Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
------------------
Commission File Number 0-19294
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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 Number)
incorporation or organization)
7733 Forsyth Boulevard, Suite 1700, St. Louis, MO 63105
-------------------------------------------------------
(Address of principal executive offices and zip code)
314-863-7422
--------------------------------------------------
(Registrant's telephone number, including area code)
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
----- -----
Indicate the number of shares outstanding of the Registrant's common stock, as
of the latest practicable date.
Class Outstanding at November 11, 2003
- -------------------------------------- --------------------------------
Common Stock, par value $.01 per share 16,119,128
1 of 26
REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
September 30, 2003 (unaudited) and December 31, 2002 3
Condensed consolidated statements of earnings for the three months
and nine months ended September 30, 2003 and 2002 (unaudited) 4
Condensed consolidated statements of cash flows for the
nine months ended September 30, 2003 and 2002 (unaudited) 5
Condensed consolidated statements of comprehensive earnings for
three months and nine months ended September 30, 2003 and 2002
(unaudited) 6
Notes to condensed consolidated financial statements (unaudited) 7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. - Quantitative and Qualitative Disclosures about Market Risks 23
Item 4. - Controls and Procedures 23
Part II. - Other Information 24
Item 1. - Legal Proceedings 24
Item 6. - Exhibits and Reports on Form 8-K 25
Signatures 26
2 of 26
PART 1. - FINANCIAL INFORMATION
Item 1. - Condensed Consolidated Financial Statements
REHABCARE GROUP, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
September 30, December 31,
2003 2002
---- ----
Assets (unaudited)
------
Current assets:
Cash and cash equivalents $ 22,420 $ 9,580
Marketable securities, available-for-sale 5,008 4
Accounts receivable, net of allowance for doubtful
accounts of $5,773 and $5,181, respectively 90,550 87,221
Income taxes receivable 1,856 2,497
Deferred tax assets 5,274 2,529
Other current assets 3,758 3,625
------- -------
Total current assets 128,866 105,456
Marketable securities, trading 3,398 4,252
Equipment and leasehold improvements, net 18,403 19,844
Excess cost over net assets acquired, net 101,685 101,685
Other 3,598 4,293
------- -------
Total assets $255,950 $235,530
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,752 $ 1,959
Accrued salaries and wages 30,529 28,579
Accrued expenses 9,830 7,072
------- -------
Total current liabilities 42,111 37,610
Deferred compensation and other long-term
liabilities 3,417 4,266
Deferred tax liabilities 7,220 5,040
------- -------
Total liabilities 52,748 46,916
------- -------
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 20,122,026 shares and 19,846,416
shares as of September 30, 2003 and December 31,
2002, respectively 201 198
Additional paid-in capital 114,428 111,671
Retained earnings 143,276 131,452
Less common stock held in treasury at cost,
4,002,898 shares as of September 30, 2003 and
December 31, 2002 (54,704) (54,704)
Accumulated other comprehensive earnings 1 (3)
------ -------
Total stockholders' equity 203,202 188,614
------- -------
$255,950 $235,530
======= =======
See accompanying notes to condensed consolidated financial statements.
3 of 26
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating revenues $134,962 $142,690 $409,847 $421,755
Costs and expenses:
Operating expenses 103,581 103,909 310,486 310,358
Selling, general & administrative
Divisions 15,786 18,576 51,213 56,396
Corporate 6,553 6,432 20,288 21,190
Restructuring charge 1,286 -- 1,286 --
Depreciation and amortization 2,084 2,178 6,429 6,138
------- ------- ------- -------
Total costs and expenses 129,290 131,095 389,702 394,082
------- ------- ------- -------
Operating earnings 5,672 11,595 20,145 27,673
Interest income 40 88 83 299
Interest expense (184) (183) (532) (508)
Other income (expense) 10 11 (63) 15
------ ------- ------- -------
Earnings before income taxes 5,538 11,511 19,633 27,479
Income taxes 2,215 4,374 7,809 10,442
------- ------- ------- --------
Net earnings $ 3,323 $ 7,137 $ 11,824 $ 17,037
======= ======= ======== ========
Net earnings per common share:
Basic $ 0.21 $ 0.43 $ 0.74 $ 0.99
======= ======= ======= =======
Diluted $ 0.20 $ 0.41 $ 0.72 $ 0.95
======= ======= ======= =======
Weighted-average number of common
shares outstanding:
Basic 16,086 16,741 15,962 17,168
======= ======= ======= =======
Diluted 16,540 17,455 16,507 18,002
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
4 of 26
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $ 11,824 $ 17,037
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 6,429 6,138
Provision for doubtful accounts 2,704 3,227
Write-down of investment 50 --
Restucturing charge 871 --
Income tax benefit realized on employee
stock option exercises 764 565
Change in assets and liabilities:
Accounts receivable, net (6,033) 667
Prepaid expenses and other current assets (133) (1,353)
Other assets 337 309
Accounts payable and accrued expenses 1,680 (3,222)
Accrued salaries and wages 1,950 1,684
Deferred compensation (703) 337
Income taxes 76 5,562
------ ------
Net cash provided by operating activities 19,816 30,951
------ ------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (4,074) (7,559)
Purchase of marketable securities (5,288) (356)
Proceeds from sale/maturities of marketable securities 996 1,030
Other, net (606) (1,267)
------ ------
Net cash used in investing activities (8,972) (8,152)
------ ------
Cash flows from financing activities:
Purchase of treasury stock -- (36,947)
Exercise of stock options 1,996 1,342
------ ------
Net cash provided by (used in)
financing activities 1,996 (35,605)
------ ------
Net increase (decrease) in cash
and cash equivalents 12,840 (12,806)
Cash and cash equivalents at beginning of period 9,580 18,534
------ ------
Cash and cash equivalents at end of period $ 22,420 $ 5,728
====== ======
See accompanying notes to condensed consolidated financial statements.
5 of 26
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Comprehensive Earnings
(dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net earnings $ 3,323 $ 7,137 $ 11,824 $ 17,037
Other comprehensive earnings:
Unrealized holding gains
(losses) arising during
period on securities 3 (17) 6 (29)
Income tax benefit (expense) (1) 5 (2) 8
------- ------- ------- -------
Comprehensive earnings $ 3,325 $ 7,125 $ 11,828 $ 17,016
======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements.
6 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Nine Month Periods Ended September 30, 2003 and 2002
(Unaudited)
Note 1. - Basis of Presentation
- -------------------------------
The condensed consolidated balance sheets and related condensed
consolidated statements of earnings, cash flows, and comprehensive earnings
contained in this Form 10-Q, which are unaudited, include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and activity have been eliminated in consolidation. In the opinion of
management, all entries necessary for a fair presentation of such financial
statements have been included. The results of operations for the three months
and nine months ended September 30, 2003 are not necessarily indicative of the
results to be expected for the fiscal year. Certain prior year amounts have been
reclassified to conform to the current year presentation.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. Reference is made
to the Company's audited consolidated financial statements and the related notes
as of December 31, 2002 and 2001 and for each of the years in the three-year
period ended December 31, 2002, included in the Annual Report on Form 10-K on
file with the Securities and Exchange Commission, which provide additional
disclosures and a further description of the Company's accounting policies.
Note 2. - Critical Accounting Policies and Estimates
- ----------------------------------------------------
The preparation of the accompanying condensed consolidated financial
statements requires management to make judgments and estimates. Some accounting
policies have a significant impact on amounts reported in these financial
statements. A summary of significant accounting policies and a description of
accounting policies that are considered critical may be found in our 2002 Annual
Report on Form 10-K, filed on March 14, 2003, in the Critical Accounting
Policies and Estimates section of "Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Note 3. - Goodwill and Other Identifiable Intangible Assets
- -----------------------------------------------------------
Statement of Financial Accounting Standards (Statement) No. 142 "Goodwill
and Other Intangible Assets" eliminates the requirement to amortize goodwill and
indefinite-lived intangible assets, requiring instead that those assets be
tested for impairment at least annually, and more often when events indicate
that an impairment may exist. An impairment loss must be recognized if the
carrying amount of an intangible asset is not recoverable and its carrying
amount exceeds its fair value. As required by Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", a long-lived asset shall be
tested for recoverability whenever a significant adverse change in the business
climate occurs that could affect the value of a long-lived asset. Due to
conditions in the healthcare staffing industry, our healthcare staffing division
is experiencing declines in operating revenues and operating earnings. As a
result, the Company has performed a test for recoverability under the provisions
of Statement No. 144 and Statement No. 142 as of September 30, 2003. Based on
the tests performed, the Company has determined that long-lived assets
(including goodwill) are not impaired as of September 30, 2003. The Company will
continue to perform impairment tests on a quarterly basis until events or
circumstance indicate that testing is no longer required.
7 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 4. - Stock-Based Compensation
- ----------------------------------
The Company accounts for stock-based employee compensation plans using the
intrinsic value method under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", 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:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share data)
Net earnings, as reported $3,323 $7,137 $11,824 $17,037
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 860 1,116 3,041 3,559
------ ------ ------ ------
Pro forma net earnings $2,463 $6,021 $8,783 $13,478
====== ====== ====== =======
Basic net earnings per share: As reported $0.21 $0.43 $0.74 $0.99
===== ===== ===== =====
Pro forma $0.15 $0.36 $0.55 $0.79
===== ===== ===== =====
Diluted net earnings per share:As reported $0.20 $0.41 $0.72 $0.95
===== ===== ===== =====
Pro forma $0.15 $0.34 $0.53 $0.75
===== ===== ===== =====
Note 5. - Net earnings per share
- --------------------------------
Basic net earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average common shares
outstanding for the period. Diluted net earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity (as
calculated utilizing the treasury stock method).
8 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
The following table sets forth the computation of basic and diluted net earnings
per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share data)
Numerator:
Numerator for basic/diluted net
earnings per share - net earnings
available to common stockholders $ 3,323 $ 7,137 $ 11,824 $ 17,037
====== ====== ====== ======
Denominator:
Denominator for basic net earnings
per share - weighted-average
shares outstanding 16,086 16,741 15,962 17,168
Effect of dilutive securities:
Stock options 454 714 545 834
------ ------ ------ ------
Denominator for diluted net
earnings per share - adjusted
weighted-average shares 16,540 17,455 16,507 18,002
====== ====== ====== ======
Basic net earnings per share $ 0.21 $ 0.43 $ 0.74 $ 0.99
====== ====== ====== ======
Diluted net earnings per share $ 0.20 $ 0.41 $ 0.72 $ 0.95
====== ====== ====== ======
Note 6. - Restructuring Costs
- -----------------------------
On July 30, 2003, the Company announced a comprehensive multifaceted
restructuring program to return the Company to growth and improved
profitability. As part of the restructuring program, the Company eliminated 61
positions in an effort to reduce corporate support functions and better align
corporate overhead with the operating divisions. As a result of the
restructuring plan, the Company recognized consolidated pre-tax expense of $1.3
million in the quarter ended September 30, 2003. Included in the third quarter
restructuring charge is $1.1 million of severance and outplacement charges and
$0.2 million for exit costs related to the closing of five StarMed branches. The
Company accounts for restructuring costs in accordance with Statement of
Financial Accounting Standards No. 146, "Accounting for Cost Associated with
Exit or Disposal Activities." In accordance with Statement No. 146, management
committed to the restructuring plan and identified the number of employees to be
terminated and the benefits that those employees would receive upon termination.
Employees were not required to render service in order to receive their
benefits, and thus a liability was recognized at the date the termination was
communicated to the employee. The severance payments and exit costs will
continue beyond 2003 since, in many instances, the terminated employees will
receive their severance payments over an extended period of time and long-term
lease payments will be paid over periods after 2003. These charges recorded in
the third quarter are reflected in the restructuring charge line on the
accompanying consolidated statements of earnings.
The following table summarizes the activity with respect to the severance
and exit costs recorded in the third quarter:
(dollars in thousands)
Severance Exit Costs Total
--------- ---------- -----
Q3 2003 Restructuring charges $ 1,094 $ 192 $ 1,286
Q3 2003 Cash payments 415 -- 415
------- ------ -------
Balance September 30, 2003 $ 679 $ 192 $ 871
======= ====== =======
9 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 7. - Industry Segment Information
- --------------------------------------
The Company operates in two business segments that are managed separately
based on fundamental differences in operations: program management services and
healthcare staffing services. Program management includes hospital
rehabilitation services (including inpatient acute rehabilitation and skilled
nursing units and 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 for the three months and nine months
ended September 30, 2003 and 2002 in each industry segment is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating Revenues from
Unaffiliated Customers (in thousands)
- --------------------------
Program management:
Hospital
rehabilitation
services $ 46,503 $ 45,210 $ 138,975 $ 133,788
Contract therapy 33,607 27,223 97,447 76,245
--------- -------- --------- ---------
Program
management total 80,110 72,433 236,422 210,033
Healthcare staffing 55,191 70,257 174,501 211,722
--------- -------- --------- ---------
Subtotal 135,301 142,690 410,923 421,755
Less Intercompany
revenues* (339) -- (1,076) --
--------- -------- --------- ---------
Total $ 134,962 $142,690 $ 409,847 $ 421,755
========= ======== ========= =========
*Intercompany revenues represent sales at market rates from the Company's
healthcare staffing segment to the Company's program management segment.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating Earnings (in thousands)
- --------------------------
Program management:
Hospital
rehabilitation
services $ 8,634 $ 8,829 $ 23,651 $ 23,249
Contract therapy 913 2,581 4,464 6,236
--------- -------- --------- ---------
Program
management total 9,547 11,410 28,115 29,485
Healthcare staffing (2,589) 185 (6,684) (1,812)
--------- -------- --------- ---------
Subtotal 6,958 11,595 21,431 27,673
Restructuring charge (1,286) -- (1,286) --
---------- -------- ---------- ---------
Total $ 5,672 $ 11,595 $ 20,145 $ 27,673
========= ======== ========= =========
10 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Depreciation and
Amortization (in thousands)
- ----------------
Program management:
Hospital
rehabilitation
services $ 1,252 $ 1,436 $ 4,024 $ 3,982
Contract therapy 343 296 993 788
--------- -------- --------- ---------
Program
management total 1,595 1,732 5,017 4,770
Healthcare staffing 489 446 1,412 1,368
--------- -------- --------- ---------
Total $ 2,084 $ 2,178 $ 6,429 $ 6,138
========= ======== ========= =========
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Capital Expenditures (in thousands)
- --------------------
Program management:
Hospital
rehabilitation
services $ 892 $ 645 $ 1,694 $ 4,346
Contract therapy 659 523 1,289 2,850
--------- -------- --------- ---------
Program
management total 1,551 1,168 2,983 7,196
Healthcare staffing 126 69 1,091 363
--------- -------- --------- ---------
Total $ 1,677 $ 1,237 $ 4,074 $ 7,559
========= ======== ========= =========
Total Assets Unamortized Goodwill
------------ --------------------
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Program management:
Hospital
rehabilitation
services $ 128,762 $104,949 $ 35,739 $ 35,739
Contract therapy 40,581 31,899 12,990 12,990
--------- -------- --------- ---------
Program
management total 169,343 136,848 48,729 48,729
Healthcare staffing 86,607 95,723 52,956 52,956
--------- -------- --------- ---------
Total $ 255,950 $232,571 $ 101,685 $ 101,685
========= ======== ========= =========
11 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. - Recent 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 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. For
information regarding the impact of adoption of Statement No. 146 and the impact
of the restructuring that the Company has undertaken during this quarter, refer
to Note 6. - Restructuring Costs.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. As adopted, this interpretation does not have a material effect on the
Company's financial position or results of operations other than the additional
disclosure requirements.
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 reported results. While the
Company has not elected to adopt fair value accounting for its stock-based
compensation, it has complied with the new disclosure requirements under
Statement No. 148. As adopted, this statement does not have a material impact on
the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation explains how to identify
variable interest entities and how an enterprise assesses its interest in a
variable interest entity to decide whether to consolidate that entity. In
October 2003 the FASB postponed the implementation date so that this
interpretation is effective for the first interim or annual period ending after
December 15, 2003 to variable interest entities in which the variable interest
was acquired before February 1, 2003. The Company does not anticipate that the
adoption of this interpretation will have any effect on the Company's financial
position or results of operations.
12 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." Statement No. 149 amends
and clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Statement No. 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The adoption of Statement No. 149 did not have any effect on the
Company's consolidated financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No. 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. Statement No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003 and must be applied to the Company's existing financial instruments
effective July 1, 2003, the beginning of the first fiscal period after June 15,
2003. The Company adopted Statement No. 150 on June 1, 2003. The adoption of
this statement did not have any effect on the Company's consolidated financial
position or results of operations.
Note 9. - Related Party Transaction
- -----------------------------------
During the third quarter of 2003, the Board of Directors approved and the
Company entered into a contract with a software vendor to develop a new public
website for the Company. John H. Short, interim CEO and a director of our
Company, and Theodore M. Wight, a director of our Company, are also directors of
the software vendor company. Messrs. Wight and Short and their affiliated
entities own 27.3% and 5.5% of the fully diluted capitalization of the software
company, respectively. The contract amount is for $320,000 and the work is
anticipated to be completed by the second quarter of 2004.
During the second quarter of 2003, the Company entered into an agreement
with Phase 2 Consulting, LLC ("Phase 2"). Per the terms of the agreement, Phase
2 will provide the Company with management, consulting and advisory services,
including having John H. Short, Ph.D., the managing director of Phase 2 and a
member of the Company's Board of Directors, serve as interim President and Chief
Executive Officer of the Company. A monthly consulting fee of $55,000 will be
paid to Phase 2 during the term of the agreement plus reimbursement of business
expenses. In addition, Phase 2 will be entitled to an incentive fee capped at
$1.3 million payable in cash or shares of the Company's stock based on
predetermined performance standards.
13 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
In conjunction with his resignation from his officer positions with the
Company during the second quarter of 2003, Alan C. Henderson, the former
President and Chief Executive Officer and currently a director of the Company,
entered into a one-year consulting arrangement with the Company. The consulting
arrangement continues Mr. Henderson's then-current monthly compensation and car
allowance of $45,191.54 per month, health and medical benefits, and stock option
vesting during the consulting period until June 3, 2004. The consulting
arrangement supersedes a similar level of payments and benefit continuation that
Mr. Henderson would have been entitled to receive under his then-existing
termination compensation agreement with the Company. Mr. Henderson will provide
executive duties, services and functions, provide advice and counsel and have
executive responsibilities and authority as specifically assigned to him from
time to time during the consulting period by the President and Chief Executive
Officer of the Company.
Note 10. - Commitments
- ----------------------
The Company has been working with a software development company to upgrade
the current operating platform and the Company's general ledger software. To
date, the Company has spent approximately $1.2 million in developing programs
and defining functional requirements. Upon review of the functional requirements
the Company determined that the scope of the project had expanded and the cost
commitment would substantially increase from the original commitment of $2.5
million to approximately $3.7 million. Due to the substantial increase in cost,
the Company has placed a hold on further development and implementation of this
project to fully re-evaluate potential benefits and cost savings.
Item 2. - Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
This Quarterly Report on Form 10-Q 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 the Company's actual results in
future periods to differ materially from forecasted results. These risks and
uncertainties may include, but are not limited to, the cost, effect and timing
of restructuring activities that have been commenced, including our ability to
achieve and sustain the annual expense reductions anticipated; the timing and
rate of the resumed growth in the staffing division; changes in and compliance
with governmental reimbursement rates; regulations or policies affecting the
hospital rehabilitation services and contract therapy divisions, including the
Company's estimates with respect to the effect of newly promulgated regulations
on the Company's business; the Company's ability to attract new client
relationships or to retain and grow existing client relationships through the
integration of our new information system with those of our clients and the
development of alternative product offerings; our ability to identify and
consummate, within the expected time frame, strategic acquisitions to accelerate
growth in the Company's divisions; the Company's ability, and the additional
costs, to attract operational and professional employees; significant increases
in health, worker's compensation and professional and general liability
insurance premiums; the adequacy and effectiveness of operating and
administrative systems; litigation risks, including the Company's ability to
predict the ultimate costs and liabilities or the disruption of the Company's
operations; competitive and regulatory effects on pricing and margins; and
general economic conditions, including efforts by governmental reimbursement
programs, insurers, healthcare providers and others to contain healthcare costs.
14 of 26
REHABCARE GROUP, INC.
Item 2. - Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (Continued)
- ---------------------------------
Results of Operations
- ---------------------
The Company derives its revenue from two business segments: program
management services for hospitals and skilled nursing facilities and healthcare
staffing services. The Company's program management segment includes hospital
rehabilitation services (including inpatient acute rehabilitation, skilled
nursing units and outpatient therapy programs) and contract therapy programs.
The Company's healthcare staffing segment includes both supplemental personnel
and traveling personnel who are typically placed based on hourly and 13-week
assignments, respectively.
Selected Operating Statistics:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Hospital Rehabilitation Services
- --------------------------------
Operating Revenues (in thousands)
Inpatient $ 34,161 $ 33,113 $ 102,076 $ 96,939
Outpatient 12,342 12,097 36,899 36,849
------- ------- ------ ------
Total $ 46,503 $ 45,210 $ 138,975 $ 133,788
Average Number of Programs
Inpatient 133 137 135 135
Outpatient 48 55 49 55
--- --- --- ---
Total 181 192 184 190
Inpatient Patient Days 179,110 185,775 544,046 556,996
Outpatient Visits 313,004 332,628 953,058 1,036,189
Contract Therapy
Operating Revenues (in thousands) $ 33,607 $ 27,223 $ 97,447 $ 76,245
Average Number of Locations 473 396 453 369
Average Revenue per Location $ 71,094 $ 68,674 $215,113 $206,428
15 of 26
REHABCARE GROUP, INC.
Operating Statistics: (Continued)
- ---------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Healthcare Staffing
- -------------------
Operating Revenues (in thousands)
Supplemental $ 29,605 $ 42,827 $ 97,500 $ 133,195
Travel 25,586 27,430 77,001 78,527
------- ------- ------- -------
Total* $ 55,191 $ 70,257 $174,501 $211,722
Gross Profit Margin
Supplemental 18.5% 23.9% 19.8% 23.4%
Travel 16.0% 21.9% 18.3% 21.6%
Total 17.3% 23.1% 19.1% 22.7%
Weeks Worked
Supplemental 21,434 31,315 69,953 100,507
Travel 13,140 13,941 39,336 40,244
------ ------ ------ ------
Total 34,574 45,256 109,289 140,751
Average Number of
Supplemental branches 70 106 76 110
* Includes intercompany revenues of $0.3 million and $1.1 million at market
rates from the Company's healthcare staffing segment to the Company's program
management segment during the three months and nine months ended September 30,
2003, respectively.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
- --------------------------------------------------------------------------------
30, 2002
- --------
Operating Revenues
Operating revenues during the third quarter of 2003 decreased by $7.7
million, or 5.4%, to $135.0 million compared to $142.7 million in the third
quarter of 2002. Revenue decreases in supplemental and travel staffing were
partially offset by revenue increases in contract therapy and hospital
rehabilitation services.
Hospital rehabilitation services revenues, consisting of hospital inpatient
and outpatient programs, increased by $1.3 million, or 2.9%, from $45.2 million
in the third quarter of 2002 to $46.5 million in the third quarter of 2003.
Inpatient revenues increased by $1.1 million, or 3.2%, from $33.1 million in the
third quarter of 2002 to $34.2 million in the third quarter of 2003 primarily as
a result of a 5.9% increase in average revenue per program. The increase in
average revenue per program primarily resulted from contract modifications to
align the fee structure with the recently implemented prospective payment system
for rehabilitation facilities. Outpatient revenues increased by $0.2 million
from $12.1 million in the third quarter of 2002 to $12.3 million in the third
quarter of 2003, with a 12.4% decrease in the average number of programs
operated, offset by a 16.5% increase in the average revenue per outpatient
program.
16 of 26
REHABCARE GROUP, INC.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
- --------------------------------------------------------------------------------
30, 2002 (Continued)
- --------------------
Contract therapy revenues increased by 23.5% from $27.2 million in the
third quarter of 2002 to $33.6 million in the third quarter of 2003, primarily
reflecting a 19.2% increase in the average number of locations and a 3.5%
increase in the average revenue per location. The increase in the average
revenue per location is primarily the result of same store growth and a
continued focus on opening larger locations.
Healthcare staffing revenues decreased from $70.3 million in the third
quarter of 2002 to $55.2 million in the third quarter of 2003(including $0.3
million inter-company sales at market rates to the Company's program management
segment). Supplemental staffing revenues decreased by $13.2 million, or 30.9%,
to $29.6 million in the third quarter of 2003, reflecting the consolidation of
branch locations in the first quarter of 2003 and a decline in the demand for
staffing agency services. The average number of branch locations decreased from
106 in the third quarter of 2002 to 70 in the third quarter of 2003. The
decrease in supplemental staffing revenues is attributable to a 31.6% decrease
in weeks worked as a result of the consolidation of branch locations and a
decline in demand, offset by a 1.0% increase in average revenue per week worked.
The increase in average revenue per week worked was a result of placing more
highly credentialed staff such as registered nurses as compared to certified
nurse assistants, as well as increased bill rates for the certified nurse
assistants. Travel staffing revenues decreased by 6.7% from $27.4 million in the
third quarter of 2002 to $25.6 million in the third quarter of 2003 as weeks
worked and revenue per week worked decreased 5.7% and 1.0%, respectively. The
decline in weeks worked was driven by a decrease in demand for travelers while
the decrease in revenue per week is a result of a decrease in radiologist
average bill rates and a shift in sales mix to more radiologists.
Cost and Expenses
Operating expenses (excluding provision for doubtful accounts) as a
percentage of operating revenues increased from 72.1% in the third quarter of
2002 to 75.9% in the third quarter of 2003, primarily reflecting lower
productivity in the contract therapy division due to a now completed complex
information system conversion during the third quarter 2003 and increased labor
and benefit costs in all divisions. The provision for doubtful accounts as a
percentage of operating revenues increased from 0.7% in the third quarter of
2002 to 0.8% in the third quarter of 2003 as the Company adjusted its accrual
rates to reflect changes in accounts receivable agings and recent write-off
experience. Division selling, general and administrative expenses as a
percentage of operating revenues decreased from 13.0% in the third quarter of
2002 to 11.7% in the third quarter of 2003 primarily due to reductions in
contract therapy, the outpatient division of hospital rehabilitation services,
and supplemental staffing. Corporate selling, general and administrative
expenses as a percentage of revenues increased from 4.5% in the third quarter of
2002 to 4.9% in the third quarter of 2003 primarily reflecting a lower revenue
base and increases in consulting costs as a result of the arrangements with
Phase 2 and Alan C. Henderson, both entered into in the second quarter 2003.
Depreciation and amortization expense as a percent of operating revenues was
comparable for each period.
In the hospital rehabilitation services division, operating expenses
(excluding provision for doubtful accounts) increased by 4.2%, or $1.2 million,
primarily reflecting increased salary-related expenses in both inpatient and
outpatient divisions as a result of higher workers compensation, professional
liability and health insurance expenses. The provision for doubtful accounts
17 of 26
REHABCARE GROUP, INC.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
- --------------------------------------------------------------------------------
30, 2002 (Continued)
- --------------------
as a percentage of operating revenues increased from 0.2% to 0.5%, primarily as
a result of the normal evaluation of the creditworthiness of the Company's
clients. Selling, general and administrative expenses for this division as a
percentage of operating revenues declined from 8.4% in the third quarter of 2002
to 7.9% in the third quarter of 2003. Corporate general and administrative
expenses, which represent allocations of corporate office expenses based upon
utilization by divisions, increased for the division as a percentage of
operating revenues from 3.9% to 4.7%. Depreciation and amortization expense as a
percentage of operating revenues decreased from 3.2% in the third quarter of
2002 to 2.7% in the third quarter of 2003, reflecting a change in the useful
life of a software system from 3 years to 5 years in the second quarter of 2003.
Operating earnings (earnings before interest and income taxes) in this division
decreased slightly from $8.8 million in the third quarter of 2002 to $8.6
million in the third quarter of 2003.
In the contract therapy division, operating expenses (excluding provision
for doubtful accounts) increased by 35.8%, or $7.0 million, primarily due to an
increase in contract labor and salary-related expenses, as well as lower
productivity as a result of a now completed complex information system
conversion during the third quarter 2003. The provision for doubtful accounts as
a percentage of operating revenues was comparable for each period. Division
selling, general and administrative expenses as a percentage of operating
revenues decreased from 9.9% in the third quarter of 2002 to 9.2% in the third
quarter of 2003, primarily as a result of revenues increasing faster than
selling, general and administrative expenses. Corporate general and
administrative expenses, which represent allocations of corporate office
expenses based upon utilization by divisions, increased for the division as a
percentage of operating revenues from 5.9% to 6.2%. Depreciation and
amortization expense as a percentage of operating revenues decreased from 1.1%
in the third quarter 2002 to 1.0% in the third quarter 2003. Operating earnings
(earnings before interest and income taxes) in this division decreased by $1.7
million, or 64.6%, to $0.9 million.
In the staffing segment, operating expenses (excluding provision for
doubtful accounts) decreased 15.5%, or $8.4 million, due to lower volumes and
increases in certain categories of operating expense. Gross profit margins in
the supplemental staffing division decreased from 23.9% in the third quarter of
2002 to 18.5% in the third quarter of 2003, while gross profit margins in the
travel division also decreased in the third quarter of 2003 to 16.0% compared to
21.9% in the comparable quarter last year. The decrease in gross profit margin
in the supplemental staffing division was primarily the result of increases in
workers compensation, professional and general liability and medical insurance
claims cost. The decrease in gross profit margin within the travel staffing
division was a result of changes within staff incentives and increases in
salary-related expenses. The provision for doubtful accounts decreased $0.1
million in the third quarter of 2003 compared to the third quarter of 2002,
primarily as a result of the normal evaluation of the creditworthiness of the
Company's clients showing improvement as supported by the improvement in
accounts receivable aging over the same period. Division selling, general and
administrative expenses decreased by $3.1 million or 25.3% as a result of branch
consolidations in the first quarter of 2003 and decreases in administrative
personnel. This resulted in a decrease in selling, general and administrative
expenses as a percentage of operating revenues from 17.2% in the third quarter
of 2002 to 16.3% in the third quarter of 2003. Corporate general and
administrative expenses, which represent allocations of corporate office
expenses based upon utilization by divisions, decreased for the division as a
percentage of operating revenues from 4.4% to 4.1%. Depreciation and
amortization expenses as a percentage of operating revenues increased from 0.6%
18 of 26
REHABCARE GROUP, INC.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
- --------------------------------------------------------------------------------
30, 2002 (Continued)
- --------------------
in the third quarter of 2002 to 0.9% in the third quarter of 2003, primarily due
to comparable expense on less revenue. Operating earnings (earnings before
interest and income taxes) in the staffing group decreased by $2.8 million from
operating earnings of $0.2 million in the third quarter of 2002 to an operating
loss of $2.6 million in the third quarter of 2003.
The restructuring charge represents severance and outplacement costs
associated with the reduction in force of 61 positions as well as costs
associated with closing five supplemental staffing branch offices. See Note 6. -
"Restructuring Costs" to the condensed consolidated financial statements.
Non-operating Items
Interest income was comparable for both periods.
Interest expense primarily represents commitment fees paid on the unused
portion of the line of credit and letter of credit fees and was comparable for
both periods. The Company had no outstanding balance on the line of credit as of
September 30, 2003 and September 30,2002.
Earnings before income taxes decreased by 51.9% to $5.5 million in the
third quarter of 2003 from $11.5 million in the third quarter of 2002. The
provision for income taxes was $2.2 million in the third quarter of 2003
compared to $4.4 million in the third quarter of 2002 representing effective
income tax rates of 40.0% and 38.0%, respectively. The effective tax rate
increase was primarily a result of increased non-deductible meals provided to
traveling radiologists and nurses in relation to earnings before income taxes.
Net earnings in the third quarter of 2003 decreased to $3.3 million as compared
to $7.1 million in the third quarter of 2002. Diluted net earnings per share
decreased by 50.9% from $0.41 in the third quarter of 2002 to $0.20 in the third
quarter of 2003. A 5.2% decrease in the weighted-average shares outstanding was
attributable primarily to the repurchase of 1.7 million shares of common stock
during the third quarter of 2002 and a smaller dilutive effect of stock options
resulting from a lower average stock price in the third quarter 2003.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2002
- ----
Operating Revenues
Operating revenues during the first nine months of 2003 decreased by $11.9
million, or 2.8%, to $409.8 million compared to $421.8 million in the first nine
months of 2002. Revenue decreases in supplemental and travel staffing were
partially offset by revenue increases in contract therapy and hospital
rehabilitation services.
Hospital rehabilitation services revenues, consisting of hospital inpatient
and outpatient programs, increased by $5.2 million, or 3.9% from $133.8 million
in the first nine months of 2002 to $139.0 million in the first nine months of
2003. Inpatient revenues increased by $5.1 million, or 5.3%, from $96.9 million
in the first nine months of 2002 to $102.1 million in the first nine months of
2003 as a result of a 5.4% increase in revenue per program on the same number of
average programs. Outpatient revenues remained flat from the first nine months
of 2002 to the first nine months of 2003, reflecting an 11.4% decrease in the
19 of 26
REHABCARE GROUP, INC.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2002 (Continued)
- ----------------
the average number of programs operated, offset by a 13.0% increase in the
average revenue per outpatient program.
Contract therapy revenues increased by 27.8% from $76.2 million in the
first nine months of 2002 to $97.4 million in the first nine months of 2003,
primarily reflecting a 22.6% increase in the average number of locations and a
4.2% increase in the average revenue per location. The increase in the average
revenue per location is primarily the result of same store growth and a
continued focus on opening larger locations.
Healthcare staffing revenues decreased from $211.7 million in the first
nine months of 2002 to $174.5 million in the first nine months of 2003(including
$1.1 million inter-company sales at market rates to the Company's program
management segment). Supplemental staffing revenues decreased by $35.7 million,
or 26.8%, from $133.2 million in the first nine months of 2002 to $97.5 million
in the first nine months of 2003, reflecting the consolidation of branch
locations in the first quarter of 2003 and a decline in the demand for staffing
agency services. The average number of branch locations decreased from 110 in
the first nine months of 2002 to 76 in the first nine months of 2003. The
decrease in supplemental staffing revenues is attributable to a 30.4% decrease
in weeks worked as a result of the consolidation of branch locations and a
decline in demand, partially offset by a 5.2% increase in average revenue per
week worked. The increase in revenue per week worked was a result of placing
more highly credentialed staff such as registered nurses as compared to
certified nurse assistants. Travel staffing revenues decreased by 1.9% from
$78.5 million in the first nine months of 2002 to $77.0 million in the first
nine months of 2003 primarily due to a 2.3% decrease in weeks worked as demand
slowed, partially offset by a 0.3% increase in revenue per week worked.
Cost and Expenses
Operating expenses (excluding provision for doubtful accounts) as a
percentage of operating revenues increased from 72.8% in the first nine months
of 2002 to 75.1% in the first nine months of 2003, primarily reflecting the
continued migration of the skill mix in our staffing division to more highly
credentialed professionals, lower productivity in the contract therapy division
due to a now completed complex information system conversion during the third
quarter 2003 and increased labor and benefit costs in all divisions. The
provision for doubtful accounts as a percentage of operating revenues decreased
from 0.8% in the prior year nine month period to 0.7% in the current nine month
period due to the improvement in the aging categories of the Company's accounts
receivables during the first and second quarters. Division selling, general and
administrative expenses as a percentage of operating revenues decreased from
13.4% in the first nine months of 2002 to 12.5% in the first nine months of 2003
primarily due to reductions in contract therapy and the outpatient division of
hospital rehabilitation services, partially offset by increases in the inpatient
division of hospital rehabilitation services and staffing. Corporate selling,
general and administrative expenses as a percentage of revenues were comparable
each of the nine month periods as restructuring and cost reduction efforts
maintained costs in relation to decreased revenues. Depreciation and
amortization expense as a percent of operating revenues increased to 1.6% from
1.5% due to depreciation expense recorded on additional capital expenditures.
In the hospital rehabilitation services division, operating expenses
(excluding provision for doubtful accounts) increased by 4.6%, or $4.0 million,
primarily reflecting increased salary-related expenses in both inpatient and
outpatient divisions as a result of higher workers compensation, professional
liability and health insurance expenses. The provision for doubtful accounts
20 of 26
REHABCARE GROUP, INC.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2002 (Continued)
- ----------------
as a percentage of operating revenues increased from 0.2% in the first nine
months of 2002 to 0.4% in the first nine months of 2003, primarily as a result
of the normal evaluation of the creditworthiness of the Company's clients.
Selling, general and administrative expenses for this division decreased as a
percentage of operating revenues from 9.0% to 8.7%, largely due to synergies
achieved in integrating inpatient and outpatient into one division. Corporate
general and administrative expenses, which represent allocations of corporate
office expenses based upon utilization by divisions, increased for the division
as a percentage of operating revenues from 4.5% to 4.7%. Depreciation and
amortization expense as a percentage of operating revenues decreased from 3.0%
in the first nine months of 2002 to 2.9% in the first nine months of 2003.
Operating earnings (earnings before interest and income taxes) in this division
increased from $23.2 million in the first nine months of 2002 to $23.7 million
in the first nine months of 2003.
In the contract therapy division, operating expenses (excluding provision
for doubtful accounts) increased by 36.4%, or $20.2 million, primarily due to
higher wage and salary-related expenses for therapists, a greater use of higher
cost contract labor, and lower productivity in the third quarter 2003 as a
result of a now completed complex information system conversion. The provision
for doubtful accounts as a percentage of operating revenues was comparable for
each period. Division selling, general and administrative expenses as a
percentage of operating revenues decreased from 10.2% in the first nine months
of 2002 to 9.2% in the first nine months of 2003, primarily as a result of
revenues increasing faster than selling, general and administrative expenses.
Corporate general and administrative expenses, which represent allocations of
corporate office expenses based upon utilization by divisions, also decreased
for the division as a percentage of operating revenues from 6.4% to 6.2%.
Depreciation and amortization expense as a percentage of operating revenues was
comparable for the two periods. Operating earnings (earnings before interest and
income taxes) in this division decreased by $1.8 million, or 28.4%, to $4.5
million.
In the staffing segment, operating expenses (excluding provision for
doubtful accounts) decreased 13.7%, or $22.5 million, due to lower volumes and
increases in certain categories of operating expense. Gross profit margins in
the supplemental staffing division decreased from 23.4% in the first nine months
of 2002 to 19.8% in the first nine months of 2003, while gross profit margins in
the travel division also decreased in the first nine months of 2003 to 18.3%
compared to 21.6% in the comparable nine months last year. These decreases in
gross profit margins are primarily the result of increased salary-related
expenses and changes within the travel division staff incentives. The provision
for doubtful accounts decreased by $1.1 million in the first nine months of 2003
compared to the first nine months of 2003, primarily as a result of the normal
evaluation of the creditworthiness of the Company's clients showing improvement
as supported by the improvement in accounts receivable aging. Division selling,
general and administrative expenses decreased $6.4 million, thus resulting in
comparable expenses as a percentage of operating revenues of 17.3% for both
periods. Corporate general and administrative expenses, which represent
allocations of corporate office expenses based upon utilization by divisions,
decreased for the division as a percentage of operating revenues from 4.8% in
the first nine months of 2002 to 4.5% in the first nine months of 2003.
Depreciation and amortization expenses as a percentage of operating revenues
increased from 0.6% in the first nine months of 2002 to 0.8% in the first nine
months of 2003 as costs remained approximately the same on a lower revenue base.
Operating earnings (earnings before interest and income taxes) in the staffing
group decreased by $4.9 million from a loss of $1.8 million in the first nine
months of 2002 to a loss of $6.7 million.
21 of 26
REHABCARE GROUP, INC.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2002 (Continued)
- ----------------
The restructuring charge represents severance and outplacement costs
associated with the reduction in force of 61 positions as well as costs
associated with closing five supplemental staffing branch offices. See Note 6. -
"Restructuring Costs" to the Condensed Consolidated Financial Statement.
Non-operating Items
Interest income decreased by $0.2 million when comparing the first nine
months of 2003 to the first nine months of 2002 as a result of decreased average
cash balances and interest rates.
Interest expense primarily represents commitment fees paid on the unused
portion of the line of credit and letter of credit fees. For the periods
compared, this expense increased slightly as a result of increased letters of
credit. The Company had no outstanding balance on the line of credit as of
September 30, 2003 and September 30, 2002.
Earnings before income taxes decreased by 28.6% to $19.6 million in the
first nine months of 2003 from $27.5 million in the first nine months of 2002.
The provision for income taxes was $7.8 million in the first nine months of 2003
compared to $10.4 million in the first nine months of 2002 representing
effective income tax rates of 39.8% and 38.0%, respectively. The effective tax
rate increase was largely the result of increased non-deductible meals provided
to traveling radiologists and nurses in relation to earnings before income
taxes. Net earnings in the first nine months of 2003 decreased to $11.8 million
as compared to $17.0 million the first nine months of 2002. Diluted net earnings
per share decreased by 24.3% from $0.95 in the first nine months of 2002 to
$0.72 in the first nine months of 2003. An 8.3% decrease in the weighted-average
shares outstanding was attributable primarily to the repurchase of 1.7 million
shares of common stock during the third quarter of 2002 and a smaller dilutive
effect of stock options resulting from a lower average stock price.
Regulatory Impact
The Medicare proposed "65 Percent Rule" is not expected to impact operating
results in 2003, as the final rule is not expected to be released until early
December 2003, with implementation no sooner than early 2004. The Company
typically does not make specific comments on the impact of proposed rulemaking
or legislation prior to final effectiveness as the impact often changes
significantly during the approval process. However, given the advanced stage of
this proposed rule and the evaluation of the potential impact completed by the
Company, the rule's impact is expected to result in an estimated decline in
discharges of zero to 3 percent in 2004 in our hospital rehabilitation services
division due to differing cost reporting periods. Mitigation strategies to
replace utilization through enhanced internal and external census development
would result in the decline in discharges being at the lower end of the range.
While the rule primarily affects the hospital rehabilitation services division,
the Company expects that the contract therapy division will potentially benefit,
as patients that cannot be served in the acute rehab setting may receive therapy
in the nursing home setting.
22 of 26
REHABCARE GROUP, INC.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2002 (Continued)
- ----------------
On September 1, 2003, the Medicare Part B therapy caps became effective,
which provide for a cap of $1,590 on certain Part B therapy services. These caps
will impact the Company's contract therapy division through the remainder of
2003. The division has been able to mitigate some of the impact of the caps
through therapy productivity improvements. However, because the caps may be
short-term in duration, the division has elected not to make more permanent
changes to its operating model.
Liquidity and Capital Resources
As of September 30, 2003, the Company reported $27.4 million in cash and
current marketable securities and a current ratio, the amount of current assets
divided by current liabilities, of 3.1 to 1. Working capital increased by $18.9
million to $86.8 million as of September 30, 2003 as compared to $67.8 million
as of December 31, 2002 due to an increase in current assets of $23.4 million
combined with an increase in current liabilities of $4.5 million. The increase
in current assets was primarily due to increased cash balances as a result of
cash generated from operations and an increase in accounts receivable and
deferred tax assets. Net accounts receivable were $90.6 million at September 30,
2003, compared to $87.2 million at December 31, 2002. The number of days'
average net revenue in net receivables was 61.8 and 57.7 at September 30, 2003
and December 31, 2002, respectively. The increase in deferred tax assets was
primarily due to an increase in accrued vacation, accrued workers compensation,
professional liability insurance and health insurance. The decrease in capital
expenditures in the current year as compared to the prior year was a result of
the completion of major system enhancements and implementations last year to
support the clinical operations of the Company. The increase in current
liabilities was primarily the result of an increase in health insurance accruals
and workers compensation and professional liability accruals and expenses offset
by a decrease in accounts payable and accrued salaries and wages.
The Company's operating cash flows constitute the Company's primary source
of liquidity and historically have been sufficient to fund working capital,
capital expenditures, internal business expansion and debt service requirements.
The Company expects to meet its future working capital, capital expenditures,
internal and external business expansion and debt service requirements from a
combination of internal sources and outside financing. The Company has a $125.0
million revolving line of credit with no balance outstanding as of September 30,
2003. The Company has $6.2 million in letters of credit issued to insurance
carriers as collateral for reimbursement of claims. The letters of credit reduce
the amount the Company may borrow under the line of credit. The Company also has
a $7.6 million promissory note issued to the Company's workers compensation
carrier as additional collateral. The promissory note is not recorded as a
liability on the balance sheet as it would only become payable upon an event of
default as defined in the security agreement with the workers compensation
carrier.
Item 3. - Quantitative and Qualitative Disclosures About Market Risks
- ---------------------------------------------------------------------
There have been no material changes in the reported market risks since the
filing of the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
Item 4. - Controls and Procedures
- ---------------------------------
As of September 30, 2003, the Company's Interim 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-15 (e) and 15d-15 (e) under the Securities Exchange Act of
1934, as amended). Based on that evaluation, the Company's Interim Chief
23 of 26
REHABCARE GROUP, INC.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2002 (Continued)
- ----------------
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 changes in internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II. - Other Information
- ----------------------------
Item 1 - Legal Proceedings
- --------------------------
The Company is subject to various claims and legal actions in the ordinary
course of business. These matters include, without limitation, professional
liability and employee-related matters and inquiries and investigations by
governmental agencies relating to Medicare or Medicaid reimbursement and other
issues.
In May 2002, the Company was 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 the Company. The
proposed class consists of persons who purchased shares of the Company's common
stock between August 10, 2000 and January 21, 2002. The plaintiffs filed an
amended complaint in December 2002 that focuses primarily on alleged weaknesses
in the software system selected by the Company's Staffing Group and the
purported negative effects of such systems on the healthcare staffing services
business operations. The Company's director and officer liability insurance
carrier has preliminarily accepted coverage of the action, including the payment
of defense costs after the satisfaction of the Company's deductible, subject to
the applicable limits of the policy. The court recently issued an order denying
the Company's motion to dismiss, without prejudice, while directing the
plaintiff to amend its complaint to present its claims with more particularity.
The Plaintiffs filed an amended complaint on November 7, 2003 and the Company
expects to file a new motion to dismiss in the near future.
In August 2002, each of the Company's directors was named as a defendant
and the Company was 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 similar events 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 filed a motion to
dismiss based primarily on the derivative plaintiff's failure to make a pre-suit
demand on the board, which was denied. The federal court hearing the securities
law class action stayed discovery in the derivative proceeding until discovery
commences in the federal securities law class action.
In February 2003, the Company was 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 was acquired in December 1999. On October 30, 2003, the parties
reached an agreement in principle whereby the plaintiff will release all claims
arising out of the agreement and the investment banking relationship against Mr.
Echales, the Company and all of its subsidiaries and affiliates, in exchange for
a lump sum payment to be paid by Mr. Echales, without contribution from the
24 of 26
Item 1 - Legal Proceedings (Continued)
- --------------------------------------
Company. Mr. Echales has also agreed to reimburse the Company for its attorney
fees and expenses incurred in this matter. The attorneys for the parties are in
the process of documenting a settlement agreement at this time.
In July, 2003 a civil Qui Tam action was filed against Baxter County
Regional Hospital, Inc. ("Baxter"), and the Company in the United States
District Court for the Eastern District of Arkansas, seeking treble damages,
civil penalties, back pay, and special damages. The allegations contained in the
suit, brought by a former independent contractor of the Company and a former
Baxter physical therapist, relate to the clinical diagnoses of patients treated
at the hospital's acute rehabilitation unit for Medicare reimbursement purposes.
The suit alleges that Baxter and the Company received reimbursement in excess of
$5,000,000. The original action was filed on August 21, 2000, under seal,
requiring an investigation by the United States Department of Justice. The
Company and Baxter fully cooperated with the Department's investigation and on
June 3, 2003, after completion of the investigation, the Department declined to
intervene and the seal was lifted. The Company and Baxter also initiated an
internal and external audit that concluded the allegations were unfounded and
that the Company and Baxter were in compliance with Medicare regulations. The
relators filed an amended complaint, and the Company was served and notified of
the civil allegations on July 15, 2003. The Company has agreed to indemnity
Baxter for certain fees and expenses on all counts except one, arising out of
the action. No discovery has been commenced in the case pending the court's
ruling on the defendant's motion to dismiss.
The Wage and Hour Division of the United States Department of Labor is
currently investigating whether persons employed as on call coordinators at
certain staffing branch locations were properly compensated for all hours
worked, and whether the entire time they were on call should be counted as hours
worked. The Company has advised the Wage and Hour Division that it believes on
call coordinators paid a flat fee per shift were properly compensated in
accordance with applicable federal law. The inquiry is limited to the period
from January 1, 2001 to the present. No final determination or position has been
taken by the Wage and Hour Division to date with respect to these matters.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See exhibit index
(b) Reports on Form 8-K
The Company has filed the following Current Reports on Form 8-K
during the period ended September 30, 2003:
Filing Date Description of Event
----------- --------------------
July 30, 2003 Item 9. Press release dated July 30, 2003,
announcing the Company's earnings for the second
quarter 2003
Item 9. Script for a conference call held by the
Registrant on July 30, 2003
September 3, 2003 Item 9. Text of Investor Relations Presentation
in use beginning September 3, 2003
25 of 26
SIGNATURES
Pursuant to the requirements 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.
REHABCARE GROUP, INC.
November 12, 2003
By: /s/ Vincent L. Germanese
-----------------------------
Vincent L. Germanese
Senior Vice President, Chief Financial
Officer and Secretary
26 of 26
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;
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)
31.1 Certification by Interim Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended
32.1 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
32.2 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
- -------------------------
EXHIBIT 31.1
CERTIFICATION
I, John H. Short, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
quarterly report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 12, 2003
By: /s/ John H. Short
--------------------------
John H. Short
Interim President and
Chief Executive Officer
RehabCare Group, Inc.
EXHIBIT 31.2
CERTIFICATION
I, Vincent L. Germanese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
quarterly report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 12, 2003
By: /s/ Vincent L. Germanese
-------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
RehabCare Group, Inc.
Exhibit 32.1
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 Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending September 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John H.
Short, Interim 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.
By: /s/ John H. Short
--------------------------
John H. Short
Interim President and
Chief Executive Officer
RehabCare Group, Inc.
November 12, 2003
* A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
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 Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending September 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Vincent
L. Germanese, Senior Vice President 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.
By: /s/ Vincent L. Germanese
-------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
RehabCare Group, Inc.
November 12, 2003
* A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.