U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-12564
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Ages Health Services Inc.
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(Name of small business issuer in its charter)
Massachusetts 04-3102249
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Hingham Street, Suite 103S
Rockland, MA 02370
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(Address of principal executive offices) (Zip Code)
617-871-6550
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(Issuer's Telephone number,
including area code)
Securities registered under Section 12 (b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, without par value
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(Title of Class)
Redeemable Common Stock Purchase Warrants
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not 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 the Form 10-
KSB or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year ending September 30,
1996 were $7,214,781
At December 23, 1996, the aggregate market value of the Company's voting
common stock held by non-affiliates, computed by reference to the average
bid and asked prices of such stock, was approximately $443,621.
DOCUMENTS INCORPORATED BY REFERENCE
Document Parts Into Which Incorporated
Proxy Statement prepared in connection Part III
with the Company's Annual Meeting of
Stockholders which will be filed within
120 days of the end of the Company's
fiscal year
Part I
Item 1. Description of Business
General
Ages Health Services Inc. (the "Company") provides behavioral health
services delivered by multidisciplinary teams of clinicians through two
programs: the Geriatric Services Program and the Outpatient Services
Program. In the Geriatric Services Program, teams go into nursing
facilities and rest homes to provide services to the residents of these
facilities. These services assist the facilities in meeting important
regulatory requirements. The Company's Geriatric Services Program operates
in Massachusetts, Connecticut and Rhode Island. The Outpatient Services
Program serves primarily non-geriatric Medicaid clients referred by a
variety of Massachusetts state agencies at the Company's mental health
clinic and in a variety of home or housing settings. The services provided
include diagnostic procedures, individual, group and family therapy,
medication monitoring and consultations to facility or state agency staff
and other caregivers. The clinical teams include masters level therapists,
social workers, psychologists, nurse practitioners, clinical nurse
specialists and psychiatrists.
Geriatric Services Program
Nursing Home Mental Health Needs. The need for mental health services for
nursing home residents is large and should grow. A recent report sponsored
by the Hebrew Rehabilitation Center for Aged's Research and Training
Institute, Mental Health Policy Research Center, federal agencies and
private organizations found that eighty to ninety percent of nursing home
residents in the United States suffer from mental health problems, including
depression, anxiety, schizophrenia, dementia, delirium and behavioral
symptoms. The primary users of the Company's services are persons over 65
years of age who reside in geriatric care facilities. The number of persons
in this age group has been increasing faster than the overall population,
largely as a result of demographic trends and advances in medical technology
which have increased life expectancies. The aging of the U.S. population
also has resulted in a greater incidence of disease and disability.
According to a study by Arthur Andersen, almost half of the people over age
65 will spend some time in a long term care facility.
The Company's Geriatric Services Program currently provides services to
approximately 4,000 residents in approximately 175 nursing homes, rest
homes, homes for the aging and other geriatric care facilities in
Massachusetts, Connecticut and Rhode Island. The Company believes that it
provides mental health services to more geriatric care facilities in
Massachusetts than any other provider of such services. The Company offers
the nursing homes and other geriatric care facilities the means to treat
residents suffering from behavioral problems, cognitive decline, dementia,
depression, psychosis and other psychological problems common to the
geriatric population. The Company enters into non-exclusive agreements with
such facilities pursuant to which the facilities may, but are not required
to, refer residents requiring such services to the Company.
Description of Services Provided. The Geriatric Services Program
constitutes the largest segment of the Company's current service system.
The Company provides comprehensive mental health services to older adults in
nursing homes, rest homes, homes for the aging and other geriatric care
facilities. Services are intensive, short-term, and goal-oriented, with a
focus on maintaining individuals in their facility and avoiding
hospitalizations.
A list of services follows:
* Psychodiagnostic assessments
* Individual psychotherapy
* Group psychotherapy
* Family systems work
* Psychopharmacological consultations
* 24 hour emergency services and crisis intervention
* Behavior management and consultation
* OBRA compliance
* Arrangements for psychiatric hospitalizations
* Specialty services for Alzheimer's patients
In addition to direct care, the Company provides education to facility staff
to support their ongoing management of patients, including crisis
management. Facility staff training is multi-tiered, with an initial
orientation about mental health services and the Company's policies and
procedures; ongoing assistance with, and training in patient management
issues; and formal seminars, with continuing education credits available for
facility staff.
Market Trends. The trend for Medicare and Medicaid programs to seek to
contract with managed care organizations to administer care and control
costs continues. In Massachusetts, Medicare is moving rapidly to increase
the percentage of Medicare beneficiaries enrolled in Medicare-risk managed
care plans. All of the New England states, including Massachusetts,
Connecticut and Rhode Island, have announced their intention to each seek
waivers from the Federal government to manage the care of those with dual
eligibility for Medicare and Medicaid within the next two years. The
Company cannot predict whether these waivers will be granted and, if
granted, what the impact on mental health services to the elderly would be.
The Company believes that the demographics showing an aging population, the
growing need to manage behavioral issues in geriatric care facilities and
the growing recognition of the cost effectiveness of outpatient mental
health services for the elderly should lead to growing demand for the
Company's Geriatric Services Programs. The challenge will be to work with
the managed care organizations to realize the value of mental health
services as a means of holding down overall healthcare costs by lowering
utilization of other healthcare services and to continue improving the
management of the delivery of services as management of costs becomes more
and more important. The Company continues to evaluate how to obtain the
management information systems necessary to remain competitive as managed
care becomes more and more prevalent. The Company continues to seek out
affiliations and other relationships across the continuum of mental health
services to better position it to be part of networks able to accept
capitated arrangements. The Company currently has no contracts to provide
mental health services on a capitated basis. If managed care organizations
did not reimburse, reduced reimbursement or otherwise did not encourage mental
health services for the elderly, this could have a material adverse effect on
the Company's Geriatric Services Programs. The Company cannot predict the
impact of increased managed care on mental health services to Medicare
beneficiaries.
Regulation of Psychosocial Needs of Residents at Long-Term Care Facilities.
The Nursing Home Reform Act, part of the Omnibus Budget Reconciliation Act
of 1987 ("OBRA"), mandated that any long-term care facility participating in
the Medicare or Medicaid program meet the psychosocial needs of its
residents and limit the use of chemical restraints. Services provided by
the Company help facilities comply with OBRA. OBRA applies to long term
care facilities nationwide. In 1995, Congress proposed, as part of Medicaid
block grants, relaxing certain federal standards in OBRA. The status of
Medicaid block grant proposals is uncertain at this time. If nursing
facilities no longer had to meet OBRA standards, this could have a material
adverse affect on the Company's geriatric services programs. The Company
cannot predict whether these proposals will be adopted or, if adopted, what
standards states would set.
Competition. The Company believes that there are many providers of mental
health services located throughout the United States which deliver mental
health care to nursing facility and rest home residents, which can be
considered competitive entities to the Company. Many providers who serve
the nursing facility and rest home population are components of larger
community-based mental health centers whose mission is to provide a wide
range of mental health services to persons of all ages. The Company
believes that many of those providers deliver single dimensional service
(usually individual counseling) and may not have the capacity to coordinate
the variety of care components required by residents with complex needs.
Furthermore, the Company believes that services provided to elderly
residents are often delivered by therapists with less specialized geriatric
training.
The Company believes that it provides geriatric services in the mental
health field to residents in more nursing facilities and rest homes in
Massachusetts than any of its competitors. The Company is aware of a number
of hospitals, hospital chains and one public company that are serving
nursing facility residents in Massachusetts. The financial and other
resources of these entities presently active in Massachusetts are
significantly larger than those of the Company, although the Company does
not believe that such entities, respective market share is larger than the
Company's. In addition, the Company is also in competition with individual
practitioners and governmental agencies engaged in providing mental health
services. The Company could be adversely affected if other companies with
substantial resources seek to enter the market for services provided by the
Company.
Outpatient Services Program
Outpatient Services Program. The Company's Outpatient Services Program
provides comprehensive diagnostic and treatment services to outpatient
clients of all ages. Clients are seen at the Company's licensed mental
health clinic in Rockland, Massachusetts and at sites throughout
Massachusetts. The Outpatient Services Program serves approximately 1,000
clients who are referred primarily by state health and social service
agencies.
Other outpatient referral sources are local physicians and therapists,
schools and school collaboratives, residential and day programs for the
disabled, and forensic services for courts and court officers. Outpatient
care consists almost exclusively of individual diagnostic evaluations and
therapy, although emergency response, consultation, group service, family
support and medication monitoring are also offered.
The Outpatient Services Program operates in a highly competitive market
dominated by several large freestanding licensed mental health clinics. The
Company's competitive position is enhanced by a service referral and
delivery model that utilizes a modified team approach, which allows referral
sources to make referral directly to specific, highly trained, licensed
clinicians. Approximately 75% of Outpatient Services are covered by
Massachusetts Medicaid's mental health managed care program. The
Massachusetts Medicaid mental health managed care contract was rebid and the
manager changed in June of 1996 from Mental Health Management of America to
the Massachusetts Behavioral Health Partnership ("MBHP"). The Company
currently participates in MBHP's network of contracted providers of mental
health services. MBHP is currently engaged in a selective procurement
process whereby it has requested all outpatient providers to submit an
application to remain a provider. A decision on all applications, including
the Company's, is currently expected sometime before April 1997. If the
Company were not included in the network utilized by MBHP, it would have a
material adverse affect on the Outpatient Services Program.
The outpatient marketing efforts focus on increasing the number of clients
referred to the Company by state agencies (Massachusetts Department of
Mental Retardation, Department of Youth Services and Department of Social
Services), managed care companies (MBHP and others) and primary care
physicians. Increased referrals are generated by providing information to
referral sources on the Company's services and by establishing contracts or
relationships with referral or case managers. The Company seeks to maintain
strong relationships with its referral sources by providing regular
utilization information and updates on patient progress.
Reimbursement
The Company's revenues are primarily derived from government payors. The
Company estimates that approximately 88% of its revenues during fiscal 1996
were derived from Medicaid and Medicare.
Medicare. Medicare is a federal health insurance program which provides
health insurance coverage for certain disabled persons, and for persons aged
65 or older. There are two parts of the Medicare program: Part A which
covers inpatient services, home health care and hospice care and Part B
which covers physicians, other health care professionals and outpatient
services. Medicare is funded by both beneficiary and Federal contributions.
The Company's mental health services provided to Medicare recipients by
psychiatrists, clinical psychologists, licensed independent social workers
and nurse practitioners are covered under Medicare Part B. Payments are
based on a published fee schedule which differs by geographic region.
Medicare beneficiaries, or the beneficiaries' supplemental insurance, if
available, are required to pay an annual deductible and co-payment for most
Part B services.
Such co-payments generally equal 20% of the Medicare allowed amount for
medical, nursing or diagnostic services. For therapeutic treatment of
mental disorders, Medicare generally pays 50% of the approved fee amount,
requiring the beneficiary or the beneficiary's supplemental coverage, if
available, to cover 50%. Medicare generally requires that the services be
provided in accordance with an established plan of treatment. Certain Part
B carriers appointed by the government to administer the Medicare Part B
program require a physician's referral and established plan of treatment to
qualify for reimbursement for mental health services.
Medicaid. Medicaid is the state administered and state and federally funded
program which provides health insurance coverage for certain low income
individuals. For qualified Medicare beneficiaries, certain Medicaid
programs pay the beneficiary's Part B premiums and generally reimburse all
deductibles and co-payment portions of the approved Medicare fee up to an
allowable amount established by each Medicaid program. Medicaid programs in
several states cover mental health services with certain reimbursement
limitations. The Company receives full Medicaid reimbursements in
Massachusetts. This includes reimbursements paid through the managed care
program operated by MBHP. The Company's participation in this managed care
program is contingent upon satisfactory participation in MBHP's network of
contracted providers of mental health services. MBHP currently manages
services provided to Massachusetts Medicaid recipients who do not also have
Medicare or private insurance coverage. However, the Company receives no
Medicaid reimbursement in Rhode Island where all mental health care is
provided by State supported clinics. Connecticut Medicaid does not
reimburse the Company for social work services. There has been an
increasing trend for Medicaid programs to contract with managed care
organizations to administer care and control costs. In these situations,
the Company and its providers must be approved to participate on provider
panels in order to service the Medicaid patients.
Government and other third-party payors' health care policies and programs
have been subject to changes in payment levels and payment methodologies
during past years. There can be no assurance that future changes will not
reduce reimbursement from these sources for mental health services.
Management Information Systems
During fiscal 1994, the Company installed a comprehensive Management
Information System ("MIS"). In fiscal 1995, the Company completed
development of billing and accounts receivable management components of the
MIS. In fiscal 1996, the Company began evaluating MIS components that were
commercially available to integrate into the MIS components it had developed
on its own. The goal would be to speed up completion of an integrated MIS
data base and achieve economies in its MIS development costs. The Company
believes access to full MIS capabilities are critical if the Company is to
meet the information demands of managed care systems.
Government Regulation
The Company is subject to various state licensing requirements and federal
regulations governing the delivery of mental health services and Medicare
and Medicaid regulations which determine the amount of allowable
reimbursement for various services. The Company bills Medicare through
several group provider numbers issued to the clinical personnel engaged by
the Company to provide mental health services. In order to bill
Massachusetts Medicaid for mental health services, the Company must be
certified as a provider. The Company is currently certified as required and
believes that it is in compliance with applicable regulations at present.
However, if changes are made to Medicare or Medicaid policies or regulations
with respect to the provision of mental health services or the level of
reimbursement for such services, significant delays, increased costs and
decreased reimbursement to the Company could result which could have a
materially adverse effect on the Company's business.
The Company has a mental health clinic license from the Massachusetts
Department of Public Health (DPH) in connection with certain aspects of its
business. State and local agencies inspect all healthcare facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participation
in government medical assistance programs. In addition, all clinics are
subject to various local building codes and other ordinances. Various state
and Federal laws regulate the relationship between providers of healthcare
services and physicians, including employment of service contracts and
investment relationships. These laws include the fraud and abuse provisions
of federal Medicare and Medicaid statutes and similar statutes governing
Medicaid and certain private payors (the "Fraud and Abuse Laws"), which
prohibit the payment, receipt, solicitation or offering of any direct or
indirect remuneration with the intent to induce the referral of residents or
for the ordering of or for the providing of covered services, items or
equipment. Violations of these provisions may result in civil or criminal
penalties and/or exclusion from participation in the Medicare and Medicaid
programs or various private insurance programs.
Licensing and Certification. Psychiatrists, clinical psychologists,
clinical social workers and registered nurse practitioners must be licensed
in the state or states in which they practice. Such licensure is controlled
by state boards as well as other regulatory authorities in each state. The
Company has procedures designed to ensure that each of the mental health
professionals it employs is properly licensed. The Company anticipates that
each of its facilities and practitioners will be able to maintain applicable
licenses, certifications and accreditations, and obtain reasonable
reimbursement for services. However, the loss, denial or restriction of any
such reimbursement, licensure, accreditation, or certification, including
certification-of-need or exemption through changes in applicable regulatory
requirements, an enforcement action, or otherwise, could have a material
adverse effect on the Company.
Governmental Health Care Regulation. As a health care provider, the Company
is currently subject to extensive and frequently changing federal, state and
local regulations governing licensure, conduct of operations at existing
facilities, purchase or lease of existing businesses, cost containment and
direct employment of psychiatrists, psychologists and other licensed
professionals by business corporations. The various types of regulatory
activity affect the Company's business either by controlling its growth,
restricting licensure of the business entity or by controlling the
reimbursement for services provided.
In order to receive Medicare reimbursement, the Company's local operations
must be registered with Medicare as a group provider. In addition, each
individual provider must be certified as an independently practicing
provider and be assigned an individual provider number. The certification
criteria, which are established by the Department of Health and Human
Services, are interpreted and administered by each state. Individual
certification is based on state licensure, academic preparation and length
of clinical experience. In certain locations, the local Part B carrier may
not require certification of the Company but will only require that
providers have certification.
The Social Security Act imposes criminal penalties upon persons who make or
receive kickbacks, bribes or rebates in connection with the Medicare or
Medicaid programs. The anti-fraud and abuse rules prohibit providers and
others from soliciting, offering, receiving or paying, directly or
indirectly, any remuneration in return for either making a referral for a
Medicare or Medicaid-covered service or item or ordering any covered service
or item. In addition, the Medicare and Medicaid Patient and Program
Protection Act of 1987 imposes civil sanctions for violation of these
prohibitions, punishable by exclusion from the Medicare and Medicaid
programs; such exclusion, if applied to the Company's operations, could
result in significant loss of reimbursement. In order to provide guidance
with respect to the anti-fraud and abuse rules, the Office of the Inspector
General issued final regulations outlining certain "safe harbor" practices,
which although potentially capable of inducing prohibited referrals, would
not be prohibited if all applicable requirements are met. A relationship
which fails to satisfy a safe harbor is not necessarily illegal, but could
be scrutinized under a case-by-case analysis. Because the anti-fraud and
abuse laws have been broadly interpreted, they limit the manner in which the
Company can acquire businesses and market its services to, and contract for
services with physicians, nursing homes and other health care providers.
Management considers and seeks to comply with these regulations in planning
and conducting its activities, and believes that its activities do not
violate the anti-fraud and abuse statute. However, no assurance can be
given regarding compliance in any particular factual situation, as there is
no procedure for advisory opinions from government officials.
Federal and some state laws impose restrictions on physicians, and, in a few
states, on psychologists and other mental health care professionals'
referrals for certain designated health services to entities with which they
have a financial relationship. The Company believes its operations are
structured to comply with these restrictions to the extent applicable.
There can be no assurance that the Federal government or other states in
which the Company operates will not enact similar or more restrictive
legislation or restrictions that could under certain circumstances impact
the Company's operations.
In certain states, the employment of psychiatrists, psychologists and other
mental health care professionals by business corporations is a permissible
practice. However, many states, including some states in which the Company
operates, have interpreted existing medical practice licensing laws to
restrict business corporations, such as the Company, from providing mental
health services through the direct employment of psychiatrists and, in a few
states, psychologists and other mental health care professionals. The
Company believes its operations are structured, or can be restructured, if
necessary, to comply with applicable laws and regulations. However, there
can be no assurance that other states in which the Company operates will not
enact similar or more restrictive legislation or regulations.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of
which may materially increase or decrease the rate of program payments to
health care facilities. Since 1985, Congress has consistently attempted to
limit the growth of Federal spending under the Medicare and Medicaid
programs. The Company can give no assurance that payments under such
programs will in the future remain at a level comparable to the present
level or be sufficient to cover the operating and fixed costs allocable to
such residents.
The Company believes it is in compliance in all material respects with all
material statutes, regulations, standards and conditions applicable to its
business. However, new laws and/or regulations, standards or conditions may
be adopted or existing laws, regulations, standards and conditions may be
interpreted in a manner which could adversely impact the Company's
operations.
Insurance. The Company believes that it maintains the types and amounts of
insurance customary in the mental health services industry, including
coverage for general liability, property damage, workers' compensation and
malpractice liability. The Company considers its insurance coverage to be
adequate both as to risks and amounts.
Business Development
The Company was organized as a Massachusetts corporation on October 30, 1990
and acquired the business of a company providing mental health services to
Massachusetts nursing facilities effective December 1, 1990. The Company
focused for several years primarily on managing and growing this
Massachusetts business. The Company's services were originally provided by
teams consisting of psychologists and masters level therapists. In late
fiscal 1992, the Company acquired certain assets of a neurology practice in
order to develop a medical and mental health clinic in Brookline,
Massachusetts (the "Brookline Facility") to offer neuro-diagnostic services
to appropriate patients being seen by teams in nursing facilities. The
Company expanded the services provided by adding nurse practitioners to
monitor medications in fiscal 1993.
With proceeds of its initial public offering in fiscal 1994, the Company
sought to diversify further and grow in a number of new directions. The
Company began to offer behavioral health services to nursing facilities in
two new states: Connecticut and Rhode Island. The Company also started the
Outpatient Services Program designed to provide outpatient mental health
services to non-geriatric populations. The Company also invested in
developing a management information system. The Company initiated the
development of an Employee Assistance Program (the "EAP Program"), intended
to serve the substantial number of employees in nursing facilities.
In fiscal 1995, the Company focused on reorganization efforts intended to
consolidate the growth from new programs while returning the Company to
profitability. Steps were taken to expand the mix of clinical services
delivered to nursing facilities. Marketing in Massachusetts to grow
revenues was de-emphasized in favor of focusing on improving the management
of the model of service delivery. The programs in Connecticut and Rhode
Island and the Massachusetts Outpatient Program grew in revenues and began
to contribute to the Company on an operating basis. Administrative
functions were reorganized to develop ways to reduce costs and to improve
management of accounts receivable and support of clinical services. Two
programs that were underperforming were discontinued as part of the
Company's reorganization efforts. The Brookline Facility had not yet
developed enough business to cover its costs and was closed in fiscal 1995.
The EAP Program had not grown as expected and was sold in fiscal 1995.
In fiscal 1996, the Company achieved revenue growth in its Connecticut and
Rhode Island Geriatric Services Programs and its Outpatient Services
Division. It also achieved improved margins in its Massachusetts and Rhode
Island Geriatrics Services Programs and the Outpatient Services Program. It
also invested in management costs intended to generate profitable growth
through new customers and better service to current customers. The
Company's efforts have not succeeded, however, in restoring profitability.
The Company expects to implement further steps intended to improve the
Company's performance in fiscal 1997.
Employees
At December 13, 1996, the Company had 101 full-time employees of whom 50
were therapists or clinical associates, 11 were nurse practitioners, 2 were
psychiatrists, and 38 were engaged in management and general administrative
work. The Company also had 29 part-time employees of whom 28 were
therapists or clinical associates and 1 was a nurse practitioner. The
Company also has fee-for-service independent contract arrangements with 5
psychologists, 17 therapists, 14 psychiatrists and 3 nurse practitioners.
The total number of persons employed by the Company is 169. None of the
Company's employees are represented by a collective bargaining agreement and
the company considers its employee relations to be satisfactory.
Item 2. Description of Property
The Company leases approximately 5,000 square feet of executive office space
in an office complex located at 800 Hingham Street in Rockland,
Massachusetts. The lease runs for the period from November 1996 through
October 1999 and provides for a rental cost of approximately $62,000 per annum.
The Company leases approximately 1,000 square feet of office space in
Worcester, Massachusetts. The lease runs for the period from November 1996 and
ends in September 1997 and provides for a rental cost of $1,000 per month. The
Company also rents space on a month to month basis in Cheshire, Connecticut for
$200 per month. The Company believes these facilities are adequate to meet its
present and future requirements, and the Company believes that it can renew
such leases; or lease comparable space, on commercially reasonable terms.
Item 3. Legal Proceedings.
The Massachusetts Department of the Attorney General has been reviewing
certain of the Company's Medicaid claims related to diagnostic, consultation
and medical services performed at nursing homes serviced by the Company.
The Company believes that the primary focus of such review is to determine
whether the services performed were qualifying reimbursable services. The
Company believes that the services provided were appropriate and that all
services were billed correctly. Without admitting liability, the Company
has made an offer of settlement of $100,000 payable over two years to the
Attorney General's office in order to resolve this matter without protracted
legal expenses and disruption to operations. There can be no assurance,
however, that this settlement offer will be accepted or that this review can
be resolved without the need for the Company to pay some other amount. The
Company has set up a reserve of $100,000 related to this possible expense.
The Company is not a party to any other legal proceedings which it believes
may have a material adverse effect on the Company's financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report subject to a vote of security-holders through the
solicitation of proxies or otherwise.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Company's securities, consisting of Common Stock and Redeemable Common
Stock Purchase Warrants (Redeemable Warrants), are traded through the
National Quotation Bureau ("Pink Sheets") and through a NASDAQ sponsored on-
line service, "The Bulletin Board" (202-728-8477).
The high and low closing price (based on bid price) as reported by NASDAQ
for the last two fiscal years follows:
<TABLE>
<CAPTION>
1995 1996
-------------------- ----------------
Common Stock: High Low High Low
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $2.375 $1.00 $.1875 $.0625
Second Quarter $1.625 $0.50 $.1875 $.125
Third Quarter $2.00 $0.625 $.4375 $.125
Fourth Quarter $0.50 $0.09375 $.4375 $.1875
<CAPTION>
1995 1996
-------------------- ----------------
Redeemable Warrants: High Low High Low
- -------------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $0.625 $0.125 $0 $0
Second Quarter $0.15625 $0.03125 $0 $0
Third Quarter $0.375 $0.03125 $0 $0
Fourth Quarter $0.03125 $0.03125 $0 $0
</TABLE>
These quotations reflect inter-dealer prices without retail mark-up, mark-
down or commission, and may not represent actual transactions. Each
Redeemable Warrant expires on December 12, 1998, five years after the date
of the Company's initial public offering. Each Redeemable Warrant entitles
the holder to purchase one share of Common Stock at an exercise price of
$4.00, subject to adjustment in certain events. The Redeemable Warrants are
redeemable by the Company, at a price of $.10 per Redeemable Warrant, at any
time commencing one year after the date of the Company's initial public
offering and prior to their expiration, on 30 days prior written notice to
the registered holders of the Redeemable Warrants, provided that the closing
bid price per share of the Common Stock for a period of 20 consecutive
trading days equals or exceeds 200% of the then current exercise price
(initially $8.00, subject to adjustment).
Holders
The number of holders of record of the Company's Common Stock as of January
19, 1996 was approximately 542.
Dividends
The Company has not paid any cash dividends on Common Stock to date and does
not anticipate or contemplate paying dividends in the foreseeable future.
It is the present intention of management to utilize all available funds for
the growth and development of the Company's business.
Item 6. Management's Discussion and Analysis of Financial Condition and
Result of Operations.
Results of Operations
Net Patient Service Revenue. Net patient service revenues for continuing
operations for fiscal 1996 were increased 3% over fiscal 1995 at $7,214,781
versus $7,026,490. The change in revenues is due to 227% increased revenue
from the Company's Massachusetts Outpatient Services Program, offset by 7%
decreased revenue from the Company's Geriatric Services Program. The Company's
reorganization efforts in the Massachusetts Geriatric Services Program focused
on increasing the percentage of services delivered by lower cost clinicians.
These changes contributed to higher than average turnover among higher cost
clinicians and the loss of a number of facility accounts, which reduced revenue
for this Program. Turnover levels and the number of lost accounts returned to
levels comparable to the period prior to reorganization efforts by the last
half of 1996. Revenue growth in the Outpatient Services Program was primarily
due to successfully recruiting additional clinicians with complementary
practices.
The Company's net patient service revenues by component are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Geriatric Services Program $6,527,567 $6,080,742
MA Outpatient Services Program 498,923 $1,134,039
---------- ----------
Total $7,026,490 $7,214,781
</TABLE>
Cost of Patient Services. The Company's cost of patient services as a
percent of net patient service revenues decreased from 78% in fiscal 1995 to
73% in fiscal 1996. The decrease in cost of patient service is attributed
to lower direct personnel costs in both of the Company's operating
components. Lower direct personnel costs came from a decrease in the
percentage of overall services delivered by higher cost clinicians such as
psychologists and psychiatrists. The Company's reorganization efforts
substantially improved operating margins in the Massachusetts and Rhode
Island Geriatric Services Programs and in the Massachusetts Outpatient
Services Program. The operating margins in the Connecticut Geriatric
Services Program eroded due to the Medicare intermediaries' decision to
limit the procedures billable by nurses and the determination that Medicaid
would not reimburse social workers and would only reimburse 20% of the
Medicare allowable amount for other clinicians.
General and Administrative Expenses. The Company's general and
administrative expenses increased from $2,575,896 in fiscal 1995 to
$2,767,182 in fiscal 1996. The increase of $191,286 is attributed to a 31%
increase in the provision for doubtful accounts (see paragraph below), a one
time $100,000 provision related to a settlement offer proposed to the
Massachusetts Department of the Attorney General (see Item 3. Legal
Proceedings) and to a 7% increase in administrative salaries due to
increased staffing for regional management, marketing, human resources,
quality assurance and medical records. The Company intends that these
increased levels of administrative staff will lead to revenue growth through
new services and better service to current customers. An important area of
offsetting decreases in general and administrative expenses occurred in
direct program administrative expenses which decreased 52% due to reduction
in consulting, advertising, printing, telephone and postage.
Provision for Doubtful Accounts. Bad debt expense increased from $387,511
or 5% of net revenues in fiscal 1995 to $554,798 or 8% of net revenues in
fiscal 1996. In addition, the reserve for doubtful accounts increased 63%
from $350,000 or 16% of gross accounts receivable at September 30, 1995, to
$570,000 or 22% of gross accounts receivable at September 30, 1996. The
provision for doubtful accounts is estimated based on an ongoing review of
collectibility of the Company's accounts receivable, by state, by pay
source. A major factor in the Company's decision to increase reserves relates
to claims submitted to the Massachusetts Medicaid Program which pays claims on
behalf of its beneficiaries only after all other insurances (Medicare and any
intervening Medicare supplementary insurances) have paid or rejected a claim.
Massachusetts Medicaid has intensified its efforts to identify intervening
insurances and to ensure compliance with regulations regarding payment or
rejection by such intervening insurances. These intensified efforts have
increased the proportion of paper claims that must be billed through
multiple payors. This process of submitting paper claims substantially
increases the time and effort involved in securing final payment of unpaid
Medicare balances from the Massachusetts Medicaid Program and substantially
increases the number of claims which are not processed by the payor
resulting in multiple rebilling efforts. The Company is exploring MIS and
operational changes which will reduce the proportion of billing that must
flow through this increasingly complex system of claims management.
Amortization of Acquisition Related Costs. Amortization of acquisition
related costs decreased by 57% in fiscal 1996. The decrease related to
completing the amortization of the value of non-compete and nursing home
agreements.
Interest Expense. Interest expenses net of interest income increased by
$52,275. The increase is attributed to increased borrowings and related
interest charges from the Company's brokerage and receivables based
borrowing arrangements.
Taxes on Income (Credit). The Company had no provision for income taxes
from continuing operations in either fiscal 1995 or 1996. The Company had a
net operating loss carry forward at September 30, 1996 of approximately
$2,200,000 available to reduce future taxable income.
Discontinued Operations. In August 1995, the Company's Board of Directors
authorized the sale of the Company's EAP Program and the disposal of the
Brookline Facility. Net patient services revenue applicable to discontinued
operations of EAP were $98,951 and of the Brookline facility $163,602 for
fiscal 1995.
Liquidity and Capital Resources.
During fiscal 1995, the Company repaid a $198,000 loan with Grant
Enterprises, Ltd. (an affiliate). The Company's investment in marketable
short term securities is pledged to support a brokerage borrowing
arrangement. During fiscal 1996, the brokerage account was moved from
Prudential Securities to Paine Webber, and in August of 1996, $500,000 of
these securities matured and were used to pay down the brokerage borrowing
account. At September 30, 1996, the market value of the securities was
$1,480,785 as compared to $1,965,470 at September 30, 1995. At September
30, 1996, $1,428,035 was borrowed against these securities bearing interest
at 8.375% per annum as compared to $1,662,257 at September 30, 1995.
Additionally, at September 30, 1996, these securities were recorded at an
unrealized loss due to market fluctuations of $18,199. In June of 1996, the
Company secured a $300,000 line of credit based on its accounts receivable.
The line can be increased to $1,000,000 upon satisfactory completion of the
review by the Massachusetts Department of the Attorney General of certain of
the Company's Medicaid claims related to diagnostic, consultation and medical
services performed at nursing homes serviced by the Company. At September
30, 1996, $267,715 was borrowed against the line of credit, bearing interest
at a rate of interest equal to three percent above prime rate, or 11.25% per
annum.
As a result of operating losses during fiscal 1996, the Company's working
capital decreased from $1,677,129 at September 30, 1995 to $653,146 at
September 30, 1996. The Company believes it is adequately capitalized to
continue current operations. The Company is negotiating with the
Massachusetts Department of the Attorney General to resolve any issues
arising from their review of certain Medicaid claims. If resolved, the
line of credit, based on available accounts receivable, will be increased
from $300,000 to $1,000,000 to provide $700,000 additional financing for
fiscal 1997. A settlement offer has been made to the Attorney General's
office (see Item 3. Legal Proceedings). There can be no assurance, however,
that issues arising from the Attorney General's review can be resolved on
financially reasonable terms.
Item 7. Financial Statements.
See Index to Financial Statements included on F-1 attached hereto.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16 (a) of the Exchange Act.
The information required by this Item 9 is hereby incorporated by reference
to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of the Company's fiscal year.
Item 10. Executive Compensation.
The information required by this Item 10 is hereby incorporated by reference
to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of the Company's fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item 11 is hereby incorporated by reference
to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of the Company's fiscal year.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item 12 is hereby incorporated by reference
to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of the Company's fiscal year.
Item 13. Exhibits and Reports on Form 8-K
Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
1.3 Form of Financial Advisory and Investment Banking Agreement (1)
3.1 Articles of Organization as amended (1)
3.1 (a) Amendment of the Articles of Organization (1)
3.1 (b) Amendment to the Registrant's Articles of Incorporation (2)
3.2 By-Laws (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Redeemable Common Stock Purchase Warrant (1)
4.3 Form of Warrant Agreement (1)
4.4 Form of Underwriters' Warrant Agreement (1)
10.1 Employment Agreement with Vernon Mark, M.D. dated July 1, 1992 (1) *
10.2 Employment Agreement with Thomas Sabin M.D. dated July 1, 1992 (1) *
10.3 Management Agreement with Drs. Mark and Sabin dated July 1, 1992 (1) *
10.4 Form of Agreement with nursing homes (1)
10.5 Settlement Agreement with the Federal Deposit Insurance Company
dated April 1, 1993 (1)
10.6 Settlement Agreement by and between the Company and Alpha
Geriatric Services Inc. dated April 14, 1993 (1)
10.7 Company's Promissory Notes in favor of Grant Enterprise Ltd. (3)
10.8 Form of Promissory Note issued to bridge investors in June
1993 (1)
10.9 Form of Warrant issued to bridge investors in June 1993 (1)
10.10 Settlement Agreement by and between the company and the
Massachusetts Department of Welfare (1)
10.11 1993 Employee Incentive Stock Option Plan (1) *
10.12 1993 Non-Employee Directors' Stock Option Plan (1) *
10.13 Operating Agreement, dated as of October 11,1991, by and between
Sentry Phila Corp. and the Company (1)
10.14 Asset Purchase Agreement, dated August 23, 1991, by and amount
Trans-Med Ambulance Service Inc., Allan Grota and Sentry Phila
Corp., as amended (1)
10.15 Asset Purchase Agreement, dated May 28, 1992, by and among Sentry
Phila Corp., the Company, George Brewster and Brewster Ambulance
Services Inc.(1)
10.16 Employment Agreement with Anders Laren dated January 1, 1994 (3) *
10.17 Employment Agreement with Dr. Jonathan Lieff dated December 27,
1993 (3)*
11.0 Calculation of Net Income (Loss) per Share of Common Stock for
Fiscal 1994 (3)
<F1> Incorporated herein by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 33-65106-B) filed with the SEC
on June 25, 1993 and as amended on August 30, 1993, November 12, 1993
and December 3, 1993, which Registration Statement became effective
December 13, 1993. The number set forth herein is the number of the
Exhibit in said Registration Statement.
<F2> Incorporated herein by reference to current Report on Form 8-K filed
with the SEC on April 14, 1994.
<F3> Incorporated herein by reference to Annual Report on Form 10-KSB filed
with the SEC on December 27, 1994.
<F*> Management Contract or Compensatory Plan or Agreement.
</TABLE>
Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Ages Health Services Inc.
By: /s/ Anders Laren
- ------------------------------------- Dated: December 24, 1996
Anders Laren, President, Chief
Executive Officer and Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signatures: Dated:
/s/ Anders Laren
- ---------------------------------
Anders Laren, President, Chief
Executive Officer (Principal
Executive Officer), Director December 24, 1996
/s/ Kuno Laren
- ---------------------------------
Kuno Laren, Director December 24, 1996
/s/ Peter W. Clegg
- ---------------------------------
Peter W. Clegg, Director December 24, 1996
/s/ Henry Goodhue
- ---------------------------------
Henry Goodhue, Controller December 24, 1996
(Principal Financial Officer)
Ages Health Services Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
------------
<S> <C>
Report of independent certified public accountants F-2
Financial statements:
Balance sheet as of September 30, 1996 F-3 to F-4
Statements of operations for the years ended September 30, 1996 and 1995 F-5
Statements of stockholders' equity for the years ended September 30, 1996
and 1995 F-6
Statements of cash flows for the years ended September 30, 1996 and 1995 F-7
Summary of accounting policies F-8 to F-10
Notes to financial statements F-11 to F-20
</TABLE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Ages Health Services Inc.
Rockland, Massachusetts
We have audited the accompanying balance sheet of Ages Health Services Inc. as
of September 30, 1996, and the related statements of operations, stockholders'
equity and cash flows for the years ended September 30, 1996 and 1995. 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 audit 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 Ages Health Services Inc. at
September 30, 1996, and the results of its operations and its cash flows for the
years ended September 30, 1996 and 1995, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
December 23, 1996
Ages Health Services Inc.
Balance Sheet
<TABLE>
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------
<S> <C>
Assets (Note 4)
Current:
Cash and cash equivalents $ 25 548
U.S. Treasury Notes (Note 2) 1 480 785
Accounts receivable, less allowance for uncollectible accounts
of $570,000 (Note 3) 2 018 537
Prepaid expenses 49 013
Current portion of long-term note receivable related to discontinued
operations (Note 1) 5 000
Deferred income taxes (Note 7) 15 000
- -----------------------------------------------------------------------------------------
Total current assets 3 593 883
- -----------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation of $231,541 193 472
- -----------------------------------------------------------------------------------------
Deferred financing costs, net of accumulated amortization of $1,030 7 207
- -----------------------------------------------------------------------------------------
Long-term note receivable related to discontinued operations, less
current portion (Note 1) 14 726
- -----------------------------------------------------------------------------------------
Total assets $ 3 809 288
=========================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
Ages Health Services Inc.
Balance Sheet
(Concluded)
<TABLE>
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings (Note 4) $ 1 695 750
Accounts payable 210 237
Dividends payable 10 000
Accrued expenses (Note 5) 832 375
Current portion of long-term debt and notes payable (Note 6) 192 375
- -----------------------------------------------------------------------------------------
Total current liabilities 2 940 737
Long-term debt and notes payable, less current portion (Note 6) 328 077
Deferred income taxes (Note 7) 15 000
- -----------------------------------------------------------------------------------------
Total liabilities 3 283 814
- -----------------------------------------------------------------------------------------
Commitments and contingencies (Notes 8, 10, 11 and 12)
Stockholders' equity (Notes 2, 11 and 12):
Preferred stock, 12% cumulative, nonparticipating, $1,000 per share
liquidation value, without par value; 100,000 shares authorized;
250 shares issued and outstanding 250 000
Common stock, without par value; 4,500,000 shares authorized;
2,580,100 shares issued and outstanding 3 375 897
Accumulated deficit (3 082 224)
Unrealized loss on marketable securities (18 199)
- -----------------------------------------------------------------------------------------
Total stockholders' equity 525 474
- -----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3 809 288
=========================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
Ages Health Services Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended September 30, 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net patient service revenue (Note 3) $ 7 214 781 $ 7 026 490
Cost of patient services 5 295 567 5 467 207
- -----------------------------------------------------------------------------------------------------------
Gross profit on patient services 1 919 214 1 559 283
- -----------------------------------------------------------------------------------------------------------
General and administrative expenses 2 767 182 2 575 896
Amortization of acquisition-related costs 45 902 106 330
- -----------------------------------------------------------------------------------------------------------
Operating expenses 2 813 084 2 682 226
- -----------------------------------------------------------------------------------------------------------
Operating loss (893 870) (1 122 943)
Interest expense, net of interest income of $92,449 and $93,835 (Note 9) 110 034 57 759
- -----------------------------------------------------------------------------------------------------------
Loss from continuing operations (1 003 904) (1 180 702)
- -----------------------------------------------------------------------------------------------------------
Discontinued operations (Note 1):
Loss from operations - (270 878)
Loss on disposal - (18 904)
- -----------------------------------------------------------------------------------------------------------
Loss from discontinued operations - (289 782)
- -----------------------------------------------------------------------------------------------------------
Net loss (1 003 904) (1 470 484)
Preferred stock dividends (Note 12) (30 000) (30 000)
- -----------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(1 033 904) $(1 500 484)
===========================================================================================================
Loss per share of common stock:
Loss from continuing operations $ (.40) $ (.47)
Loss from discontinued operations - (.11)
===========================================================================================================
Net loss per share of common stock $ (.40) $ (.58)
===========================================================================================================
Weighted average number of shares of common stock outstanding 2 580 100 2 580 100
===========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
Ages Health Services Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Preferred Stock Common Stock Gain (Loss) on Total
Years ended ----------------- ---------------------- Accumulated Marketable Stockholders'
September 30, 1995 and 1996 Shares Amount Shares Amount Deficit Securities Equity
- --------------------------- ------ -------- --------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 250 $250 000 2 580 100 $3 375 897 $ (547 836) $(104 497) $ 2 973 564
Dividends on preferred stock - - - - (30 000) - (30 000)
Net loss - - - - (1 470 484) - (1 470 484)
Unrealized gain on marketable
securities - - - - - 70 045 70 045
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 250 250 000 2 580 100 3 375 897 (2 048 320) (34 452) 1 543 125
Dividends on preferred stock - - - - (30 000) - (30 000)
Net loss - - - - (1 003 904) - (1 003 904)
Unrealized gain on marketable
securities - - - - - 16 253 16 253
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 250 $250 000 2 580 100 $3 375 897 $ (3 082 224) $ (18 199) $ 525 474
=============================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
Ages Health Services Inc.
Statements of Cash Flows
(Note 13)
<TABLE>
<CAPTION>
Years ended September 30, 1996 1995
- ------------------------- ------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1 003 904) $ (1 470 484)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 110 601 178 130
Provision for losses on accounts receivable 554 798 387 511
Gain on disposal of discontinued operations - (10 319)
Changes in operating assets and liabilities:
Accounts receivable (688 210) (599 029)
Refundable income taxes - 93 845
Prepaid expenses 33 669 73 131
Accounts payable 99 422 (2 416)
Accrued expenses 324 826 377 407
- -----------------------------------------------------------------------------------------------------
Net cash used by operating activities (568 798) (972 224)
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of U.S Treasury Notes 500 938 -
Proceeds from sale of property and equipment - 375
Purchase of property and equipment (34 649) (108 703)
Organization costs capitalized - (6 933)
Proceeds received from sale of discontinued operations - 20 000
Proceeds from notes receivable 5 274 -
- -----------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 471 563 (95 261)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deferred financing costs capitalized (8 237) -
Deferred consulting costs - 24 000
Net borrowings under short-term borrowings 33 493 1 343 009
Payments on notes to affiliate - (198 000)
Payments on notes payable (9 351) (26 151)
Dividends paid on preferred stock (20 000) (30 000)
- -----------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (4 095) 1 112 858
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (101 330) 45 373
Cash and cash equivalents, beginning of year 126 878 81 505
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 25 548 $ 126 878
=====================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
Ages Health Services Inc.
Summary of Accounting Policies
================================================================================
Business and Operations
Ages Health Services Inc. (the "Company") primarily provides behavioral
health services, including diagnostic services, therapy, consultation and
management of medications.
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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity
of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company performs ongoing reviews of the collectibility of its
accounts receivable by pay source, and adjusts its reserve for doubtful
accounts based on its determination of the amounts deemed collectible
(see Notes 3 and 14).
Financial Instruments
The estimated fair value of the Company's financial instruments, which
include account receivable, accounts payable, notes payable and long-term debt
approximate their carrying value.
U.S. Treasury Notes
The Company accounts for investments in debt and equity securities under
the provisions of Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
considers the U.S. Treasury Notes as available-for-sale securities, and
therefore are accounted for at fair market value.
The cost of securities sold is based on the first-in, first-out method in
the determination of realized gains or losses. Unrealized gains and losses are
recorded as a component of stockholders' equity. Realized gains and losses are
recognized in the results of operations.
Property, Equipment and Depreciation
Property and equipment are recorded at cost and consist of equipment,
furniture and vehicles. These assets are being depreciated over their estimated
useful lives, ranging from three to five years, using the straight-line method
of depreciation. Maintenance and repairs are expensed as incurred.
Other Assets
Intangible Assets
In fiscal 1991, the Company entered into an acquisition. All intangible
assets related to the acquisition were amortized on a straight-line basis and
were fully amortized at September 30, 1996.
Deferred Consulting Costs
Deferred consulting costs consist of costs paid at the closing of the
initial public offering for future financial, investment banking and other
services. At September 30, 1996 deferred consulting costs were fully amortized.
Deferred Financing Costs
Deferred financing costs consist of amounts paid in connection with the
establishment of a line of credit. These costs are being amortized over 24
months.
Income Taxes
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Net Patient Service Revenue
Net patient service revenue is recognized at established rates as
allowable by Medicaid, Medicare and commercial insurance companies on the date
such services are provided.
Net Loss Per Share of Common Stock
Net loss per share of common stock is computed by dividing net loss
applicable to common stockholders by the weighted average number of common and
common equivalent shares outstanding during each period presented. Common shares
issuable upon exercise of outstanding warrants and options, when dilutive, are
included in the computation of shares outstanding.
New Accounting Pronouncements
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). The new standard
establishes new guidelines regarding when impairment losses on long-lived
assets, which include property and equipment, certain identifiable intangible
assets and goodwill, should be recognized and how impairment losses should be
measured. The effect of the implementation of SFAS No. 121 was not material to
the Company's financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." SFAS No. 123 allows the Company to account for its
stock-based employee compensation plans based upon either a fair value method or
the intrinsic value method currently followed by the Company. If the current
method is retained, SFAS No. 123 requires certain additional disclosures
regarding the impact which the fair value method would have on the results of
the Company's operations. The Company expects to retain its current method of
accounting for stock-based compensation plans, and therefore, the adoption of
SFAS No. 123 will have no impact on the Company's financial position or results
of operations. Adoption of SFAS No. 123 is required for financial statements of
fiscal years beginning after December 15, 1995. The Company will implement the
disclosure requirements of SFAS No. 123 as required in fiscal 1997.
Ages Health Services Inc.
Notes to Financial Statements
================================================================================
1. Discontinued Operations
In August 1995, the Company's Board of Directors authorized the sale of
the Company's Employee Assistance Program ("EAP") and the disposal of the Center
for Neuro-Diagnostics ("Neurology").
The total selling price for EAP was $45,000 of which $25,000 was due under
a promissory note in equal monthly installments through September, 1999. The
note is secured by substantially all of the assets of the buyer. In addition,
the buyer assumed the facility lease used by EAP which continues through fiscal
1997.
Upon the disposal of Neurology, the Company wrote-off the net book value
of related property and equipment, and intangibles for $20,204 and $8,644,
respectively.
Assets of discontinued operations at September 30, 1996 consisted of a
note receivable of $19,726. There were no liabilities related to discontinued
operations at September 30, 1996.
Net patient service revenue applicable to discontinued operations of EAP
and Neurology were $98,951 and $163,602, respectively, for fiscal 1995.
2. U.S Treasury Notes
As of September 30, 1996, gross unrealized losses pertaining to the U.S.
Treasury Notes were $18,199. The U.S. Treasury Notes bear annual interest rates
ranging between 4.375% and 5.125% and mature between November 1996 and October
1998. The change in the net unrealized loss on marketable securities, included
in a separate component of stockholders' equity, during the year ended September
30, 1996 was $16,253.
3. Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------------
<S> <C>
Medicaid $ 1 386 727
Medicare 681 208
Commercial insurance 482 659
Other 37 943
--------------------------------------------------------------------
2 588 537
Less allowance for uncollectible accounts (570 000)
--------------------------------------------------------------------
Net accounts receivable $ 2 018 537
====================================================================
</TABLE>
During fiscal 1996 and fiscal 1995, approximately 88% and 91%,
respectively, of the Company's revenues were derived from Medicaid and Medicare
reimbursements. At September 30, 1996 approximately 80% of accounts receivable
were due from Medicaid and Medicare.
4. Short-Term Borrowings
The Company has a line of credit with a financial institution that is
collateralized by the Company's U.S. Treasury Notes. Interest is charged at the
lenders base rate plus a range of .5% to 2.5% based on the total outstanding
borrowings (8.375% at September 30, 1996). The U.S. Treasury Notes are subject
to a lien for the discharge of the borrowings. Outstanding borrowings at
September 30, 1996 were $1,428,035
In addition, the Company entered into a $300,000 line of credit agreement
with a financial institution that expires in June 1998. Borrowings under the
line bear interest at the prime rate plus 3.0% (11.25% at September 30, 1996)
and is secured by substantially all assets. Outstanding borrowings at September
30, 1996 were $267,715.
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------------
<S> <C>
Salaries and wages $ 147 696
Payroll taxes and withholdings 284 062
Vacation 151 290
Interest 134 233
Other 115 094
--------------------------------------------------------------------
Total accrued expenses $ 832 375
====================================================================
</TABLE>
6. Long-Term Debt and Notes Payable
Long-term debt and notes payable consist of the following:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------------
<S> <C>
Obligation under noncompete agreement $ 495 000
Notes payable 25 452
--------------------------------------------------------------------
520 452
Less current portion 192 375
--------------------------------------------------------------------
Long-term portion $ 328 077
====================================================================
</TABLE>
Amounts due under the noncompete agreement are payable in monthly
installments of $4,000 through April 1997 escalating to $4,500 in May 1997
through April 2000, and a balloon payment of $182,000 on May 15, 2000. In July
1993, the holder of the note requested the Company to suspend making future
payments. As of September 30, 1996, amounts previously due and unpaid totalled
$123,000. Interest on the outstanding balance is payable monthly at a
fluctuating annual interest rate based upon the underpayment interest rate
established by the Internal Revenue Service (8% at September 30, 1996)
Annual maturities of long-term debt and notes payable are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
----------------------------------------------
<C> <C>
1997 $ 192 375
1998 60 577
1999 54 000
2000 213 500
----------------------------------------------
Total $ 520 452
==============================================
</TABLE>
7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The Company's deferred tax asset and liability are comprised of the
following components:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------------
<S> <C>
Deferred tax asset:
Allowance for accounts receivable $ 230 000
Accrued expenses 40 000
Contribution carryforward 3 000
Net operating loss carryforward 885 000
--------------------------------------------------------------------
Gross deferred tax asset 1 158 000
Valuation allowance (1 143 000)
--------------------------------------------------------------------
Net tax deferred asset $ 15 000
====================================================================
Deferred tax liability:
Basis difference of property and equipment
and other assets $ 15 000
====================================================================
</TABLE>
In recognition of the uncertainty regarding the ultimate amount of income
tax benefits to be derived from the Company's net operating loss carryforward
and other deferred tax assets, the Company has provided a deferred tax asset
valuation allowance at September 30, 1996 equal to 100% of the net operating
loss carryforward and a portion of the other deferred tax assets. The increase
in the deferred tax asset valuation allowance of $503,000 in fiscal 1996 relates
primarily to the increase in the net operating loss carryforward.
As of September 30, 1996, the Company has a net operating loss
carryforward of approximately $2,200,000, subject to review by the Internal
Revenue Service, available to offset future taxable income for Federal income
tax purposes, expiring through 2011.
A reconciliation of the statutory federal income tax rate and the
effective tax rate is as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1996 1995
-----------------------------------------------------------------------
<S> <C> <C>
Statutory rate (34.0)% (34.0)%
Operating loss generating no current
tax benefit 34.0 34.0
-----------------------------------------------------------------------
Effective tax rate - % - %
=======================================================================
</TABLE>
8. Commitments and Contingencies
Employment and Management Agreements
The Company has an employment agreement with an executive officer which
expires on December 31, 1997. The agreement provides for a base salary and bonus
at a rate of 30% of profits before interest and taxes, as defined in excess of
$700,000, and 10% of such excess over $800,000. In addition, the Company has
employment agreements with other key employee which provides for a base salary.
The compensation expensed in connection with these agreements was approximately
$451,100 and $301,100 during fiscal 1996 and 1995, respectively. No bonus was
earned in fiscal 1996 or 1995 under the executive officer's agreement.
In conjunction with Neurology, the Company had two part-time employment
agreements. The employment agreements provided for future compensation over the
term of the agreements. The compensation expensed in connection with these
agreements was approximately $181,200 during fiscal 1995. The contracts expired
on July, 1995 and the Neurology operations were discontinued in August, 1995
(Note 1).
Aggregate minimum future compensation under the Company's employment
agreements is approximately as follows:
<TABLE>
<CAPTION>
Year ending September 30,
-----------------------------------------------
<S> <C>
1997 $ 316 000
1998 180 000
1999 150 000
2000 38 000
-----------------------------------------------
Total $ 684 000
===============================================
</TABLE>
Lease Commitments
The Company leases office space and certain equipment under noncancellable
operating leases which expire at various dates through October 1999. Total
rental expense was approximately $69,000 and $115,000 for fiscal 1996 and 1995,
respectively. Future minimum lease payments are approximately as follows:
<TABLE>
<CAPTION>
Year ending September 30,
--------------------------------------------
<S> <C>
1997 $ 78 000
1998 67 000
1999 67 000
2000 7 000
--------------------------------------------
Total $ 219 000
============================================
</TABLE>
Legal Proceedings
The Massachusetts Department of the Attorney General has been reviewing
certain of the Company's Medicaid claims related to diagnostic, consultation and
medical services performed at nursing homes serviced by the Company. The Company
believes that the primary focus of such review is to determine whether the
services performed were qualifying reimbursable services. The Company believes
that the services provided were appropriate and that all services were billed
correctly. Without admitting liability, the Company has made an offer of
settlement of $100,000 payable over two years to the Attorney General's office
in order to resolve this matter without protracted legal expenses and disruption
to operations. There can be no assurance, however, that this settlement offer
will be accepted or that this review can be resolved without the need for the
Company to pay some other amount. The Company has set up a reserve of $100,000
related to this possible expense. The Company is not a party to any other legal
proceedings which it believes may have a material adverse effect on the
Company's financial condition or results of operations.
9. Related-Party Transactions
During Fiscal 1995, the Company repaid the outstanding balance on the
promissory note payable to Grant Enterprises Ltd. ("Grant"), a stockholder of
the Company . The note bore interest at the rate of 1% per month on the
outstanding balance. Interest expense related to the Grant debt amounted to
$5,940 for fiscal 1995 .
10. Savings and Security
Plan The Company has a 401(k) employee retirement plan for the benefit of
all employees. Company matching contributions are made at the discretion of the
Company's Board of Directors and amounted to $14,198 and $8,247 during fiscal
1996 and 1995, respectively.
11. Stock Option Plans
In June 1993, the Board of Directors and stockholders adopted and approved
the 1993 Employee Incentive Stock Option Plan (the "Employee Plan") and the 1993
Non-Employee Directors' Stock Option Plan (the "Directors' Plan," and with the
Employee Plan are collectively referred to herein as the "Plans"). The Plans are
administered by the Board of Directors or by a committee appointed by the Board.
Pursuant to the Plans, options to acquire an aggregate of 241,000 shares of
common stock may be granted (181,000 shares pursuant to the Employee Plan and
60,000 shares pursuant to the Directors Plan). The Plans provide for grants to
employees, consultants and directors of the Company.
The Employee Plan authorizes the Board to issue incentive stock options
("ISOs"), as defined in Section 422A of the Internal Revenue Code. The Directors
Plan authorizes only stock options that do not conform to the requirements of
the Code section ("Non-ISOs"). Consultants and directors who are not also
employees of the Company may be granted only Non-ISOs. The exercise price of
each ISO may not be less than 100% of the fair market value of the common stock
at the time of grant, except that in the case of a grant to an employee who owns
10% or more of the outstanding stock of the Company or a subsidiary or parent of
the Company (a "10% Stockholder"), the exercise price shall not be less than
110% of the fair market value on the date of grant. The exercise price of each
Non-ISO granted under the Directors Plan shall be as determined by the Board of
Directors in its discretion and may be less than the fair market value of the
common stock on the date of the grant.
The Company has granted stock options under the plans. Options generally
expire up to six and one half years from the date of grant. No options shall be
exercisable unless at the time of such exercise (i) the fair market value of the
common stock equals or exceeds $3.50 per share and (ii) the individual is
employed by the Company. No shares were exercisable under the Employee Plan in
fiscal 1996 and 1995. Stock options granted and cancelled are as follows:
<TABLE>
<CAPTION>
Option
price
Shares Per share
-----------------------------------------------------------------
<S> <C> <C>
Balance, September 30, 1994 25 000 $1.32
Granted 5 000 .94
Cancelled (12 500) 1.32
-----------------------------------------------------------------
Balance, September 30, 1995 17 500 .94 - 1.32
Cancelled (2 500) 1.32
-----------------------------------------------------------------
Balance, September 30, 1996 15 000 $ .94 - $1.32
=================================================================
</TABLE>
12. Stockholders' Equity
Redeemable Warrants
The redeemable warrants, issued in connection with the Company's initial
stock offering, expire on December 12, 1998. Each redeemable warrant entitles
the holder to purchase one share of common stock at an exercise price of $4.00,
subject to adjustment in certain events. The redeemable warrants are redeemable
by the Company, at a price of $.10 per redeemable warrant, at any time
commencing one year after the date of the Company's initial public offering and
prior to their expiration, on 30 days prior written notice to the registered
holders of the redeemable warrants, provided that the closing bid price per
share of the common stock for a period of 20 consecutive trading days equals or
exceeds 200% of the then current exercise price (initially $8.00, subject to
adjustment). The redeemable warrants shall be exercisable until the close of the
business day preceding the date fixed for redemption.
In connection with certain bridge financing and legal services prior to
the Company's initial public offering, the Company issued 57,500 redeemable
warrants. Each warrant entitles the holder to purchase one share of common stock
at an exercise price of $4.00 per share. The warrants expire in December, 1998.
As of September 30, 1996, no warrants have been executed.
Preferred Stock
All of the Company's outstanding preferred stock is held by Grant
Enterprises, Inc.. The preferred stock entitles the holder to cumulative
dividends, before any distribution to common stockholders, at 1% of the
liquidation value of $1,000 per share per month, payable upon liquidation or
redemption. The preferred stock is redeemable at face value plus cumulative
dividends at the option of the Company.
Common Stock Reserved
In connection with the stock option plans and redeemable warrants, the
Company has reserved 1,232,500 shares of common stock as of September 30, 1996.
13. Supplemental Disclosure of Cash Flow Information
Payments for income taxes amounted to $4,470 and $900 in fiscal 1996 and
1995, respectively. Payments for interest amounted to $151,673 and $116,440 in
fiscal 1996 and 1995, respectively.
Unrealized gains on marketable securities amounted to $16,253 and $70,045
in fiscal 1996 and 1995, respectively.
14. Fourth Quarter Adjustments
The Company completed an analysis of its estimated reserves established
for uncollectible accounts receivable and recorded additional reserves of
approximately $320,000 and $125,000 during the fourth quarters of fiscal 1996
and 1995, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 25,548
<SECURITIES> 1,480,785
<RECEIVABLES> 2,588,537
<ALLOWANCES> 570,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,593,883
<PP&E> 425,013
<DEPRECIATION> 231,541
<TOTAL-ASSETS> 3,809,288
<CURRENT-LIABILITIES> 2,940,737
<BONDS> 0
0
250,000
<COMMON> 3,375,897
<OTHER-SE> (3,100,423)
<TOTAL-LIABILITY-AND-EQUITY> 3,809,288
<SALES> 7,214,781
<TOTAL-REVENUES> 7,214,781
<CGS> 5,295,567
<TOTAL-COSTS> 2,212,384
<OTHER-EXPENSES> 45,902
<LOSS-PROVISION> 554,798
<INTEREST-EXPENSE> 110,034
<INCOME-PRETAX> (1,003,904)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,003,904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,003,904)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
