U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarter ended December 31, 1996
Commission file number 1-12564
-------------------
Ages Health Services Inc.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Massachusetts 04 - 3102249
- ------------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
800 Hingham Street, Suite 103 S, Rockland, MA 02370
- --------------------------------------------------------------------------------
(Address of principal executive offices)
617 - 871- 6550
- --------------------------------------------------------------------------------
(Issuer's telephone number)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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
------- -------
The number of shares outstanding of registrant's no par value common stock,
at January 31, 1997, was 2,580,100.
Transitional small business disclosure format (check one):
Yes No X
------- -------
AGES Health Services Inc.
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION*
- -------------------------------
Item 1. - Financial Statements Page
Number
------
<S> <C>
Balance Sheets
at December 31, 1996 and September 30, 1996................... 3 - 4
Statements of Operations for the three months
ended December 31, 1996 and 1995.............................. 5
Statements of Cash Flows for the three months
ended December 31, 1996 and 1995.............................. 6 - 7
Notes to Financial Statements.................................. 8 - 9
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 10 - 12
PART II - OTHER INFORMATION
- ---------------------------
Item 1. - Legal Proceedings.......................................... 12
Item 2. - Changes in Securities See Item 5........................... 12
Item 5. - Other Matters.............................................. 12
Item 6. - Exhibits and Reports on Form 8-K........................... 13
Signatures........................................................... 14
<F*> The financial information at September 30, 1996 has been derived from
the Company's audited financial statements at that date. All other
information is unaudited.
</TABLE>
AGES HEALTH SERVICES INC.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996*
------------ -------------
Assets
<S> <C> <C>
Current:
Cash and cash equivalents...................................... $ 164,078 $ 25,548
U.S. Treasury Notes............................................ 985,630 1,480,785
Accounts receivable, less allowance for uncollectible
accounts of $570,000.......................................... 1,920,140 2,018,537
Prepaid expenses............................................... 53,793 49,013
Current portion of long-term note receivable related
to discontinued operations.................................... 5,000 5,000
Deferred taxes................................................. 15,000 15,000
--------------------------
Total current assets....................................... 3,143,641 3,593,883
--------------------------
Property and equipment, net of accumulated depreciation of
$249,180 and $231,541........................................... 189,271 193,472
--------------------------
Deferred financing costs, net of accumulated amortization of
$2,059 and $1,030............................................... 6,178 7,207
--------------------------
Long-term note receivable related to discontinued
operations, less current portion................................ 13,512 14,726
--------------------------
$ 3,352,602 $ 3,809,288
==========================
See accompanying notes to financial statements.
<F*> The balance sheet at September 30, 1996 has been derived from the
audited financial statements at that date. All other information is
unaudited.
</TABLE>
AGES HEALTH SERVICES INC.
Balance Sheets (Concluded)
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996*
------------ -------------
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Short-term borrowings.......................................... $ 1,427,956 $ 1,695,750
Accounts payable............................................... 322,683 210,237
Dividends payable.............................................. 17,500 10,000
Accrued expenses............................................... 861,386 832,375
Current portion of long-term debt and loans payable............ 203,922 192,375
--------------------------
Total current liabilities 2,833,447 2,940,737
Long-term debt and notes payable, less current portion........... 313,747 328,077
Deferred income taxes............................................ 15,000 15,000
--------------------------
Total liabilities 3,162,194 3,283,814
--------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 12% cumulative, nonparticipating, $1,000
per share liquidation value, without par value; 100,000
shares authorized, 250 shares issued and outstanding.......... 250,000 250,000
Common stock, without par value; 4,500,000 shares
authorized; 2,580,100 shares issued and outstanding.......... 3,375,897 3,375,897
Accumulated deficit............................................ (3,421,744) (3,082,224)
Unrealized loss on marketable securities....................... (13,745) (18,199)
--------------------------
Total stockholders' equity 190,408 525,474
--------------------------
$ 3,352,602 $ 3,809,288
==========================
See accompanying notes to financial statements.
<F*> The balance sheet at September 30, 1996 has been derived from the
audited financial statements at that time. All other information is
unaudited.
</TABLE>
AGES HEALTH SERVICES INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended December 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
Net patient service revenue....................... $1,623,037 $1,898,560
Cost of patient services.......................... 1,244,221 1,338,670
------------------------
Gross profit on patient services 378,816 559,890
------------------------
General and administrative expenses............... 672,007 502,844
Amortization of acquisition-related costs......... - 23,948
Amortization of deferred financing costs.......... 1,029 -
------------------------
Operating expenses 673,036 526,792
------------------------
Operating income (loss) (294,220) 33,098
Interest expense, net of interest income of
$7,245 and $23,843............................... 37,800 24,657
------------------------
Net income (loss) (332,020) 8,441
Preferred stock dividends......................... (7,500) (7,500)
------------------------
Net income (loss) applicable to common stock $ (339,520) $ 941
========================
Net income (loss) per share of common stock $ (.13) $ .00
========================
Weighted average number of shares of
common stock outstanding......................... 2,580,100 2,580,100
</TABLE>
See accompanying notes to financial statements.
AGES HEALTH SERVICES INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $(332,020) $ 8,441
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization............................... 18,668 35,700
Provision for losses on accounts receivable................. 126,346 30,993
Deferred consulting costs................................... - 9,000
Changes in operating assets and liabilites:
Accounts receivable....................................... (27,949) (146,833)
Prepaid expense........................................... (4,780) 502
Accounts payable.......................................... 112,446 60,607
Accrued expenses.......................................... 29,011 (124,858)
-----------------------
Net cash used for operating activities.................... (78,278) (126,448)
-----------------------
Cash flows from investing activities:
Purchase of property and equipment............................ (13,438) (17,472)
Proceeds from sale of marketable securities................... 499,609 -
Principal payments from note receivable....................... 1,214 -
-----------------------
Net cash provided by (used for) investing activities...... 487,385 (17,472)
-----------------------
</TABLE>
See accompanying notes to financial statements.
AGES HEALTH SERVICES INC.
Statement of Cash Flows (Concluded)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended December 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities
Proceeds from short-term borrowings........................... (267,794) 33,881
Principal payments on other notes payable..................... (2,783) (2,177)
Dividends paid on preferred stock............................. - (7,500)
-----------------------
Net cash provided by (used for) financing activities...... (270,577) 24,204
-----------------------
Net increase (decrease) in cash and cash equivalents............ 138,530 (119,716)
Cash and cash equivalents, beginning of period.................. 25,548 126,878
-----------------------
Cash and cash equivalents, end of period........................ $ 164,078 $ 7,162
=======================
</TABLE>
See accompanying notes to financial statements.
AGES HEALTH SERVICES INC.
Notes to Financial Statements
1. Basis of Presentation
The financial statements as of December 31, 1996 and 1995 are
unaudited but include all adjustments (consisting of normal, recurring
adjustments) which the Company considers necessary for a fair presentation
of such interim financial statements. The accompanying financial statements
and notes are presented as permitted by Form 10-QSB and do not contain
certain information included in the Company's annual audited financial
statements and notes thereto. The results of operations for the three
months ended December 31, 1996 are not necessarily indicative of the results
to be expected for the entire year ending September 30, 1997.
2. U.S. Treasury Notes
Short term investments in U.S. Treasury Notes are considered
available-for-sale securities, and therefore are accounted for at fair
market value. Unrealized gains and losses are recorded as a component of
Stockholders' Equity. Realized gains and losses are recognized in the
results of operations. As of December 31, 1996 unrealized losses pertaining
to the U.S. Treasury Notes amounted to $13,745. On November 15, 1996, the
Company redeemed a $500,000 U.S. Treasury Note, which matured on that date.
The note matured at full face value. Less transaction costs, the redemption
yielded $499,609 of cash, which was used to pay down short term borrowings
due under the Company's brokerage borrowing agreement. Two remaining U.S.
Treasury Notes with an aggregate face value of $1,000,000 bore, at December
31, 1996, annual interest rates of 4.75% and 5.13% with maturity dates of
February 1998 and October 1998. In January of 1997, the Company sold these
two notes. $997,901 of net proceeds from the sale were used to close out
the brokerage borrowing agreement and to provide $61,410 of working capital.
3. Short-Term Borrowings
Short-term borrowings of $933,271 at December 31, 1996 were
collateralized by the Company's U.S. Treasury Notes. Interest was charged
at the lenders base rate plus 2.5% (8.38% at December 31, 1996). The U.S.
Treasury Notes were subject to a lien for discharge of the borrowings. In
January of 1997, the Company sold the U.S. Treasury Notes and discharged the
borrowings. (see Note 2.) Other short-term borrowings of $494,685 were
collateralized by the Company's accounts receivable. Interest was charged
at prime rate plus 3% (11.25% at December 31, 1996). In January of 1997,
the short-term accounts receivable based borrowings were discharged as part
of a management agreement with Arbour Elder Services (see Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Management Agreement and Proposed Sale of Assets).
4. Taxes on Income
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 December 31, 1996 equal to 100% of
the net operating loss carryforward and a portion of the other deferred tax
assets. Accordingly, the Company has not recognized a tax credit for the
three months ended December 31, 1996 in the accompanying statements of
operations. A current tax provision was not provided for the quarter ended
December 31, 1995 due to the availability of the net operation loss
carryforward which was used to offset current taxes due.
5. Net Income (Loss) Per Share of Common Stock
Net income (loss) per share of Common Stock is computed by dividing
net income (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.
6. Cash Flow Information
Payments for interest and income taxes for the three months ended
December 31, follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest $45,045 $36,499
Income taxes $ -0- $ -0-
</TABLE>
A supplemental schedule of noncash investing and financing activities
for the three months ended December 31, follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Preferred Stock dividends accrued 7,500 -0-
Unrealized gain (or loss) on marketable securities 4,454 23,163
</TABLE>
7. Legal Proceedings
The Massachusetts Department of the Attorney General undertook a two year
review of certain of the Company's Medicaid claims related to diagnostic,
consultation and medical services performed at nursing homes serviced by the
Company. The primary focus of the review was to determine whether the
services performed were qualifying reimbursable services. The Company has
maintained that the services provided were appropriate and that all services
were billed correctly. In February of 1997, the Company and the Attorney
General jointly filed a civil settlement agreement to conclude the dispute
concerning Medicaid billings. The Company admitted no liability or wrongdoing
under the terms of the settlement. The terms of the settlement call for the
Company to pay $100,000, which amount the Company believes approximated its
projected legal expenses to conclude the matter without settlement, and which
amount the Company has previously reserved for the matter. In addition, the
Company will donate $25,000 worth of uncompensated services and training to
patients, their families and their caregivers.
AGES HEALTH SERVICES INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Management Agreement and Proposed Sale of Assets
------------------------------------------------
The Company has entered into an Asset Purchase Agreement ("Agreement")
dated February 1, 1997 with Arbour Elder Services, Inc. ("Arbour").
Pursuant to the Agreement the Company is to sell substantially all of its
operating assets. The assets being sold include certain accounts receivable,
contractual and lease rights, licenses and permits to the extent permitted
by law, equipment, and intellectual property rights. The purchase price for
the assets is $1,100,000 in cash of which $100,000 was paid on the signing
of the Agreement, the assumption of liabilities up to $760,000 and a
payment of up to $800,000 based upon the amount of retained accounts
receivable actually collected. Arbour shall be entitled to retain the first
$1,000,000 of accounts receivable collected, and shall remit the next
$800,000 of collections to the Company. Arbour shall retain any net
accounts receivable collected in excess of $1,800,000. The closing of the
transactions contemplated by the Agreement ("Closing") is subject to the
satisfaction of certain conditions, including approval of the Stockholders
of the Company.
In connection with the Agreement, the Company and Arbour entered into
a Management Agreement ("Management Agreement") pursuant to which Arbour,
effective February 1, 1997, assumed the responsibility for the management
of the operations of the Company. The services to be performed by Arbour
include all services necessary for the operation of such business, such as
hiring and firing personnel, payment of salaries and all other operating
expenses, purchasing of supplies and supervising the operations. Arbour as
manager, and for its compensation, is entitled to retain all revenues from the
services rendered, but is obligated to pay all of the expenses incurred in
connection therewith. To the extent that the expenses exceed the revenues,
the difference is to be a loan from Arbour to the Company. If the Closing
occurs, the loan will be forgiven by Arbour. If the closing does not occur,
this loan will be repaid to Arbour with interest within 90 days after the
termination of the Agreement.
Liquidity and Capital Resources
-------------------------------
During the three months ended December 31, 1996 (first quarter of
Fiscal 1997), the Company required cash of $78,278 to fund operating
activities primarily as a result of the net loss from operating activities
of ($332,000). The Company invested $13,438 in property and equipment
during the first quarter of Fiscal 1997, primarily related to computer
hardware. The Company's operating cash requirements, equipment purchases
and debt repayment was funded in part by proceeds from the sale of
marketable securities of $499,609.
The Company's working capital was $310,194 at December 31, 1996
compared to $653,146 at September 30, 1996. The Company believes it was
adequately capitalized at December 31, 1996, to continue current operations.
However, the Company required further credit to continue operations and to
undertake reorganization plans during Fiscal 1997. The Company made a
settlement offer to the Massachusetts Department of the Attorney General to
resolve any issues arising from their review of certain Medicaid claims (see
Item 3. Legal Proceedings). If resolved, the Company's line of credit,
based on available accounts receivable would have increased from $300,000 to
$1,000,000 to provide $700,000 additional financing for Fiscal 1997.
Ultimately, a civil settlement of issues arising from the investigation was
filed in February of 1997, and the Company secured the additional credit as
part of a management agreement with Arbour Elder Services (see above,
"Management Agreement and Proposed Sale of Assets".
Results of Operations
---------------------
Net patient service revenues decreased by $275,523 or 14.5% from the
first quarter of Fiscal 1996 to the first quarter of Fiscal 1997, due to a
decrease of $320,947 or 23.0% in the Massachusetts nursing home program, and
to a decrease of $76,896 or 32.5% in the Connecticut nursing home program.
Offsetting increases in net patient service revenues are due to expansion of
outpatient clinical services to non-geriatric populations, where such
revenues grew $109,331 or 48.1%, and to expansion of the Rhode Island
nursing home program, where such revenues grew $12,989 or 38.2%.
The Company's cost of patient services as a percentage of net patient
service revenues increased from 70.5% for the first quarter of Fiscal 1996
to 76.7% for the first quarter of Fiscal 1997. This increase is due
primarily to reorganization of the Company's service delivery model for
therapy services in the Massachusetts nursing home program, where the
Company hired 3 field managers to oversee and improve quality of care. Cost
of patient services as a percentage of net patient service revenues in this
segment increased from 66.5% for the first quarter of Fiscal 1996 to 73.1%
for the first quarter of Fiscal 1997.
The Company's general and administrative expenses as a percent of net
patient service revenues increased from 26.5% for the first quarter of
Fiscal 1996 to 41.4% for the first quarter of Fiscal 1997. The increase is
primarily related to increases in professional fees, to a $25,000 provision
for uncompensated services to be provided in connection with the civil
settlement jointly filed with the Massachusetts Department of the Attorney
General (see Part II, Item 1. Legal Proceedings) and to a $95,353 increase
in provision for doubtful accounts. This provision increased from $30,993
or 1.6% of net patient service revenues for the first quarter of Fiscal
1996, to $126,346 or 7.8% of net patient service revenues for the first
quarter of Fiscal 1997. In addition, the reserve for doubtful accounts as a
percent of gross accounts receivable increased from 16% at December 31, 1995
to 23% at December 31, 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 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. 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. The Company's interest expense, net of interest income,
increased by $13,143 during the first quarter of Fiscal 1997 versus the
first quarter of Fiscal 1996, as a result of increased short term
borrowings.
The Company's net loss applicable to common stock was $339,520 or $.13
per share for the first quarter of Fiscal 1997 compared to net income of
$941 or $.00 per share for the first quarter of Fiscal 1996.
PART II Other Information
- ----------------------------
Item 1. Legal Proceedings
- ---------------------------
See Note 7 to Financial Statement.
Item 2. Changes in Securities
- ------------------------------
See Item 5.
Item 5. Other Matters
- ----------------------
See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Management Agreement and Proposed Sale
of Assets.
Item 6. Exhibits and Reports on Form 8 - K
- -------------------------------------------
(a) Exhibits -- Exhibit 27-Financial Data Schedule
(b) Reports on Form 8 - K -- none
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Ages Health Services Inc.
(Registrant)
Date February 14, 1997 /s/ Henry Goodhue
------------------------- -----------------------------------
Henry Goodhue
Controller
(principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 164,078
<SECURITIES> 985,630
<RECEIVABLES> 2,490,140
<ALLOWANCES> 570,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,143,641
<PP&E> 438,451
<DEPRECIATION> 249,180
<TOTAL-ASSETS> 3,352,602
<CURRENT-LIABILITIES> 2,833,477
<BONDS> 0
0
250,000
<COMMON> 3,375,897
<OTHER-SE> (3,435,489)
<TOTAL-LIABILITY-AND-EQUITY> 3,352,602
<SALES> 1,623,037
<TOTAL-REVENUES> 1,623,037
<CGS> 1,244,221
<TOTAL-COSTS> 545,661
<OTHER-EXPENSES> 1,029
<LOSS-PROVISION> 126,346
<INTEREST-EXPENSE> 37,800
<INCOME-PRETAX> (332,020)
<INCOME-TAX> 0
<INCOME-CONTINUING> (332,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (339,520)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
