<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
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 Number)
incorporation or organization)
7733 Forsyth Boulevard, Suite 1700, St. Louis, MO 63105
(Address of principal executive offices and Zip Code)
314-863-7422
(Registrant's telephone number, including area code)
Indicate by check mark 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 the number of shares outstanding of the Registrant's common stock, as
of the latest practicable date.
Class Outstanding at July 9, 1996
Common Stock, par value $.01 per share 4,663,134
<PAGE> 2
REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
May 31, 1996 (unaudited) and February 29, 1996 3
Condensed consolidated statements of earnings for the three
months ended May 31, 1996 and 1995 (unaudited) 4
Condensed consolidated statements of cash flows for the
three months ended May 31, 1996 and 1995 (unaudited) 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. - Other Information
Item 1. - Legal Proceedings 9
Item 4. - Submission of Matters to Security Holders 10
Item 6. - Exhibits and Reports on Form 8-K 10
Signatures 12
<PAGE> 3
PART 1. - FINANCIAL INFORMATION
Item 1. - Condensed Consolidated Financial Statements
<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Balance Sheets
(Dollar amounts in thousands)
<CAPTION>
May 31, February 29,
1996 1996
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 2,447 $ 6,174
Marketable securities 2,995 4,495
Accounts receivable, net of allowance for
doubtful accounts of $1,614 and $822 19,673 10,847
Deferred tax assets 1,889 1,596
Prepaid expenses and other current assets 561 473
Total current assets 27,565 23,585
Marketable securities, non-current 682 497
Equipment and leasehold improvements, net 3,144 1,601
Other assets:
Excess of cost over net assets acquire 45,723 27,085
Deferred contract costs, net 1,475 1,661
Pre-opening costs, net 1,701 1,765
Deferred tax assets 899 577
Other 651 295
Total other assets 50,449 31,383
$81,840 $57,066
Liabilities and Stockholders' Equity:
Current liabilities:
Revolving credit facility $ 3,500 --
Current portion of long-term debt 3,093 $ 2,093
Accounts payable 4,111 1,788
Accrued salaries and wages 8,691 5,326
Accrued expenses 1,759 1,123
Income taxes payable 2,168 1,437
Total current liabilities 23,322 11,767
Deferred compensation 1,655 1,370
Long-term debt, less current portion 14,017 5,032
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000
shares, issued 4,661,384 shares and 4,517,816
shares, respectively 47 45
Additional paid-in capital 22,428 20,043
Retained earnings 20,371 18,809
Total stockholders' equity 42,846 38,897
$81,840 $57,066
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(Amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended May 31,
1996 1995
<S> <C> <C>
Operating revenues $31,000 $21,983
Costs and expenses:
Operating expenses 22,135 15,961
General and administrative 5,120 2,969
Depreciation and amortization 809 599
Total costs and expenses 28,064 19,529
Operating earnings 2,936 2,454
Interest income 62 52
Interest expense (387) (206)
Other income 12 7
Earnings before income taxes 2,623 2,307
Income taxes 1,061 948
Net earnings $ 1,562 $ 1,359
Net earnings per common and common equivalent share:
Primary $ .32 $ .30
Assuming full dilution $ .31 $ .30
Weighted average number of common and common
equivalent shares outstanding:
Primary 4,856 4,523
Assuming full dilution 5,138 4,563
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<CAPTION>
Three Months Ended May 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings $1,562 $1,359
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 809 599
Provision for losses on accounts receivable 229 99
Deferred compensation 285 242
Decrease (increase) in accounts receivable (1,548) 2,429
Decrease (increase) in prepaid expenses and
other current assets 223 (17)
Decrease in other assets 32 33
Decrease in accounts payable and accrued expenses (25) (229)
Increase in accrued salaries and wages 537 139
Increase (decrease) in income taxes payable (37) 314
505 3,609
Net cash provided by operating activities 2,067 4,968
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net(449) (20)
Deferred contract costs 24 (115)
Purchase of investments (500) (172)
Proceeds from sale/maturities of investments 1,815 9
Pre-opening costs (79) (216)
Acquisition of business, net of cash received (5,300) --
Repayment of advance to affiliate 265 --
Net cash used in investing activities (4,224) (514)
Cash flows from financing activities:
Payment on revolving credit facility (1,000) --
Payments on long-term debt (765) (1,511)
Other 195 45
Net cash used in financing activities (1,570) (1,466)
Net increase (decrease) in cash and
cash equivalents (3,727) 2,988
Cash and cash equivalents at beginning of period 6,174 3,226
Cash and cash equivalents at end of period $2,447 $6,214
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 6
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. - Basis of Presentation
The condensed consolidated balance sheets and related condensed
consolidated statements of earnings and statements of cash flows contained in
this Form 10-Q, which are unaudited, include the accounts of the Company and
its wholly owned subsidiaries, RehabCare Outpatient Services, Inc.(formerly
Physical Therapy Resources, Inc.) and Healthcare Staffing Solutions, Inc.
d/b/a Health Tour ("Health Tour"). All significant intercompany accounts have
been eliminated in consolidation. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements
have been included. Adjustments consisted only of normal recurring items.
The results of operations for the three months ended May 31, 1996, are not
necessarily indicative of the results to be expected for the full fiscal year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Reference is made to the Company's audited
consolidated financial statements and the related notes as of February 29,
1996 and February 28, 1995 and for each of the years in the three-year period
ended February 29, 1996, included in the Annual Report on Form 10-K on file
with the Securities and Exchange Commission, which provide additional
disclosures and a further description of accounting policies.
Note 2. - Contingencies
The Company, together with Comprehensive Care Corporation ("CompCare"), its
former parent, is undergoing a Federal payroll tax audit for the years 1989
through 1993. The Internal Revenue Service ("IRS") has asserted that certain
medical professionals and others engaged as independent contractors by
CompCare and the Company should have been treated as employees for payroll tax
purposes. The IRS has issued a proposed assessment of $1,935,455 for years
1989 through 1993. While the Company believes it has arguments in support of
its position and will continue to defend that position, there can be no
assurance that the Company will prevail in whole or in part. Pursuant to
terms of a settlement reached with CompCare in February 1996, in satisfaction
of a lawsuit previously filed by the Company with regard to a tax sharing
agreement between the Company and CompCare, entered into in conjunction with the
Company's initial public offering in 1991, CompCare has agreed to pay the
Company 72.5% of any loss and costs incurred after December 31, 1995 related
to the employment tax issue for fiscal years 1989 through 1991.
On October 30, 1992, CompCare filed an action against the Company with the
Federal District Court for the Eastern District of Missouri alleging fraud by
the Company under the common law and the Federal securities laws in the
negotiation of the Stock Redemption Agreement dated September 1, 1992, by and
between CompCare and the Company. The action sought both actual and punitive
monetary damages from the Company. On March 8, 1995, a Federal court jury
returned a verdict against the Company on three of the six counts of the
lawsuit in the amount of $2,681,250. No punitive damages were awarded. The
<PAGE> 7
Company believes each of the verdicts against it is erroneous and, that it has
meritorious legal defenses. Appellate arguments were heard on June 10, 1996
before a three judge panel of the Eighth Circuit Court of Appeals. No decision
has yet been rendered in connection with such appeal. Therefore, the Company
and its counsel have determined that it is not possible to estimate the amount
of damages, if any, that may ultimately be incurred. As a result, no
provision has been made in the consolidated financial statements with respect
to this matter. The Company has purchased a $3,000,000 supersedeas bond to
obtain a stay of execution on any proceedings by CompCare to enforce the
judgement. The bond is backed by a bank letter of credit.
Note 3. - Acquisition
On March 1, 1996, the Company purchased 100% of the capital stock of Health
Tour. The aggregate purchase price of $21,450,000 paid at closing included
$13,250,000 in cash, a $6,000,000 ten-year convertible subordinated promissory
note, and 123,530 shares of the Company's common stock. Additional
consideration will be paid to the former Health Tour stockholders contingent
upon the attainment of certain target cumulative earnings before interest and
income taxes up to a maximum of $8,650,000 in additional consideration over
six years. The acquisition has been accounted for by the purchase method of
accounting, whereby the operating results of Health Tour are included in
the Company's results of operations commencing on the date of acquisition.
Goodwill related to the acquisition totaling $19.1 million is being amortized
over 40 years.
The following unaudited pro forma financial information assumes the
acquisition of Health Tour occurred at the beginning of the three month period
ended May 31, 1995. This information is not necessarily indicative of results
of operations that would have occurred had the purchase been made at the
beginning of the periods presented.
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1996 May 31, 1995
<S> <C> <C>
Operating revenues $ 31,000,000 $ 28,186,000
Net earnings 1,562,000 1,507,000
Net earnings per common and
common equivalent share:
Primary $ .32 $ .32
Assuming full dilution $ .31 $ .31
</TABLE>
On March 1, 1996 as part of the acquisition of Health Tour, 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, $10,000,000 bank term loan which bears interest, at the Company's
option, at the bank s CBR, or LIBOR plus from 1.375% to 1.875%, or a
combination of the two, such rates being dependent on the ratio of the
Company s available credit to cash flow. The amount that may be borrowed
under the revolving credit facility was increased to the lesser of $14,000,000
or 85% of eligible accounts receivable, reduced by amounts outstanding under
the Company's bank letter of credit. Advances under the revised revolving
credit facility will bear interest at the Company's option of either LIBOR
plus 1.125% to 1.625%, or the bank s CBR as of the date of the advance, with
such rates being dependent on the ratio of the Company's available credit to
cash flow. As of May 31, 1996 the Company's borrowings under the revolving
credit facility totaled $3,500,000 and a letter of credit was outstanding in the
amount of $3,000,000.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Company provides physical medicine, rehabilitation and chronic care
services in a variety of settings under multi-year contracts with acute-care
hospitals. These settings include distinct-part acute rehabilitation units
that may or may not be exempt from the Medicare Prospective Payment System
(PPS), depending on their stage of development; subacute units that are
operated within licensed skilled nursing units; and outpatient clinics, both
on and off campus of the host hospital. The Company also is a contract
provider of therapists on a temporary basis to hospitals and long-term care
and rehabilitation facilities.
<TABLE>
<CAPTION>
Three Months Ended
Operating Statistics May 31,
1996 1995
<S> <C> <C>
Inpatient Units (Acute and Subacute)
Average bed capacity 1,796 1,616
Average billable length of stay (days) 16.2 17.7
Billable patient days served 104,423 101,150
Admissions 6,465 5,716
Average daily billable census 1,135 1,100
Average occupied beds per unit 13.0 13.9
Total units in operation at end of period 89 82
Outpatient Clinics
Patient visits 63,047 69,781
Units of service 185,981 180,020
Total clinics in operation at end of period 19 21
</TABLE>
Three Months Ended May 31, 1996 Compared to Three Months Ended May 31, 1995
Operating revenues during the first quarter of fiscal 1997 increased by
$9,017,000, or 41.0%, to $31,000,000. The acquisition of Health Tour accounted
for $8,544,000 or 95% of the increase. A 10.5% increase in the average number
of inpatient units from 80.9 to 89.4 units, offset by a decrease in the
average daily billable census per inpatient unit of 6.6% from 13.6 to 12.7,
generated a 3.2% increase in billable patient days at those units to 104,423.
The decrease in billable census per unit for inpatient units is primarily
attributable to an 8.5% decline in average length of stay on a 2.4% increase
in admissions per unit. The decline in average length of stay reflects the
increase in subacute units operational in fiscal 1997, which carry a shorter
length of stay.
Operating expenses for the three-month periods compared increased by
$6,174,000 or 38.7% to $22,135,000. The acquisition of Health Tour
accounted for $5,808,000 or 94.1% of the increase. The remaining increase was
attributable to the increase in patient days.
The excess of operating expenses over operating revenues associated
with non-exempt units increased from $98,000 to $262,000, attributable to the
increase in the average number of non-exempt units from 2.3 to 5.0. Average
start-up losses for a unit during the non-exempt year typically range from
$150,000 to $200,000.
<PAGE> 9
General and administrative expenses increased $2,151,000, or 72.4%, to
$5,120,000, reflecting increases in business development, operations and
subacute operations compared to the previous year, plus the addition of Health
Tour's corporate staff.
Earnings before income taxes increased by $316,000, or 13.7%, to
$2,623,000. The provision for income taxes for the first quarter of fiscal
1997 was $1,061,000, compared to $948,000 for 1996, reflecting effective
income tax rates of 40.4% and 41.1% for the respective quarters. Net earnings
increased by $203,000, or 14.9% to $1,562,000. Earnings per share increased
6.7% to 32 cents from 30 cents on a 7.4% increase in the weighted average
shares outstanding. The increase in shares outstanding is attributable
primarily to the shares issued in the acquisition of Health Tour and an increase
in common stock equivalents resulting from an increase in the market price of
the Company's stock relative to the underlying exercise prices of outstanding
stock options. See "Liquidity and Capital Resources."
Liquidity and Capital Resources
As of May 31, 1996, the Company had $5,442,000 in cash and current
marketable securities and a current ratio of 1.2:1. Working capital decreased
by $7,575,000 as of May 31, 1996, compared to February 29, 1996 due to the
cash tendered and debt issued in the acquisition of Health Tour.
Net accounts receivable were $19,673,000 at May 31, 1996, compared to
$10,847,000 at February 29, 1996. The number of days average net revenue in
net receivables was 58.4 at May 31, 1996 compared to 43.9 at February 29,
1996, reflecting the addition of Health Tour's receivables, which averaged 96
days due to credit terms that typically allow payments in installments over
the term of the therapists assignment, typically 13 weeks in duration.
The Company's operating cash flows constitute its primary source of
liquidity and historically have been sufficient to fund its working capital
and capital expansion 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. The
Company has a $14,000,000 revolving line of credit and a balance outstanding
as of May 31, 1996 of $3,500,000.
The Company has purchased a $3,000,000 supersedeas bond to obtain a stay
of execution on any proceedings by CompCare to enforce the judgment rendered
in the March 8, 1995, Federal Court jury verdict. This bond is backed by a
bank letter of credit that reduces the amount the Company may borrow under the
revolving line of credit by the amount of the bond.
Part II. - OTHER INFORMATION
Item 1. - Legal Proceedings
The Company together with CompCare is undergoing a Federal Payroll tax
audit for the years 1989 through 1993. The Company is also a party to a
Federal Court proceeding with CompCare. See Part I, "Notes to Condensed
Consolidated Financial Statements," Note 2, for further disclosure.
<PAGE> 10
Item 4. - Submission of Matters to Security Holders
The Annual Meeting of Stockholders of the Company was held on Wednesday,
June 26, 1996, at which time the stockholders voted to elect the seven
incumbent directors to hold office until the next annual meeting of
stockholders of the Company or until their successors have been duly elected
and qualified. Also, the stockholders voted on a proposal to adopt the
RehabCare Group, Inc. 1996 Long-Term Performance Plan. The names of each of
the directors of the Company who were reelected at the Annual Meeting and the
votes cast "FOR" or for which authority to vote was "WITHHELD" is as follows:
<TABLE>
<CAPTION>
Name For Withheld Authority
<S> <C> <C>
William G. Anderson 4,052,334 6,800
Richard E. Ragsdale 4,051,774 7,360
H. Edwin Trusheim 4,051,434 7,700
Theodore M. Wight 4,052,034 7,100
John H. Short 4,051,934 7,200
James M. Usdan 4,049,149 9,985
Richard C. Stoddard 4,052,334 6,800
</TABLE>
Regarding the proposal to adopt the Long-Term Performance Plan, the
votes cast were 2,691,790 "FOR" , 298,014 "AGAINST" and 16,405 "ABSTAIN".
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 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)
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated March 6, 1996 was filed by the Company to
include, pursuant to Item 7 of Form 8-K, the historical and pro forma
financial statements required to be filed upon the acquisition of Healthcare
Staffing Solutions, Inc. d/b/a Health Tour and HCH, Inc. on March 1, 1996.
The consummation of such acquisition had been previously reported by the
Company in its Annual Report on Form 10-K for the year ended February 29,
1996.
The following historical and pro forma financial statements were included in
Form 8-K:
(a) Historical Combined Financial Statements:
Healthcare Staffing Solutions, Inc. d/b/a Health Tour and HCH, Inc.
Independent auditors report
Combined balance sheets, as of December 31, 1995 and 1994
Combined statements of income and retained earnings, years ended
December 31, 1995, 1994 and 1993
Combined statements of cash flows, years ended December 31, 1995,
1994 and 1993
Notes to combined financial statements
<PAGE> 11
(b) Pro Forma Condensed Combined Financial Information (Unaudited):
RehabCare Group, Inc. and Subsidiaries
Pro forma condensed combined balance sheet, as of November 30, 1995
Pro forma condensed combined statement of operations, year ended
February 28, 1995
Pro forma condensed combined statement of operations, nine months
ended November 30, 1995
Notes to pro forma condensed combined financial information
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REHABCARE GROUP, INC.
July 9, 1996
By /S/ John R. Finkenkeller
-------------------------
John R. Finkenkeller
Senior Vice President
and Treasurer
(Chief Accounting Officer)
<PAGE> 13
EXHIBIT INDEX
10.1 RehabCare Group, Inc. 1996 Long-Term Performance Plan
(filed as Appendix A to the Registrants Proxy
Statement For the 1996 Annual Meeting of Stockholders
and incorporated herein by reference)
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> MAY-31-1996
<CASH> 2,447,000
<SECURITIES> 2,995,000
<RECEIVABLES> 21,287,000
<ALLOWANCES> 1,614,000
<INVENTORY> 0
<CURRENT-ASSETS> 27,565,000
<PP&E> 3,144,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 81,840,000
<CURRENT-LIABILITIES> 23,322,000
<BONDS> 14,017,000
0
0
<COMMON> 47,000
<OTHER-SE> 42,799,000
<TOTAL-LIABILITY-AND-EQUITY> 81,840,000
<SALES> 31,000,000
<TOTAL-REVENUES> 31,000,000
<CGS> 22,135,000
<TOTAL-COSTS> 28,064,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 387,000
<INCOME-PRETAX> 2,623,000
<INCOME-TAX> 1,061,000
<INCOME-CONTINUING> 1,562,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,562,000
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
