<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
[ ] 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
0-19726
MEADOWBROOK REHABILITATION GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3022377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Powell Street, Suite 800, Emeryville, California 94608
(Address and Zip Code of principal executive offices)
Registrant's Telephone Number, including Area Code: (510) 420-0900
____________
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
--------- ---------
At May 13, 1996, the latest practicable date, there were 1,157,244
outstanding shares of Class A Common Stock, $.01 par value per share, and
773,000 outstanding shares of Class B Common Stock, $.01 par value per share.
<PAGE>
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets ................... 3
Consolidated Statements of Operations ......... 4
Consolidated Statements of Cash Flows ......... 5
Consolidated Statements of Stockholders' Equity. 6
Item 2. Management s Discussion and Analysis of Financial
Condition and Results of Operations
Trends and Recent Events ...................... 7
Results of Operations ......................... 11
Liquidity and Capital Resources ............... 13
Impact of Accounting Statements ............... 15
Interim Periods ............................... 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ............................. 16
Item 2. Changes in Securities ......................... 16
Item 3. Defaults Upon Senior Securities ............... 16
Item 4. Submission of Matters to a Vote of Security
Holders ....................................... 16
Item 5. Other Information ............................. 16
Item 6. Exhibits ...................................... 16
SIGNATURES ................................................ 17
<PAGE>
Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1995 1996
------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $6,307,307 $3,308,904
Restricted cash 500,000 141,000
Patient accounts receivable, less allowance for doubtful accounts
of $2,001,000 and $2,063,000, respectively 4,063,945 5,599,761
Due from intermediaries 614,003 398,916
Income tax refund receivable 170,000 140,362
Other receivables 264,482 1,240,240
Prepaid expenses and other assets 285,463 266,484
------------- -------------
Total current assets 12,205,200 11,095,667
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 683,770 683,770
Furniture and equipment 2,683,870 2,965,178
Leasehold improvements 587,213 777,107
------------- -------------
3,954,853 4,426,055
Less - Accumulated depreciation (1,636,309) (2,007,829)
------------- -------------
Net property and equipment 2,318,544 2,418,226
------------- -------------
OTHER ASSETS
Goodwill and intangible assets-net 1,780,679 1,856,148
------------- -----------
TOTAL ASSETS $16,304,423 $15,370,041
------------- -----------
CURRENT LIABILITIES:
Short-term borrowings $725,229 $657,767
Current maturities of capital leases 18,601 40,791
Accounts payable 1,213,083 1,385,971
Accrued payroll and employee benefits 905,196 1,239,654
Other accrued liabilities 1,632,579 960,147
------------- -----------
Total current liabilities 4,494,688 4,284,330
------------- -----------
OTHER LONG-TERM LIABILITIES 1,074,230 822,382
------------- -----------
TOTAL LIABILITIES 5,568,918 5,106,712
------------- -----------
Minority Interest 58,774 49,624
------------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value:
Class A -- 15,000,000 shares authorized; 1,157,662 and 1,157,244 shares
issued and outstanding at June 30, 1995 and March 31, 1996, respectively 11,577 11,573
Class B -- 5,000,000 shares authorized; 773,000 and 773,000 shares issued
and outstanding at June 30, 1995 and March 31, 1996, respectively 7,730 7,730
Paid-in capital 17,908,117 17,908,121
Retained deficit 1,066,491,131 (7,713,719)
------------- -------------
Total stockholders' equity 10,676,731 10,213,705
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,304,423 $15,370,041
------------- -------------
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
The notes to consolidated financial statements, as contained in the Company's
Annual Report on Form 10-K, are an integral part of these financial
statements.
3
<PAGE>
Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
3-Mths Ended March 31, 9-Mths Ended March 31,
1995 1996 1995 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET OPERATING REVENUES $5,154,554 $6,321,363 $15,963,922 $17,995,272
OPERATING EXPENSES:
Salaries and employee benefits 3,081,467 3,866,016 9,154,117 11,774,074
Professional fees and purchased services 724,346 706,177 2,135,008 1,940,085
Provision for doubtful accounts 152,701 145,677 567,698 395,532
Other operating expenses 797,787 906,770 2,070,186 2,411,091
Depreciation and amortization 138,821 147,815 394,008 427,308
Rent:
To unrelated parties 461,934 406,822 1,364,068 1,222,772
To related parties 132,778 106,399 485,056 310,134
----------- ----------- ----------- -----------
Total operating expenses 5,489,834 6,285,676 16,170,141 18,480,996
----------- ----------- ----------- -----------
Income (loss) from operations (335,280) 35,687 (206,219) (485,724)
----------- ----------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest income (31,956) (37,529) (94,102) (150,664)
Interest expense 15,637 21,928 33,393 71,914
----------- ----------- ----------- -----------
Net other income (16,319) (15,601) (60,709) (78,750)
----------- ----------- ----------- -----------
Income (loss) before income taxes (318,961) 51,288 (145,510) (406,974)
INCOME TAX BENEFIT (98,489) 0 (29,102) 0
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST ($220,472) $51,288 ($116,408) ($406,974)
----------- ----------- ----------- -----------
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES 14,419 17,495 72,166 56,052
----------- ----------- ----------- -----------
NET INCOME (LOSS) ($234,891) $33,793 ($188,574) ($463,026)
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE
(primary and fully diluted) ($0.12) $0.02 ($0.10) ($0.24)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,936,936 1,930,244 1,936,136 1,930,384
----------- ----------- ----------- -----------
- - --------------------------------------------------------------------------------------------------------
</TABLE>
The notes to consolidated financial statements, as contained in the Company's
Annual Report on Form 10-K, are an integral part of these financial
statements.
4
<PAGE>
Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
9-Mths Ended March 31,
1995 1996
-------------- --------------
<S> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($188,574) ($463,026)
Adjustments to reconcile net income to net cash
provided by <used for> operations:
Depreciation and amortization 394,008 427,308
Loss on disposal of assets 36,545 413
Minority interest expense 72,166 56,052
Changes in assets and liabilities:
Decrease <increase> in patient receivables 324,594 (1,535,816)
Decrease in amounts due from intermediaries 341,645 215,087
Decrease in income tax refund receivable 1,557,812 29,638
Increase in other receivables (90,030) (975,758)
Decrease in prepaid expenses and other current assets 273,212 18,979
Decrease in accounts payable and
accrued liabilities (380,442) (165,086)
-------------- --------------
Cash provided by <used for> operating activities 2,340,936 (2,392,209)
-------------- --------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (156,886) (418,510)
Purchase of outpatient clinics (212,514) (123,432)
Proceeds from sale of assets 1,950 15,093
-------------- --------------
Cash used for investment activities (367,450) (526,849)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term notes borrowings 0 439,209
Payments of short-term notes payable (91,859) 1,072,987,253
Long-term notes borrowings 0 20,000
Payments of long-term debt and capital lease obligations (98,441) (97,305)
Proceeds from issuance of debt 0 19,524
Reduction in restricted cash 0 359,000
Payments to minority shareholders (62,358) (65,202)
Issuance of common stock for options exercised 1,249 0
-------------- --------------
Cash used for financing activities (251,409) (79,345)
-------------- --------------
Net increase <decrease> in cash 1,722,077 (2,998,403)
-------------- --------------
CASH, BEGINNING OF PERIOD 4,353,844 6,307,307
-------------- --------------
CASH, END OF PERIOD $6,075,921 $3,308,904
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities:
Property additions financed with notes payable $182,804 $53,024
Property additions financed with capital leases 54,000 76,020
Liability resulting from purchase of outpatient clinics 1,128,130 120,480
Payments:
Interest paid 33,393 33,128
- - -----------------------------------------------------------------------------------------------
</TABLE>
The notes to consolidated financial statements, as contained in the Company's
Annual Report on Form 10-K, are an integral part of these financial
statements.
5
<PAGE>
Part I: FINANCIAL STATEMENTS (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------- Retained Total
Class A Class B Paid-in Earnings Stockholders'
--------------------------------------------
Shares Amount Shares Amount Capital (Deficit) Equity
--------- ------- ------- ------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994 1,162,745 $11,627 773,000 $7,730 $17,950,818 ($3,721,568) $14,248,607
Common stock issuance
upon option exercise 2,250 23 --- --- 1,226 --- 1,249
Repurchase of shares (7,333) (73) --- --- (43,927) --- (44,000)
Net Loss --- --- --- --- --- (3,529,125) (3,529,125)
--------- ------- ------- ------ ----------- ---------- -----------
BALANCE, JUNE 30, 1995 1,157,662 $11,577 773,000 $7,730 $17,908,117 ($7,250,693) $10,676,731
Cancellation of Shares (418) (4) --- --- 4 --- 0
Net Income --- --- --- --- --- (463,026) (463,026)
--------- -------- ------- ------ ----------- ----------- -----------
BALANCE, MARCH 31, 1996 1,157,244 $11,573 773,000 $7,730 $17,908,121 ($7,713,719) $10,213,705
--------- ------- ------- ------ ----------- ----------- -----------
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The notes to consolidated financial statements, as contained in the Company's
Annual Report on Form 10-K, are an integral part of these financial
statements.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TRENDS AND RECENT EVENTS
------------------------
- - - REVERSE STOCK SPLIT
-------------------
On April 22, 1996, the Restated Certificate of Incorporation of the Company
was amended to effect a one-for-three reverse stock split of the Company's Class
A and Class B Common Stock. The purpose of the reverse stock split is to permit
the Company to remain listed on The NASDAQ Stock Market. In February, NASDAQ
notified the Company that it was reviewing the Company's eligibility for
continued listing. The Company was out of compliance at various times during
1996 with NASDAQ s requirement that it maintain a minimum bid price of $1.00 per
share. The Company believes that it is now in compliance with all of the
requirements for continued inclusion on NASDAQ.
The Company has retroactively reflected the reverse stock split in the
financial statements for all periods presented.
- - - LOSS HISTORY; LIQUIDITY RISKS
-----------------------------
The Company has incurred significant losses in each of the last three
fiscal years as well as the first nine months of fiscal 1996. The Company's
future profitability is dependent on a number of factors, including increased
patient census and revenues particularly in its traditional acute, subacute and
post acute businesses, a reduction in the Company's expenses as a percentage of
its total operating revenues and successful integration and management of the
outpatient rehabilitation clinics and home health business acquired on June 30,
1995. There can be no assurance as to the Company's future profitability.
The Company's recent operating losses and the funding of initial working
capital for its recently acquired Colorado outpatient clinics and home health
agency have substantially reduced its available working capital. The Company's
working capital has fallen from $7,711,000 at June 30, 1995 to $6,811,000 on
March 31, 1996. For the nine months ended March 31, 1996, the Company's
operating activities used cash of $2,392,000. Cash used for operating
activities for the nine months ended March 1996, included the receipt of
$864,000 resulting from the collection of amounts due from intermediaries. This
receipt was substantially offset by $616,000 withheld at March 31, 1996, by the
Company's intermediary on the basis of amounts due by the previous owner of the
Colorado home health agency for final settlement of the 1990 through 1994 home
health agency cost reports. While the Company believes that its working capital
will be sufficient to sustain the Company's needs for the next 12 months, the
Company's ability to continue to fund its operations thereafter is dependent on
the Company achieving profitability and positive cash flows from operating
activities. The Company has a $1,000,000 bank line-of-credit which would require
a $500,000 bank deposit if drawn. Otherwise, the Company currently does not have
access to additional capital. There can be no assurance that in the future the
Company will not experience a shortage of available cash necessary to operate
its business.
7
<PAGE>
- - - COLORADO OUTPATIENT CLINICS AND HOME HEALTH AGENCY ACQUISITION
--------------------------------------------------------------
On June 30, 1995 the Company acquired eleven outpatient rehabilitation
clinics in Colorado, three outpatient rehabilitation clinics in Alaska and a
home health agency with operations in Colorado, New Mexico and Kansas. The
Company paid $133,000 and incurred liabilities of $572,000 in connection with
the purchase. The Company also agreed to make additional payments based on the
earnings performance of the outpatient rehabilitation clinics and the home
health agency. The additional cash payments would total $1,100,000 if the
operations collectively achieve the target earnings thresholds for the twelve
months ending June 30, 1996 through 1999. The targeted earnings are $500,000,
$575,000, $650,000 and $725,000 for the years ended June 30, 1996 through 1999,
respectively. Based on results for the period ended March 31, 1996, the Company
does not expect that any cash payment will be required for the twelve months
ending June 30, 1996.
In addition, in connection with the acquisition, the Company agreed to
deposit $500,000 to secure a $900,000 bank loan to the previous owner of the
acquired businesses. The Company is administering the repayment of the line
through the collection of accounts receivable which are being collected on
behalf of the previous owner. At the time of the acquisition, the Company
anticipated that the loan would be repaid based on the accounts receivable
balance then outstanding. The loan balance on March 31, 1996 was $253,000 and
the Company's deposit to secure such loan balance was $141,000. The unaudited
net revenues for the acquired operations for the nine months ended March 31,
1996 were $5,264,000. The Company did not acquire accounts receivable in
connection with the acquisition and has funded approximately $1,748,000 of
working capital for the acquired operations since the date of acquisition.
In October, 1995 the Company was notified by its intermediary that its
Medicare payments for the recently acquired home health agency were being
withheld to offset amounts due by the previous owner for final settlement of the
1990 through 1994 home health agency cost reports. At March 31, 1996, the
intermediary had withheld $616,000 related to these settlements. This amount is
included in other receivables on the Company's balance sheet. The Company and
the previous owner have submitted appeals to these settlements and are currently
awaiting response from the intermediary. In the event that the prior owner is
unsuccessful in its appeals, the Company intends to offset the amounts withheld
against any additional amounts due to the previous owner under the acquisition
agreements. The intermediary resumed making payments to the Company for current
charges in January 1996.
On January 1, 1996, the Company acquired the assets of two physical therapy
clinics in Pueblo and Colorado City, Colorado. In connection with the
acquisitions, the Company paid $32,500 and became obligated to pay an additional
$32,500. Additionally, the Company assumed liabilities of $75,000. The
unaudited net revenues for the acquired operations for the three months ended
March 31, 1996 were $108,000.
On April 1, 1996 the Company acquired the assets of a contract therapy
business with operations in Pueblo and Colorado Springs, Colorado. The business
provides therapy staffing to hospitals, nursing homes and home health agencies.
In connection with the acquisition, the Company paid $10,000 and assumed
liabilities for leasehold improvements at its offices of $62,000.
8
<PAGE>
- - - FLORIDA OUTPATIENT CLINICS ACQUISITIONS
---------------------------------------
During fiscal 1994, the Company acquired a majority interest in or obtained
management contracts to operate nine outpatient rehabilitation clinics located
in Jacksonville, Jacksonville Beach, Orange Park, St. Augustine, St. Augustine
Beach, Palm Coast and Palatka, Florida and in Moultrie, Georgia. At closing,
the Company paid $608,000, agreed to reimburse certain selling shareholders for
accounts receivable of the acquired clinics collected after the closing, and
agreed to make additional payments based on the earnings performance of certain
clinics in each year during the three year period ending March 31, 1997.
The Company paid $494,000 based on the earnings performance of certain
clinics for the twelve months ended March 31, 1995 and $132,000 in interest on
deferred acquisition payments. At March 31, 1996, the Company's remaining
liability resulting from the purchase was $612,000 plus additional payments
based on the earnings performance of certain clinics. Such payments would total
$196,000 if the earnings of such clinics for the twelve months ending March 31,
1996 and 1997 are equal to the earnings of such clinics for the base year, the
twelve months ended December 31, 1993.
On October 1, 1994, the Company acquired the minority interest in two of
the outpatient clinics referred to above. In connection with such acquisition,
the Company paid $450,000 and is obligated to pay an additional $300,000 by
September 30, 1996.
On February 1, 1995, the Company acquired an outpatient clinic in Palm
Coast, Florida. At March 31, 1996, the Company had paid $131,000 of the
purchase price and was obligated to pay an additional $129,000 in monthly
installments through February 2000.
On May 12, 1995, the new owner of five of the Florida outpatient clinics
managed by the Company advised the Company that its management contracts were
terminated. As a result, during the fourth quarter of fiscal 1995 the Company
recorded a charge of $1,030,000 to write-off intangible assets recorded as part
of the fiscal 1994 acquisition. The charge is classified as a non-
operating expense. The Company does not agree that such contracts may be
terminated and has filed suit to protect its legal rights.
The Company opened two outpatient rehabilitation clinics during the second
quarter of fiscal 1996. The clinics are located in St. Augustine and Daytona,
Florida.
- - - CLOSURE OF FACILITIES
---------------------
CLOSURE OF PSYCHIATRIC PARTIAL HOSPITALIZATION PROGRAM.
- - -------------------------------------------------------
During fiscal 1995 the Company internally developed, through its wholly
owned subsidiary, Medbrook of Indiana, a psychiatric partial hospitalization
program which provided psychiatric services in long-term care facilities. In
June 1995, the Company decided to close the psychiatric partial hospitalization
program and the program was closed on September 22, 1995. The Company's decision
to close the program was based on difficulties in growing the business and
potential Medicare reimbursement issues. As of June 30, 1995, the Company
recorded a
9
<PAGE>
restructuring charge of $310,000 related to the closure of the program.
At March 31, 1996, the remaining liability for expected future costs related
to the closure was $104,000.
CLOSURE OF SAN JOSE, CALIFORNIA SUBACUTE FACILITY.
- - -------------------------------------------------
During the first quarter of fiscal 1994, the Company closed its subacute
program in San Jose, California. On December 27, 1994, the Company sold its
lease for the San Jose facility to an investment partnership. The investment
partnership s rent obligation commenced on February 15, 1995. This partnership
in turn subleases the facility to a third party. The Company remains obligated
to make lease payments in the event that the investment partnership defaults on
its obligations under the lease. Because the investment partnership has made
substantial improvements to the facility, the Company does not anticipate such a
default.
- - - HEALTHCARE REFORM
-----------------
President Clinton and others have expressed an intention to continue their
efforts to reform the nation's healthcare system. The principal goals of many
of the proposals are to reduce the rate of increase in national healthcare
expenditures, particularly by cutting the rate of increase in Medicare spending.
The ability of healthcare providers such as the Company to compete successfully
in such an environment may depend on its ability to obtain contracts with
managed care plans. In addition to the national reform proposals, there is
proposed legislation in various states. There can be no assurance as to the
ultimate content, timing or effect of any healthcare reform legislation, nor is
it possible, at this time, to estimate the impact of potential legislation on
the Company, which may be material.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated (a) the
percentage of net operating revenues represented by certain selected items
reflected in the Company's consolidated statements of operations and (b) the
percentage change in the dollar amount of such items from the same periods in
the prior fiscal year.
<TABLE>
<CAPTION>
% Net Revenue % Net Revenue
3-Months Ended 9-Months Ended % $ Change % $ Change
03/31/95 03/31/96 03/31/95 03/31/96 3-Month 9-Month
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Operating Revenues 100.0 100.0 100.0 100.0 22.6 12.7
Non-capital operating expenses:
Salaries and employee benefits 59.8 61.2 57.3 65.4 25.5 28.6
Other non-capital expenses 32.5 27.8 29.9 26.4 5.0 (0.5)
-------- -------- -------- --------
Total non-capital expenses 92.3 89.0 87.2 91.8 18.3 18.6
Capital expenses:
Depreciation and Amortization 2.7 2.3 2.5 2.4 6.5 8.5
Rent 11.5 8.1 11.6 8.5 (13.7) (17.1)
Interest 0.3 0.4 0.2 0.4 40.2 115.4
-------- -------- -------- --------
Total capital expenses 14.5 10.8 14.3 11.3 (8.8) (10.7)
-------- -------- -------- --------
Total expenses 106.8 99.8 101.5 103.1 14.6 14.5
Interest Income 0.6 0.6 0.6 0.8 17.4 60.1
-------- -------- -------- --------
Income (Loss) before income taxes (6.2) 0.8 (0.9) (2.3) (116.1) 179.7
Income Tax Provision (1.9) 0.0 (0.2) 0.0 (100.0) (100.0)
-------- -------- -------- --------
Net Income (Loss) before minority interest (4.3) 0.8 (0.7) (2.3) (123.3) 249.6
Minority Interest 0.3 0.3 0.5 0.3 21.3 (22.3)
-------- -------- -------- --------
Net Income (Loss) (4.6) 0.5 (1.2) (2.6) (114.4) 145.5
-------- -------- -------- --------
</TABLE>
The Company's net operating revenues increased 23% and 13% to $6,321,000
and $17,995,000 for the three and nine months ended March 31, 1996,
respectively, as compared to $5,155,000 and $15,964,000 for the same periods in
the prior fiscal year. The increase was due primarily to net revenue of
$5,264,000 generated by the Colorado outpatient clinics and home health agency
during the first nine months of fiscal 1996, and to favorable prior year cost
report settlements of $603,000 recorded in the second quarter of fiscal 1996,
related to its former San Jose, California facility and its Gardner, Kansas
facility. These increases were partially offset by the closure of the Company's
psychiatric partial hospitalization program during the first quarter of fiscal
1996 and the conversion of the Company's Georgia subacute facility from a leased
unit to a management arrangement, under which the Company's revenue consists
primarily of management fees. The increase was also offset by decreased
utilization of the Company's core facilities (i.e. acute, subacute and post
acute rehabilitation units in Georgia, Illinois and Kansas) in the nine month
period. Excluding the Texas facility that was closed, the number of patient days
in the Company's core business decreased 9% to 20,536 for the nine months ended
March 31, 1996, from 22,473 for the same period in fiscal 1995.
11
<PAGE>
In the Company's core business revenue per patient day increased 7% and 3%
to $574 and $591 for the three and nine months ended March 31, 1996,
respectively, as compared to $535 and $572 for the same periods in the prior
fiscal year. Fiscal 1996 amounts do not include revenue per patient day at the
Georgia subacute facility, which has been operated by the Company under a
management agreement since June 5, 1995. Revenue per patient day in the 1996
periods benefited from changes in service mix.
Total non-capital operating expenses for the three and nine months ended
March 31, 1996 increased 18% and 19%, to $5,625,000 and $16,521,000,
respectively, from $4,756,000 and $13,972,000 during the same periods in the
prior fiscal year. The increase in non-capital operating expenses for the three
and nine month periods ended March 31, 1996 primarily resulted from the
acquisition of the Colorado outpatient clinics and home health agency. Salaries
and employee benefits continue to be the primary component of the Company's
non-capital operating expenses. Salaries and employee benefits increased 26%
and 29% to $3,866,000 and $11,774,000 for the three and nine months ending
March 31, 1996, respectively, as compared to $3,081,000 and $9,154,000 for the
same periods in the prior fiscal year. This increase is largely due to the
inclusion of salaries and employee benefits for the Colorado outpatient clinics
and home health agency. Salaries and employee benefits as a percentage of net
operating revenues increased to 61% and 65% for the three and nine months ended
March 31, 1996, as compared to 60% and 57% for the same periods in the prior
fiscal year.
The Company's other non-capital operating expenses for the three months
ended March 31, 1996 increased 5%, as compared to the same period in the prior
fiscal year. For the nine months ended March 31, 1996, the Company's other
non-capital operating expenses decreased 1% as compared to the same period in
the prior fiscal year. In addition, the provision for doubtful accounts
decreased to $146,000 and $396,000 for the three and nine months ended March 31,
1996, respectively, from $153,000 and $568,000 for the same periods in the prior
fiscal year. The provision for doubtful accounts as a percentage of revenues
was 2% for the three and nine months ended March 31, 1996, as compared to 3% and
4% for the three and nine months ended March 31, 1995, respectively. The
reduction in the provision is due to lower required provision rates for the
Company's outpatient clinics and home health agency business lines.
Total capital expenses decreased 9% and 11% during the three and nine
months ended March 31, 1996 to $683,000 and $2,032,000, respectively, as
compared to $749,000 and $2,277,000 for the same periods in the prior fiscal
year. Rent expense decreased 14% and 17% to $513,000 and $1,533,000 for the
three and nine months ended March 31, 1996, respectively, as compared to
$595,000 and $1,849,000 for the same periods in the prior fiscal year. The
decrease in rent expense is primarily due to lower rents paid under leases
requiring payments on the basis of net revenue and patient volume at certain
facilities, as well as the conversion of its subacute facility in Georgia to a
management contract in June, 1995. The Company pays no rent under this
agreement. The decreases were partially offset by rents paid during the fiscal
1996 periods for its Colorado outpatient clinics and home health agency.
12
<PAGE>
Net interest income for the three and nine months ended March 31, 1996
increased to $38,000 and $151,000, respectively, as compared to $32,000 and
$94,000 for the same periods in the prior fiscal year. This increase is due to
higher interest rates during the fiscal 1996 period.
The Company reported net income for the three months ended March 31, 1996
of $34,000 and a net loss of $463,000 for the nine months ended March 31, 1996,
as compared to net losses of $235,000 and $189,000 for the three and nine months
ended March 31, 1995, respectively.
The Company's effective tax rate for the three and nine months ended March
31, 1995 was a benefit of 31% and 20%, respectively. The Company did not record
a benefit for the nine months ended March 31, 1996 because carrybacks of current
losses against previous taxable earnings are no longer available.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had working capital of $6,811,000 compared
to working capital of $7,711,000 at June 30, 1995. The Company had cash and
cash equivalents of $3,309,000 at March 31, 1996, as compared to $6,307,000 at
June 30, 1995.
During the nine months ended March 31, 1996, the Company's operating
activities used $2,392,000 of available cash resources, as compared to cash
provided for operating activities of $2,341,000 during the same period in the
prior fiscal year. The cash used for operating activities during the nine
months ended March 31, 1996 primarily reflects funding of working capital for
the Company's Colorado outpatient facilities and amounts necessary to fund the
Company's net operating losses. Cash provided from operating activities for the
nine months ended March 31, 1995 included a federal tax refund of $1,558,000.
Cash used for investment activities during the nine months ended March 31, 1996
was $527,000, as compared to cash used for investment activities of $367,000
during the same period in the prior fiscal year.
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $5,600,000 at March 31, 1996, as compared to $4,064,000 at
June 30, 1995. At March 31, 1996, the Company had an allowance for doubtful
accounts of $2,063,000, as compared to $2,001,000 at June 30, 1995. The number
of average days of revenue outstanding, excluding the revenues and receivables
related to litigation patients, was 71.3 days at March 31, 1996, as compared to
62.6 days at June 30, 1995.
It has been the Company's practice to admit selected patients who are
seeking monetary recovery in pending litigation with third parties. These
patients are directly obligated to pay the Company for services rendered,
although the timing of collection is determined by the settlement of their
litigation and is beyond the control of the Company. For this reason, liens are
generally placed against pending insurance settlements. Prior to admitting such
patients, the Company and its counsel evaluate the merits of the patient s case,
the anticipated cost of services to be provided and the likelihood of the
patient s successful recovery of damages in litigation. Once the patient is
admitted, the Company and its counsel monitor the status of the litigation.
There can be no assurance, however, that the Company will ultimately be
reimbursed for all the services it provides to such patients. At March 31,
1996, accounts receivable related to these litigation patients totaled
13
<PAGE>
$587,000, as compared to $642,000 at June 30, 1995. These litigation patient
receivables accounted for an additional 19.2 and 30.3 average days revenue
outstanding at March 31, 1996 and June 30, 1995, respectively.
The Company's amount due from Medicare intermediaries of $399,000 at March
31, 1996 primarily represents cost report settlements for its Colorado home
health agency acquired on June 30, 1995. Such amount also includes amounts the
Company expects to receive upon regulatory approval of the Company's annual
application for an exception from the routine cost limitation ('RCL') under the
Medicare program for fiscal years 1992 through 1995 and the nine months ended
March 31, 1996 for its Kansas facility. Medicare reimbursement is generally
based upon reasonable direct and indirect allowable costs incurred in providing
services. At the Company's inpatient facilities these costs are subject to the
RCL. An exception from the RCL has been sought and granted for fiscal years
1990 through 1994 for the Company's former San Jose facility. Requests have been
submitted for fiscal years 1992 through 1995 for the Kansas facility. The
requests are based upon atypical costs incurred at the Kansas facility, in the
treatment of patients who receive substantially more intensive services than
those generally received in skilled nursing facilities. There can be no
assurance that the Company will collect in full the amounts it has requested or
intends to request, nor can there be an assurance as to the timing of any such
collection. An initial three year exemption from the RCL expired in June 1989
at the San Jose facility and in June 1990 at the Kansas facility.
The Company has no current material commitments for capital expenditures,
except for those in connection with the Company's acquisitions as described
above. The Company also expects to make routine capital improvements to its
facilities in the normal course of business.
The Company intends to use a portion of its cash balance to finance
internal development of its outpatient rehabilitation business line. The
Company will also expand its existing facilities and programs when such
expansion meets the Company's investment criteria. The Company has a line of
credit of $1,000,000 from a bank. Any draws on the line-of-credit would be
secured by a cash deposit of up to $500,000 and the accounts receivable of the
Colorado operations. At March 31, 1996, the Company did not have amounts
outstanding under the line-of-credit. The Company will need to obtain access to
additional capital, through bank loans or otherwise, in order to fund any
significant acquisition opportunities. The Company believes that its existing
cash, credit line and cash flows from operations, will be sufficient to satisfy
the Company's estimated operating cash requirements for its existing facilities
for the next twelve months.
Inflation in recent years has not had a significant effect on the Company's
business and is not expected to adversely affect the Company in the future
unless the current rate of inflation increases significantly.
14
<PAGE>
IMPACT OF ACCOUNTING STATEMENTS
-------------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ('SFAS') No. 106, 'Employers Accounting for Post-Retirement
Benefits Other Than Pension , and SFAS No. 112, 'Employers Accounting for
Post-Employment Benefits which, in the opinion of management, will have no
effect on the Company's financial statements. The Company already provides for
income taxes under the liability method in accordance with SFAS No. 109,
'Accounting For Income Taxes.'
INTERIM PERIODS
---------------
The Company believes that all the necessary adjustments have been included
in the amounts shown in the unaudited consolidated financial statements
contained in Item 1. above, for the three and nine months ended March 31, 1995
and 1996, to state fairly and consistently the results of such interim periods.
This includes all normal recurring adjustments that the Company considers
necessary for a fair statement thereof, in accordance with generally accepted
accounting principles applied in a consistent manner. This report should be
read in conjunction with the Company's Annual Report on Form 10-K.
15
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings - None.
Item 2. Changes in Securities
The Company's Restated Certificate of Incorporation was amended on
April 22, 1996 to effect a one-for-three reverse stock split of the
Company's Class A and Class B Common Stock. The par value of Class A
and Class B Common Stock after the reverse stock split remains $.01
per share. There was no change in the rights of holders of such
stock.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders
On March 21, 1996, Harvey Wm. Glasser, M.D., the Company's majority
stockholder, executed a written consent to an amendment of the
Company's Restated Certificate of Incorporation to effect a
one-for-three reverse stock split of the Company's Class A and Class B
Common Stock. Such amendment was not submitted to a vote of all of
the Company's stockholders.
Item 5. Other Information - None.
Item 6. Exhibits 27 Financial Data Schedule
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEADOWBROOK REHABILITATION GROUP, INC.
DATE: May 13, 1996 By /s/ Harvey Wm. Glasser, M.D.
-----------------------------------
HARVEY WM. GLASSER, M.D.
President and Chief Executive Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>This schedule contains summary financial information extracted from Meadowbrook
Rehabilitation Group, Inc's quarterly report to stockholders for the quarter
ended March 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 3,450
<SECURITIES> 0
<RECEIVABLES> 8,062
<ALLOWANCES> 2,063
<INVENTORY> 0
<CURRENT-ASSETS> 11,096
<PP&E> 4,426
<DEPRECIATION> 2,008
<TOTAL-ASSETS> 15,370
<CURRENT-LIABILITIES> 4,284
<BONDS> 822
<COMMON> 19
0
0
<OTHER-SE> 10,194
<TOTAL-LIABILITY-AND-EQUITY> 15,370
<SALES> 17,995
<TOTAL-REVENUES> 17,995
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,085
<LOSS-PROVISION> 396
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> (407)
<INCOME-TAX> 0
<INCOME-CONTINUING> (407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (463)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
