UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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.
(Name of small business issuer 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 of principal executive offices) (Zip Code)
Issuer's telephone number: (510) 420-0900
---------------------
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock, par value $0.01 per share
(Title of Class)
Indicate whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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
_____.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
The registrant's revenues for its most recent fiscal year were $6,797,000.
As of September 25, 1998, the aggregate market value of the Registrant's
voting stock held by nonaffiliates of the Registrant, based on the closing price
for the Registrant's Class A Common Stock in The Nasdaq Stock Market on such
date, was $729,071. This calculation does not reflect a determination that
certain persons are affiliates of the Registrant for any other purposes.
The number of shares of Class A Common Stock outstanding on September 25,
1998 was 3,832,411. The number of shares of Class B Common Stock outstanding on
September 25, 1998 was 1,159,500.
Part III of this Form 10-KSB incorporates by reference information from the
Registrant's proxy statement with respect to the 1998 Annual Meeting of
Stockholders.
Transitional Small Business Disclosure Format (check one): Yes No X .
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TABLE OF CONTENTS
Page
PART I. ........................................................... 3
ITEM 1. DESCRIPTION OF BUSINESS........................... 3
ITEM 2. DESCRIPTION OF PROPERTY........................... 7
ITEM 3. LEGAL PROCEEDINGS................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................... 7
PART II. ........................................................... 7
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCK
MATTERS........................................... 7
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION................................. 8
ITEM 7. FINANCIAL STATEMENTS.............................. 14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............... 14
PART III. ............................................................ 14
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT............................... 14
ITEM 10. EXECUTIVE COMPENSATION............................ 14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................... 14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...................................... 14
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................. 15
SIGNATURES .................................................. 17
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company
Prior to June 30, 1998, Meadowbrook Rehabilitation Group, Inc. (together
with its subsidiaries, the "Company" or "Meadowbrook"), provided outpatient,
home health, and traditional acute, sub-acute and post-acute comprehensive
rehabilitation services. Since the beginning of the fiscal year ended June 30,
1997 ("Fiscal 1997"), and as a result of poor operating results and poor
prospects for growth in their respective markets, the Company's Board of
Directors began to sell its healthcare operating assets. As of June 30, 1998,
the Company's assets consisted mainly of cash and accounts receivable.
On September 14, 1998, the Company acquired Cambio Networks, Inc.
("Cambio"), pursuant to an Agreement and Plan of Merger, dated as of April 3,
1998, as amended by the Agreement of Amendment, dated as of July 27, 1998
(collectively, the "Agreement"). Under the terms of the Agreement, Cambio's
shareholders received an aggregate of 1,238,842 shares of the Company's Class A
Common Stock representing approximately 32.3% of the outstanding Class A and
Class B Common Stock. From the date of the acquisition, the Company's operations
have consisted solely of the operations of Cambio, which is a wholly-owned
subsidiary of the Company.
The Company provides products and services that provide network
documentation, network inventory and equipment provisioning functions for large
enterprise networks and telecommunication enterprise networks. The Company's
products and services are designed to enhance network operations support and
reduce network-related costs associated with a variety of business needs
including network changes, relocations, mergers and acquisitions, network
outsourcing, backup and disaster recovery planning. Network documentation is an
essential corporate information system that allows network support professionals
to create, maintain and access a centralized model of the entire network, its
components and their relationships. The Company also provides a broad range of
network integration, consulting, training and implementation services and Year
2000 solutions.
The Company was incorporated in 1986. The Company's finance and accounting
office is located at 2000 Powell Street, Suite 1203, Emeryville, California
94608, and its telephone number is (510) 420-0900.
Strategy
Building on its established presence as a supplier of operational and
network support systems for telecommunications service providers and enterprise
networks, the Company seeks to become a leader in the industry. The Company
intends to focus upon specific market segments and provide complete network
solutions for its customers by continuing its product development, customization
and implementation services.
Products and Services
The Company provides products and services that provide network
documentation, network inventory, and equipment provisioning functions for large
enterprise networks and telecommunication enterprise networks.
netRunner(TM). netRunner is the Company's newest product offering and is
considered the Company's flagship product. It provides the user with the ability
to create and maintain a data model that represents all of the equipment,
physical connections, and circuit connections used to implement a global
enterprise network. netRunner provides many different ways to view and maintain
network physical equipment information both graphically and in GUI forms.
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netRunner also models essential relationships such as location and connectivity.
All information created and maintained by netRunner is stored in a central
repository available to network operations personnel for planning, operating,
isolating faults, and repairing large complex networks. The Company jointly owns
the rights to source code for netRunner pursuant to a Source Code Rights
Transfer and License Agreement between the Company and Phifer Consulting Group,
Inc., dated July 1, 1998.
The netRunner product line has four modules, three of which are already
operational in customer installations. The netRunner equipment provisioning
module provides equipment inventory and provisioning functions. The netRunner
connectivity module provides connectivity functions. The netRunner fiber, cable
and radio module, of which only the fiber optic management function is currently
operational, provides fiber optic, cable and radio frequency management
functions. The netRunner circuit management and provisioning module, which the
Company anticipates will be available by October 1998, will provide circuit
inventory and provisioning functions. Additional modules and extensions of
product functionality are planned for 1998 and 1999 release.
All netRunner products are Windows NT/98/95 based client applications that
connect to Windows or UNIX based database systems that can scale from small
single site installations to multiple site installations that can handle the
needs of all networks supporting a global enterprise.
COMMAND. COMMAND is the Company's oldest product offering. COMMAND was
developed as a UNIX based client and database in the late 1980s. COMMAND is an
integrated database with proprietary graphics technology to provide graphical
views of a network. In 1997, the Company released COMMAND Version 5.0, which
added Windows NT/95 client products with GUI data forms for ease of data entry
and maintenance.
The COMMAND product line has six modules, all of which are operational in
customer installations. COMMAND Server is a Sun or Hewlett Packard UNIX based
server software product providing data access services from a central database
repository to the COMMAND Administrator, COMMAND Technician, COMMAND for
Windows, COMMAND API Gateway and Integration, and COMMAND View for Windows
client products.
The COMMAND Administrator client product provides data modeling functions,
data entry and maintenance functions, and graphical and form based views of all
system data on a Sun or Hewlett Packard based UNIX workstation. The COMMAND for
Windows client product provides data entry, data import, and data maintenance
functions with an intuitive user interface designed to increase the productivity
of personnel performing data entry and maintenance. The COMMAND Technician
product provides read-only graphical and form based viewing functions on a Sun
or Hewlett Packard based UNIX workstation. The COMMAND Viewer for Windows client
product provides all of the read-only functions of COMMAND for Windows. The
COMMAND API Gateway and Integration APIs provide integration with network
management systems such as Hewlett Packard OpenView and Hewlett Packard OEMF and
with work ticket systems such as Remedy. A COMMAND system integrated with a
network management system and a work ticket system ties together all of the
systems and information needed to diagnose, isolate, and repair network faults.
Services. The Company provides software and consulting services needed to
install, customize and fully deploy a complete network inventory, operations
systems support or network documentation system. Typical services include
installation, customer specific enhancements, customized development of
extensions to core products, data modeling, and data maintenance. The Company
also provides technical support programs and training programs for all products.
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Marketing and Sales
The Company's customers are large enterprises operating complex networks
that are mission critical to the customer's core business. Customers are in two
primary market segments: enterprises operating network communication centers and
telecommunication service providers.
The Company's products are primarily sold directly to end-user
organizations in North America through the Company's direct sales force.
Internationally, the Company has historically marketed and sold its products
through independent distributors supported by the Company's international sales
and support organization. The Company has realigned its organization to
concentrate marketing and sales into two global business units that address the
Company's two primary markets.
The Company will continue to make its products available to markets outside
North America and expects these sales will provide a significant contribution to
total revenue.
Software Development
The Company's research and development efforts are focused on the needs of
the Company's primary markets: enterprises operating network communication
centers and telecommunications service providers. Within these markets, the
focus is on new application development to meet strategic customer requirements,
enhancement of existing products, software tools for data entry, conversion and
maintenance, migration from existing systems, and integration with complementary
systems.
All of the Company's research and development has been performed in the
United States. The Company intends to continue recruiting and hiring software
developers and to consider acquisition and licensing of software and
technologies that accelerate the development and release of new products.
Competition
Competition in the markets in which the Company participates is intense and
it expects the number of competitors to increase. The Company's continued
development of enhanced network management and operational support systems will
broaden its range of available competing products. Competitors include hardware
manufacturers that have developed software (or obtained software from third
parties) to operate on their hardware. The Company also encounters competition
from a large number of small software developers which sell software or
integrated systems either for specific industries or applications within those
industries.
The telecommunications and enterprise network markets in which the Company
sells its products are relatively new, but highly competitive markets with a
limited number of competitors selling products. Some companies are using their
own internal development resources to automate their engineering and
provisioning processes. A number of these companies have nonetheless become
major customers due to the Company's broad range of advanced products.
The Company believes that in order to maintain and improve its competitive
position, it must continue to offer comprehensive services that help customers
effectively implement a complete, integrated software solution by providing a
full range of industry-leading consulting, integration, training and customer
support services. The timely delivery of flexible, cost effective solutions for
the growing dynamic marketplace will continue to be the competitive focus of the
Company.
The principal competition currently faced by the Company in the
telecommunications service provider market is the customer's development of
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in-house solutions. In the enterprise network market, the Company's principal
North American competitors are Architel Corporation, Visionael, Inc., customer
care providers attempting to expand into asset management and other "back
office" functions. Additional competition in all of the Company's markets comes
from Europe and Japan where a number of companies have developed or are
developing software and integrated systems products which may compete with the
Company's products.
Proprietary Rights
The Company relies on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and licensing arrangements to establish
and protect its proprietary rights. Presently, the Company has no patents, no
patent applications on file, and does not intend to file patent applications in
the future. As part of its confidentiality procedures, the Company generally
enters into non-disclosure agreements with its employees, distributors and
corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. Policing unauthorized use of the Company's products is
difficult and, although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In selling its products, the Company relies on both signed
license agreements and "shrink wrap" licenses that are not signed by licensees
and, therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, effective protection of intellectual property rights is unavailable or
limited in certain foreign countries. There can be no assurance that the
Company's protection of its proprietary rights, will be adequate or that the
Company's competitors will not independently develop similar technology,
duplicate the Company's products or design around any of the Company's
intellectual property rights.
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim such infringement by the Company with respect to current or
future products. The Company expects that software product developers will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows and the functionality of products in the
industry segment overlaps.
The Company jointly owns the rights to source code for netRunner pursuant
to a Source Code Rights Transfer and License Agreement between the Company and
Phifer Consulting Group, Inc., dated July 1, 1998.
Employees
As of September 25, 1998, the Company had 38 full time employees,
consisting of 12 in customer service and engineering, 12 in sales and marketing,
12 in general and administrative functions (4 of which will terminate their
employment with the Company as the assimilation of the Cambio acquisition is
completed), and two in general and administrative functions pursuing the
collection of receivables and monitoring the closing process of the healthcare
operations. The Company's future performance depends to a significant degree
upon the continued service of its key members of management, as well as
marketing, sales, consulting and product development personnel, none of whom are
bound by an employment contract, and its ability to attract and retain highly
skilled personnel in these areas. Competition for such personnel is intense, and
there can be no assurance that the Company can retain its key employees or that
it will be successful in attracting, assimilating and retaining such personnel
in the future. None of the Company's employees are represented by a labor union.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases all of its properties. The Company maintains its finance
and accounting office in Emeryville, California and its corporate office in
Dallas, Texas. The Company has engineering/development and support groups
located in Bellevue, Washington and El Paso, Texas. In addition, the Company has
sales offices in Parsippany, NJ; in the United Kingdom and in Egypt. The Company
believes that its existing facilities are adequate to meet its current needs and
in the foreseeable future and that additional space is available at reasonable
rates.
As a result of the closing of its healthcare facilities, the Company is
party to certain property leases expiring at various dates through 2001. The
Company has been able to negotiate early lease termination agreements with some
of its landlords. The associated costs related to the remaining leases through
their termination were accrued in June 1998.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded in the Nasdaq National Market.
On September 25, 1998, the closing sales price of the Class A Common Stock was
$.437 per share.
The table below sets forth the quarterly high and low closing sales prices
for the Class A Common Stock in the period from July 1, 1996 through June 30,
1998 (giving effect to the three-for-two stock split reflected on April 22, 1998
as if it had occurred on July 1, 1996):
Fiscal 1997 Fiscal 1998
----------- -----------
Quarter High Low High Low
------- ---- --- ---- ---
1st $1.83 $0.67 $2.16 $1.50
2nd $1.83 $0.92 $1.96 $1.00
3rd $1.21 $1.09 $2.83 $1.66
4th $1.66 $1.25 $2.50 $0.22
The Company has not paid cash dividends in the past and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
As of September 25, 1998, there were 60 holders of record of the Company's
Class A Common Stock and one holder of record of the Company's Class B Common
Stock. There is no public trading market for the Class B Common Stock.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
TRENDS AND RECENT EVENTS
Disposition of Healthcare Operations
Prior to June 30, 1998, the Company provided outpatient, home health, and
traditional acute, sub-acute and post-acute comprehensive rehabilitation
services. Since the beginning of Fiscal 1997, and as a result of poor operating
results and poor prospects for growth in their respective markets, the Company
has sold or closed all of its healthcare operating assets. As of June 30, 1998,
the Company's assets consisted almost exclusively of cash and accounts
receivable.
The termination of the Company's healthcare operations was completed during
the fourth quarter of Fiscal 1998 after its Board of Directors approved the
closure or disposition of its home health agencies in Colorado and Kansas and
physical therapy clinics in Colorado. The closing and/or sale of such operations
was substantially completed on June 30, 1998.
Home health agencies have traditionally received Medicare reimbursements
based on actual reasonable allowable costs subject to per visit limitations. As
a result of regulations adopted by the Health Care Financing Administration
("HCFA"), effective July 1, 1998, such reimbursements were subject to new
aggregate annual per-beneficiary limitations. The decision to close its
healthcare operations was prompted by the receipt of Medicare's notice to the
Company of the new per-beneficiary cost limits for each of its locations. These
reimbursement amounts fell far below the Company's per-beneficiary operating
expense. In order for the Company to decrease its operating losses and be able
to retain as much capital as possible for its acquisition strategy, the Company
decided to dispose of its healthcare operations.
The estimated loss on the disposition of these facilities reflected in the
Company's statements of operations for the year ended June 30, 1998 ("Fiscal
1998") includes the writedown of property and equipment to market value, the
writeoff of goodwill, closedown expenses and the operating losses through the
disposition date.
Recent Acquisition of Cambio Networks, Inc.
On September 14, 1998, the Company acquired Cambio, pursuant to an
Agreement and Plan of Merger, dated as of April 3, 1998, as amended by the
Agreement of Amendment, dated as of July 27, 1998 (collectively, the
"Agreement"). Under the terms of the Agreement, Cambio's shareholders received
an aggregate 1,238,842 of shares of the Company's Class A Common Stock
representing approximately 32.3% of the outstanding Class A and Class B Common
Stock. From the date of the acquisition, the Company's operations consist solely
of the operations of Cambio, a wholly-owned subsidiary of the Company.
Accordingly, the Company's historical results of operations will not be
comparable to its future operating results.
Potential Ineligibility for Continued Listing on Nasdaq
The Company's Class A Common Stock is currently quoted on the Nasdaq
National Market. On February 23, 1998, the Nasdaq National Market adopted new
quantitative and qualitative requirements, as set forth under NASD Marketplace
Rule 4450, which issuers are required to meet in order to maintain their
listings. The Company has been notified by Nasdaq that it does not comply with
the public float and market value of public float requirements. On June 1, 1998,
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Nasdaq issued a delisting letter identifying the review procedures available to
the Company. The Company has appealed the delisting decision and a hearing was
held on July 30, 1998. At such hearing, the Company requested that the Company's
Class A Common Stock be quoted on the Nasdaq Small Cap Market. To be eligible
for continued listing on the Nasdaq Small Cap Market, the Company must meet the
following requirements: (i) a minimum bid price of $1.00 per share, and (ii) net
tangible assets of at least $2,000,000, or (iii) a market capitalization of
$35,000,000, or (iv) net income in at least two of the last three years of
$500,000 and a public float of at least 500,000 shares with a market value of at
least $1,000,000. As of the date of this Report, the Company meets the continued
listing requirements for the Nasdaq SmallCap Market except for the minimum bid
price. In addition, Nasdaq has indicated to the Company that it is considering
whether the Company should be required to meet the initial listing requirements
for the Nasdaq SmallCap Market because the nature of its business has changed.
Such initial listing requirements are substantially more stringent than the
requirements for continued listing and the Company will not be able to meet
them. There can be no assurance that the Company will be able to meet the
requirements for continued listing on the Nasdaq SmallCap Market with respect to
the Company's Class A Common Stock. If the Company fails to maintain a Nasdaq
National Market listing or fails to obtain a listing on the Nasdaq Small Cap
Market, the Company's securities will likely be traded on the OTC Bulletin
Board. As a result, the market value of the Company's Class A Common Stock would
likely decline and stockholders likely would find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the Company's
Class A Common Stock.
Forward-looking Statements
In addition to the historical information contained herein, this Form
10-KSB 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-KSB, 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.
RESULTS OF CONTINUING OPERATIONS
For the Years ended June 30, 1998 and June 30, 1997
General and administrative expenses from continuing operations of the
Company consisted of general corporate administration expenses, costs associated
with the Company's reporting and disclosure obligations as a public company, the
collection of receivables, the monitoring and closing process of the healthcare
operations, the search for alternative business strategies and similar items.
These expenses were $1,207,000 and $1,782,000 for the years ended June 30, 1998
("Fiscal 1998") and June 30, 1997 ("Fiscal 1997"), respectively. The decrease in
such expenses from Fiscal 1997 to Fiscal 1998 was principally due to reductions
in personnel and related costs as a result of the discontinuation of the
Company's principal operations.
Interest income in Fiscal 1998 and Fiscal 1997 was approximately $140,000
and $55,000, respectively. The increase in interest income in Fiscal 1998 from
Fiscal 1997 is the result of higher cash balances attributable to the sale of
various of the Company's operating facilities during the latter part of Fiscal
1997 and the beginning of Fiscal 1998. Interest income will likely decrease as
cash is used to fund operating losses.
As a result of the foregoing factors, the Company's loss from continuing
operations was approximately $1,067,000 in Fiscal 1998, as compared to
$1,727,000 in Fiscal 1997.
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RESULTS OF DISCONTINUED OPERATIONS
Year ended June 30, 1998 compared to the Year ended June 30, 1997
The Company's net operating revenues from discontinued operations decreased
67.4% to $6,797,000 for Fiscal 1998, as compared to $20,834,000 for the same
period in the prior fiscal year. The decrease was due primarily to the sale of
the Company's Georgia, Alaska, and Illinois operations during the second and
third quarters of Fiscal 1997, the sale of the Company's Kansas and Florida
operations during the first quarter of Fiscal 1998 and the closing of the
Colorado operations during the fourth quarter of Fiscal 1998. See "Trends and
Recent Events."
Total operating expenses (excluding the (gain) loss on the sale of assets)
from discontinued operations for Fiscal 1998 decreased 61.5% to $8,800,000 from
$22,846,000, during the same period in the prior fiscal year. Salaries and
employee benefits continued to be the primary component of the Company's
expenses from discontinued operations. Salaries and employee benefits decreased
56.0% to $5,813,000 for Fiscal 1998, as compared to $13,222,000 for the same
period in the prior fiscal year. Other expenses from discontinued operations
primarily consisted of professional fees, purchased services, provision for
doubtful accounts, rent expense and other expenses. For Fiscal 1998, the
Company's other expenses from discontinued operations decreased 69.0% to
$2,984,000, as compared to $9,624,000 for the same period in the prior fiscal
year. The decrease resulted primarily from the sale of the Company's Georgia,
Alaska, and Illinois operations during the second and third quarters of Fiscal
1997, the sale of the Company's Kansas and Florida operations during the first
quarter of Fiscal 1998 and the closing of the Colorado operations during the
fourth quarter of Fiscal 1998.
The Company's results from discontinued operations for Fiscal 1998 include
a net gain of $1,771,000 on the sales of its Kansas and Florida operations. The
Company also recorded a charge of $1,563,000 for the disposal of its operations.
As a result of the foregoing factors, the Company's loss from discontinued
operations was approximately $1,798,000 in Fiscal 1998, as compared to
$2,124,000 in Fiscal 1997.
The Company reported a net loss for Fiscal 1998 of $2,865,000, as compared
to a net loss of $3,851,000 for the same for the same period in the prior fiscal
year.
Basic and diluted loss per share was $1.00 for Fiscal 1998 as compared to a
net loss of $1.33 per share for the same period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $2,176,000, compared
to working capital of $4,815,000 at June 30, 1997. The Company had cash and cash
equivalents of $1,324,000 at June 30, 1998, as compared to $2,929,000 at June
30, 1997.
During Fiscal 1998, the Company's operating activities used cash of
$1,155,000, as compared to cash provided by operating activities of $488,000
during the same period in the prior fiscal year. The cash used for operating
activities during Fiscal 1998 is primarily the result of the losses incurred by
the discontinued healthcare operations.
As of June 30, 1998, the Company had net operating loss carryforwards of
approximately $8,500,000. Availability of the Company's net operating loss and
carryforwards if not utilized will expire at various dates through the year
2013.
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Net patient accounts receivable, which excludes amounts due from
intermediaries, was $954,373 at June 30, 1998, as compared to $4,278,756 at June
30, 1997. This 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, the sale of the Company's Kansas and Florida operations during the first
quarter of Fiscal 1998 and the closing of the Colorado operations during the
fourth quarter of Fiscal 1998.
The Company's amount due from Medicare intermediaries of $860,000 at June
30, 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 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. 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 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 June
30, 1998, the Company had repurchased 301,797 shares of its Class A Common Stock
for an aggregate price of $296,349.
As of September 14, 1998, the date of the acquisition of Cambio Networks,
Inc. by the Company, the Company had loaned Cambio $1,575,000 to fund its
business activities prior to the closing. Such loans are evidenced by Secured
Bridge Financing Notes bearing interest at 8% per annum.
The Company has no current material commitments for capital expenditures.
The Company also expects to make routine capital improvements to its facilities
in the normal course of business.
The Company's current operations are cash flow negative and as of June 30,
1998, the Company had working capital of $2,176,000. The Company has only a
limited amount of working capital. Although the Company's management believes
that its expected funds from discontinued operations and currently available
working capital will be sufficient to meet its forecasted short-term cash
commitments, in the future, the Company will need additional capital to fund its
new operations resulting from the Cambio acquisition. There can be no assurance
that capital will be available, or that, if available, it can be obtained on
terms favorable to the Company. If adequate funds are not available, the
Company's liquidity could be impaired, which would have a material adverse
effect on its business.
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.
Other Factors That May Affect Future Operating Results
Accumulated Deficits; Uncertain Profitability. On September 14, 1998, the
Company acquired Cambio. Subsequent to that date, the Company's operations will
consist solely of the operations of Cambio. Cambio has incurred significant net
losses since its inception, and had an accumulated deficit of approximately
$26,998,000 at June 30, 1998. Cambio incurred net losses of $7,466,000 and
$3,175,000 on net revenues of $7,232,000 and $5,515,000 for the years ended
December 31, 1996 and 1997, respectively. There can be no assurance that the
Company will be profitable in any future period. The Company's business will
11
<PAGE>
also subject to the risks inherent in the operation of a new business
enterprise, and there can be no assurance it will be able to successfully
address such risks.
Fluctuating Operating Results. Factors that may contribute to future
fluctuations in the Company's quarterly and annual operating results include,
but are not limited to: (i) development and introduction of new operating
systems and new product development expenses; (ii) introduction or enhancement
of products by the Company; (iii) changes in pricing policies of the Company or
its competitors; (iv) increased competition; (v) technological changes in
computer systems and environments; (vi) the ability of the Company to timely
develop, introduce and market new products; (vii) quality control of products
sold; (viii) market readiness to deploy systems management products for
distributed computing environments; (ix) market acceptance of new products and
product enhancements; (x) customer order deferrals in anticipation of new
products and product enhancements; (xi) the Company's success in expanding its
sales and marketing programs; (xii) personnel changes; (xiii) foreign currency
exchange rates; (xiv) mix of products sold; (xv) acquisition costs; and (xvi)
general economic conditions.
Intense Competition. The markets in which the Company competes are
intensely competitive, highly fragmented and rapidly changing. In order to
compete effectively, the Company will have to enhance current products, enhance
the operability of its products with one another and develop new products in a
timely fashion.
The Company anticipates continued growth in competition in the
telecommunications industry and consequently, the entrance of new competitors
into the software systems market in the future. To maintain and improve its
competitive position, the Company must continue to develop and introduce, in a
timely and cost-effective manner, new product sets, new product features and
services and support that keep the Company competitive with its competitors. The
principal competitive factors in the Company's market are quality, performance,
price, customer support and training, business reputation, and product
attributes such as scalability, compatibility, functionality and acceptance. In
addition, the Company competes with a number of companies that have
substantially greater financial, technical, sales, marketing and other resources
as well as greater name recognition than the Company. As a result, the Company's
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
promotion and sale of their products and services than can the Company. There
can be no assurance that the Company will be able to compete successfully with
its existing competitors or with new competitors.
Risks Associated With International Operations. Historically, international
revenues (from sales outside the United States and Canada) have accounted for a
significant amount of Cambio's total revenues. The Company believes that its
success depends upon continued expansion of its international operations. The
Company currently has sales and service offices in the United Kingdom and Egypt.
International expansion may require the Company to establish additional foreign
offices, hire additional personnel and recruit additional international
resellers. This may require significant management attention and financial
resources and could adversely affect the Company's operating margins. To the
extent the Company is unable to effect these additions efficiently and in a
timely manner, its growth, if any, in international sales will be limited, and
its business, operating results and financial condition could be materially
adversely affected. There can be no assurance that the Company will be able to
maintain or increase international market demand for its products.
International operations subject the Company to a number of risks inherent
in developing products for sale outside of the United States, including the
potential loss of developed technology, imposition of governmental controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing
12
<PAGE>
international operations, cultural differences in the conduct of business,
longer accounts receivable payment cycles, greater difficulty in accounts
receivable collection, unexpected changes in regulatory requirements and royalty
and withholding taxes that restrict the repatriation of earnings, tariffs and
other trade barriers, the burden of complying with a wide variety of foreign
laws, and the risk of foreign currency translation gains and losses. There can
be no assurance that any of the factors described herein will not have a
material adverse effect on the Company's future international sales and
operations and, consequently, its business, operating results and financial
condition.
Reliance on Significant Customers. Historically, Cambio has generated a
significant portion of its total revenues from a limited number of customers,
some of which have exceeded 10% of revenues. This concentration of customers can
cause the Company's revenues and earnings to fluctuate from quarter to quarter
based on these customers' requirements and the timing of their orders. Although
the Company believes it has good relationships with its largest customers and
has in the past received a substantial portion of its revenues from repeat
business with established customers, none of the Company's major customers has
any obligation to purchase additional products or services, and these customers
generally have acquired fully-paid licenses to their installed systems.
Therefore, there can be no assurance that any of the Company's major customers
will continue to purchase new systems, systems enhancements and services in
amounts similar to previous years. A reduction, delay or cancellation in orders
from any of its major customers would have a material adverse effect on the
Company's results of operations and financial condition. In addition, the
acquisition by a third party of one of the Company's major customers could
result in the loss of that customer and have a material adverse effect on the
Company's results of operations and financial condition.
Rapid Technological Change and Requirement for Frequent Product
Transitions. The market for the Company's products is intensely competitive,
highly fragmented and characterized by rapid technological developments,
evolving industry standards and rapid changes in customer requirements. The
introduction of products embodying new technologies, the emergence of new
industry standards or changes in customer requirements could render the
Company's existing products obsolete and unmarketable. As a result, the
Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements and develop and introduce in
a timely manner, new products that keep pace with technological developments and
emerging industry standards. Customer requirements include, but are not limited
to, product operability and support across distributed and changing
heterogeneous hardware platforms, operating systems, relational databases and
networks. There can be no assurance that the Company's products will achieve
market acceptance or will adequately address the changing needs of the
marketplace or that the Company will be successful in developing and marketing
enhancements to its existing products or new products incorporating new
technology on a timely basis. The Company has in the past experienced delays in
product development, and there can be no assurance that the Company will not
experience further delays in connection with its current product development or
future development activities. If the Company is unable to develop and introduce
new products, or enhancements to existing products, in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, operating results and financial condition will be materially adversely
affected. Because the Company has limited resources, the Company must restrict
its product development efforts and its porting efforts to a relatively small
number of products and operating systems. There can be no assurance that these
efforts will be successful or, even if successful, that any resulting products
or operating systems will achieve market acceptance.
Year 2000 Compliance. The Company is currently evaluating the potential
impact of the Year 2000 difficulties on the processing of date-sensitive
information by the Company's computerized information system. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's computer
13
<PAGE>
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. Based on preliminary information, the costs
of addressing the potential problems are not currently expected to have a
material adverse effect on the Company's financial position, liquidity or
results of operations in future periods. Although most of the software currently
offered by the Company is either designed to be Year 2000 complaint or has been
upgraded to be Year 2000 complaint, the Company still offers some software which
is not Year 2000 complaint. The Company anticipates these software products to
be Year 2000 complaint by the end of 1998. However, if the Company, or its
customers or vendors, are unable to resolve such processing issues in a timely
manner, it could pose a material financial risk. Accordingly, the Company plans
to devote the necessary resources to resolve all significant Year 2000 issues in
a timely manner.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Consolidated Balance Sheet, Consolidated
Statements of Operations, Consolidated Statement of Stockholders' Equity and
Consolidated Statements of Cash Flows, Notes to Consolidated Financial
Statements, and Report of Independent Certified Public Accountants attached to
this Form 10-KSB. See page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information with respect to officers and directors of the Company is
incorporated by reference from the information under the caption "Directors and
Executive Officers of the Registrant" in the Company's definitive proxy
statement for its 1998 Annual Meeting of Stockholders. Information concerning
compliance with Section 16(a) of the Exchange Act is incorporated by reference
from the information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement for its 1998
Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from information under the caption "Executive
Compensation" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's
definitive proxy statement for its 1998 Annual Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Certain
Transactions" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Stockholders.
14
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger, dated April 3, 1998, between the
Registrant, Cambio's majority shareholders and Cambio, filed as
Exhibit 2.1 to the Registrant's current report on Form 8-K dated April
22, 1998 and incorporated herein by reference.
2.2 Agreement of Amendment, dated July 27, 1998, between the Registrant,
Cambio's majority shareholders and Cambio, filed as Annex A to the
Registrant's Joint Information/Consent Solicitation Statement on
Schedule 14C dated August 14, 1998 and incorporated herein by
reference.
2.3 Secured Bridge Financial Note dated April 3, 1998, between the
Registrant and Cambio, filed as Exhibit 2.2 to the Registrant's
current report on Form 8-K dated April 22, 1998 and incorporated
herein by reference.
3.1 Amended and Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (Commission File No. 33-44197) (the "Registration Statement") and
incorporated herein by reference.
3.2 Certificate of Amendment of Restated Certificate of Incorporation
filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996 and incorporated herein by
reference.
3.3 Amended and Restated By-Laws of the Company, filed as Exhibit 3.2 to
the Registration Statement and incorporated herein by reference.
10.1 1994 Stock Incentive Plan of the Company filed as Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1995 and incorporated herein by reference.
21.1 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP (see page 18 of this Form 10-KSB).
23.2 Consent of Arthur Andersen LLP (see page 19 of this Form 10-KSB).
24.1 Power of Attorney (see Page 17 of this Form 10-KSB).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
On April 22, 1998, the Company filed a current report on Form 8-K with
the Securities and Exchange Commission reporting under item 5 that on April
3, 1998 it executed an Agreement and Plan of Merger for the acquisition of
Cambio Networks, Inc.
15
<PAGE>
On June 5, 1998, the Company filed a current report on Form 8-K with
the Securities and Exchange Commission reporting under item 5 that on May
26, 1998 its Board of Directors approved the disposition of all of its
remaining operating healthcare businesses.
On August 10, 1998, the Company filed a current report on Form 8-K
with the Securities and Exchange Commission reporting under item 4 that on
August 6, 1998 its Board of Directors changed form using Arthur Andersen
LLP as its principal independent accountant and appointed Grant Thornton
LLP as its new independent accountant.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: September 25, 1998 MEADOWBROOK REHABILITATION GROUP, INC.
By /s/ HARVEY WM. GLASSER, M.D.
Harvey Wm. Glasser, M.D.
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints HARVEY WM. GLASSER, M.D. his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-KSB and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof..
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ HARVEY WM.GLASSER, M.D. Chairman of the Board, Chief September 25, 1998
- --------------------------- Executive Officer (Principal
Harvey Wm. Glasser, M.D. Executive Officer)
/s/ ALI AL-DAHWI President and Chief Operating September 25, 1998
- -------------------------- Officer
Ali Al-Dahwi
/s/ WM. SAMUEL VEAZEY Vice President of Finance, September 25, 1998
- -------------------------- Chief Financial Officer,
Wm. Samuel Veazey Treasurer and Secretary
(Principal Accounting and
Principal Financial Officer)
/s/ ROBERT RUSH Director September 25, 1998
- -------------------------
Robert Rush
/s/ JOHN MCCRACKEN Director September 25, 1998
- -------------------------
John McCracken
/s/ PHILIP CHAPMAN Director September 25, 1998
- -------------------------
Philip Chapman
/s/ GARI GRIMM Director September 25, 1998
- -------------------------
Gari Grimm
17
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our report included
in this Form 10-KSB into the Company's previously filed Registration Statement
on Form S-8 (File No. 33-50772).
GRANT THORNTON LLP
San Jose, California
September 4, 1998
18
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-KSB into the Company's previously filed
Registration Statement File No. 33-50772.
ARTHUR ANDERSEN LLP
San Francisco, California
September 25, 1998
19
<PAGE>
C O N T E N T S
Page
Reports of Independent Certified Public Accountants.........................F-2
Consolidated Balance Sheet..................................................F-4
Consolidated Statements of Operations.......................................F-5
Consolidated Statement of Stockholders' Equity..............................F-6
Consolidated Statements of Cash Flows.......................................F-7
Notes to Consolidated Financial Statements..................................F-8
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders of
Meadowbrook Rehabilitation Group, Inc.
We have audited the accompanying consolidated balance sheet of Meadowbrook
Rehabilitation Group, Inc. (a Delaware corporation) and subsidiaries as of June
30, 1998, and the related consolidated statement of operations, stockholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Meadowbrook Rehabilitation Group, Inc. and subsidiaries as of June 30, 1998, and
the consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
September 4, 1998, except for Note 7 as to which
the date is September 14, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Meadowbrook Rehabilitation Group, Inc.:
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of Meadowbrook Rehabilitation Group, Inc. (a Delaware
corporation) and subsidiaries for the year ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Meadowbrook Rehabilitation Group, Inc. and subsidiaries as of June 30, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
September 5, 1997 (except with respect to the presentation
of discontinued operations as discussed in Note 1, as
to which the date is September 4, 1998)
F-3
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 1998
ASSETS
Current assets
Cash and cash equivalents .................................. $ 1,324,000
Restricted cash ............................................ 302,000
Net assets of discontinued operations (net receivables
and other assets of $2,319,000 less liabilities
and estimated accrued disposal costs of $1,517,000) .. 802,000
------------
Total current assets .......................... 2,428,000
Property and equipment, net .................................... 23,000
Other receivables .............................................. 875,000
------------
Total assets .................................. $ 3,326,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and notes payable .................... $ 163,000
Accounts payable and accrued liabilities ................... 89,000
------------
Total current liabilities ..................... 252,000
Stockholders' equity
Common stock, $.01 par value -
Class A; 22,500,000 shares authorized; 1,434,069
shares issued and outstanding ........................ 14,000
Class B; 7,500,000 shares authorized; 1,159,500
shares issued and outstanding ........................ 12,000
Paid-in capital ............................................ 17,605,000
Accumulated deficit ........................................ (14,557,000)
------------
Total stockholders' equity .................... 3,074,000
------------
Total liabilities and stockholders' equity .... $ 3,326,000
============
F-4
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Continuing operations
General and administrative expense .............................. $(1,207,000) $(1,782,000)
Interest income ................................................. 140,000 55,000
----------- -----------
Loss from continuing operations .................... (1,067,000) (1,727,000)
Discontinued operations
Loss on disposal of discontinued businesses ..................... (1,563,000) --
Loss from operations of discontinued businesses ................. (235,000) (2,124,000)
----------- -----------
Loss from discontinued operations .................. (1,798,000) (2,124,000)
----------- -----------
NET LOSS ........................................... $(2,865,000) $(3,851,000)
=========== ===========
Basic and diluted net loss per common share - continuing operations . $ (0.37) $ (0.60)
Basic and diluted net loss per common share - discontinued operations $ (0.63) $ (0.73)
----------- -----------
Basic and diluted net loss per common share ......................... $ (1.00) $ (1.33)
=========== ===========
Weighted average shares outstanding ................................. 2,851,893 2,895,366
=========== ===========
</TABLE>
F-5
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
Total
Class A Class B Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------------ ------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 .. 1,735,866 $ 17,000 1,159,500 $ 12,000 $ 17,898,000 $ (7,841,000) $ 10,086,000
Net loss ........... -- -- -- -- -- (3,851,000) (3,851,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1997 . 1,735,866 17,000 1,159,500 12,000 17,898,000 (11,692,000) 6,235,000
Net loss ........... -- -- -- -- -- (2,865,000) (2,865,000)
Redemption of shares (301,797) (3,000) -- -- (293,000) -- (296,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1998 . 1,434,069 $ 14,000 1,159,500 $ 12,000 $ 17,605,000 $(14,557,000) $ 3,074,000
============ ============ ============ ============ ============ ============ ============
</TABLE>
F-6
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30,
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $(2,865,000) $(3,851,000)
Adjustments to reconcile net loss to cash provided (used) by
operations:
Loss from discontinued operations ........................ 1,798,000 2,124,000
Changes in assets and liabilities:
Net assets of discontinued operations .................. (1,397,000) 958,000
Accounts payable and accrued liabilities ............... (43,000) 133,000
----------- -----------
Net cash provided (used) by operations .............. (2,507,000) (636,000)
Cash flows from investing activities:
Additions to property and equipment ........................... -- (231,000)
Discontinued operations, net .................................. 1,352,000 1,124,000
----------- -----------
Net cash provided by investing activities ........... 1,352,000 893,000
Cash flows from financing activities:
Short-term borrowings ......................................... -- 517,000
Payments of short-term borrowings ............................. (143,000) (1,263,000)
Payments of long-term borrowings .............................. (35,000) --
Decrease in cash deposited to secure a loan ................... 24,000 32,000
Payments to minority shareholders ............................. -- (53,000)
Common stock redemptions ...................................... (296,000) --
----------- -----------
Net cash used by financing activities ............... (450,000) (767,000)
----------- -----------
Net decrease in cash and cash equivalents ........... (1,605,000) (510,000)
Cash and cash equivalents, beginning of year ...................... 2,929,000 3,439,000
----------- -----------
Cash and cash equivalents, end of year ............................ $ 1,324,000 $ 2,929,000
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ................................................. $ 19,000 $ 59,000
Income taxes paid ............................................. 10,000 21,000
</TABLE>
F-7
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1998
NOTE 1 - ORGANIZATION AND OPERATIONS
Meadowbrook Rehabilitation Group, Inc. ("Meadowbrook") and its subsidiaries
(collectively, the "Company") have undergone significant operating changes
in fiscal years 1997 and 1998. As of June 30, 1998, the Company has closed
or is in the process of closing all of its operating facilities. The
Company previously provided outpatient rehabilitation services and acute
and sub-acute care in several states.
After considering continued losses and a diminishing market for the
Company's services, the Company's Board of Directors decided in the fourth
quarter of fiscal 1998 to close the Company's remaining operations.
Previously, several of the Company's service locations and units had been
sold or otherwise disposed. All operations had substantially ceased as of
June 30, 1998. The Company's administrative operations are continuing to
pursue the collection of receivables, monitor the closing process and seek
alternative business strategies.
In connection with the decision to close, the Company recorded a charge
relating to the disposal of the discontinued operations of $1,563,000. This
charge includes the estimated losses on disposal, write-off of tangible and
intangible assets, and accrual for termination benefits and other closing
costs. Prior to the decision to discontinue the operations, several
facilities were sold, resulting in a net gain of $1,771,000 for the year
ended June 30, 1998. These facilities were sold for cash and notes
amounting to $2,126,000. Prior years' consolidated financial statements and
notes have been restated to reflect the discontinued operations.
At June 30, 1998, net assets of discontinued operations consist of the
following:
Receivables............................................. $ 2,166,000
Other current assets.................................... 153,000
Trade Payables and accrued liabilities.................. (379,000)
Estimated accrued disposal costs........................ (1,138,000)
-------------
$ 802,000
=============
Results of discontinued operations for 1998 and 1997 are as follows:
1998 1997
------------ ------------
Net revenues ........................... $ 6,797,000 $ 20,834,000
Net expenses ........................... (7,032,000) (22,958,000)
------------ ------------
Net loss from operations of
discontinued businesses ............ $ (235,000) $ (2,124,000)
============ ============
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
-------------
The consolidated financial statements include the accounts of Meadowbrook
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash, Cash Equivalents and Restricted Cash
------------------------------------------
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. Restricted cash
represents amounts held by the financial institution as security on the
Company's credit facility and third party debt guaranteed by the Company.
The Company retains a security interest in certain real property for this
guarantee.
F-8
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition and Receivables
-----------------------------------
Payments for services rendered to private payors and patients covered by
commercial insurance were generally negotiated at amounts lower than
standard rates. Payments for services rendered to patients covered by
Medicare and Medicaid were generally at lower than standard rates.
Allowances were recorded to reflect the difference between standard rates
and expected reimbursement, so that patient accounts receivable were
recorded net of estimated discounts.
The Company recorded additional allowances for uncollectible receivables
that reflected the best judgment of management as to the ultimate
collectibility of accounts receivable. As of June 30, 1998, the allowance
for uncollectible accounts amounted to $843,000. However, the nature of the
reimbursement process, as well as the sale and closure of the Company's
facilities, makes these judgments difficult and actual reimbursement could
vary significantly from these estimates.
Final determination of amounts receivable or payable under the Medicare and
Medicaid programs is subject to audit or review by the respective
administrative agencies. Provisions have been recorded for estimated
adjustments.
Furniture and Equipment and Depreciation
----------------------------------------
Furniture and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method based on estimated useful lives
that range from 3 to 15 years. All leasehold improvements were written off
in connection with discontinued operations.
Goodwill and Other Intangible Assets
------------------------------------
Goodwill and other intangible assets were recorded in connection with
acquisitions made in prior years. These amounts were written off in
connection with discontinued operations.
Fair Value of Financial Instruments
-----------------------------------
The fair value of cash, accounts receivable and trade payables approximate
carrying value due to the short term nature of such instruments. The fair
value of obligations to financial institutions approximates carrying value
based on terms available for similar instruments. The fair value of notes
payable to individuals is not determinable.
Recent Accounting Pronouncements
--------------------------------
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting comprehensive
income and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains/losses on available-for-sale
securities. The disclosure prescribed by SFAS No. 130 must be made
beginning with the first quarter of 1999. The Company does not expect this
pronouncement to have any effect on its financial reporting.
F-9
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The FASB also has issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement establishes standards
for the way companies report information about operating segments in
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Company has not yet determined the effect, if any, of adopting this new
standard. The disclosures prescribed by SFAS No. 131 will be effective for
the year ending June 30, 1999.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 3 - SHORT-TERM BORROWINGS AND NOTES PAYABLE
The Company has notes payable of $163,000 of which $30,000 relates to
borrowings from a bank under a credit facility. These notes are payable in
varying installments at an average interest rate of 8.6%.
NOTE 4 - STOCKHOLDERS' EQUITY
Common Stock
------------
The Company has Class A and Class B Common Stock. Class A Common Stock
includes the same rights as Class B Common Stock in all respects except for
the following:
Class B Common Stock has ten votes per share and Class A Common Stock
has one vote per share.
Class B Common Stock is convertible 1 for 1 into Class A Common Stock
at any time at the option of the holder.
Class B Common Stock automatically converts to Class A Common Stock
when Class B Common Stock represents less than 12.5% of the total
number of votes entitled to be cast in the election of directors.
No additional shares of Class B Common Stock will be issued without
prior approval of the Class A Common stockholders except for stock
dividends and stock splits.
F-10
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1998
NOTE 4 - STOCKHOLDERS' EQUITY (continued)
Stock Dividend
--------------
In April 1998, the Company effected a three for two stock split paid as a
dividend in the form of shares at the rate of one share for every two
shares of stock owned at the date of reward. The Company has retroactively
reflected the stock dividend in the financial statements for all periods
presented.
Stock Plan
----------
The 1994 Stock Incentive Plan (the "Plan") provided for the grant of
incentive stock options. Options granted under the Plan generally vest
within three years and terminate ten years from the date of grant.
Stock option activity is summarized as follows:
Weighted
Average
Exercise
Price
Shares Per Share
----------- -----------
Balance at June 30, 1996 ........ 230,000 $ 4.31
Granted...................... 10,000 1.25
Exercised.................... - -
Cancelled ................... (100,000) 3.32
----------- -----------
Balance at June 30, 1997......... 140,000 5.02
Granted...................... 5,000 1.96
Exercised.................... - -
Cancelled ................... (115,000) 3.87
------------ -----------
Balance at June 30, 1998......... 30,000 $ 2.73
=========== ===========
The following table summarizes information about stock options outstanding
as of June 30, 1998:
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Price Outstanding Price Term Exercisable Price
----- ----------- ----- ---- ----------- -----
$1.33 - $4.25 30,000 $2.73 8 22,500 $3.04
F-11
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1998
NOTE 4 - STOCKHOLDERS' EQUITY (continued)
The following table depicts the Company's pro forma results had
compensation expense for employee stock options been determined based on
the fair value at the grant dates as prescribed in SFAS No. 123:
1998 1997
-------------- -------------
Net loss applicable to common shareholders
As reported............................ $ (2,865,000) $ (3,851,000)
Pro forma ............................. (2,875,000) (3,863,000)
Basic and diluted net loss per share
As reported............................ $ (1.00) $ (1.33)
Pro forma ............................. (1.01) (1.33)
The fair value of each option grant was determined using the Black-Scholes
model. The weighted average fair value of options granted to employees was
$1.83 and $2.88 for 1997 and 1998, respectively. The following weighted
average assumptions were used to perform the calculations: expected life of
5 years; interest rate of 6%; volatility of 200%; and no dividend yield.
The pro forma disclosures above may not be representative of pro forma
effects on reported financial results for future years.
NOTE 5 - INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No.
109 deferred taxes are provided using an asset and liability method using
current tax rates. A valuation allowance is recorded when, in the opinion
of management, realization of the net asset is not probable. The Company
increased the valuation allowance by $1,203,000 and $928,000 in 1998 and
1997. No provision for taxes was made in 1997 or 1998 due to the losses in
each year.
The following table reconciles the differences between the effective tax
rate and the federal statutory rate:
1998 1997
---------- ---------
Federal statutory rate......................... (34.0)% (34.0)%
State taxes, net of federal effects............ (5.0) (3.0)
Permanent differences.......................... - 16.0
Net operating losses........................... 39.0 24.0
Other.......................................... - (3.0)
---------- ---------
- % - %
========== ==========
F-12
<PAGE>
Meadowbrook Rehabilitation Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1998
NOTE 5 - INCOME TAXES (continued)
Deferred income taxes are comprised of the following at June 30, 1998:
Accruals not currently deductible.................... $ 676,000
Tax loss carry forwards.............................. 3,322,000
----------
Net deferred income tax assets....................... 3,998,000
Less valuation allowance............................. (3,998,000)
----------
Net deferred income tax asset..................... $ --
==========
At June 30, 1998, the Company has net tax loss carry forwards of
approximately $8,500,000 available to offset future federal taxable income.
These losses expire on various dates through June 2013.
NOTE 6 - RELATED PARTY TRANSACTIONS
In prior years, the Company entered into certain transactions with parties
that are related by common ownership or control. The Company has leased in
the past certain facilities from the majority stockholder of the Company.
Rental expense on these leases was $30,000 and $382,000 for 1998 and 1997.
As of June 30, 1998, no related party leases exist.
NOTE 7 - BUSINESS ACQUISITIONS
On September 14, 1998, the Company acquired all of the outstanding shares
of stock of Cambio, Inc. ("Cambio"), a software development company in
exchange for 32.3% of the outstanding Meadowbrook shares. This acquisition
will be accounted for as a purchase.
Cambio provides products and services that provide network documentation,
network inventory and equipment provisioning functions for large enterprise
networks and telecommunication enterprise networks. Cambio's products and
services are designed to enhance network operations support and reduce
network-related costs associated with a variety of business needs including
network changes, relocations, mergers and acquisitions, network
outsourcing, backup and disaster recovery planning. Network documentation
is an essential corporate information system that allows network support
professionals to create, maintain and access a centralized model of the
entire network, its components and their relationships. Cambio also
provides a broad range of network integration, consulting, training and
implementation services and Year 2000 solutions.
At June 30, 1998, the Company had advanced to Cambio $875,000 for working
capital purposes. This amount is shown in the balance sheet as Other
Receivables.
F-13
Schedule 21.1
Corporate Office:
Meadowbrook Rehabilitation Group, Inc.
Incorporated under the laws of the State of Delaware
Operating Subsidiaries of the Registrant:
Cambio Networks, Inc.
Incorporated under the laws of the State of California
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10KSB for Meadowbrook Rehabilitation Group, Inc. for the year ended June
30, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000852164
<NAME> Meadowbrook Rehabilitation Group, Inc.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> Year Year
<FISCAL-YEAR-END> Jun-30-1998 Jun-30-1997
<PERIOD-START> Jul-01-1997 Jul-01-1996
<PERIOD-END> Jun-30-1998 Jun-30-1997
<CASH> 1,324 2,928
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,428 5,262
<PP&E> 23 62
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 3,326 6,733
<CURRENT-LIABILITIES> 252 449
<BONDS> 0 49
0 0
0 0
<COMMON> 26 29
<OTHER-SE> 3,055 6,206
<TOTAL-LIABILITY-AND-EQUITY> 3,326 6,733
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,207 1,782
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 140 55
<INCOME-PRETAX> (1,067) (1,727)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,067) (1,727)
<DISCONTINUED> (1,798) (2,124)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,865) (3,851)
<EPS-PRIMARY> (1.00) (1.33)
<EPS-DILUTED> (1.00) (1.33)
</TABLE>
