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, 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 February 13, 1998, 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 .......................... 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
June 30, December 31,
1997 1997
------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,928,781 $ 3,746,368
Restricted cash 278,649 275,865
Patient accounts receivable, less allowance for doubtful accounts
of $1,194,000 and $825,000 respectively 4,278,756 1,950,884
Due from intermediaries -- 616,000
Other receivables 293,165 412,505
Prepaid expenses and other assets 298,970 262,911
------------ ------------
Total current assets 8,078,321 7,264,533
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment 2,154,947 891,266
Leasehold improvements 686,116 152,188
------------ ------------
2,841,063 1,043,454
Less: accumulated depreciation (1,708,734) (521,765)
------------ ------------
Net property and equipment 1,132,329 521,689
------------ ------------
OTHER ASSETS:
Goodwill and intangible assets 337,734 348,354
------------ ------------
TOTAL ASSETS $ 9,548,384 $ 8,134,576
============ ============
CURRENT LIABILITIES:
Short-term borrowings and current maturities of notes payable $ 291,037 $ 172.734
Current maturities of capital lease obligations 24,821 9,812
Accounts payable 968,027 334,998
Accrued payroll and employee benefits 755,748 460,964
Due to intermediaries 100,780 --
Other accrued liabilities 1,123,124 440,655
------------ ------------
Total current liabilities 3,263,537 1,419,163
------------ ------------
LONG-TERM LIABILITIES:
Note payable and other long-term liabilities 48,989 35,783
------------ ------------
Total long-term liabilities 48,989 35,783
------------ ------------
TOTAL LIABILITIES 3,312,526 1,454,946
------------ ------------
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 December 31, 1997 11,572 11,572
Class B -- 5,000,000 shares authorized; 773,000 shares issued and outstanding
At June 30, 1997 and December 31, 1997 7,730 7,730
Paid-in capital 17,908,122 17,908,122
Retained deficit (11,691,566) (11,247,794)
------------ ------------
Total stockholders' equity 6,235,858 6,679,630
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,548,384 $ 8,134,576
============ ============
<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,
1996 1997 1996 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET OPERATING REVENUES $ 5,527,729 $ 1,940,146 $ 11,504,711 $ 5,000,374
OPERATING EXPENSES:
Salaries and employee benefits 3,949,203 1,728,517 8,101,472 4,138,917
Professional fees and purchased services 639,477 173,664 1,357,824 464,572
Provision for doubtful accounts 99,339 7,651 217,234 76,153
Other operating expenses 815,811 407,426 1,778,832 923,602
Depreciation and amortization 150,324 52,932 308,960 141,316
Rent:
To unrelated parties 348,519 135,074 734,776 321,443
To related parties 94,336 -- 191,788 29,962
Net gain on sale of assets (45,857) (302,681) (45,857) (1,475,044)
------------ ------------ ------------ ------------
Total operating expenses 6,051,152 2,202,583 12,645,029 4,620,920
------------ ------------ ------------ ------------
Income (loss) from operations (523,423) (262,437) (1,140,318) 379,454
------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Interest income (25,406) (41,145) (61,575) (81,053)
Interest expense 15,167 3,875 31,987 12,780
------------ ------------ ------------ ------------
Net other income (10,239) (37,270) (29,588) (68,273)
------------ ------------ ------------ ------------
Income (loss) before income taxes (513,184) (225,167) (1,110,730) 447,727
INCOME TAX PROVISION -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST ($ 513,184) ($ 225,167) ($ 1,110,730) $ 447,727
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES 3,756 -- 16,789 3,955
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($ 516,940) ($ 225,167) ($ 1,127,519) $ 443,772
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE (basic and diluted) ($ 0.27) ($ 0.12) ($ 0.58) $ 0.23
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,930,244 1,930,244 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
6-Mths Ended December 31,
1996 1997
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,127,519) $ 443,772
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operations:
Depreciation and amortization 308,960 141,316
Gain on sale of assets (45,857) (1,475,044)
Minority interest expense 16,789 3,955
Changes in assets and liabilities:
(Increase) decrease in patient receivables (284,526) 1,839,122
(Increase) decrease in due from intermediaries 109,074 (671,605)
Decrease in income tax refund receivables 91,417 --
Decrease in other receivables 410,555 170,653
(Increase) decrease in prepaid expenses and
other current assets 50,864 (33,479)
Increase (decrease) in accounts payable and
accrued liabilities 96,884 (522,402)
----------- -----------
Cash used for operating activities (373,359) (103,712)
----------- -----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (124,442) (33,606)
Payments on prior purchase of outpatient clinics (300,668) (281,275)
Purchase of home health agency -- (20,000)
Proceeds from sale of assets 130,973 1,407,679
----------- -----------
Cash provided by (used for) investment activities (294,137) 1,072,816
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term notes borrowings 273,002 127,221
Payments of short-term borrowings (330,756) (258,729)
Payments of capital lease obligations (14,421) (15,009)
Reduction in restricted cash 2,785 2,000
Payments to minority shareholders (31,664) (7,784)
----------- -----------
Cash used for financing activities (101,839) (151,516)
----------- -----------
Net increase (decrease) in cash (769,335) 817,588
CASH AND CASH EQUIVALENTS, Beginning of Period 3,439,440 2,928,781
----------- -----------
CASH, End of Period $ 2,670,105 $ 3,746,369
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities:
Notes received on sale of Florida operations $ -- $ 215,000
Payments:
Interest paid 41,333 29,882
Income taxes paid 20,900
10,440
<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 income -- -- -- -- -- 443,772 443,772
------------ ----------- ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 1,157,244 $ 11,572 773,000 $ 7,730 $ 17,908,122 ($11,247,794) $ 6,679,630
============ =========== ============ ============ ============ ============ ============
<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 February 13, 1998 is $4,807,000. 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, 1997, 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. As
of December 31, 1997, the Company operated home health agencies with operations
in Colorado and Kansas and four physical therapy clinics in Colorado.
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. During the second quarter of 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 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
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.
In the second quarter of fiscal 1998, certain contingencies related to the
Florida sale were resolved. The Company determined that reserves of $308,000
recorded at the time of the sale are no longer needed. Accordingly, these
reserves have been reversed and the resulting gain is included in net gain 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 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 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 in net gain 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
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 December 31, 1997 was $261,000. 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 December 31, 1997,
by Medicare and the previous owner of the Colorado operations exceed the minimum
amounts owed to the previous owner by $237,000.
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. 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 (which ended on December 31, 1997) 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 % Net Revenue % $ % $
3-Months Ended 6-Months Ended Change Change
12/31/96 12/31/97 12/31/96 12/31/97 3-Month 6-Month
---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Operating Revenues 100.0 100.0 100.0 100.0 (64.9) (56.5)
Non-capital operating expenses:
Salaries and employee benefits 71.4 89.1 70.4 82.8 (56.2) (48.9)
Other non-capital expenses 28.1 30.3 29.2 29.3 (62.1) (56.3)
Net gain on sale of assets (0.8) (15.6) (0.4) (29.5) 560.1 3,116.6
---------- ---------- ---------- ----------
Total non-capital expenses 98.7 103.8 99.2 82.6 (63.1) (63.8)
Capital expenses:
Depreciation and amortization 2.7 2.7 2.7 2.8 (64.8) (54.3)
Rent 8.0 7.0 8.1 7.0 (69.5) (62.1)
Interest 0.3 0.2 0.3 0.3 (74.5) (60.0)
---------- ---------- ---------- ----------
Total capital expenses 11.0 9.9 11.0 10.1 (68.5) (60.1)
---------- ---------- ---------- ----------
Total expenses 109.7 113.7 110.2 92.6 (63.6) (63.4)
Interest income 0.5 2.1 0.5 1.6 61.9 31.6
---------- ---------- ---------- ----------
Income (loss) before income taxes (9.2) (11.6) (9.6) 9.0 (56.1) (140.3)
Income tax provision - - - - - -
---------- ---------- ---------- ----------
Income (loss) before minority interest (9.2) (11.6) (9.6) 9.0 (56.1) (140.3)
Minority interest 0.1 - 0.1 0.1 (100.0) (76.4)
---------- ---------- ---------- ----------
Net income (loss) (9.3) (11.6) (9.7) 8.9 (56.4) (139.4)
========== ========== ========== ==========
</TABLE>
The Company's net operating revenues decreased 65% and 57% to $1,940,000
and $5,000,000 for the three and six months ended December 31, 1997, as compared
to $5,528,000 and $11,505,000 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 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 and six months
ended December 31, 1996 and 1997, with respect to operations sold by the Company
during fiscal 1997 and the first quarter of fiscal 1998.
Net operating revenues Net operating revenues
Three months ended December 31, Six months ended December 31,
1996 1997 1996 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Alaska $ 217,000 $ -- $ 372,000 $ --
Georgia 1,583,000 -- 3,213,000 --
Illinois 21,000 -- 305,000 --
Kansas 1,130,000 -- 2,461,000 320,000
Florida 533,000 -- 1,127,000 278,000
------------ ------------ ------------ ------------
Total $ 3,484,000 $ -- $ 7,478,000 $ 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 14% to 65,355 for the six months ended
December 31, 1997, from 57,297 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 and six months ended December 31, 1997 decreased 58% and
51% to $2,317,000 and $5,603,000, respectively, from $5,504,000 and $11,455,000,
respectively, 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 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 56% and 49% to $1,729,000 and
$4,139,000 for the three and six months ended December 31, 1997, as compared to
$3,949,000 and $8,101,000 for the same periods in the prior fiscal year.
Salaries and employee benefits as a percentage of net operating revenues
increased to 89% and 83% for the three and six months ended December 31, 1997,
as compared to 71% and 70% for the same periods in the prior fiscal year. The
increase is due to the Company's concentration in home health which is a more
labor intensive business.
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, 1997, the Company's other non-capital
operating expenses decreased 62% and 56% to $589,000 and $1,464,000,
respectively, as compared to $1,555,000 and $3,354,000, respectively, 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 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 $8,000 and $76,000 for
the three and six months ended December 31, 1997, from $99,000 and $217,000,
respectively, for the same periods in the prior fiscal year. The provision for
doubtful accounts as a percentage of revenues was .4% and 2% for the three and
six months ended December 31, 1997, respectively, as compared to 2% for the
three and six months ended December 31, 1996.
Total capital expenses decreased 68% and 60% during the three and six
months ended December 31, 1997, to $192,000 and $506,000, respectively, as
compared to $608,000 and $1,268,000 for the same periods in the prior fiscal
year. Rent expense decreased 70% and 62% to $135,000 and $351,000 for the three
and six months ended December 31, 1997, respectively, as compared to $443,000
and $927,000 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 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 1998 results included 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. In addition, in the second quarter of fiscal 1998, certain
contingencies related to the Florida sale were resolved. The Company determined
that reserves of $308,000 recorded at the time of the sale are no longer needed.
Accordingly, these reserves have been reversed and the resulting gain is
included in net gain of sale of assets in the accompanying income statement.
Net interest income for the three and six months ended December 31, 1997
increased to $41,000 and $81,000, respectively, as compared to $25,000 and
$62,000 for the same periods in the prior fiscal year. This increase is due to
higher cash balances during the three and six months ended December 31, 1997.
The Company reported a net loss for the three months ended December 31,
1997 of $225,000, as compared to a net loss of $517,000 for the same period in
the prior fiscal year. For the six months ended December 31, 1997 the Company
reported net income of $444,000, as compared to a net loss $1,128,000 for the
six months ended December 31, 1996. The net income for the six months ended
December 31, 1997 includes the gain on the sale of the Company's Kansas
operations. The Company's net income for the six months ended December 31, 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 $515,000
for the six months ended December 31, 1997. The Company did not record a tax
provision for the six months ended December 31, 1997 because tax loss
carryforwards are available to offset earnings in the quarter. The Company did
not record a tax benefit for the six months ended December 31, 1996 because
carrybacks of current losses against previous taxable earnings are no longer
available.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $5,845,000,
compared to working capital of $5,473,000 at December 31, 1996. The Company had
cash and cash equivalents of $3,746,000 at December 31, 1997, as compared to
$2,670,000 at December 31, 1996.
During the six months ended December 31, 1997, the Company's operating
activities used $104,000 of available cash resources, as compared to cash used
by operations of $373,000 during the same period in the prior fiscal year. The
cash used by operating activities during the six months ended December 31, 1997
primarily reflects collections of accounts receivable from the facilities sold
by the Company offset by a decrease in accounts payable related to the
facilities sold and the increased receivables from intermediaries related to the
Company's home health operations. Cash provided by investment activities during
the six months ended December 31, 1997 was $1,073,000, as compared to cash used
for investment activities of $294,000 during the same period in the prior fiscal
year. The cash provided by investment activities for the six months ended
December 31, 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 $1,951,000 at December 31, 1997, as compared to $5,023,000
at December 31, 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 $730,000 of the net patient accounts receivable balance
at December 31, 1997 as compared to $3,942,000 at December 31, 1996. At December
31, 1997, the Company had an allowance for doubtful accounts of $825,000, as
compared to $1,420,000 at December 31, 1996. The number of average days of
revenue outstanding, excluding the revenues and receivables related to
litigation patients, was 59 days at December 31, 1997, as compared to 74 days at
December 31, 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
December 31, 1997, accounts receivable related to these litigation patients
totaled $370,000, as compared to $593,000 at December 31, 1996. These litigation
patient receivables accounted for an additional 14 and 10 average days revenue
outstanding at December 31, 1997 and December 31, 1996, respectively.
The Company's amount due from Medicare intermediaries of $616,000 at
December 31, 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. 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.
<PAGE>
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 three months ended December 31, 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
At the Annual Meeting of Stockholders of the Company held on November 20,
1997, 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. 1,363,854 0 N/A N/A 0
Robert Rush 1,361,858 0 N/A N/A 0
John McCracken 1,361,858 0 N/A N/A 0
Arthur Andersen LLP: 1,382,530 N/A 11,817 5,399 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, 1998 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 informatin extracted from
Meadowbrook Rehabilitation Group, Inc.'s 10-K to stockholders for the quarter
ended June 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000852164
<NAME> Meadowbrook Rehabilitation Group, Inc.
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