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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended: JUNE 30, 2000 Commission File Number: 1-12238
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MHM SERVICES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 52-1223048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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8605 WESTWOOD CENTER DRIVE, SUITE 400, VIENNA, VIRGINIA 22182
(Address of principal executive offices) (Zip Code)
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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 9, 2000, there were 7,287 shares of Common Stock, par value $.01
per share, outstanding.
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MHM SERVICES, INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2000
INDEX
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PAGE
NUMBER
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations-
Three and Nine Months Ended June 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Balance Sheets-
June 30, 2000 (Unaudited) and September 30, 1999 5
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
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MHM SERVICES, INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED JUNE 30,
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2000 1999
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Net revenues
Capitated revenues $ 4,769,000 $ 4,391,000
Net fee-for-service revenue 277,000 60,000
------------ ------------
5,046,000 4,451,000
Costs and expenses:
Operating 3,922,000 3,839,000
General and administrative 1,051,000 1,104,000
Provision for bad debts (36,000) (63,000)
Depreciation and amortization 24,000 34,000
Other (credits) charges:
Interest expense 39,000 23,000
Gain on sale of repossessed property - -
Gain on sales of extended care division assets - -
Other-principally cost report settlements on
previously sold freestanding facilities (25,000) (14,000)
------------ ------------
Income (loss) before income tax 71,000 (472,000)
Income tax expense 45,000 32,000
------------ ------------
Net income (loss) $ 26,000 $ (504,000)
============ ============
Earnings (loss) per share:
-basic $ 3.57 $ (74.19)
============ ============
-diluted $ 3.02 $ (74.19)
============ ============
Weighted average shares outstanding:
-basic 7,287 6,793
============ ============
-diluted 8,610 6,793
============ ============
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NINE MONTHS ENDED JUNE 30,
--------------------------------
2000 1999
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Net revenues
Capitated revenues $ 13,972,000 $ 11,616,000
Net fee-for-service revenue 497,000 2,636,000
------------ ------------
14,469,000 14,252,000
Costs and expenses:
Operating 11,115,000 11,409,000
General and administrative 2,895,000 4,049,000
Provision for bad debts 68,000 1,053,000
Depreciation and amortization 72,000 206,000
Other (credits) charges:
Interest expense 111,000 274,000
Gain on sale of repossessed property - (299,000)
Gain on sales of extended care division assets - (301,000)
Other-principally cost report settlements on
previously sold freestanding facilities (201,000) 481,000
------------ ------------
Income (loss) before income tax 409,000 (2,620,000)
Income tax expense 48,000 67,000
------------ ------------
Net income (loss) $ 361,000 $ (2,687,000)
============ ============
Earnings (loss) per share:
-basic $ 49.54 $ (395.55)
============ ============
-diluted $ 40.25 $ (395.55)
============ ============
Weighted average shares outstanding:
-basic 7,287 6,793
============ ============
-diluted 8,970 6,793
============ ============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
(UNAUDITED)
JUNE 30, 2000 SEPTEMBER 30, 1999
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Assets
Current assets:
Cash and cash equivalents $ 6,000 $ 6,000
Accounts receivable, net 1,395,000 1,094,000
Prepaid expenses 117,000 284,000
Estimated third party settlements 144,000 61,000
Other current assets 191,000 269,000
Total current assets ------------ ------------
1,853,000 1,714,000
Property and equipment, net 94,000 142,000
Restricted cash 275,000 275,000
Other assets 106,000 151,000
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$ 2,328,000 $ 2,282,000
============ ============
Liabilities and Stockholders' Deficit
Current Liabilities:
Cash overdrafts $ 20,000 $ 24,000
Accounts payable 491,000 768,000
Accrued payroll and related expenses 820,000 607,000
Estimated third party payor settlements 619,000 784,000
Other accrued expenses 1,104,000 1,085,000
Notes payable - 187,000
Line of credit - 1,000,000
Current maturities of long term debt 71,000 275,000
Total current liabilities ------------ ------------
3,125,000 4,730,000
Long term debt 1,300,000 5,000
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:
7,287 in 2000 and 1999) - -
Additional paid-in capital 42,220,000 42,225,000
Accumulated deficit (44,317,000) (44,678,000)
------------ ------------
Stockholders' deficit (2,097,000) (2,453,000)
$ 2,328,000 $ 2,282,000
============ ============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED JUNE 30,
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2000 1999
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Cash flows from operating activities
Net income (loss) $ 361,000 $(2,687,000)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities (256,000) 2,120,000
----------- -----------
Net cash provided by (used in) operating activities 105,000 (567,000)
Cash flows from investing activities
Proceeds from sale of repossessed property - 1,471,000
Proceeds from sales of extended care division assets - 870,000
Proceeds from sale of other assets 50,000 -
Capital expenditures (29,000) (30,000)
Restricted cash - 351,000
Collections on note receivable 40,000 -
Other - (4,000)
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Net cash provided by investing activities 61,000 2,658,000
Cash flows from financing activities
Borrowings 300,000 3,514,000
Debt repayments (396,000) (5,492,000)
Cash payout for fractional share repurchase (66,000) -
Change in cash overdrafts (4,000) -
----------- -----------
Net cash used in financing activities (166,000) (1,978,000)
Increase in cash and cash equivalents - 113,000
Cash and cash equivalents
Beginning balance 6,000 54,000
----------- -----------
Ending balance $ 6,000 $ 167,000
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Supplemental disclosure of cash flow information:
Interest paid $ 101,000 $ 274,000
Income taxes paid 82,000 -
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Supplemental disclosure of non-cash investing and financing activities:
Issuance of stock warrants-to obtain financing guarantees
from officers and directors $ 61,000 -
Note receivable from sale of extended care division assets - $ 150,000
=========== ===========
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MHM SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 2000, condensed
consolidated statements of operations for the three and nine-month periods ended
June 30, 2000 and 1999, and condensed consolidated statements of cash flows for
the nine-month period ended June 30, 2000 and 1999 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, 2000, and for all periods presented, have been made.
Certain reclassifications of 1999 balances have been made to conform to the 2000
condensed consolidated financial statement presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1999. The results of operations
for the period ended June 30, 2000 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 that contemplates the continuation of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. The Company had a stockholders' deficit of $2,097,000 and a
working capital deficit of $1,272,000 as of June 30, 2000. The Company's
subsidiary MHM Extended Care Services had a stockholders' deficit of $6,763,000
and a working capital deficit of $864,000 at June 30, 2000. Substantially all of
the assets of this subsidiary were sold in December 1998, and in August 1999,
MHM Extended Care Services, Inc. filed a notice of its intent to dissolve in
Delaware as provided for by Sections 280 and 281 of the Delaware General
Corporate Laws ("DGCL"). Under these sections, DGCL prescribes procedures by
which the Company can satisfy its obligations to creditors of a dissolved
Delaware corporation. Under guidance of Delaware counsel, the Company is in the
process of following these procedures, which are anticipated to result in the
liquidation of the remaining assets of MHM Extended Care Services, Inc., a
satisfaction of $946,000 of external liabilities of the subsidiary as of June
30, 2000, and a reduction in the Company's working capital deficit.
As a result of the historical net losses, the Company has been
experiencing difficulty generating sufficient cash flows from operations to meet
its obligations and
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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.
The Company has funded its operating losses through a combination of
the proceeds derived from the sale of certain operations and through borrowed
funds. As of June 30, 2000, the Company has drawn down upon a $1,300,000
promissory note, with a revolving feature, from Bank of America, which has a
maximum borrowing capacity of $1,800,000.
The Company anticipates that it will continue to maintain its borrowing
capacity under the $1,800,000 credit facility, although this cannot be assured.
The credit facility alone, however, will not be sufficient to fund the Company's
working capital needs. The Company realizes that obtaining additional working
capital will be necessary to reduce its current working capital deficit. The
Company recognizes that it has exhausted its ability to obtain working capital
from divesting certain parts of its operations. Therefore, the Company is
currently planning to raise approximately $2,358,000 in investment capital
through the offering of additional shares of its common stock to its current
stockholders. 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.
NOTE 3. DEBT
Effective May 31, 2000, the Company converted its line of credit of
$1,300,000 payable on May 31, 2000 to a promissory note due on May 31, 2002.
Interest on the note is at the Eurodollar rate plus 2.6 percent per annum,
(weighted-average interest rate of 8.7% during the nine month period ended June
30, 2000). The note has a revolving feature that allows the Company to borrow,
repay and re-borrow up to the maximum aggregate amount. With no changes in the
original terms, on July 13, 2000, the Company increased the borrowing capacity
on the note to $1,800,000. Michael S. Pinkert, the Company's Chairman and Chief
Executive Officer and Dr. Jacob Shipon, Director, have personally guaranteed
this note in the amounts of $1,300,000 and $500,000, respectively. For their
guarantees, the Company granted Mr. Pinkert 180 warrants, and Dr. Shipon 126
warrants to purchase stock of the Company at $50 per share. As a fee to Mr.
Pinkert and Dr. Shipon for the ongoing risks represented by their guarantees,
for each month during which the guarantees are outstanding, warrants for the
number of shares as are equal in value (at a price of $50 per share) to one and
one-half percent of the average note balance which is outstanding during the
month will be issued.
Warrants totaling 459 have been issued and the Company has recorded
financing costs totaling approximately $61,000 for the nine-month period ended
June 30, 2000, related to guarantees and indemnifications of the Company's
promissory note.
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As of June 30, 2000, the note payable to Mentor of $47,000 is in
default for nonpayment of principal due to the dissolution of Extended Care
Services and therefore is classified as a current liability in the condensed
consolidated balance sheets. As a part of the MHM Extended Care Service
dissolution process, the Company expects this debt will be liquidated.
NOTE 4. REVERSE STOCK SPLIT
The Board of Directors approved a plan to declare a 500 to 1 reverse
stock split of all issued and outstanding shares. The record date for the
reverse stock split was March 21, 2000. The Company purchased all fractional
shares resulting from this transaction based on a pre-split fair market value of
$.45 per share, totaling approximately $66,000. This value was determined
through a third party valuation that the Company secured. All share and per
share amounts in the accompanying condensed consolidated financial statements
have been retroactively restated to reflect the effect of the reverse stock
split for all periods presented. The number of authorized shares and the par
value of common stock were not affected by the reverse stock split. The Company
had 3,788,000 shares of common stock outstanding and approximately 3,000
stockholders before the reverse stock stock split, and 7,287 shares of common
stock outstanding and approximately 250 stockholders subsequent to the reverse
stock split.
NOTE 5. CONTINGENCIES
A subsidiary of the Company, MHM Extended Care Services, Inc. ("ECS")
has several contingent liabilities that are discussed below. In the event the
dissolution procedures initiated in the State of Delaware are successful, these
contingent liabilities will be satisfied as part of such procedures.
ECS has become aware of claims for refunds of Medicare and Medicaid
reimbursement paid in connection with the delivery of mental health services to
nursing home patients by two professional corporations to which ECS provided
management services and two clinics operated by ECS directly. Each of these
matters is discussed in greater detail below. Except for the clinics operated
directly by ECS, the refund claims have not been asserted against ECS but only
against the professional corporations which ECS managed. Nevertheless, as
discussed below, principals of the professional corporations have claimed to be
entitled to be indemnified both as to the amounts of any refunds and the cost of
appealing refund determinations. ECS believes such claims are lacking in merit.
Reserves taken by ECS in the amount of $619,100, as described
below, are recorded in the condensed consolidated financial statements of the
Company and its subsidiaries as of June 30, 2000. ECS anticipates that
provisions will be made for these claims in the dissolution proceedings in which
ECS is involved in Delaware, and that any liability therefore would be limited
to a pro rata share of the current assets of ECS. The Company plans to file a
Plan of Dissolution with the Delaware Chancery Court, which would reverse these
reserves. There is no assurance that the Delaware Chancery Court will approve
the Company's Plan of Dissolution.
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Supportive Counseling Centers, P.C.
On March 2, 1998, ECS was notified that a claim for refund of certain Medicare
payments is being made against Supportive Counseling Centers (SCC), a
professional corporation to which ECS previously provided management services.
The Company guaranteed performance by ECS under the Management Agreement. The
claim is being asserted by the Medicare fiscal intermediary (Transamerica), who
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 by ECS as well as during the period in
which management services were provided to SCC by ECS. Transamerica has asserted
no claim against ECS or the Company. However, on January 7, 2000, in connection
with the dissolution procedures of ECS, SCC and one of its shareholders, Murray
Firestone M.D, asserted a claim against ECS seeking indemnification from ECS for
any refunds payable by SCC or Dr. Firestone and any legal costs incurred by SCC
or him related to the claim. SCC and Dr. Firestone did not identify any specific
amount in their claim against ECS. Dr. Firestone also has informed
representatives of the Company that he asserts that the Company as well as ECS
is liable for such indemnification. ECS rejected these claims by SCC filed in
the dissolution proceedings and informed SCC and Dr. Firestone of the
requirement that they file suit within the deadline specified in the dissolution
statute in order to preserve any claim. No such suit has been filed and the
deadline has expired. The Company does not believe that ECS or the Company has
any liability with respect to these claims by SCC or Dr. Firestone. The Company
has been informed that SCC is planning to file for bankruptcy and will be asking
the fiscal agent and the Federal Health Care Financing Administration (the
agency responsible for administering the Medicare Program) to write off the
refund claim as uncollectible. In order to avoid a dispute with SCC or its
shareholders, and in order to bring this matter to a close, the Company has
agreed to cooperate in the filing of bankruptcy by SCC and the negotiations
concerning write off of the claim, including providing funding for these efforts
up to a maximum of $15,000. In so doing, the Company is not acknowledging any
liability in the matter, and believes it will ultimately prevail were a claim
made against it either as to these assertions of overpayment or as to
indemnification of SCC and its principals.
MHM Counseling Services
On November 23, 1998, ECS received a notice from the Massachusetts Peer Review
Organization, Inc. (MassPro), the fiscal agent for the Massachusetts Medical
Assistance Program (the "Program"). In the notice, MassPro claimed there had
been an overpayment to ECS of $28,000 by the Program with respect to services
provided through the clinic, which ECS operated in Taunton, Massachusetts under
the name "MHM Counseling Services." This claim was based upon MassPro's audit of
payments made in 1997 on behalf of 25 Medicaid recipients at the Taunton clinic.
MassPro also performed an extrapolation from these 25 patients, and on the basis
of this extrapolation requested that ECS repay an additional amount of
approximately $215,000 as alleged overpayments with respect to other clinic
patients treated during the period. This amount subsequently was reduced to
$104,000 based on ECS's appeal of the audit findings which the Company has
accrued as of June 30, 2000.
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On June 3, 1999, ECS received a similar notice from MassPro, concerning the
clinic operated by ECS in Cambridge, Massachusetts. MassPro claimed that in 1997
ECS had been overpaid by the Massachusetts Medical Assistance Program in the
amount of $22,000 for services related to 26 Medicaid recipients. Based on an
extrapolation from these 26 patients, Mass Pro asserted that during 1997 ECS had
been overpaid by the Massachusetts Medical Assistance Program in the amount of
approximately $1,019,000. ECS also has appealed this determination, but has not
received a report of the results of this appeal.
In reference to the above claims, it is the position of ECS that extrapolating
from a review of a subset of certain professionals or certain treatment is not
statistically valid when applied to a group of other professionals or other
treatments. Furthermore, the extrapolations were not based on statistically
valid samples. Therefore, in ECS's view, the extrapolation is not appropriate.
Based upon ECS's review of claims audited by MassPro, ECS believes it will
prevail in reducing the amount of repayment requested and is vigorously
appealing the initial findings by MassPro. At June 30, 2000, ECS has reserved
approximately $615,000 for these claims in the condensed consolidated financial
statements. The Company believes this amount is sufficient to cover any
potential settlements by ECS with MassPro.
Psychiatric Specialty Group, P.C.
On July 14, 1999, ECS became aware that Psychiatric Specialty Group (the
"Practice") had received a notice from the CIGNA HealthCare Medicare
Administration (CIGNA) concerning post-payment review of Medicare payments paid
to the Practice in 1998. ECS provided management services to the Practice in
1998. CIGNA was the Medicare fiscal intermediary, which processed the Practice's
Medicare claims. The notice asserted that as a result of certain alleged
deficiencies in the medical records of fifteen beneficiaries' records, the
Practice had received approximately $4,100 in Medicare overpayments during the
year. CIGNA informed the Practice that by extrapolating from this limited
initial audit, it believed there may have been Medicare overpayments of as much
as $528,000 to the Practice in calendar year 1998 which it requested be
refunded. CIGNA further informed the Practice that if the Practice did not wish
to accept this estimate, CIGNA would conduct a more detailed audit of claims
paid during calendar year 1998. The Practice did not accept CIGNA's estimate;
therefore, CIGNA has informed the Practice that it intends to perform a second
audit of medical records for claims paid during calendar year 1998 and submit to
the Practice any overpayment claims that may result. The Practice has not been
informed that CIGNA has commenced such an audit, and neither ECS nor the Company
have been informed that any formal request for Medicare refunds have been
submitted to the Practice beyond the initital $4,100 claim. On March 8, 2000,
the Practice filed suit against ECS in the Delaware state court asserting that
it is entitled to indemnification by ECS for any refunds ultimately made as well
as for the costs of defending against such claims. No claim has been asserted
against the Company, and the Company and ECS believe there is no merit to the
claim against ECS by the Practice. Although ECS believes neither it nor the
Company have any liability in connection with these matters, as of June 30,
2000, ECS has reserved $4,100 for the only actual claim made by CIGNA to date.
Management believes this reserve is sufficient to cover any potential settlement
with CIGNA as to the claim.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This report contains forward-looking statements. Forward-looking
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may",
"will", "should", "expects", "plans", "anticipates", "could", "believes",
"estimates", "predicts", "potential", or "continue" or the negative of these
terms or other similar words. These statements are only predictions. The outcome
of the events described in these forward-looking statements is subject to
certain risks. Actual results could differ materially. We acknowledge our risks
include, but are not limited to, winning new Correctional Services contracts,
the liquidation of our wholly owned subsidiary MHM Extended Care Services and
satisfaction of its liabilities, the realization of future revenues under
existing contracts, and maintaining our existing borrowing facilities. Also, we
acknowledge there are risks and uncertainties which may cause actual future
activities and results of our operations to be materially different from that
suggested in this report, including, among others, that new correctional service
contracts will not be secured, Delaware courts may not grant the dissolution of
MHM Extended Care Services, Inc., existing contracts will not continue, that we
will not have adequate cash flow to continue to fund ongoing operations and
retire debt obligations as they become due, and the on-going risk of industry
consolidation, acquisitions and competition.
The following discussion addresses the financial condition of MHM
Services, Inc. and Subsidiaries as of June 30, 2000 and the results of
operations for the three and nine-month periods then ended compared with the
same period last year. Our discussion should be read in conjunction with the
Management's Discussion and Analysis section (pages 10-20) for the fiscal year
ended September 30, 1999 included in our Annual Report on Form 10-K.
GENERAL
Historically, we have provided on-site behavioral health services
through our subsidiaries MHM Correctional Services, Inc. ("Correctional
Services") and MHM Extended Care Services, Inc. ("Extended Care Services"). We
have also provided inpatient psychiatric services through our hospital division
and our subsidiary MHM of Colorado, Inc. We have made significant changes in our
operations over the past several years, including the divesting of all of our
seven freestanding hospitals.
We formed Correctional Services in 1997 and in the fourth quarter of
1997 that entity secured contracts with the Tennessee and Georgia Departments of
Correction to
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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 system as a subcontractor to Prison Health System
who provides general healthcare services to the Broward facility. During fiscal
year 1998, we made a determination to focus our strategic growth efforts on
Correctional Services. As a result, we sold most of the operations of Extended
Care Services, which had been operating unprofitably, by the first quarter of
fiscal year 1999.
Under a contract with the Georgia Department of Medical Assistance that
expired on June 30, 1997, Extended Care Services had been providing mental
health services to Medicaid residents in nursing homes throughout the State of
Georgia. Because Extended Care Services did not have sufficient resources and
because of our decision to discontinue its operations, Extended Care Services
did not seek to affect a renewal of the contract. Since we were aware of the
opportunity, however, and because Correctional Services was already operating in
Georgia under its contract with the Georgia Department of Corrections,
Correctional Services sought to procure a contract with the Georgia Department
of Medical Assistance. In May 1999, through a competitive bid process,
Correctional Services was awarded the contract for a one-year term beginning
July 1, 1999 with three successive options to renew this contract for additional
terms of up to one year each. This contract was renewed July 1, 2000. Between
July 1, 1997 and the time the contract was awarded to Correctional Services,
Extended Care Services continued to provide services for the Georgia Department
of Medical Assistance.
In July 1999, Correctional Services was awarded a one-year contract to
provide professional clinical staffing to the state of Georgia's Department of
Juvenile Justice on a fee-for-service basis. In February 2000, Correctional
Services was also awarded a three-year contract to provide medical and mental
health services, and professional clinical staffing to Career Systems
Development Corporation at the Florida Department of Juvenile Justice's Marion
Youth Development Center located in Ocala, Florida. This contract was awarded on
a fee-for-service basis. In July 2000, we were awarded a subcontract to provide
mental health staffing for the Harrison County Jail in Mississippi, a second
professional clinical staffing contract with Career Systems Development
Corporation at the Florida Department of Juvenile Justice's Marion Youth
Detention Center, and a clinical staffing contract with the Florida Department
of Juvenile Justice's St. John Juvenile Detention Center. These contracts were
awarded on a fee-for service basis.
Consistent with our strategy of focusing on the correctional services
market, we sold two freestanding facilities, Mountain Crest, an inpatient
psychiatric facility, in the third quarter of 1998, and Oakview, an inpatient
substance abuse facility, (which we initially sold in 1996 and later reacquired
by foreclosure), in March 1999. With the sale of the Mountain Crest and Oakview
facilities, we no longer own or operate any inpatient facilities.
For the nine-month period ended June 30, 2000, we are reporting income
before income taxes of $409,000. With the sale of the unprofitable operations of
Extended Care
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Services, which occurred in December 1998, beginning with the quarter ended
September 30, 1999, we have reported four consecutive quarters of income from
operations. We expect our future operations will be profitable but we recognize
the level of profits may be insufficient to cover all of our general and
administrative expenses, or if sufficient, will not provide necessary cash flow
from operations in the short term to enable us to meet any unanticipated
expenditures or provide us with the level of capital we need to grow our
business. We recognize to eliminate our current working capital deficit we need
to secure additional working capital. Therefore, in addition to pursuing new
correctional services contracts, we are planning to raise approximately
$2,358,000 in investment capital through the offering of additional shares of
our common stock to our current stockholders. No assurance can be provided that
we will be successful in securing additional contracts or obtaining additional
working capital. The report of our independent auditors on our audited
consolidated financial statements for the fiscal year ended September 30, 1999,
includes an explanatory paragraph which states that our current financial
condition raises substantial doubt as to our ability to continue as a going
concern.
FINANCIAL POSITION - JUNE 30, 2000 COMPARED TO SEPTEMBER 30, 1999
Our stockholders' deficit decreased to $2,097,000 at June 30, 2000 from
$2,453,000 at September 30, 1999. Net income of $361,000 for the nine months
ended June 30, 2000 was the primary factor that reduced the stockholders'
deficit. Current assets were $1,853,000 at June 30, 2000 as compared $1,714,000
at September 30, 1999. The increase in current assets is primarily due to
signing several new contracts in Correctional Services that has caused an
increase in our accounts receivable at June 30, 2000 as compared to September
30, 1999. Noncurrent assets were $475,000 at June 30, 2000 as compared to
$568,000 at September 30, 1999. The decrease is primarily attributable to the
depreciation of fixed assets during the nine-month period ended June 30, 2000 as
well as the sale of certain other assets. Total current liabilities were
$3,125,000 at June 30, 2000 as compared to $4,730,000 at September 30, 1999. The
primary reason for the reduction in our current liabilities was the refinancing
of a $1,300,000 line-of-credit to a long-term note.
As presented in the accompanying condensed consolidated statements of
cash flows, our cash balance of $6,000 remained consistent at June 30, 2000 as
compared to September 30, 1999. We have a deficit in working capital at June 30,
2000 of $1,272,000, which represents a reduction of $1,744,000 from the deficit
in working capital at September 30, 1999 of $3,016,000. The primary reason for
the reduction in our working capital deficit was the refinancing of a $1,300,000
line-of-credit to a long-term note.
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NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
Our net revenues for the nine-month period ended June 30, 2000 were
$14,469,000, an increase of 2% as compared to $14,252,000 for the nine-month
period ended June 30, 1999. We attribute this increase in revenues to the
signing of several new contracts by Correctional Services. For the nine-month
period ended June 30, 2000, Correctional Services revenues were $14,469,000, or
a 23% increase over revenues of $11,759,000 for the nine-month period ended June
30, 1999. Extended Care Services for which the majority of the assets were sold
in December 1998, reported revenues of $2,493,000 for the nine-month period
ended June 30, 1999.
Our operating expenses for the nine-month period ended June 30, 2000
were $11,115,000, or 77% of net revenues, as compared to $11,409,000, or 80% of
net revenues for the nine-month period ended June 30, 1999. Operating expenses
for Extended Care Services, sold during fiscal year 1999, were $1,870,000 in the
nine-month period ended June 30, 1999. When these expenses are excluded,
operating expenses directly related to Correctional Services' operation
increased by 16% over prior year. Again, we attribute this increase in operating
expenses to new contracts acquired by Correctional Services since the third
quarter of fiscal year 1999.
Our general and administrative expenses for the nine-month period ended
June 30, 2000 were $2,895,000, or 20% of net revenues as compared to $4,049,000,
or 28% of net revenues for the nine-month period ended June 30, 1999. General
and administrative expenses related to the wind down of divested operations were
$45,000 for the nine-month period ended June 30, 2000 as compared to $1,455,000
for the nine-month period ended June 30, 1999. Correctional Services had general
and administrative expenses of $1,028,000 for the nine-month period ended June
30, 2000 as compared to $744,000 for the nine-month period ended June 30, 1999.
Correctional Services has increased its administrative staff to support the new
contracts obtained in 1999 and 2000. Corporate general and administrative
expenses were $1,822,000 for the nine-month period ended June 30, 2000 as
compared to $1,850,000 for the nine-month period ended June 30, 1999 which
reflect cost savings from changes in our operations.
The provision for bad debts for the nine-month period ended June 30,
2000 decreased to $68,000 as compared to $1,053,000 for nine-month period ended
June 30, 1999. With the divestiture of the last psychiatric hospital in the
third quarter of fiscal year 1998, Mountain Crest, and the sale of certain
operating units of Extended Care Services during the first quarter of 1999, we
have changed the composition of our revenues from a fee-for-service basis, which
required substantial bad debt reserves, to a capitated revenue basis, which has
fewer collectibility uncertainties. Our 1999 bad debt provision related
primarily to the estimated net realizable value of receivables generated by
Extended Care Services. The decrease in our bad debt provision in 2000 reflects
an overall reduction in accounts receivable remaining after the sale of
substantially all Extended Care Services assets.
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Depreciation and amortization expenses were $72,000 for the nine-month
period ended June 30, 2000 as compared to $206,000 for the nine-month period
ended June 30, 1999. The decrease is attributed to a reduction in depreciable
fixed assets as a result of the sale of certain operating units of Extended Care
Services.
Interest expense for the nine-month period ended June 30, 2000 was
$111,000 as compared to $274,000 for the nine-month period ended June 30, 1999.
Interest expense as of June 30, 1999 was primarily from our line of credit of
$500,000 and short-term loan in the amount of $2,000,000 that was paid in full
at June 30, 1999. The interest on the $2,000,000 short-term loan was higher than
the interest rate on the debt outstanding during 2000.
In December 1998, we divested all but one of our remaining Extended
Care Services operating units from which we recognized a gain on sale of
$301,000. Also, on March 8, 1999, we sold a hospital property that had
previously been acquired in a foreclosure. The transaction resulted in recording
a gain on sale of $299,000.
We recognized other income of $201,000 in the nine-month period ended
June 30, 2000. The sources of our other income were $89,000 for the settlement
of prior year cost reports from a hospital that had been sold, $78,000 from the
collections of accounts receivable previously reserved as uncollectible as a
result of the sale of our Extended Care Services operating units and Hospital
division, $20,000 from interest income on invested cash balances, $8,000 from
the sales of other assets, and $6,000 in other miscellaneous credits. We
recognized other expense of $481,000 in the nine-month period ended June 30,
1999. The other expense included an expense of $528,000 from the settlement of
prior year cost reports from a hospital that had been sold which was offset by
$47,000 in other credits. Included in other credits was interest income on
invested cash balances of $28,000 and other credits of $20,000 that we received
as a fee to extend a note receivable obtained through the sale of our extended
care operations.
As a result of the foregoing, we are reporting a net income of $361,000
for the nine-month period ended June 30, 2000, compared to a net loss of
$2,687,000 for the nine-month period ended June 30, 1999.
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999
Our net revenues for the quarter ended June 30, 2000 were $5,046,000,
which represented an increase of 13% over the quarter ended June 30, 1999, which
reported net revenues of $4,451,000. The revenue growth reflects the effect of
the signing of several new contracts in Correctional Services during and
subsequent to the quarter ended June 30, 1999.
Our operating expenses for the quarter ended June 30, 2000 were
$3,922,000, or 78% of net revenues, as compared to $3,839,000, or 86% of net
revenues for the quarter ended June 30, 1999. During the quarter ended June 30,
1999, operating expenses related to Extended Care Services, which sold
substantially all assets in the first quarter of 1999,
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was $197,000. Excluding the operating expenses of Extended Care Services,
operating expenses from continuing operations for the quarter ended June 30,
2000, increased by 8% over the quarter ended June 30, 1999, primarily due to the
addition of the new contracts.
Our general and administrative expenses for the quarter ended June 30,
2000 were $1,051,000, or 21% of net revenues as compared to $1,104,000, or 25%
of net revenues for the quarter ended June 30, 1999. Correctional Services had
general and administrative expenses of $345,000 for the quarter ended June 30,
2000 as compared to $265,000 for the quarter ended June 30, 1999 due to an
increase in administrative staff to support the new contracts obtained in third
and fourth quarter of 1999. Corporate general and administrative expenses were
$672,000 for the quarter ended June 30, 2000 as compared to $716,000 for the
quarter ended June 30, 1999. General and administrative expenses related to the
wind down of our divested operations of Extended Care Services were $34,000 for
the quarter ended June 30, 2000 as compared to $123,000 for the quarter ended
June 30, 1999.
Our provision for bad debts for the quarter ended June 30, 2000 was
credit of $36,000 as compared to credit of $63,000 for the quarter ended June
30, 1999. With the sale of Mountain Crest Hospital in the third quarter of
fiscal year 1998, and the divesture of most of our operating assets in Extended
Care Services during the first quarter of fiscal year 1999, we shifted from
having a significant amount of our revenues on a fee-for-service basis, which
required substantial bad debt reserves, to a capitated revenue base, which has
fewer collectibility uncertainties. In each of the quarters ended June 30, 2000
and 1999, we experienced a credit in our provisions for bad debts. These credits
in the bad debt provision reflect an overall reduction in accounts receivable
with collectibility uncertainties remaining after the sale of the hospital and
substantially all Extended Care Services assets.
Depreciation and amortization expense was $24,000 for the quarter ended
June 30, 2000 as compared to $34,000 for the quarter ended June 30, 1999. The
decrease is attributed to a reduction in depreciable fixed assets as a result of
the sale of certain operating units of Extended Care Services.
Interest expense for the quarter ended June 30, 2000 was $39,000 as
compared to $23,000 for the quarter ended June 30, 1999. Interest expense at
June 30, 2000 was primarily from our $1,300,000 promissory note and other
short-term notes payable. Interest expense at June 30, 1999 was primarily from
our line of credit of $500,000 and short-term loan in the amount of $2,000,000
that was paid in full during the quarter ended June 30, 1999.
We recognized other credits of $25,000 in the quarter ended June 30,
2000 they comprised of interest income on invested cash balances of $12,000 and
a gain of $13,000 from the sale of other assets. We recognized other credits of
$22,000 in the quarter ended June 30, 1999 primarily from receiving an extension
fee of $20,000 on a defaulted note
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receivable. These credits were offset by an $8,000 charge for the settlement of
prior year cost reports from a hospital that had been sold.
As a result of the foregoing, we are reporting a net income of $26,000
for the quarter ended June 30, 2000, compared to a net loss of $504,000 for the
quarter ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded operating losses through a combination of the proceeds
derived from the sale of certain operations of our subsidiaries operating units
and through borrowed funds. In addition, as of June 30, 2000, we have a
$1,300,000 promissory note which is guaranteed by one of our Directors and our
Chief Executive Officer. On July 13, 2000, we increased the borrowing capacity
on the note to $1,800,000. We have filed for a corporate dissolution under
Sections 280 and 281 of the Delaware General Corporate Laws ("DGCL") for
Extended Care Services in order to obtain a discharge of Extended Care Services'
external debt totaling $946,000 at June 30, 2000. Under these sections, DGCL
prescribes procedures by which we can satisfy our obligations to creditors of a
dissolved Delaware corporation. Under guidance of Delaware counsel, we are in
the process of following these procedures, which are anticipated to result in
the liquidation of the remaining assets of Extended Care Services and a
satisfaction of the $946,000 of external liabilities as of June 30, 2000.
We anticipate that we will continue to maintain our borrowing capacity
under the $1,800,000 promissory note although this cannot be assured. The
promissory note alone, however, will not be sufficient to fund our working
capital needs. We realize to sustain our 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 our cash flow.
We further recognize that we have exhausted our ability to obtain working
capital from divesting certain parts of our operations. As we seek to obtain
additional contracts to provide mental health services in correctional
facilities, we seek to raise approximately $2,358,000 in investment capital
through the offering of additional shares of our common stock to our current
stockholders. No assurance can be provided, however, that any of our efforts to
improve our current financial condition will be successful or that we will be
able to continue in business.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are, and may be in the future, a party to litigation arising in the
ordinary course of our business. While we have no reason to believe that any
pending litigation against us is material, there can be no assurances that our
insurance coverage will be adequate to substantially cover liabilities arising
out of such claims or that any such claims will be covered by insurance. Any
material litigation, which is not covered by insurance, may have an adverse
effect on our business. Claims against us, regardless of their merit, or
outcome, may also have an adverse effect on our reputation and business. We know
of no new litigation, either pending or threatened, which is likely to have a
material adverse effect on our consolidated financial statements.
Extended Care Services has substantial claims asserted against it in
favor of fiscal intermediaries under the Medicare and Medicaid programs. In some
cases, the claims have been asserted against providers for whom Extended Care
Services provided management services. Extended Care Services does not have
assets sufficient to pay these claims; however, Extended Care Services has
contested or has valid defenses to many of the claims.
Extended Care Services has instituted dissolution proceedings under the
General Corporation Law of the State of Delaware in part to resolve all of its
outstanding liabilities. We have been advised that if it complies with the
statutory requirements for these proceedings, its liabilities, fixed and
contingent, will be satisfied, even absent of full payment to its creditors.
Final dissolution requires approval by the Delaware Court of Chancery. We expect
to submit a plan of dissolution to the court during the fourth quarter of fiscal
year 2000. Therefore, we are of the opinion that the potential for litigation
resulting from these liabilities is remote.
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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
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
Not applicable
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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 9, 2000 MHM Services, Inc.
/s/ CLEVELAND E. SLADE
Vice President, Secretary and
Chief Financial Officer
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