<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1999 Commission File Number: 1-12238
MHM SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-1223048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8065 WESTWOOD CENTER DRIVE, SUITE 400, VIENNA, VIRGINIA 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 749-4600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No
As of August 16, 1999, there were 3,538,225 shares of Common Stock, par value
$.01 per share, outstanding.
<PAGE> 2
MHM SERVICES, INC., AND SUBSIDARIES
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Condensed Consolidated Statements of Operations-
Three and Nine Months Ended June 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Balance Sheets
June 30, 1999 (Unaudited) and September 30, 1998 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1999 and 1998 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
</TABLE>
2
<PAGE> 3
MHM SERVICES, INC., AND SUBSIDARIES
QUARTER ENDED JUNE 30, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE> 4
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 4,443,000 $ 7,153,000 $ 13,724,000 $ 23,176,000
Costs and expenses
Operating 3,839,000 4,639,000 11,409,000 15,371,000
General and administrative 1,104,000 1,746,000 4,049,000 6,126,000
Provision for bad debts (63,000) 801,000 1,053,000 2,018,000
Depreciation and amortization 34,000 112,000 206,000 353,000
Other (credits) charges
Interest expense - MEDIQ - 233,000 - 757,000
Interest expense - Other 24,000 39,000 274,000 154,000
Gain on sale of freestanding hospital (2,444,000)
Gain on sale of repossessed property - - (299,000) -
Gain on sales of extended care division assets - - (301,000) -
Loss on sale of assets - - 1,000 -
Other (23,000) (125,000) (48,000) (131,000)
------------ ------------ ------------ ------------
Income (Loss) before income tax (472,000) 2,152,000 (2,620,000) 972,000
Income tax expense 32,000 - 67,000 -
------------ ------------ ------------ ------------
Net Income (Loss) $ (504,000) $ 2,152,000 $ (2,687,000) $ 972,000
============ ============ ============ ============
Income (Loss) per share:
Basic and diluted $ (0.14) $ 0.61 $ (0.76) $ 0.28
============ ============ ============ ============
Weighted average shares outstanding 3,538,000 3,526,000 3,538,000 3,526,000
------------ ------------ ------------ ------------
</TABLE>
4
<PAGE> 5
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
June 30, 1999 September 30, 1998
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 167,000 $ 54,000
Accounts receivable, net 1,168,000 2,706,000
Prepaid expenses 89,000 134,000
Estimated third party settlements 69,000 1,409,000
Repossessed property under contract for sale - 1,172,000
Other current assets - 8,000
----------- -----------
Total current assets 1,493,000 5,483,000
Property, plant and equipment, net 180,000 335,000
Restricted cash 175,000 526,000
Other intangibles, net - 431,000
Other assets 296,000 223,000
Goodwill, net 227,000 538,000
----------- -----------
$ 2,371,000 $ 7,536,000
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 847,000 $ 444,000
Accrued expenses 741,000 746,000
Estimated third party payor settlements 864,000 967,000
Other accrued expenses 1,336,000 2,258,000
Note payable - 2,000,000
Line of credit 1,000,000 500,000
Current maturities of long term debt 268,000 579,000
----------- -----------
Total current liabilities 5,056,000 7,494,000
Long term debt, less current maturities 9,000 176,000
Stockholders' deficit (2,694,000) (134,000)
----------- -----------
$ 2,371,000 $ 7,536,000
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,687,000) $ 972,000
Adjustments to reconcile net loss to net cash
provided by operating activities 2,120,000 (2,866,000)
----------- -----------
Net cash used in operating activities (567,000) (1,894,000)
Cash flows from investing activities:
Proceeds from sales of extended care division assets 870,000
Proceeds from sale of repossessed property 1,471,000
Proceeds from sale of hospital 3,182,000
Capital expenditures (30,000) (7,000)
Restricted cash 351,000 $ 25,000
Other (4,000)
----------- -----------
Net cash provided by investing activities 2,658,000 3,200,000
Cash flows from financing activities:
Borrowings, net 3,514,000 460,000
Proceeds from exercise of stock options 5,000
Debt repayments (5,492,000) (1,879,000)
----------- -----------
Net cash used in financing activities (1,978,000) (1,414,000)
Increase (decrease) in cash and cash equivalents 113,000 (108,000)
Cash and cash equivalents
Beginning balance 54,000 195,000
----------- -----------
Ending balance $ 167,000 $ 87,000
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 274,000 $ 213,000
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Note receivable from sale of extended care division assets $ 150,000
===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
NOTE 1. CONDENSED CONSOLDIATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1999, the
condensed consolidated statements of operations for the three and nine-month
periods ended June 30, 1999 and 1998, and condensed consolidated statements of
cash flows for the nine month periods ended June 30, 1999 and 1998 have been
prepared by the Company, without audit. In the opinion of management, all
material adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly the condensed consolidated financial position,
results of operations and cash flows as of June 30, 1999, and for all periods
presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. For presentation purposes, certain
amounts presented for the nine-month period and quarter ended June 30, 1998 were
reclassified to conform with the presentation for the nine-month period and
quarter ended June 30, 1999. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended September 30, 1998. The results of operations for the period ended June
30, 1999 are not necessarily indicative of the operating results for the full
year.
NOTE 2. LIQUIDITY
The accompanying condensed 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
$13,857,000 for the three years and nine months ended June 30, 1999, and had a
stockholders' deficit of $2,694,000 and a working capital deficit of $3,563,000
as of June 30, 1999.
As a result of the Company's continued negative operating results
the Company has been experiencing difficulty generating sufficient cash flows
from operations to meet its obligations and sustain its operations. Such
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The condensed consolidated financial statements do not include
any adjustments that might result should the Company be unable to continue as a
going concern.
In an effort to improve this situation, the Company divested itself
of the unprofitable extended care operations which had been conducted by a
subsidiary of the Company, expanded its correctional services business, taken
steps to reduce operating expenses, is attempting to raise additional capital,
and is working to improve its cash flows. Although the Company continues to seek
additional sources of debt and
7
<PAGE> 8
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 operating losses. Management of the Company is
currently planning to file for a corporate dissolution under Delaware law of
the Extended Care Services subsidiary in order to obtain a discharge of this
subsidiary's debts. The action has not yet been approved by the Company's Board
of Directors. The Company's liquidity could also be improved by (i) obtaining
additional correctional services contracts; (ii) achieving significant
reductions in overhead; and (iii) obtaining additional capital and/or financing
sources. However, to date, the Company's efforts to improve liquidity through
these means have not been successful. There can be no assurance that any of
such events will occur or, if they do occur, that the impact on cash flows will
be sufficient to enable the Company to continue its operations.
NOTE 3. DEBT
In October 1997, the Company borrowed an aggregate of $500,000 under
a line of credit with NationsBank, NA, which debt was guaranteed by Michael S.
Pinkert, President and Chief Executive Officer, William P. Ferretti, Director
and Lee Calligaro former Vice President and General Council of the Company. The
line of credit permitted maximum borrowings by the Company of $500,000. In June
1999, the Company increased this line of credit to a maximum borrowing capacity
of $1,300,000 with a commitment fee of .5 percent. The line of credit is
payable by May 31, 2000 and bears interest at the Eurodollar rate plus 2.6
percent, per annum (7.6% at June 30, 1999). Mr. Pinkert personally guaranteed
the entire line of credit. For his guaranty, the Company granted 90,000
warrants to purchase stock of the Company at $.10 per share. William Ferretti,
John Silverman, Jacob Shipon, directors of the Company, and Lee Calligaro, have
indemnified Mr. Pinkert on his guarantee in the extent of $550,000. For their
indemnifications, the Company granted to each indemnitor on a pro rata basis
based on their individual indemnification, at total of 99,000 warrants to
purchase stock of the Company at $.10 per share. As a fee to the guarantor and
idemnitors for the ongoing risks represented by the guarantee and
indemnification obligations, for each month during which the guarantee and
indemnification obligations are outstanding, warrants for the number of shares
as are equal in value (at a price of $.10 per share) to one and one-half
percent of the average loan balance which is outstanding during the month will
be issued. Also, Mr. Pinkert, Mr. Ferretti, and Mr. Calligaro, guarantor and
idemnitors of the original line of credit of $500,000, who earned warrants of
105,394, 35,126, and 35,126, respectively, during the period that this
obligation was outstanding, were granted a reduction in their warrant exercise
price to $.10 per share to purchase Company stock with previously earned
warrants. As of June 30, 1999, the Company had drawn $1,000,000 against this
line. Expense totalling approximately $127,000 was recorded in the third
quarter of 1999 for the issuance of these warrants.
In July 1998, the Company settled its dispute with MEDIQ Inc., its
former parent for $3,000,000 in cash. The Company funded the $3,000,000
settlement payment to MEDIQ by fully drawing on the NationsBank line of credit
in the original amount of $500,000, drawing on a portion of a revolving line of
credit with HealthCare Financial Partners, amounting to $275,000, and receiving
a loan from HealthCare Financial Partners of $2,000,000. The Company's Directors
and Officers liability insurance paid the remaining $225,000 of this settlement.
The loan from HealthCare Financial Partners had a maturity of
January 15, 1999, and an interest rate of prime plus 2%. In consideration of the
loan, the Company granted
8
<PAGE> 9
HealthCare Financial Partners five year warrants for 300,000 shares of the
Company's stock exercisable at $.01 per share. Michael S. Pinkert, the Company's
President and Chief Executive Officer, guaranteed $800,000 of the $2,000,000
HealthCare Financial Partners loan. For his guaranty, the Company granted Mr.
Pinkert ten year warrants for 145,000 shares of stock exercisable at $.50 per
share. In January 1999, the Company negotiated an extension of the $2,000,000
loan with HealthCare Financial Partners until April 15, 1999. As of June 30,
1999, the outstanding loan with HealthCare Financial Partners has been paid in
full.
NOTE 4. CONTINGENCIES
On March 2, 1998, the Company was notified that a claim
for refund of certain Medicare payments is being made against Supportive
Counseling Centers (SCC) to which a subsidiary of the Company previously
provided management services. The claim is being asserted by the Medicare
fiscal intermediary which was responsible for processing and paying SCC's
claims for Medicare payments, and arises from post payment review by the fiscal
intermediary. The claim, which seeks approximately $1,700,000 in refunds,
relates to Medicare reimbursements paid to SCC prior to any involvement of the
Company's subsidiary as well as during the period in which management services
were provided to SCC. No claim has been asserted against the Company or its
subsidiary, and the Company does not believe that it has any liability with
respect to the claims made against SCC.
On November 23, 1998, the Company received a notice from
the Massachusetts Peer Review Organization, Inc. (MassPro), that MHM Counseling
Services, through a clinic located in Taunton, Massachusetts, owned by MHM
Extended Care Services, Inc., had failed to comply with certain regulations,
rules, standards and statutes applicable to providers participating in the
Massachusetts Medical Assistance Program. As a result of MassPro's audit of
payments made in 1997 to MHM Counseling Services for 25 Medicaid recipients
which resulted in a claimed overpayment of $28,000, the MHM Counseling Services
was requested to repay the Massachusetts Medical Assistance Program an
extrapolated amount of approximately $215,000. The Company has appealed this
determination, but has not received a report of the results of this appeal. On
June 3, 1999, MHM Counseling Services received another notice from MassPro,
that the counseling service clinic located in Cambridge, Massachusetts had
failed to comply with certain regulations, rules, standards and statutes
applicable to providers participating in the Massachusetts Medical Assistance
Program. As a result this MassPro's audit of payments made in 1997 to MHM
Counseling Services of 26 Medicaid recipients which resulted in a claimed
overpayment of $22,000, the MHM Counseling Services was requested to repay the
Massachusetts Medical Assistance Program an extrapolated amount of
approximately $1,019,000. The Company had thirty days to appeal this
determination. The Company applied and received an extension to file an appeal
of these findings.
In reference to the above claims it is the Company's
position that extrapolating a sample rate from a review of a subset of certain
professionals is not statistically valid when applied to a group of other
professionals. Furthermore, the extrapolations were not based on statistically
valid samples. Therefore, in the Company's view, extrapolation is not
appropriate. Based upon the Company's review of claims audited by MassPro the
Company believes it will prevail in reducing the amount
9
<PAGE> 10
of repayment requested and is vigorously appealing the initial findings by
MassPro. At June 30, 1999, the Company has reserved approximately $615,000 in
the condensed consolidated financial statements. The Company believes this
amount is sufficient to cover any potential settlements with MassPro.
On July 14, 1999, the Company became aware that a notice of
a post-payment review of claims processed in 1998 from the CIGNA HealthCare
Medicare Administration (CIGNA), was sent to Psychiatric Specialty Group, the
"Practice". MHM Extended Care Services Inc. managed the Practice in 1998. The
notice indicated that there were certain deficiencies in the medical records of
fifteen beneficiaries' records reviewed and indicated an overpayment of $4,100.
As a result, CIGNA is now proceeding to perform a statistically valid random
sample audit. The Practice is required to immediately repay the overpayment of
$4,100 identified in the audit and such repayment has been reserved in the
Company's consolidated financial statements at June 30, 1999. The Company does
not believe its ultimate liability will exceed the amount reserved.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion addresses the financial condition of the
Company as of June 30, 1999 and the Company's results of operation for the
three-month and nine-month periods then ended compared with the same periods
last year. This discussion should be read in conjunction with Management's
Discussion and Analysis section (pages 11-20) for the fiscal year ended
September 30, 1998 included in the Company's Annual Report on Form 10-K
GENERAL
Historically, the Company has provided on-site behavioral health
services through its Correctional Services subsidiary and Extended Care Services
subsidiary. The Company has provided inpatient psychiatric services through its
Hospital Division. The Company formed the Correctional Services Subsidiary in
1997 and in the fourth quarter of 1997 Correctional Services secured contracts
with the Tennessee and Georgia Departments of Correction to provide behavioral
health services on a capitated basis to the inmates of those states'
correctional systems. In the second quarter of 1999, Correctional Services
was awarded a contract to provide similar services to the Broward County,
Florida Correctional Systems as a subcontractor to Prison Health System who
provides general healthcare services to the Broward facility. During fiscal year
1998, the Company made the determination to focus its strategic growth efforts
on the Correctional Services subsidiary and, during the first quarter of fiscal
year 1999, the Company sold most of the operations of its Extended Care Services
subsidiary, which had been operating unprofitably. The sole remaining operation
of the Extended Care Services subsidiary had been a capitated contract to
provide services to Medicaid beneficiaries residing in Georgia nursing homes.
Extended Care Services had been providing these
10
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services for the state since 1994 under a contract which expired on June 30,
1997. In April 1999 in a competitive bid process, a new one-year contract was
awarded, with three successive options to renew this contract for additional
terms up to one fiscal year each. The new contract is with the Company's
Correctional Services subsidiary effective May 1, 1999, the beginning date of
the new contract.
Consistent with its strategy of focusing on the Correctional
Services subsidiary, the Company sold two freestanding facilities, Mountain
Crest, an inpatient psychiatric facility, in the third quarter of 1998, and
Oakview, an inpatient substance abuse facility, (which the Company initially
sold in 1996 and which was later reacquired by the Company by foreclosure), in
March 1999. With the sale of the Mountain Crest and Oakview facilities, the
Company no longer owns or operates any inpatient facilities. "Collectively, the
sale of the Extended Care Services operations and the sale of the Mountain Crest
and Oakview facilities is hereafter called the Divestiture."
Since the Divestiture, the Company continues to incur operating
losses. For the nine-month period ended June 30, 1999, assets sold in the
Divestiture accounted for $1,965,000 of net revenues and $1,868,000 of loss
before income taxes (including the gain of $600,000 from sale of these assets).
Excluding revenues from assets that were sold in the Divestiture, the Company
would have had net revenues of $11,759,000 and a loss before income taxes of
$752,000 for the nine-month period ended June 30, 1999.
For the three-month period ended June 30, 1999, the Company
recognized a loss before income taxes of $472,000. The operations sold in the
Divestiture contributed $213,000 to the third quarter loss before income
taxes. Excluding revenues from the operations that were sold in the
Divestiture, the Company had net revenues of $4,443,000 and a loss before
income taxes of $259,000 for the three-month period ended June 30, 1999.
Proceeds from the sales of the Company's inpatient facilities and
certain of its extended care operating units have provided the Company with
sufficient cash to fund the Company's working capital needs as the Company
continues to sustain operating losses. These losses have totaled $13,857,000
since October 1, 1995. With the sale of the unprofitable operations of its
Extended Care Services subsidiary, beginning January 1, 1999, the Company
expects that its remaining operations will be profitable but it recognizes the
level of profits will be insufficient to cover all of the Company's general and
administrative expenses. Therefore, continuing operations will remain dependent
upon the Company securing additional contracts in the Company's Correctional
Services subsidiary and obtaining additional working capital. No assurance can
be provided that the Company will be successful in securing additional contracts
or obtaining additional working capital. See, "Liquidity." The report of the
Company's independent auditors on the Company's audited consolidated financial
statements for the fiscal year ended September 30, 1998, includes an explanatory
paragraph which states that the Company's current financial condition raises
substantial doubt as to the Company's ability to continue as a going concern.
11
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FINANCIAL POSITION - JUNE 30, 1999 COMPARED TO SEPTEMBER 30, 1998
The Company's stockholders' deficit increased to $ 2,694,000 at June
30, 1999 from $134,000 at September 30, 1998. The increase is attributable to
the Company's losses of $2,687,000 for the nine months ended June 30, 1999.
Total current assets were $1,493,000 at June 30, 1999 as compared to $5,483,000
at September 30, 1998. The decrease of $3,990,000 was mainly due to the sale of
the repossessed Oakview facility, the collection of accounts receivable, and the
settlements of estimated third party payor receivables. Noncurrent assets also
decreased significantly since September 30, 1998 primarily due to the sale of
the Extended Care Services assets. Total current liabilities were $5,056,000 at
June 30, 1999 as compared to $7,494,000 at September 30, 1998. This decrease of
$2,438,000 was mainly due to repayment of the Company's line of credit and a
six-month term loan with HealthCare Financial Partners, as well as payments to
settle estimated third party payor liabilities. At June 30, 1999, approximately
$1,690,000 of the $5,056,000 in current liabilities can be attributed to the
Divestiture.
As presented in the accompanying condensed consolidated statement
of cash flows, the Company's cash balance increased from $54,000 at September
30, 1998 to $167,000 at June 30, 1999. The Company has a deficit in working
capital at June 30, 1999 of $3,563,000, which represents an increase of
$1,552,000 from the deficit at September 30, 1998 of $2,011,000. The increase in
the deficit is primarily attributed to operating losses for the nine months
ended June 30, 1999 which was partially offset by the gains from the sales of
certain assets of the Company's Extended Care Services Subsidiary and
repossessed property under contract for sale.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
Net revenues for the nine-month period ended June 30, 1999 were
$13,724,000, a decrease of 41% as compared to $23,176,000 in net revenues for
the nine-month period ended June 30, 1998. This decrease in revenue is the
direct result of the Divestiture. The Correctional Services Subsidiary
generated net revenues of $9,707,000 for the nine-month period ended June 30,
1999 as compared to $8,191,000 for the nine-month period ended June 30, 1998.
The divested operations generated net revenues of $1,965,000 for the nine-month
period ended June 30, 1999 as compared to $12,326,000 for the nine-month period
ended June 30, 1998.
Operating expenses for the nine-month period ended June 30, 1999
were $11,409,000, or 83% of net revenues. Operating expenses decreased
26% from the same nine-month period ended June 30, 1998 when such expenses were
$15,371,000 or 66% of net revenues. This decrease in operating expenses is
primarily attributable to the Divestiture. The Correctional Services
Subsidiary had operating expenses of $8,356,000 for the nine-month period ended
June 30, 1999, which was 86% of the net revenues of Correctional Services. The
Correctional Services subsidiary had operating expenses of $7,280,000 for the
nine-month period ended June 30, 1998 which was 89% of its net revenues. The
operating expenses of the Correctional Services subsidiary
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<PAGE> 13
increased due to new correctional contracts in 1999. The divested operations had
operating expenses of $1,870,000 for the nine-month period ended June 30, 1999
as compared to $6,605,000 for the nine-month period ended June 30, 1998.
Operating expenses from the Company's divested operations included a charge for
$400,000 to increase reserves for potential liabilities as a result of fiscal
intermediaries post payment reviews. (See Note 4 to the Condensed Financial
Statements in this report).
General and administrative expenses for the nine-month period ended
June 30, 1999 were $4,049,000 or 30% of net revenues. General and
administrative expenses for the nine-month period ended June 30,1998 were
$6,126,000 or 26% of net revenues. The decrease was due mainly from reduction
in staffing and facility costs pertaining to the Divestiture. The Correctional
Services Subsidiary had general and administrative expenses of $503,000 for the
nine-month period ended June 30, 1999 equal to 5% of its net revenues. The
Correctional Services Subsidiary had general and administrative expenses of
$334,000 equal to 4% of its net revenues for the nine-month period ended June
30, 1998. The general and administrative expenses of the Correctional Services
Subsidiary increased due to new correctional contracts in 1999. Corporate
general and administrative expenses were $1,850,000 for the nine-month period
ended June 30, 1999 as compared to $1,679,000 for the nine-month period ended
June 30, 1998. The divested operations had general and administrative expenses
of $1,454,000 for the nine-month period ended June 30, 1999 as compared to
$3,468,000 for the nine-month period ended June 30, 1998.
The provision for bad debts was $1,053,000 for the nine-month period
ended June 30, 1999 as compared to $2,018,000 for the nine-month period ended
June 30, 1998. As a percentage of net revenues, bad debt expense was 8% for the
nine-month period ended June 30, 1999, compared to 9% as of June 30, 1998. The
decrease in the provision is attributed to the sale of the certain Extended Care
Services operations in the first quarter of fiscal year 1999. Included in the
Company's provision for bad debts, for the nine months ended June 30, 1999, is a
reserve in the amount of $150,000 related to a note the Company received from
the buyer of one of its divested assets. The buyer has requested an extension of
this note, which is currently in default, until August 31, 1999.
Depreciation and amortization expenses were $206,000 for the
nine-month period ended June 30, 1999 as compared to $353,000 in the nine-month
period ended June 30, 1998. The decrease of $147,000 is attributed to assets
sold in the Divestiture.
Interest expense for the nine-month period ended June 30, 1999
totaled $274,000 as compared to $911,000 for the nine-month period ended June
30, 1998. Interest expense incurred in the nine-month period of 1999 relates to
interest on the Company's six-month loan and lines of credit. For the nine-month
period ended June 30, 1998, $757,000 of the $911,000 in interest expense related
to interest on the loan due to the Company's former parent, MEDIQ. The debt was
extinguished in July 1998, as a part of the settlement with MEDIQ.
During the nine-month period ended June 30, 1999, the Company
recognized a one-time gain of $299,000 from the sale of Oakview and $301,000
from the sale of certain assets in the Divestiture. In March 1999, the Company
relocated its corporate
13
<PAGE> 14
offices. During the relocation, certain fixed assets were disposed resulting in
a loss of $1,000. During the nine-month period ended June 30, 1998, the Company
sold its last remaining freestanding hospital, Mountain Crest, resulting in a
one-time gain of $2,444,000 from the sale.
The Company recognized other credits of $48,000 in the nine-month
period ended June 30, 1999. Included in other credits is a fee of $20,000
received by the Company to extend a note receivable until August 31, 1999. The
note was received from the sale of one of the Company's extended care operations
and is currently in default. The remaining balance of the other credits is the
result of interest income on invested cash balances.
As a result of the foregoing, the Company recognized a net loss of
$2,687,000 during the nine-month period ended June 30, 1999, compared to a net
income of $972,000 for the nine-month period ended June 30, 1998. Operating
results in the 1999 period were adversely affected by the operations of the
Company's Extended Care Services subsidiary, which continued to operate
unprofitably during the first quarter of 1999. Net losses relating to the
Extended Care Services subsidiary were $1,172,000, including the $301,000 gain
on the sale of certain assets. With the Divestiture, the Company is focusing
on growth opportunities for its Correctional Services subsidiary. However,
there can be no assurance that the Company will be successful in its efforts to
secure additional contracts in its Correctional Services subsidiary or reduce
expenses in its Correctional Services subsidiary to offset corporate overhead
costs and operate profitably.
THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998
Net revenues for the third quarter ended June 30, 1999 were
$4,443,000, a decrease of 38% as compared to $7,153,000 for the third quarter
ended June 30, 1998. The decrease is attributable to the Divestiture. The
Correctional Services Subsidiary generated revenues of $4,169,000 for the third
quarter of 1999 as compared to $2,766,000 for the third quarter of 1998 as of
the result of three new contracts added to the subsidiary in 1999. The divested
operations generated revenues of $3,214,000 for the third quarter 1998.
Operating expenses for the third quarter ended June 30, 1999 were
$3,839,000, or 86% of net revenues. As a result of the Divestiture, operating
expenses decreased by 20% from $4,639,000, which was equal to 65% of net
revenues for the third quarter, ended June 30, 1998. The Correctional Services
subsidiary had operating expenses of $3,469,000 for the third quarter of 1999
as compared to $2,397,000 for the third quarter of 1998. For the quarter ended
June 30, 1999, the Correctional Services subsidiary had operating expenses of
87% of net revenue in the third quarter of 1999 as compared to 63% of net
revenues in the third quarter of 1998. The increase was due to the start-up
costs for the new contract that commenced during the third quarter of 1999. The
divested operations had operating expenses of $370,000 in the third quarter of
1999 as compared to $1,826,000 for the third quarter of 1998. During the third
quarter,
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<PAGE> 15
the Company has taken a charge to operating expenses for $400,000 to increase
its reserves for potential liabilities to fiscal intermediaries of its sold
extended care services for post payment reviews. (See Note 4 to the Condensed
Financial Statements in this report).
General and administrative expenses for the third quarter ended
June 30, 1999 were $1,104,000, or 25% of net revenues. Again as a result of the
Divestiture, general and administrative expenses decreased 36% from
$1,746,000 or 24% of net revenues for the third quarter ended June 30, 1998.
The Correctional Services subsidiary had general and administrative expenses of
$225,000 for the third quarter of 1999 as compared to $128,000 for the third
quarter of 1998. This increase in Correctional Services general and
administrative expense is attributed to the new contract which began in the
third quarter of 1999. Corporate general and administrative expenses were
$716,000 for the quarter ended June 30, 1999 as compared to $501,000 for the
quarter ended June 30, 1998. The divested operations had general and
administrative expenses of $123,000 in the third quarter of 1999 as compared to
$876,000 for the third quarter of 1998.
The provision for bad debts reflected net recoveries of $63,000 for
the third quarter of 1999 as compared to provision for bad debts of $801,000 in
the third quarter of 1998. The decrease in the provision is attributed to the
sale of the certain Extended Care Services operations in the first quarter of
fiscal year 1999. The Company collected $102,000 of fully reserved account
receivables related to its extended care operations.
Depreciation and amortization expenses were $34,000 for the third
quarter of 1999 as compared to $112,000 in the third quarter of 1998. The
reduction in depreciable fixed assets relates to the Divestiture.
During the third quarter ended June 30, 1998, the Company sold its
last remaining freestanding hospital, which resulted in a gain reported in the
quarter of $2,444,000.
Interest expense for the third quarter ended June 30, 1999 was
$24,000 as compared to $272,000 for the third quarter June 30, 1998. Interest
expense incurred in the third quarter of 1999 relates to interest on the
Company's six-month loan and lines of credit. Of such expense in the third
quarter of 1998, $233,000 was related to interest expense due to the Company's
former parent, MEDIQ.
The Company recognized other credits of $23,000 in the third quarter
as a result an extension fee of $20,000 it received on a defaulted note
receivable and interest income on invested cash balances.
As a result of the foregoing, the Company recognized a net loss of
$504,000 during the third quarter of 1999, compared to a net income of
$2,152,000 for the third quarter of 1998. Operating results in the third quarter
of 1999 were adversely affected by the divested operations which contributed
$213,000 to the third quarter net loss and the lack of sufficient revenues in
the Correctional Services subsidiary to cover general and administrative
expenses. Conversely, operating results in the third quarter of 1998 were
positively affected by $2,444,000 from the recognition of the gain on sale of
the Company's last freestanding hospital.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operating losses through a combination of
the proceeds derived from the sale of certain operations of its subsidiary
operating units and through borrowed funds. The Company had utilized a revolving
credit facility for its Extended Care Services subsidiary, which was repaid from
collections of accounts receivable remaining from the divested operating units
during the second quarter of 1999. In addition, as of June 30 1999, the Company
has utilized $1,000,000 of a line of credit from NationsBank, N.A. with a
maximum borrowing capacity of $1,300,000 guaranteed by a certain officer,
directors and shareholder of the Company. Management of the Company is
currently planning to file for a corporate dissolution under Delaware law of
the Extended Care Services subsidiary in order to obtain a discharge of the
subsidiary's debt. The action has not yet been approved by the Company's Board
of Directors. The Company is currently seeking investment capital for its
Correctional Services subsidiary; however, there is no assurance that the
Company will be successful.
The Company anticipates that it will continue to maintain its
borrowing capacity under the $1,300,000 line of credit although this cannot be
assured. The line of credit alone, however, will not be sufficient to fund the
Company's working capital needs. The Company realizes that to sustain its
operations, additional correctional service contracts will be required and that
even if such additional contracts are obtained, additional working capital may
be necessary to fund operating expenses until the additional contracts produce
contributions to the Company's cash flow. The Company further recognizes that it
has exhausted its ability to obtain working capital from proceeds obtained upon
the disposition of operating units which are no longer part of the Company's
strategic focus. As the Company seeks to obtain additional contracts in its
Correctional Services subsidiary, it will attempt to continue reducing its
general and administrative expenses. No assurance can be provided, however, that
any of the Company's efforts to improve its current financial condition will be
successful or that the Company will be able to continue in business.
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 that the Company uses and which this
issue may impact include billing related software and payroll. The Company's
Chief Financial Officer is in charge of investigating the potential impact of
the Year 2000 issue.
The Company has a relationship with a third-party vendor to provide
electronic performs billing services for one of its Medicaid contracts in its
Correctional Services subsidiary. The vendor has represented to the Company that
this billing system is Year
16
<PAGE> 17
2000 compliant. The Company's management has not performed any reviews over that
system, though the vendor is a major supplier of electronic billing services for
the Medicaid program. If their systems were to fail, the Company would manually
mail their billings to Medicaid for services rendered.
The Company has outsourced its payroll processing to an independent
payroll company. That vendor has represented to the Company that their payroll
processing system is year 2000 compliant. The Company's management has not
performed any reviews over that system, though the vendor is a major supplier of
payroll services. If their systems were to fail, the Company would manually
prepare payroll for its employees.
The Company's information systems are resident on personal
computers. During fiscal year 1999, the Company has upgraded its systems to make
these systems Year 2000 compliant. The Company is continuing to review its
systems for Year 2000 issues.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 new litigation, either pending or threatened, which is
likely to have a material adverse effect on the Company's consolidated financial
statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
17
<PAGE> 18
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
Form 8-K filed January 15, 1999
Form 8-K/A filed March 16, 1999.
18
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated August 16, 1999 MHM Services, Inc.
/s/ CLEVELAND E. SLADE
Vice President and Chief
Financial Officer
19
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