<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended: February 28, 1998
Commission File No. 0-22155
IN-HOUSE REHAB CORPORATION
- -----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-0987697
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
325 West Main Street, Suite 1400B, Louisville, Kentucky 40202
--------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(502) 568-8923
---------------------------
(Issuer's telephone number)
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 [ ]
There were 13,347,072 shares of the Registrant's Common Stock outstanding as
of March 20, 1998.
Transitional Small Business Disclosure Format: Yes --- No -X-
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, 1998 and May 31, 1997
February 28,
1998 May 31,
ASSETS (Unaudited) 1997
Current assets: ----------- -----------
Cash $ 441,708 $ -
Accounts receivable-trade, less allowance
for doubtful accounts of $241,000 and
$75,000 at February 28, 1998 and
May 31, 1997, respectively 4,474,459 2,736,132
Accounts receivable-trade - related party 3,913,808 4,548,493
Other current assets 166,855 15,057
Total current assets 8,996,830 7,299,682
Equipment, at cost 359,710 265,556
Less accumulated depreciation (90,194) (48,660)
269,516 216,896
Other assets 671,877 480,751
TOTAL ASSETS $ 9,938,223 $ 7,997,329
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 4,455,000 $ 3,542,102
Accounts payable 538,239 553,564
Other current liabilities 791,557 673,745
Total current liabilities 5,784,796 4,769,411
Minority interest 40,611 -
Stockholders' equity:
Preferred stock, $10 par value; 10,000,000
shares authorized; no shares issued - -
Common stock, no par value; 20,000,000
shares authorized; 13,347,072 and 13,344,215
shares issued and outstanding at February 28,
1998 and May 31, 1997, respectively 1,891,584 1,886,584
Subordinated convertible common stock,
no par value; 1,200,000 shares authorized;
no shares issued - -
Common stock subscriptions receivable - (58,577)
Retained earnings 2,221,232 1,399,911
4,112,816 3,227,918
Total Liabilities and Stockholders' Equity $ 9,938,223 $ 7,997,329
See accompanying notes to consolidated financial statements.
2
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IN-HOUSE REHAB CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the quarter and nine months ended February 28, 1998 and 1997
(Unaudited)
Quarter Nine Months
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
Revenues:
Contract services $2,899,564 $1,790,968 $ 8,099,805 $5,227,860
Contract services
- related party 1,461,654 2,340,031 6,276,740 5,933,690
--------- --------- ----------- ----------
4,361,218 4,130,999 14,376,545 11,161,550
Operating costs:
Salaries, wages and
benefits 2,563,640 2,172,000 7,718,745 5,690,630
Contract therapists 370,934 657,914 1,888,099 1,948,524
Other expense 170,919 150,429 868,978 306,334
--------- --------- ----------- ----------
3,105,493 2,980,343 10,475,822 7,945,488
--------- --------- ----------- ----------
Gross profit 1,255,725 1,150,656 3,900,723 3,216,062
Selling, general and
administrative expenses 780,391 586,948 2,203,468 1,609,781
Income from operations 475,334 563,708 1,697,255 1,606,281
Interest expense 97,460 48,799 272,703 91,794
Income before minority
interest and income taxes 377,874 514,909 1,424,552 1,514,487
Minority interest 23,590 - 40,611 -
Provision for income taxes 149,620 180,119 562,620 604,000
Net income $ 204,664 $ 334,790 $ 821,321 $ 910,487
Net income per share - basic $ .02 $ .02 $ .06 $ .07
---------- ---------- ----------- ----------
Net income per share -
assuming dilution $ .02 $ .02 $ .06 $ .07
See accompanying notes to consolidated financial statements.
3
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IN-HOUSE REHAB CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended February 28, 1998 and 1997
(Unaudited)
1998 1997
Cash flows from operating activities: ----------- ------------
Net income $ 821,321 $ 910,487
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 38,537 13,112
Amortization 63,459 156,730
Minority interest 40,611 -
Allowance for doubtful accounts 270,630 -
Change in assets and liabilities,
net of effects from acquisitions:
Accounts receivable (1,374,272) (2,556,125)
Other current assets (152,140) (39,566)
Other assets (101,376) (110,954)
Accounts payable (15,325) (49,403)
Other current liabilities (232,003) (11,869
----------- -----------
Net cash used in operating
activities (176,552) (1,687,588)
----------- ------------
Cash flows from investing activities:
Purchase of equipment (91,157) (120,455)
Acquisition of two minor subsidiaries - (250,000)
Investment in Rehab Tools, Inc. (145,500) -
----------- -----------
Net cash used in investing
activities (236,657) (370,455)
----------- -----------
Cash flows from financing activities:
Proceeds from stock subscription
receivable 58,919 -
Issuance of common stock 5,000 185,999
Issuance of short-term borrowings 2,030,000 4,623,770
Repayments of short-term borrowings (1,117,102) (2,810,921)
Checks issued in excess of cash on deposit (121,900) 59,195
----------- -----------
Net cash provided by financing
activities 854,917 2,058,043
----------- -----------
Decrease in cash and equivalents 441,708 -
Beginning cash balance - -
----------- -----------
Ending cash balance $ 441,708 $ -
----------- -----------
Supplemental disclosures:
Income taxes $ 721,330 $ 694,492
Cash paid for interest $ 247,774 $ 57,137
Supplemental disclosure of noncash
financing activities:
Acquisition of two minor subsidiaries $ - $ 144,228
See accompanying notes to consolidated financial statements.
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IN-HOUSE REHAB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of February 28, 1998 and 1997 and the results of operations and
cash flows for the quarter and nine month periods then ended.
This financial information should be read in conjunction with financial
statements and the notes thereto included in the Company's Form 10-KSB for the
fiscal year ended May 31, 1997.
Certain reclassifications of amounts in the consolidated financial statements
have been made to reflect comparability.
2. NET INCOME PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
became effective for periods ending after December 15, 1997. This statement
revised the calculation of earnings per share from the "primary" and "fully
diluted" methods previously employed, to the "basic" and "assuming dilution"
methods. The Company had not previously presented fully diluted earnings per
share because the result was not materially different than the primary
calculation. Under the new statement, basic earnings per share represents
earnings divided by the weighted average number of shares outstanding during
the period. Earnings per share-assuming dilution represents the basic
weighted average shares outstanding adjusted for the effects of stock options
and warrants. The calculation of the Company's earnings per share assuming
dilution closely resembles that used in prior calculations of primary earnings
per share.
In accordance with this statement, the Company has replaced its disclosure of
primary net income per share with net income per share-basic and net income
per share-assuming dilution.
The following table sets forth the computation and reconciliation of net
income per share-basic and net income per share-assuming dilution:
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For the Three Months For the Nine Months
Ended February 28, Ended February 28,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net income $ 204,664 $ 334,790 $ 821,321 $ 910,487
Weighted average shares
outstanding:
Weighted average shares
outstanding - basic 13,347,072 13,431,382 13,345,802 13,536,734
Stock options and
warrants 41,345 125,254 143,447 103,307
Weighted average shares
outstanding - assuming
dilution 13,388,417 13,556,636 13,489,250 13,640,041
Net income per share -
basic $ 0.02 $ 0.02 $ 0.06 $ 0.07
Net income per share -
assuming dilution $ 0.02 $ 0.02 $ 0.06 $ 0.07
The Company did not include warrants, equivalent to 520,000 and 346,667 shares
of common stock, or options to purchase 684,000 and 465,333 shares of common
stock for the three and nine months ended February 28, 1998, respectively,
because their effects are antidilutive. There were no transactions that
occurred subsequent to February 28, 1998 that would have materially changed
the number of shares used in computing net income per share-basic or net
income per share-assuming dilution.
3. MAJOR CUSTOMER
Approximately $6,277,000 and $5,934,000 or 44% and 53% of all revenue for the
nine months ended February 28, 1998 and 1997, respectively, and $3,820,000 and
$4,519,000 or 44% and 61% of the balance of accounts receivable at February
28, 1998 and May 31, 1997, respectively, related to one customer who is a
stockholder and related party of the Company, Retirement Care Associates, Inc.
("RCA").
RCA has announced that it has entered into a Merger Agreement (Merger) with
Sun Healthcare Group, Inc. (Sun) pursuant to which RCA would be merged into a
subsidiary of Sun. Sun currently has a subsidiary which provides
rehabilitation services similar to those services offered by the Company.
Effective January 1, 1998, the Company began working with Sun to transition
the RCA facilities that were serviced by IHR to Sun. The transition period
was completed in February 1998. As a result, the Company had no Contracts for
Therapy Program Services with facilities either owned, operated or managed by
RCA at February 28, 1998 compared with 31 at February 28, 1997. RCA continues
to make payments on its accounts receivable balance and upon the completion of
the Merger, Sun has agreed to continue to pay IHR the outstanding accounts
receivable balance in accordance with the terms of the governing contracts.
RCA has issued its financial statements for the year ended June 30, 1997,
which includes an unqualified opinion from its auditors. In the footnotes to
the aforementioned financial statements, it states that RCA "has experienced a
6
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significant net operating loss and at the same time a decline in liquidity,
resulting from the operating loss and a heightened level of investment in new
facilities." It also states that "closing of the Merger of the Company with
Sun...will provide access to additional sources of liquidity..." and outlines
RCA management's plan if the Sun Merger does not take place. In RCA's June
30, 1997 10-K, it states that RCA and Sun "have filed with the Securities
and Exchange Commission, on a confidential basis, a preliminary proxy
statement with respect to the Merger...". For further information, see
RCA's Form 10-K and other SEC filings.
RCA continued to be a major customer of the Company through December 31, 1997.
A delay in continued regular payments of accounts receivable from RCA, for any
reason, could have a significantly unfavorable effect on the Company's cash
flow from operations. As of March 27, 1998, approximately $2,225,000 or 36%
of the balance in accounts receivable related to RCA. The Company continues
to increase the number of contracts it has with long-term care facilities
operated by entities other than RCA in an effort to offset the loss of the RCA
service contract revenues.
4. SHORT-TERM BORROWINGS
The Company's revolving line of credit came due on January 2, 1998. The
Company negotiated an extension to April 2, 1998. Subsequent to the third
quarter ended February 28, 1998, the Company negotiated an extension of the
existing line of credit to July 31, 1998. The credit line provides for
maximum borrowings of $4,500,000 subject to a borrowing base formula.
Borrowings bear interest at the prime rate plus .5% payable monthly.
Borrowings as of February 28, 1998 and May 31, 1997 were $4,453,800 and
$3,525,000, respectively. The amount available under the borrowing base
formula at May 31, 1997 was $361,000. The interest rate at February 28, 1998
and May 31, 1997 was 8.75%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
QUARTERS ENDED FEBRUARY 28, 1998 AND 1997
The Company generated $4,361,000 in gross revenue for the quarter ended
February 28, 1998 compared with $4,131,000 for the same period in fiscal 1997.
Although the Company transitioned all of its RCA contracts to Sun (see
Footnote 3 of the financial statements for a detailed discussion) the Company
increased the number of non RCA contracts it services. This resulted in a net
increase in gross revenue for the quarter ended February 28, 1998 as compared
to the same period in the prior fiscal year.
Operating expenses as a percentage of revenue for the quarter ended February
28, 1998 were 71.2%. This compares to 72.1% for the same period in fiscal
1997. The decrease is primarily attributable to a reduction in the number of
contract therapists utilized.
Selling, general and administrative expenses for the quarter ended February
28, 1998 were 17.9% of revenue as compared to 14.2% for the same period in
fiscal 1997. The increase in the current period is primarily attributable to
increased expenses in the areas of professional services and personnel
recruiting.
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NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
The Company generated $14,377,000 in gross revenue for the nine months ended
February 28, 1998 compared with $11,162,000 for the nine months ended February
28, 1997. The increase is due to the addition of new service contracts and
acquisitions made during the past year.
Operating expenses as a percentage of revenue for the nine months ended
February 28, 1998 were 72.9%. This compares with 71.2% for the nine months
ended February 28, 1997. The increase is attributed to increases in the
number of personnel and wages and benefits costs.
Selling, general and administrative expenses for the nine months ended
February 28, 1998 were 15.3% of revenue as compared to 14.4% in the nine
months ended February 28, 1997. The increase is primarily attributable to
increased expenses in the areas of professional services and personnel
recruiting.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1998, the Company had working capital of $3,232,000 as
compared to working capital of $2,550,000 at May 31, 1997. The increase was
primarily due to an increase in trade receivables which was the result of an
increase in the number of high volume contracts being serviced. As of
February 28, 1998, the Company had 75 contracts to provide rehabilitation,
respiratory and/or psyche/social services compared with 82 contracts at May
31, 1997.
Net cash used in operating activities was $177,000 for the nine months ended
February 28, 1998. This compares with $1,688,000 for the same period in the
prior year. The decrease was primarily due to an increase in the turnover of
the Company's accounts receivable. Accounts receivable were collected more
quickly on average during the current period.
Net cash applied toward investing activities for the nine months ended
February 28, 1998 was $237,000. This compares with $370,000 for the same
period in the prior year. The decrease was primarily due to the acquisition
of two minor subsidiaries during the nine months ended February 28, 1997.
There were no such acquisitions in the same period of the current year.
The Company had $855,000 provided by financing activities. This compares with
$2,058,000 for the same period in the prior year. The decrease was primarily
attributable to a decrease in net short-term borrowings which was made
possible by accelerating receivable collectibles.
Except as described herein, the Company is not aware of any trends, demands,
commitments or understandings that would impact its liquidity. As discussed
in Footnote 4 to the financial statements, the Company's revolving line of
credit was extended to July 31, 1998.
REIMBURSEMENT/GOVERNMENT RELATIONS
On January 30, 1998 the Health Care Financing Administration ("HCFA"), the
federal agency responsible for the rules governing Medicare and Medicaid,
issued specific salary equivalency reimbursement guidelines for long-term care
contract rehabilitation occupational therapy and speech-language pathology
services and revisions to the existing guidelines for physical therapy
services. The rules specify that effective April 1, 1998, occupational
therapy and speech-language pathology services guidelines become effective and
physical therapy guidelines will be increased in consideration of the
substantial increases in salary and services standard since these guidelines
were last revised.
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Until such salary equivalency guidelines are effective, contract
rehabilitation for occupational therapy and speech-language pathology services
will continue to be evaluated based upon the reasonableness of costs incurred
by the provider under a "prudent buyer" standard.
The Balanced Budget Act of 1997 (the "Act") enacted in August 1997, made
several changes in the way Medicare will reimburse nursing homes and other
providers for their services. Commencing July 1, 1998, these changes will
take effect for nursing homes at different times throughout calendar years
1998 and 1999, depending on the starting date for each facility's cost
reporting year. By the middle of 1999, the Act mandates that each facility be
reimbursed, in part, under a comprehensive prospective payment system, which
will include payment for therapy services in a single all-inclusive per diem
payment. Therapy services not covered by the prospective payment system will
be covered by a fee schedule with total charges being subject to an annual
cap.
The Act also mandates changes to the payment structure for services provided
through certified rehabilitation agencies. Implementation of these changes
stretches over the next 18 months. As with nursing homes, rehabilitation
agencies will change from the current cost-based system to a system based on a
fee schedule with an annual cap.
It cannot be predicted at this time what effect the changes that salary
equivalency and the Act will have on the demand for therapy services.
Management is taking steps which it believes will help to mitigate any adverse
economic impact of these changes. There can be no assurances, however, that
these changes will not have a material adverse effect on the future operations
of the Company.
CAUTIONARY STATEMENT
Except for historical information, matters discussed above, including but not
limited to, statements concerning future growth, are forward-looking
statements that are based on management's estimates, assumptions and
projections. Important factors that could cause results to differ materially
from those expected by management include reimbursement system changes,
including customer response to the establishment of salary equivalency
guidelines for certain therapies and the change from cost-based reimbursement
to fee schedules and per diem payments, the number and productivity of
clinicians, pricing of payer contracts, management retention and development,
management's success in integrating acquired business and in developing and
introducing new products and lines of business.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security-Holders.
On January 26, 1998, the Company held an Annual Meeting of
Shareholders at which David V. Hall, Mark P. Clein, Robert J. Babine, Timothy
M. Graven and Chris Brogdon were elected to serve as Directors of the Company,
and the appointment of Strothman & Company PSC as the Company's auditors was
ratified. No other matters were presented for a vote at the meeting.
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The following sets forth the votes cast for and withheld in the
election of the Directors. There were no abstentions or broker non-votes.
Nominee For Withheld
----------------- ---------- --------
David V. Hall 11,502,910 0
Mark P. Clein 11,499,910 3,000
Robert J. Babine 11,502,910 0
Timothy M. Graven 11,456,910 43,000
Chris Brogdon 11,440,820 62,090
The following sets forth the votes cast for, against or abstained
and broker-non votes on the ratification of the appointment of Strothman &
Company PSC as the Company's auditors.
For Against Abstain Broker Non-Votes
---------- ------- ------- ----------------
11,434,210 3,000 65,700 0
Item 5. Other Events.
On March 30, 1998, the Company acquired all of the outstanding
common stock of Gateway Rehabilitation, Inc. ("Gateway") in exchange for
43,000 shares of the Company's Common Stock in a private transaction. The
acquisition was made pursuant to the terms of a Stock Purchase Agreement dated
March 1, 1998, among the Company, Gateway and Gateway's shareholders. Gateway
provides physical therapy, occupational therapy and rehabilitation program
management under contracts with thirty long-term care facilities in Illinois
and southwestern Indiana. During the year ended December 31, 1997, Gateway
had approximately $2,760,000 in sales and had a net loss of approximately
$17,000. At February 28, 1998, Gateway had approximately $978,000 in assets
and $1,100,000 in liabilities.
Under the terms of the Stock Purchase Agreement, the former
shareholders have the right to require the Company to repurchase the shares of
the Company's Common Stock received by them in the transaction for $5.00 per
share during the 10 day period commencing May 31, 1999. As a result, the
Company could be required to repurchase these shares for an aggregate of
$215,000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) Reports on Form 8-K. The Company filed a Current Report on
Form 8-K dated January 1, 1998 which reported information under Item 5.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IN-HOUSE REHAB CORPORATION
Dated: April 13, 1998 By:/s/ David V. Hall
David V. Hall, President
By:/s/ Robert J. Babine
Robert J. Babine, Chief Financial
Officer and Treasurer
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages 2 and 3 of the
Company's Form 10-QSB for the quarter ended February 28, 1998, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1998
<CASH> 441,708
<SECURITIES> 0
<RECEIVABLES> 8,388,267
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,996,855
<PP&E> 359,710
<DEPRECIATION> (90,194)
<TOTAL-ASSETS> 9,938,223
<CURRENT-LIABILITIES> 5,765,166
<BONDS> 0
0
0
<COMMON> 1,891,584
<OTHER-SE> 2,221,232
<TOTAL-LIABILITY-AND-EQUITY> 9,938,223
<SALES> 14,376,545
<TOTAL-REVENUES> 14,376,545
<CGS> 10,475,822
<TOTAL-COSTS> 10,475,822
<OTHER-EXPENSES> 2,203,468
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 272,703
<INCOME-PRETAX> 1,424,552
<INCOME-TAX> 562,620
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 821,321
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
