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 December 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 February 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 ........................ 14
Interim Periods .......................................... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 15
Item 2. Changes in Securities ................................. 15
Item 3. Defaults Upon Senior Securities ........................ 15
Item 4. Submission of Matters to a Vote of Security Holders ...... 15
Item 5. Other Information ........................................ 15
Item 6. Exhibits ................................................. 15
SIGNATURES .......................................................16
<PAGE>
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1996
---------------- ------------------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $3,439,440 $2,670,105
Restricted cash 311,000 309,000
Patient accounts receivable, less allowance for doubtful accounts
of $1,445,000 and $1,420,000 respectively 4,738,957 5,023,483
Due from intermediaries 331,918 222,844
Income tax refund receivable 140,362 48,945
Other receivables 1,264,444 853,889
Prepaid expenses and other assets 376,898 326,034
---------------- ------------------------
Total current assets 10,603,019 9,454,300
---------------- ------------------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 683,770 683,770
Furniture and equipment 2,993,965 2,826,154
Leasehold improvements 783,614 723,434
---------------- ------------------------
4,461,349 4,233,358
Less: accumulated depreciation (2,095,193) (2,103,311)
---------------- ------------------------
Net property and equipment 2,366,156 2,130,047
---------------- ------------------------
OTHER ASSETS:
Goodwill and intangible assets 1,870,555 1,837,029
---------------- ------------------------
TOTAL ASSETS $14,839,730 $13,421,376
================ ========================
CURRENT LIABILITIES:
Short-term borrowings and current maturities of notes payable $657,724 $587,994
Current maturities of capital lease obligations 32,803 29,896
Accounts payable 1,226,053 1,625,125
Accrued payroll and employee benefits 1,101,168 1,043,844
Other accrued liabilities 1,065,820 694,304
---------------- ------------------------
Total current liabilities 4,083,568 3,981,163
---------------- ------------------------
LONG-TERM LIABILITIES:
Capital lease obligations 21,815 10,301
Note payable and other long-term liabilities 636,255 471,004
---------------- ------------------------
Total long-term liabilities 658,070 481,305
---------------- ------------------------
TOTAL LIABILITIES 4,741,638 4,462,468
---------------- ------------------------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARIES 11,665 -
---------------- ------------------------
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 December 31, 1996 11,572 11,572
Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
at June 30, 1996 and December 31, 1996 7,730 7,730
Paid-in capital 17,908,122 17,908,122
Retained deficit (7,840,997) (8,968,516)
---------------- ------------------------
Total stockholders' equity 10,086,427 8,958,908
---------------- ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,839,730 $13,421,376
================ ========================
====================================================================================================================================
<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 December 31, 6-Mths Ended December 31,
1995 1996 1995 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
NET OPERATING REVENUES $6,095,022 $5,527,729 $11,673,911 $11,504,711
OPERATING EXPENSES:
Salaries and employee benefits 3,861,601 3,949,203 7,908,057 8,101,472
Professional fees and purchased services 596,016 639,477 1,233,908 1,357,824
Provision for doubtful accounts 124,435 99,339 249,855 217,234
Other operating expenses 781,483 815,811 1,503,922 1,778,832
Depreciation and amortization 141,128 150,324 279,495 308,960
Rent:
To unrelated parties 403,633 348,519 815,950 734,776
To related parties 101,996 94,336 203,735 191,788
------------ -------------- ------------ ------------
Total operating expenses 6,010,292 6,097,009 12,194,922 12,690,886
------------ -------------- ------------ ------------
Income (loss) from operations 84,730 (569,280) (521,011) (1,186,175)
------------ -------------- ------------ ------------
OTHER (INCOME) EXPENSE:
Gain (loss) on sale of assets 413 (45,857) 413 (45,857)
Interest income (46,808) (25,406) (113,135) (61,575)
Interest expense 25,970 15,167 49,982 31,987
------------ -------------- ------------ ------------
Net other income (20,425) (56,096) (62,740) (75,445)
------------ -------------- ------------ ------------
Income (loss) before income taxes 105,155 (513,184) (458,271) (1,110,730)
------------ -------------- ------------ ------------
INCOME TAX PROVISION - - - -
------------ -------------- ------------ ------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST $105,155 ($513,184) ($458,271) ($1,110,730)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES 17,404 3,756 38,557 16,789
============ ============== ============ ============
NET INCOME (LOSS) $87,751 ($516,940) $496,828) ($1,127,519)
============ ============== ============ ============
NET INCOME (LOSS) PER SHARE (primary and fully diluted) $0.05 ($0.27) ($0.26) ($0.58)
============ ============== ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,930,661 1,930,244 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>
4
<PAGE>
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION (Item 1 - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
6-Mths Ended December 31,
1995 1996
--------------- ------------
(Unnaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($496,828) ($1,127,519)
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Depreciation and amortization 279,495 308,960
Loss (gain) on sale of assets 413 (45,857)
Minority interest expense 38,557 16,789
Changes in assets and liabilities:
(Increase) in patient receivables (869,186) (284,526)
Decrease in amounts due from intermediaries 348,996 109,074
Decrease in income tax refund receivable 29,638 91,417
(Increase) decrease in other receivables (1,136,921) 410,555
(Increase) decrease in prepaid expenses and other
current assets (168,405) 50,864
(Decrease) increase in accounts payable and
accrued liabilities (362,581) 96,884
--------------- ------------
Cash (used for) operating activities (2,336,822) (373,359)
--------------- ------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (225,854) (124,442)
Payments on prior purchase of outpatient clinics (213,434) (300,668)
Proceeds from sale of assets 2,472 130,973
--------------- ------------
Cash (used for) investment activities (436,816) (294,137)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term notes borrowings 432,109 273,002
Long-term notes borrowings 14,124 -
Payments of capital lease obligations (79,590) (14,421)
Payments of short-term notes payable (384,054) (330,756)
Reduction in restricted cash 322,000 2,000
Payments to minority shareholders (30,136) (31,664)
--------------- ------------
Cash provided by (used for) financing activities 274,453 (101,839)
--------------- ------------
Net (decrease) in cash (2,499,185) (769,335)
CASH, BEGINNING OF PERIOD 6,307,307 3,439,440
--------------- ------------
CASH, END OF PERIOD $3,808,122 $2,670,105
=============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities:
Property additions financed with notes payable $20,524 $ -
Property additions financed with capital leases - -
Liability resulting from purchase of outpatient clinics 90,360 -
Payments:
Interest paid 19,129 41,333
Income taxes paid 17,700 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 --- --- --- --- --- (1,127,519) (1,127,519)
----------- -------- ---------- ------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 1,157,244 $11,572 773,000 $7,730 $17,908,122 ($8,968,516) $8,958,908
=========== ======== ========== ======= ============ ============ ============
<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 six months of fiscal 1997. 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 lines. 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 agency have
substantially reduced its available working capital. The Company's working
capital has fallen from $6,519,000 at June 30, 1996 to $5,473,000 on December
31, 1996. For the six months ended December 31, 1996, the Company's operating
activities used cash of $373,000. 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 withdrawn. 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
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 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.
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 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. If the operations collectively achieve the
target earnings thresholds for the twelve months ending June 30, 1997, through
1999, the Company's maximum liability would be $825,000.
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 December 31, 1996, was $249,000. The Company did not acquire
accounts receivable in connection with the acquisition and has funded
approximately $1,332,000 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.
During the second quarter, 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. On a net basis, amounts owed to
Meadowbrook as of December 31, 1996, by Medicare and the previous owner of the
Colorado operations exceed the minimum amounts owed to the previous owner by
$140,000. 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.
To date, the Company has paid $678,000 based on fixed payment obligations
and the earnings performance of the acquired clinics and $152,000 in interest on
deferred acquisition payments. At December 31, 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 additional 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 $750,000.
On February 1, 1995, the Company acquired an outpatient clinic in Palm
Coast, Florida. At December 31, 1996, the Company had paid $153,000 of the
purchase price and was obligated to pay an additional $107,000 prior to 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 in St. Augustine
and Daytona, Florida during the second quarter of fiscal 1996. The Company also
acquired the assets of an outpatient rehabilitation clinic in Ormond Beach,
Florida in June 1996. In December 1996, the Company closed its Daytona, Florida
clinic.
o Sale of Alaska Operations.
On January 13, 1997, the Company announced the sale of its three outpatient
clinics in Alaska. The Company expects that the net cash proceeds from these
transactions, assuming the collection of the accounts receivable retained by the
Company in connection with the sale of one of the clinics, will be approximately
$230,000.
o 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's net cash proceeds from this transaction, assuming collection of the
accounts receivable, will be approximately $360,000. This transaction resulted
in a gain of $63,000, which is recorded as other operating income as of December
31, 1996.
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.
<TABLE>
% Net Revenue % Net Revenue
3-Months Ended 6-Months Ended % $ Change % $ Change
12/31/95 12/31/96 12/31/95 12/31/96 3-Month 6-Month
--------- --------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Operating Revenues 100.0 100.0 100.0 100.0 (9.3) (1.4)
Non-capital operating expenses:
Salaries and employee benefits 63.4 71.4 67.7 70.4 2.3 2.4
Other non-capital expenses 24.6 28.1 25.6 29.2 3.5 12.3
--------- --------- ----------- ----------
Total non-capital expenses 88.0 99.6 93.3 99.6 2.6 5.1
Capital expenses:
Depreciation and amortization 2.3 2.7 2.4 2.7 6.5 10.5
Rent 8.3 8.0 8.7 8.0 (12.4) (9.1)
Interest 0.4 0.3 0.4 0.3 (41.6) (36.0)
--------- --------- ----------- ----------
Total capital expenses 11.0 11.0 11.6 11.0 (9.6) (6.1)
--------- --------- ----------- ----------
Total expenses 99.0 110.6 104.9 110.5 1.3 3.9
Gain (loss) on sale of assets 0.0 0.8 0.0 0.4 0.0 0.0
Interest income 0.8 0.5 1.0 0.5 (45.7) (45.6)
--------- --------- ----------- ----------
Income (loss) before income taxes 1.8 (9.2) (3.9) (9.6) (588.0) 142.4
Income tax provision 0.0 0.0 0.0 0.0 0.0 0.0
--------- --------- ----------- ----------
Income (loss) before minority interest 1.8 (9.2) (3.9) (9.6) (588.0) 142.4
Minority Interest 0.3 0.1 0.3 0.1 (78.4) (56.5)
--------- --------- ----------- ----------
Net Income (Loss) 1.5 (9.3) (4.3) (9.7) (689.1) 126.9
========= ========= =========== ==========
</TABLE>
The Company's net operating revenues decreased 9% and 1% to $5,528,000 and
$11,505,000 for the three and six months ended December 31, 1996, respectively,
as compared to $6,095,000 and $11,674,000 for the same periods in the prior
fiscal year. The decrease was due to decreased utilization of the Company's
Kansas facility, as well as the sale of the Company's Illinois operations in
October 1996. Net operating revenues from the Company's Illinois operations were
$915,000 for the six months ended December 31, 1995, as compared to $305,000 for
the six months ended December 31, 1996. The number of patient days in the
Company's core business decreased 4% to 12,545 for the six months ended December
31, 1996, from 13,059 for the same period in fiscal 1996. The decrease was
primarily due to lower census levels at the Company's Kansas facility and the
sale of the Company's Illinois operations in October 1996.
In the Company's core business revenue per patient day decreased 9% and 1%
to $518 and $536 for the three and six months ended December 31, 1996,
respectively, as compared to $567 and $540 for the same periods in the prior
fiscal year. Revenue per patient day was adversely affected by changes in
service mix and competitive pressures to reduce healthcare costs which resulted
in lower per diem rates.
Total non-capital operating expenses for the three and six months ended
December 31, 1996, increased 3% and 5%, to $5,504,000 and $11,455,000,
respectively, from $5,364,000 and $10,896,000 during the same periods in the
prior fiscal year. Salaries and employee benefits continue to be the primary
component of the Company's non-capital operating expenses. Salaries and employee
benefits increased 2% to $3,949,000 and $8,101,000 for the three and six months
ended December 31, 1996, as compared to $3,862,000 and $7,908,000 for the same
periods in the prior fiscal year. The increase resulted primarily from increased
salaries and expenses related to the increased utilization of the Company's
Colorado home health agencies. Salaries and employee benefits as a percentage of
net operating revenues were 71% and 70% for the three and six months ended
December 31, 1996, respectively, as compared to 63% and 68% for the same periods
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 and six months ended December 31, 1996, the Company's other non-capital
operating expenses increased 4% and 12%, to $1,555,000 and $3,354,000,
respectively, as compared to $1,502,000 and $2,988,000 for the same periods in
the prior fiscal year. This 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 $99,000 and $217,000 for the three and six months ended December
31, 1996, respectively, from $124,000 and $250,000 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 six months periods in fiscal 1996 and 1997.
Total capital expenses decreased 10% and 6% during the three and six months
ended December 31, 1996, to $608,000 and $1,268,000, respectively, as compared
to $673,000 and $1,349,000 for the same periods in the prior fiscal year. Rent
expense decreased 12% and 9% to $443,000 and $927,000 for the three and six
months ended December 31, 1996, respectively, as compared to $506,000 and
$1,020,000 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 sale of the Company's Illinois operations in October 1996.
Net interest income for the three and six months ended December 31, 1996,
decreased to $10,000 and $30,000, respectively, as compared to $21,000 and
$63,000 for the same periods in the prior fiscal year. This decrease is due to
lower cash balances available for investment during the first six months of
fiscal 1997.
The Company reported a net loss for the three and six months ended December
31, 1996, of $517,000 and $1,128,000, respectively, as compared to a net income
of $88,000 for the three months ended December 31, 1995, and a net loss of
$497,000 for the six months ended December 31, 1995. The Company did not record
a tax benefit for any of the periods reported because carrybacks of current
losses against previous taxable earnings are no longer available.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $5,473,000
compared to working capital of $6,519,000 at June 30, 1996. The Company had cash
and cash equivalents of $2,670,000 at December 31, 1996, as compared to
$3,439,000 at June 30, 1996.
During the six months ended December 31, 1996, the Company's operating
activities used $373,000 of available cash resources, as compared to cash used
for operating activities of $2,337,000 during the same period in the prior
fiscal year. The cash used for operating activities during the six months ended
December 31, 1996, primarily reflects amounts necessary to fund the Company's
net operating losses. The cash used for operating activities during the six
months ended December 31, 1995, 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 used for investment activities during
the six months ended December 31, 1996, was $294,000, as compared to cash used
for investment activities of $437,000 during the same period in the prior fiscal
year.
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $5,023,000 at December 31, 1996, compared to $4,739,000 at
June 30, 1996. At December 31, 1996, the Company had an allowance for doubtful
accounts of $1,420,000, as compared to $1,445,000 at June 30, 1996. The number
of average days of revenue outstanding, excluding the revenues and receivables
related to litigation patients, was 74 days at December 31, 1996.
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 December 31,
1996, accounts receivable related to these litigation patients totaled $593,000,
as compared to $444,000 at June 30, 1996. These litigation patient receivables
accounted for an additional 10 average days revenue outstanding at December 31,
1996.
The Company's amount due from Medicare intermediaries of $223,000 at
December 31, 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
six months ended December 31, 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. Requests have been submitted for fiscal
years 1992 through 1994 for the Gardner, Kansas facility. The Company intends to
file such a request for its Kansas facility for fiscal years 1995 and 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 for the Company's
Kansas facility expired June 1990.
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. The draws on the line-of-credit are secured by a cash
deposit. At December 31, 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.
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 six months ended December 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.
<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
At the Annual Meeting of Stockholders of the Company held on November 21, 1996,
the Company's stockholders voted in favor of: (i) the election of three
directors to the Company's Board of Directors, and (ii) the ratification of
Arthur Andersen LLP as the Company's independent auditors. The number of votes
for, withheld and against, as well as the number of abstentions and broker
non-votes as to each matter approved at the Annual Meeting of Stockholders were
as follows:
Broker
Matter For Withheld Against Abstain Non-Votes
Election of Directors:
Harvey Wm. Glasser, M.D. 8,236,182 0 N/A N/A 0
Robert Rush 8,236,614 0 N/A N/A 0
Edward Stolman 8,234,948 0 N/A N/A 0
Arthur Andersen LLP: 6,632,244 N/A 26,680 N/A 0
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: February 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 quarterly report to stockholder for the
quarter ended September 30, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
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