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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 June 30, 2004
-------------
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 2300, 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 August 3, 2004
- -------------------------------------- -----------------------------
Common Stock, par value $.01 per share 16,285,468
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REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
June 30, 2004 (unaudited) and December 31, 2003 3
Condensed consolidated statements of earnings for the three months
and six months ended June 30, 2004 and 2003 (unaudited) 4
Condensed consolidated statements of cash flows for the
six months ended June 30, 2004 and 2003 (unaudited) 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. - Quantitative and Qualitative Disclosures about Market Risks 24
Item 4. - Controls and Procedures 24
Part II. - Other Information 25
Item 1. - Legal Proceedings 25
Item 6. - Exhibits and Reports on Form 8-K 27
Signatures 28
2 of 28
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)
June 30, December 31,
2004 2003
---- ----
Assets (unaudited)
------
Current assets:
Cash and cash equivalents $ 35,666 $ 28,320
Restricted cash 3,052 --
Marketable securities, available-for-sale -- 10,065
Accounts receivable, net of allowance for doubtful
accounts of $4,997 and $3,422, respectively 65,954 62,744
Income taxes receivable 2,202 --
Deferred tax assets 8,308 14,706
Other current assets 1,975 1,912
------- -------
Total current assets 117,157 117,747
Marketable securities, trading 3,887 3,665
Equipment and leasehold improvements, net 13,255 14,063
Excess of cost over net assets acquired, net 62,391 48,729
Intangible assets, net 10,208 48
Assets held for sale -- 46,171
Investment in unconsolidated affiliate 39,537 --
Other 3,225 3,203
------- -------
Total assets $249,660 $233,626
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 720 $ --
Accounts payable 1,390 763
Accrued salaries and wages 27,386 24,035
Accrued expenses 16,454 14,800
Income taxes payable -- 1,197
------- -------
Total current liabilities 45,950 40,795
Long-term debt, less current portion 3,540 --
Deferred compensation 3,915 3,682
Deferred tax liabilities 5,571 1,423
Liabilities held for sale -- 9,771
------- -------
Total liabilities 58,976 55,671
------- -------
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 20,286,866 shares and 20,144,577
shares as of June 30, 2004 and December 31,
2003, respectively 203 201
Additional paid-in capital 116,623 114,704
Retained earnings 128,562 117,753
Less common stock held in treasury at cost,
4,002,898 shares as of June 30, 2004 and
December 31, 2003 (54,704) (54,704)
Accumulated other comprehensive earnings -- 1
------- -------
Total stockholders' equity 190,684 177,955
------- -------
Total liabilities and stockholders' equity $249,660 $233,626
======= =======
See accompanying notes to condensed consolidated financial statements.
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REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Operating revenues $90,944 $136,043 $195,441 $274,885
Costs and expenses:
Operating expenses 64,643 102,215 140,710 206,905
Selling, general & administrative:
Divisions 7,863 17,137 17,536 35,427
Corporate 6,276 6,939 12,593 13,735
Restructuring (51) -- 1,615 --
Gain on sale of business -- -- (485) --
Depreciation and amortization 2,010 2,106 3,778 4,345
------ ------- ------- -------
Total costs and expenses 80,741 128,397 175,747 260,412
------ ------- ------- -------
Operating earnings 10,203 7,646 19,694 14,473
Interest income 55 29 111 43
Interest expense (266) (183) (483) (348)
Other income (expense), net (43) (53) (50) (73)
------ ------- ------- -------
Earnings before income taxes and
equity in net loss of affiliate 9,949 7,439 19,272 14,095
Income taxes 4,136 2,982 8,000 5,594
Equity in net loss of affiliate (110) -- (463) --
------ ------- ------- -------
Net earnings $ 5,703 $ 4,457 $ 10,809 $ 8,501
====== ======= ======= =======
Net earnings per common share:
Basic $ 0.35 $ 0.28 $ 0.67 $ 0.53
====== ======= ======= =======
Diluted $ 0.34 $ 0.27 $ 0.64 $ 0.52
====== ======= ======= =======
Weighted-average number of common
shares outstanding:
Basic 16,221 15,945 16,194 15,898
====== ======= ======= =======
Diluted 16,794 16,444 16,769 16,469
====== ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $ 10,809 $ 8,501
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,778 4,345
Provision for doubtful accounts 2,116 1,612
Equity in net loss of affiliates 463
Write-down of investment -- 50
Income tax benefit realized on employee
stock option exercises 894 583
Restructuring 1,615 --
Gain on sale of business (485) --
Change in assets and liabilities:
Accounts receivable, net (1,026) (695)
Prepaid expenses and other current assets (63) 192
Other assets 31 189
Net assets held for sale 1,903 --
Accounts payable and accrued expenses (655) 467
Accrued salaries and wages 2,073 (352)
Deferred compensation 369 (608)
Income taxes 4,245 346
------ ------
Net cash provided by operating activities 26,067 14,630
------ ------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (2,187) (2,397)
Purchase of marketable securities (1,291) (189)
Proceeds from sale/maturities of marketable securities 10,998 787
Increase in restricted cash (3,052) --
Disposition of business (3,931) --
Purchase of businesses, net of cash acquired (19,557)
Other, net (434) (342)
------ ------
Net cash used in investing activities (19,454) (2,141)
------ ------
Cash flows from financing activities:
Principal payments on long term debt (180) --
Exercise of stock options 913 1,452
------ ------
Net cash provided by financing activities 733 1,452
------ ------
Net increase in cash
and cash equivalents 7,346 13,941
Cash and cash equivalents at beginning of period 28,320 9,580
------ ------
Cash and cash equivalents at end of period $ 35,666 $ 23,521
====== ======
See accompanying notes to condensed consolidated financial statements.
5 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Six Month Periods Ended June 30, 2004 and 2003
(Unaudited)
Note 1. - Basis of Presentation
- -------------------------------
The condensed consolidated balance sheets and related condensed
consolidated statements of earnings, and cash flows contained in this Form 10-Q,
which are unaudited, include the accounts of RehabCare Group, Inc. and its
wholly owned subsidiaries (the "Company"). The Company accounts for its
investment in a less than 50% owned affiliate using the equity method. 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 six months ended June 30, 2004, are not
necessarily indicative of the results to be expected for the fiscal year.
Certain prior year amounts have been reclassified to conform to 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 U.S. generally
accepted accounting principles. Reference is made to the Company's audited
consolidated financial statements and the related notes as of December 31, 2003
and 2002 and for each of the years in the three-year period ended December 31,
2003, 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 Company's condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles.
Preparation of these 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 2003 Annual Report on Form 10-K, filed on March 12, 2004, in
the Critical Accounting Policies and Estimates section of "Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 3. - Stock-Based Compensation
- ----------------------------------
The Company accounts 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:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except per share data)
Net earnings, as reported $5,703 $4,457 $10,809 $8,501
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 1,029 1,083 1,865 2,181
----- ----- ------ -----
Pro forma net earnings $4,674 $3,374 $ 8,944 $6,320
===== ===== ====== =====
Basic net earnings per share: As reported $ 0.35 $ 0.28 $ 0.67 $ 0.53
==== ==== ==== ====
Pro forma $ 0.29 $ 0.21 $ 0.55 $ 0.40
==== ==== ==== ====
Diluted net earnings per share:As reported $ 0.34 $ 0.27 $ 0.64 $ 0.52
==== ==== ==== ====
Pro forma $ 0.28 $ 0.21 $ 0.53 $ 0.38
==== ==== ==== ====
Note 4. - Restricted Cash and Other Insurance Collateral Commitments
- --------------------------------------------------------------------
Under the terms of the Company's general and professional liability
insurance policy, the insurance carrier requires that we provide collateral for
reimbursement of claim payments. As one component of the collateral, we have
entered into a trust agreement with our insurance carrier under which we have
deposited $3.1 million for its benefit in an escrow account. Our access to this
cash is restricted and the insurance carrier may only draw on these funds in the
event of a default as defined in the trust agreement. The Company also has $10.0
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 against its $125 million line of credit. Finally, the Company has a $4.2
million prommissory note issued to its workers compensation carrier as
additional collateral. The prommissory note is not recorded as a liability on
the balance sheet as it only becomes payable upon an event of default as defined
in the workers compensation security agreement.
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).
7 of 28
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except per share data)
Numerator:
Numerator for basic/diluted net
earnings per share - net earnings
available to common stockholders $ 5,703 $ 4,457 $10,809 $ 8,501
====== ====== ====== ======
Denominator:
Denominator for basic net earnings
per share - weighted-average
shares outstanding 16,221 15,945 16,194 15,898
Effect of dilutive securities:
Stock options 573 499 575 571
------ ------ ------ ------
Denominator for diluted net
earnings per share - adjusted
weighted-average shares 16,794 16,444 16,769 16,469
====== ====== ====== ======
Basic net earnings per share $ 0.35 $ 0.28 $ 0.67 $ 0.53
====== ====== ====== ======
Diluted net earnings per share $ 0.34 $ 0.27 $ 0.64 $ 0.52
====== ====== ====== ======
Note 6. - Comprehensive Income
- ------------------------------
Comprehensive income for the three-month and six-month periods ended June
30, 2004 consisted only of net income. For the three-month and six-month periods
ended June 30, 2003, the Company's only adjustment from net income to
comprehensive income was the net of tax impact of unrealized holding gains on
marketable securities in the amount of $2,000 for each period.
Note 7. - Sale of Business
- --------------------------
On February 2, 2004, the Company completed the sale of its StarMed staffing
division to InteliStaf Holdings, Inc. ("InteliStaf") in consideration for
approximately 25% of InteliStaf on a fully diluted basis. The transaction was
effected as a purchase by InteliStaf of all of the outstanding common stock of
StarMed Health Personnel, Inc., the operating company for our staffing business.
At December 31, 2003, the assets and liabilities of StarMed were reported
as assets and liabilities held for sale and were recorded at their estimated
fair market value less estimated costs to sell. Upon consummating the sale on
February 2, 2004, the Company recorded a gain of $485,000 as a result of
adjusting the estimated costs to sell for then current information, recording a
liability for the estimated fair market value of the indemnification provided to
InteliStaf in accordance with the sale agreement and as a result of changes in
the underlying asset and liability balances between December 31, 2003 and
February 2, 2004. This gain will be subject to further refinement once the
closing balance sheet has been agreed to by the parties and all costs to sell
have been finalized. These adjustments are not expected to be material.
8 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
As stated above, as part of the sale agreement, the Company indemnified
InteliStaf from certain obligations and liabilities, whether known or unknown,
which arose out of the operation of StarMed prior to February 2, 2004. As of
June 30, 2004, the Company has approximately $1.0 million accrued for this
indemnification. This liability is reported in accrued expenses on the June 30,
2004 balance sheet.
Note 8. - Investment in Unconsolidated Affiliate
- ------------------------------------------------
As stated in note 7, the Company sold its StarMed staffing business to
InteliStaf on February 2, 2004 in exchange for a 25% interest in InteliStaf on a
fully diluted basis. The Company uses the equity method to account for its
investment in InteliStaf and recorded its initial investment at its fair value
of $40 million, as determined by a third party valuation firm. A summary of the
results of operations for the three months ended June 30, 2004 and the period
from February 2, 2004 to June 30, 2004 and financial position as of June 30,
2004 follows (dollars in thousands):
Period from
Three Months Ended February 2, 2004 to
June 30, 2004 June 30, 2004
------------- -------------
Net operating revenues $ 82,970 $144,681
Operating earnings (loss) 630 (958)
Net loss (305) (1,716)
June 30, 2004
-------------
Current assets $ 69,100
Noncurrent assets 101,873
-------
Total assets $170,973
=======
Current liabilities $ 37,268
Noncurrent liabilities 46,446
-------
Total liabilities $ 83,714
=======
The value of the Company's investment in InteliStaf at the transaction date
exceeded its share of the book value of InteliStaf's stockholders' equity by
approximately $17.8 million. This excess has been accounted for as excess cost
over net assets acquired (although reported as a component of investment in
unconsolidated affiliate) and will be reviewed for impairment in accordance with
the terms of APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock."
Note 9. - Restructuring Costs
- -----------------------------
On July 30, 2003, the Company announced a comprehensive multifaceted
restructuring program to return the Company to growth and improved
profitability. As a result of the restructuring plan, the Company recognized a
pre-tax restructuring expense of $1.3 million for severance, outplacement and
exit costs.
As reported in note 7, the Company sold its StarMed staffing division to
InteliStaf on February 2, 2004. In connection with this sale, the Company
initiated a series of restructuring activities to reduce the cost of corporate
overhead that had previously been absorbed by the staffing division. These
activities included the elimination of approximately 40 positions, exiting a
portion of leased office space at the Company's corporate headquarters and the
write-off of certain abandoned leasehold improvements associated with the office
space consolidation. In addition,
9 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
the Company modified the term of the stock options of certain StarMed employees
to allow them additional time to exercise vested options after leaving the
employment of the Company. This action triggered a new measurement date for the
modified options. The corresponding expense has been included in the severance
component of the restructuring charge. As a result of these actions, the Company
recorded a pre-tax restructuring charge in the first quarter of 2004 of
approximately $1.7 million.
During the second quarter of 2004, the Company reassessed the restructuring
reserve remaining related to the actions taken during the third quarter of 2003
and determined that the reserve for severance costs was in excess of the
remaining estimated costs. Accordingly, approximately $51,000 of the reserve was
reversed to income. Additionally, the Company determined that the reserve
remaining for lease exit costs was approximately $16,000 less than the remaining
expected costs. A portion of the excess severance cost reserve was reclassified
to the lease exit cost reserve.
The following table summarizes the year-to-date activity, through June 30,
2004, with respect to these restructuring activities:
(dollars in thousands)
Leasehold
Improvement
Severance Exit Costs Write-off Total
--------- ---------- --------- -----
Balance at December 31, 2003 $ 351 $ 145 $ -- $ 496
Restructuring charge 736 520 359 1,615
Reclassification (16) 16 -- --
Cash payments and
non-cash utilization (891) (91) (359) (1,341)
---- ---- ---- ------
Balance June 30, 2004 $ 180 $ 590 $ -- $ 770
==== ==== ==== ======
Note 10. - Business Combinations
- --------------------------------
On February 2, 2004, the Company purchased the assets of CPR Therapies,
Inc. ("CPR") for cash and notes. CPR, headquartered in Denver, Colorado, is a
contract therapy services company for physical rehabilitation services in
skilled nursing and assisted living facilities with a significant market
presence in Colorado and California. CPR's annual operating revenues are
approximately $9 million. The purchase price, including estimated direct
acquisition costs, of CPR has been allocated as follows (in thousands of
dollars):
Equipment and leasehold improvements, net $ 16
Identifiable intangibles, principally
trade name, customer relationships
and noncompete agreements 1,660
Excess of cost over net assets acquired 2,425
------
$ 4,101
======
In accordance with the terms of the purchase agreement, the seller is
entitled to additional earn-out consideration up to, but not exceeding,
$799,000. The payment of this earn-out is contingent upon the execution of new
therapy contracts as defined in the agreement. Any contingent consideration paid
as a result of this contract provision will be recorded at the time the
contingency is resolved.
Effective March 1, 2004, the Company purchased from Health Net, Inc. all of
the outstanding common stock of American VitalCare, Inc. and its sister company,
Managed Alternative Care, Inc. (collectively "VitalCare") for cash and notes.
VitalCare provides management services to hospital based specialty care units in
the state of California generating annual operating revenues of approximately
$14 million.
10 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
The purchase price, including estimated direct acquisition costs, of
VitalCare has been allocated as follows (in thousands of dollars):
Accounts receivable, net of allowance $ 2,978
Equipment and leasehold improvements, net 39
Other long-term assets 12
Identifiable intangibles, principally
trade name, customer relationships,
contractual customer relationships
and noncompete agreements 8,790
Excess of cost over net assets acquired 6,859
Net deferred tax liabilities (2,902)
Accounts payable (272)
Accrued wages and salaries (514)
------
$14,990
======
During the second quarter of 2004, the purchase price was adjusted based on
the balances contained in the closing balance sheet of VitalCare as agreed to by
the parties. This adjustment is reflected in the balances reported above. The
final purchase price may be further increased or decreased for an adjustment, as
defined in the agreement, related to the retention and/or termination of
customer contracts for a period of time after the purchase date.
On May 3, 2004, the Company purchased the assets of Phase 2 Consulting,
Inc. ("Phase 2") for cash. Phase 2, with offices in Salt Lake City and Austin,
is a management consulting firm to the healthcare industry with annual operating
revenues of approximately $8 million. The purchase price, including estimated
direct acquisition costs, has been allocated as follows (in thousands of
dollars):
Current assets $ 1,324
Long-term assets 96
Trade name 310
Excess of cost over net assets acquired 4,378
Accounts payable and accrued expenses (657)
------
$ 5,451
======
The purchase price is subject to modification based on a final settlement
of the closing balance sheet.
John Short, Ph.D., the managing director of Phase 2, is President and Chief
Executive Officer of the Company and a member of the Company's Board of
Directors.
The following pro forma information assumes the acquisitions of CPR,
VitalCare and Phase 2 occurred at the beginning of each of the three-month and
six-month periods presented. This information is not necessarily indicative
either of results of operations that would have occurred had the purchases
actually been made at the beginning of the periods presented, or of the future
results of the Company.
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands,except per share data)
Operating revenues $91,771 $144,489 $201,355 $291,127
Net earnings $ 5,837 $ 5,341 $ 11,123 $ 10,064
Diluted net earnings per share $ 0.35 $ 0.32 $ 0.66 $ 0.61
11 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 11. - Excess of Cost Over Net Assets Acquired and Other Intangible Assets
- ------------------------------------------------------------------------------
At June 30, 2004 and 2003, the Company had the following excess of cost
over net assets acquired and other intangible asset balances:
(dollars in thousands)
June 30, 2004 June 30, 2003
------------- -------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized Intangible Assets:
Noncompete agreements $ 320 $ (34) $ -- $ --
Contractual customer
relationships 8,800 (618) 100 (39)
----- ---- --- ---
Total $9,120 $ (652) $ 100 $ (39)
===== ==== === ===
Unamortized Intangible Assets:
Trade names $1,740 $ --
===== ===
Amortization expense was approximately $424,000 and $600,000 for the
quarter and six-month period ended June 30, 2004, respectively and approximately
$7,000 and $13,000 for the quarter and six-month period ended June 30, 2003,
respectively. Estimated annual amortization expense for the next 5 years is:
2004 - $1.5 million; 2005 - $1.7 million; 2006 - $1.7 million; 2007 - $1.0
million and 2008 - $0.8 million.
The changes in the carrying amount of excess of cost over net assets
acquired for the six months ended June 30, 2004 are as follows:
(dollars in thousands)
Hospital
Rehabilitation Contract
Services Therapy Other Total
-------- ------- ----- -----
Balance at December 31, 2003 $35,739 $12,990 $ -- $48,729
Acquisitions 6,859 2,425 4,378 13,662
------ ------ ----- ------
Balance June 30, 2004 $42,598 $15,415 $4,378 $62,391
====== ====== ===== ======
Note 12. - Long-term Debt
- -------------------------
As part of the purchases of CPR and VitalCare, the Company issued long-term
subordinated promissory notes to the respective selling parties. In the case of
CPR, the Company issued a promissory note with a face value of $1.44 million and
a stated interest rate of 8%. Principal is due in eight equal quarterly
installments starting on May 1, 2004 along with accrued but unpaid interest. On
June 30, 2004, the remaining principal balance on this note was $1.26 million.
In the VitalCare acquisition, the Company issued a promissory note with a face
value of $3 million and a stated interest rate of 7%. Interest is payable on
August 31, 2004, November 30, 2004 and August 31, 2005 and the principal is
payable in full on August 31, 2005.
12 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 13. - Industry Segment Information
- ---------------------------------------
Prior to February 2, 2004, when the Company sold its healthcare staffing
division, the Company operated in two business segments that were 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.
Virtually all of the Company's services are provided in the United States.
Summarized information about the Company's operations for the three months and
six months ended June 30, 2004 and 2003 in each industry segment is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Operating Revenues from (in thousands)
Unaffiliated Customers
- --------------------------
Program management:
Hospital
rehabilitation
services $ 48,518 $ 46,313 $ 95,605 $ 92,472
Contract therapy 41,028 32,914 81,782 63,840
------- ------- ------- -------
Program
management total 89,546 79,227 177,387 156,312
Healthcare staffing -- 57,194 16,727 119,310
Other 1,398 -- 1,398 --
------- ------- ------- -------
Subtotal 90,944 136,421 195,512 275,622
Less Intercompany
revenues* -- (378) (71) (737)
------- ------- ------- -------
Total $ 90,944 $136,043 $195,441 $274,885
======= ======= ======= =======
*Intercompany revenues represent healthcare staffing sales made to hospital
rehabilitation services and contract therapy at market rates.
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Operating Earnings (in thousands)
- --------------------------
Program management:
Hospital
rehabilitation
services $ 8,064 $ 7,943 $ 16,861 $ 15,017
Contract therapy 1,979 1,812 4,417 3,551
------ ------ ------ ------
Program
management total 10,043 9,755 21,278 18,568
Healthcare staffing -- (2,109) (78) (4,095)
Other 109 -- 109 --
------ ------ ------ ------
Subtotal 10,152 7,646 21,309 14,473
Restructuring charge 51 -- (1,615) --
------ ------ ------ ------
Total $ 10,203 $ 7,646 $ 19,694 $ 14,473
====== ====== ====== ======
13 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Depreciation and
Amortization (in thousands)
- -----------------------
Program management:
Hospital
rehabilitation
services $ 1,355 $ 1,305 $ 2,381 $ 2,772
Contract therapy 652 332 1,394 650
------ ------ ------ ------
Program
management total 2,007 1,637 3,775 3,422
Healthcare staffing -- 469 -- 923
Other 3 -- 3 --
------ ------ ------ ------
Total $ 2,010 $ 2,106 $ 3,778 $ 4,345
====== ====== ====== ======
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Capital Expenditures (in thousands)
- ------------------------
Program management:
Hospital
rehabilitation
services $ 477 $ 447 $ 1,137 $ 802
Contract therapy 486 354 1,037 630
------ ------ ------ ------
Program
management total 963 801 2,174 1,432
Healthcare staffing -- 682 -- 965
Other 13 -- 13 --
------ ------ ------ ------
Total $ 976 $ 1,483 $ 2,187 $ 2,397
====== ====== ====== ======
Excess of Cost Over Net
Total Assets Assets Acquired, Net
------------ -------------
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Program management:
Hospital
rehabilitation
services $152,865 $121,677 $ 42,598 $ 35,739
Contract therapy 50,913 38,037 15,415 12,990
------- ------- ------- -------
Program
management total 203,778 159,714 58,013 48,729
Healthcare staffing -- 86,885 -- 52,956
Other 6,345 -- 4,378 --
Corporate -
investment in
unconsolidated
affiliate 39,537 -- -- --
------- ------- ------- -------
Total $249,660 $246,599 $ 62,391 $101,685
======= ======= ======= =======
14 of 28
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 14. - Related Party Transactions
- -------------------------------------
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, President and Chief Executive Officer
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 was for $320,000 and
was later modified for additional costs of $34,500. The work on this project is
complete.
During the first quarter of 2004, the Company entered into an addendum to
the aforementioned contract with the same software vendor to identify and
document the actual costs and timeline required to complete the Company's
employee portal/HR center project. The addendum to the contract was for the
amount of $47,000 plus out of pocket expenses. The project was completed in the
second quarter of 2004. In addition, during the second quarter of 2004, the
Company engaged the software vendor in several other minor projects with a total
aggregate cost of less than $10,000.
During 2003, the Company entered into an agreement with Phase 2. Per the
terms of the agreement, Phase 2 provided 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 was paid to Phase 2 during the term of the agreement
plus reimbursement of business expenses. In addition, Phase 2 was entitled to an
incentive fee based on predetermined performance standards. On May 3, 2004, the
Company acquired Phase 2 and elected Dr. Short as President and Chief Executive
Officer of the Company. The advisory services agreement with Phase 2 was
terminated at that time. Prior to the termination of the contract, during the
first half of 2004, the Company recorded approximately $505,000 of expense under
this agreement and made payments to Phase 2 of approximately $700,000.
Prior to the Company's acquisition of Phase 2 on May 3, 2004, the Company
engaged Phase 2 for several consulting projects for services ranging from
long-term information technology strategy, staffing analysis and acquisition
target analysis, separate from the agreement described above. The total cost of
these projects, which were paid in full, was approximately $75,000.
As a result of Dr. Short's relationship to Phase 2, the terms and
conditions of the acquisition agreement between the Company and Phase 2 were
negotiated on behalf of the Company by the independent members of the Board of
Directors. The independent board members retained an independent financial
advisor to assist them during this process.
In accordance with the terms of the Transition Services Agreement between
the Company and InteliStaf, the Company agreed to provide certain accounting and
back-office services to InteliStaf until such time as those activities were
fully integrated by InteliStaf. These services are being billed at cost. During
the period from February 2, 2004, to June 30, 2004, the Company performed
services under this agreement with an aggregate cost of approximately $1.4
million. These costs have been netted against reimbursements from InteliStaf in
the Company's statements of earnings.
During the second quarter of 2004, the Company purchased air transportation
services from 55JS Limited, Co. in the amount of approximately $29,000. 55JS
Limited, Co. is owned by the Company's President and Chief Executive Officer,
John Short. The air transportation services are billed to the Company, at cost,
for hourly usage of the plane for Company business.
15 of 28
REHABCARE GROUP, INC.
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 our actual results in future
periods to differ materially from forecasted results. These risks and
uncertainties may include, but are not limited to, our ability to integrate
acquisitions and to implement client partnering relationships within the
expected timeframes and to achieve the revenue and earnings levels from such
acquisitions and relationships at or above the levels projected; the timing and
financial effect of restructuring efforts with respect to our continuing
businesses; changes in and compliance with governmental reimbursement rates and
other regulations or policies affecting our continuing businesses; our ability
to attract new client relationships or to retain and grow existing client
relationships through expansion of our hospital rehabilitation and contract
therapy service offerings and the development of alternative product offerings;
the future operating performance of InteliStaf Holdings, Inc., and the rate of
return that RehabCare will be able to achieve from its equity interest in
InteliStaf; the adequacy and effectiveness of our operating and administrative
systems; our ability and the additional costs of attracting administrative,
operational and professional employees; significant increases in health,
workers' compensation and professional and general liability costs; litigation
risks of our past and future business, including our ability to predict the
ultimate costs and liabilities or the disruption of our 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.
Results of Operations
- ---------------------
Prior to the divestiture of our StarMed Staffing division to InteliStaf
Holdings, Inc. on February 2, 2004, we derived our revenue from two business
segments: program management services for hospitals and skilled nursing
facilities and healthcare staffing services. The program management segment
includes hospital rehabilitation services (including inpatient acute
rehabilitation, skilled nursing units and outpatient therapy programs) and
contract therapy programs.
Selected Operating Statistics:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Hospital Rehabilitation Services
- --------------------------------
Operating Revenues (in thousands)
Inpatient $ 37,121 $ 33,778 $ 72,464 $ 67,915
Outpatient 11,397 12,535 23,141 24,557
------ ------ ------ ------
Total $ 48,518 $ 46,313 $ 95,605 $ 92,472
Average Number of Programs
Inpatient 145 134 138 136
Outpatient 42 49 43 50
--- --- --- ---
Total 187 183 181 186
Contract Therapy
- ----------------
Operating Revenues (in thousands) $ 41,028 $ 32,914 $ 81,782 $ 63,840
Average Number of Locations 572 455 554 443
Other
- -----
Operating revenues $1,398 -- $1,398 --
16 to 28
REHABCARE GROUP, INC.
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
- -----------------------------------------------------------------------------
Operating Revenues
Operating revenues during the second quarter of 2004 decreased by $45.1
million, or 33.2%, to $90.9 million compared to $136.0 million in the second
quarter of 2003. The revenue decline was primarily due to the sale of the
healthcare staffing division on February 2, 2004. Revenues for hospital
rehabilitation services and contract therapy increased 4.8% and 24.7%,
respectively in the second quarter of 2004 compared to the second quarter of
2003.
Hospital rehabilitation services revenue increased by 4.8% from $46.3
million in the second quarter of 2003 to $48.5 million in the second quarter of
2004. The revenue increase of $2.2 million was mostly attributable to the
acquisition of VitalCare on March 1, 2004 and increased average revenue
per unit, partially offset by a lower number of continuing same store units. The
average number of locations managed by the division during the quarter increased
2.2% from 183 in the second quarter of 2003 to 187 in the second quarter of
2004. The average revenue per location in the inpatient segment increased 1.4%
year-over-year from $251,700 to $255,200 per location. The average revenue per
location in the outpatient segment increased 6.5% year-over-year from $254,900
to $271,400 per location. Same store discharges in inpatient increased 6.7% as a
result of more effective community education and awareness; however, same store
outpatient visits decreased 3.7%.
Contract therapy revenue increased by 24.7% from $32.9 million in the
second quarter of 2003 to $41.0 million in the second quarter of 2004. While a
portion of the revenue increase, $2.7 million, is attributable to the
acquisition of CPR Therapies, LLC in the first quarter of 2004, the division's
business development sales efforts were the driving factor behind the revenue
increase. The average number of contract therapy locations managed by the
division during the quarter increased 25.7% from 455 in the second quarter of
2003 to 572 in the second quarter of 2004. The average revenue per location
decreased 1.0% year-over-year from approximately $72,400 to $71,700 per
location. The division realized strong growth in its same store book of business
for the periods being compared; however, the termination of several large,
mature programs in the second quarter and the smaller average size of the sixty
CPR Therapies, LLC facilities purchased led to a decrease in average revenue per
location.
Cost and Expenses
The ratios of operating expenses and selling, general and administrative
expenses as a percentage of revenues were significantly affected by the sale of
our healthcare staffing division on February 2, 2004. Historically, the
healthcare staffing division's operating and selling, general and administrative
expenses as a percentage of revenues were higher than our other divisions. As a
result, with the sale of that division, we experienced improvements in these
ratios on a year-over-year basis with the ratio of operating expenses to
revenues improving from 75.1% in the second quarter of 2003 to 71.1% in the
second quarter of 2004 and the ratio of selling, general and administrative
expenses as a percentage of revenues improving from 17.7% in the second quarter
of 2003 to 15.5% in the second quarter of 2004. These improvements were achieved
despite the fact that corporate selling, general and administrative expenses
were absorbed over a smaller revenue base during the second quarter of 2004.
Depreciation and amortization expense remained relatively flat at $2.0 million
in the second quarter of 2004 versus $2.1 million in the year ago quarter as
lower depreciation and amortization resulting from the sale of the healthcare
staffing division was partially offset by increased amortization on intangible
assets relating to the acquisitions of CPR Therapies and VitalCare.
17 of 28
REHABCARE GROUP, INC.
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
Corporate selling, general and administrative expenses decreased
approximately $0.6 million to $6.3 million in the second quarter of 2004 from
$6.9 million in the second quarter of 2003. This reduction was the result of
restructuring actions taken in the third quarter of 2003 and the first quarter
of 2004 to streamline and better align our corporate support activities with our
operating activities. We have not further reduced these costs as it is our
intention to grow our company to a substantially larger size, and some of the
remaining infrastructure will be needed to manage that growth. As these growth
plans come to fruition, we expect to re-deploy some of these costs. In the
interim, as a result of selling our healthcare staffing division, a number of
fixed costs that had previously been allocated to our three divisions are now
being allocated between just two. For the hospital rehabilitation services
division, corporate selling, general and administrative expenses increased from
$2.2 million to $3.0 million, or as a percentage of operating revenues from 4.8%
to 6.2%. In contract therapy, these costs increased from $1.9 million to $3.2
million, or as a percentage of operating revenues from 5.9% to 7.8%.
Total hospital rehabilitation services costs and expenses increased 5.4%
from $38.4 million in the second quarter of 2003 to $40.5 million in the second
quarter of 2004. As a percentage of net revenues, the division's direct
operating expenses decreased from 66.0% of net revenues to 65.3% of net revenues
year-over-year. The improvement in this ratio is primarily due to an increase in
management only contracts versus full staffing agreements. Hospital
rehabilitation services has continued to leverage its division selling, general
and administrative costs, which decreased as a percentage of revenues from 9.2%
in the second quarter of 2003 to 9.1% in the second quarter of 2004. Our
increased revenue supported the investment in our business development efforts.
Depreciation and amortization expense as a percentage of operating revenues
remained flat year-over-year at 2.8% as increased amortization expense for
certain intangible assets associated with the acquisition of VitalCare was
offset by lower allocated software amortization expense. The net effect of the
revenue growth, overall cost control improvements at the divisional level and
the allocation of additional corporate overhead from the second quarter of 2003
to the second quarter of 2004 was a $0.2 million increase in hospital
rehabilitation service's operating earnings (earnings before interest and income
taxes) from $7.9 million to $8.1 million.
Total contract therapy costs and expenses increased 25.6% from $31.1
million in the second quarter of 2003 to $39.0 million in the second quarter of
2004, which was due primarily to the increase in direct operating expenses
resulting from the increased number of contract therapy locations being managed
by the division. As a percentage of net revenues, the division's direct
operating expenses decreased from 78.3% of net revenues to 77.9% of net revenues
year-over-year. These decreased costs were brought about by therapist
productivity improvements and a reduced utilization of higher cost contract
labor; however, these improvements were partially offset by an increase in our
provision for doubtful accounts in the second quarter of 2004 to mitigate some
of the risk associated with a few specific accounts in our receivables
portfolio. Contract therapy has continued to leverage its division selling,
general and administrative costs, which decreased as a percentage of revenues
from 9.2% in the second quarter of 2003 to 7.9% in the second quarter of 2004 as
the division was able to continue increasing revenues at a rate faster than it
has increased its selling, general and administrative expenses. Depreciation and
amortization expense as a percentage of operating revenues increased
year-over-year from 1.0% to 1.6%. The increased expense is due to the
amortization of the division's proprietary information system implemented in the
second half of 2003, and the amortization related to certain
18 of 28
REHABCARE GROUP, INC.
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
intangible assets associated with the acquisition of CPR Therapies, LLC. The net
effect of the revenue growth, overall cost control improvements at the
divisional level and the allocation of additional corporate overhead from the
second quarter of 2003 to the second quarter of 2004 was a $0.2 million increase
in contract therapy's operating earnings (earnings before interest and income
taxes) from $1.8 million to $2.0 million.
Non-operating Items
Interest income increased marginally in the second quarter of 2004 versus
the second quarter of 2003 as a result of higher average cash and investment
balances partially offset by the effect of lower interest rates.
Interest expense is comprised of the commitment fees paid on the unused
portion of our line of credit, letter of credit fees and interest expense on the
subordinated notes issued in connection with the acquisitions of CPR Therapies
and VitalCare. Interest expense in the second quarter of 2004 was $0.3 million,
an increase of $0.1 million over the second quarter of 2003. This increase was
primarily the result of interest related to the aforementioned subordinated
notes. We had no outstanding balance against our line of credit as of June 30,
2004 or June 30, 2003.
Earnings before income taxes and equity in net loss of affiliate increased
$2.5 million or 33.7% to $9.9 million in the second quarter of 2004 from $7.4
million in the second quarter of 2003. The provision for income taxes was $4.1
million in the second quarter of 2004 compared to $3.0 million in the second
quarter of 2003, reflecting effective income tax rates of approximately 41.6%
and 40.1%, respectively. The effective tax rate increase was primarily the
result of non-deductible goodwill associated with the sale of the staffing
division in February 2004.
In connection with the sale of the staffing division to InteliStaf
Holdings, Inc., we received in return a 25% equity interest in InteliStaf. We
account for this investment using the equity method. For the second quarter of
2004, our share of InteliStaf's after tax net loss was approximately $0.1
million. InteliStaf's results, particularly operating revenues, have been
adversely impacted by the continuing slump in the healthcare staffing industry.
In addition, their results were negatively impacted by costs to integrate and
transition the acquired StarMed business activities.
Net earnings in the second quarter of 2004 increased to $5.7 million
compared to $4.5 million in the year ago period. Diluted net earnings per share
increased by 25.9% from $0.27 in the second quarter of 2003 to $0.34 in the
second quarter of 2004.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
- -------------------------------------------------------------------------
Operating Revenues
Operating revenues during the first six months of 2004 decreased by $79.5
million, or 28.9%, to $195.4 million compared to $274.9 million in the first six
months of 2003. The revenue decline was primarily due to the sale of the
healthcare staffing division on February 2, 2004. Revenues for hospital
rehabilitation services and contract therapy increased 3.4% and 28.1%,
respectively for the first six months of 2004 compared to the first six months
of 2003.
19 of 28
REHABCARE GROUP, INC.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
Hospital rehabilitation services revenue increased by 3.4% from $92.5
million in the six months ended June 30, 2003 to $95.6 million in the six months
ended June 30, 2004. The acquisition of VitalCare in the first quarter of 2004
contributed $4.5 million to the revenue increase. This increase and an increase
in average revenue per location were offset by a decline in the average number
of units operated in the first half of 2004. The average number of hospital
rehabilitation services locations managed by the division decreased 2.7% from
186 in the six months ended June 30, 2003 to 181 in the six months ended June
30, 2004. The average revenue per location in the inpatient segment increased
5.3% year-over-year from $499,300 to $525,800 per location. The average revenue
per location in the outpatient segment increased 9.9% year-over-year from
$493,600 to $542,500 per location. The increases in revenue per location were
primarily due to increased discharges in inpatient as a result of more effective
community education and awareness, and the closure of a number of smaller units
and increases of revenue per unit and volume of units per visit in outpatient.
Contract therapy revenue increased by 28.1% from $63.8 million in the six
months ended June 30, 2003 to $81.8 million in the six months ended June 30,
2004. While a portion of the revenue increase, $4.3 million, is attributable to
the acquisition of CPR Therapies, LLC in the first quarter of 2004, the
division's business development sales efforts were the driving factor behind the
revenue increase. The average number of contract therapy locations managed by
the division during the period increased 25.1% from 443 in the six months ended
June 30, 2003 to 554 in the six months ended June 30, 2004. The average revenue
per location increased 2.4% year-over-year from $144,100 to $147,600 per
location. This increase was the result of strong growth in the division's same
store book of business for the periods being compared; however, some of this
growth was offset by the termination of several large, mature programs in the
second quarter of 2004 and the smaller average size of the sixty CPR Therapies,
LLC facilities purchased in February of 2004.
Cost and Expenses
The ratios of operating expenses and selling, general and administrative
expenses as a percentage of revenues were significantly affected by the sale of
our healthcare staffing division on February 2, 2004. Historically, the
healthcare staffing division's operating and selling, general and administrative
expenses as a percentage of revenues were higher than our other divisions. As a
result, with the sale of that division, we experienced improvements in these
ratios on a year-over-year basis with the ratio of operating expenses to
revenues improving from 75.3% in the first six months of 2003 to 72.0% in the
first six months of 2004 and the ratio of selling, general and administrative
expenses as a percentage of revenues improving from 17.9% in the first half of
2003 to 15.4% in the first half of 2004. These improvements were achieved
despite the fact that corporate selling, general and administrative expenses
were absorbed over a smaller revenue base during the first half of 2004.
Depreciation and amortization expense decreased $0.5 million to $3.8 million in
the first six months of 2004 versus $4.3 million in the year ago period as lower
depreciation and amortization resulting from the sale of the healthcare staffing
division was partially offset by increased amortization on intangible assets
relating to the acquisitions of CPR Therapies and VitalCare.
20 of 28
REHABCARE GROUP, INC.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
Corporate selling, general and administrative expenses decreased
approximately $1.1 million to $12.6 million in the first six months of 2004 from
$13.7 million in the first six months of 2003. This reduction was the result of
restructuring actions taken in the third quarter of 2003 and the first quarter
of 2004 to streamline and better align our corporate support activities with our
operating activities. We have not further reduced these costs as it is our
intention to grow our company to a substantially larger size, and some of the
remaining infrastructure will be needed to manage that growth. As these growth
plans come to fruition, we expect to re-deploy some of these costs. In the
interim, as a result of selling our healthcare staffing division, a number of
fixed costs that had previously been allocated to our three divisions are now
being allocated between just two. For the hospital rehabilitation services
division, corporate selling, general and administrative expenses increased from
$4.3 million to $5.5 million, or as a percentage of operating revenues from 4.7%
to 5.8%. In contract therapy, these costs increased from $3.9 million to $6.1
million, or as a percentage of operating revenues from 6.2% to 7.5%.
Total hospital rehabilitation services costs and expenses increased 1.7%
from $77.5 million in the six months ended June 30, 2003 to $78.7 million in the
six months ended June 30, 2004. As a percentage of net revenues, the division's
direct operating expenses decreased from 67.0% of net revenues to 65.7% of net
revenues year-over-year. The improvement in this ratio is primarily due to an
increase in management only contracts versus full staffing agreements, partially
offset by an increase in our provision for doubtful accounts in the first six
months of 2004 as a result of our normal assessment of payment risk. Hospital
rehabilitation services has continued to leverage its division selling, general
and administrative costs, which decreased as a percentage of revenues from 9.1%
in the six months ended June 30, 2003 to 8.4% in the six months ended June 30,
2004. The savings in selling, general and administrative expenses was primarily
the result of consolidating and restructuring the inpatient and outpatient
division specific overhead activities. Depreciation and amortization expense as
a percentage of operating revenues declined year-over-year from 3.0% to 2.5%.
The decrease was primarily due to a decrease in the allocation of software
amortization to the division partially offset by an increase in amortization of
certain intangible assets associated with the acquisition of VitalCare. The net
effect of the revenue growth, overall cost control improvements at the
divisional level and the allocation of additional corporate overhead from the
six months ended June 30, 2003 to the six months ended June 30, 2004 was a $1.9
million increase in hospital rehabilitation service's operating earnings
(earnings before interest and income taxes) from $15.0 million to $16.9 million.
Total contract therapy costs and expenses increased 28.3% from $60.3
million in the six months ended June 30, 2003 to $77.4 million in the six months
ended June 30, 2004, which was due primarily to the increase in direct operating
expenses resulting from the increased number of contract therapy locations being
managed by the division. As a percentage of net revenues, the division's direct
operating expenses decreased from 78.0% of net revenues to 77.5% of net revenues
year-over-year. These decreased costs were brought about by therapist
productivity improvements and a reduced utilization of higher cost contract
labor; however, these improvements were partially offset by an increase in our
provision for doubtful accounts in the second quarter of 2004 to mitigate some
of the risk associated with a few specific accounts in our receivables
portfolio. Contract therapy has continued to leverage its division selling,
general and administrative costs, which decreased as a percentage of revenues
from 9.2% in the six months ended June 30, 2003 to 7.9% in the six months ended
June 30, 2004 as the division was able to continue increasing revenues at a rate
faster than it has increased its selling, general and administrative expenses.
Depreciation and amortization expense as a percentage of operating revenues
increased year-over-year from 1.0% to 1.7%. The increased expense is due to the
21 of 28
REHABCARE GROUP, INC.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
amortization of the division's proprietary information system implemented in the
second half of 2003, and the amortization related to certain intangible assets
associated with the acquisition of CPR Therapies, LLC. The net effect of the
revenue growth, overall cost control improvements at the divisional level and
the allocation of additional corporate overhead from the six months ended June
30, 2003 to the six months ended June 30, 2004 was a $0.8 million increase in
contract therapy's operating earnings (earnings before interest and income
taxes) from $3.6 million to $4.4 million.
During the first quarter of 2004, in connection with the sale of the
healthcare staffing division, we initiated a series of restructuring activities
to reduce the cost of corporate overhead that had previously been absorbed by
that division. These activities included the elimination of approximately 40
positions, the exiting of a portion of the leased office space at our corporate
headquarters and the write-off of certain leasehold improvements associated with
the office space consolidation. As a result of the actions, we recorded a
pre-tax restructuring charge in the first quarter of 2004 in the amount of
approximately $1.7 million. This charge was recorded as a separate component of
operating expenses.
At December 31, 2003, the assets and liabilities of our healthcare staffing
division were reported as assets and liabilities held for sale and were reported
at their estimated fair market value less estimated costs to sell. Upon
consummating the sale of this business on February 2, 2004, we recorded a gain
of $485,000 as a result of adjusting the estimated costs to sell for then
current information, recording a liability for the estimated fair market value
of the indemnification provided to InteliStaf in accordance with the terms of
the purchase and sale agreement and changing the underlying asset and liability
balances between December 31, 2003 and February 2, 2004.
Non-operating Items
Interest income increased marginally in the first six months of 2004 versus
the first six months of 2003 as a result of higher average cash and investment
balances partially offset by the effect of lower interest rates.
Interest expense is comprised of the commitment fees paid on the unused
portion of our line of credit, letter of credit fees and interest expense on the
subordinated notes issued in connection with the acquisitions of CPR Therapies
and VitalCare. Interest expense in the first half of 2004 was $0.5 million, an
increase of $0.2 million over the first half of 2003. This increase was
primarily the result of interest related to the aforementioned subordinated
notes. We had no outstanding balance against our line of credit as of June 30,
2004 or June 30, 2003.
Earnings before income taxes and equity in net loss of affiliate increased
$5.2 million or 36.7% to $19.3 million in the first six months of 2004 from
$14.1 million in the year ago period. The provision for income taxes was $8.0
million in the first half of 2004 compared to $5.6 million in the first half of
2003, reflecting effective income tax rates of approximately 41.5% and 39.7%,
respectively. The effective tax rate increase was primarily the result of
non-deductible goodwill associated with the sale of the staffing division in
February 2004.
22 of 28
REHABCARE GROUP, INC.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
In connection with the sale of the staffing division to InteliStaf on
February 2, 2004, we received in return a 25% equity interest in InteliStaf. We
account for this investment using the equity method. For the first six months of
2004, our share of InteliStaf's after tax net loss was approximately $0.5
million. InteliStaf's results, particularly operating revenues, have been
adversely impacted by the continuing slump in the healthcare staffing industry.
In addition, their results were adversely impacted by costs to integrate and
transition the acquired StarMed business activities.
Net earnings in the first six months of 2004 increased to $10.8 million
compared to $8.5 million in the year ago period. Diluted net earnings per share
increased by 23.1% from $0.52 in the first six months of 2003 to $0.64 in the
first six months of 2004.
Liquidity and Capital Resources
As of June 30, 2004, we had $35.6 million in cash and cash equivalents and
$3.1 million of restricted cash, and a current ratio, the amount of current
assets divided by current liabilities, of 2.5 to 1. Working capital decreased by
$5.8 million to $71.2 million as of June 30, 2004 as compared to $77.0 million
as of December 31, 2003 due primarily to an increase in current liabilities of
$5.2 million. The increase in current liabilities was primarily attributable to
accrued indemnification expenses for the sale of the staffing division, accrued
acquisition costs for CPR Therapies, VitalCare and Phase 2 and costs accrued for
restructuring. Net accounts receivable were $66.0 million at June 30, 2004,
compared to $62.7 million at December 31, 2003. The number of days' average net
revenue in net receivables was 65.8 and 72.0 (adjusted to exclude receivables
related to the staffing division) at June 30, 2004 and December 31, 2003,
respectively. Deferred tax assets decreased approximately $6.4 million primarily
due to the sale of the staffing division, which created a significant current
income tax benefit for the tax loss on the sale.
Operating cash flows constitute our primary source of liquidity and
historically have been sufficient to fund 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 June 30, 2004. We have approximately $10.0 million in
letters of credit issued to insurance carriers as collateral for reimbursement
of claims. The letters of credit reduce the amount we may borrow under the line
of credit. We also have a $4.2 million promissory note issued to our workers
compensation carrier as additional collateral. The promissory note is not
recorded as a liability on the balance sheet as it only becomes payable upon an
event of default as defined in the security agreement with the workers
compensation carrier. Finally, as additional collateral, we have a trust
agreement with our professional and general liability insurance carrier under
which we have deposited $3.1 million for their benefit in an escrow account. Our
access to this cash is restricted and the insurance carrier may only draw on
these funds in the event of a default as defined in the trust agreement.
As part of the purchases of CPR Therapies and VitalCare, we issued
long-term subordinated promissory notes to the respective selling parties. These
notes bear interest at rates ranging from 7%-8%. As of June 30, 2004,
approximately $4.3 million of these notes remained outstanding. In addition, as
part of our arrangement with Signature Healthcare Foundation, we extended a $2.0
million line of credit to Signature. At June 30, 2004, Signature had drawn
approximately $0.4 million against this line of credit.
23 of 28
REHABCARE GROUP, INC.
Regulatory Update
On April 30, 2004, the Centers for Medicare and Medicaid Services announced
a final rule revising criteria for classifying hospitals as inpatient
rehabilitation facilities. We know this rule as the "modified 75% Rule." This
final rule became effective for cost reporting periods beginning on or after
July 1, 2004. The rule provides for a three-year transition period with
increasing percentages of the total patient population that will be required to
have one of the qualifying medical conditions. Commencing on July 1, 2004, the
annual percentage phase-in will be 50%, 60%, 65% and finally 75% after July 1,
2007, assuming no further regulatory action is taken. We are in the process of
analyzing the provisions of this new rule and the impact it will have on our
long-term financial results. For 2004, we expect the rule will have a minimal
impact on our financial results.
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 significant accounting policies,
including the use of estimates, were presented in the notes to consolidated
financial statements included in our 2003 Annual Report on Form 10-K, filed on
March 12, 2004.
Critical accounting policies are those that are considered most important
to the presentation of our financial condition and results of operations,
require management's most difficult, subjective and complex judgments, and
involve uncertainties. Our most critical accounting policies pertain to
allowance for doubtful accounts, excess cost over net assets acquired and other
intangible assets and health, workers compensation and professional liability
insurance accruals. Each of these critical accounting policies was discussed in
our 2003 Annual Report on Form 10-K in the Critical Accounting Policies and
Estimates section of "Item 7. - Management's Discussion and Analysis of
Financial Condition and Results of Operations." There were no significant
changes in the application of critical accounting policies during the first six
months of 2004.
Item 3. - Quantitative and Qualitative Disclosures About Market Risks
- ---------------------------------------------------------------------
There have been no material changes in the reported market risks since the
filing of our Annual Report on Form 10-K for the year ended December 31, 2003.
Item 4. - Controls and Procedures
- ---------------------------------
As of June 30, 2004, 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, the Company's 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.
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REHABCARE GROUP, INC.
Part II. - Other Information
- ----------------------------
Item 1 - Legal Proceedings
- --------------------------
In May 2002, a lawsuit was filed in the United States District Court for
the Eastern District of Missouri against us and certain of our former and
current directors and officers. The plaintiffs allege violations of the federal
securities laws and the suit is certified as a class action. The class consists
of persons that purchased shares of our common stock between August 10, 2000 and
January 21, 2002. The case alleges weaknesses in the software systems selected
by our recently sold StarMed Staffing subsidiary, and the purported negative
effects of such systems on our business operations. The plaintiff filed a second
amended complaint in November 2003 after the District Court Judge's ruling that
the plaintiff must present its claims with more focus and "sufficient
particularity" before the court can entertain a motion to dismiss. A hearing on
our motion to dismiss was held on May 25, 2004 and a ruling is pending.
In August 2002, a derivative lawsuit was filed in the Circuit Court of St.
Louis County, Missouri against us and certain of our former and current
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 in the federal
case. We filed a motion to dismiss based primarily on the derivative plaintiff's
failure to make a pre-suit demand, which is pending. The federal court hearing
the securities law class action has stayed discovery in the derivative
proceeding until the federal court makes its ruling on our motion to dismiss.
In July 2003, a civil action was filed under the qui tam provisions of the
False Claims Act in the United States District Court for the Eastern District of
Arkansas, seeking treble damages, civil penalties, back pay, and special damages
from us and Baxter County Regional Hospital. The allegations contained in the
suit, brought by a former independent contractor of ours and a former Baxter
physical therapist, relate to the proper clinical diagnoses of patients treated
at the hospital's acute rehabilitation unit for Medicare reimbursement purposes,
for which Baxter received reimbursement in excess of $5,000,000. The original
action was filed on August 21, 2000, under seal, and an investigation by the
United States Department of Justice resulted in a department determination not
to intervene. We and Baxter also initiated an internal and external audit that
concluded the allegations were unfounded and that we and Baxter were in
compliance with Medicare regulations. We have agreed to indemnify Baxter for all
fees and expenses on all counts except one, arising out of the action. The court
recently denied both parties motions to dismiss and we have commenced discovery.
In February 2004, Bond International Software Group, Inc. filed a suit
against our former StarMed Staffing subsidiary in the United States District
Court for the Eastern District of Virginia. The suit alleged breach of contract
for licensed software and related development configuration, support and
maintenance servicing. On June 22, 2004, the parties reached an agreement in
principle pursuant to which we will pay $150,000 in cash to Bond and each party
will agree to release all claims against the other party related to this matter.
The definitive settlement and release is currently being negotiated and we
anticipate it will be signed shortly.
On May 7, 2004 we filed a civil action against The Queens Medical Center
("Queens"), in the U.S. District Court, District for Hawaii, for breach of
contract, including past due service fees in the amount of approximately
$300,000. On May 29, 2004, Queens filed a counterclaim against us, alleging
breach of contract and seeking indemnification in the aggregate amount of
approximately $1.3 million, which represents the total Queens alleges they paid
back to Medicare for erroneous billings with respect to the skilled nursing unit
we managed, additional management fees already paid to us and an estimate of
their attorney's fees.
25 of 28
REHABCARE GROUP, INC.
Item 1 - Legal Proceedings (Continued)
- --------------------------------------
The Wage and Hour Division of the United States Department of Labor has
been conducting an investigation of our former StarMed Staffing subsidiary. The
investigation is focused on minimum wage and overtime compensation of employees
who worked as on-call coordinators. Recently, the local office conducting the
investigation requested payroll information concerning office and field staff
employees (other than staffing coordinators and other exempt personnel) who
worked on-call shifts in addition to their regular duties. We are in the process
of assembling the information requested.
Several federal lawsuits have been filed by certain on-call and staffing
coordinators seeking overtime compensation and related damages. These
individuals were employed by our former staffing division. The individuals seek
to bring a collective or class action on behalf of all similarly situated
persons. Two of these cases have been consolidated in the United States District
Court for the Central District of California. A motion to consolidate a third
case is pending. Motions to proceed as a collective or class action have been
filed but have not yet been heard.
In addition to the above matters, we are a party to a number of other
claims and lawsuits. While these actions are being contested, the outcome of
individual matters is not predictable with assurance. 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. We do not believe that any liability
resulting from any of the above matters, after taking into consideration our
insurance coverage and amounts already provided for, will have a material
adverse effect on our 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.
26 of 28
REHABCARE GROUP, INC.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See exhibit index
(b) Reports on Form 8-K
The Company has filed or provided to the Securities and Exchange
Commission the following Current Reports on Form 8-K during the
period ended June 30, 2004:
Filing Date Description of Event
----------- --------------------
April 14, 2004 Item 5 Other Events and Regulation FD Disclosure -
Filed a modification to the RehabCare Group, Inc.
Second Amended and Restated 1996 Long Term
Performance Plan.
May 4, 2004 Item 5 Other Events and Regulation FD Disclosure -
Filed a press release dated May 3, 2004 announcing
the election of John H. Short, Ph.D. to President
and Chief Executive Officer of the Company and the
acquisition of Phase 2 Consulting, a healthcare
management consulting firm.
May 6, 2004 Item 9 Regulation FD Disclosure and Item 12
Results of Operations and Financial Condition -
Providing a press release dated May 6, 2004
announcing first quarter 2004 results of
operations and guidance for the full year 2004
and a script for the conference call with
investors held on May 6, 2004.
May 21, 2004 Item 9 Regulation FD Disclosure - Providing slides
to be used by the Company in investor relations
presentations.
June 2, 2004 Item 5 Other Events and Regulation FD Disclosure -
Filing a press release dated June 1, 2004
announcing the election of Joseph R. Swedish
to the Board of Directors of the Company.
27 of 28
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.
August 6, 2004
By: /s/ Vincent L. Germanese
--------------------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
28 of 28
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 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: August 6, 2004
By: /s/ John H. Short
-----------------------
John H. Short
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: August 6, 2004
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 June 30, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, John H. Short,
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
President and
Chief Executive Officer
RehabCare Group, Inc.
August 6, 2004
* 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 June 30, 2004 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.
By: /s/ Vincent L. Germanese
-------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
RehabCare Group, Inc.
August 6, 2004
* 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.