were $1,334,000 or 18% of net revenues, as compared to
$1,161,000 or 28% of net revenues in the prior year quarter. The percentage
decrease is attributable to general and administrative costs remaining
relatively fixed while Company net revenues increased by 83% over the second
quarter of fiscal 1997.
The provision for bad debts increased to $439,000 for the first
quarter of 1998, as compared to $305,000 in the second quarter of fiscal 1997.
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.
As a percentage of net revenues, bad debt expense was 6%, compared to 7% in the
prior year period.
14
<PAGE> 15
Depreciation and amortization expenses were $109,000 for the second
quarter of fiscal 1998, compared to $89,000 for the second quarter of fiscal
1997. 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 second quarter of fiscal 1998 totaled
$311,000, compared to $265,000 for the second quarter of fiscal 1997. Of such
expense, $262,000 related to the MEDIQ Note for the second quarter of fiscal
1998, compared to $254,000 for the second quarter of fiscal 1997. The
remaining $49,000 in interest expense incurred in the second quarter of fiscal
1998 relates primarily to interest on the Company's accounts receivable line of
credit and acquisition indebtedness relating to Extended Care Services Division
acquisitions. The line of credit did not exist in the 1997 period and the
level of acquisition debt was lower.
The Company recognized other charges of $14,000 in the second quarter
of fiscal 1998, compared to other credits of $62,000 in the second quarter of
fiscal 1997. The higher credits in the 1997 period are due to the fact that
for fiscal 1998, the Company stopped recognizing any interest income on its
note receivable.
As a result of the foregoing, the Company recognized a net loss of
$579,000 during the second quarter of fiscal 1998, compared to a net loss of
$911,000 for the comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had a cash overdraft of $191,000,
compared to cash and cash equivalents of $195,000 at September 30, 1997. This
decline in cash is due primarily to continued operating losses, increases in
accounts receivable and lack of access to additional capital.
Cash used in operating activities was $946,000 for the six months
ended March 31, 1998. Cash was primarily used to fund operating losses and an
increase in accounts receivable due primarily to the growth of the Extended
Care Services Division. Net cash used in investing activities for the six
months ended March 31, 1998 consisted of reductions in other assets of $5,000
and acquisitions of new equipment of $3,000. Net cash provided by financing
activities totaled $759,000 for the six months ended March 31, 1998 primarily
representing net borrowings of $641,000 on the Company's lines of credit and
the bank overdraft of $191,000. The Company anticipates limited capital
expenditures for the remainder of fiscal 1998, consisting of minor purchases of
office equipment as required to replace old or obsolete equipment. However,
based on 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 March 31, 1998, the Company had a cash overdraft of $191,000
with little or no capacity on its lines of credit for additional borrowings.
The situation has been somewhat mitigated by the subsequent sale of the
Mountain Crest operation. However, the Company continues to experience cash
flow difficulties and continues to seek additional sources of debt and equity
financing. However, given the Company's financial condition it is unlikely
that the Company will be successful unless the Company is able to significantly
reduce its obligations to MEDIQ. As previously reported, on February 10, 1997,
the Company had filed suit in New Jersey Superior Court against MEDIQ Inc.,
its former corporate parent, to void a promissory note in the principal amount
of $11.5 million which MEDIQ required the Company to sign at the time the
Company was spun off by MEDIQ. On November 21, 1997, the Court entered summary
judgment in MEDIQ's favor on the Note, resulting in a final judgment against
the Company for $11,783,423 entered on April 17, 1998, and filed as a domestic
judgment in Virginia on May 6, 1998. As previously noted, the Company does not
have sufficient assets to pay the judgment, and could be compelled to seek
protection under the bankruptcy laws were MEDIQ to take steps to enforce the
judgment. On April 28, 1998, the Company filed its appeal in the Appellate
Division of the Superior Court, together with a motion seeking summary reversal
of the judgment on the ground that the court below was patently in error in its
ruling. That appeal remains pending, and the Company is engaged in ongoing
settlement discussions with MEDIQ.
15
<PAGE> 16
Cash flows from operations are not sufficient to permit payment of the
MEDIQ judgment or repayment of the MEDIQ Note. As of March 31, 1998, the
Company's current liabilities exceeded its current assets by $12,164,000. At
such date, current liabilities include $12,021,000 due to MEDIQ representing
the MEDIQ note, accrued interest and other accrued expenses relating 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 in generating sufficient cash flows to meet its obligations and
sustain its operations.
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 March 31, 1998, the Company
had utilized substantially all of its borrowing capacity on this credit
facility based on qualified accounts receivable. The Company has a $500,000
line of credit with NationsBank N.A., guaranteed by certain officers and
directors of the Company. At March 31, 1998, $460,000 was drawn against this
line of credit which was repaid from the proceeds of the Mountain Crest sale.
As a result of the Company's continued negative operating results and
reduced collections of accounts receivable from certain government funded
payors, as well as other administrative delays by third party payors, the
Company has been experiencing difficulty generating sufficient cash flows from
operations to meet its obligations and sustain its operations. The Company's
liquidity could be improved by accelerated collection of receivables,
significantly reducing 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 modification to its financial obligations to MEDIQ. If the Company
is unable to enhance its liquidity the Company may be required to renegotiate
the terms of its financial obligations, significantly curtail its operations or
otherwise reduce expenses.
AMERICAN STOCK EXCHANGE
On March 25, 1997, the Staff of the American Stock Exchange initiated
a review of the Company's continued eligibility for listing on the Exchange.
On May 8, 1997, representatives of the Company met with Exchange staff, and the
Staff decided to continue the Company's listing pending review of the Company's
June 30, 1997 Form 10-Q. After the June 1997 filing, the listing was continued
pending the Form 10-Q to be filed December 31, 1997. However, on November 26,
1997, two days after being informed that summary judgment had been entered in
favor of MEDIQ in the litigation described in Note 3 of the financial
statements, the Exchange notified the Company it again had determined to delist
the Company's stock. After meeting with Company officials on January 8, 1998,
the Exchange once more continued the Company's listing, until January 30,
1998, pending possible settlement of the MECIQ lawsuit. On February 3, 1998,
noting that the MEDIQ lawsuit still had not been settled, the Exchange staff
notified the Company of its intent to remove the Company's stock from the
Exchange. The Company appealed that decision to the Securities Committee of
the Exchange. A hearing was held on April 30, 1998, and a decision is pending.
The Exchange Staff has stated that in the event a final decision is made to
delist the Company's stock, the staff will assist the Company in arranging for
an alternate means for trading of its stock. Failure to be listed on the AMEX
may materially 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.
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 operation 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 cliams, the ability of
the Company to resolve its MEDIQ obligation and related matters. For
additional information, please refer to the Company's Annual Report on Form 10-K
and other reports filed by the Company with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 1998, the Registrant did not have any market risk exposure
categories as defined in Item 305 of Regulation S-K, and therefore, no related
market risk.
16
<PAGE> 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported, on February 10, 1997, the Company had
filed suit in New Jersey Superior Court against MEDIQ Inc., its former
corporate parent, to void a promissory note in the principal amount of $11.5
million which MEDIQ required the Company to sign at the time the Company was
spun off by MEDIQ. Payments have not been made on the note since February
1997. On November 21, 1997, the Court entered summary judgment in MEDIQ's
favor on the Note, resulting in a final judgment against the Company for
$11,783,423 which was entered on April 17, 1998. The judgment was filed as a
domestic judgment in Virginia on May 6, 1998. The Company has collateralized a
portion of the MEDIQ note with a $1.1 million note receivable. As previously
noted, the Company does not have sufficient assets to pay the judgment, and
could be compelled to seek protection under the bankruptcy laws were MEDIQ to
take steps to enforce the judgment. On April 28, 1998, the Company filed its
appeal in the Appellate Division of the Superior Court, together with a motion
seeking summary reversal of the judgment on the ground that the court below was
patently in error in its ruling. That appeal remains pending, and the Company
is engaged in ongoing settlement discussions with MEDIQ.
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. 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 in California state court
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. Counsel for the Company removed the case
to the United States District Court for the District of California. Plaintiff
responded by voluntarily dismissing her case on or about January 26, 1998. Her
counsel has stated his intention to refile the case in state court without the
federal claims.
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 8K
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 Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated May 15, 1998 MHM Services, Inc.
/s/ MICHAEL PINKERT
Principal Executive and Chief
Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's 10-Q for March 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,907,000
<ALLOWANCES> 5,523,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,935,000
<PP&E> 1,354,000
<DEPRECIATION> 922,000
<TOTAL-ASSETS> 12,200,000
<CURRENT-LIABILITIES> 20,099,000
<BONDS> 12,738,000
0
0
<COMMON> 35,000
<OTHER-SE> (9,479,000)
<TOTAL-LIABILITY-AND-EQUITY> 12,200,000
<SALES> 0
<TOTAL-REVENUES> 7,560,000
<CGS> 0
<TOTAL-COSTS> 7,814,000
<OTHER-EXPENSES> 325,000
<LOSS-PROVISION> 439,000
<INTEREST-EXPENSE> 311,000
<INCOME-PRETAX> (579,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (579,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (579,000)
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
