<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------------
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: DECEMBER 31,1998 Commission File Number: 1-12238
MHM SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-1223048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8605 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 No X
---
As of February 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 DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations-
Three Months Ended December 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Balance Sheets
December 31, 1998 (Unaudited) and September 30, 1998 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-11
PART II. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
</TABLE>
2
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MHM SERVICES, INC., AND SUBSIDARIES
QUARTER ENDED DECEMBER 31, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(000's)
THREE MONTHS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
Net patient revenues $ 2,219,000 $ 5,730,000
Premium revenues 3,650,000 2,733,000
------------------ -------------------
Net revenues 5,869,000 8,463,000
Costs and expenses
Operating 4,535,000 6,307,000
General and administrative 1,217,000 1,539,000
Provision for bad debts 723,000 778,000
Depreciation and amortization 117,000 132,000
Other (credits) charges
Interest expense - MEDIQ - 262,000
Interest expense - Other 172,000 66,000
Gain on sales of extended care division assets (238,000) -
Other (3,000) (20,000)
------------------ -------------------
Loss before income tax (654,000) (601,000)
Income tax expense 19,000 -
Net loss $ (673,000) $ (601,000)
================== ===================
Loss per share:
Basic and diluted $ (0.19) $ (0.17)
================== ===================
Weighted average shares outstanding 3,538,000 3,521,000
================== ===================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, 1998 SEPTEMBER 30, 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 695,000 $ 54,000
Accounts receivable, net 1,898,000 2,706,000
Prepaid expenses 198,000 134,000
Estimated third party settlements 1,409,000 1,409,000
Notes receivable 170,000
Repossessed property under contract for sale 1,172,000 1,172,000
Other current assets - 8,000
----------------- -----------------
Total current assets 5,542,000 5,483,000
Property, plant and equipment, Net 210,000 335,000
Restricted cash 610,000 526,000
Other intangibles, net - 431,000
Other assets 111,000 223,000
Goodwill, net 262,000 538,000
----------------- -----------------
$ 6,735,000 $ 7,536,000
================= =================
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable $ 514,000 $ 444,000
Accrued expenses 655,000 746,000
Estimated third party payor settlements 862,000 967,000
Other accrued expenses 2,256,000 2,258,000
Note payable 2,000,000 2,000,000
Line of credit 500,000 500,000
Current maturities of long term debt 587,000 579,000
----------------- -----------------
Total current liabilities 7,374,000 7,494,000
Long term debt, less current maturities 168,000 176,000
Stockholders' deficit (807,000) (134,000)
----------------- -----------------
$ 6,735,000 $ 7,536,000
================= =================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net loss $ (673,000) $ (601,000)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities 683,000 (156,000)
----------------- -----------------
Net cash provided by (used) in operating activities 10,000 (757,000)
Cash flows from investing activities
- ------------------------------------
Proceeds from sales of extended care division assets 850,000 -
Capital expenditures - (3,000)
Other (135,000) 9,000
Restricted cash (84,000) -
----------------- -----------------
Net cash provided by investing activities 631,000 6,000
Cash flows from financing activities
- ------------------------------------
Borrowings, net 2,151,000 827,000
Debt repayments (2,151,000) (271,000)
Other - 87,000
----------------- -----------------
Net cash provided by financing activities 0 643,000
Increase (decrease) in cash and cash equivalents 641,000 (108,000)
Cash and cash equivalents
Beginning balance 54,000 108,000
----------------- -----------------
Ending balance $ 695,000 $ -
================= =================
Supplemental disclosure of cash flow Information
Interest paid $ 169,000 $ 66,000
================= =================
Income taxes paid (refunded) - $ -
================= =================
Supplemental disclosure of non-cash investing and financing
Note receivable from sale of extended care division assets $ 170,000
=================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
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NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of December 31, 1998, the condensed
consolidated statements of operations for the three month periods ended December
31, 1998 and 1997, and condensed consolidated statements of cash flows for the
three month periods ended December 31, 1998 and 1997 have been prepared by the
Company, without audit. In the opinion of management, all material adjustments
(consisting only of normal, recurring adjustments) necessary to present fairly
the condensed consolidated financial position, results of operations and cash
flows as December 31, 1998, and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. For presentation purposes, certain amounts
presented for the quarter ended December 31, 1997 were reclassified to conform
with the presentation for the quarter ended December 31, 1998. 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 December 31, 1998 are not necessarily indicative
of the operating results for the full year.
NOTE 2 - LIQUIDITY
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the continuation of operations, realization of
assets and liquidation of liabilities in the ordinary course of business. The
Company has incurred cumulative net losses of $11,843,000 for the three years
and three months ended December 31, 1998, and had a stockholders' deficit of
$807,000 as of December 31, 1998. At December 31, 1998, the Company is
experiencing difficulty in generating sufficient cash flows to meet its
obligations. 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.
NOTE 3 - SALE OF EXTENDED CARE SERVICES DIVISION OPERATIONS
As a result of continued losses in the Extended Care Services (ECS) Division,
the Company began selling all of its ECS operations in fiscal 1998. On December
31, 1998, the Company completed the last sales of assets in this Division
(except for a captiated Medicaid contract in Georgia). Gains from the sales of
these ECS assets totaled $238,000 for the quarter ended December 31, 1998 and
are reflected in the accompanying condensed consolidated statements of
operations. Beginning January 1, 1999, the Company's operations consist only of
Correctional Services Division contracts with the states of Tennessee and
Georgia and a capitated Medicaid contract in Georgia.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion addresses the financial condition of the
Company as of December 31, 1998 and the Company's results of operation for the
three-month period then ended compared with the same period last year. This
discussion should be read in conjunction with Management's Discussion and
Analysis section (pages 10-19) for the fiscal year ended September 30, 1998
included in the Company's Annual Report on Form 10-K.
GENERAL
The Company was initially engaged in the inpatient, mental healthcare
services business. It either owned freestanding behavioral healthcare facilities
or managed behavioral healthcare programs in acute care hospitals. This
freestanding behavioral business suffered as the behavioral healthcare market
sought less expensive alternatives to inpatient services. As a result of this
downturn, the Company began to experience significant operating losses.
Therefore, it determined to transition its business to the provision of
behavioral healthcare services primarily to residents of extended care
facilities such as nursing homes. Eventually, by April 1998, all inpatient units
had been sold.
While the Company was furthering its extended care business, it also
commenced a correctional services division through which medical services were
provided on a capitated basis to inmates in correctional institutions. The
Company believed that greater opportunities were available through capitated
contracts to provide behavioral healthcare services to prison inmates than were
available in the extended care market. Moreover, the Company was sustaining
losses in its extended care business. Therefore, the Company decided to focus on
its correctional services business and, with the exception of one extended care
Medicaid contract in Georgia, to depart the extended care market. By December
31, 1998, all extended care operations, with the exception of the Georgia
contract, were divested.
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 $11,843,000
since October 1, 1995. Commencing on 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 correctional services
division 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.
Nevertheless, there can be no assurance that the Company's efforts will result
in positive effects on the Company's financial condition. See, "Liquidity".
8
<PAGE> 9
FINANCIAL POSITION - DECEMBER 31, 1998 COMPARED TO SEPTEMBER 30, 1998
The Company's stockholders' deficit increased to $807,000 at December
31, 1998 from $134,000 at September 30, 1998 as a result of the losses for the
three months ended December 31, 1998, of $673,000. As a result of the sale of
certain extended care operations in December 1998, the Company recorded a
one-time gain of $238,000 during the quarter. 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 $695,000 at December 31, 1998.
The Company has a deficit in working capital at December 31, 1998, of
$1,832,000, which represents a decrease of $179,000 from the deficit at
September 30, 1998 of $2,011,000. The decrease is primarily attributed to
proceeds received from the sale of certain assets in the extended care services
division.
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
REVENUES
Net revenues for the first quarter of fiscal 1999 were $5,869,000, a
decrease of 31% as compared to $8,463,000 for the first quarter of fiscal 1998.
This decrease in revenue is attributable to the Company's divestiture of its
last remaining freestanding hospital in the third quarter of 1998 from which
$1,359,000 of revenues were realized in the first quarter of fiscal 1998, and
increasing pressure from third party payors to reduce utilization of the
Company's services to extended care facilities. The extended care services
division generated revenues for the first quarter of 1999 of $3,102,000 as
compared to $5,731,000 for the first quarter of 1998. The correctional services
division generated revenues of $2,767,000 for the first quarter of 1999 as
compared to $2,732,000 for the first quarter of 1998.
EXPENSES
Operating expenses for the first quarter of 1999 were $4,535,000, a
decrease of 28% as compared to $6,307,000 for the first quarter of 1998. This
decrease was primarily attributable to lower costs in the Company's extended
care services division as the business of this division was curtailed. In this
regard, extended care service operating costs were $2,116,000 in the first
quarter of 1999 as compared to $3,027,000 in 1998. The Company's freestanding
facility, Mountain Crest which was sold in April 1998, incurred operating
expenses of $794,000 for the first quarter of 1998.
General and administrative expenses during the first quarter of 1999
were $1,217,000, a decrease of 21% as compared to $1,539,000 from the first
quarter of 1998. This decrease was primarily attributable to general and
administrative expenses of $407,000, which were required during the first
quarter of 1998 to support Mountain Crest.
The provision for bad debts was $723,000 for the first quarter of 1999
as compared to $778,000 in the prior year's quarter. As a percentage of net
revenues, bad debt expense was 12%, compared to 9% in the prior year period. The
increase in the provision for bad debts was
9
<PAGE> 10
primarily attributable to management's estimates of the net realizable value of
outstanding accounts receivable from divested extended care services operations
as of December 31, 1998.
Interest expense for the first quarter of 1999 totaled $172,000 as
compared to $328,000 in the prior year quarter. The key factor for this decrease
was the elimination of the Company's $11,800,000 obligation to MEDIQ, Inc. upon
which interest was being accrued. This obligation was settled for $3,000,000 in
July 1998. The settlement was financed through borrowed funds.
Income tax expense for the first quarter of 1999 totalled $19,000 and
was due from state taxable income.
SALE OF DIVISION
In the first quarter of fiscal 1999, the Company divested all but one
of its remaining extended care services units from which it recognized a one
time net gain of $238,000.
NET LOSS
For the first quarter ended December 31, 1998, the Company recognized a
net loss of $673,000, compared to a net loss of $601,000 in the prior fiscal
year period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operating losses through a combination of
the proceeds derived from the sale of operating units and through borrowed
funds. The Company has utilized a revolving credit facility for its extended
care services division which, as of December 31, 1998, had an outstanding
balance of $385,000. In addition, the Company has a $500,000 line of credit
which certain officers have guaranteed which was fully utilized as of December
31, 1998, and a $2,000,000 loan the Company secured to fund its settlement with
MEDIQ, Inc. The Company intends to repay the $500,000 line of credit and the
$2,000,000 loan primarily from cost report settlement recoveries from the
Federal Government and from the proceeds of the sale of repossessed property
under contract for sale. The Company expects the repayment of the $500,000 line
of credit and the $2,000,000 loan to occur during the second quarter of this
fiscal year as a result of receiving the recoveries from the cost report
settlement and the proceeds from the sales contract for the repossessed
property. In January 1999, the $385,000 line of credit was paid from collections
of accounts receivable remaining from the divestiture of operating units of the
extended care services division at December 31, 1998.
The Company anticipates that it will continue to maintain its borrowing
capacity under the $500,000 line of credit. This alone, however, will not be
sufficient to fund the Company's working capital needs. The Company realizes
that to sustain its operations, additional correctional services 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
10
<PAGE> 11
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 division, it will attempt to accelerate the collection of
receivables and reduce the level of expenses. No assurances 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.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) Exhibits
27.1 Financial Data Schedule
b) The Company filed a Form 8-K on January 15, 1999 to report the
sale and other dispositions of all but one of the Company's
remaining units comprising its extended care services division.
11
<PAGE> 12
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 April 5, 1999 MHM Services, Inc.
/s/ Cleveland E. Slade
----------------------
CLEVELAND E. SLADE
Vice President and Chief Financial Officer
12
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 695
<SECURITIES> 0
<RECEIVABLES> 6,732
<ALLOWANCES> (4,834)
<INVENTORY> 198
<CURRENT-ASSETS> 5,542
<PP&E> 210
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,735
<CURRENT-LIABILITIES> 7,374
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> (842)
<TOTAL-LIABILITY-AND-EQUITY> 6,735
<SALES> 0
<TOTAL-REVENUES> 6,110
<CGS> 0
<TOTAL-COSTS> 5,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 723
<INTEREST-EXPENSE> 172
<INCOME-PRETAX> (654)
<INCOME-TAX> 19
<INCOME-CONTINUING> (673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (673)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
