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, 1997
[ ] 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.)
2000 Powell Street, Suite 1203, 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, 1997, 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,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,928,781 $ 4,217,115
Restricted cash 278,649
273,726
Patient accounts receivable, less allowance for doubtful accounts
of $1,194,000 and $797,000 respectively 4,278,756 2,528,521
Due from intermediaries -- 334,151
Other receivables 293,165 619,606
Prepaid expenses and other assets 298,970 265,925
------------ ------------
Total current assets 8,078,321 8,239,044
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment 2,154,947 1,118,995
Leasehold improvements 686,116 171,974
------------ ------------
2,841,063 1,290,969
Less: accumulated depreciation (1,708,734) (726,137)
------------ ------------
Net property and equipment 1,132,329 564,832
------------ ------------
OTHER ASSETS:
Goodwill and intangible assets 337,734 333,044
------------ ------------
TOTAL ASSETS $ 9,548,384 $ 9,136,920
============ ============
CURRENT LIABILITIES:
Short-term borrowings and current maturities of notes payable $ 291,037 $ 300,487
Current maturities of capital lease obligations 24,821 17,133
Accounts payable 968,027 725,312
Accrued payroll and employee benefits 755,748 501,511
Due to intermediaries 100,780 --
Other accrued liabilities 1,123,124 645,190
------------ ------------
Total current liabilities 3,263,537 2,189,633
------------ ------------
LONG-TERM LIABILITIES:
Note payable and other long-term liabilities 48,989 42,490
------------ ------------
Total long-term liabilities 48,989 42,490
------------ ------------
TOTAL LIABILITIES 3,312,526 2,232,123
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value:
Class A -- 15,000,000 shares authorized; 1,157,244 shares issued and outstanding
At June 30, 1997 and September 30, 1997 11,572 11,572
Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
At June 30, 1997 and September 30, 1997 7,730 7,730
Paid-in capital 17,908,122 17,908,122
Retained deficit (11,691,566) (11,022,627)
------------ ------------
Total stockholders' equity 6,235,858 6,904,797
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,548,384 $ 9,136,920
============ ============
<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,
1996 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
NET OPERATING REVENUES $ 5,976,984 $ 3,060,227
OPERATING EXPENSES:
Salaries and employee benefits 4,152,269 2,410,400
Professional fees and purchased services 718,344 290,906
Provision for doubtful accounts 117,895 68,502
Other operating expenses 963,029 516,178
Depreciation and amortization 158,635 88,385
Rent:
To unrelated parties 386,258 186,368
To related parties 97,452 29,962
Gain on sale of assets -- (1,172,364)
----------- -----------
Total operating expenses 6,593,882 2,418,337
----------- -----------
Income (loss) from operations (616,898) 641,890
----------- -----------
OTHER (INCOME) EXPENSE:
Interest income (36,170) (39,908)
Interest expense 16,819 8,904
----------- -----------
Net other income (19,351) (31,004)
----------- -----------
Income (loss) before income taxes (597,547) 672,894
INCOME TAX PROVISION -- --
----------- -----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST ($ 597,547) $ 672,894
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES 13,032 3,955
----------- -----------
NET INCOME (LOSS) ($ 610,579) $ 668,939
=========== ===========
NET INCOME (LOSS) PER SHARE (primary and fully diluted) ($ 0.32) $ 0.35
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,930,244 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 I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
3-Mths Ended September 30,
1997 1997
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ($ 610,579) $ 668,939
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operations:
Depreciation and amortization 158,635 88,385
Gain on sale of assets -- (1,172,364)
Minority interest expense 13,032 3,955
Changes in assets and liabilities:
(Increase) decrease in patient receivables (382,534) 1,261,485
(Increase) in due from intermediaries (12,344) (389,756)
Decrease in income tax refund receivables 73,785 --
(Increase) in other receivables (29,757) (38,048)
(Increase) in prepaid expenses and
other current assets (128,635) (36,493)
Increase (decrease) in accounts payable and
accrued liabilities 182,501 (185,519)
----------- -----------
Cash provided by (used for) operating activities (735,896) 200,584
----------- -----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (75,779) (19,204)
Payments on prior purchase of outpatient clinics (143,222) (281,275)
Proceeds from sale of assets 302 1,405,673
----------- -----------
Cash provided by (used for) investment activities (218,699) 1,105,194
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term notes borrowings 273,002 127,221
Payments of short-term borrowings (194,851) (124,270)
Payments of capital lease obligations (7,253) (7,688)
Reduction in restricted cash -- (4,923)
Payments to minority shareholders (13,061) (7,784)
----------- -----------
Cash provided by (used for) financing activities 57,837 (17,444)
----------- -----------
Net increase (decrease) in cash (896,758) 1,288,334
CASH AND CASH EQUIVALENTS, beginning of period 3,439,440 2,928,781
----------- -----------
CASH, END OF PERIOD $ 2,542,682 $ 4,217,115
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities:
Notes received on sale of Florida operations $ -- $ 730,000
Payments:
Interest paid 31,266 17,102
Income taxes paid 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 INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
-------------------------------------------
Class A Class B Total
--------------------- -------------------- Paid-in Retained Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- --------- -------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 1,157,244 $ 11,572 773,000 $ 7,730 $ 17,908,122 ($ 7,840,997) $ 10,086,427
Net loss -- -- -- -- -- (3,850,569) (3,850,569)
--------- --------- -------- --------- ------------ ------------ ------------
BALANCE, JUNE 30, 1997 1,157,244 $ 11,572 773,000 $ 7,730 $ 17,908,122 ($11,691,566) $ 6,235,858
Net loss -- -- -- -- -- 668,939 668,939
--------- --------- -------- --------- ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 1,157,244 $ 11,572 773,000 $ 7,730 $ 17,908,122 ($11,022,627) $ 6,904,797
========= ========= ======= ========= ============ ============= ============
<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
Potential Ineligibility for Continued Listing on the NASDAQ National Market
The NASDAQ Stock Market has adopted new quantitative maintenance
requirements for continued listing on the NASDAQ National Market. The new
criteria become effective on February 23, 1998. The Company currently is in
compliance with all of the new criteria for continued NASDAQ National Market
listing except for the requirement that the market value of its public float be
at least $5 million. The Company estimates that the market value of its public
float as of November 13, 1997 is $2,877,000. If the Company is not in compliance
with the new maintenance criteria on the effective date, the Company understands
that it would be moved to the NASDAQ SmallCap Market. Delisting from the NASDAQ
National Market could have an adverse effect on the liquidity of the Company's
Class A Common Stock.
Consideration of Strategic Alternatives
Since the beginning of fiscal 1997, the Company has disposed of
substantially all of its operating assets. On August 31, 1997, the Company sold
five of its outpatient rehabilitation clinics in Florida and Georgia and certain
other assets. On September 30, the Company sold its remaining Florida outpatient
clinic and two management contracts. On July 31, 1997, the Company sold its
Kansas operations. On March 31, 1997, the Company sold all of its Georgia
operations, consisting of a neurobehavioral program, a subacute program operated
under a management agreement, and a post-acute program. Earlier in fiscal 1997,
the Company sold its post-acute program in Illinois and its outpatient
rehabilitation clinics in Alaska. In addition, the Company closed six outpatient
rehabilitation clinics in Colorado and Florida during fiscal 1997. The Board of
Directors of the Company is continuing to evaluate the Company's strategic
direction and alternatives. The alternatives under consideration by the Board
include, among other things, a merger or other business combination and/or
additional 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 the
proceeds from its 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 regardless of how other
stockholders might vote.
<PAGE>
Recent Asset Dispositions
Sale of Florida Operations. On August 31, 1997, the Company sold five
outpatient rehabilitation clinics and certain other assets located in Florida
and Georgia. The outpatient rehabilitation clinics were located in St.
Augustine, Palatka, Palm Coast, and Ormond Beach, Florida and in Moultrie,
Georgia. The Company sold the clinics in two separate transactions. The
aggregate sale price for the outpatient rehabilitation clinics and other assets
was $550,000. The Company received promissory notes from the purchasers for the
aggregate purchase price. The promissory notes are secured by the acquired
assets and the Company also received personal guarantees from the stockholders
of the purchasers. Subsequent to September 30, 1997, the Company received
$335,000 as payment in full for one of the promissory notes. The purchasers
acquired all assets including accounts receivable and are responsible for all
accounts payable and certain payroll liabilities. As part of the transaction,
the Company retained all liabilities for amounts due to the former owners of the
clinics. At closing, this amount was $197,000. This transaction resulted in a
loss of $2,046,000, primarily as a result of the write-down of goodwill
associated with the Company's acquisition of certain of the clinics in 1994. The
loss was recorded as other operating expense in the Company's June 30, 1997
financial statements.
On September 30, 1997 the Company sold its remaining outpatient clinic in
located in Jacksonville, Florida and its two management contracts located in
Jacksonville and St. Augustine, Florida. The sale price was $115,000 in cash.
The purchaser acquired all assets, including accounts receivable. There was no
gain or loss resulting from this transaction.
Sale of Kansas Operations. On July 31, 1997, the Company sold its Kansas
operations, consisting of acute, subacute and post-acute rehabilitation
programs. The sale price for the Kansas operations was $1,500,000 in cash. The
Company's agreement with the purchaser provides that the Company shall retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. Assuming collection of such accounts receivable, the increase
in the Company's cash position as a result of this transaction will be
approximately $2,500,000. This transaction resulted in a gain of approximately
$1,178,000. This gain is reflected in the Company's results for the first
quarter of fiscal 1998.
Sale of Georgia Operations. On March 31, 1997, the Company sold its Georgia
operations, consisting of a neurobehavioral program, a subacute program operated
under a management agreement, and a post-acute program and related real estate.
The sale price for the Georgia operations was $1,300,000 in cash. The Company's
agreement with the purchaser provides that the Company shall retain outstanding
accounts receivable and be responsible for the accounts payable at the closing
date. This transaction resulted in a gain of $517,000, which was recorded as
other operating income in fiscal 1997.
Sale of Alaska Operations. On January 13, 1997, the Company sold its three
outpatient rehabilitation clinics in Alaska. The sale price was $200,000. This
transaction resulted in a loss of $29,000, which was recorded as other operating
expense during fiscal 1997.
Sale of Illinois Operations. On October 7, 1996, the Company sold the
assets of its post-acute rehabilitation operations located in Park Ridge,
Illinois for $100,000 in cash. The Company's agreement with the purchaser
provides that the Company shall retain outstanding accounts receivable and be
responsible for the accounts payable at the closing date. This transaction
resulted in a gain of $63,000, which was recorded as other operating income
during fiscal 1997.
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 twelve month periods ending June 30, 1996 through 1999. The
Company was not required to make any cash payment based on results as of June
30, 1996 or 1997. If the operations collectively achieve the target earnings
thresholds for the twelve months ending June 30, 1998 and 1999, the Company's
maximum liability would be $550,000. During fiscal 1997, the Company closed its
home health agency in New Mexico.
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.
However, accounts receivable collections have not been sufficient to repay the
loan, and the loan balance on September 30, 1997 was $259,000. This loan balance
is collateralized by personal assets of the debtor.
In October 1995, the Company was notified by its intermediary that its
Medicare payments for the 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. While the intermediary
resumed making payments for current charges in January 1996, the intermediary
had withheld $728,000 related to these settlements. During the second quarter of
fiscal 1997, the Company received $425,000 in payment of amounts withheld. The
Company has submitted appeals on behalf of the previous owner requesting payment
of the remaining balance. In the event that such appeals are unsuccessful, the
Company intends to pursue collection from the previous owner and offset the
amounts withheld against any additional amounts due to the previous owner under
the acquisition agreements. Amounts owed to the Company as of September 30,
1997, by Medicare and the previous owner of the Colorado operations exceed the
minimum amounts owed to the previous owner by $237,000.
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 $45,000 and became obligated to pay an additional
$20,000. 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.
Healthcare Regulation and Reform
Continuing political debate is subjecting the healthcare industry to
significant reform. Healthcare reform proposals have been formulated by the
current administration, members of Congress, and, periodically, state
legislators. These proposals include the current administration's announcement
of a "crack down on fraud in the home healthcare industry" and the related six
month moratorium on the admission of new home health providers into the Medicare
program. Government officials can be expected to continue to review and assess
alternative healthcare delivery systems and payment methodologies. Changes in
the law or new interpretations of existing laws may have a dramatic effect on
the definition of permissible or impermissible activities, the relative cost of
doing business, and the methods and amounts of payments for medical care by both
governmental and other payors. Legislative changes to "balance the budget" and
slow the annual rate of growth of Medicare and Medicaid are expected. Such
changes may adversely impact reimbursement for the Company's services.
Forward-looking Statements
In addition to the historical information contained herein, this Form 10-Q
contains forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to risks and uncertainties, including
risks and uncertainties set forth in this Form 10-Q, that may cause actual
results to differ materially. These forward-looking statements speak only as of
the date hereof. The Company disclaims any intent or obligation to update these
forward-looking statements.
<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
3-Months Ended % $ Change
09/30/96 09/30/97 3-Month
-------- -------- ----------
<S> <C> <C> <C>
Net Operating Revenues 100.0 100.0 (48.8)
Non-capital operating expenses:
Salaries and employee benefits 69.5 78.8 (41.9)
Other non-capital expenses 30.1 28.6 (51.3)
Gain on sale of assets -- (38.3) --
------ -----
Total non-capital expenses 99.6 69.1 (64.5)
Capital expenses:
Depreciation and amortization 2.7 2.9 (44.3)
Rent 8.1 7.0 (55.3)
Interest 0.3 0.3 (47.1)
------ -----
Total capital expenses 11.0 10.2 (52.4)
------ -----
Total expenses 110.6 79.3 (63.3)
Interest income 0.6 1.3 10.3
------ -----
Income (loss) before income taxes (10.0) 22.0 (212.6)
Income tax provision -- -- --
------ -----
Income (loss) before minority interest (10.0) 22.0 (212.6)
Minority interest 0.2 0.1 (69.7)
------ -----
Net income (loss) (10.2) 21.9 (209.6)
====== =====
</TABLE>
The Company's net operating revenues decreased 49% to $3,060,000 for the
three months ended September 30, 1997, as compared to $5,977,000 for the same
period in the prior fiscal year. The decrease was due primarily to the sale of
the Company's Georgia, Alaska, and Illinois operations during the second and
third quarters of fiscal 1997 and the sale of the Company's Kansas and Florida
operations during the first quarter of fiscal 1998. See "Trends and Recent
Events".
<PAGE>
Below is a summary of net operating revenues for the three months ended
September 30, 1996 and 1997, with respect to operations sold by the Company
during fiscal 1997 and the first quarter of fiscal 1998.
Net operating revenues
--------------------------------
Three months ended September 30,
--------------------------------
1996 1997
------------- -------------
(unaudited) (unaudited)
Alaska $ 155,000 $ --
Georgia 1,630,000 --
Illinois 284,000 --
Kansas 1,331,000 320,000
Florida 594,000 278,000
------------ -------------
Total $ 3,994,000 $ 598,000
============ =============
These decreases were partially offset by increased net operating revenues
in the Company's home health business. The number of patient visits in the
Company's home health business increased 32% to 37,421 patient visits for the
three months ended September 30, 1997, from 28,442 patient visits for the same
period in the prior fiscal year.
Total non-capital operating expenses excluding the gain on the sale of
assets for the three months ended September 30, 1997 decreased 45% to
$3,286,000, from $5,952,000 during the same period in the prior fiscal year. The
decrease resulted primarily from the sale of the Company's Georgia, Alaska, and
Illinois operations during the second and third quarters of fiscal 1997 and the
sale of the Company's Kansas and Florida operations during the first quarter of
fiscal 1998. See "Trends and Recent Events". Salaries and employee benefits
continue to be the primary component of the Company's non-capital operating
expenses. Salaries and employee benefits decreased 42% to $2,410,000 for the
three months ended September 30, 1997, as compared to $4,152,000 for the same
period in the prior fiscal year. Salaries and employee benefits as a percentage
of net operating revenues increased to 79% for the three months ended September
30, 1997, as compared to 69% 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, 1997, the Company's other non-capital operating
expenses decreased 51% to $876,000, as compared to $1,799,000 for the same
period in the prior fiscal year. The decrease is primarily due to the sale of
the Company's Georgia, Alaska, and Illinois operations during the second and
third quarters of fiscal 1997 and the sale of the Company's Kansas and Florida
operations during the first quarter of fiscal 1998. See "Trends and Recent
Events". The provision for doubtful accounts decreased to $69,000 for the three
months ended September 30, 1997, from $118,000 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, 1997 and September 30, 1996.
Total capital expenses decreased 52% during the three months ended
September 30, 1997 to $314,000, as compared to $659,000 for the same period in
the prior fiscal year. Rent expense decreased 55% to $216,000 for the three
months ended September 30, 1997, as compared to $484,000 for the same period in
the prior fiscal year. The decrease is primarily due to the sale of the
Company's Georgia, Alaska, and Illinois operations during the second and third
quarters of fiscal 1997 and the sale of the Company's Kansas and Florida
operations during the first quarter of fiscal 1998. See "Trends and Recent
Events".
The Company's first quarter 1998 results include a gain of $1,178,000 on
the sale of its Kansas operations. This amount is offset by losses incurred on
the sale of certain other assets. A net gain of $1,172,000 is recorded as other
operating income on the Company's income statement. See "Trends and Recent
Events".
Net interest income for the three months ended September 30, 1997 increased
to $40,000, as compared to $36,000 for the same period in the prior fiscal year.
This increase is due to higher cash balances during the three months ended
September 30, 1997.
The Company reported net income for the three months ended September 30,
1997 of $669,000, as compared to a net loss of $611,000 for the same period in
the prior fiscal year. The net income for the three months ended September 30,
1997 includes the gain on the sale of the Company's Kansas operations. The
Company's net income for the three months ended September 30, 1997 also includes
net losses of approximately $219,000 incurred by the Company's Kansas and
Florida operations, which were sold during the first quarter of fiscal 1998.
Adjusting for these amounts, the Company had a net loss of $290,000 for the
three months ended September 30, 1997. The Company did not record a tax
provision for the three months ended September 30, 1997 because tax loss
carryforwards are available to offset earnings in the quarter. The Company did
not record a tax benefit for the three months ended September 30, 1996 because
carrybacks of current losses against previous taxable earnings are no longer
available.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of $6,049,000,
compared to working capital of $5,847,000 at September 30, 1996. The Company had
cash and cash equivalents of $4,217,000 at September 30, 1997, as compared to
$2,543,000 at September 30, 1996.
During the three months ended September 30, 1997, the Company's operating
activities provided $201,000 of available cash resources, as compared to cash
used in operations of $736,000 during the same period in the prior fiscal year.
The cash provided by operating activities during the three months ended
September 30, 1997 primarily reflects collections of accounts receivable from
the Company's sold facilities. Cash provided for investment activities during
the three months ended September 30, 1997 was $1,105,000, as compared to cash
used for investment activities of $219,000 during the same period in the prior
fiscal year. The cash provided from investment activities for the three months
ended September 30, 1997 primarily reflects the proceeds from the sale of the
Company's Kansas operations.
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $2,529,000 at September 30, 1997, as compared to $5,121,000
at September 30, 1996. This decrease is primarily due to the sale of Company's
Georgia, Alaska, and Illinois operations during the second and third quarters of
fiscal 1997 and the sale of the Company's Kansas and Florida operations during
the first quarter of fiscal 1998. See "Trends and Recent Events". Such sold
businesses represented $4,091,000 of the net patient accounts receivable balance
at September 30, 1996 as compared to $1,136,000 at September 30, 1997. At
September 30, 1997, the Company had an allowance for doubtful accounts of
$797,000, as compared to $1,504,000 at September 30, 1996. The number of average
days of revenue outstanding, excluding the revenues and receivables related to
litigation patients, was 65 days at September 30, 1997, as compared to 81 days
at September 30, 1996.
It was the Company's practice in its acute, subacute, and post-acute
businesses to admit selected patients who were 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 were generally placed against pending
insurance settlements. Prior to admitting such patients, the Company and its
counsel evaluated 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 was admitted, the Company and its
counsel monitored the status of the litigation. The Company retained the
accounts receivable related to such patients in connection with the sale of its
Kansas operations. There can be no assurance, however, that the Company will
ultimately be reimbursed for all the services it provided to such patients. At
September 30, 1997, accounts receivable related to these litigation patients
totaled $370,000, as compared to $444,000 at September 30, 1996. These
litigation patient receivables accounted for an additional 11 and 8 average days
revenue outstanding at September 30, 1997 and September 30, 1996, respectively.
The Company's amount due from Medicare intermediaries of $334,000 at
September 30, 1997 includes amounts the Company anticipates to receive on cost
report settlements for its Colorado home health agencies and its final cost
report for the Company's former Gardner, Kansas facility. 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 for its
former Gardner, Kansas facility. Medicare reimbursement is generally based upon
reasonable direct and indirect allowable costs incurred in providing services.
At the Company's former Gardner, Kansas facility these costs were subject to the
RCL. Requests for an exception from the RCL have been submitted for fiscal years
1992 through 1995 for such facility. In connection with the sale of its Kansas
operation, the Company retained the accounts receivable at the closing and
accordingly it intends to file such a request for fiscal 1996 and 1997. The
requests are based upon atypical costs incurred at the Kansas facility in the
treatment of patients who received 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 any assurance as to the timing of any such
collection.
The Company has no current material commitments for capital expenditures,
except for those in connection with the Company's acquisitions as described
under "Trends and Recent Events" above. The Company also expects to make routine
capital improvements to its facilities in the normal course of business.
The Company may use a portion of its cash balance to finance internal
development of its home health business line. 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, 1997, the Company had $30,000 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 effect the Company in the future
unless the current rate of inflation increases significantly.
IMPACT OF ACCOUNTING STATEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation", and SFAS No. 128, "Earning per Share" which, in the opinion of
management, will have no effect on the Company's financial statements. The
Company has not applied the provisions of SFAS No. 123 as stock options granted
in 1996 and 1997 were immaterial. Similarly, the adoption of SFAS No. 128 is not
expected to significantly impact the Company's earnings per share calculation.
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, 1996 and
1997, 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, 1997 By /s/ Harvey Wm. Glasser, M.D.
------------------------------------
Harvey Wm. Glasser, M.D.
President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Meadowbrook Rehabilitation Group, Inc.'s 10-Q to stockholders for the quarter
ended September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000852164
<NAME> Meadowbrook Rehabilitation Group, Inc.
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