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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, 2002
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 to Name of exchange on which registered:
Section 12(b) of the Act: New York Stock Exchange
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights
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. ( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
The aggregate market value of voting stock held by non-affiliates of
Registrant at June 30, 2002 was $414,189,202. At March 10, 2003, the Registrant
had 15,852,080 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, 2002.
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 April 30, 2003.
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1
PART I
This Annual Report on Form 10-K contains forward-looking statements that
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks and uncertainties that may cause RehabCare Group's actual results
in future periods to differ materially from forecasted results. These risks and
uncertainties may include, but are not limited to, the effect and timing of
certain corrective actions taken in supplemental staffing, the magnitude of the
costs associated with the consolidation of branch locations in the staffing
division, the effect and timing of the consolidation on the aggregate
supplemental staffing weeks worked, new program openings and planned cost
controls, fluctuations in occupancy of RehabCare Group's hospital and skilled
nursing facility clients, changes in and compliance with governmental
reimbursement rates, regulations or policies, the inability to attract new
client relationships or to retain existing client relationships, the inability
to attract operational and professional employees, the adequacy and
effectiveness of operating and administrative systems, litigation risks,
including an inability to predict the ultimate costs and liabilities or the
disruption of RehabCare Group's operations, and general economic downturn.
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
skilled nursing facilities. Our healthcare staffing services business, also
known as StarMed Staffing Group, provides temporary placement of nurses and
other healthcare professionals on a supplemental basis with locally-based
personnel and on longer-term assignments with travel personnel. Our program
management services business consists of the management of hospital-based
inpatient acute rehabilitation and skilled nursing units, hospital-based and
satellite outpatient therapy programs, as well as contract therapy programs with
skilled nursing facilities.
Established in 1982, we have more than 20 years experience helping
healthcare providers increase revenues and reduce costs while effectively and
compassionately delivering rehabilitation services. We believe our clients place
a high value on our extensive experience in assisting them to effectively
implement clinical best practices, address competition for patient services, and
navigate the complexities inherent to managed care contracting and government
reimbursement systems. Over the years, we have diversified our program
management services to include management services to hospitals, skilled nursing
units and outpatient rehabilitation, as well as management of rehabilitation
services in skilled nursing facilities.
We added temporary healthcare staffing services to our business in 1996
with the acquisition of Healthcare Staffing Solutions, Inc. providing traveling
therapists and, later, traveling nurses to hospitals and skilled nursing
facilities. In 1998, we acquired StarMed Staffing, Inc. to significantly expand
our presence into the supplemental staffing market. With the formation of
StarMed Staffing Group, we maintain one of the nation's largest databases of
healthcare professionals of many different specialties to fill travel,
supplemental and permanent positions.
2
We offer our portfolio of temporary healthcare staffing and program
management services to a highly diversified customer base. In all, we have
relationships with more than 7,000 hospitals and skilled nursing facilities
throughout the United States. We currently serve healthcare staffing clients in
all 50 states plus the District of Columbia and our program management services
business currently manages units and programs in 40 states plus the District of
Columbia.
For the year ended December 31, 2002, we had operating revenues of $562.6
million and operating earnings of $39.7 million. In 2002, approximately 49% of
our operating revenues were derived from our healthcare staffing services
business and approximately 51% were derived from our program management services
business.
The terms "RehabCare," "our company," "we" and "our" as used herein refer
to "RehabCare Group, Inc."
Industry Overview
As a provider of healthcare staffing and 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
2001 total healthcare expenditures in the United States grew by 9% to $1.4
trillion, the fifth consecutive year in which healthcare spending grew at an
accelerating rate. The Centers for Medicare and Medicaid Services reported that
hospital spending, which accounted for 30% of the health spending increase in
2001, increased 8%. The Centers for Medicare and Medicaid Services also
projected that total healthcare spending in the United States will grow an
average of 7% annually from 2002 through 2010. According to these estimates,
healthcare expenditures will account for approximately $2.6 trillion, or 16%, of
the United States gross domestic product by 2010.
Demographic considerations also affect long-term growth projections for
healthcare spending. According to the U.S. Census Bureau, there were
approximately 35 million Americans, comprising approximately 13% of the total
United States population, aged 65 or older based on the 2000 census. The number
of Americans aged 65 or older is expected to climb to approximately 40 million
by 2010 and to approximately 54 million by 2020. By 2030, the number of
Americans 65 and older is estimated to reach approximately 70 million, or 20%,
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 2030.
We believe that healthcare expenditures and longer life expectancy of the
labor force and general population will place increased pressure on healthcare
providers to find innovative, efficient means of delivering healthcare services.
In particular, many of the health conditions associated with aging - such as
stroke and heart attack, neurological disorders and diseases and injuries to the
muscles, bones and joints will increase the demand for rehabilitative therapy.
These trends, combined with the need for client hospitals to move their patients
into the appropriate level of care on a timely basis, will encourage healthcare
providers to direct patients to inpatient units and outpatient therapy and
contract therapy programs.
The aging population also affects the healthcare labor market. Findings
from the National Sample Survey of Registered Nurses conducted by the U.S.
Department of Health and Human Services Administration in 2000, published
February 2002, indicates that between 1996 and 2000 the average age of the
registered nurse population increased from 44.3 to 45.2 years. During the period
from 1980 to 2000, the proportion of registered nurses under age 40 decreased
from 53% to 32%. The major drop was among those under the age of 30. In 1980,
25% of registered nurses were under the age of 30 compared to only 9% in 2000.
3
We also see a growing demand from hospitals, who seek to work with
organizations that deliver the most efficient, responsive, cost-effective and
high-quality resources, programs and services to support a full range of needs.
We believe that these various trends imply that there will be a growing
demand for sophisticated and integrated healthcare staffing and rehabilitation
therapy solutions by healthcare providers seeking to decrease their overall
labor costs and satisfy their increasing need for qualified healthcare
professionals, who are in high demand.
Healthcare Staffing Services. The healthcare staffing industry provides
staffing of nurses, physicians and other allied healthcare professionals such as
physical and occupational therapists, speech/language pathologists, respiratory
therapists, radiological technicians, advanced practice professionals,
pharmacists, and medical and surgical specialized technicians. The healthcare
staffing industry is primarily comprised of the following three services:
o Supplemental Staffing. Supplemental staffing comprises the majority of
all 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 the 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 and
typically involves temporary relocation of the professional. In some
instances, an assignment may be in the same geographic area, but due
to its duration, is assigned through travel staffing. The staffing
company is responsible for providing arrangements for travel, housing,
licensure and credentialing for the healthcare professional being
placed.
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.
The Staffing Industry Report, an independent staffing industry publication,
estimated that revenues in the United States for all staffing services were
$80.2 billion in 2001. The healthcare staffing segment accounted for
approximately $9.1 billion of revenues in 2001, and was expected to grow by
approximately 20% annually through 2003. We believe that the demand for
healthcare staffing services is influenced by a number of factors including:
o Economic Conditions and Hospital Initiatives. We believe that extended
economic uncertainty may result in reduced supply of healthcare
professionals to the temporary staffing industry. Nurses and other
healthcare professionals currently appear to prefer full-time,
permanent employment as a means of ensuring family income during
challenging economic times. Some hospitals are also offering greater
financial and workplace incentives to recruit or retain permanent
employees, thus reducing the hospital's demand for temporary staffing
services. It is not clear whether the duration of economic pressures
or the sustainability of workplace incentives will be sufficient to
overcome the larger, long-term trend of healthcare labor shortages. We
believe that staffing services providers will continue to play an
important role over the long-term in helping hospitals successfully
manage variable labor.
4
o Shortages in Available Healthcare Professionals. A July 2002 report
published by the National Center for Health Workforce Analysis (part
of the U.S. Department of Health and Human Services) indicated that
based on current trends approximately 2.8 million registered nurses
will be needed in the United States by 2020, but only 2.0 million
registered nurses will be available. A December 2002 report by the
American Association of Colleges of Nursing, however, highlighted that
for schools that reported in both 2002 and 2001, enrollments in
undergraduate nursing programs increased by 8% in 2002. This is the
second consecutive year of increased enrollments following a previous
6-year period of decline. The American Association of Colleges of
Nursing believes the number of students in the pipeline is still
insufficient to fully meet the demand for a million new nurses over
the next 10 years as projected by the U.S. Labor Department. In
addition to the shortage of available nurses, changes in healthcare
and a trend toward temporary staffing have resulted in shortages of
various allied healthcare professionals, including radiological,
laboratory and other specialized technicians, pharmacists, physician
assistants, nurse anesthetists, transcriptionists, reimbursement
specialists, patient account representatives and medical clerical
personnel.
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.
Program Management Services. 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 average 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 setting, such as a skilled nursing facility, or
are discharged to their home and treated on a home health or outpatient basis.
Thus, while hospital inpatient admissions have continued to grow, the number of
average inpatient days per admission has declined. According to the American
Hospital Association, the aggregate number of inpatient days declined at an
average annual rate of 1.3%, from 215.9 million in 1993 to 194.1 million in
2001.
Many healthcare providers seek 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 acute-care 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 of ancillary and
post-acute services has become more important in order to increase patient
volumes and provide services at a lower cost while maintaining high quality
standards.
5
By outsourcing therapy services, hospitals are able to:
o Improve Clinical Quality. National program managers focused on
rehabilitation are able to develop and employ best practices, which benefit
client hospitals.
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 Optimize Utilization of Space. Inpatient services help hospitals optimize
physical plant space to treat patients that are within specific diagnoses
of the particular hospitals' targeted service lines.
o Increase Cost Control. Because of their extensive experience in the 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 Sign Agreements with Managed Care Organizations. We believe managed care
organizations prefer to sign contracts covering acute rehabilitation,
skilled nursing services and outpatient therapy with one entity rather than
several separate, often unrelated entities. Program managers may 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.
o Obtain Reimbursement Advice. Program managers may employ reimbursement
specialists who are available to assist client hospitals in interpreting
complicated regulations within a given specialty, a highly valued service
in the changing healthcare environment.
Of the approximately 5,000 general acute-care hospitals in the United
States, an estimated 1,000 hospitals operate inpatient acute rehabilitation
units, of which we estimate approximately 20% currently outsource acute
rehabilitation program management services. As of December 31, 2002, we had
therapy program management contracts with 116 of those hospitals that outsource
acute rehabilitation unit management services.
6
By outsourcing therapy services, skilled nursing facilities are able to:
o Obtain Clinical Resources and Expertise. Rehabilitation services providers
have the ability to develop and implement clinical training and program
development that will provide best practices for clients.
o Ensure Appropriate Levels of Staffing for Rehabilitation Professionals.
Therapy staffing in the skilled nursing environment presents unique
challenges that can be addressed by a national presence that facilitates
recruitment of qualified clinical professionals. Program managers have the
ability to manage staffing levels to address the fluctuating clinical needs
of the host facility.
o Improve Skilled Nursing Facility Profitability. Rehabilitation services
providers are equipped to support the clinical needs of the facility and to
manage staffing levels such that the client's overall profitability for
their patients requiring rehabilitation services is improved.
7
Overview of Our Business Segments
Our business is divided into two main business segments: healthcare
staffing services and program management services. The following table
summarizes the type of services we offer and their benefits to our clients.
Business Segment Description of Service Benefits to Client
---------------- ---------------------- ------------------
Healthcare Staffing Placement of temporary Enables the client to
Services healthcare professionals manage variable labor
in hospitals and skilled costs, such as turnover,
nursing facilities vacation, maternity and
generally ranging from other temporary staffing
one day to 13-week needs.
assignments and on a
permanent basis.
Program Management
Services
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 Rehabilitation services Affords the client the
in skilled nursing ability to fulfill the
facilities for continuing need for
neurological, orthopedic therapists on a
and cardiological full-time or part-time
conditions. basis. 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 "Industry Segment Information" to our consolidated financial statements.
8
As announced on January 6, 2003, healthcare staffing services branch
locations were consolidated, which reduced the number of healthcare staffing
services locations from the 101 locations we had at December 31, 2002 to 79
currently. The following table summarizes by geographic region in the United
States our healthcare staffing services locations as adjusted for the
consolidation referred to above and program management services units and
programs as of December 31, 2002:
Healthcare Program
Staffing Services Management Services
Acute
Rehabili-
tation/
Supplemental Skilled Outpatient Contract
Branch and Nursing Therapy Therapy
Geographic Region Travel Locations Units Programs Programs
- ----------------- ---------------- ----- -------- --------
Northeast Region ................... 7 17/1 6 23
Southeast Region.................... 24 20/5 20 73
North Central Region................ 20 28/6 6 131
Mountain Region..................... 6 3/1 2 2
South Central Region................ 8 41/6 16 148
Western Region...................... 14 7/2 0 35
-- ------ -- ---
Total............................ 79 116/21 50 412
Healthcare Staffing Services
Our StarMed Staffing Group meets a critical need of supplying nurses, nurse
assistants and other clinical staff to hospitals and skilled nursing facilities
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
current nationwide nursing shortage, as demand for nurse staffing far exceeds
supply. We introduced 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 skilled nursing facilities,
we added traveling and supplemental nurses in 1998 and other allied healthcare
personnel in 1999.
Supplemental Staffing
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. Our
supplemental staffing operations also performs position-specific searches for
specialized healthcare professionals to fill open client positions on a
permanent basis. On January 6, 2003, we announced the consolidation of branches
for greater focus of our management resources on client and professional staff
development. We consolidated 22 branch locations such that we had 77 branch
locations at January 31, 2003.
A typical staffing branch consists of approximately 1,000 square feet of
leased space. A branch director and a service coordinator are initially hired to
manage the branch. As the branch matures, measured by number of weeks worked the
branch has placed, new service coordinators, marketers and clerical staff are
added to support growth.
9
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 in most locations, 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 is the quality of
our personnel. Our supplemental staffing is a local business, and we believe the
relationships that our branch director and our placement and recruiting
professionals have with our clients are a significant contributor to the success
of our supplemental staffing operations.
Travel Staffing
Our travel staffing operations place nursing, radiology, therapy and other
allied healthcare professionals typically on 13-week assignments throughout the
United States. From two central locations we employ a staff of placement,
recruiting, housing and benefits specialists to support each traveler. The
traveler is assigned a recruiter 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 recruiters have one of the
industry's largest databases of healthcare professionals available in a wide
variety of specialties in all 50 states.
We believe the benefits we offer play a 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, health and
dental insurance, housing, travel reimbursement, frequent travel program,
licensing assistance, 24-hour support and continuing education.
Strategy
We plan to continue to grow our healthcare staffing services business
through a combination of controlled internal growth and selective acquisitions
that provide us with the opportunity to leverage our capabilities and help
hospitals and skilled nursing facilities address the broader challenge of
managing their variable labor costs. Key elements of our strategy are:
o Increase the volumes and productivity per branch;
o Further develop our travel division, which represents a mobile asset
base that can move across the country to meet the shifting needs of
our customers, and offers the benefit of having the same nurse for the
duration of a 13-week assignment;
o Diversify the services that our branch locations offer by furnishing
both nurse staffing and other allied medical staffing at each
location;
o Maximize the benefits of our recent branch location consolidation,
which allows us to reduce our fixed costs and concentrate our
management resources on client and staff development; and
o Consider strategic acquisitions that will deliver the benefits of
synergy and/or growth.
10
Program Management Services
Inpatient
RehabCare has developed an effective business model in the prospective
payment environment, and is instrumental in helping our clients achieve
favorable outcomes as they convert to this reimbursement methodology in their
inpatient settings.
Acute Rehabilitation. Since 1982, our inpatient division has been the
market leader in operating acute rehabilitation units in acute-care hospitals on
a contract basis. As of December 31, 2002, we managed inpatient acute
rehabilitation units in 116 hospitals for patients with diagnoses including
stroke, orthopedic conditions, arthritis, spinal cord and traumatic brain
injuries. Of the approximately 5,000 general acute-care hospitals in the United
States, an estimated 1,000 hospitals operate inpatient acute rehabilitation
units of which we estimate only approximately 20% currently outsource acute
rehabilitation program management services.
We believe that as the prospective payment system is implemented in the
inpatient rehabilitation environment for Medicare patients, our acute
rehabilitation division will be well positioned for internal growth. Of the
approximately 4,000 acute-care hospitals that do not currently operate acute
rehabilitation units, we estimate that as many as 2,000 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 growth to the extent that many of the 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
discharge or per patient day 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 case manager and
other appropriate supporting personnel.
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,
2002, we managed 21 inpatient skilled nursing units. The hospital-based skilled
nursing 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.
11
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 less intensive 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.
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, 2002, we managed a total of 50
hospital-based and satellite outpatient therapy programs. 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 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. Typically, the program is
staffed with a program director, 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.
In the fourth quarter of 2002, we announced the combination of the
inpatient therapy division with the outpatient therapy division to form the new
hospital rehabilitation services division within our program management services
business. We combined these divisions to streamline two businesses with a shared
base of clients, and provide our clients with one point of contact for all of
their rehabilitation service needs. We believe this will enhance our client
relationships and increase our efficiency, as 23 of our outpatient therapy
contracts are with hospital clients for which we also manage inpatient
rehabilitation or skilled nursing units. Creating the hospital rehabilitation
services division also supports continued strategy for growth through
cross-selling our services.
Contract Therapy
In 1997, we added contract therapy management for skilled nursing
facilities to our service offerings. This program affords the client the
opportunity to fulfill its continuing 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, 2002, we managed 412 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
facility. 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 patient
per diem rate or a negotiated fee schedule based on the type of service
rendered. Typically, 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.
12
Strategy
We believe that there is significant growth opportunity for our program
management services business as the marketplace continues to require hospitals
and skilled nursing facilities to provide high-quality rehabilitation services
in a cost-efficient and accountable manner. Outpatient therapy programs remain
underdeveloped at most hospitals, while the aging population and pressures to
control costs in all healthcare settings continue to drive demand for our
management systems and expertise, especially within a prospective payment
system. Key elements of our program management services strategy include:
o Focus our efforts on managing the continuum of rehabilitation services
for our clients;
o Maximize the benefits of combining our inpatient and outpatient
divisions to serve as a single-source provider to our clients and
facilitate cross-selling each of our programs to existing clients
which are currently utilizing only one of our services;
o Continue leveraging our expertise in the prospective payment
environment to retain clients and sign contracts with new hospitals
and skilled nursing facilities who must meet the challenges of lower
reimbursements; and
o Consider strategic acquisitions that will deliver the benefits of
synergy and/or growth.
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
administering 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.
13
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 in certain states 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.
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 healthcare 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. 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 us are restricted from
practicing therapy through the direct employment of therapists. In those states,
to comply with the restrictions imposed, we contract to obtain therapy services
from an entity permitted to employ therapists.
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 and regulations establish 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, these laws and regulations 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 or case mix group to which each Medicare
patient is assigned. In general, a hospital's payment for inpatient care
provided to a Medicare patient is limited based on the diagnosis-related or
case-mix 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.
The amount of reimbursement assigned to each diagnosis-related or case mix group
is established prospectively by the Centers for Medicare and Medicaid Services,
an agency of the U.S. Department of Health and Human Services.
14
For certain Medicare beneficiaries who have unusually costly hospital
stays, the Centers for Medicare and Medicaid Services will provide additional
payments above those specified for the diagnosis-related or case-mix group.
Under a prospective payment system, a hospital may keep the difference between
its diagnosis-related or case mix 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 or case-mix group payment rate. As a
result, hospitals have an incentive to discharge Medicare patients as soon as it
is clinically appropriate.
Prior to the implementation of the Balanced Budget Act of 1997, 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.
Beginning January 1, 2002, the Medicare program began 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 systems 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 acute-care
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. Under the new prospective payment 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.
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 for skilled nursing facilities and units based on resource
utilization group classifications. This was targeted to reduce government
spending on skilled nursing services. 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.
The Balanced Budget Act of 1997 also affected Medicare reimbursement for
non hospital-based outpatient rehabilitation services. Since 1999, reimbursement
for such 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 Centers for Medicare and Medicaid Services. This
reimbursement system applies regardless of whether the therapy services are
furnished in a hospital outpatient department, a skilled nursing facility, 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
hospital provider-based is subject to annual limits on payment for therapy
services. These limits have, however, been suspended through June 30, 2003.
15
Provider-Based Rules. The 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. Any program, facility
or organization having provider-based status on October 1, 2000, will be
considered provider-based until the hospital's first cost reporting period
beginning on or after July 1, 2003. At that time, all programs, facilities and
organizations, previously established and new, must submit self-attestation
stating that the provider based criteria and obligations are met. The Centers
for Medicare and Medicaid Services have clarified that the provider-based rules
do not apply to skilled nursing facilities and inpatient rehabilitation
facilities.
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 protected health information in electronic form;
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, for the privacy of individually
identifiable health information on December 28, 2000, and for the security of
protected health information in electronic form on February 20, 2003, all of
which apply to health plans, healthcare clearinghouses and healthcare providers
who transmit any healthcare 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 was filed with the Secretary of the Department of Health and
Human Services by October 16, 2002; if no plan was filed, the compliance date
was October 16, 2002. Compliance with the final rules concerning the privacy of
individually protected healthcare information is required by April 14, 2003.
Compliance with the final rules concerning the security of protected healthcare
information in electronic form is April 21, 2005. Proposed rules that include
standards for unique health identifiers for employers and healthcare providers,
as well as standards related to the security of individual healthcare
information and the use of electronic signatures have been published.
We have reviewed the final rules and through the efforts of our
company-based task force have taken steps to institute new policies and
procedures to meet this regulation at various locations in our company. Included
in these changes has been the implementation of a company-wide training effort
for all employees on how the regulations apply to their job role. We serve
predominantly as a business associate and have been diligent in our pursuit of
business associate agreements with all of our clients.
16
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 Department of Health and Human
Services has published regulations that identify a limited number of specific
business practices that 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.
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 healthcare 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 healthcare services include physical and occupational therapy
services, durable medical equipment, home health services, and inpatient and
outpatient hospital services. The first phase of the final regulations of the
Centers for Medicare and Medicaid Services interpreting the Stark laws became
effective on January 4, 2002. We have policies in place to set standards so
employees do not make errors in violations of the Stark law.
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.
17
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 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 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 three independent members 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 services 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 pricing of
our services, our monitoring of the job performance of our employees and the
diversity of our staffing solutions.
Our program management services business competes with companies that may
offer one or more of the same services and with hospitals and skilled nursing
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 this line of business is convincing our
potential clients, primarily hospitals and skilled nursing 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 skilled
nursing facilities. Among our principal competitive advantages are our
reputation for quality, cost effectiveness, a proprietary outcomes management
system, innovation and price and the location of our programs within hospitals.
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 services business. We compete for healthcare staffing personnel,
including nurses and therapists, with other healthcare 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, 2002, we had approximately 5,400 employees in our
program management services business and approximately 8,000 additional travel
and supplemental staff employed on a regular or periodic basis by our healthcare
staffing services business. The physicians who are the medical directors of our
acute rehabilitation units are independent contractors and not our employees.
None of our employees are subject to a collective bargaining agreement.
18
Non-Audit Services Performed by Independent Accountants
Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934 and
Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for disclosing
to investors the non-audit services approved by our audit committee to be
performed by KPMG LLP, our independent auditors. Non-audit services are defined
as services other than those provided in connection with an audit or a review of
our financial statements. During the period covered by this Form 10-K, our audit
committee pre-approved non-audit services related to tax compliance.
Web Site Access to Reports
Our Form 10-K, Form 10-Qs, definitive proxy statements, Form 8-Ks, and any
amendments to those reports are made available free of charge on our web site at
www.rehabcare.com as soon as reasonably practicable after such reports are filed
with the Securities and Exchange Commission.
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, 26,000 square feet of executive office space in Andover,
Massachusetts under a lease that expires in 2007, 6,000 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 77 store-front locations that serve as the branch locations for the
supplemental staffing operations of our StarMed Staffing Group.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and legal actions in the ordinary course
of business. These matters include, without limitation, professional liability,
employee-related and stockholder-related matters, commercial disputes and
inquiries and investigations by governmental agencies related to reimbursement
and other issues involving our clients.
In November 2002, the United States Department of Labor approved the
results of our self-audit of the wage and hour practices within our StarMed
Staffing Group during the period from January 1, 1998 through December 31, 2001.
This approval provided the basis for fully settling a federal action filed
against us by the Department of Labor in October 2001. Under the terms of the
final settlement, we computed and paid back wages in the aggregate amount of
$2.85 million to those temporary employees of our healthcare staffing services
business who were not properly compensated for overtime during the period. The
settlement had no adverse impact on our income for 2002 because we had accrued
the cost of the back wages identified through the self-audit in the fourth
quarter of 2001, including the computed payments to employees and the related
employment taxes and assessments payable by us.
In May 2002, we were named as a defendant in a suit filed in the United
States District Court for the Eastern District of Missouri alleging violations
of the federal securities laws and seeking to certify the suit as a class
action. Certain current and former officers of the Company are also defendants
in the suit and are being jointly defended with us. The court has appointed a
lead plaintiff and lead counsel for the action. The proposed class consists of
persons that purchased shares of our common stock between August 10, 2000 and
January 21, 2002. The plaintiffs filed an amended complaint in December 2002
which focuses primarily on alleged weaknesses in the software system selected by
our StarMed Staffing Group and the purported negative effects of such systems on
the healthcare staffing services business operations. Our director and officer
liability insurance carrier has preliminarily accepted coverage of the action,
including the payment of defense costs after the satisfaction of our deductible.
We have recently filed a motion to dismiss with the court. No discovery has been
commenced in the case pending the court's ruling on the motion to dismiss.
19
In August 2002, each of our directors was named as a defendant and we were
named as the nominal defendant in a derivative suit filed in the Circuit Court
of St. Louis County, Missouri. The complaint, which is based upon substantially
the same facts as are alleged in the federal securities class action, was filed
on behalf of the derivative plaintiff by a law firm that had earlier filed suit
against us in the federal case. We filed a motion to dismiss based primarily on
the derivative plaintiff's failure to make a pre-suit demand on the board.
Alternatively, we filed a motion to stay the derivative suit until the final
resolution of the federal securities law class action. The federal court hearing
the securities law class action recently stayed discovery in the derivative
proceeding until discovery commences in the class action.
In February 2003, we were named as a co-defendant in a complaint filed in
the United States District Court for the Northern District of Illinois seeking
investment banking fees under a retainer agreement executed by Maurice Echales
in February 1997 on behalf of eai Healthcare Staffing Solutions ("eai"), a
company that we acquired in December 1999. Mr. Echales, the former owner of eai,
has also been named as a defendant in this suit. The complaint asserts fees in
connection with three separate financing transactions and two acquisition
transactions which we understand were consummated by eai prior to its
acquisition by us. We are a party to the suit in our position as successor to
eai. At the time of the acquisition, we had identified potential fees under this
retainer agreement as a possible contingent liability of eai and we negotiated
indemnification from Mr. Echales and his spouse in the stock purchase agreement
for any fees and costs, including attorneys' fees and expenses, arising from
such retainer agreement. We have given notice to Mr. and Mrs. Echales of our
demand for indemnification in this suit. We have received no definitive response
from Mr. or Mrs. Echales with respect to our indemnification demand, but we
expect to assert cross-claims against Mr. Echales and to join Mrs. Echales in
this suit if Mr. and Mrs. Echales fail to voluntarily perform on their
indemnification obligations to us.
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, 2002 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, 2002 and is incorporated herein by
reference.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We provide healthcare staffing services and program management services for
hospitals and skilled nursing facilities. We derive our revenue from two
business segments: healthcare staffing and program management services. Our
program management services 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.
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
(in thousands)
Revenues from Unaffiliated Customers:
Healthcare staffing.................. $277,543 $304,574 $260,100
Program management:
Inpatient.......................... 130,743 123,276 119,963
Outpatient......................... 49,003 49,754 42,332
Contract therapy................... 105,276 64,661 29,979
-------- -------- --------
Program management total........... 285,022 237,691 192,274
-------- -------- --------
Total............................. $562,565 $542,265 $452,374
======== ======== ========
Operating Earnings (Loss): (1)
Healthcare staffing.................. $ (1,683) $ 1,496 $ 12,298
Program management:
Inpatient.......................... 28,941 28,606 28,350
Outpatient......................... 3,315 3,895 4,372
Contract therapy................... 9,124 2,970 (831)
-------- -------- --------
Program management total........... 41,380 35,471 31,891
-------- -------- --------
Total............................. $ 39,697 $ 36,967 $ 44,189
======== ======== ========
(1) Operating earnings for 2000 and 2001 have been adjusted to reflect
the corporate expense allocation methodology utilized in 2002.
21
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 payers. 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
skilled nursing facilities.
Our healthcare staffing revenues and earnings are impacted by changes in
the level of occupancy at hospitals where we provide our staffing services and
fluctuation in our clients staffing levels. These historical trends have shown
an increase in the demand for our services in the first and fourth quarters of
each year as hospitals generally experience an increase in the number of
patients in the first quarter and experience increased vacation utilization of
their staff during the fourth quarter. Hospitals generally experience a more
stable work force during the second and third quarters, resulting in a decrease
in the demand for our services and a decrease in our revenues and earnings for
our healthcare staffing services business.
Extended economic uncertainty may result in reduced supply of healthcare
professionals to the temporary staffing industry. Full-time, permanent
employment may currently be preferred by nurses and other healthcare
professionals as a means of ensuring family income during challenging economic
times. Some hospitals are also offering greater financial and workplace
incentives to recruit or retain permanent employees, thus reducing the
hospital's demand for temporary staffing services. It is not clear whether the
duration of economic pressures or the sustainability of workplace incentives
will be sufficient to overcome the larger, long-term trend of healthcare labor
shortages. We believe that staffing services providers will continue to play an
increasingly important role over the long-term in helping hospitals successfully
manage variable labor. We believe that the economic uncertainty will improve
over time and that the historical trends described above have shown these
initiatives are unlikely to overcome the long-term trend of a widening gap
between required staffing levels and available staff.
As a provider of healthcare staffing and 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 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.
Going forward, we have minimized our exposure to revenue decreases as a result
of decreased lengths of stay through restructuring our contracting philosophy to
align our incentives with the hospitals' incentives.
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; however, these limits have been suspended
through June 30, 2003. See discussion under "Item 1. Business -- Government
Regulation -- Provider-Based Rules." 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.
22
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.
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 the majority of our clients. We
are unable to predict with certainty the impact of any future changes, and we
may experience a decline in our revenue and earnings as a result of any future
changes to the prospective payment system or from any other changes in the rates
or methods of government reimbursements.
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 December 31, 2002, 2001 and 2000:
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
Operating revenues.................. 100.0% 100.0% 100.0%
Cost and expenses:
Operating ....................... 73.4 72.8 71.0
General and administrative....... 18.0 18.6 17.7
Depreciation and amortization.... 1.5 1.8 1.5
---- ---- ----
Operating earnings.................. 7.1 6.8 9.8
Other expense, net.................. (.1) (.4) (1.2)
---- ---- ----
Earnings before income taxes........ 7.0 6.4 8.6
Income taxes........................ 2.7 2.5 3.4
---- ---- ----
Net earnings........................ 4.3% 3.9% 5.2%
==== ==== ====
23
Twelve Months Ended December 31, 2002 Compared to Twelve Months
Ended December 31, 2001
Revenues
Operating revenues in 2002 increased by $20.3 million, or 3.7%, to $562.6
million as compared to $542.3 million in operating revenues in 2001. Revenue
increases in inpatient, contract therapy and travel staffing were offset by
revenue declines in supplemental staffing and outpatient.
Staffing revenue decreased by $27.1 million, or 8.9% from $304.6 million in
2001 to $277.5 million in 2002, reflecting a 22.0% decrease in weeks worked from
233,898 in 2001 to 182,552 in 2002, offset by a 16.7% increase in average
revenue per week worked from $1,302 in 2001 to $1,520 in 2002. Supplemental
staffing revenues decreased 23.7% from $225.6 million in 2001 to $172.1 million
in 2002, reflecting a 31.8% decrease in weeks worked from 188,368 in 2001 to
128,396 in 2002. The decrease in supplemental staffing weeks worked was
primarily a result of the continued management transition and systems
implementation and training initiated during the fourth quarter of 2001, a
softening in demand as a result of client's efforts to reduce utilization of
agency staff and the impact of the economy on non-skilled labor availability.
The decrease in supplemental weeks worked was partially offset by an 11.9%
increase in average revenue per week worked from $1,198 in 2001 to $1,340 in
2002 as a result of placing more highly credentialed staff such as registered
nurses and licensed practical nurses as compared to certified nurse assistants,
as well as increased bill rates. Travel staffing revenues increased 33.6% from
$78.9 million in 2001 to $105.5 million in 2002, reflecting an 18.9% increase in
weeks worked to 54,156 and a 12.3% increase in average revenue per week worked
to $1,948.
Inpatient program revenue increased by 6.1% from $123.3 million in 2001 to
$130.7 million in 2002. The increase in revenue was primarily a result of a 7.4%
increase in revenue per patient day, offset by a 1.3% decrease in patient days
from 746,583 to 737,017. The decrease in patient days was a result of a 1.9%
decrease in the average number of programs to 134.6 and a 3.6% decrease in
average length of stay to 13.3 days, offset by a 4.2% increase in average
admissions per program to 410.7. The increase in revenue per patient day is
primarily due to renegotiation of contracts to operate under a payment per
discharge methodology under the prospective payment environment. The average
length of stay decrease is also attributable to the prospective payment
environment which encourages the discharge of a patient as soon as it is
clinically appropriate.
Outpatient revenue decreased by 1.5% from $49.8 million in 2001 to $49.0
million in 2002, reflecting an 11.1% decrease in the average number of
outpatient programs managed from 61.5 in 2001 to 54.7 in 2002, partially offset
by a 10.7 % increase in revenue per program as a result of closing smaller, less
profitable locations. The increase in revenue per program is attributable to a
3.1% increase in units of service per program to 68,519 and increased bill
rates.
Contract therapy revenue increased by 62.8% from $64.7 million in 2001 to
$105.3 million in 2002, which resulted primarily from a 51.4% increase in the
average number of contract therapy locations managed from 249.8 to 378.1 and a
7.5% increase in revenue per location from $258,902 to $278,427. The increase in
revenue per location is primarily the result of same store growth and a
continued focus on opening larger locations.
24
Operating Earnings
Consolidated operating earnings increased by 7.4% from $37.0 million in
2001 to $39.7 million in 2002. Operating expenses as a percentage of revenues
increased from 72.8% in 2001 to 73.4% in 2002, primarily reflecting the
continued migration of the skill mix in our staffing division to more highly
credentialed professionals and increased labor costs as a percentage of revenues
in all divisions. General and administrative expenses as a percentage of
revenues decreased from 18.6% in 2001 to 18.0% in 2002. Excluding $3.9 million
in general and administrative expenses associated with the 2001 non-recurring
charge, general and administrative expenses as a percentage of revenue would
have increased from 17.9% in 2001 to 18.0% in 2002. Depreciation and
amortization expense as a percentage of revenue decreased from 1.8% in 2001 to
1.5% in 2002 reflecting the elimination of goodwill amortization as a result of
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" on January 1, 2002. See note 5 to consolidated
financial statements for additional information on goodwill and identified
intangible assets. The following discussion by division includes the effect of
adjusting 2001 operating earnings to reflect the current overhead allocation
methodology utilized in 2002.
Operating earnings in the staffing group decreased by $3.2 million from
$1.5 million in 2001 to a $1.7 million loss in 2002, primarily as a result of
decreased revenues in our supplemental staffing division. Gross profit margin in
the staffing group decreased from 23.7% in 2001 to 22.8% due to a lower gross
profit margin in our supplemental staffing division. Supplemental staffing gross
profit margin decreased from 26.6% in 2001 to 23.5% in 2002 due to the continued
migration of the skill mix to more highly credentialed professionals that
deliver greater profitability but less margin. Travel staffing gross profit
margin increased from 21.4% in 2001 to 21.7% in 2002, primarily reflecting a
favorable pricing environment combined with a decrease in housing expense as a
percentage of revenue. General and administrative expenses as a percent of
staffing revenue increased from 21.1% in 2001 to 22.0% in 2002, primarily due to
lower revenues in our supplemental staffing division. Depreciation and
amortization expense as a percentage of staffing revenue decreased from 1.1% in
2001 to 0.7% in 2002, reflecting the elimination of goodwill amortization
expense related to Statement No. 142.
Inpatient operating earnings increased by 1.2% from $28.6 million in 2001
to $28.9 million in 2002, primarily resulting from a 6.1% increase in revenues
and a decrease in general and administrative expenses as a percent of revenue
from 11.9% to 11.6%, partially offset by a decrease in contribution margin from
38.3% to 37.7%. The decrease in contribution margin was primarily the result of
higher labor costs as a percentage of revenues. Depreciation and amortization as
a percentage of revenues increased from 3.0% to 3.5% as depreciation on
increased capital expenditures more that offset the elimination of goodwill
amortization expense related to Statement No. 142.
Outpatient operating earnings decreased 14.9% from $3.9 million in 2001 to
$3.3 million in 2002, primarily resulting from an 11.1% decrease in the average
number of programs from 61.5 to 54.7 and a decrease in contribution margin from
27.8% to 25.7% as a result of higher labor costs as a percentage of revenues.
General and administrative expenses as a percentage of revenues increased from
16.7% in 2001 to 16.9% in 2002. Depreciation and amortization expense as a
percentage of revenue decreased from 3.1% in 2001 to 1.6% in 2002, reflecting
the elimination of goodwill amortization expense related to the adoption of
Statement No. 142.
Contract therapy operating earnings increased 207.2% from $3.0 million in
2001 to $9.1 million in 2002, primarily as a result of a 62.8% increase in
operating revenues, partially offset by a decrease in contribution margin from
29.3% in 2001 to 27.3% in 2002 due to higher salary-related expenses. General
and administrative expenses as a percentage of revenues decreased from 21.2% in
2001 to 16.1% in 2002, primarily due to increased revenues. Depreciation and
amortization expense as a percentage of revenues decreased from 1.7% in 2001 to
1.0% in 2002, reflecting the elimination of goodwill amortization expense
related to the adoption of Statement No. 142.
25
Non-operating Items
Interest income decreased by 17.1% from $0.4 million in 2001 to $0.3
million in 2002, primarily due to decreased average cash balances as a result of
the stock repurchase and lower interest rates.
Interest expense decreased by $1.2 million from $1.9 million in 2001 to
$0.7 million in 2002, due to the repayment of the line of credit in 2001 from
cash generated from the March 2001 publicly underwritten equity offering and the
repayment of all subordinated debt during the fourth quarter of 2001.
Earnings before income taxes increased by 12.6% from $35.0 million in 2001
to $39.3 million in 2002. Excluding $9.0 million of non-recurring charges and a
$0.5 million write-down of investment in 2001, earnings before income taxes for
2001 were $44.4 million. The provision for income taxes in 2002 was $15.0
million compared to $13.9 million in 2001, reflecting effective income tax rates
of 38.0% and 39.8%, respectively. Net earnings increased by $3.4 million, or
16.0%, from $21.0 million in 2001 to $24.4 million in 2002. Net earnings in 2001
excluding non-recurring charges and a write-down of investment were $26.7
million. Diluted net earnings per share increased by 19.0% from $1.16 in 2001 to
$1.38 in 2002 on a 2.4% decrease in weighted-average shares outstanding. The
decrease in the weighted-average shares outstanding was attributable primarily
to the repurchase by RehabCare of 1.7 million shares of common stock during the
third quarter 2002, offset by the effect of issuing 1.5 million shares in the
March 2001 publicly underwritten equity offering, and a decrease in the dilutive
effect of stock options resulting from a lower average stock price.
26
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.
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.
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.
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
December 31, 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 operating
earnings to reflect the current overhead allocation methodology utilized in
2002.
Operating earnings in the staffing group decreased by $10.8 million from
$12.3 million in 2000 to $1.5 million in 2001, including the aforementioned $9.0
million of non-recurring charges. Excluding the non-recurring charges, operating
earnings decreased by $1.8 million to $10.5 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 0.6%. 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.
27
Inpatient operating earnings increased 1.0% from $28.4 million in 2000 to
$28.6 million in 2001, reflecting a 3.3% increase in billable patient days, a
0.1% increase in gross margin and a 0.3% 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.
Outpatient operating earnings decreased 10.9% from $4.4 million in 2000 to
$3.9 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 15.8% in 2000 to 16.7% 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 acquisitions and current year depreciation expense
recorded on capital expenditures.
Contract therapy operating earnings increased $3.8 million from a $0.8
million loss in 2000 to $3.0 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 decreased from 29.1% to 21.2%, primarily as a result of increased
revenues. 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.
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 reflected 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 and write-down, 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.
28
Liquidity and Capital Resources
As of December 31, 2002, we had $9.6 million in cash and current marketable
securities and a current ratio, the amount of current assets divided by current
liabilities, of 2.8 to 1. Working capital decreased by $9.7 million to $67.8
million as of December 31, 2002, compared to $77.5 million as of December 31,
2001. The decrease in working capital is primarily due to the repurchase of 1.7
million shares of common stock in the third quarter 2002 at a cost of $36.9
million, partially offset by working capital generated from operations.
Net accounts receivable were $87.2 million at December 31, 2002, compared
to $91.4 million at December 31, 2001. The number of days average net revenue in
net receivables was 57.7 and 63.8 at December 31, 2002 and 2001, respectively.
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, 2002. 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. The Company also has a
$1.5 million letter of credit and a $3.1 million promissory note issued to our
worker's compensation carrier as collateral for reimbursement of claims. This
letter of credit reduces the amount the Company may borrow under the line of
credit. The promissory note would become payable only upon an event of default
as described in the security agreement with the worker's compensation carrier.
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 continued 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.
Effect of Recent Accounting Pronouncements
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period that it
is incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Statement No. 143 is effective for fiscal years beginning
after June 15, 2002. Management does not expect this statement to have a
material impact on its consolidated financial position or results of operations.
29
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the provisions of Statement No. 4
"Reporting Gains and Losses from Extinguishment of Debt", which required
classification of gain or loss on extinguishment of debt as an extraordinary
item of income, net of related income tax effect. Statement No. 145 states that
such gain or loss be evaluated for extraordinary classification under the
criteria of Accounting Principles Board No. 30 "Reporting Results of
Operations." Statement No. 145 is effective for fiscal periods beginning after
May 15, 2002, although early adoption is permitted. Management does not expect
this statement to have a material impact on its consolidated financial position
or results of operations.
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entity's commitment to an exit
plan. We implemented Statement No. 146 on January 1, 2003. Management does not
expect that this statement will have an impact on its consolidated financial
position or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." Statement No. 148 amends Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect on the methods used on reported
results. The disclosure requirements apply to all companies for fiscal years
ending after December 15, 2002. See note 7 "Stockholders Equity" in the
accompanying consolidated financial statements for the required disclosures of
Statement No. 148 at December 31, 2002.
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 make estimates of the uncollectability
of our accounts receivable balances. We determine an allowance for doubtful
accounts based upon an analysis of the collectibility of specific accounts,
historical experience and the aging of the accounts receivable. We specifically
analyze customers with historical poor payment history and customer credit
worthiness when evaluating the adequacy of the allowance for doubtful accounts.
Our accounts receivable balance as of December 31, 2002 was $87.2 million, net
of allowance for doubtful accounts of $5.2 million. 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.
30
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. Prior to January
1, 2002, goodwill relating to acquisitions was amortized on a straight-line
basis over its estimated useful life. The amortization periods differed
depending on whether the acquired entity was national in scope or a regional
provider. Goodwill related to the acquisition of a national provider was
amortized over 40 years, while goodwill related to a regional provider was
amortized over 25 years.
On January 1, 2002, we adopted the provisions of Statement of Financial
Accounting Standards ("Statement") No. 142 "Goodwill and Other Intangible
Assets." Under Statement No. 142, goodwill and intangible assets with indefinite
lives are no longer amortized and must be reviewed at least annually for
impairment. If the impairment test indicates that the carrying value of an
intangible asset exceeds its fair value, then an impairment loss would be
recognized in the statement of earnings in an amount equal to the excess
carrying value. There were no such impairments of goodwill and identified
intangible assets during the periods presented. If an impairment loss should
occur in the future, it could have an adverse impact on our results of
operations.
Health, Workers Compensation, and Professional Liability Insurance Accrual.
We maintain an accrual for our health, workers compensation and professional
liability insurances that are partially self-insured and are classified in
accrued salaries and wages (health insurance) and accrued expenses (workers
compensation and professional liability) in our consolidated balance sheets. We
determine the adequacy of these accruals by periodically evaluating our
historical experience and trends related to health, workers compensation, and
professional liability claims and payments, based on actuarial computations and
industry experience and trends. If such information indicates that our accruals
are overstated or understated, we will adjust the assumptions utilized in our
methodologies and reduce or provide for additional accruals as appropriate.
We are subject to various claims and legal actions in the ordinary course
of our business. Some of these matters include professional liability and
employee-related matters. Our hospitals and healthcare facility clients may also
become subject to claims, governmental inquiries and investigations and legal
actions to which we may become a party relating to services provided by our
professionals. From time to time, and depending upon the particular facts and
circumstances, we may be subject to indemnification obligations under our
contracts with our hospital and healthcare facility clients relating to these
matters. Although we are currently not aware of any such pending or threatened
litigation that we believe is reasonably likely to have a material adverse
effect on us, if we become aware of such claims against us, we will evaluate the
probability of an adverse outcome and provide accruals for such contingencies as
necessary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our borrowing capacity consists of a line of credit with interest rates
that fluctuate based upon market indexes. As of December 31, 2002, we did not
have any outstanding borrowings under this line of credit. As such, risk
relating to interest fluctuation is considered minimal.
31
ITEM 8A. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report 33
Consolidated Balance Sheets as of December 31, 2002 and 2001 34
Consolidated Statements of Earnings for the years
ended December 31, 2002, 2001 and 2000 35
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 36
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 37
Consolidated Statements of Comprehensive Earnings for the years
ended December 31, 2002, 2001 and 2000 38
Notes to the Consolidated Financial Statements 39
32
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, 2002 and 2001,
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, 2002. 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, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 5 to the consolidated financial statements, effective
January 1, 2002 the Company adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
St. Louis, Missouri
February 1, 2003
33
REHABCARE GROUP, INC.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
December 31,
----------------
2002 2001
---- ----
Assets
------
Current assets:
Cash and cash equivalents $ 9,580 $ 18,534
Marketable securities, available-for-sale 4 1,025
Accounts receivable, net of allowance for doubtful
accounts of $5,181 and $5,902 respectively 87,221 91,634
Income taxes receivable 2,497 2,055
Deferred tax assets 2,529 7,658
Other current assets 3,625 2,140
------- -------
Total current assets 105,456 123,046
Marketable securities, trading 4,252 2,870
Equipment and leasehold improvements, net 19,844 18,373
Goodwill, net 101,685 101,685
Other 4,293 4,687
------- -------
Total assets $235,530 $250,661
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,959 $ 3,567
Accrued salaries and wages 28,579 27,141
Accrued expenses 7,072 14,814
------ ------
Total current liabilities 37,610 45,522
Deferred compensation 4,266 3,043
Deferred tax liabilities 5,040 3,060
------ ------
Total liabilities 46,916 51,625
------ ------
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 19,846,416 shares
and 19,631,789 shares as of December 31,
2002 and 2001, respectively 198 196
Additional paid-in capital 111,671 109,522
Retained earnings 131,452 107,057
Less common stock held in treasury at cost,
4,002,898 shares and 2,302,898 shares as of
December 31, 2002 and 2001, respectively (54,704) (17,757)
Accumulated other comprehensive earnings (3) 18
------- -------
Total stockholders' equity 188,614 199,036
------- -------
$235,530 $250,661
======== ========
See accompanying notes to consolidated financial statements.
34
REHABCARE GROUP, INC.
Consolidated Statements of Earnings
(in thousands, except per share data)
Year Ended December 31,
2002 2001 2000
---- ---- ----
Operating revenues $562,565 $542,265 $452,374
Costs and expenses:
Operating 413,081 394,651 321,192
General and administrative 101,453 101,085 80,120
Depreciation and amortization 8,334 9,562 6,873
------- ------- -------
Total costs and expenses 522,868 505,298 408,185
------- ------- -------
Operating earnings 39,697 36,967 44,189
Interest income 319 385 232
Interest expense (676) (1,859) (5,348)
Other income (expense), net 9 (542) 24
------- ------- -------
Earnings before income taxes 39,349 34,951 39,097
Income taxes 14,954 13,916 15,563
------- ------- -------
Net earnings $24,395 $21,035 $23,534
======= ======= =======
Net earnings per common share:
Basic $ 1.45 $ 1.25 $ 1.62
======= ======= =======
Diluted $ 1.38 $ 1.16 $ 1.45
======= ======= =======
See accompanying notes to consolidated financial statements.
35
REHABCARE GROUP, INC.
Consolidated Statements of Stockholders' Equity
(in thousands)
Accumu-
lated
Common Stock Addi- other Total
------------ tional Treasury compre- stock
Issued paid-in Retained -------------- hensive holder's
shares Amount capital earnings Shares Amount earnings equity
------ ------ ------- -------- ------ ------ -------- -------
Balance,
December 31,
1999 15,700 $157 $33,101 $62,488 2,331 $(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 9 10,410 -- (28) 218 -- 10,637
Change in
unrealized gain
on marketable
securities,
net of tax -- -- -- -- -- -- 6 6
------ ---- -------- -------- ------ -------- --- --------
Balance,
December 31,
2000 17,409 174 49,503 86,022 2,303 (17,757) 18 117,960
Net earnings -- -- -- 21,035 -- -- -- 21,035
Issuance of
common stock
in connection
with secondary
offering 1,455 14 49,429 -- -- -- -- 49,443
Exercise of
stock options
(including
tax benefit) 767 8 10,590 -- -- -- -- 10,598
------ ---- -------- -------- ------ -------- --- --------
Balance,
December 31,
2001 19,631 196 109,522 107,057 2,303 (17,757) 18 199,036
Net earnings -- -- -- 24,395 -- -- -- 24,395
Purchase of
treasury stock -- -- -- -- 1,700 (36,947) -- (36,947)
Exercise of
stock options
(including
tax benefit) 215 2 2,149 -- -- -- -- 2,151
Change in
unrealized loss
on marketable
securities,
net of tax -- -- -- -- -- -- (21) (21)
------ ---- -------- -------- ------ -------- --- --------
Balance,
December 31,
2002 19,846 $198 $111,671 $131,452 14,003 $(54,704) $(3) $188,614
====== ==== ======== ======== ====== ======== === ========
See accompanying notes to consolidated financial statements.
36
REHABCARE GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net earnings $24,395 $21,035 $23,534
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 8,334 9,562 6,873
Provision for doubtful accounts 4,511 4,594 3,466
Write-down of investments -- 500 --
Income tax benefit realized on exercise
of employee stock options 770 6,386 5,505
Change in assets and liabilities:
Deferred compensation 407 364 178
Accounts receivable, net (98) (12,195) (20,249)
Prepaid expenses and other current assets (1,485) (982) (70)
Other assets 464 (235) (955)
Accounts payable and accrued expenses (9,350) 5,579 (3,458)
Accrued salaries and wages 1,438 2,295 7,511
Income taxes 6,667 (613) (6,197)
------- ------- -------
Net cash provided by operating
activities 36,053 36,290 16,138
------- ------- -------
Cash flows from investing activities:
Additions to equipment and leasehold
improvements, net (8,546) (10,613) (7,899)
Purchase of marketable securities (596) (922) (778)
Proceeds from sale/maturities of
marketable securities 1,030 2,435 166
Cash paid in acquisition of businesses,
net of cash received -- -- (8,949)
Other, net (1,329) (1,951) (1,513)
------- ------- -------
Net cash used in investing
activities (9,441) (11,051) (18,973)
------- ------- -------
Cash flows from financing activities:
Proceeds from (repayments on) revolving
credit facility, net -- (63,800) 51,800
Repayments on long-term debt -- (4,502) (47,893)
Proceeds from issuance of notes payable -- -- 1,000
Purchase of treasury stock (36,947) -- --
Proceeds from sale of common stock, net -- 49,443 --
Exercise of stock options 1,381 4,212 5,132
------- ------- -------
Net cash provided by (used in)
financing activities (35,566) (14,647) 10,039
------- ------- -------
Net increase (decrease) in
cash and cash equivalents (8,954) 10,592 7,204
Cash and cash equivalents at beginning of year 18,534 7,942 738
------- ------- -------
Cash and cash equivalents at end of year $ 9,580 $18,534 $ 7,942
======= ======= =======
See accompanying notes to consolidated financial statements.
37
REHABCARE GROUP, INC.
Consolidated Statements of Comprehensive Earnings
(in thousands)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Net earnings $24,395 $21,035 $23,534
Other comprehensive earnings, net of tax -
Unrealized holding gains (losses) arising
during period (21) -- 6
------- ------- -------
Comprehensive earnings $24,374 $21,035 $23,540
======= ======= =======
See accompanying notes to consolidated financial statements.
38
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(1) Overview of Company and Summary of Significant Accounting Policies
Overview of Company
RehabCare Group, Inc. (the Company) is a leading provider of healthcare
staffing and program management services of inpatient rehabilitation and skilled
nursing units, outpatient therapy programs and contract therapy services in
conjunction with over 7,000 hospitals and skilled nursing facilities throughout
the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company 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, 2002 and 2001 consist of marketable equity
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 taxes, is recorded as other accumulated comprehensive earnings. Unrealized
gains or losses on such securities are 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 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.
39
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
Equipment and Leasehold Improvements
Depreciation and amortization of equipment and leasehold improvements are
computed using 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. Upon
retirement or disposition, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in the results of
operation. Repairs and maintenance are expensed as incurred.
Acquisitions
On July 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("Statement") No. 141, "Business Combinations". Statement No. 141
eliminates the pooling-of-interests method of accounting for business
combinations completed after June 30, 2001. All of the Company's acquisitions,
including those prior to the adoption of Statement No. 141, were accounted for
using the purchase method of accounting, and as such the assets and liabilities
acquired were recorded at their estimated fair values on the dates of
acquisition. Operating results of the acquired companies were included in the
Company's consolidated financial statements from the dates of acquisition.
Goodwill and Other Identifiable Intangible Assets
Goodwill, which represents the excess of cost over net assets acquired,
relates to acquisitions. Prior to January 1, 2002, goodwill was amortized on a
straight-line basis over 25 to 40 years. Effective January 1, 2002, the Company
adopted Statement No. 142, "Goodwill and Other Intangible Assets". Under
Statement No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized to expense, but instead tested for impairment at least annually
and any related losses recognized in earnings when identified. There were no
such impairments of goodwill and intangible assets during the periods presented.
See note 5 "Goodwill and Other Identifiable Intangible Assets."
Long-Lived Assets
The Company has adopted Statement No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" effective January 1, 2002. Statement No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets to be disposed of, and supersedes Statement No. 121 and APB Opinion No.
30. The Company reviews identified intangible and other long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. If such events or changes in
circumstances are present, an impairment loss would be recognized if the sum of
the expected future net cash flows was less than the carrying amount of the
asset. There were no such impairment losses of long-lived assets during the
periods presented.
Disclosure About Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, prepaid
expenses and other current assets, accounts payable, accrued salaries and wages
and accrued expenses approximate fair value because of the short maturity of
these items.
40
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
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.
Stock-Based Compensation
The Company accounts for stock options using the intrinsic value method of
Accounting Principles Board Option No. 25 "Accounting for Stock Issued to
Employees" as permitted by Statement No. 123 "Accounting for Stock-Based
Compensation." The intrinsic value method recognizes compensation expense equal
to the excess, if any, of the fair market value of the Company's stock on the
grant date over the exercise price. Statement No. 123 requires pro forma
disclosure of net earnings (loss) and earnings (loss) per share as if the fair
value method of Statement No. 123 had been applied. The Black-Scholes stock
option pricing model was used to estimate the fair value of options granted for
the pro forma disclosure.
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.
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 accounting
principles generally accepted in the United States of America, 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 consolidated financial statements. Estimates also affect the
reported amounts of revenues and expenses during the period. Actual results may
differ from those estimates.
Reclassifications
Certain prior years' amounts have been reclassified to conform with the
current year presentation.
41
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
(2) Marketable Securities
Current marketable securities at December 31, 2002 consist primarily of
marketable equity and debt securities. Noncurrent marketable securities consist
primarily of marketable equity securities ($2.2 million and $1.1 million at
December 31, 2002 and 2001, respectively) and money market securities ($2.1
million and $1.8 million at December 31, 2002 and 2001, respectively) held in
trust under the Company's deferred compensation plan.
(3) Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands)
Balance at beginning of year $5,902 $5,347 $4,577
Provisions for doubtful accounts 4,511 4,594 3,466
Allowance related to acquisitions -- -- 471
Accounts written off (5,232) (4,039) (3,167)
------ ------ ------
Balance at end of year $5,181 $5,902 $5,347
====== ====== ======
(4) Equipment and Leasehold Improvements
Equipment and leasehold improvements, at cost, consist of the following:
December 31,
------------
2002 2001
---- ----
(in thousands)
Equipment $35,064 $29,687
Leasehold improvements 3,881 2,374
------- -------
38,945 32,061
Less accumulated depreciation and amortization 19,101 13,688
------- -------
$19,844 $18,373
======= =======
(5) Goodwill and Other Identifiable Intangible Assets
Under Statement No. 142, the Company completed the transitional impairment
tests of goodwill during the first quarter of 2002 and subsequently tested for
impairment during the fourth quarter of 2002. The results of these tests
indicated that there was no impairment of goodwill as of the date of adoption of
Statement No. 142 on January 1, 2002 and subsequently on December 31, 2002. As
of the date of adoption of Statement No. 142, the Company had unamortized
goodwill in the amount of $101.7 million and unamortized intangible assets in
the amount of $0.1 million, all of which are subject to the transition
provisions of Statement No. 142.
42
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
The following table indicates the effect on net earnings and diluted net
earnings per share if Statement No. 142 had been in effect for each of the
periods presented in the consolidated statements of earnings:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands, except per share data)
Reported net earnings $24,395 $21,035 $23,534
Add back: goodwill amortization,
net of taxes -- 2,844 2,151
------- ------- -------
Adjusted net earnings $24,395 $23,879 $25,685
======= ======= =======
Basic net earnings per share:
As reported $ 1.45 $ 1.25 $ 1.62
Add back: goodwill amortization,
net of taxes -- 0.17 0.14
------- ------- -------
Adjusted basic net earnings per share $ 1.45 $ 1.42 $ 1.76
======= ======= =======
Diluted net earnings per share:
As reported $ 1.38 $ 1.16 $ 1.45
Add back: goodwill amortization,
net of taxes -- 0.16 0.13
------- ------- -------
Adjusted diluted net earnings per share $ 1.38 $ 1.32 $ 1.58
======= ======= =======
(6) Long-Term Debt
Effective August 29, 2000, the Company consummated a $125.0 million
five-year revolving credit facility, replacing its then 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 credit facility are secured primarily by the Company's assets and
future income and profits. The credit facility 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 2002, 2001 and 2000 were $0.2 million, $12.4 million and
$20.0 million at weighted-average interest rates of 5.4%, 8.1% and 8.6% per
annum, respectively. As of December 31, 2002 there was no balance outstanding on
the revolving credit facility. Interest paid for 2002, 2001 and 2000 was $0.8
million, $2.2 million and $5.3 million, respectively. Included in the interest
paid amounts are commitment fees on the unused portion of the commitment of $0.6
million, $0.3 million and $0.1 million for 2002, 2001 and 2000, respectively.
43
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
The Company also has a $1.5 million letter of credit and a $3.1 million
promissory note issued to our worker's compensation carrier as collateral for
reimbursement of claims. This letter of credit reduces the amount the Company
may borrow under the line of credit. The promissory note would become payable
only upon an event of default as described in the security agreement with the
worker's compensation carrier.
(7) Stockholders' Equity
During the third quarter of 2002, the Company repurchased 1,700,000 shares
of its common stock at a cost of $36.9 million. These shares are presented as
treasury stock in the Company's consolidated balance sheet.
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 then
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 that become fully exercisable after six
months, substantially all remaining stock options become fully exercisable after
four years from date of grant. At December 31, 2002, 2001 and 2000, a total of
1,058,270, 1,549,594 and 1,841,116 shares, respectively, were available for
future issuance under the plans.
The per share weighted-average fair value of stock options granted during
2002, 2001 and 2000 was $13.49, $24.78 and $15.20 on the dates of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions: 2002 - expected dividend yield 0%, volatility of 55%, risk free
interest rate of 3.8% and an expected life of 6 to 8 years; 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.
The Company continues to account for stock-based employee compensation
plans using the intrinsic value method under Accounting Principles Board Opinion
No. 25 and related Interpretations. Accordingly, stock-based employee
compensation cost is not reflected in net earnings, as all stock options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. 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 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:
44
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands, except per share data)
Net earnings, as reported $24,395 $21,035 $23,534
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (5,130) (4,390) (2,155)
------- ------- -------
Proforma net earnings $19,265 $16,645 $21,379
======= ======= =======
Basic earnings per share: As reported $1.45 $1.25 $1.62
===== ===== =====
Pro forma $1.15 $0.99 $1.47
===== ===== =====
Diluted earnings per share: As reported $1.38 $1.16 $1.45
===== ===== =====
Pro forma $1.09 $0.92 $1.32
===== ===== =====
A summary of the status of the Company's stock option plans as of December
31, 2002, 2001 and 2000, and changes during the years then ended is presented
below:
2002 2001 2000
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Outstanding at
beginning
of year 2,935,575 $16.99 3,262,975 $10.62 3,890,698 $ 7.30
Granted 664,700 22.66 539,373 39.97 457,600 28.76
Exercised (214,565) 6.49 (766,753) 6.12 (869,019) 5.70
Forfeited (217,876) 25.66 (100,020) 15.08 (216,304) 8.81
--------- ------ --------- ------ --------- ------
Outstanding at
end of year 3,167,834 $18.31 2,935,575 $16.99 3,262,975 $10.62
========= ========= =========
Options exercis-
able at
end of year 2,011,184 1,873,702 2,199,037
========= ========= =========
45
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted-Average
Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$ 0.00 - 4.70 143,543 1.7 years $ 4.24 143,543 $ 4.24
4.70 - 9.40 1,196,318 5.2 8.07 1,104,418 7.98
9.40 - 14.10 476,800 5.7 11.55 466,800 11.54
18.80 - 23.50 532,950 9.6 22.23 3,200 21.86
23.50 - 28.20 105,000 9.0 25.66 53,250 25.36
28.20 - 32.90 12,500 7.3 30.18 2,500 32.38
32.90 - 37.60 209,600 7.7 34.00 108,600 34.00
37.60 - 42.30 318,916 8.5 39.65 97,916 39.71
42.30 - 47.00 172,207 8.2 43.77 30,957 43.84
--------- --- ------ --------- ------
3,167,834 6.6 $18.31 2,011,184 $12.55
On October 1, 2002, the Company's stockholder rights plan that was
originally adopted in 1992 expired in accordance with its terms. The board of
directors of the Company adopted a new stockholder rights plan pursuant to which
preferred stock purchase rights were distributed as a dividend on each share of
the Company's outstanding common stock as of the close of business on October 1,
2002. Each right, when exercisable, will entitle the holders to purchase one
one-hundredth of a share of a newly designated series B junior participating
preferred stock of the Company at an initial exercise price of $150.00 per one
one-hundredth of a share.
The rights are not exercisable or transferable until a person or affiliated
group acquires beneficial ownership of 20% or more of the Company's common stock
or commences a tender or exchange offer for 20% or more of the stock, without
the approval of the board of directors. In the event that a person or group
acquires 20% or more of the Company's stock or if the Company or a substantial
portion of the Company's assets or earning power is acquired by another entity,
each right will covert into the right to purchase shares of the Company's or the
acquiring entity's stock, at the then-current exercise price of the right,
having a value at the time equal to twice the exercise price.
The series B preferred stock is non-redeemable and junior of any other
series of preferred stock that the Company may issue in the future. Each share
of series B preferred stock, upon issuance, will have a preferential dividend in
the amount equal to the greater of $1.00 per share or 100 times the dividend
declared per share on the Company's common stock. In the event of a liquidation
of the Company, the series B 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 one-hundredth of a share
of series B preferred stock will have one vote on all matters submitted to the
stockholders and will vote together as a single class with the Company's common
stock.
46
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
(8) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Year Ended December 31,
-----------------------
Numerator: 2002 2001 2000
---------- ---- ---- ----
(in thousands,
except per share data)
Numerator for basic earnings per share -
earnings available to common
stockholders (net earnings) $24,395 $21,035 $23,534
Effect of dilutive securities - after-tax
interest on convertible subordinated
promissory notes -- -- 28
------- ------- -------
Numerator for diluted earnings per share -
earnings available to common
stockholdersafter assumed conversions $24,395 $21,035 $23,562
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 16,833 16,775 14,563
Effect of dilutive securities:
Stock options 809 1,302 1,705
------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 17,642 18,077 16,268
======= ======= =======
Basic earnings per share $ 1.45 $ 1.25 $ 1.62
======= ======= =======
Diluted earnings per share $ 1.38 $ 1.16 $ 1.45
======= ======= =======
(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 12 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 are at rates of up to 50% of the first 4% of employee contributions.
Expense in connection with the Employee Savings Plan for 2002, 2001 and 2000
totaled $1.9 million, $1.7 million and $1.1 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, 2002 and
2001, $4.3 million and $2.6 million, respectively, were payable under the
nonqualified deferred compensation plan and approximated the value of the trust
assets owned by the Company.
47
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
(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, 2002, that have initial or
remaining lease terms in excess of one year total approximately $4.8 million for
2003, $4.5 million for 2004, $4.1 million for 2005, $3.3 million for 2006 and
$2.5 million for 2007. Rent expense for 2002, 2001 and 2000 was approximately
$5.5 million, $4.8 million and $3.7 million, respectively.
(11) Income Taxes
Income taxes consist of the following:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands)
Federal - current $6,918 $14,232 $12,675
Federal - deferred 6,265 (1,964) 1,045
State 1,771 1,648 1,843
------ ------- -------
$14,954 $13,916 $15,563
======= ======= =======
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,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands)
Expected income taxes $13,773 $12,233 $13,684
Tax effect of interest income from
municipal bond obligations exempt
from Federal taxation (29) (56) (47)
State income taxes, net of Federal
income tax benefit 790 1,071 1,198
Tax effect of goodwill amortization
expense not deductible for
tax purposes -- 599 398
Other, net 420 69 330
------- ------- -------
$14,954 $13,916 $15,563
======= ======= =======
48
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
The tax effects of temporary differences that give rise to the deferred
tax assets and liabilities are as follows:
December 31,
------------
2002 2001
---- ----
(in thousands)
Deferred tax assets:
Provision for doubtful accounts $1,476 $1,698
Accrued insurance, bonus and
vacation expense 3,311 4,465
Other 1,069 3,645
------ ------
5,856 9,808
------ ------
Deferred tax liabilities:
Goodwill amortization 5,596 4,120
Other 2,771 1,090
------ ------
8,367 5,210
------ ------
Net deferred tax asset (liability) $(2,511) $4,598
====== ======
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 2002, 2001 and 2000 were $7.5 million,
$8.5 million and $13.0 million, respectively.
(12) Industry Segment Information
The Company operates in two business segments that are managed separately
based on fundamental differences in operations: healthcare staffing and program
management services. 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:
49
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
Revenues from
Unaffiliated Customers Operating Earnings
--------------------------- --------------------------
(in thousands) (in thousands)
2002 2001 2000 2002 2001(1) 2000(1)
---- ---- ---- ---- ---- ----
Healthcare staffing $277,543 $304,574 $260,100 $ (1,683) $ 1,496 $12,298
Program management:
Inpatient 130,743 123,276 119,963 28,941 28,606 28,350
Outpatient 49,003 49,754 42,332 3,315 3,895 4,372
Contract therapy 105,276 64,661 29,979 9,124 2,970 (831)
-------- -------- -------- -------- -------- -------
Program
management total 285,022 237,691 192,274 41,380 35,471 31,891
-------- -------- -------- -------- -------- -------
Total $562,565 $542,265 $452,374 $ 39,697 $ 36,967 $44,189
======== ======== ======== ======== ======== =======
Depreciation and Amortization Capital Expenditures
----------------------------- ------------------------
(in thousands) (in thousands)
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Healthcare staffing $ 1,808 $ 3,280 $ 2,813 $ 567 $ 1,424 $ 3,703
Program management:
Inpatient 4,636 3,674 2,861 3,478 3,864 2,575
Outpatient 800 1,520 809 1,306 1,695 849
Contract therapy 1,090 1,088 390 3,195 3,630 772
-------- -------- -------- -------- -------- -------
Program
management total 6,526 6,282 4,060 7,979 9,189 4,196
-------- -------- -------- -------- -------- -------
Total $ 8,334 $ 9,562 $ 6,873 $ 8,546 $ 10,613 $ 7,899
======== ======== ======== ======== ======== =======
Total Assets Unamortized Goodwill
------------------------- ---------------------------
(in thousands) (in thousands)
as of December 31, as of December 31,
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Healthcare staffing $ 92,551 $102,880 $109,911 $ 52,956 $ 52,956 $ 54,021
Program management:
Inpatient 80,921 91,135 66,194 17,162 17,162 17,750
Outpatient 29,433 30,297 30,064 18,577 18,577 19,745
Contract therapy 32,625 26,349 22,924 12,990 12,990 13,266
-------- -------- -------- -------- -------- --------
Program
management total 142,979 147,781 119,182 48,729 48,729 50,761
-------- -------- -------- -------- -------- --------
Total $235,530 $250,661 $229,093 $101,685 $101,685 $104,782
======== ======== ======== ======== ======== ========
(1) Operating earnings for 2001 and 2000 have been adjusted to reflect the
corporate expense allocation methodology utilized in 2002.
50
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
(13) Quarterly Financial Information (Unaudited)
Quarter Ended
------------------------------------------------
2002 December 31 September 30 June 30 March 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Operating revenues $140,810 $142,690 $140,836 $138,229
Operating earnings 12,024 11,595 9,526 6,552
Earnings before income taxes 11,870 11,511 9,472 6,496
Net earnings 7,358 7,137 5,872 4,028
Net earnings per common share:
Basic .46 .43 .34 .23
Diluted .45 .41 .32 .22
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) 13,519 13,193 13,042
Earnings (loss) before
income taxes (3,356) 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
(14) Recently Issued Accounting Pronouncements
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company implemented Statement No. 146 on January 1, 2003.
Management does not expect that this statement will have an impact on its
consolidated financial position or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." Statement No. 148 amends Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect on the methods used on reported
results. The disclosure requirements apply to all companies for fiscal years
ending after December 15, 2002. See note 7 "Stockholders Equity" for the
required disclosures of Statement No. 148 at December 31, 2002.
51
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002, 2001 and 2000
(15) Contingencies
In May 2002, a lawsuit was filed in the United States District Court for
the Eastern District of Missouri against the Company and certain of its current
directors and officers. The plaintiffs allege violations of the federal
securities laws and are seeking to certify the suit as a class action. The
proposed class consists of persons that purchased shares of the Company's common
stock between August 10, 2000 and January 21, 2002. The case alleges weaknesses
in the software systems selected by the Company's healthcare staffing services
business, StarMed Staffing Group, and the purported negative effects of such
systems on the healthcare staffing services business operations. The Company
recently filed a motion to dismiss with the court. No discovery has been
commenced in the case pending the court's ruling on the motion to dismiss.
In August 2002, a derivative lawsuit was filed in the Circuit Court of St.
Louis County, Missouri against the Company and certain of its directors. The
complaint, which is based upon substantially the same facts as are alleged in
the federal securities class action, was filed on behalf of the derivative
plaintiff by a law firm that had earlier filed suit against the Company in the
federal case. The Company has filed a motion to dismiss based primarily on the
derivative plaintiff's failure to make a pre-suit demand. The Company has also
filed a motion to stay the derivative suit until the final resolution of the
federal securities law class action. The federal court hearing the securities
law class action recently stayed discovery in the derivative proceeding until
discovery commences in the class action.
In February 2003, a complaint was filed in the United States District Court
for the Northern District of Illinois against the Company and the former owner
of eai Healthcare Staffing Solutions ("eai"). The complaint seeks investment
banking fees under a retainer agreement executed by the former owner of eai in
February 1997, a company that RehabCare acquired in December 1999. The complaint
asserts fees in connection with three separate financing transactions and two
acquisition transactions which the Company understands were consummated by eai
prior to its acquisition by the Company. At the time of the acquisition, the
Company had identified potential fees under this retainer agreement as a
possible contingent liability of eai and had negotiated indemnification from the
former owner of eai in the stock purchase agreement for any fees and costs,
including attorneys' fees and expenses, arising from such retainer agreement.
The Company has given notice to the former owner of eai of the demand for
indemnification in this suit. No definitive response has been received from the
former owner of eai with respect to the Company's indemnification demand.
In addition to above matters, the Company and its subsidiaries are parties
to a number of other claims and lawsuits. While these actions are being
contested, the outcome of individual matters is not predictable with assurance.
The Company does not believe that any liability resulting from any of the above
matters, after taking into consideration its insurance coverage and amounts
already provided for, will have a material adverse effect on its consolidated
financial position, cash flows or liquidity. However, such matters could have a
material effect on results of operations in a particular quarter or fiscal year
as they develop or as new issues are identified.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
52
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 2003 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....... 57 President and Chief Executive Officer
Gregory F. Bellomy...... 46 President, StarMed Staffing Group
Tom E. Davis............ 53 President, Hospital Rehabilitation Services
(Inpatient & Outpatient)
James M. Douthitt....... 40 Senior Vice President, Chief Accounting
Officer, Treasurer and Assistant Secretary
Vincent L. Germanese.... 51 Senior Vice President, Chief Financial
Officer and Secretary
Patricia M. Henry....... 50 President, Contract Therapy Division
The following paragraphs contain biographical information about our
executive officers.
Alan C. Henderson has been President and Chief Executive Officer and a
director of the company since 1998. Prior to becoming President and Chief
Executive Officer, Mr. Henderson was Executive Vice President, Chief Financial
Officer and Secretary of the company from 1991 through May 1998. Mr. Henderson
also serves as a director of General American Capital Corp, Angelica Corporation
and Reinsurance Group of America, Inc.
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 the 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 the company in January 1997 as Senior Vice President,
Operations. Prior to joining the company, Mr. Davis was Group Vice President for
Quorum Health Resources, LLC from January 1990 to January 1997.
James M. Douthitt, CPA, has been Senior Vice President, Chief Accounting
Officer, Treasurer and Assistant Secretary of the company since July 2000. Prior
to his current role, Mr. Douthitt served as Vice President of Finance for our
healthcare 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 the company Mr. Douthitt was Director of Finance for
Vencor, Inc. from August 1997 to September 1998 and Manager of Finance for
Vencor, Inc. from January 1996 to July 1997.
53
Vincent L. Germanese, CPA, has been Senior Vice President, Chief Financial
Officer and Secretary of the company since November 2002. Prior to joining the
company, Mr. Germanese was Vice President of Cap Gemini Ernst & Young and
Partner at Ernst & Young. Mr. Germanese was named a partner at Ernst & Young in
1984 and has held various management positions during his tenure at Ernst &
Young and Cap Gemini Ernst & Young.
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 the company, Ms. Henry was Director of Ancillary Operations for
Vencor, 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.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in our Proxy
Statement for the 2003 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 AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and
management is included in our Proxy Statement for the 2003 Annual Meeting of
Stockholders under the captions "Voting Securities and Principal Holders
Thereof" and "Security Ownership by Management" and is incorporated herein by
reference.
The following table provides information as of fiscal year ended December
31, 2002 with respect to the shares of common stock that may be issued under our
existing equity compensation plans:
================================================================================
Plan category Number of Weighted- Number of
securities average remaining availabe
to be issued exercise for future issuance
upon exer- price of under equity
cise of out- outstanding compensation plans
standing options, (excluding
options, warrants securities
warrants and rights reflected in
and rights column (a))
(a) (b) (c)
================================================================================
================================================================================
Equity compensation plans 3,167,834 $18.31 1,058,270
approved by security holders
================================================================================
================================================================================
Equity compensation plans not
approved by security holders - $ - -
================================================================================
================================================================================
Total 3,167,834 $18.31 1,058,270
================================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
54
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, our Chief Executive Officer
and Chief Financial Officer have conducted an evaluation of the effectiveness of
the design and operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of
1934, as amended). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective in making known in a timely fashion material
information required to be filed in this report. There have been no significant
changes in internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART IV
ITEM 15. 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, 2002 and 2001
Consolidated Statements of Earnings for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2)Financial Statement Schedules:
None
(3)Exhibits:
See Exhibit Index on page 59 of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during the three
months ended December 31, 2002:
October 30, 2002
Item 9 Regulation FD Disclosure
The script for a conference call held by the Registrant
on October 30, 2002
November 19, 2002
Item 5 Press release "RehabCare Group Names
Vincent L. Germanese as Chief Financial Officer".
Item 5 Press release "RehabCare Group Finalizes Wage
and Hour Settlement with U.S. Department of Labor".
November 20, 2002
Item 5 Press release "RehabCare Group Consolidates
Operating Divisions".
55
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 14, 2003
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 14, 2003
---------------------
Alan C. Henderson Officer and Director
(Principal Executive Officer)
/s/ Vincent L. Germanese Senior Vice President, March 14, 2003
------------------------
Vincent L. Germanese Chief Financial Officer and
(Principal Financial Officer) Secretary
/s/ James M. Douthitt Senior Vice President and March 14, 2003
---------------------
James M. Douthitt Chief Accounting Officer
(Principal Accounting Officer)
/s/ William G. Anderson Director March 14, 2003
-----------------------
William G. Anderson
/s/ Richard E. Ragsdale Director March 14, 2003
-----------------------
Richard E. Ragsdale
/s/ John H. Short Director March 14, 2003
-----------------
John H. Short
/s/ H. Edwin Trusheim Director March 14, 2003
---------------------
H. Edwin Trusheim
/s/ Colleen Conway-Welch Director March 14, 2003
------------------------
Colleen Conway-Welch
/s/ Theodore M. Wight Director March 14, 2003
---------------------
Theodore M. Wight
56
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
I, Alan C. Henderson, certify that:
1. I have reviewed this annual report on Form 10-K of RehabCare Group, Inc.
(the "Registrant"):
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 14, 2003 By: /s/ Alan C. Henderson
-------------------------
Alan C. Henderson
President and Chief Executive Officer
57
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Vincent L. Germanese, certify that:
1. I have reviewed this annual report on Form 10-K of RehabCare Group, Inc.
(the "Registrant"):
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 14, 2003 By: /s/ Vincent L. Germanese
-------------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer and Secretary
58
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 Amended and Restated Bylaws (filed as Exhibit 3.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference)
4.1 Rights Agreement, dated August 28, 2002, by and between the Registrant and
Computershare Trust Company, Inc. (filed as Exhibit 1 to the Registrant's
Registration Statement on Form 8-A filed September 5, 2002 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
(filed as Exhibit 10.5 to the Registrant's Report on Form 10-K, dated March
15, 2002, and incorporated herein by reference) *
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) *
59
EXHIBIT INDEX (CONT'D)
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) *
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, 2002 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
99.1 Certification of the Chief Executive Officer
99.2 Certification of the Chief Financial Officer
- -------------------------
* Management contract or compensatory plan or arrangement.
60
EXHIBIT 13.1
SIX-YEAR FINANCIAL SUMMARY
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------
(Year ended December 31,) 2002 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
Consolidated statement of
earnings data:
Operating revenues $562,565 $542,265 $452,374 $309,425 $207,416 $160,780
Operating earnings (1) (2) 39,697 36,967 44,189 29,922 23,331 18,980
Net earnings (1) (2) (3) 24,395 21,035 23,534 15,098 12,198 10,615
Net earnings per share
(EPS): (1) (2) (3) (4)
Basic $1.45 $1.25 $1.62 $ 1.15 $ .99 $ .88
Diluted $1.38 $1.16 $1.45 $ 1.03 $ .86 $ .73
Weighted average shares
outstanding (000s):(4)
Basic 16,833 16,775 14,563 13,144 12,368 11,998
Diluted 17,642 18,077 16,268 14,814 14,490 14,750
- --------------------------------------------------------------------------------
Consolidated balance
sheet data:
Working capital $ 67,846 $ 77,524 $ 64,186 $ 27,069 $ 20,606 $ 12,793
Total assets 235,530 250,661 229,093 187,264 156,870 97,241
Total liabilities 46,916 51,625 111,133 109,481 96,714 57,481
Stockholders' equity 188,614 199,036 117,960 77,783 60,156 39,760
- --------------------------------------------------------------------------------
Financial statistics:
Operating margin (2) 7.1% 6.8% 9.8% 9.7% 11.3% 11.8%
Net margin (1) (2) (3) 4.3% 3.9% 5.2% 4.9% 5.9% 6.6%
Current ratio 2.8:1 2.7:1 2.6:1 1.6:1 1.5:1 1.6:1
Diluted EPS growth
rate (1) (2) (3) (5) 19.0% (20.0)% 40.8% 19.8% 17.8% 55.3%
Return on equity
(1) (2) (3) (6) 12.6% 13.3% 24.0% 21.9% 24.4% 23.7%
- --------------------------------------------------------------------------------
Operating statistics:
Healthcare staffing:
Average number of
branch offices (7) 108 108 89 55 16 N/A
Number of weeks
worked (8) 182,552 233,898 223,951 131,110 52,265 29,652
Program management:
Inpatient units (acute
rehabilitation and
skilled nursing):
Average number of programs 135 137 136 132 128 110
Average admissions
per program 411 394 373 369 354 321
Average length of stay
(days/admission) 13.3 13.8 14.3 14.5 14.7 15.4
Patient days 737,017 746,583 725,497 706,822 665,403 544,583
Outpatient programs:
Average number of
locations 55 61 53 40 26 18
Patient visits 1,366,439 1,439,169 1,173,324 785,943 378,108 231,256
Contract therapy:
Average number of
locations 378 250 156 91 50 36
- --------------------------------------------------------------------------------
(1) The results for 2002 reflect the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" on
January 1, 2002.
(2) The results for 2001 include $9.0 million in non-recurring charges related
to our supplemental staffing division.
(3) The results for 2001 include a pre-tax loss of $0.5 million ($0.3 million
after tax or $0.02 per share) on write-down of an investment. The results
for 1999 include a pre-tax loss of $1.0 million ($0.6 million after tax or
$0.05 per share) on write-down of investments. The results for 1998 and
1997 include pre-tax gains of $1.5 million ($0.9 million after tax or $0.06
per share) and $1.4 million ($0.9 million after tax or $0.06 per share),
respectively, from sales of marketable securities. In addition, the results
for 1998 include a $0.8 million ($0.05 per share) after-tax charge for the
cumulative effect of change in accounting for start-up costs.
(4) Share data adjusted for 3-for-2 stock split in October 1997 and 2-for-1
stock split in June 2000.
(5) For comparability purposes, 1997 computed based upon 12 months ended
December 31, 1996.
(6) Average of beginning and ending equity.
(7) We entered the supplemental staffing business in August 1998 following the
acquisition of StarMed Staffing, Inc.
(8) Includes both supplemental and travel weeks worked.
61
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
62
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, 2003, with respect to the consolidated balance sheets
of RehabCare Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of earnings, stockholders' equity, cash
flows, and comprehensive earnings for the three-year period ended December 31,
2002, which report appears in the December 31, 2002 annual report on Form 10-K
of RehabCare Group, Inc. Our report refers to the adoption of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
St. Louis, Missouri
March 14, 2003
63
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of RehabCare Group, Inc. (the "Company") on
Form 10-K for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Alan C. Henderson,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Alan C. Henderson
--------------------------
Alan C. Henderson
Chief Executive Officer of
RehabCare Group, Inc.
March 14, 2003
64
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of RehabCare Group, Inc. (the "Company") on
Form 10-K for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Vincent L.
Germanese, Senior Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Vincent L. Germanese
--------------------------
Vincent L. Germanese
Senior Vice President and
Chief Financial Officer of
RehabCare Group, Inc.
March 14, 2003
65