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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of
the SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-19294
RehabCare Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 51-0265872
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7733 Forsyth Boulevard, 17th Floor, St. Louis, Missouri 63105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (314) 863-7422
Securities registered pursuant to Section
12(b) of the Act: Name of exchange on which registered:
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (x)
The aggregate market value of voting stock held by non-affiliates of
Registrant at March 10, 1999, was $102,030,058. At March 10, 1999, the
Registrant had 6,527,082 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information contained in the Registrant's Proxy Statement for its annual meeting
of stockholders to be held April 30, 1999.
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PART I
ITEM 1. BUSINESS
General
RehabCare Group, Inc. (the "Company" or the "Registrant"), is a leading
manager of comprehensive medical rehabilitation, subacute (skilled nursing) and
outpatient therapy programs on a multi-year contract basis and contract therapy
services to hospitals and nursing homes. Therapy professionals employed by the
Company include licensed physical and occupational therapists and their licensed
assistants, as well as speech language pathologists. The Company believes the
locus of care in the communities where it has programs will continue to be the
acute-care hospital and, thus, it works primarily with acute-care hospitals to
deliver these programs with the goal of enhancing the overall economic viability
of the client facility. The Company's strategy is to use its expertise and
experience to provide its clients with an efficient and cost-effective means to
offer physical medicine and rehabilitation services in whatever setting is most
economically feasible while establishing long-term relationships with its
clients. Each of the product lines the Company offers is part of a post-acute
continuum directed at restoring functional independence and returning patients
to a residential setting.
On July 31, 1998, the Company acquired Rehabilitative Care Systems of
America, Inc. ("RCSA"), a manager of outpatient services for hospitals and
school districts, and merged it with its outpatient division. The Company
expanded on its 1997 entry into the contract therapy business through the
acquisition of Therapeutic Systems, Ltd. ("Therapeutic Systems") on September 9,
1998.
The Company also is a leading provider of therapists and nurses to
hospitals and long-term care and rehabilitation facilities on both an interim
and permanent basis. Traveling nurses and therapists are recruited and typically
work on assignment for 13 weeks, while per diem therapists and nurses fill
vacancies of 1 day to 13 weeks. On August 17, 1998, the Company acquired StarMed
Staffing, Inc. ("StarMed"), a provider of traveling and per diem nurses.
Historically, the Company has sought to broaden its service offerings,
both through internal growth and acquisition. The Company believes that the
acquisition of additional therapy-based contract management companies,
established outpatient operators and other therapy providers within the
rehabilitation industry and staffing companies is an appropriate strategy for
growth. Additional related acquisition opportunities are regularly reviewed by
the Company.
Industry Overview
Many healthcare providers are increasingly seeking to outsource a broad
range of services through contracts with product line managers. Outsourcing
allows healthcare providers to take advantage of the specialized expertise of
contract managers, thereby enabling providers to concentrate on the businesses
they know best, such as facility and nurse management. The trend toward lowering
the cost of healthcare by reducing lengths of stay has left most healthcare
providers with empty beds. Continued reimbursement pressures under managed care
and Medicare have driven healthcare providers to look for additional sources of
revenue. As overhead and operating cost constraints have come into place and
manpower has been reduced, outsourcing has become more important in order to
increase patient volumes and provide services at a lower cost without
sacrificing quality.
By outsourcing post-acute services, healthcare providers use specialty
contract managers such as the Company to:
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Utilize unused space - Post-acute services help hospitals utilize empty
wings of their facilities, which allows the hospital to recover the cost of
capital investment and overhead associated with the space.
Increased volumes - Patients needing less intensive treatment or
post-acute therapies who would have been referred to other venues for treatment
can now remain in the hospital setting, allowing hospitals to capture revenues
that would otherwise be realized by another provider. New patients are also
attracted to the hospital by new services.
Sign agreements with managed care organizations - Managed care
organizations find it more advantageous to sign a contract covering both acute
and post-acute services with one entity rather than several separate, often
unrelated entities. Contract managers may provide patient evaluation systems
that collect data on patients in each of their units showing the degree of
improvement and the related costs from the time the patient is admitted to the
post-acute program through the time of discharge. This is an important feature
to managed care organizations in controlling their costs while assuring
appropriate outcomes. Contract managers may often also have the ability to
capture and analyze this information from a large number of acute rehabilitation
and subacute units, which an individual hospital could not otherwise do on its
own without a substantial investment in specialized systems. Becoming part of a
managed care network helps the hospital attract physicians, and in turn, bring
more patients to the hospital.
Increase cost control - Because of their extensive experience in
post-acute product lines, contract managers can offer pricing structures that
effectively control a healthcare provider's financial risk related to the
service provided. Contract managers also frequently share in the financial risks
with their hospital clients of any losses the hospital incurs in connection with
starting the unit and reimbursement from payors. For hospitals using contract
managers, the result is often lower average costs per discharge than those of
self-managed programs. A hospital is able to increase its revenues without
having to increase its administrative staff or incur other fixed costs.
Recruit therapists - Although the supply of therapists has greatly
improved, therapists are still not readily available in many communities across
the nation. Contract managers often operate tele-recruiting departments with
recruiters whose job it is to match up candidates with therapist openings. They
will typically maintain close connections with therapy schools and attend
regional and national therapy association conferences several times a year.
Obtain reimbursement advice - The contract managers may also employ
reimbursement specialists who are available to assist client hospitals in
interpreting complicated regulations. These specialists analyze current
regulations and assist the hospital in complying with them, a highly valued
service in the current changing healthcare environment.
A shortage of medical professionals and providers' efforts to manage costs
by maintaining flexible staffing has created opportunities for traveling and per
diem staffing services. In reaction to reimbursement cuts under the Balanced
Budget Act of 1997 ("BBA"), nursing homes and providers of therapists to the
nursing home industry have reduced therapy staff, thus substantially reducing
the demand for therapy staffing companies. In contrast, the nurse staffing
business, a substantially larger market, is strong due to providers continuing
to maintain variable nurse staffing levels, an increase in the average age of
nurses, and an insufficient new supply of nursing graduates.
Services
The Company operates in two businesses that have fundamental differences
in operations: program management and staffing. Program management includes the
management of acute rehabilitation and skilled nursing units, outpatient
programs and contract therapy services. Staffing includes both traveling
(generally 13-week assignments) and per diem staffing of nurses and therapists.
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Acute Rehabilitation Units - Since its inception in 1982, the Company's
core business has been the staffing and management of acute rehabilitation units
within acute-care hospitals. The Company operates these units on a fee basis
that is computed in most cases based on patient days in the unit. The unit
typically consists of 20 beds and utilizes formerly idle space in the hospital.
It treats patients having primarily one of ten required diagnoses including
stroke, head injury or hip replacement. The Company typically provides staffing
and management of the unit including a program director, a physician, and the
clinical staff which may include a psychologist, physical and occupational
therapists, a speech pathologist, a social worker, a nurse manager, a case
manager and other appropriate supporting personnel. The unit affords the
hospital the ability to offer rehabilitation services to its patients, thus
retaining those patients who might otherwise be discharged to a setting outside
the hospital. This service line represented approximately 46% of the Company's
revenues in 1998. The Company plans to continue growing this part of its
business both through the signing of new contracts as well as through retention
of current clients. Re-signings of expiring acute rehabilitation contracts have
historically ranged from 80-90 percent.
Subacute Units - In 1994, the Company added the subacute service line in
response to client requests for management services and the Company's desire to
broaden its post-acute services. The subacute unit is located in the acute-care
hospital and is separately licensed as a skilled nursing unit, utilizing
formerly idle space in the hospital. This unit treats the patients who are at
the low end of need for medical or rehabilitative care, with greater need for
nursing care. These patients' diagnoses cover approximately 60 clinical
conditions including stroke, post-surgical conditions, pulmonary disease, burn,
cancer, congestive heart failure and wound management. The subacute unit makes
it possible for the patient to remain in a hospital setting where emergency
needs can be quickly met as opposed to being sent to a freestanding skilled
nursing facility. The Company provides administrative and nurse management. The
hospital benefits, once again, by retaining patients who would be discharged to
another setting, thereby capturing additional revenue and utilizing idle space.
This service line represented approximately 7% of the Company's revenues in
1998. Due to substantially lower reimbursement rates for skilled nursing
facilities and units under BBA, the Company has negotiated reduced rates for its
services and expects revenues in this line of business to decline in 1999
compared to 1998. The Company believes there is still opportunity to provide its
services to already existing subacute units that require professional management
in order to remain economically viable under prospective payment.
Outpatient Programs - The outpatient division furnishes primarily therapy,
program development and administrative personnel to hospital outpatient
departments, satellites and school districts. In 1998, RCSA was acquired and
merged into the outpatient division. Pressure from payors to move patients to
lower cost settings has helped fuel the growth in outpatient services.
Outpatient programs help bring patients into the hospital through the referral
development efforts in the community. These programs serve a younger population
reimbursed by commercial and managed care payors and treat mainly sports
medicine and workers compensation patients. The service line helps hospitals
compete with freestanding clinics. The Company's programs are always conducted
on the client hospital's campus or in satellite locations controlled by the
hospital. In 1998, this product line represented approximately 8% of the
Company's revenues. The Company plans to increase this line of business by
signing additional contracts with hospitals as well as purchasing existing
outpatient facilities in partnership with its hospital clients.
Contract Therapy - In 1997, the Company, through acquisitions, added
contract therapy to its product lines. In September 1998, the Company expanded
this product line through the acquisition of Therapeutic Systems. Contract
therapy is the management and delivery of services, including providing
therapists, in long-term care settings. Contract therapy revenues in 1998
accounted for approximately 7% of the Company's business. Contract therapy
affords the client the opportunity to fulfill their recurring need for
therapists on a part-time basis without the need to add full-time staff. The
introduction of a prospective payment system for skilled nursing facilities and
units has created a demand for the Company's management systems and expertise,
including utilization of services and controlling costs. The Company plans to
grow this service line both through additional contracts as well as
acquisitions.
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Traveling Therapists and Nurses - In March 1996, RehabCare acquired
Healthcare Staffing Solutions, Inc. ("HSSI"), located in Lowell, Massachusetts,
thereby entering the therapy staffing business. Through its Health Tour
division, HSSI recruits and relocates physical, occupational and speech
therapists to hospitals and long-term care facilities for typically 13-week
assignments (traveling therapists). The enactment of the BBA, which established
a prospective payment system for skilled nursing facilities and units has
significantly reduced the demand for traveling therapists. In response to this
decline, HSSI entered the nurse staffing business, a market significantly larger
than the therapist market. In August 1998, the Company acquired StarMed, a
provider of traveling and per diem nurses, subsequently merging its traveling
division, which represented 25% of StarMed's business, with HSSI's traveling
therapy division. Business from traveling therapists and nurses accounted for
approximately 17% of the Company's 1998 revenues. Growth of this business is
planned primarily by increasing the number of traveling therapists and nurses on
assignment.
Per Diem Staffing - In 1997, HSSI entered the per diem staffing business
which provides short-term assignments ranging from 1 day to 13 weeks to fill
vacancies typically resulting from turnover, vacation, maternity and sick leave.
Per diem staffing is a localized market business. The acquisition of StarMed
added 35 local offices providing per diem nurse staffing. Growth of this
business is planned by increasing the number of per diem offices and leveraging
those offices to furnish both therapy and nurse staffing services. The per diem
staffing business accounted for approximately 15% of the Company's 1998
revenues.
Expansion Strategy
The Company's expertise is in the management of quality acute, subacute
and outpatient rehabilitation and therapy programs and contract therapy
services, and in the provision of quality clinical personnel to healthcare
facilities. Drawing on this expertise, the thrust of its expansion strategy will
be to develop and expand contract relationships with host facilities to
establish and manage acute, subacute and outpatient physical medicine and
rehabilitation programs, and contract therapy services as well as increasing its
per diem staffing offices and traveling nurses and therapists. Acute-care
hospitals have traditionally been the locus of healthcare delivery in the
community and, as such, have controlled a substantial amount of the expenditures
for healthcare services. As healthcare reform evolves, the Company believes that
hospitals will continue to play a central role in the delivery of healthcare
services, provided that they can achieve cost efficiencies and offer a complete
range of services required within their communities. To this end, the Company
has positioned itself to assist hospitals in providing the full continuum of
physical medicine and rehabilitation services within acute, subacute and
outpatient settings controlled by the hospital. The economies of scale offered
by the hospital's existing plant and equipment, coupled with the Company's
expertise in delivering these services, offers the opportunity for a community
hospital to be a full service provider in the area of physical medicine and
rehabilitation on a cost-effective basis.
Business Development
The Company's program management sales force focuses on generating new
accounts and making follow-on sales. It has nine regional development officers
who are responsible for cultivating relationships with prospective clients. In
addition, the Company's officers play an integral role in the Company's
marketing efforts. With a broad range of services, the Company has significant
opportunity to expand within its existing client base. Further, cross-selling
more than one product line strengthens the Company's relationships with its
clients.
The staffing division's ability to expand its per diem offices, by
controlling start-up costs and reaching profitability quickly, facilitates rapid
growth. The ability to cross-sell therapy per diem staff from existing StarMed
offices, and to generate leads for travel and permanent therapists, allows more
efficient use of overhead.
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Competition
The Company's program management division has no direct competitors
offering all the same program services although other companies may offer one or
more of the same services. The Company competes with other contract management
and therapy companies for agreements with acute-care hospitals and extended care
facilities. The Company's programs in acute-care hospitals also compete for
patients with the programs of other acute-care hospitals, freestanding
rehabilitation, skilled nursing and outpatient facilities. Among the principal
competitive advantages the Company believes it has are a reputation for quality,
cost effectiveness, a proprietary outcomes management system, innovation and
price. The Company also competes with hospitals, nursing homes, clinics,
physicians' offices and contract therapy companies for the services of physical,
occupational and speech therapists. The Company's staffing division competes
with a number of private and public companies and believes its strategic
advantage is its diversity of staffing solutions, ranging from single shift, to
a 13 week assignment, to permanent placement, which is attractive to clients and
prospective employees.
Regulation
The healthcare industry is regulated by Federal, state and local
governmental agencies. These regulations attempt to control the number of
healthcare facilities through certificate of need laws, licensure or
certification of healthcare facilities and the reimbursement for healthcare
services.
In many states, acute-care hospitals contracting with the Company
generally are not required to obtain a certificate of need prior to opening an
inpatient unit. If a certificate of need is required, the process may take up to
12 months or more depending upon the state involved. The application may be
denied if contested by a competitor or the state agency. Certificates of need
are usually issued for a specified maximum expenditure and require
implementation of the proposed improvement within a specified period of time.
Licensure is a state or local requirement, while Medicare certification is
a Federal requirement. Generally, licensure and Medicare certification follow
specific standards and requirements. Compliance is monitored by annual on-site
inspections by representatives of relevant government agencies. Loss of
licensure or Medicare certification by a hospital with which the Company has a
management contract would likely result in the termination of that contract.
Prior to 1983, Medicare provided for reimbursement of reasonable direct
and indirect costs of the services furnished by hospitals to patients. As a
result of the Social Security Amendments Act of 1983, Congress adopted the
Prospective Payment System ("PPS") as a means to control costs of most Medicare
inpatient hospital services. Under this system, the Secretary of the Department
of Health and Human Services established fixed payment amounts per discharge
based on Diagnosis-Related Groups ("DRG"). In general, a hospital's payment for
Medicare inpatients is limited to the DRG rate, regardless of the amount of
services provided to the patient or the length of the patient's hospital stay.
Under PPS, a hospital may keep any difference between its DRG payment and its
operating costs incurred in furnishing inpatient services, but is at risk for
any operating costs that exceed its payment rate. As a result, hospitals have an
incentive to discharge Medicare patients as soon as is clinically appropriate.
Inpatient rehabilitation units, skilled nursing units and outpatient
rehabilitation services have historically been exempt from PPS. Acute
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS, generally after the first year of operation, upon
satisfaction of specified Federal criteria. Such criteria include the operation
for a full 12 months under PPS and the completion of an initial exemption
survey. The exemption survey measures compliance with certain criteria
applicable to exempt units generally, including approval to participate as a
Medicare provider, admission standards, record keeping, compliance with state
licensure laws, segregation of beds, accounting standards and certain specific
standards applicable to rehabilitation units, including staffing, medical care
and patient mix. Upon successful completion of the survey, Medicare payments for
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rehabilitation provided in inpatient units are made under a cost-based
reimbursement system.
In 1997, Congress enacted the BBA, which includes numerous changes to the
Medicare system. These changes include various reductions in payments under the
current cost-based reimbursement system, the implementation of a prospective
payment system for skilled nursing facilities and units ("SNU-PPS") that is
being phased in starting July 1998 and a prospective payment system for acute
rehabilitation facilities and units to be phased in over two years starting in
late 2000. By January 1, 1999, substantially all of the Company's managed
subacute units were fully phased in under SNU-PPS. Although specifics of other
prospective payment systems are not yet available, the changes will almost
certainly favor low-cost, efficient providers. The Company believes that its
strategy of administering programs on the premises of host facilities positions
it well for the changing reimbursement environment.
Various Federal and state laws regulate the relationship between providers
of healthcare services and physicians. These laws include the "fraud and abuse"
provisions of the Social Security Act, under which civil and criminal penalties
can be imposed upon persons who pay or receive remuneration in return for
referrals of patients who are eligible for reimbursement under the Medicare or
Medicaid programs. The Company does not believe its business arrangements are
out of compliance with these provisions. The provisions are broadly written and
the full extent of their application is not currently known. The Inspector
General of the Department of Health and Human Services has issued "safe harbor"
regulations specifying certain forms of relationships that will not be deemed
violations of these provisions. The Company believes that its business
arrangements are in compliance with any definitive regulations.
In recognition of the importance of achieving and maintaining regulatory
compliance, the Company has established a Corporate Compliance Program
("Program") to establish general standards of conduct and procedures that
promote compliance with business ethics, regulations, law and accreditation
standards. In its design, the Company has established compliance standards and
procedures to be followed by its employees and other agents that are reasonably
capable of reducing the prospect of criminal conduct, and has designed systems
for reporting and auditing of potentially criminal acts. A key element of the
Program is the ongoing communication and training of employees and agents such
that it becomes a part of the day to day business operations. A compliance
committee consisting of representatives of both designated members of Company
management and the Company's Board of Directors has been established to oversee
implementation and ongoing operations of the Program, to enforce the Program
through appropriate disciplinary mechanisms, and to ensure that all reasonable
steps are taken to respond to an offense and to prevent further similar
offenses. The Company is not aware of the existence of any current activities on
the part of any of its employees that would not be materially in compliance with
this Program and has undertaken the Program in an effort to enhance the
prospects of continued compliance.
Employees
As of December 31, 1998, the Company had approximately 7,500 employees.
The physicians who are the medical directors of the contract units are
independent contractors and not employees of the Company. Nurses and therapists
in the staffing division may be on either the Company's or client's payroll.
None of the Company's employees are subject to a collective bargaining
agreement. Management considers the relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company currently leases 26,000 square feet of executive office space
in Clayton, Missouri, under a lease that expires in the year 2008, assuming all
options to renew are exercised. In addition to the monthly rental cost, the
Company is also responsible for specified increases in operating costs. HSSI
leases 32,000
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square feet of executive office space in Lowell, Massachusetts, under a lease
that expires in the year 2002, assuming all options to renew are exercised, plus
leases various properties throughout the country used as temporary housing for
traveling therapists and nurses. StarMed leases 9,000 square feet of executive
office space in Clearwater, Florida, under a lease that expires in 2002, plus
leases various office space for its per diem staffing businesses throughout the
country.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Information concerning the Common Stock of the Registrant is included on
page 40 in this Annual Report of the Registrant for the year ended December 31,
1998.
ITEM 6. SELECTED FINANCIAL DATA
Six-Year Financial Summary is included on page 40 in this Annual Report of
the Registrant for the year ended December 31, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company changed its fiscal year end from the last day of February to
December 31, effective as of December 31, 1996. The change resulted in a short
period of ten months that began March 1, 1996, and ended December 31, 1996.
The growth in the Company's operating revenues and net earnings during
1998 was the result of an increase in the number of acute, subacute and
outpatient programs, and growth from acquisitions. The 1998 results reflect an
increase in the average number of inpatient units from 110 to 128, an increase
in the average number of outpatient units managed by the Company from 18 to 26,
an increase in contract therapy locations from 44 to 67, and increased nursing
weeks worked due to the acquisition of StarMed. The growth for 1997 was
primarily attributable to an increase in acute and subacute units plus increased
therapy weeks worked at HSSI. The growth for 1996 reflects the increase in the
number of subacute units and results from the acquisition of HSSI.
In the normal course of business, new units are opened and some existing
units are closed each year. During the first year of operation, a new acute
rehabilitation unit will typically be subject to limitations in reimbursement
from Medicare considerably below the hospital's operating cost. As a
consequence, during this period the Company agrees with the client hospital to
bear certain costs on the hospital's behalf and to waive a portion of its fees
until the unit qualifies for an exemption from Medicare limitations. The Company
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assists the hospital in qualifying the unit for the exemption and in minimizing
the unreimbursed costs during this non-exempt period. The Company's average
operating losses during the qualifying period can range to as high as $150,000
to $200,000 per unit. If the Company does not obtain an exemption for the unit,
the contract may be terminated and, in the event of termination, losses would
generally not be recoverable. Upon completion of the qualifying year and
obtaining the exemption, the hospital is eligible to recover all of its costs
related to the operation of the unit, including the Company's fees under the
management contract. Once a unit becomes exempt, the unit experiences
accelerated growth in operating revenues and profitability as the patient
population is expanded in response to the more favorable reimbursement terms.
Subacute units and outpatient programs are not subject to the same
limitations in reimbursement from Medicare as acute rehabilitation units and,
therefore, should result in significantly reduced start-up losses per unit. In
1997, Congress enacted changes to the Medicare regulations calling for the
implementation of SNU-PPS that is being phased in commencing in July 1998. As of
January 1, 1999, substantially all of the Company's managed skilled nursing
units were wholly under SNU-PPS.
In March 1996 the Company acquired HSSI. The aggregate purchase price of
$21,450,000 paid at closing included $13,258,000 in cash, a $6,000,000 ten-year
convertible subordinated promissory note and 185,295 shares of the Company's
common stock. Additional consideration will be paid to the former HSSI
stockholders contingent upon the attainment of certain target cumulative
earnings before interest and income taxes up to a maximum of $8,800,000 in
additional consideration over six years. In 1998 and 1997, $2,104,000 and
$1,000,000, respectively, of additional consideration was paid to the former
owners of HSSI.
On January 28, 1997, the Company acquired TeamRehab, Inc. and Moore
Rehabilitation Services, Inc. ("Team and Moore"), a provider of contract
therapy. On June 12, 1997, the Company acquired Rehab Unlimited, Inc. and the
assets of Cimarron Health Care, Inc. and merged them into Team and Moore. The
aggregate purchase prices for these acquisitions paid at closing was $6,950,000,
consisting of $4,275,000 in cash, $1,825,000 in subordinated promissory notes
and 54,151 shares of the Company's common stock. Additional consideration will
be paid to the former Team and Moore stockholders contingent upon the attainment
of certain target cumulative earnings before interest and income taxes, up to a
maximum of $2,400,000 in additional consideration over four years. In 1998,
$301,000 of contingent consideration was paid to the former owners of Team and
Moore.
On January 31, 1997, the Company made a tender offer to purchase up to
1,387,500 shares of its common stock at a single purchase price, not less than
$13.33 nor in excess of $15.00 per share. The actual purchase price was
determined based on the lowest single purchase price at which stockholders
tendered shares that was sufficient to purchase 1,387,500 shares. As of February
28, 1997, the closing date, shares totaling greater than 1,387,500 were
tendered, resulting in the Company's repurchase on March 12, 1997, of a total of
1,499,932 shares at the single per share price of $15.00 per share. The
repurchase was financed by an increase in the bank term loan and revolving
credit facility.
On July 31, 1998, the Company acquired RCSA for consideration consisting
of cash and stock. On August 17, 1998, the Company acquired StarMed and certain
related entities for cash from Medical Resources, Inc. On September 9, 1998, the
Company acquired Therapeutic Systems for consideration consisting of cash, stock
and notes. The aggregate purchase prices for these acquisitions paid at closing
was $41,150,000, consisting of $37,950,000 in cash, 130,426 shares of stock and
$1,000,000 in subordinated notes. An additional $2,000,000 in cash consideration
in the purchase of StarMed has been deferred until certain contingencies expire
and is secured by a bank letter of credit held by a third-party escrow agent.
Additional consideration may be paid to the former stockholders of RCSA,
contingent upon the retention of clients and Therapeutic Systems, contingent
upon the attainment of certain financial goals over the next three years, of up
to $4,950,000. The cash purchase prices were funded through borrowings made
available by an increase in the Company's bank credit facility to $90,000,000.
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The acquisitions have been accounted for by the purchase method of accounting,
whereby their operating results are included in the Company's results of
operations commencing on the respective dates of acquisition.
RESULTS OF OPERATIONS
The following table sets forth for 1998, 1997 and the ten months ended
December 31, 1996, the percentage that certain items in the consolidated
statements of earnings bear to operating revenues:
Ten Months Ended
Year Ended December 31, December 31,
- ------------------------------------------------- ------------------------------------------ -----------------
1998 1997 1996
- ------------------------------------------------- ----------------------- ------------------ -----------------
Operating revenues 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses 69.5 68.9 71.1
General and administrative 17.3 17.0 16.1
Depreciation and amortization 1.9 2.3 2.6
Operating earnings 11.3 11.8 10.2
Gain on sale of marketable securities .7 .9 --
Other expense, net (1.4) (1.6) (1.0)
Earnings before income taxes and cumulative
effect of change in accounting principle 10.6 11.1 9.2
Income taxes 4.3 4.5 3.7
Earnings before cumulative effect of change in
accounting principle 6.3 6.6 5.5
Cumulative effect of change in accounting for
start-up costs, net of tax (0.4) -- --
Net earnings 5.9% 6.6% 5.5%
====================================================== ============= ===================== ===================
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended
December 31, 1997
Operating revenues in 1998 increased by $46,636,000, or 29.0%, to
$207,416,000 as compared to 1997. Acquisitions accounted for 89.2% of the net
increase. Inpatient unit revenue increased by $14,225,000. A 16.2% increase in
the average number of inpatient units from 110.3 to 128.2 units, and an increase
in the average daily billable census per inpatient unit of 6.1% from 13.2 to
14.0, generated a 23.3% increase in billable patient days to 656,363 and a 14.6%
increase in revenue from inpatient units. The increase in billable census per
unit for inpatient units is primarily attributable to a 10.4% increase in
admissions per unit, offset by a 3.8% decline in average billable length of
stay. The decline in average length of stay reflects both the continued trend of
reduced rehabilitation lengths of stay and the increase in subacute units
operational in 1998, which carry a shorter length of stay than acute
rehabilitation units. The increase in billable patient days was offset by a 7.1%
decrease in average per diem billing rates, reflecting a greater mix of subacute
units which carry lower average per diem rates than acute units and lower per
diem billing rates for subacute units subject to the BBA. Outpatient revenue
increased 74.8% to $16,484,000, reflecting $1,164,000 from the July 1998
acquisition of RCSA, plus an increase in the average number of outpatient
clinics managed from 17.9 to 26.1 and an increase in units of service per
clinic. Contract therapy revenue increased 66.6% to $13,921,000, reflecting
$2,621,000 from the acquisitions of Team and Moore and Rehab Unlimited, and
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$3,935,000 from the acquisition of Therapeutic Systems in September 1998.
Staffing revenue increased 43.5% to $66,597,000, reflecting the addition of
$34,293,000 in nurse staffing revenue achieved through the August 1998
acquisition of StarMed, offset by an approximate $14,900,000 decrease in therapy
staffing revenues. Demand for therapists has declined significantly as a result
of the implementation of SNU-PPS.
Operating expenses for the twelve month periods compared increased by
$33,461,000, or 30.2%, to $144,187,000. Acquisitions accounted for 88% of the
net increase. The remaining increase was attributable to the increase in patient
days and units of services, offset by decreased therapy staffing costs.
The excess of operating expenses over operating revenues associated with
non-exempt units decreased from $778,000 to $637,000, on a decrease in the
average number of non-exempt units from 7.7 to 3.2. The per unit average excess
of operating expenses over operating revenues increased from $102,000 to
$199,000 reflecting a greater percentage of units where the Company is obligated
to provide therapy staff. The average excess of operating expenses over
operating revenues for units during their non-exempt year can range to as high
as $150,000 to $200,000.
General and administrative expenses increased $8,638,000, or 31.6%, to
$35,932,000, reflecting increases in corporate office expenses as well as
administration, business development, operations and professional services in
support of the increase in units, plus the addition of general and
administrative expenses of companies acquired.
Depreciation and amortization increased $186,000 reflecting amortization
of goodwill from acquisitions, offset by the elimination of amortization of
start-up costs in 1998.
Interest expense increased $622,000 reflecting interest on additional debt
issued in the acquisitions of StarMed and Therapeutic Systems. Gain on sale of
marketable securities reflects the sale of the Company's investment in Intensiva
HealthCare Corporation, approximately 50% of which was sold in the first quarter
of 1997, and the remaining 50% sold in the fourth quarter of 1998.
Earnings before income taxes and cumulative effect of change in accounting
principle increased by $3,993,000, or 22.3%, to $21,875,000. The provision for
income taxes for 1998 was $8,901,000 compared to $7,267,000 in 1997, reflecting
effective income tax rates of 40.7% and 40.6%, respectively. Earnings before
cumulative effect of change in accounting principle increased by $2,359,000, or
22.2%, to $12,974,000. The cumulative effect of change in accounting principle
of $776,000 represents the after-tax charge related to the adoption, effective
January 1, 1998, of Statement of Position No. 98-5 Reporting on the Costs of
Start-up Activities. Net earnings increased by $1,583,000, or 14.9%, to
$12,198,000. Diluted earnings per share increased 16.3% to $1.71 from $1.47 on a
1.8% decrease in the weighted-average shares and assumed conversions
outstanding. The gains on sale of marketable securities represented $.12 of the
earnings per share in both 1998 and 1997. The cumulative effect of change in
accounting principle reduced earnings per share by $.11 in 1998 with no
comparable reduction in 1997. Excluding the gains on sales of marketable
securities and the cumulative effect of the change in accounting principle,
diluted earnings per share increased 25.9% from $1.35 in 1997 to $1.70 in 1998.
The decrease in shares outstanding is attributable primarily to shares
repurchased and a decrease in the dilutive effect of stock options resulting
from a decrease in the average market price of the Company's stock relative to
the underlying exercise prices of outstanding options, offset by stock option
exercises and shares issued in the acquisitions of RCSA and Therapeutic Systems.
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended
December 31, 1996
Management believes that a comparison of the twelve months ended December
31, 1997 to the ten months ended December 31, 1996 is not meaningful because of
the difference in length of reporting periods. Therefore, this discussion and
analysis of results of operations includes a comparison of the audited
twelve-month period ended December 31, 1997, to the unaudited twelve-month
period ended December 31, 1996.
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Operating revenues in 1997 increased by $40,924,000, or 34.1%, to
$160,780,000 as compared to the same period in 1996. Acquisitions accounted for
35.0% of the net increase. A 20.8% increase in the average number of inpatient
units from 91.3 to 110.3 units, and an increase in the average daily billable
census per inpatient unit of 3.1% from 12.8 to 13.2, generated a 24.6% increase
in billable patient days to 532,195. The increase in billable census per unit
for inpatient units is primarily attributable to a 9.0% increase in admissions
per unit, offset by a 5.4% decline in average billable length of stay. The
decline in average length of stay reflects both the continued trend of reduced
rehabilitation lengths of stay and the increase in subacute units operational in
1997, which carry a shorter length of stay than acute rehabilitation units. The
increase in billable patient days was offset by a 3.7% decrease in average per
diem billing rates, reflecting a greater mix of subacute units which carry lower
average per diem rates than acute units. The $16,279,000 increase in inpatient
unit revenue was offset by a 9.8% decrease in outpatient revenue to $9,429,000,
primarily reflecting the loss of two units. Revenues of HSSI increased
$17,544,000 primarily as a result of an increase in weeks worked plus revenue
from HSSI's new per diem staffing division.
Operating expenses for the twelve-month periods compared increased by
$25,305,000, or 29.6%, to $110,726,000. Acquisitions accounted for 34.2% of the
net increase. The remaining increase was attributable to the increase in patient
days and increased placements at HSSI.
The excess of operating expenses over operating revenues associated with
non-exempt units decreased from $912,000 to $778,000, on an increase in the
average number of non-exempt units from 5.4 to 7.7. The per unit average excess
of operating expenses over operating revenues declined from $169,000 to $102,000
reflecting a 2.5% increase in billable patients per unit to 2.9 plus a greater
percentage of units where the Company is not obligated to provide therapy staff.
The average excess of operating expenses over operating revenues for units
during their non-exempt year can range to as high as $150,000 to $200,000.
General and administrative expenses increased $8,725,000, or 47.0%, to
$27,294,000, reflecting increases in professional services, business
development, general office and operations compared to the previous year, plus
the addition of general and administrative expenses of companies acquired.
Depreciation and amortization increased $631,000 reflecting primarily the
amortization of goodwill from the purchase of Team and Moore and Rehab
Unlimited.
Interest income decreased $83,000 as a result of reductions in investment
balances, as cash was used to make acquisitions and make payments on the
Company's debt.
Interest expense increased $1,441,000 reflecting interest on additional
debt arising from the repurchase of shares of the Company's common stock, and
the acquisitions of HSSI, Team and Moore and Rehab Unlimited. Gain on sale of
marketable securities reflects the sale of approximately 50% of the Company's
investment in Intensiva HealthCare Corporation.
Earnings before income taxes increased by $6,192,000, or 53.0%, to
$17,882,000. The provision for income taxes for the twelve-month periods
compared was $7,267,000 compared to $4,698,000, reflecting effective income tax
rates of 40.6% and 40.2% for the respective periods. Net earnings increased by
$3,623,000, or 51.8%, to $10,615,000. Diluted earnings per share increased 58.1%
to $1.47 from $.93 on a 4.4% decrease in the weighted-average shares
outstanding. The gain on sale of marketable securities represented $.12 of the
earnings per share in 1997. Excluding the gain, diluted earnings per share
increased 45% to $1.35. The decrease in shares outstanding is attributable to
the repurchase of shares of the Company's common stock offset by an increase in
the dilutive effect of outstanding stock options.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $8,683,000 in cash and current
12
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marketable securities and a current ratio of 1.5:1. Working capital as of
December 31, 1998, increased from December 31, 1997, by $7,813,000, reflecting
working capital from the acquisitions of StarMed and Therapeutic Systems and
working capital generated by operations.
Net accounts receivable were $46,349,000 at December 31, 1998 compared to
$24,147,000 at December 31, 1997. The number of days average net revenues in net
receivable was 63.8 days and 52.0 days as of December 31, 1998 and December 31,
1997, respectively. The increase is primarily the result of acquisitions of
businesses that traditionally carry longer payment terms from clients.
During the year ended December 31, 1998, the Company incurred capital
expenditures of $2,103,000 as compared to $1,372,000 for the twelve months ended
December 31, 1997. At December 31, 1998, the Company had no material commitments
for capital expenditures.
In connection with the development and implementation of additional units,
the Company may incur capital expenditures for equipment and deferred costs
arising from payments made to hospitals for a portion of capital improvements
needed to begin a unit's operation. For the twelve months ended December 31,
1998, the Company made deferred cost payments to four client hospitals totaling
$450,000 for capital improvements, while for the twelve months ended December
31, 1997, payments were made to four client hospitals totaling $368,000. At
December 31, 1998, the Company had 8 commitments totaling $1,084,000 to make
additional capital improvement payments to client hospitals.
The Company's operating cash flows constitute its primary source of
liquidity and historically have been sufficient to fund its working capital
requirements. The Company expects to meet its future working capital, capital
expenditure, business expansion and debt service requirements from a combination
of internal sources and outside financing. As part of the acquisitions of RCSA,
StarMed and Therapeutic Systems, the Company's bank term loan and revolving
credit facility were restructured. Under the terms of the restructured loan
agreement, the Company entered into a five-year bank term loan with a commitment
of up to $60,000,000. The amount that may be borrowed under the revolving credit
facility was increased to the lesser of $30,000,000 or 85% of eligible accounts
receivable, reduced by amounts outstanding under the Company's bank letter of
credit. As of December 31, 1998, the Company's borrowings under the term loan
and revolving credit facility totaled $57,364,000 and $0, respectively, and a
letter of credit was outstanding in the amount of $2,000,000.
On January 10, 1997, the Company sold 165,000 shares of its investment in
Intensiva HealthCare Corporation in a market transaction for $1,485,000. The
remaining 161,287 shares were sold on December 18, 1998 for $1,552,000.
On March 12, 1997, the Company repurchased 1,499,932 shares of its common
stock. To finance the repurchase, the Company issued $45 million in senior
secured debt, which was restructured in 1998 as described above.
YEAR 2000
The Company is subject to risks associated with "Year 2000" compliance,
a term which refers to the ability of various data processing hardware and
software systems to interpret dates correctly after the beginning of January 1,
2000.
The Company has developed and presented to the Board of Directors its
action plan for Year 2000 compliance. The major phases of the action plan are
awareness, assessment, renovation, validation and implementation.
The awareness phase included a communication of Year 2000 compliance
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issues and the potential ramifications to the Company, education and
identification of key systems. The assessment phase included the inventorying of
systems that may be impacted by Year 2000 issues.
Most of the Company's systems are purchased from industry-known vendors
and are generally used in their standard configuration. Other systems will be
replaced by or converted to Year 2000 compatible systems. The Company has
closely reviewed the Year 2000 progress as reported by each vendor. The Company
has been assured by certain of these vendors, that new Year 2000 compliant
systems have been installed. In all other cases, compliant systems will be
delivered in time for installation and testing prior to year end 1999.
The final phase of the action plan is the implementation of remediated
and other systems into the operating environment of the Company. For those
systems that have not yet been delivered, the Company expects delivery of
compliant systems not later than early in the second quarter of 1999. The final
phase of the plan is scheduled to be completed by June 30, 1999. Concurrent with
the development and execution of the plan is the evolution of a contingency plan
that includes procedures to be followed should a system fail.
The Company is also completing an assessment of Year 2000 risks
relating to its lines of business separate from its dependence on data
processing. The assessment includes corresponding with customers to ascertain
their overall preparedness regarding Year 2000 risks. The plan also provides for
the identification and communication with significant non-data processing
third-party vendors regarding their preparedness for Year 2000 risks. It is not
possible to quantify the overall potential adverse effects to the Company
resulting from these customers' or non-data vendors' failure to adequately
prepare for Year 2000 compliance. The failure of a customer to prepare
adequately for Year 2000 could have a significant adverse effect on such
customer's operations and profitability, which, in turn, could inhibit its
ability to pay for the Company's services in accordance with their terms.
Failure of a non-data vendor to prepare adequately for Year 2000 could have a
significant adverse effect on the vendor's operations, which, in turn, could
inhibit the vendor's ability to deliver purchased goods and services to the
Company in a timely manner. The Company also recognizes the importance of Year
2000 compliance by customers, payment sources, and vendors to the Company's
customers and vendors. The Company must necessarily rely upon the compliance
programs of these third parties.
The Company does not expect that the cost of the Year 2000 compliance
will be material to its business, financial condition, or results of operations,
nor does management anticipate any material disruption in operations as the
result of any failure by the Company or its subsidiaries. While the Company is
making a substantial effort to become Year 2000 compliant, there is no assurance
the failure to adequately address all issues relating to the Year 2000 issue
would not have a material adverse effect on its financial condition or results
of operations.
INFLATION
Although inflation has abated during the last several years, the rate
of inflation in healthcare related services continues to exceed the rate
experienced by the economy as a whole. The Company's management contracts
typically provide for an annual increase in the fees paid to the Company by its
client hospitals based upon increases in various inflation indices. These
increases generally offset increases in costs incurred by the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors
RehabCare Group, Inc.:
We have audited the accompanying consolidated balance sheets of RehabCare Group,
Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, cash flows
and comprehensive earnings for the years ended December 31, 1998 and 1997 and
for the ten months ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RehabCare Group,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
and for the ten months ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs.
St. Louis, Missouri
February 5, 1999
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REHABCARE GROUP, INC.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
December 31,
Assets 1998 1997
------ ---- ----
Current assets:
Cash and cash equivalents $ 5,666 1,975
Marketable securities, available-for-sale 3,017 4,664
Accounts receivable, net of allowance for doubtful accounts
of $3,404 and $1,338, respectively 46,349 24,147
Deferred tax assets 3,382 1,773
Prepaid expenses and other current assets 938 720
------- ------
Total current assets 59,352 33,279
------- ------
Marketable securities, trading, noncurrent 1,240 1,812
------- ------
Equipment and leasehold improvements, net 4,537 3,342
------- ------
Other assets:
Excess of cost over net assets acquired, net 86,285 52,949
Deferred contract costs, net 1,184 1,138
Investments in nonconsolidated subsidiaries 1,648 1,159
Deferred tax assets -- 181
Other 2,624 3,381
------- ------
Total other assets 91,741 58,808
------- ------
$156,870 97,241
======= ======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 11,926 4,520
Accounts payable 2,179 1,700
Accrued salaries and wages 14,049 9,925
Accrued expenses 8,601 3,570
Income taxes payable 1,991 771
------- ------
Total current liabilities 38,746 20,486
------- ------
Deferred compensation and other long-term liabilities 3,084 2,501
------- ------
Deferred tax liabilities 955 --
------- ------
Long-term debt, less current portion 53,929 34,494
------- ------
Stockholders' equity:
Preferred stock, $.10 par value; authorized 10,000,000 shares,
none issued and outstanding -- --
Common stock, $.01 par value; authorized 20,000,000 shares,
issued 7,657,391 shares and 7,152,191 shares as of
December 31, 1998 and 1997, respectively 77 72
Additional paid-in capital 30,654 23,972
Retained earnings 47,390 35,192
Less common stock held in treasury at cost, 1,166,234 shares and
1,311,307 shares as of December 31, 1998 and 1997, respectively (17,975) (20,212)
Accumulated other comprehensive earnings 10 736
------- ------
Total stockholders' equity 60,156 39,760
------- ------
$156,870 97,241
======= ======
See accompanying notes to consolidated financial statements.
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REHABCARE GROUP, INC.
Consolidated Statements of Earnings
(dollars in thousands, except per share data)
Ten Months Ended
Year Ended December 31, December 31,
1998 1997 1996
Operating revenues $ 207,416 160,780 104,611
Costs and expenses:
Operating expenses 144,187 110,726 74,326
General and administrative 35,932 27,294 16,844
Depreciation and amortization 3,966 3,780 2,743
------- ------- -------
Total costs and expenses 184,085 141,800 93,913
------- ------- -------
Operating earnings 23,331 18,980 10,698
Interest income 258 186 152
Interest expense (3,381) (2,759) (1,211)
Gain on sale of marketable securities 1,516 1,448 --
Other income, net 151 27 15
------- ------- -------
Earnings before income taxes and cumulative
effect of change in accounting principle 21,875 17,882 9,654
Income taxes 8,901 7,267 3,886
Earnings before cumulative effect of ------- ------- -------
change in accounting principle 12,974 10,615 5,768
Cumulative effect of change in accounting for start-up costs,
net of tax (776) -- --
------- ------- -------
Net earnings $ 12,198 10,615 5,768
======= ======= =======
Net earnings per common share:
Basic
Earnings before cumulative effect of change in
accounting principle $ 2.10 1.77 .82
Cumulative effect of change in accounting for
start-up costs (.13) -- --
------- ------- -------
Net earnings $ 1.97 1.77 .82
======= ======= =======
Diluted
Earnings before cumulative effect of change in
accounting principle $ 1.82 1.47 .76
Cumulative effect of change in accounting for
start-up costs (.11) -- --
------- ------- -------
Net earnings $ 1.71 1.47 .76
======= ======= =======
See accompanying notes to consolidated financial statements.
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REHABCARE GROUP, INC.
Consolidated Statements of Stockholders' Equity
(amounts in thousands)
Common Stock Accumulated
------------------------- Additional other compre- Total
Issued Treasury paid-in Retained Treasury hensive stockholders'
shares stock Amount capital earnings stock earnings equity
------ -------- ------ ---------- -------- -------- ---------- ------------
Balance, February 29, 1996 6,777 -- $ 67 20,021 18,809 -- -- 38,897
Net earnings -- -- -- -- 5,768 -- -- 5,768
Issuance of common stock
in connection with acquisition 185 -- 2 2,190 -- -- -- 2,192
Exercise of stock options (including
tax benefit) 78 -- 1 582 -- -- -- 583
Unrealized gain on marketable
securities, net of tax -- -- -- -- -- -- 2,230 2,230
----- ----- --- ------ ------ ------ ----- ------
Balance, December 31, 1996 7,040 -- 70 22,793 24,577 -- 2,230 49,670
Net earnings -- -- -- -- 10,615 -- -- 10,615
Purchase of treasury stock -- 1,500 -- -- -- (23,131) -- (23,131)
Issuance of common stock
in connection with acquisitions 38 (41) 1 639 -- 644 -- 1,284
Exercise of stock options (including
tax benefit) 74 (148) 1 540 -- 2,275 -- 2,816
Change in unrealized gain on
marketable securities, net of tax -- -- -- -- -- -- (1,494) (1,494)
----- ----- --- ------ ------ ------ ----- ------
Balance, December 31, 1997 7,152 1,311 72 23,972 35,192 (20,212) 736 39,760
Net earnings -- -- -- -- 12,198 -- -- 12,198
Issuance of common stock
in connection with acquisitions 130 -- 1 2,199 -- -- -- 2,200
Exercise of stock options (including
tax benefit) 375 (145) 4 4,483 -- 2,237 -- 6,724
Change in unrealized gain on
marketable securities, net of tax -- -- -- -- -- -- (726) (726)
----- ----- --- ------ ------ ------ ----- ------
Balance, December 31, 1998 7,657 1,166 $ 77 30,654 47,390 (17,975) 10 60,156
===== ===== === ====== ====== ====== ===== ======
See accompanying notes to consolidated financial statements.
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REHABCARE GROUP, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
Ten Months Ended
Year Ended December 31, December 31,
1998 1997 1996
----------------------- ----------------
Cash flows from operating activities:
Net earnings $ 12,198 10,615 5,768
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Cumulative effect of change in accounting
for start-up costs 776 -- --
Depreciation and amortization 3,966 3,780 2,743
Provision for losses on accounts receivable 1,093 717 549
Equity in earnings of affiliate (107) (20) --
Gain on sale of marketable securities (1,516) (1,448) --
Increase (decrease) in deferred compensation (598) 545 586
Increase in accounts receivable, net (6,666) (7,755) (4,586)
Decrease (increase) in prepaid expenses and other current assets 43 (155) 259
Decrease in other assets 161 15 122
Increase (decrease) in accounts payable and accrued expenses 1,059 1,759 (1,915)
Increase in accrued salaries and wages 1,990 2,386 1,390
Increase (decrease) in income taxes payable and deferred 1,156 (622) (498)
-------- ------ -------
Net cash provided by operating activities 13,555 9,817 4,418
-------- ------ -------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (1,868) (1,343) (732)
Purchase of marketable securities (1,838) (1,473) (1,128)
Proceeds from sale/maturities of marketable securities 4,363 2,080 1,815
Cash paid in acquisition of businesses, net of cash received (42,449) (6,629) (19,258)
Investment in joint venture (382) (630) --
Deferred contract costs, net (450) (368) (160)
Other, net (805) (1,483) (1,282)
-------- ------ -------
Net cash used in investing activities (43,429) (9,846) (20,745)
-------- ------ -------
Cash flows from financing activities:
Proceeds from (payments on) revolving credit facility -- (500) 2,000
Payments on long-term debt (10,559) (3,603) (2,408)
Proceeds from issuance of long-term debt 36,400 23,500 4,750
Proceeds from issuance of notes payable 1,000 2,150 6,000
Purchase of treasury stock -- (23,131) --
Exercise of stock options (including tax benefit) 6,724 2,816 583
-------- ------ -------
Net cash provided by financing activities 33,565 1,232 10,925
-------- ------ -------
Net increase (decrease) in cash and cash
equivalents 3,691 1,203 (5,402)
Cash and cash equivalents at beginning of period 1,975 772 6,174
-------- ------ -------
Cash and cash equivalents at end of period $ 5,666 1,975 772
======== ====== =======
See accompanying notes to consolidated financial statements.
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REHABCARE GROUP, INC.
Consolidated Statements of Comprehensive Earnings
(Amounts in thousands)
Ten Months Ended
Year Ended December 31, December 31,
1998 1997 1996
---- ---- ----
Net earnings $ 12,198 10,615 5,768
Other comprehensive earnings, net of tax--
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period 184 (625) 2,230
Less: reclassification adjustment for
realized gains included in net earnings (910) (869) --
------ ------ ------
Comprehensive earnings $ 11,472 9,121 7,998
====== ====== ======
See accompanying notes to consolidated financial statements.
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REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
parent company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation. The Company has an investment which
is accounted for using the equity method and records its share
of the net earnings (losses) of this entity in consolidated net
income.
(b) Change in Fiscal Year
The Company changed its fiscal year end from the last day of
February to December 31, effective as of December 31, 1996. The
change resulted in a short fiscal period of ten months that
began March 1, 1996, and ended December 31, 1996. Information
included in the footnotes to the financial statements for 1996
refers to the ten months ended December 31, 1996.
(c) Accounting Change
The Company adopted the provisions of Statement of Position No.
98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up Activities
on January 1, 1998, which requires that costs of start-up
activities be expensed as incurred. Start-up activities are
defined in SOP 98-5 as those one-time activities related to
opening a new facility, introducing a new territory, conducting
business with a new class of customer or beneficiary, initiating
a new process in an existing facility or commencing a new
operation. Previously, the Company capitalized these costs and
amortized them over the term of the contract. The change
resulted in a cumulative after-tax charge of $776,000, $.11 per
diluted share, recorded in the quarter ended March 31, 1998.
(d) Cash Equivalents and Marketable Securities
Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less.
Such investments are deemed to be cash equivalents for purposes
of the consolidated statements of cash flows.
The Company classifies its debt and equity securities into one
of three categories: held-to- maturity, trading, or
available-for-sale. Management determines the appropriate
classification of its investments at the time of purchase and
reevaluates such determination at each balance sheet date.
Investments at December 31, 1998 consist of marketable equity
securities, variable rate municipal bonds and money market
securities. All marketable securities included in current assets
are classified as available-for-sale and as such, the difference
between cost and market, net of estimated taxes, is recorded as
other comprehensive earnings. Gain (or loss) on such securities
is not recognized in the consolidated statement of earnings
until the securities are sold. All marketable securities in
non-current assets are classified as trading.
(e) Credit Risk
The Company primarily provides services to a geographically diverse
clientele of healthcare providers throughout the United States.
The Company performs ongoing credit evaluations of its clientele
and does not require collateral. An allowance for doubtful
accounts is maintained at a level which management believes is
sufficient to cover potential credit losses.
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REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(f) Equipment and Leasehold Improvements
Depreciation and amortization of equipment and leasehold
improvements are computed on the straight-line method over the
estimated useful lives of the related assets, principally:
equipment - five to seven years and leasehold improvements -
life of lease or life of asset, whichever is less.
(g) Intangible Assets
Substantially all the excess of cost over net assets acquired
(goodwill) relates to acquisitions and is amortized on a
straight-line basis over 40 years. Accumulated amortization of
goodwill was $7,483,773 and $5,206,000 as of December 31, 1998
and 1997, respectively. The Company evaluates the realizability
of goodwill based upon expectations of undiscounted cash flows
and operating income. Based upon its most recent analysis, the
Company believes that no impairment of goodwill exists at
December 31, 1998.
(h) Deferred Contract Costs
Deferred contract costs represent payments made to hospitals for a
portion of capital improvements needed to begin a unit's
operation. The Company is entitled to a pro rata refund of
deferred capital improvement costs in the event that the
hospital terminates the contract before its scheduled
termination date. Deferred contract costs are charged to expense
over the initial term of the contracts. Accumulated amortization
of deferred contract costs was $391,000 and $1,138,000 as of
December 31, 1998 and 1997, respectively.
(i) Disclosure About Fair Value of Financial Instruments
The estimated fair-market value of the revolving credit facility
and long-term debt (including current portions thereof),
approximates carrying value due to the variable rate features of
the instruments. The Company believes it is not practical to
estimate a fair value different from the carrying value of its
subordinated debt and the notes payable to related parties as
the instruments have numerous unique features as discussed in
note 6.
(j) Revenues and Costs
The Company recognizes revenues as services are provided or when
the revenue is earned. Costs related to marketing and
development of new contracts are expensed as incurred.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates in
effect for the year in which those differences are expected to
be recovered or settled.
(l) Treasury Stock
The purchase of the Company's common stock is recorded at cost.
Upon subsequent reissuance, the treasury stock account is
reduced by the average cost basis of such stock.
(m) Comprehensive Earnings
On January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, which requires reporting of comprehensive
income (earnings) and its components, in the statement of
22
23
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
earnings and statement of stockholders' equity, including net
earnings as a component. Comprehensive earnings is the change
in equity of a business from transactions and other events and
circumstances from non-owner sources.
(n) Segment Disclosures
The Company has adopted the provisions of SFAS No. 131 ("SFAS
131"), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 establishes standards for reporting
information about operating segments and related disclosures
about products and services, geographic areas and major
customers.
(o) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and
expenses during the period. Actual results may differ from those
estimates.
(p) Reclassifications
Certain prior years' amounts have been reclassified to conform with
the current year presentation.
(q) Derivatives
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133 ("SFAS 133"), Accounting for Derivative Instruments and
Hedging Activities. SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 is effective
for all fiscal years beginning after June 15, 1999. Earlier
application of SFAS 133 is encouraged but should not be applied
retroactively to financial statements of prior periods. The
Company is currently evaluating the requirements and impact of
SFAS 133.
(2) Acquisitions
On July 31, 1998, the Company acquired Rehabilitative Care Systems of
America, Inc. ("RCSA"), a provider of program outpatient therapy, for
consideration consisting of cash and stock. On August 17, 1998, the
Company acquired StarMed Staffing, Inc. ("StarMed"), a provider of
nurse staffing, and certain related entities for cash from Medical
Resources, Inc. On September 9, 1998, the Company acquired Therapeutic
Systems, Ltd. ("Therapeutic Systems"), a provider of contract therapy,
for consideration consisting of cash, stock and notes. The aggregate
purchase prices for these acquisitions paid at closing was $41,150,000,
consisting of $37,950,000 in cash, 130,426 shares of stock and
$1,000,000 in subordinated notes. An additional $2,000,000 in cash
consideration in the purchase of StarMed has been deferred until
certain contingencies expire and is secured by a bank letter of credit
held by a third-party escrow agent. Additional consideration may be
paid to the former stockholders of RCSA, contingent upon the retention
of clients, and Therapeutic Systems, contingent upon the attainment of
certain financial goals over the next three years, of up to $4,950,000.
The cash purchase price was funded through borrowings made available by
an increase in the Company's bank credit facility to $90,000,000. See
note 6. Goodwill of approximately $33,000,000 related to the
acquisitions is being amortized over 40 years.
23
24
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The following unaudited pro forma financial information assumes the
acquisitions occurred as of January 1, 1997. This information is not
necessarily indicative of results of operations that would have
occurred had the purchases actually been made at the beginning of the
periods presented.
Year Ended December 31,
1998 1997
-----------------------
Operating revenues $ 264,635,000 229,669,000
Net earnings 13,727,000 12,355,000
Net earnings per common and common
equivalent share:
Basic $ 2.19 2.02
Diluted $ 1.90 1.68
On August 15, 1997, the Company acquired a 40% interest in Allied Therapy
Services, L.L.C. ("Allied") for $630,000 in cash and notes. The joint
venture provides physical, occupational and speech therapy services to
nursing homes, other long-term care facilities, outpatient clinics,
school systems and home health agencies. The Company accounts for its
investment using the equity method.
On January 28, 1997, the Company acquired TeamRehab, Inc. and Moore
Rehabilitation Services, Inc. ("Team and Moore"), a provider of
contract therapy. On June 12, 1997, the Company acquired Rehab
Unlimited, Inc. and the assets of Cimarron Health Care, Inc. and merged
them into Team and Moore. The aggregate purchase prices for these
acquisitions paid at closing was $6,950,000, consisting of $4,275,000
in cash, $1,825,000 in subordinated promissory notes and 54,151 shares
of the Company's common stock. Additional consideration will be paid to
the former Team and Moore stockholders contingent upon the attainment
of certain target cumulative earnings before interest and income taxes,
up to a maximum of $2,400,000 in additional consideration over four
years. In 1998, $301,000 of contingent consideration was paid to the
former owners of Team and Moore. Goodwill related to the acquisitions
totaling $6,254,000 is being amortized over 40 years.
On March 1, 1996, the Company acquired Healthcare Staffing Solutions, Inc.
("HSSI"), a provider of therapy staffing. The aggregate purchase price
of $21,450,000 paid at closing included $13,258,000 in cash, a
$6,000,000 ten-year convertible subordinated promissory note and
185,295 shares of the Company's common stock. Of the $13,258,000 of
cash paid, $8,750,000 was borrowed under the Company's term loan and
revolving credit facility. Additional consideration will be paid to the
former HSSI stockholders contingent upon the attainment of certain
target cumulative earnings before interest and income taxes up to a
maximum of $8,800,000 in additional consideration over six years. In
1998 and 1997, $2,104,000 and $1,000,000, respectively of contingent
consideration was paid to the former owners of HSSI.
The acquisitions, with the exception of Allied, have been accounted for by
the purchase method of accounting, whereby their operating results are
included in the Company's results of operations commencing on the
respective closing dates of acquisition.
24
25
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(3) Marketable Securities
Current marketable securities at December 31, 1998 consist primarily of
variable rate municipal bonds. Noncurrent marketable securities consist
of marketable equity securities ($840,000 and $1,469,000 at December
31, 1998 and 1997, respectively) and money market securities ($400,000
and $343,000 at December 31, 1998 and 1997, respectively) held in trust
under the Company's deferred compensation plan.
(4) Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is as follows:
Ten Months Ended
Year Ended December 31, December 31,
1998 1997 1996
-------------------------- -----------------
Balance at beginning of period $ 1,338,000 1,386,000 822,000
Provisions for doubtful accounts 1,093,000 717,000 549,000
Allowance related to acquisitions 1,720,000 30,000 387,000
Accounts written off (747,000) (795,000) (372,000)
--------- --------- ---------
Balance at end of period $ 3,404,000 1,338,000 1,386,000
========= ========= =========
(5) Equipment and Leasehold Improvements
Equipment and leasehold improvements, at cost, consist of the following:
December 31,
1998 1997
------------------
Equipment $ 8,227,000 5,752,000
Leasehold improvements 384,000 132,000
--------- ---------
8,611,000 5,884,000
Less accumulated depreciation and amortization 4,074,000 2,542,000
--------- ---------
$ 4,537,000 3,342,000
========= =========
25
26
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(6) Long-Term Debt
Long-term debt consists of the following:
December 31,
1998 1997
---- ----
Bank Debt:
- ----------
Term facility - LIBOR plus 1.0% to 2.0% or Corporate Base
Rate ("CBR"), rate dependent on the ratio of indebtedness, net of cash and
marketable securities, to cash flow, maturing October 1, 2003 (weighted-
average rates of 6.7% and 7.2% at December 31, 1998 and 1997, respectively) $ 57,364,000 22,750,000
Revolving credit facility-LIBOR plus 1.0% to 2.0% or CBR, rate dependent on the
ratio of indebtedness, net of cash and marketable securities, to cash flow,
maturing October 1, 2003 (weighted-average rate of 7.4% at December 31, 1997) -- 8,000,000
Subordinated Debt:
Note payable, 6.25% convertible, maturing March 1, 2006 6,000,000 6,000,000
Note payable, 8%, maturing October 15, 1997, held in escrow as
of December 31, 1997 -- 395,000
Note payable, 8%, payable $93,750 quarterly through February 1,
2001 844,000 1,219,000
Note payable, 8%, payable in quarterly installments of $40,625
commencing July 1, 1999, maturing July 1, 2001 322,000 325,000
Note payable, 8%, maturing August 15, 2001 325,000 325,000
Note payable, 8%, maturing September 9, 2002 1,000,000 --
---------- ----------
65,855,000 39,014,000
Less current portion 11,926,000 4,520,000
---------- ----------
Total long-term debt $ 53,929,000 34,494,000
========== ==========
On August 17, 1998, as part of the 1998 acquisitions, the Company
restructured and increased its bank debt. Under the terms of the
restructured loan agreement the Company entered into a five-year,
$60,000,000 term loan and a revolving line of credit which allows the
Company to borrow up to the lesser of $30,000,000 or 85% of eligible
accounts receivable as defined by the agreement, reduced by amounts
outstanding under bank letters of credit. The Company pays a fee on the
unused portion of the commitment from .2% to .5% per annum, with such
rate being dependent on the ratio of the Company's indebtedness, net of
cash and marketable securities, to cash flow. Borrowings under the
agreement, including the revolving credit facility, are secured
primarily by the Company's accounts receivable, equipment and leasehold
improvements, and future income and profits. The loan agreement
requires the Company to meet certain financial covenants including
maintaining minimum net worth and fixed charge coverage ratios. The
loan agreement also restricts the Company's ability to pay dividends to
its stockholders. As of December 31, 1998, the Company had an
outstanding bank letter of credit in the amount of $2,000,000. The
average outstanding borrowings under the revolving credit facility for
1998, 1997 and 1996 were $3,451,000, $7,507,000 and $3,000,000 at
weighted-average interest rates of 7.0%, 7.4% and 7.5% per annum,
respectively.
26
27
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The $6,000,000 convertible subordinated notes payable may be redeemed in
whole or in part by the Company at any time after March 1, 2000 at from
100% to 104% of the principal balance. The notes are convertible into
the Company's common stock prior to March 1, 2006, subject to earlier
redemption by the Company, at the option of the former HSSI
shareholders, at a conversion price of $14.17 per share. Of the
$6,000,000 balance outstanding $4,500,000 is payable to a director of
the Company who is president of HSSI.
The scheduled principal payments of long-term debt at December 31, 1998
are as follows: $11,926,000 in 1999, $12,010,000 in 2000, $11,973,000
in 2001, $12,473,000 in 2002, $11,473,000 in 2003 and $6,000,000,
thereafter. Interest paid for 1998, 1997 and 1996 was, $3,630,000,
$2,598,000 and $1,053,000, respectively. The Company purchases interest
rate swaps and caps of twelve months in length to reduce the impact of
fluctuations in interest rates on its floating rate debt. At December
31, 1998, the Company had a $20,000,000 interest rate swap outstanding.
The difference to be paid or received under these agreements is
recognized as an adjustment to interest expense. The fair value of the
swap if the Company were to terminate the agreement at December 31,
1998 was not material.
(7) Stockholders' Equity
On January 31, 1997, the Company made a tender offer to purchase up to
1,387,500 shares of its common stock at a single purchase price, not
less than $13.33 nor in excess of $15.00 per share. The actual
purchase price was determined based on the lowest single purchase price
at which stockholders tendered shares that was sufficient to purchase
at least 1,387,500 shares. As of February 28, 1997, the closing date,
shares totaling greater than 1,387,500 were tendered, resulting in the
Company's repurchase on March 12, 1997, of a total of 1,499,932 shares
at the single purchase price of $15.00 per share. The repurchase was
financed by an increase in the bank term loan and revolving credit
facility.
The Company has a 1996 Long-Term Performance Plan pursuant to which stock
appreciation rights, restricted stock, performance awards, incentive
stock options or nonqualified stock options, may be granted to
employees. Under the plan, stock awards for 1,050,000 shares may be
granted within 10 years of the date of adoption of the plan. The
Company also has a 1987 Incentive Stock Option Plan, a 1987
Nonstatutory Stock Option Plan, and a Directors' Stock Option Plan
(together with the 1996 Long-Term Performance Plan, the "Plans")
pursuant to which incentive stock options may be granted to employees
and nonstatutory stock options may be granted to employees or
directors. Under the 1987 Incentive Stock Option and Nonstatutory Stock
Option Plans, options to purchase 1,500,000 shares were available for
grant, of which 825,000 shares were incentive stock options. Under the
Directors' Stock Option Plan (the "Directors' Plan"), options to
purchase 525,000 shares of stock may be granted. Stock options may be
granted for a term not to exceed 10 years (five years with respect to a
person receiving an incentive stock option who owns more than 10% of
the capital stock of the Company) and must be granted within 10 years
from the date of adoption of the respective plan. The exercise price of
all stock options must be at least equal to the fair market value (110%
of fair market value for a person receiving an incentive stock option
who owns more than 10% of the capital stock of the Company) of the
shares on the date granted. Under the Directors' Plan, each director
who is not otherwise an officer or employee of the Company, receives an
option each year through 1998 to acquire 15,000 shares of stock, or
such lesser amount as provided in the Directors' Plan, at the fair
market value on the respective option grant date. Options for a
designated number of shares may also be granted to a particular
director or directors from time to time at the discretion of the Board.
All stock options become fully exercisable after four years from date
of grant, except for options granted under the Directors' Plan which
become fully exercisable after six months.
27
28
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $8.55, $7.64 and $6.89 on the dates of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield 0%,
volatility of 40%, risk-free interest rate of 4.7% and an expected life
of 4 to 7 years; 1997 - expected dividend yield 0%, volatility of 33%,
risk-free interest rate of 5.6% and an expected life of 4 to 7 years;
1996 expected dividend yield 0%, volatility of 30%, risk-free interest
rate of 6.25% and an expected life of 4 to 7 years.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its Plans. Accordingly, no
compensation cost has been recognized for its long-term performance and
stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS
No. 123 ("SFAS 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:
Ten Months Ended
Year Ended December 31, December 31,
1998 1997 1996
---- ---- ----
Net earnings As reported $12,198,000 $10,615,000 $5,768,000
Pro forma 10,546,000 9,820,000 5,340,000
Basic earnings per share As reported 1.97 1.77 .82
Pro forma 1.71 1.64 .76
Diluted earnings per share As reported 1.71 1.47 .76
Pro forma 1.49 1.36 .71
In accordance with SFAS 123, the pro forma net earnings reflects only
options granted subsequent to February 1995 and does not reflect the
full impact of calculating compensation cost for stock options granted
prior to March 1995, that vested in 1998, 1997 and 1996.
A summary of the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996, and changes during the periods ending
on those dates is presented below:
Year Ended Year Ended Ten Months Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ ---------------- ------ ----------------
Outstanding at
beginning of period 1,925,809 $ 11.00 1,863,671 $ 9.11 1,625,738 $ 8.64
Granted 833,696 15.53 335,375 19.43 456,399 10.78
Exercised (519,848) 8.76 (221,558) 7.78 (78,028) 6.65
Forfeited (469,508) 26.16 (51,679) 11.45 (140,438) 10.43
--------- --------- ---------
Outstanding at
end of period 1,770,149 13.26 1,925,809 11.00 1,863,671 9.11
========= ========= =========
Options exercisable
at end of period 1,061,756 1,247,265 1,159,959
========= ========= =========
28
29
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
$ 4.83 - 9.17 630,503 4.8 years $ 8.60 589,234 $ 8.60
10.67 - 14.38 552,044 7.6 11.37 333,022 11.45
16.25 - 20.08 396,884 9.8 18.36 3,891 17.43
22.08 - 27.38 190,718 8.3 23.52 135,609 23.81
--------- ---------
4.83 - 27.38 1,770,149 7.2 13.26 1,061,756 11.47
========= =========
The Board of Directors of the Company declared a dividend distribution of
one preferred stock purchase right (the "Rights") for each share of the
Company's common stock owned as of October 1, 1992, and for each share
of the Company's common stock issued until the Rights become
exercisable. Each Right, when exercisable, will entitle the registered
holder to purchase from the Company one sixty-seventh of a share of the
Company's Series A junior participating preferred stock, $.10 par value
(the Series A preferred stock), at a price of $35 per one sixty-seventh
of a share. The Rights are not exercisable and are transferable only
with the Company's common stock until the earlier of 10 days following
a public announcement that a person has acquired ownership of 15% or
more of the Company's outstanding common stock, or the commencement or
announcement of a tender offer or exchange offer, the consummation of
which would result in the ownership by a person of 15% or more of the
Company's outstanding common stock. The Series A preferred stock will
be nonredeemable and junior to any other series of preferred stock that
the Company may issue in the future. Each share of Series A preferred
stock, upon issuance, will have a preferential dividend in an amount
equal to the greater of $1.00 per share or 100 times the dividend
declared per share of the Company's common stock. In the event of the
liquidation of the Company, the Series A preferred stock will receive a
preferred liquidation payment equal to the greater of $100 or 100 times
the payment made on each share of the Company's common stock. Each one
sixty-seventh of a share of Series A preferred stock outstanding will
have one vote on all matters submitted to the stockholders of the
Company and will vote together as one class with the holders of the
Company's common stock.
In the event that a person acquires beneficial ownership of 15% or more of
the Company's common stock, holders of Rights (other than the acquiring
person or group) may purchase, at the Rights' then current purchase
price, shares of the Company's common stock having a value at that time
equal to twice such exercise price. In the event that the Company
merges into or otherwise transfers 50% or more of its assets or
earnings power to any person after the Rights become exercisable,
holders of Rights (other than the acquiring person or group) may
purchase, at the then current exercise price, common stock of the
acquiring entity having a value at that time equal to twice such
exercise price.
29
30
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(8) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Ten Months Ended
Year Ended December 31, December 31,
1998 1997 1996
---- ---- ----
Numerator:
Numerator for basic earnings per share -
earnings available to common stockholders
(net earnings) $ 12,198,000 10,615,000 5,768,000
Effect of dilutive securities - after-tax interest on
convertible subordinated promissory notes 225,000 225,000 184,000
---------- ---------- ---------
Numerator for diluted earnings per share -
earnings available to common stockholders
after assumed conversions $ 12,423,000 10,840,000 5,952,000
========== ========== =========
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 6,184,000 5,999,000 7,001,000
Effect of dilutive securities:
Stock options 585,000 809,000 388,000
Convertible subordinated promissory notes 423,000 423,000 423,000
Contingently issuable shares 53,000 144,000 --
---------- ---------- ---------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 7,245,000 7,375,000 7,812,000
========== ========== =========
Basic earnings per share $ 1.97 1.77 .82
==== ==== ===
Diluted earnings per share $ 1.71 1.47 .76
==== ==== ===
(9) Employee Benefits
The Company has an Employee Savings Plan, which is a defined contribution
plan qualified under Section 401(k) of the Internal Revenue Code, for
the benefit of its eligible employees. Employees who attain the age of
21 and complete twelve consecutive months of employment with a minimum
of 1,000 hours worked are eligible to participate in the plan. Each
participant may contribute from 2% to 20% of his or her compensation to
the plan subject to limitations on the highly compensated employees to
ensure the plan is nondiscriminatory. Contributions made by the Company
to the Employee Savings Plan were at rates of up to 50% of the first 4%
of employee contributions. Expense in connection with the Employee
Savings Plan for 1998, 1997 and 1996 totaled $681,000, $439,000 and
$329,000, respectively.
The Company maintains a nonqualified deferred compensation plan for
certain employees. Under the plan, participants may defer up to 100% of
their yearly compensation. The amounts deferred are held in trust but
remain the property of the Company.
The Company establishes supplemental bonus plans in order to retain key
members of management. The current plans have vesting periods of from
four to seven years. Deferred payments that have vested are distributed
upon termination of employment or at such later date as established by
30
31
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
the plans. The total cost of the supplemental bonus plans is charged to
earnings as compensation over the service period of the participant.
Compensation expense under the plans for 1998, 1997, and 1996 totaled
$360,000, $56,000, and $309,000, respectively.
At December 31, 1998 and 1997, $1,240,000 and $1,812,000, respectively,
were payable under the nonqualified deferred compensation and
supplemental bonus plans and approximated the value of the trust assets
owned by the Company.
(10) Lease Commitments
The Company leases office space and certain office equipment under
noncancellable operating leases. Future minimum lease payments under
noncancellable operating leases, as of December 31, 1998, that have
initial or remaining lease terms in excess of one year total
approximately $1,639,000 for 1999, $1,426,000 for 2000, $1,036,000 for
2001, $887,000 for 2002 and $512,000 for 2003 and thereafter. Rent
expense for 1998, 1997 and 1996 was approximately $1,203,000, $766,000
and $605,000, respectively.
(11) Income Taxes
Income taxes consist of the following:
Ten Months Ended
Year Ended December 31, December 31,
1998 1997 1996
---- ---- ----
Federal - current $ 7,922,000 6,298,000 3,787,000
Federal - deferred 42,000 (122,000) (539,000)
State 937,000 1,091,000 638,000
--------- --------- ---------
$ 8,901,000 7,267,000 3,886,000
========= ========= =========
Deferred tax liability recorded in
stockholders' equity $ 4,000 520,000 1,367,000
========= ========= =========
A reconciliation between expected income taxes, computed by applying the
statutory Federal income tax rates to earnings before income taxes,
and actual income tax is as follows:
Ten Months Ended
Year Ended December 31, December 31,
1998 1997 1996
---- ---- ----
Statutory U.S. Federal rate 35% 35% 34%
=== === ===
Expected income taxes $ 7,656,000 6,259,000 3,282,000
Tax effect of interest income from
municipal bond obligations
exempt from Federal taxation (65,000) (54,000) (43,000)
State income taxes, net of Federal
income tax benefit 609,000 709,000 421,000
Tax effect of amortization expense
not deductible for tax purposes 261,000 261,000 211,000
Other, net 440,000 92,000 15,000
--------- --------- ---------
$ 8,901,000 7,267,000 3,886,000
========= ========= =========
31
32
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to the deferred
tax assets and liabilities are as follows:
December 31,
1998 1997
----------------------------
Deferred tax assets:
Net operating loss $ 95,000 569,000
Provision for doubtful accounts 1,112,000 519,000
Accrued insurance, bonus and
vacation expense 2,776,000 2,442,000
Other 740,000 351,000
--------- ---------
4,723,000 3,881,000
--------- ---------
Deferred tax liabilities:
Unrealized gains on marketable
securities 4,000 520,000
Goodwill amortization 1,494,000 765,000
Other 798,000 642,000
--------- ---------
2,296,000 1,927,000
--------- ---------
Net deferred tax asset $ 2,427,000 1,954,000
========= =========
The Company is required to establish a valuation allowance for deferred
tax assets if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income of
the periods which the deferred tax assets are deductible, management
believes that a valuation allowance is not required, as it is more
likely than not that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets.
As a result of the acquisition of Advanced Rehabilitation Resources, Inc.
in 1993, the Company, as of December 31, 1998, has approximately
$231,000 of net operating loss carryforwards for income tax purposes,
which will expire in years 2005 through 2008. The Tax Reform Act of
1986 imposes an annual limitation on the amount of any preacquisition
loss carryforwards that can be used to offset Company Federal taxable
income generated after the acquisition date. Generally, this annual
limitation will approximate $1,200,000.
Income taxes paid by the Company for 1998, 1997 and 1996 were $6,500,000,
$6,400,000 and $4,234,000, respectively.
(12) Industry Segment Information
The Company operates in two business segments that are managed separately
based on fundamental differences in operations: program management and
staffing. The program management segment includes the management of
acute rehabilitation and skilled nursing units, outpatient programs and
32
33
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
contract therapy services. The staffing segment includes staffing of
nurses and therapists on a temporary and permanent basis. All of the
Company's services are provided in the United States. Summarized
information about the Company's operations in each industry segment is
as follows:
Revenues from
Unaffiliated Customers Operating Earnings
------------------------------------ ----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Program management $ 142,051,000 115,209,000 76,349,000 21,225,000 14,566,000 8,043,000
Staffing 65,365,000 45,571,000 28,262,000 2,106,000 4,414,000 2,655,000
----------- ----------- ----------- ---------- ---------- ----------
Total $ 207,416,000 160,780,000 104,611,000 23,331,000 18,980,000 10,698,000
=========== =========== =========== ========== ========== ==========
Total Asset Depreciation and Amortization
------------------------------------ ----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Program management $ 89,369,000 67,530,000 54,236,000 2,758,000 2,874,000 2,076,000
Staffing 67,501,000 29,711,000 26,566,000 1,208,000 906,000 667,000
----------- ---------- ---------- --------- --------- ---------
Total $ 156,870,000 97,241,000 80,802,000 3,966,000 3,780,000 2,743,000
=========== ========== ========== ========= ========= =========
Capital Expenditures
------------------------------------
1998 1997 1996
---- ---- ----
Program management $ 1,491,000 1,123,000 541,000
Staffing 612,000 249,000 191,000
--------- --------- -------
Total $ 2,103,000 1,372,000 732,000
========= ========= =======
(13) Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
Quarter Ended
1998 Dec. 31 Sep. 30 June 30 Mar. 31
---- ------- ------- ------- -------
Operating revenues $ 66,835 54,050 42,967 43,564
Operating earnings 6,712 5,935 5,345 5,339
Earnings before income taxes and cumulative
effect of change in accounting principle 7,178 5,147 4,808 4,742
Net earnings 4,227 3,072 2,883 2,016
Net earnings per common share:
Basic
Earnings before cumulative effect of
change in accounting principle .65 .49 .48 .47
Net earnings .65 .49 .48 .35
Diluted
Earnings before cumulative effect of
change in accounting principle .59 .43 .41 .40
Net earnings .59 .43 .41 .29
33
34
Quarter Ended
1997 Dec. 31 Sep. 30 June 30 Mar. 31
---- ------- ------- ------- -------
Operating revenues $ 42,728 42,151 39,496 36,405
Operating earnings 5,352 4,854 4,464 4,310
Earnings before income taxes 4,659 4,139 3,741 5,343
Net earnings 2,744 2,439 2,165 3,267
Net earnings per common share:
Basic .47 .43 .38 .48
Diluted .38 .35 .31 .42
The sum of the quarterly earnings per common share may not equal the
full year earnings per common share due to rounding and
computational differences.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding directors and executive officers of the
Company is contained under the caption "Item 1 - Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" included
in the Proxy Statement for the 1999 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
The following is a list as of March 11, 1999, of the names and ages of the
executive officers of the Company and positions with the Company. The employment
history of each of the executive officers for the past five years follows the
list. There is no family relationship between any of the named persons.
Name Age Position
---- --- --------
Alan C. Henderson 53 President and Chief Executive Officer
Richard C. Stoddard 50 Executive Vice President, President, HSSI
Gregory F. Bellomy 42 President, Contract Therapy Division
Tom E. Davis 49 President, Inpatient Division
Keith L. Goding 48 Executive Vice President and Chief Development Officer
Alfred J. Howard 46 President, Outpatient Division
Hickley M. Waguespack 55 Executive Vice President, Customer Service and Retention
John R. Finkenkeller 46 Senior Vice President, Chief Financial Officer and Secretary
ALAN C. HENDERSON has been President and Chief Executive Officer and a
Board Member of the Company since May 1998 and was Executive Vice President,
Chief Financial Officer and Secretary from 1991 through May 1998.
RICHARD C. STODDARD is a co-founder of HSSI, has been President of HSSI
since 1989, and is also a Board Member at the Company.
34
35
GREGORY F. BELLOMY has been President of the Company's Contract Therapy
Division since September 1998. Prior to joining the Company, Mr. Bellomy served
in various capacities, including Division President, Division Vice President and
Area General Manager, at TheraTex Incorporated from 1992 to 1997, at which time
TheraTex was acquired by Vencor Incorporated. Mr. Bellomy was National Director
of Vencare Ancillary Services for Vencor until he joined the Company.
TOM E. DAVIS has been President of the Inpatient Division of the Company
since January 1998 and joined the Company in January 1997 as Senior Vice
President of Operations. Prior to joining the Company, Mr. Davis was Group Vice
President for Quorum Health Resources from January 1990 to January 1997.
KEITH L. GODING has been Executive Vice President and Chief Development
Officer of the Company since February 1995. Prior to joining the Company, Mr.
Goding was Vice President for Corporate Alliances and Vice President of Sales,
Marketing and Product Development for Spectrum Healthcare Services, a division
of ARAMARK, where he was employed since 1974.
ALFRED J. HOWARD has been President of the Outpatient Division of the
Company since August 1996. Prior to joining the Company he was President of the
Eastern Operations for Pacific Rehabilitation and Sports Medicine from October
1993 to August 1996.
HICKLEY M. WAGUESPACK has been Executive Vice President, Customer Service
and Retention of the Company since January 1998, was Chief Operating Officer of
the Company from March 1995 through December 1997, and was Senior Vice President
- - Operations from June 1991 until February 1995.
JOHN R. FINKENKELLER has been Senior Vice President and Chief Financial
Officer of the Company since June 1998, was elected Secretary in August 1998 and
was Senior Vice President and Treasurer since October 1991.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is contained under the
caption "Compensation of Executive Officers," included in the Proxy Statement
for the 1999 Annual Meeting of Stockholders, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is contained under the captions "Voting Securities and Principal
Holders Thereof" and "Security Ownership by Management," included in the Proxy
Statement for the 1999 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
35
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Earnings for the years ended
December 31, 1998 and 1997, and for the ten months ended
December 31, 1996
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998 and 1997, and for the ten
months ended December 31, 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997, and for ten months ended
December 31, 1996
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 1998 and 1997, and for the ten
months ended December 31, 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
None
(3) Exhibits:
See Exhibit Index on page 46 of this Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the three
months ended December 31, 1998.
36
37
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: March 11, 1999
REHABCARE GROUP, INC.
(Registrant)
By: /s/ ALAN C. HENDERSON
-------------------------------------
(Alan C. Henderson)
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Dated
--------- ----- -----
/s/ ALAN C. HENDERSON President, Chief Executive March 11, 1999
-------------------------------- Officer and Director
(Alan C. Henderson)
Principal Executive Officer
/s/ JOHN R. FINKENKELLER Senior Vice President March 11, 1999
-------------------------------- and Chief Financial Officer
(John R. Finkenkeller)
Principal Financial Officer
/s/ WILLIAM G. ANDERSON Director March 11, 1999
--------------------------------
(William G. Anderson)
/s/ RICHARD E. RAGSDALE Director March 11, 1999
--------------------------------
(Richard E. Ragsdale)
/s/ JOHN H. SHORT Director March 11, 1999
--------------------------------
(John H. Short)
/s/ RICHARD C. STODDARD Director March 11, 1999
--------------------------------
(Richard C. Stoddard)
/s/ H. EDWIN TRUSHEIM Director March 11, 1999
--------------------------------
(H. Edwin Trusheim)
/s/ THEODORE M. WIGHT Director March 11, 1999
--------------------------------
(Theodore M. Wight)
37
38
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 Report on Form 10-Q for the quarter
ended May 31, 1995 and incorporated herein by reference)
3.3 Bylaws (filed as Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1, dated May 9, 1991 [Registration No. 33-40467] and
incorporated herein by reference)
4.1 Rights Agreement, dated September 21, 1992, by and between the Company
and Boatmen's Trust Company (filed as Exhibit 1 to the Company's
Registration Statement on Form 8-A filed September 24, 1992 and
incorporated herein by reference)
10.1 1987 Incentive Stock Option and 1987 Nonstatutory Stock Option Plans
(filed as Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, dated May 9, 1991 [Registration No. 33-40467] and incorporated
herein by reference)
10.2 Form of Stock Option Agreement (filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, dated May 9, 1991
[Registration No. 33-40467] and incorporated herein by reference)
10.3 Employment Agreement with Alan C. Henderson, dated May 1, 1991 (filed as
Exhibit 10.4 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1, dated June 19, 1991 [Registration No. 33-40467]
and incorporated herein by reference)
10.4 Employment Agreement with Richard C. Stoddard, dated March 1, 1996 by
and between Registrant, Healthcare Staffing Solutions, Inc. d/b/a Health
Tour, and Richard C. Stoddard (filed as Exhibit 10.1 to the Registrant's
Current Report on Form 8-K, dated March 1, 1996 and incorporated herein
by reference)
10.5 Form of Termination Compensation Agreement for Alan C. Henderson (filed
as Exhibit 10.6 to the Registrant's Registration Statement on Form S-1,
dated February 18, 1993 [Registration No. 33-58490] and incorporated
herein by reference)
10.6 Form of Termination Compensation Agreement for other executive officers
(filed as Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1, dated February 18, 1993 [Registration No. 33-58490] and
incorporated herein by reference)
10.7 Supplemental Bonus Plan (filed as Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1, dated February 18, 1993
[Registration No. 33-58490] and incorporated herein by reference)
10.8 Deferred Profit Sharing Plan (filed as Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1, dated February 18, 1993
[Registration No. 33-58490] and incorporated herein by reference)
10.9 RehabCare Executive Deferred Compensation Plan (filed as Exhibit 10.12
to the Registrant's Report on Form 10-K, dated May 27, 1994 and
incorporated herein by reference)
38
39
EXHIBIT INDEX (CONT'D)
10.10 RehabCare Directors' Stock Option Plan (filed as Appendix A to
Registrant's Proxy Statement for the 1994 Annual Meeting of Stockholders
and incorporated herein by reference)
10.11 RehabCare Group, Inc. 1996 Long-Term Performance Plan (filed as Appendix
A to the Registrant's Proxy Statement for the 1996 Annual Meeting of
Stockholders and incorporated herein by reference)
10.12 Form of Subordinated Convertible Promissory Note of Registrant issued to
stockholders of Healthcare Staffing Solutions, Inc. d/b/a Health Tour
(filed as Exhibit 2.4 to the Registrant's Current Report on Form 8-K,
dated March 1, 1996 and incorporated herein by reference)
10.13 Stock Purchase Agreement, dated January 27, 1997 by and among Registrant
and the stockholders of TeamRehab, Inc., Moore Rehabilitation Services,
Incorporated and Moore Rehabilitation Services, PC. (filed as Exhibit
10.19 to the Registrant's Report on Form 10-K, dated March 12, 1997 and
incorporated herein by reference)
10.14 Form of Subordinated Promissory Note of Registrant issued to the
stockholders of TeamRehab, Inc., Moore Rehabilitation Services,
Incorporated and Moore Rehabilitation Services, PC. (filed as Exhibit
10.20 to the Registrant's Report on Form 10-K, dated March 12, 1997 and
incorporated herein by reference)
10.15 Stock Purchase Agreement, dated July 8, 1998 by and among Medical
Resources, Inc., HealthCare Staffing Solutions, Inc. and RehabCare
Group, Inc. (filed as Exhibit 2.1 to Registrant's Current Report on Form
8-K, dated August 14, 1998 and incorporated herein by reference)
10.16 Escrow Agreement, dated as of August 14, 1998 by and among Medical
Resources Inc., RehabCare Group, Inc. and IBJ Schroder Bank & Trust
Company (filed as Exhibit 2.2 to Registrant's Current Report on Form
8-K, dated August 14, 1998 and incorporated herein by reference)
10.17 L/C Procedures Agreement, dated as of July 8, 1998 by and between
Medical Resources, Inc. and RehabCare Group, Inc. (filed as Exhibit 2.3
to Registrant's Current Report on Form 8-K, dated August 14, 1998 and
incorporated herein by reference)
10.18 Stock Purchase Agreement dated as of August 5, 1998 by and among
RehabCare Group Inc., Therapeutic Systems, Ltd. and Ronald C. Stauber
(filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K, dated
September 9, 1998 and incorporated herein by reference)
10.19 Amendment No. 1 to Stock Purchase Agreement dated as of September 9,
1998 by and among RehabCare Group, Inc., Therapeutic Systems, Ltd. and
Ronald C. Stauber (filed as Exhibit 2.2 to Registrant's Current Report
on Form 8-K, dated September 9, 1998 and incorporated herein by
reference)
13.1 Those portions of the Annual Report for the year ended Page 40
December 31, 1998 of the Registrant included in response
to Items 5 and 6 of Form 10-K
21.1 Subsidiaries of the Registrant Page 41
23 Consent of KPMG LLP Page 42
27 Financial Data Schedule Page 43
39
40
Exhibit 13.1
SIX-YEAR FINANCIAL SUMMARY Dollars in thousands, except per share data
(year ended December 31, unless noted) 1998 1997 1996 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of earnings data:
Operating revenues $207,416 $160,780 $119,856 $89,377 $83,210 $61,740
Operating earnings 23,331 18,980 12,717 10,276 8,531 5,533
Net earnings 12,198 10,615 6,992 5,878 4,735 3,070
Net earnings per share (EPS):
Basic $ 1.97 $ 1.77 $ 1.01 $ .87 $ .71 $ .59
Diluted $ 1.71 $ 1.47 $ .93 $ .84 $ .70 $ .59
Weighted average shares outstanding (000s):
Basic 6,184 5,999 6,955 6,725 6,614 4,514
Diluted 7,245 7,375 7,711 6,975 6,783 5,214
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Working capital $ 20,606 $ 12,793 $ 9,254 $11,818 $ 5,460 $ 6,271
Total assets 156,870 97,241 80,802 57,066 52,833 45,445
Total debt 65,855 39,014 17,467 7,125 10,200 7,700
Stockholders' equity 60,156 39,760 49,670 38,897 32,431 24,132
- ------------------------------------------------------------------------------------------------------------------------------------
Financial statistics:
Operating margin 11.3% 11.8% 10.6% 11.5% 10.2% 9.0%
Net margin 5.8% 6.1% 5.8% 6.6% 5.7% 5.0%
Current ratio 1.5:1 1.6:1 1.6:1 2.0:1 1.4:1 1.6:1
Diluted EPS growth rate 25.9% 45.2% 14.8% 20.0% 18.6% 22.9%
Return on equity 24.1% 21.8% 16.1% 16.5% 16.7% 25.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating statistics:
Inpatient (acute rehab and subacute):
Average number of units 128.2 110.3 91.3 84.7 84.1 64.4
Average admissions per unit 354 321 294 279 261 264
Average length of stay (billable) 14.5 15.0 15.9 17.3 18.4 19.0
Patient days (billable) 656,363 532,195 426,995 408,385 403,784 323,040
Outpatient:
Average number of locations 26.1 17.9 19.6 21.2 13.6 7.6
Patient visits 378,108 231,256 223,904 278,970 135,064 N/A
Therapy staffing - Number of weeks worked 52,265 29,652 21,908 -- -- --
Contract therapy - Average number of locations 49.5 35.6 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
For comparability purposes, reflects the twelve months ended December 31,
1996.
Twelve month period ended last day of February.
All share data adjusted for 3-for-2 stock split in October 1997.
1998 and 1997 include pre-tax gains of $1.5 million ($0.9 million after tax
or $0.12 per share) and $1.4 million ($0.9 million after tax or $0.12 per
share), respectively, from sales of marketable securities. 1998 includes an
$0.8 million ($0.11 per share) after-tax charge for the cumulative effect of
change in accounting for start-up costs.
Excludes gains from sale of marketable securities and charge for the
cumulative effect of change in accounting principle described in .
Average of beginning and ending equity.
N/A - Not available
- --------------------------------------------------------------------------------
STOCK DATA
The Company's common stock is listed and traded on the New York Stock Exchange
under the symbol "RHB". The stock prices below are the high and low sale prices.
Calendar Quarter 1st 2nd 3rd 4th
1998: High $27.50 $31.75 $25.13 $21.00
Low 20.63 21.75 11.88 11.00
1997: High 17.58 24.83 25.25 31.13
Low 12.50 15.75 17.67 23.50
The Company has not paid dividends on its common stock during the two most
recently completed fiscal years and has not declared any dividends during the
current fiscal year. The Company does not anticipate paying cash dividends in
the foreseeable future. The number of holders of the Company's common stock as
of March 11, 1999 was approximately 3,637 including 158 shareholders of record
and an estimated 3,479 persons or entities holding common stock in nominee name.
Shareholders may receive earnings news releases, which provide timely financial
information, by notifying our investor relations department or by visiting our
website at http://www.rehabcare.com.
40
41
Exhibit 21.1
Subsidiaries of Registrant
Healthcare Staffing Solutions, Inc. Incorporated in the Commonwealth
d/b/a Health Tour of Massachusetts
Health Tour Management, Inc. Incorporated in the Commonwealth
of Massachusetts
TeamRehab, Inc. Incorporated in the State of Missouri
Moore Rehabilitation Services, Inc. Incorporated in the State of Missouri
RehabCare Group East, Inc. Incorporated in the State of Delaware
RehabCare Group Management Services, Inc. Incorporated in the State of Delaware
RehabCare Group of California, Inc. Incorporated in the State of Delaware
RehabCare Group of Texas Holdings, Inc. Incorporated in the State of Delaware
RehabCare Group of Texas, L.P. Organized in the State of Texas
StarMed Management, L.L.C. Incorporated in the State of Delaware
StarMed Health Personnel, Inc. Incorporated in the State of Delaware
Wesley Medical Resources, Inc. Incorporated in the State of Delaware
Therapeutic Systems, Ltd. Incorporated in the State of Illinois
41
42
Exhibit 23
Independent Auditors' Consent
The Board of Directors
RehabCare Group, Inc.:
We consent to the incorporation by reference in the registration statement No.
33-82106 on Form S-8, registration statement No. 33-82048 on Form S-8, and
registration statement No. 333-11311 on Form S-8 of RehabCare Group, Inc. of our
report dated February 5, 1999, with respect to the consolidated balance sheets
of RehabCare Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of earnings, stockholders' equity, cash
flows and comprehensive earnings for the years ended December 31, 1998 and 1997
and for the ten months ended December 31, 1996, which report is included in the
December 31, 1998 annual report on Form 10-K of RehabCare Group, Inc.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs.
KPMG LLP
St. Louis, Missouri
March 24, 1999
42