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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number: 1-12238
MHM SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 52-1223048
(State or Other Jurisdiction of (Identification I.R.S. Employer No.)
Incorporation or Organization)
8000 TOWERS CRESCENT DRIVE, SUITE 810, VIENNA, VIRGINIA 22182
(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code: (703) 749-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the Registrant's common stock held by
nonaffiliates (based upon the closing price of $ .6875 of Common Stock on the
American Stock Exchange) on December 30, 1997, was approximately $1,321,279.
As of December 30, 1997, there were 3,525,848 shares of Common Stock,
par value $.01 per share, of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCES
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
MHM Services, Inc., through its wholly-owned subsidiaries, MHM Extended
Care Services, Inc. ("Extended Care Services Division"), MHM Correctional
Services, Inc. ("Correctional Services Division"), and MHM of Colorado, Inc.
("Hospital Division"), (collectively, the "Company"), offers, arranges for and
manages specialty healthcare services primarily in institutional settings. Since
its founding, the Company's goal has been to offer the highest quality,
cost-effective care in the industry. The Company's Extended Care Services
Division provides specialized medical and behavioral healthcare services to
residents of 870 nursing homes in six states, and provides a wide range of
outpatient behavioral healthcare services to children, adolescents, adults and
families in multiple clinics located in Massachusetts. The Extended Care
Services Division also provides behavioral healthcare services to more than
2,000 Medicaid patients residing in nursing homes under a contract with the
State of Georgia. The Correctional Services Division was formed in fiscal 1997
to provide mental health and other specialized healthcare services to inmates
of correctional systems. In June and September of 1997, the Correctional
Services Division was awarded multi-year contracts with each of the States of
Tennessee and Georgia to provide mental health services to the inmates of such
states' correctional facilities for which the Company is compensated on a
capitation basis. Under these contract awards, the Company currently provides
mental health services to approximately 49,000 inmates in these states. Also,
the Correctional Services Division provides dental services to approximately
5,000 inmates in Delaware under a subcontract with Prison Health Services, Inc.
The Correctional Services Division generated 3 % of the Company's net revenues
in fiscal year 1997. Until April 1996, the Company's Hospital Division operated
seven freestanding psychiatric and substance abuse facilities, which generated
86% of the Company's net revenues for fiscal 1995, and had comprised 77% of the
Company's total assets at the end of fiscal 1995. As a result of the sale of
five of the freestanding facilities in May 1996, and one facility in April
1996, the Hospital Division represented only 67% of net revenues for fiscal
1996 and 31% of net revenues for fiscal 1997. See "Sale of Freestanding
Facilities/Continued Operation of Mountain Crest Hospital."
Historically, the Company's principal businesses were the operation of
freestanding behavioral healthcare facilities and the management of behavioral
healthcare programs under contracts with acute care hospitals. The market for
behavioral healthcare has undergone dramatic changes in recent years. Pressure
on providers to reduce costs has resulted in an increase in the development and
utilization of alternatives to long-term in-patient care, and a decrease in the
utilization of in-patient care and reimbursement rates. With market forces
emphasizing managed care approaches to healthcare, this trend is anticipated to
continue.
In response to these market changes and their adverse impact on the
Company's operating results, significant changes have been made in the structure
of the Company's operations over the past several years. The Company made
significant changes in its operations in 1995, 1996 and 1997, including the sale
of six of the Company's seven freestanding behavioral healthcare facilities (see
"Recent Developments"), 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
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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, the Company further refined its strategy to achieve
profitability. The Company is closing or selling extended care operations in
certain states because revenues have not been sufficient to achieve
profitability, and selectively reducing operating and general and administrative
costs and consolidating or outsourcing billing and payroll functions. 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.
SALE OF FREESTANDING FACILITIES/CONTINUED OPERATION OF MOUNTAIN CREST HOSPITAL
Consistent with the Company's decision to focus on its Extended Care
Services Division, during the first six months of 1996 the Company sold six of
its free-standing hospital facilities. In connection with the sale in April 1996
of the Company's Oakview Treatment Center the Company obtained a waiver from
MEDIQ Incorporated ("MEDIQ") of an event of default provision of a note payable
to MEDIQ (the "MEDIQ Note") relating to the sale of the assets of a significant
subsidiary. In order to obtain the waiver, the Company pledged a note receivable
obtained from the purchaser of such facility with an original principal balance
of $1,875,000 as collateral for the Company's obligations under the MEDIQ Note.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
During fiscal 1997, the Company used the remainder of the proceeds from
the sale of five of its free-standing facilities to fund operating losses,
Extended Care Services Division acquisitions and increases in receivables
primarily relating to growth in the Extended Care Services Division. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company continues to operate Mountain Crest Hospital, a 60-bed
psychiatric hospital located in Fort Collins, Colorado, which also operates
seven alternative care programs for adult, adolescent and geriatric patients,
and serves communities in Colorado. The Company commenced operating this
facility in August 1994 pursuant to a sublease agreement. Mountain Crest
Hospital represented 27% of the Company's net revenue in fiscal 1997, 16% in
fiscal 1996 and 14% in fiscal 1995. See "Item 2. Properties." As a result of
Mountain Crest Hospital's positive contribution to the Company's operating
income, the Company has decided not to actively seek a buyer for its sole
remaining hospital, because it continues to contribute to the Company's
revenues and cash flows. The Company currently leases the Mountain Crest real
estate on which the facility is located but is in the process of seeking
financing to purchase the land and building. The Company believes that this
purchase and financing would have a positive impact on profitability and cash
flow, however, there is no assurance that the Company will be successful in
locating an acceptable financing source for this transaction.
Mountain Crest Hospital is subject to compliance with various federal,
state and local statutes and regulations, including requirements relating to
facility use, licensure and inspection requirements,
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licensing or certification requirements of federal, state and local health
agencies and industry accreditation agencies, such as the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"). Mountain Crest Hospital is
JCAHO accredited.
Many states also have statutory requirements, known as certificate of
need laws, intended to avoid the proliferation of unnecessary or under-utilized
healthcare services and facilities by requiring a healthcare facility to obtain
approval prior to offering services or undertaking certain acts. Mountain Crest
Hospital has obtained the necessary certificate of need approval, and the
Company believes it is operating in compliance with the conditions of such
approval. Facilities used for healthcare programs must also comply with
licensing requirements of federal, state and local health agencies, and with the
requirements of municipal building, health and fire codes. In granting and
renewing a facility's license, state health agencies generally consider, among
other factors, the physical condition of the facility, the type of services
offered by the facility, the qualifications of administrative and professional
staff, the quality of professional and other services, and the continuing
compliance of such facility with the laws and regulations applicable to its
operations. Licensing, certificate of need, reimbursement and other applicable
regulations vary by jurisdiction and are subject to change. The Company believes
that the Mountain Crest Hospital is materially in compliance with all applicable
requirements. The Company is not able to predict the impact of future changes in
regulations affecting the industry.
Many healthcare providers receive reimbursement under one or more of
the Medicare or Medicaid programs for behavioral healthcare services. The
Company is reimbursed under such programs for services provided at Mountain
Crest Hospital. In order to receive reimbursement under such programs, each
facility must meet applicable requirements promulgated by the United States
Department of Health and Human Services relating to the type of facility, the
qualifications and requirements of personnel, standards of patient care and
compliance with applicable state and local laws, rules and regulations. The
Company believes that Mountain Crest Hospital, which is currently subject to
such certification, is materially in compliance with all applicable
requirements.
The Medicare prospective payment system uses predetermined
reimbursement rates based upon diagnosis-related groups ("DRGs"). The DRG system
established fixed payment amounts per discharge diagnoses generally provided by
acute care hospitals. Mountain Crest Hospital is currently exempt from the DRG
system. It is possible that, in the future, mental health programs could be
included in the DRG system. The Company is not able to predict the impact, if
any, on its business or operations of such a change in the Medicare
reimbursement system.
Federal law contains certain provisions designed to ensure that
services rendered by healthcare providers to Medicare and Medicaid patients are
medically necessary and meet professionally recognized standards. Those
provisions include a requirement that admissions of Medicare and Medicaid
patients to hospitals must be reviewed in a timely manner to determine medical
necessity. In addition, these provisions state that a hospital may be required
to reimburse the government for the cost of Medicare paid services determined by
a peer review organization to have been medically unnecessary. Mountain Crest
Hospital has quality assurance programs and procedures for utilization review
and retrospective patient care evaluation. Various state and federal laws
regulate the relationships between providers of healthcare services and referral
sources. Among these laws are the Medicare and Medicaid anti-fraud and abuse
provisions (the "Fraud and Abuse Statute"). The Fraud and Abuse Statute
prohibits individuals or entities participating in the Medicare or Medicaid
programs from knowingly and willfully offering, paying, soliciting, or receiving
remuneration in order to induce referrals for items or services
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reimbursed under those programs. The policy objective of this statute is to
ensure that the purpose for a referral is quality of care and not monetary gain
by the referring individual. This prohibition applies to Medicare patients,
Medicaid patients and other beneficiaries of certain federally-funded programs,
and imposes felony criminal penalties and civil sanctions, as well as exclusion
from the Medicare or Medicaid programs, for violations. This provision also sets
forth certain specific exceptions to the general prohibition, and authorizes the
Department of Health and Human Services to promulgate, by regulation, additional
payment practices (known as "safe harbors") which will be immune from
prosecution. In 1991, regulations were issued creating certain "safe harbors"
for relationships between healthcare providers and referral sources. Any
relationship that satisfies the terms of a safe harbor is protected from
criminal prosecution and civil sanctions. Failure to satisfy the requirements of
a safe harbor does not necessarily mean that the relationship is prohibited;
rather, the failure to fit within a safe harbor means the arrangement is not
immune from scrutiny and the possibility of punishment. The Company has
agreements with the physicians who provide professional services at Mountain
Crest Hospital, which generally provide for payments to such persons by the
Company as compensation for their administrative services. The Company believes
that its relationships comply with the Fraud and Abuse Statute provisions and
the safe harbor regulations, and has an on-going compliance monitoring program.
The Omnibus Budget Reconciliation Act of 1993 includes provisions
prohibiting certain physician referrals. These provisions ("Stark II") prohibit
a physician who has a financial relationship with an entity from referring to
that entity for the furnishing of "designated health services" for which payment
would otherwise be made by Medicare or Medicaid. Furthermore, the entity may not
present a claim or bill an individual, third party payor or other entity for
"designated health services" furnished pursuant to such a referral. Inpatient
and outpatient hospital services are specifically included in the definition of
"designated health services."
Although the Fraud and Abuse Statute and Stark II prohibitions apply to
Medicare patients, Medicaid patients and other beneficiaries of certain
federally-funded programs, many state laws extend the prohibition to all payors.
The Company believes its relationships comply with all state and federal
statutes and regulations restricting patient referrals.
There are federal, state and local regulations relating to certain
aspects of the Company's business, including civil commitment of patients to
psychiatric programs and disclosure of information concerning patient
treatments. Many states have adopted "patient bill of rights" regulations which
set forth standards for least restrictive treatment, patient confidentiality,
patient access to mail and telephones, patient access to legal counsel and
requirements that patients be treated with dignity. Moreover, many states have
reporting requirements and procedures. The Company's facility has adopted and
implemented policies and procedures consistent with such regulations.
In recent years, media and public attention has been focused on
allegations of fraudulent practices related to the nature and duration of
patient treatments and related billing practices by certain psychiatric care
providers. These alleged practices have been the subject of federal and state
investigations, as well as legal proceedings. Although not involving the
Company, there is a possibility that such activities and investigations could
have a negative impact on the entire industry. The Company is not able to
determine the extent of such impact, if any, on the Company's business or
operations. Several large companies have suffered financial difficulties
resulting from their psychiatric
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care operations. These companies have been prompted to sell, close or convert to
other uses many facilities throughout the United States.
SALE OF CONTRACT MANAGEMENT BUSINESS
In August 1994, the Company formed a joint venture (Joint Venture) to
combine its contract management business with that of Horizon Mental Health
Services, Inc. (Horizon) of Denton, Texas. The Joint Venture, which was owned
27.5 percent by the Company and 72.5 percent by Horizon, managed both companies'
hospital behavioral health care contracts. The terms of the Joint Venture
provided for the Company's continued ownership of its management contracts and
the assignment to the Joint Venture of the operating responsibilities and
revenues related to such contracts.
In March 1995, Horizon completed its initial public offering, and, in
accordance with the terms of the Joint Venture Agreement, acquired the Company's
interest in the Joint Venture for approximately $9,600,000 (net of related
expenses). The sale resulted in a gain of approximately $500,000 (net of income
taxes of $3,000,000). In connection with the sale, the Company assigned to
Horizon all of its rights and interests in its management contracts, including
related accounts receivable.
MHM was involved in litigation with Horizon involving MHM's right to
certain cash flows as part of the sale of its interest in the Joint Venture. In
May 1997, a court award in the Company's favor was upheld by the Supreme Court
of Delaware, for approximately $459,000. This amount is reported in other income
in 1997.
EXTENDED CARE SERVICES DIVISION
General. The Company's Extended Care Services Division represented
approximately 66% of net revenues for fiscal 1997, 33% for fiscal 1996 and 14%
for fiscal 1995. The increased percentage of revenues generated by this
division resulted from the Company's decision to focus its operations on
opportunities in the Extended Care Services Division primarily as a result of
certain acquisitions completed in 1996 and 1997. Through 1997, the Extended
Care Services Division has not operated profitably overall. Consistent with the
Company's efforts to reduce operating expenses and focus on profitable
operations, the Company is closing or selling extended care operations in
certain states because revenues have not been sufficient to achieve
profitability, and is selectively reducing operating and general and
administrative costs and consolidating or outsourcing billing and payroll
functions. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company believes that the Extended
Care Services Division can operate profitably in the future by effecting these
improvements; however, there can be no assurance that the Company will be
successful or achieve profitability in its Extended Care Services Division. The
Company's strategic growth efforts are currently focused on its Correctional
Services Division. The Company does not anticipate additional acquisitions in
the Extended Care Services Division for the foreseeable future.
The Company's Extended Care Services Division was formed in October
1993 to pursue opportunities to provide on-site care to nursing home residents
and other patients needing less acute care. In November 1993, the Company
acquired the assets of Atlanta-based ICH Services, L.L.C. (successor to HCI
Services, Inc.), which provided behavioral health and other specialized medical
services to residents of extended care facilities, such as nursing homes,
skilled nursing facilities and
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assisted living facilities. In the fourth quarter of fiscal 1997, the Company
decided to dispose of the Florida and North Carolina operations which were a
core part of the HCI acquisition. See Note 6 of Notes to the Consolidated
Financial Statements and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The focus of the Company's on-site medical and behavioral healthcare
service programs is to arrange for the provision of clinically-appropriate
cost-effective care to residents of extended care facilities. The aim of the
programs is to maximize the level of functioning and improve the quality of life
of residents, as well as decrease the frequency and duration of in-patient
treatment.
The market for specialized medical and behavioral healthcare services
for residents of extended care facilities has benefited from adoption of the
Omnibus Budget Reconciliation Act ("OBRA") by the Federal government in 1987 (as
amended in 1989, 1992 and 1996). OBRA mandated that all long-term care
facilities make mental health and other specialized medical services, such as
dental, podiatry and optometry, available to their residents in order for the
facility to continue to be certified for Medicare and Medicaid. OBRA also
created the requirement for Pre-Admission Screening and Annual Resident Review
("PASARR") of nursing home residents to evaluate their physical and mental
health prior to admission and annually thereafter. The 1996 OBRA amendments
repealed the annual review of mentally ill and mentally retarded residents of
nursing facilities but required such facilities to promptly notify appropriate
state authorities after a significant change in the physical or mental condition
of a resident who is mentally ill or mentally retarded and mandated that an
assessment review be conducted of the resident after such notification.
In 1994, the Extended Care Services Division began providing mental
health services to Medicaid patients residing in nursing homes in the State of
Georgia under a contract pursuant to the PASARR Program which, through annual
renewals, continues in effect. This program was created by the State of Georgia
to provide a way for extended care facilities to comply with the OBRA mandate.
The contract with the State of Georgia expires in June 1998. The Company
continues to provide services and earn revenues under this program. However,
there can be no assurance that the Company will be successful in its efforts to
secure a follow on contract award. This contract represented 17% of the
Company's net revenues for fiscal 1997. As of September 30, 1997, the Company
provided services under Georgia's PASARR program to approximately 2,400
residents in 317 nursing homes.
In fiscal years 1995 through 1997 the Company pursued a growth
strategy, primarily through acquisitions, to increase its market share and net
revenues in its Extended Care Services Division. By the end of fiscal 1997, the
Company reevaluated this strategy in light of continuing overall losses in the
Extended Care Services Division, lack of capital resources to support further
growth and better alternative growth opportunities in the Correctional Services
Division. Following such evaluation, the Company has determined to focus its
growth efforts on its Correctional Services Division. The Company does not
anticipate additional acquisitions in its Extended Care Services Division for
the foreseeable future.
In 1995, 1996 and 1997, the Company completed several acquisitions in
the Extended Care Services Division which are described below.
Acquisition of SCC/Subsequent Determination to Discontinue Operations.
In July 1995, the Company's Extended Care Services Division acquired certain
assets of Supportive Counseling Care
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("SCC"). SCC, based in Manhattan Beach, California, is a professional
corporation which provided behavioral healthcare services to residents of
approximately 50 extended care facilities. As consideration for the acquired
assets, the Company paid $500,000 in cash and notes. The Company's Extended Care
Services Division also entered into a 40-year management contract to provide
administrative services to SCC.
In November 1996, the Company decided to discontinue the operations of
SCC based upon SCC's continued operating losses and negative cash flow,
resulting in part from significant delays in Medicare reimbursement. The Company
shut down SCC's operations in early December 1996. Certain equipment was
transferred to other offices in the Company. All other SCC assets were written
off as of September 30, 1996. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Acquisition of Clinic Operations in Massachusetts (MHM Counseling
Services). In December 1995, the Company's Extended Care Services Division
acquired the operations of several behavioral health clinics located in the
metropolitan Boston, Massachusetts area from National Mentor, Inc. As
consideration for the acquired assets, the Company paid $150,000 in cash and
agreed to pay $338,000 in 36 equal monthly installments. At acquisition, the
main clinic in Charlestown, Massachusetts, and the one satellite clinic in
Taunton, Massachusetts, employed approximately 70 behavioral health
professionals, and provided clinical behavioral healthcare services to
approximately 1,400 patients. The Company changed the name of the clinics to MHM
Counseling Services. MHM Counseling Services offers diverse programs designed to
meet the needs of often overlooked and underserved populations: school children,
the mentally impaired and physically disabled, those with chronic medical
illnesses, and older adults. Services can be obtained at a number of convenient
clinic sites across Massachusetts as well as in home-based and outreach
locations, including public schools, nursing homes, vocational centers, day
treatment centers, assisted living facilities, group homes, rehabilitation
hospitals, dialysis centers, and workshops for the developmentally delayed. The
clinics provide scheduling, administration, billing and marketing services.
Acquisition of Extended Care Operations in Massachusetts (Liberty Bay).
Effective as of December 1, 1996, the Company's Extended Care Services Division
acquired, pursuant to an Agreement (the "Liberty Bay Agreement") by and among
the Company, MHM Extended Care Services, Inc., Liberty Bay Colony Health
Services, Inc ("Liberty Bay") and Liberty Management Group, Inc. ("Liberty
Management"), certain assets and contractual rights from Liberty Bay which
constituted Liberty Bay's geropsychiatric management services operations in
Massachusetts. Liberty Bay, a wholly-owned subsidiary of Liberty Management,
provided behavioral healthcare services on a contract basis to residents of
approximately 60 extended care facilities in Massachusetts at the date of
acquisition. The Company combined these operations with MHM Counseling Services
operating under the name "MHM/Bay Colony Counseling Services". See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As consideration for the purchase, the Company paid Liberty Bay
$150,000 in cash and issued a promissory note in the principal amount of
$150,000 (the "Liberty Bay Note"). The purchase price was primarily allocated to
intangible assets. The Liberty Bay Note provides for quarterly interest payments
at an annual rate of 9% and the payment of the principal amount in one
installment on December 1, 1999. The agreement for the acquisition of Liberty
Bay Colony provides for additional consideration based on cash flows. Amounts
payable are calculated annually for a five-year period at twenty percent
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of the aggregate cash flows from all contracts (net of expenses). The agreement
stipulates limitations on the amount of bad debt expense and regional overhead
which may be charged against cash flow. The agreement also stipulates that the
calculation will be made on a contract by contract basis with no adjustment for
contracts in a loss position, except that in the first annual earnout period a
one time adjustment to regional overhead is made for losses on fifteen specific
contracts. The Company currently estimates that it will be required to make
annual earn out payments of approximately $70,000. However, the actual amount
to be paid will depend upon actual cash flows and may vary significantly from
the Company's current estimate.
Acquisition of Extended Care Operations of Apogee - Effective March 31,
1997, the Extended Care Services Division acquired certain assets and
contractual rights related to the long-term care operations of Apogee, Inc. in
Pennsylvania and Tennessee, consisting of contracts with approximately 275
facilities.
As consideration for the purchase, the Company paid $100,000 in cash,
issued a three-year promissory note in the principal amount of $125,000 and
issued 200,000 shares of common stock of MHM Services, Inc. at $.50 per share.
The purchase price was primarily allocated to intangible assets. The note
provides for interest payments at an interest rate of 7% payable quarterly
(except for the first six months which is payable on September 30, 1997) and
annual principal payments over a three year period. The agreement for the
acquisition of Apogee provides for additional consideration based on net cash
collected as defined in the Apogee purchase agreement. The annual earnout is
payable for a five year period based on 20% of net cash collected. Net cash
collected as defined in the agreement means the actual cash collected reduced
for directly related expenses but not including bad debt allowances, corporate
overhead, amortization of purchase price and depreciation expenses. The Company
incurred a loss from these operations for the period of operation from April 1,
1997 to September 30, 1997 and accordingly estimates that no amount of
additional consideration will be due for the first year. The Company currently
estimates that it will be required to pay approximately $50,000 for each
subsequent year in the five-year period. However, the actual amount to be paid
will depend upon actual future cash flow and may vary significantly from the
Company's current estimate.
Operations of the Extended Care Services Division. In general, the
Company's extended care services are provided under annual contracts with
extended care facilities, which are typically cancelable upon thirty days
notice. The Company schedules provider visits to the facilities and handles
billing and administration. The Company's professionals visit the facilities
either on an as-needed basis or at regularly scheduled intervals. The
obligations of the facility are generally limited to providing space in the
facility for the Company's professionals to meet with residents and assisting
the Company in locating residents who may need care. The Company's Extended Care
Services Division does not receive any compensation from the facility. The
services provided by the Company's professionals are provided only as needed by
the residents. The residents are not required by the facility or the Company to
utilize the Company's professionals.
The healthcare professionals providing services under the Company's
programs are either employees of the Company or render their services on an
independent contract basis pursuant to annual agreements with the Company, which
typically are renewed automatically on an annual basis and cancelable by the
Company upon 60 days notice.
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As of December 15, 1997, the Extended Care Services Division (including
the Georgia PASARR contract) had contracts to arrange for professionals
(employed by or under contract with the Company) to provide mental health
services to residents of 870 extended care facilities in the following states:
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State Number of Facilities
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Georgia 442
Delaware 3
Massachusetts 126
New Jersey 6
Pennsylvania 157
Tennessee 136
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Total 870
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The Extended Care Services Division competes with national, regional
and local companies which provide services to residents of extended care
facilities in a manner similar to that of the Company. In addition, the Company
competes with community-based acute care hospitals which operate programs to
serve the needs of residents of extended care facilities, as well as national
hospital chains which have targeted this market for expansion. The Company also
competes with regional and local behavioral healthcare and other medical
professionals (and their affiliated professional corporations) which provide
services in extended care facilities. Many of the Company's competitors are
larger and have greater financial and other resources than the Company. The
Company believes that competition in this business is primarily on the basis of
quality, range of services and availability of professionals.
The business of the Extended Care Services Division is affected by
federal, state and local laws and regulations concerning, among other matters,
professional licensure and reimbursement. Licensing, reimbursement and other
applicable regulations vary by jurisdiction and are subject to change. The
Company is not able to predict the impact of future changes in regulations
affecting the industry. Certain of the services provided by the Company's
professionals to residents of extended care facilities are reimbursed under the
Medicare and/or Medicaid programs. Accordingly, certain of the Company's
relationships and arrangements are subject to compliance with the Medicare and
Medicaid Fraud and Abuse Statute described above. As mentioned, this statute
sets forth certain specific exceptions to the general prohibition of individuals
or entities participating in the Medicare or Medicaid programs from knowingly
and willfully offering, paying or soliciting or receiving payment in order to
induce referrals for items or services reimbursed under those programs, and
authorizes the Department of Health and Human Services to promulgate, by
regulation, additional payment practices (known as "safe harbors") which will be
immune from prosecution. In 1991, regulations were issued creating certain "safe
harbors" for relationships between healthcare providers and referral sources.
Any relationship that satisfies the terms of a safe harbor is protected from
criminal prosecution and civil sanctions. However, failure to satisfy the
requirements of a safe harbor condition does not necessarily mean that the
relationship is prohibited; rather, the failure to fit within a safe harbor
means the arrangement is not immune from scrutiny and the possibility of
prosecution and sanctions. The Company believes that its
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relationships comply with the Fraud and Abuse Statute as well as all other state
and federal statutes and regulations restricting patient referrals.
Most of the Company's Extended Care Services Division's revenues are
generated through fees paid under Medicare insurance arrangements. The Medicare
benefit has a co-insurance allowable feature which is paid according to a set
fee schedule, plus a "co-insurance" amount which is typically the patient's
responsibility. The co-insurance amount is currently 20% of the allowable for
the services. In many states, this co-payment is covered by the Medicaid program
for eligible individuals, up to the amount stipulated by the Medicare fee
schedule. In the Balanced Budget Act of 1997, Congress increased the states'
flexibility in determining how much to pay for these co-payments. Payment levels
can now be determined by the states' Medicaid Program which could be lower than
the Medicare fee schedule. Although it is unclear when these provisions will
take effect, should states decide to lower their co-pay reimbursement levels,
there would be a material adverse effect on the Company's future Extended Care
Services Division revenues.
Current Medicare regulations do not require a physician to certify the
need for outpatient mental health services for each patient (other than for
partial hospitalization treatment). However, these regulations do require that
such services be part of an established plan of treatment. Some of the fiscal
intermediaries administering the Medicare program in specific geographic regions
require a physician's referral and an established plan of treatment to qualify
for reimbursement for mental health services.
Psychiatrists, psychologists, social workers and nurses are required to
be licensed in the state or states in which they practice. Licensure
requirements are administered by state agencies. The Company's screening process
includes confirmation of necessary licensure, and the Company continually
monitors license status, as well as satisfaction of continuing education and
other related requirements.
In certain states, the employment of psychiatrists, psychologists,
other mental healthcare professionals and other medical professionals by
business corporations is a permissible practice. However, many states, including
some states in which the Company operates, prohibit or otherwise limit business
corporations, such as the Company, from providing behavioral health and other
medical services through the direct employment of psychiatrists, psychologists
and other professionals. In such states, the Company contracts with professional
corporations owned by such professionals, and arranges for the provision of such
services. The Company believes that the operations of the Extended Care Services
Division are structured in compliance with such rules.
CORRECTIONAL SERVICES DIVISION
In fiscal 1997, the Company became aware of opportunities to provide
specialized healthcare services to correctional facilities and formed the MHM
Correctional Services Division to pursue opportunities in this market niche. In
February 1997, the Company began to provide dental services under a contract
with Prison Health Services, Inc. ("PHS") to the 5,000 inmates in the Delaware
correctional system. This contract is for a one-year term and is renewable
annually at the option of PHS. In June 1997, the Tennessee Department of
Corrections awarded the Company a three-year contract to provide statewide
mental health services to the Tennessee prison system, consisting of
approximately 12,000 inmates in 22 facilities, for compensation on a per capita
basis. The Company began to provide services under this contract on July 1,
1997. In September 1997, the Georgia Department of Corrections
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<PAGE> 13
awarded the Company a contract with the initial term being the remaining
nine months of the Department's fiscal year, with four additional one year
extensions at the option of the State of Georgia, to provide statewide mental
health services to the Georgia correctional system, consisting of approximately
37,000 inmates in 40 facilities for compensation on a per capita basis. The
Company began to provide services under this contract on October 1, 1997.
The Georgia and Tennessee correctional contracts make the Company one
of the largest providers of mental health services to inmates in the United
States. The Company is actively pursuing other correctional contract
opportunities. Proposals are submitted pursuant to a competitive bid process,
and there can be no assurance that the Correctional Services Division will win
other contracts. Net revenues from the Correctional Services Division
approximated 3% of the Company's total net revenues for fiscal 1997. However,
such net revenues do not include any revenues from the Company's contract with
the State of Georgia and only three months of revenues from the contract with
the State of Tennessee. Total annual revenues of the Company's three
correctional contracts are estimated to be $10.4 Million.
The Company believes that there are significant opportunities to grow
the Correctional Services Division based on the size of the market, federal and
state mandates for mental health services to prisoners and the increasing trend
for states to outsource mental health services. Accordingly, the Company has
decided to focus its growth efforts on this division. Approximately 30% of
current inmate healthcare spending in the United States is provided by private
contractors. Privatization of inmate healthcare services continues to increase
due to growing acceptance, success of privatization efforts and recognition that
managed care practices are applicable in correctional system settings. In the
past, many states have hired psychologists and other mental health workers on a
contract basis to provide these same services to their inmates. However, the
Internal Revenue Service has recently been threatening to impose payroll tax
requirements on some states which has accelerated the trend to outsource such
services.
The Company believes that there are several advantages to providing
health care services on a capitation basis including lack of billing/collection
costs, more immediate cash flow, fewer bad debts, less government regulations
and fewer compliance issues. At the same time, there are financial risks
associated with entering into capitated arrangements for health care. These
include penetration levels (number of patients treated as a percentage of the
total population), increasing costs and usage of psychotropic medications,
including the introduction of new or improved and more costly medications, and
the availability and cost of labor. If the Company were unable to cover the
costs of these capitated contracts within the agreed upon capitation rates,
significant losses could be incurred. There are also risks unique to providing
health care services in a correctional setting including psychotropic drug use
and abuse and the high degree of litigation which is often present in a
correctional system.
As a result of the Company's continued negative operating results, lack
of cash and availability of capital and a November 1997 unfavorable judgment in
the MEDIQ litigation (See Item 3 - Legal Proceedings), the Company has been
experiencing severe difficulty generating sufficient cash flows from operations
to meet its obligations and sustain its operations. The report of the Company's
independent auditors on the Company's consolidated financial statements as of
and for the 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. See "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 2 of
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<PAGE> 14
the Notes to Consolidated Financial Statements. 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 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 November
1997 unfavorable judgment against the Company in the MEDIQ litigation will not
result in the Company's filing for reorganization under Chapter 11 of the
bankruptcy laws.
EMPLOYEES
As of December 15, 1997, the Company had 158 full-time employees and 87
part-time employees engaged in the operations of the Extended Care Services
Division and 41 full-time employees in the Correctional Services Division and 60
full-time employees and 6 part-time employees engaged in the operations of the
Mountain Crest freestanding facility. In addition, as of such date, the Company
had 11 employees engaged in corporate and administrative operations. In an
effort to help reduce costs, since June 30, 1996, the Company leased its
employees under a contract with Administaff Companies, Inc. ("Administaff").
Under the contract, Administaff and the Company are each responsible for
compliance with specified laws and for specified purposes but also are
considered co-employers for certain other purposes. The Company pays Administaff
a fee based upon a percentage of the Company's gross payroll. The Company and
Administaff agreed to terminate their contract as of January 31, 1998. All
employees covered by the Administaff arrangement will become legal employees of
the Company effective as of that date.
The Company's employees include healthcare professionals, such as
psychiatrists, psychologists, social workers, nurses, counselors and
occupational and activities therapists, and employees engaged in corporate,
finance, marketing, administration and other support positions. None of the
Company's employees are covered by a collective bargaining agreement, and the
Company considers its employee relations to be good. The Company's relationships
with certain healthcare professionals are pursuant to contracts with each
professional establishing independent contractor relationships.
COMPANY HISTORY
The Company was incorporated in 1981 in the Commonwealth of Virginia,
and in October 1994 changed its state of incorporation to Delaware. From 1986 to
August 1993, the Company was a wholly-owned subsidiary of MEDIQ Incorporated
("MEDIQ"). In August 1993, MEDIQ distributed the stock of the Company to MEDIQ's
shareholders.
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<PAGE> 15
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements based on management's
current plans and expectations relating to 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, lack of adequate cash flow to continue to fund
ongoing operations, retire debt obligations as they become due, pay the MEDIQ
Note if the Company's efforts to overturn the MEDIQ judgment are unsuccessful,
the amount and timing of receipt of third party payor settlements, government
reimbursement, risks associated with industry consolidation and acquisitions and
competition.
ITEM 2. PROPERTIES
The Company's executive offices are located in Vienna, Virginia
pursuant to a lease expiring in December 1998. Pursuant to such lease, the
Company pays annual rent of approximately $23 per square foot on approximately
6,600 square feet, with annual increases in an amount equal to 3% of the prior
year's base rent. In connection with the operation of its Extended Care Services
and Correctional Services Divisions, the Company maintains five regional offices
which requires an annual lease commitment of approximately $250,000 per year.
These leases expire from 1999 to 2004. Mountain Crest Hospital is operated
pursuant to a sublease expiring in 2000 and requires base rental payments of
$20,000 monthly and additional rent equal to 6.5% of the net revenues of the
facility and 50% of the facility's excess cash flows (as defined in the lease
agreement). The Company believes that its facilities are adequate to carry on
its business as currently conducted.
ITEM 3. 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's suit against MEDIQ and as a
result, judgment has been entered in MEDIQ's favor for the full
15
<PAGE> 16
principal balance and related accrued interest of $11,259,000 and other expenses
of $357,000. The Court also denied the Company's request for a stay in the entry
or execution of judgment.
The Company has filed an appeal with the Appellate Division of the New
Jersey Supreme Court. The Company also has filed a motion in the Appellate
Division seeking summary reversal of the Court's action. 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 have been limited to date. 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 financing, which is 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.
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 on
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 is currently in the process of evaluating the merits of
this lawsuit.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended September 30, 1997.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK HOLDER
MATTERS
MARKET INFORMATION
The following table sets forth, for the periods indicated, the high and
low sales prices for the Company's common stock, par value $.01 per share (the
"Common Stock"), as listed on the American Stock Exchange ("AMEX").
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended September 30, 1997:
First Quarter $1.063 $.375
Second Quarter .813 .125
Third Quarter .938 .625
Fourth Quarter 1.875 .875
Year ended September 30, 1996:
First Quarter $3.750 $1.750
Second Quarter 2.625 1.000
Third Quarter 1.875 1.250
Fourth Quarter 1.500 .750
</TABLE>
Because of the Company's financial condition and operating results, on
November 26, 1997, the Company received notification from the AMEX that the
Company's common stock will be delisted due to the Company's continuing failure
to meet the AMEX listing guidelines and the acceleration of the MEDIQ Note.
Although the Company has appealed the delisting, there can be no assurance that
the Company will be able to forestall the delisting of the Common Stock by AMEX.
Further, given the Company's financial condition, it is unlikely that the
Company could satisfy the standards for listing on another exchange or Nasdaq.
The delisting of the Common Stock by AMEX would adversely affect the price of
the Company's Common Stock and the ability of the Company's stockholders to sell
their shares.
COMMON STOCKHOLDERS
As of December 30, 1997, there were approximately 1,555 holders of
record of the Company's Common Stock.
DIVIDENDS
The Company has never declared or paid any cash dividends and does not
expect to pay cash dividends for the foreseeable future. The declaration of
dividends in the future will at all times be subject to the sole discretion of
the Company's Board of Directors, and will depend upon the operating results,
capital requirements and financial position, general economic conditions and
other pertinent conditions or restrictions relating to any future financing.
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<PAGE> 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented below has
been derived from the audited financial statements of the Company. This data is
qualified in its entirety by reference to, and should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere herein.
STATEMENT OF OPERATIONS DATA (IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------
1997 1996 1995(1) 1994(1) 1993
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 20,851 $ 34,670 $ 41,109 $ 48,286 $ 46,667
Costs and expenses:
Operating 14,875 25,765 28,918 33,895 31,760
General and administrative 5,760 9,718 10,085 10,644 8,448
Provision for bad debts 3,467 6,320 4,467 2,009 1,444
Depreciation and amortization 369 1,034 1,603 1,617 1,826
Loss - sale of freestanding -- 4,440 -- -- --
facilities (2)
Writedown of long-term assets (3) 696 461 2,228 -- --
Restructuring charges (4) -- -- -- 966 --
Management fees - MEDIQ (6) -- -- -- -- 1,111
Other (credits) charges:
Equity in earnings of Joint Venture -- -- (835) (292) --
Gain on sale of Joint Venture -- -- (3,542) -- --
Interest expense - MEDIQ 1,042 1,097 1,171 932 834
Interest expense - other 93 290 366 389 328
Other (income) expense-net (5) (662) (233) (223) (33) (50)
---------- ---------- ----------- ----------- -----------
Income (loss) before income tax
expense (benefit), extraordinary item
and cumulative effect of a change in
accounting principle (4,789) (14,222) (3,129) (1,841) 966
Income tax (benefit) expense -- (308) 894 (525) 451
Extraordinary item (7) -- (463) -- -- --
Cumulative effect of a change in
accounting principle (8) -- -- -- (732) --
---------- ---------- ----------- ----------- -----------
Net (loss) income $ (4,789) $ (14,377) $ (4,023) $ ( 2,048) $ 515
========== ========== =========== =========== ===========
(Loss) earnings per share $ (1.40) $ (4.34) $ (1.22) $ (.63) $ .17
========== ========== =========== =========== ===========
Weighted average shares outstanding 3,411 3,310 3,310 3,267 2,980
========== ========== =========== =========== ===========
</TABLE>
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<PAGE> 19
BALANCE SHEET DATA
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------
1997 1996 1995(1) 1994(1) 1993
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ (11,158) $ 2,566 $ 5,923 $ 485 $ 7,377
Total assets 11,414 15,669 30,283 41,900 37,364
Long term debt, less current maturities 1,456 257 2,422 716 4,532
Due to MEDIQ, less current maturities (9) -- 9,967 10,733 11,500 11,500
Stockholders' (deficit) equity (8,270) (3,582) 10,795 14,818 15,546
</TABLE>
See Notes to Selected Consolidated Financial Data
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<PAGE> 20
Notes to Selected Consolidated Financial Data:
(1) Effective August 1, 1994, the Company formed a joint venture ("Joint
Venture") to combine its contract management business with that of
Horizon Mental Health Services, Inc. ("Horizon"). The Joint Venture,
which was owned 27.5% by the Company and 72.5% by Horizon, managed both
companies' hospital behavioral health care contracts. The operating
results of the contract management business were included in the
Company's results of operations through the commencement of the Joint
Venture on August 1, 1994. On March 20, 1995, Horizon completed its
initial public offering and, in accordance with the terms of the Joint
Venture Agreement, acquired the Company's interest in the Joint Venture
for approximately $9,600,000 (net of related expenses). The sale
resulted in a pre-tax gain of $3,542,000 (approximately $500,000 net of
taxes).
(2) The Company completed the sale of six of its seven freestanding
behavioral health facilities in 1996 and recorded a loss of $4,440,000
consisting primarily of the write off of intangibles related to the
facilities of $3,184,000, loss on the sale of certain property, plant,
and equipment aggregating $319,000, transaction expenses of $568,000,
severance expenses of $349,000, and other expenses of $680,000, offset
by estimated Medicare depreciation recapture income of approximately
$660,000.
(3) In the fourth quarter of 1997, the Company decided to dispose of the
Florida and North Carolina operations of its Extended Care Services
Division and close its Atlanta, Georgia billing office. In connection
with these decisions, the Company determined that goodwill relating to
the acquisition of HCI was permanently impaired and wrote it down to
estimated value resulting in a charge of $696,000. In the fourth
quarter of 1996, the Company wrote off the assets related to the
discontinued operations of SCC including property, plant and equipment
and goodwill resulting in a charge of $461,000. In the fourth quarter
of 1995, the Company determined that the recoverability of certain of
the assets, including property, plant and equipment and goodwill,
related to one of the Company's freestanding facilities, was impaired,
other than temporarily. Accordingly, the carrying value of such assets
was reduced to estimated fair value, resulting in a charge of
$2,228,000.
(4) In connection with the commencement of the Joint Venture, the Company
recorded a restructuring charge of $966,000 related to the downsizing
of its corporate activities.
(5) In May 1997, the Supreme Court of Delaware upheld a lower court award
of $459,000 to the Company from Horizon relating to the rights of the
Company to receive certain cash flows as part of the sale of its
interest in the joint venture to Horizon resulting in additional income
in fiscal 1997.
(6) These management fees represent primarily an allocation of MEDIQ's
claimed overhead, as well as claimed costs to provide services to the
Company. In anticipation of the August 1993 distribution of the
Company's stock to MEDIQ's stockholders, MEDIQ discontinued charging
management fees to the Company effective April 1, 1993. The Company had
continued to obtain certain services from MEDIQ pursuant to a services
agreement which terminated in 1996. Fees for services rendered by MEDIQ
were $30,000, $38,000 and $140,000 in 1997, 1996 and 1995,
respectively, and were included in general and administrative expenses.
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<PAGE> 21
(7) The Company recorded an extraordinary item in the amount of $463,000
consisting primarily of costs related to the early retirement of the
Company's long-term debt and the write-off of associated loan
acquisition costs.
(8) This amount represents the cumulative effect of a change in the
Company's method of accounting for certain preopening costs and certain
costs incurred in securing management contracts.
(9) The Company's long term debt obligations to MEDIQ were reclassified as
a current liability in 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements, and notes thereto, included elsewhere in this report.
GENERAL
The Company made significant changes in its operations in 1995, 1996
and 1997, including the sale of six of the Company's seven freestanding
behavioral healthcare facilities (see "Recent Developments"), 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, the Company further refined its strategy to
achieve profitability. The Company is closing or selling extended care
operations in certain states because revenues have not been sufficient to
achieve profitability, and selectively reducing operating and general and
administrative costs and consolidating or outsourcing billing and payroll
functions. 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 September 30, 1997, the Company's
current liabilities exceeded its current assets by $11,158,000. 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, Law
Division, Camden County, entered a judgment against the Company and in favor of
MEDIQ. The adverse decision dismissed the Company's suit against MEDIQ and as a
result, judgment has been entered in MEDIQ's favor for the full principal
balance of the MEDIQ Note and related accrued interest of $11,259,000 and other
expenses of $357,000. The Court also denied the Company's request for a stay in
the entry or execution of judgment.
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<PAGE> 22
The Company has filed an appeal with the Appellate Division of the New
Jersey Supreme Court. The Company also has filed a motion in the Appellate
Division seeking summary reversal of the Court's action. 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 have been limited to date. 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 financing, which is 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.
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 requirements, restructure the MEDIQ obligation, 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 November 1997 unfavorable judgment against the Company in
the MEDIQ litigation will not result in the Company's filing for reorganization
under Chapter 11 of the bankruptcy laws.
RECENT DEVELOPMENTS
The Company incurred aggregate net losses of $23,189,000 for the three
years ended September 30, 1997, and had a stockholders' deficit of $8,270,000 as
of September 30, 1997. The Company is experiencing difficulty in generating
sufficient cash flows to meet its obligations and sustain its operations. At
September 30, 1997, current liabilities exceeded current assets by $11,158,000,
primarily due to the MEDIQ obligation, which is discussed in detail below. See
Note 2 of Notes to Consolidated Financial Statements. The report of the
independent auditors for the fiscal year ended September 30, 1997 includes an
explanatory paragraph which states that such conditions raise substantial doubt
about the Company's ability to continue as a growing concern.
OPERATING STRATEGY. Historically, the Company's principal business was
the operation of freestanding behavioral health-care facilities and the
management of behavioral health-care programs under contracts with acute care
hospitals. The market for behavioral heath-care has undergone dramatic changes
in recent years, resulting in pressure on providers to reduce costs and lower
utilization of in-patient care and reimbursement rates.
In response to these market changes and their adverse impact on the
Company's operating results, the Company has changed its business dramatically
in recent years. In 1996, the Company sold six of its seven freestanding
behavioral health facilities, which had generated approximately 51% of net
revenues for fiscal 1996, deciding to focus on the growth of its Extended Care
Services Division. The Company continues to own one freestanding behavioral
health facility (Mountain Crest), which continues to generate operating cash
flow. The Company currently leases the real estate on which the
22
<PAGE> 23
Mountain Crest facility is located but is seeking financing to purchase the land
and building. There can be no assurance that the Company will be successful in
locating an acceptable source of financing for this transaction.
In fiscal 1996, the Company determined that it would focus its
operating strategy on growth opportunities in its Extended Care Services
Division and other specialty on-site health-care services. During fiscal 1997,
the Company made several acquisitions in its Extended Care Services Division.
See Note 5 of Notes to Consolidated Financial Statements. However, based upon
the Company's liquidity and capital resources, there can be no assurance the
Company will have sufficient resources to be able to continue to expand this
division. Through 1997, the Extended Care Services Division has not operated
profitably overall. Consistent with the Company's efforts to reduce operating
expenses and focus on profitable operations, the Company is closing or selling
extended care operations in certain states where revenues have not been
sufficient to operate on a profitable scale, and is selectively reducing
operating and general and administrative costs and consolidating or outsourcing
billing and payroll functions. See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company believes
that the Extended Care Services Division can operate profitably in the future by
effecting these improvements; however, there can be no assurance that the
Company will be successful or achieve profitability in its Extended Care
Services Division. The Company does not anticipate additional acquisitions in
the Extended Care Services Division in the foreseeable future.
In fiscal 1997, the Company further refined its operating strategy by
forming a Correctional Services Division to provide specialized health services
to inmates in correctional facilities. In fiscal 1997, the Company was awarded
capitated contracts with the States of Tennessee and Georgia to provide mental
health services to inmates in their state correctional facilities. The Company
began performing under these contracts on July 1, 1997 (Tennessee) and October
1, 1997 (Georgia). The Company intends to pursue additional contract
opportunities in the correctional service area, although there can be no
assurance that it will have sufficient resources to do so.
In a continuing effort to improve the Company's financial condition and
operating results for both the immediate future and the longer term, the Company
continues to seek to reduce operating expenses, seek more profitable business
opportunities, finance its working capital requirements, restructure the MEDIQ
obligation, raise additional capital and improve its cash flows. There can be no
assurance the Company's efforts will result in positive effects on the Company's
results of operations or financial condition.
SOURCES OF FINANCING. The Company continues to seek sources of
financing to fund operating costs and expenses. Effective March 11, 1997, the
Company's subsidiary, MHM Extended Care Services, Inc., obtained a revolving
credit facility in an amount up to $4,000,000. The amount eligible for
borrowings on the credit facility is limited based on the amount of the
Company's qualified accounts receivable. In October 1997, the Company borrowed
$500,000 under a line of credit with NationsBank, N.A., which debt is
guaranteed by certain officers and directors of the Company. The line of credit
permits maximum borrowings by the Company of $500,000, and bears interest at a
rate 1/4% below prime rate. As of December 31, 1997, the Company had drawn the
full $500,000. See Note 17 of Notes to Consolidated Financial Statements. As of
September 30, 1997, the Company had cash and cash equivalents available of
$195,000. The Company has continued to experience significant negative cash
flow from operations. Although the
23
<PAGE> 24
Company continues to seek additional sources of debt and equity financing, 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 obligation
to MEDIQ. See "Liquidity and Capital Resources."
ACQUISITIONS. Effective as of March 31, 1997, the Company's Extended
Care Services Division acquired certain assets and contractual rights related to
the long-term care operations of Apogee, Inc. in Pennsylvania and Tennessee,
consisting of contracts with approximately 275 facilities. As consideration for
the purchase, the Company paid $100,000 in cash, issued a three-year promissory
note in the principal amount of $125,000 and issued 200,000 shares of common
stock of MHM Services, Inc. at $.50 per share. The purchase price was primarily
allocated to intangible assets. The note provides for interest payments on
September 30, 1997 for the first two quarters and quarterly thereafter at an
annual interest rate of 7% and annual principal payments in the amount of
approximately $41,668. The agreement for the acquisition of Apogee provides for
additional consideration based on net cash collected as defined in the Apogee
purchase agreement. The annual earnout is payable for a five year period based
on 20% of net cash collected. Net cash collected as defined in the agreement
means the actual cash collected reduced for directly related expenses but not
including bad debt allowances, corporate overhead, amortization of purchase
price and depreciation expenses. The Company incurred a loss from these
operations for the period of operations from April 1, 1997 to September 30,
1997 and accordingly estimates that no amount of additional consideration will
be due for the first year. The Company currently estimates that it will be
required to pay approximately $50,000 for each subsequent year in the five-year
period. However, the actual amount to be paid will depend upon actual future
cash flow and may vary significantly from the Company's current estimate.
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
constitute Liberty Bay's geropsychiatric management services operations in
Massachusetts. The Company has integrated these operations under the name
"MHM/Bay Colony Counseling Services." As a result of this acquisition and the
continued development of MHM/Bay Colony Counseling Services, as of September 30,
1997, the Company served approximately 90 extended care facilities 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 "Liberty Bay Note"). The purchase price was primarily allocated to
intangible assets. The Liberty Bay Note provides for quarterly interest payments
at an annual rate of nine percent and the payment of the principal amount in one
installment on December 1, 1999. The agreement for the acquisition of Liberty
Bay Colony provides for additional consideration based on cash flows. Amounts
payable are calculated annually for a five year period at twenty percent of the
aggregate cash flows from all contracts (net of expenses). The agreement
stipulates limitations on the amount of bad debt expense and regional overhead
which may be charged against cash flow. The agreement also stipulates that the
calculation will be made on a contract by contract basis with no adjustment for
contracts in a loss position, except that in the first annual earnout period a
one-time adjustment to regional overhead is made for losses on fifteen specific
contracts. The Company currently estimates that it will be required to make
annual earnout payments under the contract of approximately $70,000. However,
the actual amount to be paid will depend upon actual future cash flow and may
vary significantly from the Company's current estimate.
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<PAGE> 25
OVERVIEW OF REVENUE SOURCES
In the Extended Care Services Division, the Company is paid primarily
by third-party payors based on established contractual rates. In certain
instances, the Company also is paid by the patient for all or a portion of the
services. The Company recognizes net revenues from extended care services at the
estimated net realizable amounts from third-party payors, principally state and
federal health insurers (including Medicare and Medicaid) and to a lesser extent
patients, less amounts payable to professionals for the provision of such
services. Estimated amounts recognized by the Company are reconciled at the time
the payment for the services provided is actually received.
The Company's Extended Care Services Division generates revenues from
administrative services for physicians and other healthcare professionals
providing care to residents of extended care facilities. Such revenues
represented approximately 66%, 33% and 14% of total net revenues in 1997, 1996
and 1995, respectively. The increased revenues resulted from the Company's
decision to focus its operations on opportunities in the Extended Care
Services Division primarily as a result of certain acquisitions in 1996 and
1997.
The Company's Correctional Services Division generates revenues from
the provision of specialty health care services to the inmates of correctional
systems primarily at capitated rates based on inmate census. These revenues
represented approximately 3% of total 1997 net revenues. In two of the three
contracts in the Correctional Services Division, the Company is paid by the
state on a monthly basis at contractually agreed-upon rates applied to the
number of inmates in the prison system during the period. Net revenues in this
division are reported on an accrual basis at the capitated rate applied to the
number of inmates.
In the Hospital Division, at the Mountain Crest facility, the Company
is paid at a fixed-rate for services provided based on the allowable cost of
such services. Such payments are generally made by third-party payors,
principally Medicare, but also including Medicaid and other health-care
insurers. The Company has agreements with third-party payors that provide for
payments for patient services at amounts which differ from its established
rates. For Medicare, the Company is reimbursed for cost reimbursable items at a
tentative rate with final settlement determined after submission of annual cost
reports by the Company and audits thereof by the Medicare fiscal intermediary.
The Company is in the process of negotiating final settlements for prior
reporting periods relating to filed costs reports for the six freestanding
facilities sold in 1996. The Company continues to file cost reports for its
Mountain Crest facility.
Patient service revenues from the Company's freestanding facilities
were based on covered charges billed primarily to third party payors, including
Medicare, Medicaid and other government-sponsored programs. These accounted for
31%, 67% and 86% of the Company's total net revenues in 1997, 1996 and 1995,
respectively. Such revenues can be significantly affected by changes in
utilization and reimbursement rates. Typically, payments from such payors are
made at amounts less than the amounts charged, based on existing contractual
relationships or reimbursement methodologies. The Company records net patient
service revenues based upon expected reimbursement. Certain government-sponsored
programs pay primarily on a cost reimbursement basis. The Company is reimbursed
for cost reimbursable items at a tentative rate, with final settlement generally
determined several years after submission of fiscal year cost reports and audits
thereof by the fiscal intermediary. Differences between amounts recorded as
tentative settlements and final audited amounts are reflected as
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<PAGE> 26
adjustments to contractual allowances in the year in which settlement is
determined. The Company also receives patient service revenues under payment
agreements with commercial insurance carriers, health maintenance organizations
and preferred provider organizations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship that components of the Company's results of operations
bear to net revenues.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Costs and expenses:
Operating 71.4 74.3 70.3
General and administrative 27.7 28.0 24.5
Provision for bad debts 16.6 18.2 10.9
Depreciation and amortization 1.8 3.0 3.9
Loss on sale of freestanding facilities -- 12.8 --
Writedown of long-term assets 3.3 1.3 5.4
Other (credits) charges:
Equity in earnings of Joint Venture -- -- (2.0)
Gain on sale of Joint Venture -- -- (8.6)
Interest expense - MEDIQ 5.0 3.2 2.8
Interest expense - other .4 .8 .9
Other (income) expense - net (3.2) (.6) (.5)
------ ------- ------
Loss before income taxes and extraordinary item (23.0) (41.0) (7.6)
Income tax (benefit) expense -- (.9) 2.2
------ ------- ------
Loss before extraordinary item (23.0) (40.1) (9.8)
------
Extraordinary item - loss on early extinguishment of debt -- (1.3) --
------ ------- ------
Net loss (23.0)% (41.4)% (9.8)%
====== ======= ======
</TABLE>
26
<PAGE> 27
Fiscal Year 1997 Compared to Fiscal Year 1996
Net revenues for the year ended September 30, 1997, were $20,851,000 as
compared to $34,670,000 for the prior year, a decrease of $13,819,000 or 40%,
primarily reflecting the reduction in net revenues due to the 1996 sales of the
Company's freestanding facilities. The Company sold Oakview Treatment Center on
April 5, 1996 and sold five other freestanding facilities on May 31, 1996. The
Company continues to operate one facility, the Mountain Crest facility. As a
result, net revenues from freestanding facilities were $6,482,000 for 1997
compared to $23,255,000 for 1996. Net revenues from the Extended Care Services
Division were $13,737,000 in 1997 as compared to $11,415,000 in 1996, an
increase of 20%. This increase is due principally to the revenues recognized
from two acquisitions made by the Company in its Extended Care Services
Division during fiscal 1996; Liberty Bay (December 1996) and Apogee (March
1997). In the fourth quarter of 1997, the Company decided to dispose of its
extended care operations in Florida and North Carolina. As a result,
approximately $595,000 of net revenues reported in 1997 will not continue in
future years. Net revenues for 1997 also included $632,000 relating to the
Correctional Services Division, which commenced operations in February 1997.
Operating expenses for the year ended September 30, 1997, were
$14,875,000, as compared to $25,765,000 in the prior year, a decrease of
$10,890,000 or 42%. This decrease was attributable primarily to the sale of six
of the Company's seven freestanding behavioral healthcare facilities, offset in
part by increased costs in the Company's Extended Care Services Division and
Correctional Services Division which commenced operations in fiscal 1997.
General and administrative expenses for the year ended September 30,
1997, were $5,760,000 as compared to $9,718,000, a decrease of $3,958,000 or
41%. This decrease was attributable primarily to the sale of six of the
Company's seven freestanding behavioral healthcare facilities, offset by
increases in costs in the Company's Extended Care Services Division and
Correctional Services Division.
The provision for bad debts for 1997 decreased to $3,467,000 as
compared to $6,320,000 for 1996. As a percentage of net revenues, bad debt
expense was 17% in 1997 and 18% in 1996. The 1996 bad debt expense was high due
to the provision for bad debts relating to SCC (See Fiscal Year 1996 Compared to
Fiscal 1995). The 1997 bad debt expense was high due to reserves against
receivables remaining from the sale of freestanding facilities and reserves
against Extended Care Services Division receivables in the Company's Georgia
billing office. In the fourth quarter of 1997, the Company shut down its Georgia
billing office and intends to outsource all of its billing and collection
efforts to minimize further bad debts.
The Company continues to take steps to reduce the operating and general
and administrative costs associated with its Extended Care Services Division,
including consolidation and outsourcing of billing and payroll functions,
closing certain regional offices and disposing of operations in North Carolina
and Florida. However, there can be no assurance that these efforts will not
impact revenue adversely or result in profitable operations.
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<PAGE> 28
Depreciation and amortization decreased to $369,000 in 1997 from
$1,034,000 in the prior year. This decrease of 64% was due to the sale of the
freestanding facilities which had a much higher base of fixed assets than
ongoing operations.
Loss on sale of freestanding facilities were transactions occurring
solely in 1996.
Interest expense - other decreased in 1997 to $93,000 from $290,000 in
1996, a decrease of 68%. This decrease is primarily attributable to the
retirement of debt relating to the freestanding facilities sold in 1996.
Other income for 1997 increased by $429,000 due to the May 1997 award
to the Company of certain cash flows due it from the sale of its interest in the
joint venture to Horizon.
The total net loss for 1997 was $4,789,000 as compared to a loss of
$14,377,000 for 1996. The 1996 loss was higher than 1997 due to operating losses
from the freestanding facilities through the date of sale and the loss from the
sale of freestanding facilities.
Fiscal Year 1996 Compared to Fiscal Year 1995
Net revenues for 1996 were $34,670,000 as compared to $41,109,000 for
the prior year, a decrease of $6,439,000 or 16%, reflecting an increase in net
revenues from the Extended Care Services Division, more than offset by decreased
net revenues from the freestanding facilities. Net revenues from freestanding
facilities were $23,255,000 (including $5,694,000 from Mountain Crest Hospital,
the Company's remaining freestanding facility) in 1996, a decrease of
$12,116,000, or 34%, as compared to the prior year. The decrease in net revenues
resulted primarily from the sale of five of the freestanding facilities on May
31, 1996 and the sale of Oakview Treatment Center on April 5, 1996. Net revenues
from the Extended Care Services Division were $11,415,000 in 1996, as compared
to $5,738,000 in the prior year. This increase is the result of net revenues of
$4,448,000 (as compared to $1,317,000 in 1995) attributable to an acquisition in
July 1995 (SCC) and $1,456,000 attributable to an acquisition in December 1995
(MHM Counseling Services), as well as increased net revenues under a contract
with the State of Georgia to provide mental health services to Medicaid patients
in nursing homes. SCC operations were discontinued in early December 1996. See
provision for bad debts discussion below.
Operating expenses for 1996 were $25,765,000 as compared to $28,918,000
in the prior year. This decrease was attributable to the sale of six of the
Company's seven freestanding behavioral healthcare facilities, offset by
increases in costs associated with the expansion of the Extended Care Services
Division. The level of operating costs of the Extended Care Services Division,
together with the increased provision for bad debts (described below) and
general and administrative expenses, have had an adverse impact on operating
results.
General and administrative expenses for 1996 were $9,718,000 or 28% of
net revenues, as compared to $10,085,000 or 25% of net revenues, in the prior
year. This decrease was attributable to the sale of six of the Company's seven
freestanding behavioral healthcare facilities, offset by increases in costs
associated with the expansion of the Extended Care Services Division. The level
of operating costs of the Extended Care Services Division, together with the
increased provision for bad debts (described below) and general and
administrative expenses, have had an adverse impact on operating results.
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<PAGE> 29
The provision for bad debts for 1996 increased to $6,320,000 as
compared to $4,467,000 in the prior year. The increase in the provision for bad
debts resulted primarily from the operations of SCC (acquired in July 1995)
which are subject to Medicare reimbursement limits, with the remaining charges
billed to the patients or other third party payors. In March 1996, the Company
became aware that SCC's claims, as well as claims submitted by other industry
providers in the region, for reimbursement under the Medicare program were being
subjected to a pre-payment review process by the Medicare fiscal intermediary in
Southern California commencing in April 1996. Under applicable Medicare rules,
therefore, SCC was then required to include specified supporting documentation
with its claims for reimbursement. After the commencement of this prepayment
review, SCC received an increased number of denials and requests for additional
information. In addition, SCC received notice of a proposed suspension of
Medicare payments based upon a review of certain claims by such fiscal
intermediary. Based upon the number of denials, the Company's assessment of
available documentation and knowledge of, and experience with, the appeal
process, the Company increased its provision for bad debts by approximately
$1,000,000 in the third and fourth quarters of fiscal 1996. The allowance for
doubtful accounts represents approximately 90% of the Company's net accounts
receivable balance from SCC's operations as of September 30, 1996. In November
1996, the Company decided to discontinue the operations of SCC based upon SCC's
continued operating losses and negative cash flow, resulting in part from
significant delays in Medicare reimbursement. The Company shut down SCC's
operations in early December 1996. The Company continues to pursue an appeal of
the denied claims. However, there is no assurance that the Company will collect
anything from these claims, and in fiscal 1997, the Company fully reserved the
remaining balance of SCC receivables.
Depreciation and amortization expense for 1996 was $1,034,000 as
compared to $1,603,000 in the prior year. The decrease in depreciation and
amortization expense was attributable to the sale of the six freestanding
facilities.
The Company completed the sale of six of its seven freestanding
behavioral health facilities in 1996 and recorded a loss of $4,440,000
consisting primarily of the write off of intangibles related to the facilities
of $3,184,000, loss on the sale of certain property, plant, and equipment
aggregating $319,000, transaction expenses of $568,000, severance expenses of
$349,000, and other expenses of $680,000, offset by estimated Medicare
depreciation recapture income of approximately $660,000.
In the fourth quarter of 1996, the Company wrote off the assets related
to the discontinued operations of SCC including property, plant and equipment
and intangibles resulting in a charge of $461,000. This compares to a write down
of $2,228,000 in 1995, which related primarily to the assets of one of the
freestanding behavioral health facilities which were reduced to estimated value
based upon an independent appraisal.
Interest expense for 1996 was $1,387,000, as compared to $1,537,000 in
the prior year. The decrease is primarily attributable to the extinguishment of
the working capital line of credit and paydown on the MEDIQ note.
Pretax loss for 1996 before extraordinary item was $14,222,000 as
compared to pretax loss of $3,129,000 in the prior year. The pretax loss for the
current period included a loss of $4,440,000 related to the sale of the
freestanding behavioral health facilities, increases in the bad debt provision
related to SCC reimbursement denials of approximately $1,000,000 and write off
of long-term assets of $461,000 related to the closing of SCC in December 1996.
The prior period included a pretax gain of $3,542,000 on the sale of the
Company's interest in the Joint Venture as well as earnings of $835,000 related
to the
29
<PAGE> 30
Joint Venture offset by the writedown of certain assets of the Company's
freestanding behavioral facilities in the amount of $2,228,000. In addition, the
increase in costs associated with expansion of the Extended Care Services
Division, as well as the increased provision for bad debts, had an adverse
impact on operating results for 1996.
In 1996, the Company recorded an extraordinary item in the amount of
$463,000, consisting primarily of costs related to the early retirement of the
Company's long-term debt and the subsequent write off of associated loan
acquisition costs.
MAJOR CUSTOMER
The Company has two contracts with the State of Georgia. The Extended
Care Services Division provides behavioral healthcare services to more than
2,000 Medicaid patients residing in nursing homes under the Pre-Admission
Screening and Annual Resident Review (PASARR) contract with the State of
Georgia. The PASSAR contract expires June, 1998. In the year ended September 30,
1997, the PASARR contract accounted for 17% of net revenues. MHM Correctional
Services was awarded a multi-year contract (single year with four optional
extension years) with the State of Georgia to provide mental health services to
the inmates of the state's correctional facilities on a capitated basis. This
contract begins on October 1, 1997. This contract is projected to provide
approximately $8 million of annual revenue. Both of these contracts are subject
to the procurement process of the State of Georgia, and there is no assurance as
to the expectation of future revenues earned under these contracts.
IMPACT OF INFLATION
Behavioral health programs are labor intensive. As wages and employee
benefit costs increase during inflationary periods, and outside suppliers pass
cost increases through to the Company, costs rise proportionately. The Company
has implemented systems to monitor and control increases in expenses.
Government-sponsored programs, including Medicare and Medicaid, which represent
a substantial portion of the Company's revenues, and contractual arrangements
with other third party payors, may limit the Company's ability to obtain
corresponding revenue increases. Additionally, the Company's capitated contracts
with the correctional systems of Georgia and Tennessee are subject to an
inflation risk if psychotropic drug costs exceed the contracted increase in the
capitation rate the Company receives.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Specific application programs which the Company uses and which may be
impacted by this problem include billing related software and the Company's
accounting system. The Company has not yet evaluated the impact of the Year 2000
problem, and therefore there can be no assurance that this issue will not
materially affect future financial results, or cause reported financial
information not to be necessarily indicative of future operating results or
future financial condition. The Company plans to undertake an assessment of the
Year 2000 issue during fiscal 1998.
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<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of
$195,000, compared to $3,305,000 at September 30, 1996. The significant decrease
in available cash is the result of the Company using cash to fund continued
operating losses.
Cash used in operating activities was $3,151,000 for 1997, as compared
to $4,882,000 for the prior year. Cash was primarily used in 1997 to fund a
significant increase of $5,000,000 in accounts receivable and estimated third
party settlements and to fund the provision for bad debts of $3,467,000. 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. The Company also used $647,000 of cash
to fund investing activities, principally acquisitions in its Extended Care
Services Division ($427,000).
Net cash provided by financing activities in 1997 of $688,000 consisted
primarily of borrowings under the line of credit extended to the Company's
subsidiary by Healthcare Financial Partners. The Company does not presently
anticipate significant capital expenditures during fiscal 1998.
In March 1997, the Company's wholly owned subsidiary, MHM Extended Care
Services, Inc., obtained a revolving credit facility in an amount up to
$4,000,000. The amount eligible for borrowings on the credit facility is limited
based on the amount of the Company's qualified accounts receivable. At September
30, 1997, the Company had outstanding borrowings of $1,122,000 which was
approximately equal to what the Company was eligible to borrow at that date.
Borrowings under the line of credit bear interest at a rate of prime plus 2 and
1/4 percent (10.75% at September 30, 1997). Interest is payable monthly on
outstanding borrowings and the line of credit expires in March, 1999. See Note
10 of Notes to Consolidated Financial Statements.
In October 1997, the Company borrowed $500,000 under a line of credit
with NationsBank, N.A., which debt is guaranteed by certain officers and
directors of the Company. The line of credit permits maximum borrowings by the
Company of $500,000, and bears interest at a rate 1/4% below prime rate. As of
December 31, 1997, the Company had drawn the full $500,000. See Note 17 of Notes
to Consolidated Financial Statements.
As of September 30, 1997, the Company had cash and cash equivalents of
$195,000. The Company has continued to experience significant negative cash flow
from operations. Although the Company continues to seek additional sources of
debt and equity financing, 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 fiduciary 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 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
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<PAGE> 32
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.
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's suit against MEDIQ and as a
result, judgment has been entered in MEDIQ's favor for the full principal
balance and related accrued interest of $11,259,000 and other expenses of
$357,000. The Court also denied the Company's request for a stay in the entry
or execution of judgment.
The Company has filed an appeal with the Appellate Division of the New
Jersey Supreme Court. The Company also has filed a motion in the Appellate
Division seeking summary reversal of the Court's action. 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 have been limited to date. If the Company is
unable to obtain a stay from the Appellate Division, 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 is 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.
Cash flows from operations are not sufficient to permit payment of the
MEDIQ judgment or repayment of the MEDIQ Note. As of September 30, 1997, the
Company's current liabilities exceeded its current assets by $11,158,000. At
such date, current liabilities include $11,497,000 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.
MEDIQ has pledged the MEDIQ Note as collateral for certain of its indebtedness
to a third party unaffiliated with MEDIQ or the Company. In the event of default
by MEDIQ on such indebtedness, such third party would obtain all of MEDIQ's
rights under the MEDIQ Note, including the right to the payment of principal and
interest as and when due in accordance with the terms of the MEDIQ Note.
As a result of the Company's continued negative operating results and
reduced collections of accounts receivable from certain government-funded
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. In an effort to
improve this situation, the Company sold most of its freestanding facilities and
is taking steps to reduce operating expense, attempting to raise additional
capital, and working to improve its cash flows. See "Recent Developments." With
respect to its efforts to reduce operating expenses, the Company recently
decided to close extended care services provided in the States of North Carolina
and Florida, and may close or sell additional operations in its Extended Care
Services Division. The Company also recently closed a billing office in Georgia.
See "Recent Developments." The Company's liquidity could also be improved by:
(i) the collection of additional outstanding receivables (ii) significant
reductions in overhead; and (iii) obtaining additional capital and/or financing
sources. However, to date the
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<PAGE> 33
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. In the event that the Company is unable to
enhance its liquidity, the Company may be required to renegotiate the terms of
its financial obligations, significantly curtail its level of operations or
otherwise significantly reduce operating expenses. The Company has had
discussions with potential investors with the objective of raising additional
capital. To date, such efforts have been unsuccessful. The Company believes that
it will be unable to obtain additional capital without first obtaining
modifications to its financial obligations to MEDIQ. If the Company is not
successful in its appeal of the MEDIQ judgment or negotiating restructured terms
with MEDIQ, it may be forced to file for reorganization under Chapter 11 of the
bankruptcy laws.
As described above, the Company had $195,000 of available cash at
September 30, 1997, is fully drawn on its line of credit with Healthcare
Financial Partners and also fully drawn on its line of credit with NationsBank.
As discussed above, the Company intends to continue to pursue opportunities to
reduce operating expenses, increase its profitable activities and obtain
additional financing in an effort to improve its liquidity, financial condition
and results of 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. The Company is currently
not able to pay the MEDIQ judgment entered in November of 1997, or to post a
bond to secure the judgment pending the Company's appeal. If the Company is not
successful in obtaining modification of its obligations to MEDIQ and is not able
to secure additional financing, the Company currently anticipates that it will
be forced to file for reorganization under the bankruptcy laws.
This report includes forward-looking statements based on management's
current plans and expectations, relating to, among other matters, the MEDIQ
litigation, the proposed business activities of the Company, and the proposed
activities of the Company relating to improving its liquidity. Such statements
involve risks and uncertainties which may cause actual future activities and
results of operations to be materially different from that suggested in this
report, including, among others, the use of available cash resources to fund
continued operating losses, the risks associated with industry consolidation and
acquisitions, the need to manage growth and the outcome of the MEDIQ litigation.
33
<PAGE> 34
ITEM 8 FINANCIAL STATEMENTS
Independent Auditors' Report - 1997 35
Independent Auditors' Report - 1996 and 1995 36
Consolidated Statements of Operations -
Three Years Ended September 30, 1997 37
Consolidated Balance sheets -
September 30, 1997 and 1996 38
Consolidated Statements of Stockholders' Deficit -
Three Years Ended September 30, 1997 39
Consolidated Statements of Cash Flows -
Three Years Ended September 30, 1997 40-41
Notes to Consolidated Financial Statements 42-65
34
<PAGE> 35
Independent Auditors' Report
Board of Directors and Stockholders
MHM Services, Inc.:
We have audited the accompanying consolidated balance sheet of MHM Services,
Inc. and subsidiaries as of September 30, 1997, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
then ended. Our audit also included the financial statement schedule listed in
the Index at Item 14. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and the financial statement schedule based on our audit. The accompanying
consolidated financial statements of MHM Services, Inc. as of September 30, 1996
and 1995, were audited by other auditors whose report thereon dated December 30,
1996, expressed an unqualified opinion with an explanatory paragraph describing
an uncertainty about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MHM
Services, Inc. and subsidiaries as of September 30, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
aggregated net losses of $23,189,000 for the three years ended September 30,
1997, has a stockholders' deficit of $8,270,000 as of September 30, 1997 and is
experiencing difficulty in generating sufficient cash flows to meet its
obligations and sustain its operations, as discussed in Note 2 to the
consolidated financial statements. The Company is also involved in litigation
regarding debt of approximately $12 million. A judgment has been entered against
the Company for the full amount. The Company plans to file an appeal, however,
if they do not prevail and the lender pursues collection, the Company may be
required to file for reorganization under Chapter 11 of the bankruptcy laws (see
Note 10). Such conditions raise substantial doubt as to the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
McLean, Virginia
November 26, 1997
35
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
MHM Services, Inc.
Vienna, Virginia
We have audited the accompanying consolidated balance sheet of MHM Services,
Inc. and subsidiaries as of September 30, 1996, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
two years in the period ended September 30, 1996. Our audits also included the
financial statement schedule for the two years ended September 30, 1996 listed
in the Index at Item 14. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MHM Services, Inc. and
subsidiaries as of September 30, 1996, and the results of their operations and
their cash flows for each of the two years in the period ended September 30,
1996 in conformity with generally accepted accounting principles. Also, in
our opinion, the financial statement schedule for the two years ended September
30, 1996, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
aggregated net losses of $20,448,000 for three years ended September 30, 1996
and has a stockholders' deficiency of $3,582,000 as of September 30, 1996 and
is experiencing difficulty in generating sufficient cash flows to meet its
obligations and sustain its operations. Such conditions raise substantial doubt
as to the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Washington, D.C.
December 30, 1996
<PAGE> 37
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
=======================================================================================================
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net patient service revenue $ 16,986,000 31,400,000 38,442,000
Premium revenue 3,865,000 3,270,000 2,667,000
- ------------------------------------------------------------------------------------------------------
20,851,000 34,670,000 41,109,000
- ------------------------------------------------------------------------------------------------------
Costs and expenses:
Operating 14,875,000 25,765,000 28,918,000
General and administrative 5,760,000 9,718,000 10,085,000
Provision for bad debts 3,467,000 6,320,000 4,467,000
Depreciation and amortization 369,000 1,034,000 1,603,000
Loss on sale of freestanding facilities (note 4) - 4,440,000 -
Writedown of long-term assets (note 6) 696,000 461,000 2,228,000
Other (credits) charges:
Equity in earnings of Joint Venture (note 3) - - (835,000)
Gain on sale of Joint Venture (note 3) - - (3,542,000)
Interest expense - MEDIQ (note 13) 1,042,000 1,097,000 1,171,000
Interest expense - other 93,000 290,000 366,000
Other income - net (note 3) (662,000) (233,000) (223,000)
- ------------------------------------------------------------------------------------------------------
25,640,000 48,892,000 44,238,000
- ------------------------------------------------------------------------------------------------------
Loss before income taxes and extraordinary item (4,789,000) (14,222,000) (3,129,000)
Income tax (benefit) expense (note 12) - (308,000) 894,000
- ------------------------------------------------------------------------------------------------------
Loss before extraordinary item (4,789,000) (13,914,000) (4,023,000)
Extraordinary item - loss on early extinguishment
of debt (note 10) - (463,000) -
- ------------------------------------------------------------------------------------------------------
Net loss $ (4,789,000) (14,377,000) (4,023,000)
- ------------------------------------------------------------------------------------------------------
Loss per share:
Loss before extraordinary item $ (1.40) (4.20) (1.22)
Extraordinary item - (.14) -
- ------------------------------------------------------------------------------------------------------
Net loss $ (1.40) (4.34) (1.22)
- ------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 3,411,000 3,310,000 3,310,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
==============================================================================================================================
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 195,000 3,305,000
Accounts receivable, less allowances of $5,514,000 and $4,404,000 in 1997 and 1996,
respectively (note 10) 4,491,000 4,565,000
Prepaid expenses 103,000 237,000
Income taxes refundable - 662,000
Estimated third-party payor settlements (note 7) 1,910,000 2,616,000
Other current assets 352,000 183,000
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 7,051,000 11,568,000
Property, plant, and equipment, net (note 8) 531,000 538,000
Restricted cash 450,000 306,000
Notes receivable, net (note 4) 1,039,000 1,229,000
Other intangibles, net of accumulated amortization
of $247,000 and $104,000 in 1997 and 1996, respectively 873,000 230,000
Deferred rent 416,000 218,000
Other assets 288,000 205,000
Goodwill, net of accumulated amortization of $297,000 and $188,000 in 1997 and 1996,
respectively (notes 5 and 6) 766,000 1,375,000
- ------------------------------------------------------------------------------------------------------------------------------
$ 11,414,000 15,669,000
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 975,000 805,000
Accrued payroll and related expenses 908,000 583,000
Accrued expenses - MEDIQ (note 13) 1,019,000 321,000
Estimated third-party payor settlements (note 7) 2,187,000 4,500,000
Other accrued expenses (note 9) 2,400,000 1,833,000
Current maturities of long-term debt (note 10) 10,720,000 960,000
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 18,209,000 9,002,000
Long-term debt (note 10):
MEDIQ - 9,967,000
Other 1,456,000 257,000
Other liabilities 19,000 25,000
- ------------------------------------------------------------------------------------------------------------------------------
19,684,000 19,251,000
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' deficit:
Preferred stock ($.01 par value; authorized: 5,000,000; issued and outstanding: none) - -
Common stock ($.01 par value; authorized: 15,000,000; issued and
outstanding: 3,513,000 and 3,310,000 in 1997 and 1996, respectively) 35,000 33,000
Additional paid-in capital 41,798,000 41,699,000
Accumulated deficit (50,103,000) (45,314,000)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (8,270,000) (3,582,000)
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 11)
$ 11,414,000 15,669,000
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
===========================================================================================================================
Common stock
--------------------------- Additional
Shares paid-in Accumulated
issued Amount capital deficit Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1994 3,310,000 $ 33,000 41,699,000 (26,914,000) 14,818,000
Net loss - - - (4,023,000) (4,023,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 3,310,000 33,000 41,699,000 (30,937,000) 10,795,000
Net loss - - - (14,377,000) (14,377,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 3,310,000 33,000 41,699,000 (45,314,000) (3,582,000)
Issuance of common stock in connection
with Apogee acquisition (note 5) 200,000 2,000 98,000 - 100,000
Exercise of stock options 3,000 - 1,000 - 1,000
Net loss - - - (4,789,000) (4,789,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 3,513,000 $ 35,000 41,798,000 (50,103,000) (8,270,000)
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
==================================================================================================================================
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,789,000) (14,377,000) (4,023,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 369,000 1,034,000 1,603,000
Provision for bad debts 3,467,000 6,320,000 4,467,000
Provision (benefit) for deferred income taxes - 500,000 (215,000)
Loss on sale of freestanding facilities - 4,440,000 -
Undistributed earnings from Joint Venture - - (835,000)
Gain on sale of Joint Venture - - (3,542,000)
Writedown of long-term assets 696,000 461,000 2,228,000
Other - - 57,000
Increase (decrease) from changes in:
Accounts receivable and estimated third-party settlements, net (5,000,000) (723,000) (2,596,000)
Income taxes refundable 662,000 (662,000) -
Prepaid and other assets (118,000) 10,000 969,000
Deferred rent (198,000) (52,000) (166,000)
Accounts payable 170,000 (867,000) (514,000)
Accrued payroll and related expenses 325,000 (283,000) 118,000
Accrued expenses - MEDIQ 698,000 (56,000) (616,000)
Other accrued expenses 567,000 (554,000) (271,000)
Income taxes payable - (73,000) 988,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,151,000) (4,882,000) (2,348,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of freestanding facilities and Joint Venture - 9,099,000 9,609,000
Capital expenditures for property, plant and equipment (178,000) (273,000) (631,000)
Distributions from Joint Venture - - 1,000,000
Collections on notes receivable 190,000 - -
Acquisitions of businesses (427,000) (150,000) (100,000)
Deferred costs - 69,000 -
Restricted cash (144,000) (306,000) -
Other assets (82,000) (30,000) -
Other liabilities (6,000) (6,000) (589,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (647,000) 8,403,000 9,289,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings 4,110,000 - 1,679,000
Debt repayments (3,393,000) (3,280,000) (6,271,000)
Other (29,000) (20,000) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 688,000 (3,300,000) (4,592,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,110,000) 221,000 2,349,000
Cash and cash equivalents:
Beginning of year 3,305,000 3,084,000 735,000
- ----------------------------------------------------------------------------------------------------------------------------------
End of year $ 195,000 3,305,000 3,084,000
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 358,000 1,398,000 1,577,000
Income taxes (refunded) paid, net (662,000) (71,000) 121,000
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
==================================================================================================================================
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of non-cash investing and financing activities:
Property and equipment and other assets financed with capital leases
and long-term debt $ - 63,000 487,000
Acquisition - portion financed with long-term debt 275,000 338,000 -
Notes received from sale of freestanding facility - 1,400,000 -
Liabilities assumed - BHC - 1,160,000 -
Issuance of stock - acquisition of Apogee 100,000 - -
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997, 1996 and 1995
================================================================================
(1) Organization and Summary of Significant Accounting Policies
Organization
MHM Services, Inc., through its wholly-owned subsidiaries, MHM Extended Care
Services, Inc. (Extended Care Services Division), MHM Correctional Services,
Inc. (Correctional Services Division), and MHM of Colorado, Inc., (collectively
the Company), offers, arranges for and manages specialty healthcare services
primarily in institutional settings. Since its founding, the Company's goal has
been to offer the highest quality, cost-effective care in the industry.
In October 1986, the Company was acquired by MEDIQ Incorporated (MEDIQ).
Effective August 31, 1993, MEDIQ distributed to its shareholders the shares of
the Company's common stock.
Consolidation
The accompanying consolidated financial statements include the accounts of MHM
Services, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents include all liquid investments with purchased maturities of
three months or less.
Accounts Receivable
The Company's accounts receivable from its freestanding facility and Extended
Care Services Division are due from its patients and other third-party payors,
primarily Medicare (56 percent), Medicaid (18 percent), Blue Cross (3 percent)
and various commercial insurance companies and other (23 percent). The Company's
accounts receivable from its Correctional Services Division are due from the
states which MHM has contracted. The Company grants credit without requiring
collateral to support these receivables. The Company maintains an allowance for
potential losses from uncollectible accounts.
(Continued)
42
<PAGE> 43
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(1) Continued
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Capital leases are recorded at
the present value of future lease payments. The Company provides for
depreciation and amortization on a straight-line basis as follows:
Buildings and improvements 30 years
Furniture, fixtures and equipment 5-8 years
Equipment under capital lease 5-8 years
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired and is amortized on a straight-line basis over twenty years (see
note 6).
Carrying Value of Long-Term Assets
At September 30, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of. The Company evaluates the carrying
value of long-term assets, including property, plant, and equipment, goodwill
and other intangible assets, based upon current and anticipated net income and
undiscounted cash flows, and recognizes an impairment when it is probable that
such estimated future net income and/or cash flows will be less than the
carrying value of the asset. Measurement of the amount of impairment, if any, is
based upon the difference between carrying value and fair value (see note 6).
Restricted Cash
Restricted cash consists of certificates of deposit which secure performance
bonds obtained as required by a correctional contract with the state of
Tennessee and an extended care contract with the state of Georgia.
Other Intangible Assets
Other intangible assets consist primarily of contractual rights and covenants
not to compete. These assets are amortized on a straight-line basis over ten to
twenty years.
(Continued)
43
<PAGE> 44
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(1) Continued
Patient Service Revenue Recognition
Net patient service revenues are reported at the estimated net realizable
amounts from patients and third-party payors for services rendered, including
estimated retroactive adjustments under reimbursement agreements with
third-party payors. Retroactive adjustments are accrued on an estimated basis in
the period in which the related services are rendered and adjusted in future
periods as final settlements are determined.
Premium Revenue Recognition
The Company has agreements with two states to provide mental health services to
prison inmates and nursing home residents. Under these agreements, the Company
receives monthly capitated payments based on the number of participants,
regardless of services actually performed by the Company.
Charity Care
The Company has a policy of providing charity care at its behavioral health
facilities to patients who are unable to pay. Such patients are identified based
on financial information obtained from the patient and subsequent analysis.
Since the Company does not expect payment, estimated charges for charity care
are not included in revenues. The amount of charity care provided, at
established rates, was $12,000, $682,000, and $1,081,000 for 1997, 1996, and
1995, respectively.
Malpractice Insurance Coverage
Medical malpractice claims are covered by a medical malpractice insurance
policy, which is a claims made policy with a prepaid five year extended
reporting period included.
Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the year. Stock options have not been included because their
effect would be antidilutive.
(Continued)
44
<PAGE> 45
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(1) Continued
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, third-party
payor settlements, accounts payable and accrued expenses are equivalent to their
carrying value because of the short-term maturity of those instruments. The fair
values of the Company's long-term debt (see note 10) are considered to be
equivalent to their carrying values based upon consideration of borrowings with
similar credit ratings, collateral and maturities. The fair value of the
Company's notes receivable is equivalent to its carrying value which was
estimated at net realizable value (see note 4).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also effect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The more
significant estimates include the allowance for potential losses from
uncollectible accounts receivable, estimates of assets and liabilities due
from/to third-party payors, the estimated net realizable value of notes
receivable, and the estimated impairment of goodwill.
Income Taxes
Income taxes are accounted for in accordance with Financial Accounting Standards
Board Statement No. 109 (Statement 109). Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled.
Stock Option Plan
Prior to October 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued
(Continued)
45
<PAGE> 46
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(1) Continued
to Employees, and related interpretations. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On October 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Reclassifications
Certain items in the prior years' financial statements have been reclassified to
conform with the 1997 presentation.
(2) Liquidity
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the continuation of operations, realization of
assets and liquidation of liabilities in the ordinary course of business. The
Company has incurred aggregated net losses of $23,189,000 for the three years
ended September 30, 1997, and has a stockholders' deficit of $8,270,000 as of
September 30, 1997. The Company is experiencing difficulty in generating
sufficient cash flows to meet its obligations and sustain its operations. At
September 30, 1997, current liabilities exceed current assets by $11,158,000
primarily due to the MEDIQ litigation as discussed in note 10. As further
discussed in note 10, on November 21, 1997, a judge of the New Jersey superior
court entered a 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 which represented approximately 51 percent of net revenues for fiscal
1996. These facilities were sold 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 but is in the
process of seeking
(Continued)
46
<PAGE> 47
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(2) Continued
financing to purchase the land and building. The Company believes that this
purchase and financing will have a positive impact on profitability and cash
flow, however, there is no assurance that the Company will be successful in
locating an acceptable financing source for this transaction.
The Company has made several acquisitions in its Extended Care Services Division
(see note 5). 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, as well as
making selective reductions in operating and general and administrative costs
and consolidating or outsourcing 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. obtained a $4,000,000
revolving credit facility to finance its receivables. Borrowings on the credit
facility are limited to qualified accounts receivable. As discussed in note 17,
the Company borrowed $500,000 in October 1997 on a line of credit guaranteed by
certain officers and directors of the Company.
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 November 1997 unfavorable summary judgment against the
Company in the MEDIQ litigation will not result in the Company's filing for
reorganization under Chapter 11 of the bankruptcy laws.
(Continued)
47
<PAGE> 48
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) Joint Venture
In August 1994, the Company formed a joint venture (Joint Venture) to combine
its contract management business with that of Horizon Mental Health Services,
Inc. (Horizon) of Denton, Texas. The Joint Venture, which was owned 27.5 percent
by the Company and 72.5 percent by Horizon, managed both companies' hospital
behavioral health care contracts. The terms of the Joint Venture provided for
the Company's continued ownership of its management contracts and the assignment
to the Joint Venture of the operating responsibilities and revenues related to
such contracts.
In March 1995, Horizon completed its initial public offering, and, in accordance
with the terms of the Joint Venture Agreement, acquired the Company's interest
in the Joint Venture for approximately $9,600,000 (net of related expenses). The
sale resulted in a gain of approximately $500,000 (net of income taxes of
$3,000,000). In connection with the sale, the Company assigned to Horizon all of
its rights and interests in its management contracts, including related accounts
receivable.
MHM was involved in litigation with Horizon involving MHM's right to certain
cash flows as part of the sale of its interest in the Joint Venture. In May
1997, a court award in the Company's favor was upheld by the Supreme Court of
Delaware, for approximately $459,000. This amount is reported in other income in
1997.
(4) Sale of Freestanding Facilities
On April 5, 1996, the Company sold Oakview Treatment Center to a non-profit
corporation affiliated with a privately-owned operator of two psychiatric
hospitals for $50,000 in cash and $2,150,000, evidenced by two promissory notes
payable to the Company. For financial statement purposes, the notes were
recorded using the cost recovery method of accounting at an estimated net
realizable value of $1,400,000. This value was equal to the net book value of
the Oakview Treatment Center immediately prior to the sale. The notes are
payable in monthly installments of principal and interest (at prime) based on a
15-year amortization, with the remaining principal due in five years (or earlier
under certain circumstances). In connection with obtaining a waiver from MEDIQ
of an event of default provision of the MEDIQ Note relating to the sale of the
assets of a significant subsidiary, the Company pledged one of the notes
receivable
(Continued)
48
<PAGE> 49
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(with an original principal balance of $1,875,000) as collateral for the
Company's obligations under the MEDIQ Note (see note 10).
On May 31, 1996, the Company sold certain assets, consisting principally of five
of its freestanding behavioral healthcare facilities, to Behavioral Healthcare
Corporation, pursuant to an Asset Purchase Agreement (the BHC Agreement), dated
as of January 24, 1996, and amended as of April 11, 1996, by and between the
Company and BHC (the BHC Sale). The facilities were sold to BHC for
approximately $10,209,000, consisting of $9,049,000 in cash and $1,160,000 in
assumed liabilities of the freestanding facilities (reflecting post-closing
adjustments by both parties).
The Company used a portion of the proceeds from the BHC Sale for (i) the
repayment of the principal amount outstanding under the Company's revolving
credit facility ($2,515,000, including related early termination fees of
$174,000); (ii) the extinguishment of a portion of the indebtedness not assumed
by BHC at the closing of the sale ($692,000, including early termination fees of
$139,000), which consisted primarily of indebtedness secured by certain of the
assets (particularly a facility and certain equipment) acquired by BHC; and
(iii) the funding of the Company's obligation to complete repairs to two of the
freestanding facilities sold to BHC in the amount of $284,000. During 1997, the
Company used the remainder of the proceeds to fund operating losses, Extended
Care Services Division acquisitions and increases in receivables primarily
relating to growth in the Extended Care Services Division.
The pretax loss on the sale of six of its seven freestanding behavioral health
facilities in 1996 was $4,440,000 consisting primarily of the write off of
intangibles related to the facilities of $3,184,000, loss on the sale of certain
property, plant, and equipment aggregating $319,000, transaction expenses of
$568,000, severance expenses of $349,000, and other expenses of $680,000, offset
by estimated Medicare depreciation recapture income of approximately $660,000.
(5) Acquisitions
HCI Services
In November 1993, the Company acquired substantially all of the assets and
assumed certain liabilities of Atlanta-based ICH Services, L.L.C. (ICH)
(successor to HCI Services, Inc.), which provides behavioral health and other
specialized medical services under annual contracts with extended care
facilities. The operating results are included in the Company's consolidated
(Continued)
49
<PAGE> 50
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(5) Continued
results of operations from the date of acquisition. The purchase price consisted
of 330,000 shares of the Company's common stock, as well as certain additional
consideration payable, in cash or additional shares of the Company's common
stock at the option of the former ICH members, after the third anniversary of
the acquisition (November 18, 1996) in an amount equal to approximately 20
percent of the appraised fair market value of the acquired operations.
To date, neither the Company nor ICH has requested an appraisal of the acquired
operations as provided for in the purchase agreement. Both parties have
negotiated to modify the terms of the additional consideration without reaching
any definitive agreements. The progress of future negotiations is uncertain.
If no agreement is reached, the Company will be required to comply with the
terms of the original agreement. The Company believes that the value of the
acquired assets has significantly declined since the acquisition date based on
prior and ongoing operational losses as well as increasing regulatory and
economic pressures inherent in the extended care services business. Therefore
the Company believes that it will be able to meet its obligation to fund the
additional consideration, and the amount estimated to be payable under the terms
of the original agreement of $158,000 has been accrued as of September 30, 1997,
in the consolidated financial statements. However, if an appraisal results in a
value significantly in excess of the Company's expectation and ICH members
demand payment in cash, the Company could be forced into a bankruptcy filing as
a result of insufficient funding. In any event, the issuance of additional stock
to satisfy the Company's obligation could have a dilutive effect on the
Company's outstanding common stockholders.
Supportive Counseling Care
In July 1995, the Company acquired certain assets of Supportive Counseling Care
(SCC) of Manhattan Beach, California, a provider of behavioral healthcare
services to extended care facilities, for $500,000, and entered into a 40 year
management contract to provide administrative services to SCC. The operating
results of the acquired business are included in the Company's consolidated
results of operations from the date of acquisition.
This business was discontinued in December 1996 (see note 6).
(Continued)
50
<PAGE> 51
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(5) Continued
MHM Counseling Services
In December 1995, the Company's Extended Care Services Division acquired the
behavioral healthcare clinic operations of National Mentor, Inc. located in
Charlestown and Taunton, Massachusetts. The Company changed the name of the
clinics to MHM Counseling Services. The purchase price included cash of $150,000
and a $338,000 term loan payable in 36 monthly installments. The purchase price
was allocated primarily to intangible assets. The operating results of the
acquired business are included in the Company's consolidated results of
operations from the date of acquisition.
Liberty Bay
Effective as of December 1, 1996, the Company's Extended Care Services Division
acquired, pursuant to an Agreement (the Liberty Bay Agreement) by and among the
Company, MHM Extended Care Services, Inc., Liberty Bay Colony Health Services,
Inc. (Liberty Bay) and Liberty Management Group, Inc. (Liberty Management),
certain assets and contractual rights from Liberty Bay which constituted Liberty
Bay's geropsychiatric management services operations in Massachusetts. The
Company has integrated these operations with MHM Counseling Services and the
combined operations from the date of acquisition operate under the name "MHM/Bay
Colony Counseling Services", and, as a result of the acquisition and continued
development, serve approximately 90 extended care facilities.
As consideration for the purchase, the Company paid Liberty Bay $150,000 in cash
and issued a promissory note in the principal amount of $150,000. The 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. Such
additional consideration is calculated annually by the Company.
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.
(Continued)
51
<PAGE> 52
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(5) Continued
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. Such additional consideration is calculated
annually by the Company.
(6) Writedown of Long-Term Assets
In fiscal 1995, the Company determined that the recoverability of certain of the
assets, including property, plant and equipment and goodwill, related to one of
the Company's freestanding behavioral health facilities was impaired, other than
temporarily. Accordingly, the carrying value of such assets was reduced to the
estimated fair value, resulting in a charge of $2,228,000 based upon an
independent appraisal.
In November 1996, the Company decided that its SCC operation was to be
discontinued because of its continuing losses. The Company shut down operations
in early December 1996. As a result, the carrying value of all other assets
related to SCC, primarily intangibles, have been written off resulting in a
charge of $461,000 in the year ended September 30, 1996.
In September 1997, the Company decided to dispose of the Florida and North
Carolina operations of its Extended Care Services Division and close its
Atlanta, Georgia billing office. In connection with these decisions, the Company
determined that the recoverability of goodwill relating to the HCI acquisition
(note 5) was permanently impaired. The Company evaluated the carrying value of
goodwill based on discounted cash flow analysis and estimated disposal values.
As a result, the carrying value of goodwill and other intangibles relating to
these operations were written down by $696,000.
(Continued)
52
<PAGE> 53
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) Third-Party Payors
The Company has agreements with third-party payors that provide for payments for
patient services at amounts which differ from its established rates. The Company
is in the process of negotiating final settlements for prior reporting periods
relating to filed cost reports for the six freestanding behavioral health
facilities sold in 1996. The Company continues to file cost reports for its
Mountain Crest facility.
During 1997, tentative and final settlements with all third-party payors for
cost reporting periods prior to 1997 have resulted in an adjustment to increase
net patient service revenue by approximately $965,000.
A summary of the payment arrangements with major third party payors follows.
Medicare
Inpatient nonacute services, certain outpatient services and defined capital
costs related to Medicare beneficiaries are paid primarily on a cost
reimbursement basis. The Company is reimbursed for cost reimbursable items at a
tentative rate with final settlement determined after submission of annual cost
reports by the Company and audits thereof by the Medicare fiscal intermediary.
Other Third-Party Payors
The Company has also entered into payment agreements with certain commercial
insurance carriers, health maintenance organizations and preferred provider
organizations. The basis for payment to the Company under these agreements
includes prospectively determined rates per discharge, discounts from
established charges and prospectively determined daily rates. Services rendered
to Blue Cross subscribers are paid based upon the provisions of individual plans
and include payment of predetermined rates or a percentage of charges.
(Continued)
53
<PAGE> 54
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(8) Property, Plant and Equipment
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Buildings and improvements $ 29,000 18,000
Furniture, fixtures and equipment 994,000 836,000
Equipment under capital lease 323,000 314,000
- ------------------------------------------------------------------------------
1,346,000 1,168,000
Less accumulated depreciation and amortization 815,000 630,000
- ------------------------------------------------------------------------------
$ 531,000 538,000
==============================================================================
</TABLE>
Depreciation and amortization expense related to property, plant and equipment
was $185,000, $735,000, and $1,272,000 for 1997, 1996 and 1995, respectively.
(9) Other Accrued Expenses
Other accrued expenses includes the following:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Accrued rent $ 255,000 218,000
Accrued refunds 218,000 345,000
Accrued professional fees 860,000 677,000
Accrued miscellaneous taxes 254,000 223,000
Other accrued expense 813,000 370,000
- -------------------------------------------------------------
$ 2,400,000 1,833,000
=============================================================
</TABLE>
(10) Long-Term Debt
MEDIQ Note
(Continued)
54
<PAGE> 55
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(10) Continued
In connection with the spin-off of the Company by MEDIQ, its former corporate
parent, on August 31, 1993, the Company executed a five-year note (the MEDIQ
Note) for the balance of unpaid payment obligations imposed on the Company by
MEDIQ and described by MEDIQ as management fees and intercompany interest. The
original principal amount of the MEDIQ Note was $11,500,000 which bears
interest at a rate of prime plus 1.5 percent (10 percent at September 30,
1997), with monthly payments of interest only through September 1995 and then
monthly principal and interest payments for the following three years
(principal payments of $767,000 were made in 1996, and additional principal
payments of $256,000 representing the contractually required principal payments
for October 1996 through January 1997, have been made as of September 30,
1997), based on a fifteen year amortization period, with the balance due on
August 31, 1998.
The Company filed a complaint on February 10, 1997 in Superior Court of New
Jersey, Law Division against MEDIQ alleging that the MEDIQ Note is invalid on
the grounds that MEDIQ breached its fiduciary obligations in connection with
forcing the Company to execute the MEDIQ Note, the MEDIQ Note lacks
consideration, the MEDIQ Note is unconscionable and it unjustly enriches MEDIQ
at the Company's expense. The case was then transferred by the Court to Camden,
New Jersey. 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. Consequently, the outstanding amounts owed by the Company under the MEDIQ
Note ($10,478,000) have been classified as a current liability. Additionally,
the Company has accrued interest payable under the terms of the note through
September 30, 1997 of $777,000 and other accrued expenses of $242,000.
On November 21, 1997, a Judge of 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 and as a
result, judgment has been entered in MEDIQ's favor for the full principal
balance and related accrued interest. The
(Continued)
55
<PAGE> 56
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(10) Continued
Law Division also denied the Company's request for a stay in the entry or
execution of judgment.
The Company has filed an appeal with the Appellate Division of the New
Jersey Supreme Court. The Company also has filed a motion in the Appellate
Division seeking reversal of the Court's action. 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 have been limited to date. If the Company is unable to obtain a
stay, MEDIQ will be free to commence collection efforts under the judgment to
be entered for the outstanding principal, accrued interest and other accrued
expenses. The Company does not have sufficient funds to pay the 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 is 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.
Revolving Credit Facility
Effective August 14, 1995, the Company entered into a $5,000,000 revolving
credit facility with a commercial lender. The facility, which bore interest at
prime plus 2 percent, was secured by accounts receivable from the freestanding
behavioral health facilities and property plant and equipment at two of the
freestanding behavioral health facilities. In 1996, the Company repaid the
outstanding balance of the revolving credit facility with proceeds from the sale
of the freestanding behavioral health facilities.
Effective March 11, 1997, MHM Extended Care Services, Inc. entered into a
$4,000,000 revolving credit facility with an affiliate of Bethesda,
Maryland-based commercial lender Healthcare Financial Partners. The facility,
which bears interest at prime plus 2.25 percent, is secured by accounts
receivable and expires in March 1999. The loan is also secured by the stock of
the Company's subsidiary, MHM Extended Care Services, Inc. The amount of credit
available fluctuates based on the amount of qualified accounts receivable. As of
September 30, 1997, the Company had $1,122,000 outstanding under this facility.
The weighted average interest rate is 10.75 percent as of September 30, 1997.
(Continued)
56
<PAGE> 57
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(10) Continued
Term Loans and Capital Lease Obligations
At September 30, 1997 and 1996, term loans totaling $450,000 and $289,000,
respectively, represent various notes payable relating to the Apogee, Liberty
Bay, and MHM Counseling acquisitions which bear interest at rates ranging from 7
percent to 9 percent and terms through March 2000 (see note 5).
Capital lease obligations totaling $126,000 and $162,000 at September 30, 1997
and 1996, respectively, are payable in monthly installments including interest
at rates ranging from 9 percent to 13 percent and terms through January 2001 and
are collateralized by certain assets with a net book value of $115,000 and
$143,000, respectively.
Early Retirement of Debt
In 1996, the Company recorded an extraordinary item in the amount of $463,000,
consisting primarily of costs related to the early retirement of the Company's
long-term debt and the write off of associated loan acquisition costs.
Scheduled maturities of long-term debt (including the MEDIQ Note) are as
follows:
<TABLE>
<CAPTION>
Year ending September 30
- -------------------------------------------------------------
<S> <C>
1998 $ 10,720,000
1999 1,238,000
2000 208,000
2001 8,000
2002 2,000
- -------------------------------------------------------------
$ 12,176,000
=============================================================
</TABLE>
(11) Commitments and Contingencies
Leases
The Company leases certain equipment and office facilities under noncancelable
operating leases. The future minimum lease payments required under operating
leases are as follows:
(Continued)
57
<PAGE> 58
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(11) Continued
<TABLE>
<CAPTION>
Year ending September 30
- ---------------------------------------------------------
<S> <C>
1998 $ 1,148,000
1999 850,000
2000 673,000
2001 329,000
2002 200,000
Thereafter 260,000
- ---------------------------------------------------------
Total future minimum lease payments $ 3,460,000
- ---------------------------------------------------------
</TABLE>
Lease expense was $1,496,000, $1,433,000, and $2,053,000 for 1997, 1996 and
1995, respectively. The terms of the lease for the Company's Mountain Crest
facility, expiring in December 2000, require additional rent based upon 6.5
percent of the net revenues of the facility and 50 percent of excess cash flow
(as defined in the lease agreement).
Litigation
The Company is involved in various other legal proceedings incidental to its
business, some of which may be covered by insurance. With the exception of the
MEDIQ litigation, the Company knows of no other litigation, either pending or
threatened, which is likely to have a material adverse effect on the Company's
consolidated financial statements.
(12) Income Taxes
Income tax (benefit) expense consists of the following:
(Continued)
58
<PAGE> 59
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(12) Continued
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - (662,000) 670,000
State - (146,000) 439,000
- ---------------------------------------------------------------------------------------
- (808,000) 1,109,000
- ---------------------------------------------------------------------------------------
Deferred:
Federal - 500,000 (200,000)
State - - (15,000)
- ---------------------------------------------------------------------------------------
- 500,000 (215,000)
- ---------------------------------------------------------------------------------------
Total income tax (benefit) expense $ - (308,000) 894,000
- ---------------------------------------------------------------------------------------
</TABLE>
The differences between the effective income tax (benefit) expense and the
income tax (benefit) expense computed using the U.S. federal income tax rate are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory benefit $ (1,676,000) (4,888,000) (1,064,000)
State income taxes, net of federal (benefit) tax (71,000) (96,000) 280,000
Valuation reserve 1,668,000 4,658,000 -
Effect of disposition of Joint Venture - - 1,206,000
Writedown of long-term assets - - 300,000
Goodwill amortization 5,000 18,000 65,000
Other items - net 74,000 - 107,000
- ------------------------------------------------------------------------------------------
Income tax (benefit) expense $ - (308,000) 894,000
- ------------------------------------------------------------------------------------------
</TABLE>
(Continued)
59
<PAGE> 60
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(12) Continued
Significant components of deferred tax assets and liabilities follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Assets:
Allowance for doubtful accounts $ 2,256,000 1,136,000
Capital loss carryforward - 832,000
Net operating loss carryforwards 4,318,000 3,195,000
Writedown of long-term assets 268,000 157,000
Other 191,000 112,000
Valuation allowance (6,958,000) (5,290,000)
- --------------------------------------------------------------------
75,000 142,000
- --------------------------------------------------------------------
Liabilities:
Prepaid expenses 39,000 77,000
Depreciation and amortization 36,000 34,000
Other - 31,000
- --------------------------------------------------------------------
75,000 142,000
- --------------------------------------------------------------------
Net deferred tax asset $ - -
- --------------------------------------------------------------------
</TABLE>
At September 30, 1997, for income tax purposes, the Company had federal and
state net operating loss carryforwards of approximately $11,216,000 and
$18,316,000, respectively, expiring through 2012. The change in valuation
allowance was $1,668,000 in 1997 and $4,658,000 in 1996.
(13) Related-Party Transactions
Accrued Expenses - MEDIQ
Amounts payable to MEDIQ include accrued interest payable of $777,000 and other
accrued expenses of $242,000 primarily representing unpaid federal taxes for the
period in which the Company was included in MEDIQ's consolidated federal tax
return and expenses incurred by MEDIQ on behalf of the Company.
Interest Expense MEDIQ
The Company incurred interest expense related to the note payable to MEDIQ of
$1,042,000, $1,097,000, and $1,171,000 in 1997, 1996, and 1995, respectively.
(Continued)
60
<PAGE> 61
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(13) Continued
Services Agreement - MEDIQ
Since April 1, 1993, the Company has obtained certain legal, accounting, tax and
risk management services from MEDIQ at prescribed rates pursuant to a services
agreement. The services agreement terminated in 1996. Fees for such services
were $30,000, $38,000, and $140,000 for 1997, 1996, and 1995, respectively, and
are included in general and administrative expenses.
Tax Allocation/Sharing Agreement
Pursuant to a tax allocation/sharing agreement, the Company will reimburse MEDIQ
for any future tax assessments against MEDIQ resulting from the Company's
operations, the Company will be reimbursed by MEDIQ for any future tax benefit
derived by MEDIQ resulting from the Company's operations and the Company will be
indemnified for certain tax liabilities, in each case, for periods during which
the Company had been a member of MEDIQ's consolidated group.
(14) Stock Option Plans
The company has a Stock Option Plan (the Stock Option Plan) and a Stock Option
Plan for Non-Employee Directors (the Directors' Stock Option Plan). Under the
Stock Option Plan, up to 350,000 shares of the Company's common stock may be
subject to stock options granted to officers and key employees of the Company.
Options vest at 20 percent each year and may not be granted for a term in excess
of ten years from the date of grant. On January 30, 1997, all outstanding
options, which totaled 233,600, were re-priced at an exercise price of $.50. As
of September 30, 1997, options to acquire 162,400 shares of stock were
exercisable under the Stock Option Plan and options to acquire 14,000 shares of
stock were exercisable under the Directors' Stock Option Plan. Exercise prices
of stock options granted represent fair market value of the common stock at date
of grant, or for the repriced options, at January 30, 1997.
The Company applies APB Opinion No. 25 in accounting for its stock option plan
for options granted to employees and directors and accordingly, no compensation
expense has been recognized in the financial statements. Had the Company
determined compensation expense based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
(Continued)
61
<PAGE> 62
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(14) Continued
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Net loss:
As reported $ (4,789,000) $ (14,377,000)
Pro forma (4,808,000) (14,391,000)
Loss per common share:
As reported $ (1.40) $ (4.34)
Pro forma (1.41) (4.35)
- --------------------------------------------------------------
</TABLE>
Proforma net losses reflect compensation expense under SFAS No. 123 only for
options granted in 1997 and 1996. Therefore, the full impact of calculating
compensation expense for stock options under SFAS No. 123 is not reflected in
the proforma net loss amounts presented above because compensation expense is
reflected over the options' vesting period and compensation expense for options
granted prior to October 1, 1995 is not considered.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions generally used for grants in 1997 and 1996, respectively: dividend
yield of 0 percent (both years), expected volatility of 132.79 and 140.19
percent, risk free interest rate of 6.46 and 6.9 percent, and expected lives of
8 years.
A summary of the status of the Company's stock options as of September 30, 1997,
1996 and 1995, and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 259,600 $3.28 269,600 $3.68 264,600 $3.86
Granted 165,000 0.98 61,500 1.99 64,000 3.00
Exercised (3,000) 0.50 - - - -
Forfeited (62,200) 1.48 (71,500) 3.68 (59,000) 3.72
- ------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 359,400 0.72 259,600 3.28 269,600 3.68
- ------------------------------------------------------------------------------------------------------------------
Options exerciseable at
year end 176,400 0.50 161,500 3.62 124,800 3.87
- ------------------------------------------------------------------------------------------------------------------
Weighted-average fair value
of options granted
during the year $0.93 $1.83 $2.88
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
62
<PAGE> 63
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(14) Continued
The following table summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------- ---------------------
Weighted-average Weighted- Weighted-
remaining average average
Exercise contractual exercise exercise
prices Number life price Number price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.50 254,400 7.05 $.50 176,400 $.50
1.25 105,000 9.77 1.25 - -
- ---------------------------------------------------------------------------------------------
$.50 - 1.25 359,400 7.84 $ .72 176,400 $.50
- ---------------------------------------------------------------------------------------------
</TABLE>
(15) Retirement Plan
The Company has a 401(k) plan (the Plan). Employees are eligible to join the
Plan upon completion of six months of service during which they have worked a
minimum of 1,000 hours and are age 21 or older. The Plan provides that the
Company will make a matching contribution equal to $0.50 for each $1.00
contributed by a participant not to exceed 3 percent of a participant's
compensation. The Company's matching contribution is made in cash to be used to
purchase shares of common stock of the Company for the accounts of the
participants. For the years ended September 30, 1997, 1996, and 1995, the
Company's contributions were $38,000, $70,000, and $81,000, respectively.
(16) Fourth-Quarter Results
The fourth quarter loss of approximately $2,400,000 exceeded prior quarterly
reported losses for several reasons including the following: writing down of HCI
goodwill and other intangibles ($696,000) due to the decision to dispose of most
of these operations (note 5), reserving the remaining accounts receivable of
$510,000 related to the facilities sold in 1996 due to the significant drop off
in collections in the fourth quarter, and reaching an agreement to pay a former
employee a total of $150,000. In addition, the Company reduced its liability to
third-party payors by about $965,000, which was primarily offset by additional
reserves for accounts receivable.
(Continued)
63
<PAGE> 64
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(17) Subsequent Events
In October 1997, the Company borrowed $500,000 from NationsBank on an unsecured
line of credit. The line of credit bears interest at 1/4 below prime rate and is
due for renewal in April 1998. Three officers and directors of the Company
personally guaranteed the line of credit and in consideration thereof will be
awarded common stock warrants based on the amounts outstanding on the loan.
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 the ability of the Company's stockholders to sell their shares.
(Continued)
64
<PAGE> 65
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(18) New Financial Accounting Standards
The Financial Accounting Standards Board has issued SFAS No. 128, Earnings per
Share, which will require the Company to change its method of calculating EPS.
SFAS No. 128 simplifies the computation of EPS by replacing the presentation of
primary EPS with a presentation of basic EPS. Basic EPS is calculated by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Options, warrants, and other
potentially dilutive securities are excluded from the calculation of basic EPS.
Diluted EPS, which has not changed significantly from the current calculation of
fully diluted EPS, includes the options, warrants and other potentially dilutive
securities that are excluded from basic EPS. In accordance with the provisions
of SFAS No. 128, the Company will adopt this new standard for the year ending
September 30, 1998. Had the Company adopted the new standard for the year ended
September 30, 1997, (early adoption is specifically prohibited) the results
would have been the same as the loss per share amount reflected in the
accompanying consolidated statement of operations.
The Financial Accounting Standards Board has also issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information which will
require the Company to report certain information about operating segments. In
accordance with the provisions of SFAS No. 131, the Company will adopt this new
standard for the year ending September 30, 1999. The adoption of this standard
will not have a material effect on the financial position or results of
operations of the Company.
65
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 1, 1997, the Registrant discharged Deloitte & Touche LLP as
the Company's independent accountant to audit the Registrant's consolidated
financial statements. KPMG Peat Marwick LLP was engaged as its new independent
accountant to audit the Registrant's consolidated financial statements for the
fiscal year ending September 30, 1997.
The independent accountants' reported dated December 30, 1996 on the
consolidated financial statements for the fiscal years ended September 30, 1996
and 1995 contained no qualification or modification as to audit scope or
accounting principles, nor any disclaimer of opinion; however, for each of the
years it included an explanatory paragraph relating to the Company's ability to
continue as a going concern. The decision to change accountants was recommended
by management and approved by the Board of Directors.
During fiscal years 1996 and 1995 and subsequent interim periods of
1997, there have been no disagreements with Deloitte & Touche, LLP on any
matter of accounting principles or practices which if not resolved to their
satisfaction would have resulted in a reference to the subject matter in the
independent accountants' report. Similarly, there have been no such
disagreements with KPMG Peat Marwick LLP since the date of their engagement.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding directors and executive officers set forth in
the Company's proxy statement for the Annual Meeting of Stockholders to be held
in 1998 (the "Proxy Statement") is incorporated herein by this reference.
Item 11. Executive Compensation.
Executive compensation information set forth in the Company's proxy
statement is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership information set forth in the Company's proxy
statement is incorporated herein by this reference.
66
<PAGE> 67
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions
set forth in the Company's proxy statement is incorporated herein by this
reference.
67
<PAGE> 68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The response to this portion of Item 14 is submitted as a separate
section of this report commencing on page 36
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts and Reserves
Other schedules are omitted because of the absence of conditions
under which they are required.
(a)(3) EXHIBITS. The Exhibits are listed in the Exhibit Index appearing
below.
(b) REPORTS ON FORM 8-K: The Company submitted a Current Report on Form
8-K on July 22, 1997 announcing the resignation of Carolyn Zimmerman as Vice
President of Finance, Treasurer, CFO and a member of the Company's Board of
Directors and the reorganization of its finance department.
(c) EXHIBITS (numbered in accordance with Item 601 of Regulation S-K).
<TABLE>
<CAPTION>
Exhibit # Description and Method of Filing
- -------------------------------------------------
<S> <C>
2.1 Distribution Agreement by and between MHM and MEDIQ (1)
2.2 Agreement regarding L.L.C. dated August 1, 1994 (2)
2.3 Limited Liability Agreement dated August 1, 1994 (2)
3.1 Restated Articles of Incorporation of MHM (6)
3.2 Amended Bylaws of MHM (7)
4.1 Specimen MHM Common Stock Certificate (3)
10.1 Tax Indemnification Agreement, dated August 31, 1993 by and between MHM and MEDIQ (1)
10.2 Services Agreement, dated August 31, 1993 by and between MHM and MEDIQ (1)
10.3 Insurance Liability Agreement, dated August 31, 1993 by and between MHM and MEDIQ (1)
10.4 Promissory Note of MHM to MEDIQ, dated August 31, 1993 (1)
10.5 MHM 1993 Stock Option Plan (1)
10.6 MHM 1993 Non-Employee Director Stock Option Plan (1)
10.7 MHM 1993 Bonus Plan (3)
10.8 MHM 1996 Non-Employee Directors' Stock Option Plan (4)
10.9 MHM Amendment to 1993 Stock Option Plan (4)
10.10 Agreement by and among the Company and ICH Services, L.L.C., dated November 18, 1993 (5)
10.11 Agreement by and among the Company, MHM Extended Care Services, Inc., and
Liberty Management Group, Inc., and Liberty Bay Colony Health Services, Inc.
dated November 22, 1996 (10)
10.12 Form of Purchase Warrant Agreement between the Company and Murray I. Firestone
</TABLE>
68
<PAGE> 69
<TABLE>
<S> <C>
10.13 Form of Repurchase Agreement between the Company and Murray I. Firestone dated July 7, 1995 (10)
10.14 Amendment to Repurchase Agreement between the Company and Murray I. Firestone dated August 22, 1995 (10)
10.15 Asset Purchase Agreement between the Company and Behavioral Healthcare Corporation (8)
10.16 Asset Purchase Agreement between the Company and Oakview Treatment Center (9)
10.17 Sublease Agreement dated June 1996 between the Company and Stanley Martin Companies, Inc. (10)
10.18 Client Services Agreement and Addendum dated June 30, 1996 between the Company and Administaff Companies, Inc. (10)
10.19 Client Services Agreement and Addendum dated June 30, 1996 between MHM Extended Care Services, Inc. and Administaff
Companies, Inc. (10)
10.20 Client Services Agreement and Addendum dated June 30, 1996 between
MHM of Colorado, Inc. and Administaff Companies, Inc. (10)
10.21 Tennessee Department of Corrections Contract (11)
10.22 Tennessee Department of Corrections Consent to Assignment (11)
10.23 Georgia Department of Corrections Contract (11)
10.24 Apogee Purchase Agreement (11)
21 Subsidiaries of MHM (10)
23 Consents of KPMG Peat Marwick LLP and Deloitte & Touche LLP (11)
27 Financial Data Schedule (11)
</TABLE>
- ------------------
(1) Incorporated by reference to the Registrant's Form 10-K report for
fiscal 1993, as amended.
(2) Incorporated by reference to the Registrant's Form 10-Q report for
the Quarter Ended June 30, 1994.
(3) Incorporated by reference to the Registrant's Form 10 filed August
13, 1993, as amended.
(4) Incorporated by reference to the Registrant's 1996 Annual Meeting
Proxy Statement.
(5) Incorporated by reference to the Registrant's Form 8-K report, dated
December 2, 1993.
(6) Incorporated by reference to the Registrant's Form 8-K/A, dated May
15, 1996.
(7) Incorporated by reference to the Registrant's Form 10-K report for
fiscal 1995, as amended.
(8) Incorporated by reference to the Registrant's May 1, 1996 Special
Meeting Proxy Statement.
Incorporated by reference to the Registrant's Form 8-K dated April
18, 1996.
Incorporated by reference to the Registrant's Form 10-K report for
fiscal 1996.
(11) Filed herewith.
69
<PAGE> 70
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: MHM SERVICES, INC.
By: /s/Michael S. Pinkert
------------------------------------
Michael S. Pinkert, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, which include at
least a majority of the Board of Directors on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
- ---------------------------------- President, Chief January 13, 1998
Michael S. Pinkert Executive Officer and
Director
- ---------------------------------- Vice President, Operations January 13, 1998
Steve Wheeler and Director
- ---------------------------------- Director January 13, 1998
William P. Ferretti
- ---------------------------------- Director January 13, 1998
Kenneth A. Kessler, M.D.
</TABLE>
70
<PAGE> 71
MHM SERVICES, INC.
AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other Accounts at End
Description Period Expenses Deductions of Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended September 30, 1997:
Allowance for doubtful accounts $ 4,404 $ 3,467 $ 2,357 $5,514
---------------------------------------------------------------------------------------
Year ended September 30, 1996:
Allowance for doubtful accounts $ 1,299 $ 6,320 $ 3,215 $ 4,404
---------------------------------------------------------------------------------------
Year ended September 30, 1995:
Allowance for doubtful accounts $ 1,891 $ 4,467 $ 5,059 $ 1,299
---------------------------------------------------------------------------------------
</TABLE>
DC1/44996
<PAGE> 1
RFS NO.: 329.00-011
CONTRACT
BETWEEN THE
STATE OF TENNESSEE, DEPARTMENT OF CORRECTION
AND
MHM SERVICES, INC.
THIS CONTRACT, by and between the State of Tennessee, Department of
Correction, hereinafter referred to as the "State" and MHM SERVICES, INC.
hereinafter referred to as the "Contractor", is for the provision of mental
health services as further defined in the "SCOPE OF SERVICES" below.
WHEREAS, the State provides mental health services to the inmate
population confined within twenty-one (21) Tennessee correctional facilities.
It is projected that there will be twenty-two (22) TDOC facilities operational
by June 1998. These facilities are located in the East, Middle, and West
Regions of Tennessee and are as follows:
<TABLE>
<S> <C>
EAST MIDDLE WEST
REGION 1 REGION 2 REGION 3
*Brushy Mountain State *Middle Tennessee *Cold Creek Correctional
Penitentiary Reception Center Facility
*Carter County Work Camp *Nashville Community Service *Lake County Regional
*Chattanooga Community Center Correctional Facility
Service Center *Riverbend Maximum Security *Mark Luttrell Reception Center
*Knoxville Community Service Institution *Northwest Correction Center
Center *Turney Center Industrial Prison *Wayne County Boot Camp
*Morgan County Regional and Farm *West Tennessee High
Correctional Center *Tennessee Prison for Women Security Facility
*Northeast Correctional Center *Tennessee Correction Academy *Lauderdale County Facility
*Southeast Tennessee State *Tennessee Correctional Work (ANTICIPATED CONSTRUCTION
Regional Correctional Facility Center 1997)
REGION 4: LOIS M. DEBERRY SPECIAL NEEDS FACILITY
</TABLE>
THEREFORE, the State desires to contract with a vendor(s) who are
capable of providing quality mental health care in a cost effective manner.
The State wishes to reduce the number of contracts so as to improve the
continuity of service delivery throughout the correctional system. The State
intends to award an at-risk capitated rate contract for the services outlined
in the Scope of Services (Section A) below.
WITNESSETH, in consideration of the mutual promises herein contained,
the parties have agreed and do hereby enter into this Contract according to the
provisions set out herein:
A. SCOPE OF SERVICES:
1. GENERAL
A. All mental health services provided under
this contract shall be in conformance with
ALL TDOC policies as they may be amended from
time to time. (Only TDOC Mental Health
Policies are attached for the
<PAGE> 2
RFS No.: 329.00-011
convenience of the proposer.) Other TDOC
Policies may be reviewed through a
coordinated effort with the Department's
Central Office.
1) Said policies are available for
review in the historical data and
statistics section of this document.
2) The TDOC shall be responsible for
notifying the Contractor in writing
of any policy changes that will
impact the Contractor.
3) At the institutional level, the
Contractor('s) clinicians shall
administratively respond to the TDOC
Warden or Warden's Designee.
Clinical matters are the sole
responsibility of the licensed
psychiatrist/psychologist. The
State's Director of Mental Health
shall assist in the statewide
coordination of services, monitoring
and continuous developmental aspects
of the terms outlined in this
contract.
B. The Contractor's service system shall provide
a uniform and consistent continuum of quality
mental health service delivery statewide.
The Contractor shall work in concert with
existing TDOC mental and medical
professionals, and other contract entities,
if applicable, in providing mental health
care.
C. The Contractor shall measure various
clinical/programmatic mental health outcomes.
At a minimum, the State shall require the
Contractor to evaluate response to prescribed
psychiatric medications, improvement in
mental health status, patient
functioning/sense of well-being, etc. The
State in a cooperative effort shall assist in
the development of additional outcome
measures. The Contractor shall abide by the
following milestone schedule for the
development, standardization, and reporting
requirements of the outcome measures.
Within 90 days from Contract Execution: The
Contractor shall propose in writing to the
Director of Mental Health Services draft
standardized outcome measures to be utilized
regionally/state wide.
Within 120 days from Contract Execution: The
Contractor shall have revised and developed,
in consultation with the Director of Mental
Health Services, functional outcome
measurement instruments that can be used
regionally/state wide. The instruments will
be applied and data gathered in such a manner
as to allow the collection of both
time-series and cross-sectional data. The
instruments may vary based upon the treatment
objectives and geographical location,(i.e.
DeBerry Special Needs Facility) but the
instrument must be universal enough to report
meaningful information to both the Director
of Mental Health Services and the Director of
Contracts Administration.
Failure to meet these milestones will be
considered an incident of noncompliance for
each week they are not performed. The
mechanism outlined in E.15. "Special Terms
and Conditions" may be applied in the event
the milestones are not met (See Attachment
A).
2
<PAGE> 3
RFS No.: 329.00-011
D. The Contractor shall adhere to the specific
performance measures outlined in Attachment
A. The State shall reserve the right to
expand upon the performance measures denoted
in Attachment A. The State's Director of
Mental Health Services may solicit the
expertise of the Contractor in the
development of any new performance
measure(s). The State shall commence the
assessment of damages as it relates to
performance measures 60 days from the date of
contract execution.
The Contractor shall report to the Director
of Mental Health Services and the Director of
Contracts Administration the results of any
approved and functional performance/outcome
measures. The information will be provided
in both electronic and paper formats. The
utilized for service delivery comparisons
such as, but not limited to, effectiveness of
service delivery. During the developmental
stage, a distinction will be made as to
whether the performance measure is
determining the outcome of a specific program
intervention or the performance expectation
of the contractor.
E. Upon approved written consent, conduct or
participate in the development of research
studies in conjunction with state and/or any
other professional entity deemed appropriate
by the TDOC.
F. The contract providers will actively
participate, when applicable, with the
State's Quality Assurance/Improvement program
as it relates to mental health service
delivery.
G. When applicable, the appropriately licensed
clinician will provide clinical supervision
to psychological internship or practicum
students.
H. The TDOC shall, when applicable, provide
specialized training for sexual offender
treatment programs. The contractor shall
follow the program philosophy and design
standards as presented by the TDOC.
I. The Contractor shall provide technical
assistance to the TDOC Director of Mental
Health Services in developing a standard
anger management/violent offender treatment
program that is to be implemented at selected
TDOC sites. Implementation date and
treatment sites to be determined.
J. The Contractor shall designate an individual
with the overall responsibility for this
contract. This person shall be available to
consult and coordinate service delivery with
the State's Director of Mental Health and/or
other designated state officials.
K. When required, the Contractor shall enter
specific service delivery information into
the Tennessee Offender Management Information
System (TOMIS). Training and access to
equipment shall be provided by the TDOC.
L. The Contractor shall insure adequate backup
coverage to address the clinical service
needs of any TDOC facility.
3
<PAGE> 4
RFS No.: 329.00-011
2. PSYCHIATRIC SERVICES
A. Psychiatric services shall be provided by
licensed physicians who are board eligible or
board certified in psychiatry. Standards of
practice shall be according to those of the
community and in compliance with state and
federal laws.
B. Evaluate and diagnose in accordance with the
current DSM criteria those inmates referred
by the Mental Health Treatment Team or other
health care staff.
C. Complete psychiatric evaluations/assessments
as necessary and provide an individual
treatment plan specific for those patients
requiring psychiatric intervention to include
medication.
D. Patients shall have a documented physical
assessment prior to the prescribing of a
psychotropic medication.
E. Provide that all medications shall be
reviewed, and orders renewed if necessary, at
least every thirty days as specified by
policy.
F. Patients receiving psychiatric medications
shall receive a direct assessment from a
psychiatrist prior to ninety (90) days
elapsing.
G. Prescribe only those medications approved in
the TDOC's formulary, unless otherwise
approved as TDOC procedure dictates.
H. Provide consultation to mental health service
staff and administrative staff and
participate in the treatment team reviews
when clinically necessary.
I. Provide accessibility for twenty-four (24)
hours per day, seven (7) days per week per
calendar year emergency consultation with the
mental health and health care staff. Such
availability may be by telephone unless
circumstances necessitate on-site delivery.
J. Provide a direct assessment to a patient
within 72 hours from the time a telephone
order was given for cases involving
restrictive therapeutic dispositions.
K. Provide clinical
recommendations/consultations and
coordination of patient referrals to other
specialized TDOC programs, or designated
contract hospitals. The contractor(s) must
secure appropriate privileges at the
designated hospital to provide services if
required. Said services may be provided in a
written format and/or visual presentation,
role play, teleconferencing medium, etc.
L. Provide an appropriate level of psychiatric
monitoring of patients requiring psychotropic
medication intervention.
M. When applicable, provide or assist in the
provision of a mental health education
program to other institutional staff that
shall include, but not be limited to, the
following:
4
<PAGE> 5
RFS No.: 329.00-011
(1) Early detection of potential mental
health problems, i.e., signs and
symptoms of mental illness,
retardation, and chemical
dependency.
(2) Crisis intervention/suicide
precaution programs.
(3) Said services may be provided in a
written format, audio/visual
presentation, role play,
teleconferencing medium, etc.
3. PSYCHOLOGICAL SERVICES
A. The delivery of doctoral level psychological
services shall be provided by psychologists
with health service provider designation who
are licensed by the State of Tennessee or who
have legal reciprocity to practice in the
state of Tennessee. Standards of practice
shall be according to those of the community
and with State and Federal laws.
B. Evaluate and diagnose in accordance with the
current DSM criteria those inmates referred
by the Mental Health Treatment Team or other
health care staff.
C. Complete psychological
evaluations/assessments as necessary and
provide an individual treatment plan specific
for those patients requiring psychological
intervention(s).
D. When clinically/programmatically deemed
appropriate, provide individual and/or group
therapy/consultation.
E. Participate in the treatment team reviews
when necessary.
F. Be responsible for twenty-four (24) hours per
day, seven (7) days per week per calendar
year emergency consultation with the health
care or other mental health staff. Such
availability may be by telephone unless
circumstances necessitate on-site delivery.
G. Provide clinical recommendations and
coordination of referrals of patients to
DeBerry Special Needs Facility or other
specialized TDOC treatment units.
H. Provide clinical supervision and/or
consultation to institutional psychological
examiner(s), mental health program
specialist(s), alcohol and drug counselors,
and health care staff.
I. The Contractor shall provide or assist in the
provision of mental health education programs
to other institutional staff that shall
include but not be limited to the following:
(1) Early detection of potential mental
health problems, i.e., signs and
symptoms of mental illness,
retardation, and chemical
dependency.
(2) Crisis intervention/suicide
precaution programs.
5
<PAGE> 6
RFS No.: 329.00-011
(3) Provide consultation supervisory
services to mental health staff
involved in special programs. Said
services may be provided in a
written format and/or visual
presentation, role play,
teleconferencing medium, etc.
J. Complete the initial thirty (30) and ninety
(90) day mental health assessments on
specially segregated inmates as policy
dictates. Review findings documented by
other licensed professionals.
K. Provide psychological evaluations upon the
request of the Board of Paroles.
L. Provide psychological evaluations to all
newly hired correctional officer/probation
officers with the Tennessee Department of
Corrections. Said evaluations shall be,
1) Centrally provided at the Tennessee
Correctional Academy located in
Tullahoma, Tennessee. The TDOC may,
in the future decentralize the
evaluation process.
2) The test battery shall minimally
consist of the MMPI II, but may
include the IPI and a stress
management inventory. Equivalent
assessment measures/inventories may
be utilized as clinically deemed
appropriate.
3) The Contractor may utilize
psychological examiners who are
licensed in the State of Tennessee
to assist in providing psychological
evaluations to all newly hired
correctional officers/probation
officers employed with the Tennessee
Department of Correction. Standards
of practice shall be in accordance
to those of the community and with
state and federal laws.
B. PAYMENT TERMS AND CONDITIONS:
1. The Contractor shall be compensated based upon the
capitated rates as follows:
Capitated Annual Rate
<TABLE>
<S> <C>
July 1997 - December 1997 $129.94
January 1998 - December 1998 $133.19
January 1999 - December 1999 $136.52
January 2000 - December 2000* $139.93
January 2001 - December 2001* $143.43
</TABLE>
* Option Years
Each month, the State will provide information to the
Contractor regarding inmate population. The
Contractor will use TDOC's information to prepare its
monthly invoice to the State.
6
<PAGE> 7
RFS No.: 329.00-011
2. The Capitated Rate in Paragraph 1 of this Section,
shall constitute the entire compensation due the
Contractor for the Service and all of the Contractor's
obligations hereunder regardless of the difficulty,
materials or equipment required. The Capitated Rate
include, but are not limited to, all applicable
taxes, fees, overheads, profit and all other direct
and indirect costs incurred or to be incurred, by the
Contractor. The cost of medications issued from
Central Pharmacy will be deducted from the Capitated
Rate Payment.
3. The Capitated Rates in Paragraph 1 of this Section
are firm for the duration of the Contract and are not
subject to escalation for any reason, unless amended.
In the event of changes in the anticipated scope of
services, governmental regulations or other
circumstances, the State or the Contractor may submit
a written request for amendment. If, within thirty
(30) days thereafter the parties are unable in good
faith to negotiate satisfactory modifications, the
party submitting the request may terminate this
Contract by giving sixty (60) days notice.
4. The Contractor shall submit all invoices, in a form
acceptable to the State with all of the necessary
supporting documentation, prior to any reimbursement
of allowable costs.
5. The Payment of an invoice by the State shall not
prejudice the State's right to object to or question
any invoice or matter in relation thereto. Such
payment by the State shall neither be construed as
acceptance of any part of the work or service
provided nor as an approval of any of the costs
invoiced therein. Contractor's invoice shall be
subject to reduction for amounts included in any
invoice or payment theretofore made which are
determined by the State, on the basis of audits
conducted in accordance with the terms of this
contract, not to constitute allowable costs. Any
payment shall be reduced for over-payments, or
increased for under-payments on subsequent invoices.
6. The State reserves the right to deduct from amounts
which are or shall become due and payable to the
Contractor under this or any contract between the
parties any amounts which are or shall become due and
payable to the State by the Contractor.
7. In no event shall the maximum liability to the State
under this contract exceed SEVEN MILLION FOUR HUNDRED
SEVENTY-THREE THOUSAND THREE HUNDRED FOUR DOLLARS
($7,473,304.00).
8. The Contractor shall complete and sign an
"Authorization Agreement for Automatic Deposits (ACH
Credits) Form". This form shall be provided to the
Contractor by the State. Once this form has been
completed and submitted to the State by the
Contractor, all payments to the Contractor, under
this or any other contract the Contractor has with
the State, shall be made through the State's
Automated Clearing House wire transfer system. The
Contractor shall not commence work or invoice the
State for services until he has completed this form
and submitted it to the State. The debit entries to
correct errors authorized by the "Authorization
Agreement for Automatic Deposits Form" shall be
limited to those errors detected prior to the
effective date of the credit entry. The remittance
advice shall note that a correcting entry was made.
All corrections shall be made within two banking days
of the effective date of the original transaction.
All other errors detected at a later date shall take
the form of a
7
<PAGE> 8
RFS No.: 329.00-011
refund, or in some instances, a credit memo if
additional payments are to be made
C. TERM:
This Contract shall be effective for a period of 36 months,
commencing on July 1, 1997 and ending on June 30, 2000. The
State shall have no obligation for services rendered by the
Contractor which are not performed within the specified
period. The State shall have the option to renew the contract
for two additional one (1) year periods.
D. STANDARD TERMS AND CONDITIONS:
1. The State is not bound by this Contract until it is
executed by the appropriate parties and is approved
by the appropriate State officials as indicated on
the signature page of this Contract.
2. This Contract may be modified only by a written
amendment which has been executed and approved by the
appropriate state officials as indicated on the
signature page of this Contract.
3. The State may terminate this Contract by giving the
Contractor at least sixty (60) calendar days written
notice before the effective termination date. The
Contractor shall be entitled to receive equitable
compensation for satisfactory authorized services
completed as of termination date. Said termination
shall not be deemed a breach of contract.
4. If the Contractor fails to properly perform its
obligations under this Contract or violates any terms
of this Contract, the State shall have the right to
immediately terminate the Contract and withhold
payments in excess of fair compensation for completed
services. The Contractor shall not be relieved of
liability to the State for damages sustained by the
virtue of any breach of this Contract by the
Contractor.
5. The Contractor shall not assign this Contract or
enter into a subcontract for any of the services
performed under this Contract without obtaining the
prior written approval of the State. If such
subcontracts are approved by the State, they shall
contain, at a minimum, Paragraphs D.6 and D.8 of this
Contract.
6. The Contractor warrants that no part of the total
Contract amount shall be paid directly or indirectly
to any employee or official of the State of Tennessee
as wages, compensation, or gifts in exchange for
acting as officer, agent, employee, subcontractor, or
consultant to the Contractor in connection with any
work contemplated or performed relative to this
Contract.
7. The Contractor shall maintain documentation for all
charges against the State under this Contract. The
books, records, and documents of the Contractor,
insofar as they relate to work performed or money
received under this Contract, shall be maintained for
a period of three (3) full years from the date of the
final payment, and shall be subject to audit, at any
reasonable time and upon reasonable notice, by the
State agency or the Comptroller of the Treasury, or
8
<PAGE> 9
RFS No.: 329.00-011
their duly appointed representatives. The Financial
Statements shall be prepared in accordance with
generally accepted accounting principles.
8. No person on the ground of handicap or disability,
age, race, color, religion, sex, national origin, or
any other classification protected by Federal and/or
Tennessee State constitutional and/or statutory law
shall be excluded from participation in, or be denied
benefits of, or be otherwise subjected to
discrimination in the performance under this
Contract, or in the employment practices of the
Contractor. The Contractor shall, upon request show
proof of such non-discrimination, and shall post in
conspicuous places, available to all employees,
applicants, visitors and offenders notices of
non-discrimination.
9. The Contractor, being an independent Contractor,
agrees to carry adequate public liability and other
appropriate forms of insurance. The Contractor shall
show proof of such insurance coverage.
10. The Contractor agrees to pay all taxes incurred in
the performance of this Contract.
11. The State shall have no liability except as
specifically provided in the Contract.
12. The Contractor shall comply with all applicable
Federal and State laws and regulations in the
performance of this Contract.
13. This Contract shall be governed by laws of the State
of Tennessee.
E. SPECIAL TERMS AND CONDITIONS:
1. Should any of these special terms and conditions
conflict with any other terms and conditions of this
Contract, these special terms and conditions shall
control.
2. Where a term in the Contract differs from the RFP
and/or the proposal, the Contract shall rule. Where
a term in the RFP differs from the proposal, the RFP
shall rule.
3. The Contractor shall maintain confidentiality of all
records in acceptance with state and federal law; and
TDOC policy.
4. This Contract and any extension of the terms of this
Contract are subject to appropriation and
availability of State and/or Federal funds. In the
event that the funds are not appropriated or are
otherwise unavailable, the State reserves the right
to terminate this Contract upon written notice to the
Contractor. Upon receipt of the written notice, the
Contractor shall cease all work associated with the
Contract. Should such an event occur, the Contractor
shall be entitled to compensation for all authorized
services satisfactorily completed as of the
termination date.
5. Upon expiration or early termination of this
Contract, the Contractor agrees to cooperate with any
treatment successor to effect an orderly and
therapeutically efficient transition for those
patients actively receiving care.
6. The Contractor agrees to indemnify and hold harmless
the State as well as its officers, agents and
employees from all claims, losses or suits accruing
or
9
<PAGE> 10
RFS No.: 329.00-011
resulting to any person, firm, corporation or other
entity which may be injured or damaged as a result of
acts or omissions of the Contractor relating to this
Contract. The State shall give the Contractor
written notice of each such claim or suit and full
right and opportunity to conduct the Contractor's own
defense.
7. The sovereign immunity of the State shall not apply
to the Contractor nor any subcontractor, agent,
employee, or insurer of the Contractor. Neither
Contractor nor any subcontractor, agent, employee, or
insurer of the Contractor may plead the defense of
sovereign immunity in any action arising out of the
performance or failure to perform any responsibility
or duty under this Contract.
8. The Contractor shall be responsible for the correct
use, maintenance and protection of all equipment
furnished by the State under this Contract. Upon
termination of this Contract, all equipment furnished
shall be returned to the State in good order and
condition as when received, reasonable use and wear
thereof excepted. Should the equipment be destroyed,
lost or stolen, the Contractor shall be responsible
to the State for the residual value of the equipment
at the time of loss.
9. The Contractor shall document mental health services
provided utilizing an approved TDOC format. The
Contractor in concert with TDOC institutional staff
shall enter service codes into the Tennessee Offender
Management Information System (TOMIS). This
automated process shall serve as a data collection
mechanism for each contract provider.
10. The Contractor shall submit to the institutional
Warden or Warden's designee a hard copy of their TDOC
Services Provided Encounter Log as supporting
documentation.
11. If requested by the State, the Contractor must agree
to random background checks which shall include
fingerprinting by the State's internal affairs
department. If requested by the State, the
Contractor must submit copies of drivers licenses
and/or social security cards to be on file with the
State. If background checks are requested, such
checks shall be at the expense of the Contractor.
Results of such checks shall be provided to the
State.
12. The Contractor shall at all times honor the security
of the TDOC Tennessee Offender Management Information
System (TOMIS) information and shall not misuse,
abuse, alter, or attempt to alter the information
contained within TOMIS, except as pertains to the use
and data entry requirements necessary to fulfill the
Contractors obligations under the terms of this
Contract.
13. The Contractor shall be duly licensed to conduct
business within the State of Tennessee.
14. The Contractor shall establish a performance bond in
the amount of $100,000.00 for regional contracts or
$400,000.00 for a statewide contract. Said
performance bond shall be in the form of a bond
issued by an insurance company or other reputable
bonding agent that is acceptable to the State. The
following shall be the contractual terms controlling
this performance bond.
a. Said performance bond shall be in force for
the duration of the Contract.
10
<PAGE> 11
RFS No.: 329.00-011
b. Should the State terminate this Contract
under Section D.3., the Contractor shall
continue to fully provide the services
required under this Contract during the sixty
(60) day termination period as provided by
Section D.6. of this Contract in its
entirety.
c. Should the Contractor fail to provide these
services during the sixty (60) day
termination period, then the State shall be
entitled to recover actual damages against
the performance bond.
15. The State's Director of Mental Health and Director of
Contracts Administration shall review mental health
performance/outcome measures to determine compliance,
effectiveness and quality of service delivery. If
services designated to the Contractor are deemed
non-compliant, the State's Directors shall submit to
the Contractor a written warning citing the specific
non-compliant issue(s). If upon reinspection the
non-compliant item(s) remain deficient, a stipulated
liquidated damages value shall be assessed per
non-compliant item(s) for the reporting period
identified (See Attachment A). The contractor's
payment shall be reduced by the amount of accumulated
liquidated damages within thirty (30) days from the
point of receiving the second written notice.
16. Prior to the end of the first contract year, the
Contractor shall submit for TDOC approval a mental
health service delivery recommendation plan. The
plan shall be prepared with the assistance of the
State's Director of Mental Health. The plan should
include a method for determining the types and levels
of service needs; a method for determining resource
needs; alternative service technology; etc. Upon
approval of the plan, the state then reserves the
right to renegotiate the Contract provisions with the
existing Contractor.
17. The parties agree that due to the complicated nature
of the Contractor's obligations under this Contract,
it would be difficult to specifically designate a
monetary amount for a breach by Contractor designated
in Attachment A as said amounts are likely to be
uncertain and not easily proven. Contractor hereby
represents and convenants that it has carefully
reviewed the liquidated damages contained in
Attachment A and agree that said amounts are the
liquidated damages resulting from agreement between
the parties, represent a reasonable relationship
between the amount and what might reasonably be
expected in the event of breach, and are a reasonable
estimate of the damages that would occur from a
breach.
18. It is hereby agreed between the parties that the
liquidated damages represent solely the damages and
injuries sustained by the State in losing the benefit
of the bargain with Contractor and do not include any
injury or damage sustained by a third party and
Contractor agrees that the liquidated damage amount
is in addition to any amounts the Contractor may owe
the State pursuant to the indemnity provision
contained in Section E(6) or otherwise.
19. The State may continue to withhold the liquidated
damages or a portion thereof until the Contractor
cures the breach or the State terminates the
Contract.
20. The State is not obligated to assess liquidated
damages before availing itself of any other remedy.
11
<PAGE> 12
RFS No.: 329.00-011
21. The State agrees to provide Contractor thirty (30)
days notice to cure in the event Contractor fails to
properly perform its obligations under this Contract
or violates any terms of this Contract.
22. The State may choose to discontinue liquidated
damages and avail itself of any other remedy
available under this Contractor or at law or equity;
provided, however, Contractor shall receive a credit
for said liquidated damages previously withheld.
23. The Contractor shall not publish any outcomes based
on data obtained from the operation of this Contract
without prior written consent of the TDOC.
24. The Contractor shall be responsible for the costs of
all medications prescribed by the Contractor's
providers and said costs shall be a part of the
capitated rate. The TDOC will forward to the
Contractor a monthly statement itemizing the drugs
prescribed by the Contractor's providers and
detailing the direct deductions made from the
Contractor's payments. The Contractor's providers
shall utilize the TDOC formulary for the purpose of
prescribing medications. The TDOC central pharmacy
shall be responsible for packaging and distribution
of psychopharmacological prescriptions. Provided
that, with the consent of TDOC, Contractor, at its
own cost, may utilize other reasonable alternatives
for purchasing, packaging and distribution of
psychopharmacological prescriptions, provided that
the TDOC pharmacy first shall be given the
opportunity to match any alternative proposal for the
purchase, packaging and distribution of
psychopharmacological prescriptions which Contractor
is considering.
25. TDOC may delegate or authorize other parties in
writing to perform any of the services or functions
specified in this contract as being the
responsibility of TDOC. TDOC may, upon written
notice to the contractor, delegate or authorize the
services of functions to be performed by another
party.
26. The State may require the Contractor to modify
staffing provisions if, upon review, the provisions
of services are deemed unacceptable in meeting the
clinical or program needs at any given TDOC facility.
27. The Contract shall be governed by the laws of the
State of Tennessee. Any legal proceedings against
the State regarding this Contract shall be brought in
the State of Tennessee administrative or judicial
forum. Request shall be in Davidson County,
Tennessee.
12
<PAGE> 13
RFS No.: 329.00-011
MHM SERVICES, INC.
BY:
/s/ MIKE PINKERT
- ------------------------------------------------ ---------------------
MIKE PINKERT, PRESIDENT DATE
FED I.D. NO. 521223048
---------------------------------
STATE OF TENNESSEE
DEPARTMENT OF CORRECTION
BY:
/s/ DONAL CAMPBELL 7/2/97
---------------------------------------- ---------------------
DONAL CAMPBELL, COMMISSIONER DATE
APPROVED:
TENNESSEE DEPARTMENT OF FINANCE AND ADMINISTRATION
BY:
/s/ JOHN D. FERGUSON JUL 11 1997
---------------------------------------- ---------------------
JOHN D. FERGUSON, COMMISSIONER DATE
APPROVED:
COMPTROLLER OF THE TREASURY
BY:
/s/ WILLIAM R. SNODGRASS 7-15-97
---------------------------------------- --------------------
WILLIAM R. SNODGRASS, COMPTROLLER DATE
13
<PAGE> 14
PERFORMANCE MEASURES
ATTACHMENT A
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DEFICIENCY DEFINITION LIQUIDATED
DAMAGES
<S> <C> <C>
I A performance standard which, if not met, is $200 will be assessed
likely to be physically or psychologically for each Type I
distressing to the patient. There will be a deficiency found at
disruption in the quality of care and policy the time of reporting.
adherence.
II A performance standard which, if not met, has $75.00 will be assessed
the potential to adversely impact the care of a for each Type II
given patient and/or adversely impact deficiency found at
administrative/clinical practice. the time of reporting.
III A performance standard which, if not met, $50.00 will be assessed
prevents the state from monitoring the for each Type III
contractor's performance and/or may deficiency found at
adversely impact continuity of care. the time of reporting.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: A written warning will be submitted to the contractor denoting a
particular deficiency prior to assessing any damages. A second deficiency
in the same area will warrant assessment of damages.
<PAGE> 15
PROVIDER PERFORMANCE MEASURES
<TABLE>
<CAPTION>
SERVICE DESIRED PERFORMANCE REPORTING
AREA OUTCOME MEASURE STANDARD REQUIREMENT
<S> <C> <C> <C> <C>
Administrative Treatment providers Providers acknowledge A1 100% of the service Able to initiate the
A1 have satisfactory understanding of their providers are capable performance
working responsibilities of recognizing and measurements
relationship with related to performance implementing required process.
facility staff and measures. services.
are familiar with
TDOC policy and
procedures.
Administrative Provider and TDOC A2 75% of surveyed Reported by type of
A2 staff satisfaction TDOC sites rated their provider utilizing a
reporting rate experience with satisfaction scaled
contract personnel to score, i.e., Likert
be fair to good. 90% Scale.
rated it as good or
excellent.
Administrative Providers report type A3 100% of service When applicable,
A3 of service(s) providers accurately services reported
provided. fill out service logs daily by provider
and enter data. utilizing TOMIS.
(TDOC staff may
provide assistance.)
Administrative Clinical/administra- Telephone non-response A4 80% of providers Response time for
A4 tive staff obtain or significant delay. respond to for non-emergency
access to provider. non-emergency inquiries.
inquiries within 24
hours.
A4.1 95% of Response time for
psychiatrists respond emergency inquiries
to emergency inquiries in minutes.
within 15 minutes.
</TABLE>
<TABLE>
<CAPTION>
SERVICE REPORTING DEFICIENCY
AREA FREQUENCY TYPE
<S> <C> <C>
Administrative 60 days III
A1 After contract
initiation.
Administrative Annually III
A2
Administrative Weekly III
A3 (state
generated
report)
Administrative Quarterly III
A4
Quarterly I
</TABLE>
<PAGE> 16
PROVIDER PERFORMANCE MEASURES
<TABLE>
<CAPTION>
SERVICE DESIRED PERFORMANCE REPORTING
AREA OUTCOME MEASURE STANDARD REQUIREMENT
<S> <C> <C> <C> <C>
Clinical Emergency psychiatric On-site review of C1 100% of the Number of documented
C1 cases reviewed within emergency intervention(s) psychiatrists providing days to respond. (Phone
reasonable period of that requires phone emergency phone dated and signed by
time following phone consult. consultation will see psychiatrist.
consultation and patient(s) within a 72
ordering of hour period from the
intervention. time of the original
phone order.
Clinical Patients are seen for Average length of time C2.1 100% of specialty Number of patients and
C2 routine and specialty patient waits to be seen referrals to psychiatry number of days that
psychological/ from the time of referral shall be seen within 14 elapsed beyond 14 days
psychiatric consults/ to face-to-face contact day time period. before patient was
treatment in a timely with psychiatrist or seen.
manner. psychologist.
C2.2 100% of routine Number of patients and
referrals to number of days that
psychologist shall be elapsed beyond 14 days
seen within a 30 days before patient was seen
time period.
Clinical Patients prescribed Frequency of face-to-face C3 98% of the patients A sample of patients
C3 psychotropic contact with psychiatrist prescribed psychotropic who have been
medications will meet for patients prescribed medication will have prescribed psychotropic
face-to-face with a psychotropic medications. met directly with a medications by
psychiatrist as psychiatrist every 3 frequency of
indicated by the months. face-to-face contact
treatment plan but with psychiatrist
not less frequently during previous 3
than once every 3 months.
months.
Clinical Treatment plans that Percentage of patients C4. 98% of all patients A sample of diagnosed
C4 address the clinical with a diagnosis who have warranting a treatment patients with treatment
care of a patient a treatment plan to plan will have been plans shall be
meet the approval of address their mental reviewed, signed and reviewed.
the psychiatrist needs. dated by the
and/or psychologist. psychiatrist and/or
psychologist. An
appropriate diagnosis
will have been assigned
to each patient.
</TABLE>
<TABLE>
<CAPTION>
SERVICE REPORTING DEFICIENCY
AREA FREQUENCY TYPE
<S> <C> <C>
Clinical Quarterly for DeBerry I
C1 Special Needs
Facility). Every four
months for other TDOC
facilities.
Clinical Quarterly for II
C2 reception centers.
Every four months for
other TDOC
facilities.
Quarterly for II
reception centers.
Every four months for
other TDOC
facilities.
Clinical Annually II
C3
Clinical Annually II
C4
</TABLE>
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C>
Clinical Documentation that all In-house mental health C5. 100% of documented Memorandum noting
C5 in-house mental health policies reflect TDOC mental health in-house approval of each
policies have been policy requirements and policies shall meet the in-house mental health
approved by the accepted clinical approval of the policy.
psychologist and/or practices of the psychologist and/or
psychiatrist. community. psychiatrist through
memorandum.
</TABLE>
<TABLE>
<S> <C> <C>
Clinical Annually II
C5
</TABLE>
<PAGE> 18
PATIENT/PROGRAM OUTCOME PERFORMANCE
<TABLE>
<CAPTION>
SERVICE DESIRED PERFORMANCE REPORTING
AREA OUTCOME MEASURE STANDARD REQUIREMENT
<S> <C> <C> <C> <C>
Administrative Implement specific Contractor will The contractor will The state will be in
A1 patient/program develop with the submit to the state's a position to
outcome measures assistance and Director of Mental implement outcome at
statewide/regionally approval of the Health several it's discretion.
state specific patient outcome
patient/program measures.
outcome measures.
</TABLE>
<TABLE>
<CAPTION>
SERVICE REPORTING DEFICIENCY
AREA FREQUENCY TYPE
<S> <C> <C>
Administrative 120 days after III
A1 contract initiation
</TABLE>
NOTE: Additional patient/program outcome performance measures shall be
developed at a later date. Not all outcome measures will be subject to
liquidated damages.
<PAGE> 19
CONTRACT SUMMARY SHEET
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
[ ] NEW CONTRACT [ ] FA [ ] GR [ ] DP [ ] RV CONTRACT NUMBER RFS NUMBER
[X] AMENDMENT #1 [ ] ID [ ] Z [ ] DG [ ] NC --------------------------------------------------
[ ] GU [ ] GG [ ] DL FA-98-12426-01 329.00-011
- ---------------------------------------------------------------------------------------------------------------------------
[ ] OTHER CONTRACTING PARTY (VENDOR): [ ] GRANTEE: VENDOR I.D. NUMBER
MHM SERVICES, INC. [ ]V [X]C 521223048
- ---------------------------------------------------------------------------------------------------------------------------
STATE AGENCY: CORRECTION DIVISION: ADMINISTRATION/MENTAL HEALTH SVCS
- ---------------------------------------------------------------------------------------------------------------------------
PROGRAM CONTACT: LENNY LOCOCO FISCAL CONTACT: FRED HIX
FLOOR(SUITE)/BLDG: 4TH FLR RACHEL JACKSON BLDG. FLOOR(SUITE)/BLDG: 3RD FLR RACHEL JACKSON BLDG.
TELEPHONE: 741-2607 TELEPHONE: 741-2351
- ---------------------------------------------------------------------------------------------------------------------------
ALLOTMENT COST MAJOR & MINOR GRANT IS ON GRANT SUBGRANT CFDA
CODE CENTER OBJECT CODE FUND STARS CODE CODE NUMBER
- ---------------------------------------------------------------------------------------------------------------------------
329.01 43 083 [ ] YES
- ---------------------------------------------------------------------------------------------------------------------------
BEGINNING DATE: 7/1/97 TERMINATION DATE: 6/30/00
- ---------------------------------------------------------------------------------------------------------------------------
ESTIMATED EXPENDITURES BY FISCAL YEAR BY FUNDING SOURCE:
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACT AMOUNT
FY STATE FEDERAL INTERDEPARTMENTAL OTHER INCLUDING ALL AMENDMENTS
- ---------------------------------------------------------------------------------------------------------------------------
98 $2,303,856.00 $2,303,856.00
- ---------------------------------------------------------------------------------------------------------------------------
99 $2,506,155.00 $2,506,155.00
- ---------------------------------------------------------------------------------------------------------------------------
00 $2,663,293.00 $2,663,293.00
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $7,473,304.00 $7,473,304.00
===========================================================================================================================
CONTRACT SCOPE/SERVICE DESCRIPTION:
- ---------------------------------------------------------------------------------------------------------------------------
PROVISION OF MENTAL HEALTH SERVICES FOR THE INMATE POPULATION CONFINED WITHIN THE TN DEPT. OF CORRECTION
- ---------------------------------------------------------------------------------------------------------------------------
CHECK ONE FOR EACH CATEGORY:
- ---------------------------------------------------------------------------------------------------------------------------
[ ] FISCAL YEAR FUNDING IS STRICTLY LIMITED.
[ ] FUNDS MAY ROLL FORWARD TO SUBSEQUENT FISCAL YEARS WITHIN THE CONTRACT TERM.
- ---------------------------------------------------------------------------------------------------------------------------
[X] VENDOR IS ALREADY SET UP IN STARS ON ACH.
[ ] VENDOR ACH FORM IS ATTACHED.
- ---------------------------------------------------------------------------------------------------------------------------
[X] CURRENT FORM W-9 INFORMATION IS ON FILE IN ACCOUNTS.
[ ] A FORM W-9 IS ATTACHED.
- ---------------------------------------------------------------------------------------------------------------------------
APPROVED BY FISCAL OFFICER: COMPLETE FOR AMENDMENTS ONLY:
- ---------------------------------------------------------------------------------------------------------------------------
ORIGINAL CONTRACT THIS AMENDMENT
AND PRIOR AMENDMENTS
/s/ FRED W. HIX 11-3-97 ---------------------------------------------------------------
---------------------------------------------------- TERMINATION
SIGNATURE DATE DATE:
- ---------------------------------------------------------------------------------------------------------------------------
OCA USE ONLY FY/FUNDING:
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
TOTAL:
-----------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
CONSENT TO ASSIGNMENT
OF
MENTAL HEALTH SERVICES CONTRACT
BETWEEN
THE STATE OF TENNESSEE DEPARTMENT OF CORRECTIONS
AND
MHM SERVICES, INC.
WHEREAS, MHM Services, Inc. (Contractor), entered into a Mental Health
Services Contract with the State of Tennessee, Department of Correction (TDOC)
effective on July 1, 1997, and Paragraph D.5 of that Agreement requires the
Contractor to obtain TDOC's prior written consent before assigning Contractor's
rights and responsibilities under the contract to any other party;
WHEREAS, Contractor desires to assign all of the right and responsibilities
under the Mental Health Services Contract to its wholly-owned subsidiary, MHM
Correctional Services, Inc., effective July 1, 1997, a copy of which Assignment
is attached.
NOW, THEREFORE, TDOC hereby consents to such assignment of Contractor's rights
and responsibilities under the Mental Health Services Contract to MHM
Correctional Services, Inc., subject to Contractor remaining responsible for
performance by MHM Correctional Services, Inc. of its duties and obligations
under the Mental Health Services Contract.
The State is not bound by this consent to assignment until it is approved by
the appropriate State officials as indicated on the signature page of this
Amendment.
1
<PAGE> 2
ASSIGNMENT
This instrument is entered into this 10th day of October, 1997, between MHM
Services, Inc. (Assignor) and MHM Correctional Services, Inc. (Assignee).
WHEREAS, Assignor entered into a Mental Health Services Contract with the State
of Tennessee Department of Correction (TDOC) on July 1, 1997.
Effective as of July 1, 1997, Assignor transfers and assigns for a good and
valuable consideration and $1.00 cash in hand paid, receipt of which is
acknowledged, all of its rights and responsibilities under the Mental Health
Services Contract, to Assignee. Assignee agrees to accept all of Assignor's said
rights and responsibilities as if the Mental Health Services Contract were fully
set forth herein and Assignee agrees to assume all of Assignor's duties and
obligations under the Mental Health Services Contract. Not withstanding this
assignment, Assignor shall remain responsible for performance of the duties and
obligations of Assignor set forth in the aforesaid Mental Health Services
contract.
Accepted and agreed to this 10th day of October, 1997.
ASSIGNOR:
MHM Services, Inc.
By: [SIG]
--------------------------
Title: President
----------------------
ASSIGNEE:
MHM Correctional Services, Inc.
By: [SIG]
--------------------------
Title: Vice President
----------------------
IN WITNESS WHEREOF, the parties have by their duly authorized representatives
set their signature.
CONTRACTOR:
MHM Services, Inc.
By: [SIG] Date: 10/10/97
-------------------------- --------------
Title: President
----------------------
{Signatures Continued on Next Page}
2
<PAGE> 3
STATE OF TENNESSEE
DEPARTMENT OF CORRECTION:
By: /s/ DONAL CAMPBELL Date: 10/29/97
-------------------------- -----------
Donal Campbell
Commissioner
Approved:
COMMISSIONER OF FINANCE AND ADMINISTRATION:
By: /s/ JOHN D. FERGUSON Date: 11/5/97
-------------------------- -----------
John Ferguson
Commissioner
STATE OF TENNESSEE
COMPTROLLER OF THE TREASURY:
By: /s/ WILLIAM R. SNODGRASS Date: 11/7/97
-------------------------- -----------
Williamn R. Snodgrass
Comptroller
3
<PAGE> 1
GEORGIA DEPARTMENT OF CORRECTIONS
LEGAL SERVICES OFFICE
[STATE OF GEORGIA SEAL]
PROFESSIONAL SERVICES
AGREEMENT
THIS AGREEMENT is entered into the 29 day of August, 1997, by and between
the GEORGIA DEPARTMENT OF CORRECTIONS, an agency of the State of Georgia
(hereinafter referred to as the "Department"), and MHM CORRECTIONAL SERVICES,
INC., duly authorized by law to transact business in the State of Georgia (the
"Contractor").
WHEREAS, the Department desires to engage Contractor to provide certain
services as more fully described below, and Contractor desires to provide such
services in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of these premises and the mutual promises
and agreements hereinafter set forth, the parties hereby agree as follows:
1. Scope of Services. The Contractor agrees to perform fully and
faithfully the services described in the Request for Proposals prepared by the
Department and the corresponding Proposal submitted by the Contractor, together
forming Exhibit "A," attached hereto and incorporated by reference herein (the
"Services"), in accordance with standards applicable to similar professionals
practicing in the geographic locality that Services are to be performed. In the
event of any conflict in the interpretation of the Services arising between the
terms and conditions of the Request for Proposals and those of the Proposal,
then the former document shall govern. No additional or different services shall
be performed unless provided for by an amendment to this Agreement, executed by
the parties in the manner provided for herein. No provision of this Agreement
shall be construed to prohibit Contractor from offering similar or different
services to the public, including other State agencies.
<PAGE> 2
2. Independent Contractor. In the performance of the Services, and for all
tax, liability and insurance purposes, Contractor shall at all times be an
independent contractor and not an agent, representative or employee of the
Department. Contractor may perform Services through employees or subcontractors,
provided in each case that the individuals actually providing the Services shall
meet all applicable criteria set out at Exhibit "A," as reasonably determined by
the Department, provided further that Contractor shall at all times remain
responsible for performance of Services hereunder. Contractor shall determine
the means and manner of performance of Services to be rendered, and Contractor
shall not hold itself out to be an employee or agent of the Department or use
the name of the Department in its business (except to describe its role under
this Agreement).
3. Compensation. The Department agrees to pay Contractor a sum not to
exceed $6,321,918.20 (Six Million Three Hundred Twenty-One Thousand Nine
Hundred Eighteen Dollars and Twenty Cents) for the full and faithful performance
of Services during the Term hereof, said sum being payable in monthly
installments in advance, upon receipt of Contractor's monthly invoice in
approved form on or before the 15th of each month (commencing with a September
invoice for October's Services). The Department shall endeavor to pay approved
invoices within 30 days of receipt; however, no interest shall accrue on
past-due amounts.
Actual payments to the Contractor shall be made on the basis of the
capitated rate of $19.03 (Nineteen Dollars and Three Cents) per inmate, per
month, for the Term hereof. In the event that the Department elects to renew
this Agreement for one or more additional terms, then the foregoing capitated
rate shall be increased as follows:
July 1, 1998 - June 30, 1999 $19.32 per inmate per month
July 1, 1999 - June 30, 2000 $19.79 per inmate per month
July 1, 2000 - June 30, 2001 $20.58 per inmate per month
July 1, 2001 - June 30, 2002 $21.40 per inmate per month
The parties acknowledge and agree that a reasonable estimate of the
average daily inmate census for purposes of calculating each month's payment is
36,912 inmates, provided that the initial payment and each monthly payment
thereafter shall be subject to adjustment by the actual average daily inmate
census for the preceding month, itemized separately as a debit or credit on a
subsequent invoice. Commencing with the month of November, 1997, and for each
succeeding month, the Department agrees to submit to the Contractor on or before
the 10th day of each month, the average daily inmate census for the preceding
month.
2
<PAGE> 3
4. Medication Costs. The Contractor agrees to pay the Department for the
costs of psychotropic medications prescribed by Contractor's physicians in
accordance with the provisions of this paragraph. The Department shall invoice
the Contractor for psychotropic medication inventory on hand as of October 1,
1997, which inventory shall be available to Contractor for prescription purposes
on and after that date. Thereafter, but not more frequently than monthly, the
Department shall invoice the Contractor for supplies of psychotropic medications
purchased to replenish inventory on hand, provided that the Department shall
submit reasonable documentation as required by the Contractor from time to time.
The Contractor shall endeavor to pay appropriately documented invoices within
thirty days of receipt. The Department agrees to repurchase psychotropic
medication inventory upon any termination of this Agreement, including any
extension hereof. The Department's check for the full amount of the cost of said
inventory existing as of the termination date shall be submitted to the
Contractor within sixty days of termination.
Contractor may propose reasonable alternatives for purchasing, packaging
and distribution of psychotropic medications, and Contractor shall use best
efforts to arrange for such alternatives to be made available to the
Department's other medical services providers. Any savings resulting from use of
such alternative sources shall benefit the Contractor and the Department
equally.
5. Pledges of Credit. Contractor acknowledges that the State of Georgia
may not lawfully pledge its credit so as to cause a State agency to incur a
financial obligation unless funds to honor the obligation have been lawfully
appropriated. In the event that the source of any payment by the Department as
provided for herein is insufficient, in the sole discretion of the Department,
then this Agreement shall terminate without further obligation of the
Department.
6. Expenses. The Department shall not be liable for and shall not
reimburse the Contractor for any travel or other expenses incurred by the
Contractor except as required and approved in advance by the Department in
writing. Any request for reimbursement shall be submitted in accordance with
fiscal guidelines established by the Department.
7. Term of Agreement. This Agreement shall be effective as of October 1,
1997, and shall continue in force and effect until June 30, 1998, unless such
period is extended by mutual agreement of the parties in writing. The Department
shall have the right to terminate this Agreement at any time for its
convenience, with 30 days' prior written notice to the Contractor. Contractor
agrees that no agreement shall be effective to prohibit the Department from, or
in any manner impairing the Department's ability with respect to, engaging the
services of any employees, agents or subcontractors of Contractor in the event
of any termination of this Agreement.
3
<PAGE> 4
8. Compliance with Laws. The Contractor agrees to perform Services in
accordance with the terms and conditions of this Agreement and in compliance
with all laws, rules, regulations and orders of federal, State and local
governments, including orders of any court of competent jurisdiction. Without
limitation to the generality of the foregoing, Contractor agrees to comply with
any special conditions, undertakings or representations attached hereto, all of
which form a part hereof.
9. Screening. Contractor acknowledges and agrees that Contractor,
including employees and subcontractors of Contractor, shall be subject to
customary background investigations conducted by duly authorized agents of the
State, and, while on the premises of any GDC facility, Contractor and
Contractor's personnel shall be subject to, and agree to comply with, reasonable
rules pertaining or related to safety and security, including spoken directives
of GDC facility staff.
10. Licenses, Certifications and Insurance. Contractor agrees to maintain
for the duration of this Agreement all licenses, certifications and permits
applicable to Services. Contractor further agrees to maintain insurance during
the term of this Agreement in amounts and of types reasonably protective of the
respective interests of the parties, and in any event, in amounts and of types
as follows:
a) Workers' compensation insurance in amounts established by State law;
b) Comprehensive general liability insurance on an occurrence basis, broad
form, in the amount of $1,000,000.00 per occurrence/ $3,000,000.00
aggregate;
c) Auto liability insurance covering owned and nonowned vehicles in the
amount of $1,000,000.00 per occurrence/ $2,000,000.00 aggregate;
d) Professional liability insurance in the amount of $1,000,000.00 per
occurrence/ $1,000,000.00 aggregate.
The foregoing policies shall be obtained from insurance companies licensed to do
business in the State of Georgia and shall contain a provision that coverages
afforded under the policies will not be canceled or amended without 30 days'
prior written notice. All policies shall be specifically endorsed to provide for
a waiver of the insurance carrier's rights to subrogation against the
Department. Evidence of insurance, in the form of an insurance certificate
naming the Department as a certificate holder, will be required of Contractor
prior to the commencement of Services.
11. Shop Right. Contractor agrees that any processes, equipment,
proprietary know-how or other proprietary information or matters that are
produced or result, directly or
4
<PAGE> 5
indirectly, from or in connection with Contractor's performance of the Services
shall be the property of the Department, and Contractor further agrees to
execute any and all documents, or take additional actions which may be necessary
in the future to give full effect to this provision.
12. Cooperation. Contractor, its employees, agents, subcontractors and
assigns, agree to cooperate fully in the defense of any litigation brought
against the Department or Contractor relating to Services to be performed under
this Agreement, and each party shall give the other prompt notice of any claim,
demand, suit or proceeding.
13. Taxes. Contractor shall be solely responsible for the payment, in a
timely manner, of all federal, State and local taxes, fees or assessments of any
type. Contractor further agrees to indemnify the Department from any loss, cost,
claim, damage or expense arising therefrom.
14. Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties hereto and replaces, cancels and supersedes
any prior agreements and understandings relating to the subject matter hereof;
and all prior representations, agreements, and undertakings between the parties
hereto with respect to the subject matter hereof are merged herein.
15. Amendment. The parties recognize and agree that it may be necessary or
convenient for the parties to amend this Agreement so as to provide for the
orderly implementation of all of the undertakings described herein, and the
parties agree to cooperate fully in connection with such amendments if and as
necessary. However, no change, modification or amendment to this Agreement shall
be effective unless the same is reduced to writing and signed by the parties
hereto.
In the event that there shall be changes in the scope of services,
governmental policies or regulations, the drug formulary governing psychotropic
medications that may be utilized in providing the Services, or other
circumstances, then either party may submit a written request to renegotiate any
of the terms hereof, including but not limited to terms respecting payments to
be made hereunder. However, no request for renegotiation of the Agreement shall
be submitted (a) if at the time this Agreement was executed, the party
submitting the request had actual knowledge of the facts on which the request
would be based, and (b) unless the basis for the request has a substantial and
material financial impact on the party submitting the request. If within thirty
days of receipt of the request, the parties are unable in good faith to
negotiate a satisfactory modification hereto, the party submitting the request
may terminate this Agreement by giving the other sixty days' notice thereof.
5
<PAGE> 6
16. Notices. Any notice under this Agreement shall be deemed duly given if
delivered by hand (against receipt) or if sent by registered or certified mail
- -- return receipt requested, to a party hereto at the address set forth below or
to such other address as the parties may designate by notice from time to time
in accordance with this Agreement.
If to the Contractor: MHM Correctional Services, Inc.
8000 Towers Crescent Drive
Suite 810
Vienna, Virginia 22182
If to the Department: Commissioner of Corrections
Georgia Department of Corrections
Room 852, East Tower
Floyd Memorial Building
Two Martin Luther King, Jr., Drive
Atlanta, Georgia 30334
17. Headings. The headings in this Agreement have been inserted for
convenience only and shall not affect or control the meaning or construction of
any of the provisions of this Agreement.
18. Survival. The terms, conditions, representations, obligations,
understandings and undertakings herein shall survive any termination of this
Agreement.
19. Governing Law. This Agreement is executed in the State of Georgia, and
all matters pertaining to the validity, construction, interpretation and effect
of this Agreement shall be governed by the laws of the State of Georgia.
20. Remedies. No remedies or rights herein conferred upon the parties are
intended to be exclusive of any remedy or right provided by law, but each shall
be cumulative and shall be in addition to every other remedy or right given
hereunder or now or hereafter existing at law or in equity (including the right
of specific performance).
21. Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be an original but all of which shall constitute one
agreement. No party shall be bound by this Agreement until all parties have
executed it.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused the authorized representatives
of each to execute this Agreement on the day and year first above written.
GEORGIA DEPARTMENT OF CONTRACTOR:
CORRECTIONS:
By: [SIG] By: [SIG]
-------------------------- -----------------------------
Witness: [SIG] Witness: [SIG]
--------------------- ------------------------
7
<PAGE> 8
CONTRACT SUMMARY SHEET
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
[X] NEW CONTRACT [X] FA [ ] GR [ ] DP [ ] RV CONTRACT NUMBER RFS NUMBER
[ ] AMENDMENT # [ ] ID [ ] Z [ ] DG [ ] NC --------------------------------------------------
[ ] GU [ ] GG [ ] DL FA 98-12-12426-01 329.00-011
- ---------------------------------------------------------------------------------------------------------------------------
[X] OTHER CONTRACTING PARTY (VENDOR): [ ] GRANTEE: VENDOR I.D. NUMBER
MHM SRVICES, INC. [ ]V [X]C 521223048
- ---------------------------------------------------------------------------------------------------------------------------
STATE AGENCY: CORRECTION DIVISION: ADMINISTRATION/MENTAL HEALTH SVS
- ---------------------------------------------------------------------------------------------------------------------------
PROGRAM CONTACT: LENNY LOCOCO FISCAL CONTACT: FRED HIX
FLOOR(SUITE)/BLDG. 4TH FLR RACHEL JACKSON BLDG. FLOOR(SUITE)/BLDG. 3RD FLR RACHEL JACKSON BLDG.
TELEPHONE: 741-2607 TELEPHONE: 741-2351
- ---------------------------------------------------------------------------------------------------------------------------
ALLOTMENT COST MAJOR & MINOR GRANT IS ON GRANT SUBGRANT CFDA
CODE CENTER OBJECT CODE FUND STARS CODE CODE NUMBER
- ---------------------------------------------------------------------------------------------------------------------------
329.01 43 083 [ ] YES
- ---------------------------------------------------------------------------------------------------------------------------
BEGINNING DATE: 7/1/97 TERMINATION DATE: 6/30/00
- ---------------------------------------------------------------------------------------------------------------------------
ESTIMATED EXPENDITURES BY FISCAL YEAR BY FUNDING SOURCE:
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACT AMOUNT
FY STATE FEDERAL INTERDEPARTMENTAL OTHER INCLUDING ALL AMENDMENTS
- ---------------------------------------------------------------------------------------------------------------------------
98 $2,303,856.00 $2,303,856.00
- ---------------------------------------------------------------------------------------------------------------------------
99 $2,506,155.00 $2,506,155.00
- ---------------------------------------------------------------------------------------------------------------------------
00 $2,663,293.00 $2,663,293.00
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $7,473,304.00 $7,473,304.00
===========================================================================================================================
CONTRACT SCOPE/SERVICE DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------------
PROVISION OF MENTAL HEALTH SERVICES FOR THE INMATE POPULATION CONFINED WITHIN THE TN DEPT. OF CORRECTION
- ---------------------------------------------------------------------------------------------------------------------------
CHECK ONE FOR EACH CATEGORY:
- ---------------------------------------------------------------------------------------------------------------------------
[ ] FISCAL YEAR FUNDING IS STRICTLY LIMITED.
[ ] FUNDS MAY ROLL FORWARD TO SUBSEQUENT FISCAL YEARS WITHIN THE CONTRACT TERM.
- ---------------------------------------------------------------------------------------------------------------------------
[ ] VENDOR IS ALREADY SET UP IN STARS ON ACH.
[ ] VENDOR ACH FORM IS ATTACHED.
- ---------------------------------------------------------------------------------------------------------------------------
[ ] CURRENT FORM W-9 INFORMATION IS ON FILE IN ACCOUNTS.
[ ] A FORM W-9 IS ATTACHED.
- ---------------------------------------------------------------------------------------------------------------------------
APPROVED BY FISCAL OFFICER: COMPLETE FOR AMENDMENTS ONLY:
- ---------------------------------------------------------------------------------------------------------------------------
ORIGINAL CONTRACT THIS AMENDMENT
AND PRIOR AMENDMENTS
/s/ FRED W. HIX 7-1-97 ---------------------------------------------------------------
---------------------------------------------------- TERMINATION
SIGNATURE DATE DATE:
- ---------------------------------------------------------------------------------------------------------------------------
OCA USE ONLY FY/FUNDING:
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
TOTAL:
-----------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
AGREEMENT
BY AND AMONG
MHM EXTENDED CARE SERVICES, INC.,
MHM SERVICES, INC.,
APOGEE, INC.,
APOGEE OF TENNESSEE, INC.,
and
APOGEE OF PENNSYLVANIA, INC.
<PAGE> 2
TABLE OF CONTENTS
Paragraph Title Page
No.
1. Purchase of Sale of Assets 2
2. Purchase Price 5
3. Representations and Warranties of Sellers 13
4. Representations and Warranties of Buyer 25
5. Covenants of Sellers 29
6. Covenants of Buyer 31
7. Conditions to Obligations of Buyer 32
8. Conditions to Obligations of Sellers 34
9. Provisions for Indemnification 37
10. Closing 45
11. Opinion of Counsel for Sellers 48
12. Opinion of Counsel for Buyer and Buyer Parent 49
13. Restrictive Covenant 50
14. Survival of Representations and Warranties 52
15. Further Assurances 52
16. Access 53
17. Notices 53
18. Broker 55
19. Expenses 55
20. No Solicitation 56
21. Entire Agreement 56
22. Employees & Independent Contractors 57
23. Binding Effect 58
24. Assignment 59
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<PAGE> 3
Paragraph Title Page
No.
25. Headings 59
26. Law Governing 60
27. Counterparts 60
28. Consented Assignment 60
29. Transfer of Common Stock 61
30. Definitions 63
-ii-
<PAGE> 4
LIST OF EXHIBITS
Exhibit i(a)(i) Real Property Lease
Exhibit i(a)(ii) Fixed Assets
Exhibit i(a)(iii) Facility Contracts
Exhibit i(a)(v)-i HCS Software Agreement
Exhibit i(a)(v)-2 License Agreement (Lotus)
Exhibit 2(a)(ii) Promissory Note
Exhibit 3(c) Knowledge of Sellers re: material
changes in Business
Exhibit 3(d) Liens, etc.
Exhibit 3(e) Continuing Breaches, Violations,
Defaults,etc.
Exhibit 3(f) Litigation
Exhibit 3(g) Power and Authority, etc.
Exhibit 3(i)(i)-l Licenses, Permits, etc.
Exhibit 3(i)(i)-2 Consents, Waivers, Approvals, etc.
Exhibit 3(j) Unions and Employees
Exhibit 3(k) Licenses to the Software
Exhibit 3(n) Reductions in Reimbursement Levels
Exhibit 4(d) Litigation
Exhibit 4(g) Knowledge of Buyer re: material
changes in Business
Exhibit 4(h) Reductions in Reimbursement Levels
Exhibit 7(i) Restrictive Covenant Regarding
Professional Corporations
Exhibit 7(j) Katz Employment Agreement
Exhibit 7(k) Interim Management Agreement
Exhibit 7(l) Shared Services Agreement
Exhibit 7(m) AHS Agreement
Exhibit 7(n) CSPC Agreement
Exhibit 8(f) Registration Rights Agreement
Exhibit 8(j) Guaranty of Buyer Parent
Exhibit 9(j)-l Form of Provisional Note
Exhibit 9(j)-2 Form of Provisional Guaranty
Exhibit 9(j)-3 Form of Provisional Security
Agreement
Exhibit 10(a)(i) Bill of Sale and Assignment (First
Closing)
Exhibit 10(c) Bill of Sale and Assignment (Final
Closing)
Exhibit 18 Broker
Exhibit 22(a) Employees offered positions as of
First Closing
Exhibit 22(b) Employees offered positions as of
Final Closing
Exhibit 22(c) Administrative and Clerical
Independent Contractors
Exhibit 22(d) Clinical Independent Contractors
-iii-
<PAGE> 5
AGREEMENT
THIS AGREEMENT (the "Agreement"), made as of the 31st day of March, 1997
by and among MHM Services, Inc., a corporation organized and existing under the
laws of the State of Delaware (hereafter referred to as "Buyer Parent") and its
wholly owned subsidiary MHM Extended Care Services, Inc., a corporation
organized and existing under the laws of the State of Delaware, with its
principal offices at 8000 Towers Crescent Drive, Suite 810, Vienna, Virginia
22182 (hereinafter referred to as "Buyer"), and Apogee, Inc., a corporation
organized and existing under the laws of the State of Delaware (hereinafter
referred to as "Seller Parent"), and its wholly owned subsidiaries Apogee of
Tennessee, Inc., a corporation organized and existing under the laws of the
State of Tennessee (hereinafter referred to as "TN Seller"), and Apogee of
Pennsylvania, Inc., a corporation organized and existing under the laws of the
State of Delaware (hereinafter referred to as "PA Seller" and, collectively with
Seller Parent and TN Seller as "Sellers"). The term "Sellers" as used herein
shall mean the Sellers or each or any of them, as the context requires.
W I T N E S S E T H :
WHEREAS, Sellers are engaged in the provision of behavioral healthcare
services to residents of skilled and unskilled nursing homes and assisted living
facilities in the Commonwealth of Pennsylvania, the management of the provision
of such services to residents of such facilities in the Commonwealth of
Pennsylvania and the State of Tennessee, the management (by the TN Seller) of a
Tennessee professional corporation (Clinical Services, P.C.) that
<PAGE> 6
provides such services to such residents in Tennessee, and the management (by
the PA Seller) of a Pennsylvania professional corporation (AHS Psychiatric
Associates of Pennsylvania, P.C.) that provides psychiatric services to such
residents in Pennsylvania (hereinafter all of the foregoing are referred to as
the "Business"; provided, however, the term "Business" shall not include the
management of any activities of Clinical Services, P.C. other than its Tennessee
operations); and
WHEREAS, Buyer wishes to purchase from Sellers certain of the assets and
substantially all of the contractual rights of the Business owned by Sellers;
and
WHEREAS, Sellers wish to sell the said assets and contractual rights to
Buyer upon, under and subject to certain terms and conditions agreed upon by and
among the parties as hereinafter set forth; and
WHEREAS, Sellers wish to assign to Buyer and Buyer wishes to assume from
Sellers certain liabilities as hereinafter set forth;
NOW THEREFORE, intending to be legally bound hereby, and in consideration
of the mutual covenants herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. PURCHASE AND SALE OF ASSETS
(a) Buyer hereby agrees to purchase from each Seller set forth below
and each Seller agrees to sell to Buyer such of the following assets and
contractual rights (collectively, the "Assets") as are owned by such Seller
(which Assets, together with
-2-
<PAGE> 7
the Excluded Assets described in subparagraph 1(d) hereof, constitute
substantially all of the assets used in the Business), for the purchase price
set forth in paragraph 2 hereinafter:
(i) All of Seller Parent's right, title and interest as lessee
under the provisions of that certain lease for the premises located at 415
Poplar Avenue, Suite 322 in Memphis, Tennessee, together with all improvements
thereon (the "Lease"). A true and complete copy of the Lease is attached hereto
and made a part hereof as Exhibit 1(a)(i);
(ii) The furniture, equipment, and other fixed assets owned by
the Sellers set forth on Exhibit 1(a)(ii) and used in the Business, which are
listed in Exhibit 1(a)(ii) attached hereto and made a part hereof;
(iii) All rights of each of Seller Parent, TN Seller, and PA
Seller, as the case may be, under or in connection with certain agreements with
skilled and unskilled nursing homes and assisted living facilities in force on
the Final Closing Date (collectively, "Facility Contracts"). A list of all
Facility Contracts currently in force, showing, inter alia, the name of each
applicable Seller, is set forth on Exhibit 1(a)(iii) attached hereto. Buyer and
Sellers agree that the agreements to be transferred to Buyer pursuant to this
subparagraph 1 (a)(iii) at the Final Closing shall be those set forth in
Exhibit 1(a)(iii) with such additions and deletions between the time of the
execution of this Agreement and the Final Closing Date to which Buyer expressly
agrees in writing;
-3-
<PAGE> 8
(iv) All of the rights, title and interest of Sellers in the
customer lists of the Business;
(v) Certain rights and interests of Sellers in certain computer
software used in the operation of the Business or developed and owned by Sellers
for use in the Business as more particularly set forth in the agreement attached
as Exhibit 1(a)(v)-1 hereto and the license in the form set forth as Exhibit
1(a)(v)-2 hereto (hereinafter collectively, the "Software"); and
(vi) the goodwill of Sellers in connection with the Business.
(b) The Assets shall be transferred by Sellers to Buyer free of all
security interests, liens, encumbrances, restrictions, indebtedness and charges
of any kind except for certain restrictions set forth in the Facility Contracts,
the Lease, and the license agreements for the Software.
(c) Buyer shall not assume, nor be obligated to perform, fulfill or
pay, any obligations or indebtedness of Sellers or the Business whatsoever,
except that Buyer shall assume the obligations and indebtedness arising from
Buyer's operation of the Business after the First Closing Date, including
obligations and indebtedness arising from the Lease and the Facility Contracts
(the "Assumed Liabilities"), subject to and in accordance with the terms of the
Interim Management Agreement, the Shared Services Agreement, the AHS Agreement
and the CSPC Agreement (as hereinafter defined).
(d) The Assets to be transferred to Buyer hereunder shall not
include, and Sellers shall retain for their own account,
-4-
<PAGE> 9
any and all other assets of the Business, other than the Assets.
2. PURCHASE PRICE
(a) As consideration for the purchase of the Assets and the
restrictive covenants of Sellers, Buyer shall deliver to Sellers as the Purchase
Price hereunder:
(i) One Hundred Thousand Dollars ($100,000.00) payable at the
First Closing (as hereinafter defined), by wire transfer of immediately
available funds;
(ii) One Hundred and Twenty Five Thousand Dollars ($125,000.00)
payable at the First Closing by delivery of a promissory note in the form
attached as Exhibit 2(a)(ii) (the "Promissory Note"), which Promissory Note
shall provide for simple interest at the rate of seven percent (7%) per annum,
such interest to be paid six months after the First Closing Date for the first
two quarters and quarterly thereafter, and payments of principal in the amount
of Forty One Thousand, Six Hundred and Sixty Six Dollars ($41,666.00) on each of
the first and second anniversaries of the First Closing Date, and an additional
payment of principal in the amount of Forty One Thousand, Six Hundred and Sixty
Eight Dollars ($41,668.00) on the third anniversary of the First Closing Date;
(iii) Two Hundred Thousand (200,000) shares of the common
stock of Buyer Parent, par value $0.01 per share, to be delivered at the First
Closing (the "Common Stock") registered in the name of Seller Parent; and
(iv) Such Annual Earnout described in subparagraph 2(b) as may
be payable on the dates and in accordance
-5-
<PAGE> 10
with the terms specified therein and in subparagraph 2(c).
(b) With respect to services performed during the period of five (5)
years commencing on March 1, 1997 (the "Earnout Commencement Date"), Buyer
shall pay to Sellers and Sellers will be entitled to receive from Buyer, subject
to the payment provisions of paragraph 2(c), twenty percent (20%) of the Net
Cash Collected (as defined in paragraph 2(d) hereof) (each annual payment, an
"Annual Earnout").
(c) Each Annual Earnout shall be determined based on the Net Cash
Collected with respect to each annual period (each an "Annual Earnout Period"),
and shall be payable to Sellers as follows:
(i) Within ninety (90) days after the end of each year after the
Earnout Commencement Date for five (5) years (each an "Annual Calculation
Date"), Buyer will provide Seller Parent with detailed reports and calculations
of the Expenses (as hereinafter defined) for the preceding Annual Earnout
Period, determined through the end of such Annual Earnout Period, together with
a certification by the Chief Financial Officer of Buyer Parent of the
completeness and accuracy of such calculations in accordance with the terms of
this Agreement. Beginning on the fourth anniversary of the Earnout Commencement
Date, Buyer, in its absolute discretion, may exclude from such detailed reports
and calculations any information reasonably deemed by it to be confidential to
Buyer's Extended Care Operations. Seller Parent shall have the right to audit
the records that support all such
-6-
<PAGE> 11
detailed reports and calculations by Buyer, in accordance with the provisions
of subparagraph 2(f) hereof.
(ii) Within fifteen (15) days after the end of each Annual
Calculation Date and each calendar month after the first Annual Earnout Period
(the "Monthly Reporting Date") until a date to be mutually agreed upon in good
faith by Buyer and Seller Parent, Buyer shall provide Seller Parent with: (a) a
detailed report of all collections received by Buyer during the preceding Annual
Earnout Period (in the case of reports to be provided on an Annual Calculation
Date) or the last full calendar month preceding such Monthly Reporting Date (in
the case of reports to be provided on a Monthly Reporting Date) with respect to
Buyer's Extended Care Operations for each preceding Annual Earnout Period,
designating the Annual Earnout Period to which such collections apply; and (b) a
detailed report and calculation of the Net Cash Collected (as defined in
subparagraph 2(d) hereof) for each preceding Annual Earnout Period. Seller
Parent shall have the right to audit the records that support each detailed
report and calculation of Net Cash Collected, in accordance with the provisions
of subparagraph 2(f) hereof.
(iii) On each Annual Calculation Date and Monthly Reporting Date,
Buyer shall pay to Sellers the sum for all Annual Earnout Periods of Twenty
Percent (20%) of the Net Cash Collected for each such Annual Earnout Period;
provided, however, that such payments shall be reduced by the amounts of the
Annual Earnout previously paid with respect to each Annual Earnout Period.
-7-
<PAGE> 12
(d) As used herein, the following terms have the following meanings:
(i) "Buyer's Extended Care Operations" shall consist solely of
the provision, after the First Closing Date, of behavioral healthcare,
optometry, dentistry and podiatry services to residents of skilled and unskilled
nursing homes and assisted living facilities in the Commonwealth of Pennsylvania
and the State of Tennessee and the management of the provision of such services
to residents of such facilities in the Commonwealth of Pennsylvania and the
State of Tennessee after the First Closing Date, whether such operations are
conducted directly by Buyer or indirectly through an affiliate of Buyer or a
professional corporation managed by Buyer;
(ii) "Expenses" shall mean only those costs and expenses directly
attributable or allocable to the Buyer's Extended Care Operations as accrued and
allocated in accordance with generally accepted accounting principles,
consistently applied in accordance with Buyer's customary practice. (If a direct
cost is incurred on behalf of both Buyer's Extended Care Operations and other
operations of Buyer (the "Other Operations"), such direct cost shall be
allocated to Expenses in proportion to the ratio of the consolidated net
revenues of Buyer's Extended Care Operations for the applicable Annual Earnout
Period (determined in accordance with generally accepted accounting principles)
to the sum of (aa) such net revenues and (bb) the consolidated net revenues for
such Annual Earnout Period of the Other Operations. Since Buyer's
-8-
<PAGE> 13
Extended Care Operations may be conducted by Buyer, an affiliate of Buyer, or a
professional corporation managed by Buyer or an affiliate of Buyer, Expenses
shall be calculated on a consolidated basis. As used in this Agreement, an
"affiliate" of Buyer shall mean any entity that, directly or indirectly through
one or more intermediaries, is controlled by, controls, or is under common
control with the Buyer.) Such direct costs and expenses shall include, without
limitation, salaries, bonuses, costs of clinicians, benefits, all direct
overhead costs incurred in connection with the Buyer's Extended Care Operations
including billing and collection fees, audit fees (other than audit fees
required because Buyer Parent is a public company), legal fees, insurance,
taxes, license fees and all other costs incurred in connection with the Buyer's
Extended Care Operations and directly attributable or allocable to the Buyer's
Extended Care Operations, including the actual cost of services performed by
Buyer Parent and Buyer's affiliates specifically for the Buyer's Extended Care
Operations which otherwise would not have been incurred by Buyer Parent or
Buyer's affiliate. The following costs shall not be considered direct expenses
for the purposes of this subparagraph: bad debt allowances, depreciation,
Buyer's corporate overhead expenses, including amortization (including
amortization of goodwill), and interest related to the acquisition of the
Assets; and
(iii) "Net Cash Collected" shall mean, for each Annual Earnout
Period preceding any Annual Calculation Date or
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<PAGE> 14
Monthly Reporting Date referred to above, the amount by which actual cash
collections of Buyer, or professional corporations or other operations managed
by Buyer or an affiliate of Buyer for healthcare services rendered, as of the
end of the Annual Earnout Period or monthly period, as the case may be,
immediately preceding such Annual Calculation Date or Monthly Reporting Date, as
the case may be, as a result of Buyer's Extended Care Operations in such Annual
Earnout Period exceeds the amount of Expenses for such Annual Earnout Period.
(e) The purchase price, exclusive of the Earnout, shall be allocated
as follows:
(i) One Hundred Forty Thousand Dollars ($140,000) to PA Seller;
(ii) Eighty Five Thousand Dollars ($85,000) to TN Seller; and
(iii) the balance to Seller Parent.
Payments, if any, under the Earnout are allocable in proportion to the
above allocations of the purchase price among the three Sellers.
The purchase price is further allocable as follows:
(i) One Thousand Dollars ($1,000) to the purchase of the Assets
that are tangible personal property;
(ii) Fifty Thousand Dollars ($50,000) to the restrictive covenant
set forth in paragraph 13; and
(iii) the balance of the purchase price to the purchase of the
Assets that are intangible.
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<PAGE> 15
(f) Seller Parent may exercise its right to audit detailed reports
and calculations pursuant to paragraphs 2(c)(i) and (ii) hereof (the "Buyer
Calculations") only in accordance with the procedures set out in this paragraph.
Seller Parent shall give written notice to Buyer within twenty (20) days after
receipt of a detailed report and calculation of its election to exercise its
right to audit the supporting records. If Seller Parent so elects, it shall
retain an accounting firm at its expense to conduct such audit (which accounting
firm may review records deemed by Buyer to be confidential to Buyer's Extended
Care Operations only after agreeing in writing to maintain the confidentiality
thereof and not to disclose same to any person, including without limitation,
any Seller), or it may conduct such audit with representatives of Seller
Parent, provided that beginning on the fourth anniversary of the Earnout
Commencement Date such representatives shall not be permitted to review those
records deemed by Buyer to be confidential to Buyer's Extended Care Operations,
and shall provide a copy of the determination of such accounting firm or such
representatives (the "Seller Determination") to Buyer within thirty (30) days
after delivery of its written notice of election to Buyer. Buyer and Buyer
Parent shall provide such accounting firm or representatives with reasonable
access and cooperation with regard to the files and materials relevant to such
audit in order to facilitate and expedite such audit. Seller Parent shall take
such measures to maintain the confidentiality of any information obtained in any
audit as it takes to maintain the confidentiality
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<PAGE> 16
of its own confidential information, and all such information will be destroyed
or returned to Buyer promptly after the conclusion of the audit, or in the event
of an arbitration, the issuance of an arbitration award. In the event there is a
discrepancy between Buyer's detailed report and calculation and the Seller
Determination, and the parties hereto do not reach an agreement on any
adjustments to Buyer's detailed report and calculation within twenty (20)
business days following Buyer's receipt of a copy of the Seller Determination,
then the matter shall be submitted to binding arbitration in Washington, D.C.,
before a single arbitrator who is a Certified Public Accountant, in accordance
with the commercial arbitration rules of the American Arbitration Association
("AAA"). If the parties fail to agree on the selection of an arbitrator within
ten (10) business days after the expiration of the above-described twenty (20)
business day period, then the AAA shall promptly make the selection, which
decision shall be binding upon the parties. The disputed issues shall be
submitted to the arbitrator within five (5) business days after selection of the
arbitrator and each issue shall be decided by the arbitrator within thirty (30)
days. The arbitrator must decide each disputed issue on the basis of either the
Buyer Calculations or the Seller Determination. The fees and expenses of the AAA
and the arbitrator shall be paid by the parties hereto in proportion to the
dollar amount of the disputed issues decided against each party. Judgment may be
entered on any decision rendered by the arbitrator, including the fees and
expenses of the arbitrator. Notwithstanding
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the foregoing, in the event of arbitration, the parties and the arbitrators
shall have access to confidential business information of the other parties,
subject to the execution of appropriate confidentiality agreements.
3. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant, effective as of
March 26, 1997, upon which representations and warranties Buyer relies, and
which representations and warranties shall survive Closing for the period set
forth in paragraph 14 hereinafter, as follows:
(a) Each Seller is a corporation duly organized, validly existing,
and in good standing under the laws of its state of incorporation, and has all
requisite power and authority to own the Assets and carry on the Business as it
is now being conducted and to enter into this Agreement and to consummate the
transactions contemplated hereunder. The Articles or Certificates of
Incorporation and all amendments thereto to date of Sellers and their Bylaws as
amended to date, all of which have been delivered to Buyer for review prior to
execution of this Agreement, are complete and correct to the date of this
Agreement. Sellers are not in violation of any of the provisions of their
Articles or Certificates of Incorporation, as amended, nor of their Bylaws as
amended.
(b) Sellers have delivered to Buyer (i) unaudited profit and loss
statements for each of PA Seller and TN Seller and (ii) an unaudited cost report
for the Memphis Billing Office, in each case
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for the twelve month period ending December 31, 1996 (collectively, the
"Financial Statements"). The Financial Statements are in accordance with the
books and records of Sellers, have been prepared on an accrual basis,
consistently applied, and fairly present in all material respects the financial
position and the results of the operations of the Business, PA Seller and TN
Seller as of the dates and for the periods indicated.
(c) Since December 31, 1996, except as described on Exhibit 3(c)
attached hereto and made a part hereof, to the Knowledge of Sellers, there has
not been (i) any material change, or any material development, or the incurring
of any material liability which has affected or could affect adversely, in any
material respect, the Assets or the Business or the operations, earnings,
liabilities or financial condition of the Business, other than changes in the
ordinary course of business or economic, regulatory or other changes affecting
businesses generally or the industry of the Sellers as a whole, which, in the
aggregate, have not had a Material Adverse Effect; (ii) any damage, destruction,
or loss, whether or not covered by insurance, materially and adversely affecting
the Business; (iii) any transfer of or grant of any rights to the Software; or
(iv) any material modification, change or termination of any existing material
license, lease, contract or other document referred to in this Agreement or any
of the Exhibits hereto, or failure to renew or extend the Lease or any Facility
Contract or other material contract or license constituting a part of the
Assets, except in the ordinary course of business.
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<PAGE> 19
(d) Except as set forth in Exhibit 3(d), Sellers own and have good
and transferable title to all the Assets, other than, with respect the Lease and
other contractual rights, subject to the consent of the other contracting party
or parties before a transfer of such rights may occur. Except as set forth on
Exhibit 3(d) attached hereto, the Assets are not subject to any security
interest, mortgage, deed of trust, pledge, lien, charge, encumbrance, claim,
option, restriction or limitation on their transferability, or adverse interest
(collectively, "Encumbrances"), except for Assets subject to capital leases and
except for minor imperfections of title and Encumbrances, if any, which
individually and in the aggregate are not substantial in character, amount, or
extent, do not detract from the value of the properties subject thereto, or
interfere with the use of the properties for the purposes for which they are
presently used, or otherwise impair the Business in any material respect, and,
in any event, have arisen only in the ordinary course of the Business. None of
the Assets is subject to any commitment or other arrangement for their sale or
use by any affiliate of Sellers or by any third party.
(e) Copies of all Facility Contracts, the Lease, and all other
contracts and agreements, if any, constituting part of the Assets have been
delivered to Buyer (or copies of the form of agreement have been delivered to
Buyer and access to the original, individual contracts has been granted to
Buyer) and are true and complete, with only such additions and deletions between
the date
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<PAGE> 20
of execution of this Agreement and the Final Closing Date as shall be approved
in writing by Buyer in its sole discretion, except where Sellers have received
notice of termination of any such contracts or agreements. Sellers have not
received notice of default under any of the aforesaid which could have a
Material Adverse Effect. All of the aforesaid are valid and binding upon
Sellers. To the Knowledge of Sellers, each Seller and each other party thereto
have substantially complied in all respects with all of the provisions of all
such contracts and agreements and of all other leases, contracts, agreements,
franchises or commitments with respect to the Business to which it is a party
(except where such failures to comply, in the aggregate, could not have a
Material Adverse Effect), and is not in breach, violation or default under any
of them (except where such breaches, violations or defaults, in the aggregate,
could not have a Material Adverse Effect), and no event has occurred, which
constitutes, or with the lapse of time or the giving of notice, or both, would
constitute such a breach, violation or default (except where such breaches,
violations or defaults, in the aggregate, could not have a Material Adverse
Effect), which would permit the other party to terminate, recover damages or
otherwise avail itself of a legal or equitable remedy, except as described on
Exhibit 3(e) attached hereto and made a part hereof.
(f) Except for those matters disclosed on Exhibit 3(f) attached
hereto and made part hereof, there is no action, suit, litigation, claim,
administrative, state, federal or local, or
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<PAGE> 21
governmental or quasi-governmental investigation or proceeding pending or, to
the Knowledge of Sellers, threatened or communicated, against or relating to the
Business or the Assets, nor, to the Knowledge of Sellers, do any facts exist
that might reasonably provide the basis for any of the same except with regard
to billing matters in the ordinary course of business or where such action,
suit, litigation, claim, investigation or proceeding could not have a Material
Adverse Effect. No Seller is subject to any order, judgment, decree or
obligation which could limit in any material respect its ability to operate the
Business in the ordinary course or enter into this Agreement and consummate the
transactions contemplated hereby. Without restricting the generality of the
foregoing, Sellers have not received any notice of any pending or threatened
claim, investigation, or inquiry by any governmental or quasi-governmental
authority asserting that Sellers have at any time engaged in any unlawful
activity in connection with the Business or the Assets, including, without
limitation, any investigation, inquiry or review not in the ordinary course of
business of billing for services rendered by the Business or any pending or
threatened claim for disallowance or demand for refund not in the ordinary
course of business with respect to such billing that, taken in the aggregate,
could have a Material Adverse Effect.
(g) Except as set forth in Exhibit 3(g) attached hereto and made a
part hereof, Sellers have the full, absolute and unrestricted right, power,
legal capacity and authority to enter
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into this Agreement; and the Agreement and the transactions contemplated herein
will not constitute a violation or breach of, or be in conflict with, or
constitute a default under the terms of, or give rise to a right of termination
of, or accelerate the performance required by, or require the consent not
heretofore obtained of any person under, any contract (other than the Facility
Contracts), agreement, equipment lease or other instrument to which Sellers are
subject, or party, or bound, or by which any of the Assets, or the relationships
of Sellers with the customers of the Business, or the Business generally, may be
affected (except where such violation, breach, conflict, default, termination,
acceleration of performance or failure to obtain consent could not have a
Material Adverse Effect), or violate any statute, law, regulation, rule, court
or administrative judgment, order or decree which is applicable to Sellers (in
the conduct of the Business) or the Business or the Assets, or to which Sellers
(in the conduct of the Business) are subject or by which Sellers (in the conduct
of the Business) are bound, or Sellers' Articles or Certificates of
Incorporation, or Bylaws (except where such violation could not have a Material
Adverse Effect and except for denials of billings in the ordinary course of
business). All corporate actions of Sellers necessary to authorize Sellers to
execute, deliver and consummate this Agreement have been duly and validly
authorized and taken, and no further actions or authorizations are required.
This Agreement constitutes the valid, legally binding obligation of Sellers and
is enforceable in accordance with its terms, except as
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<PAGE> 23
the enforceability may be limited by bankruptcy, insolvency, or other similar
laws affecting the enforcement of creditors' rights generally, and further
except to the extent that the enforceability of such obligations is subject to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(h) To the Knowledge of Sellers, all of the Assets (whether owned or
leased) which are material to the conduct of the Business, are currently as a
whole in normal operating condition and repair (if the Assets are tangible
personal property), except for ordinary wear and tear that does not materially
affect the use or operation thereof, and are owned, maintained and used in
conformity with all applicable federal, state and local laws, regulations and
ordinances (including but not limited to zoning, environmental, occupational
safety and health laws and regulations) except where the absence of such
conformity could not constitute a Material Adverse Effect.
(i) (i) To the Knowledge of Sellers, the permits, licenses, provider
agreements, provider numbers, and governmental authorizations described in
Exhibit 3(i)(i)-1 attached hereto and made part hereof (collectively,
"Licenses") are all of the Licenses required for and utilized in ownership and
operation of the Business as it is currently being conducted. Except as set
forth in Exhibit 3(i)(i)-2 attached hereto and made part hereof and except
for consents to assignment of the Facility Contracts, no consent, waiver,
approval, license or authorization of or
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<PAGE> 24
designation, declaration or filing with any governmental agency or authority, or
any third party is required in connection with the execution and delivery of
this Agreement or any instrument contemplated hereby or the consummation of the
transactions contemplated hereby (except where failure to obtain such consent,
waiver, approval, license or authorization or make such designation, declaration
or filing could not have a Material Adverse Effect); and except as set forth in
Exhibit 3(i)(i) and except for billing matters in the ordinary course of
business, Sellers have complied with, and are currently in compliance with, all
statutes, laws, ordinances, rules, regulations, judgments, decrees and orders,
of any court or governmental or quasi-governmental authority, to which the
Business or Sellers in connection with the Business are subject or by which any
Seller is bound and non-compliance with which could result in a Material Adverse
Effect.
(ii) No Seller has executed any contracts or agreements with any
governmental authority or person providing that Sellers provide a certain amount
of welfare, free care or discounted or government assisted patient care.
(j) Except as described on Exhibit 3(j) attached hereto and made
part hereof:
(i) No employees of the Business are represented by any labor
organization and, as of the date hereof, no labor organization or group of
employees of the Business has made a demand to any Seller for recognition or has
filed a petition
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seeking a representation proceeding or given any Seller notice of any intention
to hold an election of a collective bargaining representative in connection with
the employees of the Business. There is no strike, work stoppage, or labor
disturbance pending or, to the Knowledge of Sellers, threatened which involves
any employee of the Business; and
(ii) There are no unfair employment or labor practice charges or
employment-related litigation or administrative proceedings which are presently
pending against any Seller in relation to any employee of the Business.
Exhibit 3(j) includes true and complete lists setting forth:
(i) the title or position, the rate of salary, the number of
standard hours billed during the period of November and December 1996, and the
anniversary date of employment of each employee whose salary is charged, in
whole or in part, to the Business or who works more than 10 hours per week in
the Business; and
(ii) all material employee benefits received by or available to
employees of the Business.
(k) Except as set forth in Exhibits 1(a)(v)-1 and 2 and 3(k), the
Software (as defined in subparagraph 1(a)(v) hereof) is not subject to any
license, lien, claim, security interest, charge or encumbrance whatsoever, and
no licenses for the use of any of such Software have been granted by Sellers to
any third parties except as set forth on Exhibit 3(k). To the Knowledge of
Sellers
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the Software does not infringe upon, and has not in the past infringed upon,
the rights of any other person, firm or corporation. Except as disclosed on
Exhibit 3(k), no Seller is a party to any license, agreement or arrangement,
whether as licensor, licensee or otherwise, with respect to any Software or
applications in respect thereof.
(1) To the Knowledge of Sellers, no Seller, nor any officer,
director, employee or agent of any Seller has at any time made gifts,
gratuities, or payments in any other form, whether in cash, goods or services,
to any persons or entities whatsoever, in payment for, or intended to induce or
encourage, or which resulted in or may have resulted in or had the effect of
inducing, obtaining, encouraging or continuing the referral of persons or
entities as customers, or inducing, obtaining, encouraging or extending any
contractual relationship, written or oral, in violation of any law; nor, to the
Knowledge of Sellers, has any Seller or any officer, director, employee, member
or agent of any Seller (i) entered into any arrangement, written or oral, under
or pursuant to which bribes, kickbacks, rebates, payoffs or other forms of
illegal or improper payments or remuneration have been or will be made, provided
for, or offered, either directly or indirectly through agents, brokers,
distributors, dealers or other intermediaries, or (ii) made any illegal or
improper contribution of monies, services or property to any political party,
candidate or elected official for any purpose, or (iii) made any payments
directly or indirectly through agents, brokers, distributors,
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dealers or other intermediaries, other than in the country in which such agent,
distributor, broker, dealer or intermediary resides.
(m) To the Knowledge of Sellers, there are no toxic wastes or other
toxic or hazardous substances being stored or otherwise held by any Seller on,
under or about any of the real property subject to the Lease (the "Leased Real
Property"). The activities of Sellers on the Leased Real Property have been
conducted in compliance with all federal, state and local environmental
protection, occupational health and safety, and similar laws, ordinances,
restrictions, licenses and regulations, except where failure to comply could not
have a Material Adverse Effect.
(n) Except as may have been published and communicated to all
providers and which publications and communications constitute part of the
public record, no third party payor or intermediary has attempted since January
1, 1996, to impose any reduction in reimbursement levels, nor has any Seller
been notified of or otherwise gained knowledge of any such attempted reduction
upon such Seller, or of any disallowance or demand for refund not in the
ordinary course of business by a third party payor or patient with respect to a
billing for services rendered by the Business, which could, in the aggregate,
have a Material Adverse Effect, except as set forth on Exhibit 3(n) attached
hereto and made part hereof.
(o) (i) Seller Parent hereby represents that it is acquiring the
Common Stock pursuant to subparagraph 2(a)(iii)
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<PAGE> 28
hereof for its own account with the present intention of holding such securities
for purposes of investment, and that it has no intention of selling such
securities in a public distribution in violation of the federal securities or
any applicable state securities laws; provided that nothing herein shall prevent
any Seller or subsequent holder of the Common Stock from transferring such
securities in compliance with (A) an effective registration statement under the
Securities Act of 1933, as amended, or any similar federal law then in force
(the "Securities Act"), (B) Rule 144 or Rule 144A of the Securities and Exchange
Commission (or any similar rule or rules then in force) if such rule is
available and (C) subject to the conditions specified in subparagraph 29 hereof,
any other legally available means of transfer.
(ii) Each Seller acknowledges that the Common Stock is being
issued and sold hereunder pursuant to exemptions from registration provided in
the Securities Act and under applicable state securities laws and, therefore,
cannot be sold by Seller Parent unless subsequently registered under the
Securities Act or applicable state securities laws or an exemption from such
registrations is available. Accordingly, Seller Parent represents and warrants
that it is able to bear the economic risk of any investment in the Common Stock
for an indefinite period of time.
(iii) Each Seller represents that it has had the opportunity to
ask questions and receive answers concerning the Common Stock and to obtain
whatever information concerning the Company as has been requested by such Seller
in order to make its
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<PAGE> 29
investment decision. Each Seller is aware that the common stock of Buyer Parent
is registered as a class of securities under the Securities Exchange Act of 1934
and that filings available at the Securities and Exchange Commission contain
information material to the value of the Common Stock. Without restricting the
generality of the foregoing, each Seller acknowledges receipt of a copy of the
audited financial statements of Buyer Parent for the fiscal year ended September
30, 1996, as filed with the Securities and Exchange Commission on January 9,
1996.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer and Buyer Parent, jointly and severally, represent
and warrant to Sellers, effective as of March 26, 1997, upon which
representations and warranties Sellers rely, and which representations and
warranties shall survive Closing for the period set forth in paragraph 14
hereinafter, as follows:
(a) Each of Buyer and Buyer Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has full, absolute and unrestricted right, power, legal capacity and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby.
(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereunder have been duly authorized and no
further actions or authorizations are required; and this Agreement has been duly
executed and delivered by each of Buyer and Buyer Parent and constitutes the
valid, legally binding obligation of each of Buyer and Buyer Parent in
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<PAGE> 30
accordance with its terms, except as the enforceability may be limited by
bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors' rights generally, and further except to the extent that the
enforceability of such obligations is subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
(c) The execution and delivery of this Agreement and the consummation
of the transactions contemplated by this Agreement will not:
(i) Result in any breach of, or constitute a default under, the
Certificate of Incorporation or Bylaws of Buyer or Buyer Parent; or
(ii) Violate any existing statute, law, regulation, rule, court
or administrative judgment, order, writ, injunction or decree or obligation
applicable to Buyer or Buyer Parent or to which either of them is subject or by
which either of them is bound; or
(iii) Constitute a violation or breach of, or be in conflict
with, or constitute a default under the terms of, or give rise to a right of
termination of, or accelerate the performance required by, or require the
consent not heretofore obtained of any person under, any material contract,
agreement, equipment lease, obligation or other instrument to which either Buyer
or Buyer Parent is subject, or party, or bound, or by which any of the
relationships of Buyer with the customers of Buyer's Extended Care Operations,
or Buyer's Extended Care Operations
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<PAGE> 31
generally, may be affected (except where such violation, breach, conflict,
default, termination, acceleration of performance or failure to obtain consent
could not have a Material Adverse Effect).
(d) Except for those matters disclosed on Exhibit 4(d) attached
hereto and made part hereof, there is no action, suit, litigation, claim,
administrative, state, federal or local, or governmental or quasi-governmental
investigation or proceeding pending or, to the knowledge of Buyer or Buyer
Parent, threatened or contemplated, against or relating to Buyer's Extended Care
Operations, nor to the knowledge of Buyer or Buyer Parent, do any facts exist
that might reasonably provide the basis for any of the same.
(e) Neither Buyer nor Buyer Parent, nor any officer, director,
employee or agent of Buyer or Buyer Parent has at any time made gifts,
gratuities, or payments in any other form, whether in cash, goods or services,
to any persons or entities whatsoever, in payment for, or intended to induce or
encourage, or which resulted in or may have resulted in or had the effect of
inducing, obtaining, encouraging or continuing the referral of persons or
entities as customers, or inducing, obtaining, encouraging or extending any
contractual relationship, written or oral, in violation of any law; nor has
Buyer or Buyer Parent or any officer, director, employee, member or agent of
Buyer or Buyer Parent (i) entered into any arrangement, written or oral, under
or pursuant to which bribes, kickbacks, rebates, payoffs or other
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<PAGE> 32
forms of illegal or improper payments or remuneration have been or will be
made, provided for, or offered, either directly or indirectly through agents,
brokers, distributors, dealers or other intermediaries, or (ii) made any illegal
or improper contribution of monies, services or property to any political party,
candidate or elected official for any purpose, or (iii) made any payments
directly or indirectly through agents, brokers, distributors, dealers or other
intermediaries, other than in the country in which such agent, distributor,
broker, dealer or intermediary resides.
(f) Buyer is not subject to any order, judgment, decree or obligation
which could limit in any material respect its ability to operate the Business in
the ordinary course. Without restricting the generality of the foregoing, Buyer
has not received any notice of any pending or threatened claim, investigation,
or inquiry by any governmental or quasi-governmental authority asserting that
Buyer has at any time engaged in any unlawful activity in connection with
Buyer's Extended Care Operations, including, without limitation, any
investigation, inquiry or review not in the ordinary course of business of
billing for services rendered by Buyer's Extended Care Operations or any pending
or threatened claim for disallowance or demand for refund not in the ordinary
course of business with respect to such billing that, taken in the aggregate,
could have a Material Adverse Effect.
(g) Since September 30, 1996, except as described on Exhibit 4 (g)
attached hereto and made a part hereof, to the knowledge of Buyer and Buyer
Parent, there has not been (i) any
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<PAGE> 33
material change, or any material development, or the incurring of any material
liability which has affected or could affect adversely, in any material respect,
the assets or the business or the operations, earnings, liabilities or financial
condition of the business of Buyer, other than changes in the ordinary course of
business or economic, regulatory or other changes affecting businesses generally
or the industry of Buyer as a whole, which, in the aggregate, have not had a
Material Adverse Effect.
(h) Except as may have been published or communicated to all
providers and which publishing and communication constitute part of the public
record, no third party payor or intermediary has attempted since January 1,
1996, to impose any reduction in reimbursement levels, nor has either Buyer or
Buyer Parent been notified of or otherwise gained knowledge of any such
attempted reduction upon Buyer or Buyer Parent, or of any disallowance or demand
for refund not in the ordinary course of business by a third party payor or
patient with respect to a billing for services rendered by Buyer's Extended Care
Operations, which could, in the aggregate, have a Material Adverse Effect,
except as set forth on Exhibit 4(h) attached hereto and made part hereof.
5. COVENANTS OF SELLERS
From the date hereof to the Final Closing Date, Sellers jointly and
severally agree:
(a) To maintain each Seller as a corporation in good standing under
the laws of its state of organization, and under the laws of each other state in
which it is qualified to do business.
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<PAGE> 34
(b) To take or cause to be taken all action necessary or desirable
under this Agreement on its part as promptly as practicable, so as to permit the
consummation of the transactions contemplated hereby at the earliest possible
date, and to cooperate fully with the other parties hereto to that end.
(c) Unless approved in advance by Buyer, not to issue any press
release or written statement for general or public circulation relating to the
transactions contemplated hereby, except as required by law in the reasonable
opinion of Sellers' counsel. Sellers shall use good faith efforts to obtain
Buyer's approval of the text of any public report, statement or release to be
made on behalf of Sellers.
(d) In cooperation with Buyer as required, to commence all reasonable
action required hereunder (i) to obtain all applicable permits, licenses,
certificates and other governmental authorizations or approvals necessary for
Buyer to carry on the Business, and (ii) to obtain all applicable consents,
approvals and agreements of, and to give all notices to and make all filings
with, any third parties as may be necessary to consummate the transactions
contemplated hereby at the earliest practical date. Notwithstanding the
foregoing, the failure to obtain a consent under any Facility Contract shall not
constitute a breach under this Agreement.
(e) Not to terminate, assign, or encumber any of the Facility
Contracts.
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<PAGE> 35
6. COVENANTS OF BUYER
From the date hereof to the Final Closing Date, Buyer
agrees:
(a) To maintain Buyer as a corporation in good standing under the
laws of its state of organization, and under the laws of each other state in
which it is qualified to do business.
(b) To take or cause to be taken all action necessary or desirable
under this Agreement on its part as promptly as practicable, so as to permit the
consummation of the transactions contemplated hereby at the earliest practical
date, and to cooperate fully with the other party hereto to that end.
(c) Unless approved in advance by Seller Parent, not to issue any
press release or written statement for general or public circulation relating to
the transactions contemplated hereby, except as required by law in the
reasonable opinion of Buyer's counsel. Buyer agrees to use good faith efforts to
obtain Seller Parent's approval of the text of any public report, statement or
release to be made on behalf of Buyer.
(d) In cooperation with Sellers as required, to commence all
reasonable action required hereunder (i) to obtain all applicable permits,
licenses, certificates and other governmental authorizations or approvals
necessary for Buyer to carry on the Business, and (ii) to obtain all applicable
consents, approvals and agreements of, and to give all notices and make all
filings with, any third parties as may be necessary to consummate the
transactions contemplated hereby at the earliest practical date.
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Without restricting the generality of the foregoing, Buyer shall make best
reasonable efforts to obtain at the earliest practical date all necessary
Medicare and Medicaid group practice provider numbers necessary to permit Buyer
or any professional corporation managed by Buyer to bill the Medicare and
Medicaid programs for services rendered by Buyer and Buyer shall, at the
earliest practical date, link all provider numbers and group numbers and shall
stop billing under provider numbers of Sellers or any professional corporation
managed by Sellers. Buyer shall promptly notify Sellers of its receipt of any or
all such provider numbers.
7. CONDITIONS TO OBLIGATIONS OF BUYER
Buyer's obligations hereunder with respect to the First Closing are
subject to the fulfillment, on or prior to March 26, 1997, of each of the
following conditions, performance of any or all of which may be waived in
writing by Buyer; together with the delivery by Sellers of the documents
required to be delivered by them pursuant to the provisions of paragraph 10
hereinafter:
(a) The Board of Directors of and shareholder of Buyer and the Board
of Directors of Buyer Parent shall have ratified and approved the execution and
performance of this Agreement and the transactions contemplated hereby.
(b) The Representations and Warranties of Sellers contained in this
Agreement shall be true and correct in all material respects as of March 26,
1997, as though the Representations and Warranties of Sellers were made at such
time. As of March 26, 1997, Sellers shall have performed and complied
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with all agreements, covenants and conditions required by this Agreement to be
performed and complied with by them prior to or at the First Closing. Each
Seller shall have delivered a Good Standing Certificate issued by the
appropriate department of its state of incorporation, dated as of a day
proximately before or as of March 26, 1997, as well as a Certificate of its
authorized officer certifying to the truth of such representations and
warranties and such performance and compliance.
(c) There shall not have been any damage, destruction or loss
materially and adversely affecting the Assets or any material adverse change in
the Business or its financial condition, or its value as a going business.
(d) No suit, action or other legal or administrative proceeding shall
have been instituted or threatened, or claim or demand made against Buyer or
Sellers before any court or other governmental body, seeking to restrain or
prohibit, or to obtain substantial damages with respect to, the consummation of
the transactions contemplated hereby, or which questions their validity or
legality, or which might materially and adversely affect the Business.
(e) All proceedings to be taken and all documents to be executed and
delivered by Sellers in connection with the consummation of the transactions
contemplated hereby shall be reasonably satisfactory as to form and substance to
Buyer and its counsel.
(f) The Board of Directors of each of TN Seller and PA
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Seller and the Board of Directors of Seller Parent shall have ratified and
approved the execution and performance of this Agreement, and each Seller shall
have delivered to Buyer a true and correct copy of such resolutions, certified
by such Seller's Secretary or Assistant Secretary.
(g) Intentionally omitted.
(h) The landlord shall have consented to assignment of the Lease to
Buyer.
(i) Apogee, Inc., shall have entered into a Restrictive Covenant
Regarding Professional Corporations in the form attached as Exhibit 7(i).
(j) Dr. Gilbert M. Katz ("Katz") shall have entered into an
employment agreement and restrictive covenant in the form attached as Exhibit
7(j).
(k) Sellers shall have entered into an Interim Management Agreement
in the form attached as Exhibit 7(k) (the "Interim Management Agreement").
(1) Sellers shall have entered into a Shared Services Agreement in
the form attached as Exhibit 7(l) (the "Shared Services Agreement").
(m) Sellers and Buyer shall have entered into an Agreement Relating
to AHS Administrative Services Contract and Option Agreement, in the form
attached as Exhibit 7(m) (the "AHS Agreement").
(n) Sellers, Katz, and Buyer shall have entered into an agreement in
the form attached hereto as Exhibit 7(n) (the "CSPC
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Agreement").
8. CONDITIONS TO OBLIGATIONS OF SELLERS
The obligations of Sellers hereunder with respect to the First
Closing are subject to the fulfillment, on or prior to March 26, 1997, of each
of the following conditions, performance of any or all of which may be waived in
writing by Sellers; together with the delivery by Buyer of the documents
required to be delivered by it pursuant to the provisions of paragraph 10
hereinafter:
(a) The representations, warranties and covenants of Buyer and Buyer
Parent contained in this Agreement shall be true and correct in all material
respects as of March 26, 1997, as though such representations, warranties and
covenants were made at such time. As of March 26, 1997, Buyer and Buyer Parent
shall have performed and complied with all agreements, covenants and conditions
required by this Agreement to be performed and complied with by Buyer and Buyer
Parent prior to or at the First Closing. Buyer and Buyer Parent shall have
delivered a Good Standing Certificate issued by the appropriate department of
its state of incorporation, dated as of a day proximately before Closing or as
of March 26, 1997, as well as a certificate of its authorized officer certifying
to the truth of such representations and warranties and such performance and
compliance.
(b) No suit, action or other legal or administrative proceeding shall
have been instituted or threatened, or claim or demand made against Buyer or
Sellers before any court or other governmental body, seeking to restrain or
prohibit, or to obtain
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substantial damages with respect to, the consummation of the transactions
contemplated hereby, or which questions their validity or legality.
(c) All proceedings to be taken and all documents to be executed and
delivered by Buyer in connection with the consummation of the transactions
contemplated hereby shall be reasonably satisfactory as to form and substance to
Sellers and their counsel.
(d) The Board of Directors of and shareholder of Buyer and the Board
of Directors of Buyer Parent shall have ratified and approved the execution and
performance of this Agreement, and Buyer and Buyer Parent each shall have
delivered to Sellers a true and correct copy of such resolutions, certified by
its Secretary or Assistant Secretary.
(e) The landlord shall have consented to assignment of the Lease to
Buyer.
(f) Buyer Parent shall have entered into a Registration Agreement
with respect to the Common Stock in the form attached as Exhibit 8(f), which
form shall be satisfactory to Buyer Parent.
(g) Buyer shall have entered into the Interim Management Agreement.
(h) Buyer shall have entered into the Shared Services Agreement.
(i) Buyer shall have obtained from Katz a Termination and Release
releasing Sellers, in the form satisfactory to Sellers.
(j) Buyer Parent shall have executed the Guaranty in the form
attached hereto as Exhibit 8(j).
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(k) Sellers and Buyer shall have entered into the AHS Agreement.
(1) Sellers, Katz, and Buyer shall have entered into the CSPC
Agreement.
9. PROVISIONS FOR INDEMNIFICATION
(a) Sellers hereby jointly and severally agree to indemnify Buyer and
Buyer Parent save and hold Buyer and Buyer Parent harmless from, against, for
and in respect of any and all damages, losses, obligations, liabilities,
setoffs, costs and expenses incident to any suit, action, investigation, claim
or proceeding, including, without limitation, interest, penalties, reasonable
attorneys' fees and reasonable amounts paid in defense and/or settlement of any
of the foregoing (collectively, "Buyer's Damages"), suffered, sustained,
incurred or required to be paid by Buyer or Buyer Parent by reason of, or in
connection with, or arising out of:
(i) Any breach of any warranty, representation or covenant made
by Sellers in this Agreement or any Exhibit hereto;
(ii) Any loss or damage resulting to Buyer or Buyer Parent by
reason of any claim against, or any debt, liability or obligation of, any
Seller, except for liabilities or obligations of Sellers expressly assumed by
Buyer pursuant to the provisions of subparagraph 1(c) of this Agreement or the
provisions of the Interim Management Agreement, the AHS Agreement, the CSPC
Agreement, or the Shared Services Agreement;
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(iii) Any Taxes for any taxable period of Sellers, except as
otherwise agreed in the Interim Management Agreement, the AHS Agreement, the
CSPC Agreement, or the Shared Services Agreement to be the obligation of Buyer
or Buyer Parent.
(iv) Except for the Assumed Liabilities, and liabilities assumed
by Buyer or Buyer Parent under the Interim Management Agreement, the AHS
Agreement, the CSPC Agreement or the Shared Services Agreement, all material
liabilities, and obligations, fixed or contingent, known or unknown, actual or
alleged, asserted against, imposed upon or incurred by Buyer or Buyer Parent as
a result of or in connection with any act, failure to act, misconduct, unlawful
act, dereliction of duty or negligence on the part of Sellers occurring prior to
the First Closing and not disclosed herein; and
(v) All other liabilities and obligations arising out of the
Sellers' operations or management of the Business before the First Closing.
Without restricting the generality of the foregoing, Sellers hereby
jointly and severally agree to indemnify Buyer and Buyer Parent and save and
hold them harmless from, against, for and in respect of any and all Buyers'
Damages arising if any disallowance or demand for refund by a third party payor
or patient with respect to a billing for services rendered prior to the First
Closing results in a setoff by such payor or patient against a billing for
services rendered by Buyer or an operation managed by Buyer after the First
Closing which the Buyer reasonably expected
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to collect.
(b) Buyer and Buyer Parent hereby agree to indemnify Sellers and save
and hold Sellers harmless from, against, for and in respect of any and all
damages, losses, obligations, liabilities, costs and expenses incident to any
suit, action, investigation, claim or proceeding, including, without limitation,
interest, penalties, reasonable attorneys' fees and reasonable amounts paid in
defense and/or settlement of any of the foregoing (collectively, "Sellers'
Damages") suffered, sustained, incurred or required to be paid by Sellers by
reason of, or in connection with, or arising out of:
(i) Any breach of any warranty, representation or covenant made
by Buyer in this Agreement or any Exhibit hereto;
(ii) Any loss or damages resulting to Sellers with respect to
the liabilities and obligations of Sellers expressly assumed by Buyer pursuant
to the provisions of subparagraph 1(c) of this Agreement;
(iii) All liabilities and obligations, fixed or contingent,
known or unknown, actual or alleged, asserted against, imposed upon or incurred
by Sellers as a result of or in connection with any act, failure to act,
misconduct, unlawful act, dereliction of duty or negligence on the part of Buyer
or Buyer Parent; and
(iv) All other liabilities and obligations arising out of the
Buyer's or Buyer's affiliates' operation or management of the Business or use by
Buyer or Buyer's affiliates of the provider numbers of Seller or professional
corporations managed
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by Sellers.
(c) Any party claiming a right to indemnification under the
provisions of this paragraph 9 (hereinafter, the "Indemnitee") shall give
written notice as promptly as practicable (and in any event, within five (5)
days after receipt of notice or service of any citation, Summons, Complaint or
lawsuit) to the other parties of each claim for indemnification hereunder,
specifying the amount and nature of the claim, and of any matter which, in the
opinion of the claiming party, is likely to give rise to an indemnification
claim. Notwithstanding the foregoing, the failure to give timely notice shall
not affect rights to indemnification hereunder, except to the extent that the
party or parties against whom such indemnity is sought to be recovered
(hereinafter, the "Indemnitor") shall demonstrate damage caused by such failure.
Indemnitor shall have the right to undertake the defense of any such matter at
Indemnitor's sole cost and expense, and through legal counsel reasonably
acceptable to Indemnitee, provided that Indemnitor proceeds in good faith,
expeditiously and diligently. No final determination shall be made pursuant to
subparagraph 9(d) below while such defense is still being made until the
earlier of (x) the resolution of such claim by Indemnitor with the claimant by a
final determination thereof as set forth below, or (y) the termination of the
defense by Indemnitor against such claim or the failure of Indemnitor to
prosecute such defense in good faith and in an expeditious and diligent manner.
Indemnitee, at its option and at its sole cost and expense, shall have the right
to participate in
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any defense undertaken by Indemnitor, with legal counsel of its own selection.
No settlement or compromise may be made by Indemnitor without the prior written
consent of Indemnitee unless (x) prior to such settlement or compromise
Indemnitor acknowledges in writing Indemnitor's obligation to pay in full the
amount of the settlement or compromise and all associated expenses; (y)
Indemnitee is furnished with security reasonably satisfactory to Indemnitee that
Indemnitor will in fact pay such amount and expenses; and (z) if any part of the
settlement or compromise establishes an obligation other than payment and the
making of customary releases and filings, the Indemnitee is not required to
fulfill any such obligation. If the Indemnitor elects not to undertake the
defense of a matter, or if the Indemnitee must retain counsel due to a conflict
of interest between the Indemnitor and the Indemnitee, Indemnitor will be
responsible for all reasonable defense costs of the Indemnitee (which shall
include only one counsel) and such costs will be reimbursed by the Indemnitor on
a monthly basis as they are incurred.
(d) Indemnitor shall pay to Indemnitee the amount of claims for
indemnification for which there has been a final determination within five (5)
days after the establishment thereof (the "Due Date") in cash or by certified
check. Any amounts not paid by Indemnitor on or before the Due Date shall bear
interest from the Due Date thereof until the date paid at a rate equal to the
prime rate of interest as published in The Wall Street Journal under "Money
Rates" from time to time or, if such a rate is no
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longer published by The Wall Street Journal, the rate most comparable to the
prime rate.
(e) The indemnifications provided in this paragraph 9 shall survive
Closing, provided however that no claim for indemnification may be made unless
notice thereof is given, in such specificity as is reasonable given the
information then available, pursuant to paragraph 9(c), within one (1) year
from the First Closing; provided, however, that upon such notice being timely
given, costs or liabilities incurred or arising after such one year period with
respect to such claim shall be covered as provided in this paragraph 9.
(f) Notwithstanding anything to the contrary contained herein, no
indemnity shall be payable by hereunder until the amount of all claims of the
Indemnitee pursuant to this paragraph 9 shall exceed $15,000.00 in the aggregate
and any indemnity payable hereunder shall be limited to the excess of the amount
of all claims over $15,000.00.
(g) The sole remedy for any misrepresentation, breach of warranty or
failure to fulfill any agreement or covenant to be performed prior to the First
Closing (it being understood and agreed that this limitation shall not apply to
covenants or agreements to be performed subsequent to the First Closing)
hereunder on the part of any party shall be governed by and limited to the
provisions of this paragraph 9.
(h) Damages payable to an Indemnitee shall be reduced by (i) any Tax
Benefit (as hereinafter defined) actually received by
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the Indemnitee on account of such indemnification and (ii) any insurance
proceeds actually received by the Indemnitee on account of such indemnification
at the time the indemnification payment occurs, it being understood that in no
event shall any indemnification payment be delayed in anticipation of the
receipt of any Tax Benefit or insurance proceeds. If the Indemnitee receives a
Tax Benefit after an indemnification payment is made, Indemnitee shall pay to
the Indemnitor the aggregate amount of such Tax Benefit at such time or times as
and to the extent that such Tax Benefit is received. If, upon audit by the
relevant tax authority, part or all of such Tax Benefit shall be disallowed, the
Indemnitor, upon written notice to that effect from the Indemnitee, shall
promptly reimburse the Indemnitee for the full amount so disallowed up to the
amount of the Tax Benefit credited to the Indemnitor. For purposes hereof, "Tax
Benefit" shall mean any refund of tax or reduction in the amount of taxes which
would otherwise be payable. The parties hereto shall seek full recovery under
all insurance policies covering any indemnification payment in the ordinary
course of business to the same extent as they would if such claim were not
subject to an indemnification payment hereunder. In the event that an insurance
recovery is made by the Indemnitee, with respect to any indemnification payment
for which an indemnification claim has been made, the Indemnitor shall pay to
the Indemnitee the amount of the insurance recovery, but not more than the
amount of such indemnification payment.
(i) Sellers shall not be obligated to indemnify Buyer
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and Buyer Parent for the Buyer's Damages in excess of an aggregate of $500,000
(the "Cap"), and the obligations of Sellers for indemnification hereunder shall
terminate when the Cap has been paid; provided, however, that the Cap shall not
apply to that portion of the Buyer's Damages which are finally determined to be
owed to Buyer or Buyer Parent which consist of the actual amounts of any
disallowance or demand for refund by a third party payor or patient with respect
to a billing for services rendered by Sellers or a professional corporation
managed by Sellers prior to the First Closing that results in a set-off by such
payor or patient against a billing for services rendered by Buyer, or by a
professional corporation or other operation managed by Buyer, after the First
Closing which Buyer reasonably expected to collect.
(j) In the event that the Medicare intermediary in either Tennessee
or Pennsylvania shall set-off against a billing for services rendered by Buyer
or by a professional corporation or other operation managed by Buyer, after the
First Closing, which Buyer reasonably expected to collect, a billing for
services rendered by Sellers or a professional corporation managed by Sellers
prior to the First Closing, Seller Parent shall, at the election of Buyer, loan
to Buyer up to $250,000 (but in any event not in excess of (i) the amount of any
such set-off against billings reasonably expected to be collected or (ii)
$100,000 plus a sum equal to the amount of accounts receivable outstanding on
the date of the First Closing that Sellers shall have collected after the First
Closing, up to a maximum of $150,000 of such accounts
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receivable in accordance with the terms of the promissory note in the form of
Exhibit 9(j)-l. The obligations of Buyer under such promissory note shall be
guaranteed by Buyer's Parent by guaranty in the form of Exhibit 9(j)-2 and
secured by a security interest in certain accounts receivable of Buyer pursuant
to a security agreement in the form of Exhibit 9(j)-3.
(k) A final determination of a claim shall be (i) a judgment of any
court determining the validity of a disputed claim, if no appeal is pending from
such judgment and if the time to appeal therefrom has elapsed, (ii) an award of
any arbitration determining the validity of such disputed claim, if there is not
pending any motion to set aside such award or if the time within which to move
to set such award aside has elapsed, (iii) a written termination of the dispute
with respect to such claim signed by all of the parties thereto or their
attorneys and the Indemnitor, (iv) a written acknowledgment of the Indemnitor
that it no longer disputes the validity of such claim, or (v) such other
evidence of final determination of a claim as shall be acceptable to the
parties.
10. CLOSING
The First Closing shall take place on March 31, 1997, according to
such modalities as shall be agreed upon in writing by Counsel for Sellers and
Buyer (the "First Closing Date"), said time being of the essence. All
proceedings to be taken and all documents to be executed and delivered by all
parties at the Closing shall be deemed to have been taken and executed
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simultaneously, and no proceedings shall be deemed taken nor any documents
executed or delivered, until all have been taken, executed and delivered. At the
First Closing:
(a) Sellers shall deliver to Buyer:
(i) Bill(s) of Sale and Assignment, substantially in the form
attached hereto as Exhibit 10(a)(i), transferring to Buyer all of the Assets
except the Facility Contracts in accordance with the terms hereof;
(ii) an Assignment of the Lease from Seller Parent to Buyer,
together with the written consent of the landlord to said assignment;
(iii) the agreement and license described in subparagraph
1(b)(v), duly executed on behalf of Sellers and any other parties thereto other
than Buyer;
(iv) the Certificate of Good Standing of each Seller described
in subparagraph 7(b);
(v) the certificate of each Seller's authorized officer
described in subparagraph 7(b);
(vi) each Secretary's certification of corporate resolutions
described in subparagraph 7(f);
(vii) the Opinion of Counsel described in paragraph 11;
(viii) the Interim Management Agreement duly executed on behalf
of Sellers;
(ix) the Shared Services Agreement duly executed on behalf of
Sellers;
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(x) the AHS Agreement executed by Sellers; and
(xi) the CSPC Agreement executed by Sellers.
(b) Buyer shall deliver to Sellers;
(i) One Hundred Thousand Dollars ($100,000.00) in immediately
available funds;
(ii) the Promissory Note to be issued to the Sellers pursuant to
paragraph 2(a)(ii) hereof;
(iii) certificate(s) representing Two Hundred Thousand shares of
Common Stock of Buyer Parent owned by Buyer, registered in the name of Seller
Parent, which certificate(s) shall bear the legend provided for in subparagraph
29(a) hereof;
(iv) the certificate of Good Standing of Buyer described in
subparagraph 8(a);
(v) the certificate of the President of Buyer and Buyer Parent
described in subparagraph 8(a);
(vi) each Secretary's certification of corporate resolutions
described in subparagraph 8(d);
(vii) the Opinion of Counsel described in paragraph 12;
(viii) the Registration Agreement described in subparagraph
8(f), duly executed by Buyer Parent;
(ix) the Termination and Release of Katz, in form satisfactory
to Sellers, as described in paragraph 9(i);
(x) the AHS Agreement, executed by Buyer; and
(xi) the CSPC Agreement, executed by Buyer and Katz.
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(c) The Final Closing, shall be effective five (5) business days
after Buyer receives and concurrently notifies Sellers that Buyer has received
the provider numbers described in paragraph 6(d) (but shall in no event be
effective later than July 1, 1997). In the event that Buyer receives the
necessary provider numbers applicable to the Tennessee Facility Contracts prior
to receiving the necessary provider numbers applicable to the Pennsylvania
Facility Contracts, or vice versa, Buyer shall notify Sellers and the Final
Closing shall be effective in two or more stages, such that the Final Closing
with respect to those Facility Contracts with respect to which the necessary
provider numbers have been received shall take place, rather than delaying such
closing until all necessary provider numbers have been received. At the Final
Closing(s), Seller shall deliver to Buyer Bill(s) of Sale and Assignment
substantially in the form attached hereto as Exhibit 10(c).
11. OPINION OF COUNSEL FOR SELLERS
Sellers shall deliver to Buyer at the First Closing an opinion of their
Counsel, in form and substance reasonably acceptable to Buyer and Buyer Parent's
counsel, dated as of March 26, 1997, addressed to Buyer and Buyer Parent to the
effect that:
(a) Each Seller is a corporation duly organized, validly
existing and in good standing under the laws of the its state of incorporation,
with full corporate power to carry on its business as it is being conducted.
(b) The execution, delivery and performance of this
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Agreement and all documents and agreements required to be executed by each
Seller by this Agreement have been duly authorized and approved by all necessary
corporate and other required action, and neither the execution, delivery or
performance of, or consummation of the transactions contemplated by, this
Agreement by any Seller require any further actions or authorizations except as
expressly provided in this Agreement. This Agreement and all such documents and
agreements delivered pursuant to this Agreement have been duly executed and
delivered by each Seller, require no further actions or authorizations except as
expressly provided in this Agreement, and constitute their respective legal,
valid and binding obligations, enforceable in accordance with their respective
terms, except as the enforceability of all such documents and agreements may be
limited by bankruptcy, insolvency, or other similar laws affecting the
enforcement of creditors' rights generally, and further except to the extent
that the enforceability of such obligations is subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
12. OPINION OF COUNSEL FOR BUYER AND BUYER PARENT
Buyer shall deliver to Sellers at the First Closing an opinion of
Simon, Turnbull & Martin, Chartered, counsel for Buyer, in form and substance
reasonably acceptable to Sellers' counsel, dated as of March 26, 1997, addressed
to Sellers, to the effect that:
(a) Each of Buyer and Buyer Parent is a corporation duly
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organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power to carry on its business as it is being
conducted.
(b) The execution, delivery and performance of this Agreement and all
documents and agreements required to be executed by Buyer and/or Buyer Parent,
as the case may be, by this Agreement have been duly authorized and approved by
all necessary corporate and other required action, and neither the execution,
delivery or performance of, or consummation of the transactions contemplated by,
this Agreement by Buyer and Buyer Parent require any further actions or
authorizations except as expressly provided in this Agreement. This Agreement
and all such documents and agreements delivered pursuant to this Agreement have
been duly executed and delivered by buyer and/or Buyer Parent, as the case may
be, require no further actions or authorizations except as expressly provided in
this Agreement, and constitute their respective legal, valid and binding
obligations, enforceable in accordance with their respective terms, except as
the enforceability of all such documents and agreements may be limited by
bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors' rights generally, and further except to the extent that the
enforceability of such obligations is subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
13. RESTRICTIVE COVENANT
(a) The parties understand and agree that it is the
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intention of Buyer to expand markets and marketing activities, utilizing the
Assets, beyond those engaged in by Sellers; and further that such operations are
intended in the future to be throughout the State of Tennessee and the
Commonwealth of Pennsylvania. Therefore, Sellers agree that for a period of
five (5) years from and after the First Closing Date, Sellers will not, directly
or indirectly, within the State of Tennessee or the Commonwealth of
Pennsylvania, carry on or engage in, whether by owning an interest in, leasing,
managing, operating, providing services to, or otherwise, any business which
shall provide or manage the provision of behavioral healthcare, optometry,
dentistry, podiatry or other services to residents of skilled and unskilled
nursing homes and assisted living facilities.
(b) Sellers acknowledge that the restrictions contained in
subparagraph 13(a), in view of the nature of the business activities in which
Buyer intends to utilize the Assets, are reasonable and necessary in order to
protect the legitimate interests of Buyer, and that any violation thereof would
result in irreparable injuries to Buyer. Sellers therefore acknowledge that in
the event of a breach or threatened breach of the provisions of subparagraph
13(a) by Sellers, Buyer shall be entitled to obtain from any court of competent
jurisdiction, preliminary and permanent injunctive relief restraining Sellers
from any violation of the foregoing, provided that Buyer shall not be entitled
to an injunction contrary to the public health, safety or welfare. If the period
of time or geographic area specified should be deemed
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unreasonable in any proceeding, then the period of time or geographic area will
be reduced by the elimination or reduction of a portion thereof so that such
restrictions may be enforced for such time and area as is adjudged to be
reasonable.
(c) Nothing herein shall be construed as prohibiting Buyer from
pursuing any other remedies available to it for such breach or threatened
breach, including recovery of damages and an equitable accounting of all
earnings, profits and other benefits arising from such violation, from Sellers.
14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The parties hereto agree that the representations and warranties
contained in this Agreement and the Exhibits hereto, and in each certificate,
document or instrument delivered in connection herewith, shall survive the
execution and delivery of this Agreement and the Closing hereunder, regardless
of any investigation made by any of the parties hereto; and shall continue to
exist as to each such representation and warranty (a) for a period of one (1)
year from and after Closing, or (b) until the expiration of the applicable
statute of limitations as to each such warranty and representation, whichever
shall first occur.
15. FURTHER ASSURANCES
Subsequent to the First Closing or the Final Closing, as
the case may be, Sellers and Buyer shall each, at the reasonable request of the
other, furnish, execute and deliver such documents, instruments, certificates,
notices and other and further assurances as counsel for the requesting party
shall reasonably require as
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necessary or desirable to effect complete consummation of this Agreement and to
carry out the transactions contemplated hereunder, or in connection with the
preparation and filing of reports (including tax returns and reviews thereof)
required or requested by governmental agencies, stock exchanges or other
regulatory bodies. Subsequent to the First Closing or the Final Closing, as the
case may be, Sellers shall make available to Buyer such patient records as Buyer
may reasonably request in connection with post-closing provision of services to
patients and billing, so as to ensure continuity of care and billing.
16. ACCESS
From and after the First Closing Date Sellers shall, at the request
of Buyer, on reasonable prior notice from Buyer and during normal business
hours, afford Buyer non-exclusive access to the written protocols, policies and
procedures relating to the operations of the Business and to the credentials,
personnel and payroll records of any employee or independent contractor of any
Seller who becomes an employee or independent contractor of Buyer or any
affiliate of Buyer subsequent to the First Closing or the Final Closing. Without
restricting the generality of the foregoing, such right of access shall include
the right to use and make copies at Buyer's expense.
17. NOTICES
(a) Each notice, demand, request, consent, report, approval or
communication ("Notice") which is or may be required to be given by any party to
any other party in connection with this
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Agreement and the transactions contemplated hereby, shall be in writing, and
given by telecopy, personal delivery, receipted delivery service, or by
certified mail, return receipt requested, prepaid and properly addressed to the
party to be served as shown in subparagraph 17(b) below.
(b) Notices shall be effective on the date sent via telecopy, the
date delivered personally or by receipted delivery service, or three (3) days
after the date mailed:
If to Sellers: c/o Apogee, Inc.
1018 West Ninth Avenue
Suite 202
King of Prussia, PA 19406
Attention: President
Fax No. (610) 922-0483
In each case,
with copies to: Haythe & Curley
237 Park Avenue
New York, NY 10017
Attn: Robert A. Ouimette, Esq.
Fax No. (212) 682-0200
If to Buyer Parent
or Buyer: MHM Services, Inc.
8000 Towers Crescent Drive
Suite 810
Vienna, VA 22182
Attn: Michael S. Pinkert
President
Fax No.(703) 749-4604
In each case,
with copies to: Lowell D. Turnbull, Esq.
Simon, Turnbull & Martin,
Chartered
1299 Pennsylvania Avenue, N.W.
Suite 1050 East
Washington, D.C. 20004-2400
Fax No. (202) 508-9809
(c) Each party may designate by Notice to the others in writing,
given in the foregoing manner, a new address to which any
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<PAGE> 59
Notice may thereafter be so given, served or sent.
18. BROKER
Except as disclosed on Exhibit 18, no broker's or finder's fee,
expense, commission or other form of compensation (collectively, "Fee") is due
or payable from or by Buyer, Buyer Parent or Sellers; nor has any such Fee been
earned by any third party on behalf of any of the foregoing in connection with
the negotiation and execution of this Agreement, or in any other manner
affecting or involving the Business, or the consummation of any transaction
contemplated hereby, or in connection with any proposed sale of the Business or
any of the Assets, or any restructuring or merger or similar transaction
involving Sellers. Sellers agree to indemnify and save Buyer harmless from and
against any and all claims or demands for Fee by or from any person or persons
whatsoever, based on any arrangement made by Sellers. Buyer agrees to indemnify
and save Sellers harmless from and against any and all claims or demands for Fee
by or from any person or persons whatsoever, based on any arrangement made by
Buyer.
19. EXPENSES
Whether or not the transactions contemplated hereby are consummated,
Sellers shall be solely responsible for the payment of, and shall pay, the fees,
expenses, commissions or other forms of compensation (collectively, "Expenses")
due or payable to, or earned by, attorneys, accountants, bankers investment
bankers, consultants, analysts and advisors (collectively, "Advisors") selected
or retained by Sellers, and Buyer and Buyer Parent shall
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<PAGE> 60
be solely responsible for the payment of, and shall pay, the Expenses of
Advisors selected or retained by Buyer or Buyer Parent, in connection with the
negotiation, authorization, preparation, execution and performance of this
Agreement, and the consummation of the transactions contemplated hereby.
20. NO SOLICITATION
Unless and until the Final Closing shall have occurred, Sellers shall
not, and shall use their best efforts to cause each of Sellers' officers,
directors and affiliates not to:
(a) Encourage, solicit or initiate, directly or indirectly,
discussions or negotiations with any corporation, partnership, person or other
entity or group concerning any sale of assets or similar transaction involving
the Business (a "Takeover Proposal"); or
(b) Except as required by law, knowingly disclose, directly or
indirectly, any information not customarily disclosed to any person (other than
Buyer and its Advisors) concerning the business and properties of Sellers,
knowingly afford to any other Person access to the properties, books or records
of Sellers or otherwise knowingly assist or encourage any person (other than
Buyer, and its Advisors) in connection with a Takeover Proposal.
21. ENTIRE AGREEMENT
This Agreement, together with the Exhibits hereto,
constitutes and sets forth the entire agreement and understanding of the parties
pertaining to the subject matter hereof, and there are no other prior or
contemporaneous written or oral agreements,
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<PAGE> 61
understandings, undertakings, negotiations, promises, discussions, warranties
or covenants not specifically referred to or contained herein or attached
hereto, except the letter agreement dated March 26, 1997, with respect to escrow
arrangements. No supplement, modification, termination in whole or in part, or
waiver of this Agreement shall be binding unless executed in writing by the
party to be bound thereby. No waiver of any of the provisions of this Agreement
shall be deemed, or shall constitute, a waiver of any other provision hereof
(whether or not similar), nor shall any such waiver constitute a continuing
waiver unless otherwise expressly provided.
22. EMPLOYEES & INDEPENDENT CONTRACTORS
Sellers shall be responsible for, and hold Buyer and Buyer Parent
harmless against, all obligations to employees and independent contractors of
the Business accrued as of March 1, 1997, including, without limitation, salary,
vacation, and benefits. Buyer agrees that (i) upon the First Closing, it will
offer employment or cause its designee to offer employment to those management,
administrative and clerical employees of the Business listed on Exhibit 22(a) on
an at-will basis or upon such other basis as specifically negotiated and agreed
upon by the employee and Buyer; and (ii) upon the Final Closing, it will offer
employment or cause its designee to offer employment to those clinical employees
of the Business listed on Exhibit 22(b) on an at-will basis or upon such other
basis as specifically negotiated and agreed upon by the employee and Buyer. In
addition, Buyer
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<PAGE> 62
agrees that (i) upon the First Closing, it will offer contracts or cause its
designee to offer contracts to those management, administrative and clerical
independent contractors of the Business listed on Exhibit 22(c) on an at-will
basis or upon such other basis as specifically negotiated and agreed upon by the
contractor and Buyer; and (ii) upon the Final Closing, it will offer contracts
or cause its designee to offer contracts to those clinical independent
contractors of the Business listed on Exhibit 22(d) on an at-will basis or upon
such other basis as specifically negotiated and agreed upon by the contractor
and Buyer. Buyer further agrees that, for a period of two (2) years after the
Final Closing, Buyer will not solicit or induce any employee of any Seller who
remains employed by such Seller after the Final Closing to leave such Seller's
employment. Sellers shall be responsible for, and hold Buyer and Buyer Parent
harmless against, any severance payments or other obligations (including without
limitation any liability for wrongful discharge) that may be due by reason of
termination of employment of any employees of the Business not listed on Exhibit
22, whether such termination occurs before or after the First Closing.
23. BINDING EFFECT
Subject to the provisions of paragraph 24 hereinafter, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto,
their and each of their respective heirs, executors, administrators, successors
and permitted assigns, and no other person shall have or derive any right,
benefit or obligation
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hereunder.
24. ASSIGNMENT
Neither this Agreement nor any of the rights or obligations hereunder
may be assigned by either party without the prior written consent of the other
party; provided that Buyer may, without such consent, assign any or all such
rights and such obligations to an affiliate of Buyer, or to a professional
corporation managed by Buyer, or to any successor corporation or entity or
purchaser of substantially all of the assets of the Business, which shall assume
all obligations and liabilities hereunder so assigned, but without releasing
Buyer with respect to any such obligations or liabilities except with the prior
written consent of Sellers in its sole discretion; and provided further that
Buyer may, without such consent, assign any or all of its rights and obligations
pursuant to paragraph 22 hereof to Administaff Companies, Inc. or other employee
leasing service under contract with Buyer or its successor(s) or assign(s);
and provided further that any Seller may without such consent, assign any or all
such rights and such obligations to an affiliate of such Seller, provided that
all applicable securities laws have been complied with, which shall assume all
obligations and liabilities hereunder so assigned, but without releasing Sellers
with respect to any such obligations or liabilities except with the prior
written consent of Buyer and Buyer Parent in their sole discretion.
25. HEADINGS
The headings or titles of the various paragraphs of this
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<PAGE> 64
Agreement are inserted merely for the purpose of convenience and do not
expressly or by implication or intention, limit, define, extend or affect the
meaning or interpretation of this Agreement or the specific terms or text of the
paragraph so designated.
26. LAW GOVERNING
This Agreement shall be governed in all respects, whether
as to validity, construction, interpretation, capacity, performance or
otherwise, by the laws of the State of Delaware applicable to transactions to be
performed wholly within such state. If any provision of this Agreement shall be
held invalid by a court with jurisdiction over the parties to this Agreement,
then and in that event, such provision shall be deleted from the Agreement,
which shall then be construed to give effect to the remaining provisions
thereof. Except as aforesaid, if any one or more of the provisions contained in
this Agreement or in any other instrument referred to herein shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, then and
in that event, to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provisions of this
Agreement or any other such instrument.
27. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
28. CONSENTED ASSIGNMENT
Anything contained herein or therein to the contrary
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<PAGE> 65
notwithstanding, as between the Buyer and third parties, this Agreement and the
assignments to be granted by Sellers hereunder shall not constitute an
assignment or an agreement to assign any claim, right, contract, license, lease,
commitment, sales order or purchase order if an attempted assignment thereof
without the consent of another party thereto would constitute a breach thereof
or in any material way affect the rights of Sellers thereunder, unless such
consent is obtained; provided that, as between Buyer and Sellers, such
assignments or agreements shall be valid and binding. If such consent is not
obtained, or if an attempted assignment would be ineffective or would materially
affect Sellers' rights thereunder so that Buyer would not in fact receive all
such rights, Sellers shall cooperate in any reasonable arrangement designed to
provide the Buyer the benefits under any such claim, right, contract, license,
lease, commitment, sales order or purchase order, including, without limitation,
enforcement of any and all rights of the Sellers against the other party or
parties thereto arising out of the breach or cancellation by such other parties
or otherwise; provided, however, that the foregoing shall not be deemed a waiver
of Buyer's right to require, as a condition precedent to Closing, consents
described in subparagraph 7(h).
29. TRANSFER OF COMMON STOCK
(a) Each certificate for Common Stock shall be imprinted with a
legend in substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The transfer
of the securities represented by this
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<PAGE> 66
certificate is subject to the conditions specified in the Agreement,
dated as of March 31, 1997, by and among the issuer (the "Company"),
a wholly owned subsidiary of the Company, Apogee, Inc., and two
wholly-owned subsidiaries of Apogee, Inc., as amended from time to
time in accordance with its terms, and the Company reserves the right
to refuse the transfer of such securities until such conditions have
been fulfilled with respect to such transfer. A copy of such
conditions shall be furnished by the Company to the holder hereof
upon written request and without charge."
(b) In connection with the transfer of any Common Stock (other that a
transfer pursuant to an effective registration statement under the Securities
Act or Rule 144 or Rule 144A of the Securities and Exchange Commission, the
holder thereof shall deliver written notice to Buyer Parent (also referred to in
this paragraph 29 as the "Company") describing in detail the transfer or
proposed transfer, together with an opinion of counsel who (to the Company's
reasonable satisfaction) is knowledgeable in securities law matters to the
effect that such transfer of Common Stock may be effected without registration
of such Common Stock under the Securities Act. In addition, if the holder of the
Common Stock delivers to the Company an opinion of such counsel that no
subsequent transfer of such Common Stock shall require registration under the
Securities Act, the Company shall promptly upon such contemplated transfer
deliver new certificates for such Common Stock which do not bear the legend set
forth in subparagraph 29(a) hereof. If the Company is not required to deliver
new certificates for such Common Stock not bearing such legend, the holder
thereof shall not transfer the same until the prospective transferee has
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confirmed to the Company in writing its agreement to be bound by the conditions
contained in this paragraph.
(c) Upon the request of any holder of Common Stock, the Company shall
remove the legend set forth in subparagraph 29(a) hereof from the certificates
for such holder's Common Stock; provided that such Common Stock is eligible for
sale pursuant to Rule 144(k).
30. DEFINITIONS.
(a) The term "Taxes" as used herein shall mean all Federal, state,
local and foreign taxes, assessments, deficiencies, levies, imports, duties,
license fees, registration fees, withholdings, and other similar governmental
charges, and all interest, penalties and additions to tax imposed thereon;
(b) the term "Knowledge of Sellers" as used herein shall mean the
actual knowledge or awareness of Lawrence M. Davies, Alan N. Vinick, Stan
Szczygiel, Dr. Gilbert M. Katz, Mr. Wayne Watkinson, or Ms. Karen Katunich, and
shall with respect to each officer or manager named above, mean the actual
knowledge or awareness of such named officer without the duty to conduct any
investigation or inquiry;
(c) The term "Material Adverse Effect" shall mean the incurrence of
liabilities, losses or and/or costs equal to or more than $20,000.00 by the
party adversely affected.
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<PAGE> 68
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers and have affixed their
respective corporate seals, all as of the day and year first above written.
BUYER:
MHM Extended Care Services, Inc.
BY: /s/ CAROLYN ZIMMERMAN
------------------------------------------
Carolyn Zimmerman,
Vice President
BUYER PARENT:
MHM Services, Inc.
BY: /s/ CAROLYN ZIMMERMAN
-------------------------------------------
Carolyn Zimmerman,
Vice Presdient
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-09147 of MHM Services, Inc. on Form S-8 of our report dated December 30,
1996, appearing in this Annual Report on Form 10-K of MHM Services, Inc. for
the year ended September 30, 1997.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Washington, D.C.
January 12, 1998
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MHM Services, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-09147) on Form S-8 of MHM Services, Inc. of our report dated November 26,
1997, on the consolidated balance sheet of MHM Services, Inc. and subsidiaries
as of September 30, 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the year then ended and
the related schedule, which report appears in the September 30, 1997 annual
report on Form 10-K of MHM Services, Inc.
Our report dated November 26, 1997, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations, has a
net capital deficiency, is experiencing difficulty in generating sufficient
cash flows to meet its obligations and sustain its operations. The Company is
also involved in litigation regarding debt of approximately $12 million. A
judgment has been entered against the Company for the full amount. The Company
has filed an appeal, however, if they do not prevail and the lender pursues
collection, the Company may be required to file for reorganization under
Chapter 11 of the bankruptcy laws. Such conditions raise substantial doubt as
to the Company's ability to continue as a going concern. The consolidated
financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of that uncertainty.
(signed) KPMG Peat Marwick LLP
McLean, Virginia
January 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH AS INCLUDED IN THE COMPANY'S FORM 10-K FOR SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 195
<SECURITIES> 0
<RECEIVABLES> 10,005
<ALLOWANCES> 5,514
<INVENTORY> 0
<CURRENT-ASSETS> 7051
<PP&E> 1,346
<DEPRECIATION> 815
<TOTAL-ASSETS> 11,414
<CURRENT-LIABILITIES> 18,209<FN>
<BONDS> 12,176
35
0
<COMMON> 0
<OTHER-SE> (8,305)
<TOTAL-LIABILITY-AND-EQUITY> 11,414
<SALES> 0
<TOTAL-REVENUES> 20,851
<CGS> 0
<TOTAL-COSTS> 21,004
<OTHER-EXPENSES> 696
<LOSS-PROVISION> 3,467
<INTEREST-EXPENSE> 1,135
<INCOME-PRETAX> (4,789)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,789)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,789)
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 0
<FN>
<F1>Current liabilities include 10,720 of
current portion of long term debt.
</FN>
</TABLE>
