<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 August 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 October 9, 1996
Common Stock, par value $.01 per share 4,678,598
<PAGE> 2
REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
August 31, 1996 (unaudited) and February 29, 1996 3
Condensed consolidated statements of earnings for the three
months and six months ended August 31, 1996 and 1995
(unaudited) 4
Condensed consolidated statements of cash flows for the
six months ended August 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 10
Item 6. - Exhibits and Reports on Form 8-K 11
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>
August 31, February 29,
1996 1996
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ -- $ 6,174
Marketable securities 2,995 4,495
Accounts receivable, net of allowance for
doubtful accounts of $1,765 and $822 22,222 10,847
Deferred tax assets 1,932 1,596
Prepaid expenses and other current assets 527 473
Total current assets 27,676 23,585
Marketable securities, non-current 1,202 497
Equipment and leasehold improvements, net 3,118 1,601
Other assets:
Excess of cost over net assets acquired, net 45,419 27,085
Deferred contract costs, net 1,566 1,661
Pre-opening costs, net 1,859 1,765
Deferred tax assets 771 577
Other 629 295
Total other assets 50,244 31,383
$ 82,240 $ 57,066
Liabilities and Stockholders' Equity:
Current liabilities:
Revolving credit facility $ 700 $ --
Current portion of long-term debt 3,093 2,093
Accounts payable 3,548 1,788
Accrued salaries and wages 9,110 5,326
Accrued expenses 1,848 1,123
Income taxes payable 1,402 1,437
Total current liabilities 19,701 11,767
Deferred compensation 1,781 1,370
Long-term debt, less current portion 16,245 5,032
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000
shares, issued 4,663,134 shares and 4,517,816
shares, respectively 47 45
Additional paid-in capital 22,442 20,043
Retained earnings 22,024 18,809
Total stockholders' equity 44,513 38,897
$ 82,240 $ 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 Six Months Ended
August 31, August 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Operating revenues $30,888 $22,470 $61,888 $44,453
Costs and expenses:
Operating expenses 22,111 16,489 44,246 32,450
General and administrative 4,864 2,913 9,984 5,882
Depreciation and amortization 817 612 1,626 1,211
Total costs and expenses 27,792 20,014 55,856 39,543
Operating earnings 3,096 2,456 6,032 4,910
Interest income 39 62 101 114
Interest expense (363) (203) (750) (409)
Other income(expense) (2) 7 10 14
Earnings before income taxes 2,770 2,322 5,393 4,629
Income taxes 1,117 948 2,178 1,896
Net earnings $ 1,653 $ 1,374 $ 3,215 $ 2,733
Net earnings per common and
common equivalent share:
Primary $ .34 $ .30 $ .66 $ .60
Assuming full dilution $ .33 $ .30 $ .64 $ .59
Weighted average number of common and
common equivalent shares outstanding:
Primary 4,892 4,631 4,874 4,572
Assuming full dilution 5,186 4,652 5,181 4,650
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>
Six Months Ended August 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,215 $ 2,733
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,626 1,211
Provision for losses on accounts receivable 392 205
Deferred compensation 411 346
Decrease (increase) in accounts receivable (4,260) 731
Decrease (increase) in prepaid expenses and
other current assets 257 (93)
Decrease in other assets 54 133
Decrease in accounts payable and accrued expenses (499) (10)
Increase in accrued salaries and wages 956 462
Decrease in income taxes payable (718) (255)
(1,781) 2,730
Net cash provided by operating activities 1,434 5,463
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (630) (155)
Deferred contract costs (228) (165)
Purchase of investments (1,020) (2,597)
Proceeds from sale/maturities of investments 1,815 10
Pre-opening costs (382) (461)
Acquisition of business, net of cash received (5,300) --
Repayment of advance to affiliate 265 --
Net cash used in investing activities (5,480) (3,368)
Cash flows from financing activities:
Payments on revolving credit facility, net (1,300) --
Payments on long-term debt (1,037) (2,027)
Other 209 59
Net cash used in financing activities (2,128) (1,968)
Net increase (decrease) in cash and
cash equivalents (6,174) 127
Cash and cash equivalents at beginning of period 6,174 3,226
Cash and cash equivalents at end of period $ 0 $ 3,353
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 six
months ended August 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, in May 1996, issued a proposed assessment against the Company of
$1,935,455 for years 1989 through 1993. The Company subsequently received from
the IRS separate proposed Closing Agreements for these same independent
contractors under the IRS's new "Classification Settlement Program" with an
alternate aggregate assessment of $253,426 covering the 1989 through 1993 audit,
including any additional potential liability through September 30, 1991. The
Company is currently evaluating whether to accept any of the settlement offers
and as a result, change its classification policy as required by the Closing
Agreement, or to continue to defend its current practice. While the Company
believes it has arguments to support its current 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 years 1989 through February 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
<PAGE> 7
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 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 six-month period
ended August 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 such periods presented.
<TABLE>
<CAPTION>
Six Months Ended
August 31, 1996 August 31, 1995
<S> <C> <C>
Operating revenues $ 61,888,000 $ 57,488,000
Net earnings 3,215,000 3,020,000
Net earnings per common and
common equivalent share:
Primary $ .66 $ .64
Assuming full dilution $ .64 $ .62
</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. The revolving credit facility will terminate with the balance payable
on April 30, 1998. Advances under the revised revolving credit facility will
<PAGE> 8
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 August 31, 1996
the Company's borrowings under the revolving credit facility totaled $3,200,000
of which $2,500,000 is classified as long-term debt and a letter of credit was
outstanding in the amount of $3,000,000.
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 Six Months Ended
Operating Statistics August 31, August 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Inpatient Units (Acute and Subacute)
Average bed capacity 1,814 1,674 1,805 1,645
Average billable length of stay (days) 15.8 17.4 16.0 17.6
Billable patient days served 105,149 102,764 209,572 203,914
Admissions 6,645 5,897 13,110 11,613
Average daily billable census 1,143 1,117 1,139 1,108
Average occupied beds per unit 12.8 13.4 12.9 13.7
Total units in operation at end of period 91 85 91 85
Outpatient Clinics
Patient visits 48,788 69,001 111,835 138,782
Units of service 152,222 185,222 338,203 365,242
Total clinics in operation at end of period 19 22 19 22
</TABLE>
Three Months Ended August 31, 1996 Compared to Three Months Ended
August 31, 1995
Operating revenues during the second quarter of fiscal 1997 increased by
$8,418,000, or 37.5%, to $30,888,000. The acquisition of Health Tour accounted
for substantially all of the net increase. A 7.6% increase in the average
number of inpatient units from 84.4 to 90.8 units, offset by a decrease in the
average daily billable census per inpatient unit of 4.5% from 13.2 to 12.6,
generated a 2.3% increase in billable patient days at those units to 105,149 and
a 2.0% increase in inpatient unit revenue. The decrease in billable census per
unit for inpatient units is primarily attributable to a 9.2% decline in average
length of stay on a 4.7% increase in admissions per unit. 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
fiscal 1997, which carry a shorter length of stay. The increase in inpatient
unit revenue was offset by a comparable decrease in outpatient revenue.
<PAGE> 9
Operating expenses for the three-month periods compared increased by
$5,622,000 or 34.1% to $22,111,000. The acquisition of Health Tour accounted
for substantially all of the net increase.
The excess of operating expenses over operating revenues associated with
non-exempt units increased from $25,000 to $192,000, attributable to the
increase in the average number of non-exempt units from 1.0 to 5.0. Average
start-up losses for a unit during the non-exempt year typically range from
$150,000 to $200,000.
General and administrative expenses increased $1,951,000, or 67.0%, to
$4,864,000, reflecting increases in professional services, operations and legal
compared to the previous year, plus the addition of Health Tour's corporate
staff.
Interest expense increased $160,000 reflecting an increase in interest
rates and interest on net new debt issued in the acquisition of Health Tour.
Earnings before income taxes increased by $448,000, or 19.3%, to
$2,770,000. The provision for income taxes for the second quarter of fiscal
1997 was $1,117,000, compared to $948,000 for 1996, reflecting effective income
tax rates of 40.3% and 40.8% for the respective quarters. Net earnings
increased by $279,000, or 20.3% to $1,653,000. Earnings per share increased
13.3% to 34 cents from 30 cents on a 5.6% 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."
Six Months Ended August 31, 1996 Compared to Six Months Ended August 31, 1995
Operating revenues during the first six months of fiscal 1997 increased by
$17,435,000, or 39.2%, to $61,888,000. The acquisition of Health Tour accounted
for substantially all of the increase. An 8.9% increase in the average number
of inpatient units from 82.7 to 90.1 units, offset by a decrease in the average
daily billable census per inpatient unit of 6.0% from 13.4 to 12.6, generated a
2.8% increase in billable patient days at those units to 209,572 and a 1.9%
increase in inpatient unit revenue. The decrease in billable census per unit
for inpatient units is primarily attributable to a 9.0% decline in average
length of stay on a 3.6% increase in admissions per unit. The increase in
inpatient unit revenue was offset by the decrease in outpatient revenue in the
second quarter of fiscal 1997. 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 fiscal 1997, which carry a shorter
length of stay.
Operating expenses for the six-month periods compared increased by
$11,796,000 or 36.4% to $44,246,000. The acquisition of Health Tour accounted
for $11,660,000 or 98.8% 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 $123,000 to $455,000, attributable to the
increase in the average number of non-exempt units from 1.7 to 5.0. Average
start-up losses for a unit during the non-exempt year typically range from
$150,000 to $200,000.
General and administrative expenses increased $4,102,000, or 69.7%, to
<PAGE> 10
$9,984,000, reflecting increases in business development, operations and
professional services compared to the previous year, plus the addition of Health
Tour's corporate staff.
Interest expense increased $341,000 reflecting the increase in interest
rates and interest on net new debt issued in the acquisition of Health Tour.
Earnings before income taxes increased by $764,000, or 16.5%, to
$5,393,000. The provision for income taxes for the first six months of fiscal
1997 was $2,178,000, compared to $1,896,000 for 1996, reflecting effective
income tax rates of 40.4% and 41.0% for the respective quarters. Net earnings
increased by $482,000, or 17.6% to $3,215,000. Earnings per share increased
10.0% to 66 cents from 60 cents on a 6.6% 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 August 31, 1996, the Company had $2,995,000 in cash and current
marketable securities and a current ratio of 1.4:1. Working capital decreased
by $3,843,000 as of August 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 $22,222,000 at August 31, 1996, compared to
$10,847,000 at February 29, 1996. The number of days average net revenue in net
receivables was 66.2 at August 31, 1996 compared to 43.9 at February 29, 1996,
reflecting the addition of Health Tour's receivables, which averaged 113 days
due to credit terms that typically allow payments in installments over the term
of the therapists' assignments, 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 August 31,
1996 of $3,200,000.
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 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> 11
Item 6 - Exhibits and Reports on Form 8-k
(a) Exhibits
27 Financial Data Schedule
(b) Report on Form 8-k
None
<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.
October 9, 1996 By /S/ John R. Finkenkeller
John R. Finkenkeller
Senior Vice President
and Treasurer
(Chief Accounting Officer)
<PAGE> 13
EXHIBIT INDEX
Page Number
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> AUG-31-1996
<CASH> 0
<SECURITIES> 2,995,000
<RECEIVABLES> 23,987,000
<ALLOWANCES> 1,765,000
<INVENTORY> 0
<CURRENT-ASSETS> 27,676,000
<PP&E> 3,118,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 82,240,000
<CURRENT-LIABILITIES> 19,701,000
<BONDS> 16,245,000
0
0
<COMMON> 47,000
<OTHER-SE> 44,466,000
<TOTAL-LIABILITY-AND-EQUITY> 82,240,000
<SALES> 61,888,000
<TOTAL-REVENUES> 61,888,000
<CGS> 44,246,000
<TOTAL-COSTS> 55,856,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 750,000
<INCOME-PRETAX> 5,393,000
<INCOME-TAX> 2,178,000
<INCOME-CONTINUING> 3,215,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,215,000
<EPS-PRIMARY> .66
<EPS-DILUTED> .64
</TABLE>
