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 September 30, 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 November 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>
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30
1996 1996
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,439,440 $2,542,682
Restricted cash 311,000 311,000
Patient accounts receivable, less allowance for doubtful accounts
of $1,445,000 and $1,504,000 respectively 4,738,957 5,121,491
Due from intermediaries 331,918 344,262
Income tax refund receivable 140,362 66,577
Other receivables 1,264,444 1,294,201
Prepaid expenses and other assets 376,898 505,533
------------ ------------
Total current assets 10,603,019 10,185,746
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 683,770 683,770
Furniture and equipment 2,993,965 3,053,795
Leasehold improvements 783,614 799,259
------------ ------------
4,461,349 4,536,824
Less - accumulated depreciation (2,095,193) (2,237,064)
------------ ------------
Net property and equipment 2,366,156 2,299,760
------------ ------------
OTHER ASSETS:
Goodwill and intangible assets 1,870,555 1,853,793
------------ ------------
TOTAL ASSETS $14,839,730 $14,339,299
============ ============
CURRENT LIABILITIES:
Short-term borrowings and current maturities of notes payable $657,724 $854,431
Current maturities of capital lease obligations 32,803 32,133
Accounts payable 1,226,053 1,643,176
Accrued payroll and employee benefits 1,101,168 1,107,669
Other accrued liabilities 1,065,820 701,255
------------ ------------
Total current liabilities 4,083,568 4,338,664
------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligations 21,815 15,232
Note payable and other long-term liabilities 636,255 497,919
------------ ------------
Total long term liabilities 658,070 513,151
------------ ------------
TOTAL LIABILITIES 4,741,638 4,851,815
------------ ------------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARIES 11,665 11,636
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value:
Class A -- 15,000,000 shares authorized; 1,157,244 shares issued and outstanding
at June 30, 1996 and September 30, 1996 11,572 11,572
Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
at June 30, 1996 and September 30, 1996 7,730 7,730
Paid-in capital 17,908,122 17,908,122
Retained deficit (7,840,997) (8,451,576)
------------ ------------
Total stockholders' equity 10,086,427 9,475,848
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,839,730 $14,339,299
============ ============
<FN>
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.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
3-Mths Ended September 30,
1995 1996
(Unaudited) (Unaudited)
----------- ------------
<S> <C> <C>
NET OPERATING REVENUES $5,578,887 $5,976,984
OPERATING EXPENSES:
Salaries and employee benefits 4,046,452 4,152,269
Professional fees and purchased services 637,890 718,344
Provision for doubtful accounts 125,419 117,895
Other operating expenses 722,438 963,029
Depreciation and amortization 138,365 158,635
Rent:
To unrelated parties 412,317 386,258
To related parties 101,739 97,452
----------- -----------
Total operating expenses 6,184,620 6,593,882
----------- -----------
Loss from operations (605,733) (616,898)
----------- -----------
OTHER (INCOME) EXPENSE:
Interest income (66,327) (36,170)
Interest expense 24,011 16,819
----------- -----------
Net other income (42,316) (19,351)
----------- -----------
Loss before income taxes (563,417) (597,547)
INCOME TAX PROVISION 0 0
----------- -----------
NET LOSS BEFORE MINORITY INTEREST ($563,417) ($597,547)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES 21,153 13,032
----------- -----------
NET LOSS ($584,570) ($610,579)
=========== ===========
NET LOSS PER SHARE (primary and fully diluted) ($0.30) ($0.32)
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,930,661 1,930,244
=========== ===========
<FN>
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.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part 1: FINANCIAL INFORMATION (Item 1 - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
3-Mths Ended September 30,
1995 1996
------------- ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($584,570) ($610,579)
Adjustments to reconcile net loss to cash provided by
(used for) operating activities -
Depreciation and amortization 138,365 158,635
Loss on disposal of assets 413 0
Minority interest expense 21,153 13,032
Changes in assets and liabilities -
(Increase) in patient accounts receivable, net (1,123,977) (382,534)
Decrease (increase) in due from intermediaries 128,050 (12,344)
Decrease in income tax refund receivable 0 73,785
(Increase) in other receivables (243,943) (29,757)
(Increase) in prepaid expenses and other current assets (350,363) (128,635)
Increase in accounts payable and accrued liabilities 119,348 182,501
------------ ------------
Cash used for operating activities (1,895,524) (735,896)
------------ ------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (118,083) (75,779)
Payments on prior purchase of outpatient clinics (51,578) (143,222)
Proceeds from sale of assets 2,472 302
------------ ------------
Cash used for investment activities (167,189) (218,699)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 432,109 273,002
Payments of short-term borrowings (202,841) (194,851)
Long-term borrowings 14,124 0
Payments of capital lease obligations 0 (7,253)
Payments to minority shareholders (9,585) (13,061)
------------ ------------
Cash provided by financing activities 233,807 57,837
------------ ------------
Net decrease in cash (1,828,906) (896,758)
CASH AND CASH EQUIVALENTS, beginning of period 6,307,307 3,439,440
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $4,478,401 $2,542,682
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities -
Property additions financed with notes payable $20,524 $0
Liability resulting from purchase of outpatient facilities 45,180 0
Payments -
Interest paid 9,227 31,266
Income taxes paid 0 20,900
<FN>
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.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part I: FINANCIAL STATEMENTS (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
---------------------------------------
Class A Class B Retained Total
-------------------- ----------------- Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
---------- -------- --------- ------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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) (5) --- --- 5 --- ---
Net loss --- --- --- --- --- (590,304) (590,304)
---------- -------- --------- ------- ------------ ------------ -------------
BALANCE, JUNE 30, 1996 1,157,244 $11,572 773,000 $7,730 $17,908,122 ($7,840,997) $10,086,427
Net loss --- --- --- --- --- (610,579) (610,579)
---------- -------- --------- ------- ------------ ------------ -------------
BALANCE, SEPTEMBER 30, 1996 1,157,244 $11,572 773,000 $7,730 $17,908,122 ($8,451,576) $9,475,848
========== ======== ========= ======= ============ ============ =============
<FN>
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.
</FN>
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TRENDS AND RECENT EVENTS
o Loss History; Liquidity Risks
The Company has incurred significant losses in each of the last three
fiscal years as well as the first three months of fiscal 1997. The Company's
future profitability is dependent on a variety of factors, including without
limitation, increased patient census, a reduction in expenses as a percentage of
total operating revenues and the successful integration and management of the
Company's outpatient rehabilitation clinics and home health agencies. 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 Colorado outpatient clinics and home health agencies have
substantially reduced its available working capital. The Company's working
capital has fallen from $6,519,000 at June 30, 1996 to $5,847,000 on September
30, 1996. For the three months ended September 30, 1996, the Company's operating
activities used cash of $736,000. 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.
o Consideration of Strategic Alternatives
As a result of the Company's continued losses, the Board of Directors is in
the process of evaluating the Company's strategic direction and alternatives.
The alternatives under consideration by the Board include, among other things, a
merger or other business combination transaction or sales of assets. There can
be no assurance that any such alternatives will be available on favorable terms,
if at all.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the Company's business should not necessarily be limited to
medical rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity, the Company should consider investing proceeds
from any asset sales in non-healthcare businesses. As a result, the nature of
the Company's business could change significantly. Dr. Glasser holds a majority
of the combined voting power of the Company's two classes of common stock and
accordingly has the ability to effect a change in management or to cause or
prevent a significant corporate transaction.
<PAGE>
o 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 was to permit
the Company to remain listed on The NASDAQ Stock Market. In February 1996,
NASDAQ notified the Company that it was reviewing the Company's eligibility for
continued listing. The Company was out of compliance at various times prior to
the reverse stock split 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.
o 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 home
health agencies 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 agencies based on the results for the period ended June 30, 1996. The
Company was not required to make any cash payments. The additional cash payments
would total $825,000 if the operations collectively achieve the target earnings
thresholds for the twelve months ending June 30, 1997 through 1999.
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 overseeing the repayment of the loan 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 September 30, 1996 was $251,000. The Company did not acquire
accounts receivable in connection with the acquisition and has funded
approximately $1,312,000 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 agencies were being
withheld to offset amounts due by the previous owner for final settlement of the
home health agencies cost reports for the years 1992 through 1995. At September
30, 1996, the intermediary had withheld $728,000 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
appeals of the prior owner and the Company are unsuccessful, 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.
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 of $62,000.
o 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 $123,000 based on the earnings performance of certain
clinics and $20,000 in interest on deferred acquisition payments. At September
30, 1996, the Company's remaining liability resulting from the purchase was
$280,000 plus additional payments based on the earnings performance of certain
clinics. Such payments would total $135,000 if the earnings of such clinics for
the twelve months ending March 31, 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 $600,000 and is obligated to pay an additional $150,000 by
October 1, 1996. Such amount was paid on October 1, 1996.
On February 1, 1995, the Company acquired an outpatient clinic in Palm
Coast, Florida. At September 30, 1996, the Company had paid $146,000 of the
purchase price and was obligated to pay an additional $114,000 in equal monthly
installments of $3,300 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. The Company also acquired the assets of an outpatient rehabilitation
clinic in Ormond Beach, Florida in June 1996.
o Sale/Closure of Facilities
Sale of Park Ridge, Illinois Post Acute Facility.
On October 7, 1996 the Company sold the assets of its post acute
rehabilitation facility located in Park Ridge, Illinois. The Company's agreement
with the purchaser provides that the Company will collect outstanding accounts
receivable and be responsible for the accounts payable at the closing date. The
Company expects that the net cash proceeds to the Company from this transaction,
assuming collection of the accounts receivable, will be approximately $360,000.
This transaction has not been reflected in the financial statements as of
September 30, 1996.
Closure of Psychiatric Partial Hospitalization Program.
During fiscal year 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 restructuring charge of $310,000 related to the closure of
the program.
Closure of San Jose, California Subacute Facility.
During the first quarter of fiscal year 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.
o 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.
<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.
% Net Revenue % $ Change
3-Months Ended 3-Month
9/30/95 9/30/96 Qtr
-------- ------- ----------
Net Operating Revenues 100.0 100.0 7.1
Non-capital operating expenses:
Salaries and employee benefits 72.5 69.5 2.6
Other non-capital expenses 26.6 30.1 21.1
-------- -------
Total non-capital expenses 99.1 99.6 7.6
Capital expenses:
Depreciation and amortization 2.5 2.7 14.6
Rent 9.2 8.1 (5.9)
Interest 0.4 0.3 (30.0)
-------- -------
Total capital expenses 12.1 11.0 (2.6)
-------- -------
Total expenses 111.2 110.6 6.5
Interest Income 1.2 0.6 (45.5)
-------- -------
Loss before income taxes (10.0) (10.0) 6.1
Income Tax Provision 0.0 0.0 0.0
-------- -------
Loss before minority interest (10.0) (10.0) 6.1
Minority Interest 0.4 0.2 (38.4)
-------- -------
Net Loss (10.4) (10.2) 4.4
======== =======
The Company's net operating revenues increased 7% to $5,977,000 for the
three months ended September 30, 1996, as compared to $5,579,000 for the same
period in the prior fiscal year. The increase was due primarily to higher
utilization in the Company's Colorado home health agencies. These increases were
partially offset by the closure of the Company's psychiatric partial
hospitalization program during the first quarter of fiscal 1996. 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). The number of patient days in the Company's core business decreased 4%
to 6,457 for the three months ended September 30, 1996, from 6,706 for the same
period in fiscal 1995.
<PAGE>
In the Company's core business revenue per patient day increased 5% to $552
for the three months ended September 30, 1996, as compared to $527 for the same
period in the prior fiscal year. The Company's revenues per patient day for both
periods 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 1997 period benefited from changes in
service mix.
Total non-capital operating expenses for the three months ended September
30, 1996 increased 8% to $5,952,000 from $5,532,000 during the same period in
the prior fiscal year. The increase resulted from increased salaries and
expenses related to the increased utilization of the Company's Colorado home
health agencies. Salaries and employee benefits continue to be the primary
component of the Company's non-capital operating expenses. Salaries and employee
benefits increased 3% to $4,152,000 for the three months ending September 30,
1996, as compared to $4,046,000 for the same period in the prior fiscal year.
Salaries and employee benefits as a percentage of net operating revenues
decreased to 70% for the three months ended September 30, 1996, as compared to
73% for the same period in the prior fiscal year.
The Company's other non-capital operating expenses primarily consist of
professional fees, purchased services and other operating expenses. For the
three months ended September 30, 1996, the Company's other non-capital operating
expenses increased 21% to $1,799,000 as compared to $1,486,000 for the same
period in the prior fiscal year. The increase is primarily due to increased
mileage reimbursement and purchased services related to increased utilization of
the Company's Colorado home health agencies. The provision for doubtful accounts
decreased to $118,000 for the three months ended September 30, 1996, from
$125,000 for the same period in the prior fiscal year. The provision for
doubtful accounts as a percentage of revenues was 2% for the three months ended
September 30, 1996, and September 30, 1995.
Total capital expenses decreased 3% during the three months ended September
30, 1996 to $659,000, as compared to $676,000 for the same period in the prior
fiscal year. Rent expense decreased 6% to $484,000 for the three months ended
September 30, 1996, as compared to $514,000 for the same period 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.
Net interest income for the three months ended September 30, 1996 decreased
to $19,000, as compared to $42,000 for the same period in the prior fiscal year.
This decrease is due to lower cash balances during the three months ended
September 30, 1996.
The Company reported a net loss for the three months ended September 30,
1996 of $611,000, as compared to a net loss of $585,000 for the same period in
the prior fiscal year. The Company did not record a tax benefit for the three
months ended September 30, 1995 and 1996 because carrybacks of current losses
against previous taxable earnings are no longer available.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $5,847,000
compared to working capital of $6,963,000 at September 30, 1995. The Company had
cash and cash equivalents of $2,543,000 at September 30, 1996, as compared to
$4,478,000 at September 30, 1995.
During the three months ended September 30, 1996, the Company's operating
activities used $736,000 of available cash resources, as compared to $1,896,000
during the same period in the prior fiscal year. The cash used for operating
activities during the three months ended September 30, 1996 primarily reflects
amounts necessary to fund the Company's net operating losses. Cash used for
investment activities during the three months ended September 30, 1996 was
$219,000, as compared to cash used for investment activities of $167,000 during
the same period in the prior fiscal year.
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $5,121,000 at September 30, 1996, as compared to $5,188,000
at September 30, 1995. At September 30, 1996, the Company had an allowance for
doubtful accounts of $1,504,000, as compared to $2,057,000 at September 30,
1995. The number of average days of revenue outstanding, excluding the revenues
and receivables related to litigation patients, was 81 days at September 30,
1996, as compared to 71 days at September 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 September 30,
1996, accounts receivable related to these litigation patients totaled $444,000,
as compared to $1,303,000 at September 30, 1995. These litigation patient
receivables accounted for an additional 8 and 23 average days revenue
outstanding at September 30, 1996 and September 30, 1995, respectively.
<PAGE>
The Company's amount due from Medicare intermediaries of $344,000 at
September 30, 1996 includes amounts the Company anticipates it will receive on
cost report settlements for its Colorado home health agencies. 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 1996 and the
three months ended September 30, 1996 for its Gardner, 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 and 1993 for the
Gardner, Kansas facility. The Company intends to file such a request for its
Kansas facility for fiscal years 1994 through 1996. 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 Gardner, 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 and home health business
lines. 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. At September 30, 1996, the Company had $60,000
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.
<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 months ended September 30, 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.
<PAGE>
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 - None.
Item 5. Other Information - None.
Item 6. Exhibits 27.1 Financial Data Schedule
<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: November 13, 1996 By /s/ Harvey Wm. Glasser, M.D.
--------------------------------
Harvey Wm. Glasser, M.D.
President and Chief Executive Officer
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