<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON August 15, 2000
REGISTRATION NO. _________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
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REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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MHM SERVICES, INC.
(Exact name of issuer 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
(703) 749-4600
(Address and telephone number of principal executive offices)
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MR. CLEVELAND E. SLADE
8605 WESTWOOD CENTER DRIVE, SUITE 400, VIENNA, VIRGINIA 22182
(703) 749-4600
(Name, address and telephone number of agent for service)
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COPIES TO:
MARK J. WISHNER, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY & POPEO, PC
ONE FOUNTAIN SQUARE, 11911 FREEDOM DRIVE, RESTON, VIRGINIA 20190
(703) 464-4800
FACSIMILE: (703) 464-4895
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: from time to
time after the effective date of this Registration Statement
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [ ]
"If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: [ ]"
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed
Title of each Proposed maximum
class of maximum aggregate Amount of
securities to Amount to be offering price offering price registration
be registered registered per share (1) (1) fee (1)
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<S> <C> <C> <C> <C>
Common Stock 34,000 $72.00 $2,448,000 $646.27
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</TABLE>
(1) Pursuant to Rule 457(e), the registration fee was based on the price of the
securities being offered to existing security holders.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
PROSPECTUS
August 15, 2000
MHM SERVICES, INC.
34,000 SHARES OF COMMON STOCK
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<TABLE>
<CAPTION>
THE OFFERING:
<S> <C>
- 8605 Westwood Center Drive
Suite 400 - We are offering 34,000 shares of
Vienna, VA 22182 our common stock.
(703) 749-4600
- This non-transferable offer is first
being made to existing stockholders.
Any shares under this offering not
purchased by existing stockholders
will be offered to outside
investors.
SYMBOL & MARKET:
- MHMI.OB - Closing: September 30, 2000
- OTC Bulletin Board
</TABLE>
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price: $72.00 $2,448,000
Proceeds to MHM Services, Inc. $69.35 $2,358,000
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</TABLE>
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE, NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
We will amend and complete the information in this prospectus. Although we are
permitted by US federal securities law to offer these securities using this
prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities has been declared
effective by the SEC. This prospectus is not an offer to sell these securities
or our solicitation of your offer to buy these securities in any jurisdiction
where that would not be permitted or legal.
1
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.......................................................... 3
Risk Factors................................................................ 5
Special Note Regarding Forward-Looking Statements........................... 8
Plan of Distribution........................................................ 8
Description of Securities to be Registered.................................. 9
Market for Common Equity, Dividend Policy and Related Stockholder Matters... 10
Quantitative & Qualitative Disclosures About Market Risk.................... 12
Use of Proceeds............................................................. 12
Dilution.................................................................... 13
Capitalization.............................................................. 14
Selected Consolidated Financial Data........................................ 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................ 17
Description of Business..................................................... 22
Available Information....................................................... 25
Incorporation of Certain Information by Reference........................... 26
Indemnification of Officers and Directors................................... 26
Legal Matters............................................................... 27
Experts..................................................................... 27
MHM Services, Inc. Index to Financial Statements............................ 28
Information Not Required in Prospectus...................................... 59
Signatures.................................................................. 61
</TABLE>
2
<PAGE> 4
PROSPECTUS SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. This summary may not contain all
the information that is important to you or that you should consider before
buying shares in this offering. The other information is important, so please
read this entire prospectus carefully.
MHM SERVICES, INC.
We currently provide mental health services at over 60 correctional
facilities encompassing over 55,000 inmates through statewide contracts with the
departments of corrections of the states of Georgia and Tennessee, a subcontract
covering a women's correctional facility in Florida, and the departments of
juvenile justice of the states of Georgia and Florida. None of our contracts are
subject to Medicare or Medicaid reimbursement.
We have been providing mental health services since the late 1970's.
Throughout our history, we have provided mental health services in general
hospitals, substance abuse and psychiatric hospitals, nursing homes,
correctional facilities, and juvenile correctional facilities. We have also
owned freestanding psychiatric and substance abuse hospitals.
We have recently shifted our business focus and divested ourselves of
operations we no longer wished to continue. With one limited exception, we have
either sold or discontinued all of our hospital operations as well as all of our
nursing home operations. Since 1998, we have focused exclusively on expanding
and developing our delivery of mental health services to inmates incarcerated in
correctional facilities.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by us .............................. 34,000 shares
Common stock to be outstanding after this offering ...... 41,287 shares
Use of proceeds ......................................... We intend to use the net proceeds
of this offering to pay off the
balance of our credit facility
and for general corporate
purposes, including funding our
operations, capital
expenditures, and working
capital.
Symbol................................................... MHMI.OB
</TABLE>
We have sought to raise capital from external sources but our efforts have
been unsuccessful. We have, therefore, determined to seek to raise capital from
our stockholders. In order to provide an incentive for our stockholders to
invest, we are offering shares at a 23% discount from our latest trading price.
Any stockholder who does not participate in this offering will sustain
substantial dilution in the percentage interest which such stockholder holds in
MHM Services, Inc.
Each stockholder will initially have the right to purchase four shares for
each Company share held and the pro rata right to purchase the shares which
other stockholders decline to purchase. Michael S. Pinkert, our chief executive
officer, has indicated to MHM Services, Inc., his intent to not only purchase
the initial 4,348 shares available to him, but an additional 2,760 shares as
well. This will require a $511,776 investment from Mr. Pinkert.
The 41,287 shares of common stock to be outstanding after this offering is
based on the 7,287 shares outstanding as of June 30, 2000 and includes 34,000
shares of common stock being offered by us in this offering. The number of
shares of common stock that will be outstanding after this offering excludes:
2,198 shares of common stock underlying warrants granted and outstanding as of
June 30, 2000 at a weighted average exercise price of $64.10 per share, and 513
shares of common stock underlying options granted and outstanding as of June 30,
2000 under our stock option plans at a weighted average exercise price of
$325.19.
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<PAGE> 5
SUMMARY FINANCIAL DATA
The following summary of consolidated financial data should be read in
conjunction with MHM Services' consolidated financial statements and condensed
consolidated financial statements and related notes included elsewhere in the
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The consolidated statements of
operations data for the years ended September 30, 1999, 1998, and 1997, are
derived from the audited consolidated financial statements included elsewhere in
this prospectus. Those audited consolidated financial statements contain an
explanatory paragraph concerning the uncertainty of our ability to continue as a
going concern. The statements of operations data for the years ended September
30, 1996 and 1995, is derived from audited consolidated financial statements not
included herein. The 1996 and 1995 audited consolidated financial statements
were audited by a predecessor auditor whose report contains an explanatory
paragraph concerning the uncertainty of our ability to continue as a going
concern. The consolidated statements of operations data for the nine-month
periods ended June 30, 2000 and 1999, has not been audited by our independent
accountants. Our historical results summarized below are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
(dollars in thousands, except share and per share amounts) (UNAUDITED)
1999 1998 1997 1996 1995 2000 1999
----------- ----------- ------------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Net Revenues:
Capitated revenue $ 16,181 14,430 3,865 3,270 2,667 13,972 11,616
Net fee-for-service revenue 2,207 14,864 16,986 31,400 38,442 497 2,636
----------- ----------- ------------- ------------ ---------- ---------- ---------
18,388 29,294 20,851 34,670 41,109 14,469 14,252
----------- ----------- ------------- ------------ ---------- ---------- ---------
Costs and expenses:
Operating 15,128 20,040 14,875 25,765 28,918 11,115 11,409
General and administrative 4,937 7,539 5,760 9,718 10,085 2,895 4,049
Provision for bad debts 898 3,326 3,467 6,320 4,467 68 1,053
Depreciation and amortization 252 597 369 1,034 1,603 72 206
(Gain) Loss on sales of assets (net) (600) (2,465) -- 4,440 (3,542) -- (600)
Write-down of long-term assets -- 430 696 461 2,228 -- --
Other (credits) charges (37) -- (662) (233) (1,058) (201) 481
Interest expense 342 923 1,135 1,387 1,537 111 274
----------- ----------- ------------- ------------ ---------- ---------- ---------
20,920 30,390 25,640 48,892 44,238 14,060 16,872
Income (loss) before income taxes
and extraordinary item (2,532) (1,096) (4,789) (14,222) (3,129) 409 (2,620)
Income tax (benefit) expense 39 93 -- (308) 894 48 67
----------- ----------- ------------- ------------ ---------- ---------- ---------
Income (loss) before extraordinary item (2,571) (1,189) (4,789) (13,914) (4,023) 361 (2,687)
Extraordinary items -- 9,185 -- (463) -- -- --
----------- ----------- ------------- ------------ ---------- ---------- ---------
Net income (loss) $ (2,571) 7,996 (4,789) (14,377) (4,023) 361 (2,687)
=========== =========== ============= ============ ========== ========== =========
Income (loss) per share:
Income (loss) before extraordinary item $ (376.92) (175.68) (732.37) (2,195.68) (634.84) 49.54 (395.55)
Extraordinary item - 1,357.12 - (73.06) - - -
----------- ----------- ------------- ------------ ---------- ---------- ---------
Income (loss) per share - basic $ (376.92) 1,181.44 (732.37) (2,268.74) (634.84) 49.54 (395.55)
=========== =========== ============= ============ ========== ========== =========
Income (loss) per share - diluted $ (376.92) 1,181.44 (732.37) (2,268.74) (634.84) 40.25 (395.55)
=========== =========== ============= ============ ========== ========== =========
Weighted average shares outstanding:
Basic 6,821 6,768 6,539 6,337 6,337 7,287 6,793
----------- ----------- ------------- ------------ ---------- ---------- ---------
Diluted 6,821 6,768 6,539 6,337 6,337 8,970 6,793
=========== =========== ============= ============ ========== ========== =========
</TABLE>
4
<PAGE> 6
RISK FACTORS
An investment in our securities is speculative in nature and involves a high
degree of risk. In addition to the other information contained in this
prospectus, you should carefully consider the following factors in evaluating us
and our business before purchasing the securities offered hereby. This
prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause or contribute to such differences include, without limitation,
those discussed below and elsewhere in this prospectus.
OUR AUDITORS HAVE EXPRESSED UNCERTAINTY ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
For each of our 1997, 1998, and 1999 fiscal years, our independent auditors,
KPMG LLP, have included in their report an explanatory paragraph relating to our
ability to continue as a going concern that states: "The Company has incurred
aggregated losses before extraordinary item of $8,549,000 for the three years
ended September 30, 1999, has an accumulated deficit of $44,678,000 as of
September 30, 1999, has a working capital deficiency of $3,016,000 as of
September 30, 1999, and is experiencing difficulty in generating sufficient cash
flows to meet its obligations and sustaining its operations, as further
discussed in Note 2 to the accompanying consolidated financial statements. Such
conditions raise substantial doubt as to the Company's ability to continue as a
going concern."
WE MAY NOT HAVE ADEQUATE CASH FUNDS TO MEET OUR OPERATING NEEDS.
We have recently been depending on a promissory note with Bank of America to
sustain our cash needs. The note has a revolving feature, which allows us to
borrow, repay, and re-borrow up to the maximum aggregate amount. The note is
personally guaranteed by our chief executive officer, Michael Pinkert, for $1.3
million and one of our directors, Dr. Jacob Shipon, for $500,000. The maximum
amount that may be drawn on the note is $1.8 million from which we have drawn
$1.3 million as of June 30, 2000. We intend on paying the outstanding balance on
this note with the proceeds of this offering. See "Use of Proceeds." The
guaranteeing officer and director have informed us that they are not willing to
increase the amounts of their guarantees. As a result, if cash from operations
is inadequate to fund the continuation of our business, we must identify other
sources of cash in order to continue our operations. We may not be able to raise
additional capital when needed or on acceptable terms, which could adversely
affect our operating results and prospects.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
Based on our current operating plan, we anticipate that the net proceeds from
this offering and cash provided from operations will allow us to meet our cash
requirements both for current operations and for reasonable expansion. However,
we may require additional funding. In addition, unplanned acquisition and
development opportunities and other contingencies may arise which could cause us
to require additional capital. We cannot be certain that additional financing
will be available on commercially reasonable terms, if at all. If we raise
additional capital through the sale of additional equity, including preferred
stock or convertible debt securities, the per share value of our outstanding
capital stock may be diluted. If we obtain debt financing, we may be required to
agree to restrictions on our activities that could impair operations.
THERE CAN BE NO ASSURANCE OF CONTINUED PROFITABILITY AND WE HAVE A LIMITED
OPERATING HISTORY.
The quarter ended September 30, 1999, was our first profitable quarter from
operations. There can be no assurance that we will be able to maintain this
profitability. We commenced our correctional facility mental healthcare
operations beginning in February 1997, and therefore we have less than four
years of operating history in this business upon which you can judge our
performance. For the nine-month period ended June 30, 2000, we have experienced
net income of $361,000; however, as a result of historical net losses, we have a
deficit in working capital of $1,272,000 and a stockholders' deficit of
$2,097,000.
WE MAY BE UNSUCCESSFUL IN EXECUTING OUR PLAN FOR EXPANSION, WHICH COULD
ADVERSELY AFFECT THE RESULTS OF OUR OPERATIONS.
Much of the new business we hope to develop is obtained by responding to
requests for proposals ("RFPs") issued by the appropriate governmental agency,
which is usually a state department of corrections. In submitting a proposal in
response to such an RFP, we are competing with other bidders, and there can be
no assurance that our proposal
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<PAGE> 7
will be selected. Procurement through RFPs can be a time-consuming and costly
process, and in some cases the standards for selection may not be clear. In
addition, in some instances, selection of contractors to provide services to
state or local government agencies such as correctional facilities may be
subject to political considerations over which we have no control.
IF WE LOSE ONE OF OUR FEW MAJOR CLIENTS, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
During fiscal year 1999, our contracts with the Tennessee and Georgia
departments of corrections accounted for approximately 61% of our annual
revenues. Contracts with revenues exceeding 10 percent of our consolidated
revenues for the year ended September 30, 1999 included 49% from our Georgia
Department of Corrections contract, 12% from our contract with the Tennessee
Department of Corrections, and 20% from our contract with the Georgia Department
of Medical Assistance. Collectively, 81% of our total fiscal year 1999 revenues
were derived from these three relationships. For the nine-month period ended
June 30, 2000, 80% of our total fiscal year 2000 revenues were derived from
these three relationships.
WE HAVE MANY SHORT-TERM AGREEMENTS THAT CAN BE CANCELED WITH LITTLE OR NO
PENALTY. IF CLIENTS TERMINATE AGREEMENTS WITH US, OUR RESULTS OF OPERATIONS
COULD SUFFER.
The terms of our contracts with our clients provide that clients can cancel the
contracts for any reason. Clients may terminate the contract by providing us 30
days notice, or in some cases 90 days notice, of their intent to do so. Concerns
about our financial condition could cause these customers to terminate their
contracts with us. Loss of any one of our clients could have a significant
material effect on our operations and could call into question our ability to
continue our business operations.
WE COULD LOSE MONEY BECAUSE WE ARE PAID A CAPITATED FEE UNDER CERTAIN CONTRACTS
REGARDLESS OF THE COST OF THE SERVICES WE MUST PROVIDE.
Under most of our correctional facility contracts, we are paid a capitated
amount for each inmate eligible for the mental health services we provide,
regardless of whether the inmate uses our services, requires basic services, or
requires protracted and expensive treatment. Accordingly, if more inmates
require mental health services than we previously anticipated, or if the
services required are more extensive or expensive than estimated, our costs may
exceed our revenue. It has been observed that the availability of services we
provide often increases the demand for those services, thus exposing us to the
potential of increased utilization. Inmates are entitled to the same level of
care as the community in general, and the necessity and degree of treatment must
be determined by health care professionals in the exercise of their best
professional judgment. Accordingly, we are limited in the control we can
maintain over the cost of services. In addition, a large component of the cost
of mental health care consists of the cost of psychotropic medications. Although
our contracts require us to provide these medications within our capitated fee
arrangement, we have little or no control over the amount and cost of the drugs
that are prescribed. If utilization of mental health services were to increase
significantly, or if the amount or cost of psychotropic medications were to
escalate substantially, there could be a material adverse effect on our
operating results.
WE MAY NOT BE ABLE TO HIRE AND RETAIN HIGHLY SKILLED PROFESSIONALS, WHICH WOULD
ADVERSELY AFFECT OUR BUSINESS.
All of the mental health services provided under our correctional facility
contracts are delivered by licensed clinicians. To succeed, we must hire and
retain licensed clinicians to work at the correctional facilities covered by our
contracts. We may not be able to hire enough professionals or to retain and
manage the professionals we are able to hire. This could hinder our ability to
satisfy our contractual requirements and compete effectively in the market
place.
WE MAY BE SUBJECT TO LIABILITIES ARISING FROM OUR PRIOR AREAS OF BUSINESS, WHICH
COULD CAUSE OUR OPERATIONS TO SUFFER.
Each of the psychiatric hospitals which we previously operated were required to
submit a cost report at the end of each fiscal year to support the reimbursement
the hospital had been paid under the Medicare Program. In the event the Medicare
Program disallows costs listed on that report, refunds could be required of some
of the reimbursement paid during the year covered by the cost report. The
Medicare Program has finalized its review on all the facilities' cost reports
with the exception of the 1997 and 1998 cost reports for Mountain Crest
Hospital. With the exception of these cost reports, we are exposed to any post
settlement reviews of previously audited cost reports through September 30,
2001. Although we do not anticipate any substantial disallowances of the costs
included in any of these cost reports, if significant refunds of reimbursement
were required, there could be a material adverse affect on our financial
condition.
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<PAGE> 8
Refunds also may be required with respect to our prior business related to the
delivery of mental health services on site to nursing home patients. This line
of business was operated by MHM Extended Care Services, Inc. ("ECS"), one of our
wholly owned subsidiaries. ECS has been notified on behalf of the Massachusetts
Medicaid Program that refunds of Medicaid reimbursement previously paid to ECS
for services rendered in 1997 are being sought in the amount of $1,101,157.
Services to nursing home patients in California and Tennessee were delivered by
independently owned professional corporations, which ECS managed. The California
professional corporation has received notice that refunds totaling $1.7 million
are being sought related to Medicare payments made for services provided to
nursing home patients in that state during 1994 through 1996. In Tennessee,
refunds of Medicare payments have been requested from the Tennessee professional
corporation of $528,000 as a result of a post payment audit of claims paid in
1998. In each of these cases, the professional corporations have claimed that
ECS is responsible for indemnifying the professional corporations and their
owners for any liability for these refunds. We do not believe we have any
liability for these matters. In any event, because ECS no longer engages in any
active business, it is in the process of being dissolved under Delaware
dissolution procedures. It is anticipated that any such liabilities will be
resolved as part of the corporate dissolution proceedings without any material
impact on our current operations. However, it is possible that ECS or MHM
Services, Inc. could be held liable for some or all of these claims. Any such
assessment of liability could have a material adverse effect on our financial
condition.
In addition, a lawsuit is pending against our subsidiary corporation ("MHM of
Colorado, Inc") which owned and operated Mountain Crest Hospital, our inpatient
psychiatric hospital in Fort Collins, Colorado. (Foianini v. Mt. Crest
Behavioral Health Care System, et al., Civ. Action No.99CV - 218B (U.S. Dist.
Ct., Wyo.)). The lawsuit was brought by the family of a 19-year-old boy who
committed suicide within days after being discharged from the hospital. The
claim is covered by insurance, up to a maximum limit of $1,000,000. However, if
the plaintiffs were to obtain a judgment significantly in excess of the policy
limits, and were able to enforce such a judgment against the parent corporation,
there could be a material adverse effect on our financial situation.
THE LOSS OF CERTAIN KEY OFFICERS COULD ADVERSELY AFFECT OUR BUSINESS.
The success of our business depends heavily upon the active participation of our
executive officers, particularly our chairman and chief executive officer,
Michael S. Pinkert; our president and chief operating officer, Steven H.
Wheeler; and our vice president for the southwest region, Robert W. May. We do
not have employment contracts with any of these individuals. As a result, these
officers may terminate their employment with us at any time and without penalty.
The loss of the services of any of these officers could have a material adverse
effect on our business.
IF WE FACE EXCESSIVE MEDICAL MALPRACTICE CLAIMS, OUR BUSINESS MAY SUFFER.
Although licensed clinicians in the independent exercise of their professional
judgment deliver the actual provision of the mental health care services, which
we provide, we could nevertheless also be accused of medical negligence. We have
obtained an insurance policy that provides medical malpractice insurance, which
is a claims-made policy with a prepaid five-year, extended reporting period
included. However, a successful claim against us in excess of our insurance
coverage could have a material adverse effect upon our business. In addition, we
frequently are named as a party in lawsuits brought by inmates complaining of
the conditions of their incarceration, alleged violations of their
constitutional rights, and the healthcare services they receive. If we
experience more of these claims than we expect, we could suffer increased
defense costs and our operations may be adversely affected.
IF ANY OF OUR HEALTH CARE PROVIDERS VIOLATE FEDERAL OR STATE LAWS, OUR BUSINESS
MAY SUFFER.
Federal and state laws extensively regulate the relationships among providers of
health care services and various aspects of their operations. These laws include
federal fraud and abuse provisions which if violated by any of our health care
providers could put us at risk of severe criminal and monetary penalties. Any
criminal or civil penalties imposed upon us could damage our reputation causing
clients to cancel their contracts or potential clients to refuse to do business
with us.
WE HAVE NO ASSURANCE OF A CONTINUED PUBLIC MARKET FOR OUR STOCK.
Our stock previously had been listed on the American Stock Exchange, but was
delisted in 1998. Our shares presently are traded on the over-the-counter
bulletin board under the symbol MHMI.OB. Maintenance of active trading in our
stock requires the continuing interest of brokers who act as "market makers" for
our shares. There can
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be no assurance that such market makers will continue to trade in our stock or
that sufficient buyers will be available to create market demand for our stock.
OUR COMMON STOCK IS NOT ACTIVELY TRADED AND WE MAY CEASE TO BE A SEC REPORTING
COMPANY IN THE FUTURE, WHICH MAY HAVE AN ADVERSE EFFECT ON THE VALUE AND
LIQUIDITY OF THE SHARES BEING OFFERED UNDER THIS PROSPECTUS.
After our 500 to 1 reverse stock split in March 2000, the number of outstanding
shares of our common stock was reduced from 3,788,225 to 7,287, and the number
of beneficial holders of our common stock was reduced from approximately 3,000
to 250. As of June 30, 2000, there had been no trades executed since the reverse
stock split. The reduced number of shares outstanding and the fewer number of
beneficial holders may serve to restrict an effective market from ever
developing for our common stock and depress its value. Because of the decrease
in the number of outstanding stockholders and the expenses associated with
complying with the filing requirements of the Securities Exchange Act of 1934,
we may choose not to continue being a SEC reporting company. If we decide to
stop filing reports with the SEC, our common stock will no longer be eligible
for listing on the OTC Bulletin Board, although it could still be traded through
the "pink sheets." This could further reduce the liquidity of our shares and
further decrease the value of our shares.
WE MAY NOT COMPETE SUCCESSFULLY WITH OUR COMPETITORS, WHICH COULD RESULT IN
REDUCED REVENUES.
Some of our competitors for the delivery of mental health services are larger
general healthcare firms with greater financial resources and stronger financial
results than ours. In selecting providers for mental health services,
correctional systems typically require assurance of the financial strength of
potential providers. In addition, some of our competitors provide a full range
of healthcare services, including physical medicine. Although we believe our
specialization in mental health is an advantage, some correctional systems may
prefer to deal with a single provider for all healthcare services. In addition,
competitors who already are providing healthcare services to a given
correctional system may have an advantage in retaining that business or
expanding into the mental health field. There can be no assurance that we can
compete successfully with these competitors for new business.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus 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. The outcome of the events described in these
forward-looking statements is subject to certain risks. Actual results could
differ materially. The "Risk Factors" section and those sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Business" as well as other sections in this
prospectus discusses some of the factors that could contribute to these
differences.
PLAN OF DISTRIBUTION
We will initially offer the right to purchase the shares covered by this
prospectus to our existing stockholders. In no event will these rights be
transferable. Each existing stockholder, as of the date of this prospectus, will
be allotted the right to purchase four shares for each share that they hold in
MHM Services, Inc. In addition, each of our stockholders will have the
opportunity to purchase additional shares from the shares allotted to other
stockholders who have either chosen not to purchase any shares or to purchase
less than the total number of shares initially allotted to them. Each of our
stockholders shall have the opportunity to indicate the maximum number of shares
they desire to purchase on the subscription form that accompanies this
prospectus. This subscription form must be returned to us and in our possession
no later than 45 days from the date of this prospectus. We then will determine
the additional shares available for purchase from the initial allotments. We
then will allocate these shares pro rata among the stockholders who have
indicated their intent to purchase additional shares based upon the maximum
number of shares each of these stockholders have indicated in their subscription
forms that they desire to purchase. Thereafter, we will notify each stockholder
by mail of the total number of shares that they have purchased. Payment for the
shares will be due within ten business days from the date of our notification
letter.
This plan of distribution coupled with the discounted price at which
shares are being offered has been developed to provide an incentive to our
stockholders to invest. This discount is equal to approximately a 23% reduction
from the latest trade price, which is equivalent to a post-reverse split price
of $93.75 per share. If a stockholder determines not to invest and all or
substantially all of the shares offered in this offering are sold, the
stockholder's interest in MHM Services, Inc. will be substantially diluted.
Michael S. Pinkert, our chief executive
8
<PAGE> 10
officer, who, at a minimum, shall have the right to purchase 4,348 shares, has
indicated his intent to purchase an additional 2,760 shares or a total of 7.108
shares, which equals an investment of $511,776. Therefore, Mr. Pinkert is
prepared to purchase approximately 20% of the shares being offered. Assuming all
shares offered are sold, if a stockholder does not participate in this offering,
the stockholder's percentage interest in MHM Services, Inc. will be reduced by
80%.
If our stockholders do not purchase all the shares offered under this
prospectus, we reserve the right to offer the shares not purchased to outside
investors at the same price being offered to existing stockholders. We have
identified various potential investors that have previously expressed an
interest in making an investment in our capital stock. Following the 45-day
period for the return of the subscription form, if shares remain, we will
commence contacting these other investors and offer them the opportunity to
participate in this offering.
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
We are currently authorized to issue up to 15,000,000 shares of common
stock, par value $0.01. As of June 30, 2000, there were 7,287 shares issued and
outstanding. There are approximately 250 holders of record of our common stock.
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of the common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. The holders of our common stock are entitled to receive such
dividends, if any, as may be declared by our board of directors from time to
time out of legally available funds. Upon our liquidation, dissolution or
winding up, the holders of our common stock are entitled to share in all of our
assets that are legally available for distribution, after payment of all debts
and other liabilities. The holders of our common stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of our
common stock are, and the shares of our common stock offered hereby will be,
when issued, fully paid and nonassessable.
9
<PAGE> 11
MARKET FOR COMMON EQUITY, DIVIDEND POLICY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our shares of common stock are currently quoted on the OTC Bulletin Board
under the symbol "MHMI.OB." In March 2000, our 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. We
purchased all fractional shares resulting from this transaction based on a
pre-split fair market value of $.45 per share. This value was determined through
a third-party valuation we secured. This reverse stock split resulted in a
reduction in the number of stockholders from approximately 3,000 as of March 21,
2000, to approximately 250 as of June 30, 2000. All share and per share amounts
in the accompanying consolidated financial statements and condensed consolidated
financial statements have been retroactively restated to reflect this 500 to 1
reverse stock split. Prior to the reverse stock split, our shares of common
stock were quoted on the OTC Bulletin Board under the symbol "MHMM". As of June
30, 2000, 15,000,000 shares of common stock are authorized and 7,287 shares are
issued and outstanding. No sales of our common stock have occurred since the
stock split. Therefore, the following table sets forth, for the periods
indicated, the high and low sales prices of our common stock, under the symbol
"MHMM", as listed on the American Stock Exchange ("AMEX") through June 16, 1998,
and the Over-the-Counter Bulletin Board ("OTCBB") thereafter:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
Nine month ended June 30,
2000:
<S> <C> <C>
First Quarter $ .625 $ .375
Second Quarter .469 .188
Third Quarter* .313 .188
<CAPTION>
Year ended September 30,
1999:
<S> <C> <C>
First Quarter $1.156 $ .563
Second Quarter .781 .500
Third Quarter .750 .438
Fourth Quarter .719 .438
<CAPTION>
Year ended September 30,
1998:
<S> <C> <C>
First Quarter $1.937 $ .375
Second Quarter .937 .312
Third Quarter .937 .500
Fourth Quarter 1.750 .438
</TABLE>
* The price for the trades occurring during the third quarter of fiscal year
2000 do not take into account the 500 to 1 reverse stock split effected on March
21, 2000.
Market quotations for our shares of common stock reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions. On June 30, 2000, the last reported sales price
of the shares of common stock on the OTC Bulletin Board was $.1875 per share
under the symbol of "MHMM".
HOLDERS
As of June 30, 2000, there were approximately 250 record holders of the
common shares. Such number of record holders was determined from our stockholder
records.
10
<PAGE> 12
DIVIDEND POLICY
We do not anticipate paying any dividends on any of our common stock in
the foreseeable future. We currently intend to retain all of our earnings, if
any, for use in our business. We may also incur debt in the future, which may
prohibit or restrict the payment of dividends.
11
<PAGE> 13
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We executed a promissory note with Bank of America that has a $1.8 million
maximum borrowing capacity. This note provides for a variable rate of interest
based on the Eurodollar rate plus 2.6% and may expose us to interest rate risk
resulting from changes in the Eurodollar rate. At June 30, 2000, we had $1.3
million outstanding on the note.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 34,000 shares of
common stock we are offering will be approximately $2,358,000 based upon an
assumed offering price of $72.00 per share, after deducting the estimated
offering expenses.
We intend to use the net proceeds of this offering to first pay the
outstanding balance on our note with Bank of America. As of August 15, 2000, the
outstanding balance on the Bank of America note is $1.3 million. We intend to
use the remainder of any proceeds from this offering for general corporate
purposes, including funding our operations, capital expenditures, and working
capital.
The foregoing represents our intentions based upon our present plans and
business conditions. The occurrence of unforeseen events or changed business
conditions, however, could result in our applying the proceeds of this offering
in a manner other than as described in this prospectus.
12
<PAGE> 14
DILUTION
Our net tangible book value as of June 30, 2000 was $(2,097,000), or
$(287.77) per share of common stock. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding at that date.
After giving effect to the sale of 34,000 shares of common stock being
offered hereby at an offering price of $72.00 per share, and
after deducting estimated offering expenses, the pro forma net tangible book
value at June 30, 2000 would have been $261,000 or $6.32 per share. This
represents an immediate increase in pro forma net tangible book value per share
of $294.09 to existing stockholders and an immediate dilution of $65.68 per
share to investors. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Offering price per share.................................................................. $72.00
Net tangible book value per share at June 30, 2000............................$(287.77)
Increase per share attributable to new investors................................294.09
Pro forma net tangible book value per share after this offering........................... $ 6.32
------
Dilution per share to new investors....................................................... $65.68
======
</TABLE>
13
<PAGE> 15
CAPITALIZATION
The following table sets forth MHM Services' capitalization as of June 30,
2000:
- On an actual basis; and
- On a pro forma as adjusted basis to give effect to the sale of 34,000
shares of our common stock at an offering price of $72.00 per share (after
deducting the estimated offering expenses and eliminating our outstanding
long-term debt by using the proceeds from this offer.) See "Use of
Proceeds."
<TABLE>
<CAPTION>
Pro forma
Actual As Adjusted
------------------ ------------------
<S> <C> <C>
(In thousands, except share and per share amounts)
Current portion of long term debt, including current maturies of capital leases 71 71
Long-term debt, less current maturities, including capital leases 1,300 -
Stockholders' deficit:
Common stock, $.01. par value, 15,000,000 shares authorized, actual
and proforma as adjusted; 7,287 shares issued and outstanding,
acutal; 41,287 shares issued and outstanding, as adjusted - -
Peferred stock, $.01 par value, 5,000,000 shares authorized, actual
and proforma as adjusted; no shares issued and outstanding, - -
actual and proforma as adjusted
Additional paid in-capital 42,220 44,578
Accumulated deficit (44,317) (44,317)
------------------ ------------------
Total stockholders' (deficit) equity (2,097) 261
Total capitalization (726) 332
================== ==================
</TABLE>
---------
The outstanding number of shares of common stock after the offering is based on
the number of shares outstanding as of June 30, 2000 and excludes:
- 2,198 shares issuable on the exercise of stock options outstanding as
of June 30, 2000 at a weighted average exercise price of $64.10 per
share,
- 513 shares issuable upon exercise of warrants outstanding as of June
30, 2000 at a weighted average exercise price of $325.19 per share,
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and condensed consolidated financial statements and accompanying
notes appearing elsewhere in this prospectus.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share amounts)
The following selected consolidated financial data should be read in
conjunction with MHM Services' consolidated financial statements and condensed
consolidated financial statements and related notes included elsewhere in the
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The consolidated statements of
operations data for the years ended September 30, 1999, 1998, and 1997, and the
consolidated balance sheet data as of September 30, 1999 and 1998, are derived
from the audited consolidated financial statements included elsewhere in this
prospectus. These audited consolidated financial statements contain an
explanatory paragraph concerning the uncertainty of our ability to continue as a
going concern. The statements of operations data for the years ended September
30, 1996 and 1995, and the balance sheet data as of September 30, 1997, 1996,
and 1995, is derived from audited consolidated financial statements not included
herein. The 1996 and 1995 audited consolidated financial statements were audited
by a predecessor auditor whose report contains an explanatory paragraph
concerning the uncertainty of our ability to continue as a going concern. The
consolidated balance sheet data and consolidated statements of operations data
as of June 30, 2000 and 1999, and for the nine-month periods then ended, has not
been audited by our independent accountants. Our historical results summarized
below are not necessarily indicative of results to be expected for any future
period.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
Consolidated Statements of Operations Data: (dollars in thousands, except share and per share amounts)
1999 1998 1997 1996 1995 (1)
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Capitated revenue $ 16,181 14,430 3,865 3,270 2,667
Net fee-for-service revenue 2,207 14,864 16,986 31,400 38,442
-------- --------- -------- ---------- --------
18,388 29,294 20,851 34,670 41,109
---------------------------------------------------------------
Costs and expenses:
Operating 15,128 20,040 14,875 25,765 28,918
General and administrative 4,937 7,539 5,760 9,718 10,085
Provision for bad debts 898 3,326 3,467 6,320 4,467
Depreciation and amortization 252 597 369 1,034 1,603
(Gain) loss on sale of freestanding facilities (note 2) -- (2,465) -- 4,440 --
Gain on sale of repossessed property (note 2) (299) -- -- -- --
Writedown of long-term assets (note 3) -- 430 696 461 2,228
Gain on sale of extended care division assets (note 4) (301) -- -- -- --
Other (credits) charges:
Equity in earnings of Joint Venture (note 1) -- -- -- -- (835)
Gain on sale of Joint Venture (note 1) -- -- -- -- (3,542)
Interest expense -- MEDIQ -- 757 1,042 1,097 1,171
Interest expense -- other 342 166 93 290 366
Other income, net (note 5) (37) -- (662) (233) (223)
---------------------------------------------------------------
20,920 30,390 25,640 48,892 44,238
---------------------------------------------------------------
Income (loss) before income taxes and extraordinary item (2,532) (1,096) (4,789) (14,222) (3,129)
Income tax (benefit) expense 39 93 -- (308) 894
---------------------------------------------------------------
Income (loss) before extraordinary item (2,571) (1,189) (4,789) (13,914) (4,023)
Extraordinary item -- gain (loss) on early extinguishment
of debt (note 6) -- 9,185 -- (463) --
---------------------------------------------------------------
Net income (loss) $ (2,571) 7,996 (4,789) (14,377) (4,023)
===============================================================
Income (loss) per share-basic and diluted
Income (loss) before extraordinary item $(376.92) (175.68) (732.37) (2,195.68) (634.84)
Extraordinary item -- 1,357.12 -- (73.06) --
---------------------------------------------------------------
Income (loss) per share - basic (note 7) $(376.92) 1,181.44 (732.37) (2,268.74) (634.84)
===============================================================
Income (loss ) per share - diluted (note 7) $(376.92) 1,181.44 (732.37) (2,268.74) (634.84)
===============================================================
Weighted average shares outstanding:
basic (note 7) 6,821 6,768 6,539 6,337 6,337
---------------------------------------------------------------
diluted (note 7) 6,821 6,768 6,539 6,337 6,337
===============================================================
BALANCE SHEET DATA (IN THOUSANDS)
Working capitial - (deficiency) $ (3,016) $ (2,011) $(11,245) $ 2,566 $ 5,923
Total assets 2,282 7,699 11,414 15,669 30,283
Long term debt, less current maturities 5 176 1,456 257 2,422
Due to MEDIQ, less current maturities (note 8) -- -- -- 9,967 10,733
Stockholders' (deficit) equity (2,453) (134) (8,270) (3,582) 10,795
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
(dollars in thousands,
Consolidated Statements of Operations Data: except share and per share amounts)
2000 1999
------- --------
<S> <C> <C>
Net Revenues:
Capitated revenue 13,972 11,616
Net fee-for-service revenue 497 2,636
------- --------
14,469 14,252
------- --------
Costs and expenses:
Operating 11,115 11,409
General and administrative 2,895 4,049
Provision for bad debts 68 1,053
Depreciation and amortization 72 206
(Gain) loss on sale of freestanding facilities (note 2) -- --
Gain on sale of repossessed property (note 2) -- (299)
Writedown of long-term assets (note 3) -- --
Gain on sale of extended care division assets (note 4) -- (301)
Other (credits) charges:
Equity in earnings of Joint Venture (note 1) -- --
Gain on sale of Joint Venture (note 1) -- --
Interest expense -- MEDIQ -- --
Interest expense -- other 111 274
Other income, net (note 5) (201) 481
------- --------
14,060 16,872
------- --------
Income (loss) before income taxes and extraordinary item 409 (2,620)
Income tax (benefit) expense 48 67
------- --------
Income (loss) before extraordinary item 361 (2,687)
Extraordinary item -- gain (loss) on early extinguishment
of debt (note 6) -- --
------- --------
Net income (loss) 361 (2,687)
======= ========
Income (loss) per share-basic and diluted
Income (loss) before extraordinary item 49.54 (395.55)
Extraordinary item -- --
------- --------
Income (loss) per share - basic (note 7) 49.54 (395.55)
======= ========
Income (loss ) per share - diluted (note 7) 40.25 (395.55)
======= ========
Weighted average shares outstanding:
basic (note 7) 7,287 6,793
------- --------
diluted (note 7) 8,970 6,793
======= ========
BALANCE SHEET DATA (IN THOUSANDS)
Working capitial - (deficiency) $(1,272) $ (3,563)
Total assets 2,328 2,371
Long term debt, less current maturities 1,300 9
Due to MEDIQ, less current maturities (note 8) -- --
Stockholders' (deficit) equity (2,097) (2,694)
</TABLE>
15
<PAGE> 17
Notes to Selected Consolidated Financial Data:
(1) Effective August 1, 1994, we formed a joint venture ("Joint Venture") to
combine our contract management business with that of Horizon Mental Health
Services, Inc. ("Horizon"). The Joint Venture, which was owned 27.5% by us
and 72.5% by Horizon, managed both companies' hospital behavioral health
care contracts. The operating results of the contract management business
were included in our results of operations through the commencement of the
Joint Venture on August 1, 1994. On March 20, 1995, Horizon completed its
initial public offering and, in accordance with the terms of the Joint
Venture Agreement, acquired our interest in the Joint Venture for
approximately $9,600,000 (net of related expenses). The sale resulted in a
pre-tax gain of $3,542,000 (approximately $500,000 net of taxes).
(2) We completed the sale of six of our seven freestanding behavioral health
facilities in 1996 and recorded a loss of $4,440,000 consisting primarily of
the write off of intangibles related to the facilities of $3,184,000, loss
on the sale of certain property, plant, and equipment aggregating $319,000,
transaction expenses of $568,000, severance expenses of $349,000, and other
expenses of $680,000, offset by estimated Medicare depreciation recapture
income of approximately $660,000. In April 1998, we sold our last inpatient
psychiatric hospital operation and reported a gain on sale of $2,465,000. In
March 1999, we sold a hospital property that we reacquired in September
1998, and a gain of $299,000 on the sale of repossessed property.
(3) In the fourth quarter of 1995, we determined that the recoverability of
certain of the assets, including property, plant and equipment and goodwill,
related to one of our freestanding facilities, were impaired, other than
temporarily. Accordingly, the carrying value of such assets was reduced to
estimated fair value, resulting in a charge of $2,228,000. In the fourth
quarter of 1996, we wrote off the assets related to the discontinued
operations of Supportive Counseling Care ("SCC") including property, plant
and equipment and goodwill resulting in a charge of $461,000. In the fourth
quarter of 1997, we decided to dispose of the Florida and North Carolina
operations of our Extended Care Services subsidiary and close our Atlanta,
Georgia billing office. In connection with these decisions, we determined
that goodwill relating to the acquisition of HCI was partially impaired and
was written down to an estimated value resulting in a charge of $696,000. In
the fourth quarter of 1998, we decided to dispose of certain assets and
contractual rights of our Extended Care Services subsidiary. In connection
with this decision, we determined that goodwill and other intangibles
related to the prior acquisition of HCI and Apogee operations by Extended
Care Services were permanently impaired and were written down to an
estimated value resulting in a charge of $430,000.
(4) In the first quarter of 1999, we sold certain assets of our Extended Care
Services subsidiary, which resulted in a gain of $301,000.
(5) In May 1997, the Supreme Court of Delaware upheld a lower court award of
$459,000 we were due from Horizon relating to our rights to receive certain
cash flows as part of the sale of our interest in the joint venture to
Horizon resulting in additional income in fiscal 1997. In September 1999, we
completed negotiations with ICH Services, LLC (ICH) regarding certain
additional consideration payable to ICH as a result of our acquisition of
certain assets from ICH in November 1993. Based on the final settlement we
paid less consideration than we had projected. As a final settlement, we
paid additional consideration of 500 shares of our common stock to ICH.
The common stock was issued in September 1999 at its fair value of
approximately $109,000. The gain from the settlement was applied to the
remaining balance of goodwill recorded as of September 30, 1999 from the
initial purchase of the assets. The net gain of $17,000 is reported as other
income in fiscal year 1999.
(6) In 1996, we recorded an extraordinary loss in the amount of $463,000
consisting primarily of costs related to the early retirement of a portion
of our long-term debt and the write-off of associated loan acquisition
costs. In July 1998, we settled a judgment in the amount of $11,800,000 for
$3,000,000 in cash that was brought against us by our former parent MEDIQ.
As a result of this transaction, the Company recorded a gain on early
extinguishment of debt of $9,185,000.
(7) In 2000, our 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. We purchased all fractional
shares resulting from this transaction based on a pre-stock split fair
market value of $.45 per share. This value was determined through a third
party valuation that we secured. We paid approximately $66,000 for the
purchase of fractional shares. All share and per share amounts in the
condensed consolidated financial statements have been retroactively restated
to effect this 500 to 1 reverse stock split. As of June 30, 2000, 15,000,000
shares of common stock are authorized and 7,287 shares are issued and
outstanding.
(8) The Company's long-term debt obligations to MEDIQ were reclassified as a
current liability in 1997. The MEDIQ obligation was settled in July 1998.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the condensed consolidated financial statements and
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of factors including, but not limited to,
those discussed under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Historically, we have provided on-site behavioral health services through
our subsidiaries MHM Correctional Services, Inc. ("MHM Correctional Services")
and MHM Extended Care Services, Inc. ("MHM 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 divestiture of all of our
seven freestanding behavioral healthcare facilities.
We formed MHM Correctional Services in 1997 and in the fourth quarter of
1997 that entity 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 facilities. In the second quarter of 1999,
MHM 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, we made a determination to focus our strategic growth
efforts on MHM Correctional Services. As a result, we sold most of the
operations of MHM Extended Care Services, which had been operating unprofitably,
by the first quarter of fiscal year 1999.
MHM Extended Care Services had been providing mental health services to
Medicaid residents in nursing homes throughout the State of Georgia under a
contract with the Georgia Department of Medical Assistance that expired on June
30, 1997. Because MHM Extended Care Services did not have sufficient resources
and because of our decision to discontinue its operations, MHM Extended Care
Services did not seek to effect a renewal of the contract. Since we were aware
of the opportunity, however, and because MHM Correctional Services was already
operating in Georgia under its contract with the Georgia Department of
Corrections, MHM Correctional Services sought to procure a contract with the
Georgia Department of Medical Assistance. In May 1999, through a competitive bid
process, MHM Correctional Services was awarded a one-year contract 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 for another
year. Between July 1, 1997 and the time the contract was awarded to MHM
Correctional Services, MHM Extended Care Services continued to provide services
for the Georgia Department of Medical Assistance.
In July 1999, MHM 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, MHM 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.
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.
RESULTS OF OPERATIONS
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 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
17
<PAGE> 19
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, net of expenses, in investment capital through this offering. 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.
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.
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-
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<PAGE> 20
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.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Net revenues for the year ended September 30, 1999, were $18,388,000 as
compared to $29,294,000 for the prior year, a decrease of $10,906,000 or 37%,
which reflects the divestiture of assets in the third quarter of 1998 and in the
first quarter of 1999. Net revenues from MHM Correctional Services were
$14,324,000 in 1999 compared to $10,888,000 in 1998. MHM Correctional Services
revenues increased $3,436,000 or 32% due to the new contracts that began in
April, May and July of 1999. Net revenues from the MHM Extended Care Services
were $4,546,000 in 1999 as compared to $15,326,000 in 1998, a decrease of
$10,780,000 or 70%. The portion of the MHM Extended Care Services operations
that were sold in December 1998, accounted for $9,291,000 of the decrease. The
remaining reduction in the MHM Extended Care Services revenues is primarily
attributable to renewal of the Georgia Medicaid contract in the MHM Correctional
Services subsidiary effective May 1, 1999. In April 1998, we sold our last
freestanding facility, Mountain Crest Hospital. Net revenues from freestanding
facilities were $2,793,000 for 1998. Settlements on third party cost reports
related to our hospital division had a negative impact of $482,000 on net
revenues in 1999 as compared to a $287,000 positive impact on net revenues in
1998.
Operating expenses for the year ended September 30, 1999, were $15,128,000
as compared to $20,040,000 in the prior year, a decrease of $4,912,000 or 25%.
This decrease was attributable primarily to the divestiture of certain assets in
the third quarter of 1998 and first quarter of 1999. Operating expenses for MHM
Correctional Services were $12,075,000 in 1999 compared to $9,613,000 in 1998.
MHM Correctional Services operating expenses increased $2,462,000 or 26%
primarily due to the new contracts added in 1999. MHM Extended Care Services
operating expenses were $3,053,000 in 1999 as compared to $8,730,000. The
decrease of $5,677,000 or 65% reflects the sale of substantially all of the MHM
Extended Care Services' operation with the exception of the Medicaid Georgia
contract. The sale of Mountain Crest Hospital in April 1998 and the decrease in
wind-up costs associated with hospitals sold in 1996 accounted for $1,697,000 of
the decrease in operating expenses between 1999 and 1998.
General and administrative expenses for the year ended September 30, 1999,
were $4,937,000 as compared to $7,539,000 in prior year, a decrease of
$2,602,000 or 35%. Again, this decrease was attributable primarily to the
divestiture of certain assets in the third quarter of 1998 and first quarter of
1999. MHM Correctional Services general and administrative expenses were
$825,000 in 1999 as compared to $483,000 in 1998. General and administrative
expenses increased by $342,000 as a result of additional personnel and facility
costs associated with the new contracts secured by the subsidiary in 1999. MHM
Extended Care Services general and administrative expenses were $1,699,000 as
compared to $3,934,000 in 1998. The decrease of $2,235,000 reflects the sale of
certain MHM Extended Care Services operations in fiscal year 1998 and the first
quarter of 1999. The sale of Mountain Crest Hospital in April 1998 accounted for
$917,000 of the decrease in general and administrative expenses between 1999 and
1998. Corporate general and administrative expenses were $2,342,000 in 1999 as
compared to $2,238,000 in 1998. The increase in general and administrative
expenses of $104,000 is attributed to increasing development efforts to grow the
correctional services business.
The provision for bad debts for 1999 decreased to $898,000 as compared to
$3,326,000 for 1998. As a percentage of net revenues, the provision for bad
debts was 4.9% in 1999 and 11.4% in 1998. The divestiture of certain operations
in the third quarter of 1998 and first quarter of 1999 has changed our operation
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 1998 bad debt provision related
primarily to the estimated net realizable value of receivables generated in the
MHM Extended Care Services subsidiary and reserves on receivables remaining
after the sale of our 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 MHM Extended
Care Services assets.
Depreciation and amortization decreased to $252,000 in 1999 from $597,000
in the prior year due to the sale of certain operations in the third quarter of
1998 and first quarter of 1999.
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<PAGE> 21
In March 1999, we received $1,470,000 from the sale of a hospital property
that we reacquired in September 1998 in a foreclosure. As a result of this
transaction, we recorded a gain on the sale of $299,000 in 1999. In April 1998,
we sold our last remaining freestanding psychiatric hospital operation, Mountain
Crest Hospital in Fort Collins, Colorado for a cash price of approximately
$6,500,000. As a result of the transaction, we reported a one-time gain of
$2,465,000 in 1998.
In December 1998, we sold certain assets related to the delivery of
mental health services to residents of extended care facilities in the states of
Pennsylvania, Georgia, Tennessee and Massachusetts. We received consideration of
$1,020,000 for these transactions and recorded a gain on these sales of $301,000
in 1999.
As a result of a settlement between MEDIQ, our former parent, and us in
July 1998, there was no interest expense recorded for the note payable to MEDIQ
in 1999 as compared to $757,000 in 1998. Other interest expense increased by
$176,000 from $166,000 in 1998 to $342,000 in 1999. The increase in other
interest expense was the result of interest costs related to the MHM Extended
Care Services revolving line of credit with HealthCare Financial Partners, the
six-month loan with HealthCare Financial Partners utilized to settle the MEDIQ
note, and the increase in the line of credit with Bank of America used to fund
current operations.
Other income of $37,000 is attributable to $28,000 from interest income
earned on certificates of deposit serving as performance bonds for existing
contracts, $20,000 in other fees paid for an extension of payment terms for a
note due to us and $5,000 from interest earned on operating cash accounts. We
realized a gain of $17,000 from the final settlement with the former partners of
ICH in regards to additional consideration due the partners from the acquisition
of HCI Services, Inc. in 1993. In addition, we realized a $33,000 loss on
disposal of certain assets.
In July 1998, in return for a $3,000,000 payment, we settled an
$11,800,000 judgment, brought against us by MEDIQ, our former parent. As a
result of this settlement, we recognized an extraordinary gain of $9,185,000
related to early extinguishment of debt.
The net loss in 1999 was $2,571,000 as compared to net income in 1998 of
$7,996,000. Approximately $1,722,000 of our 1999 net loss can be attributed to
the assets and operations sold in the sale of Mountain Crest Hospital and
Oakview Hospital, as well as the sale of MHM Extended Care Services' operations.
The net income for 1998 was primarily derived from the gain on sale of our last
freestanding hospital and the extraordinary gain on the MEDIQ settlement.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Net revenues for the year ended September 30, 1998, were $29,294,000 as
compared to $20,851,000 for the prior year, an increase of $8,443,000 or 40%,
primarily reflecting the revenue growth from MHM Correctional Services in 1998.
Net revenues from the MHM Correctional Services were $10,888,000 in 1998
compared to $632,000 in 1997. MHM Correctional Services commenced operations in
February 1997. Net revenues from the MHM Extended Care Services were $15,326,000
in 1998 as compared to $13,737,000 in 1997, an increase of $1,589,000 or 12%.
This increase is due principally to the revenues related to two acquisitions
made by our MHM Extended Care Services subsidiary during fiscal 1997; Liberty
Bay (December 1996) and Apogee (March 1997). In April 1998, we sold our last
freestanding facility, Mountain Crest Hospital. As a result, net revenues from
freestanding facilities were $2,793,000 for 1998 compared to $6,482,000 for
1997. Net revenues from favorable settlements on third-party costs reports were
$762,000 in 1998.
Operating expenses for the year ended September 30, 1998, were
$20,040,000, as compared to $14,875,000 in the prior year, an increase of
$5,165,000 or 35%. The increase was attributable primarily to increased costs in
MHM Correctional Services, which commenced operations in 1997.
General and administrative expenses for the year ended September 30, 1998,
were $7,539,000 as compared to $5,760,000 in 1997, an increase of $1,779,000 or
31%. Again, the increase in general and administrative expenses was attributed
to increased costs in MHM Correctional Services, which commenced operations in
1997.
The provision for bad debts for 1998 decreased to $3,326,000 as compared
to $3,467,000 for 1997. As a percentage of net revenues, the provision for bad
debts was 11.4% in 1998 and 16.6% in 1997. Increased revenues from MHM
Correctional Services have primarily caused this reduction. Because these
revenues are paid on a capitated basis, there are fewer collectibility
uncertainties. The 1998 bad debt provision relates to the estimated net
realizable value of receivables generated from MHM Extended Care Services and
reserves on receivables remaining after the sale of the freestanding facilities.
The decline for the 1998 bad debt provision reflects an overall reduction in
accounts receivable remaining after the sale of the
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<PAGE> 22
freestanding facilities and the sale of certain operations in MHM Extended Care
Services.
Depreciation and amortization increased to $597,000 in 1998 from $369,000
in the prior year. We reevaluated useful lives and accelerated amortization of
goodwill and other intangibles related to the Liberty and Apogee acquisitions,
beginning October 1, 1997. Amortization costs in 1998 were $406,000 as compared
to $184,000 in 1997.
In preparation for the divestiture of certain operations of MHM Extended
Care Services, we took a write down of $430,000 of goodwill and capitalized
start-up costs from the acquisition of our extended care operations of Apogee
and HCI.
In April 1998, we sold our last remaining freestanding psychiatric
hospital operation, Mountain Crest Hospital in Fort Collins, Colorado for a cash
price of approximately $6,500,000. As a result of the transaction, we reported a
one-time gain of $2,465,000.
Other interest expense increased 78% in 1998 to $166,000 from $93,000 in
1997. This increase is primarily caused by interest costs for the revolving line
of credit with HealthCare Financial Partners, the line of credit with Bank of
America (previously NationsBank) and the six-month loan with HealthCare
Financial Partners.
In July 1998, in return for a $3,000,000 payment, we settled an
$11,800,000 judgment, brought against us by MEDIQ, our former parent. As a
result of this settlement, we recognized an extraordinary gain of $9,185,000
related to early extinguishments of debt.
Net income for 1998 was $7,996,000 as compared to a net loss for 1997 of
$4,789,000. The net income for 1998 was primarily derived from the sale of our
last freestanding hospital and the extraordinary gain from the MEDIQ settlement.
The gain from sale of the freestanding hospital and the operation of MHM
Correctional Services in Georgia and Tennessee generated taxable income in
certain states resulting in an estimated state tax provision of $93,000 in 1998.
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, net of expenses, in
investment capital through this offering. 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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DESCRIPTION OF BUSINESS
OUR HISTORY
We were formerly known as Mental Health Management, Inc. We were founded
in the late 1970's to develop and manage psychiatric inpatient units in general
hospitals. We were subsequently purchased by Michael S. Pinkert, our current
chief executive officer and a director, and other investors in 1981 and quickly
grew to become one of the largest providers of inpatient mental health care in
general hospitals. We also owned freestanding psychiatric and substance abuse
hospitals.
In 1986, MEDIQ, Inc., a publicly traded company, purchased us. Eight years
later, in 1994, MEDIQ divested itself of us to its stockholders, making us a
freestanding public company. At that time, a decision was made to exit the
inpatient business and shift to outpatient services. In particular, we decided
to focus on services that could be provided on-site instead of at facilities to
which patients had to travel. To implement this decision, most of our hospital
operations and all of our management contract operations were sold in several
transactions in 1996 and 1997. Through our wholly owned subsidiary, MHM Extended
Care Services, Inc., a series of acquisitions were made to establish a new
business for providing on-site mental health services to nursing home patients.
This business, which grew to gross revenues of approximately $15 million by
1998, included a statewide contract in Georgia with the Georgia Department of
Medical Assistance (called the "PASARR" program) to provide mental health
services to all of the state's Medicaid patients residing in over 300 nursing
homes. However, because the Medicare Program covered most of the nursing home
patients to whom we provided mental health services, we became dependent on
Medicare for most of our revenues (with the exception of the PASARR program).
During 1997, we believed Medicare altered the way it viewed and treated the
provision of mental health services in nursing homes. In our opinion, these
changes made this business unprofitable. As a result, we decided to seek other
markets that did not involve Medicare.
By December 31, 1998, all the nursing home related operations (with the
exception of the PASARR program) were sold and we focused our development
efforts completely on providing mental health services to inmates incarcerated
in correctional facilities. Starting with a small contract to provide dental
services to inmates in the Delaware state prison system, we began our current
business of providing healthcare services in correctional facilities. Our wholly
owned subsidiary, MHM Correctional Services, was then awarded two statewide
contracts to provide mental health services to inmates in the Georgia and
Tennessee correctional systems.
OUR BUSINESS
Since 1998, our primary business has been arranging for and managing the
delivery of mental health services to inmates in prisons and jails. This
business has been conducted through a wholly owned subsidiary corporation, MHM
Correctional Services, Inc. MHM Correctional Services provides mental health
services at over 60 correctional facilities and covers more than 55,000 inmates
through statewide contracts with the departments of corrections of Georgia and
Tennessee, a subcontract covering a women's correctional facility in Florida,
and the departments of juvenile justice of Georgia and Florida.
We provide these services under what are known as "capitation"
arrangements. Capitation means we are paid a fixed fee for each inmate eligible
for our services. For that fixed fee, we are required to provide all psychiatric
and psychological services, as well as any psychotropic drugs (i.e., medications
prescribed for mental illness), which are needed by any eligible inmates.
However, we are not responsible for providing inpatient hospitalization that is
provided outside the correctional facilities. The exact level of care we are
required to provide for the inmate population is established by each contract.
We also continue to provide mental health services through the PASSAR
program under a contract with the Georgia Department of Medical Assistance to
2,400 nursing home patients in the state. These services consist of on-site
psychiatric and psychological services. The Georgia Department of Medical
Assistance pays us for these services on a "case rate" basis. This means we are
paid a fixed amount for each patient to whom treatment is provided.
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Details on several of our contracts are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Revenue from Revenue for nine
Current Contracts for Fiscal months ended
Client Expiration (1) Description of Contract Year 1999 June 30, 2000 (2)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Georgia Department of June 30, 2001, with two PASARR Program $3.6 Million $2.9 Million
Medical Assistance possible one-year
renewal terms
Georgia Department of June 30, 2001, with two Statewide mental health $9.0 Million $7.1 Million
Corrections options to renew for one staffing for approximately
additional year 40,000 inmates
Tennessee Department June 30, 2001, with the Statewide mental health $2.1 Million $1.7 Million
of Correction option to renew for one staffing for approximately
additional year 13,000 inmates
Broward Correctional March 31, 2002, with two Mental health staffing for $1.5 Million $2.5 Million
Institute possible one-year 632 bed women's prison with
(Subcontract with Prison renewal terms 48 inpatient beds
Health Systems)
Georgia Department of Continuous contract with Mental health staffing for $86,000 $213,000
Juvenile Justice no set date of five facilities
termination
Marion Youth Centers February 1, 2003 Medical and mental $0 $66,000
(Subcontract with Career health staffing for two
Systems Development facilities
Corporation)
Harrison County Continuous Contract with $0 $0
Commission no set date of Mental health staffing for
of Mississippi termination Harrison County Jail
(Subcontract
with NaphCare, Inc.)
Florida Department of June 30, 2001 Medical and mental health $0 $0
Juvenile Justice staffing
</TABLE>
(1) All renewal terms referenced in the above chart are subject to
early termination by the client, in its sole discretion.
(2) Contracts reporting $0 revenues for the nine-month period ended
June 30, 2000, were signed effective July 1, 2000. Projected
annual revenues from the Harrison County and Florida Department
Juvenile Justice contracts are $75,000 and $82,000, respectively.
The services we provide are rendered only by licensed mental health
professionals who we either employ on a full or part-time basis, or by licensed
mental health professionals who are independent contractors. All non-licensed
psychiatric staff involved in providing these services at the correctional
facilities in Georgia and Tennessee are employed directly by the departments of
corrections of those states.
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<PAGE> 25
Our statewide contracts in both Georgia and Tennessee are supervised by a
full-time program manager and a full-time medical director. In addition,
personnel in regional offices who work on business development; quality
assurance and other administrative duties support each contract. A Vice
President of Quality Assurance and a part-time National Medical Director in turn
support this regional staff.
The majority of our management and financial services are provided from
our corporate office located in Vienna, Virginia. Our key officers at corporate
headquarters are Michael S. Pinkert, Chairman of the Board and Chief Executive
Officer; Steven H. Wheeler, President and Chief Operating Officer: Cleveland E.
Slade, Vice President, Secretary, and Chief Financial Officer; and Dayna
Stewart, Vice President of Marketing and Development.
Michael S. Pinkert has been our Chief Executive Officer and director since
he purchased the company in 1981. He was formerly Vice President of Psychiatric
Institutes of America ("PIA") from 1979 to 1981. Prior to that, he was Vice
President of Charter Medical Corporation from 1976 to 1977 where he was
responsible for international marketing. He also worked in conjunction with
Charter Medical Corporation and Psychiatric Institutes of America from 1974 to
1975 in establishing a hospital management company in Iran. Mr. Pinkert has
worked in the health care management and consulting industry for over 30 years.
Mr. Pinkert became Chairman of the Board of Directors in May 2000.
Steven H. Wheeler is currently our President and Chief Operating Officer.
Mr. Wheeler joined us in May 1994 and previously served as Vice President of
Operations beginning in December 1997. Prior to that, he served as Vice
President of Integrated Delivery Systems. Before joining us, Mr. Wheeler was
Director of Business Development/Operations for Florida Psychiatric Group from
April 1993 to February 1994; General Manager of Psych Options, Inc. from March
1992 to April 1993; and Regional Director of Operations of Merit Behavioral Care
Corporation (formerly American Biodyne) from May 1990 to February 1992. Mr.
Wheeler was promoted to President and Chief Operating Officer of the company in
May 2000.
Cleveland E. Slade has been Vice President of Finance and Chief Financial
Officer since July 1998. Previously, Mr. Slade served as Vice President of
Finance, Chief Financial Officer and Secretary of Sheppard Pratt Foundation from
February 1997 to June 1998. Mr. Slade also served as our regional controller and
the corporate controller from September 1994 to January 1997.
Dayna Stewart joined us beginning June 1, 2000 as Vice President of
Marketing and Development. Ms. Stewart was formerly associated with The Brown
Schools as Vice President for Development where she was responsible for
acquisitions and development and Cornell Corrections, Inc. where she was
responsible for marketing and development for the juvenile division.
OUR INDUSTRY
We believe there are significant opportunities for the expansion of our
core business of delivering mental health services to inmates in correctional
facilities. In the United States today there are approximately 6.3 million
adults, or 3.1% of all U.S. residents, under some form of correctional
supervision, including varying levels of incarceration, probation or parole.
According to the U.S. Department of Justice's Bureau of Justice Statistics,
there were 1.9 million more adults under correctional supervision in 1999 than
in 1990. During 1999, the correctional population increased by 2.7%. There are a
number of factors contributing to this increase in incarceration rates including
mandatory sentencing rules coupled with increased conviction rates, an increase
in prison and jail terms for drug-related offenses, longer sentences, and
pressures to reduce or eliminate parole.
All of these inmates have a guaranteed legal right to healthcare. In fact,
in many instances, courts have specifically required the government to provide
such care. As a rule, the healthcare provided to inmates must be of the same
quality and accessibility as in the community at large. In determining these
community standards that set the level of care to which inmates are entitled,
comparison often is made to the level of care available to patients in state
Medicaid programs.
It has been estimated that the cost of providing general healthcare to
inmates in correctional facilities is between $3-5 billion annually. Providers
of healthcare to inmates also estimate that approximately 20% of this cost is
incurred in providing services to the mentally ill. In addition, the Justice
Department's Bureau of Justice statistics estimates that between 1997 and 1998,
there were 283,800 mentally ill offenders being held in the nation's state and
federal prisons and local jails, and an additional 547,800 mentally ill people
on probation in the community. These estimates suggest that the potential market
for mental health services in correctional facilities may be between $600
million to $1 billion per year.
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The national problem of addictive diseases is particularly acute in
correctional facilities. The U.S. Department of Justice estimates that 60% of
the total prison population suffers from addiction problems. It is also
estimated that about 14% of the nation's prison inmates and 7% of jail inmates
suffer from other serious mental illnesses. According to a survey by the Federal
Bureau of Justice Statistics, 52% of state prisoners and 34% of federal
prisoners represent they were under the influence of alcohol or drugs at the
time they committed their crimes. However, only 12% of state inmates receive
formal drug treatment while in prison. This is particularly troublesome to
correctional officials in light of a Federal Bureau of Prisons study showing
that 12.1% of inmates who needed but did not receive drug treatment while
incarcerated were re-arrested within six months after release. By comparison,
only 3.3% of such prisoners who did receive drug treatment were re-arrested
within that time period.
As more addicted and mentally ill offenders enter correctional facilities,
correctional officials are increasingly being required to focus on providing
behavioral healthcare to the inmates under their control. One increasingly major
problem for correctional systems is the provision of psychotropic medications
due to the rapidly increasing cost of these drugs. In addition, the problem of
recruiting and hiring qualified mental health professionals, as well as managing
them in programs that provide cost-effective care, is also becoming increasingly
difficult. These and other management and cost issues surrounding the provision
of mental health services have motivated corrections officials to turn to
outside private contractors to assist them. It is estimated that private
providers are furnishing presently only 38% of mental healthcare services in
correctional facilities.
OUR PLAN FOR GROWTH
We have been experiencing an upsurge of inquiries from state and local
correctional systems that have mental health specific problems and who are
looking for assistance in dealing with them. Many of these correctional systems
solicit offers from the private sector for the provision of inmate healthcare
services by issuing "Requests for Proposals" or "RFPs." Our success in
responding to such RFPs has enabled us to achieve a dominant position in the
correctional mental health services market. To achieve greater growth rates, our
strategy is to:
- enter into consulting arrangements with corrections systems which
may lead to larger contracts without requiring RFP procedures;
- expand into other specialty programs such as programs dealing with
substance abuse and self-injurious problems; and
- more aggressively market our services and experiences to
departments of corrections before RFPs are issued.
In order to implement this strategy, we have added a new Vice President
for Marketing and Development to lead our marketing staff. We also are seeking
to hire additional full-time marketing personnel. We intend to augment this
staff with part-time consultants located in key markets who are familiar with
the correctional facilities in those markets. Our marketing plans also include
expanding on-site visits, increasing our participation in professional programs,
and developing a national advertising campaign. To support this marketing
effort, we also are developing new lines of consulting products covering
caseload management, pharmacy management, and measurement of the outcomes of
treatment.
Our primary competition for providing mental healthcare to inmates is
established firms that provide healthcare to inmates for physical illnesses.
Some of these companies directly provide mental health services along with
physical medicine and others engage subcontractors to provide mental healthcare.
The three leading inmate healthcare providers are Correctional Mental Services,
Inc., Prison Health Services, Inc., and Wexford Health Services.
We are familiar with most of these providers and in fact have jointly
submitted proposals with these providers on certain contracts to the state. For
instance, we obtained the contract with the Florida Department of Corrections
for the women's facility in Broward County in a joint proposal with Prison
Health Services, a subsidiary of America Services Group.
AVAILABLE INFORMATION
We are a public company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. Copies of such reports, proxy and other information may be read and
copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can request copies of such documents by writing to the SEC and
paying a fee for the copying cost. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains a web site at (http: //www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
25
<PAGE> 27
This prospectus is part of a Registration Statement on Form S-2 that we
filed with the SEC. Certain information in the Registration Statement has been
omitted from this prospectus in accordance with the rules and regulations of the
SEC. We have also filed exhibits and schedules with the Registration Statement
that are excluded from this prospectus. For further information you may:
- read a copy of the Registration Statement, including the exhibits and
schedules, without charge at the SEC's Public Reference Room; or
- obtain a copy from the SEC upon payment of the fees prescribed by the
SEC.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" certain of our publicly
filed documents into this prospectus, which means that information included in
these documents is considered part of this prospectus. We incorporate by
reference in this prospectus:
- Our Annual Report on Form 10-K for the fiscal year ended September
30, 1999;
- Our Quarterly Report on Form 10-Q for the three-month period ended
December 31, 1999;
- Our Current Report on Form 8-K filed on March 23, 2000;
- Our Annual Report of Employee Stock Purchase, Savings and Similar
Plans on Form 11-K for the fiscal year ended September 30, 1999;
- Our Quarterly Report on Form 10-Q for the six-month period ended
March 31, 2000; and
- Our Quarterly Report on Form 10-Q for the nine-month period ended
June 30, 2000.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our bylaws provide generally for indemnification of our officers,
directors, agents and employees to the extent authorized by the Delaware General
Corporation law. Pursuant to Section 145 of the Delaware General Corporation
Law, a corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interests of the corporation, and with respect to any criminal action they
had no reasonable cause to believe their conduct was unlawful. With respect to
suits by or in the right of a corporation, however, indemnification is not
available if such person is adjudged to be liable for negligence or misconduct
in the performance of his duty to the corporation unless the court determines
that indemnification is appropriate. The statute also expressly provides that
the power to indemnify authorized thereby is not exclusive of any rights granted
under any bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise.
As permitted by Section 102 of the Delaware General Corporation Law, our
stockholders have approved and incorporated provisions into our Certificate of
Incorporation eliminating a director's personal liability for monetary damages
to the Company and its stockholders arising from a breach of a director's
fiduciary duty, except for liability under Section 174 of the Delaware General
Corporation Law or liability for any breach of the director's duty of loyalty to
us or our stockholders, for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law or for any transaction in
which the director derived an improper personal benefit. The determination of
whether indemnification is proper under the circumstances, unless made by a
court, shall be made by a majority of a quorum of disinterested members of the
Company's Board of Directors, independent legal counsel or the stockholders of
the Company. The Company has purchased directors and officers liability
insurance in an amount totaling $5,000,000, subject to certain deductions.
The above discussion of the Company's Bylaws and Certification of
Incorporation of the Delaware General Corporation Law is not intended to be
exhaustive and is qualified in its entirety by such Bylaws, Certificate of
Incorporation, and statute.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the forgoing provisions, the registrant has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
26
<PAGE> 28
LEGAL MATTERS
Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Reston, Virginia, have
passed upon the validity of the shares of common stock offered by this
prospectus.
EXPERTS
The consolidated financial statements of MHM Services, Inc. as of
September 30, 1999 and 1998, and for each of the years in the three year period
ended September 30, 1999 included in this prospectus and elsewhere in the
registration statement have been included herein in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere in this
prospectus, given on the authority of that firm as experts in accounting and
auditing.
27
<PAGE> 29
MHM SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 29
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998, and 1997 30
Consolidated Balance Sheets at September 30, 1999, and 1998 31
Consolidated Statements of Stockholders' Deficit for the
three years ended September 30, 1999 32
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998, and 1997 33 - 34
Notes to Consolidated Financial Statements 35 - 50
Condensed Consolidated Statements of Operations
for the three-and nine-month periods ended June 30, 2000 and 1999 (Unaudited) 51
Condensed Consolidated Balance Sheets at June 30, 2000 (Unaudited) and
September 30, 1999 52
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended June 30, 2000 and 1999 (Unaudited) 53
Notes to Condensed Consolidated Financial Statements (Unaudited) 54 - 57
</TABLE>
28
<PAGE> 30
Independent Auditors' Report
Board of Directors and Stockholders
MHM Services, Inc.:
We have audited the accompanying consolidated balance sheets of MHM Services,
Inc. and subsidiaries (the Company), as of September 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the years in the three-year period ended September 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MHM Services, Inc.
and subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
aggregated losses before extraordinary item of $8,549,000 for the three years
ended September 30, 1999, has an accumulated deficit of $44,678,000 as of
September 30, 1999, has a working capital deficiency of $3,016,000 as of
September 30, 1999, and is experiencing difficulty in generating sufficient cash
flows to meet its obligations and sustaining its operations, as further
discussed in Note 2 to the consolidated financial statements. Such conditions
raise substantial doubt as to the Company's ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
2 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG, LLP
McLean, Virginia
December 17, 1999, except for note 19,
which is as of March 21, 2000
29
<PAGE> 31
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Capitated revenue $ 16,181,000 14,430,000 3,865,000
Net fee-for service revenue 2,207,000 14,864,000 16,986,000
------------ ------------ ------------
18,388,000 29,294,000 20,851,000
------------ ------------ ------------
Costs and expenses:
Operating 15,128,000 20,040,000 14,875,000
General and administrative 4,937,000 7,539,000 5,760,000
Provision for bad debts 898,000 3,326,000 3,467,000
Depreciation and amortization 252,000 597,000 369,000
Gain on sale of freestanding facilities (note 4) -- (2,465,000) --
Gain on sale of repossessed property (note 4) (299,000) -- --
Writedown of long-term assets (note 6) -- 430,000 696,000
Gain on sale of extended care division assets (301,000) -- --
Other (credits) charges:
Interest expense - MEDIQ (note 11) -- 757,000 1,042,000
Interest expense - other 342,000 166,000 93,000
Other income, net (notes 3 and 5) (37,000) -- (662,000)
------------ ------------ ------------
20,920,000 30,390,000 25,640,000
------------ ------------ ------------
Loss before income taxes and extraordinary item (2,532,000) (1,096,000) (4,789,000)
Income tax expense (note 14) 39,000 93,000 --
------------ ------------ ------------
Loss before extraordinary item (2,571,000) (1,189,000) (4,789,000)
Extraordinary item - gain on early extinguishment
of debt (note 11) -- 9,185,000 --
------------ ------------ ------------
Net income (loss) $ (2,571,000) 7,996,000 (4,789,000)
============ ============ ============
Earnings (loss) per share-basic and diluted:
Loss before extraordinary item $ (376.92) (175.68) (732.37)
Extraordinary item -- 1,357.12 --
------------ ------------ ------------
Net income (loss) $ (376.92) 1,181.44 (732.37)
============ ============ ============
Weighted average shares outstanding 6,821 6,768 6,539
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS (NOTE 11) 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,000 54,000
Accounts receivable, less allowances of $337,000
and $4,438,000 in 1999 and 1998, respectively 1,094,000 2,706,000
Prepaid expenses 284,000 134,000
Estimated third-party payor settlements (note 7) 61,000 1,409,000
Repossessed property under contract for sale (note 4) -- 1,172,000
Other current assets (note 8) 269,000 171,000
------------ ------------
Total current assets 1,714,000 5,646,000
Property and equipment, net (note 9) 142,000 335,000
Restricted cash 275,000 526,000
Other intangibles, net of accumulated amortization of $0
and $395,000 in 1999 and 1998, respectively (notes 5 and 6) -- 431,000
Other assets 151,000 223,000
Goodwill, net of accumulated amortization of $0
and $419,000 in 1999 and 1998, respectively (notes 5 and 6) -- 538,000
------------ ------------
$ 2,282,000 7,699,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdrafts $ 24,000 --
Accounts payable 768,000 425,000
Accrued payroll and related expenses 607,000 830,000
Estimated third-party payor settlements (note 7) 784,000 1,181,000
Other accrued expenses (note 10) 1,085,000 2,054,000
Notes payable (note 11) 187,000 2,069,000
Line of credit (note 11) 1,000,000 500,000
Current maturities of long-term debt (note 11) 275,000 598,000
------------ ------------
Total current liabilities 4,730,000 7,657,000
Long-term debt (note 11) 5,000 176,000
------------ ------------
4,735,000 7,833,000
------------ ------------
Stockholders' deficit (note 19):
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 and 6,793 in 1999 and 1998, respectively) -- --
Additional paid-in capital 42,225,000 41,973,000
Accumulated deficit (44,678,000) (42,107,000)
------------ ------------
Total stockholders' deficit (2,453,000) (134,000)
------------ ------------
Commitments and contingencies (note 12)
$ 2,282,000 7,699,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 33
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Years ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED
ISSUED AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996 6,337 $ -- 41,732,000 (45,314,000) (3,582,000)
Issuance of common stock in
connection with Apogee
acquisition (note 5) 400 -- 100,000 -- 100,000
Exercise of stock options 6 -- 1,000 -- 1,000
Net loss -- -- -- (4,789,000) (4,789,000)
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1997 6,743 -- 41,833,000 (50,103,000) (8,270,000)
Exercise of stock options 50 -- 12,000 -- 12,000
Issuance of stock warrants in
connection with MEDIQ
settlement (note 16) -- -- 128,000 -- 128,000
Net income -- -- -- 7,996,000 7,996,000
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 6,793 -- 41,973,000 (42,107,000) (134,000)
Issuance of stock warrants in
connection with Line of Credit
(note 16) -- -- 143,000 -- 143,000
Shares issued in connection with
ICH earnout settlement (note 5) 494 -- 109,000 -- 109,000
Net loss -- -- -- (2,571,000) (2,571,000)
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1999 7,287 $ -- 42,225,000 (44,678,000) (2,453,000)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 34
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,571,000) 7,996,000 (4,789,000)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 252,000 597,000 369,000
Issuance of stock warrants 143,000 -- --
Provision for bad debts 898,000 3,326,000 3,467,000
Gain on sale of freestanding facilities -- (2,465,000) --
Gain on sale of extended care operations (301,000) -- --
Gain on sale of repossessed property (299,000) -- --
Gain on early extinguishment of debt -- (9,185,000) --
Loss on disposal of fixed assets 33,000 28,000 --
Writedown of long-term assets -- 430,000 696,000
Increase (decrease) in cash from changes in:
Accounts receivable and estimated third-party
payor settlements, net 1,665,000 (2,997,000) (5,000,000)
Income taxes refundable -- -- 662,000
Prepaid expenses and other (69,000) 141,000 (118,000)
Deferred rent -- (31,000) (198,000)
Accounts payable 343,000 (531,000) 170,000
Accrued payroll and related expenses (223,000) (162,000) 325,000
Accrued expenses - MEDIQ -- 817,000 698,000
Other accrued expenses (632,000) (308,000) 567,000
----------- ----------- -----------
Net cash used in operating activities (761,000) (2,344,000) (3,151,000)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of freestanding facilities and Joint Venture 870,000 3,688,000 --
Proceeds from sale of repossessed property 1,471,000 -- --
Disposals of extended care services assets 143,000 -- --
Capital expenditures for property, plant and equipment (45,000) (23,000) (178,000)
Collections on notes receivable 100,000 -- 190,000
Acquisitions of businesses -- -- (427,000)
Restricted cash 251,000 11,000 (231,000)
Other assets -- 65,000 (82,000)
Other liabilities -- (19,000) (6,000)
----------- ----------- -----------
Net cash provided by (used in) investing
activities 2,790,000 3,722,000 (734,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from cash overdrafts 24,000 -- --
Borrowings 3,514,000 12,651,000 4,110,000
Debt repayments (5,615,000) (14,095,000) (3,393,000)
Other -- 12,000 (29,000)
----------- ----------- -----------
Net cash provided by (used in) financing
activities (2,077,000) (1,432,000) 688,000
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (48,000) (54,000) (3,197,000)
Cash and cash equivalents:
Beginning of year 54,000 108,000 3,305,000
----------- ----------- -----------
End of year $ 6,000 54,000 108,000
=========== =========== ===========
(Continued)
</TABLE>
33
<PAGE> 35
MHM SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $ 376,000 292,000 358,000
Income taxes refunded, net of payments -- -- 662,000
=========== =========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Acquisition - portion financed with long-term debt $ -- -- 275,000
Note received from sale of Extended Care Services assets 170,000 -- --
Issuance of stock warrants - to obtain financing from
Bank of America 143,000 -- --
Issuance of stock warrants - to obtain financing
from HCFP -- 128,000 --
Note obtained for insurance premiums 225,000 107,000 --
Issuance of stock - settlement of ICH earnout 109,000 -- --
Issuance of stock - acquisition of Apogee -- -- 100,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 36
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
MHM Services, Inc., through its wholly-owned subsidiary, MHM
Correctional Services, Inc. (Correctional Services) is a provider
of mental health services under capitated contract arrangements
with correctional facilities and residents of a long-term care
facility. The Company had provided on-site behavioral mental
healthcare services through its wholly-owned subsidiary, MHM
Extended Care Services, Inc. (Extended Care Services) and
inpatient services through its Hospital Division and MHM of
Colorado Inc.
The Company primarily operates in three states. The Company's
premium revenue is derived from three contracts with the state of
Georgia, one contract with the state of Tennessee, and one
subcontract with a prime contractor to the State of Florida. The
Company is compensated on the basis of the number of in-mates or
residents in each of the facilities. The Company's contracts
provide for fixed capitation rates. The terms of each contract
vary and can be from one to four years. Contracts for more than
one year have annual renewal options for multiple years, which are
exercisable on mutual agreement between the Company and the
government agency or contractor.
(b) CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of MHM Services, Inc. and its subsidiaries. All
significant inter-company accounts and transactions have been
eliminated in consolidation.
(c) CASH EQUIVALENTS
Cash equivalents include all liquid investments with remaining
maturities at purchase of three months or less.
(d) ACCOUNTS RECEIVABLE
The Company's account receivable are primarily from Correctional
Services operations for services rendered to residents of
correctional and long-term care facilities. The amounts are due
from the states and the prime contractor with which MHM has
contracted. The Company maintains an allowance for potential
losses from uncollectible accounts.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Capital leases are
recorded at the present value of future lease payments. The
Company provides for depreciation and amortization on a
straight-line basis as follows:
<TABLE>
<S> <C>
Furniture, fixtures, and equipment 5-8 years
Equipment under capital lease 5-8 years
Leasehold improvements life of lease
</TABLE>
(Continued)
35
<PAGE> 37
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(f) RESTRICTED CASH
Restricted cash consists of certificates of deposit, which secure
performance bonds obtained as required by a correctional contract
with the State of Tennessee and a Medicaid capitation contract
with the State of Georgia. It also includes lockbox accounts
restricted to pay down a revolving credit facility (see note 11).
(g) OTHER INTANGIBLE ASSETS
Other intangible assets consist primarily of contractual rights
and covenants not to compete. These assets are amortized on a
straight-line basis over three to five years (see note 6).
(h) GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of net assets acquired and is amortized on a straight-line
basis over three to five years (see note 6).
(i) CARRYING VALUE OF LONG-TERM ASSETS
The Company evaluates the carrying value of its long-term assets,
including property and equipment, goodwill and other intangible
assets, based upon current and anticipated undiscounted cash
flows, and recognizes an impairment when it is probable that such
estimated future cash flows will be less than the carrying value
of the asset. Measurement of the amount of impairment, if any, is
based upon the difference between carrying value and fair value
(see note 6).
(j) NET FEE-FOR-SERVICE REVENUE RECOGNITION
Net fee-for-service revenues are reported at the estimated net
realizable amounts from patients and third-party payors for
services rendered, including estimated retroactive adjustments
under reimbursement agreements with third-party payors.
Retroactive adjustments are accrued on an estimated basis in the
period in which the related services are rendered and adjusted in
future periods, as final settlements are determined.
(k) CAPITATED REVENUE RECOGNITION
The Company has agreements with two states and a contractor to
provide mental health services to prison inmates and nursing home
residents. Under these agreements, the Company receives monthly
capitated payments based on the number of participants, regardless
of services actually performed by the Company. These capitated
payments are earned and recognized as revenue on a monthly basis.
(l) MALPRACTICE INSURANCE COVERAGE
Medical malpractice claims are covered by a medical malpractice
insurance policy, which is a claims-made policy with a prepaid
five-year extended reporting period included.
(m) EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding during the year. Common stock equivalents such as
stock options and warrants are excluded from the earnings (loss)
per share calculation because the effect would be antidilutive.
36
(Continued)
<PAGE> 38
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, restricted cash,
accounts receivable, estimated third-party payor settlements
receivable and payable, accounts payable, accrued expenses, notes
payable and lines of credit are equivalent to their carrying value
because of the short-term maturity of those instruments. The fair
values of the Company's long-term debt (see note 11) are
considered to be equivalent to their carrying values based upon
consideration of borrowings with similar credit ratings,
collateral and maturities.
(o) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates
also effect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. The most significant estimates include the allowance
for potential losses from uncollectible accounts receivable,
estimates of assets and liabilities due from/to third-party
payors, and the estimated impairment of goodwill and other
intangible assets.
(p) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(q) STOCK OPTION PLAN
The Company accounts for stock-based compensation plans using the
intrinsic value based method of accounting prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees; however
the Company discloses the proforma effect on net income as if the
fair value based method of accounting as defined in SFAS No. 123
had been applied.
(r) RECLASSIFICATIONS
Certain amounts in the 1998 financial statements have been
reclassified to conform to the 1999 presentation.
(2) LIQUIDITY
The accompanying 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 has incurred aggregated net losses before
extraordinary item of $8,549,000 for the three years ended September 30,
1999, has an accumulated deficit of $44,678,000 as of September 30, 1999,
and has a stockholders' deficit of $2,453,000 as of September 30, 1999.
As of September 30, 1999, the Company is in default on one of its notes
payable (see note 11) and is experiencing difficulty in generating
sufficient cash flows to meet its other obligations and to sustain its
operations. At September 30, 1999, current liabilities exceed current
assets by $3,016,000. Such conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result
should the Company be unable to continue as a going concern.
In April 1998, the Company sold its one remaining freestanding behavioral
health facility (Mountain Crest). This facility was sold due the
expectation of more profitable opportunities to grow Correctional
Services and other specialty on-site healthcare services.
37 (Continued)
<PAGE> 39
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
The Company made several acquisitions in Extended Care Services through
fiscal 1998 (see note 5). However, to date, the subsidiary has operated
unprofitably. As a result, in the first quarter of 1999, the Company sold
substantially all of its Extended Care Services operations and is making
selective reductions in operating and general and administrative costs.
Extended Care Services represented approximately 25 percent of net
revenues for fiscal 1999.
Effective March 11, 1997, Extended Care Services obtained a $4,000,000
revolving credit facility to finance its receivables. Borrowings on the
credit facility were limited to qualified accounts receivable. Also, the
Company borrowed $500,000 in October 1997 and again in July 1998 on a
line of credit guaranteed by certain officers and directors of the
Company. In July 1998, the Company borrowed $2,000,000 to finance a
settlement with MEDIQ (note 11). In June 1999, the Company increased its
borrowing under a line of credit from $500,000 to $1.3 million.
On August 24, 1999, Extended Care Services notified the state of Delaware
about its intent to dissolve under Section 275 of the General Corporation
Law of the State of Delaware. Subsequent to the filing, Extended Care
Services informed all known and foreseeable creditors about its intent
for dissolution. Extended Care Services has begun preparing a dissolution
plan for which to pay its creditors. Extended Care Services expects its
plan of dissolution will be approved by the Delaware Court of Chancery in
fiscal year 2000. MHM Extended Care Services, Inc. has total assets of
$81,000 and total liabilities to external creditors of $1,189,000 at
September 30, 1999. If the plan of dissolution is approved by the
Delaware Court of Chancery, the Company will be relieved of approximately
$1,108,000 of liabilities to external creditors.
Proceeds from the sales of the Company's inpatient facilities and
substantially all of its Extended Care Services operations have provided
the Company with sufficient cash to fund the Company's working capital
needs as the Company continues to sustain operating losses. With the sale
of the unprofitable operations of Extended Care Services in 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 Correctional Services and obtaining additional working
capital. There can be no assurance that any of such events will occur or,
if they do occur, that the impact on cash flows will be sufficient to
enable the Company to continue its operations.
(3) JOINT VENTURE
In August 1994, the Company formed a joint venture (Joint Venture) to
combine its contract management business with that of Horizon Mental
Health Services, Inc. (Horizon) of Denton, Texas. The Joint Venture,
which was owned 27.5 percent by the Company and 72.5 percent by Horizon,
managed both companies' hospital behavioral health care contracts. The
terms of the Joint Venture provided for the Company's continued ownership
of its management contracts and the assignment to the Joint Venture of
the operating responsibilities and revenues related to such contracts.
In March 1995, Horizon completed its initial public offering, and, in
accordance with the terms of the Joint Venture Agreement, acquired the
Company's interest in the Joint Venture for approximately $9,600,000 (net
of related expenses). The sale resulted in a gain of approximately
$500,000 (net of income taxes of $3,000,000). In connection with the
sale, the Company assigned to Horizon all of its rights and interest in
its management contracts, including related accounts receivable.
The Company was involved in litigation with Horizon involving the
Company's right to certain cash flows as part of the sale of its interest
in the Joint Venture. In May 1997, the Supreme Court of Delaware upheld a
court award in the Company's favor for approximately $459,000. This
amount is reported in other income in 1997.
(4) SALE OF FREESTANDING FACILITIES
On April 5, 1996, the Company sold Oakview Treatment Center to a
non-profit corporation affiliated with a privately owned operator of two
psychiatric hospitals for $50,000 in cash and $2,150,000, evidenced by
two
38 (Continued)
<PAGE> 40
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
promissory notes payable to the Company. For financial statement
purposes, the notes were recorded using the cost recovery method of
accounting at an estimated net realizable value of $1,400,000. This was
equal to the net book value of the Oakview Treatment Center immediately
prior to the sale. The notes were collateralized by the real property
sold. On July 31, 1998, due to lack of payment on the promissory notes,
the Company declared the notes to be in default. As a result, the Company
reacquired Oakview Treatment Center in a foreclosure sale on September
11, 1998. The property was reacquired subject to a junior lien held by
the Internal Revenue Service (IRS). At September 30,1998, the notes
receivable due from the purchaser totaled $1,172,000 and are reported as
repossessed property in the accompanying balance sheets. The Company
entered into an agreement to resell the property in fiscal 1998. The sale
was settled on March 8, 1999 and resulted in a gain of approximately
$299,000 in fiscal 1999.
The Company sold its last freestanding behavioral health facility,
Mountain Crest Hospital, on April 17, 1998. The hospital operations,
together with certain assets previously leased by the Hospital, were sold
to Poudre Valley Hospital for a cash purchase price of approximately
$6,500,000. In connection with the sale to Poudre Valley, the Company
acquired the previously leased assets for a purchase price of $2,700,000.
As a result of this sale, the Company reported a pretax gain of
approximately $2,400,000 in fiscal 1998.
(5) ACQUISITIONS
(a) HCI SERVICES
In November 1993, Extended Care Services acquired substantially
all of the assets and assumed certain liabilities of Atlanta-based
ICH Services, L.L.C. (ICH) (successor to HCI Services, Inc.),
which provided behavioral health and other specialized medical
services under annual contracts with extended care facilities. The
operating results are included in the Company's consolidated
results of operations from the date of acquisition. The purchase
price consisted of 660 shares of the Company's common stock,
as well as certain additional consideration payable in cash or
additional shares of the Company's common stock at the option of
the former ICH members, after the third anniversary of the
acquisition (November 18, 1996) in an amount equal to
approximately 20 percent of the appraised fair market value of the
acquired operations.
On December 16, 1998, Extended Care Services entered into an
agreement with another organization to divest substantially all of
the assets acquired from ICH related to the delivery of mental
health services to patients of extended care facilities in the
state of Georgia. No consideration was received; however, the
Company was relieved of managing the business. Losses of
approximately $75,000 consisting of the writedown of related
intangible assets were recognized in fiscal 1998 in anticipation
of this transaction.
On September 9, 1999, the Company negotiated a final settlement
with the former partners of ICH to pay the additional
consideration with 500 shares of the Company's common stock. The
common stock was issued in September 1999 at its fair value of
approximately $109,000. At the time of settlement, substantially
all the assets previously acquired had been sold. Therefore, the
effect of this settlement resulted in a reversal of amounts
previously accrued totaling $337,000, a write down of remaining
goodwill totaling $209,000, and the remainder credited to other
income, net.
(b) MHM COUNSELING SERVICES
In December 1995, Extended Care Services acquired the behavioral
healthcare clinic operations of National Mentor, Inc. located in
Charlestown and Taunton, Massachusetts. The Company changed the
name of the clinics to MHM Counseling Services and relocated the
Charlestown clinic to Cambridge. The purchase price included cash
of $150,000 and a $338,000 term loan payable in 36 monthly
installments. The purchase price was allocated primarily to
intangible assets. The operating results of the acquired business
are included in the Company's consolidated results of operations
from the date of acquisition.
(c) LIBERTY BAY
Effective as of December 1, 1996, Extended Care Services acquired,
pursuant to an Agreement (the Liberty Bay Agreement) by and among
the Company, MHM Extended Care Services, Inc., Liberty Bay Colony
Health Services, Inc. (Liberty Bay) and Liberty Management Group,
Inc. (Liberty Management),
39 (Continued)
<PAGE> 41
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
certain assets and contractual rights from Liberty Bay which
constituted Liberty Bay's geropsychiatric management services
operations in Massachusetts. Extended Care Services has integrated
these operations with MHM Counseling Services and the combined
operations from the date of acquisition operate under the name
"MHM/Bay Colony Counseling Services", and, as a result of the
acquisition and continued development, serve approximately 115
extended care facilities.
As consideration for the purchase, Extended Care Services paid
Liberty Bay $150,000 in cash and issued a promissory note in the
principal amount of $150,000. The purchase price was primarily
allocated to intangible assets. The note provides for quarterly
interest payments at an annual rate of 9 percent and the payment
of the principal amount in one installment on December 1, 1999.
Extended Care Services obtained an extension of the payment of the
principal amount of the note to December 31, 2000. The Company
also agreed to pay Liberty Bay additional consideration consisting
of 20 percent of "cash flow" (as such term is defined in the
Liberty Bay Agreement) from the acquired contracts over the five
year period commencing December 1, 1996. Such additional
consideration is calculated, paid, and expensed annually by the
Company and totaled approximately $0 and $37,000 for years
beginning December 1, 1998 and 1997, respectively.
On December 31, 1998, Extended Care Services entered into an
agreement with another organization to sell certain of the assets
acquired from National Mentor, Inc., Liberty Bay and Liberty
Management related to the delivery of outpatient mental health
services and services to patients of extended care facilities in
the state of Massachusetts. These assets were sold for $850,000,
which will result in a gain on sale of approximately $290,000 in
fiscal 1999.
(d) APOGEE
Effective as of March 31, 1997, Extended Care Services acquired
certain assets and contractual rights related to the long-term
care operations of Apogee, Inc. in Pennsylvania and Tennessee,
consisting of contracts with approximately 263 facilities. The
operating results are included in the Company's consolidated
results of operations from the date of acquisition.
As consideration for the purchase, the Extended Care Services paid
$100,000 in cash, issued a three year promissory note in the
principal amount of $125,000, and the Company issued 400 shares of
common stock of MHM Services, Inc. at $250 per share. The purchase
price was primarily allocated to intangible assets. The note
provides for interest payments six months after the closing date
for the first two quarters and quarterly thereafter at an annual
interest rate of 7 percent and annual principal payments. Extended
Care Services also agreed to pay Apogee additional consideration
consisting of 20 percent of "net cash collected" (as such term is
defined in the Apogee Agreement) from the acquired operations over
a five year period commencing March 31, 1997. Such additional
consideration is calculated annually by the Company and did not
result in additional consideration for the years beginning March
31, 1997 or 1998.
On December 16, 1998, the Company entered into an agreement with
another organization to divest certain assets related to the
delivery of mental health services to patients of extended care
facilities in the state of Tennessee. No consideration was
received; however, the Company was relieved of managing the
business. The sale resulted in a loss of $4,000 which was
recognized in fiscal 1999. Losses of approximately $176,000
consisting of the write down of related intangibles were
recognized in fiscal 1998.
On December 31, 1998, the Company entered into an agreement with
another organization to sell certain assets related to the
delivery of mental health services to patients of extended care
facilities in the state of Pennsylvania. The total consideration
for this transaction was $170,000 of which $20,000 was paid at
closing and the remaining $150,000 was in the form of a promissory
note payable, in its entirety, on March 30, 1999. The assets
acquired by the purchaser in this transaction secure this note.
This transaction resulted in a gain on the sale of approximately
$15,000 in fiscal 1999.
(6) WRITEDOWN OF LONG-TERM ASSETS
In September 1997, the Company decided to dispose of the Florida and
North Carolina operations of Extended Care Services and close its
Atlanta, Georgia billing office. In connection with these decisions, the
Company
40 (Continued)
<PAGE> 42
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
determined that the recoverability of goodwill relating to the HCI
acquisition (note 5) was permanently impaired. The Company evaluated the
carrying value of goodwill based on cash flow analysis and estimated
disposal values. As a result, the carrying value of goodwill and other
intangibles relating to these operations were written down resulting in a
charge of $696,000 in the year ended September 30, 1997.
In September 1998, the Company decided to sell certain additional assets
and contractual rights related to the Extended Care Services. In
connection with this decision, the Company determined that the
recoverability of remaining goodwill and other intangible assets relating
to a portion of the HCI Services and Apogee acquisitions (note 5) was
permanently impaired. As a result, the carrying value of goodwill and
other intangibles relating to these operations were written down
resulting in a charge of $430,000 in the year ended September 30, 1998.
HCI Services and Apogee collectively represent revenues of $2,919,000,
$5,028,000, and $4,771,000, for the years ended September 30, 1999, 1998,
and 1997, respectively. HCI Services and Apogee collectively represent
net losses of $371,000, $1,205,000 and $2,645,000 for the years ended
September 30, 1999, 1998 and 1997, respectively.
As a result of sales of assets related to Extended Care Services
described above and in note 4, the Company has no ongoing revenues from
those operations. Had these sales of assets taken place at the beginning
of fiscal year 1999, the Company's total revenues for the year ended
September 30, 1999 would have been approximately $15,895,000. Similarly,
the Company's net loss for the year ended September 30, 1999 would have
been approximately $804,000 and its loss per share (basic and diluted)
would have been approximately $(117.87).
(7) THIRD-PARTY PAYORS
The Company had agreements with third-party payors that provided for
payments for patient services at amounts that differed from its
established rates. The Company is in the process of negotiating final
settlements for prior reporting periods relating to filed cost reports
for a freestanding behavioral health facility sold in 1998.
Tentative and final settlements with all third-party payors for prior
cost reporting periods have resulted in adjustments to decrease
fee-for-service revenue by approximately $1,056,000 for 1999 and increase
fee-for-service revenue by $762,000 and $965,000 for 1998 and 1997,
respectively.
A summary of the payment arrangements that the Company had with major
third-party payors relating to operations which have all been sold as of
September 30, 1999, is as follows:
(a) MEDICARE
Inpatient non-acute services, certain outpatient services and
defined capital costs related to Medicare beneficiaries are paid
primarily on a cost reimbursement basis. The Company is reimbursed
for cost reimbursable items at a tentative rate with final
settlement determined after submission of annual cost reports by
the Company and audits thereof by the Medicare fiscal
intermediary.
(b) OTHER THIRD-PARTY PAYORS
The Company has also entered into payment agreements with certain
commercial insurance carriers, health maintenance organizations
and preferred provider organizations. The basis for payment to the
Company under these agreements includes prospectively determined
rates per discharge, discounts from established charges and
prospectively determined daily rates. Services rendered to Blue
Cross subscribers are paid based upon the provisions of individual
plans and include payment of predetermined rates or a percentage
of charges.
(c) EXTENDED CARE SERVICES
Professional services provided to residents of extended care
facilities are paid primarily on a fee-for-service basis. Medicare
is the primary payor for such services. The Company is reimbursed
based on fee schedules and is subject to prepayment and
retroactive reviews of medical necessity conducted by the
intermediary.
41 (Continued)
<PAGE> 43
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(8) OTHER CURRENT ASSETS
Other current assets includes the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deposit $ 75,000 --
Pharmaceutical supplies 173,000 163,000
Other current assets 21,000 8,000
---------- ----------
$ 269,000 171,000
========== ==========
</TABLE>
(9) PROPERTY AND EQUIPMENT
Property and equipment includes the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Leasehold and improvements $ 23,000 21,000
Furniture, fixtures, and equipment 761,000 968,000
Equipment under capital lease 187,000 323,000
----------- -----------
971,000 1,312,000
Less accumulated depreciation (829,000) (977,000)
----------- -----------
$ 142,000 335,000
=========== ===========
</TABLE>
Depreciation expense related to property and equipment was $120,000,
$191,000, and $185,000 for 1999, 1998, and 1997, respectively.
(10) OTHER ACCRUED EXPENSES
Other accrued expenses includes the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Accrued refunds $ 6,000 166,000
Accrued professional fees 330,000 665,000
Accrued pharmaceutical costs 491,000 284,000
Accrued miscellaneous taxes 106,000 184,000
Other accrued expenses 152,000 755,000
----------- -----------
$ 1,085,000 2,054,000
=========== ===========
</TABLE>
(11) LONG-TERM DEBT
(a) MEDIQ
In connection with the spin-off of the Company by MEDIQ, its
former corporate parent, on August 31, 1993, the Company executed
a five-year note (the MEDIQ Note) for the balance of unpaid
payment obligations imposed on the Company by MEDIQ and described
by MEDIQ as management fees and intercompany interest. The
original principal amount of the MEDIQ Note was $11,500,000 which
bore interest at a rate of prime plus 1.5 percent, with monthly
payments of interest only through September 1995 and then monthly
principal and interest payments for the following three
42 (Continued)
<PAGE> 44
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
years. Principal payments of $767,000 were made in 1996 and
additional principal payments of $256,000 representing the
contractually required principal payments for October 1996 through
January 1997, were made as of September 30, 1997, based on a
fifteen year amortization period, with the balance due on August
31, 1998.
The Company filed a complaint on February 10, 1997 in Superior
Court of New Jersey, Law Division against MEDIQ alleging that the
MEDIQ Note is invalid on the grounds that MEDIQ breached its
fiduciary obligations in connection with forcing the Company to
execute the MEDIQ Note, the MEDIQ Note lacks consideration, the
MEDIQ Note is unconscionable and it unjustly enriches MEDIQ at the
Company's expense. The case was then transferred by the Court of
Camden, New Jersey. The Company asked the Court to declare the
MEDIQ Note null and void, require MEDIQ to return to the Company
all payments MEDIQ has received under the MEDIQ Note and award the
Company compensatory, consequential and punitive damages. The
Company remained current in its payments under the MEDIQ Note
until filing the lawsuit at which time it withheld payments
commencing with the payment due for February 1997 and all
subsequent payments. The Company received notice from MEDIQ by
letter dated February 11, 1997 stating that as a result of the
Company's withholding of the February installment due under the
MEDIQ Note, MEDIQ claims to have accelerated all principal and
interest due under the MEDIQ Note. For fiscal year ended September
30, 1997, the outstanding amount owed by the Company under the
MEDIQ Note ($10,478,000) was classified as a current liability.
Additionally, the Company had accrued interest payable under the
terms of the note of $777,000 and other accrued expenses of
$242,000 as of September 30, 1997.
On November 21, 1997, a Judge of the New Jersey Superior Court,
Law Division, Camden County, entered a summary judgement against
the Company and in favor of MEDIQ. The adverse decision dismissed
the Company's suit against MEDIQ and as a result, judgement was
entered in MEDIQ's favor for the full principal balances and
related accrued interest. The Law Division also denied the
Company's request for a stay in the entry of execution of the
judgement.
On July 15, 1998, the Company and MEDIQ settled the $11,800,000
judgement against the Company. In return for a cash payment of
$3,000,000 by the Company, MEDIQ has vacated its claim, and
released the Company and its affiliates from any and all other
liabilities; provided, however, no bankruptcy proceedings
involving the Company occur which result in MEDIQ repaying all or
part of the settlement amount it received. The settlement resulted
in an extraordinary gain for fiscal 1998 of approximately
$9,185,000.
A $2,000,000 note obtained from HealthCare Financial Partners as
well as draws on the Company's existing line of credit funded the
settlement. The $2,000,000 note was collateralized by
substantially all the assets of the Company, had a six month term
which expired in January 1999, carried interest at prime plus two
percent, required a two percent commitment fee, and a completion
fee of an additional two percent.
(b) REVOLVING CREDIT FACILITY
Effective March 11, 1997, Extended Care Services entered into a
$4,000,000 revolving credit facility with HealthCare Financial
Partners. The facility bore interest at prime plus 2.25 percent,
was secured by accounts receivable, and expired in March 1999. The
loan was also secured by the stock of the Company's subsidiary,
Extended Care Services. The amount of credit available fluctuated
based on the amount of qualified accounts receivable. As of
September 30, 1999 and 1998, the Company had $0 and $344,000
outstanding under this facility, respectively.
(c) LINE OF CREDIT
In October 1997, the Company borrowed an aggregate of $500,000
under a line of credit with Bank of America, which debt was
guaranteed by Michael S. Pinkert, President and Chief Executive
Officer, William P. Ferretti, Director and Lee Calligaro former
Vice President and General Counsel of the Company. The line of
credit permitted maximum borrowings by the Company of $500,000 and
was originally due on March 31, 2000.
43 (Continued)
<PAGE> 45
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
In June 1999, the Company increased this line of credit to a
maximum borrowing capacity of $1,300,000 with a commitment fee of
.5 percent. The line of credit is due in May 2000 and bears
interest at the Eurodollar rate plus 2.6 percent, per annum
(weighted-average interest rate of 9.9 percent at September 30,
1999). As of September 30, 1999, the Company had drawn $1,000,000
against this line.
Mr. Pinkert personally guaranteed the entire line of credit. For
his guaranty, the Company granted, in June 1999, 180 warrants to
purchase stock of the Company at $50 per share. William Ferretti,
John Silverman, Dr. Jacob Shipon, directors of the Company, and
Lee Calligaro, have indemnified Mr. Pinkert on his guarantee in
the extent of $550,000. For their indemnifications, the Company
granted to each indemnitor on a pro rata basis based on their
individual indemnification, a total of 198 warrants to purchase
stock of the Company at $50 per share. As a fee to the guarantor
and idemnitors for the ongoing risks represented by the guarantee
and indemnification obligations, for each month during which the
guarantee and indemnification obligations are outstanding,
warrants for the number of shares as are equal in value (at a
price of $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 $84,000 were recorded in 1999 as a
result of the issuance of these warrants.
Also in June 1999, Mr. Pinkert, Mr. Ferretti, and Mr. Calligaro,
guarantor and idemnitors of the original line of credit of
$500,000, who earned warrants of 210, 70, and 70, respectively,
during the period that the original obligation was outstanding,
were granted a reduction in the warrant exercise price of these
warrants to $50 per share to purchase Company stock. Expense
totaling approximately $59,000 was recorded in 1999 for the
reduction in the warrant exercise price.
(d) TERM LOANS AND CAPITAL LEASE OBLIGATIONS
At September 30, 1999 and 1998, term loans totaling $192,000 and
$339,000, respectively, represent various notes payable relating
to the Apogee, Liberty Bay, and MHM Counseling acquisitions which
bear interest at rates ranging from 7 percent to 9 percent and
terms through March 2000 (see note 5). The note to Mentor totaling
$47,000 at September 30, 1999, is in technical default for
nonpayment of principal due to the dissolution of Extended Care
Services and therefore is classified as a current liability in the
consolidated financial statements.
Capital lease obligations totaling $21,000 and $72,000 at
September 30, 1999 and 1998, respectively, are payable in monthly
installments including interest at rates ranging from 9 percent to
13 percent through January 2001 and are collateralized by certain
assets with a net book value of $40,000 and $76,000, respectively.
(e) NOTES PAYABLE
At September 30, 1999 and 1998, the Company had promissory notes
outstanding totaling $187,000 and $69,000, respectively. The notes
were issued to insurance underwriters to finance the purchase of
certain insurance policies. The notes are being repaid in monthly
installments with interest of 8 percent and are due in 2000. The
notes are secured by prepaid insurance premiums which are
classified as prepaid expenses in the accompanying consolidated
balance sheets.
Scheduled maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
<S> <C>
2000 $ 275,000
2001 5,000
------------
$ 280,000
============
</TABLE>
44 (Continued)
<PAGE> 46
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(12) COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company leases certain equipment and office facilities under
non-cancelable operating leases. The future minimum lease payments
required under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
<S> <C>
2000 $ 168,000
2001 173,000
2002 169,000
2003 155,000
2004 81,000
------------
Total future minimum lease payments $ 746,000
============
</TABLE>
Lease expense was $357,000, $938,000, and $1,496,000 for 1999,
1998, and 1997, respectively.
(b) LITIGATION
The Company is involved in various other legal proceedings
incidental to its business, some of which may be covered by
insurance. The Company knows of no litigation, either pending or
threatened, which is likely to have a material adverse effect on
the Company's consolidated financial position.
(c) CONTINGENCIES
On March 2, 1998, the Company was notified that a claim for refund
of certain Medicare payments is being made against Supportive
Counseling Centers (SCC) to which a subsidiary of Extended Care
Services previously provided management services. The claim is
being asserted by the Medicare fiscal intermediary which was
responsible for processing and paying SCC's claims for Medicare
payments, and arises from post payment review by the fiscal
intermediary. The claim, which seeks approximately $1,700,000 in
refunds, relates to Medicare reimbursements paid to SCC prior to
any involvement of Extended Care Services subsidiary as well as
during the period in which management services were provided to
SCC. No claim has been asserted against the Company or its
subsidiary, and the Company does not believe that it has any
liability with respect to the claims made against SCC.
On November 23, 1998, the Company received a notice from the
Massachusetts Peer Review Organization, Inc. (MassPro), that MHM
Counseling Services, through a clinic located in Taunton,
Massachusetts, owned by Extended Care Services, 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 services provided to
25 Medicaid recipients at the Taunton facility, MHM Counseling
Services was requested to repay the Massachusetts Medical
Assistance Program an extrapolated amount of approximately
$215,000. The Company has appealed this determination, but has not
received a report of the results of this appeal. On June 3, 1999,
MHM Counseling Services received another notice from MassPro, that
the counseling service clinic located in Cambridge, Massachusetts
had failed to comply with certain regulations, rules, standards
and statutes applicable to providers participating in the
Massachusetts Medical Assistance Program. As a result of Mass
Pro's audit of payments made in 1997 to MHM Counseling Services
for services provided to 26 Medicaid recipients at the Cambridge
facility, MHM Counseling Services was requested to repay the
Massachusetts Medical Assistance Program an extrapolated amount of
approximately $1,019,000. The Company has vigorously appealed
these findings with the State.
In reference to the above claims, it is the Company's position
that extrapolating the results from a limited sample from a review
of a subset of certain professionals is not valid when applied to
a group of other professionals. Furthermore, the samples selected
were not based on a statistically valid sampling methodology.
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
45 (Continued)
<PAGE> 47
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
amount of repayment requested and is vigorously appealing the
initial findings by MassPro. At September 30, 1999, the Company
has reserved approximately $615,000 and believes this amount is
sufficient to cover any potential settlements with MassPro. It is
reasonably possible that any potential settlement will differ from
the amounts reserved.
On July 14, 1999, the Company became aware that a notice of a
post-payment review of claims processed in 1998 from the CIGNA
HealthCare Medicare Administration (CIGNA), was sent to
Psychiatric Specialty Group, the (Practice). MHM Extended Care
Services Inc. managed the Practice in 1998. The notice indicated
that there were certain deficiencies in the medical records of
fifteen beneficiaries' records reviewed and indicated an
overpayment of $4,100. As a result, CIGNA is now proceeding to
perform a statistically valid random sample audit. The Practice is
required to immediately repay the overpayment of $4,100 identified
in the audit and such repayment has been reserved in the Company's
consolidated financial statements at September 30, 1999. The
Company does not believe its ultimate liability will exceed the
amount reserved.
(d) MALPRACTICE INSURANCE
The Company has a general and professional liability policy that
is written on a claims-made basis with a five year prepaid
extended reporting period. This means coverage is extended for
events reported sixty months after the policy ends, as long as the
event occurred during the policy period. The coverage per
occurrence is $1,000,000 with a $3,000,000 aggregate.
(13) CONCENTRATION OF CREDIT RISK
Approximately 78 percent, 37 percent, and 3 percent of the Companies
revenues for the years ended September 30, 1999, 1998, and 1997,
respectively, relates to amounts earned under five contracts to provide
mental health services to correctional and long-term care facilities in
three states. Contracts with revenues exceeding 10 percent of the
Company's total consolidated revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Georgia Department of Corrections 49% 29% 2%
Tennessee Department of Corrections 12% 7% 1%
Georgia Department of Medical Assistance 20% 12% 17%
</TABLE>
The Company's accounts receivable are primarily from Correctional
Services for services rendered to the states and a prime contractor with
which MHM has contracted. Accounts receivable under these contracts with
an outstanding balance of 10 percent or greater at September 30, 1999,
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------
<S> <C>
Georgia Department of Medical Assistance 31%
Prison Health Services 16%
Tennessee Department of Corrections 48%
</TABLE>
46 (Continued)
<PAGE> 48
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(14) INCOME TAXES
Income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ -- -- --
State 39,000 93,000 --
--------- --------- ---------
39,000 93,000 --
--------- --------- ---------
Deferred:
Federal -- -- --
State -- -- --
--------- --------- ---------
-- -- --
--------- --------- ---------
Total income tax (benefit)
expense $ 39,000 93,000 --
========= ========= =========
</TABLE>
The differences between the effective income tax (benefit) expense and
the income tax (benefit) expense computed using the U.S. Federal income
tax rate are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory expense (benefit) $ (862,000) (386,000) (1,676,000)
State income tax (benefit) expense (89,000) 93,000 (71,000)
Increase in valuation allowance 1,052,000 383,000 1,668,000
Goodwill amortization -- -- 5,000
Other items, net (62,000) 3,000 74,000
----------- ----------- -----------
Total income tax (benefit)
expense $ 39,000 93,000 --
=========== =========== ===========
</TABLE>
The reconciliation presented above reflects tax expense from income
(loss) before extraordinary items. For 1998, the MEDIQ extraordinary gain
of $9,185,000 does not result in any tax expense. This is due to the
extraordinary gain qualifying for income exclusion under Internal Revenue
Code (IRC) Section 108 and utilization of net operating loss
carry-forwards.
Significant components of deferred tax assets and liabilities follow:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets: $
Allowance for doubtful accounts 130,000 1,709,000
Net operating loss carryforwards 4,885,000 1,716,000
Writedown of long-term assets -- 434,000
Other 58,000 105,000
----------- -----------
5,073,000 3,964,000
Valuation allowance (4,964,000) (3,912,000)
----------- -----------
109,000 52,000
Liabilities - prepaid expenses 109,000 52,000
----------- -----------
Net deferred tax asset $ -- --
=========== ===========
</TABLE>
47 (Continued)
<PAGE> 49
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
At September 30, 1999, for income tax purposes, the Company had federal
operating loss carry-forwards of approximately $11,900,000 expiring
through 2019. The income exclusion under IRC Section 108 causes a
reduction in tax attributes; thus net operating loss carry-forwards are
reduced accordingly. The change in valuation allowance was an increase of
$1,052,000 in 1999 and an increase of $383,000 in 1998.
(15) RELATED-PARTY TRANSACTIONS
(a) INTEREST EXPENSE - MEDIQ
The Company incurred interest expense related to the note payable
to MEDIQ of $0, $757,000, and $1,042,000 in 1999, 1998, and 1997,
respectively.
(b) SERVICES AGREEMENT - MEDIQ
From April 1, 1993 through September 30, 1996, the Company
obtained certain legal, accounting, tax and risk management
services from MEDIQ at prescribed rates pursuant to a services
agreement. The service agreement terminated in 1996. Fees for such
services, were $30,000 for fiscal 1997, and are included in
general and administrative expenses.
(16) STOCK OPTIONS AND WARRANTS
(a) OPTIONS
The Company has a Stock Option Plan (the Stock Option Plan) and a
Stock Option Plan for Non-Employee Directors (the Directors' Stock
Option Plan). Under the Stock Option Plan, up to 900 shares of the
Company's common stock may be subject to stock options granted to
officers and key employees of the Company. Under the Stock Option
Plan for Non-Employee Directors there is no limitation of the
Company's common stock that may be subject to stock options
granted. Options vest at 20 percent each year and may not be
granted for a term in excess of ten years from the date of grant.
On January 30, 1997, all outstanding options, which totaled 467,
were re-priced at an exercise price of $250.00. As of September
30, 1999, options to acquire 402 shares of stock were exercisable
under the Stock Option Plan and options to acquire 32 shares of
stock were exercisable under the Directors' Stock Option Plan.
Exercise prices of stock options granted represent fair market
value of the common stock at date of grant, or for the re-priced
options, at January 30, 1997.
The Company applies APB Opinion No. 25 in accounting for its stock
option plan for options granted to employees and directors and,
accordingly, no compensation expense for stock options has been
recognized in the consolidated financial statements. Had the
Company determined compensation expense based on the fair value at
the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have been decreased (increased)
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1999 1998 1997
--------------- -------------- ------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (2,571,000) 7,996,000 (4,789,000)
Pro forma (2,607,000) 7,961,000 (4,808,000)
Income (loss) per common share:
As reported (376.92) 1,181.44 (732.37)
Pro forma $ (382.20) 1,176.27 (735.28)
</TABLE>
48 (Continued)
<PAGE> 50
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
The fair value of each option is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions generally used for grants in 1999,
1998 and 1997, respectively: dividend yield of 0 percent (all
years); expected volatility 116.85, 126.51 and 132.79 percent;
risk-free interest rate of 4.98, 5.66 and 6.46 percent; and
expected lives of 3 years for options granted in 1999 and 8 years
for options granted in 1998 and 1997.
A summary of the status of the Company's stock options as of
September 30, 1999, 1998, and 1997, and changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 764 $ 380.00 719 $ 360.00 $ 519 $1,640.00
Granted 225 310.00 190 420.00 330 490.00
Exercised -- -- (50) 250.00 (6) 250.00
Forfeited (95) 395.00 (95) 370.00 (124) 740.00
--------- --------- --------- --------- --------- ---------
Outstanding at end of year 894 360.00 764 380.00 719 360.00
--------- --------- --------- --------- --------- ---------
Options exercisable at
end of year 434 325.00 363 295.00 352 250.00
Weighted-average fair value
of options granted
during the year $ 220.00 $ 395.00 $ 465.00
========= ========= =========
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
------------------------------------------------------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICES NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
-------------------- -------- ---------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$250.00 - $375.00 681 6.70 $ 285.00 350 $ 260.00
500.00 - 750.00 213 7.91 615.00 84 610.00
-------------------- -------- -------- -------- -------- --------
$250.00 - $750.00 894 7.01 $ 360.00 434 $ 325.00
==================== ======== ======== ======== ======== ========
</TABLE>
(b) WARRANTS
On July 15, 1998, the Company issued warrants to purchase 600
shares of common stock at $5.00 per share to HealthCare Financial
Partners (HCFP), in exchange for HCFP granting the Company a
$2,000,000 note payable used to fund the MEDIQ settlement (see
note 11). The warrants are immediately exercisable and will expire
on July 15, 2003. This resulted in an expense of $128,000 that
served to reduce the MEDIQ gain.
On July 15, 1998, the Company issued warrants to purchase 290
shares of common stock at $250.00 per share (which exceeded the
current fair value of each share) to the Company's Chief Executive
Officer in exchange for an $800,000 personal guarantee on the
$2,000,000 note payable to HCFP. The warrants are immediately
exercisable and will expire on July 15, 2008. No expense was
attributed to this grant.
On October 1, 1997, the Company issued warrants to purchase 180
shares of common stock at $755.00 per share to certain members of
the Company's senior management and a certain Board member in
exchange for personal guarantees on the $500,000 Bank of America
line of credit
49 (Continued)
<PAGE> 51
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(see note 11). In addition, for each month there was an
outstanding balance on the line of credit, the Company issued
additional warrants to purchase shares of common stock at $755.00
per share. As a result, during fiscal 1998, an additional 91
warrants were granted. All of the warrants are immediately
exercisable and have no expiration period. No expense was
attributed to these grants in fiscal 1998, as to the exercise
price exceeded the stock's fair value on each date of grant.
In June 1999, the Company increased the line of credit to
$1,300,000. In exchange for guarantees and indemnifications by
officers and directors as described in note 11, the Company
repriced 351 warrants previously granted to these individuals from
an exercise price of $755.00 per share to $50.00 per share of the
Company's stock. Expense totaling approximately $59,000 was
recorded in 1999 for the reduction in warrant exercise price. The
Company also granted these individuals a total of 498 warrants for
shares of the Company's stock at $50.00 per share. These warrants
do not expire and are immediately exercisable. Expense totaling
approximately $84,000 was recorded in 1999 for the issuance of
these warrants.
At September 30, 1999, the Company had a total of 1,739 warrants
outstanding with exercise prices ranging from $5.00 to $250.00 and
remaining lives ranging from 4 to 10 years.
(17) RETIREMENT PLAN
The Company has a 401(k) plan (the Plan). Employees, who are age 21 or
older, are eligible to join the Plan upon completion of six months of
service. The Plan provides that the Company will make a matching
contribution equal to $0.50 for each $1.00 contributed by a participant
not to exceed 1.5 percent of a participant's compensation. The Company's
matching contribution is made in cash to be used to purchase shares of
common stock of the Company for the accounts of the participants. For the
years ended September 30, 1999, 1998, and 1997, the Company's
contributions were $29,000, $44,000, and $38,000, respectively.
(18) FOURTH-QUARTER RESULTS (UNAUDITED)
The Company experienced net income of approximately $116,000 in the
fourth quarter of 1999 as a result of increased revenues from
Correctional Services contracts, reduction in operating expenses and
general and administrative expenses from the wind down of operations sold
in Extended Care Services.
(19) SUBSEQUENT EVENT
On March 21, 2000, 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.
The number of authorized shares and the par value of common stock were
not affected by the reverse stock split. The effect of the reverse stock
split has been retroactively reflected in the consolidated balance sheets
and consolidated statements of stockholders' deficit for all periods
presented. All references to the number of common shares and per share
amounts elsewhere in the consolidated financial statements and related
footnotes have been restated as appropriate to reflect the effect of the
split for all periods presented.
50
<PAGE> 52
MHM SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Capitated revenues $ 4,769,000 $ 4,391,000 $ 13,972,000 $ 11,616,000
Net fee-for-service revenue 277,000 60,000 497,000 2,636,000
------------ ------------ ------------ ------------
5,046,000 4,451,000 14,469,000 14,252,000
Costs and expenses:
Operating 3,922,000 3,839,000 11,115,000 11,409,000
General and administrative 1,051,000 1,104,000 2,895,000 4,049,000
Provision for bad debts (36,000) (63,000) 68,000 1,053,000
Depreciation and amortization 24,000 34,000 72,000 206,000
Other (credits) charges:
Interest expense 39,000 23,000 111,000 274,000
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 (25,000) (14,000) (201,000) 481,000
------------ ------------ ------------ ------------
Income (loss) before income tax 71,000 (472,000) 409,000 (2,620,000)
Income tax expense 45,000 32,000 48,000 67,000
------------ ------------ ------------ ------------
Net income (loss) $ 26,000 $ (504,000) $ 361,000 $ (2,687,000)
============ ============ ============ ============
Earnings (loss) per share:
-basic $ 3.57 $ (74.19) $ 49.54 $ (395.55)
============ ============ ============ ============
-diluted $ 3.02 $ (74.19) $ 40.25 $ (395.55)
============ ============ ============ ============
Weighted average shares outstanding:
-basic 7,287 6,793 7,287 6,793
============ ============ ============ ============
-diluted 8,610 6,793 8,970 6,793
============ ============ ============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
51
<PAGE> 53
MHM SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 2000 SEPTEMBER 30, 1999
<S> <C> <C>
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
------------ ------------
$ 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
============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
52
<PAGE> 54
MHM SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
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)
------------ ------------
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
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 101,000 $ 274,000
Income taxes paid 82,000 -
============ ============
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
============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
53
<PAGE> 55
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statement
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 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, net of expenses, 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.
(Continued)
54
<PAGE> 56
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statement
June 30, 2000
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.
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 period 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 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
(Continued)
55
<PAGE> 57
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statement
June 30, 2000
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.
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.
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.
(Continued)
56
<PAGE> 58
MHM SERVICES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statement
June 30, 2000
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 a 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 of the Company
have been informed that any formal request for Medicare refunds have been
submitted to the Practice beyond the initial $4,100 claim. On March 8, 2000, the
Practice filed suit against ECS in 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.
57
<PAGE> 59
MHM SERVICES, INC. AND SUBSIDIARIES
PROSPECTUS
No person has been authorized to give any information or to make any
representation not contained in this prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by us. This prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such an offer in such jurisdiction.
Neither the delivery of this prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information contained herein
is correct as of any time subsequent to the date hereof or that there has been
no change in the companies affairs since such date.
Until _________, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................................................................................. 3
Risk Factors................................................................................................... 5
Special Note Regarding Forward-Looking Statements.............................................................. 8
Plan of Distribution........................................................................................... 8
Description of Securities to be Registered..................................................................... 9
Market for Common Equity, Dividend Policy and Related Stockholder Matters...................................... 10
Quantitative & Qualitative Disclosures About Market Risk....................................................... 12
Use of Proceeds................................................................................................ 12
Dilution....................................................................................................... 13
Capitalization................................................................................................. 14
Selected Consolidated Financial Data........................................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 17
Description of Business........................................................................................ 22
Available Information.......................................................................................... 25
Incorporation of Certain Information by Reference.............................................................. 26
Indemnification of Officers and Directors...................................................................... 26
Legal Matters.................................................................................................. 27
Experts........................................................................................................ 27
MHM Services, Inc. Index to Financial Statements............................................................... 28
Information Not Required in Prospectus......................................................................... 59
Signatures..................................................................................................... 61
</TABLE>
58
<PAGE> 60
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The fees and expenses payable by the Company in connection with the sale
of the shares of common stock being registered are estimated as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
SEC Filing Fee........................................................................................... $ 646.27
Legal Fees and Expenses*................................................................................. $36,000.00
Accounting Fees*......................................................................................... $35,000.00
Printing and Miscellaneous Expenses*..................................................................... $18,000.00
Total*................................................................................................... $89,646.27
</TABLE>
------------------
*Indicates estimate
Item 15. Indemnification of Directors and Officers.
Our bylaws provide generally for indemnification of our officers,
directors, agents and employees to the extent authorized by the Delaware General
Corporation law. Pursuant to Section 145 of the Delaware General Corporation
Law, a corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interests of the corporation, and with respect to any criminal action they
had no reasonable cause to believe their conduct was unlawful. With respect to
suits by or in the right of a corporation, however, indemnification is not
available if such person is adjudged to be liable for negligence or misconduct
in the performance of his duty to the corporation unless the court determines
that indemnification is appropriate. The statute also expressly provides that
the power to indemnify authorized thereby is not exclusive of any rights granted
under any bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise.
As permitted by Section 102 of the Delaware General Corporation Law, our
stockholders have approved and incorporated provisions into our Certificate of
Incorporation eliminating a director's personal liability for monetary damages
to the Company and its stockholders arising from a breach of a director's
fiduciary duty, except for liability under Section 174 of the Delaware General
Corporation Law or liability for any breach of the director's duty of loyalty to
us or our stockholders, for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law or for any transaction in
which the director derived an improper personal benefit. The determination of
whether indemnification is proper under the circumstances, unless made by a
court, shall be made by a majority of a quorum of disinterested members of the
Company's Board of Directors, independent legal counsel or the stockholders of
the Company. The Company has purchased directors and officers liability
insurance in an amount totaling $5,000,000, subject to certain deductions.
The above discussion of the Company's Bylaws and Certification of
Incorporation of the Delaware General Corporation Law is not intended to be
exhaustive and is qualified in its entirety by such Bylaws, Certificate of
Incorporation, and statute.
59
<PAGE> 61
Item 16. Exhibits.
<TABLE>
<S> <C>
5. Opinion of Legality
10.1 Contract with Georgia Department of Medical Assistance
10.2 Contract with Georgia Department of Corrections
10.3 Contract with Tennessee Department of Correction
10.4 Contract with Prison Health Systems
10.5 Contract with Career Systems Development Corporation
10.6 Contract with NaphCare, Inc.
15. Letter re: Unaudited Interim Financial Statements
23.1 Consent of KPMG
23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C. (included in Exhibit 5)
24. Power of Attorney (included in signature page)
</TABLE>
Item 17. Undertakings.
None.
60
<PAGE> 62
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Vienna, Virginia, on this 15th day of August 2000.
MHM SERVICES, INC.
Dated: August 15, 2000 By: /s/Michael S. Pinkert
---------------------------
Chief Executive Officer
Each person whose signature appears below does hereby make, constitute
and appoint Michael S. Pinkert as such person's true and lawful attorney-in-fact
and agent, with full power of substitution, resubstitution and revocation to
execute, deliver and file with the Securities and Exchange Commission, for and
on such person's behalf, and in any and all capacities, this Registration
Statement on Form S-2, any and all amendments (including post-effective
amendments) thereto and any abbreviated registration statement in connection
with this Registration Statement pursuant to Rule 462(b) under the Securities
Act of 1933, with all exhibits thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent or such person's substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities indicated and
on the dates listed.
<TABLE>
<S> <C>
Signature: Title:
/s/Michael S. Pinkert Chairman, Chief Executive Officer, Director
---------------------------
Michael S. Pinkert
/s/Steven H. Wheeler President, Chief Operating Officer, Director
---------------------------
Steven H. Wheeler
/s/Cleveland E. Slade Vice President of Finance, Chief Financial Officer, Secretary
---------------------------
Cleveland E. Slade
/s/William P. Ferretti Director
---------------------------
William P. Ferretti
/s/John Silverman Director
---------------------------
John Silverman
/s/Michael Sandler Director
---------------------------
Michael Sandler
/s/Jacob A.Shipon Director
------------------
Jacob A. Shipon, M.D.
Each of the above signatures is
affixed as of August 15, 2000
</TABLE>
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15538
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