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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 March 31, 1997
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 May 12, 1997
- -------------------------------------- ---------------------------
Common Stock, par value $.01 per share 3,768,547
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REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
March 31, 1997 (unaudited) and December 31, 1996 3
Condensed consolidated statements of earnings for the three
months ended March 31, 1997 and 1996 (unaudited) 4
Condensed consolidated statements of cash flows for the
three months ended March 31, 1997 and 1996 (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 4. - Submission of Matters to Security Holders 10
Item 6. - Exhibits and Reports on Form 8-K 10
Signatures 11
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PART 1. - FINANCIAL INFORMATION
Item 1. - Condensed Consolidated Financial Statements
<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Balance Sheets
(Dollar amounts in thousands)
<CAPTION>
March 31, December 31,
1997 1996
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 2,827 $ 772
Marketable securities 4,100 6,666
Accounts receivable, net of allowance for
doubtful accounts of $1,451 and $1,386 20,251 15,546
Deferred tax assets 1,798 921
Prepaid expenses and other current assets 649 525
------ ------
Total current assets 29,625 24,430
------ ------
Marketable securities, non-current 1,304 1,310
------ ------
Equipment and leasehold improvements, net 2,985 2,935
------ ------
Other assets:
Excess of cost over net assets acquired, net 51,884 47,119
Deferred contract costs, net 1,166 1,302
Pre-opening costs, net 2,381 2,295
Deferred tax assets 339 424
Other 954 987
------ ------
Total other assets 56,724 52,127
------ ------
$ 90,638 $ 80,802
====== ======
Liabilities and Stockholders' Equity:
Current liabilities:
Revolving credit facility $ -- 500
Current portion of long-term debt 3,000 2,967
Current portion of notes payable, related parties 1,056 --
Accounts payable 2,035 1,083
Accrued salaries and wages 9,730 6,969
Accrued expenses 3,045 2,026
Income taxes payable 2,399 1,631
------ ------
Total current liabilities 21,265 15,176
------ ------
Deferred compensation 2,051 1,956
------ ------
Long-term debt, less current portion 31,000 8,000
------ ------
Notes payable, related parties, less current portion 7,125 6,000
------ ------
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000
shares, issued 4,768,127 shares and 4,693,362
shares, respectively 48 47
Additional paid-in capital 23,794 22,816
Retained earnings 27,845 24,577
Less common stock held in treasury at cost,
999,955 shares as of March 31, 1997 (23,131) --
Unrealized gain on marketable securities,
net of tax 641 2,230
------ ------
Total stockholders' equity 29,197 49,670
------ ------
$ 90,638 $ 80,802
====== ======
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(Amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Operating revenues $36,405 $25,558
Costs and expenses:
Operating expenses 25,196 18,300
General and administrative 6,021 3,401
Depreciation and amortization 878 675
------ ------
Total costs and expenses 32,095 22,376
------ ------
Operating earnings 4,310 3,182
Interest income 35 142
Interest expense (450)
Other income -- 19
Gain on sale of investment 1,448 --
------ -----
Earnings before income taxes 5,343 3,102
Income taxes 2,076 1,250
------ ------
Net earnings $ 3,267 $ 1,852
====== ======
Net earnings per common and common equivalent share:
Primary $ .66 $ .38
====== ======
Assuming full dilution $ .63 $ .37
====== ======
Weighted average number of common and common equivalent shares outstanding:
Primary 4,959 4,833
====== ======
Assuming full dilution 5,310 5,117
====== ======
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,267 $ 1,852
------ ------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 878 675
Provision for losses on accounts receivable 105 80
Deferred compensation 95 109
Increase in accounts receivable (3,816) (6,597)
Decrease (increase) in prepaid expenses and
other current assets (107) 190
Decrease in other assets 33 128
Increase in accounts payable and accrued expenses 1,725 1,121
Increase in accrued salaries and wages 2,322 3,172
Decrease (increase) in income taxes payable (495) 36
------ ------
740 (1,086)
------ ------
Net cash provided by operating activities 4,007 766
------ ------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (246) (297)
Deferred contract costs -- (73)
Purchase of investments -- (339)
Proceeds from sale/maturities of investments 1,454 1,500
Pre-opening costs (275) (77)
Acquisition of business, net of cash received (4,951) (19,258)
------ ------
Net cash used in investing activities (4,018) (18,544)
------ ------
Cash flows from financing activities:
Proceeds from revolving credit facility, net 7,000 4,500
Payments on long-term debt (786) (513)
Issuance of note payable 1,500 6,000
Issuance of long-term debt 17,000 6,086
Purchase of treasury stock (23,131) --
Other 483 483
------ ------
Net cash provided by financing activities 2,066 16,556
------ ------
Net increase (decrease) in cash and
cash equivalents 2,055 (1,222)
Cash and cash equivalents at beginning of period 772 3,963
------ ------
Cash and cash equivalents at end of period $ 2,827 $ 2,741
====== ======
See notes to condensed consolidated financial statements.
</TABLE>
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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.), Healthcare Staffing Solutions, Inc. d/b/a Health Tour("HSSI"),
and TeamRehab, Inc. and Moore Rehabilitation Services, Inc. ("Team and Moore").
All significant intercompany accounts and activity 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 March 31, 1997, are not necessarily indicative of the results
to be expected for the 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 December 31, 1996
and February 29, 1996 and for the ten months ended December 31, 1996 and for
each of the years in the two-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.
The Company changed its fiscal year end from the last day of February to
December 31, effective as of December 31, 1996. For purposes of comparability,
the condensed consolidated statements of earnings and statements of cash flows
for the three month periods ended March 31, 1997 and 1996 have been set forth
herein.
Note 2. - Contingencies
The Company has undergone 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 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 December 31, 1996. In October 1996, the Company
accepted a settlement offer for one of the classes of medical professionals,
paid $11,613 as settlement and agreed to prospectively treat this class of
professionals as employees. The Company is currently continuing to defend its
classification of the remaining classes which represent a total proposed
assessment of $1,364,000 ($242,000 under the classification settlement program.)
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The Company will continue to evaluate whether to accept any of the
additional settlement offers and, as a result, change its classification policy
as required by the Closing Agreements. 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. In December 1996, the Company and
Comprehensive Care Corporation ("CompCare"), the Company's former parent,
entered into an agreement and release whereby CompCare paid the Company $154,000
resulting in discharge of CompCare's obligations for employment taxes and costs
under the Tax Sharing Agreement entered into in conjunction with the Company's
initial public offering in 1991. In the opinion of management, the ultimate
disposition of this matter will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Note 3. - Acquisition
On January 28, 1997, the Company purchased 100% of the capital stock of Team
and Moore. The aggregate purchase price of $5,600,000 paid at closing included
$3,600,000 in cash, a $1,500,000 subordinated promissory note, and 25,365 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. The acquisition has been
accounted for by the purchase method of accounting, whereby the operating
results of Team and Moore have been included in the Company's results of
operations commencing on the date of acquisition. Goodwill related to the
acquisition totaling $5,100,000 is being amortized over 40 years.
Note 4. - Common Stock Repurchase
On January 31, 1997 the Company made a tender offer to purchase up to
925,000 shares of its common stock at a single purchase price, not less than
$20.00 nor in excess of $22.50 per share, the purchase price to be selected by
the Company based on prices specified by tendering stockholders at the lowest
single purchase price sufficient to purchase 925,000 shares. As of February 28,
1997, the closing date, shares totaling greater than 925,000 were tendered,
resulting in the Company's repurchase on March 12, 1997 of a total of 999,955
shares at the single purchase price of $22.50 per share. To finance the
repurchase, on March 5, 1997 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, $25,000,000 bank term loan and a
$20,000,000 revolving credit facility. The amount that may be borrowed under the
revolving credit facility was increased to the lesser of $20,000,000 or 85% of
eligible accounts receivable. Amounts borrowed under the revised term loan and
revolving credit facility will bear interest at the Company's option, at the
banks CBR, or LIBOR plus from 1.25% to 2.00%, or a combination of the two, such
rates being dependent on the ratio of the Company's indebtedness, net of cash
and marketable securities, to cash flow.
Note 5. - Earnings Per Share
In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share," was issued establishing new standards for computing
and presenting earnings per share. The historical measures of earnings per share
(primary and fully diluted) are replaced with two new computations of earnings
per share (basic and diluted). The Company will adopt SFAS 128 as of December
31, 1997. Earnings per share, on a pro forma basis, for the three month periods
ended
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March 31, 1997 and 1996, computed pursuant to the provisions of SFAS 128, would
have been as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Basic earnings per share $ .72 $ .41
Diluted earnings per share $ .63 $ .37
</TABLE>
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. 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 continuing and temporary
basis to hospitals and long-term care and rehabilitation facilities.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Operating Statistics
Inpatient Units (Acute and Subacute)
Average bed capacity 2,003 1,784
Average billable length of stay (days) 15.3 16.5
Billable patient days served 125,716 104,792
Admissions 8,199 6,341
Average daily billable census 1,397 1,152
Average occupied beds per unit 13.6 12.8
Total units in operation at end of period 106 88
Outpatient Clinics
Patient visits 60,710 71,801
Units of service 191,450 199,380
Total clinics in operation at end of period 19 20
Therapist Placement
Weeks worked 6,792 N/A
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Operating revenues during the first quarter of calendar 1997 increased
by $10,847,000, or 42.4%, to $36,405,000. Acquisitions accounted for 73.2% of
the net increase. A 14.6% increase in the average number of inpatient units from
89.7 to 102.8 units and an increase in the average daily billable census per
inpatient unit of 6.3% from 12.8 to 13.6, generated a 20.0% increase in billable
patient days to 125,716 and a 16.4% increase in revenue from inpatient units.
The increase in billable census per unit for inpatient units is primarily
attributable to a 12.8%
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increase in admissions per unit offset by a 7.3% decline in average 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 calendar 1997, which carry a shorter length of stay than acute
rehabilition units. The increase in billable patient days was offset by a 3.0%
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 $3,316,000
increase in inpatient unit revenue was offset by a 10.3% decrease in outpatient
revenue to $2,638,000, primarily reflecting the loss of two units.
Operating expenses for the three-month periods compared increased by
$6,896,000, or 37.7% to $25,196,000. Acquisitions accounted for 77.5% of the net
increase. The remaining increase was attributabe to the increase in patient
days.
The excess of operating expenses over operating revenues associated
with non-exempt units decreased from $246,000 to $151,000, on an increase in the
average number of non-exempt units from 5.0 to 7.0. The per unit average excess
of operating expenses over operating revenues declined from $49,248 to $22,000
reflecting a 37.1% 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.
Average start-up losses for units during their non-exempt year can range to as
high as $150,000 to $200,000.
General and administrative expenses increased $2,620,000, or 77.0%, to
$6,021,000, reflecting increases in professional services, business development
and general office, compared to the previous year, plus the addition of
corporate staff from acquisitions.
Interest income decreased $107,000 as a result of reductions in
investment balances, as cash was used to acquire HSSI and make payments on
Company debt. Interest expense increased $209,000 reflecting an increase in
interest rates and interest on net new debt issued in the acquisition of HSSI
and the repurchase of Company Common Stock. Gain on sale of investment reflects
the sale in the first quarter of calendar 1997 of approximately 50% of the
Company's investment in Intensiva Healthcare Corporation.
Earnings before income taxes increased by $2,241,000, or 72.2%, to
$5,343,000. The provision for income taxes for the first quarter of calendar
1997 was $2,076,000, compared to $1,250,000 for 1996, reflecting effective
income tax rates of 38.9% and 40.3% for the respective quarters. Net earnings
increased by $1,415,000, or 76.4% to $3,267,000. Earnings per share increased
73.7% to 66 cents from 38 cents on an 2.6% increase in the weighted average
shares outstanding. The gain on sale of investment accounted for 18 cents of the
increase in earnings per share. The increase in shares outstanding is
attributable primarily to the shares issued in the acquisition of HSSI 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, offset by shares repurchased. See "Liquidity and
Capital Resources."
Liquidity and Capital Resources
As of March 31, 1997, the Company had $6,927,000 in cash and current
marketable securities and a current ratio of 1.4:1. Working capital decreased by
$894,000 as of March 31, 1997, compared to December 31, 1996, due to the cash
tendered and debt issued in the acquisition of Team and Moore and the increase
in current portion of long-term debt issued in the repurchase of Company Common
Stock.
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Net accounts receivable were $20,251,000 at March 31, 1997, compared to
$15,546,000 at December 31, 1996. The number of days average net revenue in net
receivables was 50.1 at March 31, 1997 compared to 45.5 at December 31, 1996.
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
$20,000,000 revolving line of credit and a balance outstanding as of March 31,
1997, of $9,000,000.
Part II. - OTHER INFORMATION
Item 1. - Legal Proceedings
The Company together with CompCare has undergone a Federal Payroll tax
audit for the years 1989 through 1993. See Part I, "Notes to Condensed
Consolidated Financial Statements," Note 2, for further disclosure.
Item 4. - Submision of Matters to Security Holders
The Annual Meeting of Stockholders of the Company was held on
Wednesday, April 30, 1997, 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. 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 2,905,488 2,900
Richard E. Ragsdale 2,904,488 3,900
H. Edwin Trusheim 2,905,488 2,900
Theodore M. Wight 2,905,488 2,900
John H. Short 2,905,488 2,900
James M. Usdan 2,904,838 3,550
Richard C. Stoddard 2,904,338 4,050
</TABLE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Report on Form 8-K
A report on Form 8-K dated January 28, 1997 was filed by
the Company to report, pursuant to Item 5 of the Form
8-K, the consummation of the acquisition of all of the
outstanding capital stock of TeamRehab, Inc. and Moore
Rehabilitation Services, Inc.
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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.
May 12, 1997
By /s/ John R. Finkenkeller
John R. Finkenkeller
Senior Vice President
and Treasurer
(Chief Accounting Officer)
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<PAGE>
EXHIBIT INDEX
Page Number
27 Financial Data Schedule Not Included in
Paper Filing
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,827
<SECURITIES> 4,100
<RECEIVABLES> 21,702
<ALLOWANCES> 1,451
<INVENTORY> 0
<CURRENT-ASSETS> 29,625
<PP&E> 2,985
<DEPRECIATION> 0
<TOTAL-ASSETS> 90,638
<CURRENT-LIABILITIES> 21,265
<BONDS> 38,125
0
0
<COMMON> 48
<OTHER-SE> 29,149
<TOTAL-LIABILITY-AND-EQUITY> 90,638
<SALES> 36,405
<TOTAL-REVENUES> 36,405
<CGS> 25,196
<TOTAL-COSTS> 32,095
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 405
<INCOME-PRETAX> 5,343
<INCOME-TAX> 2,076
<INCOME-CONTINUING> 3,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,267
<EPS-PRIMARY> .66
<EPS-DILUTED> .63
</TABLE>
