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FORM 10 KSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED] for the transition period from
____________ to ____________
Commission file number: 000-28976
ACADIA NATIONAL HEALTH SYSTEMS, INC.
(Name of small business issuer in its charter)
COLORADO 72 1234136
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
95 Park Street
Lewiston, Maine 04240
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (207) 777-3423
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Securities registered pursuant to Section 12(b) of the Securities Exchange Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to section 12(g) of the Securities Exchange Act:
Title of each class Name of each exchange on which registered
COMMON STOCK,
NO PAR VALUE PER SHARE NASD
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10 KSB or any
amendment to this Form 10 KSB
[ ]
The aggregate market value of the 3,837,987 shares of Common Stock held by non
affiliates was $1.12 per share as of September 30, 1998. For purposes of the
foregoing calculation only, each of the issuer's officers and directors is
deemed to be an affiliate. The market value of the shares was calculated based
on the closing sales of such shares on The OTC: Bulletin Board Market
on such date.
As of September 30, 1998, 3,837,987 shares of the issuer's Common Stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE:
See Part III, Item 13, Exhibits and Reports on Form 8-K
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
THIS FORM 10 KSB AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO
TIME BY ACADIA NATIONAL HEALTH SYSTEMS, INC. OR ITS REPRESENTATIVES
CONTAIN STATEMENTS WHICH MAY CONSTITUTE "FORWARD LOOKING
STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FIFTEEN U.S.C.A. SECTIONS 77Z 2 AND 78U 5
(SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF ACADIA NATIONAL HEALTH
SYSTEMS, INC. AND MEMBERS OF ITS MANAGEMENT TEAM AS WELL AS THE
ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING
STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
FORWARD LOOKING STATEMENTS ARE SET FORTH IN THE SAFE HARBOR
COMPLIANCE STATEMENT FOR FORWARD LOOKING STATEMENTS INCLUDED AS
EXHIBIT 99.1 TO THIS FORM 10 KSB, AND ARE HEREBY INCORPORATED HEREIN
BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR
REVISE FORWARD LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS,
THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
EXECUTIVE SUMMARY
Acadia National Health Systems, Inc., a corporation originally organized in
1971 and re-organized in 1996 under the laws of the State of Colorado
("Acadia" or the "Company"), provides business management services to
physicians and hospitals, including data collection, data input, medical
coding, billing, cash collections and accounts receivable management. These
services are designed to assist customers with the business management
functions associated with the delivery of healthcare services, allowing
physicians and hospital staff to focus on providing quality patient care.
These services also assist physicians and hospitals in improving cash flows
and reducing administrative costs and burdens. The Company also provides
information technology and consulting services to healthcare markets.
Acadia markets its products and services primarily to integrated healthcare
delivery networks, hospitals, physician practices, long term care facilities
and home health providers. The Company will also continue to focus on small
practices in tertiary markets ignored by the major MSO players. Acadia's
business and marketing plan combines the experiences of its leadership team
with expanded executive talent.
The company was formed to become a major national Medical Management Services
Organization (MSO) over the next five years. MSOs offer billing, consulting,
software, business systems, related services and financing to physicians and
other health care providers. In a growing managed care environment, these
firms offer business resources to an industry that is traditionally clinically
oriented.
MSOs offer doctors and other medical providers an alternative that puts them
at the forefront of health care reform while positioning them to have choices
regarding their autonomy and profits.
THE HEALTHCARE INDUSTRY
The healthcare industry is undergoing significant and rapid change. Hospitals
and other healthcare providers have come under increased scrutiny from
regulators and third party payers. As a result, providers of healthcare are
now looking to "outsource" to third parties certain costly or complicated
functions that are not directly related to core competencies or where they are
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unable to achieve economies of scale. In particular, billing, and the delivery
of such service in a timely fashion, has become critical to improving
productivity, efficiency and cost containment, while maintaining a high level
of patient care. For instance, many providers are finding that their medical
billing departments are inadequate, and to remedy the inadequacies of these
functions, they are beginning to turn to third party service providers which
have expertise in managing medical billing and other affiliated departments.
The healthcare industry has recognized the need for improvement in the
processing of healthcare information, billing and regulatory compliance, and
to achieve this improvement, there has been a dramatic increase in the
development of solutions offered by third party vendors.
Advances in telecommunications, Internet technologies and voice recognition
capabilities are emerging, creating opportunities to apply these technological
advances to various functions within the medical billing department, including
medical transcription, abstracting, and coding. These technologies enable
cost effective digital movement of voice, images, and data allowing for
offsite processing of these various functions. The ability to process offsite
allows for faster turnaround times, increased availability of skilled
professionals, and lower costs.
MARKETING MIX
Acadia will become a major national MSO within five years and will accomplish
this goal by developing and expanding its marketing along three primary
fronts:
Billing Service
Billing is and will continue to be the cornerstone of Acadia's business, with
more than 88% of the revenue coming from this source. Billing is often the
first service a provider seeks and becomes the entry toward offering other
services.
Acadia plans to become a leading provider of business management solutions and
claims processing to physicians in the United States. The Company presently
serves individual physician clients and physician groups throughout four (4)
states. Acadia offers clients both revenue and cost management services.
Revenue management services include medical coding, electronic and manual
claims submission, automated patient billing, past due and delinquent accounts
receivable collection, capitation analysis (i.e., an analysis of the price per
member paid to healthcare providers by managed care health programs for a
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predetermined set of healthcare services and procedures) and contract
negotiation with payors, including managed care organizations. Cost
management provides comprehensive practice management services including front
office administration, employee benefit plan design and administration, cash
flow forecasting and budgeting and general consulting services.
Acadia's current systems support approximately ten (10) different medical and
surgical specialties.
Consulting
Acadia plans to develop a dedicated practice management division, led by
veterans with national exposure to critical medical consulting issues. This
experience will add significant marketing exposure and enhanced market
visibility to providers who may need some or all of the multifaceted health
care services provided by a MSO.
Acadia has developed a broad service selection. Its core services include
accounts receivable management, fee for service billing, expense accounting,
practice consulting, analysis of practice statistics, and electronic data
interchange ("EDI") consulting regarding claims and remittance status. The
Company also has developed a variety of emerging services in response to the
changing business needs of physicians, including: activity based costing
systems; consulting services regarding alliances and mergers and acquisitions;
capitation management and analysis; compliance services; consulting regarding
EDI for eligibility, referrals and authorizations; outcomes reporting; and
medical guidelines management. Acadia has expanded its range of services to
include information management and consulting services for mergers and group
formations, and has created a distinct operating unit whose exclusive mission
is to manage specialty networks.
MARKETING PLAN
Mergers and Acquisitions
Planned mergers and acquisitions will add sales volume and continue to enhance
our in-house software capability and experienced practice management team to
Acadia's historical strength in medical billing. The Company will work with a
secondary stock offering advisor during early 1999 to propel to an accelerated
growth rate over the next five years. Funds from the offering will be used to
merge with or acquire other MSOs, expand leadership and the management team,
and implement a national marketing and sales program.
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Business combinations will bring one or more top level executives in the
disciplines of general management, health care finance, billing operations,
practice management consulting, software development, regulatory compliance,
business law and investor relations. These executives will have extensive
sales and marketing experience in their respective credentials. These skills
and experiences are complimentary with a minimum of overlap. Acadia continues
to expand a core management team of company founders, each with extensive
company experience in their field.
Company Objectives (Short Term)
The combination of billing services, software, consulting, mergers and
acquisitions, orchestrated by national and regional dynamic sales directors,
exponentially add to the marketing penetration of our products. With these
driving vehicles, Acadia will successfully infiltrate and become a leader in
the industry. Mergers and acquisitions will give Acadia the critical mass
needed to defend this growth methodology.
Acadia will market billing, practice management consulting, systems and other
physician orientated business services to small medical practices in tertiary
markets as well as large medical group organizations in urban areas. Catering
to these markets will play to small practice strengths inherited from our
predecessor company, Physician Resources, Inc. and large group practice
strengths transmitted from the internal growth of our management team.
The company will take advantage of several existing market conditions and
national trends to achieve accelerated growth:
- -Managed care, Medicare reform and other third party payer changes are
creating complexity, more rules and new liabilities for medical providers,
driving doctor offices and small billing firms out of the medical billing
business. The maximum importance is shifting from that needed to submit a
bill to that required to fully document the encounter outcomes, protocols,
resource utilization and best practices.
- -Many of the current major managed care professionals treat doctors as
employees, limiting both their incomes and traditional management role. MSOs
give doctors an opportunity to be profitable, active partner in reform rather
than its victims.
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- -Cutting edge technology changes including computer networking, the Internet,
dedicated Intranets, electronic banking, billing and collections, automated
scheduling plus distributed data processing leave the doctors office and small
billing firms at best inefficient and at worst without access to payment
facilities. Discrete systems are giving way to enterprise-wide and automated
systems. Acadia already has extensive experience with these new technologies
and is currently expanding its state-of-the-art systems.
- -Acadia addresses the national trend toward health care organization
alliances. Its strengths in medical industry expertise, business leadership,
capitalization, computer systems and capital formation will lead to strategic
partnerships, joint ventures and other rapid growth mechanisms. Small and
medium-sized billing and practice management companies will find that joining
Acadia is a good business strategy.
- -Developments throughout international markets continue to suggest that Acadia
will be able to utilize those markets. Recent studies suggest that China is
home to over one hundred thirty million (130,000,000) people who can afford
private medical services. India, Mexico, South America and Europe also
present attractive markets to secure strategic alliance relationships.
Acadia will assimilate the operations of future acquisitions and streamlining
and standardizing of functions. Lead locations and executives are being
established for each service. New positions in marketing and sales have been
recruited. Field personnel, including sales, operations managers and systems
maintenance, report to the head of their particular department. Thus, the
Company will continue to have a top level manager in nearly every location
with each employee reporting to a supervisor who understands his/her
discipline.
Acadia will implement an aggressive marketing and sales program for services,
mergers and strategic alliances. The field sales force will focus on selling
medical billing clients and identifying opportunities for other services or
relationships. These prospects will be referred to high-level, product line
specialists in: software, practice management or business combinations. Each
product line will have a separate marketing program tailored to its particular
opportunities and needs. For example, mergers and acquisitions will
concentrate on trade associations, business brokers and personal
relationships.
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The following positions were recruited in 1998 and will be completed by first
quarter of fiscal year ending September 30, l999:
National Marketing and Sales Manager - working with the Chief Executive
Officer to establish new mergers and acquisitions, strategic alliances, joint
ventures and clients. This person will recruit and assist in the training and
motivation of staff to fully empower them for their role of selling services
to medical providers. This individual is a career sales leader and manager
with extensive prior national experience in the medical and financial services
industry. He shares the vision of Acadia to become one of the top Medical
Management Services Organization in the country within five years.
Compliance Officer - is developing and monitoring a comprehensive written plan
for meeting state and federal regulatory standards for Acadia and its
clients. The compliance function will be a profit center. It will include
employee training, procedures for detecting and reporting infractions and for
responding to violation reports. The person is thoroughly familiar with
current regulations and will strive to maintain currency.
Chief Financial Officer - is a CPA with experience in the medical industry.
The Chief Financial Officer is managing Acadia's balance sheet, budgets and
cash flows, working with independent auditors, investors and lenders to give
Acadia the financial platform for rapidly expanding operations. This person
will participate in due diligence activities on joint ventures, strategic
alliances, acquisitions, franchising, and provider setup. They are a primary
liaison with the legal staff in codifying all financial arrangements. She is
an entrepreneurial personality with extensive financial management experience,
excellent analytical skills and prior public accounting experience with a
prestigious public accounting firm.
President and Chief Operating Officer - is a seasoned Executive Vice President
of a large international corporation. The prospective employee tenured as
director at the restructuring of his division which resulted in a substantial
increase in profitability. He completed a number of national and
international mergers and acquisitions of the parent company. He will be
responsible for the day-to-day operations and strategic development for the
company under a long term arrangement.
Senior Vice President and Director of Marketing - has recently completed two
years as Special Project Director for the Office of the Governor, State of
Maine. Previously he was a partner, co-founder and director of a $20 million
dollar multi-national marketing and communications company with offices around
the world.
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Vice President of Internal Affairs - will bring 30 years of healthcare
senior management experience to Acadia. He led the development of Maine's
largest and arguably most successful home health agency following the
implementation of Medicare. More recently, he has held key positions in both
acute and long term care. His primary responsibilities at Acadia, in addition
to human resources, will be staff development and corporate compliance.
Company Objectives
- -Data, audit trails and staff to support successful payer audits without
disruption of the regular work flow and without penalties for noncompliance
- -Electronic filing and electronic funds transfer for faster processing
- -More frequent billing for improved cash flow
- -Monitoring action on denials and delinquencies to eliminate orphaned claims
- -The ability to interface with all payers including Medicare, Medicaid,
group insurances, managed care (capitation) and private pay
- -Historical databases with reports that will support negotiations
- -Separate billing becomes a vital component of Group Practice Without
Walls (GPWW). Volume and comprehensive services give GPWW providers
negotiating power with managed care organizations
Specialization, increased capital intensity and technological change are
leading to increased outsourcing in all areas of human commerce. The health
industry is no exception. Today's communications technology makes it
practical to deliver medical services in multiple locations, process billing
data geographically and audit the data at a centralized location. Increased
regulatory pressure will replace the office clerk with a highly-trained
billing specialist who processes services strictly for a medical specialty.
But because of the need for continuous education and expanding compliance
management, many small providers will be forced to look at outsourcing this
critical function.
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Professional Practice Management
Consulting is a dynamic field in high demand to assist independent physicians
joining together into large management service organizations (MSO),
independent practice associations (IPA) and strategic alliances with
physicians as large group practices. The professional consulting division
facilitates not only the growth of these relationships, but acts as a conduit
for promoting other service products of Acadia, such as billing and
information systems technology.
Employment of a practice management consultant will allow professional medical
staff to concentrate on clinical issues. Acadia will offer an experienced,
objective outside review of office procedures, practices and staffing. A
practice manager can perform special projects, such as a fee schedule review
and adjustment, that are not within the capacity of in-house staff. The
practice manager can also advise principals on business and financial issues
encountered in benefits, investment and retirement planning, consolidation,
mergers and contract negotiating.
Hospitals are expanding their operations to include primary care medical
practices to provide added patient referral flow. Additionally, hospitals
offer financing and the security of a steady income to doctors. Frequently,
hospital billing systems and staff lack the capacity (or capability) to deal
with doctor billing and sophisticated practice management issues. Acadia can
offer supplemental services to hospitals that will permit them to own
practices without disrupting themselves or upsetting their providers.
External billing and practice management can be a win-win situation for all
parties.
After decades of health care inflation well in excess of general levels, the
public now demands a more efficient and affordable health care delivery
system. This led to the growth of managed care and reducing physician
autonomy. Managed care though expected to dominate the market by the end of
the century, is experiencing public backlash for restraints of patient
directed care. Physicians need avenues to regain their autonomy while
satisfying the demands of public pressure and managed care. Close partnership
with efficient business organizations offers the provider medical control and
profit incentives. It also gives the physician accurate and predictable
business and financial results.
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Health care providers, particularly doctors, frequently experience business
operations difficulties. The discipline of practice management has evolved to
fill this need. Medical practice managers may be accountants, lawyers,
business consultants or they may be doctors who have chosen to specialize in
the business aspect of medicine. Practice managers work with providers to
develop procedures and techniques to improve responsiveness to patients' needs
and increase productivity and profitability. They often manage special
projects, such as fee schedule negotiations or new clinician screening.
Software and Information Systems Technology
Acadia, through a Master Software Licensing Agreement, has incorporated
MEDISENSE, Computer Systems, Inc. as its internal software technology
engine and will convert each merger and acquisition to this standard
information system for all operating divisions and facilities. A vital
component of Acadia's growth, MEDISENSE, provides a solid foundation for
communication with medical bill payors and regulators. Information companies
must expect that unit service prices will come down steadily as technology
improves. Continuous improvement in software for billing, practice management
and internal communications will keep Acadia ahead of the price curve.
International Strategic Alliance and Business Combinations
Developments throughout international markets continue to suggest that Acadia
will be able to utilize those markets through implementation of its strategic
alliance platform. Members of the Acadia management team possess
international experience and will assist the Company in establishing the
strategic relationships abroad in targeted countries. Acadia will be
introduced to representatives from international business development
associations (i.e. France, Ireland, Sweden, Spain, Germany, Italy, Morocco,
Puerto Rico, the Caribbean, Columbia, Bolivia, Argentina, Peru, Japan,
Thailand, Taiwan, China, India and the Middle East), business development
centers, marketing experts, consulate departments and international business
expositions. Acadia will also participate in international trade shows.
Operations Financing
Acadia National Health Systems, Inc. pioneered financing of waivered foster
home care operations in 1994. The waivered foster home program includes
small, thinly capitalized boarding homes that incur substantial costs in
providing care, but do not normally receive payment for several weeks. The
program has been very successful in the last three years and enjoys an
excellent growth rate. Revenue from this service is anticipated to grow
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significantly by the year 2002.
COMPETITION
The MSO and medical billing business is highly competitive. The Company
competes with national and regional physician reimbursement organizations and
certain physician groups and hospitals which provide their own business
management and billing services. Competition among these organizations is
based upon the relationship with the client or prospective client, the
efficiency and effectiveness of converting medical services to cash, the
ability to provide pro-active practice management services and, to the extent
that service offerings are comparable, upon price.
With the substantial market opportunity, some or all of the following sources
are likely to enter the market: healthcare information management consultants;
healthcare information services providers, particularly developers and vendors
of management software; companies that outsource business office functions;
and other parties in contract management businesses (for example, business or
financial management services) desiring to enter the healthcare field. The
Company expects that distinguishing competitive factors will include
reputation for expertise in health information management, expertise and
experience in implementing leading technologies, size and scope of
referenceable accounts, prior experience in billing, outsourcing, and pricing.
Additionally, there are national companies that operate in other areas of the
health information management spectrum, primarily, the business office and
billing. As the Company expands its scope into other areas of health
information management, the Company expects to compete with other,
perhaps better established, better capitalized and larger competitors.
The Company experiences competition with respect to its billing business from
a variety of sources, including both local and national businesses. The
medical billing services market is highly fragmented, with thousands of
medical billing companies nationally. The Company believes the principal
competitive factors include reputation, prior experience, technology,
management, marketing, compliance, pricing, timeliness and accuracy of
performance.
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OPERATIONS
Service Delivery Methods
Acadia will provide business and financial services to smaller health care
providers and organizations in suburban and rural areas in addition to
regional and national clients in urban areas.
Acadia intends to develop its core business units through internal growth,
mergers and acquisitions. Marketing and area development will concentrate
around each location with expansion parameters.
Any organization that delivers goods or services over a wide geographic area
must contend with centralization of functions and identify duties to be
distributed into the field. Since Acadia's core activity will be billing,
these issues are first discussed in billing terms.
Some elements require regimentation and tight controls to satisfy fiduciary
and regulatory responsibilities. Others must be conservative to foster
initiative, creativity and growth. Development of staff, business systems and
selection of software to promote this loose/tight approach is a major factor
for rapidly growing financial services companies in the information age.
Sales always occur at the client site or a regional office. Sales will be the
primary responsibility of the Acadia sales associates. Each will have the
latitude to cultivate a variety of relationships with health providers in the
designated area and the incentives toward building volume.
The growth of third party payment organizations, both public and commercial,
along with their demands for timeliness, quality and technical capability make
centralized processing, transactions and quality control essential. As
communication costs have fallen, the drawback of processing thousands of miles
away has disappeared when compared with the advantages of a large, efficient,
tightly managed "back room" organization.
Methods of Operation (Billing)
Each medical office has a standard protocol that lists all procedures. The
listings reference an industry standard CPT code. Coding errors are among the
most common causes of claim rejections or charges of misbilling. After
performing a procedure, the provider will complete the appropriate steps that
enable Acadia to correctly gather required patient data. This information
will be keyed into a computer network, along with general information and
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third party payment data on each new patient. Compliance management will
screen procedures for appropriateness before billing.
Compliance will screen to verify:
1. Both the provider and the patient were appropriate for the procedure.
(Example: An orthopedic surgeon could not bill for a cesarean section on
a male.)
2. The procedure was appropriate at the stage of care and was not included
in some broader procedure billed simultaneously.
Charges not passing the compliance screen will be referred to the compliance
staff for additional review, contact with the clinician and possible
revisions.
Information will then be stored by payer and invoices generated. Some payers
will receive paper invoices by mail and others electronic invoices by
telecommunications. Those receiving electronic invoices pay on average 30
days earlier than those who receive paper invoices.
When payment is received, funds will be deposited in an account owned
exclusively by the provider. Each practice will receive a weekly or monthly
payment and reconciliation report. Acadia will perform bookkeeping for some
practices and provide a full monthly accounting of all activities.
All billing and collection information will be compiled and reported to the
practice in summary form. This information will be available as a special
report supporting data for fee for services and capitation negotiations with
third party payers.
TECHNOLOGY
Software and Systems Technology
Acadia has signed Master Licensing Agreement with a national medical billing
software and leading edge technology company, MEDISENSE. The Company's
software operates on a NT network that allows centralized or decentralized
processing. Additional considerations are:
- - Windows NT operating system software will have more robust structure,
easier maintenance and better cap
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REGULATORY CONSIDERATIONS
Healthcare Industry
Acadia's business is affected by, among other things, trends in the U.S.
healthcare industry. As healthcare expenditures have grown as a percentage of
the U.S. gross national product, public and private healthcare cost
containment measures have applied pressure to the margins of healthcare
providers. Historically, some healthcare payors have paid the prices
established by providers while other healthcare payors, notably government
agencies and managed care companies, have paid less than established prices
(in many cases less than the average cost of providing the services). As a
consequence, prices charged to healthcare payors willing to pay established
prices have increased in order to recover the cost of services purchased by
government agencies and others but not paid for by them (i.e., "cost
shifting"). The increasing complexity in the reimbursement system and
assumption of greater payment responsibility by individuals have caused
healthcare providers to experience increased accounts receivable and bad
debt levels and higher business office costs.
Healthcare providers historically have addressed these pressures on
profitability by increasing their prices, by relying on demographic changes to
support increases in the volume and intensity of medical procedures, and by
cost shifting. Notwithstanding the providers' responses to these pressures,
management believes that the revenue growth rate experienced by certain
Company clients continues to be adversely affected by increased managed care
and other industry factors affecting healthcare providers in the United
States. At the same time, the process of submitting healthcare claims for
reimbursement to third party payors in accordance with applicable industry and
regulatory standards continues to grow in complexity and to become more
costly. Management believes that these trends have adversely affected and
could continue to adversely affect the revenues and profit margins of the
Company's operations.
Under Medicare law, physicians and hospitals are only permitted to assign
Medicare claims to a billing service in certain limited circumstances. The
Medicare statutes that restrict the assignment of Medicare claims are
supplemented by Medicare regulations and provisions in the Manual.
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The Medicare regulations and the Manual provide that a billing service that
prepares and sends bills for the provider or physician and does not receive
and negotiate the checks made payable to the provider or physician does not
violate the restrictions on assignment of Medicare claims. Management believes
that its practices do not violate the restrictions on assignment of Medicare
claims because, among other things, it bills only in the name of the medical
provider, checks and payments for Medicare services are made payable to the
medical provider and the Company lacks any power, authority or ability to
negotiate checks made payable to the medical provider. Acadia's medical
billing activities are also governed by numerous federal and state civil and
criminal laws. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs.
Submission of claims for services or procedures that are not provided as
claimed may lead to civil monetary penalties, criminal fines, imprisonment
and/or exclusion from participation in Medicare, Medicaid and other federally
funded healthcare programs. Specifically, the Federal False Claims Act allows
a private person to bring suit alleging false or fraudulent Medicare or
Medicaid claims or other violations of the statute and for such person to
share in any amounts paid to the government in damages and civil penalties.
Successful plaintiffs can receive up to 25 30% of the total recovery from the
defendant. Such qui tam actions or "whistle blower" lawsuits have increased
significantly in recent years and have increased the risk that a company
engaged in the healthcare industry, such as Acadia and many of its clients,
may become the subject of a federal or state investigation or may ultimately
be required to defend a false claims action, may be subjected to government
investigation and possible criminal fines, may be sued by private payors and
may be excluded from Medicare, Medicaid and/or other federally funded
healthcare programs as a result of such an action. The government on its own
may also institute a Civil False Claims Act case, either in conjunction with a
criminal prosecution or as a stand alone civil case. Whether instituted by a
qui tam plaintiff or by the government, the government can recover triple its
damages together with civil penalties of $5,000 $10,000 per false claim. Under
applicable case law, a party successfully sued under the Federal False Claims
Act may be jointly and severally liable for damages and penalties. Some state
laws also provide for false claims actions, including actions initiated by a
qui tam plaintiff. There can be no assurance that Acadia will not be the
subject of false claims or qui tam proceedings relating to its billing
activities or that Acadia will not be the subject of further government
scrutiny or investigations relating to its billing and accounts receivable
management services operations. Any such proceeding or investigation
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could have a material adverse effect upon the Company.
Governmental Budgetary Constraints and Healthcare Reform
The federal government in recent years has placed increased scrutiny on the
billing practices of healthcare providers and related entities. This
scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations under
the Medicare program. This heightened examination has resulted in a number of
high profile investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting Act
of 1996, Pub. L. No. 104 191, 1996 U.S.C.C.A.N. (110 Stat. 1936) (codified in
scattered titles of the United States Code, including 18, 26, 29 and 42
U.S.C.) which includes an expansion of certain fraud and abuse provisions,
such as expanding the application of Medicare and Medicaid fraud penalties to
other federal healthcare programs, and creating additional criminal offenses
relating to healthcare benefit programs, which are defined to include both
public and private payer programs. The Health Insurance Act also provides for
forfeitures and asset freezing orders in connection with such healthcare
offenses. Civil monetary penalties and program exclusion authority available
to the OIG also have been expanded. The Health Insurance Act contains
provisions for instituting greater coordination of federal, state and local
enforcement agency resources and actions through the OIG. There also have
been several recent healthcare reform proposals which have included an
expansion of the anti kickback laws to include referrals of any patients
regardless of payer source.
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation was on budgetary and related funding mechanism issues.
A number of reports, including the 1995 Annual Report of the Board of Trustees
of the Federal Hospital Insurance Program, projected that the Medicare trust
fund is likely to become insolvent by the year 2002 if the current growth rate
of approximately 10% per annum in Medicare expenditures continues. Similarly,
federal and state expenditures under the Medicaid program are projected to
increase significantly during the same seven year period. In response to these
projected expenditure increases, and as part of an effort to balance the
federal budget, both the Congress and the Clinton Administration have made
proposals to reduce the rate of increase in projected Medicare and Medicaid
expenditures and to change funding mechanisms and other aspects of both
<PAGE> 19
programs. In late 1995, Congress passed legislation that would substantially
reduce projected expenditure increases and would make significant changes in
the Medicare and the Medicaid programs. The Clinton Administration has
proposed alternate measures to reduce, to a lesser extent, projected increases
in Medicare and Medicaid expenditures.
A number of states in which Acadia plans operations either have adopted or are
considering the adoption of healthcare reform proposals at the state level.
Acadia cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These medical
reforms include certain employer initiatives such as creating purchasing
cooperatives and contracting for healthcare services for employees through
managed care companies (including health maintenance organizations), and
certain provider initiatives such as risk sharing among healthcare providers
and managed care companies through capitated contracts and integration among
hospitals and physicians into comprehensive delivery systems. Consolidation of
management and billing services by integrated delivery systems may result
in a decrease in demand for Acadia billing services for particular physician
practices, but this decrease may be offset by an increase in demand for
Acadia's consulting and comprehensive business management services (including
billing services) for the new provider systems.
INSURANCE
The Company maintains director and officer ("D&O") liability insurance on a
claims made basis for all of its current officers and directors. Insurance
coverage under such policies is contingent upon a policy being in effect when
a claim is made, regardless of when the events which caused the claim
occurred. The cost and availability of such coverage has varied widely in
recent years. While the Company believes its insurance policies are adequate
in amount and coverage for its current operations, there can be no assurance
that the coverage maintained by the Company is sufficient to cover all future
claims or will continue to be available in adequate amounts or at a reasonable
cost.
EMPLOYEES
As of September 30, 1998, the Company employed approximately thirty-four (34)
people. None of the Company's employees is a member of a labor union, and the
Company considers its relations with its employees to be excellent.
<PAGE> 20
IMPORTANT FACTORS RELATED TO
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
The statements contained in this report that are not purely historical are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including
statements regarding the Company's expectations, hopes, intentions or
strategies regarding the future. All forward looking statements included
herein are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward looking statements. Among the
factors that could cause actual results to differ materially are the risk
factors which may be listed from time to time in the Company's reports on Form
10 QSB, 10 KSB and registration statements filed under the Securities Act.
Forward looking statements encompass the (i) expectation that the Company can
secure additional capital, (ii) continued expansion of the Company's
operations through joint ventures and acquisitions, (iii) success of existing
and new marketing initiatives undertaken by the Company, and (iv) success in
controlling the cost of services provided and general administrative expenses
as a percentage of revenues.
The forward looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These forward
looking statements were based on assumptions that the Company would continue
to expand, that capital will be available to fund the Company's growth at a
reasonable cost, that competitive conditions within the industry would not
change materially or adversely, that demand for the Company's services would
remain strong, that there would be no material adverse change in the Company's
operations or business, and that changes in laws and regulations or court
decisions will not adversely or significantly alter the operations of the
Company. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive, regulatory and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company.
Although the Company believes that the assumptions underlying the forward
looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward looking
information will prove to be accurate. In light of the significant
uncertainties inherent in the forward looking information included herein, the
<PAGE> 21
inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company
will be achieved.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases its headquarters facility at 95 Park Street in
Lewiston, Maine, which is owned by Fleet Bank FSB. The space for the
headquarters facility is leased to the Company. The following tabulates
certain information with respect to the lease currently executed between the
Company and Fleet Bank.
<TABLE>
<CAPTION>
Current
Square Monthly Lease
Location Footage Rental Lessor Expiration
------- ------- ------- ----------
<S> <C> <C> <C> <C>
Executive Offices 5,600 sq. ft. $3,500 Fleet Bank 7/31/03
95 P ark Street
Lewiston, Maine 04240
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings to which the Company (or any of its directors
and officers in their capacities as such) is party or to which property of the
Company is subject is pending and no such material proceeding is known by
management of the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
<PAGE> 22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the National Association of
Securities Dealers' ("NASD") National Market System Over-the-Counter ("OTC")
Bulletin Board under the trading symbol "ACAD" since the NASD cleared the
Company's Form 211 application, pursuant to Rule 15c2-11(a)(5) of the Exchange
Act and accompanying Information and Disclosure Statement in May of 1997. The
following table sets forth the range of high and low closing prices of the
Company's Common Stock, as reported by the OTC Bulletin Board Market, from
June 30, 1998 through September 30, 1998. The prices set forth below reflect
inter-dealer quotations, without retail markups, markdowns or commissions, and
do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
The prices in the table below represent the high and low sales price for the
Common Stock as reported on the OTC Bulletin Board Market for the periods
presented. Such prices are based on inter dealer bid and asked prices without
markup, markdown, commissions or adjustments and may not represent actual
transactions.
<S> <C> <C>
YEAR ENDED SEPTEMBER 27, 1997 HIGH LOW
- ----------------------------- ---- ----
First Quarter.......................... $ $
Second Quarter......................... $ $
Third Quarter.......................... $ $
Fourth Quarter......................... $ 2.500 $ 1.875
<PAGE> 23
YEAR ENDED SEPTEMBER 30, 1998 HIGH LOW
- ----------------------------- ---- ----
First Quarter......................... $2.1875 $1.875
Second Quarter........................ $2.0000 $1.625
Third Quarter......................... $1.875 $1.875
Fourth Quarter........................ $1.125 $ .50
</TABLE>
The last reported sale price of the Common Stock on September 30, 1998 was
$1.12 per share. The number of record holders of the Company's Common Stock
was 351 on September 30, 1998.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Company's Board of Directors. No dividends on the Common
Stock have been paid by the Company, nor does the Company anticipate that
dividends will be paid in the foreseeable future, but intends instead to
retain any future earnings for reinvestment in its business.
As reflected in the price quotations above, there have been price fluctuations
in the Company's Common Stock. Factors that may cause or can cause market
prices to fluctuate include any purchase or sale of a significant number of
securities during a relatively short time period, quarterly fluctuations in
results of operations, announcements of new facilities, issuance of additional
securities, registration of securities and entrance of such securities into
the public float, market conditions specific to the Company's industry and
market conditions in general. In addition, in recent years the stock market
in general has experienced significant price and volume fluctuations. These
fluctuations, which may be unrelated to the operating performance of specific
companies, have had a substantial effect on the market price for many small
capitalization companies such as the Company.
Factors such as those cited above, as well as other factors that may be
unrelated to the operating performance of the Company, may adversely affect
the price of the Common Stock.
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OR
PLAN OF OPERATION
FISCAL YEAR ENDING September 30, 1998
NOTE:
On September 1, 1998, Acadia National Health Systems purchased selected assets
of Northeast Medical Business Group, Inc., a medical billing and management
services corporation located in Keene, New Hampshire. The following
management discussion and analysis of financial conditions and results of
operations includes the operations of Northeast from September 1, 1998 to
September 30, 1998.
The following discussion should be read in conjunction with the Financial
Statements and notes thereto.
GENERAL
Acadia National Health Systems, Inc., a corporation originally organized in
1971 and re-organized in 1996 under the laws of the State of Colorado
("Acadia" or the "Company"), provides business management services to
physicians and hospitals, including data collection, data input, medical
coding, billing, cash collections and accounts receivable management. These
services are designed to assist customers with the business management
functions associated with the delivery of healthcare services, allowing
physicians and hospital staff to focus on providing quality patient care.
These services also assist physicians and hospitals in improving cash flows
and reducing administrative costs and burdens. The Company also provides
information technology and consulting services to healthcare markets.
Acadia markets its products and services primarily to integrated healthcare
delivery networks, hospitals, physician practices, long term care facilities
and home health providers. The Company will also continue to focus on small
practices in tertiary markets ignored by the major MSO players. Acadia's
business and marketing plan will combine the experiences of its leadership
team with expanded executive talent.
<PAGE> 25
The company was formed to become a major national Medical Management
Services Organization (MSO) over the next five years. MSOs offer billing,
consulting, software, business systems, related services and financing to
physicians and other health care providers. In a growing managed care
environment, these firms offer business resources to an industry that is
traditionally clinically oriented.
SALES
Sales for the year were $1,134,972 compared to $730,546 for the corresponding
period in 1997. This represents a 55% increase in volume over the period.
Acadia was successful in adding nine (9) new clients during the year with
annualized revenues of $425,000. Two additional client contracts were
signed late in August and September with anticipated gross sales of $65,000
for fiscal year 1999.The Company also signed a major contract in July 1998
with a large local behavioral medicine group for a one year term. Revenue
earned on this contract in the 1998 fiscal year totaled $61,000 with additional
revenue of over $100,000 expected before the contract expires in mid 1999.
At that time both parties have agreed to review results to determine if any
future contractual relationship should take place.
As a result of the acquisition of Northeast Medical Business Group, Inc. as
described above, Acadia added ten (10) physician practice groups to its client
base. Gross revenue earned on these contracts in the 1998 fiscal year totaled
$42,400. Gross sales of $650,000 are expected for fiscal year 1999 from these
clients.
All the Company's new clients are medical specialists in radiology,
anesthesiology, behavioral and family medicine, which further compliments our
solid base in these disciplines.
OPERATING EXPENSES
Increases in operating expenses during the period were principally
due to increased costs incurred in servicing the expanded client base, in
addition to increases in depreciation, occupancy, and administrative costs
related to the acquisition of Northeast Medical Billing.
OPERATING INCOME
The operating gain for the year was $80,371 compared to a gain of $4,066 for
fiscal year 1997. This represents a significant increase over the prior year.
<PAGE> 26
INCOME TAXES
Acadia is a C Corporation with an accrual of $8,770 combined State and
Federal income taxes.
NET INCOME
Acadia's net gain after taxes of $53,650 was ($0.0143) per share on 3,744,321
average outstanding common shares as compared to $1,866 ($0.0005 per share)
on 3,733,987 outstanding common shares in fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's non-trade accounts receivable increased $233,718 due to the
rapid growth of the Waivered Foster Home and non-medical billing programs as
well as the acquisition of Northeast Medical Group. These are clean, secured
receivables with the majority due from the State of Maine. During this same
period, the Company added $97,684 in property, plant and equipment,
principally computer systems and related software. Anticipated expansions and
potential acquisitions will place additional demands on liquidity during the
remainder of next year. The Company received a $30,000 four (4) year term
loan, variable rate of .75% over national prime APR in June l998. The Company
also signed a second five (5) year term loan for $200,000 at a 9.25% fixed rate
in September 1998 to cover start up expenses and technology costs related to
the acquisition of Northeast Medical Billing.
These loans are secured by accounts receivables and equipment, including new
assets acquired as a result of the acquisition.
SALARIES AND WAGES
Increase reflects the Company's expanded client base creating the need for
additional staff, as well as the expansion of the Senior Management team.
DEPRECIATION
Increase reflects the Company's normal investment in property and equipment to
support growth in its business as well as the acquisition of Northeast Medical
Group, Inc. Primary capital expenditures were in the technology area.
<PAGE> 27
AMORTIZATION
Amortization of intangible assets, which are primarily associated with the
Company's acquisitions and software products, was $8,544 for the year ended
September 30, 1998 as compared with $3,419 for the same period in 1997.
INTANGIBLE ASSETS
The Company amortizes goodwill over a period of five years as management
believes that these assets have a determinate life based on the non-competition
agreements related to the acquisition. Management continually monitors
events and circumstances both within the Company and within the industry,
which could warrant revisions to the Company's estimated useful life
of goodwill. If the Company ever determines that a reduction in the
amortization period is necessary, it could have a material impact on the
Company's results of operations.
INTEREST EXPENSE
Net interest expense was $57,200 in the year ended September 30, 1998 as
compared with $34,095 in the same period of 1997. The increase in interest
expense was due to additional financing requirements related to the
acquisition of Northeast as well as capital expansions.
OTHER INFORMATION
=================
Acadia has spent the second fiscal year of operations preparing the
organization for rapid sales growth and expansion. The Company has
completely revised operating policies, installed a new financial management
system and recruited experienced, operational and management personnel.
Discussions continue with other similar businesses for future acquisitions and
mergers. Also, the Company is actively working with underwriters and capital
formation specialists, concentrating in health care companies, to arrange a
secondary offering capitalization.
Another major accomplishment this year was the development and adoption of a
medical reporting compliance program. Acadia takes very seriously the need
for correct verification, reporting and billing of medical services to all
payors. Education of our employees and providers is constant and critical to
remain abreast in this very complex and rapidly changing medical billing and
regulated arena.
<PAGE> 28
MAJOR ACQUISITION
The Company continues to initiate discussions with various companies towards
major acquisitions that will greatly strengthen Acadia and its product lines.
SALES TRENDS
Trends in Acadia's existing business lines, medical billing services and
billing for waivered foster home care, are positive, with expected growth
throughout FY1999. Added billing clients, software sales, practice
management consulting, related support services and major acquisitions are
expected to result in major revenue and earning increases in FY 1999 and
beyond.
ACCOMPLISHMENTS AND OBJECTIVES
The Company will grow through strategic acquisitions, joint ventures and
internal strategic alliance. Our market capitalization will foster our
national marketing and sales programs. Promotion of our medical billing
software technology and medical practice management consulting services will
add additional growth to our front line business of medical billing. Many
smaller billing services and some practice management consultants are ill
equipped to deal with the changes occurring in the health care market and
regulatory environment, establishing them as candidates for affiliation.
Acadia intends to grow its business through mergers and acquisitions of
companies whose business philosophy is based on producing a high quality
product, who's management is dedicated to long term ethical growth and who's
organization and structure are complimentary to Acadia's vision of a superior
company with a premium product.
The degree to which the Company is leveraged could have the following
consequences: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other
general corporate purpose may be impaired; and (ii) a substantial portion of
the Company's cash flow from operations may be dedicated to the payment of
principal and interest on its indebtedness thereby reducing the funds
available to the Company for its operations. In addition, the Credit Lines and
short-term debt contain financial and other restrictive covenants, including
without limitation those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends, sales of
assets, capital expenditures, and prepayments of indebtedness.
<PAGE> 29
YEAR 2000
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems,
and is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than make all the systems
Year 2000 compatible.
The detail planning and inventory for the majority of the Company's legacy
systems that are being modified for Year 2000 compatibility has been completed
and such systems are in remediation. Customers, vendors and resellers have
been identified and requests for information distributed regarding the Year
2000 readiness of such parties. Responses are expected through the first
quarter of 1999. The Company will develop contingency plans during the first
quarter of 1999 through the second quarter of 1999 in response to assessments
of the Year 2000 readiness of customers, vendors and resellers.
The estimated cost of the Company's Year 2000 efforts is $25,000 to $30,000
over 1999, the majority of which represents redirection of internal resources.
However, there can be no assurance that the Company will identify all such
Year 2000 problems in its computer systems or those of its customers, vendors
or resellers in advance of their occurrence or that the Company will be able
to successfully remedy any problems that are discovered. The expenses of the
Company's efforts to identify and address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company's business,
financial condition and results of operations. The revenue stream and
financial stability of existing customers may be adversely impacted by Year
2000 problems, which could cause fluctuations in the Company's revenue. In
addition, failure of the Company to identify and remedy Year 2000 problems
could put the Company at a competitive disadvantage relative to companies
that have corrected such problems.
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS
The financial statements are included beginning at F 2. See page F 1 for the
Index to the Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On August 4, 1997, Berry, Dunn, McNeil & Parker, Certified Public Accountants,
whose address is 100 Middle Street, Portland, Maine 04104 1100 has been
engaged as the principal accountant to audit the Registrant's financial
statements.
Additionally, there has been no occurrence requiring a response to this item.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS;
Acadia National Health Systems, Inc. strives to provide a pleasant working
environment and a strong team spirit. Acadia has embraced the philosophy of
"Distributive Ownership" that will be carried further through corporate office
incentives and business unit ownership.
Board of Directors - will continue to be drawn from leaders in the financial
services, insurance and medical industries.
Acadia will be governed by experienced veterans from health care, finance, law
and operations. Corporate policy will be from an amalgamation of ideas from
experts with experience. Operational decision will be delegated to a senior
management team directed by a national Chief Executive Officer with counsel
and implementation from experienced administrative leaders.
Paul W. Chute, President and Chief Executive Officer - brings over 22 years
senior executive experience from Western Maine Health Care Corporation and its
family of organizations and an additional four years from public accounting
firms. Mr. Chute's executive experience includes the design, development and
implementation of nine active corporations where he was responsible for the
finance and operation of over 600 employees and $38 million in sales. He also
directed and participated in key strategic planning activities for the
<PAGE> 31
development of rural health care systems, hospital cooperatives and community
organizations. Mr. Chute played a significant role in major health care
issues by promoting specific legislation through the State of Maine
Legislature. He has also testified in various legislative committees and
sub-committees at the state and national congressional level.
Mr. Chute has extensive experience in developing joint business and partnering
agreements with other standalone health care organizations, creation of new
jointly owned companies and cooperative arrangements where major for-profit
companies participated in health care programs developed and directed by him.
Mr. Chute's experiences bring together a wealth of financial experiences and
knowledge and extensive background in operations and systems development.
Mr. Chute has a Masters Degree in Business, is certified as a Diplomate from
the American College of Healthcare Executives, carries an advanced
certification as Fellow from the Healthcare Financial Management Association
and is certified as a health care billing and management executive.
Jacquelyn J. Magno, Vice President and Secretary - has been with the Company
for 24 years. She became general manager in 1985. She has been responsible
for sales, operations, provider setup and liaison. Magno keeps the company
abreast of the latest changes in third party policy. She will continue to
expand and develop the waivered foster home billing program, enabling Acadia
to market and promote "waivered billing" services nationally.
Mark T. Thatcher, Vice President, Corporate Counsel - Mr. Thatcher has
participated as a business and legal advisor for a number of public and
privately held companies. He has been retained for federal and state
securities compliance, venture capital analysis, public and private merger
and acquisition review, corporate reorganization/restructuring planning,
and international franchising development.
Mr. Thatcher coordinates and administers consultation regarding advanced
securities planning, corporate acquisitions and mergers, advanced foreign
situs estate planning, international tax planning, Securities Act of 1933
compliance, Securities Exchange Act of 1934 compliance, "Blue Sky Law"
compliance and Rule 144/145/701 sales and transaction compliance. He has
participated directly in eight public offerings registered with the S.E.C.
and filed over thirty private offerings.
<PAGE> 32
Mr. Thatcher was a junior partner of Daniel P. Edwards, P.C., an "AV" rated
Colorado law firm with multiple listings for "preeminence" in the Martindale
Hubell Directory. The firm was "of counsel" to Hughes Dorsey, Denver,
Colorado, Heron Burchette, Washington, D.C. and Sparks, Dix and Enoch,
Colorado Springs, Colorado. He is an honorary member of Phi Kappa Delta,
Sutton Award candidate, and recipient of the E.V. Graham Scholarship Merit
Award.
Mr. Thatcher attended the University of Denver where he earned a Juris
Doctorate and Masters in Business Administration. He is presently a
member of the State Bar of Colorado; Court of Appeals, District of Columbia;
Committee Member of the Securities Forum, Washington, D.C.; Member of
the Business Section, Securities Forum, Tax Section and Estate and
Probate Section of the American Bar Association; and Member of the
American Society of International Law.
John L. Crispin, M.D., Member of the Board of Directors - Doctor Crispin,
currently a practicing physician is Chief, Department of Anesthesiology, at
Central Maine Medical Center. He has held the position of Department Chief
since 1995. Doctor Crispin, is licensured in the State of Maine and certified
as Diplomate, American Board of Anesthesiology. Doctor Crispin holds a B.A.
Cum Laude from Colby College, Waterville, Maine and a 1982 graduate of
Dartmouth Medical School. He has served his internship, residency,
fellowship, military and as Chief Resident duties throughout the northern
seaboard. Doctor Crispin was awarded the John Dukrey Award for Excellence in
Regional Anesthesia and the Robert D. Dripps Award for the outstanding
graduate resident in anesthesiology. He currently is a member of the Board of
Directors for United Way of Androscoggin County and Lewiston-Auburn
Physician's Association in addition to serving on the Executive, Operating
Room, Pharmacy and Therapeutic Committees at Central Maine Medical Center.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following material contains information concerning the directors,
including their recent employment, positions with the Company, other
directorships and age as of the date of this Form 10 KSB.
<PAGE> 33
CAPACITIES IN DIRECTOR OR
NAME AGE WHICH SERVED OFFICER SINCE
--- ------------- -------------
Paul W. Chute 49 Chairman of the Board, 1997
President and Treasurer
Jacquelyn J. Magno 51 Vice President and 1996
Secretary
John Crispin, MD 42 Director 1997
Mark T. Thatcher, Esq. 34 Director 1997
Each director holds office until the next annual meeting of shareholders or
until a successor has been duly elected and qualified. The Board is seeking
qualified nominees to fill the vacancies and anticipates that the nominees
will be presented to shareholders at the Company's next annual meeting.
Officers are appointed by and serve at the discretion of the Board of
Directors. All of the Company's officers devote full time to the Company's
business and affairs.
COMMITTEES OF THE BOARD
The Board of Directors delegates certain of its authority to a Compensation
Committee and an Audit Committee. There are currently vacancies on both of
these committees. The Board expects to fill such vacancies after it has
filled the vacancies on the Board of Directors.
The primary function of the Compensation Committee will be to review and make
recommendations to the Board with respect to the compensation, including
bonuses, of the Company's officers and to administer the Company's proposed
Option Plan.
<PAGE> 34
The function of the Audit Committee is to review and approve the scope of
audit procedures employed by the Company's independent auditors, to review and
approve the audit reports rendered by both the Company's independent auditors
and to approve the audit fee charged by the independent auditors. The Audit
Committee will report to the Board of Directors with respect to such matters
and recommends the selection of independent auditors.
BOARD AND COMMITTEE ATTENDANCE
In the 1998 fiscal year, the Board of Directors held four meetings. All
directors attended more than 75% of the aggregate of board and committee
meetings held during the 1998 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Long Term Compensation
________________________________________________________________________________
Annual Compensat. Awards Payouts
________________________________________________________________________________
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Rest. All
Name and Annual Stock LTIP Other
Principal Comp. Award(s) Opt. P/outs Comp.
Position Year Salary Bonus($) ($) ($) SARs(#) ($) ($)
________________________________________________________________________________
CEO &
Treasurer 1998 51,750.00
Chute,
Paul W.
1997 56,000.00
(Annualized)
V.P.
Magno,
Jacquelyn J. 1998 33,800.00
1997 50,000.00
(Annualized)
1996 50,000.00
V.P.
DeJohn,
Frank J. 1998 35,000.00
(Annualized)
No employee of the Company receives any additional compensation for his
services as a director. Non management directors receive no salary for their
services as such, but are entitled to receive reasonable travel or other out
of pocket expenses incurred by non management directors in attending meetings
of the Board of Directors and a fee of $100.00 per meeting attended.
The Company has no retirement, pension or profit sharing program for the
benefit of its directors, officers or other employees. The Board of Directors
may recommend one or more such programs for adoption in the future.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors, its
executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Commission and the Company. Specific due dates for these reports have been
established and the Company is required to disclose any failure to file, or
late filing, of such reports. Based solely on the Company's review of Forms
3, 4 and 5 and amendments thereto furnished to the Company and written
representations with respect to filing of such Forms, the Company is aware
that all Forms have been filed timely to date.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of September 30, 1998 by (i) each person known by
the Company to own beneficially more than 5% of the outstanding Common Stock,
(ii) each director, and (iii) all executive officers and directors as a
group. Each person has sole voting and sole investment or dispositive power
with respect to the shares shown except as noted.
<PAGE> 36
Shares of Acadia
Common Stock to be
Beneficially Owned Percent
Name and as of the Distrib. of
Address Record Date Class
Paul W. Chute 710,750 19.01%
76 North Withman School Road
Buckfield, ME 04220
Jacquelyn Magno 710,350 19.00%
124 Fairway Drive
Auburn, ME 04210
Mark T. Thatcher 700,000 18.24%
5 Julia Court
Portsmouth, RI 02871
All Directors and 2,247,100 58.56%
Executive Officers
As a Group
Management of Acadia has advised that they may acquire additional shares of
Acadia Common Stock from time to time in the open market at prices prevailing
at the time of such purchases.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with affiliate and insider transactions, the Company will not
secure an independent determination of the fairness and reasonableness of such
transactions and arrangements with affiliates of the Company. However, in
each instance, the directors will review and unanimously approve the fairness
and reasonableness of the terms of the transactions. The Company believes
that the approved transactions will be fair and reasonable to the Company on
the basis that such transactions will be on terms at least as favorable as
could have been obtained from unaffiliated third parties. The transactions
between officers and directors of the Company, on the one hand, and the
Company, on the other, have inherent conflicts of interest.
<PAGE> 37
On September 8, 1998, the Registrant entered into a Contract for Sale of
Assets agreement with Northeast Medical Business Group, Inc., a New Hampshire
corporation (hereinafter referred to as "Northeast" or "Company") and Frank
and Martha DeJohn, sole shareholders of the Company, to acquire selected
assets and a limited list of liabilities of the Company. The Registrant
acquired all accounts receivables, furniture & equipment, computer hardware
and operating systems as well as all software licenses along with various
inventories an prepaid assets. In consideration, the Registrant paid a
combination of $300,000 in cash and selected bank, lease and trade debt
assumption, along with one hundred thousand (100,000) shares of the
Registrant's common stock valued at $1.12 per share. A portion of the cash
used in the acquisition was supplied by a five (5) year term loan for $200,000
at variable market rates obtained from Northeast Bank FSB, Auburn, Maine 04211
(no relationship with acquisition). All assets acquired were owned by or under
lease to Northeast Medical Business Group, Inc., and will continue to be used
in the operations of medical billing, accounts receivable management and
medical practice management.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8 K
(a) EXHIBITS
The following documents are filed herewith or have been included as exhibits
to previous filings with the Commission and are incorporated herein by this
reference:
EXHIBIT NO. DOCUMENT
* 2.1 Assets Purchase Agreement between Acadia National
Health Systems, Inc. and Physician Resources, Inc.,
dated September 27, 1996;
#### 2.2 Contract for Sale of Assets of Northeast Medical
Business Group to Acadia National Health Systems, Inc.,
dated September 8, 1998;
#### 2.3 Non-Competition, Confidentiality and Non-Solicitation
Agreement between Frank and Martha DeJohn and Acadia
National Health Systems, Inc., dated September 8, 1998;
<PAGE> 38
EXHIBIT NO. DOCUMENT
* 3.1 Articles of Incorporation of the Company, as amended;
* 3.2 Bylaws of the Company;
* 4.1 Instruments Defining Rights of Security
Holders/Minutes of Annual/ Special Meetings of the
Company;
* 4.2 Loan Agreements Secured by Demand Notes/Promissory
Notes, Defining Rights of Holders of Long Term Debt;
#### 5.1 Opinion on Legality of Securities Being Issued to
Frank and Martha DeJohn;
* 10.1 Software License Master Agreement;
* 10.2 Lease of Premises, Acadia Corporate Headquarters, 460
Main Street, Lewiston, Maine 04240 (Assignment);
* 10.3 Employment Agreements, dated September 27, 1996
between Acadia and THOMAS N. HACKETT, C.E.O.,
JACQUELYN J. MAGNO, Vice President;
* 10.4 Internal Revenue Code Section 125 Cafeteria Plan
dated June 1, 1996;
* 10.5 Line of Credit Memorandum dated September 8, 1995
with PEOPLE'S HERITAGE BANK in the amount of
$250,000.00;
* 10.6 Line of Credit Memorandum dated July 29, 1996 with
PEOPLE'S HERITAGE BANK in the amount of$100,000.00;
### 10.7 Common Stock Purchase Agreement for 156,000 shares
of common stock of Acadia National Health Systems, Inc.
### 10.8 Assignment Separate from Certificate and
Irrevocable Stock Power for 156,000 shares of common
stock of Acadia National Health Systems, Inc.
<PAGE> 39
EXHIBIT NO. DOCUMENT
### 10.9 Opinion of Counsel with respect to transfer of
156,000 shares of common stock of Acadia National
Health Systems, Inc.
### 10.10 Common Stock Purchase Agreement for 2,326,000 shares of
common stock of Acadia National Health Systems, Inc.
### 10.11 Assignment Separate from Certificate and Irrevocable
Stock Power for 2,326,000 shares of common stock of
Acadia National Health Systems, Inc.
### 10.12 Opinion of Counsel with respect to transfer of
2,326,000 shares of common stock of Acadia National
Health Systems, Inc.
#### 10.13 Board of Directors' Resolution Authorizing Increase
of outstanding Shares in connection with the issuance
of 100,000 shares of common stock of Acadia National
Health Systems, Inc., to Frank and Martha DeJohn, in
joint tenancy w/ right of survivorship;
#### 10.14 Opinion of Counsel with respect to issuance
of 100,000 shares of common stock of Acadia National
Health Systems, Inc. to Frank and Martha DeJohn;
x 11 Computation of Basic and Diluted Earnings Per Share
## 16.1 Baker Newman & Noyes' Letter dated August 18, 1997
in response to Item 4(a)(i), Item 4(a)(ii) and Item
4(a)(iii) of this Form 8-KA.
### 20.1 Board of Director's Resolution authorizing new
lines of credit and a term loan in connection with
canceling personal guaranty and Debts of
Thomas N. Hackett, founder of the Registrant.
### 20.2 Opinion of Borrower's Counsel
### 20.3 Indemnification Agreement (Estate of Thomas N.
Hackett)
<PAGE> 40
EXHIBIT NO. DOCUMENT
### 20.4 Indemnification Agreement (Peacock Hill Farm Limited
Liability Company)
#### 20.5 Board of Director's Resolutions authorizing a term
loan in connection with purchase of selected assets of
Northeast Medical Business Group, Inc. by Acadia
National Health Systems, Inc;
#### 20.6 Opinion of Borrower's Counsel;
x 23.1 Consent of Counsel
x 23.2 Consent of Berry, Dunn, McNeil & Parker, independent
certified public accountants for the Company.
x 27 Financial Data Schedule
x 99.1 Private Securities Litigation Reform Act of 1995 Safe
Harbor Compliance Statement for Forward-Looking
Statements
#### 99.2 Text of press release dated September 9, 1998.
- ------------------------------
x Filed herewith.
* Incorporated by reference from the issuer's Registration Statement
on Form 10SB12G (S.E.C. File No. 000-1026491) as declared effective
on January 11, 1997.
# Incorporated by reference from the Issuer's Form 8 KA for event
date of July 31, 1997.
## Incorporated by reference from the Issuer's Form 8 KA for event
date of August 8 and August 20, 1997.
### Incorporated by reference from the Issuer's Form 8 K for event
date of August 13, 1997.
#### Incorporated by reference from the Issuer's Form 8-K for
event date of September 23, 1998.
<PAGE> 41
(b) REPORTS ON FORM 8 K
The Company filed the following reports on Form 8 K during the last quarter of
the 1998 fiscal year.
8-K, September 9, 1998, Item 99.1, Press Release
8-K, September 23, 1998, Item 2, Acquisition of Assets and
Item 5, Other Events
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACADIA NATIONAL HEALTH SYSTEMS, INC.
By: /s/ Paul W. Chute
Paul W. Chute,
Chairman of the Board and Chief Executive Officer
Date: December 30, 1998
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<PAGE> 42
SIGNATURE TITLE DATE
/s/ Paul W. Chute Chairman of the Board, December 30, 1998
President (Principal
Executive Officer) and
Treasurer
/s/ Jacquelyn J. Magno Vice President and December 30, 1998
Secretary
/s/ John Crispin, MD Director December 30, 1998
/s/ Mark T. Thatcher, Esq. Director December 30, 1998
<PAGE> F-1
ACADIA NATIONAL HEALTH SYSTEMS, INC.
FINANCIAL STATEMENTS TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditors'
Report...............................................F-2
Financial Statements
Balance Sheet
September 30, 1998..............................F-3
Statements of Operations
Years Ended September 30, 1998 and
September 26, 1997..............................F-4
Statement of Changes in Stockholders' Equity
Years Ended September 30, 1998 and
September 26, 1997..............................F-5
Statements of Cash Flows
Years Ended September 30, 1998 and
September 26, 1997..............................F-6
Notes to Consolidated Financial
Statements...........................................F-7
</TABLE>
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Acadia National Health Systems, Inc.
We have audited the accompanying balance sheet of Acadia National Health
Systems, Inc., as of September 30, 1998, and the related statements of income,
changes in stockholders' equity and cash flows for the years ended September
30, 1998 and September 26, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 audits to
obtain reasonable assurance about whether the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Acadia National Health
Systems, Inc., as of September 30, 1998, and the results of its operations,
changes in stockholders' equity, and its cash flows for the years ended
September 30, 1998 and September 26, 1997, in conformity with generally
accepted accounting principles.
Portland, Maine
November 20, 1998
<PAGE> F-3
ACADIA NATIONAL HEALTH SYSTEMS, INC.
Balance Sheet
September 30, 1998
ASSETS
Current assets
Cash $ 2,529
Accounts receivable and advances 1,001,107
Current portion of note receivable 19,885
Prepaid expenses and other assets 69,634
Deferred income taxes 5,960
Total current assets 1,099,115
Property and equipment
Computer software and licenses 79,847
Equipment 134,703
Furniture and fixtures 38,431
Leased equipment under capital leases 211,173
464,154
Less accumulated depreciation 94,863
Net property and equipment 369,291
Other assets
Deferred costs, net of amortization of $10,552 31,754
Goodwill, net of amortization of $1,412 83,323
Note receivable 63,487
Total other assets 178,564
$ 1,646,970
<PAGE> F-4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 542,738
Current portion of long-term debt 57,600
Current portion of obligations under capital leases 55,800
Accounts payable 72,633
Accrued expenses 43,339
Income taxes payable 8,770
Total current liabilities 780,880
Deferred income taxes 12,500
Long-term debt, excluding current portion 248,399
Note payable - stockholder 20,850
Obligations under capital leases,
excluding current portion 92,193
Total liabilities 1,154,822
Commitments (Note 10)
Stockholders' equity
Common stock of no par value; authorized 50,000,000
shares; issued and outstanding 3,837,987 shares 394,640
Additional paid-in capital 41,992
Retained earnings 55,516
Total stockholders' equity 492,148
$ 1,646,970
<PAGE> F-5
ACADIA NATIONAL HEALTH SYSTEMS, INC.
Statements of Income
Years Ended September 30, 1998 and
September 26, 1997
1998 1997
----------- -----------
Revenues $ 1,134,972 $ 730,546
Direct expenses 394,773 229,844
Gross profit 740,199 500,702
Selling, general and administrative expenses
Salaries and benefits 242,685 143,683
Professional fees 42,763 141,423
Administrative 82,624 55,358
Depreciation and amortization 43,773 31,797
Equipment 45,604 23,342
Postage 69,199 30,579
Occupancy 60,190 39,702
Travel 16,438 14,709
Bad debts 5,509 -
Total expenses 608,785 480,593
Other income (expense)
Interest expense (57,199) (34,095)
Interest income 9,450 552
Other income 10,697 17,500
Loss on disposition of fixed assets (13,991) -
Total other expenses (51,043) (16,043)
Income before income taxes 80,371 4,066
Income taxes 26,721 2,200
Net income $ 53,650 $ 1,866
Net income per common share $ .0143 $ .0005
<PAGE> F-6
ACADIA NATIONAL HEALTH SYSTEMS, INC.
Statements of Changes in Stockholders' Equity
Years Ended September 30, 1998 and September 26, 1997
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Paid-in Capital Earnings Total
_________ ___________ _______________ ___________ ____________
<S> <C> <C> <C> <C> <C>
Balance, September 27, 1996 3,708,987 $ 251,640 $ - $ - $ 251,640
Issuance of common stock 25,000 25,000 - - 25,000
Additional capital contribution - - 41,992 - 41,992
Net income - - - 1,866 1,866
Balance, September 26, 1997 3,733,987 276,640 41,992 1,866 320,498
Issuance of common stock 4,000 6,000 - - 6,000
Common stock to be issued 100,000 112,000 - - 112,000
Net income - - - 53,650 53,650
Balance, September 30, 1998 3,837,987 $ 394,640 $ 41,992 $ 55,516 $ 492,148
</TABLE>
<PAGE> F-7
Statements of Cash Flows
Years Ended September 30, 1998 and September 26, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 53,650 $ 1,866
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Stock issued for services received 6,000 41,992
Depreciation and amortization 43,773 31,797
Loss on disposition of fixed assets 13,991 -
Deferred income taxes 13,540 500
Decrease (increase) in
Accounts receivable and advances (95,887) (547,106)
Prepaid expenses and other assets (12,836) 26,184
Increase (decrease) in
Accounts payable 15,436 3,235
Accrued expenses 13,058 (9,694)
Income taxes payable 7,070 1,700
Net cash provided (used) by operating activities 57,795 (449,526)
Cash flows from investing activities
Deposits - 12,000
Additions to property and equipment (97,683) (87,493)
Cash paid for net assets acquired (18,168) -
Note receivable (8,372) (75,000)
Net cash used by investing activities (124,223) (150,493)
Cash flows from financing activities
Net short-term borrowings (10,125) 463,946
Principal payments on long-term debt (20,667) (103,912)
Proceeds from issuance of long-term debt 101,287 101,407
Principal payments under capital lease obligations (7,249) -
Organizational costs - (6,150)
Deferred financing cost - (2,352)
Increase in note payable to stockholder - 6,803
Sale of common stock - 25,000
Net cash provided by financing activities 63,246 484,742
Net decrease in cash (3,182) (115,277)
Cash, beginning of year 5,711 120,988
Cash, end of year $ 2,529 $ 5,711
</TABLE>
<PAGE> F-8
ACADIA NATIONAL HEALTH SYSTEMS, INC.
Notes to Financial Statements
September 30, 1998 and September 26, 1997
Nature of Business and Change in Year End
The Company provides practice management, invoicing and accounts
receivable collection services for doctors' offices, foster homes, and
hospital-based practices in the New England area. The Company's
operations commenced on September 27, 1996, after the acquisition of an
affiliate. During 1998, the Company changed from a 52/53 week year-end
to a fiscal year ending September 30.
1. Summary of Significant Accounting Policies
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 affect the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid investments
with an original maturity of three months or less.
Reclassifications
Certain 1997 balances have been changed to conform with 1998 presentation.
Earnings Per Share
Earnings per share are based upon the weighted average number of common shares
outstanding during the year. There are no common stock equivalents that dilute
the number of shares.
Property and Equipment
Property and equipment are stated at cost and are being depreciated over the
estimated useful lives of the assets using straight-line and accelerated
methods.
<PAGE>
1. Summary of Significant Accounting Policies (Concluded)
Deferred Costs
Deferred development and organizational costs are being amortized using the
straight-line method over five years.
Deferred financing costs are being amortized over the five year term of the
loan.
Goodwill
Goodwill in the amount of $84,735 arose from the acquisition of Northeast
Medical Billing Group. It is being amortized on a straight-line basis over
five years, based on the duration of the non-competition agreement.
Advertising
The Company expenses advertising as incurred. Advertising expense was $8,685
and $630 for the years ended September 30, 1998 and September 26, 1997.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
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 the change is enacted.
Restatement
Equity balances at September 26, 1997 were restated to appropriately reflect
stockholder transactions. There was no change to total stockholders' equity.
<PAGE>
2. Acquisition
On September 8, 1998, the Company acquired selected assets of Northeast
Medical Business Group, Inc., a medical billing and management services
corporation located in New Hampshire. The Company acquired selected assets
and assumed certain bank, lease, and trade debt, in exchange for $18,000 in
cash and 100,000 shares of the Company's common stock, valued at $1.12 per
share. The purchase method was used to account for the acquisition, and the
purchase price was allocated as follows:
Accounts receivable $ 138,000
Deposits and prepaid expenses 8,000
Property and equipment 155,000
Goodwill 85,000
Current liabilities (47,000)
Loan payable (122,000)
Capital lease obligations (87,000)
Cash paid and stock to be issued $ 130,000
The accompanying financial statements include the operations of Northeast
Medical Billing Group, Inc. for the period from September 8, 1998 to
September 30, 1998.
The unaudited consolidated results of operations on a pro forma basis as
though Northeast Medical Business Group had been acquired as of the
beginning of the Company's fiscal years 1998 and 1997 are as follows:
1998 1997
----------- -----------
Revenues and other income $ 1,631,818 $ 1,813,035
Net income 119,842 62,541
Earnings per common share 0.03123 0.01630
3. Accounts Receivable and Advances
Accounts receivable and advances consist of the following at September 30,
1998:
Accounts receivable $ 346,507
Advances 654,600
$ 1,001,107
<PAGE>
3. Accounts Receivable and Advances (Concluded)
The Company has arrangements with certain customers whereby the Company
advances cash to the customer based on their outstanding accounts receivable.
The Company then assumes the responsibility for billing and collecting such
receivables, which have been pledged as collateral.
4. Note Receivable
The Company holds an $83,372 conditional note receivable from a vendor at
l0% interest, due in monthly installments of $2,420, including interest
beginning November l, 1998. The note is collateralized by accounts receivable,
equipment and inventory of the vendor.
5. Indebtedness
Long-Term Debt:
Long-term debt at September 30, 1998 consists of the following:
Note payable to bank at 1.25% above prime, (9.75% at the
balance sheet date), due in monthly installments of $2,822,
including interest, through July 2002; collateralized by
substantially all assets of the Company $ 105,999
9.25% note payable to bank, due in monthly installments
of $4,177, including interest, through September 2003;
collateralized by equipment and fixtures 200,000
305,999
Less current portion 57,600
Long-term debt, excluding current portion $ 248,399
Maturities of long-term debt for the next five years are as follows:
1999 $ 57,600
2000 63,300
2001 69,600
2002 67,900
2003 47,599
<PAGE>
5. Indebtedness (Concluded)
Lines of Credit:
The Company, as co-borrower with Community Living Options (CLO), a customer of
the Company, has a $ 250,000 revolving line of credit which is collateralized
by all assets of the Company, exclusive of real estate. Interest is at the
National Prime rate plus l% (9.50% at September 30, 1998). Borrowings under
this line of credit are limited to 80% of eligible accounts receivable of CLO
(trade accounts receivable due to CLO under its Job Smart program). Advances
under the line totaled $170,038 at September 30, 1998.
The Company also has a $400,000 revolving line of credit which is
collateralized by all assets of the Company, exclusive of real estate.
Interest is at the National Prime rate plus l% (9.50% at September 30, 1998).
Borrowings under this line of credit are limited to 80% of eligible accounts
receivable less the principal amount outstanding on the $105,999 term note
from same lender. Advances under the line totaled $372,700 at September 30,
1998.
6. Leases
Through July 1998, the Company leased office space under an operating
lease agreement calling for monthly rental payments of $1,700. The lease
expired on December 31, 1996, and was renewed on a monthly basis through
July 1998. The Company currently leases office space under an operating
lease agreement that expires in 2003. The lease calls for monthly rental
payments of $3,500. Lease payments under these agreements totaled $25,312
and $20,400 in 1998 and 1997, respectively.
The company leases certain computer and other office equipment under
capital leases that expire from 2000 through 2003. The company also leases
certain computer equipment under a noncancelable operating lease that
expires next year.
Included under property, plant, and equipment at September 30, 1998 are
the following amounts applicable to capital leases:
Equipment $ 207,687
Furniture and fixtures 3,486
211,173
Less accumulated amortization 3,825
$ 207,348
<PAGE>
6. Leases (Concluded)
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of September 30,
1998 are as follows:
Capital Operating
Leases Leases
----------- -----------
1999 $ 69,800 $ 88,000
2000 70,700 62,000
2001 23,200 65,000
2002 5,600 47,000
2003 4,700 41,000
174,000 $ 303,000
Less amount representing interest at 9.25% 26,007
Present value of minimum capital lease payments 147,993
Less current portion 55,800
Obligations under capital leases,
excluding current portion $ 92,193
7. Issuance of Stock as Compensation
During 1997, 60,000 shares of common stock were transferred from an existing
stockholder for services rendered, at a calculated cost per share of $.05087.
An additional 700,000 shares were transferred for services to be rendered
over the next three years. Prepaid expense of $35,609 was recorded and is
being expensed over a three year period beginning in 1998. Accordingly, these
transactions were recorded in additional paid-in capital.
<PAGE>
8. Income Taxes
Income tax expense at September 30, 1998 consists of:
Current Deferred Total
----------- ----------- -----------
1998
----
Federal $ 9,637 $ 10,140 $ 19,777
State 3,544 3,400 6,944
$ 13,181 $ 13,540 $ 26,721
1997
----
Federal $ 1,350 $ 400 $ 1,750
State 350 100 450
$ 1,700 $ 500 $ 2,200
The current deferred tax asset of $5,960 results from accrued vacation pay
which is not currently deductible for income tax purposes.
The noncurrent deferred tax liability of $12,500 results from assets whose tax
basis differs from the financial statement carrying amount.
9. Supplemental Cash Flow Information
Cash paid for interest and income taxes during 1998 and 1997 were as follows:
1998 1997
----------- -----------
Interest $ 57,199 $ 34,095
Income taxes $ 7,444 $ -
<PAGE>
9. Supplemental Cash Flow Information (Concluded)
The Company had the following noncash transactions during 1998:
Equipment was acquired under capital leases totaling $155,243.
The Company had noncash transactions related to the acquisition of Northeast
Medical Billing Group. Debt assumed as part of the acquisition and related
closing costs, totaling $128,713, were refinanced as part of a bank note
payable. In addition, assets were acquired through the issue of common stock
with a market value of $112,000.
10. Commitments
The Company signed a Memorandum of Understanding dated October 1998 with a
corporation to acquire 20% of their issued and outstanding common stock in
exchange for certain considerations totaling approximately $374,000. An
initial payment of $50,000 in cash and 20,000 common shares of
the Company, valued at $1.12 per share, are to be delivered on the closing
date. The remaining cash of $100,000 and 180,000 common shares of stock at
the prevailing market price are to be issued ratably in nine successive
monthly installments. The terms of this agreement are contingent upon
completion of due diligence and acceptance of noncompetition agreements and
other conditions.
11. Related Party Transactions
The Company has notes payable due on demand to an officer and stockholder.
The principal balance of the note was $20,850 at September 30, 1998. The
note is unsecured and requires monthly interest payments at a rate of 10%.
Interest of $2,085 was paid for the years ended September 30, 1998 and
September 26, 1997.
The Company's attorney is a shareholder and also serves on the Board of
Directors. Amounts totaling $11,524 were paid during 1998 for legal and
consulting fees.
12. Fair Value of Financial Instruments
The Corporation's financial instruments consist of cash, short-term trade
receivables and payables, long-term notes receivable, lines of credit and
long-term debt. The carrying amounts of all instruments approximate their
fair value.
<PAGE>
13. Accounting Pronouncement
Effective for fiscal year ended September 30, 2000, all start-up and
organizational costs will have to be expensed as incurred. Remaining
organizational costs of $16,279 will be recorded as a cumulative effect
of a change in accounting principle at that time.
14. Subsequent Event
On October 14, 1998, the Board of Directors authorized the private issuance
of one million shares of the Company's common stock to officers, directors,
stockholders, and employees of the Company at a price of fifty cents per
share.
<PAGE>
EXHIBIT NO. DOCUMENT
* 2.1 Assets Purchase Agreement between Acadia National
Health Systems, Inc. and Physician Resources, Inc.,
dated September 27, 1996;
#### 2.2 Contract for Sale of Assets of Northeast Medical
Business Group to Acadia National Health Systems, Inc.,
dated September 8, 1998;
#### 2.3 Non-Competition, Confidentiality and Non-Solicitation
Agreement between Frank and Martha DeJohn and Acadia
National Health Systems, Inc., dated September 8, 1998;
* 3.1 Articles of Incorporation of the Company, as amended;
* 3.2 Bylaws of the Company;
* 4.1 Instruments Defining Rights of Security
Holders/Minutes of Annual/ Special Meetings of the
Company;
* 4.2 Loan Agreements Secured by Demand Notes/Promissory
Notes, Defining Rights of Holders of Long Term Debt;
#### 5.1 Opinion on Legality of Securities Being Issued to
Frank and Martha DeJohn;
* 10.1 Software License Master Agreement;
* 10.2 Lease of Premises, Acadia Corporate Headquarters, 460
Main Street, Lewiston, Maine 04240 (Assignment);
* 10.3 Employment Agreements, dated September 27, 1996
between Acadia and THOMAS N. HACKETT, C.E.O.,
JACQUELYN J. MAGNO, Vice President;
* 10.4 Internal Revenue Code Section 125 Cafeteria Plan
dated June 1, 1996;
* 10.5 Line of Credit Memorandum dated September 8, 1995
with PEOPLE'S HERITAGE BANK in the amount of
$250,000.00;
<PAGE>
EXHIBIT NO. DOCUMENT
* 10.6 Line of Credit Memorandum dated July 29, 1996 with
PEOPLE'S HERITAGE BANK in the amount of$100,000.00;
### 10.7 Common Stock Purchase Agreement for 156,000 shares
of common stock of Acadia National Health Systems, Inc.
### 10.8 Assignment Separate from Certificate and
Irrevocable Stock Power for 156,000 shares of common
stock of Acadia National Health Systems, Inc.
### 10.9 Opinion of Counsel with respect to transfer of
156,000 shares of common stock of Acadia National
Health Systems, Inc.
### 10.10 Common Stock Purchase Agreement for 2,326,000 shares of
common stock of Acadia National Health Systems, Inc.
### 10.11 Assignment Separate from Certificate and Irrevocable
Stock Power for 2,326,000 shares of common stock of
Acadia National Health Systems, Inc.
### 10.12 Opinion of Counsel with respect to transfer of
2,326,000 shares of common stock of Acadia National
Health Systems, Inc.
#### 10.13 Board of Directors' Resolution Authorizing Increase
of outstanding Shares in connection with the issuance
of 100,000 shares of common stock of Acadia National
Health Systems, Inc., to Frank and Martha DeJohn, in
joint tenancy w/ right of survivorship;
#### 10.14 Opinion of Counsel with respect to issuance
of 100,000 shares of common stock of Acadia National
Health Systems, Inc. to Frank and Martha DeJohn;
x 11 Computation of Basic and Diluted Earnings Per Share
## 16.1 Baker Newman & Noyes' Letter dated August 18, 1997
in response to Item 4(a)(i), Item 4(a)(ii) and Item
4(a)(iii) of this Form 8-KA.
<PAGE>
EXHIBIT NO. DOCUMENT
### 20.1 Board of Director's Resolution authorizing new
lines of credit and a term loan in connection with
canceling personal guaranty and Debts of
Thomas N. Hackett, founder of the Registrant.
### 20.2 Opinion of Borrower's Counsel
### 20.3 Indemnification Agreement (Estate of Thomas N.
Hackett)
### 20.4 Indemnification Agreement (Peacock Hill Farm Limited
Liability Company)
#### 20.5 Board of Director's Resolutions authorizing a term
loan in connection with purchase of selected assets of
Northeast Medical Business Group, Inc. by Acadia
National Health Systems, Inc;
#### 20.6 Opinion of Borrower's Counsel;
x 23.1 Consent of Counsel
x 23.2 Consent of Berry, Dunn, McNeil & Parker, independent
certified public accountants for the Company.
x 27 Financial Data Schedule
x 99.1 Private Securities Litigation Reform Act of 1995 Safe
Harbor Compliance Statement for Forward-Looking
Statements
#### 99.2 Text of press release dated September 9, 1998.
- ------------------------------
x Filed herewith.
* Incorporated by reference from the issuer's Registration Statement
on Form 10SB12G (S.E.C. File No. 000-1026491) as declared effective
on January 11, 1997.
# Incorporated by reference from the Issuer's Form 8 KA for event
date of July 31, 1997.
<PAGE>
## Incorporated by reference from the Issuer's Form 8 KA for event
date of August 8 and August 20, 1997.
### Incorporated by reference from the Issuer's Form 8 K for event
date of August 13, 1997.
#### Incorporated by reference from the Issuer's Form 8-K for
event date of September 23, 1998.
ACADIA NATIONAL HEALTH SYSTEMS, INC.
COMPUTATION OF BASIC EARNINGS PER SHARE
Twelve Months Ended September 30, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 30, September 30,
Description 1998 1997
----------------- ----------------
<S> <C> <C>
Weighted average shares outstanding
during the period 3,744,321 3,733,987
Shares issuable upon assumed exercise
of stock options, less amounts assumed
repurchased under the treasury stock 0 0
method ----------------- ----------------
Total weighted average common stock
and common stock equivalents
outstanding during the period 3,744,321 3,733,987
================= ================
Net income from continuing operations $ 53,650 $ 1,866
Discontinued operation, net of tax 0 0
Extraordinary items, net of tax 0 0
----------------- ----------------
Net income $ 53,650 $ 1,866
================= ================
Net income per common share: $ .0143 $ .0005
</TABLE>
CONSENT OF COUNSEL
I hereby consent to the use of my name as legal counsel in the Annual Report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal year ended September 30, 1998 filed by Acadia National Health Systems,
Inc. on Form 10-KSB.
LAW OFFICES OF MARK T. THATCHER
/S/ Mark T. Thatcher
By:_____________________________
MARK T. THATCHER, ESQ.
Newport, RI
December 30, 1998
We hereby consent to the use of our name as auditing firm in the Annual Report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal year ended September 30, 1998 filed by Acadia National Health Systems,
Inc. on Form 10-KSB.
Berry, Dunn, McNeil & Parker
Portland, Maine
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,529
<SECURITIES> 0
<RECEIVABLES> 1,070,741
<ALLOWANCES> 0
<INVENTORY> 2,468
<CURRENT-ASSETS> 1,099,115
<PP&E> 464,154
<DEPRECIATION> 94,863
<TOTAL-ASSETS> 1,646,970
<CURRENT-LIABILITIES> 780,880
<BONDS> 0
<COMMON> 394,640
0
0
<OTHER-SE> 97,508
<TOTAL-LIABILITY-AND-EQUITY> 1,646,970
<SALES> 1,134,972
<TOTAL-REVENUES> 1,155,119
<CGS> 394,773
<TOTAL-COSTS> 608,785
<OTHER-EXPENSES> 13,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,199
<INCOME-PRETAX> 80,371
<INCOME-TAX> 26,721
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<PAGE>
<CHANGES> 0
<NET-INCOME> 53,650
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), 15 U.S.C.A. Sections 77z 2 and 78u 5 (Supp. 1996), Congress encouraged
public companies to make "forward looking statements" by creating a safe
harbor to protect companies from securities law liability in connection with
forward looking statements. Acadia National Health Systems, Inc. ("Acadia"
or the "Company") intends to qualify both its written and oral forward looking
statements for protection under the Reform Act and any other similar safe
harbor provisions.
"Forward looking statements" are defined by the Reform Act. Generally, forward
looking statements include expressed expectations of future events and the
assumptions on which the expressed expectations are based. All forward
looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward looking statements of Acadia. The
Company undertakes no obligation to update or revise this Safe Harbor
Compliance Statement for Forward Looking Statements (the "Safe Harbor
Statement") to reflect future developments. In addition, Acadia undertakes no
obligation to update or revise forward looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time.
Acadia provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward looking
statements include the disclosures contained in the Quarterly Report on Form
10 KSB to which this statement is appended as an exhibit and also include the
following:
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial indebtedness and, as a result, significant debt
service obligations. The Company's ability to make payments on its debt
obligations will depend on its future operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control. If the Company is
unable to service its indebtedness, it will be required to adopt alternative
strategies, which may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms.
The degree to which the Company is leveraged could have important
consequences, including: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions or other general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations may be
dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for its operations; (iii)
the Company's existing indebtedness contains, and future financings are
expected to contain, financial and other restrictive covenants, including
without limitation those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends, sales of
assets, capital expenditures, and prepayment of indebtedness and those
requiring maintenance of minimum net worth, minimum EBITDA and minimum
interest coverage and limiting leverage; (iv) certain of the Company's
borrowings are and will continue to be at variable rates of interest which
expose the Company to the risk of increases in interest rates; and (v) the
Company may be more leveraged than certain of its competitors, which may place
the Company at a relative competitive disadvantage and make the Company more
vulnerable to changes in its industry and changing economic conditions. As a
result of the Company's level of indebtedness, its financial capacity to
respond to market conditions, extraordinary capital needs and other factors
may be limited.
LIQUIDITY
The Company expects to consummate the sale of equity in connection with a
planned secondary offering prior to September 30, 1999 and to use a portion of
the net proceeds from the sale to pay off indebtedness. There can be no
assurance that the sale will close by such date or at all.
LITIGATION AND GOVERNMENT INVESTIGATIONS
Numerous federal and state civil and criminal laws govern medical billing
activities. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal
and state healthcare programs.
The Company and its clients from time to time anticipate that they will
receive in the future, official inquiries (including subpoenas, search
warrants, as well as informal requests) concerning particular billing
practices related to the Company and its many clients.
EVOLVING INDUSTRY STANDARDS; RAPID TECHNOLOGICAL CHANGES
Acadia's success in its business will depend in part upon its continued
ability to enhance its existing products and services, to introduce new
products and services quickly and cost effectively to meet evolving customer
needs, to achieve market acceptance for new product and service offerings and
to respond to emerging industry standards and other technological changes.
There can be no assurance that Acadia will be able to respond effectively to
technological changes or new industry standards. Moreover, there can be no
assurance that competitors of Acadia will not develop competitive products, or
that any such competitive products will not have an adverse effect upon
Acadia's operating results.
The Company intends further to refine, enhance and develop certain of the
Company's existing software and billing systems and to change all of the
Company's billing and accounts receivable management services operations over
to the Company's most proven software systems and technology to reduce the
number of systems and technologies that must be maintained and supported.
Moreover, management intends to continue to implement "best practices" and
other established process improvements in its operations going forward. There
can be no assurance that the Company will be successful in refining, enhancing
and developing its software and billing systems going forward, that the costs
associated with refining, enhancing and developing such software and systems
will not increase significantly in future periods, that the Company will be
able successfully to migrate the Company's billing and accounts receivable
management services operations to the Company's most proven software systems !
and technology or that the Company's existing software and technology will not
become obsolete as a result of ongoing technological developments in the
marketplace.
YEAR 2000
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the year 2000 or thereafter without error or interruption
(commonly known as the "Year 2000" problem). The Company has conducted a
review of its business systems, including its computer systems, and is
querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. Through its review, the Company has identified a
number of older legacy systems that will be abandoned in favor of a limited
number of more efficient processing systems, rather than make all the systems
Year 2000 compatible. Customers, vendors and resellers have been identified
and requests for information distributed regarding the Year 2000 readiness of
such parties.
Responses are expected through the first quarter of 1999. The Company will
develop contingency plans during the first quarter of 1999 through the second
quarter of 1999 in response to assessments of the Year 2000 readiness of
customers, vendors and resellers. The estimated cost of the Company's Year 2000
efforts is $25,000 to $30,000 over 1998 and 1999, the majority of which
represents redirection of internal resources. However, there can be no assurance
that the Company will identify all such Year 2000 problems in its computer
systems or those of its customers, vendors or resellers in advance of their
occurrence or that the Company will be able to successfully remedy any problems
that are discovered. The expenses of the Company's efforts to identify and
address such problems, or the expenses or liabilities to which the Company may
become subject as a result of such problems, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The revenue stream and financial stability of existing customers may be
adversely impacted by Year 2000 problems, which could cause fluctuations in the
Company's revenue. In addition, failure of the Company to identify and remedy
Year 2000 problems could put the Company at a competitive disadvantage
relative to companies that have corrected such problems.
COMPETITION; INDUSTRY AND MARKET CHANGES
The business of providing billing and management services to physicians and
hospitals is highly competitive. Acadia competes with certain national and
regional physician and hospital reimbursement organizations and billing
businesses (including local independent operating companies), certain
national information and data processing organizations and certain physician
groups and hospitals that provide their own business management services.
Potential industry and market changes that could adversely affect the billing
aspects of Acadia's business include (i) a significant increase in managed
care providers relative to conventional fee for service providers, potentially
resulting in substantial changes in the medical reimbursement process, or the
Company's failure to respond to such changes and (ii) new alliances between
healthcare providers and third party payors in which healthcare providers are
employed by such third party payors. The business of providing application
software, information technology and consulting services is also highly
competitive and Acadia faces competition from certain national and regional
companies in connection with its technology operations. Certain of Acadia's
competitors have longer operating histories and greater financial, technical
and marketing resources than Acadia. There can be no assurance that
competition from current or future competitors will not have a material
adverse effect upon Acadia.
The Company's business is affected by, among other things, trends in the U.S.
healthcare industry. As healthcare expenditures have grown as a percentage of
the U.S. Gross National Product, public and private healthcare cost
containment measures have applied pressure to the margins of healthcare
providers.
Historically, some healthcare payors have paid the prices established by
providers while other healthcare payors, notably government agencies and
managed care companies, have paid less than established prices (in many cases
less than the average cost of providing the services). As a consequence,
prices charged to healthcare payors willing to pay established prices have
increased in order to recover the cost of services purchased by government
agencies and others but not paid for by them (i.e., "cost shifting"). The
increasing complexity in the reimbursement system and assumption of greater
payment responsibility by individuals have caused healthcare providers to
experience increase accounts receivable and bad debt levels and higher
business office costs. Healthcare providers historically have addressed these
pressures on profitability by increasing their prices, by relying on
demographic changes to support increases in the volume and intensity of
medical procedures and by cost shifting. Notwithstanding the providers'
responses to these pressures, management believes that the revenue growth
rate experienced by certain of the Company's clients continues to be adversely
affected by increased managed care and other industry factors affecting
healthcare providers in the United States. At the same time, the process of
submitting healthcare claims for reimbursement to third party payors in
accordance with applicable industry and regulatory standards continues to
grow in complexity and to become more costly. Management believes that
these trends have adversely affected and could continue to adversely affect
the revenues and profit margins of the Company's operations.
GOVERNMENTAL INVESTIGATORY RESOURCES AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing practices of healthcare providers and related entities, and
particularly on possibly fraudulent billing practices. This heightened
scrutiny has resulted in a number of high profile civil and criminal
investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting Act
of 1996, Pub. L. No. 104 191, 1996 U.S.C.C.A.N. (110 Sat. 1936) (codified in
scattered sections of the United States Code, including 18, 26, 29 and 42
U.S.C.), which includes an expansion of provisions relating to fraud and
abuse, creates additional criminal offenses relating to healthcare benefit
programs, provides for forfeitures and asset freezing orders in connection
with such healthcare offenses and contains provisions for instituting greater
coordination of federal, state and local enforcement agency resources and
actions.
In recent years, the focus of healthcare legislation has been on budgetary and
related funding mechanism issues. Both the Congress and the Clinton
Administration have made proposals to reduce the rate of increase in projected
Medicare and Medicaid expenditures and to change funding mechanisms and other
aspects of both programs. In late 1995, Congress passed legislation that would
substantially reduce projected expenditure increases and would make
significant changes in the Medicare and Medicaid programs. Acadia cannot
predict the effect of pending legislation, if adopted, on its operations.
A number of states in which Acadia has operations either have adopted or are
considering the adoption of healthcare reform proposals at the state level.
Acadia cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market, including certain employer initiatives such as creating purchasing
cooperatives and contracting for healthcare services for employees through
managed care companies (including health maintenance organizations), and
certain provider initiatives such as risk sharing among healthcare providers
and managed care companies through capitated contracts and integration among
hospitals and physicians into comprehensive delivery systems. Consolidation of
management and billing services through integrated delivery systems may result
in a decrease in demand for Acadia billing services for particular physician
practices.
EXISTING GOVERNMENT REGULATION
Existing government regulation can adversely affect Acadia's business through,
among other things, its potential to reduce the amount of reimbursement
received by Acadia's clients for healthcare services. Acadia's medical
billing activities are also governed by numerous federal and state civil and
criminal laws. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs. Submission of claims for services or procedures that are
not provided as claimed, or which otherwise violate the regulations, may lead
to civil monetary penalties, criminal fines, imprisonment and/or exclusion
from participation in Medicare, Medicaid and other federally funded healthcare
programs. Specifically, the Federal False Claims Act allows a private person
to bring suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and for such person to share in any amounts paid to
the government in damages and civil penalties. Successful plaintiffs can
receive up to 25 30% of the total recovery from the defendant. Such qui tam
actions or "whistle blower" lawsuits have increased significantly in recent
years and have increased the risk that a company engaged in the healthcare
industry, such as Acadia and many of its customers, may become the subject of
a federal or state investigation, may ultimately be required to defend a false
claims action, may be subjected to government investigation and possible
criminal fines, may be sued by private payors and may be excluded from
Medicare, Medicaid and/or other federally funded healthcare programs as a
result of such an action. Some state laws also provide for false claims
actions, including actions initiated by a qui tam plaintiff. Any such
proceeding or investigation could have a material adverse effect upon the
Company.
The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect
hospital reimbursement. Such regulation could have an adverse effect on the
operations of hospitals in general, and consequently reduce the amount of the
Company's revenue related to potential hospital clients.
There can be no assurance that current or future government regulations or
healthcare reform measures will not have a material adverse effect upon
Acadia's business.
VOLATILITY OF STOCK PRICE
Acadia believes factors such as the Company's liquidity and financial
resources, healthcare reform measures and quarter to quarter and year to year
variations in financial results could cause the market price of Acadia Common
Stock to fluctuate substantially. Any adverse announcement with respect to
such matters or any shortfall in revenue or earnings from levels expected by
Management could have an immediate and material adverse effect on the trading
price of Acadia Common Stock in any given period. As a result, the market for
Acadia Common Stock may experience material adverse price and volume
fluctuations and an investment in the Company's Common Stock is not suitable
for any investor who is unwilling to assume the risk associated with any such
price and volume fluctuations.
