SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] 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)
(510) 420-0900
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ______
At May 14, 1998, the latest practicable date, there were 1,735,866
outstanding shares of Class A Common Stock, $.01 par value per share, and
1,159,500 outstanding shares of Class B Common Stock, $.01 par value per share.
<PAGE>
8
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 ...............................12
Liquidity and Capital Resources ......................14
Impact of Accounting Statements ......................16
Interim Periods ........................................16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ......................................17
Item 2. Changes in Securities ...............................17
Item 3. Defaults Upon Senior Securities ......................17
Item 4. Submission of Matters to a Vote of Security Holders ....17
Item 5. Other Information ......................................17
Item 6. Exhibits ...............................................17
SIGNATURES .........................................................18
<PAGE>
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,548,494 $ 2,928,781
Restricted cash 281,521 278,649
Patient accounts receivable, less allowance for doubtful accounts
of $757,000 and $1,194,000 respectively 1,375,373 4,278,756
Due from intermediaries 816,462 --
Other receivables 334,115 293,165
Prepaid expenses and other assets 166,382 298,970
-------------- -------------
Total current assets 6,522,347 8,078,321
-------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment 903,258 2,154,947
Leasehold improvements 151,813 686,116
-------------- -------------
1,055,071 2,841,063
Less: accumulated depreciation
(563,422) (1,708,734)
-------------- --------------
Net property and equipment 491,649 1,132,329
-------------- --------------
OTHER ASSETS:
Goodwill and intangible assets 343,663 337,734
-------------- --------------
TOTAL ASSETS $ 7,357,659 $ 9,548,384
============== ==============
CURRENT LIABILITIES:
Short-term borrowings and current maturities of notes payable $ 102,836 $ 291,037
Current maturities of capital lease obligations 2,491 24,821
Accounts payable 307,845 968,027
Accrued payroll and employee benefits 392,625 755,748
Due to intermediaries -- 100,780
Other accrued liabilities 883,793 1,123,124
-------------- --------------
Total current liabilities 1,689,590 3,263,537
-------------- --------------
LONG-TERM LIABILITIES:
Note payable and other long-term liabilities 21,394 48,989
-------------- --------------
Total long-term liabilities 21,394 48,989
-------------- --------------
TOTAL LIABILITIES 1,710,984 3,312,526
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value:
Class A - 15,000,000 shares authorized; 1,157,244 shares issued and outstanding
at March 31, 1998 and June 30, 1997 11,572 11,572
Class B - 5,000,000 shares authorized; 773,000 shares issued and outstanding
at March 31, 1998 and June 30, 1997 7,730 7,730
Paid-in capital 17,908,122 17,908,122
Treasury stock, at cost, Class A - 59,900 shares at March 31, 1998 -- (231,610)
Retained deficit (12,049,139) (11,691,566)
-------------- --------------
Total stockholders' equity 5,646,675 6,235,858
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,357,659 $ 9,548,384
============== ==============
<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.
3
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET OPERATING REVENUES $ 1,286,115 $ 5,508,323 $ 6,286,489 $17,013,035
OPERATING EXPENSES:
Salaries and employee benefits 1,476,604 3,824,664 5,615,519 11,926,130
Professional fees and purchased services 136,022 529,770 600,592 1,887,597
Provision for doubtful accounts 4,953 129,147 81,106 346,381
Other operating expenses 336,823 882,961 1,261,534 2,658,606
Depreciation and amortization 48,715 139,147 190,032 448,109
Rent:
To unrelated parties 122,642 303,237 444,085 1,038,016
To related parties -- 97,920 29,962 289,708
(Gain) loss on sale of assets 3,045 (488,240) (1,471,999) (530,942)
------------ ------------ ------------ ------------
Total operating expenses 2,128,804 5,418,606 6,750,831 18,063,605
------------ ------------ ------------ ------------
Income (loss) from operations (842,689) 89,717 (464,342) (1,050,570)
------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Interest income (44,776) (24,021) (126,936) (85,564)
Interest expense 3,432 15,394 16,212 47,380
------------ ------------ ------------ ------------
Net other income (41,344) (8,627) (110,724) (38,184)
------------ ------------ ------------ ------------
Income (loss) before income taxes (801,345) 98,344 (353,618) (1,012,386)
INCOME TAX PROVISION -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST (801,345) 98,344 (353,618) (1,012,386)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES -- 9,871 3,955 26,660
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (801,345) $ 88,473 $ (357,573) $(1,039,046)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE (basic and diluted) $ (0.42) $ 0.05 $ (0.18) $ (0.54)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,906,844 1,930,244 1,922,558 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.
4
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (357,573) $ (1,039,046)
Adjustments to reconcile net (loss) to net cash
provided by (used for) operations:
Depreciation and amortization 190,032 448,109
Gain on sale of assets (1,471,999) (530,942)
Minority interest expense 3,955 26,660
Changes in assets and liabilities:
(Increase) decrease in patient receivables 2,414,633 (383,152)
(Increase) decrease in due from intermediaries (872,067) 322,288
Decrease in income tax refund receivables -- 91,417
Decrease in other receivables 249,043 294,198
Decrease in prepaid expenses and
other current assets 47,613 197,753
(Decrease) in accounts payable and
accrued liabilities (158,943) (190,458)
-------------- --------------
Cash (used) provided for operating activities 44,694 (763,173)
-------------- --------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (51,121) (149,246)
Payments on prior purchase of outpatient clinics (281,275) (318,244)
Purchase of home health agency (20,000) --
Proceeds from sale of assets 1,407,807 1,459,652
-------------- --------------
Cash provided by investment activities 1,055,411 992,182
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term notes borrowings 127,221 273,002
Payments of short-term borrowings (343,017) (546,599)
Payments of capital lease obligations (22,330) (22,113)
(Increase) decrease in restricted cash (2,872) 62,000
Payments to minority shareholders (7,784) (43,746)
Purchase of Treasury stock (231,610) --
-------------- --------------
Cash (used for) financing activities (480,392) (277,456)
-------------- --------------
Net increase (decrease) in cash 619,713 (48,477)
CASH AND CASH EQUIVALENTS, Beginning of Period 2,928,781 3,439,440
-------------- --------------
CASH, End of Period $ 3,548,494 $ 3,390,993
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities:
Notes received on sale of Florida operations $ 215,000 $ --
Payments:
Interest paid 16,212 51,626
Income taxes paid 11,600 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.
5
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Retained Total
-----------------------------------------
Class A Class B Paid-in Earnings Treasury Stockholders'
-------------------- -------------------
Shares Amount Shares Amount Capital (Deficit) Stock Equity
---------- --------- --------- -------- ------------ ------------- ---------- ------------
<S> <C> <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
Purchase of shares
for treasury -- -- -- -- -- -- (231,610) (231,610)
Net (loss) -- -- -- -- -- (357,573) (357,573)
---------- --------- --------- -------- ------------ ------------- ----------- ------------
BALANCE, MARCH 31, 1998 1,157,244 $ 11,572 773,000 $ 7,730 $ 17,908,122 $(12,049,139) $ (231,610) $ 5,646,675
========== ========= ========= ======== ============ ============= ========== ============
<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.
6
</FN>
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
TRENDS AND RECENT EVENTS
Consideration of Strategic Alternatives
As a result of poor operating results and poor prospects for growth in
their respective markets, the Company's Board of Directors decided to sell its
acute, subacute and post-acute operations as well as certain of the Company's
Florida and Georgia outpatient rehabilitation clinic operations. Since the
beginning of the fiscal year ended June 30, 1997 ("Fiscal 1997"), the Company
has disposed of substantially all of its operating assets. Early in Fiscal 1997,
the Company sold its post-acute program in Illinois and its outpatient
rehabilitation clinics in Alaska. 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. On July 31,
1997, the Company sold its Kansas operations. On August 31, 1997, the Company
sold five of its outpatient rehabilitation clinics in Florida and Georgia and
certain other assets. On September 30, 1997, the Company sold its remaining
Florida outpatient clinic and two management contracts. In addition, the Company
closed six outpatient rehabilitation clinics in Colorado and Florida during
Fiscal 1997. As of March 31, 1998, the Company operated home health agencies
with operations in Colorado and Kansas and four physical therapy clinics in
Colorado.
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.
On April 7, 1998, the Company announced that it had entered into an
agreement to acquire Cambio Networks, Inc. ("Cambio"). Based in Bellevue,
Washington, Cambio is a network management inventory software company providing
services to financial, telephony, medical, and Y2K Markets in both the U.S. and
Common Market. Cambio's COMMAND Network Inventory Management System provides a
comprehensive solution for network inventory management that enables customers
to optimize the management of a corporation's network infrastructure - both
physical and logical. The agreement provides for a merger in which the Company
will acquire each issued and outstanding share of common and preferred stock of
Cambio through the merger of a wholly owned subsidiary of the Company with and
into Cambio. Under the terms of the agreement, Cambio's current shareholders
will receive in the aggregate a number of shares of the Company's Class A Common
Stock representing 32.5% of the outstanding Class A and Class B Common Stock of
the Company at the time of the closing. The closing of the merger is subject to
7
<PAGE>
several conditions, including the approval of the stockholders of the Company
and Cambio. If these and certain other conditions are met, the transaction is
anticipated to be completed by the end of June 1998.
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, acquisitions or other
business combinations and/or additional sales of assets. There can be no
assurance that any such alternatives will be available on favorable terms, if at
all. Acquisitions entail numerous risks, including difficulties or an inability
to successfully assimilate acquired operations and products, diversion of
management's attention and loss of key employees of acquired businesses, all of
which the Company has encountered with previous acquisitions. Future
acquisitions by the Company may require dilutive issuances of equity securities,
the incurrence of additional debt, and the creation of goodwill or other
intangible assets that could result in amortization expense. These factors could
have a material adverse effect on the Company's business, operating results and
financial condition.
Potential Ineligibility for Continued Listing on the NASDAQ National Market
On February 23, 1998, the Nasdaq Stock Market adopted new quantitative
maintenance requirements for continued listing on the Nasdaq National Market.
During February 1998, the Company was notified by the Nasdaq Stock Market that
it was not in compliance with the requirement that listed companies have a
minimum public float of at least 750,000 shares and that the market value of its
public float be at least $5,000,000. On April 22, 1998, the Company effected a
three-for-two stock split which increased the Company's public float to
approximately 954,485 shares. The Company, however, is not in compliance with
the market value of its public float requirement. The Company estimates that the
market value of its public float as of May 13, 1998 is $1,431,728. The Company
has until May 28, 1998, to comply with such requirement or to request a
temporary exception from it, which would stay the delisting process until
further review. In the event the Company is unable to meet the requirements for
continued listing on the Nasdaq National Market, it intends to apply for
inclusion of its Class A Common Stock on 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.
Three-for-Two Stock Split of the Company's Common Stock
On March 8, 1998, the Company's Board of Directors authorized a
three-for-two stock split of the Company's Common Stock, which was effected in
the form of a stock dividend on April 22, 1998. Except for the disclosure
regarding the shares outstanding as of May 14, 1998, the latest practicable
date, all share information and per share data throughout this report has not
been adjusted to reflect such stock split.
8
<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. During the three months ended December 31, 1997 ("Second
Quarter Fiscal 1998"), the Company received $335,000 as payment in full for one
of the promissory notes. The purchasers acquired all assets including accounts
receivable and were 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 Fiscal 1997 financial statements.
On September 30, 1997, the Company sold its remaining outpatient clinic
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.
During Second Quarter Fiscal 1998, certain contingencies related to the
Florida sale were resolved and the Company determined that reserves of $308,000
recorded at the time of the sale were no longer needed. Accordingly, these
reserves have been reversed and the resulting gain is included in (gain) loss on
sale of assets in the accompanying income statement.
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 provided for the Company to retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. This transaction resulted in a gain of approximately
$1,178,000. This gain is reflected in the Company's results for the three months
ended September 30, 1997 ("First Quarter 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 provided for the Company to 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.
9
<PAGE>
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 in (gain)
loss on sale of assets 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
provided for the Company to 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 in net gain (loss) on sale of
assets 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 March 31, 1998 was approximately $267,000. 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 three months
ended September 30, 1996 ("First Quarter 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 March 31, 1998, by Medicare and the previous
owner of the Colorado operations exceed the minimum amounts owed to the previous
owner by $237,000.
10
<PAGE>
Healthcare Regulation and Reform
There is continuing political debate concerning the need for reform of
the healthcare industry. Healthcare reform proposals have been formulated by the
current administration, members of Congress, and, periodically, state
legislators. The Health Care Financing Administration ("HCFA") has recently
adopted regulations that will affect Medicare cost reimbursements based on
actual reasonable allowable costs subject to per visit limitations. Effective
July 1, 1998, such reimbursements will also be subject to an aggregate annual
per beneficiary limitation. 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.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated (i) the
percentage of net operating revenues represented by certain selected items
reflected in the Company's consolidated statements of operations and (ii) the
percentage change in the dollar amount of such items from the same periods in
the prior fiscal year.
<TABLE>
<CAPTION>
% of Net Revenue % of Net Revenue
Three Months Ended Nine Months Ended % $ % $
March 31, March 31, Change Change
--------------------- ----------------------- Three Nine
1998 1997 1998 1997 Months Months
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Operating Revenues 100.0 100.0 100.0 100.0 (76.7) (62.5)
Non-capital operating expenses:
Salaries and employee benefits 114.8 69.4 89.3 70.1 (61.4) (52.9)
Other non-capital expenses 37.2 28.0 30.9 28.8 (69.0) (60.3)
(Gain) loss on sale of assets 0.2 (8.9) (23.4) (3.1) (100.6) 177.2
-------- -------- -------- --------
Total non-capital expenses 152.2 88.5 96.8 95.7 (59.9) (62.6)
Capital expenses:
Depreciation and amortization 3.8 2.5 3.0 2.6 (65.0) (57.6)
Rent 9.5 7.3 7.5 7.8 (69.4) (64.3)
Interest 0.3 0.3 0.3 0.3 (77.7) (65.8)
--------
-------- -------- --------
Total capital expenses 13.6 10.1 10.8 10.7 (68.5) (62.7)
-------- -------- -------- --------
Total expenses 165.8 98.6 107.6 106.4 (60.8) (62.6)
Interest income 3.5 0.4 2.0 0.5 86.4 48.4
-------- -------- -------- --------
Income (loss) before income taxes (62.3) 1.8 (5.6) (5.9) (914.8) (74.9)
Income tax provision -- -- -- -- -- --
-------- -------- -------- --------
Income (loss) before minority
interest (62.3) 1.8 (5.6) (5.9) (914.8) (74.9)
Minority interest -- 0.2 0.1 0.2 (100.0) (85.2)
-------- -------- -------- --------
Net income (loss) (62.3) 1.6 (5.7) (6.1) (1,005.8) (75.2)
======== ======== ======== ========
</TABLE>
The Company's net operating revenues decreased 76.7% and 62.5% to
$1,286,115 and $6,286,489 for the three months ended March 31, 1998 ("Third
Quarter Fiscal 1998") and nine months ended March 31, 1998 ("Nine Months Fiscal
1998"), as compared to $5,508,323 and $17,013,035 for the same periods 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
Fiscal 1997 and the sale of the Company's Kansas and Florida operations during
the First Quarter Fiscal 1998. See "Trends and Recent Events".
Due to increased pressures on home health referrals by physicians
stemming from healthcare reform initiatives, the Company's home health business
is experiencing decreasing net operating revenues. The number of patient visits
in the Company's home health business decreased 33.1 % and 2.6% to 20,878 and
86,233 for the Third Quarter and Nine Months Fiscal 1998, from 31,220 and 88,514
for the same periods in the prior fiscal year. In addition, the Company
anticipates that as a result of the new per-beneficiary annual limitations on
home health agency costs, which will be in effect as of July 1,1998, the home
health business will be subject to lower Medicare cost reimbursements thereby
12
<PAGE>
further decreasing operating revenues. The Company is currently restructuring
its home health operations to address these industry trends.
Below is a summary of net operating revenues for the Third Quarter and
Nine Months Fiscal 1997 and 1998, with respect to operations sold by the Company
during Fiscal 1997 and the First Quarter Fiscal 1998.
Net operating revenues Net operating revenues
Three months ended March 31, Nine months ended March 31,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Alaska $ -- $ -- $ -- $ 372,036
Georgia -- 1,642,764 -- 4,856,216
Illinois -- -- -- 307,086
Kansas -- 1,277,771 319,728 3,738,745
Florida -- 486,001 277,788 1,613,276
------------- ------------- ------------- -------------
Total $ -- $ 3,406,536 $ 597,516 $ 10,887,359
============= ============= ============= =============
Total non-capital operating expenses (excluding the (gain) loss on the
sale of assets) for the Third Quarter and Nine Months Fiscal 1998 decreased
63.6% and 55.1% to $1,954,402 and $7,558,751, respectively, from $5,366,542 and
$16,818,714, during the same periods 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 Fiscal 1997 and the sale of the
Company's Kansas and Florida operations during the First Quarter 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 61.4% and 52.9% to $1,476,604 and $5,615,519 for
the Third Quarter and Nine Months Fiscal 1998, as compared to $3,824,664 and
$11,926,130 for the same periods in the prior fiscal year. Salaries and employee
benefits as a percentage of net operating revenues increased to 114.8% and 89.3%
for the Third Quarter and Nine Months Fiscal 1998, as compared to 69.4% and
70.1% for the same periods in the prior fiscal year. The increase is due to the
Company's concentration in home health, which is more labor-intensive and has
suffered from decreasing revenues as discussed above.
The Company's other non-capital operating expenses primarily consist of
professional fees, purchased services, provision for doubtful accounts and other
operating expenses. For the Third Quarter and Nine Months Fiscal 1998, the
Company's other non-capital operating expenses decreased 69.0% and 60.3% to
$477,798 and $1,943,232, respectively, as compared to $1,541,878 and $4,892,584,
for the same periods 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 Fiscal 1997 and the sale of the Company's Kansas and
Florida operations during the First Quarter Fiscal 1998. See "Trends and Recent
Events".
13
<PAGE>
Total capital expenses decreased 68.5% and 62.7% during the Third
Quarter and Nine Months Fiscal 1998, to $174,789 and $680,291, respectively, as
compared to $555,698 and $1,823,213 for the same periods in the prior fiscal
year. Rent expense decreased 69.4% and 64.3% to $122,642 and $474,047 for the
Third Quarter and Nine Months Fiscal 1998, respectively, as compared to $401,157
and $1,327,724 for the same periods 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 Fiscal 1997 and the sale of the
Company's Kansas and Florida operations during the First Quarter Fiscal 1998.
See "Trends and Recent Events".
The Company's results for its Nine Months Fiscal 1998 include a net
gain of $1,471,999 on the sale of its Kansas and Florida operations. This amount
is offset by losses incurred on the sale of certain other assets.
Net interest income for the Third Quarter and Nine Months Fiscal 1998
increased to $44,776 and $126,936, respectively, as compared to $24,021 and
$85,564 for the same periods in the prior fiscal year. This increase is due to
higher cash balances during the Third Quarter and Nine Months Fiscal 1998.
The Company reported a net loss for the Third Quarter Fiscal 1998 of
$801,345, as compared to net income of $88,473 for the same period in the prior
fiscal year. For the Nine Months Fiscal 1998, the Company reported net loss of
$357,573, as compared to a net loss of $1,039,046 for the Nine Months Fiscal
1997. The net loss for the Nine Months Fiscal 1998 includes the gain on the sale
of the Company's Kansas and Florida operations. The Company did not record a tax
provision for the Nine Months Fiscal 1997 because tax loss carryforwards were
available to offset earnings in the period.
Basic and diluted loss per share was $0.42 and $0.18 for the Third
Quarter and Nine Months Fiscal 1998, respectively, as compared to a net income
of $0.05 and a net loss of $0.54 per share for the same period in the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $4,832,757,
compared to working capital of $4,814,784 at June 30, 1997. The Company had cash
and cash equivalents of $3,548,494 at March 31, 1998, as compared to $2,928,781
at June 30, 1997.
During the Nine Months Fiscal 1998, the Company's operating activities
provided $44,694, as compared to cash used for operating activities of $763,173
during the same period in the prior fiscal year. The cash provided by operating
activities during the Nine Months Fiscal 1998 are primarily the result of
collections of accounts receivable from the facilities sold by the Company,
offset by a decrease in accounts payable related to the facilities sold and
increased receivables from intermediaries related to the Company's home health
operations. Cash provided by investment activities during the Nine Months Fiscal
1998 was $1,055,411, as compared to cash provided of $992,182 during the same
period in the prior fiscal year. The cash provided by investment activities for
the Nine Months Fiscal 1998 and Fiscal 1997 primarily reflects the proceeds from
the sale of the Company's assets.
14
<PAGE>
On February 21, 1998, the Company's Board of Directors approved a stock
repurchase program under which it could purchase up to an aggregate of ten
percent (10%) of the outstanding shares of its Class A Common Stock. As of March
31, 1998, the Company had repurchased 59,900 shares of its Class A Common Stock
for an aggregate price of $231,610.
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $1,375,373 at March 31, 1998, as compared to $4,278,756 at
June 30, 1997. This decrease is primarily due to the sale of Company's Georgia,
Alaska, and Illinois operations during the Second and Third Quarters Fiscal 1997
and the sale of the Company's Kansas and Florida operations during the First
Quarter Fiscal 1998. See "Trends and Recent Events". At March 31, 1998, the
Company had an allowance for doubtful accounts of $757,000, as compared to
$1,194,000 at June 30, 1997.
The Company's amount due from Medicare intermediaries of $816,462 at
March 31, 1998 includes amounts the Company anticipates that it will receive in
connection with 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 1997 for such facility. 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.
On April 3, 1998, the Company and Cambio executed a Secured Bridge
Financing Note (the "Note") pursuant to which the Company provided Cambio with a
loan of five hundred thousand dollars ($500,000) to finance its ongoing
operations. The Note bears interest at 8% per annum and is due the earliest of
(i) July 31, 1998; (ii) upon the closing of the acquisition of Cambio; or (iii)
the occurrence of certain events as defined in the Note.
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 its
ongoing home health business operations. 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. 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
15
<PAGE>
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. 128, "Earning per Share", the
adoption of which 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 Third Quarter Fiscal 1997 and 1998, 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.
16
<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 and Reports on Form 8-K
A. Exhibits
27.1 - Financial Data Schedule
B. Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEADOWBROOK REHABILITATION GROUP, INC.
DATE: May 15, 1998 By /s/ Harvey Wm. Glasser, M.D.
------------------------------------
Harvey Wm. Glasser, M.D.
President and Chief Executive Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Meadowbrook Rehabilitation Group, Inc.'s 10-K to stockholder for the quarter
ended March 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000852164
<NAME> Meadowbrook Rehabilitation Group, Inc.
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Mar-31-1998
<CASH> 3,830
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<RECEIVABLES> 1,435
<ALLOWANCES> (757)
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