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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number 0-19294
RehabCare Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 51-0265872
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7733 Forsyth Boulevard, 17th Floor, St. Louis, Missouri 63105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (314) 863-7422
Securities registered pursuant Name of Exchange
to Section 12(b) of the Act: on which registered:
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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. ( )
The aggregate market value of voting stock held by non-affiliates of
Registrant at March 8, 2002 was $415,043,191. At March 8, 2002, the Registrant
had 17,359,341 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Annual Report on Form 10-K incorporates by reference
information contained in the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 2001.
Part III of this Annual Report on Form 10-K incorporates by reference
information contained in the Registrant's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on May 1, 2002.
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1
PART I
ITEM 1. BUSINESS
Overview of Our Company
RehabCare Group, Inc., a Delaware corporation, is a leading provider of
temporary healthcare staffing and therapy program management for hospitals and
long-term care facilities. From the 112 supplemental healthcare staffing
branches of our StarMed Staffing Group, we provide temporary placement of nurses
and other healthcare professionals on a supplemental basis using locally-based
personnel. We also provide traveling nurses from the tele-recruiting offices of
our healthcare travel staffing division generally on a 13-week basis. Our
therapy program management business consists of the management of 109
hospital-based inpatient acute rehabilitation units and 25 hospital-based
inpatient skilled nursing units, 56 hospital-based and satellite outpatient
therapy programs and 305 contract therapy programs with long-term care
facilities. For the year ended December 31, 2001, we had net operating revenues
of $542.3 million and operating earnings, excluding $9.0 million of
non-recurring charges, of $45.9 million. During this period, we earned 56.2% of
our net operating revenues from our healthcare staffing business and 43.8% from
our therapy program management business.
The terms "RehabCare," "our company," "we" and "our" as used herein refer
to "RehabCare Group, Inc."
Industry Overview
As a provider of temporary healthcare staffing and therapy program
management services, our revenues and growth are affected by trends and
developments in healthcare spending. The U.S. Centers for Medicare and Medicaid
Services estimated that in 2000 total healthcare expenditures in the United
States grew by 7.0% to $1.3 trillion. It projected that total healthcare
spending in the United States would grow by 8.6% in 2001 and by an average of
7.1% annually from 2002 through 2010. According to these estimates, healthcare
expenditures will increase by nearly $1.3 trillion in the next decade and, by
2010, will account for approximately $2.6 trillion, or 15.9% of the United
States gross domestic product.
Demographic considerations also affect long-term growth projections for
healthcare spending. According to the U.S. Census Bureau, there are
approximately 35 million Americans aged 65 or older in the United States today,
who comprise approximately 12.7% of the total United States population. By the
year 2030, the number of Americans aged 65 or older is expected to climb to 70.3
million, or 20.0%, of the total population. Due to the increasing life
expectancy of Americans, the number of people aged 85 years or older is also
expected to increase from 4.3 million to 8.9 million by the year 2030.
We believe that rising projected healthcare expenditures and longer life
expectancy of the population will place increased pressure on healthcare
providers to find innovative, efficient means of delivering healthcare services.
Continued spending pressure will encourage efficiency by directing patients
toward lower cost settings such as our inpatient units and our outpatient
therapy and contract therapy programs. We also believe that as part of this
trend the demand for temporary healthcare staffing services will expand as
healthcare providers seek to decrease their overall labor costs and satisfy
their need for qualified healthcare employees, who are in high demand.
2
Temporary Healthcare Staffing. The temporary healthcare staffing industry
provides staffing of nurses, physicians and other allied healthcare
professionals such as physical and occupational therapists, speech/language
pathologists, respiratory therapists, radiologic technicians, advanced practice
professionals, pharmacists, and medical and surgical specialized technicians.
The temporary healthcare staffing industry is primarily comprised of the
following three services:
o Supplemental Staffing. Supplemental staffing comprises the majority of
all temporary healthcare staffing and involves placement of
locally-based healthcare professionals on very short-term assignments,
often for daily shift work. Supplemental staffing often involves very
short advance notice of assignments by the client.
o Travel Staffing. Travel staffing involves placement of healthcare
professionals on a contracted, fixed-term basis on assignments which
may run several weeks to a year, but are generally 13 weeks long. The
healthcare professional temporarily relocates to the assignment. The
staffing company is responsible for providing arrangements for travel,
housing, licensure and credentialing.
o Placement and Search. Placement and search relates to
position-specific searches for specialized healthcare professionals to
fill open positions on a permanent basis. Search firms offer a range
of placement and search services on both a retainer and contingency
basis.
Most temporary healthcare staffing companies will specialize in one of the
three services set forth above. We currently offer all three services.
The Staffing Industry Report, an independent staffing industry publication,
estimated that revenues in the United States for all temporary staffing services
were $84.8 billion in 2000. The temporary healthcare staffing segment accounted
for approximately $7.2 billion of revenues in 2000, and was expected to grow by
approximately 21% in 2001 and 22% in 2002. We believe that the demand for
temporary healthcare staffing services will continue to increase due to various
factors including:
o Changes in the Healthcare Payment System. As healthcare expenditures
in the United States have continued to increase, healthcare providers
have experienced increased cost reduction pressures as a result of
managed care and the implementation of prospective payment systems and
other changes in Medicare reimbursement. The need to control costs has
forced many healthcare providers to re-evaluate their staffing
policies and seek more efficient labor management techniques,
including the use of temporary employees to enhance flexibility and
reduce costs by transforming a portion of their labor costs from fixed
to variable.
o Shortages in Available Healthcare Professionals. Increasing demand for
temporary healthcare professionals and shifts in the labor market have
resulted in shortages in the availability of qualified nurses and many
allied healthcare personnel. A recent study published in The Journal
of the American Medical Association estimates that based on current
trends approximately 1,754,000 registered nurses will be needed in the
United States by 2020, but only 635,000 registered nurses will be
available. The same study found that from 1983 to 1998 the average age
of working registered nurses increased from 37 to 42 years. Within the
next ten years, the average age of registered nurses is forecasted to
be 45.4 years, with more than 40% of the registered nurse workforce
expected to be 50 years old or older. Further, a recent report by the
American Association of Colleges of Nursing indicates that enrollments
in undergraduate nursing programs decreased by 2.2% in 2000. Nurse
graduation rates have declined 19% from 1995 to 2000. In addition to
the shortage of available nurses, changes in healthcare and the trend
toward temporary staffing have resulted in shortages of various allied
healthcare professionals, including radiologic laboratory and other
specialized technicians, pharmacists, physician assistants, nurse
anesthetists, transcriptionists, reimbursement specialists, patient
account representatives and medical clerical personnel.
3
Therapy Program Management. The growth of managed care and its focus on
cost control has encouraged healthcare providers to provide quality care at the
lowest cost possible. While generally less aggressive than managed care,
Medicare and Medicaid incentives have also driven declines in inpatient days per
admission. In many cases, patients are treated initially in the higher cost,
acute-care hospital setting; after their condition has stabilized, they are
either moved to a lower cost facility, such as a skilled nursing unit, or are
discharged to their home. Thus, while hospital inpatient admissions have
continued to grow, the number of inpatient days per admission has declined.
According to the American Hospital Association, the aggregate number of
inpatient days declined at an annual rate of 1.6%, from 215.9 million in 1993 to
192.4 million in 2000.
Many healthcare providers are increasingly seeking to outsource a broad
range of services through contracts with product line managers. Outsourcing
allows healthcare providers to take advantage of the specialized expertise of
contract managers, enabling providers to concentrate on the businesses they know
best, such as facility and nurse management. Continued reimbursement pressures
under managed care and Medicare have driven healthcare providers to look for
additional sources of revenue. As constraints on overhead and operating costs
have increased and manpower has been reduced, outsourcing has become more
important in order to increase patient volumes and provide services at a lower
cost while maintaining high quality standards.
By outsourcing services, healthcare providers are able to:
o Utilize Unused Space. Inpatient services help hospitals utilize empty
wings of their facilities, which enables them to recover the cost of
capital investment and overhead associated with the space.
o Increase Volumes. Patients who are discharged from an intensive care
unit or medical/ surgical bed and need acute rehabilitation or skilled
nursing care, and who in the past would have otherwise been referred
to other venues for treatment, can now remain in the hospital setting.
This allows hospitals to capture revenues that would otherwise be
realized by another provider. Upon discharge, patients can return for
outpatient care, adding additional revenues for the provider. By
offering new services, the hospital also attracts new patients.
o Sign Agreements with Managed Care Organizations. We believe managed
care organizations prefer to sign contracts covering both acute
rehabilitation, skilled nursing services and outpatient therapy with
one entity rather than several separate, often unrelated entities.
Program managers provide patient evaluation systems that collect data
on patients in each of their units showing the degree of improvement
and the related costs from the time the patient is admitted to the
unit through the time of discharge. This is an important feature to
managed care organizations in controlling their costs while assuring
appropriate outcomes. Program managers may often have the ability to
capture and analyze this information from a large number of acute
rehabilitation and skilled nursing units to improve clinical care,
which an individual hospital could not do on its own without a
substantial investment in specialized systems. Becoming part of a
managed care network helps the hospital attract physicians, and in
turn, attract more patients to the hospital.
4
o Increase Cost Control. Because of their extensive experience in their
product line, program managers can offer pricing structures that
effectively control a healthcare provider's financial risk related to
the service provided. For hospitals and other providers that utilize
program managers, the result is often lower average cost than that of
self-managed programs. As a result, the facility is able to increase
its revenues without having to increase administrative staff or incur
other fixed costs.
o Obtain Reimbursement Advice. Program managers may employ reimbursement
specialists who are available to assist client hospitals in
interpreting complicated regulations, a highly valued service in the
changing healthcare environment.
o Improve Clinical Quality. National program managers focused on
rehabilitation are able to develop and employ best practices, which
benefit client hospitals.
Of the approximately 5,000 general acute-care hospitals in the United
States, an estimated 900 hospitals operate inpatient acute rehabilitation units,
of which we estimate only approximately 150 currently outsource acute
rehabilitation program management services. We currently have therapy program
management contracts with 109 of those hospitals that outsource acute
rehabilitation unit management services.
Overview of Our Business Lines
Our business is divided into two main business segments: temporary
healthcare staffing and therapy program management. Our temporary healthcare
staffing business encompasses placement of nurses and other healthcare
professionals on either a short-term basis, ranging from one day to several
weeks, an interim basis, generally 13 weeks, or a permanent basis. Our therapy
program management business consists of management of hospital-based inpatient
acute rehabilitation and skilled nursing units, outpatient therapy programs and
contract therapy programs. The following table summarizes the type of services
we offer and their benefits to our clients.
5
Business Line Description of Service Benefits to Client
------------- ---------------------- ------------------
Temporary Healthcare Placement of temporary Enables the client to
Staffing healthcare professionals manage fixed labor
in hospitals and costs, turnover,
long-term care facilities vacation, maternity and
for one day to thirteen other temporary staffing
week assignments. needs.
Therapy Program Management
Inpatient
Acute High acuity Utilizes formerly idle
Rehabilitation rehabilitation for space and affords the
Units: conditions such as client the ability to
stroke, hip replacement offer specialized
and head injury. clinical rehabilitation
Skilled Nursing services to patients who
Units: Lower acuity might otherwise be
rehabilitation but often discharged to a setting
more medically complex outside the client's
than acute rehabilitation facility.
units for conditions such
as stroke, cancer, heart
failure, burns and wounds.
Outpatient Outpatient therapy Helps bring patients
programs for into the client's
hospital-based and facility and helps the
satellite programs client compete with
(primarily sports and freestanding clinics.
work-related injuries).
Contract Therapy Therapy services in Affords the client the
long-term care facilities ability to fulfill the
under management. recurring need for
therapists on a
full-time or part-time
basis, especially for
clients whose operations
do not warrant a
full-time therapist.
Offers the client a
better opportunity to
improve the quality of
the programs.
Financial information about each of our business segments is contained in
Note 12 to the "Notes to Consolidated Financial Statements" beginning on page
45.
We offer our portfolio of temporary healthcare staffing and therapy program
management services to a highly diversified customer base. We serve healthcare
staffing clients in all 50 states and our therapy program management business
currently manages units and programs in 41 states. The following table
summarizes by geographic region the locations of our healthcare staffing
branches and therapy program management clients as of December 31, 2001:
6
7
Therapy Program Management
--------------------------
Acute
Rehabili-
tation/
Healthcare Skilled Outpatient Contract
Staffing Nursing Therapy Therapy
Geographic Region Branches Units Programs Programs
- ----------------- -------- ----- -------- --------
Northeast Region ................... 9 16/2 7 10
(CT, DE, MA, MD, ME, NH, NJ, NY, PA, RI, VT)
Southeast Region.................... 32 15/6 20 44
(AL, FL, GA, KY, MS, NC, SC, TN, VA, WV)
North central Region................ 26 26/6 7 79
(IA, IL, IN, MI, MN, ND, NE, OH, SD, WI)
Mountain Region..................... 10 2/1 2 3
(AZ, CO, ID, MT, NM, NV, UT, WY)
South central Region................ 19 42/7 18 132
(AR, KS, LA, MO, OK, TX)
Western Region...................... 16 8/3 2 37
(AK, CA, HI, OR, WA)................ ___ ______ __ ___
Total............................ 112 109/25 56 305
Temporary Healthcare Staffing Services
Our StarMed Staffing Group meets a critical need of supplying nurses, nurse
assistants and other medical staff to hospitals and nursing homes in communities
across the United States, helping healthcare facilities operate to the optimal
level of staffing for their ever-changing patient population. Additionally, we
assist healthcare facilities in alleviating pressures of the nationwide nursing
shortage, as demand for nurse staffing far exceeds supply. We introduced
temporary healthcare staffing to our portfolio of services in 1996. Initially
focusing on recruiting traveling physical and occupational therapists and
speech/language pathologists for hospitals and long-term care facilities, we
added traveling and supplemental nurses in 1998 and other allied healthcare
personnel in 1999.
Supplemental Staffing Operations. Our supplemental staffing operations
provide nurses, nurse assistants and other allied healthcare staff to hospitals
and other healthcare facilities on short-term assignments, typically ranging
from one day to several weeks. As of December 31, 2001, we operated 112
healthcare staffing branches throughout the United States. A typical staffing
branch consists of approximately 1,000 square feet of leased space. A branch
director and a recruiter are initially hired to manage the branch. As the branch
matures, measured by number of weeks worked the branch has placed, new
recruiters, marketers and clerical staff are added to support growth. We believe
that the benefits program we provide for our temporary staff differentiates us
from many other companies in the industry. These benefits include direct
deposit, next-day pay, 401(k) plan, flexible assignments, vacation pay,
continuing education reimbursements, health insurance, sign-on bonuses, referral
bonuses and a uniform program. We believe another significant factor in our
performance has been the quality of our personnel. Our supplemental staffing is
a local business, and we believe the relationships that our branch managers and
our placement and recruiting professionals have with our clients have been a
significant contributor to the continued success of our supplemental staffing
operations.
Our supplemental staffing growth strategy is:
o increasing the volumes per branch
o increasing the number of branches in key geographic locations;
o diversifying the services our branches provide by furnishing both
nurse staffing and other allied medical staffing at each location; and
o continuing to evaluate acquisition opportunities and executing
acquisitions where and when appropriate.
7
Travel Staffing. Our travel staffing operations place nursing, radiology
and allied healthcare professionals typically on thirteen week assignments
throughout the United States. We employ a staff in a central branch of
placement, recruiting, housing and benefits specialists to support each
traveler. The traveler is assigned a specialist who will assist the traveler
through every step of the assignment. Our staff is available 24 hours a day, 7
days a week to help with any issue the traveler may have. We believe our
placement specialists have one of the industry's largest databases of positions
available in a wide variety of specialties in all 50 states. We also believe the
benefits we offer play a critical role in a traveler's decision to choose us
over our competition. Benefits include bonuses, 401(k) plan, guaranteed pay,
assignment cancellation protection, direct deposit, financial success planning,
health and dental insurance, housing, travel reimbursement, frequent travel
program, licensing assistance, 24-hour support and continuing education.
We plan to continue to grow our travel staffing business through a
combination of controlled internal growth and selective acquisition
opportunities.
Therapy Program Management
Inpatient
Acute Rehabilitation. At our inception in 1982, our entire business
consisted of management of acute rehabilitation units within general acute-care
hospitals. Today, our inpatient division is a market leader in operating acute
rehabilitation units in acute-care hospitals on a contract basis. We manage
inpatient acute rehabilitation units in 109 hospitals for patients with
diagnoses including stroke, orthopedic conditions, arthritis, spinal cord and
traumatic brain injuries. Of the approximately 5,000 hospitals in the United
States, an estimated 900 operate inpatient acute rehabilitation units; of which
we estimate only approximately 150 currently outsource management services. We
believe that as the prospective payment system is implemented in the inpatient
rehabilitation environment, our acute rehabilitation division will be well
positioned for internal growth. Of the approximately 4,100 acute-care hospitals
that do not currently operate acute rehabilitation units, we estimate that as
many as 1,000 meet our general criteria for support of acute rehabilitation
units in their markets. In light of the changing reimbursement environment, we
believe that there is an opportunity for internal growth to the extent that many
of the 750 hospitals currently operating their own acute rehabilitation units
reevaluate the efficiency of their operations and consider outsourcing
management services to companies such as ours.
We establish acute rehabilitation units in hospitals that have vacant space
and unmet rehabilitation needs in their markets. We also work with hospitals
that currently operate acute rehabilitation units to determine the projected
level of cost savings we can deliver to them by implementing our scheduling,
clinical protocol and outcome systems. In the case of hospitals that do not
operate acute rehabilitation units already, we review their historical and
existing hospital population, as well as the demographics of the geographic
region, to determine the optimal size of the proposed acute rehabilitation unit
and the potential of the new unit under our management to generate additional
revenues to cover anticipated expenses. We are generally paid by our clients on
the basis of a negotiated fee per patient day or fee per discharge pursuant to
contracts that are typically for terms of three to five years. These contracts
are generally subject to termination or renegotiation in the event the hospital
experiences a material change in its reimbursement from government or other
providers. An acute rehabilitation unit affords the hospital the ability to
offer rehabilitation services to patients, retaining patients who might
otherwise be discharged to a setting outside the hospital. A unit typically
consists of 20 beds and is staffed with a program director, a physician-medical
director and clinical staff which may include a psychologist, physical and
occupational therapists, a speech/language pathologist, a social worker, a nurse
manager, a case manager and other appropriate supporting personnel.
8
Skilled Nursing Units. In 1994, the inpatient division added the skilled
nursing service line in response to client requests for management services and
our strategic decision to broaden our inpatient services. As of December 31,
2001, we managed 25 inpatient skilled nursing units. The unit enables patients
to remain in a hospital setting where emergency needs can be met quickly as
opposed to being sent to a freestanding skilled nursing facility. The unit is
located within the acute-care hospital and is separately licensed as a skilled
nursing unit. We are generally paid by our clients on the basis of a negotiated
fee per patient day pursuant to contracts that are typically for terms of three
to five years. The hospital benefits by retaining patients who would be
discharged to another setting, capturing additional revenue and utilizing idle
space. A skilled nursing unit treats patients who require low levels of
rehabilitative care, but who have a greater need for nursing care. Patients'
diagnoses are typically long-term and medically complex covering approximately
60 clinical conditions, including stroke, post-surgical conditions, pulmonary
disease, cancer, congestive heart failure, burns and wounds.
We intend to achieve continued internal growth of our inpatient services
through cross-selling our services to our existing clients and generating new
client relationships.
Outpatient
In 1993, we began managing outpatient therapy programs that provide
management of therapy services to patients with work-related and sports-related
illnesses and injuries, and as of December 31, 2001, we managed a total of 56
hospital-based and satellite outpatient therapy programs. We realized that the
same expertise we brought to hospitals in managing their acute rehabilitation
units could be modified to add value to a hospital's outpatient therapy program.
An outpatient therapy program complements the hospital's occupational medicine
initiatives and allows therapy to be continued for patients discharged from
inpatient rehabilitation units and medical/surgical beds . An outpatient therapy
program also attracts patients into the hospital and is conducted either on the
client hospital's campus or in satellite locations controlled by the hospital.
We also market our outpatient therapy management services to physician groups.
Our physician-based programs are located at or in close proximity to the
physician group's offices.
We believe our management of outpatient therapy programs delivers increased
productivity through our scheduling, protocol and outcome systems, as well as
through productivity training for existing staff. We also provide our clients
with expertise in compliance and quality assurance. The typical outpatient
therapy program we manage provides services for 50 patient visits per day. The
program is staffed with a program manager, four to six therapists and two to
four administrative and clerical staff. We are typically paid by our clients on
the basis of a negotiated fee per unit of service.
As outpatient therapy programs remain underdeveloped at most hospitals and
physician practice groups, we intend to continue to grow this line of business
by signing contracts with new hospital clients and cross-selling our outpatient
therapy programs to existing inpatient clients. We also intend to expand our
therapy management services to additional physician groups. In addition, we will
actively consider strategic acquisitions to accelerate the growth of this
division.
9
Contract Therapy
In 1997, we added contract therapy management to our service offerings. Our
contract therapy division manages therapy services for long-term care
facilities. This program affords the client the opportunity to fulfill its
recurring need for therapists on a full-time or part-time basis without the need
to hire and retain full-time staff. As of December 31, 2001, we managed 305
contract therapy programs.
Our typical contract therapy client has 100 beds, a portion of which are
licensed as skilled nursing beds. We manage therapy services, including physical
and occupational therapy and speech/language pathology, for the skilled nursing
beds. Our broad base of staffing strategies, full-time, part-time and on-call,
can be adjusted at each location according to the facility's and its patients'
needs. We are generally paid by our clients on the basis of a negotiated per
diem rate. Our contract therapy program is led by a full-time program
coordinator who is also a therapist and two to four full-time professionals
trained in physical and occupational therapy or speech/language pathology.
We believe the introduction of a prospective payment system for skilled
nursing facilities and units in 1998 has created demand for our management
systems and expertise, particularly with regard to controlling costs. As a
result, we will focus our growth strategy in this division on signing new
contracts.
Government Regulation
Overview. The healthcare industry is required to comply with many complex
federal and state laws and regulations and is subject to regulation by a number
of federal, state and local governmental agencies, including those that
administer the Medicare and Medicaid programs, those responsible for the
licensure of healthcare providers and facilities and those responsible for
administrating and approving health facility construction, new services and
high-cost equipment purchasing. The healthcare industry is also affected by
federal, state and local policies developed to regulate the manner in which
healthcare is provided, administered and paid for nationally and locally. Laws
and regulations in the healthcare industry are extremely complex and, in many
instances, the industry does not have the benefit of significant regulatory or
judicial interpretation. As a result, the healthcare industry is sensitive to
legislative and regulatory changes and is affected by reductions and limitations
in healthcare spending as well as changing healthcare policies. Moreover, our
business is impacted not only by those laws and regulations that are directly
applicable to us, but also by certain laws and regulations that are applicable
to our hospital, skilled nursing facility and other clients. If we fail to
comply with the laws and regulations directly applicable to our business, we
could suffer civil penalties, criminal penalties and/or be excluded from
contracting with providers participating in Medicare, Medicaid and other federal
and state healthcare programs. If our hospital, skilled nursing facility and/or
other clients fail to comply with the laws and regulations applicable to their
businesses, they could suffer civil penalties, criminal penalties and/or be
excluded from participating in Medicare, Medicaid and other federal and state
healthcare programs, which could, indirectly, have an adverse impact on our
business.
Facility Licensure, Medicare Certification, and Certificate of Need. Our
clients are required to comply with state facility licensure, federal Medicare
certification, and certificate of need laws that are not generally applicable to
us.
Generally, facility licensure and Medicare certification follow specific
standards and requirements. Compliance is monitored by various mechanisms,
including periodic written reports and on-site inspections by representatives of
relevant government agencies. Loss of licensure or Medicare certification by a
healthcare facility with which we have a contract would likely result in
termination of that contract.
10
A few states require that health facilities obtain state permission prior
to entering into contracts for the management of their services. Some states
also require that health facilities obtain state permission in the form of a
certificate of need prior to constructing or modifying their space, purchasing
high-cost medical equipment, or adding new healthcare services. If a certificate
of need is required, the process may take up to 12 months or more, depending on
the state involved. The certificate of need application may be denied if
contested by a competitor or if the new facility or service is deemed
unnecessary by the state reviewing agency. A certificate of need is usually
issued for a specified maximum expenditure and requires implementation of the
proposed improvement or new service within a specified period of time.
Professional Licensure and Corporate Practice. Many of the healthcare
professionals employed or engaged by us, including nurses and therapists, are
required to be individually licensed or certified under applicable state law. We
take steps to ensure that our licensed healthcare professionals possess all
necessary licenses and certifications, and we believe that our nurses and
therapists comply with all applicable state laws.
In some states, business corporations such as our company are restricted
from practicing therapy through the direct employment of therapists. In those
states, to comply with the restrictions imposed, we either contract to obtain
therapy services from an entity permitted to employ therapists, or we manage the
physical therapy practice owned by licensed therapists through which the therapy
services are provided.
Staffing Agency/Business Licenses. A number of states require state
licensure for businesses that, for a fee, employ and assign personnel, including
healthcare personnel, to provide temporary services on-site at hospitals and
other healthcare facilities to support or supplement the hospitals' or
healthcare facilities' work force. A number of states also require state
licensure for businesses that operate placement services for individuals
attempting to secure employment. Failure to obtain the necessary licenses can
result in injunctions against operating, cease and desist orders and/or fines.
We endeavor to maintain all required state licenses.
Reimbursement. Federal and state laws establishing payment methodologies
and mechanisms for healthcare services covered by Medicare, Medicaid and other
government healthcare programs, while applicable to our clients and not
generally applicable to us, still have an indirect impact on our business.
Medicare pays acute-care hospitals for most inpatient hospital services
under a payment system known as the "prospective payment system." Under this
system, acute-care hospitals are paid a specific amount toward their operating
costs based on the diagnosis-related group to which each Medicare patient is
assigned. The amount of reimbursement assigned to each diagnosis-related group
is established prospectively by the U.S. Centers for Medicare and Medicaid
Services, an agency of the U.S. Department of Health and Human Services, and is
not related to a hospital's actual costs. In general, a hospital's payment for
inpatient care provided to a Medicare patient is limited based on the
diagnosis-related group to which the patient is assigned, regardless of the
amount of services provided to the patient or the length of the patient's
hospital stay. However, for certain Medicare beneficiaries who have unusually
costly hospital stays, the U.S. Centers for Medicare and Medicaid Services will
provide additional payments above those specified for the diagnosis-related
group. Under the diagnosis-related group system, a hospital may keep the
difference between its diagnosis-related group payment and its operating costs
incurred in furnishing inpatient services, but is at risk for any operating
costs that exceed the applicable diagnosis-related group payment rate. As a
result, hospitals have an incentive to discharge Medicare patients as soon as it
is clinically appropriate.
During the past several years, acute rehabilitation units, skilled nursing
units and hospital-based outpatient therapy programs were generally exempt from
the above-described prospective payment system and were paid instead on the
basis of their direct and indirect costs under a "cost-based" reimbursement
system. As discussed below, the Balanced Budget Act of 1997 mandated new payment
systems and methodologies for acute rehabilitation units, skilled nursing units
and hospital-based outpatient therapy programs.
11
Under the Balanced Budget Act of 1997, beginning January 1, 2002, the
Medicare program is phasing in a prospective payment system for eligible
inpatient rehabilitation hospitals and rehabilitation units in hospitals,
collectively referred to as "inpatient rehabilitation facilities." Inpatient
rehabilitation facilities may transition into the new payment system over a one
year period, during which payments would be based on a blend of rates paid under
the old and the new payment system or inpatient rehabilitation facilities may
elect to go directly to the new prospective payment system rates. The
prospective payment system for inpatient rehabilitation facilities is similar to
the diagnosis-related group payment system used for inpatient hospital services
but uses a case mix group rather than a diagnosis-related group. Each patient is
assigned to a case mix group based on clinical characteristics and expected
resource needs as a result of information reported on a "patient assessment
instrument" which is completed upon patient admission and discharge. As is the
case under the diagnosis-related group system, a hospital may keep the
difference between its case mix group payment and its operating costs incurred
in furnishing patient services, but is at risk for operating costs that exceed
the applicable case mix group payment. As was the case under the old payment
system, an acute inpatient rehabilitation unit will be paid under the hospital
diagnosis-related group system until it qualifies for exemption. To qualify for
exemption, the unit must comply with a number of operational and patient care
criteria. This process typically takes one year after unit opening. Upon
qualification for the exemption, the unit would then be reimbursed under the
prospective payment system for inpatient rehabilitation facilities.
We believe that the new prospective payment system for inpatient
rehabilitation facilities favors low-cost, efficient providers, and that our
strategy of managing programs on the premises of our hospital clients positions
us well for the changing reimbursement environment. However, in the event that a
client hospital experiences a material reduction in reimbursement under the new
system, in most cases, the client hospital will have the right to renegotiate
its contract with us, including the financial terms.
The Balanced Budget Act of 1997 also mandated the phase-in of a prospective
payment system based on resource utilization group classifications for skilled
nursing facilities and units. This was targeted to reduce government spending on
skilled nursing services by 18%. All of the skilled nursing units to which we
provide management services are now fully phased in under the resource
utilization group system for skilled nursing facilities.
Medicare reimbursement for outpatient rehabilitation services was also
affected by the Balanced Budget Act of 1997. Since 1999, reimbursement for such
services is no longer based on a provider's costs; instead, all reimbursement
for covered outpatient rehabilitation services is currently based on the lesser
of the provider's actual charge for such services or the applicable Medicare
physician fee schedule amount established by the U.S. Centers for Medicare and
Medicaid Services. This reimbursement system applies regardless of whether the
therapy services are furnished in a hospital outpatient department, a
physician's office, or the office of a therapist in private practice. Under
current law, an outpatient therapy program that is not designated as being
provider-based is subject to annual limits on payment for therapy services;
however, these limits have been suspended through 2002, but may be renewed
thereafter. See discussion below entitled "Provider-Based Rules."
12
Provider-Based Rules. The U.S. Centers for Medicare and Medicaid Services
recently promulgated new rules regarding the provider-based status of certain
facilities and organizations furnishing healthcare services to Medicare
beneficiaries. Designation as a provider-based facility or organization can, in
some cases, result in greater reimbursement from the Medicare program than would
otherwise be the case. Under the new rules, a designation as provider-based also
mandates compliance with a specific set of billing and patient notification
requirements and emergency medical treatment regulations. Until October 1, 2002,
any program, facility or organization treated as having provider-based status on
October 1, 2000, will retain this designation. All new programs, facilities and
organizations established after October 1, 2000 desiring provider-based status
must obtain an affirmative determination of provider-based status in order to
receive reimbursement as a provider-based facility for services provided to
Medicare beneficiaries. As of October 1, 2002, programs, facilities and
organizations that were in existence on October 1, 2000 will also need to obtain
an affirmative determination of provider-based status to receive provider-based
reimbursement. In November 2001, the U.S. Centers for Medicare and Medicaid
Services clarified that the provider-based rules do not apply to skilled nursing
facilities, to inpatient rehabilitation units that are excluded from the
inpatient prospective payment system for acute hospital services and to
facilities furnishing only physical, occupational or speech therapy patients for
as long as the $1,500 annual cap on coverage of physical, occupational, and
speech therapy remains suspended.
Health Information Practices. Subtitle F of the Health Insurance
Portability and Accountability Act of 1996 was enacted to improve the efficiency
and effectiveness of the healthcare system through the establishment of
standards and requirements for the electronic transmission of certain health
information. To achieve that end, the act requires the Secretary of the U.S.
Department of Health and Human Services to promulgate a set of interlocking
regulations establishing standards and protections for health information
systems, including standards for the following:
o the development of electronic transactions and code sets to be used in
those transactions;
o the development of unique health identifiers for individuals,
employers, health plans, and healthcare providers;
o the security of individual health information;
o the transmission and authentication of electronic signatures; and
o the privacy of individually identifiable health information.
Final rules setting forth standards for electronic transactions and code
sets were published on August 17, 2000, and for the privacy of individually
identifiable health information on December 28, 2000, both of which apply to
health plans, healthcare clearinghouses and healthcare providers who transmit
any health information in electronic form in connection with certain
administrative and billing transactions. The compliance deadline for the
electronic transaction and code set standards is October 16, 2003 if a
compliance plan is filed with the Secretary of the U.S. Department of Health and
Human Services by October 16, 2002; if no plan is filed, the compliance date is
October 16, 2002. Compliance with the final rules concerning the privacy of
individually protected healthcare information is required by April 14, 2003.
Proposed rules that include standards for unique health identifiers for
employers and healthcare providers, as well as standards related to the security
of individual health information and the use of electronic signatures have been
published.
We are currently evaluating the effect of the proposed and final rules
published to date and have developed a task force to address the standards set
forth in these rules and their effect on our business. Given the fact that not
all of the standards have been issued in final form, we cannot estimate at this
time the cost of compliance.
13
Fraud and Abuse. Various federal laws prohibit the knowing and willful
submission of false or fraudulent claims, including claims to obtain payment
under Medicare, Medicaid and other government healthcare programs. The federal
anti-kickback statute also prohibits individuals and entities from knowingly and
willfully paying, offering, receiving or soliciting money or anything else of
value in order to induce the referral of patients or to induce a person to
purchase, lease, order, arrange for or recommend services or goods covered by
Medicare, Medicaid, or other government healthcare programs. The anti-kickback
statute is extremely broad and potentially covers many standard business
arrangements. Violations can lead to significant criminal and civil penalties,
including fines of up to $25,000 per violation, civil monetary penalties of up
to $50,000 per violation, assessments of up to three times the amount of the
prohibited remuneration, imprisonment, or exclusion from participation in
Medicare, Medicaid, and other government healthcare programs. The Office of the
Inspector General of the U.S. Department of Health and Human Services has
published regulations which identify a limited number of specific business
practices which fall within safe harbors guaranteed not to violate the
anti-kickback statute. While many of our business relationships fall outside of
the published safe harbors, conformity with the safe harbors is not mandatory
and failure to meet all of the requirements of an applicable safe harbor does
not by itself make conduct illegal.
A number of states have in place statutes and regulations that prohibit the
same general types of conduct as that prohibited by the federal laws described
above. Some states' antifraud and anti-kickback laws apply only to goods and
services covered by Medicaid. Other states' antifraud and anti-kickback laws
apply to all healthcare goods and services, regardless of whether the source of
payment is governmental or private.
In recent years, federal and state government agencies have increased the
level of enforcement resources and activities targeted at the healthcare
industry. In addition, federal law allows individuals to bring lawsuits on
behalf of the government in what are known as qui tam or "whistleblower"
actions, alleging false or fraudulent Medicare or Medicaid claims and certain
other violations of federal law. The use of these private enforcement actions
against healthcare providers and their business partners has increased
dramatically in the recent past, in part, because the individual filing the
initial complaint is entitled to share in a portion of any settlement or
judgment.
We endeavor to conduct our operations in compliance with the applicable
fraud and abuse statutes and to stay informed as to evolving regulatory and
judicial interpretations of these broad and complex laws. Should we identify any
of our practices as being contrary to these laws, we will take appropriate
action to address the matter, including, when appropriate, making disclosure to
the proper authorities.
Anti-Referral Laws. The federal Stark law generally provides that, if a
physician or a member of a physician's immediate family has a financial
relationship with a healthcare entity, the physician may not make referrals to
that entity for the furnishing of designated health services covered under
Medicare, Medicaid, or other government healthcare programs, unless one of
several specific exceptions applies. For purposes of the Stark law, a financial
relationship with a healthcare entity includes an ownership or investment
interest in that entity or a compensation relationship with that entity.
Designated health services include physical and occupational therapy services,
durable medical equipment, home health services, and inpatient and outpatient
hospital services. The Stark law has limited impact on our current operations;
however, as we expand our outpatient division's business into new venues, such
as physician offices, our physician clients must consider the impact of the
Stark law on their practice. On January 4, 2001, U.S. Centers for Medicare and
Medicaid Services published the first phase of a set of final regulations
interpreting the Stark law. The effective date of these regulations was
January 4, 2002.
The federal government will make no payment for designated health services
provided in violation of the Stark law. In addition, sanctions for violating the
Stark law include civil monetary penalties of up to $15,000 per prohibited
service provided and exclusion from any federal, state, or other government
healthcare programs. There are no criminal penalties for violation of the Stark
law.
14
A number of states have in place statutes and regulations that prohibit the
same general types of conduct as that prohibited by the federal Stark law
described above. Some states' Stark laws apply only to goods and services
covered by Medicaid. Other states' Stark laws apply to certain designated
healthcare goods and services, regardless of whether the source of payment is
government or private.
Corporate Compliance Program. In recognition of the importance of achieving
and maintaining regulatory compliance, we have established a corporate
compliance program that establishes general standards of conduct and procedures
that promote compliance with business ethics, regulations, law and accreditation
standards. We have established compliance standards and procedures to be
followed by our employees that are reasonably capable of reducing the prospect
of criminal conduct, and have designed systems for the reporting and auditing of
potentially criminal acts. A key element of our compliance program is ongoing
communication and training of employees so that it becomes a part of our
day-to-day business operations. A compliance committee consisting of our board
of directors has been established to oversee implementation and ongoing
operations of our compliance program, to enforce our compliance program through
appropriate disciplinary mechanisms and to ensure that all reasonable steps are
taken to respond to an offense and to prevent further similar offenses. We are
not aware of the existence of any current activities on the part of any of our
employees that would not be materially in compliance with our compliance
program.
Competition
Our healthcare staffing business competes in national, regional and local
markets with full-service staffing companies and with specialized staffing
agencies. We believe our strategic advantages in this line of business include
our ability to match qualified employees to specific job requirements, our
ability to provide qualified employees in a timely manner, the price of our
services, monitoring of the job performance of our employees and the diversity
of our staffing solutions.
Our therapy program management business has no direct competitors offering
all of the same program services, although other companies may offer one or more
of the same services. Our therapy program management business competes with
hospitals and long-term care facilities that do not choose to outsource their
acute rehabilitation and skilled nursing units, outpatient therapy programs and
contract therapy programs. The fundamental challenge in our therapy program
management business is convincing our potential clients, primarily hospitals and
long-term care facilities, that we can provide rehabilitation services more
efficiently than they can themselves. The inpatient units and outpatient
programs that we manage are in highly competitive markets and compete for
patients with other hospitals and long-term care facilities, as well as public
companies. Among our principal competitive advantages are our reputation for
quality, cost effectiveness, a proprietary outcomes management system,
innovation and price.
We rely significantly on our ability to attract, develop and retain nurses,
therapists and other healthcare personnel who possess the skills, experience
and, as required, licensure necessary to meet the specified requirements of our
healthcare staffing clients, as well as our own needs in our therapy program
management business. We compete for healthcare staffing personnel, including
nurses and therapists, with other temporary healthcare staffing companies, as
well as actual and potential clients, some of whom seek to fill positions with
either regular or temporary employees.
Employees
As of December 31, 2001, we had approximately 5,700 employees and
approximately 12,000 additional travel and supplemental staff employed by our
staffing division. The physicians who are the medical directors of our acute
rehabilitation units are independent contractors and not our employees. Nurses
and therapists in our temporary healthcare staffing business may be on our
payroll or the client's payroll. None of our employees are subject to a
collective bargaining agreement. We consider our relationship with our employees
to be good.
15
ITEM 2. PROPERTIES
We currently lease 71,000 square feet of executive office space in Clayton,
Missouri under a lease that expires in the year 2012, assuming all options to
renew are exercised. In addition to the monthly rental cost, we are also
responsible for specified increases in operating costs. In addition, our
subsidiaries lease 10,000 square feet in Salt Lake City, Utah under a lease that
expires in 2011, 21,000 square feet of executive office space in Andover,
Massachusetts under a lease that expires in the year 2010, 8,000 square feet of
executive office space in Clearwater, Florida under a lease that expires in 2007
and 10,000 square feet of executive office space in Phoenix, Arizona under a
lease that expires in 2003, each assuming all options to renew are exercised. We
also lease 112 store-front locations that serve as the branch offices for the
supplemental staffing operations of our StarMed Staffing Group.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and legal actions in the ordinary course
of business. These matters include, without limitation, professional liability,
employee-related matters and inquiries and investigations by governmental
agencies relating to Medicare or Medicaid reimbursement and other issues.
We have recently reached an agreement with the United States Department of
Labor under which we will conduct a self-audit of the overtime practices for
temporary employees of our staffing division for the period from January 1, 1998
to October 26, 2001. In order to implement the agreement, the Department of
Labor recently filed suit against us and certain of our subsidiaries in federal
court in St. Louis, Missouri and a pre-negotiated order was approved by the
court on November 2, 2001. Pursuant to the order, we have commenced the process
of determining whether any present or former temporary employee is owed any
additional overtime wages that had not previously been paid. The suit serves to
bar multiple future suits on the overtime wage issue by the persons covered by
the order. In the fourth quarter of 2001, we reported a non-recurring charge of
approximately $6 million relating to costs associated with these overtime
payments, including the associated costs of the audit. While we believe the $6
million will be adequate to cover these payments and costs, the actual total
expenses incurred in this matter may be higher or lower.
In addition, our clients may become subject to claims, governmental
inquiries and investigations and legal actions to which we may become a party
relating to services provided by us. From time to time and depending on the
particular facts and circumstances, we may be subject to indemnification
obligations under our contracts with our clients relating to these matters. We
have recently received a formal demand for indemnification by the current owner
of a client facility for liabilities, including attorneys' fees and expenses,
arising out of a recent assessment of liability communicated by the United
States Department of Justice to our client for settlement purposes. The
Department's claim is the result of its investigation of alleged improper
billing practices under the Medicare program relating to an inpatient
rehabilitation unit that we manage at the client facility. We have denied any
liability under the indemnification provisions of our contract with the client
facility based upon our belief that the alleged inaccuracies in the billing
process for Medicare patients were not the result of any of our actions or
omissions in operating the rehabilitation unit. At no time were we responsible,
either contractually or otherwise, for the client facility's cost reporting for
Medicare patients, nor do we believe that any of the clinical information that
we provided to the client facility formed the basis for the allegedly inaccurate
cost reporting. We are not a party to the Department of Justice's claim against
the client facility and we have declined our client's offer to be a party to the
settlement discussions based upon our belief that we have no indemnification
liability on this claim.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Information concerning our Common Stock is included under the heading
"Stock Data" in our Annual Report to Stockholders for the year ended December
31, 2001 and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Our Six-Year Financial Summary is included in our Annual Report to
Stockholders for the year ended December 31, 2001 and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We provide temporary healthcare staffing and therapy program management
services for hospitals and long-term care facilities. We derive our revenue from
two business segments: temporary healthcare staffing and therapy program
management. Our therapy program management segment includes inpatient programs
(including acute rehabilitation and skilled nursing units), outpatient therapy
programs and contract therapy programs. Summarized information about our
revenues and earnings from operations in each segment is provided below.
17
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(in thousands)
Revenues from Unaffiliated Customers:
Healthcare staffing.................. $304,574 $260,100 $148,180
Therapy program management:
Inpatient.......................... 123,276 119,963 116,497
Contract therapy................... 64,661 29,979 14,071
Outpatient......................... 49,754 42,332 30,677
-------- -------- --------
Therapy program management total... 237,691 192,274 161,245
-------- -------- --------
Total............................. $542,265 $452,374 $309,425
======== ======== ========
Operating Earnings (Loss): (1)
Healthcare staffing.................. $ (65)(2)$ 12,011 $5,228
Therapy program management:
Inpatient.......................... 24,081 21,815 18,123
Contract therapy................... 6,773 3,331 333
Outpatient......................... 6,178 7,032 6,238
-------- -------- --------
Therapy program management total... 37,032 32,178 24,694
-------- -------- --------
Total............................. $ 36,967 $ 44,189 $ 29,922
======== ======== ========
(1) Operating earnings for prior years have been adjusted to reflect the
corporate expense allocation methodology utilized in 2001.
(2) Includes $9.0 million in non-recurring charges.
Revenues
We derive substantially all of our revenues from fees paid directly by
healthcare providers rather than through payment or reimbursement by government
or other third-party payors. Our inpatient and outpatient therapy programs are
typically provided through agreements with hospital clients with three to
five-year terms. Our contract therapy and temporary healthcare staffing services
are typically provided under interim or short-term agreements with hospitals and
long-term care facilities.
Our healthcare staffing revenues and earnings are impacted by changes in
the level of occupancy at hospitals where we provide our staffing services.
During the first and fourth quarters of each year, hospitals generally
experience an increase in the number of patients, resulting in an increase in
the demand for our temporary healthcare staffing services and an increase in our
revenues and earnings in this line of business. Hospitals generally experience a
decrease in the number of patients during the second and third quarters,
resulting in a decrease in our revenues and earnings for our healthcare staffing
services line.
As a provider of temporary healthcare staffing and therapy program
management services, our revenues and growth are affected by trends and
developments in healthcare spending. Over the last three years, our revenues and
earnings from our therapy program management services have been negatively
impacted by an aggregate decline in average billable lengths of stay. The
decline in average billable lengths of stay reflects the continued trend of
reduced rehabilitation lengths of stay.
Material changes in the rates or methods of government reimbursements to
our clients for services rendered in the programs that we manage could give our
clients the right to renegotiate their existing contracts with us to include
terms that are less favorable to us. For example, outpatient therapy programs
receive payment from the Medicare program under a fee schedule. Under current
law, an outpatient therapy program that is not designated as being
provider-based is subject to an annual limit on payments for therapy services
provided to Medicare beneficiaries. See discussion under "Item 1. Business -
Government Regulation - Provider-Based Rules." However, application of this
limit is subject to a moratorium through December 31, 2002. The Secretary of the
U.S. Department of Health and Human Services is required to review reimbursement
claims for outpatient therapy services while the moratorium is in effect and to
make a proposal to Congress to revise the payment system for outpatient therapy
services. Any changes adopted by Congress, which could include reduced annual
limits or a new payment system, could have an adverse effect on the outpatient
therapy program business.
18
In addition, changes in the rates or methods of government reimbursements
could negatively impact the benefits that we are able to provide to our clients.
The enactment of the Balanced Budget Act of 1997, which established a
prospective payment system for skilled nursing facilities and units,
significantly reduced the demand for therapists generally, which had a negative
impact on our healthcare staffing business. It also resulted in reduction of the
per diem billing rates we were able to negotiate with the skilled nursing units
that we manage. We believe the recently released rates and other reimbursement
regulations with respect to the implementation of a prospective payment system
for acute rehabilitation services will be favorable for many of our clients.
However, we are unable to predict with certainty the impact of the changes at
this time, and we may experience a decline in our revenue and earnings as a
result of the prospective payment system or from any other changes in the rates
or methods of government reimbursements.
Acquisitions
During 1999 and 2000, we completed a number of acquisitions. These
acquisitions are summarized in the table below. Each of the acquisitions has
been accounted for by the purchase method of accounting, which means that the
operating results of the acquired entity are included in our results of
operations commencing on the date of acquisition of each entity.
We have amortized the goodwill for each of our acquisitions, the excess of
the cost of the acquisition over the book value of the net assets acquired, on a
straight-line basis over 25 to 40 years through the year ended December 31,
2001. As of January 1, 2001 the goodwill amortization periods were changed to 25
years on the acquisitions of Physical Therapy Resources, Inc.; TeamRehab,
Inc./Moore Rehabilitation Services, Inc.; Rehab Unlimited, Inc./Cimarron Health
Care, Inc.; Rehabilitative Care Systems of America, Inc.; Therapeutic Systems,
Inc.; Salt Lake Physical Therapy Associates, Inc.; AllStaff, Inc.; and
DiversiCare Rehab Services, Inc. This change resulted in a net after-tax
increase of approximately $0.5 million in the annual goodwill amortization
associated with these acquisitions and a decrease in diluted net earnings per
share of approximately $0.03 for the year ended December 31, 2001. We retained
40-year amortization periods for the acquisitions of Advanced Rehabilitation
Resources, Inc.; Healthcare Staffing Solutions, Inc.; StarMed Staffing, Inc.;
and eai Healthcare Staffing Solutions, Inc., which had businesses that were more
national in scope. As of January 1, 2002, we adopted the provisions of the
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (Statement) No. 142, "Goodwill and Other Intangible Assets." Statement
No. 142 requires that all acquisitions consummated after January 1, 2002 will no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement No. 142. See further discussion
below under the heading "Effect of Recent Accounting Pronouncements".
19
Company Date Description Consideration(1)
------- ---- ----------- ----------------
1999
- ----
Salt Lake Physical May 20, 1999 Outpatient therapy
Therapy Associates, programs Aggregate
Inc. of
$17.3
AllStaff, Inc. June 30, 1999 Temporary healthcare million
staffing (nurses and in cash,
nurse assistants) notes
and
eai Healthcare December 20, 1999 Temporary healthcare stock
Staffing Solutions, staffing (allied
Inc. healthcare personnel)
2000
- ----
DiversiCare Rehab September 15, 2000 Outpatient therapy Aggregate of $8.5
Services, Inc. programs million in cash
and notes
(1) Amounts include contingent payments made in connection with the
acquisitions listed.
Results of Operations
The following table sets forth the percentage that selected items in the
consolidated statements of earnings bear to operating revenues for the years
ended December31, 2001, 2000 and 1999 and on an as adjusted basis for 2001:
Year Ended December 31,
-----------------------
2001 2000 1999
--------------------- ---- ----
Actual As adjusted (1)
------ --------------
Operating revenues.................. 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Operating ....................... 72.8 71.8 71.0 71.7
General and administrative....... 18.6 17.9 17.7 16.9
Depreciation and amortization.... 1.8 1.8 1.5 1.7
--- --- --- ---
Operating earnings.................. 6.8 8.5 9.8 9.7
Other expense, net.................. (.4) (.3) (1.2) (1.6)
--- --- --- ---
Earnings before income taxes........ 6.4 8.2 8.6 8.1
Income taxes........................ 2.5 3.3 3.4 3.2
--- --- --- ---
Net earnings........................ 3.9% 4.9% 5.2% 4.9%
(1) Excludes $9.0 million non-recurring charges and $0.5 million write-down
of an investment. The $9.0 million of non-recurring charges consists of $5.1
million in operating expenses and $3.9 million in general and administrative
expenses. The $0.5 million write-down of an investment is excluded from other
expense.
20
Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended December
31, 2000
Revenues
Operating revenues in 2001 increased by $89.9 million, or 19.9%, to $542.3
million as compared to $452.4 million in operating revenues in 2000. The
September 2000 acquisition of DiversiCare Rehab Services, Inc. (DiversiCare)
accounted for 6.1% of the net increase.
Staffing revenue increased by 17.1% from $260.1 million in 2000 to $304.6
million in 2001, reflecting a 4.4% increase in weeks worked from 223,951 to
233,898 and a 12.1% increase in average revenue per week worked from $1,161 to
$1,302.
Inpatient program revenue increased by 2.8% from $120.0 million in 2000 to
$123.3 million in 2001. A 1.0% increase in the average number of inpatient
programs managed from 135.8 to 137.2, and a 2.8% increase in the average daily
billable census per inpatient program from 14.4 to 14.8 resulted in a 3.3%
increase in billable days to 740,938. The increase in billable census per
program for inpatient programs is primarily attributable to a 5.7% increase in
average admissions per program from 373.0 to 394.3 offset by a 3.5% decrease in
the average length of stay to 13.7 days. The increase in patient days was offset
by a 0.4% decrease in the average per diem billing rates.
Contract therapy revenue increased by 115.7% from $30.0 million in 2000 to
$64.7 million in 2001, reflecting a 60.1% increase in the average number of
contract therapy locations managed from 156.0 to 249.8, and a 34.8% increase in
revenue per location. The increase in revenue per location is primarily the
result of opening larger, more efficient programs.
Outpatient revenue increased by 17.5% from $42.3 million in 2000 to $49.8
million in 2001, reflecting $5.5 million from the September 15, 2000 acquisition
of DiversiCare, an increase in the average number of outpatient programs managed
from 53.1 to 61.5 (including a net increase of 7.7 from DiversiCare) and an 8.1%
increase in units of service per program.
Operating Earnings
Consolidated operating earnings decreased by 16.3% from $44.2 million in
2000 to $37.0 million in 2001, due primarily to $9.0 million of non-recurring
charges related to our staffing division recorded in the fourth quarter of 2001.
These non-recurring charges consisted of approximately $6.0 million in costs
associated with correcting overtime payments for the period January 1, 1998 to
October 26, 2001 and $3.0 million related to severance and technology costs
associated with the reorganization of certain functions and processes. Of the
$9.0 million non-recurring charges, $5.1 million was recorded as an operating
expense, while the remaining $3.9 million represents general and administrative
expenses. Excluding these non-recurring charges, operating earnings increased
4.0% to $45.9 million. Depreciation and amortization as a percentage of revenues
increased from 1.5% in 2000 to 1.8% in 2001 as a result of the change in
goodwill amortization from 40 years to 25 years on certain regional acquisitions
plus depreciation expense recorded on $10.6 million of capital expenditures in
2001. The additional amortization expense recorded as a result of the change in
goodwill amortization lives was approximately $0.7 million pre-tax. The
following discussion by division includes the effect of adjusting 2000 operating
earnings to reflect the current overhead allocation methodology utilized in
2001.
21
Operating earnings in the staffing division decreased by $12.1 million from
$12.0 million in 2000 to a $0.1 million loss in 2001, including the
aforementioned $9.0 million of non-recurring charges. Excluding the
non-recurring charges, operating earnings decreased by $3.1 million to $8.9
million in 2001, reflecting significant expenses associated with systems
training and a move toward consolidation of the division's branch administrative
functions. As a result, general and administrative expenses, excluding the
non-recurring charges, as a percentage of revenues increased by 1.0%. Operating
costs excluding the non-recurring charges increased by 0.7% in 2001 due to
increased salary related costs. Depreciation and amortization expense as a
percentage of revenue was comparable for the two periods compared.
Inpatient operating earnings increased 10.4% from $21.8 million in 2000 to
$24.1 million in 2001, reflecting a 3.3% increase in billable patient days, a
0.1% increase in gross margin and a 2.0% reduction in general and administrative
costs as a percentage of revenue. Depreciation and amortization as a percentage
of revenues increased from 2.4% in 2000 to 3.0% in 2001, reflecting current year
depreciation expense on capital expenditures.
Contract therapy operating earnings increased 103.3% from $3.3 million in
2000 to $6.8 million in 2001, reflecting a 115.7% increase in operating
revenues, offset by a slight decrease in gross margin as a result of increased
labor costs. General and administrative expenses as a percentage of revenues
were comparable for the two periods. Depreciation and amortization expense as a
percentage of revenues increased from 1.3% in 2000 to 1.7% in 2001, reflecting
an additional $0.3 million of amortization expense associated with the change in
amortization lives on certain prior acquisitions, plus current year depreciation
expense recorded on capital expenditures.
Outpatient operating earnings decreased 12.1% from $7.0 million in 2000 to
$6.2 million in 2001 reflecting a 0.7% decrease in gross margin as a result of
increased labor expenses and an increase in general and administrative expenses
as a percentage of revenues from 9.7% in 2000 to 12.1% in 2001. Depreciation and
amortization expense as a percentage of revenues increased from 1.9% in 2000 to
3.1% in 2001, reflecting additional amortization expense associated with the
September 15, 2000 acquisition of DiversiCare, plus additional amortization
expense recorded in the current year as a result of the change in amortization
lives on certain prior acquisition and current year depreciation expense
recorded on capital expenditures.
Non-operating Items
Interest income increased by $0.2 million or 65.9% to $0.4 million due to
increased cash balances.
Interest expense decreased by $3.5 million or 65.2% to $1.9 million in
2001, primarily reflecting the repayment of $49.4 million in debt from the net
proceeds of the sale of common stock in a March 2001 publicly underwritten
equity offering and the repayment of $18.9 million of debt as a result of cash
generated from operations.
Other expense in 2001 primarily reflects a $0.5 million write-down of an
investment.
Earnings before income taxes, including the non-recurring charges and
write-down of an investment, decreased by $4.1 million, or 10.6% from $39.1
million in 2000 to $35.0 million in 2001. The provision for income taxes in 2001
was $13.9 million compared to $15.6 million in 2000, reflecting effective income
tax rates of 39.8% for each period. Net earnings, including the non-recurring
charges and write-down of an investment, decreased by $2.5 million, or 10.6%, to
$21.0 million from $23.5 million in 2000. Diluted earnings per share including
the non-recurring charges, decreased by 20.0% from $1.45 in 2000 to $1.16 in
2001 on an 11.1% increase in the weighted-average shares outstanding. The
increase in weighted-average shares outstanding is attributable primarily to the
March 2001 publicly underwritten equity offering, and stock option grants and
exercises.
Diluted earnings per share excluding the $9.0 million in non-recurring
charges and the $0.5 million write-down of an investment increased 2.1% from
$1.45 in 2000 to $1.48 in 2001.
22
Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended December
31, 1999
Revenues
Operating revenues in 2000 increased by $143.0 million, or 46.2%, to $452.4
million as compared to $309.4 million in operating revenues in 1999.
Acquisitions accounted for 19.9% of the net increase. Excluding the effects of
acquisitions, increases in inpatient, outpatient, contract therapy, nurse travel
and supplemental staffing revenues were offset by a decline in therapist travel
staffing revenues and a decrease in the number of skilled nursing units.
Staffing revenue increased by 75.5% from $148.2 million in 1999 to $260.1
million in 2000 reflecting $3.2 million from the June 30, 1999 acquisition of
AllStaff, Inc., $21.5 million from the December 20, 1999 acquisition of eai
Healthcare Staffing Solutions, Inc. and a 50.7% increase in weeks worked in 2000
at existing and newly opened travel and supplemental staffing branches from
126,816 to 191,076. Total weeks worked attributable to the 1999 acquisitions
were 32,875.
Inpatient program revenue increased by 3.0% from $116.5 million in 1999 to
$120.0 million in 2000. A 3.0% increase in the average number of inpatient
programs managed from 131.8 to 135.8, plus the additional revenue from one
additional day in February 2000, offset by a 0.7% decrease in the average daily
billable census per inpatient program from 14.5 in 1999 to 14.4 in 2000,
resulted in a 2.8% increase in billable patient days to 716,993. The decrease in
billable census per program for inpatient programs is primarily attributable to
a 0.7% decrease in average billable length of stay from 14.3 days in 1999 to
14.2 days in 2000.
Contract therapy revenue increased by 113.1% from $14.1 million in 1999 to
$30.0 million in 2000 reflecting a 71.8% increase in the average number of
contract therapy locations managed from 90.8 to 156.0 and a 24.0% increase in
revenue per location.
Outpatient revenue increased by 38.0% from $30.7 million in 1999 to $42.3
million in 2000 reflecting $1.4 million from the May 20, 1999 acquisition of
Salt Lake Physical Therapy Associates, Inc., $2.3 million from the September 15,
2000 acquisition of DiversiCare Rehab Services, Inc., an increase in the average
number of outpatient programs managed from 40.0 to 53.1 and a 14.0% increase in
units of service per program.
Operating Earnings
Consolidated operating earnings increased by 47.7% from $29.9 million in
1999 to $44.2 million in 2000. Acquisitions accounted for 17.8% of the net
increase.
Operating earnings in the staffing division increased 129.7% from $5.2
million in 1999 to $12.0 million in 2000. The 1999 acquisitions of Allstaff,
Inc. and eai Healthcare Staffing Solutions, Inc. accounted for 26.1% of the net
increase. The remaining increase is attributable to the increase in weeks worked
at existing branch offices combined with a 2.1% decrease in operating costs as a
percentage of revenues. General and administrative expenses as a percentage of
revenues increased by 1.2% due to the expansion of systems and additional
support staff added to support the growth. Depreciation and amortization expense
as a percentage of revenues was comparable for the respective periods
23
Inpatient operating earnings increased by 20.4% from $18.1 million in 1999
to $21.8 million in 2000, reflecting a 2.8% increase in billable patient days,
and a 3.1% increase in gross margin. General and administrative expenses and
depreciation and amortization expense as a percentage of revenues were
comparable for the respective periods.
Contract therapy operating earnings increased by $3.0 million from $333,000
in 1999 to $3.3 million in 2000, reflecting a 113.1% increase in operating
revenues, offset by a 2.2% decrease in gross margin as a result of increased
labor costs. General and administrative expenses and depreciation and
amortization expense as a percentage of revenues decreased 8.2% and 1.4%,
respectively, as efficiencies were realized as a result of the increase in
revenues.
Outpatient operating earnings increased by 12.7% from $6.2 million in 1999
to $7.0 million in 2000. The 1999 acquisition of Salt Lake Physical Therapy
Associates, Inc. and the 2000 acquisition of DiversiCare Rehab Services, Inc.
accounted for substantially all of the net increase, as a slight increase in
gross profit margin was offset by increases in general and administrative
expenses and depreciation and amortization expense as a percentage of revenues.
Non-operating Items
Interest expense increased 29.1%, or $1.2 million, from $4.1 million in
1999 to $5.3 million in 2000 reflecting interest on additional debt funding
acquisitions, borrowings under the revolving line of credit for working capital
purposes and an increase in interest rates.
Earnings before income taxes increased by $14.1 million, or 56.2%, from $25.0
million in 1999 to $39.1 million in 2000. The provision for income taxes for
2000 was $15.6 million compared to $9.9 million in 1999, reflecting effective
income tax rates of 39.8% and 39.7% for these periods. Net earnings increased by
$8.4 million in 2000, or 55.9%, to $23.5 million from $15.1 million in 1999.
Diluted earnings per share increased by 40.8% to $1.45 from $1.03 on a 9.8%
increase in the weighted average shares and assumed conversions outstanding.
Excluding losses on the write-down of investments in 1999, diluted net earnings
increased 34.3% from $1.08 in 1999 to $1.45 in 2000. The increase in weighted
average shares outstanding is attributable primarily to stock option exercises
and the increase in the dilutive effect of stock options as a result of an
increase in the average market price of our stock relative to the underlying
exercise prices of outstanding options.
Liquidity and Capital Resources
As of December 31, 2001, we had $19.6 million in cash and current
marketable securities and a current ratio, the amount of current assets divided
by current liabilities, of 2.7 to 1. Working capital increased by $13.3 million
to $77.5 million as of December 31, 2001, compared to $64.2 million as of
December 31, 2000. The increase in working capital is primarily due to the
capital generated from operations, the March 2001 sale of common stock and the
exercise of stock options.
Net accounts receivable were $91.4 million at December 31, 2001, compared
to $84.0 million at December 31, 2000. The number of days average net revenue in
net receivables was 63.8 at both December 31, 2001 and 2000.
24
Our operating cash flows constitute our primary source of liquidity and
historically have been sufficient to fund our working capital, capital
expenditures, internal business expansion and debt service requirements. We
expect to meet our future working capital, capital expenditures, internal and
external business expansion and debt service requirements from a combination of
internal sources and outside financing. We have a $125.0 million revolving line
of credit with no balance outstanding as of December 31, 2001. During 2001, we
retired all outstanding balances on debt obligations, primarily from the net
proceeds of the sale of 1,455,000 shares of common stock in a March 2001 equity
sale of common stock and cash generated from operations.
In connection with the development and implementation of additional
programs, we may incur capital expenditures for equipment and deferred costs
arising from advances made to hospitals for a portion of capital improvements
needed to begin a program's operation.
Inflation
Although inflation has abated during the last several years, the rate of
inflation in healthcare related services continues to exceed the rate
experienced by the economy as a whole. Our management contracts typically
provide for an annual increase in the fees paid to us by our clients based on
increases in various inflation indices. These increases generally offset
increases in costs incurred by us.
Effect of Recent Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business Combinations",
and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement No. 142 requires that
goodwill with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
No. 142.
The Company adopted the provisions of Statement No. 141 on July 1, 2001 and
the provisions of Statement No. 142 on January 1, 2002. Furthermore, any
goodwill and any intangible assets determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement No. 142 accounting literature.
Goodwill acquired in business combinations completed before July 1, 2001
continued to be amortized prior to the adoption of Statement No. 142.
As of the date of adoption of Statement No. 142, the Company had
unamortized goodwill in the amount of approximately $101.8 million, which is
subject to the transition provisions of Statements No. 141 and No. 142.
Amortization expense related to goodwill was approximately $3.6 million and $2.9
million for the years ended December 31, 2001 and December 31, 2000,
respectively. Because of the extensive effort needed to comply with adopting
Statements No. 141 and No. 142, it is not practicable to reasonably estimate
whether any transitional impairment losses will be required to be recognized as
a cumulative effect of a change in accounting principle. We expect Statement No.
142 to result in the elimination of amortization of goodwill from previous
acquisitions in the amount of $3.6 million pre-tax in 2002.
In October 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." Statement No. 144 is
intended to establish one accounting model for long-lived assets to be disposed
of by sale and to address significant implementation issues. The Company adopted
Statement No. 144 on January 1, 2002. We do not expect Statement No. 144 to have
a material effect on the consolidated financial statements.
25
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us 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. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because
of the use of estimates inherent in the financial reporting process, actual
results could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include estimating the allowance for doubtful
accounts and impairment of goodwill and other intangible assets. In addition,
Note 1 to the Consolidated Financial Statements includes further discussion of
our significant accounting policies.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Allowance for Doubtful Accounts. We must make estimates of the
uncollectability of our accounts receivable balances. We specifically analyze
accounts with historical poor payment history, and customer credit-worthiness
when evaluating the adequacy of the allowance for doubtful accounts. Our
accounts receivable balance was $91.4 million, net of allowance for doubtful
accounts of $5.9 million as of December 31, 2001. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. We continually evaluate
the adequacy of our allowance for doubtful accounts.
Goodwill and Other Intangibles. The cost of acquired companies is allocated
first to their identifiable assets based on estimated fair values. Costs
allocated to identifiable intangible assets are generally amortized on a
straight-line basis over the remaining estimated useful lives of the assets. The
excess of the purchase price over the fair value of identifiable assets
acquired, net of liabilities assumed, is recorded as goodwill. Goodwill relating
to acquisitions consummated prior to July 1, 2001 is amortized on a
straight-line basis over its estimated useful life. The amortization periods
differ depending on whether the acquired entity was national in scope or a
regional provider. Goodwill related to the acquisition of a national provider is
amortized over 40 years, while goodwill related to a regional provider is
amortized over 25 years.
The Company annually evaluates the carrying amounts of goodwill, as well as
related amortization periods, to determine whether adjustments to these amounts
or useful lives are required based on current events and circumstances. The
evaluation is based on the Company's projection of the undiscounted future
operating cash flows of the acquired operation over the remaining useful lives
of the related goodwill. To the extent such projections indicate future
undiscounted cash flows are not sufficient to recover the carrying amounts of
related goodwill, the underlying assets are written down by charges to expense
so that the carrying amount is equal to the fair value of the asset.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
26
ITEM 8A. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report 28
Consolidated Balance Sheets at December 31, 2001 and 2000 29
Consolidated Statement of Earnings for the years
ended December 31, 2001, 2000 and 1999 30
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 31
Consolidated Statement of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 32
Consolidated Statement of Comprehensive Earnings
for the years ended December 31, 2001, 2000 and 1999 33
Notes to the Consolidated Financial Statements 34
27
Independent Auditors' Report
The Board of Directors
RehabCare Group, Inc.:
We have audited the accompanying consolidated balance sheets of RehabCare
Group, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000,
and the related consolidated statements of earnings, stockholders' equity, cash
flows and comprehensive earnings for each of the years in the three-year period
ended December 31, 2001. 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 auditing standards generally
accepted in the United States of America. 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 RehabCare
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
St. Louis, Missouri
February 1, 2002
28
REHABCARE GROUP, INC.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
December 31,
------------
Assets 2001 2000
------ ---- ----
Current assets:
Cash and cash equivalents $18,534 $ 7,942
Marketable securities, available-for-sale 1,025 3,025
Accounts receivable, net of allowance for doubtful
accounts of $5,902 and $5,347, respectively 91,384 84,033
Income taxes receivable 2,055 3,672
Deferred tax assets 7,658 4,872
Prepaid expenses and other current assets 2,390 1,158
------- -------
Total current assets 123,046 104,702
Marketable securities, trading 2,870 2,383
Equipment and leasehold improvements, net 18,373 12,427
Excess of cost over net assets acquired, net 101,785 104,782
Other 4,587 4,799
-------- --------
Total assets $250,661 $229,093
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ - $ 2,868
Accounts payable 3,567 2,790
Accrued salaries and wages 27,141 24,846
Accrued expenses 14,814 10,012
------ ------
Total current liabilities 45,522 40,516
Deferred compensation and other long-term liabilities 3,043 2,679
Deferred tax liabilities 3,060 2,504
Long-term debt, less current portion - 65,434
------- -------
Total liabilities 51,625 111,133
------- -------
Stockholders' equity:
Preferred stock, $.10 par value; authorized
10,000,000 shares, none issued and outstanding - -
Common stock, $.01 par value; authorized 60,000,000
shares, issued 19,631,789 shares and 17,409,584
shares as of December 31, 2001 and 2000,
respectively 196 174
Additional paid-in capital 109,522 49,503
Retained earnings 107,057 86,022
Less common stock held in treasury at cost,
2,302,898 shares as of
December 31, 2001 and 2000 (17,757) (17,757)
Accumulated other comprehensive earnings 18 18
-------- --------
Total stockholders' equity 199,036 117,960
-------- --------
$250,661 $229,093
======== ========
See accompanying notes to consolidated financial statements.
29
REHABCARE GROUP, INC.
Consolidated Statements of Earnings
(in thousands, except per share data)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Operating revenues $542,265 $452,374 $309,425
Costs and expenses:
Operating 394,651 321,192 221,892
General and administrative 101,085 80,120 52,315
Depreciation and amortization 9,562 6,873 5,296
------- ------- -------
Total costs and expenses 505,298 408,185 279,503
------- ------- -------
Operating earnings 36,967 44,189 29,922
Interest income 385 232 233
Interest expense (1,859) (5,348) (4,142)
Other income (expense), net (542) 24 (986)
-------- -------- --------
Earnings before income taxes 34,951 39,097 25,027
Income taxes 13,916 15,563 9,929
-------- -------- --------
Net earnings $ 21,035 $ 23,534 $ 15,098
======== ======== ========
Net earnings per common share:
Basic $ 1.25 $ 1.62 $ 1.15
======== ======== ========
Diluted $ 1.16 $ 1.45 $ 1.03
======== ======== ========
See accompanying notes to consolidated financial statements.
30
REHABCARE GROUP, INC.
Consolidated Statements of Stockholders' Equity
(in thousands)
Common Stock Accumulated
---------------------Additional other compre- Total
Issued Treasury paid-in Retained Treasury hensive stockholders'
shares stock Amount capital earnings stock earnings equity
Balance, December 31, 1998 15,314 2,331 $153 $ 30,578 $47,390 $(17,975) $ 10 $ 60,156
Net earnings - - - - 15,098 - - 15,098
Issuance of common stock in
connection with acquisitions 96 - 1 840 - - - 841
Exercise of stock options
(including tax benefit) 290 - 3 1,683 - - - 1,686
Change in unrealized gain on
marketable securities,
net of tax - - - - - - 2 2
------ ------ ------ ------ ------ ------ ------- ------
Balance, December 31, 1999 15,700 2,331 157 33,101 62,488 (17,975) 12 77,783
Net earnings - - - - 23,534 - - 23,534
Conversion of debt 847 - 8 5,992 - - - 6,000
Exercise of stock options
(including tax benefit) 862 (28) 9 10,410 - 218 - 10,637
Change in unrealized gain on
marketable securities,
net of tax - - - - - - 6 6
- -
------ ----- ----- ------ ------ ------ ------ -------
Balance, December 31, 2000 17,409 2,303 174 49,503 86,022 (17,757) 18 117,960
Net earnings - - - - 21,035 - - 21,035
Issuance of common stock
in connection with secondary
offering 1,445 - 14 49,429 - - - 49,443
Exercise of stock options
(including tax benefit) 777 - 8 10,590 - - - 10,598
------ ----- ----- ------ ------- ------ ------ -------
Balance, December 31, 2001 19,631 2,303 $ 196 $109,522 $107,057 $(17,757) $ 18 $199,036
====== ===== ===== ======= ======= ======= ====== =======
See accompanying notes to consolidated financial statements.
31
REHABCARE GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net earnings $21,035 $23,534 $15,098
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 9,562 6,873 5,296
Provision for doubtful accounts 4,594 3,466 2,743
Write-down of investments 500 - 1,009
Income tax benefit realized on employee stock
option exercises 6,386 5,505 630
Change in assets and liabilities:
Deferred compensation 364 178 598
Accounts receivable, net (11,945) (20,249) (18,703)
Prepaid expenses and other current assets (1,232) (70) (3)
Other assets (235) (955) (88)
Accounts payable and accrued expenses 5,579 (3,458) 3,630
Accrued salaries and wages 2,295 7,511 1,507
Income taxes (613) (6,197) (386)
------ ------ -------
Net cash provided by operating activities 36,290 16,138 11,331
------ ------ -------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (10,613) (7,899) (3,002)
Purchase of marketable securities (922) (778) (671)
Proceeds from sale/maturities of marketable securities 2,435 166 134
Cash paid in acquisition of businesses, net of cash
received - (8,949) (16,273)
Other, net (1,951) (1,513) (913)
------- ------- -------
Net cash used in investing activities (11,051) (18,973) (20,725)
------- ------- -------
Cash flows from financing activities:
Proceeds from (repayments on) revolving credit
facility, net (63,800) 51,800 12,000
Repayments on long-term debt (4,502) (47,893) (12,740)
Proceeds from issuance of notes payable - 1,000 4,150
Proceeds from sale of common stock, net 49,443 - -
Exercise of stock options 4,212 5,132 1,056
------- ------ -------
Net cash provided by (used in) financing
activities (14,647) 10,039 4,466
------- ------- -------
Net increase (decrease) in cash and cash
equivalents 10,592 7,204 (4,928)
Cash and cash equivalents at beginning of year 7,942 738 5,666
------- ------- -------
Cash and cash equivalents at end of year $18,534 $ 7,942 $ 738
======= ======= =======
See accompanying notes to consolidated financial statements.
32
REHABCARE GROUP, INC.
Consolidated Statements of Comprehensive Earnings
(in thousands)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Net earnings $21,035 $23,534 $15,098
Other comprehensive earnings, net of tax -
Unrealized gains on securities:
Unrealized holding gains arising
during period - 6 2
------ ------- -------
Comprehensive earnings $21,035 $23,540 $15,100
======= ======= =======
See accompanying notes to consolidated financial statements.
33
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Overview of Company and Summary of Significant Accounting Policies
Overview of Company
RehabCare Group, Inc. is a leading provider of temporary healthcare
staffing and therapy program management services for hospitals and long-term
care facilities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Common Stock Split
During May 2000, the Company's Board of Directors approved a two-for-one
split of the Company's common stock in the form of a stock dividend, which was
distributed on June 19, 2000, to stockholders of record as of May 31, 2000.
Share and per share amounts in the consolidated financial statements and
accompanying notes have been restated to reflect the split.
Cash Equivalents and Marketable Securities
Cash in excess of daily requirements is invested in short-term investments
with original maturities of three months or less. Such investments are deemed to
be cash equivalents for purposes of the consolidated statements of cash flows.
The Company classifies its debt and equity securities into one of three
categories: held-to-maturity, trading, or available-for-sale. Management
determines the appropriate classification of its investments at the time of
purchase and reevaluates such determination at each balance sheet date.
Investments at December 31, 2001 consist of marketable equity securities,
variable rate municipal bonds and money market securities. All marketable
securities included in current assets are classified as available-for-sale and
as such, the difference between cost and market, net of estimated taxes, is
recorded as other comprehensive earnings. Gain (or loss) on such securities is
not recognized in the consolidated statements of earnings until the securities
are sold. All marketable securities in non-current assets are classified as
trading, with all investment income, including unrealized gains (or losses)
recognized in the consolidated statements of earnings.
Credit Risk
The Company provides services primarily to a geographically diverse
clientele of healthcare providers throughout the United States. The Company
performs ongoing credit evaluations of its clientele and does not require
collateral. An allowance for doubtful accounts is maintained at a level which
management believes is sufficient to cover anticipated credit losses.
34
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
Equipment and Leasehold Improvements
Depreciation and amortization of equipment and leasehold improvements are
computed on the straight-line method over the estimated useful lives of the
related assets, principally: equipment - three to seven years and leasehold
improvements - life of lease or life of asset, whichever is less.
Intangible Assets
Substantially all the excess of cost over net assets acquired (goodwill)
relates to acquisitions and is amortized on a straight-line basis over 25 to 40
years. Goodwill related to acquisitions of national providers is amortized over
40 years, while goodwill related to acquisitions of regional providers is
amortized over 25 years. Accumulated amortization of goodwill was $16.4 million
and $12.8 million as of December 31, 2001 and 2000, respectively.
The Company assesses the recoverability of goodwill by determining whether
the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows. The amount of
goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. Based upon its most
recent analysis, the Company believes that no impairment of goodwill exists at
December 31, 2001. See discussion of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (Statement) No. 142, "Goodwill and
Other Intangible Assets" under "New Accounting Pronouncements."
Disclosure About Fair Value of Financial Instruments
The estimated fair market value of the revolving credit facility and
long-term debt (including current portions thereof), approximates carrying value
due to the variable rate features of the instruments. The Company believes it is
not practical to estimate a fair value different from the carrying value of its
subordinated debt as the instruments have numerous unique features as discussed
in note 6. During 2001, the Company retired all outstanding balances on debt
obligations.
Revenues and Costs
The Company recognizes revenues and related costs from temporary healthcare
staffing assignments and therapy program management services in the period in
which services are performed. Costs related to marketing and development are
expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those differences are expected to be
recovered or settled.
35
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
Treasury Stock
The purchase of the Company's common stock is recorded at cost. Upon
subsequent reissuance, the treasury stock account is reduced by the average cost
basis of such stock.
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. Estimates also affect the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates.
New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business Combinations",
and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement No. 142 requires that
goodwill with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
No. 142.
The Company adopted the provisions of Statement No. 141 on July 1, 2001 and
the provisions of Statement No. 142 on January 1, 2002. Furthermore, any
goodwill and any intangible assets determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement No. 142 accounting literature.
Goodwill acquired in business combinations completed before July 1, 2001
continued to be amortized prior to the adoption of Statement No. 142.
As of the date of adoption of Statement No. 142, the Company had
unamortized goodwill in the amount of approximately $101.8 million, which is
subject to the transition provisions of Statements No. 141 and No. 142.
Amortization expense related to goodwill was approximately $3.6 million and $2.9
million for the years ending December 31, 2001 and December 31, 2000,
respectively. Because of the extensive effort needed to comply with adopting
Statements No. 141 and No. 142, it is not practicable to reasonably estimate
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle. Management expects
Statement No. 142 to result in the elimination of amortization of goodwill from
previous acquisitions in the amount of $3.6 million pre-tax in 2002.
In October 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transaction." Statement No. 144 is
intended to establish one accounting model for long-lived assets to be disposed
of by sale and to address significant implementation issues. The Company adopted
Statement No. 144 on January 1, 2002. Management does not expect Statement No.
144 to have a material effect on the consolidated financial statements.
36
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
Reclassifications
Certain prior years' amounts have been reclassified to conform with the
current year presentation.
(2) Acquisitions
On September 15, 2000, the Company acquired DiversiCare Rehab Services,
Inc., a regional provider of outpatient therapy to physician groups, hospitals
and school systems. The aggregate purchase price paid at closing was $8.5
million consisting of $7.5 million in cash and $1.0 million in subordinated
notes. The cash component of the purchase price was funded by borrowings on the
Company's revolving credit facility. Goodwill of approximately $7.8 million
related to the acquisition was capitalized and is being amortized. The goodwill
was reduced in the current year to reflect the final audited closing balance
sheet adjustments.
On May 20, 1999, the Company acquired Salt Lake Physical Therapy
Associates, Inc. ("Salt Lake"), a regional provider of physical and occupational
therapy and speech/language pathology through hospital contracts, a freestanding
clinic and home health agencies for consideration consisting of cash, stock and
subordinated notes. On June 30, 1999, the Company purchased AllStaff, Inc.
("AllStaff"), a regional provider of supplemental nurse staffing to healthcare
providers for consideration consisting of cash, stock and subordinated notes. On
December 20, 1999, the Company acquired eai Healthcare Staffing Solutions, Inc.,
a national provider of temporary allied healthcare personnel to hospitals,
managed healthcare organizations, laboratories, and physician offices for
consideration consisting of cash and subordinated notes. The aggregate purchase
prices for these acquisitions was $16.9 million, consisting of $11.9 million in
cash, 96,866 shares of stock, and $4.2 million in subordinated notes. Additional
consideration of $105,000 was paid to the former stockholders of Salt Lake in
August 2000, based upon the attainment of certain financial goals. Additional
consideration of $286,000 was paid to the former stockholders of AllStaff based
upon the attainment of a minimum target growth in gross profit for the
twelve-month period ended June 30, 2000. The cash component of the purchase
prices was funded by the Company's working capital plus additional borrowings on
its bank credit facility. Goodwill of approximately $15.7 million related to the
acquisitions was capitalized and is being amortized.
Each of the acquisitions has been accounted for by the purchase method of
accounting, whereby the operating results of the acquired entity are included in
the Company' results of operations commencing on the respective closing dates
of acquisition.
The following unaudited pro forma financial information assumes the
acquisitions occurred as of January 1, 2000. This information is not necessarily
indicative of results of operations that would have occurred had the purchases
actually been made as of January 1, 2000.
Year Ended December 31,
-----------------------
2000
----
(in thousands, except per share data)
Operating revenues $457,945
Net earnings 23,955
Net earnings per common and common
equivalent share:
Basic 1.64
Diluted 1.47
37
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(3) Marketable Securities
Current marketable securities at December 31, 2001 consist primarily of
marketable equity and debt securities. Noncurrent marketable securities consist
primarily of marketable equity securities ($1.1 million and $1.7 million at
December 31, 2001 and 2000, respectively) and money market securities ($1.8
million and $0.7 million at December 31, 2001 and 2000, respectively) held in
trust under the Company's deferred compensation plan.
(4) Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is as follows:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(in thousands)
Balance at beginning of year $5,347 $4,577 $3,404
Provisions for doubtful accounts 4,594 3,466 2,743
Allowance related to acquisitions - 471 111
Accounts written off (4,039) (3,167) (1,681)
------ ------ ------
Balance at end of year $5,902 $5,347 $4,577
====== ====== ======
(5) Equipment and Leasehold Improvements
Equipment and leasehold improvements, at cost, consist of the following:
December 31,
------------
2001 2000
---- ----
(in thousands)
Equipment $29,687 $20,387
Leasehold improvements 2,374 1,513
------- -------
32,061 21,900
Less accumulated depreciation and amortization 13,688 9,473
------- -------
$18,373 $12,427
======= =======
38
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(6) Long-Term Debt
Long-term debt consists of the following: December 31,
------------
2001 2000
---- ----
Bank Debt: (in thousands)
Revolving credit facility - repaid in full during 2001
$ - $63,800
Subordinated Debt:
Notes payable, 7% - repaid in full during 2001 - 250
Notes payable, 6% - repaid in full during 2001 - 50
Note payable, 8% - repaid in full during 2001 - 118
Notes payable, 7% - repaid in full during 2001 - 1,000
Note payable, 8% - repaid in full during 2001 - 1,450
Notes payable, 8% - repaid in full during 2001 - 1,000
Notes payable, 6.5% - repaid in full during 2001 - 634
------ -------
- 68,302
Less current portion - 2,868
------ -------
Total long-term debt $ - $65,434
====== =======
Effective August 29, 2000, the Company consummated a $125.0 million
five-year revolving credit facility, replacing its existing $90.0 million term
and revolving credit facility. The interest rates are set based on either a base
rate plus from 0.50% to 1.75% or a Eurodollar rate plus from 1.50% to 2.75%. The
base rate is the higher of the Federal Funds Rate plus .50% or the Prime Rate.
The Eurodollar rate is defined as (a) the Interbank Offered Rate divided by (b)
1 minus the Eurodollar Reserve Requirement. The Company pays a fee on the unused
portion of the commitment from 0.375% to 0.50%. The interest rates and
commitment fees vary depending on the ratio of the Company's indebtedness, net
of cash and marketable securities, to cash flow. Borrowings under the agreement
are secured primarily by the Company's assets and future income and profits. The
loan agreement requires the Company to meet certain financial covenants
including maintaining minimum net worth and fixed charge coverage ratios. The
average outstanding borrowings under the revolving credit facilities for 2001,
2000 and 1999 were $12.4 million, $20.0 million and $1.7 million at
weighted-average interest rates of 8.1%, 8.6% and 7.5% per annum, respectively.
As of December 31, 2001 there was no balance outstanding on the revolving credit
facility. Interest paid for 2001, 2000 and 1999 was $2.2 million, $5.3 million
and $3.8 million, respectively.
On February 14, 2000, the $6.0 million convertible subordinated notes
payable to the former shareholders of Healthcare Staffing Solutions, Inc. were
converted into Company common stock. The conversion price was $7.08 per share,
resulting in the issuance of 847,052 shares of Company common stock. This
transaction had no effect on diluted earnings per share.
39
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(7) Stockholders' Equity
During March 2001, the Company issued and sold 1,455,000 shares of its
common stock in an underwritten public equity offering. The net proceeds from
this transaction of $49.4 million were used to reduce the Company's outstanding
balance on its revolving credit facility.
The Company has various long-term performance plans for the benefit of
employees and nonemployee directors. Under the plans, employees may be granted
incentive stock options or nonqualified stock options and nonemployee directors
may be granted nonqualified stock options. Certain of the plans also provide for
the granting of stock appreciation rights, restricted stock, performance awards,
or stock units. Stock options may be granted for a term not to exceed 10 years
(five years with respect to a person receiving incentive stock options who owns
more than 10% of the capital stock of the Company) and must be granted within 10
years from the adoption of the respective plan. The exercise price of all stock
options must be at least equal to the fair market value (110% of fair market
value for a person receiving an incentive stock option who owns more than 10% of
the capital stock of the Company) of the shares on the date of grant. Except for
options granted to nonemployee directors which become fully exercisable after
six months and options granted to management that become exercisable after
achievement of certain stock prices, substantially all remaining stock options
become fully exercisable after four years from date of grant. At December 31,
2001, 2000 and 1999, a total of 1,549,594, 1,841,116 and 2,085,676 shares,
respectively, were available for future issuance under the plans.
The per share weighted-average fair value of stock options granted during
2001, 2000 and 1999 was $24.78, $15.20 and $4.88 on the dates of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 2001 - expected dividend yield 0%, volatility of 56%, risk free
interest rate of 4.5% and an expected life of 7 to 9 years; 2000 - expected
dividend yield 0%, volatility of 55%, risk free interest rate of 5.0% and an
expected life of 4 to 6 years; 1999 - expected dividend yield 0%, volatility of
45%, risk free interest rate of 6.5% and an expected life of 5 to 7 years.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its long-term performance and stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock Based Compensation, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:
40
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(in thousands, except per share data)
Net earnings: As reported $21,035 $23,534 $15,098
Pro forma 16,645 21,379 13,407
Basic earnings per share:
As reported 1.25 1.62 1.15
Pro forma 0.99 1.47 1.02
Diluted earnings per share:
As reported 1.16 1.45 1.03
Pro forma 0.92 1.32 .92
In accordance with SFAS 123, the pro forma net earnings reflects only
options granted subsequent to February 1995 and does not reflect the full impact
of calculating compensation cost for stock options granted prior to March 1995
that vested in 1999.
A summary of the status of the Company's stock option plans as of December
31, 2001, 2000 and 1999, and changes during the years then ended is presented
below:
2001 2000 1999
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at
beginning of year 3,262,975 $10.62 3,890,698 $ 7.30 3,540,298 $6.63
Granted 539,373 39.97 457,600 28.76 848,700 9.06
Exercised (766,753) 6.12 (869,019) 5.70 (288,992) 4.70
Forfeited (100,020) 15.08 (216,304) 8.81 (209,308) 6.86
-------- -------- --------
Outstanding at
end of year 2,935,575 $16.99 3,262,975 $10.62 3,890,698 $7.30
========= ========= =========
Options exercisable at
end of year 1,873,702 2,199,037 1,968,410
========= ========= =========
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 0.00 - 4.70 207,559 2.5 years $4.06 207,559 $4.06
4.70 - 9.40 1,377,868 6.3 8.01 1,056,245 7.71
9.40 -14.10 496,425 6.6 11.54 480,675 11.52
18.80 -23.50 2,000 8.4 20.16 500 20.16
23.50 -28.20 40,000 9.8 26.44 - -
28.20 -32.90 5,000 8.7 32.38 1,250 32.38
32.90 -37.60 302,350 8.6 34.00 84,850 34.00
37.60 -42.30 332,166 9.5 39.67 31,666 39.38
42.30 -47.00 172,207 9.2 43.77 10,957 43.41
--------- ---------
2,935,575 6.9 $16.99 1,873,702 $10.24
========= =========
41
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
The Board of Directors of the Company declared a dividend distribution of
one preferred stock purchase right (the "Rights") for each share of the
Company's common stock owned as of October 1, 1992, and for each share of the
Company's common stock issued until the Rights become exercisable. Each Right,
when exercisable, will entitle the registered holder to purchase from the
Company one thirty-third of a share of the Company's Series A junior
participating preferred stock, $.10 par value (the "Series A preferred stock"),
at a price of $17.50 per one thirty-third of a share. The Rights are not
exercisable and are transferable only with the Company's common stock until the
earlier of 10 days following a public announcement that a person has acquired
ownership of 15% or more of the Company's outstanding common stock, or the
commencement or announcement of a tender offer or exchange offer, the
consummation of which would result in the ownership by a person of 15% or more
of the Company's outstanding common stock. The Series A preferred stock will be
nonredeemable and junior to any other series of preferred stock that the Company
may issue in the future. Each share of Series A preferred stock, upon issuance,
will have a preferential dividend in an amount equal to the greater of $1.00 per
share or 100 times the dividend declared per share of the Company's common
stock. In the event of the liquidation of the Company, the Series A preferred
stock will receive a preferred liquidation payment equal to the greater of $100
or 100 times the payment made on each share of the Company's common stock. Each
one thirty-third of a share of Series A preferred stock outstanding will have
one vote on all matters submitted to the stockholders of the Company and will
vote together as one class with the holders of the Company's common stock.
In the event that a person acquires beneficial ownership of 15% or more of
the Company's common stock, holders of Rights (other than the acquiring person
or group) may purchase, at the Rights' then current purchase price, shares of
the Company's common stock having a value at that time equal to twice such
exercise price. In the event that the Company merges into or otherwise transfers
50% or more of its assets or earnings power to any person after the Rights
become exercisable, holders of Rights (other than the acquiring person or group)
may purchase, at the then current exercise price, common stock of the acquiring
entity having a value at that time equal to twice such exercise price.
42
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(8) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Year Ended December 31,
-----------------------
Numerator: 2001 2000 1999
---- ---- ----
(in thousands, except per share data)
Numerator for basic earnings per share -
earnings available to commons stockholders
(net earnings) $21,035 $23,534 $15,098
Effect of dilutive securities - after-tax interest on
convertible subordinated promissory notes - 28 225
Numerator for diluted earnings per share -
earnings available to common stockholders ------- ------- -------
after assumed conversions $21,035 $23,562 $15,323
======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 16,775 14,563 13,144
Effect of dilutive securities:
Stock options 1,302 1,705 823
Convertible subordinated promissory notes - - 847
------ ------ ------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 18,077 16,268 14,814
====== ====== =======
Basic earnings per share $ 1.25 $ 1.62 $ 1.15
====== ====== =======
Diluted earnings per share $ 1.16 $ 1.45 $ 1.03
====== ====== =======
(9) Employee Benefits
The Company has an Employee Savings Plan, which is a defined contribution
plan qualified under Section 401(k) of the Internal Revenue Code, for the
benefit of its eligible employees. Employees who attain the age of 21 and
complete twelve consecutive months of employment with a minimum of 1,000 hours
worked are eligible to participate in the plan. Each participant may contribute
from 2% to 20% of his or her annual compensation to the plan subject to
limitations on the highly compensated employees to ensure the plan is
nondiscriminatory. Contributions made by the Company to the Employee Savings
Plan were at rates of up to 50% of the first 4% of employee contributions.
Expense in connection with the Employee Savings Plan for 2001, 2000 and 1999
totaled $1.7 million, $1.1 million and $0.8 million, respectively.
The Company maintains a nonqualified deferred compensation plan for certain
employees. Under the plan, participants may defer up to 100% of their base cash
compensation. The amounts are held by a trust in designated investments and
remain the property of the Company until distribution. At December 31, 2001 and
2000, $2.6 million and $2.2 million, respectively, were payable under the
nonqualified deferred compensation plan and approximated the value of the trust
assets owned by the Company.
43
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(10) Lease Commitments
The Company leases office space and certain office equipment under
noncancellable operating leases. Future minimum lease payments under
noncancellable operating leases, as of December 31, 2001, that have initial or
remaining lease terms in excess of one year total approximately $3.8 million for
2002, $3.2 million for 2003, $3.1 million for 2004, $2.7 million for 2005 and
$2.4 million for 2006. Rent expense for 2001, 2000 and 1999 was approximately
$4.8 million, $3.7 million and $2.3 million, respectively.
(11) Income Taxes
Income taxes consist of the following:
Year Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Federal - current $14,232 $12,675 $9,707
Federal - deferred (1,964) 1,045 (1,026)
State 1,648 1,843 1,248
------- ------- ------
$13,916 $15,563 $9,929
======= ======= ======
Deferred tax liability recorded in
stockholders' equity $ 7 $ 7 $ 5
======= ======= ======
A reconciliation between expected income taxes, computed by applying the
statutory Federal income tax rate of 35% to earnings before income taxes, and
actual income tax is as follows:
Year Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Expected income taxes $12,233 $13,684 $8,759
Tax effect of interest income from
municipal bond obligations
exempt from Federal taxation (56) (47) (46)
State income taxes, net of Federal
income tax benefit 1,071 1,198 792
Tax effect of amortization expense
not deductible for tax purposes 599 398 295
Other, net 69 330 129
------- ------- ------
$13,916 $15,563 $9,929
======= ======= ======
44
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities are as follows:
December 31,
----------------
2001 2000
---- ----
(in thousands)
Deferred tax assets:
Provision for doubtful accounts $1,698 $1,305
Accrued insurance, bonus and
vacation expense 4,465 4,555
Other 3,645 1,185
----- -----
9,808 7,045
----- -----
Deferred tax liabilities:
Goodwill amortization 4,120 3,314
Other 1,090 1,363
----- -----
5,210 4,677
----- -----
Net deferred tax asset $4,598 $2,368
===== =====
The Company is required to establish a valuation allowance for deferred tax
assets if, based on the weight of available evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income in the periods which the deferred tax
assets are deductible, management believes that a valuation allowance is not
required, as it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the deferred tax assets.
Income taxes paid by the Company for 2001, 2000 and 1999 were $8.5 million,
$13.0 million and $10.5 million, respectively.
(12) Industry Segment Information
The Company operates in two business segments that are managed separately
based on fundamental differences in operations: temporary healthcare staffing
and therapy program management. Therapy program management includes inpatient
programs (including acute rehabilitation and skilled nursing units), outpatient
therapy programs and contract therapy programs. All of the Company's services
are provided in the United States. Summarized information about the Company's
operations in each industry segment is as follows:
45
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
Revenues from
Unaffiliated Customers Operating Earnings (1)
------------------------------ ---------------------------
(in thousands) (in thousands)
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Healthcare staffing $304,574 $260,100 $148,180 $ (65)(2) $12,011 $5,228
Therapy program
management:
Inpatient 123,276 119,963 116,497 24,081 21,815 18,123
Contract therapy 64,661 29,979 14,071 6,773 3,331 333
Outpatient 49,754 42,332 30,677 6,178 7,032 6,238
-------- -------- -------- ------- ------- -------
Therapy program
management total 237,691 192,274 161,245 37,032 32,178 24,694
-------- -------- -------- ------- ------- -------
Total $542,265 $452,374 $309,425 $36,967 $44,189 $29,922
======== ======== ======== ======= ======= =======
Total Assets Depreciation and Amortization
--------------------------- ---------------------------
(in thousands) (in thousands)
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Healthcare staffing $102,880 $109,911 $92,795 $ 3,280 $2,813 $1,959
Therapy program
management:
Inpatient 91,135 66,194 53,822 3,674 2,861 2,460
Contract therapy 26,349 22,924 19,752 1,088 390 379
Outpatient 30,297 30,064 20,895 1,520 809 498
Therapy program ------- ------- ------- ------ ----- -----
management total 147,781 119,182 94,469 6,282 4,060 3,337
------- ------- ------- ----- ----- -----
Total $250,661 $229,093 $187,264 $9,562 $6,873 $5,296
======= ======= ======= ===== ===== =====
Capital Expenditures
---------------------------
(in thousands)
2001 2000 1999
---- ---- ----
Healthcare staffing $1,424 $3,703 $1,733
Therapy program
management:
Inpatient 3,864 2,575 1,217
Contract therapy 3,630 772 42
Outpatient 1,695 849 51
------ ----- -----
Therapy program
management total 9,189 4,196 1,310
------ ----- -----
Total $10,613 $7,899 $3,043
====== ===== =====
(1) Operating earnings for prior years have been adjusted to reflect the
corporate expense allocation methodology utilized in 2001.
(2) Includes $9.0 million in non-recurring charges.
46
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(13) Quarterly Financial Information (Unaudited)
Quarter Ended
2001 December 31 September 30 June 30 March 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Operating revenues $134,236 $140,434 $136,871 $130,724
Operating earnings (loss) (2,787)(1) 13,519 13,193 13,042
Earnings (loss) before income
taxes (3,356)(2) 13,356 13,024 11,927
Net earnings (loss) (2,017) 8,042 7,832 7,178
Net earnings (loss) per
common share:
Basic (.12) .47 .46 .47
Diluted (.12) .44 .43 .42
(1) Includes $9.0 million in non-recurring charges.
(2) Includes the $9.0 million in (1) above plus $0.5 million write-down of an
investment.
Quarter Ended
-------------
2000 December 31 September 30 June 30 March 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Operating revenues $122,900 $115,820 $107,721 $105,933
Operating earnings 12,014 11,150 10,438 10,587
Earnings before income taxes 10,586 10,002 9,189 9,320
Net earnings 6,372 6,007 5,544 5,611
Net earnings per common share:
Basic .42 .41 .38 .41
Diluted .38 .36 .35 .37
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding our directors and executive officers is
included in our Proxy Statement for the 2002 Annual Meeting of Stockholders
under the captions "Item 1 - Election of Directors" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" and is incorporated herein by
reference.
The following table sets forth the name, age and position of each of our
executive officers. There is no family relationship between any of the following
individuals.
Name Age Position
- ---- --- -----------------------------------------------
Alan C. Henderson....... 56 President, Chief Executive Officer and Director
Gregory F. Bellomy...... 45 President, StarMed Staffing Group
Tom E. Davis............ 52 President, Inpatient Division
James M. Douthitt....... 39 Senior Vice President and Chief Accounting Officer
Gregory J. Eisenhauer... 43 Senior Vice President, Chief Financial Officer and Secretary
Patricia M. Henry....... 49 President, Contract Therapy Division
Alfred J. Howard........ 49 President, Outpatient Division
The following paragraphs contain biographical information about our
directors and executive officers.
Alan C. Henderson has been President and Chief Executive Officer and a
director of our company since 1998. Prior to becoming President and Chief
Executive Officer, Mr. Henderson was Executive Vice President, Chief Financial
Officer and Secretary of our company from 1991 through May 1998. Mr. Henderson
also serves as a director of General American Capital Corp, Angelica
Corporation, Reinsurance Group of America, Inc. and is a member of the St. Louis
Corporate Board of US Bancorp.
Gregory F. Bellomy has been President of our staffing division since
November 2001 and was President of our contract therapy division from September
1998 to November 2001. Prior to joining our company, Mr. Bellomy served in
various capacities, including Division President, Division Vice President and
Area General Manager at TheraTx Incorporated from 1992 to 1997, at which time
TheraTx Incorporated was acquired by Vencor Incorporated. Mr. Bellomy was
National Director of Vencare Ancillary Services for Vencor Incorporated until he
joined our company.
Tom E. Davis has been President of our inpatient division since January
1998. Mr. Davis joined our company in January 1997 as Senior Vice President,
Operations. Prior to joining our company, Mr. Davis was Group Vice President for
Quorum Health Resources, LLC from January 1990 to January 1997.
48
James M. Douthitt has been Senior Vice President, Chief Accounting Officer
and Treasurer of our company since July 2000. Prior to his current role, Mr.
Douthitt served as Vice President of Finance for our staffing division from
January through June 2000 and Vice President of Finance for our contract therapy
division from October 1998 through December 1999. Prior to joining our company
Mr. Douthitt was Director of Finance for Vencare, Inc. from August 1997 to
September 1998 and Manager of Finance for Vencare, Inc. from January 1996 to
July 1997.
Gregory J. Eisenhauer has been Senior Vice President, Chief Financial
Officer and Secretary of our company since August 2000. Mr. Eisenhauer joined
our company in 1993 and has served in various management positions with our
company, including Vice President, Finance; Vice President, Outpatient
Operations; Senior Vice President, Acquisitions; and Senior Vice President,
Finance.
Patricia M. Henry has been President of our contract therapy division since
November 2001. Ms. Henry joined the company in October 1998 and served most
recently as Senior Vice President of Operations, Contract Therapy Services.
Prior to joining our company, Ms. Henry was Director of Ancillary Operations for
Vencare, Inc. Prior to Vencor's acquisition of TheraTx, Ms. Henry was a Regional
Vice President of Operations from September 1994 to September 1998. Before
joining TheraTx, Ms. Henry was Area Vice President for NovaCare, Inc., Southwest
Division from July 1990 to September 1994.
Alfred J. Howard has been President of our outpatient division since August
1996. Prior to joining our company, he served as President of the Eastern
Operations for Pacific Rehabilitation and Sports Medicine from October 1993 to
August 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in our Proxy
Statement for the 2002 Annual Meeting of Stockholders under the captions
"Compensation of Executive Officers", and "Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is included in our Proxy Statement for the 2002 Annual Meeting of
Stockholders under the captions "Voting Securities and Principal Holders
Thereof" and "Security Ownership by Management" and is incorporated herein by
reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
49
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1)Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Earnings for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Comprehensive Earnings for the years
ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2)Financial Statement Schedules:
None
(3)Exhibits:
See Exhibit Index on page 52 of this Annual Report on Form 10-K.
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the three months
ended December 31, 2001.
50
SIGNATURES
Pursuant to the requirements of Section 13 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.
Dated: March 15, 2002
REHABCARE GROUP, INC.
(Registrant)
By: /s/ Alan C. Henderson
------------------------------------------
Alan C. Henderson
President and Chief Executive Officer
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 date indicated.
Signature Title Dated
--------- ----- -----
/s/ Alan C. Henderson President, Chief Executive March 15, 2002
----------------------------- Officer and Director
Alan C. Henderson
(Principal Executive Officer)
/s/ Gregory J. Eisenhauer Senior Vice President, March 15, 2002
----------------------------- Chief Financial Officer and
Gregory J. Eisenhauer Secretary
(Principal Financial Officer)
/s/ James M. Douthitt Senior Vice President and March 15, 2002
----------------------------- Chief Accounting Officer
James M. Douthitt
(Principal Accounting Officer)
/s/ William G. Anderson Director March 15, 2002
-----------------------------
William G. Anderson
/s/ Richard E. Ragsdale Director March 15, 2002
-----------------------------
Richard E. Ragsdale
/s/ John H. Short Director March 15, 2002
-----------------------------
John H. Short
/s/ H. Edwin Trusheim Director March 15, 2002
-----------------------------
H. Edwin Trusheim
/s/ Colleen Conway-Welch Director March 15, 2002
-----------------------------
Colleen Conway-Welch
/s/ Theodore M. Wight Director March 15, 2002
-----------------------------
Theodore M. Wight
51
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, dated May 9, 1991
[Registration No. 33-40467], and incorporated herein by reference)
3.2 Certificate of Amendment of Certificate of Incorporation (filed as Exhibit
3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 31, 1995 and incorporated herein by reference)
3.3 Bylaws (filed as Exhibit 3.2 to the Registrant's Registration Statement on
Form S-1, dated May 9, 1991 [Registration No. 33-40467], and incorporated
herein by reference)
4.1 Rights Agreement, dated September 21, 1992, by and between the Registrant
and Boatmen's Trust Company (filed as Exhibit 1 to the Registrant's
Registration Statement on Form 8-A filed September 24, 1992 and
incorporated herein by reference)
10.1 1987 Incentive Stock Option and 1987 Nonstatutory Stock Option Plans (filed
as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1,
dated May 9, 1991 [Registration No. 33-40467], and incorporated herein by
reference) *
10.2 Form of Stock Option Agreement (filed as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, dated May 9, 1991 [Registration No.
33-40467], and incorporated herein by reference) *
10.3 Employment Agreement with Alan C. Henderson, dated May 1, 1991 (filed as
Exhibit 10.4 to Amendment No. 1 to the Registrant's Registration Statement
on Form S-1, dated June 19, 1991 [Registration No. 33-40467], and
incorporated herein by reference) *
10.4 Form of Termination Compensation Agreement for Alan C. Henderson (filed as
Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, dated
February 18, 1993 [Registration No. 33-58490], and incorporated herein by
reference) *
10.5 Form of Termination Compensation Agreement for other executive officers *
10.6 Supplemental Bonus Plan (filed as Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1, dated February 18, 1993 [Registration
No. 33-58490], and incorporated herein by reference) *
10.7 Deferred Profit Sharing Plan (filed as Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1, dated February 18, 1993 [Registration
No. 33-58490], and incorporated herein by reference) *
10.8 RehabCare Executive Deferred Compensation Plan (filed as Exhibit 10.12 to
the Registrant's Report on Form 10-K, dated May 27, 1994, and incorporated
herein by reference) *
52
EXHIBIT INDEX (CONT'D)
10.9 RehabCare Directors' Stock Option Plan (filed as Appendix A to Registrant's
definitive Proxy Statement for the 1994 Annual Meeting of Stockholders and
incorporated herein by reference) *
10.10Amended and Restated 1996 Long-Term Performance Plan (filed as Appendix A
to Registrant's definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders and incorporated herein by reference) *
10.11RehabCare Group, Inc. 1999 Non-Employee Director Stock Plan (filed as
Appendix B to Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders and incorporated herein by reference) *
10.12Credit Agreement, dated as of August 29, 2000, by and among RehabCare
Group, Inc., as borrower, certain subsidiaries and affiliates of the
borrower, as guarantors, and First National Bank, Firstar Bank, N.A., Bank
of America, N.A., First Union Securities, Inc., and Banc of America
Securities, LLC (filed as Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 and incorporated herein
by reference)
10.13Pledge Agreement, dated as of August 29, 2000, by and among RehabCare
Group, Inc. and Subsidiaries, as pledgors, and Bank of America, N.A., as
collateral agent, for the holders of the Secured Obligations (filed as
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 and incorporated herein by reference)
10.14Security Agreement, dated as of August 29, 2000, by and among RehabCare
Group, Inc. and Subsidiaries, as grantors, and Bank of America, N.A., as
collateral agent, for the holders of the Secured Obligations (filed as
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 and incorporated herein by reference)
13.1 Those portions of the Registrant's Annual Report to Stockholders for the
year ended December 31, 2001 included in response to Items 5 and 6 of this
Annual Report on Form 10-K
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
_________________________
* Management contract or compensatory plan or arrangement.
53
EXHIBIT 10.5
REHABCARE GROUP, INC.
TERMINATION COMPENSATION AGREEMENT
This agreement ("Agreement") has been entered into this 3rd day of May,
2001, by and between RehabCare Group, Inc., a Delaware corporation (the
"Company"), and ___________, an individual (the "Executive").
RECITALS
The Board of Directors of the Company has determined that it is in the best
interests of the Company and its stockholders to reinforce and encourage the
continued attention and dedication of the Executive to the Company as a member
of the Company's management and to assure that the Company will have the
continued dedication of the Executive, notwithstanding the possibility or
occurrence of a Change in Control (as defined below). The Board desires to
provide for the continued employment of the Executive on terms competitive with
those of other corporations, and the Executive is willing to rededicate himself
and continue to serve the Company. Additionally, the Board believes it is
imperative to diminish the inevitable distraction of the Executive by virtue of
the personal uncertainties and risks created by a potential or pending Change in
Control and to encourage the Executive's full attention and dedication to the
Company currently and in the event of any potential or pending Change in
Control, and to provide the Executive with compensation and benefits
arrangements upon certain terminations of employment either prior to or after a
Change in Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied. Therefore, in order to accomplish these
objectives, the Board has caused the Company to enter into this Agreement.
IT IS AGREED AS FOLLOWS:
Section 1: Definitions and Construction.
1.1 Definitions. For purposes of this Agreement, the following words and
phrases, whether or not capitalized, shall have the meanings specified below,
unless the context plainly requires a different meaning.
1.1(a) "Accrued Obligations" has the meaning set forth in Section
4.1(a) of this Agreement.
1.1(b) "Annual Base Salary" has the meaning set forth in Section
2.4(a) of this Agreement.
1.1(c) "Board" means the Board of Directors of the Company.
1.1(d) "Cause" has the meaning set forth in Section 3.3 of this
Agreement.
54
1.1(e) "Change in Control" means:
(i) The acquisition by any individual, entity or group, or a
Person (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) of ownership of twenty-five percent (25%) or more
of either (a) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (b) the
combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); or
(ii) Individuals who, as the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election, by the Company's
stockholders was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered
as though such individual were a member of the Incumbent Board,
but excluding, as a member of the Incumbent Board, any such
individual whose initial assumption of office occurs as a result
of either an actual or threatened election contest (as such terms
are used in Rule l4a-11 of Regulation l4A promulgated under the
Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the
Board; or
(iii)Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless,
following such reorganization, merger or consolidation, (a) more
than fifty percent (50%) of, respectively, the then outstanding
shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting
power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities
immediately prior to such reorganization, merger or consolidation
in substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or
consolidation, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (b) no
Person beneficially owns, directly or indirectly, twenty-five
percent (25%) or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting
power of the then outstanding voting securities of such
corporation, entitled to vote generally in the election of
directors and (c) at least a majority of the members of the board
of directors of the corporation resulting from such
reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger or
consolidation;
55
(iv) Approval by the stockholders of the Company of (a) a
complete liquidation or dissolution of the Company or (b) the
sale or other disposition of all or substantially all of the
assets of the Company, other than to a corporation, with respect
to which following such sale or other disposition, (1) more than
fifty percent (50%) of, respectively, the then outstanding shares
of common stock of such corporation and the combined voting power
of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities
immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (2) no Person beneficially owns, directly or
indirectly, twenty-five percent (25%) or more of, respectively,
the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the
election of directors and (3) at least a majority of the members
of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other
disposition of assets of the Company; or
(v) the sale or other disposition of all or substantially all of
the stock or assets of the Division, other than to another
subsidiary of the Company, if at the time of the sale or other
disposition, the Executive is serving as President of such
Division.
1.1(f) "Change in Control Date" means the date that the Change in
Control first occurs.
1.1(g) "Company" has the meaning set forth in the first paragraph of
this Agreement and, with regard to successors, in Section 5.2 of this
Agreement.
1.1(h) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.1(i) "Date of Termination" has the meaning set forth in Section 3.7
of this Agreement.
1.1(j) "Division" means the __________ Division or such other division
of the Company for which the Executive may from time to time in the future
perform the most significant portion of his duties and responsibilities as
an employee of the Company.
1.1(k) "Disability" has the meaning set forth in Section 3.2 of this
Agreement.
56
1.1(l) "Disability Effective Date" has the meaning set forth in
Section 3.2 of this Agreement.
1.1(m) "Effective Date" means the date of this Agreement.
1.1(n) "Employment Period" means the period beginning on the Effective
Date and ending on the later of (i) May 3, 2002, or (ii) May 3 of any
succeeding year during which notice is given by either party (as described
in Section 2.1 of this Agreement) of such party's intent not to renew this
Agreement.
1.1(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1.1(p) "Excise Tax" has the meaning set forth in Section 4.2(e)(i) of
this Agreement.
1.1(q) "Good Reason" has the meaning set forth in Section 3.4 of this
Agreement.
1.1(r) "Gross-Up Payment" has the meaning set forth in Section 4.2(i)
of this Agreement.
1.1(s) "Incentive Bonus" has the meaning set forth in Section 2.4(b)
of this Agreement.
1.1(t) "Incumbent Board" has the meaning set forth in Section
1.1(e)(ii) of this Agreement.
1.1(u) "Notice of Termination" has the meaning set forth in Section
3.6 of this Agreement.
1.1(v) "Other Benefits" has the meaning set forth in Section 4.1(e) of
this Agreement.
1.1(w) "Outstanding Company Common Stock" has the meaning set forth in
Section 1.1(e)(i) of this Agreement.
1.1(x) "Outstanding Company Voting Securities" has the meaning set
forth in Section 1.1(e)(i) of this Agreement.
1.1(y) "Payment" has the meaning set forth in Section 4.2(e)(i) of
this Agreement.
1.1(z) "Person" means any "person" within the meaning of Sections
13(d) and 14(d) of the Exchange Act.
1.1(aa)"Prorated Target Bonus" has the meaning set forth in Section
4.1(b) of this Agreement.
1.1(bb)"Severance Bonus Amount" has the meaning set forth in Section
4.2(b) of this Agreement.
57
1.1(cc)"Term" means the period that begins on the Effective Date and
ends on the earlier of: (i) the Date of Termination, or (ii) the close of
business on the later of May 3, 2002 or May 3 of any renewal term.
1.2 Gender and Number. When appropriate, pronouns in this Agreement used in
the masculine gender include the feminine gender, words in the singular include
the plural, and words in the plural include the singular.
1.3 Headings. All headings in this Agreement are included solely for ease
of reference and do not bear on the interpretation of the text. Accordingly, as
used in this Agreement, the terms "Article" and "Section" mean the text that
accompanies the specified Article or Section of the Agreement.
1.4 Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri, without reference to its
conflict of law principles.
Section 2: Terms and Conditions of Employment.
2.1 Period of Employment. The Executive shall remain in the employ of the
Company throughout the Term of this Agreement in accordance with the terms and
provisions of this Agreement. This Agreement will automatically renew for annual
one-year periods unless either party gives the other written notice, by February
3, 2002, or February 3 of any succeeding year, of such party's intent not to
renew this Agreement.
2.2 Positions and Duties.
2.2(a) Throughout the Term of this Agreement, the Executive shall
serve as _________, subject to the reasonable directions of the Board
or the President and Chief Executive Officer of the Company. The
Executive shall have such authority and shall perform such duties as
are specified by the Board or the President and Chief Executive
Officer of the Company for the office to which he has been appointed
hereunder and shall so serve, subject to the control exercised by the
Board and the President and Chief Executive Officer from time to time.
2.2(b) Throughout the Term of this Agreement (but excluding any
periods of vacation and sick leave to which the Executive is
entitled), the Executive shall devote reasonable attention and time
during normal business hours to the business and affairs of the
Company and shall use his reasonable best efforts to perform
faithfully and efficiently such responsibilities as are assigned to
him under or in accordance with this Agreement; provided that, it
shall not be a violation of this Section 2.2(b) for the Executive to
(i) serve on corporate, civic or charitable boards or committees,
(ii) deliver lectures or fulfill speaking engagements, or (iii) manage
personal investments, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as
an employee of the Company in accordance with this Agreement or
violate the Company's conflict of interest policy as in effect
immediately prior to the Effective Date.
2.3 Situs of Employment. Throughout the Term of this Agreement, the
Executive's services shall be performed at the location where the Executive was
employed immediately prior to the Effective Date or at any other office of the
Company which is located in the greater St. Louis, Missouri metropolitan area.
58
2.4 Compensation.
2.4(a) Annual Base Salary. At the Effective Date, the Executive
receives an annual base salary ("Annual Base Salary") of _____________
Dollars ($_______). The Executive's Annual Base Salary shall be paid
in equal or substantially equal semi-monthly installments. During the
Term of this Agreement, the Annual Base Salary payable to the
Executive shall be reviewed at least annually and shall be increased
at the discretion of the Board or the Compensation Committee of the
Board but shall not be reduced.
2.4(b) Incentive Bonuses. In addition to Annual Base Salary, the
Executive shall be awarded the opportunity to earn an incentive bonus
on an annual basis ("Incentive Bonus") under any incentive
compensation plan which are generally available to other peer
executives of the Company. During the Term of this Agreement, the
annual target Incentive Bonus which the Executive will have the
opportunity to earn shall be reviewed at least annually and be
increased at the discretion of the Board or the Compensation Committee
of the Board.
2.4(c) Incentive, Savings and Retirement Plans. Throughout the Term of
this Agreement, the Executive shall be entitled to participate in all
incentive, savings and retirement plans generally available to other
peer executives of the Company.
2.4(d) Welfare Benefit Plans. Throughout the Term of this Agreement
(and thereafter, subject to Section 4.1(d) hereof), the Executive
and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the
Company (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs) to the extent
generally available to other peer executives of the Company.
2.4(e) Expenses. Throughout the Term of this Agreement, the Executive
shall be entitled to receive prompt reimbursement for all reasonable
business expenses incurred by the Executive in accordance with the
policies, practices and procedures generally applicable to other peer
executives of the Company.
2.4(f) Fringe Benefits. Throughout the Term of this Agreement, the
Executive shall be entitled to such fringe benefits as generally are
provided to other peer executives of the Company.
2.4(g) Office and Support Staff. Throughout the Term of this
Agreement, the Executive shall be entitled to an office or offices of
a size and with furnishings and other appointments, and to personal
secretarial and other assistance, as are generally provided to other
peer executives of the Company.
2.4(h) Vacation. Throughout the Term of this Agreement, the Executive
shall be entitled to paid vacation in accordance with the plans,
policies, programs and practices as are generally provided to other
peer executives of the Company.
59
Section 3: Termination of Employment.
3.1 Death. The Executive's employment shall terminate automatically upon
the Executive's death during the Employment Period.
3.2 Disability. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), the Company may give to the Executive
written notice in accordance with Section 6.2 of its intention to terminate the
Executive's employment. In such event, the Executive's employment with the
Company shall terminate effective on the thirtieth (30th) day after receipt of
such notice by the Executive (the "Disability Effective Date"), provided that,
within the thirty (30) days after such receipt, the Executive shall not have
returned to full-time performance of the Executive's duties. For purposes of
this Agreement, "Disability" shall mean that the Executive has been unable to
perform the services required of the Executive hereunder on a full-time basis
for a period of one hundred eighty (180) consecutive business days by reason of
a physical and/or mental condition. "Disability" shall be deemed to exist when
certified by a physician selected by the Company and acceptable to the Executive
or the Executive's legal representative (such agreement as to acceptability not
to be withheld unreasonably). The Executive will submit to such medical or
psychiatric examinations and tests as such physician deems necessary to make any
such Disability determination.
3.3 Termination for Cause. The Company may terminate the Executive's
employment during the Employment Period for "Cause," which shall mean
termination based upon: (i) the Executive's willful and continued failure to
substantially perform his duties with the Company (other than as a result of
incapacity due to physical or mental condition), after a written demand for
substantial performance is delivered to the Executive by the Company, which
specifically identifies the manner in which the Executive has not substantially
performed his duties, (ii) the Executive's commission of an act constituting a
criminal offense that would be classified as a felony under the applicable
criminal code or involving moral turpitude, dishonesty, or breach of trust, or
(iii) the Executive's material breach of any provision of this Agreement. For
purposes of this Section, no act or failure to act on the Executive's part shall
be considered "willful" unless done, or omitted to be done, without good faith
and without reasonable belief that the act or omission was in the best interest
of the Company. Notwithstanding the foregoing, the Executive shall not be deemed
to have been terminated for Cause unless and until (i) he receives a Notice of
Termination from the Company, (ii) he is given the opportunity, with counsel, to
be heard before the Board, and (iii) the Board finds, in its good faith opinion,
that the Executive was guilty of the conduct set forth in the Notice of
Termination.
3.4 Termination for Good Reason after a Change in Control. The Executive
may terminate his employment with the Company for "Good Reason" after a Change
in Control which shall mean:
3.4(a) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 2.2(a) or any other action
by the Company which results in a material diminution in such
position, authority, duties or responsibilities;
3.4(b) (i) the failure by the Company to continue in effect for the
Executive any benefit or compensation plan, stock ownership plan, life
insurance plan, health and accident plan or disability plan that are
generally available to other peer executives of the Company, (ii) the
taking of any action by the Company which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any such plans as compared with the participation or
benefits generally provided to other peer executives of the Company,
or (iii) the failure by the Company to provide the Executive with paid
vacation equivalent to that paid vacation generally provided to other
peer executive of the Company.
60
3.4(c) the Company's requiring the Executive to be based at any office
or location other than that described in Section 2.3;
3.4(d) a material breach by the Company of any provision of this
Agreement;
3.4(e) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
3.4(f) within a period ending at the close of business on the date two
(2) years after the Change in Control Date, if the Company has failed
to comply with and satisfy Section 5.2 on or after such Change in
Control Date.
For purposes of this Section, any termination of the Executive's employment
based upon a good faith determination of "Good Reason" made by the Executive
shall be subject to a delivery of a Notice of Termination by the Executive to
the Company in the manner prescribed in Section 3.6 and subject further to the
ability of the Company to remedy promptly any action not taken in bad faith by
the Company may otherwise constitute Good Reason under this Section 3.4.
3.5 Voluntary Termination by the Executive. The Executive may voluntarily
terminate his employment with the Company for any reason or for no reason at any
time during the Employment Period.
3.6 Notice of Termination. Any termination by the Company for Cause or
Disability, or by the Executive for Good Reason, shall be communicated by Notice
of Termination to the other party, given in accordance with Section 6.2. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, and (iii) if the Date of
Termination (as defined in Section 3.7 hereof) is other than the date of receipt
of such notice, specifies the termination date (which date shall be not more
than fifteen (15) days after the giving of such notice). The failure by the
Executive or the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in enforcing
the Executive's or the Company's rights hereunder.
3.7 Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, the Date of Termination shall
be the date of receipt by the Executive of the Notice of Termination or any
later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be, or (iii) if the Executive's employment is
terminated by the Executive for Good Reason, the Date of Termination shall be a
date specified in the Notice of Termination, with such specified date being not
less than ten (10) days after the date of receipt by the Company of the Notice
of Termination, (iv) if the Executive's employment is terminated by the Company
other than for Cause, death, or Disability, the Date of Termination shall be the
date of receipt by the Executive of the Notice of Termination; provided that if
within thirty (30) days after any Notice of Termination is given, the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement of
the parties, or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
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Section 4: Certain Benefits Upon Termination.
4.1 Termination Without Cause Prior to a Change in Control. If, prior to a
Change in Control during the Employment Period, the Company terminates the
Executive's employment without Cause, the Executive shall be entitled to the
payment of the benefits provided below:
4.1(a) Accrued Obligations. Within thirty (30) days after the Date of
Termination, the Company shall pay to the Executive the sum of (1) the
Executive's accrued salary through the Date of Termination, (2) the
accrued benefit payable to the Executive under any deferred
compensation plan, program or arrangement in which the Executive is a
participant subject to the computation of benefits provisions of such
plan, program or arrangement, and (3) any accrued vacation pay; in
each case to the extent not previously paid (the "Accrued
Obligations").
4.1(b) Annual Base Salary and Target Bonus Continuation. For a period
of twelve (12) months beginning in the month after the Date of
Termination, the Company shall pay to the Executive on a monthly basis
one-twelfth of an amount equal the Executive's then-current Annual
Base Salary and Prorated Target Bonus. For purposes of this Agreement,
the term "Prorated Target Bonus" means an amount determined by
multiplying the actual percentage of the Executive's base salary paid
to the Executive as an Incentive Bonus in the year prior to the year
in which the Date of Termination occurs by the Executive's
then-current Annual Base Salary as of the Date of Termination and
prorating this amount by multiplying it by a fraction, the numerator
of which is the number of days during the then-current calendar year
that the Executive was employed by the Company up to and including the
Date of Termination and the denominator of which is 365. The Company
at any time may elect to pay the balance of such payments then
remaining in a lump sum.
4.1(c) Stock-Based Awards. To the extent not otherwise provided for
under the terms of the Company's stock-based benefit plans or the
Executive's grant agreement, all stock-based awards held by the
Executive that have not expired and are scheduled to vest and/or
become exercisable within six (6) months after the Date of Termination
in accordance with their respective terms, shall vest and/or become
exercisable as of the Date of Termination and shall remain exercisable
after the Date of Termination in accordance with the original terms of
their respective grant agreements.
4.1(d) Medical and Health Benefit Continuation. For a period of twelve
(12) months beginning in the month the Date of Termination occurs, the
Company shall pay the costs of medical and health benefits to the
Executive and/or the Executive's family at least equal to those which
would have been provided to them in accordance with the Company's
plans, programs, practices and policies if the Executive's employment
had not been terminated; provided, however, that if the Executive
becomes reemployed with another employer and is eligible to receive
medical or health benefits under another employer-provided plan,
program, practice or policy the medical and health benefits described
herein shall be immediately terminated upon the commencement of
coverage under the new employer's plan, program, practice or policy.
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4.1(e) Other Benefits. To the extent not previously paid or provided,
the Company shall timely pay or provide to the Executive and/or the
Executive's family any other amounts or benefits required to be paid
or provided for which the Executive and/or the Executive's family is
eligible to receive pursuant to this Agreement and under any plan,
program, policy or practice or contract or agreement of the Company as
those provided generally to other peer executives and their families
("Other Benefits").
4.2 Benefits Upon a Change in Control. If a Change in Control occurs during
the Employment Period and within three years after the Change in Control Date
(a) the Company terminates the Executive's employment without Cause, or (b) the
Executive terminates employment with the Company for Good Reason, then the
Executive shall become entitled to the payment of the benefits as provided
below:
4.2(a) Accrued Obligations. Within thirty (30) days after the Date of
Termination, the Company shall pay to the Executive the Accrued Obligations
and the Prorated Target Bonus.
4.2(b) Severance Amount. Within thirty (30) days after the Date of
Termination, the Company shall pay to the Executive as severance pay in a
lump sum, in cash, an amount equal to 1.5 times the sum of the Executive's
then-current Annual Base Salary and Severance Bonus Amount. For purposes of
this Agreement, the term "Severance Bonus Amount" means an amount
determined by averaging the percentages of the Executive's base salary that
were actually paid to the Executive as an Incentive Bonus during the five
most recently completed years prior to the year in which the Date of
Termination occurs and multiplying such average percentage by the
Executive's then-current Annual Base Salary.
4.2(c) Stock-Based Awards. To the extent not otherwise provided for
under the terms of the Company's stock-based benefit plans or the
Executive's grant agreements, all stock-based awards held by the Executive
that have not expired in accordance with their respective terms shall vest
and/or become fully exercisable as of the Change in Control Date and shall
remain exercisable after the Change in Control Date in accordance with the
original terms of the respective grant agreements.
4.2(d) Other Benefits. To the extent not previously paid or provided,
the Company shall timely pay or provide to the Executive and/or the
Executive's family any Other Benefits.
4.2(e) Gross-up Payments.
(i) Anything in this Agreement to the contrary notwithstanding,
in the event that it shall be determined that any payment by the
Company to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise but determined without regard to any
additional payments required under this Section 4.2(e)) (a
"Payment") would be subject to the excise tax imposed by Code
Section 4999 (or any successor provision) or any interest or
penalties are incurred by the Executive with respect to such
excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest
or penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment on an after-tax basis equal to the Excise Tax
imposed upon the Payment. The intent of the parties is that the
Company shall be responsible in full for, and shall pay, any and
all Excise Tax on any Payments and Gross-up Payment(s) and any
income and all excise and employment taxes (including, without
limitation, penalties and interest) imposed on any Gross-up
Payment(s) as well as any loss of deduction caused by or related
to the Gross-up Payment(s).
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(ii) Subject to the provisions of Section 4.2(e)(iii), all
determinations required to be made under this Section 4.2(e),
including whether and when a Gross-up Payment is required and the
amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determinations, shall be made by
KPMG LLP (the "Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and to the Executive
within fifteen (15) business days of receipt of notice from the
Company or the Executive that there has been or will be a
Payment. In the event that the Accounting Firm is serving as the
accountant or auditor for the Person effecting the Change in
Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the
"Accounting Firm" hereunder). All fees and expenses of the
Accounting Firm shall be paid solely by the Company. Any Gross-Up
Payment, as determined pursuant to this Section 4.2(e), shall be
paid by the Company to the Executive within five (5) days after
the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive with a written opinion
that failure to report the Excise Tax on the Executive's
applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Company and the
Executive in the absence of a material mathematical or legal
error. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that the
Gross-Up Payments will not have been made by the Company that
should have been made or that the Gross-Up Payments will have
been made that should not have been made, in each case consistent
with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section
4.2(e)(iii) below and the Executive is thereafter required to
make a payment of any Excise Tax or any interest, penalty or
addition to tax related thereto, the Accounting Firm shall
determine the amount of the underpayment of Excise Taxes that has
occurred and such underpayment and interest, penalty or addition
to tax shall be promptly paid by the Company to the Executive,
along with such additional amounts described in Section
4.2(e)(i). In the event that the Accounting Firm determines that
an overpayment of Gross-Up Payment(s) has occurred, any such
overpayment shall be treated for all purposes as a loan to the
Executive with interest at the applicable federal rate provided
for in Section 7872(f)(2) of the Code, due and payable within
ninety (90) days after written demand to the Executive by the
Company; provided, however, that the Executive shall have no duty
or obligation whatsoever to repay such overpayment if Executive's
receipt of the overpayment, or any portion thereof, is included
in the Executive's income and the Executive's repayment of the
same is not deductible by the Executive for federal or state
income tax purposes.
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(iii) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but no later
than ten (10) business days after the Executive is informed in
writing of such claim by the Internal Revenue Service and the
notification shall apprise the Company of the nature of the claim
and the date on which such claim is required to be paid. The
Executive shall not pay such claim prior to the expiration of a
30-day period following the date on which the Executive has given
such notification to the Company (or such shorter period ending
on the date that any payment of taxes with respect to such claim
is required). If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to contest
such claim, the Executive shall:
(A) give the Company any information reasonably requested by
the Company relating to such claim;
(B) take such action in connection with contesting such
claim as the Company shall reasonably request in writing
from time to time, including without limitation, accepting
legal representation with respect to such claim by an
attorney reasonably selected by the Company;
(C) cooperate with the Company in good faith in order to
effectively contest such claim; and
(D) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay all
costs and expenses (including additional interest and
penalties) incurred in connection with such contest, and
shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, for any Excise Tax or
income tax (including interest and penalties with respect
thereto) imposed as a result of such contest. Without
limitation on the foregoing provisions of this Section
4.2(e), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole
option, either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a
court of initial jurisdiction or in one or more appellate
courts, as the Company shall determine; provided, however,
that if the Company directs the Executive to pay such claim
and sue for a refund, the Company shall advance the amount
of such payment to the Executive, on an interest-free basis,
and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto)
imposed with respect to such advance; and provided further
that any extension of the statute of limitations relating to
payment of taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
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(iv) If after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 4.2(e)(iii), the
Executive becomes entitled to receive any refund with
respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section
4.2(e)(iii)) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by
the Executive of an amount advanced by the Company pursuant
to Section 4.2(e)(iii), a determination is made that the
Executive shall not be entitled to a refund with respect to
such claim and the Company does not notify the Executive in
writing of its intent to contest such denial or refund prior
to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall
not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of the
Gross-Up Payment required to be paid by the Company to the
Executive.
4.3 Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period (either prior or subsequent to a
Change in Control), this Agreement shall terminate without further obligations
to the Executive's legal representatives under this Agreement, other than for
(i) payment of Accrued Obligations (as defined in Section 4.1(a)) (which shall
be paid to the Executive's estate or beneficiary, as applicable, in a lump sum
in cash within thirty (30) days of the Date of Termination) and (ii) the timely
payment or provision of Other Benefits (as defined in Section 4.1(e)), including
death benefits pursuant to the terms of any plan, policy, or arrangement of the
Company.
4.4 Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period (either prior or
subsequent to a Change in Control), this Agreement shall terminate without
further obligations to the Executive, other than for (i) payment of Accrued
Obligations (as defined in Section 4.1(a)) (which shall be paid to the Executive
in a lump sum in cash within thirty (30) days of the Date of Termination) and
(ii) the timely payment or provision of Other Benefits (as defined in Section
4.1(e)) including Disability benefits pursuant to the terms of any plan, policy
or arrangement of the Company.
4.5 Termination by the Company for Cause, by the Executive Prior to a
Change in Control for any Reason or by the Executive Other Than Good Reason
After a Change in Control. If the Executive's employment shall be terminated by
the Company for Cause during the Employment Period (either prior or subsequent
to a Change in Control) or by the Executive for any reason prior to a Change in
Control or by the Executive for a reason other than Good Reason after a Change
in Control, this Agreement shall terminate without further obligations to the
Executive, other than for (i) payment of the Executive's Accrued Obligations (as
defined in Section 4.1(a)) (which shall be paid to the Executive in a lump sum
in cash within thirty (30) days of the Date of Termination), and (ii) the timely
payment or provision of Other Benefits (as defined in Section 4.1(e)), as
applicable for such termination.
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4.6 Non-Exclusivity of Rights. Except as provided in Section 4.1(d),
nothing in this Agreement shall prevent or limit the Executive's continuing or
future participation in any plan, program, policy or practice provided by the
Company and for which the Executive may qualify, nor shall anything herein limit
or otherwise affect such rights as the Executive may have under any other
contract or agreement with the Company. Amounts which are vested benefits of
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of, or any other contract or agreement with, the Company at
or subsequent to the Date of Termination, shall be payable in accordance with
such plan, policy, practice or program or contract or agreement.
4.7 Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and, except as provided
in Section 4.1(d), such amounts shall not be reduced whether or not the
Executive obtains other employment. The Company agrees to pay promptly as
incurred, to the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive regarding the amount of any payment pursuant to this Agreement), plus
in each case interest on any delayed payment at the applicable Federal rate
provided for in Code Section 7872(f)(2)(A).
Section 5: Successors.
5.1 Successors of Executive. This Agreement is personal to the Executive
and, without the prior written consent of the Company, the rights (but not the
obligations) shall not be assignable by the Executive otherwise than by will or
the laws of descent and distribution. This Agreement shall inure to the benefit
of and be enforceable by the Executive's legal representatives.
5.2 Successors of Company. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company or the division
in which the Executive is employed, as the case may be, to assume expressly and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession had taken
place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to terminate the Agreement at his option on or after
the Change in Control Date for Good Reason. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its business
or the business of the Division and/or its assets or the assets of the Division
which assumes and agrees to perform this Agreement by operation of law, or
otherwise.
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Section 6: Miscellaneous.
6.1 Other Agreements. This Agreement supersedes all prior dated agreements,
letters and understandings concerning severance benefits payable to the
Executive, either before or after a Change in Control. The Board may, from time
to time in the future, provide other incentive programs and bonus arrangements
to the Executive with respect to the occurrence of a Change in Control that will
be in addition to the benefits required to be paid in the designated
circumstances in connection with the occurrence of a Change in Control. Such
additional incentive programs and/or bonus arrangements will affect or abrogate
the benefits to be paid under this Agreement only in the manner and to the
extent explicitly agreed to by the Executive in any such subsequent program or
arrangement.
6.2 Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses as set forth below; provided that all notices to the
Company shall be directed to the attention of the President and Chief Executive
Officer, or to such other address as one party may have furnished to the other
in writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
Notice to Executive:
--------------------
____________________
c/o RehabCare Group, Inc.
7733 Forsyth Boulevard
Suite 1700
St. Louis, Missouri 63105
Notice to Company:
------------------
RehabCare Group, Inc.
7733 Forsyth Boulevard
Suite 1700
St. Louis, Missouri 63105
6.3 Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
6.4 Withholding. The Company may withhold from any amounts payable under
this Agreement such Federal, state or local taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
6.5 Waiver. The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 3.4 shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
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IN WITNESS WHEREOF, the Executive and the Company, pursuant to the
authorization from its Board, have caused this Agreement to be executed in its
name on its behalf, all as of the day and year first above written.
Name: _______________________________________
REHABCARE GROUP, INC.
By: /s/ ALAN C. HENDERSON
---------------------------------------------
Name: Alan C. Henderson
Title: President and Chief Executive Officer
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EXHIBIT 21.1
Subsidiaries of Registrant
Subsidiary Jurisdiction of Organization
---------- ----------------------------
StarMed Management, Inc. State of Delaware
RehabCare Group East, Inc. State of Delaware
RehabCare Group Management Services, Inc. State of Delaware
RehabCare Group of California, Inc. State of Delaware
RehabCare Texas Holdings, Inc. State of Delaware
RehabCare Group of Texas, L.P. State of Texas
StarMed Health Personnel, Inc. State of Delaware
Salt Lake Physical Therapy Associates, Inc. State of Utah
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EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
RehabCare Group, Inc.:
We consent to the incorporation by reference in the registration statement No.
33-43236 on Form S-8, registration statement No. 33-67944 on Form S-8,
registration statement No. 33-82106 on Form S-8, registration statement No.
33-82048 on Form S-8, registration statement No. 333-11311 on Form S-8, and
registration statement No. 333-86679 on Form S-8 of RehabCare Group, Inc. of our
report dated February 1, 2002, with respect to the consolidated balance sheets
of RehabCare Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of earnings, stockholders' equity, cash
flows, and comprehensive earnings for the three-year period ended December 31,
2001, which report is included in the December 31, 2001 annual report on Form
10-K of RehabCare Group, Inc.
/s/ KPMG LLP
St. Louis, Missouri
March 15, 2002
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