UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number
0-19726
MEADOWBROOK REHABILITATION GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3022377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2200 Powell Street, Suite 800, Emeryville, California 94608
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 420-0900
---------------------
Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $0.01 per share
(Title of Class)
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 _____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K [x].
As of September 26, 1996, 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 $2,544,712. 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
26, 1996 was 1,157,244. The number of shares of Class B Common Stock outstanding
on September 26, 1996, was 773,000.
Part III of this Form 10-K incorporated by reference information from
the Registrant's proxy statement with respect to the 1996 Annual Meeting of
Stockholders.
TABLE OF CONTENTS
Page
PART I. .......................................................... 3
ITEM 1. BUSINESS................................................ 3
ITEM 2. PROPERTIES.............................................. 12
ITEM 3. LEGAL PROCEEDINGS....................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................. 14
PART II. .......................................................... 15
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................. 15
ITEM 6. SELECTED FINANCIAL DATA................................. 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 25
PART III. ......................................................... 26
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.............................................. 26
ITEM 11. EXECUTIVE COMPENSATION.................................. 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................ 26
PART IV. ......................................................... 27
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..................................... 27
SIGNATURES ................................................. 30
PART I
ITEM 1 BUSINESS
Meadowbrook Rehabilitation Group, Inc. (together with its subsidiaries, the
"Company" or "Meadowbrook"), has expanded its business lines in recent years in
an effort to diversify and expand its range of rehabilitation services. This
expansion has primarily been in outpatient rehabilitation services including
most recently, the Company's fiscal 1996 acquisitions of three outpatient
rehabilitation clinics in Colorado and one outpatient rehabilitation clinic in
Florida. In addition, in 1996 the Company acquired a therapy staffing company in
Colorado. These acquisitions complement the Company's 1995 acquisition of eleven
outpatient rehabilitation clinics in Colorado, three outpatient rehabilitation
clinics in Alaska and home health agencies with operations in Colorado, New
Mexico and Kansas, as well as the fiscal 1994 acquisition of outpatient
rehabilitation clinics in Florida. All of the Company's outpatient
rehabilitation clinics specialize in sports, industrial and general
rehabilitation.
The Company's recent focus on development of its outpatient rehabilitation
business reflects its view that the outpatient rehabilitation business has
stronger prospects for long-term growth than the Company's traditional acute,
subacute and post-acute business. Over the past few years, the Company has
closed several facilities in its traditional line of business and is currently
considering divestiture of additional such facilities. In addition, the
Company's Board of Directors is in the process of evaluating the Company's
overall strategic direction and alternatives. The alternatives under
consideration by the Board include, among other things, a merger or other
business combination transaction or sales of assets. There can be no assurance
that any such alternatives will be available on favorable terms, if at all.
The Company segregates its business into two product lines: (i) outpatient
rehabilitation and home health services; and (ii) its traditional acute,
subacute and post-acute comprehensive rehabilitation services. The Company's
outpatient rehabilitation business comprised 40% of the Company's fiscal 1996
net operating revenues while the traditional business represented 60%. A
description of each of the Company's business lines is provided below.
See Item 7., Management's Discussion and Analysis of Financial Condition
and Results of Operations, for further discussion of certain trends, events and
risks affecting the Company's business.
Industry Background
Medical rehabilitation is the process of restoring individuals disabled by
disease or injury to their optimal level of physical, cognitive and social
functioning. Rehabilitation services can be segmented into four types of
programs: acute, subacute, post-acute and outpatient. Acute rehabilitation care
is usually provided in rehabilitation units of medical/surgical hospitals or
acute rehabilitation hospitals. In general, patients in acute rehabilitation
programs are persons who require at least three hours of therapy each day and
continue to show progress as a result of this therapy. Subacute rehabilitation
care is generally provided in dedicated units of skilled nursing facilities
("SNFs") or medical/surgical hospitals to patients who may not meet the acute
industry standard or whose course of recovery is slower. In many cases, the
therapy and nursing care provided in the subacute setting are substantially
equivalent to that provided in an acute care setting. Patients who demonstrate
moderate independence in activities of daily living may be treated in a
post-acute program, such as a transitional living center ("TLC") or day
treatment clinic. Outpatient rehabilitation services include nursing care and
physical, occupational and speech/language therapy and social services provided
in a clinic environment or in the patient's home.
Outpatient Rehabilitation and Home Health Services
General. At June 30, 1996, the Company owned or had management contracts to
operate eight outpatient rehabilitation clinics in Jacksonville, St. Augustine,
Palm Coast and Palatka, Florida and in Moultrie, Georgia. During fiscal 1996 the
Company acquired an outpatient clinic in Ormond Beach, Florida. The Company
opened two outpatient rehabilitation clinics in Daytona Beach and St. Augustine,
Florida. 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
also acquired the assets of two outpatient rehabilitation clinics in Pueblo and
Colorado City, Colorado and a therapy staffing company and outpatient
rehabilitation clinic in Colorado Springs, Colorado.
The Company entered the outpatient rehabilitation and home health
businesses based on its experience in the acute, subacute and post-acute
industry where it experienced a growing trend toward early discharges of
patients from acute and subacute facilities. Many of these patients have not
received the intensity of services that may be necessary for them to achieve a
full recovery from their diseases, disorders, injuries or other traumatic
conditions. As a result, the Company believes that there is a continuing need
for outpatient rehabilitation services.
The Company believes the outpatient rehabilitation market will continue to
grow primarily as the result of (i) the recognition of the cost-effectiveness of
rehabilitation; (ii) the increased acceptance of rehabilitation by the
healthcare industry; (iii) increasing emphasis on physical fitness and the
treatment and prevention of sports injuries; (iv) the aging of the population;
and (v) earlier discharge from acute care hospitals to alternate sites. The
Company also believes the outpatient rehabilitation market will continue to
consolidate due to the highly fragmented nature of the market, growing
legislative and payor pressure to prohibit or limit referrals by physicians to
entities in which they have a financial interest, and the preference of managed
care organizations and other third party payors to contract with providers
offering comprehensive, cost-effective outpatient rehabilitation programs on a
regional or national basis.
The Company believes that there are opportunities for expansion of its
outpatient rehabilitation and home health businesses through internal growth in
areas surrounding its current outpatient rehabilitation clinics.
The Company's outpatient operations generally experience a decrease in
revenues in some markets in the summer and holiday periods. In addition, the
Company's outpatient business line has grown and expects to continue to grow
through a limited number of acquisitions, as well as through internal
development. These seasonal trends, as well as the timing, number and
integration of the Company's acquisitions, may cause financial results of
operations to vary on a quarterly basis.
Outpatient Rehabilitation Services. The goals of the Company's outpatient
rehabilitation services are to improve a patient's physical strength and range
of motion, reduce pain, help prevent re-injury and restore the ability to
perform basic activities. The primary services provided collectively are:
Therapy Modalities and Therapeutic Exercises. Each patient receives an
initial evaluation by a licensed therapist and based on that evaluation, an
individualized rehabilitation program is developed for the patient. Patients may
be treated in the Company's outpatient rehabilitation clinics or in nursing
homes where the Company has contracts to provide such services. At these
locations, the Company provides a full range of therapy services, including
physical therapy, occupational therapy, speech/language therapy and social
services. Patients undergo varying courses of therapy dependent upon their
needs. Some patients may only require a few hours of therapy per week for a few
weeks, while others may remain in therapy up to six months or more, depending on
the nature, severity and complexity of their injuries.
Functional Capacity Assessment. The Company also provides functional
capacity assessments to evaluate the physical condition and endurance of a
current or prospective employee to meet the requirements of employment. The
assessment may be used by employers, insurers and other payors to estimate the
extent of rehabilitation treatment needed or as an objective method of
evaluating specific work capacity.
Preventative Services. The Company also provides services designed to
prevent or avoid injuries in the work place. These preventative services, which
may be performed at an employer's work site, include programs to teach employees
proper body mechanics, techniques and detailed analysis of specific job
activities, such as lifting, with the goal of changing how a job is performed to
prevent injuries to employees.
Home Health Services. The Company's home health agencies in Colorado,
Kansas and New Mexico provide nursing care and rehabilitative therapy to
patients in their homes. This care includes medication supervision, cardiac and
respiratory monitoring, oxygen therapy, skin care, injections, colostomy and
catheter care, diet instruction, as well as instruction in home management of
health problems. The home health agencies work in conjunction with the Company's
recently acquired therapy staffing company to provide physical therapy,
occupational therapy, speech/language therapy and social services in the
patient's home. Home health care reduces the length and cost of hospitalization
by making earlier discharge possible and in certain cases prevents admissions to
nursing homes or other institutions. In addition, home health care enables the
patient's family to participate in the care and allows the patient to return
more quickly to the familiar surroundings of the home.
Acute, Subacute and Post-Acute Rehabilitation Services
The Company's traditional business provides comprehensive rehabilitation
services to patients with a wide range of diagnoses, including patients with
neurologic diagnoses resulting from head injury and patients with non-neurologic
diagnoses, including orthopedic, cardiac and pulmonary care, skin/wound care,
post-surgical stabilization and intravenous therapy.
At June 30, 1996, Meadowbrook operated seven such rehabilitation programs
in three metropolitan areas in Kansas, Georgia, and Illinois. The Company
operates one acute, one neurobehavioral, two subacute and three post-acute
programs. The Company's acute program is located at its Gardner, Kansas
facility. The Company's neurobehavioral program is located in Atlanta, Georgia,
in leased space within a 294 bed acute care hospital. The Company's subacute
rehabilitation programs are located in dedicated hospital-based units in
Gardner, Kansas and Lithia Springs, Georgia. Its post-acute programs are offered
in community settings providing residential, day and outpatient services. The
post-acute programs are located in Decatur, Georgia, Gardner, Kansas and Park
Ridge, Illinois.
In its Kansas and Georgia facilities, the Company integrates treatments for
different stages of the rehabilitation process within the same facility or
metropolitan area to provide a continuum of care as patients progress. The
rehabilitation treatment plan for each patient is developed and managed by a
team of professionals, including physiatrists, psychologists, occupational and
physical therapists, speech/language pathologists, social workers,
rehabilitation nurses and case managers. The Company's professionals are
specially trained to treat neurologic and related diagnoses as well as other
medical and rehabilitation diagnoses and are thus able to provide high quality
rehabilitation services to their patient population.
Operating Strategy. The Company's objective is to provide high quality,
comprehensive rehabilitation services to patients who can benefit from and
afford such care. The Company's goal is to provide these services on a
cost-effective basis. The Company's operating strategy in its traditional
business is based on the following:
Patient Profile and Pre-admission Screening. The Company continues to
derive a large amount of its volume in its traditional rehabilitation business
from patients with neurologic diagnoses, particularly those who have suffered
traumatic brain injury. In general, these patients are younger and otherwise
healthier with longer life expectancies than others in need of intensive
rehabilitation services. Because of the extended survival period, the Company
works with both the patient's family and payor to plan a treatment program for
the patient which is designed to restore the patient to his or her optimal level
of functioning.
During the past four fiscal years, the Company has expanded the range of
subacute medical services provided in its facilities. While these patients do
not require an acute medical setting, they do require more treatment than is
available in a traditional nursing home, outpatient or home health program. The
Company is providing subacute medical care to patients with a variety of
diagnoses, including orthopedic, cardiac and pulmonary care, skin/wound care,
post-surgical stabilization and intravenous therapy.
For each type of patient, the planning process begins prior to the
patient's admission. The clinical staff at the facility reviews the clinical
appropriateness of each potential patient and assists the Company's corporate
office in evaluating financial appropriateness.
Specialized Team Approach. The Company's professionals are highly trained
in the rehabilitation of patients with either neurologic diagnoses or subacute
medical needs. By specializing in the treatment of these patients, Company
professionals are able to recognize and respond to their complex needs. The
Company forms interdisciplinary teams comprised of medical professionals,
including attending physicians, physiatrists, rehabilitation nurses, and
professionals in the disciplines of physical and occupational therapy,
speech/language pathology and psychology. The Company believes that its team
approach allows continual communication between the various professionals to
maximize patients' treatments, in contrast to medical/surgical hospitals where
the various therapy departments often operate independently. Not all patients
require the services of the entire interdisciplinary team, the Company
incorporates the services of individual team members as clinically and
financially appropriate.
Continuum of Service. The Company makes available a continuum of services
to patients in its traditional rehabilitation business beginning with discharge
from a medical/surgical or acute rehabilitation hospital through the patient's
re-entry into the community. This approach allows the Company to match the
patient's needs as recovery progresses with the most effective use of the
payor's funds. At the Company's Georgia and Kansas facilities this continuum of
services is provided entirely by the Company. In other markets, the Company
makes or receives referrals to or from other healthcare providers to ensure that
this continuum is provided.
Case Management. The Company's case management system is a key component of
its traditional businesses operating strategy. The goal of case management is to
maximize the patient's progress by providing services appropriate to both the
patient's special needs and financial resources. Case management offers daily
monitoring of the patient's individualized treatment plan. In addition, case
management provides flexibility to tailor services to individual benefit
packages and promotes ongoing communication so that services, costs and lengths
of stay are understood and anticipated by the payor. This process encourages
moving patients to more appropriate, less expensive programs as the patients
progress.
Each of the Company's inpatient facilities has staff case managers to
oversee a limited number of patients. Case managers continuously monitor the
types of services delivered to the patients, as well as the patients' progress.
The case manager also works with the payor to establish a common understanding
of the progress that might be achieved, the anticipated length of time to
achieve the desired outcome and the estimated cost of providing such treatment.
This information is communicated routinely to the payor through written reports,
frequent telephone contact and regularly scheduled case management conferences.
The case manager and the payor work together to determine the most appropriate
level of care for the patient, thus avoiding inappropriate services which could
otherwise arise if the medical or rehabilitation process is not managed
properly.
Psychiatric Partial Hospitalization Program
During fiscal 1995 the Company internally developed, through its wholly
owned subsidiary, Medbrook of Indiana, a psychiatric partial hospitalization
program which provided psychiatric services in long term care facilities. In
June 1995, the Company decided to close the psychiatric partial hospitalization
program. The program was closed on September 22, 1995. The Company's decision to
close the psychiatric partial hospitalization program stems from difficulties in
growing the business and potential Medicare reimbursement issues. As of June 30,
1995, the Company recorded a restructuring charge of $310,000 related to the
closure of the program. At June 30, 1996, the remaining liability for expected
future costs related to the closure was $104,000.
Marketing
The Company's overall marketing strategy is to develop a broad base of
referral sources for all of its services on national, regional and local levels.
In marketing its services, the Company focuses on the high quality of its
services and its geographic presence. The Company also emphasizes its outcome
oriented approach to rehabilitation, the goal of which is to return the patient
to the community.
On a national level, the Company targets major payors such as insurance
companies, large preferred provider organizations ("PPOs") and health
maintenance organizations ("HMOs") for referrals and managed care contracts.
Insurance case managers who have had successful experience with the Company
constitute a major referral source and often control the placement of patients
as well as reimbursement for services. The Company has secured contracts with
numerous insurance companies, and continues to pursue contractual relationships
with payors at the national, regional and local level.
On a regional and local level, the Company targets hospital discharge
planners, regional HMOs, PPOs and other managed care providers and physicians
for referrals. Families are also a source of referrals, often due to information
provided by family support organizations or past experience with the Company.
Sources of Revenues and Reimbursement
The following table sets forth the dollar volume and percentage of the
Company's net operating revenues derived from each product line.
Year Ended
June 30, 1996
-----------------------
(000's) %
Acute, Subacute and Post-Acute Rehabilitation
Services $14,243 60%
Outpatient Rehabilitation and Home Health Services 9,380 40%
--------- -----
Net Operating Revenues ............................ $ 23,623 100%
========= =====
The following table sets forth the percentage of the Company's net
operating revenues from private payors, Medicare and Medicaid for the periods
indicated:
Source Year Ended June 30,
------ --------- -------- ------
1994 1995 1996
--------- -------- ------
Private payors ............ 81% 67% 59%
Medicare .................. 6% 16% 34%
Medicaid................... 13% 17% 7%
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Total ..................... 100% 100% 100%
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Private payors include indemnity insurance carriers, HMOs, workers'
compensation programs and self paying patients. The Company's charges for such
patients are established by the Company, although in the Company's traditional
business it negotiates fixed-rate contractual arrangements with numerous
individual patients and third party payors, including insurance companies and
managed care providers. The Company's Georgia and Kansas facilities have
negotiated fixed-rates based on charges for its Medicaid patients who come from
a number of in-state and out-of-state Medicaid programs under short-term
contracts. The increase in the percentage of net operating revenue received from
Medicare during fiscal 1995 and 1996 reflects the increased number of subacute
and acute Medicare patients at the Company's Gardner, Kansas facility, as well
as effects of the Company's June 30, 1995 Colorado acquisition.
The Company provides inpatient and outpatient services to Medicare patients
at several of its facilities. The Medicare program generally utilizes a
cost-based reimbursement system for rehabilitation services under which
certified SNFs, rehabilitation agencies, and certified outpatient rehabilitation
facilities ("CORFs") are reimbursed for the reasonable direct and indirect
allowable costs incurred in providing routine care, plus a return on equity,
subject to certain cost ceilings. These costs normally include allowances for
administrative and general costs and the cost of property and equipment
(depreciation and interest or rent expense). The Company files annual cost
reports for each cost-reimbursed facility. These cost reports serve as the basis
for determining the prior year's cost settlements and interim per diem payment
rates for the next year.
An exception from such cost ceilings has been sought and granted for fiscal
years 1990 through 1994 for its former subacute facility in San Jose,
California. The Company has applied for an exception from such cost ceilings for
fiscal years 1992 through 1995 for its Gardner, Kansas facility. The Company
intends to file such requests for its Kansas facility for fiscal 1996. These
exceptions are based on atypical costs incurred in providing more intensive
services to its patients than those typically rendered in a SNF. See
"Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources".
Cost-based reimbursement is generally subject to retrospective audit and
adjustment. In conducting annual reviews of a facility's reimbursement rates,
Medicare may determine that payments previously made to a facility on an interim
basis were in excess of allowable costs and may recover any such overpayments by
reducing future payments to the affected facility or other facilities operated
by the same owner. Management believes that it has properly applied the Medicare
payment formula and that any future adjustments arising from such retrospective
audits should have no material adverse effect on the Company.
Competition
The healthcare industry generally, and the outpatient rehabilitation and
subacute medical services sectors in particular, are highly competitive and
subject to continual changes in the manner in which services are provided and in
which providers are selected. Depending upon the geographic market, the Company
may compete with national, regional or local providers.
In the Company's traditional business, it may compete with specialized
rehabilitation service companies, medical/surgical hospitals, acute
rehabilitation hospitals which provide subacute care and other SNFs. The Company
competes with regional and national outpatient rehabilitation providers for
Medicare, Medicaid and private payor patients. The Company also competes with
these entities in the recruitment of rehabilitation nurses, therapists and other
skilled professionals. In each of the Company's business lines many of the
Company's competitors have greater financial and personnel resources than the
Company.
The primary competitive factors in the rehabilitation and subacute medical
industries remain quality of care, responsiveness to the patients' and payors'
needs, durable outcomes and cost-effectiveness.
The Company's business has been effected by the healthcare industry's
emphasis on cost containment and managed care, coupled with increased
competition for national contracts. During the past several years the Company
was adversely effected by the competitive pressure to reduce healthcare costs in
its traditional business. An increase in the number of providers offering
similar services resulted in a shift of patients to other providers, shorter
lengths of stay and lower per diem rates, contributing to the decrease in the
Company's revenues in its traditional business.
Regulation
The healthcare industry is subject to substantial federal, state and local
government regulation. These regulations effect the Company primarily by
requiring licensing or certification of its facilities and controlling
reimbursement for services.
Licensing is regulated by the states, while Medicare certification is
federally administered. Generally, licensing and Medicare certification follow
specific standards and requirements. Compliance is monitored by periodic on-site
inspections by representatives of applicable government agencies.
The Company believes that all the facilities operated by the Company are
duly licensed in accordance with the requirements of federal, state and local
agencies having jurisdiction over its operations. However, there can be no
assurance that changes in present laws or interpretations of current laws would
not have a material adverse effect on the Company. The Company's facilities in
Kansas, Georgia and Illinois are accredited by the Commission on Accreditation
of Rehabilitation Facilities.
Some states have enacted regulations controlling the growth of healthcare
facilities or the operation of new facilities under a health planning statutory
scheme referred to as a Certificate of Need ("CON") program. Whether a CON is
granted depends upon a finding of need by the state health planning agency and a
determination that the applicant is the appropriate provider for the type of
services. Georgia has enacted a statute requiring a CON for facilities providing
transitional living center rehabilitative services to traumatic brain injured
patients. Prior to this legislation, there was no state regulation of such
facilities in Georgia. The Company has received its CON certification to operate
its existing TLC program as a Traumatic Brain Injury Facility under the Georgia
statute. Expansion in Georgia and other states could be adversely effected by
state CON requirements.
Certain state laws prohibit general business corporations from practicing
or holding themselves out as a practitioner of medicine. The Company neither
employs physicians to practice medicine nor holds itself out as a medical
practitioner. Generally, the corporate practice of medicine doctrine has not
been construed by the courts to apply to the type of health professionals
employed by the Company. The Company believes it is in compliance with state
laws prohibiting the corporate practice of medicine. However, there can be no
assurance that changes in interpretations of the laws would not adversely effect
the Company's operations. In any event, the Company believes that it will be
able to adjust its operations to bring the Company in compliance with the law if
so required.
Fifty-five beds in the Company's inpatient facility in Kansas are Medicare
certified as acute rehabilitation beds. The Company's outpatient facility in
Moultrie, Georgia and all of the Company's Colorado outpatient rehabilitation
clinics are certified by Medicare as rehabilitation agencies. The Company's
post-acute facilities in Georgia and Illinois are CORF certified. As part of its
June 30, 1995 acquisition, the Company acquired home health agencies with
several sites which are all certified to participate in Medicare as providers of
home health services. In order to receive Medicare reimbursement, all of the
Company's certified facilities must meet the applicable conditions promulgated
by the United States Department of Health and Human Services relating to
standards of patient care, type of facility, equipment and personnel, and must
comply with all state and local laws, rules and regulations. These facilities
undergo routine Medicare certification surveys. To date, the Company's Medicare
certified facilities have been found to be in compliance with Medicare
requirements. The Company files annual cost reports for its Medicare certified
facilities to determine cost settlements for the most recent fiscal year, and
interim payment rates for the following year.
The Company's amount due from Medicare intermediaries of $332,000 at June
30, 1996, includes amounts the Company anticipates to receive on cost report
settlements for its Colorado home health agencies acquired on June 30, 1995.
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 Gardner, Kansas facility. Medicare reimbursement is generally based
upon reasonable direct and indirect allowable costs incurred in providing
services. At the Company's inpatient facilities these costs are subject to the
RCL. An exception from the RCL has been sought and granted for fiscal years 1990
through 1994 for the Company's former San Jose, California facility. Requests
have been submitted for fiscal years 1992 through 1995 for the Gardner, Kansas
facility. The Company intends to file such request for its Kansas facility for
fiscal 1996. The requests are based upon atypical costs incurred at the Gardner,
Kansas facility, in the treatment of patients who receive substantially more
intensive services than those generally received in SNFs. There can be no
assurance that the Company will collect in full the amounts it has requested or
intends to request, nor can there be an assurance as to the timing of any such
collection. An initial three year "exemption" from the RCL expired in June 1989,
at the San Jose, California facility and in June 1990, at the Gardner, Kansas
facility.
Insurance
The Company maintains professional malpractice liability coverage for each
of its facilities in addition to a claims made policy for its professional and
general liability coverage. The policy covers only claims that are filed within
the policy period. The Company intends to continue to carry such insurance,
although there can be no assurance that coverage will continue to be available
in adequate amounts or at a reasonable cost.
Employees
At June 30, 1995 and 1996, the Company had the following employees:
June 30,
1995 1996
----- -----
Full-Time Employees 375 412
Part-Time Employees 86 73
On-Call Per Diem Employees 94 128
====== ======
Total Employees 555 613
====== ======
Of the full-time employees at June 30, 1995 and 1996, 16 and 15 persons,
respectively, were employed at the Company's headquarters in Emeryville,
California. None of the Company's employees are represented by a labor union,
and the Company is not aware of any current activities to unionize its
employees. Management considers the relationship between the Company and its
employees to be positive. The 42 employees at the Florida outpatient clinics are
employed under a staff leasing arrangement. The employees are under contract
with a staff leasing agency which provides payroll processing services and
comprehensive health and workers' compensation benefits. All other liabilities
related to the employees are assumed by the Company. These employees are
included in the table above.
The closure of the Company's psychiatric partial hospitalization program in
September 1995, resulted in a total reduction of 16 employees. These employees
are included in the June 30, 1995 balances provided above. Severance costs
associated with these reductions were expensed by the Company in fiscal 1995.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Although the Company has a sufficient pool of skilled employees to staff
its facilities at current levels, there is no assurance that in the event that
the Company grows it would be able to meet its needs for such medical
professionals due to a general shortage of qualified therapists.
ITEM 2. PROPERTIES
Operating Facilities
Outpatient Rehabilitation Clinics and Home Health Agencies
As of June 30, 1996, the Company operated eight outpatient clinics in the
greater Jacksonville, Florida area. Four of these clinics were acquired as part
of the Company's fiscal 1994 Florida outpatient clinic acquisition effective
April 30, 1994. During fiscal 1996, the Company opened two outpatient
rehabilitation clinics in St. Augustine and Daytona Beach and acquired an
outpatient rehabilitation clinic in Ormond Beach, Florida. All the clinics are
under lease agreements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Florida Facilities Location
------------------ --------
Beaches Physical Therapy St. Augustine, FL
Body Anew Ormond Beach, FL
Bodymax Physical Therapy of Palatka Palatka, FL
Medbrook Rehab Center Daytona Beach, FL
Medbrook Rehab Center Palm Coast, FL
Medbrook Rehab Center St. Augustine, FL
Medbrook Rehab Center Jacksonville, FL
Moultrie Physical Therapy Moultrie, GA
On June 30, 1995, the Company announced the acquisition of eleven
outpatient rehabilitation clinics in Colorado, three outpatient rehabilitation
clinics in Alaska and a home health agency with ten locations operating in
Colorado, New Mexico and Kansas. During fiscal 1996 the Company closed three of
these outpatient rehabilitation clinics. On January 1, 1996, the Company
acquired the assets of two outpatient rehabilitation clinics in Pueblo and
Colorado City, Colorado. On April 1, 1996, the Company acquired the assets of a
contract therapy business with operations in Pueblo and Colorado Springs,
Colorado and a outpatient rehabilitation clinic in Colorado Springs, Colorado.
All the facilities are under lease agreements.
Colorado & Alaska Clinics Location
------------------------- --------
Medbrook Rehab Center of Alaska Kenai, AK
Medbrook Rehab Center of Alaska North Pole, AK
Medbrook Rehab Center of Alaska Soldotna, AK
Medbrook Rehab Center of Colorado Colorado City, CO
Medbrook Rehab Center of Colorado Colorado Springs, CO
Medbrook Rehab Center of Colorado Florence, CO
Medbrook Rehab Center of Colorado Las Animas, CO
Medbrook Rehab Center of Colorado Monte Vista, CO
Medbrook Rehab Center of Colorado Pueblo, CO
Medbrook Rehab Center of Colorado Rifle, CO
Medbrook Rehab Center of Colorado Trinidad, CO
Medbrook Rehab Center of Colorado Walsenburg, CO
Medbrook Rehab Center of Colorado Woodland Park, CO
Home Health
-----------
Total Home Health, Inc. Florence, CO
Total Home Health, Inc. Holly, CO
Total Home Health, Inc. La Junta, CO
Total Home Health, Inc. Lamar, CO
Total Home Health, Inc. Montrose, CO
Total Home Health, Inc. Pueblo, CO
Total Home Health, Inc. Rocky Ford, CO
Total Home Health, Inc. Trinidad, CO
Total Home Health, Inc. Walsenburg, CO
Total Home Health, Inc. Leoti, KS
Total Home Health, Inc. Raton, NM
The Company cannot calculate a patient utilization percentage for the
Company's outpatient rehabilitation facilities because there is no measurable
capacity for the potential number of outpatient visits.
Acute, Subacute and Post-Acute Programs
As of June 30, 1996, the Company's traditional business operated seven
programs in five cities in Kansas, Georgia, and Illinois.
Set forth below is certain information concerning the Company's facilities
at June 30, 1996. In fiscal 1995 the Company moved its subacute program in
Atlanta, Georgia from the 30 bed unit which the Company leased within a 146 bed
SNF to a 48 bed hospital based SNF unit in Lithia Springs, Georgia which the
Company operates under a management contract.
Acute, Subacute and Post-Acute Facilities Location Capacity (1) Date Opened
- - ----------------------------------------- ------------- ------------ -----------
Acute Rehabilitation:
Meadowbrook Rehabilitation Hospital of Kansas Gardner, KS 63 Beds December 1986
Subacute Rehabilitation Facilities:
Meadowbrook Rehabilitation Hospital of Kansas Gardner, KS 21 Beds December 1986
Meadowbrook of Atlanta Lithia Springs, GA 48 Beds June 1995
Meadowbrook of Atlanta (The Neurobehavioral Ctr.) Atlanta, GA 22 Beds July 1991
Post-Acute, TLCs and Day Treatment Clinics:
Meadowbrook Rehabilitation Hospital of Kansas Gardner, KS 4 Patients July 1987
Meadowbrook of Atlanta Decatur, GA 12 Patients December 1988
Meadowbrook of Chicago Park Ridge, IL 12 Patients May 1990
<FN>
(1) The number of beds shown in the table reflects the number of available beds
(i.e., beds utilized by the facility), which is generally less than the number
of licensed beds. The Company's residential TLC patients, at its Illinois
facility, are housed in apartments and can be expanded through the rental or
acquisition of additional residential units.
(2) The Company moved its Neurobehavioral unit in February 1996, from a 120 bed
medical/surgical hospital in Decatur, Georgia to a 294 bed medical/surgical
hospital in Atlanta, Georgia.
</FN>
The Company's acute and subacute facilities achieved an overall
utilization, based on patient days, of 43% and 46% of available beds (i.e., beds
utilized by the facility) for fiscal 1996 and 1995, respectively. The Company
cannot calculate a patient utilization percentage for the Company's post-acute
facilities because there is no measurable capacity for the number of day
treatment patients which can be served.
The Company leases all of its properties except for the Georgia TLC
facility which the Company owns and the Georgia subacute unit which is operated
under a management agreement. In fiscal 1993, the Company purchased a building
which houses a portion of its Georgia TLC operations. The Company has a lease
for an adjoining facility which houses the remaining portion of its TLC
operations. Such lease expires in February 1997, with an option to renew or
purchase. The Company moved its neurobehavioral facility from a 120 bed
medical/surgical hospital in Decatur, Georgia to a 294 bed medical/surgical
hospital in Atlanta, Georgia. This lease expires in February 1998. The Company's
facility in Gardner, Kansas is leased from the Company's President and Chief
Executive Officer, Harvey Wm. Glasser, M.D. The lease for the Company's
post-acute treatment clinic in Illinois expired in December 1995. The Company
currently occupies this space under a month-to-month rental agreement. The
Company maintains its corporate offices in Emeryville, California under a lease
which expires in October 1996, with a one year renewal option.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Executive Officers of the Registrant
In addition to Harvey Wm. Glasser, M.D., the executive officers of the
Company are as follows:
James F. Murphy joined the Company in March 1994, as Vice President and
Chief Financial Officer. From July 1993 to March 1994, Mr. Murphy served as a
consultant to the Company. From December 1991 to March 1994, Mr. Murphy operated
a financial consulting firm specializing in corporate restructuring. Prior to
that, Mr. Murphy worked in finance for a large real estate developer. Mr. Murphy
worked for Arthur Andersen LLP from 1986 to 1990 and received his C.P.A. in
1989. Mr. Murphy is 34 years old.
Anita M. Macke joined the Company in April 1986, as Vice President and
Director of Program Reimbursement. During fiscal 1996, Ms. Macke assumed the
role of Vice President and Administrator of the Company's Gardner, Kansas
hospital. From June 1983 through April 1986, Ms. Macke was Director of Billing
for New Medico Associates. Ms. Macke is 36 years old.
All officers of the Company serve at the pleasure of the Board of
Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on The NASDAQ Stock Market. On
September 26, 1996, the closing sales price of the Class A Common Stock was
$2.25 per share.
On April 22, 1996, the Restated Certificate of Incorporation of the Company
was amended to effect a one-for-three reverse stock split of the Company's Class
A and Class B Common Stock. The purpose of the reverse stock split was to permit
the Company to remain listed on The NASDAQ Stock Market. In February 1996,
NASDAQ notified the Company that it was reviewing the Company's eligibility for
continued listing. The Company was out of compliance at various times prior to
the reverse stock split with NASDAQ's requirement that it maintain a minimum bid
price of $1.00 per share. The Company believes that it is now in compliance with
all of the requirements for continued inclusion on NASDAQ.
The table below sets forth the quarterly high and low closing sales prices
for the Class A Common Stock in the period from July 1, 1994 through June 30,
1996 (giving effect to the one-for-three reverse stock split as if it had
occurred on July 1, 1994):
Fiscal 1995 Fiscal 1996
Quarter High Low High Low
------- ------ ------ ------ ------
1st $6 $4 7/8 $7 1/2 $6
2nd $6 $3 3/8 $6 $1 1/2
3rd $7 1/2 $5 1/4 $4 1/2 $2 1/4
4th $7 1/2 $5 5/8 $4 1/4 $1 1/2
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 26, 1996, there were 72 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.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended June 30,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
Statements of Operations Data:
Net operating revenues $33,805 $28,650 $18,052 $19,974 $23,623
Non-capital operating expenses:
Salaries and employee benefits 16,550 15,905 11,107 12,036 15,189
Provision for doubtful accounts 974 3,681 1,099 1,371 584
Other non-capital operating expenses 7,638 8,639 6,353 5,821 5,986
--------- ---------- --------- ---------- ---------
Total non-capital operating expenses 25,162 28,225 18,559 19,228 21,759
--------- ---------- --------- ---------- ---------
Capital expenses:
Depreciation and amortization 508 497 479 543 586
Rent 3,096 3,085 2,223 2,351 1,953
Interest expense (income) 227 (201) (193) 26 (114)
--------- ---------- --------- ---------- ---------
Total capital expenses 3,831 3,381 2,509 2,920 2,425
--------- ---------- --------- ---------- ---------
Write-off of intangible assets -- -- -- 1,030 --
Restructuring charges -- 1,041 675 310 --
Settlement of litigation -- -- 1,438 -- --
--------- ---------- --------- ---------- ---------
Total expenses 28,993 32,647 23,181 23,488 24,184
--------- ---------- --------- ---------- ---------
Income (loss) before income taxes 4,812 (3,997) (5,129) (3,514) (561)
Income tax provision (benefit) before
minority interest 1,925 (1,244) (787) (93) --
--------- ---------- --------- ---------- ---------
Net income (loss) before minority interest $2,887 ($2,753) ($4,342) ($3,421) ($561)
Minority interest --- --- 30 108 29
--------- ---------- --------- ---------- ---------
Net income (loss) $2,887 ($2,753) ($4,372) ($3,529) ($590)
========= ========== ========= ========== =========
Net income (loss) per common share $1.70 ($1.42) ($2.26) ($1.82) ($0.31)
Weighted average common shares used in per
common share calculation 1,700 1,943 1,939 1,937 1,930
At June 30,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $19,825 $16,451 $11,889 $7,711 $6,519
Total assets 24,561 23,058 18,587 16,304 14,840
Long-term liabilities and capital lease
obligations 96 129 550 1,074 658
Stockholders' equity 21,444 18,721 14,249 10,677 10,086
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS AND RESULTS OF OPERATIONS
TRENDS AND RECENT EVENTS
Loss History; Liquidity Risks
The Company has incurred significant losses in each of the last four fiscal
years. The Company's future profitability is dependent on a variety of factors,
including without limitation, increased patient census, a reduction in expenses
as a percentage of total operating revenues and the successful integration and
management of the outpatient rehabilitation clinics and home health agencies.
There can be no assurance as to the Company's future profitability.
The Company's recent operating losses and the funding of initial working
capital for its recently acquired Colorado outpatient clinics and home health
agencies have substantially reduced its available working capital. The Company's
working capital has fallen from $7,711,000 at June 30, 1995 to $6,519,000 on
June 30, 1996. In fiscal 1996, the Company's operating activities used cash of
$2,001,000. This amount includes $728,000 withheld at June 30, 1996, by the
Company's intermediary on the basis of amounts due by the previous owner of the
Colorado home health agencies for final settlement of the 1992 through 1995 home
health agencies' cost reports. In addition, cash used for operating activities
includes $1,447,000 of working capital funding for its recently acquired
Colorado operations. While the Company believes that its working capital will be
sufficient to sustain the Company's needs for the next twelve months, the
Company's ability to continue to fund its operations thereafter is dependent on
the Company achieving profitability and positive cash flows from operating
activities. The Company has a $1,000,000 bank line-of-credit which would require
a $500,000 bank deposit if drawn. Otherwise, the Company currently does not have
access to additional capital. There can be no assurance that in the future the
Company will not experience a shortage of available cash necessary to operate
its business.
Consideration of Strategic Alternatives
As a result of the Company's continued losses, the Board of Directors is in
the process of evaluating the Company's strategic direction and alternatives.
The alternatives under consideration by the Board include, among other things, a
merger or other business combination transaction or sales of assets. There can
be no assurance that any such alternatives will be available on favorable terms,
if at all.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the Company's business should not necessarily be limited to
medical rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity, the Company should consider investing proceeds
from any asset sales in non-healthcare businesses. As a result, the nature of
the Company's business could change significantly. Dr. Glasser holds a majority
of the combined voting power of the Company's two classes of common stock and
accordingly has the ability to effect a change in management or to cause or
prevent a significant corporate transaction.
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 results for the year ended June 30, 1996, no cash
payment is required for the twelve months ending June 30, 1996. The additional
cash payments would total $825,000 if the operations collectively achieve the
target earnings thresholds for the twelve months ending June 30, 1997 through
1999.
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 over seeing the repayment of the loan
through the collection of accounts receivable which are being collected on
behalf of the previous owner. At the time of the acquisition, the Company
anticipated that the loan would be repaid based on the accounts receivable
balance then outstanding. The loan balance on June 30, 1996 was $251,000. The
Company did not acquire accounts receivable in connection with the acquisition
and has funded approximately $1,447,000 of working capital for the acquired
operations since the date of acquisition.
In October 1995, the Company was notified by its intermediary that its
Medicare payments for the recently acquired home health agencies were being
withheld to offset amounts due by the previous owner for final settlement of the
home health agencies' cost reports for the years 1992 through 1995. During the
twelve months ending June 30, 1996, the intermediary withheld $728,000 related
to these settlements. This amount is included in other receivables on the
Company's balance sheet. The Company and the previous owner have submitted
appeals to these settlements and are currently awaiting a response from the
intermediary. In the event that the appeals of the prior owner and the Company
are unsuccessful, the Company intends to offset the amounts withheld against any
additional amounts due to the previous owner under the acquisition agreements.
The intermediary resumed making payments to the Company for current charges in
January 1996.
On January 1, 1996, the Company acquired the assets of two outpatient
rehabilitation clinics in Pueblo and Colorado City, Colorado. In connection with
the acquisition, the Company paid $32,500 and became obligated to pay an
additional $32,500. Additionally, the Company assumed liabilities of $75,000.
The net revenues for the acquired operations for the six month period ending
June 30, 1996 were $180,000.
On April 1, 1996, the Company acquired the assets of a contract therapy
business with operations in Pueblo and Colorado Springs, Colorado. The business
provides therapy staffing to hospitals, nursing homes and home health agencies.
In connection with the acquisition, the Company paid $10,000 and assumed
liabilities for leasehold improvements of $62,000.
Florida Outpatient Clinics Acquisition
During fiscal 1994, the Company acquired a majority interest in or obtained
management contracts to operate nine outpatient rehabilitation clinics located
in Jacksonville, Jacksonville Beach, Orange Park, St. Augustine, St. Augustine
Beach, Palm Coast and Palatka, Florida and in Moultrie, Georgia. At closing, the
Company paid $608,000, agreed to reimburse certain selling shareholders for
accounts receivable of the acquired clinics collected after the closing, and
agreed to make additional payments based on the earnings performance of certain
clinics in each year during the three year period ending March 31, 1997.
Subsequent to June 30, 1996, the Company paid $123,000 based on the
earnings performance of certain clinics and $20,000 in interest on deferred
acquisition payments. At June 30, 1996, the Company's remaining liability
resulting from the purchase was $510,000, plus additional payments based on the
earnings performance of certain clinics. Such payments would total $135,000 if
the earnings of such clinics for the twelve months ending March 31, 1997 are
equal to the earnings of such clinics for the base year, the twelve months ended
December 31, 1993.
On October 1, 1994, the Company acquired the minority interest in two of
the outpatient clinics referred to above. In connection with such acquisition,
the Company paid $600,000 and is obligated to pay an additional $150,000 by
September 30, 1996.
On February 1, 1995, the Company acquired an outpatient clinic in Palm
Coast, Florida. At June 30, 1996, the Company had paid $138,000 of the purchase
price and was obligated to pay an additional $122,000 in equal monthly
installments of $3,300 through February 2000.
On May 12, 1995, the new owner of five of the Florida outpatient clinics
managed by the Company advised the Company that its management contracts were
terminated. As a result, during the fourth quarter of fiscal 1995 the Company
recorded a charge of $1,030,000 to write-off intangible assets recorded as part
of the fiscal 1994 acquisition. The charge is classified as a non-operating
expense. The Company does not agree that such contracts may be terminated and
has filed suit to protect its legal rights.
The Company opened two outpatient rehabilitation clinics during the second
quarter of fiscal 1996. The clinics are located in St. Augustine and Daytona
Beach, Florida. The Company also acquired the assets of an outpatient
rehabilitation clinic in Ormond Beach, Florida in June 1996.
Closure of Facilities
Closure of Psychiatric Partial Hospitalization Program
During fiscal year 1995, the Company internally developed, through its
wholly owned subsidiary, Medbrook of Indiana, a psychiatric partial
hospitalization program which provided psychiatric services in long-term care
facilities. In June 1995, the Company decided to close the psychiatric partial
hospitalization program and the program was closed on September 22, 1995. The
Company's decision to close the program was based on difficulties in growing the
business and potential Medicare reimbursement issues. As of June 30, 1995, the
Company recorded a restructuring charge of $310,000 related to the closure of
the program. At June 30, 1996, the remaining liability for expected future costs
related to the closure was $104,000.
Closure of Arlington, Texas Post-Acute Facility
In June 1994, the Company decided to close its post-acute facility in
Arlington, Texas, and the facility was closed on September 30, 1994. The
Arlington facility had experienced increased competition and significant
operating losses and the Company was not optimistic about its long-term
prospects for profitability. The Company recorded a charge of $350,000 during
fiscal 1994 related to the closure of the facility.
Closure of San Jose, California Subacute Facility
During the first quarter of fiscal year 1994, the Company closed its
subacute program in San Jose, California. On December 27, 1994, the Company sold
its lease for the San Jose facility to an investment partnership. The investment
partnership's rent obligation commenced on February 15, 1995. This partnership
in turn subleases the facility to a third party. The Company remains obligated
to make lease payments in the event that the investment partnership defaults on
its obligations under the lease. Because the investment partnership has made
substantial improvements to the facility, the Company does not anticipate such a
default.
Healthcare Reform
President Clinton and others have expressed an intention to continue their
efforts to reform the nation's healthcare system. The principal goal of many of
the proposals are to reduce the rate of increase in national healthcare
expenditures, particularly by cutting the rate of increase in Medicare spending.
The ability of healthcare providers such as the Company to compete successfully
in such an environment may depend on its ability to obtain contracts with
managed care plans. In addition to the national reform proposals, there is
proposed legislation in numerous states. There can be no assurance as to the
ultimate content, timing or effect of any healthcare reform legislation, nor is
it possible, at this time, to estimate the impact of potential legislation on
the Company, which may be material.
RESULTS OF OPERATIONS
The following table sets forth the relationship, as a percentage of net
operating revenues, of certain items included in the Company's consolidated
statements of operations for the periods indicated:
Year ended June 30,
---------------------------------
Statements of Operations Data: 1994 1995 1996
---- ---- ----
Net operating revenues 100.0% 100.0% 100.0%
Non-capital operating expenses:
Salaries and employee benefits 61.5 60.3 64.3
Provision for doubtful accounts 6.1 6.9 2.5
Other non-capital operating expenses 35.2 29.1 25.3
------- ------- ------
Total non-capital operating expenses 102.8 96.3 92.1
------- ------- ------
Capital expenses:
Depreciation and amortization 2.7 2.7 2.5
Rent 12.3 11.8 8.3
Interest (income) expense (1.1) 0.1 (0.5)
------- ------- ------
Total capital expenses 13.9 14.6 10.3
------- ------- ------
Write-off of intangible assets -- 5.2 --
Restructuring charges 3.7 1.6 --
Settlement of litigation 8.0 -- --
------- ------- ------
Total expenses 128.4 117.7 102.4
------- ------- ------
Income (loss) before income taxes (28.4) (17.7) (2.4)
Income tax provision (benefit) before
minority interest (4.4) ( 0.5) --
------- ------- ------
Net (loss) before minority interest (24.0) (17.2) (2.4)
Minority interest 0.2 0.5 0.1
------- ------- ------
Net (loss) (24.2)% (17.7)% (2.5)%
======= ======= ======
Year ended June 30, 1996 Compared to the Year ended June 30, 1995
The Company's net operating revenues increased 18% to $23,623,000 for the
year ended June 30, 1996, as compared to $19,974,000 in the prior fiscal year.
The increase was due primarily to net revenue of $7,127,000 generated by the
Colorado outpatient clinics and home health agency during fiscal 1996, and to
favorable prior year cost report settlements of $603,000 recorded in the second
quarter of fiscal 1996, related to its former San Jose, California facility and
its Gardner, Kansas facility. The comparability of fiscal 1996 and 1995 net
operating revenues was affected by the closure of the Company's psychiatric
partial hospitalization program during the first quarter of fiscal 1996 and the
conversion in June 1995, of the Company's Georgia subacute facility from a
leased unit to a management arrangement, under which the Company's revenue
consists primarily of management fees. Fiscal 1996 net operating revenues also
reflect decreased utilization of the Company's core facilities (i.e. acute,
subacute and post-acute rehabilitation units in Georgia, Illinois and Kansas)
during fiscal 1996. Excluding the Company's Arlington, Texas post-acute facility
which was closed in 1995, the number of patient days in the Company's core
business decreased 7% to 27,014 for the fiscal year ended June 30, 1996, from
28,944 for fiscal 1995.
In the Company's core business, revenue per patient day decreased 7% to
$526 for the year ended June 30, 1996, as compared to $567 for the prior fiscal
year. Fiscal 1996 amounts do not include revenue per patient day at the Georgia
subacute facility, which has been operated by the Company under a management
agreement since June 5, 1995. This decrease is largely due to an increase in the
percentage of Medicare patients served at the Company's Gardner, Kansas
facility.
Total non-capital operating expenses for the year ended June 30, 1996
increased 13% to $21,758,000 from $19,228,000 during the prior fiscal year. This
increase primarily resulted from the acquisition of the Colorado outpatient
clinics and home health agencies. Salaries and employee benefits continue to be
the primary component of the Company's non-capital operating expenses. Salaries
and employee benefits increased 26% to $15,189,000 for the year ended June 30,
1996, as compared to $12,036,000 for the same period in the prior fiscal year.
This increase is largely due to the inclusion of salaries and employee benefits
for the Colorado outpatient clinics and home health agencies. Salaries and
employee benefits as a percentage of net operating revenues increased to 64% for
the year ended June 30, 1996, as compared to 60% in the prior fiscal year.
The Company's other non-capital operating expenses primarily consists of
professional fees, purchased services and other operating expenses. For the year
ended June 30, 1996 other non-capital expenses increased 3% to $5,986,000, as
compared to $5,821,000 for the same period in the prior fiscal year. The
increase is primarily due to the inclusion of other non-capital operating
expenses for the Colorado outpatient clinics and home health agencies. The
provision for doubtful accounts decreased 57% to $584,000 for the year ended
June 30, 1996, from $1,371,000 for the prior fiscal year. The provision for
doubtful accounts as a percentage of net operating revenues was 2.5% for the
year ended June 30, 1996, as compared to 6.9% for the prior fiscal year. The
reduction in the provision is due to lower provision rates for the Company's
outpatient clinics and home health business lines. In addition, the provision
for doubtful accounts for the year ended June 30, 1995 includes a charge of
$700,000 for the write-off of two litigation receivables in which the patients
were unsuccessful in their third party litigation.
Total capital expenses decreased 17% for the year ended June 30, 1996 to
$2,425,000, as compared to $2,920,000 for the prior fiscal year. Rent expense
decreased 17% to $1,953,000 for the year ended June 30, 1996, as compared to
$2,351,000 for the prior fiscal year. The decrease in rent expense is primarily
due to lower rents paid under leases requiring payments on the basis of net
revenue and patient volume at certain facilities, as well as the conversion of
the Company's subacute facility in Georgia to a management contract in June
1995. The Company pays no rent under this management contract. The decreases
were partially offset by rents paid during fiscal 1996 for its Colorado
outpatient clinics and home health agencies.
Net interest income for the year ended June 30, 1996 was $114,000 as
compared to net interest expense of $26,000 for the prior fiscal year. This
increase is due to higher interest earnings during the fiscal 1996 period, as
well as less interest expense on acquisition payments during fiscal 1996.
The Company reported a net loss for the year ended June 30, 1996 of
$590,000 as compared to a net loss of $3,529,000 for the prior fiscal year. The
Company's effective tax rate for fiscal 1995 was a benefit of 3%. The Company
did not record a benefit for the year ended June 30, 1996 because carrybacks of
current losses against previous taxable earnings are no longer available.
Year ended June 30, 1995 Compared to the Year ended June 30, 1994
The Company's net operating revenues increased 11% to $19,974,000 for the
fiscal year ended June 30, 1995, as compared to $18,052,000 in fiscal 1994.
Fiscal 1995 net operating revenues benefited from a full year of operations at
the Florida outpatient clinics acquired in April 1994, and the revenues
generated by the Company's psychiatric partial hospitalization program, which
opened in May 1994. The nine outpatient clinics and the partial psychiatric
hospitalization program contributed net operating revenue of $2,161,000 and
$1,068,000, respectively, for the fiscal year ended June 30, 1995. Fiscal 1995
net operating revenues were adversely effected by the closure of the Arlington,
Texas facility in the first quarter of fiscal 1995. The facility had net
operating revenues of $1,091,000 in fiscal 1994, as compared to $306,000 in
fiscal 1995.
Revenue per patient day in the Company's traditional business decreased 2%
to $567 for the fiscal year ended June 30, 1995, as compared to $577 in the
prior fiscal year. Revenue per patient day was adversely effected by changes in
service mix and competitive pressures to reduce healthcare costs, which resulted
in lower per diem rates. Total patient days in the Company's core facilities
(excluding closed facilities) increased 2% from 28,267 in fiscal 1994 to 28,944
in fiscal 1995.
Total non-capital operating expenses for the fiscal year ended June 30,
1995 increased to $19,228,000 from $18,559,000 in the prior year, reflecting an
increase of approximately 4%. Salaries and employee benefits were the primary
component of the Company's non-capital operating expenses. Salaries and employee
benefits increased 8% to $12,036,000 for the fiscal year ending June 30, 1995,
as compared to $11,107,000 for fiscal 1994. The increase in salaries and
employee benefits resulted from expenses incurred at the outpatient clinics in
Florida and the partial psychiatric hospitalization program. This increase was
partially offset by the closure of the Arlington, Texas facility in the first
quarter of fiscal 1995.
The Company's other non-capital operating expenses for the fiscal year
ended June 30, 1995, decreased 8% from $6,353,000 in fiscal 1994 to $5,821,000
in fiscal 1995. The Company's provision for doubtful accounts increased 25% to
$1,371,000 for the year ended June 30, 1995, from $1,099,000 for fiscal 1994.
The increase was due to a $700,000 write-off of two litigation receivables
during the fourth quarter in which the patients were unsuccessful in their third
party litigation. The provision for doubtful accounts as a percentage of
revenues was 7% for the fiscal year ended June 30, 1995, as compared to 6% for
fiscal 1994. The Company also experienced a 19% decrease in purchased services
from $3,724,000 in fiscal 1994 to $3,023,000 in fiscal 1995. This decrease
reflects a reduction in registry and temporary labor in the Company's core
facilities.
Total capital expenses increased 16% during the fiscal year ended June 30,
1995, to $2,920,000, as compared to $2,509,000 during the prior fiscal year.
Rent expense increased 6% to $2,351,000 for the fiscal year ended June 30, 1995,
as compared to $2,223,000 for the prior fiscal year. The increase in rent
expense resulted from rents paid at the Florida outpatient clinics and the
partial psychiatric hospitalization program. These increases were partially
offset by lower rents paid for certain facilities where the payment is variable
based on net revenue and patient volume.
In fiscal 1995, the Company recorded a charge of $1,030,000 to write-off
intangible assets recorded as part of its fiscal 1994 Florida outpatient clinic
acquisition. See "Trends and Recent Events". In addition, the Company recorded a
restructuring charge of $310,000 related to the closure of its psychiatric
partial hospitalization program. See "Trends and Recent Events".
During fiscal 1994, the Company recorded a charge of $1,438,000 classified
as non-operating expenses for the settlement of the Company's shareholder
litigation.
During fiscal 1994, the Company recorded additional restructuring charges
of $325,000 related to the closure of its San Jose, California facility. Such
charges include additional rent during the subtenant's construction period and
the write-off of idle equipment. In addition, the Company recorded a
restructuring charge of $350,000 related to the closure of its Arlington, Texas
facility. See "Trends and Recent Events".
For fiscal 1995, the Company incurred net interest expense of $26,000, as
compared to net interest income of $193,000 for fiscal 1994. Included in the net
interest expense amount is $132,000 of interest on unpaid principal related to
its fiscal 1994 Florida acquisition. See "Trends and Recent Events".
The Company sustained an after-tax loss for the fiscal year
ended June 30, 1995 of $3,529,000, as compared to a loss of $4,372,000 for the
fiscal year ended June 30, 1994. The Company's effective tax rate decreased from
a benefit of 15% for the fiscal year ended June 30, 1994 to a benefit of 3% for
the fiscal year ended June 30, 1995. The tax benefits in fiscal years 1994 and
1995 were limited by the lack of availability of loss carrybacks in certain
states where the Company files tax returns, as well as limited taxable earnings
in the past to which losses may be applied.
Unaudited Quarterly Results
Set forth below is certain summary information with respect to the
Company's operations for the last eight fiscal quarters
Fiscal 1995 Fiscal 1996
------------------------------------- -------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Statements of Operations Data: (In thousands, except per share data)
Net operating revenues $5,405 $5,405 $5,155 $4,009 $5,579 $6,095 $6,321 $5,628
Income (loss) before income
taxes and minority interest 130 43 (319) (3,368) (563) 105 51 (154)
Net income (loss) 29 17 (235) (3,340) (585) 88 34 (127)
Earnings (loss) per share $0.01 $0.01 ($0.12) ($1.72) ($0.30) $0.05 $0.02 ($0.07)
Average shares outstanding 1,936 1,936 1,937 1,937 1,931 1,930 1,930 1,930
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of $6,519,000, compared
to working capital of $7,711,000 at June 30, 1995. The Company had cash and cash
equivalents of $3,439,000 at June 30, 1996, as compared to $6,307,000 at June
30, 1995. At June 30, 1995, the Company had deposited $500,000 to secure a bank
loan of $900,000 as part of its Colorado outpatient clinic and home health
agencies acquisition. At June 30, 1996, $311,000 of the amount deposited is
classified as restricted cash securing the loan balance of $251,000, as well as
security for the Company's outstanding balance on its line-of-credit. See
"Trends and Recent Events". The Company is administering the repayment of the
loan through the collection of receivables which are being collected on behalf
of the previous owner.
During the fiscal year ended June 30, 1996, the Company's operating
activities used $2,001,000 of available cash resources, as compared to cash
provided for operating activities of $4,075,000 during the same period in the
prior fiscal year. The cash used for operating activities during the year ended
June 30, 1996 primarily reflects funding of working capital for the Company's
Colorado outpatient clinics and home health agencies and amounts necessary to
fund the Company's net operating losses. In addition, this amount includes
amounts withheld by the Company's intermediary on the basis of amounts due by
the previous owner of the Colorado home health agency for final settlement of
the 1992 through 1995 home health agencies' cost reports. Cash provided from
operating activities for the year ended June 30, 1995 included a federal tax
refund of $1,908,000. Cash used for investment activities during the year ended
June 30, 1996 was $1,013,000, as compared to cash used for investment activities
of $1,581,000 during the prior fiscal year.
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $4,739,000 at June 30, 1996, as compared to $4,064,000 at
June 30, 1995. At June 30, 1996, the Company had an allowance for doubtful
accounts of $1,445,000, as compared to $2,001,000 at June 30, 1995. The number
of average days of revenue outstanding, excluding the revenues and receivables
related to litigation patients, was 65 days at June 30, 1996, as compared to 63
days at June 30, 1995.
It has been the Company's practice to admit selected patients who are
seeking monetary recovery in pending litigation with third parties. These
patients are directly obligated to pay the Company for services rendered,
although the timing of collection is determined by the settlement of their
litigation and is beyond the control of the Company. For this reason, liens are
generally placed against pending insurance settlements. Prior to admitting such
patients, the Company and its counsel evaluate the merits of the patient's case,
the anticipated cost of services to be provided and the likelihood of the
patient's successful recovery of damages in litigation. Once the patient is
admitted, the Company and its counsel monitor the status of the litigation.
There can be no assurance, however, that the Company will ultimately be
reimbursed for all the services it provides to such patients. At June 30, 1996,
accounts receivable related to these litigation patients totaled $444,000, as
compared to $642,000 at June 30, 1995. These litigation patient receivables
accounted for an additional 19 and 30 average days revenue outstanding at June
30, 1996 and June 30, 1995, respectively.
The Company's amount due from Medicare intermediaries of $332,000 at June
30, 1996 includes amounts the Company anticipates to receive on cost report
settlements for its Colorado home health agencies acquired on June 30, 1995.
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 Gardner, Kansas facility. Medicare reimbursement is generally based
upon reasonable direct and indirect allowable costs incurred in providing
services. At the Company's inpatient facilities these costs are subject to the
RCL. An exception from the RCL has been sought and granted for fiscal years 1990
through 1994 for the Company's former San Jose, California facility. Requests
have been submitted for fiscal years 1992 through 1995 for the Gardner, Kansas
facility. The Company intends to file such request for its Kansas facility for
fiscal 1996. The requests are based upon atypical costs incurred at the Kansas
facility in the treatment of patients who receive substantially more intensive
services than those generally received in SNFs. 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.
An initial three year "exemption" from the RCL expired in June 1989, at the San
Jose, California facility and in June, 1990, at the Gardner, Kansas facility.
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 intends to use a portion of its cash balance to finance
internal development of its outpatient rehabilitation and home health business
lines. The Company will also expand its existing facilities and programs when
such expansion meets the Company's investment criteria. The Company has a
line-of-credit of $1,000,000 from a bank. Any draws on the line-of-credit would
be secured by a cash deposit. At June 30, 1996, the Company had $60,000
outstanding under the line-of-credit. The Company will need to obtain access to
additional capital, through bank loans or otherwise, in order to fund any
significant acquisition opportunities. The Company believes that its existing
cash, credit line and cash flows from operations, will be sufficient to satisfy
the Company's estimated operating cash requirements for its existing facilities
for the next twelve months.
Inflation in recent years has not had a significant effect on the Company's
business and is not expected to adversely effect the Company in the future
unless the current rate of inflation increases significantly.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Balance Sheets, Consolidated
Statements of Operations, Consolidated Statements of Stockholders' Equity and
Consolidated Statements of Cash Flows, Notes to Consolidated Financial
Statements, Financial Statement Schedules and Report of Independent Public
Accountants attached to this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Registrant is incorporated by
reference from the information under the caption "Election of Directors" in the
Company's definitive proxy statement for its 1996 Annual Meeting of
Stockholders. Information with respect to certain executive officers of the
Registrant is included in Part I of this Form 10-K under the caption "Executive
Officers of the Registrant". Information concerning compliance with Section
16(a) of the Exchange Act is incorporated by reference from the information
under the caption "Compliance with Section 16(a) of the Exchange Act" in the
Company's definitive proxy statement for its 1996 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from information under the caption "Executive
Compensation" in the Company's definitive proxy statement for its 1996 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Stock
Ownership of Directors and Executive Officers" in the Company's definitive proxy
statement for its 1996 Annual Meeting of Stockholders.
ITEM 13. 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 1996 Annual
Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Reference Page
Attached Consolidated
Financial Statements
(a) 1. Consolidated financial statements:
Report of Independent Public Accountants........................ 2
Consolidated Balance Sheets at June 30, 1995 and 1996.......... 3
Consolidated Statements of Operations for the Years
Ended June 30, 1994, 1995 and 1996..................... 4
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1994, 1995 and 1996............... 5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1994, 1995 and 1996..................... 6
Notes to Consolidated Financial Statements..................... 7
2. Financial statement schedules for the years ended June 30,
1994, 1995 and 1996:
II - Valuation and Qualifying Accounts.................. 18
3. Exhibits:
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.
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 or Form 10-K for the
fiscal year ended June 30, 1995 (the "1995 10-K") and
incorporated herein by reference.
10.2 Lease, dated September 1, 1987, between Harvey Wm. Glasser
and Meadowbrook Neurocare-Kansas City, Inc., addenda dated
May 1, 1988 and April 1, 1989 and amendment (with lease
guaranty by the Company) dated July 1, 1991, filed as
Exhibit 10.1 to the Registration Statement and
incorporated herein by reference.
10.3 Lease, dated July 1, 1989, between Harvey Wm. Glasser and
Meadowbrook Neurocare-Kansas City, Inc. and amendment
(with lease guaranty by the Company) dated July 1, 1991,
filed as Exhibit 10.5 to the Registration Statement and
incorporated herein by reference.
10.4 Amendment To Lease, dated January 1, 1992, between Harvey
Wm. Glasser and Meadowbrook Neurocare-Kansas City, Inc.,
filed as Exhibit 10.15 to the Registration Statement and
incorporated herein by reference.
10.5 Fourth Amendment To Lease, dated January 1, 1992, between
Harvey Wm. Glasser and Meadowbrook Neurocare-Kansas City,
Inc., filed as Exhibit 10.11 to the Registration Statement
and incorporated herein by reference.
10.6 Stock Purchase Agreements, dated as of April 30, 1994, by
and among Medbrook Corp. and the named shareholders of
each of Southpark Rehabilitation, Inc., Megsis, Inc., The
Last Stand, Inc., Soleil, Inc., Menage A Trois, Inc., 1st
Coast Physical Therapy, Inc., and Southpark Physical
Therapy, Inc., filed as Exhibit 2.1 to the Company's
current report on Form 8-K dated May 11, 1994 and
incorporated herein by reference.
10.7 Earnout Agreement, dated as of April 30, 1994, by and
among MedBrook Corp, Lynne W. Powell and Mark W.
Adukiewicz, filed as Exhibit 2.2 to the Company's current
report on Form 8-K dated May 11, 1994 and incorporated
herein by reference.
10.8 Earnout Agreement, dated as of April 30, 1994, by and
among MedBrook Corp., Lynne W. Powell and Elizabeth A.
Norton, filed as Exhibit 2.3 to the Company's current
report on Form 8-K dated May 11, 1994 and incorporated
herein by reference.
10.9 Amended and Restated Earnout Agreement, dated June 26,
1995, by and among Medbrook Corp., Lynne Powell, Mark
Adukiewicz, James Powell and Beth Norton, filed as Exhibit
10.10 to the 1995 10-K and incorporated herein by
reference.
10.10 Lease Agreement, dated December 28, 1994, by and among
Meadowbrook Hospital, Inc. and Dr. Harvey Wm. Glasser,
filed as Exhibit 10.11 to the 1995 10-K and incorporated
herein by reference.
10.11 Management Agreement dated June 1, 1995, by and among
Meadowbrook Rehabilitation Group of Georgia, Inc. and
Parkway Medical Center, filed as Exhibit 10.12 to the 1995
10-K and incorporated herein by reference.
10.12 Amendment to lease, dated December 28, 1994, by and among
Meadowbrook Hospital, Inc., North Lake Investors, LLC and
Dr. Harvey Wm. Glasser, filed as Exhibit 10.13 to the 1995
10-K and incorporated herein by reference.
10.13 Agreement for Sale of Lease, dated December 28, 1994, by
and among Meadowbrook Hospital, Inc. and North Lake
Investors, LLC, filed as Exhibit 10.14 to the 1995 10-K
and incorporated herein by reference.
10.14 Lease Agreement dated December 31, 1994, by and among Dr.
Harvey Wm. Glasser and Meadowbrook Hospital, Inc. and
Meadowbrook Rehabilitation Group, Inc., filed as Exhibit
10.16 to the 1995 10-K and incorporated herein by
reference.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP (see Page 31 of this Form
10-K).
24.1 Power of Attorney (see Page 30 of this Form 10-K).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
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 26, 1996 MEADOWBROOK REHABILITATION GROUP,
INC.
By HARVEY WM. GLASSER, M.D.
---------------------------
Harvey Wm. Glasser, M.D.
Chief Executive Officer and
President
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-K 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
--------- ----- ----
HARVEY WM. GLASSER, M.D. Chief Executive Officer, September 26, 1996
- - ------------------------ President and Treasurer
Harvey Wm. Glasser, M.D. (Principal Executive Officer)
JAMES F. MURPHY Vice President and September 26, 1996
- - ------------------------ Chief Financial Officer
James F. Murphy (Principal Accounting Officer
and Principal Financial Officer)
KENNETH BARBER Director September 26, 1996
- - ------------------------
Kenneth Barber
ROBERT RUSH Director September 26, 1996
- - ------------------------
Robert Rush
EDWARD STOLMAN Director September 26, 1996
- - ------------------------
Edward Stolman
MEADOWBROOK REHABILITATION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1995 AND 1996
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Meadowbrook Rehabilitation Group, Inc.:
We have audited the accompanying consolidated balance sheets of Meadowbrook
Rehabilitation Group, Inc. (a Delaware corporation) and subsidiaries as of June
30, 1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1996. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Meadowbrook
Rehabilitation Group, Inc. and subsidiaries as of June 30, 1995 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1996, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not a
part of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
September 10, 1996
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1995 AND 1996
ASSETS
1995 1996
------------- -----------
CURRENT ASSETS
Cash and cash equivalents $6,307,307 $3,439,440
Restricted cash 500,000 311,000
Patient accounts receivable, less
allowance for doubtful accounts of
$2,001,000 and $1,445,000 respectively 4,063,945 4,738,957
Due from intermediaries 614,003 331,918
Income tax refund receivable 170,000 140,362
Other receivables 264,482 1,264,444
Prepaid expenses and other assets 285,463 376,898
------------ ------------
Total current assets 12,205,200 10,603,019
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land and building 683,770 683,770
Furniture and equipment 2,683,870 2,993,965
Leasehold improvements 587,213 783,614
------------ ------------
3,954,853 4,461,349
Less accumulated depreciation (1,636,309) (2,095,193)
------------ ------------
Net property and equipment 2,318,544 2,366,156
------------ ------------
OTHER ASSETS
Goodwill and intangible assets 1,780,679 1,870,555
------------ ------------
Total assets $16,304,423 $14,839,730
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current maturities of notes payable $725,229 $657,724
Current maturities of capital lease obligations 18,601 32,803
Accounts payable 1,213,083 1,226,053
Accrued payroll and employee benefits 905,196 1,101,168
Other accrued liabilities 1,632,579 1,065,820
------------ ------------
Total current liabilities 4,494,688 4,083,568
------------ ------------
LONG-TERM LIABILITIES
Capital lease obligations -- 21,815
Notes payable and other long-term liabilities 1,074,230 636,255
------------ ------------
Total long-term liabilities 1,074,230 658,070
------------ ------------
Total liabilities 5,568,918 4,741,638
------------ ------------
MINORITY INTEREST IN EQUITY OF
CONSOLIDATED SUBSIDIARIES 58,774 11,665
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value -
Class A; 15,000,000 shares authorized;
1,157,662 and 1,157,244 shares issued and
outstanding at June 30, 1995 and 1996 respectively 11,577 11,572
Class B; 5,000,000 shares authorized;
773,000 shares issued and outstanding
at June 30, 1995 and 1996 7,730 7,730
Paid-in-capital 17,908,117 17,908,122
Retained deficit (7,250,693) (7,840,997)
------------ ------------
Total stockholders' equity 10,676,731 10,086,427
------------ ------------
Total liabilities and stockholders' equity 16,304,423 $14,839,730
============ ============
<FN>
The accompanying notes are an integral part of these consolidated
statements.
</FN>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
1994 1995 1996
------------ ------------ ------------
NET OPERATING REVENUES $18,051,614 $19,973,613 $23,622,560
OPERATING EXPENSES:
Salaries and employee benefits 11,106,803 12,036,473 15,189,173
Professional fees and purchased services 3,724,439 3,023,225 2,509,166
Provision for doubtful accounts 1,098,744 1,371,151 583,661
Other operating expenses 2,628,991 2,797,809 3,476,400
Depreciation and amortization 478,745 542,890 586,180
Rent -
To unrelated parties 1,538,738 1,764,617 1,540,634
To related parties 683,915 586,518 412,468
Restructuring charges 675,000 310,000 -
------------ ------------ ------------
Total operating expenses 21,935,375 22,432,683 24,297,682
------------ ------------ ------------
Loss from operations (3,883,761) (2,459,070) (675,122)
------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Interest (income) expense, net (192,700) 25,536 (113,834)
Write-off of intangible assets - 1,029,767 -
Settlement of litigation 1,437,500 - -
------------ ------------ ------------
Total other (income) expense 1,244,800 1,055,303 (113,834)
------------ ------------ ------------
Loss before income taxes (5,128,561) (3,514,373) (561,288)
INCOME TAX BENEFIT (787,313) (92,890) -
------------ ------------ ------------
Loss before minority interest (4,341,248) (3,421,483) (561,288)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES 30,267 107,642 29,016
------------ ------------ ------------
Net loss ($4,371,515) ($3,529,125) ($590,304)
============ ============ ============
NET LOSS PER COMMON SHARE ($2.26) ($1.82) ($0.31)
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,938,551 1,936,703 1,930,349
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated
statements.
</FN>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
Class A Class B
---------------------- -------------------
Retained Total
Shares Amount Shares Amount Paid-in Earnings Stockholders'
Capital (Deficit) Equity
---------------------- ------------------- ------------ ------------ ------------
BALANCE, JUNE 30, 1993 1,025,078 $10,250 925,000 $9,250 $18,051,306 $649,947 $18,720,753
Common stock issuance upon
option exercise 3,375 34 - - 1,839 - 1,873
Repurchase of shares (17,708) (177) - - (102,327) - (102,504)
Conversion of Class B to
Class A 152,000 1,520 (152,000) (1,520) - - -
Net loss - - - - - (4,371,515) (4,371,515)
------------------------ ------------------- ------------ ------------ ------------
BALANCE, JUNE 30, 1994 1,162,745 11,627 773,000 7,730 17,950,818 (3,721,568) 14,248,607
Common stock issuance upon
option exercise 2,250 23 - - 1,226 - 1,249
Repurchase of shares (7,333) (73) - - (43,927) - (44,000)
Net loss - - - - - (3,529,125) (3,529,125)
------------------------ ------------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1995 1,157,662 11,577 773,000 7,730 17,908,117 (7,250,693) 10,676,731
Cancellation of shares (418) (5) - - 5 - -
Net loss - - - - - (590,304) (590,304)
----------------------- ------------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1996 1,157,244 $11,572 773,000 $7,730 $17,908,122 ($7,840,997) $10,086,427
======================= ================== ============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
1994 1995 1996
------------ ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,371,515) ($3,529,125) ($590,304)
Adjustments to reconcile net loss to cash provided by
(used for) operating activities -
Depreciation and amortization 478,745 542,890 586,180
Loss on disposal of assets 176,976 33,592 8,122
Minority interest expense - - 29,016
Write-off of intangible assets - 1,029,767 -
Changes in assets and liabilities -
Decrease (increase) in patient accounts receivable, net 1,184,995 2,345,398 (675,012)
Decrease (increase) in due from intermediaries (115,209) 1,579,372 282,085
Decrease (increase) in income tax refund receivable (646,276) 1,908,244 29,638
Decrease in notes receivable from related parties 97,629 - -
(Increase) in other receivables (54,100) (161,555) (999,962)
Decrease (increase) in prepaid expenses and other current assets 211,973 108,892 (91,435)
Decrease in deferred income taxes 1,358,779 - -
Decrease in other long-term assets 184,773 - -
Increase (decrease) in accounts payable and accrued liabilities (696,067) 217,834 (357,817)
(Decrease) in other long-term liabilities (8,282) - (221,897)
------------ ------------ -----------
Cash provided by (used for) operating activities (2,197,579) 4,075,309 (2,001,386)
------------ ------------ -----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (204,816) (359,129) (556,705)
Purchase of outpatient clinics (608,000) (1,056,604) (82,500)
Payments on prior purchase of outpatient clinics - - (357,543)
Costs resulting from purchase of outpatient facilities (202,088) (167,447) (40,000)
Proceeds from sale of assets 49,636 1,950 23,431
----------- ------------ ------------
Cash used for investment activities (965,268) (1,581,230) (1,013,317)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 142,646 325,840 791,942
Payments of short-term borrowings (317,640) (166,714) (759,816)
Long-term borrowings - - 95,198
Payments of long-term debt - (40,631) (53,364)
Payments of capital lease obligations (101,403) (70,360) (40,003)
Decrease (increase) in cash deposited to secure a loan - (500,000) 189,000
Repurchase of common stock (102,504) - -
Issuance of common stock for options exercised 1,873 1,249 -
Payments to minority shareholders (44,250) (90,000) (76,121)
----------- ------------ ------------
Cash provided by (used for) financing activities (421,278) (540,616) 146,836
----------- ------------ ------------
Net increase (decrease) in cash (3,584,125) 1,953,463 (2,867,867)
CASH AND CASH EQUIVALENTS, beginning of period 7,937,969 4,353,844 6,307,307
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $4,353,844 $6,307,307 $3,439,440
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities -
Property additions financed with capital leases $17,505 $ - $76,020
Property additions financed with notes payable - - 114,098
Liability resulting from purchase of outpatient facilities 670,683 1,743,319 186,692
Stock received as repayment of receivable from related party - 44,000 -
Payments -
Interest paid 41,282 179,567 44,881
Income taxes paid - - 32,492
<FN>
The accompanying notes are an integral part of these consolidated
statements.
</FN>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION AND OPERATIONS:
Meadowbrook Rehabilitation Group, Inc. (Meadowbrook) and its subsidiaries
(collectively, the Company) develop and operate facilities for patients with
varying medical diagnoses. The Company provides outpatient rehabilitation, home
health services, acute, subacute and post-acute care to these patients.
The Company experienced significant operating losses during fiscal years
1994, 1995 and 1996. Factors contributing to fiscal 1996 results include among
other things, losses incurred at the Company's recently acquired Colorado
facilities, as well as decreased patient census and revenue per patient day in
the Company's acute, subacute and post-acute facilities.
Major factors contributing to fiscal 1995 losses included, among others, a
continued deterioration in patient census and revenue per patient day at the
Company's acute, subacute and post-acute facilities and a charge of $1,029,767
to write-off intangible assets recorded as part of the fiscal 1994 acquisition
of its Florida operations. The write-off is the result of the Company's
management contracts at five facilities being terminated (see Note 10). In
addition, the Company recorded a charge of $700,000 to write-off two litigation
receivables in which the patients were unsuccessful in their third party
litigation (see Note 3). In addition, the Company recorded restructuring charges
of $310,000 related to the closure of its psychiatric partial hospitalization
program. The program was closed on September 22, 1995 (see Note 2).
Major factors contributing to fiscal 1994 losses were a continued
deterioration in patient census and revenue per patient day at the Company's
acute, subacute and post-acute facilities and a charge of $1,437,500 to settle a
lawsuit brought against the Company in February 1993. The lawsuit alleged
violations of securities laws arising out of an alleged failure to disclose
information about the Company's financial results and business prospects in
connection with the Company's initial public offering in February 1992, and
thereafter (see Note 11). In addition, the Company recorded restructuring
charges of $675,000 related to the closure of its Arlington, Texas facility (see
Note 2) and additional charges for its San Jose, California facility which was
closed during fiscal 1994.
The Company's future profitability is dependent on a number of factors,
including increased patient census and revenues in its traditional acute,
subacute and post-acute businesses and improved profitability of its Colorado
outpatient rehabilitation clinics and home health agencies, as well as a further
reduction in the Company's expenses as a percentage of its total operating
revenues. There can be no assurance as to the Company's future profitability.
The Company's continued operating losses have substantially reduced its
available working capital. While the Company believes that its working capital
will be sufficient to sustain the Company's needs for the next twelve months,
the Company's ability to continue to fund its operations thereafter is dependent
on the Company achieving profitability and positive cash flows from operating
activities. The Company has a $1,000,000 bank line-of-credit which would require
a $500,000 bank deposit if drawn (see Note 3). Otherwise, the Company currently
does not have access to additional capital. There can be no assurance that in
the future the Company will not experience a shortage of available cash
necessary to operate its business.
As a result of the Company's continued losses, the Board of Directors is in
the process of evaluating 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 sales of assets. There can be no
assurance that any such alternatives will be available on favorable terms, if at
all.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the Company's business should not necessarily be limited to
medical rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity, the Company should consider investing proceeds
from any asset sales in non-healthcare businesses. As a result, the nature of
the Company's business could change significantly. Dr. Glasser holds a majority
of the combined voting power of the Company's two classes of common stock and
accordingly has the ability to effect a change in management or to cause or
prevent a significant corporate transaction.
2. OPERATING CHARGES AND RESTRUCTURING:
During fiscal years 1994 and 1995 the Company's operating results included
charges related to the Company's corporate restructuring involving management
changes, reductions in work force and the closure or sale of certain facilities
and lines of business as described below. Costs associated with the
restructuring are segregated in the accompanying consolidated statement of
operations and include the following:
1994 1995
---------- ----------
Severance costs $ 64,000 $ 21,000
Future lease obligations for closed or sold
facilities:
Related party 177,000 --
Other 77,000 9,000
Future operating losses during shut-down period
for closed facilities 114,000 71,000
Write-off of unrealizable assets 208,000 139,000
Other 35,000 70,000
========== ==========
$ 675,000 $ 310,000
========== ==========
Facility Closures
Indianapolis
During fiscal 1995 the Company internally developed, through its wholly
owned subsidiary, Medbrook of Indiana, a psychiatric partial hospitalization
program which provided psychiatric services in long-term care facilities. In
June 1995, the Company decided to close the psychiatric partial hospitalization
program. The program was closed on September 22, 1995. The Company recorded a
restructuring charge of $310,000, as of June 30, 1995, related to the closure of
the program.
Arlington
In June 1994, the Company decided to close its post-acute facility in
Arlington, Texas and closed the facility in September 1994. The Company recorded
a restructuring charge during fiscal 1994 of $350,000 related to the facility
closure.
San Jose
During the first quarter of fiscal 1994, the Company closed its subacute
program in San Jose, California. On December 27, 1994, the Company sold its
lease for the San Jose facility to an investment partnership. The investment
partnership's rent obligation commenced on February 15, 1995. This partnership
in turn subleases the facility to a third party. The Company remains obligated
to make lease payments in the event that the investment partnership defaults on
its obligations under the lease. Because the investment partnership has made
substantial improvements to the facility, the Company does not anticipate such a
default. The Company recorded a restructuring charge of $325,000 in fiscal 1994
related to the facility closure.
3. 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. In 1995, the Company
deposited $500,000 to secure a bank loan of $900,000 made by a bank to the
previous owner of the acquired Colorado operations. 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. The loan balance on June
30, 1996 was $251,000. The Company has not recorded this amount as a liability,
but reflects a corresponding amount as restricted cash on its balance sheet. As
the loan is paid off, the security deposit will be transferred and become
security on the Company's $1,000,000 line-of-credit with the bank. At June 30,
1996, $311,000 of the amount deposited is classified as restricted cash securing
the loan balance of $251,000, as well as, security for the Company's outstanding
balance of $60,000.
Accounts Receivable and Allowance for Doubtful Accounts
The reimbursement process related to many of the Company's patients is
complex and involves multiple payors. In addition, it has been the Company's
practice to admit selected patients who, although obligated to pay the Company,
are seeking monetary recovery in pending litigation with third parties. The
industry's trend towards cost containment has imposed increasing limits on
reimbursement which has resulted in longer collection periods and, in some
cases, has made ultimate reimbursement more difficult. These factors delay the
timing and affect the amount of payment to the Company.
During the year ended June 30, 1996, the Company wrote-off net balances of
$1,052,000 of accounts receivable compared to $1,395,000 during the year ended
June 30, 1995. During fiscal 1995 the Company recorded a charge of $700,000 to
write-off two receivables in which the patients were unsuccessful in their third
party litigation. As of June 30, 1995 and 1996, $1,282,000 and $1,328,000,
respectively, of the Company's accounts receivable were greater than one year
past due. The Company has recorded allowances for uncollectible accounts that
reflect the best judgment of management as to the ultimate collectibility of
accounts receivable balances, but the nature of the reimbursement process makes
these judgments difficult and actual reimbursement could vary significantly from
these estimates.
Patient Revenues and Provision for Contractual Discounts
Patient services are billed at standard rates. Payments for services
rendered to private payors and patients covered by commercial insurance are
generally negotiated at amounts lower than standard rates. Payments for services
rendered to patients covered by Medicare and Medicaid are generally at lower
than standard rates. Contractual allowances are recorded to reflect the
difference between standard rates and expected reimbursement, so that patient
accounts receivable are recorded net of estimated discounts. The Company
provides care to Medicaid beneficiaries under short-term contracts.
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 (see Note 9).
The following table reflects the estimated percentage of net patient revenues by
payor type:
Year Ended June 30,
----------------------------------
Source 1994 1995 1996
--------- --------- --------
Private payors ....... 81% 67% 59%
Medicare ............. 6% 16% 34%
Medicaid ............. 13% 17% 7%
--------- --------- --------
Total ................ 100% 100% 100%
--------- --------- --------
Property and Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method based on the estimated useful lives
that range as follows:
Building - 20 years
Furniture and equipment - 3 to 15 years
Leasehold improvements - Life of the lease
Goodwill and Other Intangible Assets
Goodwill and other intangible assets recorded in connection with the
Company's acquisitions are amortized on a straight-line basis, over periods of 6
to 40 years.
Net Loss Per Common Share
Net loss per share is computed based on the weighted average number of
common shares outstanding during each period. Net common income per common share
is computed based on the weighted average number of common and common equivalent
shares outstanding during each period and the assumed exercise of dilutive stock
options (less the number of treasury shares assumed to be purchased from the
proceeds using the estimated average market price of Class A Common Stock).
Common equivalent shares consist of stock options and warrants granted.
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.
4. SHORT-TERM BORROWINGS AND NOTES PAYABLE:
At June 30, 1995 and 1996 the Company had notes payable of $1,479,910 and
$1,196,330, respectively. These notes are payable in varying installments at an
average interest rate of 8.6%. The notes payable at June 30, 1996 included
$877,616 arising from its Florida and Colorado outpatient acquisitions (see Note
10).
Scheduled maturities for the notes payable and other long-term liabilities
are as follows:
1997 $ 657,724
1998 310,780
1999 177,328
2000 144,658
2001 3,489
------------
$ 1,293,979
============
5. LEASES:
The Company leases certain property and equipment under capital and
operating leases. The original cost of assets under capital leases included in
property and equipment is $90,278 at June 30, 1995, and $165,494 at June 30,
1996, with accumulated depreciation of $46,392 and $70,632 as of June 30, 1995
and 1996, respectively.
The minimum future lease payments required under the Company's capital and
operating leases during the five years beginning July 1, 1996, are as follows:
Capital Operating
Leases Leases
-------- ----------
Year 1 $ 32,803 $1,175,159
Year 2 21,815 885,497
Year 3 -- 657,401
Year 4 -- 595,326
Year 5 -- 435,909
Thereafter -- --
-------- ----------
Total minimum payments 54,618 $3,749,292
===========
Interest on capital lease obligations --
--------
Net minimum payments 54,618
Current maturities of capital obligations 32,803
--------
Long-term capital lease obligations $ 21,815
========
6. 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:
o Class B Common Stock has ten votes per share and Class A Common Stock
has one vote per share.
o Class B Common Stock is convertible 1 for 1 into Class A Common Stock
at any time at the option of the holder.
o 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.
o 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.
Reverse Stock Split
On April 22, 1996, the Restated Certificate of Incorporation of the Company
was amended to effect a one-for-three reverse stock split of the Company's Class
A and Class B Common Stock.
The Company has retroactively reflected the reverse stock split in the
financial statements for all periods presented.
Stock Plan
The 1994 Stock Incentive Plan (the "Plan") was adopted by the Company's
Board of Directors in September 1994, and was approved by the Company's
stockholders in November 1994. At June 30, 1996, a total of 626,667 shares of
Class A Common Stock were reserved for issuance under the Plan pursuant to the
direct award or sale of shares or the exercise of options granted under the
Plan. The Plan is administered by a compensation committee of the Board of
Directors of the Company, which selects the persons to whom shares will be sold
or awarded or to whom options will be granted. The committee determines the
number of shares subject to each sale, award or grant, and prescribes other
terms and conditions, including vesting schedules, in connection with each sale,
award or grant.
The exercise price of nonqualified options must be at least 75% of the fair
market value of the Class A Common Stock on the date of the grant. The exercise
price of incentive stock options (ISOs) cannot be lower than 100% of the fair
market value of the Class A Common Stock on the date of the grant and, in the
case of ISOs granted to holders of more than 10% of the voting power of the
Company, not less than 110% of such fair market value. The term of an option
cannot exceed ten years, and the term of an option granted to a holder of more
than 10% of the voting rights of the Company cannot exceed five years. The
purchase price of shares sold under the Plan must be at least 85% of the fair
market value of the Class A Common Stock and, in the case of a holder of more
than 10% of the voting power of the Company, not less than 100% of such fair
market value.
Class A Common Stock ISO's outstanding under the Plan are as follows:
Shares Exercise Price
Under Option Per Share
------------ ----------------------
Outstanding at June 30, 1994 191,008 $0.56-$39.00
------------
Granted July 1994 3,333 6.00
Cancelled September 1994 (8,333) 6.00
Granted January 1995 33,333 6.00
Exercised February 1995 (2,250) 0.57
Cancelled February 1995 (18,017) 3.30-18.00
Cancelled May 1995 ( 6,667) 5.25
Cancelled June 1995 ( 3,333) 6.00
Granted June 1995 10,000 6.00
------------
Outstanding at June 30, 1995 199,074 $0.56-$39.00
------------
Granted September 1995 10,000 6.19
Cancelled October 1995 (33,333) 5.63
Cancelled October 1995 (33,333) 6.00
Granted October 1995 21,667 3.38
Cancelled November 1995 (833) 0.03
Cancelled November 1995 (1,667) 39.00
Cancelled November 1995 (1,667 21.38
Cancelled November 1995 (1,575) 3.33
Cancelled November 1995 (8,333) 5.25
Granted January 1996 6,667 3.00
Cancelled January 1996 (6,667) 3.38
Cancelled January 1996 (1,667) 6.00
============
Outstanding at June 30, 1996 148,333 $0.56-$39.00
============
As of June 30, 1996, 60,001 options were exercisable.
The exercise price for options granted was at least fair market value at
the date of grant. Options issued under the Plan, unless otherwise specified,
vest evenly over a four-year period from the date of grant.
Warrants
In February 1992, the Company granted to each of two partners in an
investment banking firm, one of whom was a director of the Company, a warrant to
purchase 25,833 shares of Class A Common Stock at $39 per share. These warrants
expire in February 1997.
7. INCOME TAXES:
The Company provides for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under SFAS 109 deferred taxes are provided under
the liability method using current tax rates.
The Company recorded a tax benefit for the years ended June 30, 1994 and
1995 due to the availability of federal and state loss carry backs for tax and
financial reporting purposes. The tax benefit rate is reduced significantly in
1994 and 1995 primarily because of limits on available federal tax payments made
in prior years which could be refunded. For fiscal 1996, no benefit was recorded
because carrybacks of current losses against previous taxable earnings are no
longer available.
The following is a summary of the Company's benefit for income taxes:
Year Ended June 30
------------------------------------------------
1994 1995 1996
------------- ------------- -------------
Current -
Federal $ (2,240,583) $ (92,890) $ --
State -- -- --
------------- ------------- -------------
(2,240,583) (92,890) --
Deferred (prepaid) -
Federal 1,335,437 -- --
State 117,833 -- --
-------------- ------------ -------------
1,453,270 -- --
============== ============= =============
Benefit $ (787,313) $ (92,890) $ --
============== ============= =============
The deferred provision (benefit) for income taxes results from the
following temporary differences:
Year Ended June 30
---------------------------------------
1994 1995 1996
----------- ----------- ---------
Allowance for doubtful accounts $ 303,501 $ (52,910) $205,720
Accrued payables 57,057 82,276 74,000
Depreciation (22,087) (10,360) (37,000)
Tax loss carry forwards (183,000) (695,600) (117,157)
Deferred preopening costs (18,220) -- --
Other 313 -- --
Valuation allowance 1,315,706 676,594 (125,563)
----------- ----------- ----------
$1,453,270 $ -- $ --
=========== =========== ==========
The income tax provision (benefit) is calculated based upon effective tax
rates which differ from the federal statutory rate. The following table
reconciles the differences between the two rates by amount and percentage:
Year Ended June 30
-----------------------------------------------------------
1994 1995 1996
------------ ------------ ---------
Amount % Amount % Amount %
-----------------------------------------------------------
Federal statutory rate $(1,743,711) (34%) $(1,194,887) (34%) $(200,703) (34%)
State taxes, net of
federal effects (205,160) (4) (105,431) (3) (17,709) (3)
Permanent differences 19,000 -- 437,185 12 53,280 9
Net operating losses
not currently benefited 1,315,706 26 676,594 19 165,132 28
Other (173,148) (3) 93,649 3 -- --
===========================================================
Benefit $ (787,313) (15%) $ (92,890) (3%) $ -- --
===========================================================
The deferred income tax assets liabilities are comprised of the following
at June 30:
1995 1996
------------ ------------
Allowance for doubtful accounts $ 740,370 $ 534,650
Accrued payables 244,940 170,940
Depreciation 128,390 165,390
Tax loss carry forwards 878,600 995,757
------------ ------------
Net deferred income tax assets 1,992,300 1,866,737
Less valuation allowance (1,992,300) (1,866,737)
------------ ------------
Deferred income tax asset $ -- $ --
============ ============
8. RELATED PARTY TRANSACTIONS:
The Company has entered into certain transactions with parties that are
related by common ownership or control. These transactions are summarized below:
o The Company leases and has leased in the past certain facilities from
the majority stockholder of the Company. The Company entered into
agreements to lease these facilities for initial terms of up to ten
years. The Company pays the stockholder a base rental amount per month,
plus a percentage (ranging from 2-1/2% to 5%) of patient revenue
collections above a defined threshold. Rental expense on these leases
for the years ended June 30, 1994, 1995 and 1996, was $683,915, $586,518
and $412,468, respectively, of which $2,012 and $7,577 was unpaid at
June 30, 1995 and 1996, respectively. All but one of these leases relate
to facilities that have been either closed or sold (see Note 2).
o As part of the Company's initial public offering, the Company granted
certain directors an aggregate of 5,000 shares of Class A Common Stock
in lieu of directors' fees. The shares vested over a four year period.
For the years ended June 30, 1994 and 1995, the Company recorded
expenses of $104,270 and $27,761, respectively, related to these shares.
o During fiscal 1995 the Company entered into an agreement whereby it
forgave a loan of $44,000 to a former officer in exchange for 7,333
shares of Class A Common Stock which had been pledged as security. The
Company did not recognize any gain or loss on the transaction.
9. COMMITMENTS AND CONTINGENCIES:
Medicare Reimbursement
The Company's amount due from Medicare intermediaries of $332,000 at June
30, 1996 includes amounts the Company anticipates to receive on cost report
settlements for its Colorado home health agencies acquired on June 30, 1995.
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 Gardner, Kansas facility. Medicare reimbursement is generally based
upon reasonable direct and indirect allowable costs incurred in providing
services. At the Company's inpatient facilities these costs are subject to the
RCL. An exception from the RCL has been sought and granted for fiscal years 1990
through 1994 for the Company's former San Jose, California facility. Requests
have been submitted for fiscal years 1992 through 1995 for the Gardner, Kansas
facility. The Company intends to file such request for its Kansas facility for
fiscal 1996. The requests are based upon atypical costs incurred at the Gardner,
Kansas facility, in the treatment of patients who receive substantially more
intensive services than those generally received in SNFs. There can be no
assurance that the Company will collect in full the amounts it has requested or
intends to request, nor can there be an assurance as to the timing of any such
collection. An initial three year "exemption" from the RCL expired in June 1989,
at the San Jose, California facility and in June 1990, at the Gardner, Kansas
facility.
10. ACQUISITIONS:
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 results for the year ended June 30, 1996, no cash
payment is required for the twelve months ending June 30, 1996. The additional
cash payments would total $825,000 if the operations collectively achieve the
target earnings thresholds for the twelve months ending June 30, 1997 through
1999.
In addition, in connection with the acquisition, the Company agreed to
deposit $500,000 to secure a $900,000 bank loan to the previous owner of the
acquired businesses. The Company is overseeing the repayment of the loan through
the collection of accounts receivable which are being collected on behalf of the
previous owner. At the time of the acquisition, the Company anticipated that the
loan would be repaid based on the accounts receivable balance then outstanding.
The loan balance on June 30, 1996 was $251,000. The Company did not acquire
accounts receivable in connection with the acquisition and has funded
approximately $1,447,000 of working capital for the acquired operations since
the date of acquisition.
In October 1995 the Company was notified by its intermediary that its
Medicare payments for the recently acquired home health agencies were being
withheld to offset amounts due by the previous owner for final settlement of the
home health agencies' cost reports for the years 1990 through 1994. During the
twelve months ending June 30, 1996, the intermediary withheld $728,000 related
to these settlements. This amount is included in other receivables on the
Company's balance sheet. The Company and the previous owner have submitted
appeals to these settlements and are currently awaiting a response from the
intermediary. In the event that the appeals of the prior owner and the Company
are unsuccessful, the Company intends to offset the amounts withheld against any
additional amounts due to the previous owner under the acquisition agreements.
The intermediary resumed making payments to the Company for current charges in
January 1996.
Florida Outpatient Clinics Acquisition
During fiscal 1994, the Company acquired a majority interest in or obtained
management contracts to operate nine outpatient rehabilitation clinics located
in Jacksonville, Jacksonville Beach, Orange Park, St. Augustine, St. Augustine
Beach, Palm Coast and Palatka, Florida and in Moultrie, Georgia. At closing, the
Company paid $608,000, agreed to reimburse certain selling shareholders for
accounts receivable of the acquired clinics collected after the closing, and
agreed to make additional payments based on the earnings performance of certain
clinics in each year during the three year period ending March 31, 1997.
The following summary, prepared on a proforma basis, combines the unaudited
consolidated results of the Company's operations as if the nine outpatient
clinics had been acquired as of the beginning of the period presented, after
including the impact of certain adjustments, such as: amortization of
intangibles, increased interest expense on the acquisition debt, the minority
interest in earnings of consolidated subsidiary and the related income tax
effects.
Year Ended June 30,
1994
(unaudited)
-----------------
Net operating revenue $19,856,806
Net loss before minority interest (3,803,326)
Minority interest in earnings of consolidated subsidiary 177,679
Net loss (3,981,005)
Net loss per share $ 2.05
The proforma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
On October 1, 1994, the Company acquired the minority interest in two of
the outpatient clinics referred to above. In connection with such acquisition,
the Company paid $600,000 and is obligated to pay an additional $150,000 by
September 30, 1996.
On February 1, 1995, the Company acquired an outpatient clinic in Palm
Coast, Florida. At June 30, 1996, the Company had paid $138,000 of the purchase
price and was obligated to pay an additional $122,000 in equal monthly
installments of $3,300 through February 2000.
On May 12, 1995, the new owner of five of the Florida outpatient clinics
managed by the Company advised the Company that its management contracts were
terminated. As a result, during the fourth quarter of fiscal 1995 the Company
recorded a charge of $1,029,767 to write-off intangible assets recorded as part
of the fiscal 1994 acquisition. The charge is classified as a non-operating
expense. The Company does not agree that such contracts may be terminated and
has filed suit to protect its legal rights.
Subsequent to June 30, 1996, the Company paid $123,442 based on the
earnings performance of certain clinics and $19,547 in interest on deferred
acquisition payments. At June 30, 1996, the Company's remaining liability
resulting from the purchase was $510,000, plus additional payments based on the
earnings performance of certain clinics. Such payments would total $135,000 if
the earnings of such clinics for the twelve months ending March 31, 1997 are
equal to the earnings of such clinics for the base year, the twelve months ended
December 31, 1993.
11. LEGAL MATTERS:
Shareholder Litigation
In February 1993, the Company was named as a defendant in a complaint filed
in the United States District Court for the Northern District of California. Six
current or former officers and directors of the Company were also named as
defendants in this action. The complaint alleged violations of securities laws
arising out of an alleged failure to disclose information about the Company's
financial results and business prospects in connection with the Company's
initial public offering in February 1992, and thereafter. The suit sought
unspecified damages on behalf of an alleged class of investors who purchased the
Company's Class A Common Stock during the period from February 13, 1992 through
January 6, 1993.
The parties to the shareholder litigation settled on May 20, 1994. In
exchange for the dismissal of the litigation and pursuant to numerous other
terms and provisions as set forth in the settlement agreement, the Company and
the insurance carrier for its directors and officers funded a settlement in the
total amount of $2,875,000. Meadowbrook recorded a charge of $1,437,500 during
the second quarter of fiscal 1994 for its contribution to this settlement. The
Company funded its portion of the settlement in April 1994. The Company's
cumulative charge through June 30, 1994, relating to the defense of this
litigation was $442,000. The majority of this amount was expensed in fiscal year
1993.
The Company's willingness to settle this litigation was based upon the
anticipated costs of defending the litigation and the desire to minimize
disruption of Company operations and management resources, among other factors.
SCHEDULE II
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
1994 1995 1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS: ----------- ----------- ----------
Balance at beginning of period $2,711,000 $2,025,000 $2,001,000
Provision charged to expense 1,098,744 1.381.151 583.661
Write-offs, net of recoveries (1,784,744) (1,395,151) (1,051,890)
Other -- -- (87,887)
----------- ----------- -----------
Balance at end of period $2,025,000 $2,001,000 $1,445,000
=========== =========== ===========