<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 September 30, 1999
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, 1999
- -------------------------------------- --------------------------------
Common Stock, par value $.01 per share 6,658,136
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
September 30, 1999 (unaudited) and December 31, 1998 3
Condensed consolidated statements of earnings for the three
months and nine months ended September 30, 1999 and
1998 (unaudited) 4
Condensed consolidated statements of comprehensive earnings
for the three months and nine months ended
September 30, 1999 and 1998 (unaudited) 5
Condensed consolidated statements of cash flows for the
nine months ended September 30, 1999 and 1998 (unaudited) 6
Notes to condensed consolidated financial statements (unaudited) 7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. - Other Information
Item 6. - Exhibits and Reports on Form 8-K 14
Signatures 15
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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>
September 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 1,517 $ 5,666
Marketable securities, available-for-sale 3,017 3,017
Accounts receivable, net of allowance for doubtful
accounts of $4,116 and $3,404, respectively 53,046 46,349
Deferred tax assets 4,848 3,382
Prepaid expenses and other current assets 1,074 938
------- -------
Total current assets 63,502 59,352
------- -------
Marketable securities, trading, noncurrent 1,691 1,240
------- -------
Equipment and leasehold improvements, net 5,001 4,537
------- -------
Other assets:
Excess of cost over net assets acquired, net 92,486 86,285
Deferred contract costs, net 1,059 1,184
Investments in nonconsolidated subsidiaries 1,624 1,648
Other 2,783 2,624
------- -------
Total other assets 97,952 91,741
------- -------
$168,146 $156,870
======= =======
Liabilities and Stockholders' Equity:
Current liabilities:
Revolving credit facility $ 2,150 $ --
Current portion of long-term debt 11,636 11,926
Accounts payable 2,102 2,179
Accrued salaries and wages 15,341 14,049
Accrued expenses 9,919 8,601
Income taxes payable 2,957 1,991
------- -------
Total current liabilities 44,105 38,746
------- -------
Deferred compensation and other long-term
liabilities 3,541 3,084
------- -------
Deferred tax liabilities 1,449 955
------- -------
Long-term debt, less current portion 45,876 53,929
------- -------
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000
shares, issued 7,820,358 and 7,657,391 shares,
respectively 78 77
Additional paid-in capital 32,285 30,654
Retained earnings 58,778 47,390
Less common stock held in treasury at cost,
1,166,234 shares (17,975) (17,975)
Accumulated other comprehensive earnings 9 10
------- -------
Total stockholders' equity 73,175 60,156
------- -------
$168,146 $156,870
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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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,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $ 79,663 $ 54,050 $222,523 $140,581
Costs and expenses:
Operating expenses 57,208 37,799 159,655 96,725
General and administrative 13,125 9,277 37,278 24,408
Depreciation and amortization 1,339 1,039 3,807 2,829
------- ------- ------- -------
Total costs and expenses 71,672 48,115 200,740 123,962
------- ------- ------- -------
Operating earnings 7,991 5,935 21,783 16,619
Interest income 71 61 185 185
Interest expense (1,029) (866) (3,091) (2,218)
Other income (expense) (12) 17 18 111
------- ------- ------- -------
Earnings before income taxes and cumulative
effect of change in accounting principle 7,021 5,147 18,895 14,697
Income taxes 2,788 2,075 7,507 5,950
------- ------- ------- -------
Earnings before cumulative effect of
change in accounting principle 4,233 3,072 11,388 8,747
Cumulative effect of change in accounting
for start-up costs, net of tax -- -- -- (776)
------- ------- ------- -------
Net earnings $ 4,233 $ 3,072 $ 11,388 $ 7,971
======= ======= ======= =======
Net earnings per common share:
Basic
Earnings before cumulative effect of
change in accounting principle $ .64 $ .49 $ 1.74 $ 1.44
Cumulative effect of change in
accounting for start-up costs -- -- -- (.13)
------- ------- ------- -------
Net earnings $ .64 $ .49 $ 1.74 $ 1.31
======= ======= ======= =======
Diluted
Earnings before cumulative effect of
change in accounting principle $ .57 $ .43 $ 1.56 $ 1.23
Cumulative effect of change in
accounting for start-up costs -- -- -- (.11)
------- ------- ------- -------
Net earnings $ .57 $ .43 $ 1.56 $ 1.12
======= ======= ======= =======
Weighted average number of common shares outstanding:
Basic 6,610 6,302 6,545 6,077
======= ======= ======= =======
Diluted 7,478 7,348 7,386 7,236
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
<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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings $ 4,233 $ 3,072 $11,388 $ 7,971
Other comprehensive earnings net of tax -
Unrealized holding losses arising
during period on securities (1) (345) (1) (315)
------ ------ ------ ------
Comprehensive earnings $ 4,232 $ 2,727 $11,387 $ 7,656
====== ====== ====== ======
</TABLE>
See notes to condensed consolidated financial statements.
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<TABLE>
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings $11,388 $7,971
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Cumulative effect of change in accounting
for start-up costs -- 776
Depreciation and amortization 3,807 2,829
Provision for losses on accounts receivable 1,972 599
Increase (decrease) in deferred compensation 516 (735)
Increase in accounts receivable, net (7,825) (4,008)
Increase in prepaid expenses and other current assets (78) (20)
Decrease (increase) in other assets (87) 149
Increase in accounts payable and accrued expenses 1,066 3,176
Increase in accrued salaries and wages 821 1,795
Decrease in income taxes payable and deferred (355) (77)
------ ------
Net cash provided by operating activities 11,225 12,455
------ ------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (1,484) (1,180)
Purchase of marketable securities (584) (1,078)
Deferred contract costs (127) (309)
Proceeds from sale/maturities of investments 133 3,412
Cash paid in acquisition of businesses,
net of cash received (7,263) (41,567)
Other (738) (1,266)
------ ------
Net cash used in investing activities (10,063) (41,988)
------ ------
Cash flows from financing activities:
Proceeds from revolving credit facility, net 2,150 --
Proceeds from issuance of notes payable 1,250 1,000
Payments on long-term debt (9,593) (10,463)
Proceeds from issuance of long-term debt -- 36,400
Exercise of stock options, including tax benefit 882 6,040
------ ------
Net cash provided by (used in)
financing activities ( 5,311) 32,977
------ ------
Net increase (decrease) in cash and cash
equivalents ( 4,149) 3,444
Cash and cash equivalents at beginning of period 5,666 1,975
------ ------
Cash and cash equivalents at end of period $ 1,517 $5,419
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
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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 the
Company and its wholly owned subsidiaries. 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, 1999, 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, 1998
and 1997 and for the years ended December 31, 1998 and 1997, and for the ten
months ended December 31, 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. - Acquisitions
On July 31, 1998, the Company acquired Rehabilitative Care Systems of
America, Inc. ("RCSA"), a provider of program outpatient therapy, for
consideration consisting of cash and stock. On August 17, 1998, the Company
acquired StarMed Staffing, Inc. ("StarMed"), a provider of nurse staffing, and
certain related entities for cash from Medical Resources, Inc. On September 9,
1998, the Company acquired Therapeutic Systems, Ltd. ("Therapeutic Systems"), a
provider of contract therapy, 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, 130,426 shares of 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 $202,000 was paid to the former stockholders of
RCSA, based upon the retention of clients. The cash component of the purchase
prices was funded by an increase in the Company's bank credit facility to
$90,000,000. Goodwill of approximately $33,000,000 related to the acquisitions
is being amortized over 40 years.
On May 20, 1999 the Company acquired Salt Lake Physical Therapy
Associates, Inc. ("Salt Lake"), a provider of physical, occupational and speech
therapy through hospital contracts, a freestanding clinic and home health
agencies for consideration, consisting of cash, stock and subordinated notes. On
July 1, 1999, the Company purchased All Staff, Inc. ("All Staff"), a provider of
supplemental nurse staffing to health care providers for consideration
consisting of cash, stock and subordinated notes. The aggregate purchase prices
for these acquisitions paid at closing was $6,600,000, consisting of $4,500,000
in cash, 48,433 shares of stock, and $1,250,000 in subordinated notes.
Additional consideration of up to $1,900,000 may be paid to the former
stockholders of Salt Lake contingent upon the attainment of certain financial
goals over the next three years. Additional consideration may be paid to the
former stockholder of Salt Lake contingent upon the attainment of a minimum
target growth in gross profit for the twelve-month period ending June 30, 2000.
Goodwill of approximately $6,600,000 related to the acquisitions is being
amortized over 40 years. The cash component of the purchase prices was funded by
the Company's cash flow plus additional borrowings on its bank credit facility.
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<TABLE>
Note 3. - Earnings per Share
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings
per share - earnings available
to common stockholders
(net earnings) $4,233 $3,072 $11,388 $7,971
Effect of dilutive securities -
after-tax interest on convertible
subordinated promissory notes 56 56 168 168
----- ----- ------ -----
Numerator for diluted earnings per
share - earnings available to
common stockholders after assumed
conversions $4,289 $3,128 $11,556 $8,139
===== ===== ====== =====
Denominator:
Denominator for basic earnings per
share - weighted-average shares
outstanding 6,610 6,302 6,545 6,077
Effect of dilutive securities:
Stock options 445 386 418 499
Convertible subordinated
promissory notes 423 423 423 423
Contingently issuable shares -- 237 -- 237
----- ----- ------ -----
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 7,478 7,348 7,386 7,236
===== ===== ====== =====
Basic earnings per share $ .64 $ .49 $ 1.74 $ 1.31
===== ===== ====== =====
Diluted earnings per share $ .57 $ .43 $ 1.56 $ 1.12
===== ===== ====== =====
</TABLE>
Note 4. - Industry Segment Information
The Company operates in two business segments that are managed separately
based on fundamental differences in operations: program management and staffing.
The program management segment includes the management of acute rehabilitation
and skilled nursing programs, outpatient programs and contract therapy services.
The staffing segment includes staffing of nurses and other medical professionals
on a temporary and permanent basis. All of the Company`s services are provided
in the United States. Summarized information about the Company's operations for
the three months and nine months ended September 30, 1999 and 1998 in each
industry segment is as follows:
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C>
Revenues from
Unaffiliated
Customers
Program management $ 40,934 $ 36,751 $118,672 $102,724
Staffing 38,729 17,299 103,851 37,857
-------- -------- -------- --------
Total $ 79,633 $ 54,050 $222,523 $140,581
======== ======== ======== ========
Operating Earnings
Program management $5,722 $5,814 $ 18,073 $ 16,117
Staffing 2,269 121 3,710 502
-------- -------- -------- --------
Total $7,991 $5,935 $ 21,783 $ 16,619
======== ======== ======== ========
Total Assets
Program management $ 92,281 $ 82,534 $ 92,281 $ 82,534
Staffing 75,865 67,159 75,865 67,159
-------- -------- -------- --------
Total $168,146 $149,693 $168,146 $149,693
======== ======== ======== ========
Depreciation and
Amortization
Program management $ 871 $ 705 $2,478 $2,003
Staffing 468 334 1,329 826
-------- -------- -------- --------
Total $1,339 $1,039 $3,807 $2,829
======== ======== ======== ========
Capital Expenditures
Program management $ 187 $ 629 $1,018 $ 991
Staffing 164 50 480 209
-------- -------- -------- --------
Total $ 351 $ 679 $1,498 $1,200
======== ======== ======== ========
</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 programs that may or may not be
exempt from the Medicare Prospective Payment System ("PPS"), depending on their
stage of development; subacute programs 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 is a contract provider of nurse and other medical
staffing on a continuing and temporary basis to hospitals and long-term care
facilities.
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Operating Statistics September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Program Management:
Inpatient Programs (Acute and Subacute)
Average bed capacity 2,574 2,640 2,591 2,481
Average billable length of stay (days) 14.3 14.6 14.3 14.4
Billable patient days served 171,479 170,623 520,521 484,044
Admissions 12,035 11,708 36,335 33,507
Average daily billable census 1,864 1,855 1,907 1,773
Average occupied beds per program 14.2 13.9 14.5 14.0
Total programs in operation at end of period 133 133 133 133
Outpatient Clinics
Patient visits 210,904 106,474 547,895 245,879
Units of service 587,363 305,885 1,507,209 735,631
Total clinics in operation at end of period 42 35 42 35
Contract Therapy
Number of locations at end of period 100 68 100 68
Staffing
Weeks worked 34,395 14,654 92,147 27,910
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Operating revenues during the third quarter 1999 increased by $25,613,000,
or 47.4%, to $79,663,000 as compared to the third quarter of 1998. Acquisitions
accounted for 73.9% of the net increase. Excluding the effects of acquisitions,
increases in inpatient, outpatient and nurse travel staffing revenues were
offset by a decline in subacute, therapy travel staffing and contract therapy
revenues. Inpatient program revenue increased by $249,000 to $28,967,000. A 2.2%
increase in the average daily billable census per inpatient program from 13.9 to
14.2 was offset by a 1.5% decrease in the average number of inpatient programs
from 133.5 to 131.5 units, resulting in a .5% increase in billable patient days
to 171,479. The increase in billable patient days, combined with a 0.4% increase
in average per diem billing rates, generated a .9% increase in revenue from
inpatient programs. The increase in billable census per program for inpatient
programs is primarily attributable to a 4.3% increase in admissions per program.
The average billable length of stay decreased, reflecting the continued trend of
reduced rehabilitation lengths of stay. Outpatient revenue increased 81.0% to
$8,388,000, reflecting $142,000 from the July 1998 acquisition of RCSA,
$1,222,000 from the May 1999 acquisition of Salt Lake, an increase in the
average number of outpatient clinics managed from 29.2 to 41.5, and an increase
in units of service per clinic. Contract therapy revenue increased 5.3% to
$3,578,000, of which $669,000 was attributable to the acquisition of Therapeutic
Systems in September 1998, offset by a 44.5% decrease in revenue per unit to
$37,978, reflecting lower volumes and reimbursement rates under the Balanced
Budget Act of 1997 ("BBA").
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<PAGE> 11
Staffing revenue increased 123.9% to $38,729,000, reflecting the addition
of $16,934,000 in supplemental nurse staffing revenue achieved through the
August 1998 acquisition of StarMed and an increase in existing nurse travel
staffing revenue of $8,430,000, offset by an approximate $5,099,000 decrease in
therapy travel staffing revenues. Demand for therapists in the long-term care
setting has declined significantly as a result of the implementation of PPS for
skilled nursing facilities and units.
Operating expenses for the three months ended September 30, 1999 increased
by $19,409,000, or 51.3%, to $57,208,000 as compared to the three months ended
September 30, 1998. Acquisitions accounted for approximately 74.2% of the net
increase. A $8,779,000 increase in operating expenses attributable to the
increase in patient days, units of services, and existing travel nursing was
offset by a $3,779,000 decrease in therapy staffing and contract therapy costs.
The aggregate excess of operating expenses over operating revenues
associated with non-exempt programs decreased from $196,000 to $90,000, on an
increase in the average number of non-exempt units from 3.1 to 3.9. The per
program average excess of operating expenses over operating revenues decreased
from $63,000 to $23,000 reflecting an increase in the average billable length of
stay from 5.6 to 7.1 and a 52.6% increase in average per diem billing rates. The
average excess of operating expenses over operating revenues for programs during
their non-exempt year can range to as high as $150,000 to $200,000.
General and administrative expenses increased $3,848,000, or 41.5%, to
$13,125,000, reflecting increases in corporate office expenses as well as
marketing, business development, operations and professional services in support
of the increase in programs, plus the addition of general and administrative
expenses of companies acquired.
Depreciation and amortization increased $300,000 reflecting an increase in
goodwill from acquisitions.
Interest expense increased $163,000 reflecting interest on additional debt
funding the acquisitions.
Earnings before income taxes increased by $1,874,000, or 36.4%, to
$7,021,000. The provision for income taxes for 1999 was $2,788,000 compared to
$2,075,000 in 1998, reflecting effective income tax rates of 39.7% and 40.3%,
respectively. Net earnings increased by $1,161,000, or 37.8%, to $4,233,000.
Diluted earnings per share increased 32.6% to $.57 from $.43 on a 1.8% increase
in the weighted-average shares and assumed conversions outstanding. The increase
in shares outstanding is attributable primarily to stock option exercises and
shares issued in acquisitions, and an increase in the dilutive effect of stock
options resulting from an increase in the average market price of the Company's
stock relative to the underlying exercise prices of outstanding options.
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<PAGE> 12
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Operating revenues during the first nine months of 1999 increased by
$81,942,000, or 58.3%, to $222,523,000 as compared to the first nine months of
1998. Acquisitions accounted for 89.8% of the net increase. Excluding the
effects of acquisitions, increases in inpatient, outpatient and nurse travel
staffing revenues were offset by a decline in subacute, therapy travel staffing,
and contract therapy revenue. Inpatient program revenue increased by $4,336,000.
A 3.9% increase in the average number of inpatient programs from 126.4 to 131.3
programs, and 93.6% increase in the average daily billable census per inpatient
program from 14.0 to 14.5, resulted in a 7.5% increase in billable patient days
to 520,521 and a 5.2% increase in revenue from inpatient programs to
$87,141,000. The increase in billable census per program for inpatient programs
is primarily attributable to a 4.4% increase in admissions per program. The
average billable length of stay was comparable. The increase in billable patient
days was offset by a 2.1% decrease in average per diem billing rates, reflecting
lower per diem billing rates for subacute units subject to the BBA. Outpatient
revenue increased 99.7% to $21,897,000, reflecting $1,875,000 from the July 1998
acquisition of RCSA, $1,741,000 from the May 1999 acquisition of Salt Lake, an
increase in the average number of outpatient clinics managed from 23.0 to 38.1,
and an increase in units of service per clinic. Contract therapy revenue
increased 7.9% to $9,631,000 reflecting $3,830,000 from the acquisition of
Therapeutic Systems in September 1998, offset by a 44.1% decrease in revenue per
unit to $113,753, reflecting lower volumes and reimbursement rates under the
BBA.
Staffing revenue increased 174.3% to $103,851,000, reflecting the addition
of $66,158,000 in supplemental nurse staffing revenue achieved through the
August 1998 acquisition of StarMed. An increase in existing nurse travel
staffing revenue of $20,709,000 was offset by a similar decrease in therapy
travel staffing revenues. Demand for therapists in the long-term care setting
has declined significantly as a result of the implementation of a PPS for
skilled nursing facilities and units.
Operating expenses for the first nine months of 1999 increased by
$62,930,000, or 65.1%, to $159,655,000 as compared to the first nine months of
1998. Acquisitions accounted for 89.3% of the net increase. A $24,471,000
increase in operating expenses attributable to the increase in patient days,
units of services, and existing nurse travel staffing was offset by a
$17,757,000 decrease in therapy travel staffing and contract therapy costs.
The aggregate excess of operating expenses over operating revenues
associated with non-exempt programs decreased from $500,000 to $273,000, on an
increase in the average number of non-exempt units from 3.1 to 4.0. The per
program average excess of operating expenses over operating revenues decreased
from $159,000 to $68,000 reflecting an increase in the average billable census
per program from 3.5 to 5.0. The average excess of operating expenses over
operating revenues for programs during their non-exempt year can range to as
high as $150,000 to $200,000.
General and administrative expenses increased $12,870,000, or 52.7%, to
$37,278,000, reflecting increases in corporate office expenses as well as
marketing, business development, operations and professional services in support
of the increase in programs, plus the addition of general and administrative
expenses of companies acquired.
Depreciation and amortization increased $978,000 reflecting an increase in
goodwill from acquisitions.
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<PAGE> 13
Interest expense increased $873,000 reflecting interest on additional debt
funding the acquisitions.
Earnings before income taxes and cumulative effect of change in accounting
principle increased by $4,198,000, or 28.6%, to $18,895,000. The provision for
income taxes for 1999 was $7,507,000 compared to $5,950,000 in 1998, reflecting
effective income tax rates of 39.7% and 40.5%, respectively. Earnings before
cumulative effect of change in accounting principle increased by $2,641,000, or
30.2%, to $11,388,000. The cumulative effect of change in accounting principle
of $776,000 represents the after-tax charge related to the adoption, effective
January 1, 1998, of Statement of Position No. 98-5 Reporting on the Costs of
Start-up Activities. Net earnings increased by $3,417,000, or 42.9%, to
$11,388,000. Diluted earnings per share increased 39.3% to $1.56 from $1.12 on a
2.1% increase in the weighted-average shares and assumed conversions
outstanding. The cumulative effect of change in accounting principle reduced
earnings per share by $.11 in 1998 with no comparable reduction in 1999.
Excluding the cumulative effect of the change in accounting principle, diluted
earnings per share increased 26.8% from $1.23 in 1998 to $1.56 in 1999. The
increase in shares outstanding is attributable primarily to stock option
exercises and shares issued in acquisitions, 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.
Liquidity and Capital Resources
As of September 30, 1999, the Company had $4,534,000 in cash and current
marketable securities and a current ratio of 1.4:1. Working capital decreased by
$1,209,000 as of September 30, 1999, compared to December 31, 1998, primarily
reflecting cash paid in acquisitions.
Net accounts receivable were $53,046,000 at September 30, 1999, compared
to $46,349,000 at December 31, 1998. The number of day's average net revenue in
net receivables was 61.3 at September 30, 1999 compared to 63.8 at December 31,
1998.
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
$30,000,000 revolving line of credit with a balance outstanding as of September
30, 1999 of $2,150,000. Additionally, a letter of credit was outstanding in the
amount of $2,000,000, which reduces the amount the Company could borrow under
the revolving line of credit.
Year 2000
The Company is subject to risks associated with Year "2000" compliance, a
term which refers to the ability of various data processing hardware and
software systems to interpret dates correctly beginning January 1, 2000.
The Company has developed a plan that includes five phases relating to
awareness, assessment, renovation, validation and implementation. The plan
establishes a timetable and summarizes each major phase of the project and the
estimated costs to renovate the systems in preparation for Year 2000. Status of
the project is regularly reported to the Board of Directors.
13 of 15
<PAGE> 14
The awareness phase included a communication of Year 2000 compliance
issues 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 Year 2000 issues. Systems were then prioritized
from critical to non-critical, based upon the potential adverse effect on the
financial condition of the Company in the event of loss or interruption in the
use of each system.
Most of the Company's systems are purchased from or outsourced to
industry-known vendors. The data systems purchased by the Company and used in
their standard configuration include accounting, word processing and spread
sheets. These systems have been installed and tested for Year 2000 compliance.
The Company's payroll/human resources is outsourced and the Company has been
assured by these vendors that new Year 2000 compliant systems have been
installed. Other systems such as recruiting and clinical systems have been
replaced by or converted to Year 2000 compatible systems. The Company has
closely reviewed the Year 2000 progress as reported by each vendor. Where
possible, the Company is testing its systems in a non-operating environment.
The Company's costs associated with Year 2000 implementation will be
reduced due to its outsourcing arrangements; however, incremental direct costs
have been incurred in updating telephone and accounting systems in the amount of
$100,000, and accelerated capital improvements of $40,000. Although the Company
estimates that additional costs will be minimal, unforeseen circumstances could
develop in implementing the plan that could result in the cost varying
significantly from current estimates.
The final phase of the action plan is the implementation of remediated and
other systems into the operating environment of the Company. The final phase of
the plan has been completed. 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 Year 2000 compliance. 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 vendor's ability to deliver purchased goods and services to the
Company in a timely manner. The Company also recognizes the importance of the
Year 2000 compliance by customers, payment sources, and vendors to the Company's
customers and vendors. The Company must necessarily rely upon the compliance
programs of these third parties.
The Company does not 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
issue would not have a material adverse effect on its financial condition or
results of operations.
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
None
14 OF 15
<PAGE> 15
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 12, 1999
By /s/ John R. Finkenkeller
John R. Finkenkeller
Senior Vice President and
Chief Financial Officer
(Chief Accounting Officer)
15 of 15
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