<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: MARCH 31, 2000 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 X No
-
As of May 15, 2000, there were 7,287 shares of Common Stock, par value $.01 per
share, outstanding.
<PAGE> 2
MHM SERVICES, INC. AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations-
Three and Six Months Ended March 31, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Balance Sheets-
March 31, 2000 (Unaudited) and September 30, 1999 5
Condensed Consolidated Statements of Cash Flows-
Six Months Ended March 31, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
</TABLE>
2
<PAGE> 3
MHM SERVICES, INC. AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 2000
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 MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net patient service revenue $ 153,000 $ 357,000 $ 220,000 $ 2,576,000
Net contract revenues 4,586,000 3,575,000 9,203,000 7,225,000
----------- ----------- ----------- -----------
Net revenues 4,739,000 3,932,000 9,423,000 9,801,000
Costs and expenses
Operating 3,669,000 3,420,000 7,193,000 7,570,000
General and administrative 912,000 1,344,000 1,844,000 2,945,000
Provision for bad debts 29,000 393,000 104,000 1,116,000
Depreciation and amortization 25,000 55,000 48,000 172,000
Other (credits) charges
Interest expense 36,000 79,000 72,000 251,000
Gain on sale of repossessed property - (299,000) - (299,000)
Gain on sales of extended care division assets - (63,000) - (301,000)
Loss on disposal of assets - 1,000 5,000 1,000
Other - principally cost report settlements on
previously sold freestanding facilities (100,000) 497,000 (181,000) 494,000
----------- ----------- ----------- -----------
Income (loss) before income tax 168,000 (1,495,000) 338,000 (2,148,000)
Income tax (benefit) expense (11,000) 16,000 3,000 35,000
----------- ----------- ----------- -----------
Net income (loss) $ 179,000 $(1,511,000) $ 335,000 $(2,183,000)
=========== =========== =========== ===========
Earnings (loss) per share:
-basic $ 24.56 $ (222.43) $ 45.97 $ (321.36)
=========== =========== =========== ===========
-diluted $ 20.14 $ (222.43) $ 37.35 $ (321.36)
=========== =========== =========== ===========
Weighted average shares outstanding:
-basic 7,287 6,793 7,287 6,793
=========== =========== =========== ===========
-diluted 8,889 6,793 8,970 6,793
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 2000 SEPTEMBER 30, 1999
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 98,000 $ 6,000
Accounts receivable, net 1,040,000 1,094,000
Prepaid expenses 186,000 284,000
Estimated third party settlements 150,000 61,000
Other current assets 192,000 269,000
------------------- ---------------------
Total current assets 1,666,000 1,714,000
Property and equipment, net 105,000 142,000
Restricted cash 275,000 275,000
Other assets 151,000 151,000
------------------- ---------------------
$ 2,197,000 $ 2,282,000
=================== =====================
Liabilities and Stockholders' Deficit
Current Liabilities
Cash overdrafts $ - $ 24,000
Accounts payable 458,000 768,000
Accrued payroll and related expenses 707,000 607,000
Estimated third party payor settlements 630,000 784,000
Other accrued expenses 1,112,000 1,085,000
Notes payable 49,000 187,000
Line of credit 1,300,000 1,000,000
Current maturities of long term debt 75,000 275,000
------------------- ---------------------
Total current liabilities 4,331,000 4,730,000
Long term debt - 5,000
Stockholders' deficit (2,134,000) (2,453,000)
------------------- ---------------------
$ 2,197,000 $ 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>
SIX MONTHS ENDED MARCH 31,
--------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income (loss) $ 335,000 $ (2,183,000)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities (200,000) 2,077,000
----------------- -----------------
Net cash provided by (used in) operating activities 135,000 (106,000)
Cash flows from investing activities
- ------------------------------------
Proceeds from sale of repossessed property - 1,470,000
Proceeds from sales of extended care division assets - 870,000
Capital expenditures (16,000) (13,000)
Restricted cash - 334,000
Collections on note receivable 40,000 -
Other - (4,000)
----------------- -----------------
Net cash provided by investing activities 24,000 2,657,000
Cash flows from financing activities
- ------------------------------------
Borrowings 300,000 2,924,000
Debt repayments (343,000) (5,197,000)
Change in cash overdrafts (24,000) -
----------------- -----------------
Net cash used in financing activities (67,000) (2,273,000)
Increase in cash and cash equivalents 92,000 278,000
Cash and cash equivalents
Beginning balance 6,000 54,000
----------------- -----------------
Ending balance $ 98,000 $ 332,000
================= =================
Supplemental disclosure of cash flow information
Interest paid $ 77,000 $ 251,000
Income taxes paid 78,000 -
================= =================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of stock warrants-to obtain financing from
Bank of America $ 86,000 -
Note receivable from sale of extended care division assets - $ 150,000
================= =================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
MHM Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2000
NOTE 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 2000, the
condensed consolidated statements of operations for the three and six-month
periods ended March 31, 2000 and 1999, and condensed consolidated statements of
cash flows for the six-month period ended March 31, 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 March 31, 2000, and for all periods
presented, have been made. Certain reclassifications of 1999 balances have been
made to conform to the 2000 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 March 31, 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 $2,134,000 and a
working capital deficit of $2,665,000 as of March 31, 2000. The Company's
subsidiary MHM Extended Care Services had a stockholders' deficit of $6,731,000
and a working capital deficit of $832,000 at March 31, 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. 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.
7
<PAGE> 8
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 March 31, 2000, the Company
has utilized $1,300,000 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. 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 its operating 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.
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 8.5%
during the six-month period ended March 31, 2000. Michael S. Pinkert, the
Company's Chief Executive Officer, personally guaranteed the entire line of
credit. For his guaranty, the Company granted 180 warrants to purchase stock of
the Company at $50 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
8
<PAGE> 9
each indemnitor on a pro-rata basis tied to the amount of their individual
indemnification, a total of 198 warrants to purchase stock of the Company at
$50 per share. As a fee to the guarantor and indemnitors for the ongoing risks
represented by the guarantee and indemnification obligations, for each month
during which the guarantee and indemnification obligations are outstanding,
warrants for the number of shares as are equal in value (at a price of $50 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 between
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 210, 70, and 70,
respectively, during the period that this obligation was outstanding, were
granted a reduction in their warrant exercise purchase price to $50 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 126 warrants to purchase
stock of the Company at $50 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 $50 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 $49,000 have been recorded for the
six-month period ended March 31, 2000 for the issuance of all warrants related
to guarantees and indemnifications of the Company's line of credit.
As of March 31, 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.
NOTE 4. REVERSE STOCK SPLIT
The Board of Directors has 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 will purchase all
fractional shares resulting from this transaction based on a pre-stock fair
market value of $.45 per share. This value was determined through a third party
valuation that the Company secured. The Company has accrued approximately
$65,000 for purchase of fractional shares as of March 31, 2000. All share and
per share amounts in the accompanying condensed consolidated financial
statements have been retroactively restated to effect this 500 to 1 reverse
stock split. As of March 31, 2000, 15,000,000 shares of common stock are
authorized and 7,287 shares are issued and outstanding.
9
<PAGE> 10
NOTE 5. CONTINGENCIES
A subsidiary of the Company, Extended Care Services, Inc. ("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 as to the clinics operated directly by
ECS, the refund claims have not been asserted against ECS but only against the
professional corporations. 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. ECS also anticipates that
provision 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. Because the Company does not
consider that it has any liability with regard to these matters, it has not
recorded any reserves with respect to them. However, certain reserves taken by
ECS, as described below, are recorded in the condensed consolidated financial
statements of the Company and its subsidiaries as of March 31, 2000.
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.
Performance by ECS under the Management Agreement was guaranteed by the Company.
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 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, asserted a claim against ECS seeking
indemnification from ECS for any refunds payable by SCC and any legal costs
incurred by SCC related to the claim. SCC and Dr. Firestone did not identify any
specific amount 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. The Company does not believe that ECS or the Company have any
liability with respect to these claims by SCC or Dr. Firestone. However, in
order to avoid a dispute with SCC or its shareholders, the Company is discussing
the possibility that it participate in defense of these claims, including
possible contributions to the cost of appealing the Transamerica determinations.
The Company believes it will ultimately prevail in these matters.
10
<PAGE> 11
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 March 31, 2000.
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 March
31, 2000, ECS has reserved approximately $615,000 for these claims that appear
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. As a result of this initial audit, CIGNA has informed the Practice that it
intends to perform a second audit of medical records for claims paid during
calendar year 1998. ECS has not been notified on the commencement of the second
audit. 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
11
<PAGE> 12
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. ECS has reserved $4,100 for this claim as of March 31,
2000, which Management believes is sufficient to cover any potential settlement
with CIGNA.
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.
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, MHM 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.
The following discussion addresses the financial condition of MHM
Services, Inc. and Subsidiaries (MHM) as of March 31, 2000 and the results of
operations for the three and six-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 MHM's Annual Report on Form 10-K.
GENERAL
Historically, MHM has provided on-site behavioral health services
through our subsidiaries MHM Correctional Services, Inc. (Correctional Services)
and MHM Extended Care Services, Inc. (Extended Care Services). MHM has also
provided inpatient psychiatric services through our Hospital Division and our
subsidiary MHM of Colorado, Inc. MHM made significant changes in our operations
over the past several years, including the divesting of all of our seven
freestanding behavioral healthcare facilities. MHM 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,
MHM made the determination to focus our strategic growth efforts on Correctional
Services. As a result, MHM 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 beginning July
1, 1999 was awarded, with three successive options to renew this contract for
additional terms up to one fiscal year each. Due to our decision to shutdown
Extended Care Services, the new contract was bid by Correctional Services
effective May 1, 1999.
12
<PAGE> 13
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. In February 2000, Correctional Services was
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 services basis.
Consistent with our strategy of focusing on the correctional
services market, MHM sold two freestanding facilities, Mountain Crest, an
inpatient psychiatric facility, in the third quarter of 1998, and Oakview, an
inpatient substance abuse facility, (which MHM initially sold in 1996 and which
was later reacquired by MHM by foreclosure), in March 1999. With the sale of the
Mountain Crest and Oakview facilities, MHM 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 six-month period ended March 31, 2000, MHM recognized income
before income taxes of $338,000. With the sale of the unprofitable operations of
Extended Care Services, beginning October 1, 1999, MHM expects that our
remaining operations will be profitable but we recognize the level of profits
may be insufficient to cover all of our general and administrative expenses.
Therefore, continuing operations will remain dependent upon MHM securing
additional contracts in Correctional Services and obtaining additional working
capital. No assurance can be provided that MHM will be successful in securing
additional contracts or obtaining additional working capital. See "Liquidity."
The report of our independent auditors on MHM's audited consolidated financial
statements for the fiscal year ended September 30, 1999, includes an explanatory
paragraph which states that MHM's current financial condition raises substantial
doubt as to our ability to continue as a going concern.
FINANCIAL POSITION - MARCH 31, 2000 COMPARED TO SEPTEMBER 30, 1999
MHM's stockholders' deficit decreased to $2,134,000 at March 31,
2000 from $2,453,000 at September 30, 1999. Net income of $335,000 for the six
months ended March 31, 2000 was the primary factor that reduced the
stockholders' deficit. Total current assets were $1,666,000 at March 31, 2000 as
compared $1,714,000 at September 30, 1999. The reduction in current assets is
primarily due to the amortization during the six-month period ended March 31,
2000 of certain prepaid assets as of September 30, 1999. Noncurrent assets were
$531,000 at March 31, 2000 as compared to $568,000 at September 30, 1999. The
decrease is primarily attributable to the depreciation of fixed assets during
the six-month period ended March 31, 2000. Total current liabilities were
$4,331,000 at March 31, 2000 as compared to $4,730,000 at September 30, 1999. As
a result of the positive cash flow from operations during the six-month period
ending March 31, 2000, we were able to reduce our current liabilities by
$399,000.
13
<PAGE> 14
As presented in the accompanying condensed consolidated statements
of cash flows, MHM's cash balance increased from $6,000 at September 30, 1999 to
$98,000 at March 31, 2000. MHM has a deficit in working capital at March 31,
2000 of $2,665,000, which represents a reduction of $351,000 from the deficit in
working capital at September 30, 1999 of $3,016,000.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
Net revenues for the six-month period ended March 31, 2000 were
$9,423,000, a decrease of 4% as compared to $9,801,000 for the six-month period
ended March 31, 1999. The decrease is attributable to the sale of certain
unprofitable operations of Extended Care Services in fiscal year 1999. Revenues
from existing operations were $9,423,000 for the six-month period ended March
31, 2000 as compared to $7,303,000 for the six-month period ended March 31,
1999. The 29% increase in revenues over prior year's six-month period is
attributed to new contracts added to Correctional Services in 1999. Extended
Care Services generated revenues of $2,498,000 for the six-month period ended
March 31, 1999.
Operating expenses for the six-month period ended March 31, 2000
were $7,193,000, or 76% of net revenues, as compared to $7,570,000, or 77 % of
net revenues for the six-month period ended March 31, 1999. As a result of the
sale of the certain operating units of Extended Care Services, operating
expenses decreased by 5%. Operating expenses from existing operations increased
by 22% over prior year's six-month period due primarily to the additions of new
contracts to Correctional Services in the third quarter of fiscal year 1999.
Extended Care Services had operating expenses of $1,673,000 in the six-month
period ended March 31, 1999.
General and administrative expenses for the six-month period ended
March 31, 2000 were $1,844,000, or 20% of net revenues as compared to
$2,945,000, or 30% of net revenues for the six-month period ended March 31,
1999. As a result of the sale of certain operating units of Extended Care
Services, general and administrative expenses decreased 37% from the prior year.
Correctional Services had general and administrative expenses of $683,000 for
the six-month period ended March 31, 2000 as compared to $277,000 for the
six-month period ended March 31, 1999 due to an increase in support staff to
support the new contracts obtained in 1999. Corporate general and administrative
expenses were $1,150,000 for the six-month period ended March 31, 2000 as
compared to $1,225,000 for the six-month period ended March 31, 1999. Extended
Care Services had general and administrative expenses of $11,000 from the wind
down of operations for the six-month period ended March 31, 2000 as compared to
$1,485,000 for the six-month period ended March 31, 1999. From the divested
assets, MHM realized administrative recoveries of $42,000 for the six-month
period ended March 31, 1999.
The provision for bad debts for the six-month period ended March 31,
2000 decreased to $104,000 as compared to $1,116,000 for six-month period ended
March 31, 1999. The divestiture of Mountain Crest Hospital in the third quarter
of fiscal year 1998 and the sale of certain operating units of Extended Care
Services during the first quarter
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<PAGE> 15
of 1999 has shifted MHM 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. The 1999
bad debt provision related primarily to the estimated net realizable value of
receivables generated by Extended Care Services and reserves on receivables
remaining after the sale of our freestanding facilities. The decrease in the bad
debt provision in 2000 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 $48,000 for the
six-month period ended March 31, 2000 as compared to $172,000 for the six-month
period ended March 31, 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 six-month period ended March 31, 2000 was
$72,000 as compared to $251,000 for the six-month period ended March 31, 1999.
Interest expense as of March 31, 1999 was primarily from MHM's line of credit of
$500,000 and short-term loan in the amount of $2,000,000 that was paid down to
$210,000, at March 31, 1999.
During the first quarter of the six-month period ended March 31,
1999, MHM divested all but one of our remaining Extended Care Services operating
units from which we recognized a gain on sale of $301,000. Also, during the
quarter ended March 31, 1999, MHM sold a hospital property that had previously
been acquired in a foreclosure. The transaction resulted in the recording of a
gain on sale of $299,000.
MHM disposed of certain fixed assets deemed obsolete during the
six-month period ended March 31, 2000 that resulted in a loss on disposal of
$5,000. For the six-month period ended March 31, 1999, MHM disposed certain
fixed assets, which resulted in a loss on disposal of $1,000.
MHM recognized other income of $181,000 in the six-month period
ended March 31, 2000. The sources of our other income were $91,000 for the
settlement of prior year cost reports from a freestanding hospital that had been
sold, $77,000 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, and $13,000 from interest income on invested cash
balances. MHM recognized other expense of $494,000 in the six-month period ended
March 31, 1999. During the six-month period ended March 31, 1999, MHM recognized
an expense of $520,000 from the settlement of prior year cost reports from a
freestanding hospital that had been sold which was offset by $26,000 of interest
income on invested cash balances.
As a result of the foregoing, MHM recognized net income of $335,000
for the six-month period ended March 31, 2000, compared to a net loss of
$2,183,000 for the six-month period ended March 31, 1999.
15
<PAGE> 16
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
Net revenues for the quarter ended March 31, 2000 were $4,739,000,
which represented an increase of 21% over the quarter ended March 31, 1999,
which reported net revenues of $3,932,000. The increase is attributable to the
growth in revenues from Correctional Services. Revenues from existing operations
were $4,739,000 for the quarter ended March 31, 2000 as compared to $3,653,000
for the quarter ended March 31, 1999. The 30% increase in revenues over prior
year's quarter is primarily attributed to new contracts added to Correctional
Services in the third quarter of fiscal year 1999. Extended Care Services
generated revenues of $279,000 for the first quarter ended March 31, 1999.
Operating expenses for the quarter ended March 31, 2000 were
$3,669,000, or 77% of net revenues, as compared to $3,420,000, or 87 % of net
revenues for the quarter ended March 31, 1999. Operating expenses from existing
operations increased by 24% over prior year's quarter from continuing operations
due primarily to the additions of the new contracts in Correctional Services
during the third quarter of fiscal year 1999. Extended Care Services had
operating expenses of $458,000 in the quarter ended March 31, 1999. As a result
of the sale of certain operating units of Extended Care Services, and the growth
in contracts of Correctional Services, operating expenses increased 7% in the
quarter ended March 31, 2000 as compared to the quarter ended March 31, 1999.
General and administrative expenses for the quarter ended March 31,
2000 were $912,000, or 19% of net revenues as compared to $1,344,000, or 34% of
net revenues for the quarter ended March 31, 1999. Again as a result of the sale
of Extended Care Services, general and administrative expenses decreased 32% in
the quarter ended March 31, 2000 as compared to the quarter ended March 31,
1999. Correctional Services had general and administrative expenses of $320,000
for the quarter ended March 31, 2000 as compared to $39,000 for the quarter
ended March 31, 1999 due to an increase in support staff to support the new
contracts obtained in third and fourth quarter of 1999. Corporate general and
administrative expenses were $583,000 for the quarter ended March 31, 2000 as
compared to $675,000 for the quarter ended March 31, 1999. Extended Care
Services had general and administrative expenses of $9,000 from the wind down of
operations for the quarter ended March 31, 2000 as compared to $715,000 of
general and administrative expenses for the quarter ended March 31, 1999. MHM
realized $85,000 in general and administrative recoveries from our sale of
freestanding hospitals during the quarter ended March 31, 1999.
The provision for bad debts for the quarter ended March 31, 2000
decreased to $29,000 as compared to $393,000 for the quarter ended March 31,
1999. The sale of Mountain Crest Hospital in the third quarter of fiscal year
1998 and the divesture of certain operating units in Extended Care Services
during first quarter of fiscal year 1999 has shifted MHM from having a
significant amount of our revenues on a fee-for-service
16
<PAGE> 17
basis, which required substantial bad debt reserves, to a capitated revenue
base, which has fewer collectibility uncertainties. The 1999 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 our freestanding facilities. The decrease in the bad debt provision in 2000
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 $25,000 for the quarter
ended March 31, 2000 as compared to $55,000 for the quarter ended March 31,
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 March 31, 2000 was $36,000 as
compared to $79,000 for the quarter ended March 31, 1999. Interest expense at
March 31, 1999 was primarily from MHM's line of credit of $500,000 and
short-term loan in the amount of $2,000,000 that was paid down to $210,000 as of
March 31, 1999.
During the quarter ended March 31, 1999, MHM sold a hospital
property, Oakview Treatment Center, which had previously been acquired in a
foreclosure. The transaction resulted in the recording of a gain on sale of
$299,000. Also, as a result of MHM divesting all but one of our remaining
Extended Care Services operating units in the first quarter of fiscal year 1999,
an additional gain on sale of $63,000 was recognized during the quarter ended
March 31, 1999.
MHM recognized other income of $100,000 in the quarter ended March
31, 2000 as compared to other expense of $497,000 for the quarter ended March
31, 1999. Other income from settlements of prior year cost reports of a
freestanding hospital that had been sold was $89,000 for the quarter ended March
31, 2000 as compared to an expense of $520,000 for the quarter ended March 31,
1999. Other income from collections on accounts receivable from divested
operations was $9,000 for the quarter ended March 31, 2000. Interest income on
invested cash balances was $2,000 as of the quarter ended March 31, 2000 as
compared to $23,000 for the quarter ended March 31, 1999.
As a result of the foregoing, MHM recognized net income of $179,000
for the quarter ended March 31, 2000, compared to a net loss of $1,511,000 for
the quarter ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
MHM has funded operating losses through a combination of the
proceeds derived from the sale of certain operations of our subsidiary operating
units and through borrowed funds. MHM had utilized a revolving credit facility
for Extended Care Services, which was repaid from collections of accounts
receivable remaining from the divested operating units during the second quarter
of 1999. In addition, as of March 31,
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<PAGE> 18
2000, MHM 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
MHM. Management of MHM has filed for a corporate dissolution under Delaware law
for Extended Care Services in order to obtain a discharge of Extended Care
Services' external debt totaling $931,000 at March 31, 2000.
MHM anticipates that we will continue to maintain our 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 our working
capital needs. MHM realizes that 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. MHM further recognizes that we have exhausted our ability to obtain
working capital from divesting certain parts of our operations. As we seek to
obtain additional contracts in Correctional Services, we will attempt to
continue reducing our general and administrative expenses as a percentage of net
revenues. No assurance can be provided, however, that any of MHM's efforts to
improve our current financial condition will be successful or that MHM will be
able to continue in business.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
MHM is, 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 MHM 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 MHM, regardless of their merit, or
outcome, may also have an adverse effect on our reputation and business. MHM
knows 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. MHM 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
18
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of Chancery. MHM expects to submit a plan of dissolution to the court during the
fourth quarter of fiscal year 2000. Therefore, MHM is of the opinion that the
potential for litigation resulting from these liabilities is remote.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Board of Directors has 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 is March 21, 2000. MHM will purchase all fractional
shares resulting from this transaction based on a pre-stock fair market value of
$.45 per share. This value was determined through a third party valuation that
MHM secured. MHM has accrued approximately $65,000 for purchase of fractional
shares as of March 31, 2000.
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
Form 8-K filed March 23, 2000
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<PAGE> 20
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 May 15, 2000 MHM Services, Inc.
/s/ CLEVELAND E. SLADE
Vice President and Chief
Financial Officer
20
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