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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 September 30, 1998
Commission File Number 0-19294
REHABCARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 51-0265872
(State or other jurisdiction of (I.R.S. Employer Identification 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 whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of the Registrant's common stock, as
of the latest practicable date.
Class Outstanding at November 12, 1998
Common Stock, par value $.01 per share 6,491,157
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REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
September 30, 1998 (unaudited) and December 31, 1997 3
Condensed consolidated statements of earnings for the three months and
nine months ended September 30, 1998 and 1997 (unaudited) 4
Condensed consolidated statements of comprehensive earnings
for the three months and the nine months ended September 30, 1998
and 1997 (unaudited) 5
Condensed consolidated statements of cash flows for the
nine months ended September 30, 1998 and 1997 (unaudited) 6
Notes to condensed consolidated financial statements (unaudited) 7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. - Other Information
Item 6. - Exhibits and Reports on Form 8-K 15
Signatures 17
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PART I - FINANCIAL INFORMATION
Item 1. - Condensed Consolidated Financial Statements
<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Balance Sheets
(Dollar amounts in thousands)
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 5,419 $ 1,975
Marketable securities, available-for-sale 2,439 4,664
Accounts receivable, net of allowance for
doubtful accounts of $3,300 and $1,338,
respectively 46,786 24,147
Deferred tax assets 2,872 1,773
Prepaid expenses and other current assets 878 720
------- ------
Total current assets 58,394 33,279
------- ------
Marketable securities, available-for-sale,
noncurrent 1,179 1,812
------- ------
Equipment and leasehold improvements, net 4,149 3,342
Other assets: ------- ------
Excess of cost over net assets acquired, net 81,124 52,949
Deferred contract costs, net 1,126 1,138
Pre-opening costs, net 3,501 2,908
Deferred tax assets -- 181
Other 2,154 1,632
------- ------
Total other assets 87,905 58,808
------- ------
$151,627 $ 97,241
======= ======
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 8,995 $ 4,520
Accounts payable 2,740 1,700
Accrued salaries and wages 13,046 9,925
Accrued expenses 8,610 3,570
Income taxes payable 1,139 771
------- ------
Total current liabilities 34,530 20,486
------- ------
Deferred tax and other liabilities 1,466 --
------- ------
Deferred compensation 2,089 2,501
------- ------
Long-term debt, less current portion 56,956 34,494
------- ------
Stockholders' equity:
Preferred stock, $.10 par value; authorized
10,000,000 shares, none issued and outstanding -- --
Common stock, $.01 par value; authorized 20,000,000
shares, issued 7,646,619 and 7,152,191 shares,
respectively 76 72
Additional paid-in capital 30,021 23,972
Retained earnings 44,043 35,192
Less common stock held in treasury at cost,
1,166,234 and 1,311,307 shares, respectively (17,975) (20,212)
Accumulated other comprehensive earnings -
unrealized gain on marketable securities,
net of tax 421 736
------- ------
Total stockholders' equity 56,586 39,760
------- ------
$151,627 $ 97,241
======= ======
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 Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $54,050 $42,151 $140,581 $118,052
Costs and expenses:
Operating expenses 37,578 29,331 96,199 81,799
General and administrative 9,277 7,001 24,408 19,855
Depreciation and amortization 1,160 965 3,181 2,770
------ ------ ------- -------
Total costs and expenses 48,015 37,297 123,788 104,424
------ ------ ------- -------
Operating earnings 6,035 4,854 16,793 13,628
Interest income 61 48 185 141
Interest expense (866) (779) (2,218) (2,010)
Other income 17 16 111 16
Gain on sale of marketable securities -- -- -- 1,448
------ ------ ------- -------
Earnings before income taxes 5,247 4,139 14,871 13,223
Income taxes 2,115 1,700 6,020 5,352
------ ------ ------- -------
Net earnings $ 3,132 $ 2,439 $ 8,851 $ 7,871
====== ====== ======= =======
Net earnings per common share:
Basic $ .50 $ .42 $ 1.46 $ 1.30
Diluted $ .43 $ .35 $ 1.25 $ 1.08
Weighted average number of common shares outstanding:
Basic 6,302 5,741 6,077 6,065
Diluted 7,348 7,190 7,236 7,413
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Comprehensive Earnings
(Amounts in thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 3,132 $ 2,439 $ 8,851 $ 7,871
Other comprehensive earnings, net of tax
Unrealized losses on securities:
Unrealized holding losses
arising during period (345) (69) (315) (659)
Less: reclassification adjustment
for realized gains included in
net earnings -- -- -- (869)
----- ----- ----- -----
Comprehensive earnings $ 2,787 $ 2,370 $ 8,536 $ 6,343
===== ===== ===== =====
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>
Nine Months Ended September 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,851 $ 7,871
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,181 2,770
Provision for losses on accounts receivable 599 492
Equity in earnings of affiliate (102) (10)
Gain on sale of marketable securities -- (1,448)
Increase (decrease) in deferred compensation (735) 467
Increase in accounts receivable, net (4,008) (5,532)
Increase in prepaid expenses and other
current assets (20) (280)
Decrease (increase) in other assets 251 (38)
Increase in accounts payable and accrued expenses 3,176 2,038
Increase in accrued salaries and wages 1,795 2,524
Decrease in income taxes payable and deferred (7) (902)
------ ------
Net cash provided by operating activities 12,981 7,952
------ ------
Cash flows from investing activities:
Additions to equipment and leasehold improvements,
net (1,180) (1,101)
Deferred contract costs (309) (221)
Proceeds from sale/maturities of marketable
securities 2,334 782
Payments related to pre-opening costs (1,407) (1,084)
Investment in joint venture (385) (630)
Cash paid in acquisitions of businesses, net of
cash received (41,567) (6,623)
------ ------
Net cash used in investing activities (42,514) (8,877)
------ ------
Cash flows from financing activities:
Proceeds from revolving credit facility, net -- 1,000
Payments on long-term debt (10,463) (3,038)
Proceeds on issuance of note payable 1,000 1,825
Proceeds on issuance of long-term debt 36,400 24,000
Purchase of treasury stock -- (23,131)
Exercise of stock options (including tax benefit) 6,040 1,393
Other -- 204
------ ------
Net cash provided by financing activities 32,977 2,253
------ ------
Net increase in cash and cash equivalents 3,444 1,328
Cash and cash equivalents at beginning of period 1,975 772
------ ------
Cash and cash equivalents at end of period $ 5,419 $ 2,100
====== ======
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, comprehensive earnings and cash flows
contained in this Form 10-Q, which are unaudited, include the accounts of
RehabCare Group, Inc. and its wholly owned subsidiaries (the "Company"). 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 and nine months ended September 30, 1998, are not necessarily
indicative of the results to be expected for the fiscal year. Certain prior
years' amounts have been reclassified to conform with the current year
presentation.
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, 1997
and 1996 and for the year ended December 31, 1997, for the ten months ended
December 31, 1996 and for the year 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. - Comprehensive Earnings
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, on January 1, 1998,
which requires reporting of comprehensive income (earnings) and its components,
in the statement of operations and statement of equity, including net income as
a component. Comprehensive income is the change in equity of a business from
transactions and other events and circumstances from non-owner sources.
Note 3. - Acquisitions
On July 31, 1998, the Company purchased 100% of the capital stock of
Rehabilitative Care Systems of America, Inc. ("RCSA") for consideration
consisting of cash and stock. On August 17, 1998, the Company purchased 100% of
the capital stock of StarMed Staffing, Inc., ("StarMed"), and certain related
entities for cash from Medical Resources, Inc. On September 9, 1998, the Company
purchased 100% of the capital stock of Therapeutic Systems, Ltd. ("Therapeutic
Systems") of Chicago, Illinois for consideration consisting of cash, stock and
notes. The aggregate purchase prices for these acquisitions paid at closing was
$41,150,000, consisting of $37,950,000 in cash, $2,200,000 in stock and
$1,000,000 in subordinated notes. An additional $2,000,000 in cash consideration
in the purchase of StarMed has been deferred until certain contingencies expire
and is secured by a bank letter of credit held by a third party escrow agent.
Additional consideration of up to $4,950,000 may be paid to the former
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stockholders of RCSA and Therapeutic Systems contingent upon the retention of
clients or the attainment of certain financial goals over the next three years,
respectively. The cash purchase price was funded through borrowings made
available by an increase in the Company's bank credit facility to $90,000,000.
See note 4.
The acquisitions have been accounted for by the purchase method of
accounting, whereby the operating results have been included in the Company's
results of operations commencing on the respective closing dates of the
acquisitions. Goodwill, of approximately $28,000,000 related to the acquisitions
is being amortized over 40 years.
The following unaudited pro forma financial information assumes the
acquisitions occurred as of January 1, 1997. This information is not necessarily
indicative of results of operations that would have occurred had the purchases
actually been made at the beginning of the periods presented.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Operating revenues $ 197,800,000 $ 169,719,000
Net earnings 10,380,000 9,077,000
Net earnings per common and
common equivalent share:
Basic $ 1.68 $ 1.47
Diluted $ 1.43 $ 1.23
</TABLE>
Note 4. - Debt
On August 17, 1998 as part of the acquisitions, the Company's bank term
loan and revolving credit facility were restructured. Under the terms of the
restructured loan agreement, the Company entered into a five-year, bank term
loan with a commitment of up to $60,000,000. The amount that may be borrowed
under the revolving credit facility was increased to the lesser of $30,000,000
or 85% of eligible accounts receivable, reduced by amounts outstanding under the
Company's bank letter of credit. The term loan and advances under the revolving
credit facility will bear interest at the Company's option of either LIBOR plus
1.0% to 2.0%, or the bank's corporate base rate, with such rates being dependent
on the ratio of the Company's indebtedness, net of cash and marketable
securities, to cash flow. As of September 30, 1998 the Company's borrowings
under the term loan and revolving credit facility totaled $57,364,000, and $0,
respectively, and a letter of credit was outstanding in the amount of
$2,000,000. The weighted average interest rate as of September 30, 1998 was
6.8%.
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<TABLE>
Note 5. - Earnings per Share
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per
share - earnings available to
common stockholders (net earnings) $3,132,000 2,439,000 8,851,000 7,871,000
Effect of dilutive securities - after
tax interest on convertible
subordinated promissory notes 57,000 57,000 169,000 169,000
--------- --------- --------- ---------
Numerator for diluted earnings per
share - earnings available to
common stockholders after assumed
conversions $3,189,000 2,496,000 9,020,000 8,040,000
========= ========= ========= =========
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 6,302,000 5,741,000 6,077,000 6,065,000
Effect of dilutive securities:
Stock options 386,000 918,000 499,000 817,000
Convertible subordinated promissory
notes 423,000 423,000 423,000 423,000
Contingently issuable shares 237,000 108,000 237,000 108,000
--------- --------- --------- ---------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 7,348,000 7,190,000 7,236,000 7,413,000
========= ========= ========= =========
Basic earnings per share $.50 .42 1.46 1.30
Diluted earnings per share $.43 .35 1.25 1.08
</TABLE>
Note 6. - Current Developments in Accounting and Reporting
In April 1998, Statement of Position 98-5, Reporting on the Costs of
Start-up Activities ("SOP"), was issued which is effective for fiscal years
beginning after December 15, 1998, and requires that costs of start-up
activities be expensed as incurred. Start-up activities are defined in the SOP
as those one-time activities related to opening a new facility, introducing a
new territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility or commencing a new operation.
Initial application of the SOP should be as of the beginning of the fiscal year
in which the SOP is adopted and should be reported as the cumulative effect of a
change in accounting principle. At September 30, 1998, the Company has $3.5
million of costs related to start-up activities capitalized. Approximately 50%
of these costs will be subject to write-off under the SOP.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"), which establishes
standards for the way public enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 is effective for financial statements
for periods beginning after December 15, 1997. SFAS 131 is a disclosure item,
and as a result, the adoption will not have a material impact on the Company's
financial position or results of operations.
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In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for all fiscal years beginning
after June 15, 1999. Earlier application of SFAS 133 is encouraged but should
not be applied retroactively to financial statements of prior periods. The
Company is currently evaluating the requirements and impact of SFAS 133.
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; outpatient clinics, both on and off campus of the host hospital, and
therapy services for long-term care facilities and school districts. The Company
also provides therapist and nurse staffing on a continuing and temporary basis
to hospitals and long-term care and rehabilitation facilities.
<TABLE>
Three Months Ended Nine Months Ended
Operating Statistics September 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Inpatient Units (Acute and Subacute)
-----------------------------------
Average bed capacity 2,640 2,149 2,481 2,070
Average billable length of stay (days) 14.6 15.0 14.4 15.1
Billable patient days served 170,623 135,083 484,044 390,211
Admissions 11,708 9,007 33,507 25,799
Average daily billable census 1,855 1,468 1,773 1,429
Average occupied beds per unit 13.9 13.0 14.0 13.3
Total units in operation at end of period 133 116 133 116
Outpatient Clinics
------------------
Patient visits 106,474 53,494 245,879 174,401
Units of service 305,885 171,052 735,631 553,808
Total clinics in operation at end of period 35 16 35 16
Contract Therapy
----------------
Number of locations at end of period 88 43 88 43
Staffing
--------
Weeks worked 14,654 7,726 27,910 21,943
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months September 30,
1997
Operating revenues during the third quarter of 1998 increased by
$11,899,000, or 28.2%, to $54,050,000. Acquisitions accounted for an increase of
$12,770,000 in revenue for the quarter. Inpatient unit revenue increased by
$4,019,000. An 18.0% increase in the average number of inpatient units from
113.1 to 133.5 units and an increase in the average daily billable census per
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inpatient unit of 6.9% from 13.0 to 13.9, generated a 26.3% increase in billable
patient days to 170,623 and a 16.3% increase in revenue from inpatient units.
The increase in billable census per unit for inpatient units is primarily
attributable to a 10.1% increase in admissions per unit offset by a 2.7% decline
in average billable length of stay. The decline in average length of stay
reflects both the continued trend of reduced rehabilitation lengths of stay and
the increase in subacute units operational in 1998, which carry a shorter length
of stay than acute rehabilitation units. The increase in billable patient days
was offset by a 7.9% decrease in average per diem billing rates, reflecting a
greater mix of subacute units, which carry lower average per diem rates than
acute units and lower per diem billing rates for subacute units subject to the
new Medicare Prospective Payment System. In the third quarter of 1998, the
decline in subacute per diem rates was substantially offset by an increase in
unit occupancy and patient days. Outpatient revenue increased 115.0% to
$4,633,000, reflecting $550,000 from the July 1998 acquisition of RCSA, plus an
increase in the average number of outpatient clinics managed from 16 to 21 and
an increase in average units of service per clinic. Contract therapy revenue
increased 25.9% to $3,399,000, reflecting $898,000 from the September 1998
acquisition of Therapeutic Systems. Staffing revenue increased 37.7% to
$17,644,000 reflecting increased volumes in nurse staffing bookings achieved
through the August 1998 acquisition of StarMed, offset by an approximate
$6,000,000 decrease in therapy staffing revenue. Demand for therapists has
declined significantly as a result of changes in Medicare reimbursement for
skilled nursing facilities.
Operating expenses for the three-month periods compared increased by
$8,247,000, or 28.1% to $37,578,000. Acquisitions accounted for substantially
all of the net increase as costs associated with the increase in patient days
and outpatient locations were offset by the decrease in therapy staffing costs.
The excess of operating expenses over operating revenues associated with
non- exempt acute units decreased from $278,000 to $162,000, on a decrease in
the average number of non-exempt units from 7.9 to 3.1. The per unit average
excess of operating expenses over operating revenues increased from $35,000 to
$53,000, reflecting a greater percentage of units where the Company is obligated
to provide therapy staff. The average excess of operating expenses over
operating revenues for units during their non-exempt year can range to as high
as $150,000 to $200,000.
General and administrative expenses increased $2,276,000, or 32.5%, to
$9,277,000, reflecting increases in corporate office expenses, as well as
administration, business development, operations and professional services in
support of the increase in units, compared to the previous year, plus the
addition of corporate staff from acquisitions.
Interest expense increased $87,000 reflecting interest on additional debt
issued in acquisitions offset by a decline in interest rates.
Earnings before income taxes increased by $1,108,000, or 26.8%, to
$5,247,000. The provision for income taxes for the third quarter of 1998 was
$2,115,000, compared to $1,700,000 for 1997, reflecting effective income tax
rates of 40.3% and 41.1% for the respective quarters. Net earnings increased by
$693,000, or 28.4% to $3,132,000. Diluted earnings per share increased 22.9% to
43 cents from 35 cents on a 2.2% increase in the weighted average shares
outstanding. The increase in shares outstanding is attributable primarily to
stock option exercises and shares issued in the acquisition of RCSA and
Therapeutic Systems, offset by a decrease in the dilutive effect of stock
options resulting from a decrease in the average market price of the Company's
stock relative to the underlying exercise prices of outstanding options.
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Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Operating revenues during the first nine months of 1998 increased by
$22,529,000, or 19.1%, to $140,581,000. Acquisitions accounted for 68.3% of the
net increase. Inpatient unit revenue increased by $10,678,000. A 17.5% increase
in the average number of inpatient units from 107.6 to 126.4 units and an
increase in the average daily billable census per inpatient unit of 5.3% from
13.3 to 14.0, generated a 24.0% increase in billable patient days to 484,044 and
a 14.8% increase in revenue from inpatient units. The increase in billable
census per unit for inpatient units is primarily attributable to a 10.6%
increase in admissions per unit offset by a 4.6% decline in average billable
length of stay. The decline in average length of stay reflects both the
continued trend of reduced rehabilitation lengths of stay and the increase in
subacute units operational in 1998, which carry a shorter length of stay than
acute rehabilitation units. The increase in billable patient days was offset by
a 7.5% decrease in average per diem billing rates, reflecting a greater mix of
subacute units, which carry lower average per diem rates than acute units and
lower per diem billing rates for subacute units subject to the new Medicare
Prospective Payment System. Outpatient revenue increased 50.7% to $10,966,000,
reflecting $550,000 from the July 1998 acquisition of RCSA, plus an increase in
the average number of outpatient clinics managed from 18 to 20 and an increase
in units of service per clinic. Contract therapy revenue increased 62.7% to
$8,952,000, reflecting $487,000 from the acquisitions of Team Rehab, Inc. and
Moore Rehabilitation Services, Inc. in January 1997, $2,134,000 from the
acquisition of Rehab Unlimited in June 1997, and $898,000 from the acquisition
of Therapeutic Systems in September 1998. Staffing revenue increased 15.6% to
$38,949,000, reflecting increased volumes in nurse staffing bookings achieved
through the August 1998 acquisition of StarMed, offset by an approximate
$6,000,000 decrease in therapy staffing revenues. Demand for therapists has
declined significantly as a result of changes in Medicare reimbursement for
skilled nursing facilities.
Operating expenses for the nine-month periods compared increased by
$14,400,000, or 17.6% to $96,199,000. Acquisitions accounted for 78.6% of the
increase. The remaining increase was attributable to the increase in patient
days and units of service, offset by decreased therapy staffing costs.
The excess of operating expenses over operating revenues associated with
non- exempt units decreased from $645,000 to $393,000, on a decrease in the
average number of non-exempt units from 7.6 to 3.1. The per unit average excess
of operating expenses over operating revenues increased from $85,000 to $127,000
reflecting a greater percentage of units where the Company is obligated to
provide therapy staff. The average excess of operating expenses over operating
revenues for units during their non-exempt year can range to as high as $150,000
to $200,000.
General and administrative expenses increased $4,553,000, or 22.9%, to
$24,408,000, reflecting increases in corporate office expenses as well as
administration, business development, operations and professional services in
support of the increase in units, plus the addition of corporate staff from
acquisitions.
Interest expense increased $208,000 reflecting interest on additional debt
issued in the acquisitions of StarMed and Therapeutic Systems, as well as
additional debt issued in acquisitions consummated in 1997 and the repurchase of
Company common stock during 1997. Gain on sale of marketable securities reflects
the sale of approximately 50% of the Company's investment in Intensiva
Healthcare Corporation in the first quarter of 1997, with no comparable gain in
the first nine months of 1998.
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Earnings before income taxes increased by $1,648,000, or 12.5%, to
$14,871,000. Excluding the gain on sale of marketable securities, earnings
before income taxes would have increased $3,096,000 or 26.3%. The provision for
income taxes for the first nine months of 1998 was $6,020,000, compared to
$5,352,000 for 1997, reflecting effective income tax rates of 40.5% for the
respective periods. Net earnings increased by $980,000, or 12.5% to $8,851,000.
Diluted earnings per share increased 15.7% to $1.25 from $1.08 on a 2.4%
decrease in the weighted average shares outstanding. The gain on sale of
marketable securities represented 12 cents of the earnings per share in 1997.
Excluding this gain, diluted earnings per share increased 30.2% from 96 cents in
the first nine months of 1997. The decrease in shares outstanding is
attributable primarily to shares repurchased and a decrease in the dilutive
effect of stock options resulting from a decrease in the average market price of
the Company's stock relative to the underlying exercise prices of outstanding
options, offset by stock option exercises and shares issued in the acquisitions
of RCSA and Therapeutic Systems.
Liquidity and Capital Resources
As of September 30, 1998, the Company had $7,858,000 in cash and current
marketable securities and a current ratio of 1.7:1. Working capital increased by
$11,071,000 as of September 30, 1998, compared to December 31, 1997, reflecting
working capital from the acquisitions of StarMed and Therapeutic Systems and
working capital generated by operations.
Net accounts receivable were $46,786,000 at September 30, 1998, compared to
$24,147,000 at December 31, 1997. The number of days average net revenue in net
receivables was 68.5 at September 30, 1998 compared to 52.0 at December 31,
1997. The increase is primarily the result of the acquisitions of businesses
that traditionally carry longer payment terms from clients.
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. As part of the
acquisitions of RCSA, StarMed and Therapeutic Systems, the Company's bank term
loan and revolving credit facility were restructured. Under the terms of the
restructured loan agreement, the Company entered into a five-year, bank term
loan with a commitment of up to $60,000,000. The amount that may be borrowed
under the revolving credit facility was increased to the lesser of $30,000,000
or 85% of eligible accounts receivable, reduced by amounts outstanding under the
Company's bank letter of credit. As of September 30, 1998 the Company's
borrowings under the term loan and revolving credit facility totaled
$57,364,000, and $0, respectively, and a letter of credit was outstanding in the
amount of $2,000,000.
The Company has accounted for its acquisitions using the purchase method of
accounting, whereby the purchase price is allocated to the estimated fair market
value of tangible and intangible assets as of the effective date of the
acquisition. The excess cost is allocated to excess of cost over net assets
acquired (goodwill) and is amortized over 40 years. The Company evaluates the
realizability of goodwill based upon expectations of undiscounted cash flows and
operating income.
13 of 17
<PAGE> 14
Year 2000
The Company is subject to risks associated with the "Year 2000" problem, a
term which refers to uncertainties about the ability of various data processing
hardware and software systems to interpret dates correctly after the beginning
of January 1, 2000.
The Company has developed and presented to the Board of Directors its
action plan for Year 2000 compliance. The major phases of the action plan are
awareness, assessment, renovation, validation and implementation.
The awareness phase included a communication of the Year 2000 problem and
the potential ramifications to the Company, education and identification of key
systems. The assessment phase included the inventorying of systems that may be
impacted by the Year 2000 problem.
Most of the Company's systems are purchased from industry-known vendors and
are generally used in their standard configuration. Other systems will be
replaced by or converted to Year 2000 compatible systems. The Company has
closely reviewed the Year 2000 progress as reported by each vendor. The Company
has been assured by certain of these vendors, that new Year 2000 compliant
systems have been installed. In all other cases, compliant systems will be
delivered in time for installation and testing prior to year end 1999.
The final phase of the action plan is the implementation of remediated and
other systems into the operating environment of the Company. For those systems
that have not yet been delivered, the Company expects delivery of compliant
systems not later than early in the second quarter of 1999. The final phase of
the plan is scheduled to be completed by June 30, 1999. Concurrent with the
development and execution of the plan is the evolution of a contingency plan
that includes procedures to be followed should a system fail.
The Company is also completing an assessment of Year 2000 risks relating to
its lines of business separate from its dependence on data processing. The
assessment includes corresponding with customers to ascertain their overall
preparedness regarding Year 2000 risks. The plan also provides for the
identification and communication with significant non-data processing third
party vendors regarding their preparedness for Year 2000 risks. It is not
possible to quantify the overall potential adverse effects to the Company
resulting from these customers' or non data vendors' failure to adequately
prepare for the Year 2000. The failure of a customer to prepare adequately for
Year 2000 could have a significant adverse effect on such customer's operations
and profitability, which, in turn, could inhibit its ability to pay for the
Company's services in accordance with their terms. Failure of a non data vendor
to prepare adequately for Year 2000 could have a significant adverse effect on
the vendor's operations, which, in turn, could inhibit the vendors ability to
deliver purchased goods and services to the Company in a timely manner. The
Company also recognizes the importance of Year 2000 compliance by customers,
payment sources, and vendors of the Company's customers and vendors. The Company
must necessarily rely upon the compliance programs of these third parties.
The Company does not expect that the cost of the year 2000 compliance will
be material to its business, financial condition, or results of operations, nor
does management anticipate any material disruption in operations as the result
of any failure by the Company or its subsidiaries. While the Company is making a
substantial effort to become Year 2000 compliant, there is no assurance the
failure to adequately address all issues relating to the Year 2000 problem would
not have a material adverse effect on its financial condition or results of
operations.
14 of 17
<PAGE> 15
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated July 8, 1998 was filed by the
Company to report, pursuant to Item 5 of the Form 8-K, that
the Company has entered into a definitive agreement to
acquire StarMed Staffing, Inc. from Medical Resources, Inc.
A report on Form 8-K dated August 14, 1998 was filed by the
Company on August 28, 1998 to report, pursuant to Item 2 of
the Form 8-K, the consummation of the acquisition of StarMed
Staffing, Inc. pursuant to the terms and conditions of a
Stock Purchase Agreement dated July 8, 1998.
A report on Form 8-K/A dated August 14, 1998 was filed by
the Company on October 26, 1998 setting forth the following
historical financial statements of StarMed Staffing, Inc.
and the unaudited pro forma financial information of
RehabCare Group, Inc.:
(i) Historical financial statements of StarMed Staffing,Inc.:
Report of Independent Certified Public Accountants
Combined Balance Sheets, December 31, 1997 and 1996
Combined Statements of Income(Loss), Years Ended
December 31, 1997 and 1996
Combined Statements of Changes in Stockholder's
Equity, Years Ended December 31, 1997 and 1996
Combined Statements of Cash Flows, Years Ended
December 31, 1997 and 1996
Notes to Combined Financial Statements
Condensed Combined Balance Sheet, June 30, 1998
(Unaudited)
Condensed Combined Statements of Earnings, Six Months
Ended June 30, 1998 and 1997 (Unaudited)
Condensed Combined Statement of Cash Flows, Six
Months Ended June 30, 1998 (Unaudited)
Notes to Condensed Combined Financial Statements
(Unaudited)
(ii) Pro forma combined financial statements of RehabCare
showing the effect of the acquisition of StarMed
Staffing, Inc.:
Pro Forma Condensed Combined Balance Sheet as of
June 30, 1998 (Unaudited)
Pro Forma Condensed Combined Statement of Earnings
for the Year Ended December 31, 1997 (Unaudited)
Pro Forma Condensed Combined Statements of Earnings
for the Six Months Ended June 30, 1998 (Unaudited)
Notes to Unaudited Pro Forma Condensed Combined
Financial Statements (Unaudited)
15 of 17
<PAGE> 16
A report on Form 8-K dated August 5, 1998 was filed by the
Company to report, pursuant to Item 5 of the Form 8-K, that
the Company has entered into a definitive agreement to
acquire Therapeutic Systems, Ltd.
A report on form 8-K dated September 9, 1998 was filed by
the Company on September 24, 1998 to report, pursuant to
Item 2 of the Form 8-K, the consummation of the acquisition
of Therapeutic Systems, Ltd. pursuant to the terms and
conditions of a Stock Purchase Agreement dated as of August
5, 1998 as amended by Amendment No. 1 to the Stock Purchase
Agreement dated September 9, 1998.
A report on Form 8-K/A dated September 9, 1998 was filed by
the Company on November 10, 1998 setting forth the following
historical financial statements of Therapeutic Systems, Ltd.
and the unaudited pro forma financial information of
RehabCare Group, Inc.:
(i) Historical financial statements of Therapeutic Systems,
Ltd.:
Report of Independent Auditors
Balance Sheet, December 31, 1997
Statement of Income, Year Ended December 31, 1997
Statement of Cash Flows, Year Ended December 31, 1997
Notes to Financial Statements
Condensed Balance Sheet, June 30, 1998 (Unaudited)
Condensed Statement of Earnings, Six Months Ended
June 30, 1998 (Unaudited)
Condensed Statement of Cash Flows, Six Months Ended
June 30, 1998 (Unaudited)
Notes to Condensed Financial Statements (Unaudited)
(ii) Pro form combined financial statements of RehabCare
showing the effect of the acquisition of Therapeutic
Systems, Inc.:
Pro Forma Condensed Combined Balance Sheet as of
June 30, 1998 (Unaudited)
Pro Forma Condensed Combined Statement of Earnings
for the Year Ended December 31, 1997 (Unaudited)
Pro Forma Condensed Combined Statement of Earnings
for the Six Months Ended June 30, 1998 (Unaudited)
Notes to Unaudited Pro Forma Condensed Combined
Financial Statements (Unaudited)
16 of 17
<PAGE> 17
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.
November 13, 1998
By /s/ John R. Finkenkeller
-------------------------------
John R. Finkenkeller
Senior Vice President
and Chief Financial Officer
(Chief Financial Officer)
17 of 17
<PAGE> 18
EXHIBIT INDEX
Number Page
- ------ ----
27 Financial Data Schedule 19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,419,000
<SECURITIES> 2,439,000
<RECEIVABLES> 50,086,000
<ALLOWANCES> 3,300,000
<INVENTORY> 0
<CURRENT-ASSETS> 58,394,000
<PP&E> 4,149,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 151,627,000
<CURRENT-LIABILITIES> 34,530,000
<BONDS> 56,956,000
0
0
<COMMON> 76,000
<OTHER-SE> 56,510,000
<TOTAL-LIABILITY-AND-EQUITY> 151,627,000
<SALES> 140,581,000
<TOTAL-REVENUES> 140,581,000
<CGS> 96,199,000
<TOTAL-COSTS> 123,788,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,033,000
<INCOME-PRETAX> 14,871,000
<INCOME-TAX> 6,020,000
<INCOME-CONTINUING> 8,851,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,851,000
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.25
</TABLE>
