<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------------- ----------------------
COMMISSION FILE NUMBER 1-13177
---------
APOGEE, INC.
------------
(Exact name of registrant as specified in its charter)
Delaware 13-3605119
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1060 First Avenue - Suite 410
King of Prussia, PA 19406
- ----------------------------- ------
(Address of principal executive offices) (Zip Code)
(610) 992-2600
- ----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of May 15, 1998, Apogee, Inc. had 10,144,329 shares of common
stock, $0.01 par value, outstanding.
PAGE 1 OF 22
<PAGE> 2
APOGEE, INC.
FORM 10-Q - QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
FORM 10-Q FORM 10-Q FORM 10-Q
PART NO: ITEM NO. DESCRIPTION PAGE NO.
- --------- --------- ----------- ---------
<S> <C> <C> <C>
I. FINANCIAL INFORMATION
1. Financial Statements
- Consolidated Statements of
Operations for the Three
Months Ended March 31, 1998
and 1997 3
- Consolidated Balance Sheets
as of March 31, 1998 and
December 31, 1997 4
- Consolidated Statements of
Cash Flows for the Three Months
Ended March 31, 1998 and 1997 5
- Consolidated Statement of
Changes in Stockholders' Equity
for the Three Months Ended
March 31, 1998 6
- Notes to Consolidated Financial
Statements 7 - 8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 19
II. OTHER INFORMATION
1. Legal Proceedings 20
6. Exhibits and Reports on Form 8-K 20
Signatures 21
Index to Exhibits 22
</TABLE>
PAGE 2 of 22
<PAGE> 3
APOGEE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET REVENUES:
PATIENT SERVICE REVENUE $12,565 $16,740
PREMIUM REVENUE 2,839 2,460
----------- -----------
TOTAL NET REVENUES 15,404 19,200
----------- -----------
COST OF REVENUES:
PATIENT SERVICE COSTS 10,126 13,166
PREMIUM SERVICE COSTS 1,734 1,759
----------- -----------
TOTAL COST OF REVENUES 11,860 14,925
----------- -----------
GROSS PROFIT 3,544 4,275
SELLING AND ADMINISTRATIVE EXPENSES 2,493 2,885
PROVISION FOR DOUBTFUL ACCOUNTS 770 964
AMORTIZATION OF INTANGIBLE ASSETS AND EXCESS
COST OVER FAIR VALUE OF NET ASSETS ACQUIRED 420 539
----------- -----------
LOSS FROM OPERATIONS (139) (113)
INTEREST EXPENSE, NET 310 299
----------- -----------
LOSS BEFORE INCOME TAXES (449) (412)
PROVISION FOR INCOME TAXES 32 8
----------- -----------
NET LOSS ($481) ($420)
=========== -----------
BASIC AND DILUTED NET LOSS PER COMMON SHARE ($0.05) ($0.04)
----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC
AND DILUTED 10,062,736 9,851,342
=========== ===========
</TABLE>
PAGE 3 OF 22
<PAGE> 4
APOGEE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
ASSETS 1998 DECEMBER 31,
(UNAUDITED) 1997
-------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $1,938 $2,154
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
FOR DOUBTFUL ACCOUNTS OF $7,281 IN 1998 AND 5,885 5,939
$7,348 IN 1997
OTHER ACCOUNTS RECEIVABLE 820 1,455
OTHER CURRENT ASSETS 431 410
-------------- ---------------
TOTAL CURRENT ASSETS 9,074 9,958
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
AMORTIZATION OF $1,437 IN 1998 AND $1,253 IN 1997 2,378 2,426
INTANGIBLE ASSETS AND EXCESS COST OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET OF ACCUMULATED
AMORTIZATION OF $5,872 IN 1998 AND $5,452 IN 1997 30,837 31,031
OTHER ASSETS, NET 192 185
-------------- ---------------
$42,481 $43,600
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT $15,893 $13,891
ACCOUNTS PAYABLE 1,818 2,283
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 19,920 21,430
-------------- ---------------
TOTAL CURRENT LIABILITIES 37,631 37,604
LONG-TERM DEBT 42 809
OTHER LONG-TERM LIABILITIES 60 128
DEFERRED INCOME TAX LIABILITY 346 346
-------------- ---------------
TOTAL LIABILITIES 38,079 38,887
-------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
COMMON STOCK, $.01 PAR VALUE, 20,000,000 SHARES
AUTHORIZED; ISSUED 10,089,329 IN 1998 AND
10,029,325 IN 1997 101 100
CAPITAL IN EXCESS OF PAR VALUE 86,513 86,349
ACCUMULATED DEFICIT (82,188) (81,707)
DEFERRED COMPENSATION (24) (29)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 4,402 4,713
-------------- ---------------
$42,481 $43,600
============== ===============
</TABLE>
PAGE 4 OF 22
<PAGE> 5
APOGEE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($481) ($420)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATIONS:
DEPRECIATION AND AMORTIZATION 604 704
PROVISION FOR DOUBTFUL ACCOUNTS 770 964
CHANGES IN ASSETS AND LIABILITIES, NET OF
EFFECTS OF BUSINESSES ACQUIRED:
INCREASE IN ACCOUNTS RECEIVABLE (716) (1,109)
DECREASE IN OTHER CURRENT ASSETS 214 177
DECREASE IN ACCOUNTS PAYABLE (465) (495)
DECREASE IN ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES (301) (516)
(INCREASE) DECREASE IN OTHER ASSETS AND OTHER LIABILITIES (75) 87
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (450) (608)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONAL PAYMENTS FOR BUSINESSES ACQUIRED
IN PRIOR YEARS (1,265) (562)
DISPOSITION OF BUSINESSES 400 100
PURCHASES OF PROPERTY AND EQUIPMENT (136) (179)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (1,001) (641)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM BORROWINGS 2,200 2,450
PRINCIPAL PAYMENTS ON LONG-TERM OBLIGATIONS (965) (1,477)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,235 973
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (216) (276)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,154 2,299
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,938 $2,023
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
INTEREST PAID $382 $357
============= =============
INCOME TAXES PAID $31 $20
============= =============
</TABLE>
PAGE 5 OF 22
<PAGE> 6
APOGEE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON SHARES
--------------------------
CAPITAL IN
EXCESS OF ACCUMULATED DEFERRED
NUMBER PAR VALUE PAR VALUE DEFICIT COMPENSATION TOTAL
------------ ------------ ------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 10,029 $100 $86,349 ($81,707) ($29) $4,713
COMMON STOCK ISSUED IN CONNECTION WITH
ACQUISITIONS 60 1 164 165
AMORTIZATION OF DEFERRED COMPENSATION 5 5
NET LOSS (481) (481)
------------ ------------ ------------- ---------------- ---------------- -------------
BALANCE AT MARCH 31, 1998 (UNAUDITED) 10,089 $101 $86,513 ($82,188) ($24) $4,402
============ ============ ============= ================ ================ =============
</TABLE>
PAGE 6 OF 22
<PAGE> 7
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Dollars in thousands, per share data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited. These
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission and should be read in conjunction with
the Company's consolidated financial statements and notes thereto for the year
ended December 31, 1997 included in its Form 10-K filed with the Securities and
Exchange Commission on April 15, 1998. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of Company management, the consolidated
financial statements for the unaudited interim periods presented include all
adjustments, consisting only of normal recurring adjustments, necessary to
present a fair statement of the results for such interim periods.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for a full year or
any portion thereof.
NOTE 2 - INCOME TAXES
The provision for income taxes is based on the Company's estimated
effective income tax rate for 1998. At December 31, 1997, the Company had net
operating loss carryforwards for Federal income tax purposes of approximately
$10,000. Their use is limited to future taxable earnings of the Company and, as
specified in the Internal Revenue Code, use of certain of the net operating loss
carryforwards is limited as they were acquired by the Company in a purchase of
the stock of other companies. The carryforwards expire in varying amounts
through 2012. A valuation reserve has been established against the potential
future benefit of the net operating loss carryforwards and other deferred tax
assets.
PAGE 7 OF 22
<PAGE> 8
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Dollars in thousands, except share and per share data)
NOTE 3 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
Clinician fees and medical claims...... $ 3,407 $ 3,291
Acquisition related costs.............. 3,941 5,006
Salaries and vacation.................. 1,543 1,507
Restructuring costs ................... 2,702 3,218
Long-term care reserves................ 5,800 5,800
Other.................................. 2,527 2,608
------- --------
$19,920 $21,430
======= =======
</TABLE>
Acquisition related costs pertain to consideration payable to former owners of
acquired businesses based upon the resolution of purchase price contingencies.
PAGE 8 OF 22
<PAGE> 9
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, except per share data)
The Company operates multi-disciplinary outpatient behavioral health group
practices and is one of the largest providers of outpatient behavioral health
services in the United States. The Company provides behavioral health and
related services, principally at free-standing clinics. At March 31, 1998, the
Company's outpatient operations were principally concentrated in Florida,
Maryland, New Jersey, Pennsylvania, Virginia and Wisconsin.
Largely through its Integra Division, the Company also provides managed
behavioral health services through full and shared risk arrangements with
employers and managed care organizations to perform behavioral health services
on a capitated, sub-capitated and case rate basis. In addition, the Company
provides an array of managed behavioral health services including: employee
assistance programs; third party clinical case management and claims
adjudication.
Sale and Divestiture of Outpatient Business
In December 1997, the Company announced its plans to sell and divest its
outpatient behavioral health group practice operations (the "Sale"). The Company
entered into an agreement to sell substantially all of the assets of the
outpatient behavioral health group practice business, except for practices
located in the Western region of the United States which the Company has sold or
shut down. The consummation of the Sale will result in the divestiture by the
Company of substantially all the assets and business of the Company's outpatient
behavioral health practices. As of December 31, 1997, the outpatient behavioral
health practice business accounted for approximately eighty-four percent (84%)
of the assets of the Company (before the impact of the write down of assets held
for sale and the impact of the restructuring charge - see below); and for the
year ended December 31, 1997 approximately eighty-three percent (83%) of the
Company's net revenues. After the closing date of the Sale, the Company will no
longer operate outpatient behavioral health practices and its primary business
activity will be managed behavioral healthcare through its Integra Division. As
a result of the Sale, the Company will be a significantly smaller company in
terms of revenues and assets.
On December 26, 1997, the Company entered into an agreement of Purchase
and Sale (the "Purchase Agreement") with PsychPartners MidAtlantic, Inc.,
PsychPartners, Inc., and PsychPartners, LLC (collectively "PsychPartners" or
the "Purchasers"). Pursuant to the Purchase Agreement, the Company will sell to
the Purchasers substantially all of the assets and business of the Company's
outpatient behavioral healthcare business, which consists of (i) all of the
capital stock of one of the subsidiaries of the Company (the "Subsidiary
Stock") operating two outpatient behavioral health practices and (ii)
substantially all of the assets (the "Assets") relating to 20 of the Company's
outpatient behavioral health practices (the 22 practices are collectively, the
"Practices"). In consideration for the sale of the Practices, the Purchasers
will pay to the Company a purchase price consisting of (a) $27,000 in cash, (b)
a warrant contingently issuable to purchase 400,000 Common Units of
PsychPartners at a purchase price of $.05 per Common Unit (the "Warrant") and
(c) the assumption of certain liabilities of the Company and the Practices
(collectively, the "Purchase Price"). The Purchase Price may be adjusted if
the cash, accounts receivable, deposits and prepaid expenses of the Practices
are less than the liabilities and future contingent payment obligations of the
Practices.
PAGE 9 OF 22
<PAGE> 10
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
Background to the Sale and Divestiture of Outpatient Business.
On an ongoing basis, the Company evaluates and considers alternatives
to improve operating results and enhance shareholder value. These alternatives
include continued acquisitions or mergers, joint ventures, strategic alliances
and sale of assets. In October 1997, the Company executed a non-binding
memorandum of understanding with PsychPartners for the sale of substantially all
of the Company's outpatient behavioral health businesses. The Company then began
a more focused assessment of alternatives available to the Company including an
evaluation of the transaction with PsychPartners to determine if such a
transaction was both viable and in the best interests of the Company and its
shareholders. In December 1997, the Company's Board of Directors reached
agreement that an exit and disposal of the Company's outpatient operations and a
refocus on behavioral managed care was the best course of action for the Company
to pursue. The Board authorized management to proceed with and attempt to close
the transaction with PsychPartners. On December 26, 1997, the Company executed
a Purchase Agreement with PsychPartners. The Company's Board of Directors
believes that the terms of the Sale are fair to, and in the best interests of,
the Company and its shareholders. Accordingly, the Board of Directors has
unanimously approved the Sale and recommends approval of the Sale by the
shareholders. While the Company's estimated future cash flows from these
operations showed full recovery of the carrying value of the related assets
prior to the decision to sell, the Company believes the sale of substantially
all of the Company's outpatient businesses will enable the Company to achieve
higher returns than would be obtained if the Company continued to operate its
outpatient operations. In reaching its decision to approve the Sale to
PsychPartners, the Company and the Board of Directors considered the following
factors:
(i) The condition, prospects and strategic direction of the Company's
outpatient behavioral healthcare business. In this regard, the Board of
Directors has reviewed its analyses of the earnings potential of the outpatient
behavioral healthcare business based upon various operating and market
assumptions and its conclusion that there was a significant probability that
the shareholder value of the Company may not significantly improve in the near
term. This review included a discussion of (a) the Company's cost structure,
(b) the competitive market in each of the Company's businesses, and (c) the
Company's losses in recent periods;
(ii) The constraints on the Company's ability to finance growth,
including the dilutive impact of additional equity financing and the costs of
additional financing;
(iii) Recent and historical market prices for the Company Common Stock
indicated that the Company had not created in the eyes of the public market a
clear enough distinction between its group practice strategy and its managed
care strategy and the Sale would allow the Company to focus on pursuing a pure
managed care strategy which might be perceived more positively in the market;
PAGE 10 OF 22
<PAGE> 11
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
(iv) The successful negotiations regarding the Purchase Agreement
which the Company believed reflected a fair and equitable understanding between
the parties;
(v) The substantial likelihood that the Sale would be consummated and
the fact that no other viable alternative to the Sale was available; and
(vi) The $27,000 cash consideration to be received upon the
consummation of the Sale will allow the Company to repay its existing Credit
Facility and satisfy its obligations in connection with past acquisitions and
the Florida Medicare review and will provide the Company with funds to pursue
its growth strategy in the managed behavioral healthcare field through its
Integra Division.
In addition, the Board received a written fairness opinion from Banc
One Capital Corporation which states that the Sale was fair from a financial
point of view. If the Sale is not consummated, the Company will pursue other
strategic alternatives and will be required to refinance its revolving Credit
Facility and obtain additional financing. See "Liquidity and Capital
Resources."
In December 1997, and in conjunction with the above, the Board also
authorized a plan to shut down or sell the remaining outpatient operations not
included in the proposed Sale to PsychPartners. When reaching this decision the
Board considered the following factors:
(i) The recent operating losses in these remaining outpatient
operations. The Company projected that over time, these operations would be able
to be returned to profitability, however, the Company would be required to make
a substantial investment in terms of both capital to fund the short-term losses
and management resources. The Company believes that dedicating Company resources
to the behavioral managed care market would ultimately result in a higher return
on investment than if the Company continued to invest in the Western Region
outpatient operations.
(ii) The proposed Sale to PsychPartners would divest the Company of
substantially all of its outpatient operations. By executing a plan to divest
the remaining outpatient operations, the Company would have the opportunity to
significantly reduce its regional and corporate infrastructure which the Company
believes will improve overall profitability.
On May 14, 1998, at the Special Meeting of the Shareholders of Apogee,
Inc., the shareholders of the Company approved and adopted the terms of the
purchase agreement with PsychPartners. Effective on May 18, 1998, the Company
closed the aforementioned transaction. PsychPartners elected not to acquire the
assets associated with one of the Company's practices which is undergoing a
Medicaid review. As a result the purchase agreement was amended to reflect the
above including adjustment of the purchase price to: (a) $26,400 in cash, (b) a
warrant contingently issuable to purchase 230,000 Common Units of PsychPartners
at a purchase price of $.05 per Common Unit and (c) the assumption of certain
liabilities.
PAGE 11 OF 22
<PAGE> 12
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
Results of Operations
The consolidated financial statements include the accounts of the Company
and all wholly owned and beneficially owned subsidiaries. Because of corporate
practice of medicine laws in certain states in which the Company operates, the
Company does not own the professional corporations which operate the
professional and clinical aspects of the outpatient behavioral healthcare
practices in those states, but instead has the contractual right to designate,
in its sole discretion and at any time, the licensed professional who is the
owner of the capital stock of the professional corporation at a nominal cost
("Nominee Arrangements"). In addition, the Company enters into exclusive
long-term management services agreements ("Management Services Agreements") with
the professional corporations. Through the Management Services Agreements, the
Company has exclusive authority over decision making relating to all major
ongoing operations of the underlying professional corporations with the
exception of the professional aspects of the practice of psychiatry, psychology
and other professional behavioral healthcare services as required by certain
state laws. Under the Management Services Agreements, the Company establishes
annual operating and capital budgets for the professional corporations and
compensation guidelines for the clinical professionals. The Management Services
Agreements generally have initial terms of ten years or greater. The method of
computing the management fees varies by contract. Management fees are based on
either (i) billings of the affiliated practice less the amounts necessary to pay
professional compensation and other professional expenses or (ii) a license fee
per location, reimbursement of direct costs, reimbursement of marketing costs
plus a markup, and a flat administrative fee or (iii) a percentage of gross
receipts of the affiliated practice. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests are unilaterally saleable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporations.
Through the Nominee Arrangements, the Company has a significant long-term
financial interest in the affiliated practices and, therefore, according to
Emerging Issues Task Force No. 97-2 "Application of FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No. 16,
Business Combinations, to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangement", the Company must
consolidate the results of the affiliated practices with those of the Company.
Because the Company must present consolidated financial statements, net revenues
are presented in the accompanying Consolidated Statements of Operations. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.
PAGE 12 OF 22
<PAGE> 13
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
TOTAL NET REVENUES
Patient Service Revenue
Patient service revenue is reported when earned at time of service at the
estimated amounts to be realized through payments from patients, third party
payors and others for services rendered. Third party reimbursement is initially
billed at "usual, customary and reasonable" market rates. Aggregate billings are
adjusted when recorded to reflect the estimated amounts realizable from third
party payors based on the Company's historical experience and contractual rates
established with the payors. Patient service revenue represents billings of the
Company's operations other than its behavioral managed care division, Integra,
which are principally comprised of the outpatient group practice business and
long-term care behavioral health business which the Company exited in December
1996.
Patient service revenue for the three months ended March 31, 1998
decreased to $12,565 from $16,740 in the same period of the prior year. This
decrease is essentially a result of the impact of operations which were
discontinued or downsized in conjunction with the Company's restructurings in
the fourth quarter of 1996 and 1997 including the Company's Western Region
outpatient operations and long term care operations.
Premium Revenue
Premium revenues pertain to the Company's Integra Division which maintains
a portfolio of agreements with managed care organizations and corporations to
provide inpatient and outpatient behavioral health services. Revenues are
primarily generated by capitated managed behavioral health and employee
assistance programs. The fees are defined by contract and are primarily
calculated on a fixed per-member per month fee. Revenues under these contracts
are recorded in the month for which the member is entitled to services.
Generally, these membership contracts are on a one to three year basis subject
to cancellation by either party without cause at any time with thirty to ninety
days written notice.
PAGE 13 OF 22
<PAGE> 14
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other facts. The Company typically does not subcapitate the risk of providing
services under these contracts, but arranges discounted fee-for-service rates
with independent inpatient and outpatient behavioral health providers, which the
Company manages. Integra utilizes certain Apogee outpatient behavioral health
practices as part of the provider network. The Company anticipates that where
practicable, it will continue to utilize these outpatient behavioral health
practices as network providers at the existing or comparable rates which it
believes are at fair market. The Company believes there is a ready supply of
service providers in these markets, and accordingly, is not dependent on the
Apogee outpatient behavioral health practices for the delivery of service to
their contracts.
Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of the contracts. An underestimation
in the utilization or price of services for these contracts could result in
material losses to the Company. Historically, Integra has managed these
capitated contracts profitably. The Company maintains no re-insurance against
the risk of loss under these contracts, however the Company maintains
malpractice and errors and omission insurance coverage for all professionals who
perform services on behalf of the Company.
Premium revenues for the three months ended March 31, 1998 increased to
$2,839 from $2,460 in the same period of the prior year. This increase was
primarily a result of new contracts and increased enrollment in the Company's
employee assistance programs and third party clinical case management and claims
adjudication services.
GROSS PROFIT
Gross profit comprises net revenues less personnel, field management,
facility and other costs and expenses directly associated with the delivery of
services. Gross profit decreased to $3,544 for the three months ended March 31,
1998 from $4,275 for the comparable period last year. This decrease is primarily
a result of the impact of operations which were discontinued or downsized in
conjunction with the Company's restructuring and decision to exit the outpatient
behavioral health business in the fourth quarter of 1997.
PAGE 14 OF 22
<PAGE> 15
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses are primarily comprised of corporate
office, regional management and centralized billing expenses. Selling and
administrative expenses decreased to $2,493 for the three months ended March 31,
1998 from $2,885 for the same period in 1997, due primarily to a combination of
reduced administrative costs as a result of discontinued operations. Subsequent
to the close of the Sale of the outpatient operations to PsychPartners, the
Company intends to further reduce administrative costs which assist in the
support of the outpatient operations.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts pertains largely to the patient
service revenue and decreased to $770 for the three months ended March 31, 1998
from $964 for the same period in 1997. This decrease results primarily from a
decrease in the patient service net revenue as the provision for doubtful
accounts has remained fairly consistent as a percentage of net revenues.
AMORTIZATION OF INTANGIBLE ASSETS AND EXCESS COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED
During 1997, the company wrote off approximately $48 million in goodwill
when it changed its strategic direction and approved a plan to exit and dispose
of the outpatient operations. These write downs were based on the Company's cash
flow analyses which reflected the cash flows expected to result from the use of
these assets prior to their disposal as well as the proceeds expected to results
from their disposal based upon the terms of the Purchase Agreement with
PsychPartners. This write down in goodwill resulted in a reduction of
amortization of approximately $300 for the quarter ended March 31, 1998.
After the completion of the Sale and divestiture, the Company will be
substantially smaller in terms of both assets and net revenues. In light of the
repositioning of the Company as a managed behavioral healthcare company and
continuing changes in the managed health care industry, the Company in the
fourth quarter of 1997, changed its estimated useful life for the cost over fair
value of assets acquired from 40 years to 25 years. Amortization expense
increased approximately $180 for the three months ended March 31, 1998 as a
result of this change in estimate.
PAGE 15 OF 22
<PAGE> 16
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
OTHER MATTERS
During 1996, certain of the Company's Medicare Part B and related
co-insurance billings previously submitted were selected for review by the
Office of the Inspector General of the Department of Health and Human Services
("OIG") and the Department of Justice ("DOJ"). The Company has been informed by
the DOJ that the review is a civil matter relating to billings for services to
Medicare patients in long-term care facilities in the State of Florida during
the period from approximately January 1994 through mid-1995. During the pendency
of this review, the Medicare intermediary has suspended all Medicare payments to
this subsidiary. It is the Company's policy to comply with all federal, state
and local laws including those applicable to the Medicare program. In December
1997, the Company and representatives from the United States Attorney's office
reached an agreement in principle that would settle all of the OIG's civil
claims against the Company relating to this matter for a payment of $3,000. This
tentative agreement is subject to the final approval by the appropriate officers
of the DOJ and OIG. Throughout this process, the Company has been fully
cooperating with the review and anticipates reaching a definitive agreement in
1998.
In March 1998, the Company received notification that the Medicare
intermediary in California has completed a post payment medical review of
billings previously submitted and paid between 1990 and 1994. Based on the
results of their review, the intermediary has requested a refund of
approximately $1,200. Services were denied primarily on the basis of medical
necessity and incomplete documentation. The Company has not yet completed its
review of the intermediary's findings, but anticipates requesting an
administrative hearing. The Company has fully reserved for the above amount.
In April 1998, the Company received notice from the office of the
Attorney General of New York State that the New York Medicaid billings of one
of the operations with which it has a Management Services Agreement will be
audited. Due to the preliminary nature of the review, the Comapny can not
predict when the audit will be completed, its ultimate outcome or its potential
impact of earnings, but belives the outcome of the audit, including repayments,
if any, should not have a material adverse on the Company's financial
condition.
Although management believes the reserves established for the above
matters are sufficient, it is possible that the final resolution of these
matters may exceed the established reserves by an amount which could be
material to the Company's results of operations. The Company does not believe
the ultimate outcome of these matters will have a material adverse effect on
the Company's overall financial condition, liquidity or operations.
Liquidity and Capital Resources
Net cash used in operations was $450 for the three months ended March 31,
1998, compared to net cash used in operations of $608 for the same period in the
prior year. Cash and cash equivalents remained fairly consistent, decreasing
from $2,154 at December 31, 1997 to $1,938 at March 31, 1998.
PAGE 16 OF 22
<PAGE> 17
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
At March 31, 1998, the Company had a working capital deficit of $28,557.
This deficit is primarily attributable to the current classification of the
Company's revolving credit facility ("Credit Facility") and accrued liabilities
of $8,502 which pertain to the Company's sale of and exit from the outpatient
behavioral group practice business and reserves established for its long-term
care operations which were discontinued in 1996.
In April 1996, the Company entered into an agreement with PNC Bank to
establish the Credit Facility for up to a maximum of $15,000. Borrowings
availability under this Credit Facility are based on the Company's earnings
before interest, income taxes, depreciation and amortization, and the value of
selected assets, principally accounts receivable and property and equipment;
subject to various financial and non-financial covenants; and secured by
substantially all of the assets of the Company. Borrowings under the Credit
Facility bear interest at the bank's prime rate plus 1.0% or LIBOR plus 2.85%.
The proceeds of this Credit Facility are available for future acquisitions,
working capital and general corporate purposes. In March 1997, the Credit
Facility was amended to reset various financial covenants to reflect the
Company's restructuring and other charges incurred in 1996. In addition, the
bank retained discretion for borrowings in excess of $12,000.
At March 31, 1998, the Company was in default of certain financial
covenants contained in the Credit Facility. The bank has waived the covenant
violations and extended the additional borrowings contingent upon consummation
of the Sale to PsychPartners at which point the Company has agreed to repay all
existing bank debt with proceeds from the Sale. Through May 14, 1998, total
advances under the Credit Facility were $14,770. This amount was fully repaid
with proceeds from sale to PsychPartners.
In addition to repayment of the Credit Facility, the Company anticipates
that the net proceeds from the Sale to PsychPartners will primarily be used to
repay bank debt, fund payment of acquisition notes and contingent consideration
and settlement of the Florida Medicare review (see above). The Company intends
to establish a new credit facility which it expects will provide between
$7,000 and $10,000 in borrowings availability in future periods.
PAGE 17 OF 22
<PAGE> 18
APOGEE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data)
In the event the sale was not completed the Company entered into an
agreement with certain investment partnerships (the "Investment Partnerships")
which are significant stockholders of the Company and are managed by Foster
Management Company, an affiliated party, to obtain their commitment to
guarantee an additional $7,000 of financing. In return, the investment funds
will receive the following: (i) a commitment fee of 2% of the guaranteed
amount ; (ii) a draw down fee of 2% on borrowings in excess of $15,000; (iii)
an unused commitment fee of 1/2% per annum; and (iv) warrants to purchase
400,000 shares of common stock of the Company at a price of $0.05 per share
(the "Apogee Warrants") or, in the event the Sale is not consummated, a
transaction fee of $3,500 payable on April 30, 1999. With the Sale completed,
the Company estimates the cost to the Company will be $140 in cash payable to
the Investment Partnerships and a non-recurring charge of approximately $930
which represents the difference between the exercise price of the Apogee
Warrants and the fair market value of the underlying Company Common Stock.
These charges will be recorded in the Company's results of operations for the
quarter ending June 30, 1998.
The Company believes that the cash flow generated by the Company's
operations, together with its existing cash and proceeds from the
Sale, will be sufficient to meet the Company's cash requirements in 1998.
The Company's current ratio, working capital and debt to equity ratio are
set forth below for the dates indicated:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Current Ratio.................... .24:1 .26:1
Working Capital Deficit.......... $(28,557) $(27,646)
Debt to Equity................... 3.6:1 3.1:1
</TABLE>
PAGE 18 OF 22
<PAGE> 19
APOGEE, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
MARCH 31, 1998
(Dollars in thousands, except per share data)
Inflation
A significant portion of the Company's operating expenses have been
subject to inflationary increases, including clinical and administrative
salaries and rent expense. Based on management's assessment, the Company has
historically been unable to substantially offset inflationary increases through
price increases but believes the Company has somewhat mitigated the effect by
expanding services and increasing operating efficiencies. There can be no
assurance that the Company will be able to offset future inflationary increases
in expenses, if any which would result in a dilutive impact on the Company's
future earnings.
CAUTIONARY STATEMENT
Matters discussed above contain forward-looking statements that are based
on the Company's estimates, assumptions and projections. Major factors which
could cause results to differ materially from those expected by management
include the timing and nature of reimbursement charges, the nature of changes in
laws and regulations that govern various aspects of the Company's business, new
criteria adopted to determine medical necessity for behavioral health services,
the outcome of post-payment reviews of the Company's billings to Medicare
patients in long-term care facilities, including a review in the State of
Florida by the Department of Justice, successful renegotiation of the Company's
Credit Facility, changes in procedures by third party payors, pricing of managed
care and other third party contracts, the number and productivity of clinicians,
the direction and success of competitors, management retention and unanticipated
market changes.
PAGE 19 OF 22
<PAGE> 20
APOGEE, INC.
FORM 10-Q - QUARTER ENDED MARCH 31, 1998
ITEM 1 - LEGAL PROCEEDINGS
From time to time, the Company is a party to certain claims, suits and
complaints which arise in the ordinary course of business. During 1996, certain
Medicare Part B and related co-insurance billings previously submitted by one of
the Apogee subsidiaries were selected for review by the Office of the Inspector
General of the Department of Health and Human Services ("OIG") and the
Department of Justice ("DOJ"). Apogee has been informed by the DOJ review is a
civil matter relating to billings for services to Medicare patients in long-term
care facilities in the State of Florida during the period from approximately
January 1994 through mid-1995. During the pendency of this review, the Medicare
intermediary has suspended all Medicare payments to this subsidiary. It is the
Company's policy to comply with all federal, state and local laws, including
those applicable to the Medicare program. In December 1997, the company and
representatives from the United States Attorney's office reached an agreement in
principle that would settle all of the OIG's civil claims against the Company
relating to this matter for a payment of $3,000. This tentative agreement is
subject to the final approval by the appropriate officers of the DOJ and OIG.
Throughout this process, the Company has been fully cooperating with the review
and anticipates reaching a definitive agreement in 1998. The Company has
established a reserve for the above amount, which is included with Accrued
Expenses and Other Accrued Liabilities, in the accompanying Balance Sheet. The
final agreement, when reached, is not expected to materially differ from the
terms outlined above.
In March 1998, the Company received notification that the Medicare intermediary
in California has completed a post payment medical review of billings previously
submitted and paid between 1990 and 1994. Based on the results of their review,
the intermediary has requested a refund of approximately $1,200. Services were
denied primarily on the basis of medical necessity and incomplete documentation.
The Company has not yet completed its review of the intermediary's findings, but
anticipates requesting an administrative hearing. The Company fully reserved the
above amount.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) The exhibits required to be filed as part of this Quarterly
Report on Form 10-Q are contained in the attached Index to Exhibits.
b) Current Reports on Form 8-K:
None.
PAGE 20 OF 22
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
APOGEE, INC.
----------------------------------------------
(registrant)
May 15, 1998 /s/Mark D. Gibson
- ---------------------- -----------------
(Date) By: Mark D. Gibson
Chief Accounting Officer
PAGE 21 OF 22
<PAGE> 22
INDEX TO EXHIBITS
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
PAGE 22 OF 22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,938
<SECURITIES> 0
<RECEIVABLES> 13,166
<ALLOWANCES> 7,281
<INVENTORY> 0
<CURRENT-ASSETS> 9,074
<PP&E> 3,815
<DEPRECIATION> 1,437
<TOTAL-ASSETS> 42,481
<CURRENT-LIABILITIES> 37,631
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 4,301
<TOTAL-LIABILITY-AND-EQUITY> 42,481
<SALES> 0
<TOTAL-REVENUES> 15,404
<CGS> 0
<TOTAL-COSTS> 11,860
<OTHER-EXPENSES> 2,493
<LOSS-PROVISION> 770
<INTEREST-EXPENSE> 310
<INCOME-PRETAX> (449)
<INCOME-TAX> 32
<INCOME-CONTINUING> (481)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (481)
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
