<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: DECEMBER 31, 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 February 14, 1999, there were 3,788,225 shares of Common Stock, par value
$.01 per share, outstanding.
<PAGE> 2
MHM SERVICES, INC., AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 1999
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, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Balance Sheets
December 31, 1999 (Unaudited) and September 30, 1999 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 1999 and 1998 (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 11-15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
</TABLE>
2
<PAGE> 3
MHM SERVICES, INC., AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 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 DECEMBER 31,
---------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Net patient service revenue $ 67,000 $ 2,219,000
Premium revenue 4,617,000 3,650,000
-------------------- --------------------
Net revenues 4,684,000 5,869,000
Costs and expenses
Operating 3,524,000 4,535,000
General and administrative 932,000 1,217,000
Provision for bad debts 75,000 723,000
Depreciation and amortization 23,000 117,000
Other (credits) charges
Interest expense 36,000 172,000
Gain on sales of extended care division assets - (238,000)
Loss on disposal of assets 5,000 -
Other (81,000) (3,000)
-------------------- --------------------
Income (loss) before income tax 170,000 (654,000)
Income tax expense 14,000 19,000
-------------------- --------------------
Net income (loss) $ 156,000 $ (673,000)
==================== ====================
Earnings (loss) per share
-basic $ 0.04 $ (0.19)
==================== ====================
-diluted $ 0.03 $ (0.19)
==================== ====================
Weighted average shares outstanding 3,788,000 3,538,000
-------------------- --------------------
</TABLE>
4
<PAGE> 5
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, 1999 SEPTEMBER 30, 1999
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 19,000 $ 6,000
Accounts receivable, net 1,158,000 1,094,000
Prepaid expenses 212,000 284,000
Estimated third party settlements 61,000 61,000
Other current assets 264,000 269,000
------------------ ---------------------
Total current assets 1,714,000 1,714,000
Property and equipment, net 119,000 142,000
Restricted cash 275,000 275,000
Other assets 148,000 151,000
------------------ ---------------------
$ 2,256,000 $ 2,282,000
================== =====================
Liabilities and Stockholders' Deficit
Current Liabilities
Cash overdrafts $ - $ 24,000
Accounts payable 458,000 768,000
Accrued payroll and related expenses 860,000 607,000
Estimated third party payor settlements 685,000 784,000
Other accrued expenses 988,000 1,085,000
Notes payable 106,000 187,000
Line of credit 1,300,000 1,000,000
Current maturities of long term debt 118,000 275,000
------------------ ---------------------
Total current liabilities 4,515,000 4,730,000
Long term debt 2,000 5,000
Stockholders' deficit (2,261,000) (2,453,000)
------------------ ---------------------
$ 2,256,000 $ 2,282,000
================== =====================
</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>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------
1999 1998
--------------------- -------------------
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income (loss) $ 156,000 $ (673,000)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities (213,000) 683,000
--------------------- -------------------
Net cash (used in) provided by operating activities (57,000) 10,000
Cash flows from investing activities
- ------------------------------------
Proceeds from sales of extended care division assets - 850,000
Capital expenditures (5,000) -
Restricted cash - (84,000)
Collections on note receivable 40,000 -
Other - (135,000)
--------------------- -------------------
Net cash provided by investing activities 35,000 631,000
Cash flows from financing activities
- ------------------------------------
Borrowings 300,000 2,151,000
Debt repayments (241,000) (2,151,000)
Change in cash overdrafts (24,000) -
--------------------- -------------------
Net cash provided by financing activities 35,000 -
Increase in cash and cash equivalents 13,000 641,000
Cash and cash equivalents
Beginning balance 6,000 54,000
--------------------- -------------------
Ending balance $ 19,000 $ 695,000
===================== ===================
Supplemental disclosure of cash flow information
Interest paid $ 38,000 $ 169,000
Income taxes paid 71,000 -
===================== ===================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of stock warrants-to obtain financing from
Bank of America $ 36,000 -
Note receivable from sale of extended care division assets - $ 170,000
===================== ===================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
NOTE 1. CONDENSED CONSOLDIATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of December 31, 1999, the
condensed consolidated statements of operations for the three-month periods
ended December 31, 1999 and 1998, and condensed consolidated statements of cash
flows for the three-month periods ended December 31, 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 December 31, 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. 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 December 31, 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 had a stockholders' deficit of $2,261,000 and a
working capital deficit of $2,801,000 as of December 31, 1999. The Company's
subsidiary MHM Extended Care Services had a stockholders' deficit of $6,802,000
and a working capital deficit of $956,000 at December 31, 1999. 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 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. and a
satisfaction of all the liabilities of the subsidiary.
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 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 of its subsidiaries
operating units and through borrowed funds. As of December 31 1999, the Company
has utilized $1,300,000
7
<PAGE> 8
of a line of credit from Bank of America, which is the line's maximum borrowing
capacity.
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. Therefore, the Company is currently seeking
investment capital; however, there is no assurance that the Company will be
successful. The Company further recognizes that it has exhausted its ability to
obtain working capital from divesting certain parts of its operations. 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.
This report includes forward-looking statements based on management's
current plans and expectations relating to becoming profitable in fiscal 2000,
winning new Correctional Services contracts, the liquidation of the Extended
Care Services subsidiary and satisfaction of its liabilities, the realization of
future revenues under existing contracts, and maintaining existing borrowing
facilities. Such statements involve risks and uncertainties which may cause
actual future activities and results of operations to be materially different
from that suggested in this report, including, among others, that new
Correctional Services contracts will not be secured, Delaware courts may not
grant the Extended Care Services subsidiary dissolution, existing contracts will
not continue, the Company will have adequate cash flow to continue to fund
ongoing operations, and retire debt obligations as they become due, and risks
associated with industry consolidation, acquisitions and competition.
NOTE 3. DEBT
In May 1999, the Company increased the line of credit with Bank of
America from $500,000 to a maximum borrowing capacity of $1,300,000. The line of
credit is payable by May 28, 2000 and bears interest at the Eurodollar rate plus
2.6 percent, per annum and carried a weighted average interest rate of 8.4%
during the quarter ended December 31, 1999. Michael S. Pinkert, the Company's
Chief Executive Officer, 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, formerly the Company's Vice
President and General Counsel, indemnified Mr. Pinkert on his guarantee to the
extent of $550,000. For their indemnifications, the Company granted to each
indemnitor on a pro-rata basis tied to the amount of their individual
indemnification, a total of 99,000 warrants to purchase stock of the Company at
$.10 per share. As a fee to the guarantor and indemnitors for the ongoing risks
represented by the guarantee and
8
<PAGE> 9
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. These warrants are prorated among Mr. Pinkert and the indemnitors based
on the amount of the loan of which they have liability, which in Mr. Pinkert's
case is net of the indemnifications. Also, Mr. Pinkert, Mr. Ferretti, and Mr.
Calligaro, guarantor and indemnitors 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 purchase price to $.10 per share to purchase Company stock with
previously earned warrants.
In December 1999, the Company increased its draw on the line of credit
to $1,300,000, its maximum borrowing capacity. Jacob Shipon personally
guaranteed the line of credit in the amount of $500,000 and the indemnification
obligations of Mr. Ferretti, Mr. Silverman, and Mr. Calligaro were terminated.
As a part of Dr. Shipon's guarantee, Mr. Pinkert's personal guarantee was
reduced to $800,000, and the Company granted Dr. Shipon 63,000 warrants to
purchase stock of the Company at $.10 per share in consideration of his
guarantee. 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 $.10 per share) to one and one-half percent of the average loan balance which
is outstanding during the month will be issued.
Expenses totaling approximately $36,000 were recorded during the
quarter ended December 31, 1999 for the issuance of all warrants related to
guarantees and indeminfications of the Company's line of credit.
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 Extended Care Services previously provided management services.
The claim is being asserted by the Medicare fiscal intermediary (Transamerica)
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.
Transamerica has asserted no claim against the Company or its subsidiary, but on
January 7, 2000, SCC asserted a claim for no specific amount against the Company
for these matters. Based upon the Management Agreement between Extended Care
Services and SCC, the Company does not believe that it has any liability with
respect to the claims made against Extended Care Services by SCC. The Company
believes it will ultimately prevail in these matters.
9
<PAGE> 10
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, MHM Counseling Services was
requested to repay the Massachusetts Medical Assistance Program an extrapolated
amount of approximately $215,000 which was reduced to $104,000 based on the
Company's initial appeal of the audit's findings. 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 of
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, MHM
Counseling Services was requested to repay the Massachusetts Medical Assistance
Program an extrapolated amount of approximately $1,019,000. The Company 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 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 of repayment requested and is vigorously
appealing the initial findings by MassPro. At December 31, 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 of the initial audit, CIGNA has informed the Company that it intends
to perform a second audit of medical records for claims paid during calendar
year 1998, however CIGNA has not begun this process. Regardless of the outcome
of the second audit, the Practice is required to repay the overpayment of $4,100
identified in the initial audit after the second audit has been performed and
such repayment has been reserved in the Company's condensed consolidated
financial statements at December 31, 1999. The Company believes this amount is
sufficient to cover any potential settlement with CIGNA.
10
<PAGE> 11
In the event the dissolution procedures, initiated in the State of
Delaware, are successful, the contingent liabilities discussed above will be
satisfied as part of such procedures.
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, 1999 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 10-20) for the fiscal year ended September 30, 1999
included in the Company's Annual Report on Form 10-K
GENERAL
Historically, the Company has provided on-site behavioral health
services through its subsidiaries MHM Correctional Services, Inc. (Correctional
Services) and MHM Extended Care Services, Inc. (Extended Care Services). The
Company has also provided inpatient psychiatric services through its Hospital
Division and its subsidiary MHM of Colorado, Inc. The Company made significant
changes in its operations over the past several years, including the divesting
of all of the Company's seven freestanding behavioral healthcare facilities. The
Company formed Correctional Services 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 Correctional Services. As a result, the Company
sold most of the operations of Extended Care Services, which had been operating
unprofitably, by the first quarter of fiscal year 1999. The sole remaining
operation of Extended Care Services had been a capitated contract to provide
services to Medicaid beneficiaries residing in Georgia nursing homes. Extended
Care Services had been providing these services for the state since 1994 under a
contract that 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. Due to the
Company's decision to shutdown the Extended Care Services subsidiary, the new
contract was bid by Correctional Services effective May 1, 1999. 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 services basis.
11
<PAGE> 12
Consistent with its strategy of focusing on the correctional services
market, 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."
For the three-month period ended December 31, 1999, the Company
recognized net income before income taxes of $170,000. With the sale of the
unprofitable operations of its Extended Care Services subsidiary, beginning
October 1, 1999, the Company expects that its remaining operations will be
profitable but it recognizes the level of profits may 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, 1999, 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.
FINANCIAL POSITION - DECEMBER 31, 1999 COMPARED TO SEPTEMBER 30, 1999
The Company's stockholders' deficit decreased to $ 2,261,000 at
December 31, 1999 from $2,453,000 at September 30, 1999. Net income of $156,000
for the three months ended December 31, 1999 was the primary factor which
reduced the Company's stockholder's deficit. Total current assets were
$1,714,000 at December 31, 1999 and at September 30, 1999. Noncurrent assets
were $542,000 at December 31, 1999 as compared to $568,000 at September 30,
1999. The decrease is primarily attributable to the depreciation of fixed assets
during the quarter. Total current liabilities were $4,515,000 at December 31,
1999 as compared to $4,730,000 at September 30, 1999. As a result of the first
quarter operations, the Company was able to reduce its current liabilities by
$215,000.
As presented in the accompanying condensed consolidated statement of
cash flows, the Company's cash balance increased from $6,000 at September 30,
1999 to $19,000 at December 31, 1999. The Company has a deficit in working
capital at December 31, 1999 of $2,801,000, which represents a reduction of
$215,000 from the deficit at September 30, 1999 of $3,016,000.
12
<PAGE> 13
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
Net revenues for the first quarter ended December 31, 1999 were
$4,684,000, a decrease of 20% as compared to $5,869,000 for the first quarter
ended December 31, 1998. The decrease is attributable to the "Divestiture".
Revenues from existing operations were $4,684,000 for the quarter ended December
31, 1999 as compared to $3,650,000 for the quarter ended December 31, 1998. The
increase in revenues over prior year's quarter by approximately 28% is
attributed to the Broward County and Georgia Juvenile Justice contracts added to
Correctional Services in 1999. The divested operations generated revenues of
$2,219,000 for the first quarter ended December 31, 1998.
Operating expenses for the quarter ended December 31, 1999 were
$3,524,000, or 75% of net revenues, as compared to $4,535,000, or 77 % of net
revenues for the quarter ended December 31, 1998. As a result of the
"Divestiture", operating expenses decreased by 22%. Operating expenses from
existing operations increased by 20% over prior year's quarter from continuing
operations due primarily to the additions of Broward County and Georgia Juvenile
Justice contracts. The divested operations had operating expenses of $1,599,000
in the quarter ended December 31, 1998.
General and administrative expenses for the quarter ended December 31,
1999 were $932,000, or 20% of net revenues as compared to $1,217,000, or 21% of
net revenues for the quarter ended December 31, 1998. Again as a result of the
"Divestiture", general and administrative expenses decreased 23% from the prior
year. The Correctional Services subsidiary had general and administrative
expenses of $363,000 for the quarter ended December 31, 1999 as compared to
$238,000 for the first quarter ended December 31, 1998 due to an increase in
support staff to support the new contracts obtained in 1999. Corporate general
and administrative expenses were $567,000 for the quarter ended December 31,
1999 as compared to $551,000 for the quarter ended December 31, 1998. The
divested operations had general and administrative expenses of $2,000 from the
wind down of operations for the quarter ended December 31, 1999 as compared to
$428,000 for the quarter ended December 31, 1998.
The provision for bad debts for the quarter ended December 31, 1999
decreased to $75,000 as compared to $723,000 for quarter ended December 31,
1998. The Divestiture of certain operations in the third quarter of 1998 and
first quarter of 1999 has shifted the Company from having a significant amount
of it revenues on a fee-for service basis, which required substantial bad debt
reserves, to a capitated revenue base, which has fewer collectibility
uncertainties. The 1998 bad debt provision related primarily to the estimated
net realizable value of receivables generated in Extended Care Services and
reserves on receivables remaining after the sale of the freestanding facilities.
The decrease in the bad debt provision in 1999 reflects an overall reduction in
accounts receivable remaining after the sale of the freestanding facilities and
substantially all Extended Care Services assets.
Depreciation and amortization expenses were $23,000 for the quarter
ended December 31, 1999 as compared to $117,000 for the quarter ended December
31, 1998.
13
<PAGE> 14
The decrease is attributed to a reduction in depreciable fixed assets as a
result of the "Divestiture".
Interest expense for the quarter ended December 31, 1999 was $36,000 as
compared to $172,000 for the quarter December 31, 1998. Interest expense at
December 31, 1998 was primarily from the Company's line of credit and
short-term loan in the amount of $2,450,000 with Healthcare Financial Partners
which were subsequently paid during the second and third quarters of fiscal
year 1999.
During the first quarter ended December 31, 1998, the Company divested
all but one of its remaining Extended Care Services operating units from which
it recognized a gain on sale of $238,000.
The Company disposed of certain fixed assets deemed obsolete during the
quarter ended December 31, 1999 that resulted in a loss on disposal of $5,000.
The Company recognized other income of $81,000 in the quarter ended
December 31, 1999. Other income was primarily the result of the Company
collecting $77,000 in accounts receivable previously reserved as uncollectible
as a result of the sale of its Extended Care Services operating units and
Hospital division. Interest income on invested cash balances was $4,000 as of
the quarter ended December 31, 1999 as compared to $3,000 for the quarter ended
December 31, 1998.
As a result of the foregoing, the Company recognized a net income of
$156,000 for the quarter ended December 31, 1999, compared to a net loss of
$673,000 for the quarter ended December 31, 1998.
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 December 31 1999, the
Company has utilized all credit available under a $1,300,000 line of credit from
Bank of America guaranteed by a Director and the Chief Executive Officer of the
Company. Management of the Company has filed for a corporate dissolution under
Delaware law of the Extended Care Services subsidiary in order to obtain a
discharge of the subsidiary's external debt totaling $972,000 at December 31,
1999.
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
14
<PAGE> 15
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
divesting certain parts of its operations. As the Company seeks to obtain
additional contracts in its Correctional Services subsidiary, it will attempt to
continue reducing its general and administrative expenses as a percentage of net
revenues. 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is, and may be in the future a party to litigation arising
in the ordinary course of its business. While the Company has no reason to
believe that any pending litigation against it is material, there can be no
assurance that the Company's insurance coverage will be adequate to
substantially cover liabilities arising out of such claims or that any such
claims will be covered by the Company's insurance. Any material litigation,
which is not covered by insurance, may have an adverse effect on the Company's
business. Claims against the Company, regardless of their merit, or outcome, may
also have an adverse effect on the Company's reputation and business. 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.
The Company's subsidiary, MHM Extended Care Services, Inc. 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 the subsidiary provided management services. The
subsidiary does not have assets sufficient to pay these claims; however, the
subsidiary has contested or has valid defenses to many of the claims.
The subsidiary has instituted dissolution proceedings under the General
Corporation Law of the State of Delaware in part to resolve all of its
outstanding liabilities. The Company has 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. The
Company expects to submit a plan of dissolution to the court during the fourth
quarter of fiscal year 2000. Therefore, the Company is of the opinion that the
potential for litigation resulting from these liabilities is remote.
15
<PAGE> 16
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.
16
<PAGE> 17
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 February 14, 1999 MHM Services, Inc.
/s/ CLEVELAND E. SLADE
Vice President and Chief
Financial Officer
17
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