<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 November 30, 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 January 14, 1997
Common Stock, par value $.01 per share 4,698,487
<PAGE> 2
REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
November 30, 1996 (unaudited) and February 29, 1996 3
Condensed consolidated statements of earnings for the three
months and nine months ended November 30, 1996 and 1995
(unaudited) 4
Condensed consolidated statements of cash flows for the
nine months ended November 30, 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 11
Item 5. - Other Information 11
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>
November 30, February 29,
1996 1996
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 1,076 $ 6,174
Marketable securities 5,279 4,495
Accounts receivable, net of allowance for
doubtful accounts of $1,674 and $822 21,884 10,847
Deferred tax assets 1,513 1,596
Prepaid expenses and other current assets 532 473
Total current assets 30,284 23,585
Marketable securities, non-current 1,285 497
Equipment and leasehold improvements, net 3,057 1,601
Other assets:
Excess of cost over net assets acquired, net 45,114 27,085
Deferred contract costs, net 1,404 1,661
Pre-opening costs, net 2,151 1,765
Deferred tax assets 557 577
Other 1,006 295
Total other assets 50,232 31,383
$ 84,858 $ 57,066
Liabilities and Stockholders' Equity:
Current liabilities:
Revolving credit facility $ 1,000 $ --
Current portion of long-term debt 3,061 2,093
Accounts payable 3,030 1,788
Accrued salaries and wages 9,498 5,326
Accrued expenses 2,158 1,123
Income taxes payable 1,739 1,437
Total current liabilities 20,486 11,767
Deferred compensation 1,914 1,370
Long-term debt, less current portion 14,500 5,032
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000
shares, issued 4,682,973 shares and 4,517,816
shares, respectively 47 45
Additional paid-in capital 22,653 20,043
Retained earnings 23,888 18,809
Unrealized gain on marketable securities,
net of tax 1,370 --
Total stockholders' equity 47,958 38,897
$ 84,858 $ 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 Nine Months Ended
November 30, November 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Operating revenues $31,519 $22,430 $93,407 $66,883
Costs and expenses:
Operating expenses 22,137 16,626 66,383 49,076
General and administrative 5,126 2,730 15,110 8,612
Depreciation and amortization 834 594 2,460 1,805
Total costs and expenses 28,097 19,950 83,953 59,493
Operating earnings 3,422 2,480 9,454 7,390
Interest income 36 78 137 192
Interest expense (351) (182) (1,101) (591)
Other income(expense) 1 (1) 11 13
Earnings before income taxes 3,108 2,375 8,501 7,004
Income taxes 1,244 961 3,422 2,857
Net earnings $ 1,864 $ 1,414 $ 5,079 $ 4,147
Net earnings per common and
common equivalent share:
Primary $ .37 $ .31 $ 1.03 $ .90
Assuming full dilution $ .36 $ .30 $ 1.00 $ .87
Weighted average number of common and
common equivalent shares outstanding:
Primary 4,993 4,618 4,913 4,588
Assuming full dilution 5,276 4,759 5,243 4,758
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>
Nine Months Ended November 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,079 $ 4,147
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 2,460 1,805
Provision for losses on accounts receivable 454 299
Deferred compensation 544 456
Decrease (increase) in accounts receivable(3,984) 600
Decrease (increase) in prepaid expenses and
other current assets 252 (94)
Decrease in other assets 103 118
Increase (decrease) in accounts payable and
accrued expenses (707) 2
Increase in accrued salaries and wages 1,344 477
Decrease in income taxes payable (588) (116)
(122) 3,547
Net cash provided by operating activities 4,957 7,694
Cash flows from investing activities:
Additions to equipment and leasehold
improvements, net (781) (224)
Deferred contract costs (214) (165)
Purchase of investments (1,103) (4,726)
Proceeds from sale/maturities of investments 1,815 510
Pre-opening costs (843) (570)
Investment in affiliate (500) --
Acquisition of business, net of cash received(5,300) --
Repayment of advance to affiliate 265 --
Net cash used in investing activities (6,661) (5,175)
Cash flows from financing activities:
Payments on revolving credit facility, net (2,300) --
Payments on long-term debt (1,514) (2,548)
Other 420 134
Net cash used in financing activities (3,394) (2,414)
Net increase (decrease) in cash and
cash equivalents (5,098) 105
Cash and cash equivalents at beginning
of period 6,174 3,226
Cash and cash equivalents at end of period $ 1,076 $ 3,331
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
("HSSI"). 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
nine months ended November 30, 1996, 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 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, 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 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 December 31, 1996. In
October 1996, the Company accepted a settlement offer for one of the classes of
medical professionals, paying $11,613 as settlement. The Company is currently
continuing to defend its classification of the remaining classes which represent
a total proposed assessment of $1,364,000. 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 CompCare 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 section 4 of the Tax Sharing
Agreement entered into in conjunction with the Company's initial public offering
in 1991.
<PAGE> 7
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. The Company appealed the adverse jury verdicts and appellate arguments
were heard in June 1996 before a three-judge panel of the Federal Court of
Appeals for the Eighth Circuit. On October 22, 1996 the appellate court
reversed all adverse verdicts against the Company and on November 21, 1996,
CompCare's motion for rehearing was denied. The Company has terminated the
$3,000,000 supersedeas bond purchased to obtain a stay of execution pending
the conclusion of its appeal, and has cancelled the $3,000,000 bank letter
of credit that had been issued to secure the bond. The Company is seeking to
recover $120,083 in court related costs from CompCare pursuant to the favorable
appeal.
Note 3. - Acquisition
On March 1, 1996, the Company purchased 100% of the capital stock of HSSI. 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 HSSI 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 HSSI 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 HSSI occurred at the beginning of the nine-month period ended
November 30, 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>
Nine Months Ended
November 30, 1996 November 30, 1995
<S> <C> <C>
Operating revenues $ 93,407,000 $ 86,436,000
Net earnings 5,079,000 4,593,000
Net earnings per common and
common equivalent share:
Primary $ 1.03 $ .97
Assuming full dilution $ 1.00 $ .92
</TABLE>
On March 1, 1996 as part of the acquisition of HSSI, 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, the actual
rate charged 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
<PAGE> 8
receivable, reduced by amounts outstanding under any bank letter of credit(see
Note 2). The revolving credit facility will terminate with the balance payable
on April 30, 1998. 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 the actual rate charged being
dependent on the ratio of the Company's available credit to cash flow. As of
November 30, 1996 the Company's borrowings under the revolving credit facility
totaled $2,500,000 of which $1,500,000 is classified as long-term debt and a
letter of credit (which has since been cancelled) was outstanding in the amount
of $3,000,000.
Note 4. - Marketable Securities
The Company owns 326,287 shares of common stock of Intensiva HealthCare
Corporation, which completed an initial public offering (IPO) of stock in
September 1996. Effective with the date of the IPO, the Company classified the
investment as available - for - sale, and as such has recorded the investment
at market value with a corresponding credit net of taxes to stockholders'
equity. The market value of this investment at November 30, 1996 of $2,284,000
exceeded the cost basis by $2,210,000. Gain (or loss) is not recognized in the
Statement of Earnings until the securities are sold. On January 10, 1997,
165,000 of these shares were sold for net proceeds of $1,485,000.
Note 5. - Change in Fiscal Year
The Company has changed its fiscal year end from the last day of February to
December 31, effective as of December 31, 1996. The Company will file a Form
10-K containing financial statements for the fiscal year beginning March 1,
1996 and ended December 31, 1996 on or before March 31, 1997.
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 temporary basis to
hospitals and long-term care and rehabilitation facilities.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Operating Statistics November 30, November 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Inpatient Units (Acute and Subacute)
Average bed capacity 1,857 1,691 1,822 1,660
Average billable length of stay (days) 15.6 17.3 15.8 17.5
Billable patient days served 110,390 102,324 319,962 306,238
Admissions 7,082 5,903 20,192 17,516
Average daily billable census 1,213 1,124 1,163 1,114
Average occupied beds per unit 13.0 13.2 12.8 13.3
Total units in operation
at end of period 94 84 94 84
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Operating Statistics (contd.) November 30, November 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Outpatient Clinics
Patient visits 48,069 71,937 159,904 210,719
Units of service 155,802 187,885 493,777 553,127
Total clinics in operation
at end of period 19 22 19 22
Therapist Placement
Weeks booked 6,315 N/A N/A N/A
</TABLE>
Three Months Ended November 30, 1996 Compared to Three Months Ended
November 30, 1995
Operating revenues during the third quarter of fiscal 1997 increased by
$9,089,000, or 40.5%, to $31,519,000. The acquisition of HSSI accounted for
87.7% of the net increase. A 9.1% increase in the average number of inpatient
units from 85.3 to 93.1 units, offset by a decrease in the average daily
billable census per inpatient unit of 1.5% from 13.2 to 13.0, generated a 7.9%
increase in billable patient days to 110,390 and a 7.5% increase in revenue from
inpatient units. The decrease in billable census per unit for inpatient units is
primarily attributable to a 10.1% decline in average length of stay on a 9.9%
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 12.4%
decrease in outpatient revenue to $2,481,000, reflecting the loss of one unit in
the fourth quarter of fiscal 1996 and two in the first quarter of fiscal 1997.
Operating expenses for the three-month periods compared increased by
$5,511,000 or 33.1% to $22,137,000. The acquisition of HSSI accounted for
substantially all of the net increase.
The excess of operating expenses over operating revenues associated with non-
exempt units increased from $57,000 to $230,000, attributable to the increase in
the average number of non-exempt units from 1.0 to 6.0. 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 $2,396,000, or 87.8%, to
$5,126,000, reflecting increases in professional services, business development,
general office, outpatient services, and legal compared to the previous year,
plus the addition of HSSI's corporate staff.
Interest expense increased $169,000 reflecting an increase in interest rates
and interest on net new debt issued in the acquisition of HSSI.
Earnings before income taxes increased by $733,000, or 30.9%, to $3,108,000.
The provision for income taxes for the third quarter of fiscal 1997 was
$1,244,000, compared to $961,000 for 1996, reflecting effective income tax rates
of 40.0% and 40.5% for the respective quarters. Net earnings increased by
$450,000, or 31.8% to $1,864,000. Earnings per share increased 19.4% to 37
cents from 31 cents on an 8.1% increase in the weighted average shares
outstanding. 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.
See "Liquidity and Capital Resources."
<PAGE> 10
Nine Months Ended November 30, 1996 Compared to Nine Months Ended
November 30, 1995
Operating revenues during the first nine months of fiscal 1997 increased by
$26,524,000, or 39.7%, to $93,407,000. The acquisition of HSSI accounted for
94.2% of the increase. A 9.1% increase in the average number of inpatient units
from 83.5 to 91.1 units, offset by a decrease in the average daily billable
census per inpatient unit of 3.8% from 13.3 to 12.8, generated a 4.5% increase
in billable patient days to 319,962 and a 3.8% increase in revenue from
inpatient units. The decrease in billable census per unit for inpatient units
is primarily attributable to a 9.7% decline in average length of stay on a 5.7%
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 an 8.1%
decrease in outpatient revenue to $7,670,000, reflecting the loss of one
unit in the fourth quarter of fiscal 1996 and two in the first quarter of
fiscal 1997.
Operating expenses for the nine-month periods compared increased by
$17,307,000 or 35.3% to $66,383,000. The acquisition of HSSI accounted for
substantially all of the increase.
The excess of operating expenses over operating revenues associated with non-
exempt units increased from $180,000 to $685,000, attributable to the increase
in the average number of non-exempt units from 1.4 to 5.3. 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 $6,498,000, or 75.5%, to
$15,110,000, reflecting increases in business development, operations, general
office and professional services compared to the previous year, plus the
addition of HSSI;s corporate staff.
Interest expense increased $510,000 reflecting the increase in interest rates
and interest on net new debt issued in the acquisition of HSSI.
Earnings before income taxes increased by $1,497,000, or 21.4%, to
$8,501,000. The provision for income taxes for the first nine months of
fiscal 1997 was $3,422,000, compared to $2,857,000 for 1996, reflecting
effective income tax rates of 40.3% and 40.8% for the respective quarters.
Net earnings increased by $932,000, or 22.5% to $5,079,000. Earnings per share
increased 14.4% to $1.03 from 90 cents on a 7.1% increase in the weighted
average shares outstanding. 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. See "Liquidity and Capital Resources."
Liquidity and Capital Resources
As of November 30, 1996, the Company had $6,355,000 in cash and current
marketable securities and a current ratio of 1.5:1. Working capital decreased
by $2,020,000 as of November 30, 1996, compared to February 29, 1996,
due to the cash tendered and debt issued in the acquisition of HSSI.
<PAGE> 11
Net accounts receivable were $21,884,000 at November 30, 1996, compared to
$10,847,000 at February 29, 1996. The number of days average net revenue in net
receivables was 63.2 at November 30, 1996 compared to 43.9 at February 29, 1996,
reflecting the addition of HSSI's receivables, which averaged 112 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
November 30, 1996, of $2,500,000.
As discussed in Note 2, the Federal Court of Appeals for the Eighth Circuit
reversed the jury verdicts rendered in the March 1995 Federal District Court.
The$3,000,000 supersedeas bond and supporting bank letter of credit have been
cancelled, which increased 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 has undergone a Federal Payroll tax audit
for the years 1989 through 1993. The Company was also a party to a Federal
Court proceeding with CompCare. See Part I, "Notes to Condensed Consolidated
Financial Statements," Note 2, and "Liquidity and Capital Resources" for
further disclosure.
Item 5. - Other Information
The Company has changed its fiscal year end from the last day of February to
December 31, effective as of December 31, 1996. The Company will file a
Form 10-K containing financial statements for the fiscal year beginning
March 1, 1996 and ended December 31, 1996 on or before March 31, 1997.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Settlement Agreement and Release dated December 1996
and Settlement Agreement and Mutual Release dated
September 17, 1996 with CompCare regarding the Tax
Sharing Agreement with CompCare, dated May 8, 1991
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.
January 14, 1997
By /s/ John R. Finkenkeller
John R. Finkenkeller
Senior Vice President
and Treasurer
(Chief Accounting Officer)
<PAGE> 13
EXHIBIT INDEX
Page Number
10.1 Settlement Agreement and Release dated December 1996
and Settlement Agreement and Mutual Release dated
September 17, 1996 with CompCare regarding the Tax
Sharing Agreement with CompCare, dated May 8, 1991. 14
27 Financial Data Schedule Not Included in
Paper Filing
<PAGE> 14
Exhibit 10.1
SETTLEMENT AGREEMENT AND RELEASE
THIS SETTLEMENT AGREEMENT AND RELEASE entered into and
executed this ____ day of December, 1996, by RehabCare Group, formerly known as
RehabCare Corporation, a corporation (hereinafter referred to as "RehabCare"),
and Comprehensive Care Corporation, a corporation (hereinafter referred to as
"CompCare") (RehabCare and CompCare shall be referred to collectively as the
Parties ).
Recitals
WHEREAS, the Parties entered into a Tax Sharing Agreement, dated May 8,
1991 ("TSA"). Section 4 of the TSA provides, among other things, that CompCare
shall indemnify RehabCare, on an after-tax basis (as defined in the TSA), for
(a) all employment taxes (as defined in the TSA) that accrued before March 1,
1991( Employment Taxes ); and (b) all fees, costs and expenses, including
reasonable attorney s fees, arising out of any proceedings before any taxing or
judicial authority with respect to any amount indemnifiable for Employment Taxes
under the TSA; and
WHEREAS, RehabCare instituted litigation against CompCare in the Circuit
Court of St. Louis County, State of Missouri, seeking damages for breach of the
TSA and indemnification with respect to Employment Taxes, interest, penalties
and related costs, including reasonable attorneys fees, paid by RehabCare with
respect to section 4 of the TSA for the tax years 1987 and 1988(the
"Litigation"); and
WHEREAS, RehabCare and CompCare resolved, settled and compromised
all matters and controversies relating to the Litigation; and
<PAGE> 15
WHEREAS, the Parties acknowledge CompCare's continuing obligations
under the TSA for Employment Taxes that accrued during certain tax periods not
addressed in the Litigation, specifically 1989, 1990 and the period beginning
January 1, 1991 and ending February 28, 1991 (the Taxable Period ); and
WHEREAS, the Parties desire to fully and finally resolve all obligations
and liabilities between them relating to or arising under section 4 of the TSA
with respect to Employment Taxes and to enter into this Settlement Agreement and
Release to effectuate that purpose.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements contained herein, the Parties do hereby agree as follows:
1. On the date hereof, CompCare shall pay $150,000 to RehabCare in complete
discharge and satisfaction of all of CompCare s obligations under section 4 of
the TSA to indemnify RehabCare for Employment Taxes, interest and penalties,
whether assessed or unassessed, incurred or to be incurred, known or unknown and
whether or not ascertainable on the date hereof. It is the intent of the
Parties that this payment completely and fully discharge CompCare for all
obligations and indemnification to RehabCare for the Employment Taxes, interest
and penalties covered by section 4 of the TSA. Payment of the sum of $150,000
shall be in addition to sums already paid by CompCare to RehabCare pursuant to
the settlement of the Litigation or otherwise under the TSA. This payment shall
be made by wire transfer pursuant to instructions provided by RehabCare.
<PAGE> 16
2. On the date hereof, CompCare shall pay $3,969.57 to RehabCare in
complete discharge and satisfaction of all of CompCare's obligations under
section 4 of the TSA to indemnify RehabCare for fees, costs and expenses,
including reasonable attorney s fees, relating or arising with respect to
Employment Taxes, incurred or to be incurred, known or unknown and whether or
not ascertainable on the date hereof. It is the intent of the Parties that this
payment completely and fully discharge CompCare for all obligations and
indemnification to RehabCare for fees, costs and expenses, including attorney's
fees, related to or arising with respect to Employment Taxes under section 4 of
the TSA. This payment shall be made by wire transfer pursuant to instructions
provided by RehabCare.
3. RehabCare, its officers, directors, employees, trustees, shareholders,
agents, attorneys, representatives, successors, assigns, and anyone claiming
through or under them, do hereby release, acquit and forever discharge CompCare,
its officers, directors, employees, trustees, shareholders, agents, attorneys,
representatives, successors, assigns, and anyone claiming through or under them,
of and from any and all claims, demands, damages, actions or causes of action of
every kind and nature whatsoever, whether now known or unknown, suspected or
unsuspected, which RehabCare now has, may have in the future, has had, holds or
has at any time heretofore owned or held against CompCare regarding or relating
to Employment Taxes under section 4 of the TSA, including, but not limited to,
all federal and state employment taxes, penalties and interest for all periods
covered by the TSA, and all fees, costs and expenses, including reasonable
attorney's fees, incurred by RehabCare in any proceeding relating to Employment
Taxes under the TSA.
<PAGE> 17
4. CompCare, its officers, directors, employees, trustees, shareholders, agents,
attorneys, representatives, successors, assigns, and anyone claiming through or
under them, do hereby release, acquit and forever discharge RehabCare, its
officers, directors, employees, trustees, shareholders, agents, attorneys,
representatives, successors, assigns, and anyone claiming through or under them,
of and from any and all claims, demands, damages, actions or causes of action of
every kind and nature whatsoever, whether now known or unknown, suspected or
unsuspected, which CompCare now has, may have in the future, has had, holds or
has at any time heretofore owned or held against RehabCare regarding or relating
to Employment Taxes under section 4 of the TSA, including, but not limited to,
all federal and state employment taxes, penalties and interest for all periods
covered by the TSA, and all fees, costs and expenses, including reasonable
attorney's fees, incurred by CompCare in any proceeding relating to Employment
Taxes under the TSA.
5. RehabCare shall indemnify and hold CompCare harmless with respect to any
liability imposed against CompCare by the Internal Revenue Service or any other
taxing authority for Employment Taxes,interest and/or penalties of RehabCare and
shall indemnify and hold CompCare harmless with respect to all liability for
fees, costs and expenses (including reasonable attorney's fees) arising out of
or incident to any proceeding, regardless of forum, with respect to any
liability imposed against CompCare by the Internal Revenue Service or any other
taxing authority for Employment Taxes, interest and/or penalties of RehabCare.
<PAGE> 18
6. CompCare understands and expressly acknowledges that RehabCare is
currently in a dispute with the Internal Revenue Service with respect to its
employment tax liabilities for the tax years 1989, 1990, 1991, 1992 and 1993,and
that in connection with that dispute, RehabCare may need access to documents and
information maintained by CompCare. CompCare hereby agrees to undertake
reasonable efforts to locate and to provide RehabCare with reasonable access to
documents, books and records that CompCare maintains that are pertinent or
helpful in any way to RehabCare in its defense of such dispute, which shall
include, but are not limited to, internal memoranda with respect to corporate
practice of medicine, and documents received and/or authored by its internal
counsel or outside counsel with respect to the retention of physicians and/or
psychologists, industry practices, surveys or other documents relating to the
engagement of physicians and/or psychologists, copies of contracts and
correspondence with retained physicians or psychologists or any document
requested by the Internal Revenue Service and its agents or counsel in
connection with the current audit of RehabCare by the Internal Revenue Service,
and/or administrative or judicial proceedings relating to RehabCare s
employment tax liabilities. RehabCare shall be permitted to examine such
documents, books and records at CompCare's offices at mutually agreeable times,
and shall be permitted to make copies at its own expense. Notwithstanding the
foregoing, the parties expressly acknowledge and agree that if the reasonable
efforts by CompCare to locate such documents as requested by RehabCare exceeds,
in the aggregate, five (5) hours, then CompCare shall not be required to
continue with its efforts to locate such documents unless the parties can agree
on a method to provide reasonable compensation to CompCare to continue with its
efforts to locate such documents.
<PAGE> 19
CompCare shall also allow RehabCare reasonable access to Kerri Ruppert or her
successor,at times and places mutually agreeable to Ms. Ruppert or her successor
and RehabCare. CompCare shall not interfere with RehabCare's reasonable efforts
to interview former employees of CompCare who have personal knowledge of a
factual nature regarding 1) the issues raised in RehabCare's employment tax
disputes for the Taxable Period or 2) the classification of medical directors
and/or psychologists as independent contractors. CompCare shall have the right
to inform its former employees that issues with respect to any responsibility
of CompCare for Employment Taxes relating to the Taxable Period have been
resolved.
7 Except as expressly provided herein, the TSA shall remain in force and effect.
8. This Settlement Agreement and Release may be executed in counterpart
originals, and any party hereto may sign any counterpart original; this
Agreement shall be effective when each party hereto shall have signed a
counterpart original. A set of counterpart originals bearing the signature of
each party hereto shall constitute this agreement as fully as if all the
Parties shall have signed a single original document.
9. The Parties hereto further state and warrant by their signatures below that
they have read and reviewed the foregoing, with the assistance of counsel,
understand its contents, and do freely and voluntarily enter into this
Settlement Agreement and Release.
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this Settlement
Agreement and Release to be executed on the date first written above.
REHABCARE GROUP WITNESS:
f/k/a RehabCare Corporation
By /s/ Alan C. Henderson /s/ Betty D. Cammarata
Alan C. Henderson Betty D. Cammarata
Executive Vice President & CFO
COMPREHENSIVE CARE CORPORATION WITNESS:
By /s/ Kerri Ruppert /s/Cheryl A. Arnold
Kerri Ruppert Cheryl A. Arnold
Senior Vice President & CFO
<PAGE> 21
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE entered into
and executed this 17th day of September, 1996, by RehabCare
Group, formerly known as RehabCare Corporation, a corporation
(hereinafter referred to as "RehabCare") and Comprehensive Care
Corporation, a corporation (hereinafter referred to as
"CompCare").
Recitals
WHEREAS, RehabCare filed a Petition in the Circuit Court
of St. Louis County, State of Missouri entitled RehabCare
Corporation vs. Comprehensive Care Corporation, Cause number
663957, Division 7, seeking damages for breach of a Tax Sharing
Agreement (hereinafter "TSA") entered into between RehabCare and
CompCare, dated May 8, 1991 (the "Litigation"); and
WHEREAS, said TSA, a copy of which is attached hereto and
made a part hereof as Exhibit A, provides, inter alia, that
CompCare shall indemnify RehabCare, on an after-tax basis, for
(a) all federal and/or state employment taxes for the tax periods
before March 1, 1991; and (b) for all fees, costs and expenses,
including reasonable attorney's fees, arising out of any
proceedings before any taxing or judicial authority with respect
to any amount indemnifiable under the TSA.
WHEREAS, RehabCare alleged that its breach of contract
damages as of the date of trial, February 14, 1996, consisted of
the following:
(a) $343,107.77 - for federal employment taxes,
penalties and interest paid by RehabCare to the
Internal Revenue Service for the years 1987 and
1988;
<PAGE> 22
(b) $4,795.29 - for the State of California
employment taxes, penalties and interest paid by
RehabCare to the State of California for the years
1989, 1990, and 1991;
(c) $304,125.71 - for all reasonable attorney's fees
and expenses paid by RehabCare to the law firm of
McDermott, Will and Emery (for all expenses incurred
and services rendered through November 30, 1995,
reimbursable under the TSA);
(d) interest on all of the foregoing as provided in
the TSA; and
(e) all other reasonable attorney's fees and
expenses reimbursable under the TSA, including, but
not limited to, all reasonable attorney's fees and
expenses paid by RehabCare to the law firm of Kramer
& Frank, P.C., for the litigation described above,
for expenses incurred and services rendered through
February 16, 1996; and
WHEREAS, in the Litigation, CompCare has denied any and
all liability to RehabCare under the TSA, and alleged as defenses
to CompCare's liability to RehabCare under the TSA that; (a)
RehabCare failed to fulfill its obligations under the TSA or
otherwise breached the TSA; (b) that the TSA was void due to an
alleged breach of fiduciary duty owned by a former officer of
both RehabCare and CompCare, now an officer of RehabCare,
regarding the negotiation and drafting of the TSA; and (c) that
the TSA was void due to fraudulent representations and/or
omissions in the execution of the TSA. CompCare has further
claimed that the term "after-tax amount" as used in the TSA was
intended to effectively mean that CompCare shall indemnify
RehabCare for 60% of the total actual employment taxes and
related reasonable attorney's fees and expenses paid by RehabCare
and indemnifiable under the TSA;
<PAGE> 23
WHEREAS, RehabCare has denied the above-described defenses
to CompCare's liability under the TSA; and
WHEREAS, RehabCare and CompCare have resolved, settled and
compromised all matters and controversies between them regarding
the above-referenced litigation, per the copy of the Settlement
Memorandum attached hereto and made a part hereof as Exhibit B.
NOW, THEREFORE, in consideration of the mutual promises,
covenants and agreements contained herein and in the Settlement
Memorandum, Exhibit B attached hereto, the parties do hereby
agree as follows:
1. This Agreement does not nullify, replace, constitute a
novation, or otherwise impair the effect of the Settlement
Memorandum attached hereto. To the contrary, this Agreement is a
supplement thereto, and the two documents are to be construed
together as one agreement.
2. RehabCare hereby acknowledges the receipt of the
$550,000 payment from CompCare which is referred to in Paragraph
3 of the Settlement Memorandum.
3. RehabCare, its officers, directors, employees,
trustees, shareholders, agents, attorneys, representatives,
successors, assigns, and anyone claiming through or under them,
do hereby release, acquit and forever discharge CompCare, its
officers, directors, employees, trustees, shareholders, agents,
attorneys, representatives, successors, assigns, and anyone
claiming through or under them, of and from any and all claims,
demands, damages, actions or causes of actions of every kind and
<PAGE> 24
nature whatsoever, whether no known or unknown, suspected or
unsuspected, which RehabCare now has, may have, have had, holds
or has at any time heretofore owned or held against CompCare
relating to any of the following items:
(a) All federal employment taxes, penalties and
interest paid by RehabCare to the Internal Revenue
Service for the years 1987 and 1988;
(b) All State of California employment taxes,
penalties and interest paid by RehabCare to the
State of California for the years 1989, 1990 and
1991;
(c) All attorney's fees and expenses paid by
RehabCare to the law firm of McDermott, Will and
Emery for expenses incurred and services rendered
through November 30, 1995;
(d) Interest on all of the foregoing; and
(e) All other attorney's fees and expenses
reimbursable under the TSA, including, but not
limited to, all attorney's fees and expenses paid by
RehabCare to the law firm of Kramer & Frank, P.C.
for this litigation, for expenses incurred and
services rendered through February 16, 1996.
It is expressly understood and agreed that this Release,
the Settlement Memorandum attached hereto as Exhibit B, and
RehabCare's Dismissal with Prejudice of the above-described
Litigation, shall not in any manner whatsoever operate to release
or otherwise acquit or discharge CompCare from any future
liability under the TSA for: (a) any federal employment tax,
penalties and interest for 1989, 1990 and through February 28,
1991; and (b) any other state employment tax, penalties and
interest which occurred before March 1, 1991, other than the
State of California taxes referred to in Paragraph 3(b) above;
and (c) all fees, costs and expenses, including reasonable
attorney's fees, paid by Plaintiff to McDermott, Will and Emery
<PAGE> 25
for expenses incurred and services rendered on or after December
1, 1995, which are otherwise reimbursable under the TSA; or (d)
any other fees, costs and expenses, including reasonable
attorney's fees, for expenses incurred and services rendered
after February 16, 1996, which are otherwise reimbursable under
the TSA. It is further agreed and understood that this Release
shall not in any manner impair or affect any remaining claims
which RehabCare may have against CompCare under the TSA as
described herein.
4. CompCare, its officers, directors, employees,
trustees, shareholders, agents, attorneys, representatives,
successors, assigns, and anyone claiming
through or under them,do hereby release, acquit and forever discharge
RehabCare, itsofficers, directors, employees, trustees, shareholders, agents,
attorneys, successors, assigns, and anyone claiming through or
under them, of and from any and all claims, demands, damages,
actions or causes of actions of every kind and nature whatsoever,
whether now known or unknown, suspected or unsuspected, which
CompCare now has, may have, have had, holds or has at any time
heretofore owned or held against RehabCare regarding or arising
out of: (a) the negotiation, drafting, and/or execution of the
TSA; and (b) for any breach of the TSA by RehabCare on or before
February 16, 1996. It is further agreed and understood that this
Release, the Settlement Memorandum attached hereto as Exhibit B,
and RehabCare's dismissal of the Litigation with prejudice, shall
in no way release, impair, or affect any defense CompCare may
<PAGE> 26
have to any claim brought in the future by RehabCare, except
those defenses expressly released herein. It is further agreed
and understood that nothing in this Release, the Settlement
Memorandum attached hereto as Exhibit B, and RehabCare's
dismissal of the Litigation with prejudice, shall in any way
affect, impair or release any of the claims brought, or the
judgment obtained, by CompCare against RehabCare,or the
counterclaim brought by RehabCare against CompCare, in the
lawsuit styled Comprehensive Care Corporation vs. RehabCare
Corporation, brought in the United States District Court for the
Eastern District of Missouri and assigned cause number
4:92CV2194CAS, and now pending in the United States Court of
Appeals for the Eighth Circuit and assigned cause number
95-3328EMSL.
5. This settlement agreement and release may be executed
in counterpart originals, and any party hereto may sign any
counterpart original; this Agreement shall be effective when each
party hereto shall have signed a counterpart original. A set of
counterpart originals bearing the signature of each party hereto
shall constitute this agreement as fully as if all the parties
shall have signed a single original document.
6. The parties hereto further state and warrant by their
signatures below that they have read and reviewed the foregoing,
with the assistance of counsel, understand its contents, and do
freely and voluntarily enter into this Settlement Agreement and
Release.
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this
Settlement Agreement and Release to be executed on the date first
written above.
REHABCARE GROUP,
f/k/a REHABCARE CORPORATION WITNESS:
by: /s/Alan C. Henderson /s/Betty D. Cammarata
Alan C. Henderson
Executive Vice President & CFO
COMPREHENSIVE CARE CORPORATION WITNESS:
by: /s/Kerri Ruppert /s/Maggie Rivas
Senior Vice President & CFO
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