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
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number
0-19726
MEADOWBROOK REHABILITATION GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3022377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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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 25, 1997, 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 $2,876,545. This calculation does not reflect a determination that
certain persons are affiliates of the Registrant for any other purposes.
The number of shares of Class A Common Stock outstanding on September 25,
1997 was 1,157,244. The number of shares of Class B Common Stock outstanding on
September 25, 1997 was 773,000.
Part III of this Form 10-K incorporates by reference information from the
Registrant's proxy statement with respect to the 1997 Annual Meeting of
Stockholders.
TABLE OF CONTENTS
Page
PART I. .......................................................... 3
ITEM 1. BUSINESS............................................. 3
ITEM 2. PROPERTIES........................................... 13
ITEM 3. LEGAL PROCEEDINGS.................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.............................................. 15
PART II. .......................................................... 16
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.......................... 16
ITEM 6. SELECTED FINANCIAL DATA.............................. 17
ITEM 7. .....MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................... 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................. 27
PART III. ......................................................... 28
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................... 28
ITEM 11. EXECUTIVE COMPENSATION............................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................................... 28
PART IV. ......................................................... 29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.................................. 29
SIGNATURES ................................................. 32
PART I
ITEM 1 BUSINESS
Meadowbrook Rehabilitation Group, Inc. (together with its subsidiaries, the
"Company" or "Meadowbrook"), sold all of its traditional acute, subacute and
post-acute operations during fiscal 1997 and subsequent to fiscal year end. In
addition, subsequent to fiscal year end, the Company sold certain of its
outpatient rehabilitation clinics in Florida and Georgia. The Board of
Directors' decision to sell its acute, subacute and post-acute operations as
well as certain of the Company's Florida and Georgia outpatient rehabilitation
clinic operations were due to the poor operating results from these businesses
as well as poor prospects for growth in their respective markets. The growth of
these business lines was also limited by the Company's lack of capital to
execute internal growth or strategic acquisitions, which might have given the
Company the critical mass to compete effectively in these business lines.
In October 1996, the Company sold the assets of its post-acute
rehabilitation facility located in Park Ridge, Illinois. On January 13, 1997,
the Company sold its three outpatient rehabilitation clinics in Alaska. On March
31, 1997, the Company sold its Georgia operations, consisting of a
neurobehavioral program, a subacute program operated under a management
agreement, a post-acute program and related real estate. Subsequent to fiscal
year end, the Company sold the assets of its Kansas operations. The Company's
Kansas operations included an acute program, a subacute program and a post-acute
program. The Kansas sale transaction closed on July 31, 1997. On August 31,
1997, the Company sold five outpatient rehabilitation clinics and certain other
assets in Florida and Georgia. In addition, the Company closed six outpatient
rehabilitation clinics in Colorado and Florida during fiscal 1997.
Following such closures and dispositions, the operations of the Company
include its home health agencies with operations in Colorado and Kansas, its
four outpatient rehabilitation clinics in Colorado and three outpatient
rehabilitation clinics (two of which are operated under a management agreement)
in Florida. The Company's recent focus on home health reflects its view that the
home health industry has strong prospects for long-term growth. Currently, the
Company has no plans to divest its home health business and is evaluating
possible opportunities to expand such business. In addition, the Company's Board
of Directors is continuing to evaluate 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. 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 in
non-healthcare businesses. As a result, the nature of the Company's business
could change significantly.
The Company's outpatient rehabilitation and home health businesses
comprised 52% of the Company's fiscal 1997 net operating revenues while the
Company's acute, subacute and post-acute business lines, which where sold during
fiscal 1997 and subsequent to year end, comprised 48%. Descriptions of the
Company's home health and outpatient rehabilitation business lines are 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.
Home Health Services
General. The Company operates home health agencies with operations in
Colorado and Kansas under the name Total Home Health. The Company entered the
home health business because of its experience in acute, subacute and post-acute
healthcare where there is a growing trend toward early discharges of patients
from acute and subacute treatment programs. 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 an increasing need
for home health services.
Industry. The importance of home healthcare is increasing as a result of
significant economic pressures within the healthcare industry. Total
expenditures within the healthcare industry have increased at twice the rate of
inflation in recent years. The ongoing pressure to contain healthcare costs,
while maintaining high quality care, is accelerating the growth of alternate
site care that reduces hospital admissions and lengths of hospital stays, such
as home healthcare. Home healthcare is one of the fastest growing segments of
the healthcare industry.
The growth in home healthcare is also due to increased acceptance by
payors, patients and the medical community, including physicians, hospitals and
other providers. Home healthcare often results in lower costs, which is
increasingly important under managed care. In addition, home healthcare has
grown rapidly as a result of advances in medical technology, which have
facilitated the delivery of services in alternate sites; demographic trends,
such as an aging population; and a strong preference among patients to receive
healthcare in their homes.
Historically, the home healthcare industry has been highly fragmented and
characterized by local providers that typically do not offer a comprehensive
range of cost-effective services. These local providers often do not have the
capital necessary to expand their operations or the range of services offered,
which limits their ability to compete for managed care contracts and other
referrals and to realize efficiencies in their operations. As managed care has
become more prevalent, payors increasingly are seeking home healthcare providers
that offer a cost-effective, comprehensive range of services in each market
served, which further inhibits the ability of local providers to compete
effectively. As a result of these economic and competitive pressures, the home
healthcare industry is undergoing rapid consolidation, a trend the Company
expects will continue.
Strategy. Building on its established presence in Colorado and Kansas, the
Company seeks to further enhance its position in these markets by providing a
full range of cost-effective home healthcare services. To achieve this goal, the
Company intends to more closely coordinate and monitor patient care through its
own nursing staff and in training its employees, identifying patients' needs and
cross-selling the Company's services.
The Company will consider opportunities to expand its existing branch
locations, expand the range of services offered and increase referrals from
managed care organizations. In addition, the Company will review selected
acquisition opportunities in the geographic region in which the Company
operates. Management believes that by developing a substantial market presence
in its geographic region, the Company will be able to increase its referrals
from managed care organizations.
The Company is also targeting managed care organizations by stressing its
disease management programs for the treatment of HIV/AIDS, cancer, and other
chronic illnesses, and by providing customized outcome and utilization reports.
The Company expects that managed care contracts will generate an increasing
number of referrals as the penetration of managed care continues to accelerate.
Products and Services. The Company delivers its services through branches
whose functions include (i) receiving referrals from physicians, (ii) assessing
a patient's needs, (iii) determining the extent of a patient's insurance
coverage and coordinating reimbursement for services, (iv) coordinating the
delivery of care to the patient and (v) supervising the quality of the care the
patient receives.
Each branch is managed by an administrator who is responsible for ensuring
the quality of the services provided by the Company. Coordinators at each site
work with all of the professionals servicing the patient to ensure the proper
management of the patient's care. Offering a full range of home healthcare
services and coordinating that care through its own nursing and therapy staff
allows the Company to offer cost-effective, high quality services.
Nursing and Related Patient Services. Working closely with each patient's
physician, who develops that patient's plan of treatment, the team of clinicians
at the branch closely monitor the patient's course of treatment and provide the
physician with regular reports on the patient's status. Prior to the delivery of
home healthcare, a nurse from the local branch assesses the home environment and
helps determine the suitability of home care and what services are needed.
Nurses continue to visit their patients as needed to carefully monitor their
course of treatment. The Company offers a broad range of nursing and related
patient services, including:
Registered nurses who provide a broad range of nursing care, including
pain management, infusion therapy, skilled observation and assessment
and teaching procedures.
Licensed practical nurses who perform technical nursing procedures,
such as injections and dressing changes.
Physical therapists who provide needed therapies to help patients
improve activities of daily living, as well as structured therapies to
improve mobility and specialized exercise programs.
Occupational therapists who provide structured therapies for increased
independence in the patient's daily living.
Speech therapists who provide therapies to increase a patient's
communication skills and improve swallowing techniques following a
trauma.
Social workers who help patients and their families deal with the
concerns that arise from health problems.
Home health aides who provide assistance, hourly or around-the-clock,
with personal care, such as bathing and walking.
Homemakers/companions who assist with meal preparation and
housekeeping.
Infusion Therapy Services. Infusion therapies involve the intravenous
administration of anti-infective, chemotherapy, pain management, nutrition and
other therapies. Before accepting a patient for home infusion treatment, the
nursing staff at the local branch works closely with the patient's physician to
assess the patient's suitability for home care. Once it has been determined that
the patient should receive home infusion therapy, the nursing staff trains the
patient and/or patient's family members in the proper use of home infusion
therapy equipment. The Company provides the following home infusion therapy
services:
Enteral nutrition which is the infusion of nutrients through a feeding
tube inserted directly into the functioning portion of a patient's
digestive tract. This long-term therapy is often prescribed for
patients who are unable to eat or drink normally.
Antibiotic therapy which is the infusion of antibiotic medications
into a patient's bloodstream typically to treat a variety of serious
infections and diseases.
Total parenteral nutrition which is the long-term provision of
nutrients through surgically implanted central vein catheters or
through peripherally inserted central catheters, for patients who
cannot absorb adequate nutrients enterally due to chronic
gastrointestinal conditions.
Pain management which involves the infusion of certain drugs into the
bloodstream of patients suffering from acute or chronic pain.
Chemotherapy which is the infusion of drugs into a patient's
bloodstream to treat various forms of cancer.
Other therapies including new delivery technologies and medications to
address a broad range of patient conditions, such as the side effects
associated with transplants, HIV/AIDS and cancer.
Marketing. The Company generates referrals from physicians, hospitals,
discharge planners and other healthcare professionals. Recently, more people
have enrolled in managed care organizations and, as a result, the Company's
traditional referral base has changed. In order to compete, the Company is
continuing its program of marketing its services to managed care organizations.
The Company competes for referrals by offering a full range of cost-effective
home healthcare services, a focus on disease management and a strong regional
presence. The Company believes that its reputation as a cost-conscious provider
of services positions it favorably among managed care organizations.
Each branch manager spends time marketing the Company's services to
referral and payment sources. The marketing techniques employed by the Company
include direct solicitation, direct mail, exhibitions at professional
conferences and seminars, submission of proposals for contractual arrangement,
active participation in community events and ongoing commitment to customer
service.
Corporate personnel work closely with each branch to develop their
abilities to cross-sell the Company's services. The nursing staff assists in the
marketing effort by helping to educate referral sources about the services the
Company offers to its specialized patient populations.
Competition. The home healthcare market is highly competitive and is
undergoing both horizontal and vertical integration. As a result of such
consolidation, the Company's competitors include nationwide operators who have
hundreds of branches. Some of the competitors include hospital chains and
providers of multiple products and services for the home healthcare market. The
established referral networks of certain of these healthcare providers, combined
with their size and purchasing power, make them formidable competitors to the
Company. Managed care organizations, a referral base crucial to the Company's
success, may show a preference to deal with these larger, regional or national
providers, who may offer more services and areas of expertise.
In addition, there are few barriers to entry in the home healthcare market.
New competitors have entered the areas served by the Company and others may do
so in the future. There can be no assurance that such increased competition will
not have a material adverse effect on the Company's operations and financial
condition.
The Company competes on the basis of a number of factors, including the
cost-effectiveness of its services, the quality of its services, and its
reputation and regional focus. The Company's focus on disease management and
emphasis on treating certain patient populations allows it to differentiate
itself from its competitors. By increasing its regional focus and reducing its
overhead to become a low-cost provider, the Company believes that it can compete
against larger alternate healthcare providers.
Outpatient Rehabilitation Services
General. Currently, the Company operates four outpatient rehabilitation
clinics in Colorado and three outpatient rehabilitation clinics (two of which
are operated under a management agreement) in Florida. During fiscal 1997, the
Company closed six outpatient rehabilitation clinics in Colorado and Florida.
Subsequent to fiscal year end, the Company sold five outpatient rehabilitation
clinics in Florida and Georgia. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The Company is currently
considering possible opportunities to sell its Colorado outpatient
rehabilitation clinics and its remaining Florida operations.
Products and Services. The Company delivers its services through its
outpatient rehabilitation clinics. 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 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.
Marketing. The Company's marketing strategy is to develop a broad base of
referral sources for its outpatient rehabilitation services on regional and
local levels. In marketing its services, the Company focuses on the high quality
of its services and its geographic presence in Colorado. The Company also
emphasizes its outcome oriented approach to rehabilitation.
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.
The Company has secured contracts with numerous insurance companies, and
continues to pursue contractual relationships with payors at the regional and
local level.
Competition. The outpatient rehabilitation industry is 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.
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 therapists and other skilled
professionals. Many of the Company's competitors have far greater financial and
personnel resources than the Company.
The primary competitive factors in the outpatient rehabilitation industry
remain quality of care, responsiveness to the patients' and payors' needs,
durable outcomes and cost-effectiveness.
The Company's outpatient rehabilitation business has been affected 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 affected by the competitive pressure to reduce
healthcare costs. An increase in the number of providers offering similar
services resulted in a shift of patients to other providers, and lower
reimbursement rates. These factors contributed to the Company's decision to sell
or close a number of its outpatient rehabilitation clinics during fiscal 1997
and subsequent to fiscal year end. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
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 business line:
Year Ended
June 30, 1997
------------------
(000's) %
Acute, Subacute and Post-Acute Rehabilitation
Services................................... $9,990 48%
Outpatient Rehabilitation Services ........... 4,541 22%
Home Health Services.......................... 6,303 30%
------- -------
Net Operating Revenues ....................... $20,834 100%
======= =======
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,
------ ------------------------------------
1995 1996 1997
---- ---- ----
Private payors and commercial insurance .... 67% 59% 51%
Medicare ................................... 16% 34% 41%
Medicaid ................................... 17% 7% 8%
---- ---- ----
Total ................................ 100% 100% 100%
==== ==== ====
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 negotiated fixed-rate contractual arrangements with numerous
individual patients and third party payors, including insurance companies and
managed care providers. The increase in the percentage of net operating revenue
received from Medicare during fiscal 1996 and 1997 reflects the increased
proportion of Medicare patients at the Company's home health agencies in
Colorado and Kansas.
During fiscal 1997 and subsequent to year end the Company sold all of its
acute, subacute and post-acute facilities as well as its outpatient
rehabilitation clinics in Alaska and five outpatient rehabilitation clinics and
certain other assets in Florida and Georgia. In addition, the Company closed six
outpatient rehabilitation clinics in Colorado and Florida during fiscal 1997.
The Company currently operates home health agencies with operations in Colorado
and Kansas, four outpatient rehabilitation clinics in Colorado and three
outpatient rehabilitation clinics (two of which are operated under a management
agreement) in Florida. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The following table sets forth the percentage of the Company's net
operating revenues for fiscal 1997 assuming that the dispositions referred to
above had taken place at the beginning of fiscal 1997:
Year Ended
June 30,
Source 1997
------ ----------
Private payors and commercial insurance .... 21%
Medicare ................................... 67%
Medicaid.................................... 12%
----------
Total............................ 100%
==========
During fiscal 1997, the Company provided inpatient and outpatient services
to Medicare patients at several of its facilities and in its home health
business. The Medicare program generally utilizes a cost-based reimbursement
system for rehabilitation services under which home health agencies, 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.
The Company has applied for an exception from such cost ceilings for fiscal
years 1992 through 1995 for its former Gardner, Kansas facility. The Company did
not transfer accounts receivable in connection with the sale of its Kansas
operations. Accordingly the Company intends to file such requests for the Kansas
facility for fiscal years 1996 and 1997. 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 or home health agency'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.
Regulation
The healthcare industry is subject to substantial federal, state and local
government regulation. These regulations affect 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 and programs 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.
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 affect
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.
The Company's Colorado and Kansas home health agencies and its Colorado
outpatient rehabilitation clinics are certified to participate in Medicare. 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 is also subject to federal and state fraud and abuse laws
prohibiting direct or indirect payments for patient referrals, prohibiting
referrals to an entity in which the referring provider has a financial interest,
and regulating reimbursement procedures and practices under Medicare, Medicaid
and state programs as well as in relation to private payors. While the Company
believes that it is in material compliance with such laws, it continues to
monitor its compliance.
The anti-kickback provisions of the federal Medicare and Medicaid Patient
and Program Protection Act of 1987 (the "Anti-kickback Statute") prohibit the
offer, payment, solicitation or receipt of any remuneration in return for the
referral of items or services paid for in whole or in part under the Medicare or
Medicaid programs (or certain other state healthcare programs). To date, courts
and government agencies have interpreted the Anti-kickback Statute to apply to a
broad range of financial relationships between providers and referral sources,
such as physicians and other practitioners. The United States Department of
Health and Human Services has adopted regulations creating "safe harbors" for
federal criminal and civil penalties under the Anti-kickback Statute by
exempting certain types of ownership interests and other financial arrangements
that do not appear to pose a threat of Medicare and Medicaid program abuse.
Transactions covered by the Anti-kickback Statue that do not conform to an
applicable safe harbor are not necessarily in violation of the Anti-kickback
Statute, but the practice may be subject to increased scrutiny and possible
prosecution. The criminal penalty for conviction under the Anti-kickback Statute
is a fine of up to $25,000 and/or up to 5 years imprisonment. In addition,
conviction mandates exclusion from participation in the Medicare and Medicaid
programs. Such exclusion can also result in conviction under other federal laws
which impose civil and criminal penalties for submitting false claims, such as
claims for services not provided as alleged. Several healthcare reform proposals
have included an expansion of the Anti-kickback Statute to apply to referrals of
any patients regardless of payor source.
The federal government has increased significantly the financial and human
resources allocated to enforcing the fraud and abuse laws. It is the Company's
policy to monitor its compliance with such laws and to take appropriate actions
to ensure such compliance. While the Company believes that it is in material
compliance with such laws, there can be no assurance that the practices of the
Company, if reviewed, would be found to be in full compliance with such laws, as
such laws ultimately may be interpreted.
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, 1996 and 1997, the Company had the following employees:
June 30,
-----------
1996 1997
---- ----
Full-Time Employees 412 274
Part-Time Employees 73 38
On-Call Per Diem Employees 128 113
---- ----
Total Employees 613 425
==== ====
Of the full-time employees at June 30, 1996 and 1997, 15 and 11 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 35 employees at the Company's former Florida
outpatient clinics were employed under a staff leasing arrangement at June 30,
1997. The employees were 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 sale of the Company's Georgia and Illinois operations in fiscal 1997,
resulted in a total reduction of 191 employees. These employees are included in
the June 30, 1996 totals set forth above. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
The following table reflects the approximate number of people employed by
the Company, as of the date of this report, at the Company's outpatient
rehabilitation clinics in Colorado and Florida, the home health agencies with
operations in Colorado and Kansas, and the Company's headquarters.
Full-Time Employees 184
Part-Time Employees 26
On-Call Per Diem Employees 87
----
Total Employees 297
====
Although the Company has a sufficient pool of skilled employees to staff
its programs 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 the date of this report, the Company operates four outpatient
rehabilitation clinics in Colorado, three outpatient rehabilitation clinics (two
of which are operated under a management agreement) in Florida and fifteen home
health agencies and satellite locations.
Colorado Outpatient Rehabilitation Clinics Location
------------------------------------------ --------
Medbrook Rehab Center of Colorado Colorado City, CO
Medbrook Rehab Center of Colorado Monte Vista, CO
Medbrook Rehab Center of Colorado Pueblo, CO
Medbrook Rehab Center of Colorado Trinidad, CO
Florida Outpatient Rehabilitation Clinics
-----------------------------------------
Medbrook Rehab Center Jacksonville, FL
Medbrook Rehab Center Jacksonville, FL
Medbrook Rehab Center St. Augustine, FL
Home Health
-----------
Total Home Health, Inc. Colorado Springs,CO
Total Home Health, Inc. Cortez, CO
Total Home Health, Inc. Delta, CO
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. Dodge City, KS
Total Home Health, Inc. Garden City, KS
Total Home Health, Inc. Leoti, KS
Sold or Closed Locations
During fiscal 1997 and subsequent to year end the Company sold or closed the
following locations:
Colorado and Alaska Outpatient Facilities 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 Springs, CO
Medbrook Rehab Center of Colorado Florence, CO
Medbrook Rehab Center of Colorado Las Animas, CO
Medbrook Rehab Center of Colorado Rifle, CO
Medbrook Rehab Center of Colorado Walsenburg, CO
Medbrook Rehab Center of Colorado Woodland Park, CO
Florida Outpatient Facilities Location
----------------------------- --------
Beaches Physical Therapy St. Augustine, FL
Body Anew Ormond Beach, FL
Bodymax Physical Therapy of Palatka Palatka, FL
Medbrook Rehab Center Daytona, FL
Medbrook Rehab Center Palm Coast, FL
Medbrook Rehab Center St. Augustine, FL
Moultrie Physical Therapy Moultrie, GA
Acute Rehabilitation Facility Location Capacity Date Opened
----------------------------- -------- -------- -----------
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
The Company cannot calculate a patient utilization percentage for the
Company's outpatient rehabilitation facilities or home health agencies because
there is no measurable capacity for the potential number of visits.
The Company leases all of its properties. The Company maintains its
corporate office in Emeryville, California under a lease which expires in
October 1997.
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 only other executive officer
of the Company is James F. Murphy. Mr. 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 35 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 25, 1997, the closing sales price of the Class A Common Stock was
$2.50 per share.
The table below sets forth the quarterly high and low closing sales prices
for the Class A Common Stock in the period from July 1, 1995 through June 30,
1997 (giving effect to the one-for-three reverse stock split reflected on April
22, 1996 as if it had occurred on July 1, 1995):
Fiscal 1996 Fiscal 1997
----------- -----------
Quarter High Low High Low
------- ---- --- ---- ---
1st $7 1/2 $6 $2 3/4 $1
2nd $6 $1 1/2 $2 3/4 $1 3/8
3rd $4 1/2 $2 1/4 $1 13/16 $1 5/8
4th $4 1/4 $1 1/2 $2 1/2 $1 7/8
The Company has not paid cash dividends in the past and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
As of September 25, 1997, there were 74 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,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
Statements of Operations Data:
Net operating revenues $28,650 $18,052 $19,974 $23,623 $20,834
Non-capital operating expenses:
Salaries and employee benefits 15,905 11,107 12,036 15,189 14,877
Provision for doubtful accounts 3,681 1,099 1,371 584 454
Other non-capital operating expenses 8,639 6,353 5,821 5,986 5,650
Write-down of intangible assets -- -- 1,030 -- 1,440
Net loss on disposal and provision
for subsequent disposal of assets -- -- -- -- 82
-------- -------- -------- -------- --------
Total non-capital operating expenses 28,225 18,559 20,258 21,759 22,503
-------- -------- -------- -------- --------
Capital expenses:
Depreciation and amortization 497 479 543 586 572
Rent 3,085 2,223 2,351 1,953 1,635
Interest expense (income) (201) (193) 26 (114) (55)
-------- -------- -------- -------- --------
Total capital expenses 3,381 2,509 2,920 2,425 2,152
-------- -------- -------- -------- --------
Restructuring charges 1,041 675 310 -- --
Settlement of litigation -- 1,438 -- -- --
-------- -------- -------- -------- --------
Total expenses 32,647 23,181 23,488 24,184 24,655
-------- -------- -------- -------- --------
Net loss before income taxes and minority
interest (3,997) (5,129) (3,514) (561) (3,821)
Income tax provision (benefit) (1,244) (787) (93) -- --
-------- -------- -------- -------- --------
Net loss before minority interest ($2,753) ($4,342) ($3,421) ($561) ($3,821)
Minority interest -- 30 108 29 30
-------- -------- -------- -------- --------
Net loss ($2,753) ($4,372) ($3,529) ($590) ($3,851)
======== ======== ======== ======== ========
Net loss per common share ($1.42) ($2.26) ($1.82) ($0.31) ($1.99)
Weighted average common shares used in per
common share calculation 1,943 1,939 1,937 1,930 1,930
At June 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $16,451 $11,889 $7,711 $6,519 $4,815
Total assets 23,058 18,587 16,304 14,840 9,548
Long-term liabilities and capital lease
obligations 129 550 1,074 658 49
Stockholders' equity 18,721 14,249 10,677 10,086 6,236
During fiscal 1997 and subsequent to year end the Company sold all of its
acute, subacute and post-acute facilities as well as its outpatient
rehabilitation clinics in Alaska, and certain outpatient rehabilitation clinics
in Florida and Georgia. In addition, the Company closed six outpatient
rehabilitation clinics in Colorado and Florida during fiscal 1997. The Company
currently operates home health agencies with operations in Colorado and Kansas,
four outpatient rehabilitation clinics in Colorado and three outpatient
rehabilitation clinics (two of which are operated under a management agreement)
in Florida.
The following table sets forth unaudited pro forma selected financial data
for the twelve months ended June 30, 1997 as if the asset dispositions that have
occurred since July 1, 1996 had taken place on July 1, 1996. Such unaudited pro
forma financial information reflects all adjustments for the twelve months ended
June 30, 1997, consisting only of normal recurring adjustments which, in the
opinion of management, are necessary to fairly state the Company's results of
its operations for the period presented. The unaudited pro forma financial
information does not purport to present the consolidated financial position and
consolidated results of operations of the Company had the dispositions actually
occurred on July 1, 1996; nor does it purport to be indicative of results that
will be attained in the future. The pro forma financial information should be
read in conjunction with the Company's Form 8-K dated March 31, 1997, the
Company's Form 8-K dated July 31, 1997, and the Company's Form 8-K dated August
31, 1997.
Year Ended
June 30,
1997
---------------------
(In thousands, except
per share data)
Pro Forma Statements of Operations Data:
Net operating revenues $9,186
Non-capital operating expenses:
Salaries and employee benefits 6,216
Provision for doubtful accounts 82
Other non-capital operating expenses 2,675
Loss on disposal of assets 7
-------
Total non-capital operating expenses 8,980
Capital expenses:
Depreciation and amortization 249
Rent 508
Interest expense (income) (270)
-------
Total capital expenses 487
-------
Net loss before income taxes (281)
Income tax provision (benefit) --
-------
Net loss ($281)
=======
Net loss per common share ($0.15)
Weighted average common shares used in per
common share calculation 1,930
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TRENDS AND RECENT EVENTS
Potential Ineligibility for Continued Listing on the NASDAQ National Market
The NASDAQ Stock Market has adopted new quantitative maintenance
requirements for continued listing on the NASDAQ National Market. The new
criteria become effective on February 23, 1998. The Company currently is in
compliance with all of the new criteria for continued NASDAQ National Market
listing except for the requirement that the market value of its public float be
at least $5 million. The Company estimates that the market value of its public
float as of September 25, 1997 is $2,877,000. If the Company is not in
compliance with the new maintenance criteria on the effective date, the Company
understands that it would be moved to the NASDAQ SmallCap Market. Delisting from
the NASDAQ National Market could have an adverse effect on the liquidity of the
Company's Class A Common Stock.
Consideration of Strategic Alternatives
Since the beginning of fiscal 1997, the Company has disposed of
substantially all of its operating assets. On August 31, 1997, the Company sold
five of its outpatient rehabilitation clinics in Florida and Georgia and certain
other assets. On July 31, 1997, the Company sold its Kansas operations. On March
31, 1997, the Company sold all of its Georgia operations, consisting of a
neurobehavioral program, a subacute program operated under a management
agreement, and a post-acute program. Earlier in fiscal 1997, the Company sold
its post-acute program in Illinois and its outpatient rehabilitation clinics in
Alaska. In addition, the Company closed six outpatient rehabilitation clinics in
Colorado and Florida during fiscal 1997. The Board of Directors of the Company
is continuing to evaluate the Company's strategic direction and alternatives.
The alternatives under consideration by the Board include, among other things, a
merger or other business combination and/or additional sales of assets. There
can be no assurance that any such alternatives will be available on favorable
terms, if at all.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the Company's business should not necessarily be limited to
medical rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity, the Company should consider investing the
proceeds from its asset sales in non-healthcare businesses. As a result, the
nature of the Company's business could change significantly. Dr. Glasser holds a
majority of the combined voting power of the Company's two classes of common
stock and, accordingly, has the ability to effect a change in management or to
cause or prevent a significant corporate transaction regardless of how other
stockholders might vote.
Recent Asset Dispositions
Sale of Florida Operations. On August 31, 1997, the Company sold five
outpatient rehabilitation clinics and certain other assets located in Florida
and Georgia. The outpatient rehabilitation clinics were located in St.
Augustine, Palatka, Palm Coast, and Ormond Beach, Florida and in Moultrie,
Georgia. The Company sold the clinics in two separate transactions. The
aggregate sale price for the outpatient rehabilitation clinics and other assets
was $550,000. The Company received promissory notes from the purchasers for the
aggregate purchase price. The promissory notes are secured by the acquired
assets and the Company also received personal guarantees from the stockholders
of the purchasers. The purchasers acquired all assets including accounts
receivable and are responsible for all accounts payable and certain payroll
liabilities. As part of the transaction, the Company retained all liabilities
for amounts due to the former owners of the clinics. At closing, this amount was
$197,000. This transaction resulted in a loss of $2,046,000, primarily as a
result of the write-down of goodwill associated with the Company's acquisition
of certain of the clinics in 1994. The loss is recorded as other operating
expense in the Company's June 30, 1997 financial statements.
Sale of Kansas Operations. On July 31, 1997, the Company sold its Kansas
operations, consisting of acute, subacute and post-acute rehabilitation
programs. The sale price for the Kansas operations was $1,500,000 in cash. The
Company's agreement with the purchaser provides that the Company retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. The increase in the Company's cash position as a result of
this transaction, assuming collection of the accounts receivable, will be
approximately $2,500,000. This transaction will result in a gain of
approximately $1,178,000. This gain will be reflected in the Company's first
quarter fiscal 1998 results.
Sale of Georgia Operations. On March 31, 1997, the Company sold its Georgia
operations, consisting of a neurobehavioral program, a subacute program operated
under a management agreement, and a post-acute program and related real estate.
The sale price for the Georgia operations was $1,300,000 in cash. The Company's
agreement with the purchaser provided that the Company retain outstanding
accounts receivable and be responsible for the accounts payable at the closing
date. This transaction resulted in a gain of $517,000, which was recorded as
other operating income in fiscal 1997.
Sale of Alaska Operations. On January 13, 1997, the Company sold its three
outpatient rehabilitation clinics in Alaska. The sale price was $200,000. This
transaction resulted in a loss of $29,000, which was recorded as other operating
expense during fiscal 1997.
Sale of Illinois Operations. On October 7, 1996, the Company sold the
assets of its post-acute rehabilitation operations located in Park Ridge,
Illinois for $100,000 in cash. The Company's agreement with the purchaser
provided that the Company retain outstanding accounts receivable and be
responsible for the accounts payable at the closing date. This transaction
resulted in a gain of $63,000, which was recorded as other operating income
during fiscal 1997.
Colorado Outpatient Clinics and Home Health Agency Acquisition. On June 30,
1995, the Company acquired eleven outpatient rehabilitation clinics in Colorado,
three outpatient rehabilitation clinics in Alaska and home health agencies with
operations in Colorado, New Mexico and Kansas. The Company paid $133,000 and
incurred liabilities of $572,000 in connection with the purchase. The Company
also agreed to make additional payments based on the earnings performance of the
outpatient rehabilitation clinics and the home health agencies based on the
results for the twelve month periods ending June 30, 1996 through 1999. The
Company was not required to make any cash payment based on results as of June
30, 1996 or 1997. If the operations collectively achieve the target earnings
thresholds for the twelve months ending June 30, 1998 and 1999, the Company's
maximum liability would be $550,000. During fiscal 1997 the Company closed its
home health agency in New Mexico.
In addition, in connection with the acquisition, the Company agreed to
deposit $500,000 to secure a $900,000 bank loan to the previous owner of the
acquired businesses. The Company is overseeing the repayment of the loan through
the collection of accounts receivable which are being collected on behalf of the
previous owner. At the time of the acquisition, the Company anticipated that the
loan would be repaid based on the accounts receivable balance then outstanding.
However, accounts receivable collections have not been sufficient to repay the
loan, and the loan balance on June 30, 1997 was $249,000. This loan balance is
collateralized by personal assets of the debtor.
In October 1995, the Company was notified by its intermediary that its
Medicare payments for the home health agencies were being withheld to offset
amounts due by the previous owner for final settlement of the home health
agencies' cost reports for the years 1992 through 1995. While the intermediary
resumed making payments for current charges in January 1996, the intermediary
had withheld $728,000 related to these settlements. During the second quarter of
fiscal 1997, the Company received $425,000 in payment of amounts withheld. The
Company has submitted appeals on behalf of the previous owner requesting payment
of the remaining balance. In the event that such appeals are unsuccessful, the
Company intends to pursue collection from the previous owner and offset the
amounts withheld against any additional amounts due to the previous owner under
the acquisition agreements. Amounts owed to the Company as of June 30, 1997, by
Medicare and the previous owner of the Colorado operations exceed the minimum
amounts owed to the previous owner by $237,000.
On January 1, 1996, the Company acquired the assets of two physical therapy
clinics in Pueblo and Colorado City, Colorado. In connection with the
acquisitions, the Company paid $45,000 and became obligated to pay an additional
$20,000. Additionally, the Company assumed liabilities of $75,000.
On April 1, 1996, the Company acquired the assets of a contract therapy
business with operations in Pueblo and Colorado Springs, Colorado. The business
provides therapy staffing to hospitals, nursing homes and home health agencies.
In connection with the acquisition, the Company paid $10,000 and assumed
liabilities for leasehold improvements of $62,000.
Healthcare Regulation and Reform
Continuing political debate is subjecting the healthcare industry to
significant reform. Healthcare reform proposals have been formulated by the
current administration, members of Congress, and, periodically, state
legislators. These proposals include the current administration's announcement
of a "crack down on fraud in the home healthcare industry" and the related six
month moratorium on the admission of new home health providers into the Medicare
program. Government officials can be expected to continue to review and assess
alternative healthcare delivery systems and payment methodologies. Changes in
the law or new interpretations of existing laws may have a dramatic effect on
the definition of permissible or impermissible activities, the relative cost of
doing business, and the methods and amounts of payments for medical care by both
governmental and other payors. Legislative changes to "balance the budget" and
slow the annual rate of growth of Medicare and Medicaid are expected. Such
changes may adversely impact reimbursement for the Company's services.
Forward-looking Statements
In addition to the historical information contained herein, this Form 10-K
contains forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to risks and uncertainties, including
risks and uncertainties set forth in this Form 10-K, that may cause actual
results to differ materially. These forward-looking statements speak only as of
the date hereof. The Company disclaims any intent or obligation to update these
forward-looking statements.
RESULTS OF 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: 1995 1996 1997
---- ---- ----
Net operating revenues 100.0% 100.0% 100.0%
------- ------- -------
Non-capital operating expenses:
Salaries and employee benefits 60.3 64.3 71.4
Provision for doubtful accounts 6.9 2.5 2.2
Other non-capital operating expenses 29.1 25.3 27.1
Write-down of intangible assets 5.2 -- 6.9
Net loss on disposal and provision for
subsequent disposal of assets -- -- 0.4
------- ------- -------
Total non-capital operating expenses 101.5 92.1 108.0
------- ------- -------
Capital expenses:
Depreciation and amortization 2.7 2.5 2.8
Rent 11.8 8.3 7.9
Interest (income) expense 0.1 (0.5) (0.3)
------- ------- -------
Total capital expenses 14.6 10.3 10.4
------- ------- -------
Restructuring charges 1.6 -- --
------- ------- -------
Total expenses 117.7 102.4 118.4
------- ------- -------
Net loss before income taxes and minority
interest (17.7) (2.4) (18.4)
Income tax provision (benefit) (0.5) -- --
------- ------- -------
Net (loss) before minority interest (17.2) (2.4) (18.4)
Minority interest 0.5 0.1 0.1
------- ------- -------
Net (loss) (17.7%) (2.5%) (18.5%)
======= ======= =======
Year ended June 30, 1997 Compared to the Year ended June 30, 1996
The Company's net operating revenues decreased 12% to $20,834,000 for the
year ended June 30, 1997, as compared to $23,623,000 in the prior fiscal year.
The decrease was due to decreased patient volume at the Company's Kansas
facility, as well as the sale of the Company's Illinois operations in October
1996, the sale of the Company's Alaska operations in December 1996, and the sale
of the Company's Georgia operations in March 1997. See "Trends and Recent
Events". The number of patient days in the Company's former core business
decreased 23% to 20,846 patient days for the year ended June 30, 1997, from
27,014 in the prior fiscal year. The decrease was primarily due to lower census
levels at the Company's Kansas facility and the sale transactions referred to
above.
Below is a summary of net operating revenues and patient days for fiscal
1996 and 1997 with respect to the operations sold by the Company during fiscal
1997:
Net Operating Revenues Patient Days
Fiscal year Fiscal year
------------------------ ----------------
1996 1997 1996 1997
---------- ---------- ------ ------
Alaska $696,000 $372,000 N/A N/A
Georgia 6,068,000 4,856,000 13,767 10,672
Illinois 1,803,000 307,000 3,142 614
---------- ---------- ------ ------
Total $8,567,000 $5,535,000 16,909 11,286
========== ========== ====== ======
The decrease in net operating revenues in the Company's former core
business was partially offset by increased net operating revenues in the
Company's home health business. The number of patient visits in the Company's
home health business increased 46% to 126,510 patient visits for the year ended
June 30, 1997, from 86,868 patient visits in the prior fiscal year.
In the following discussion, the Company distinguishes between capital and
non-capital operating expenses. This distinction is made to clarify those costs
that are controllable from those costs that are not controllable, in the short
term. Capital expenses such as rent are generally fixed in the short term.
Non-capital operating expenses such as employee costs are generally variable in
the short term and are therefore subject to faster management intervention as
business conditions change.
Total non-capital operating expenses increased 3% for the year ended June
30, 1997, to $22,503,000, as compared to $21,759,000 for the same period in the
prior fiscal year. The increase relates primarily to the write-down of
intangible assets and provision for the loss on the subsequent disposition of
the Company's Florida operations totaling $2,046,000. Such loss was partially
offset by the net gain of $524,000 recorded on the sale of the Company's Alaska,
Georgia and Illinois operations, as well as losses on the sale of certain other
assets. Salaries and employee benefits continue to be the primary component of
the Company's non-capital operating expenses. Salaries and employee benefits
decreased 2% to $14,877,000 for the year ended June 30, 1997, as compared to
$15,189,000 for the same period in the prior fiscal year.
The Company's other non-capital operating expenses primarily consist of
professional fees, purchased services and other operating expenses. For the year
ended June 30, 1997, the Company's other non-capital operating expenses
decreased 6% to $5,650,000, as compared to $5,986,000 for the same period in the
prior fiscal year. The decrease is primarily due to lower purchased services and
professional fees as a result of the sale of the Company's Alaska, Georgia and
Illinois operations during fiscal 1997. The provision for doubtful accounts
decreased to $454,000 for the year ended June 30, 1997, from $584,000 for the
same period in the prior fiscal year. The provision for doubtful accounts as a
percentage of revenues was 2% for fiscal 1996 and 1997.
Total capital expenses decreased 11% for the year ended June 30, 1997, to
$2,152,000 as compared to $2,425,000 for the same period in the prior fiscal
year. Rent expense decreased 16% to $1,635,000 for the year ended June 30, 1997
as compared to $1,953,000 for the same period in the prior fiscal year. The
decrease in rent expense is primarily due to lower rents paid under leases
requiring payments on the basis of net operating revenue and patient volume at
certain facilities, as well as the sale of the Company's Alaska, Georgia and
Illinois operations during fiscal 1997.
Net interest income for the year ended June 30, 1997, decreased to $55,000
as compared to $114,000 for the same period in the prior fiscal year. This
decrease is due to lower cash balances available for investment during fiscal
1997.
The Company reported a net loss of $3,851,000 for the year ended June 30,
1997, as compared to a net loss of $590,000 for the same period in the prior
fiscal year. The fiscal 1997 loss included the $1,522,000 net loss incurred in
connection with the sale of certain operations during and subsequent to fiscal
1997. The Company did not record a tax benefit for fiscal years 1996 and 1997
because carrybacks of current losses against previous taxable earnings are no
longer available.
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 operating revenue of $7,127,000 generated
by the Colorado outpatient clinics and Colorado and Kansas home health business
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., its acute, subacute and post-acute rehabilitation units in
Georgia, Illinois and Kansas). Excluding the Company's Arlington, Texas
post-acute facility which was closed in fiscal 1995, the number of patient days
in the Company's core business decreased 7% to 27,014 patient days 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 was operated by the Company under a management
agreement beginning on June 5, 1995. The decrease in fiscal 1996 was 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 7% to $21,759,000 from $20,258,000 during the prior fiscal year. This
increase primarily resulted from the acquisition of the Colorado outpatient
clinics and Colorado and Kansas home health agencies. Salaries and employee
benefits were 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 was 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 consist of
professional fees, purchased services and other operating expenses. For the year
ended June 30, 1996 other non-capital operating 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 Colorado and Kansas
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% for the year ended June 30, 1996, as compared to 7% 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
operating 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 Colorado and Kansas 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, 01996 because carrybacks of
current losses against previous taxable earnings are no longer available.
Unaudited Quarterly Results
Set forth below is certain summary information with respect to the
Company's operations for the last eight fiscal quarters:
Fiscal 1996 Fiscal 1997
------------------------------------ ---------------------------------
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 $5,579 $6,095 $6,321 $5,628 $5,977 $5,528 $5,508 $3,821
Income (loss) before income
taxes and minority interest (563) 105 51 (154) (598) (513) 98 (2,809)
Net Income (loss) (585) 88 34 (127) (611) (517) 88 (2,811)
Earnings (loss) per share ($0.30) $0.05 $0.02 ($0.07) ($0.32) ($0.27) $0.05 ($1.46)
Average shares outstanding 1,931 1,930 1,930 1,930 1,930 1,930 1,930 1,930
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $4,815,000, compared
to working capital of $6,519,000 at June 30, 1996. The Company had cash and cash
equivalents of $2,929,000 at June 30, 1997, as compared to $3,439,000 at June
30, 1996. 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, 1997, $279,000 of the amount deposited is
classified as restricted cash securing the loan balance of $249,000, as well as
security for the Company's outstanding balance on its line-of-credit. See
"Trends and Recent Events".
During the fiscal year ended June 30, 1997, the Company's operating
activities used $637,000 of available cash resources, as compared to cash used
for operating activities of $2,001,000 during the same period in the prior
fiscal year. The cash used for operating activities during the year ended June
30, 1997 primarily reflects amounts necessary to fund the Company's net
operating losses. The cash used for operating activities during the year ended
June 30, 1996 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. Cash provided from investment activities during
the year ended June 30, 1997 was $923,000, as compared to cash used for
investment activities of $1,013,000 during the prior fiscal year. The cash
provided from investment activities for the year ended June 30, 1997 primarily
relates to proceeds from the sales of the Company's Alaska, Georgia and Illinois
operations. See "Trends and Recent Events".
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $4,279,000 at June 30, 1997, as compared to $4,739,000 at
June 30, 1996. At June 30, 1997, the Company had an allowance for doubtful
accounts of $1,195,000, as compared to $1,445,000 at June 30, 1996. The number
of average days of revenue outstanding, excluding the revenues and receivables
related to litigation patients, was 67 days at June 30, 1997, as compared to 65
days at June 30, 1996.
It was the Company's practice in its core business to admit selected
patients who were seeking monetary recovery in pending litigation with third
parties. These patients are directly obligated to pay the Company for services
rendered although the timing of collection is determined by the settlement of
their litigation and is beyond the control of the Company. For this reason,
liens were generally placed against pending insurance settlements. Prior to
admitting such patients, the Company and its counsel evaluated the merits of the
patient's case, the anticipated cost of services to be provided and the
likelihood of the patient's successful recovery of damages in litigation. Once
the patient was admitted, the Company and its counsel monitored the status of
the litigation. The Company retained the accounts receivable related to such
patients in connection with the sale of its Kansas operations. There can be no
assurance, however, that the Company will ultimately be reimbursed for all the
services it provided to such patients. At June 30, 1997, accounts receivable
related to these litigation patients totaled $520,000, as compared to $444,000
at June 30, 1996. These litigation patient receivables accounted for an
additional 13 and 19 average days revenue outstanding at June 30, 1997 and June
30, 1996, respectively.
The Company's amount due to Medicare intermediaries of $101,000 at June 30,
1997 includes amounts the Company anticipates to pay on cost report settlements
for its Colorado home health agencies and its final cost report for the
Company's former Gardner, Kansas facility. Such amount also includes amounts the
Company expects to receive upon regulatory approval of the Company's annual
application for an exception from the routine cost limitation ("RCL") under the
Medicare program for fiscal years 1992 through 1996 for its former Gardner,
Kansas facility. Medicare reimbursement is generally based upon reasonable
direct and indirect allowable costs incurred in providing services. At the
Company's former Gardner, Kansas facility these costs were subject to the RCL.
Requests for an exception from the RCL have been submitted for fiscal years 1992
through 1995 for the Company's former Gardner, Kansas facility. In connection
with the sale of its Kansas operation, the Company retained the accounts
receivable and it accordingly intends to file such a request for fiscal 1996 and
1997. The requests are based upon atypical costs incurred at the Kansas facility
in the treatment of patients who received substantially more intensive services
than those generally received in 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.
The Company has no current material commitments for capital expenditures,
except for those in connection with the Company's acquisitions as described
under "Trends and Recent Events" above. The Company also expects to make routine
capital improvements to its facilities in the normal course of business.
The Company may use a portion of its cash balance to finance internal
development of its home health business line. The Company has a line-of-credit
of $1,000,000 from a bank. Any draws on the line-of-credit would be secured by a
cash deposit. At June 30, 1997, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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 1997 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 "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive proxy statement for its 1997 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 1997 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 1997 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 1997 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, 1996 and 1997............ 3
Consolidated Statements of Operations for the Years
Ended June 30, 1995, 1996 and 1997....................... 4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1995, 1996 and 1997....................... 5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1995, 1996 and 1997....................... 6
Notes to Consolidated Financial Statements....................... 7
2. Financial statement schedules for the Years
Ended June 30, 1995, 1996 and 1997
II - Valuation and Qualifying Accounts.................... 17
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 filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended 1996
and incorporated herein by reference.
3.3 Amended and Restated By-Laws of the Company, filed as
Exhibit 3.2 to the Registration Statement and
incorporated herein by reference.
10.1 1994 Stock Incentive Plan of the Company filed as Exhibit
10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 (the "1995 10-K") and
incorporated herein by reference.
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 Lease Agreement dated December 31, 1994, by and among Dr.
Harvey Wm. Glasser, 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 33 of this Form
10-K).
24.1 Power of Attorney (see Page 32 of this Form 10-K).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
On March 31, 1997, the Company filed a current report on Form
8-K with the Securities and Exchange Commission reporting
under items 2 and 7 thereof and including pro forma financial
statements for the year ended June 30, 1996 and the six months
ended December 31, 1996.
On July 31, 1997, the Company filed a current report on Form
8-K with the Securities and Exchange Commission reporting
under items 2 and 7 thereof and including pro forma financial
statements for the year ended June 30, 1996 and the nine
months ended March 31, 1997.
On August 31, 1997, the Company filed a current report on Form
8-K with the Securities and Exchange Commission reporting
under items 2 and 7 thereof and including pro forma financial
statements for the year ended June 30, 1996 and the nine
months ended March 31, 1997.
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, 1997 MEADOWBROOK REHABILITATION GROUP,
INC.
By /s/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, 1997
- -----------------------
Harvey Wm. Glasser, M.D. President and Treasurer
(Principal Executive Officer)
JAMES F. MURPHY Vice President and September 26, 1997
- -----------------------
James F. Murphy Chief Financial Officer
(Principal Accounting Officer
and Principal Financial Officer)
JOHN MCCRACKEN Director September 26, 1997
- -----------------------
John McCracken
ROBERT RUSH Director September 26, 1997
- -----------------------
Robert Rush
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into the Company's previously filed
Registration Statement File No. 33-50772.
San Francisco, California ARTHUR ANDERSEN LLP
September 26, 1997
MEADOWBROOK REHABILITATION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1997
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, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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, 1996 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1997, 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 5, 1997
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1997
ASSETS
1996 1997
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $3,439,440 $2,928,781
Restricted cash 311,000 278,649
Patient accounts receivable, less
allowance for doubtful accounts of
$1,445,000 and $1,195,000 respectively 4,738,957 4,278,756
Other receivables 1,264,444 293,165
Due from intermediaries 331,918 --
Income tax refund receivable 140,362 --
Prepaid expenses and other assets 376,898 298,970
------------ ------------
Total current assets 10,603,019 8,078,321
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 683,770 --
Furniture and equipment 2,993,965 2,154,947
Leasehold improvements 783,614 686,116
------------ -----------
4,461,349 2,841,063
Less - accumulated depreciation (2,095,193) (1,708,734)
------------ ------------
Net property and equipment 2,366,156 1,132,329
------------ ------------
OTHER ASSETS:
Goodwill and intangible assets 1,870,555 337,734
------------ ------------
Total assets $14,839,730 $9,548,384
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of $657,724 $291,037
notes payable
Current maturities of capital lease obligations 32,803 24,821
Accounts payable 1,226,053 968,027
Accrued payroll and employee benefits 1,101,168 755,748
Due to intermediaries -- 100,780
Other accrued liabilities 1,065,820 1,123,124
------------ ------------
Total current liabilities 4,083,568 3,263,537
------------ ------------
LONG-TERM LIABILITIES:
Note payable and other long-term liabilities 636,255 48,989
Capital lease obligations 21,815 --
------------ -----------
Total long-term liabilities 658,070 48,989
------------ -----------
Total liabilities 4,741,638 3,312,526
------------ -----------
MINORITY INTEREST IN EQUITY OF
CONSOLIDATED SUBSIDIARIES 11,665 --
------------ -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Class A; 15,000,000 shares authorized;
1,157,244 shares issued and outstanding
at June 30, 1996 and 1997 11,572 11,572
Class B; 5,000,000 shares authorized;
773,000 shares issued and outstanding
at June 30, 1996 and 1997 7,730 7,730
Paid-in capital 17,908,122 17,908,122
Retained deficit (7,840,997) (11,691,566)
------------ -----------
Total stockholders' equity 10,086,427 6,235,858
------------ -----------
Total liabilities and stockholders'
equity $14,839,730 $9,548,384
============ ===========
The accompanying notes are an integral part of these consolidated statements.
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1995 1996 1997
------------ ------------- ------------
NET OPERATING REVENUES $19,973,613 $23,622,560 $20,834,438
OPERATING EXPENSES:
Salaries and employee benefits 12,036,473 15,189,173 14,877,168
Professional fees and purchased services 3,023,225 2,509,166 2,239,179
Provision for doubtful accounts 1,371,151 583,661 454,255
Other operating expenses 2,797,809 3,476,400 3,411,087
Depreciation and amortization 542,890 586,180 572,249
Rent -
To unrelated parties 1,764,617 1,540,634 1,252,802
To related parties 586,518 412,468 382,456
Write-down of intangible assets 1,029,767 -- 1,439,520
Net loss on disposal and provision
for subsequent
disposal of assets -- -- 82,130
Restructuring charges 310,000 -- --
------------ ------------- ------------
Total operating expenses 23,462,450 24,297,682 24,710,846
------------ ------------- ------------
Loss from operations (3,488,837) (675,122) (3,876,408)
------------ ------------- ------------
OTHER (INCOME) EXPENSE:
Interest (income) expense, net 25,536 (113,834) (55,313)
------------ ------------- ------------
Total other (income) expense 25,536 (113,834) (55,313)
------------ ------------- ------------
Loss before income taxes and minority interest (3,514,373) (561,288) (3,821,095)
INCOME TAX BENEFIT (92,890) -- --
------------ ------------- ------------
Loss before minority interest ($3,421,483) ($561,288) ($3,821,095)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES 107,642 29,016 29,474
------------ ------------- ------------
Net loss ($3,529,125) ($590,304) ($3,850,569)
============ ============= ============
NET LOSS PER COMMON SHARE ($1.82) ($0.31) ($1.99)
============ ============= ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,936,703 1,930,349 1,930,244
============ ============= ==============
<FN>
The accompanying notes are an integral part of these consolidating statements.
</FN>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
Class A Class B
--------------------- --------------------
Total
Shares Amount Shares Amount Paid-in Retained Stockholders'
Capital Deficit Equity
-------------------- -------------------- ------------ ------------- -------------
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
Net loss -- -- -- -- -- (3,850,569) (3,850,569)
---------- -------- ------- ------ ------------ ------------- -------------
BALANCE, JUNE 30, 1997 1,157,244 $11,572 773,000 $7,730 $17,908,122 ($11,691,566) $6,235,858
========== ======== ======= ====== ============ ============= =============
<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, 1995, 1996 AND 1997
1995 1996 1997
------------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,529,125) ($590,304) ($3,850,569)
Adjustments to reconcile net loss to cash provided by
(used for) operating activities -
Depreciation and amortization 542,890 586,180 572,249
Net loss on disposal and provision for
subsequent
disposal of assets 33,592 8,122 82,130
Write-down of intangible assets 1,029,767 -- 1,439,520
Minority interest expense -- 29,016 29,474
Changes in assets and liabilities -
Decrease (increase) in patient accounts receivable, net 2,345,398 (675,012) 460,201
Decrease in due from/to intermediaries 1,579,372 282,085 432,698
Decrease in income tax refund receivable 1,908,244 29,638 140,362
Decrease (increase) in other receivables (161,555) (999,962) 971,279
Decrease (increase) in prepaid expenses and other current assets 108,892 (91,435) 77,928
Increase (decrease) in accounts payable and accrued liabilities 217,834 (357,817) (991,931)
Decrease in other long-term liabilities -- (221,897) --
------------ ----------- ------------
Cash provided by (used for) operating activities 4,075,309 (2,001,386) (636,659)
------------ ----------- ------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (359,129) (556,705) (231,046)
Payments on prior purchase of -- (357,543) (330,724)
outpatient clinics
Proceeds from sale of assets 1,950 23,431 1,485,009
Purchase of outpatient (1,056,604) (82,500) --
clinics
Costs resulting from purchase of outpatient facilities (167,447) (40,000) --
------------ ----------- ------------
Cash provided by (used for) investment activities (1,581,230) (1,013,317) 923,239
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 325,840 791,942 517,239
Payments of short-term borrowings (207,345) (813,180) (1,263,909)
Long-term borrowings -- 95,198 --
Payments of capital lease obligations (70,360) (40,003) (29,797)
Decrease (increase) in cash deposited to secure a loan (500,000) 189,000 32,351
Payments to minority (90,000) (76,121) (53,123)
shareholders
Issuance of common stock for options exercised 1,249 -- --
------------ ----------- -----------
Cash provided by (used for) financing activities (540,616) 146,836 (797,239)
Net increase (decrease) in cash 1,953,463 (2,867,867) (510,659)
CASH AND CASH EQUIVALENTS, beginning of period 4,353,844 6,307,307 3,439,440
------------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $6,307,307 $3,439,440 $2,928,781
============= =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities -
Property additions financed with capital leases $-- $76,020 $--
Property additions financed with notes payable -- 114,098 --
Liability resulting from purchase of outpatient facilities 1,743,319 186,692 --
Stock received as repayment of receivable from related party 44,000 -- --
Payments -
Interest paid 179,567 44,881 59,152
Income taxes paid -- 32,492 20,900
<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, 1997
1. ORGANIZATION AND OPERATIONS:
Meadowbrook Rehabilitation Group, Inc. (Meadowbrook) and its subsidiaries
(collectively, the Company) have undergone significant operating changes during
and subsequent to fiscal year 1997. As of September 1997, the Company operates
home health agencies in Colorado and Kansas, four outpatient rehabilitation
clinics in Colorado and three outpatient rehabilitation clinics (two of which
are operated under a management agreement) in Florida. The Company has sold all
of its traditional acute, subacute and post-acute operations during fiscal 1997
and subsequent to year end. In addition, the Company sold five of its outpatient
rehabilitation clinics located in Florida and Georgia subsequent to year end.
The Company also closed six outpatient rehabilitation clinics during fiscal
1997. These transactions are more fully described in Note 2.
The Company experienced significant operating losses during fiscal years
1995, 1996 and 1997. Factors contributing to fiscal year 1997 losses include a
net loss of $1,522,000 (including a write-down of intangible assets) recorded in
connection with the Company's sale of its Alaska, Georgia and Illinois
operations during fiscal 1997 and the sale of five outpatient rehabilitation
clinics and certain other assets in Florida and Georgia subsequent to year end.
The fiscal 1997 results also include operating losses incurred by the Company's
Florida and Kansas operations.
Factors contributing to fiscal 1996 results include among other things,
losses incurred at the Company's 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
Companys acute, subacute and post-acute facilities and a charge of $1,030,000
to write-off intangible assets recorded as part of the fiscal 1994 acquisition
of its Florida operations. The write-off was the result of the Company's
management contracts at five facilities being terminated. In addition, the
Company recorded a charge of $700,000 to write-off two litigation accounts
receivable 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 in Indianapolis. The program was closed on September 22, 1995 (see Note
2).
The Company's future profitability is dependent on the successful operation
of the Company's home health agencies and outpatient rehabilitation clinics.
There can be no assurance as to the Company's future profitability. 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.
The Company's Board of Directors is continuing to evaluate 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 and/or additional sales of assets. There can be no
assurance that any such alternatives will be available on favorable terms, if at
all.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the Company's business should not necessarily be limited to
medical rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity, the Company should consider investing in
non-healthcare businesses. As a result, the nature of the Company's business
could change significantly. Dr. Glasser holds a majority of the combined voting
power of the Company's two classes of common stock and accordingly has the
ability to effect a change in management or to cause or prevent a significant
corporate transaction regardless of how other stockholders might vote.
2. OPERATING CHANGES AND SALE OF OPERATIONS:
Florida In May, 1997, the Company's board of directors and management
initiated the sale of its Florida operations. On August 31, 1997, the Company
sold the assets of five outpatient rehabilitation clinics and certain other
assets located in Florida and Georgia. The outpatient rehabilitation clinics
were located in St. Augustine, Palatka, Palm Coast, and Ormond Beach, Florida
and in Moultrie, Georgia. The Company sold the clinics in two separate
transactions. The aggregate sale price for the outpatient rehabilitation clinics
and other assets was $550,000. The Company received promissory notes from the
purchasers for the aggregate purchase price. The promissory notes are secured by
the acquired assets and the Company also received personal guarantees from
shareholders of the purchasers. The purchasers acquired all assets including
accounts receivable and are responsible for all accounts payable and certain
payroll liabilities. As part of the transaction, the Company retained all
liabilities for amounts due to the former owners of the clinics. At closing,
this amount was $197,000. The assets sold consisted of current assets of
$384,000, property and equipment of $275,000, and liabilities of $117,000. As of
June 30, 1997 a provision has been recorded to reduce the carrying value of the
assets related to these operations to realizable value. This transaction
resulted in a loss of $2,046,000, primarily as a result of the write-down of
goodwill associated with the Company's acquisition of certain of the clinics in
1994. The loss is recorded as other operating expense in the Company's June 30,
1997 financial statements.
Kansas On July 31, 1997, the Company sold the majority of the assets of its
Kansas operations, consisting of acute, subacute and post-acute rehabilitation
programs. The sale price for the Kansas operations was $1,500,000 in cash. The
Company's agreement with the purchaser provides that the Company will retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. The assets sold consisted of current assets of $2,000 and
property and equipment of $179,000. The hospital was leased from Harvey Wm.
Glasser, M.D., the Company's Chief Executive Officer and majority shareholder.
Concurrently with the sale of the assets of the subsidiary, Dr. Glasser sold the
hospital leased by the subsidiary to the same purchaser. The Company's sale of
the Kansas operations will result in a gain of $1,178,000. This gain will be
recorded in the Company's first quarter fiscal 1998 results.
Georgia On March 31, 1997, the Company sold the majority of the assets of
its Georgia operations, consisting of a neurobehavioral program, a subacute
program operated under a management agreement, and a post-acute program and
related real estate. The sale price for the Georgia operations was $1,300,000 in
cash. The Company's agreement with the purchaser provides that the Company
retain outstanding accounts receivable and be responsible for the accounts
payable at the closing date. This transaction resulted in a gain of $517,000,
which was recorded as other operating income in fiscal 1997.
Alaska On January 13, 1997, the Company sold its three outpatient clinics
in Alaska. The sale price was $200,000 in cash. This transaction resulted in a
loss of $29,000, which was recorded as other operating expense during fiscal
1997.
Illinois On October 7, 1996, the Company sold the majority of the assets of
its post-acute rehabilitation facility located in Park Ridge, Illinois. The
Company's agreement with the purchaser provided that the Company retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. This transaction resulted in a gain of $63,000, which was
recorded as other operating income during fiscal 1997.
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.
The operations sold during fiscal year 1997 or subsequent to year end
comprised the majority of the Company's operations. The following table
segregates net operating revenues and operating results between operations
retained and operation disposed of. Loss from operations amounts include
allocations of common corporate overhead cost.
1995 1996 1997
(unaudited) (unaudited) (unaudited)
---------------------------- ---------------------------- ----------------------------
Net Net Net
operating Loss from operating Loss from operating Loss from
revenues operations revenues operations revenues operations
----------- ------------ ----------- ---------- ----------- ------------
Operations retained $870,217 ($108,895) $10,265,871 ($182,545) $9,186,447 ($550,850)
Operations disposed of
during and subsequent
to year end 19,103,396 (3,379,942) 13,356,689 (492,577) 11,647,991 (3,325,558)
----------- ------------ ----------- ---------- ----------- ------------
$19,973,613 ($3,488,837) $23,622,560 ($675,122) $20,834,438 ($3,876,408)
=========== ============ =========== ========== =========== ============
The above information does not purport to present the consolidated results
of operations of the Company had the dispositions actually occurred on July 1,
1994; nor does it purport to be indicative of results that will be attained in
the future.
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 loan balance on June 30,
1997 was $249,000. The Company has not recorded as a liability, but reflects the
restricted cash on its balance sheet. As the loan is repaid, 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, 1997, $279,000 of the amount deposited
is classified as restricted cash securing the loan balance of $249,000 as well
as the Company's outstanding line-of-credit 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 had 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, 1997, the Company wrote-off net balances of
$704,000 of accounts receivable compared to $1,052,000 during the year ended
June 30, 1996. 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, 1996 and 1997, $1,328,000 and $1,141,000,
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. However the nature of the reimbursement process,
as well as the sale of certain of the Company's facilities during and subsequent
to year end, 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
provided care to Medicaid beneficiaries under short-term contracts at the
Company's Gardner, Kansas facility.
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 1995 1996 1997
------- ------- -------
Private payors and commercial insurance.. 67% 59% 51%
Medicare ................................ 16% 34% 41%
Medicaid ................................ 17% 7% 8%
------- ------- -------
Total ................................... 100% 100% 100%
------- ------- -------
The operations retained by the Company after the sale activity described in
Note 2 receive approximately 80% of their revenue through the Medicare and
Medicaid programs.
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.
Long-Lived Assets
The Company reviews the carrying value of its long-lived assets at least
quarterly to determine if facts and circumstances exist which suggest that the
long-lived assets may be impaired or that the amortization period needs to be
modified. Among the factors the Company considers in making the evaluation are
changes in market position, reputation, profitability and geographic
penetration, as well as technological obsolescence. If there are indications
that the impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the related operation and determine if the long-lived
asset is recoverable based on such projected undiscounted cash flows. If
impairment is indicated, then an adjustment will be made to reduce the carrying
value of the asset to its fair value.
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.
The adoption of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" is not expected to significantly impact the Company's
earnings per share calculation.
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, 1996 and 1997 the Company had notes payable of $1,196,330 and
$340,026, respectively. These notes are payable in varying installments at an
average interest rate of 8.6%. The notes payable at June 30, 1997 include
$136,425 arising from prior year acquisitions (see Notes 2 and 10) and $60,000
related to borrowings from a bank under a line-of-credit arrangement.
Scheduled maturities for the notes payable and other long-term liabilities
are as follows:
1998 $291,037
1999 36,833
2000 12,156
2001 --
2002 --
--------
$340,026
========
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 $165,494 at June 30, 1996, and $88,570 at June 30,
1997, with accumulated depreciation of $70,632 and $32,463 as of June 30, 1996
and 1997, respectively.
The minimum future lease payments required under the Company's capital and
operating leases (excluding facilities sold subsequent to year end) during the
five years beginning July 1, 1997, are as follows:
Capital Operating
Leases Leases
------------ ---------------
Year 1 $28,031 $ 398,323
Year 2 -- 248,976
Year 3 -- 147,566
Year 4 -- 63,568
Year 5 -- 13,467
Thereafter -- --
------------ ---------------
Total minimum payments 28,031 $871,900
===============
Interest on capital lease obligations (3,210)
------------
Net minimum payments 24,821
Current maturities of capital obligations 24,821
------------
Long-term capital lease obligations $ --
============
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.
Potential Ineligibility for Continued Listing on the NASDAQ Stock Market
The NASDAQ Stock Market has adopted new quantitative maintenance
requirements for continued listing on the NASDAQ National Market. The new
criteria become effective on February 23, 1998. The Company currently is in
compliance with all of the new criteria for continued NASDAQ National Market
listing except for the requirement that the market value of its public float be
at least $5 million. The Company estimates that the market value of its public
float as of September 25, 1997 is $2,877,000. If the Company is not in
compliance with the new maintenance criteria on the effective date, the Company
understands that it would be moved to the NASDAQ SmallCap Market. Delisting from
the NASDAQ National Market could have an adverse effect on the liquidity of the
Company's Class A Common Stock.
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, 1997, a total of 681,667 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, 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
Granted April 1996 5,000 4.13
------------
Outstanding at June 30, 1996 153,333 $0.56-$39.00
--------------
Cancelled October 1996 (5,000) 6.00
Cancelled October 1996 (5,000) 3.38
Cancelled November 1996 (1,667) 6.00
Cancelled November 1996 (1,667) 3.00
Cancelled January 1997 (5,000) 6.00
Granted January 1997 3,333 1.75
Cancelled March 1997 (16,667) 18.00
Cancelled March 1997 (4,167) 6.18
Cancelled March 1997 (5,833) 3.38
Cancelled March 1997 (3,333) 6.00
Granted April 1997 3,333 2.00
Cancelled April 1997 (8,333) 5.25
Cancelled April 1997 (1,666) 6.00
Cancelled April 1997 (1,666) 3.00
Cancelled April 1997 (1,667) 1.75
Cancelled June 1997 (5,000) 4.13
--------------
Outstanding at June 30, 1997 93,333 $1.75-$18.00
==============
As of June 30, 1997, 60,000 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.
The Company has not applied the provisions of SFAS No. 123, "Accounting for
Stock Based Compensation" because options granted in fiscal years 1996 and 1997
are immaterial.
7. INCOME TAXES:
The Company provides for income taxes under the liability method in
accordance with 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 year ended June 30, 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 1995
primarily because of limits on available federal tax payments made in prior
years which could be refunded. For fiscal years 1996 and 1997, 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
--------------------------------------------------
1995 1996 1997
------------- -------------- -------------
Current -
Federal $ (92,890) $ -- $ --
State -- -- --
------------- -------------- -------------
(92,980)
Deferred (prepaid) -
Federal -- -- --
State -- -- --
------------- ------------- -------------
Benefit $ (92,890) $ -- $ --
============= ============= =============
The deferred provision (benefit) for income taxes results from the
following temporary differences:
Year Ended June 30
------------------------------------------
1995 1996 1997
------------ ------------- ------------
Allowance for doubtful accounts $ (52,910) $ 205,720 $ 92,500
Accrued payables 82,276 74,000 (142,450)
Depreciation (10,360) (37,000) 54,390
Tax loss carry forwards (695,600) (117,157) (933,053)
Other -- -- --
Valuation allowance 676,594 (125,563) 928,613
------------ ------------- ------------
$ -- $ -- $ --
============ ============= ============
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
------------------------------------------------------------------------------
1995 1996 1997
--------------- ------------- ---------------
Amount % Amount % Amount %
--------------- ----- ------------- ----- --------------- -----
Federal statutory rate $ (1,194,887) (34%) $ (200,703) (34%) $ (1,309,340) (34%)
State taxes, net of federal
effects (105,431) (3) (17,709) (3) (3)
(115,530)
Permanent differences 437,185 12 53,280 9 610,500 16
Net operating losses
not currently benefited 676,594 19 165,132 28 933,053 24
Other 93,649 3 -- -- (118,683) (3)
---------------- ----- ------------- ----- -------------- -----
Benefit $ (92,890) (3%) $ -- -- $ -- --
================ ===== ============= ===== ============== =====
The deferred income tax assets are comprised of the following at June 30:
1996 1997
--------------- --------------
Allowance for doubtful accounts $ 534,650 $ 442,150
Accrued payables 170,940 313,390
Depreciation 165,390 111,000
Tax loss carry forwards 995,757 1,928,810
--------------- --------------
Net deferred income tax assets 1,866,737 2,795,350
Less valuation allowance (1,866,737) (2,795,350)
--------------- --------------
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 net patient revenue
less a provision for bad debts above a defined threshold. Rental expense
on these leases for the years ended June 30, 1995, 1996 and 1997, was
$586,518, $412,468 and $382,456, respectively, of which $7,577 and
$1,158 was unpaid at June 30, 1996 and 1997, respectively. Subsequent to
year end the majority stockholder sold the final facility leased to the
Company in conjunction with the Company's sale of its Kansas operations
(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 year ended June 30, 1995, the Company recorded expense of
$27,761 related to these shares.
9. COMMITMENTS AND CONTINGENCIES:
Medicare Reimbursement The Company's amount due to Medicare intermediaries
of $101,000 at June 30, 1997 includes amounts the Company anticipates to pay on
cost report settlements for its Colorado home health agencies and Colorado
outpatient rehabilitation clinics acquired on June 30, 1995 and its final cost
report for the Company's Gardner, Kansas facility. Such amount also includes
amounts the Company expects to receive upon regulatory approval of the Company's
annual application for an exception from the routine cost limitation ("RCL")
under the Medicare program for fiscal years 1992 through 1996 for its Gardner,
Kansas facility. Medicare reimbursement is generally based upon reasonable
direct and indirect allowable costs incurred in providing services. At the
Company's Gardner, Kansas facility these costs were subject to the RCL. Requests
for an exception from the RCL have been submitted for fiscal years 1992 through
1995 for the Company's Gardner, Kansas facility. In connection with the sale of
its Kansas operation, the Company retained the accounts receivable and it
accordingly intends to file such a request for fiscal 1996 and 1997. The
requests are based upon atypical costs incurred at the Kansas facility in the
treatment of patients who received substantially more intensive services than
those generally received in 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.
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 the results for the twelve month periods ending June
30, 1996, through 1999. The Company was not required to make any cash payment
based on results as of June 30, 1996 and 1997. If the operations collectively
achieve the target earnings thresholds for the twelve months ending June 30,
1998 through 1999, the Company's maximum liability would be $550,000.
In addition, in connection with the acquisition, the Company agreed to
deposit $500,000 to secure a $900,000 bank loan to the previous owner of the
acquired businesses. The Company is overseeing the repayment of the loan through
the collection of accounts receivable which are being collected on behalf of the
previous owner. At the time of the acquisition, the Company anticipated that the
loan would be repaid based on the accounts receivable balance then outstanding.
However, accounts receivable collections have not been sufficient to repay the
loan and the loan balance on June 30, 1997 was $249,000. This loan balance is
collateralized by personal assets of the debtor.
In October 1995, the Company was notified by its intermediary that its
Medicare payments for the home health agencies' were being withheld to offset
amounts due by the previous owner for final settlement of the home health
agencies' cost reports for the years 1992 through 1995. While the intermediary
resumed making payments for current charges in January 1996, the intermediary
had withheld $728,000 related to these settlements. During the second quarter of
fiscal 1997, the Company received $425,000 in payment of amounts withheld. The
Company has submitted appeals on behalf of the previous owner requesting payment
of the remaining balance. In the event that such appeals are unsuccessful, the
Company intends to pursue collection from the previous owner and offset the
amounts withheld against any additional amounts due to the previous owner under
the acquisition agreements. Amounts owed to the Company as of June 30, 1997, by
Medicare and the previous owner of the Colorado operations exceed the minimum
amounts owed to the previous owner by $237,000. This amount is included in other
receivables on the Company's balance sheet.
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1995, 1996, AND 1997
1995 1996 1997
----------- ----------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance at beginning of period $2,025,000 $2,001,000 $1,445,000
Provision charged to expense 1,371,151 583,661 454,255
Write-offs, net of recoveries (1,395,151) (1,051,890) (704,255)
Other -- (87,771) --
----------- ----------- -----------
Balance at end of period $2,001,000 $1,445,000 $1,195,000
=========== =========== ===========